UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[x] Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 2010
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-10324
THE INTERGROUP CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3293645
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10940 Wilshire Blvd., Suite 2150, Los Angeles, California 90024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 889-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock $.01 par value The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
[ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act) [ ] Yes [X] No
The aggregate market value of the Common Stock, $.01 Par value, held by non-
affiliates computed by reference to the closing sales price on The NASDAQ
Capital Market on December 31, 2009 (the last business day of registrant's most
recently completed second fiscal quarter) was $7,806,107.
The number of shares outstanding of registrant's Common Stock, as of September
20, 2010, was 2,421,600.
DOCUMENTS INCORPORATED BY REFERENCE: None
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TABLE OF CONTENTS
PART I PAGE
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Item 1. Business. 5
Item 1A. Risk Factors. 14
Item 1B. Unresolved Staff Comments. 14
Item 2. Properties. 15
Item 3. Legal Proceedings. 21
PART II
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Item 5. Market for Registrant's Common Equity, Related Stockholder 21
Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data. 21
Item 7. Management's Discussion and Analysis of Financial 22
Condition and Results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 30
Item 8. Financial Statements and Supplementary Data. 30
Item 9. Changes in and Disagreements With Accountants on 64
Accounting and Financial Disclosure.
Item 9A. Controls and Procedures. 64
Item 9B. Other Information. 65
PART III
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Item 10. Directors, Executive Officers and Corporate Governance. 66
Item 11. Executive Compensation. 70
Item 12. Security Ownership of Certain Beneficial Owners and 80
Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and 82
Director Independence.
Item 14. Principal Accounting Fees and Services. 83
PART IV
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Item 15. Exhibits, Financial Statement Schedules. 84
SIGNATURES 87
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation reform Act of 1995.
Forward-looking statements give our current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They contain words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe"
"may," "could," "might" and other words or phrases of similar meaning in
connection with any discussion of future operating or financial performance.
From time to time we also provide forward-looking statements in our Forms 10-Q
and 8-K, Annual Reports to Shareholders, press releases and other materials we
may release to the public. Forward looking statements reflect our current views
about future events and are subject to risks, uncertainties, assumptions and
changes in circumstances that may cause actual results or outcomes to differ
materially from those expressed in any forward looking statement. Consequently,
no forward looking statement can be guaranteed and our actual future results
may differ materially.
Factors that may cause actual results to differ materially from current
expectations include, but are not limited to:
* risks associated with the lodging industry, including competition,
increases in wages, labor relations, energy and fuel costs, actual and
threatened pandemics, actual and threatened terrorist attacks, and
downturns in domestic and international economic and market conditions,
particularly in the San Francisco Bay area;
* risks associated with the real estate industry, including changes in real
estate and zoning laws or regulations, increases in real property taxes,
rising insurance premiums, costs of compliance with environmental laws
and other governmental regulations;
* the availability and terms of financing and capital and the general
volatility of securities markets;
* changes in the competitive environment in the hotel industry;
* risks related to natural disasters;
* litigation; and
* other risk factors discussed below in this Report.
We caution you not to place undue reliance on these forward-looking statements,
which speak only as to the date hereof. We undertake no obligation to publicly
update any forward looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any further
disclosures we make on related subjects on our Forms 10-K, 10-Q, and 8-K
reports to the Securities and Exchange Commission.
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PART I
Item 1. Business.
GENERAL
The InterGroup Corporation ("InterGroup" or the "Company" and may also be
referred to as "we" "us" or "our" in this report) is a Delaware corporation
formed in 1985, as the successor to Mutual Real Estate Investment Trust ("M-
REIT"), a New York real estate investment trust created in 1965. The Company
has been a publicly-held company since M-REIT's first public offering of shares
in 1966.
The Company was organized to buy, develop, operate, rehabilitate and dispose of
real property of various types and descriptions, and to engage in such other
business and investment activities as would benefit the Company and its
shareholders. The Company was founded upon, and remains committed to, social
responsibility. Such social responsibility was originally defined as providing
decent and affordable housing to people without regard to race. In 1985, after
examining the impact of federal, state and local equal housing laws, the
Company determined to broaden its definition of social responsibility. The
Company changed its form from a REIT to a corporation so that it could pursue a
variety of investments beyond real estate and broaden its social impact to
engage in any opportunity which would offer the potential to increase
shareholder value within the Company's underlying commitment to social
responsibility.
As of June 30, 2010, the Company owned approximately 76% of the common shares
of Santa Fe Financial Corporation ("Santa Fe"), a public company (OTCBB: SFEF).
Santa Fe's revenue is primarily generated through its 68.8% owned subsidiary,
Portsmouth Square, Inc. ("Portsmouth"), a public company (OTCBB: PRSI).
InterGroup also directly owns approximately 11.7% of Portsmouth. Portsmouth's
principal business is conducted through its general and limited partnership
interest in the Justice Investors limited partnership ("Justice" or the
"Partnership"). The Company has a 50.0% limited partnership interest in Justice
and serves as one of the general partners. Justice owns a 544 room hotel
property located at 750 Kearny Street, San Francisco, California 94108, known
as the "Hilton San Francisco Financial District" (the "Hotel") and related
facilities, including a five level underground parking garage. The financial
statements of Justice are consolidated with those of the Company. See Note 2 to
the consolidated financial statements.
The other general partner, Evon Corporation ("Evon"), served as the managing
general partner of Justice until December 1, 2008. As discussed below, the
Limited Partnership Agreement was amended, effective December 1, 2008, to
provide for a change in the respective roles of the general partners. Pursuant
to that amendment, Portsmouth became the Managing General Partner of Justice
while Evon assumed the role of Co-General Partner of Justice.
Most significant partnership decisions require the active participation and
approval of both general partners. Pursuant to the terms of the partnership
agreement, voting rights of the partners are determined according to the
partners' entitlement to share in the net profit and loss of the partnership.
The Company is not entitled to any additional voting rights by virtue of its
position as a general partner. The partnership agreement also provides that no
portion of the partnership real property can be sold without the written
consent of the general and limited partners entitled to more than 72% of the
net profit. As of June 30, 2010, there were 113 limited partners in Justice,
including Portsmouth and Evon.
