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| INTG > SEC Filings for INTG > Form 10-K/A on 14-Oct-2009 | All Recent SEC Filings |
14-Oct-2009
Annual Report
RESULTS OF OPERATIONS
The Company's principal business is conducted through Portsmouth's general and limited partnership interest in Justice, rental income from its investments in multi-family real estate properties and income received from investment of its cash and securities assets. Portsmouth has a 50.0% limited partnership interest in Justice and serves as the managing general partner of Justice. Evon Corporation ("Evon") serves as the other general partner. Justice owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California, known as the Hilton San Francisco Financial District (the "Hotel"). The financial statements of Justice have been consolidated with those of the Company. See Note 2 to the Consolidated Financial Statements.
The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation. The term of the Agreement is for a period of 15 years commencing on January 12, 2006, with an option to extend the license term for another five years, subject to certain conditions. Justice also has a Management Agreement with Prism Hospitality L.P. ("Prism") to perform the day-to-day management functions of the Hotel.
Until September 30, 2008, the Partnership also derived income from the lease of the parking garage to Evon. Effective October 1, 2008, Justice entered into an installment sale agreement with Evon to purchase the remaining term of the garage lease and related garage assets and assumed the contract with Ace Parking for the operations of the garage. Justice also leases a portion of the lobby level of the Hotel to a day spa operator. Portsmouth also receives management fees as a general partner of Justice for its services in overseeing and managing the Partnership's assets. Those fees are eliminated in consolidation.
In addition to the operations of the Hotel, the Company also generates income from the ownership and management of real estate. Properties include eighteen apartment complexes, two commercial real estate properties, and two single- family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has investments in unimproved real property. All of the Company's residential rental properties with exception of the San Antonio and Las Colinas, Texas properties, are managed by professional third party property management companies.
The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential.
For the Year Ended June 30, 2009 as compared to June 30, 2008.
As discussed in Note 3 to the Consolidated Financial Statements, the Company has restated its consolidated financial statements for the fiscal year ended June 30, 2008. The consolidated statements of operations were restated to give effect to an accounting treatment that requires the Company to take 100% of the losses of Justice, rather than just the portion attributable to Portsmouth's 50% limited partnership interest, due to the fact that there was accumulated deficit in partners' equity at Justice. The restatements do not have an impact on the previously reported revenues, operating expenses, income from operations, other income (expense) or income tax provisions.
The Company had net income of $389,000 for the year ended June 30, 2009 compared to a net loss of $1,037,000 for the year ended June 30, 2008. The change is primarily attributable to the net gain on marketable securities of $6,132,000 in fiscal 2009 compared to a net loss of $1,561,000 in fiscal 2008, partially offset by the gain on sale of real estate of $4,074,000 in the fiscal 2008 and the increase in the loss from Hotel operations in fiscal 2009.
The following table sets forth a more detailed presentation of Hotel operations for the years ended June 30, 2009 and 2008.
For the years ended June 30, 2009 2008
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Hotel revenues:
Hotel rooms $ 25,237,000 $29,426,000
Food and beverage 4,911,000 6,017,000
Garage 2,104,000 1,602,000
Other operating departments 569,000 733,000
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Total hotel revenues 32,821,000 37,778,000
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Operating expenses excluding interest, depreciation
and amortization (28,015,000) (31,870,000)
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Operating income before interest, depreciation and
amortization 4,806,000 5,908,000
Interest expense (2,873,000) (2,858,000)
Depreciation and amortization expense (4,655,000) (4,660,000)
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Loss from hotel operations $(2,722,000) $(1,610,000)
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For the fiscal year ended June 30, 2009, the Hotel generated operating income of approximately $4,806,000 before interest, depreciation and amortization, on operating revenues of approximately $32,821,000 compared to operating income of approximately $5,908,000 before interest, depreciation and amortization, on operating revenues of approximately $37,778,000 for the fiscal year ended June 30, 2008. Despite a significant decrease in total operating revenues of approximately $4,957,000, Hotel operating income declined by only $1,102,000, of which $684,000 was attributable to a one-time loss on the termination of the garage lease which is included in operating expenses. The Hotel was able to achieve those results in a very difficult economic environment primarily due to a significant reduction in operating expenses of approximately $3,855,000 from fiscal 2008 and an increase in garage revenues due to the termination of the garage lease effective October 1, 2008 and the integration of those operations into those of the Hotel.
Room revenues decreased by approximately $4,189,000 for the fiscal year ended June 30, 2009 when compared to the fiscal year ended June 30, 2008 and food and beverage revenues decreased by approximately $1,106,000 for the same period. The decrease in room revenues was primarily attributable to a decline in average daily room rates as hotels in the San Francisco market began to reduce room rates beginning in October 2008 in an effort to maintain occupancy levels in an increasingly more competitive market as economic conditions continued to deteriorate. The decrease in food and beverage revenues is primarily attributable to decline in banquet and catering business as companies dramatically cut back on business travel, corporate meetings and events.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room ("RevPar") of the Hotel for the fiscal years ended June 30, 2009 and 2008.