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Historically, the Partnership's most significant source of income was a lease
between Justice and Holiday Inn for the Hotel portion of the property. That
lease was amended in 1995, and ultimately assumed by Felcor Lodging Trust, Inc.
("Felcor") in 1998. The lease of the Hotel to Felcor was terminated effective
June 30, 2004. With the termination of the Hotel lease, Justice assumed the
role of an owner/operator with the assistance of a third party management
company. Effective July 1, 2004, the Hotel was operated as a Holiday Inn Select
brand hotel pursuant to a short term franchise agreement until it was
temporarily closed for major renovations on May 31, 2005. The Hotel was
reopened on January 12, 2006 to operate as a full service Hilton hotel,
pursuant to a Franchise License Agreement with Hilton Hotels Corporation.
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. As discussed below, 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. 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.
In addition to the operations of the Hotel, the Company also generates income
from the ownership, management and, when appropriate, sale of real estate.
Properties include eighteen apartment complexes, two commercial real estate
properties and two single-family houses. 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 in California are managed by professional third
party property management companies and the rental properties outside of
California are managed by the Company. The commercial real estate in California
is also managed by the Company.
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 and its Real Estate Investment Committee. The Company may
also look for new real estate investment opportunities in hotels, apartments,
office buildings and development properties. The acquisition of any new real
estate investments will depend on the Company's ability to find suitable
investment opportunities and the availability of sufficient financing to
acquire such investments. To help fund any such acquisition, the Company may
borrow funds to leverage its investment capital. The amount of any such debt
will depend on a number of factors including, but not limited to, the
availability of financing and the sufficiency of the acquisition property's
projected cash flows to support the operations and debt service.
The Company also derives income from the investment of its cash and investment
securities assets. The Company has invested in income-producing instruments,
equity and debt securities and will consider other investments if such
investments offer growth or profit potential. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
discussion of the Company's marketable securities and other investments.
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BUSINESS DEVELOPMENTS DURING THE LAST THREE FISCAL YEARS
Garage Installment Sale Agreement
Effective October 1, 2008, Justice and Evon entered into an Installment Sale
Agreement whereby the Partnership purchased all of Evon's right title and
interest in the remaining term of its lease of the parking garage, which was to
expire on November 30, 2010, and other related assets. The partnership also
agreed to assume Evon's contract with Ace Parking Management, Inc. ("Ace
Parking") for the management of the garage and any other liabilities related to
the operation of the garage commencing October 1, 2008. The purchase price for
the garage lease and related assets was approximately $755,000, payable in one
down payment of approximately $28,000 and 26 equal monthly installments of
approximately $29,000, which includes interest at the rate of 2.4% per annum.
See Note 12 to the Consolidated Financial Statements.
Amendment of Limited Partnership Agreement
On December 1, 2008, Portsmouth and Evon, as the two general partners of
Justice, entered into a 2008 Amendment to the Limited Partnership Agreement
(the "Amendment") that provides for a change in the respective roles of the
general partners. Pursuant to the Amendment, Portsmouth assumed the role of
Managing General Partner and Evon continued on as the Co-General Partner of
Justice. The Amendment was ratified by approximately 98% of the limited
partnership interests. The Amendment also provides that future amendments to
the Limited Partnership Agreement may be made only upon the consent of the
general partners and at least seventy five percent (75%) of the interests of
the limited partners. Consent of at least 75% of the interests of the limited
partners will also be required to remove a general partner pursuant to the
Amendment.
New General Partner Compensation Agreement
Concurrent with the Amendment to the Limited Partnership Agreement, a new
General Partner Compensation Agreement (the "Compensation Agreement") was
entered into on December 1, 2008, among Justice, Portsmouth and Evon to
terminate and supersede all prior compensation agreement for the general
partners. Pursuant to the Compensation Agreement, the general partners of
Justice will be entitled to receive an amount equal to 1.5% of the gross annual
revenues of the Partnership (as defined), less $75,000 to be used as a
contribution toward the cost of Justice engaging an asset manager. In no event
shall the annual compensation be less than a minimum base of approximately
$285,000, with eighty percent (80%) of that amount being allocated to
Portsmouth for its services as managing general partner and twenty percent
(20%) allocated to Evon as the co-general partner. Compensation earned by the
general partners in each calendar year in excess of the minimum base, will be
payable in equal fifty percent (50%) shares to Portsmouth and Evon.
During the years ended June 30, 2010 and 2009, the general partners were paid
approximately $417,000 and $435,000 respectively, under the applicable
compensation agreements. Of those amounts, approximately $264,000 and $222,000
was paid to Portsmouth for fiscal 2010 and 2009.
HILTON HOTELS FRANCHISE LICENSE AGREEMENT
On December 10, 2004, the Partnership entered into a Franchise License
Agreement with Hilton Hotels Corporation (the "Franchise Agreement") for the
right to operate the Hotel as a Hilton brand hotel. The term of the Franchise
Agreement is for 15 years commencing on the opening date of the Hotel, January
12, 2006, with an option to extend that Agreement for another five years,
subject to certain conditions.
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Pursuant to the Franchise Agreement, the Partnership paid monthly royalty fees
for the first two years of three percent (3%) of the Hotel's gross room
revenue, as defined, for the preceding calendar month; the third year was at
four percent (4%) of the Hotel's gross room revenue; and the fourth year until
the end of the term will be five percent (5%) of the Hotel's gross room
revenue. Justice also pays a monthly program fee of four percent (4%) of the
Hotel's gross room revenue. The amount of the monthly program fee is subject to
change; however, the increase cannot exceed one percent (1%) of the Hotel gross
room revenue in any calendar year, and the cumulative increases in the monthly
fees will not exceed five percent (5%) of gross room revenue. The Partnership
also pays a monthly information technology recapture charge of 0.75% of the
Hotel's gross revenue. In this difficult economic environment, Hilton agreed to
reduce its information technology fees to 0.65% for the 2010 calendar year.
Prior to operating the Hotel as a Hilton hotel, the Partnership was required to
make substantial renovations to the Hotel to meet Hilton standards in
accordance with a product improvement plan ("PIP") agreed upon by Hilton and
the Partnership, as well as comply with other brand standards. That project
included a complete renovation and upgrade of all of the Hotel's guestrooms,
meeting rooms, common areas and restaurant and bar. As of January 12, 2006,
the Hotel renovation work was substantially completed, at which time Justice
obtained approval from Hilton to open the Hotel as the "Hilton San Francisco
Financial District". The Hotel opened with a limited number of rooms available
to rent, which increased as the Hotel transitioned into full operations by the
end of February 2006.
The total cost of the construction-renovation project of the Hotel was
approximately $37,030,000, which includes approximately $630,000 in interest
costs incurred during the construction phase that were capitalized. To meet
those substantial financial commitments, and the costs of operations during the
renovation period and for the first five months when the Hotel ramped up its
operations, the Partnership has relied on additional borrowings to meet its
obligations. As discussed in Item 2. Properties, the Partnership was able to
secure adequate financing, collateralized by the Hotel, to meet those
commitments.
HOTEL MANAGEMENT COMPANY AGREEMENT
In February 2007, the Partnership terminated its prior hotel management
agreement with Dow Hotel Company and entered into a management agreement with
Prism Hospitality ("Prism") to manage and operate the Hotel as its agent,
effective February 10, 2007. Prism is an experienced Hilton approved operator
of upscale and luxury hotels throughout the Americas. The agreement is
effective for a term of ten years, unless the agreement is extended as provided
in the agreement, and the Partnership has the right to terminate the agreement
upon ninety days written notice without further obligation. Under the
management agreement, the Partnership is to pay base management fees of 2.5% of
gross operating revenues for the fiscal year. However, 0.75% of the stated
management fee is due only if the partially adjusted net operating income for
the subject fiscal year exceeds the amount of a minimum Partnership's return
($7 million) for that fiscal year. Prism is also entitled to an incentive
management fee if certain milestones are accomplished. No incentive fees were
earned during the years ended June 30, 2010 and 2009. In support of the
Partnership's efforts to reduce costs in this difficult economic environment,
Prism agreed to reduce its management fees by fifty percent from January 1,
2009 through December 31, 2010, after which the original fee arrangement will
remain in effect. Management fees paid to Prism during the years ended June 30,
2010 and 2009 were $246,000 and $398,000, respectively.
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GARAGE LEASE AND OPERATIONS
Until September 30, 2008, the garage portion of the Hotel property was leased
by the Partnership to Evon. That lease provided for a monthly rental of sixty
percent (60%) of gross parking revenues with a minimum rent of $20,000 per
month. That lease was to expire in November 2010. The garage lessee, Evon,
was responsible for insurance, repairs and maintenance, utilities and all taxes
assessed against the improvements to the leased premises. The garage is
operated by Ace Parking pursuant to a parking facility management agreement. As
discussed above, effective October 1, 2008, the Partnership purchased all of
Evon's right title and interest in the remaining term of its lease and other
related assets and assumed Evon's contract with Ace Parking as well as other
liabilities associated with the operation of the garage. The Ace Parking
agreement runs until October 31, 2010, with an option to renew for another
five-year term. Pursuant to that agreement, the Partnership will pay to Ace
Parking a management of $2,000 per month, an accounting fee equal to $250 per
month, plus three percent (3%) of annual net profits in excess of $150,000.
TRU SPA LEASE
Approximately 5,400 square feet of space on the lobby level of the Hotel is
leased to Tru Spa for the operation of a health and beauty spa. The lease
expires in May 2013, with a five year option to extend the term. The spa lease
provides for minimum monthly rent of $14,000. Minimum rental amounts are
subject to adjustment every three years based on increases in the Consumer
Price Index.
CHINESE CULTURE FOUNDATION LEASE
On March 15, 2005, the Partnership entered into an amended lease with the
Chinese Culture Foundation of San Francisco (the "Foundation") for the third
floor space of the Hotel commonly known as the Chinese Cultural Center, which
the Foundation had right to occupy pursuant to a 50-year nominal rent lease.
The amended lease requires the Partnership to pay to the Foundation a monthly
event space fee in the amount of $5,000, adjusted annually based on the local
Consumer Price Index. The term of the amended lease expires on October 17,
2023, with an automatic extension for another 10 year term if the property
continues to be operated as a hotel. This amendment allowed Justice to
incorporate the third floor into the renovation of the Hotel resulting in a new
ballroom for the joint use of the Hotel and new offices and a gallery for the
Chinese Culture Center.
RENTAL PROPERTIES
At June 30, 2010, the Company's investment in real estate consisted of
properties located throughout the United States, with a concentration in Texas
and Southern California. These properties include eighteen apartment
complexes, two single-family houses as strategic investments and two commercial
real estate properties. All properties are operating properties. In addition
to the properties, the Company owns approximately 4.1 acres of unimproved real
estate in Texas and 2 acres of unimproved land in Maui, Hawaii.
As of June 30, 2010, 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.
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MANAGEMENT OF RENTAL PROPERTIES
The Company may engage third party management companies as agents to manage
certain of Company's residential rental properties.
The Company entered into a Management Agreement with Century West Properties,
Inc. ("Century West") to act as an agent of the Company to rent and manage all
of the Company's residential rental properties in the Los Angeles, California
area. The Management Agreement with Century West was for an original term of
twelve months ending on July 31, 2006 and continues on a month-to-month basis,
until terminated upon 30 days prior written notice. The Management Agreement
provides for a monthly fee equal to 4% of the monthly gross receipts from the
properties with resident managers and a fee of 4 1/2% of monthly gross receipts
for properties without resident managers. During the years ended June 30, 2010
and 2009, the management fees were $142,000 and $166,000, respectively.
During the year ended June 30, 2009, the Company terminated its property
management agreements with Productive Management(Productive) and brought the
property 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. During the year June 30,
2009, the management fees paid to Productive were $152,000.
MARKETABLE SECURITIES INVESTMENT POLICIES
In addition to its Hotel and real estate operations, the Company also invests
from time to time in income producing instruments, corporate debt and equity
securities, publically traded investment funds, mortgage backed securities,
securities issued by REIT's and other companies which invest primarily in real
estate.