Fiscal Year Ended Average Average
June 30, Daily Rate Occupancy% RevPar
----------------- ---------- --------- --------
2009 $157 81% $127
2008 $176 84% $148
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The full impact of the downturn in the domestic and international economies and markets began to be felt by the operations of the Hotel in September 2008 and that downturn is expected to continue at least through calendar 2009 with a modest improvement in the latter part of calendar 2010. The lodging industry was particularly hard hit by a steep decline in room rates resulting from the sharp deterioration in the higher rated business travel segment forcing hotels to support occupancy with lower rated Internet and discount business. As a result, the Hotel's RevPar decline of approximately $21 in fiscal 2009 was primarily attributable to a decline in average daily room rates of approximately $19, while occupancy declined by a modest 3%.
Facing difficult economic conditions and a decline in business, group and leisure travel, both domestic and international, management has continued to focus on ways to improve efficiencies and reduce operating costs and other expenses in its efforts to stabilize and maintain operating income of the Hotel. One significant step was to move lunch and dinner services from the restaurant to the lounge to create a more intimate, yet lively, atmosphere and to complement the new wine bar "Flyte" in the lobby of the Hotel. That initiative appears to be working as the Hotel reduced the operating losses from its food and beverage operations to approximately $132,000 in fiscal 2009 from approximately $214,000 in fiscal 2008. We have also initiated numerous energy saving programs that have resulted in additional cost savings. The Hotel's management company has added further support to those efforts by agreeing to reduce its management fees by fifty percent for the 2009 calendar year. As a result, we have seen further reductions in operating costs of the Hotel as a percentage of Hotel revenues for the fiscal year ended June 30, 2009. Management will continue to explore new and innovative ways to improve operations and enhance the guest experience.
General and administrative expenses decreased to $1,663,000 for the year ended June 30, 2009 from $1,817,000 for the year ended June 30, 2008 primarily as the result of the decrease in accounting related fees.
The Company's real estate operations for the year ended June 30, 2009 remained relatively consistent with the comparable prior year. The Company had real estate revenues of $12,787,000 for the year ended June 30, 2009 compared to revenues of $12,833,000 for the year ended June 30, 2008. Operating expenses was $6,337,000 for fiscal 2009 compared to $6,296,000 for fiscal 2008. Although the Company operated in a tougher economic environment in fiscal 2009, the Company's real estate operations remained relatively consistent with comparable prior year period. Management continues to review and analyze the Company's real estate operations to improve occupancy and rental rates, reduce expenses and improve efficiencies.
During the year ended June 30, 2009, the Company terminated its property management agreement with Productive Management and brought the management of its six remaining properties located outside of California back in-house. Management believes that the Company can manage the properties more effectively and efficiently in-house. The removal of the management company will save the Company annually over $150,000 in property management fees alone.
As of June 30, 2009, the Company had listed for sale its 249-unit apartment complex located in Austin, Texas and its 132-unit apartment complex located in San Antonio, Texas. These properties are classified as held for sale on the Company's consolidated balance sheet with the operations of these properties classified under discontinued operations in the consolidated statements of operations. No depreciation expense is recorded on these two properties.
In August 2007, the Company sold its 224-unit apartment complex located in Irving, Texas for $8,050,000 and recognized a gain on the sale of real estate of $4,074,000 which is included in discontinued operations. The revenues and expenses from the operation of this property for the year ended June 30, 2008 have been classified as income from discontinued operations in the consolidated statements of operations.
The Company had a net gain on marketable securities of $6,132,000 for the year ended June 30, 2009 as compared to a net loss on marketable securities of $1,561,000 for the year ended June 30, 2008. For the year ended June 30, 2009, the Company had a net realized gain of $1,190,000 and a net unrealized gain of $4,942,000. For the year ended June 30, 2008, the Company had a net realized gain of $1,879,000 and a net unrealized loss of $3,440,000. Gains and losses on marketable securities and other investments may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net income. However, the amount of gain or loss on marketable securities and other investments for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities please see the Marketable Securities section below.
The Company may also invest, with the approval of the Securities Investment Committee, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non- marketable securities are carried at cost on the Company's balance sheet as part of other investments, net of other than temporary impairment losses. As of June 30, 2009 and 2008, the Company had net other investments of $6,567,000 and $6,798,000, respectively. During the years ended June 30, 2009 and 2008, the Company performed an impairment analysis of its other investments and determined that its investments had other than temporary impairments and recorded impairment losses of $1,300,000 and $1,253,000, respectively.