The Company's securities investments are made under the supervision of a
Securities Investment Committee of the Board of Directors. The Committee
currently has three members and is chaired by the Company's Chairman of the
Board and President, John V. Winfield. The Committee has delegated authority
to manage the portfolio to the Company's Chairman and President together with
such assistants and management committees he may engage. The Committee has
established investment guidelines for the Company's investments. These
guidelines presently include: (i) corporate equity securities should be listed
on the New York Stock Exchange (NYSE), NYSE ARCA, American Stock Exchange
(AMEX) or the Nasdaq Stock Market (NASDAQ); (ii) securities should be priced
above $5.00 per share; and (iii) investment in a particular issuer should not
exceed 5% of the market value of the total portfolio. The investment policies
do not require the Company to divest itself of investments, which initially
meet these guidelines but subsequently fail to meet one or more of the
investment criteria. Non-conforming investments require the approval of the
Securities Investment Committee. The Committee has in the past approved non-
conforming investments and may in the future approve non-conforming
investments. The Securities Investment Committee may modify these guidelines
from time to time.
The Company may also invest, with the approval of the Securities Investment
Committee, in unlisted securities, such as convertible notes, through private
placements including private equity investment funds. Those investments in
non-marketable securities are carried at cost on the Company's balance sheet as
part of other investments and reviewed for impairment on a periodic basis. As
of June 30, 2010, the Company had other investments of $6,651,000.
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As part of its investment strategies, the Company may assume short positions in
marketable securities. Short sales are used by the Company to potentially
offset normal market risks undertaken in the course of its investing
activities or to provide additional return opportunities. As of June 30, 2010,
the Company had obligations for securities sold (equities short) of $1,698,000.
In addition, the Company may utilize margin for its marketable securities
purchases through the use of standard margin agreements with national brokerage
firms. The use of available leverage is guided by the business judgment of
management and is subject to any internal investment guidelines, which may be
imposed by the Securities Investment Committee. The margin used by the Company
may fluctuate depending on market conditions. The use of leverage could be
viewed as risky and the market values of the portfolio may be subject to large
fluctuations. As of June 30, 2010, the Company had a margin balance of
$2,235,000 and incurred $435,000 and $211,000 in margin interest expense during
the year ended June 30, 2010 and 2009, respectively.
As Chairman of the Securities Investment Committee, the Company's President and
Chief Executive officer, John V. Winfield, directs the investment activity of
the Company in public and private markets pursuant to authority granted by the
Board of Directors. Mr. Winfield also serves as Chief Executive Officer
and Chairman of Santa Fe and Portsmouth and oversees the investment activity of
those companies. Depending on certain market conditions and various risk
factors, the Chief Executive Officer, his family, Santa Fe and Portsmouth may,
at times, invest in the same companies in which the Company invests. The
Company encourages such investments because it places personal resources of the
Chief Executive Officer and his family members, and the resources of Santa Fe
and Portsmouth, at risk in connection with investment decisions made on behalf
of the Company.
Further information with respect to investment in marketable securities and
other investments of the Company is set forth in Management Discussion and
Analysis of Financial Condition and Results of Operations section and Notes 6
and 7 of the Notes to Consolidated Financial Statements.
Seasonality
Hotel's operations historically have been seasonal. Like most hotels in the San
Francisco area, the Hotel generally maintains higher occupancy and room rates
during the first and second quarters of its fiscal year (July 1 through
December 31) than it does in the third and fourth quarters (January 1 through
June 30). These seasonal patterns can be expected to cause fluctuations in the
quarterly revenues from the Hotel.
Competition
The hotel industry is highly competitive. Competition is based on a number of
factors, most notably convenience of location, brand affiliation, price, range
of services and guest amenities or accommodations offered and quality of
customer service. Competition is often specific to the individual market in
which properties are located.
The Hotel is located in an area of intense competition from other hotels in the
Financial District and San Francisco in general. After being closed for more
than seven months for a substantial renovation project in fiscal year 2006, it
has taken some time for the Hotel, now operating as a Hilton, to gain
recognition as a totally upgraded and higher level property after being under
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the Holiday Inn brand for almost 35 years. The Hotel is also somewhat limited
by having only 15,000 square feet of meeting room space. Other hotels, with
greater meeting room space, may have a competitive advantage by being able to
attract larger groups and small conventions. Increased competition from new
hotels, or hotels that have been recently undergone substantial renovation,
could have an adverse effect on occupancy, average daily rate ("ADR") and room
revenue per available room ("RevPar") and put pressure on the Partnership to
make additional capital improvements to the Hotel to keep pace with the
competition.
The Hotel's target market is business travelers, leisure customers and
tourists, and small to medium size groups. Since the Hotel operates in an upper
scale segment of the market, we also face increased competition from providers
of less expensive accommodations, such as limited service hotels, during
periods of economic downturn when leisure and business travelers become more
sensitive to room rates. Like other hotels, we have experienced a significant
decrease in higher rated corporate and business travel during the last two
fiscal years as many companies have severely cut their travel and entertainment
budgets in response to economic conditions. As a result, there is added
pressure on all hotels in the San Francisco market to lower room rates in an
effort to maintain occupancy levels during such periods.
In this highly competitive market, Management has continued to focus on ways to
enhance the guest experience as well as improve operating efficiencies. The
Hotel has recently upgraded its guest room with newer flat panel televisions
systems that provide guests with greater entertainment options. The Hotel has
also installed many energy saving controls and devices as part of its efforts
to become greener and reduce operating costs. Management will continue to
explore new and innovative ways to improve operations and to attract new guests
to the Hotel at higher room rates.
The Hotel is also subject to certain operating risks common to all of the hotel
industry, which could adversely impact performance. These risks include:
* Competition for guests and meetings from other hotels including
competition and pricing pressure from internet wholesalers and
distributors;
* increases in operating costs, including wages, benefits, insurance,
property taxes and energy, due to inflation and other factors, which may
not be offset in the future by increased room rates;
* labor strikes, disruptions or lock outs;
* dependence on demand from business and leisure travelers, which may
fluctuate and is seasonal;
* increases in energy costs, cost of fuel, airline fares and other expenses
related to travel, which may negatively affect traveling;
* terrorism, terrorism alerts and warnings, wars and other military
actions, SARS, swine flu, pandemic or other medical events or warnings
which may result in decreases in business and leisure travel; and
* adverse effects of down turns and recessionary conditions in
international, national and/or local economies and market conditions.
The ownership, operation and leasing of multifamily rental properties are
highly competitive. The Company competes with domestic and foreign financial
institutions, other REITs, life insurance companies, pension trusts, trust
funds, partnerships and individual investors. In addition, The Company competes
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for tenants in markets primarily on the basis of property location, rent
charged, services provided and the design and condition of improvements. The
Company also competes with other quality apartment owned by public and private
companies. The number of competitive multifamily properties in a particular
market could adversely affect the Company's ability to lease its multifamily
properties, as well as the rents it is able to charge. In addition, other forms
of residential properties, including single family housing and town homes,
provide housing alternatives to potential residents of quality apartment
communities or potential purchasers of for-sale condominium units. The Company
competes for residents in its apartment communities based on resident service
and amenity offerings and the desirability of the Company's locations. Resident
leases at the Company's apartment communities are priced competitively based on
market conditions, supply and demand characteristics, and the quality and
resident service offerings of its communities.
Environmental Matters
In connection with the ownership of the Hotel, the Company is subject to
various federal, state and local laws, ordinances and regulations relating to
environmental protection. Under these laws, a current or previous owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on, under or in such property. Such
laws often impose liability without regard to whether the owner or operator
knew of, or was responsible for, the presence of hazardous or toxic substances.
Environmental consultants retained by the Partnership or its lenders conducted
updated Phase I environmental site assessments in fiscal year ended June 30,
2008 on the Hotel property. These Phase I assessments relied, in part, on Phase
I environmental assessments prepared in connection with the Partnership's first
mortgage loan obtained in July 2005. Phase I assessments are designed to
evaluate the potential for environmental contamination on properties based
generally upon site inspections, facility personnel interviews, historical
information and certain publicly-available databases; however, Phase I
assessments will not necessarily reveal the existence or extent of all
environmental conditions, liabilities or compliance concerns at the properties.
Although the Phase I assessments and other environmental reports we have
reviewed disclose certain conditions on our properties and the use of hazardous
substances in operation and maintenance activities that could pose a risk of
environmental contamination or liability, we are not aware of any environmental
liability that we believe would have a material adverse effect on our business,
financial position, results of operations or cash flows.
The Company believes that the Hotel and its rental properties are in
compliance, in all material respects, with all federal, state and local
environmental ordinances and regulations regarding hazardous or toxic
substances and other environmental matters, the violation of which could have
a material adverse effect on the Company. The Company has not received written
notice from any governmental authority of any material noncompliance, liability
or claim relating to hazardous or toxic substances or other environmental
matters in connection with any of its present properties.
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EMPLOYEES
As of June 30, 2010, the Company had a total of 7 full-time employees in its
corporate office. Effective July 2002, the Company entered into a client
service agreement with Administaff Companies II, L.P. ("Administaff"), a
professional employer organization serving as an off-site, full service human
resource department for its corporate office. Administaff personnel management
services are delivered by entering into a co-employment relationship with the
Company's employees. There are also approximately 32 employees at the Company's
properties outside of the State of California that are subject to similar co-
employment relationships with Administaff. The employees and the Company are
not party to any collective bargaining agreement, and the Company believes that
its employee relations are satisfactory.
Employees of Justice and management of the Hotel are not unionized and the
Company believes that their employee relationships are satisfactory. Most of
the non-management employees of the Hotel are part of Local 2 of the Hotel
Employees and Restaurant Employees Union ("UNITE HERE"). The Hotel's contract
with Local 2 expired on August 14, 2009. While Local 2 has sent a statutory
letter to the Hotel to open negotiations, no talks between the Hotel and union
representatives have commenced to date. At this time, no disruptions to the
operations of the Hotel are expected resulting from this expired and unresolved
union contract.
The Hotel has two other labor agreements. A new contract with Stationary
Engineers, Local 39 was reached on July 31, 2009 with an effective date
retroactive to January 12, 2009 and an expiration date of January 11, 2011. A
contract with Teamsters Local 856 expiring on December 31, 2008 was extended to
December 31, 2010.
ADDITIONAL INFORMATION
The Company files annual and quarterly reports on Forms 10-K and 10-Q, current
reports on Form 8-K and other information with the Securities and Exchange
Commission ("SEC" or the "Commission"). The public may read and copy any
materials that we file with the Commission at the SEC's Public Reference Room
at 100 F Street, NE, Washington, DC 20549, on official business days during the
hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of
the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission also maintains an Internet site at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the Commission.
Other information about the Company can be found on our parent company's
website www.intergroupcorporation.com. Reference in this document to that
website address does not constitute incorporation by reference of the
information contained on the website.
Item 1A. Risk Factors.
Not required for smaller reporting companies.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
SAN FRANCISCO HOTEL PROPERTY
The Hotel is owned directly by the Partnership. The Hotel is centrally located
near the Financial District in San Francisco, one block from the Transamerica
Pyramid. The Embarcadero Center is within walking distance and North Beach is
two blocks away. Chinatown is directly across the bridge that runs from the
Hotel to Portsmouth Square Park. The Hotel is a 31-story (including parking
garage), steel and concrete, A-frame building, built in 1970. The Hotel has 544
well appointed guest rooms and luxury suites situated on 22 floors as well as a
5,400 square foot Tru Spa health and beauty spa on the lobby level. The third
floor houses the Chinese Culture Center and grand ballroom. The Hotel has
approximately 15,000 square feet of meeting room space, including the grand
ballroom. Other features of the Hotel include a 5-level underground parking
garage and pedestrian bridge across Kearny Street connecting the Hotel and the
Chinese Culture Center with Portsmouth Square Park in Chinatown. The bridge,
built and owned by the Partnership, is included in the lease to the Chinese
Culture Center.