Margin interest and trading expenses decreased to $1,186,000 for the year ended June 30, 2009 from $1,625,000 for the year ended June 30, 2008 due to the decrease in trading related expenses and the decrease in margin interest to $211,000 from $302,000. The decrease is the result of the maintenance of lower margin balances.
For income tax purposes, the Company can only record a tax benefit pertaining 50% of losses of Justice representing its ownership interest as opposed to the 100% of the losses of Justice that is required to be recognized under GAAP. During the year ended June 30, 2009, the provision for income tax benefit (expense) changed to an expense of $944,000 ($827,000 from continuing operations and $117,000 from discontinued operations) from a net benefit of $297,000 ($2,005,000 benefit from continuing operations less $1,708,000 from discontinued operations) for the year ended June 30, 2008. The effective tax rate is significantly different for the year ended June 30, 2009 as compared to the year ended June 30, 2008, primarily due to the percentage change in the loss from Justice compared the Company's consolidated pre-tax income.
Minority interest, net of tax related to the Company's other subsidiaries decreased to $627,000 for the year ended June 30, 2009 from $1,213,000 for the year ended June 30, 2008 primarily as the result of the lower net losses incurred by the Company's subsidiaries.
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As of June 30, 2009 and 2008, the Company had investments in marketable equity
securities of $13,920,000 and $6,706,000, respectively. The following table
shows the composition of the Company's marketable securities portfolio by
selected industry groups as:
June 30, 2009 % of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Dairy products $ 5,433,000 39.0%
REITs and financial 3,835,000 27.6%
Basic materials and energy 1,733,000 12.4%
Electronic traded funds(ETFs) 1,328,000 9.5%
Services 376,000 2.7%
Other 1,215,000 8.8%
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$ 13,920,000 100.0%
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June 30, 2008 % of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Dairy products $ 1,540,000 23.0%
Communications 1,123,000 16.7%
Financial 721,000 10.8%
Basic materials 654,000 9.8%
Medical 467,000 7.0%
Transportation 442,000 6.6%
Others 1,759,000 26.1%
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$ 6,706,000 100.0%
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The Company's investment portfolio is diversified with 74 different equity securities. The Company has three individual positions that comprise more than 5% of the equity value of the portfolio with the largest being 23% of the value of the portfolio. The amount of the Company's investment in any particular issue may increase or decrease, and additions or reductions to its securities portfolio may occur, at any time. While it is the internal policy of the Company to limit its initial investment in any single equity to less than 5% of its total portfolio value, that investment could eventually exceed 5% as a result of equity appreciation or reductions in other positions.
The following table shows the net gain(loss) on the Company's marketable securities and the associated margin interest and trading expenses for the respective years:
For the years ended June 30, 2009 2008
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Net investment gain(loss) $ 6,132,000 $ (1,561,000)
Impairment loss on other investments (1,300,000) (1,253,000)
Dividend and interest income 205,000 199,000
Margin interest (211,000) (302,000)
Trading expenses (975,000) (1,323,000)
------------ ------------
$ 3,851,000 $ (4,240,000)
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The Company may also invest, with the approval of the Securities Investment Committee, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non- marketable securities are carried at cost on the Company's balance sheet as part of other investments, net of other than temporary impairment losses.
As of June 30, 2009 and 2008, the Company had net other investments of $6,567,000 and $6,798,000, respectively. During the years ended June 30, 2009 and 2008, the Company made investments in corporate debt instruments of a public company in the basic materials sector totaling $1,500,000 and $1,275,000, respectively. As of June 30, 2009 and 2008, the Company had investments in this company, net of impairment losses, totaling $750,000 and $64,000, respectively. These amounts are included as a part of other investments, net on the consolidated balance sheets.
During the years ended June 30, 2009 and 2008, the Company received common stock issued upon conversion or as payment of interest and penalties on convertible notes in this company. Through sales of this common stock, the Company was able to recover approximately $1,984,000 and $1,683,000 of its investments during the years ended June 2009 and 2008. The sales of this common stock were recognized as realized gains in the consolidated statement of operations in the respective years. As of June 30, 2009, the Company had $787,000 of this company's common stock included in its investment in marketable securities balance of $13,920,000. As of June 30, 2009, the Company still holds notes and convertible notes of this company totaling approximately $10,405,000, before impairment adjustments which includes $7,846,000 of principal and $2,559,000 of accrued interest and penalties.