Since the Hotel just completed renovations, there is no present program for any
further major renovations; however, the Partnership expects to reserve
approximately 4% of gross annual Hotel revenues each year for future capital
requirements. In the opinion of management, the Hotel is adequately covered by
insurance.
HOTEL FINANCINGS
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 120 months at
a fixed interest rate of 5.22% per annum. The Prudential Loan calls for monthly
installments of principal and interest in the amount of approximately $165,000,
calculated on a 30-year amortization schedule. The Loan is collateralized by a
first deed of trust on the Partnership's Hotel property, including all
improvements and personal property thereon and an assignment of all present and
future leases and rents. The Prudential Loan is without recourse to the limited
and general partners of Justice. The principal balance of the Prudential Loan
was $27,723,000 as of June 30, 2010.
On March 27, 2007, Justice entered into a second mortgage loan with Prudential
(the "Second Prudential Loan") in a principal amount of $19,000,000. The term
of the Second Prudential Loan is for approximately 100 months and matures on
August 5, 2015, the same date as the first Prudential Loan. The Second
Prudential Loan is at a fixed interest rate of 6.42% per annum and calls for
monthly installments of principal and interest in the amount of approximately
$119,000, calculated on a 30-year amortization schedule. The Second Prudential
Loan is collateralized by a second deed of trust on the Partnership's Hotel
property, including all improvements and personal property thereon and an
assignment of all present and future leases and rents. The Second Prudential
Loan is also without recourse to the limited and general partners of Justice.
The principal balance of the Second Prudential Loan was $18,267,000 as of June
30, 2010.
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The Partnership had a $2,500,000 unsecured revolving line of credit facility
with a bank that was to mature on April 30, 2010. Borrowings under that line of
credit bore interest at Prime plus 3.0% per annum or based on the Wall Street
Journal Prime Rate (3.25%) plus 3.0% per annum, floating, (but subject to a
minimum floor rate at 5.0% per annum). Borrowings under the line of credit were
subject to certain financial covenants, which are measured annually at June
30th and December 31st based on the credit arrangement. Effective April 29,
2010, the Partnership obtained a modification from the bank which converted its
revolving line of credit facility to a term loan. The Partnership also obtained
a waiver of any prior noncompliance with financial covenants.
The modification provides that Justice will pay the $2,500,000 balance on its
line of credit facility over a period of four years, to mature on April 30,
2014. This term loan calls for monthly principal and interest payments of
$41,000, calculated on a six-year amortization schedule, with interest only
from May 1, 2010 to August 31, 2010. Pursuant to the modification, the annual
floating interest rate was reduced by 0.5% to the WSJ Prime Rate plus 2.5%
(with a minimum floor rate of 5.0% per annum). The modification includes
financial covenants written to reflect financial conditions that all hotels are
facing. The covenants include specific financial ratios and a return to minimum
profitability by June 2011. Management believes that the Partnership has the
ability to meet the specific covenants and the Partnership was in compliance
with the covenants as of June 30, 2010. The Partnership paid a loan
modification fee of $10,000. The loan continues as unsecured. As of June 30,
2010, the interest rate was 5.75% and the outstanding balance was $2,500,000.
As of June 30, 2009, the interest rate was 6.25% and the outstanding balance on
the line of credit was $1,811,000.
RENTAL PROPERTIES
At June 30, 2010, the Company's investment in real estate consisted of
properties located throughout the United States, with a concentration in Texas
and Southern California. These properties include eighteen apartment
complexes, two single-family houses as strategic investments and two commercial
real estate properties. All properties are operating properties. In addition
to the properties, the Company owns approximately 4.1 acres of unimproved real
estate in Texas and 2 acres of unimproved land in Maui, Hawaii.
In the opinion of management, each of the properties is adequately covered by
insurance. None of the properties are subject to foreclosure proceedings or
litigation, other than such litigation incurred in the normal course of
business. The Company's rental property leases are short-term leases, with no
lease extending beyond one year.
Las Colinas, Texas. The Las Colinas property is a water front apartment
community along Beaver Creek that was developed in 1993 with 358 units on
approximately 15.6 acres of land. The Company acquired the complex on April
30, 2004 for approximately $27,145,000. Depreciation is recorded on the
straight-line method, based upon an estimated useful life of 27.5 years. Real
estate property taxes for the year ended June 30, 2010 were approximately
$614,000. The outstanding mortgage balance was approximately $18,414,000 at
June 30, 2010 and the maturity date of the mortgage is May 1, 2013.
Morris County, New Jersey. The Morris County property is a two-story garden
apartment complex that was completed in June 1964 with 151 units on
approximately 8 acres of land. The Company acquired the complex on September
15, 1967 at an initial cost of approximately $1,600,000. Real estate property
taxes for the year ended June 30, 2010 were approximately $197,000.
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Depreciation is recorded on the straight-line method, based upon an estimated
useful life of 40 years. The outstanding mortgage balance was approximately
$9,420,000 at June 30, 2010 and the maturity date of the mortgage is May 1,
2013.
St. Louis, Missouri. The St. Louis property is a two-story project with 264
units on approximately 17.5 acres. The Company acquired the complex on
November 1, 1968 at an initial cost of $2,328,000. For the year ended June 30,
2010, real estate property taxes were approximately $131,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $5,989,000 at June
30, 2010 and the maturity date of the mortgage is May 29, 2013.
Florence, Kentucky. The Florence property is a three-story apartment complex
with 157 units on approximately 6.0 acres. The Company acquired the property
on December 20, 1972 at an initial cost of approximately $1,995,000. For the
year ended June 30, 2010, real estate property taxes were approximately
$49,000. Depreciation is recorded on the straight-line method, based upon an
estimated useful life of 40 years. The outstanding mortgage balance was
approximately $4,018,000 at June 30, 2010 and the maturity date of the mortgage
is July 1, 2014.
San Antonio, Texas. The San Antonio property is a two-story project with 132
units on approximately 4.3 acres. The Company acquired the complex on June 29,
1993 for $2,752,000. For the year ended June 30, 2010, real estate taxes were
approximately $116,000. Depreciation is recorded on the straight-line method,
based upon an estimated useful life of 40 years. The outstanding mortgage
balance was approximately $3,248,000 at June 30, 2010 and the maturity date of
the mortgage is October 30, 2011.
Austin, Texas. The Austin property is a two-story project with 249 units on
approximately 7.8 acres. The Company acquired the complex with 190 units on
November 18, 1999 for $4,150,000. The Company also acquired an adjacent
complex with 59 units on January 8, 2002 for $1,681,000. For the year ended
June 30, 2010, real estate taxes were approximately $182,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $7,202,000 at June
30, 2010 and the maturity date of the mortgage is July 1, 2023. The Company
also owns approximately 4.1 acres of unimproved land adjacent to this property.
Los Angeles, California. The Company owns two commercial properties, twelve
apartment complexes, and two single-family houses in the general area of West
Los Angeles.
The first Los Angeles commercial property is a 5,500 square foot, two story
building that served as the Company's corporate offices until it was leased
out, effective October 1, 2009 and the Company leased a new space for its
corporate office. The Company acquired the building on March 4, 1999 for
$1,876,000. The property taxes for the year ended June 30, 2010 were
approximately $22,000. Depreciation is recorded on the straight-line method,
based upon an estimated useful life of 40 years. The outstanding mortgage
balance was approximately $1,155,000 at June 30, 2010 and the maturity date of
the mortgage is March 25, 2014.
The second Los Angeles commercial property is a 5,900 square foot commercial
building. The Company acquired the building on September 15, 2000 for
$1,758,000. The property taxes for the year ended June 30, 2010 were
approximately $13,000. Depreciation is recorded on the straight-line method,
based upon an estimated useful life of 40 years. The outstanding mortgage
balance was approximately $660,000 at June 30, 2010 and the maturity date of
the mortgage is December 15, 2013.
-17-
The first Los Angeles apartment complex is a 10,600 square foot two-story
apartment with 12 units. The Company acquired the property on July 30, 1999 at
an initial cost of approximately $1,305,000. For the year ended June 30,
2010, real estate property taxes were approximately $19,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $952,000 at June 30,
2010 and the maturity date of the mortgage is December 1, 2018.
The second Los Angeles apartment complex is a 29,000 square foot three-story
apartment with 27 units. This complex is held by Intergroup Woodland Village,
Inc. ("Woodland Village"), which is 55.4% and 44.6% owned by Santa Fe and the
Company, respectively. The property was acquired on September 29, 1999 at an
initial cost of approximately $4,075,000. For the year ended June 30, 2010,
real estate property taxes were approximately $57,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $1,660,000 at June
30, 2010 and the maturity date of the mortgage is October 1, 2029.
The third Los Angeles apartment complex is a 12,700 square foot apartment with
14 units. The Company acquired the property on October 20, 1999 at an initial
cost of approximately $2,150,000. For the year ended June 30, 2010, real
estate property taxes were approximately $33,000. Depreciation is recorded on
the straight-line method, based upon an estimated useful life of 40 years. The
outstanding mortgage balance was approximately $984,000 at June 30, 2010 and
the maturity date of the mortgage is November 1, 2029.
The fourth Los Angeles apartment complex is a 10,500 square foot apartment with
9 units. The Company acquired the property on November 10, 1999 at an initial
cost of approximately $1,675,000. For the year ended June 30, 2010, real
estate property taxes were approximately $26,000. Depreciation is recorded on
the straight-line method, based upon an estimated useful life of 40 years. The
outstanding mortgage balance was approximately $735,000 at June 30, 2010 and
the maturity date of the mortgage is December 31, 2029.
The fifth Los Angeles apartment complex is a 26,100 square foot two-story
apartment with 31 units. The Company acquired the property on May 26, 2000 at
an initial cost of approximately $7,500,000. For the year ended June 30, 2010,
real estate property taxes were approximately $99,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $3,608,000 at June
30, 2010 and the maturity date of the mortgage is August 1, 2033.
The sixth Los Angeles apartment complex is a 27,600 square foot two-story
apartment with 30 units. The Company acquired the property on July 7, 2000 at
an initial cost of approximately $4,411,000. For the year ended June 30, 2010,
real estate property taxes were approximately $67,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. In June 2003, the operations of this property stopped and in December
2003, major renovations of the property began. In May 2004, the Company
obtained a construction loan in the amount of $6,268,000 as part of a major
renovation. In July 2006, the renovation of the property was completed and
renting of the apartments commenced. In August 2007, the construction loan was
refinanced to a note payable. The outstanding mortgage balance was
approximately $6,787,000 at June 30, 2010 and the maturity date of the mortgage
is September 1, 2022.
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The seventh Los Angeles apartment complex is a 3,000 square foot apartment with
4 units. The Company acquired the property on July 19, 2000 at an initial cost
of approximately $1,070,000. For the year ended June 30, 2010, real estate
property taxes were approximately $16,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $399,000 at June 30,
2010 and the maturity date of the mortgage is August 1, 2030.
The eighth Los Angeles apartment complex is a 4,500 square foot two-story
apartment with 4 units. The Company acquired the property on July 28, 2000 at
an initial cost of approximately $1,005,000. For the year ended June 30, 2010,
real estate property taxes were approximately $15,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $669,000 at June 30,
2010 and the maturity date of the mortgage is December 1, 2018.
The ninth Los Angeles apartment complex is a 7,500 square foot apartment with 7
units. The Company acquired the property on August 9, 2000 at an initial cost
of approximately $1,308,000. For the year ended June 30, 2010, real estate
property taxes were approximately $20,000. Depreciation is recorded on the
straight-line method, based upon an estimated useful life of 40 years. The
outstanding mortgage balance was approximately $984,000 at June 30, 2010 and
the maturity date of the mortgage is December 1, 2018.
The tenth Los Angeles apartment complex is a 32,800 square foot two-story
apartment with 24 units. The Company acquired the property on March 8, 2001 at
an initial cost of approximately $2,859,000. For the year ended June 30, 2010,
real estate property taxes were approximately $43,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $1,578,000 at June
30, 2010 and the maturity date of the mortgage is April 1, 2031.