SUPPLEMENTAL DISCLOSURE ON RESTATEMENTS OF INTERIM QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 3 to the Consolidated Financial Statements, the Company has also restated its interim quarterly financial information for its two most recent fiscal years ended June 30, 2009 and 2008. The consolidated statements of operations for those periods were restated to reflect an accounting treatment that required the Company to absorb 100% of the losses of the Partnership rather than just the portion attributable to Portsmouth's 50% limited partnership interest, due to the fact that there was accumulated deficit in partners' equity at Justice. The effects of the restatements on the previously reported consolidated balance sheets are the reduction in the minority interest asset related to Justice Investors to zero and decrease in retained earnings and minority interest related to Portsmouth and Santa Fe. The effects of the restatements on the previously reported consolidated statements of operations are the reduction in the minority interest related to Justice Investors, pre-tax, to zero and decrease or increase in minority interest related to Portsmouth and Santa Fe, which results in changes to previously reported net income or loss. The restatements do not have an impact on the previously reported revenues, operating expenses, income from operations, other income (expense), or income tax provisions.
The following tables summarize the restatement adjustments on the Company's previously reported consolidated statements of operations for the interim quarterly periods for the Company's two most recent completed fiscal years ended June 30, 2009 and 2008 as more described in Note 3.
As Previously Restatement
Reported Adjustment As Restated
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ -----------
For the three months ended March 31, 2009
Minority interest - Justice Investors, net of tax $ - $ - $ -
Minority interest - net of tax $ 640,000 $(134,000) $ 506,000
Net loss $(1,260,000) $(134,000) $(1,394,000)
For the three months ended December 31, 2008
Minority interest - Justice Investors, net of tax $ - $ - $ -
Minority interest - net of tax $ 414,000 $(99,000) $ 315,000
Net loss $ (615,000) $(99,000) $ (714,000)
For the three months ended September 30, 2008
Minority interest - Justice Investors, net of tax $ (96,000) $ 96,000 $ -
Minority interest - net of tax $ 212,000 $(74,000) $ 138,000
Net income $ 649,000 $ 22,000 $ 671,000
For the three months ended March 31, 2008
Minority interest - Justice Investors, net of tax $ 266,000 $(266,000) $ -
Minority interest - net of tax $ 697,000 $ (52,000) $ 645,000
Net loss $(1,900,000) $(318,000) $(2,218,000)
For the three months ended December 31, 2007
Minority interest - Justice Investors, net of tax $ 257,000 $(257,000) $ -
Minority interest - net of tax $ (68,000) $ 124,000 $ 56,000
Net income $ 347,000 $(133,000) $ 214,000
For the three months ended September 30, 2007
Minority interest - Justice Investors, net of tax $ 278,000 $(278,000) $ -
Minority interest - net of tax $ 409,000 $ 27,000 $ 436,000
Net income $ 1,263,000 $(251,000) $ 1,012,000
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FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated from the operations of Justice Investors. The Company also receives revenues generated from its real estate operations and from the investment of its cash and securities assets. Since the operations of the Hotel were temporarily suspended on May 31, 2005, and significant amounts of money were expended to renovate and reposition the Hotel as a Hilton, Justice did not pay any partnership distributions until the end of March 2007. As a result, the Company had to depend more on the revenues generated from the investment of its cash and marketable securities during that transition period.
The Hotel started to generate cash flows from its operations in June 2006. For the fiscal year ended June 30, 2009, Justice paid a total of $850,000 in limited partnership distributions, of which the Company received $425,000. For the fiscal year ended June 30, 2008, Justice paid a total of $1,450,000 in limited partnership distributions, of which the Company received $725,000. The fiscal 2009 distributions were paid in September 2008, after which the San Francisco hotel market began to feel the full impact of the significant downturn in domestic and international economies that continued throughout
fiscal 2009. Since no significant improvement in economic conditions is expected in the lodging industry until sometime during the second half of calendar 2010, no limited partnership distributions are anticipated in the foreseeable future. The general partners will continue to monitor and review the operations and financial results of the Hotel and to set the amount of any future distributions that may be appropriate based on operating results, cash flows and other factors, including establishment of reasonable reserves for debt payments and operating contingencies.
The new Justice Compensation Agreement that became effective on December 1, 2008, when Portsmouth assumed the role of managing general partner of Justice, has provided additional cash flows to the Company. Under the new Compensation Agreement, Portsmouth is now entitled to 80% of the minimum base fee to be paid to the general partners of $285,000, while under the prior agreement, Portsmouth was entitled to receive only 20% of the minimum base fee. As a result, total general partner fees paid to Portsmouth for the year ended June 30, 2009 increased to $222,000, compared to $180,000 for the year ended June 30, 2008.
To meet its substantial financial commitments for the renovation and transition of the Hotel to a Hilton, Justice had to rely on borrowings to meet its obligations. On July 27, 2005, Justice entered into a first mortgage loan with The Prudential Insurance Company of America in a principal amount of $30,000,000 (the "Prudential Loan"). The term of the Prudential Loan is for . . .
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