The eleventh Los Angeles apartment complex is a 13,000 square foot two-story
apartment with 8 units. The Company acquired the property on May 1, 2001 at an
initial cost of approximately $1,206,000. For the year ended June 30, 2010,
real estate property taxes were approximately $18,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40
years. The outstanding mortgage balance was approximately $518,000 at June 30,
2010 and the maturity date of the mortgage is November 1, 2029.
The twelfth Los Angeles apartment complex, which is owned 100% by the Company's
subsidiary Santa Fe, is a 4,200 square foot two-story apartment with 2 units.
Santa Fe acquired the property on February 1, 2002 at an initial cost of
approximately $785,000. For the year ended June 30, 2010, real estate property
taxes were approximately $11,000. Depreciation is recorded on the straight-line
method based upon an estimated useful Life of 40 years. The outstanding
mortgage balance was approximately $407,000 at June 30, 2010 and the maturity
date of the mortgage is January 18, 2032.
The first Los Angeles single-family house is a 2,771 square foot home. The
Company acquired the property on November 9, 2000 at an initial cost of
approximately $660,000. For the year ended June 30, 2010, real estate property
taxes were approximately $10,000. Depreciation is recorded on the straight-
line method, based upon an estimated useful life of 40 years. The outstanding
mortgage balance was approximately $435,000 at June 30, 2010 and the maturity
date of the mortgage is December 1, 2030.
The second Los Angeles single-family house is a 2,201 square foot home. The
Company acquired the property on August 22, 2003 at an initial cost of
approximately $700,000. For the year ended June 30, 2010, real estate property
taxes were approximately $11,000. Depreciation is recorded on the straight-
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line method, based upon an estimated useful life of 40 years. The
outstanding mortgage balance was approximately $470,000 at June 30, 2010 and
the maturity date of the mortgage is November 1, 2033.
In August 2004, the Company purchased an approximately two acre parcel of
unimproved land in Kihei, Maui, Hawaii for $1,467,000. The Company intends to
obtain the entitlements and permits necessary for the joint development of the
parcel with an adjoining landowner into residential units. After the completion
of this predevelopment phase, the Company will determine whether it more
advantageous to sell the entitled property or to commence with construction.
MORTGAGES
Further information with respect to mortgage notes payable of the Company is
set forth in Note 11 of the Notes to Consolidated Financial Statements.
ECONOMIC AND PHYSICAL OCCUPANCY RATES
The Company leases units in its residential rental properties on a short-term
basis, with no lease extending beyond one year. The economic occupancy (gross
potential less rent below market, vacancy loss, bad debt, discounts and
concessions divided by gross potential rent) and the physical occupancy(gross
potential rent less vacancy loss divided by gross potential rent) for each of
the Company's operating properties for fiscal year ended June 30, 2010 are
provided below.
Economic Physical
Property Occupancy Occupancy
-------- --------- ----------
Apartments:
1. Las Colinas,TX 65% 91%
2. Morris County, NJ 81% 94%
3. St. Louis, MO 78% 88%
4. Florence, KY 81% 92%
5. San Antonio, TX 74% 84%
6. Austin, TX 56% 75%
7. Los Angeles, CA (1) 79% 98%
8. Los Angeles, CA (2) 70% 99%
9. Los Angeles, CA (3) 88% 91%
10. Los Angeles, CA (4) 86% 96%
11. Los Angeles, CA (5) 71% 99%
12. Los Angeles, CA (6) 72% 91%
13. Los Angeles, CA (7) 86% 92%
14. Los Angeles, CA (8) 86% 95%
15. Los Angeles, CA (9) 84% 92%
16. Los Angeles, CA (10) 82% 96%
17. Los Angeles, CA (11) 87% 93%
18. Los Angeles, CA (12) 87% 92%
The Company's Los Angeles, California properties are subject to various rent
control laws, ordinances and regulations which impact the Company's ability to
adjust and achieve higher rental rates.
The Company's two commercial properties in Los Angeles, California are fully
leased to two respective tenants. The first commercial building lease ends in
November of 2011 with the tenant having the option to extend the lease for
another five years. The second commercial building lease ends in September
2016.
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Item 3. LEGAL PROCEEDINGS
The Company is not subject to any legal proceedings requiring disclosure.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is listed and trades on the NASDAQ Capital Market
tier of the NASDAQ Stock Market, LLC under the symbol: "INTG". The following
table sets forth the high and low sales prices for the Company's common stock
for each quarter of the last two fiscal years ended June 30, 2010 and 2009 as
reported by NASDAQ.
Fiscal 2010 High Low
----------- ----- -----
First Quarter 7/1 - 9/30 $12.01 $ 7.80
Second Quarter 10/1 - 12/31 $11.64 $ 8.35
Third Quarter 1/1 - 3/31 $11.34 $ 8.50
Fourth Quarter 4/1 - 6/30 $16.24 $10.86
Fiscal 2009 High Low
----------- ----- -----
First Quarter 7/1 - 9/30 $17.40 $10.37
Second Quarter 10/1 - 12/31 $16.84 $ 8.60
Third Quarter 1/1 - 3/31 $12.91 $ 6.54
Fourth Quarter 4/1 - 6/30 $12.84 $ 7.55
As of September 10, 2010, the approximate number of holders of record of the
Company's Common Stock was 415. Such number of owners was determined from the
Company's shareholders records and does not include beneficial owners of the
Company's Common Stock whose shares are held in names of various brokers,
clearing agencies or other nominees. Including beneficial holders, there are
approximately 1,050 shareholders of the Company's Common Stock.
DIVIDENDS
The Company has not declared any cash dividends on its common stock and does
not foresee issuing cash dividends in the near future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
This information appears in Part III, Item 12 of this report.
ISSUER PURCHASES OF EQUITY SECURITIES
The Company did not make any purchases of its equity securities during the last
quarter of fiscal 2010.
Item 6. Selected financial Data.
Not required for smaller reporting companies.
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Item 7. Management Discussion and Analysis of Financial Condition
and Results of Operations.
RESULTS OF OPERATIONS
The Company's principal sources of revenue continue to be derived from the
investment of its 68.8% owned subsidiary, Portsmouth, in the Justice Investors
limited partnership ("Justice" or the "Partnership"), 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 in California are managed by professional third
party property management companies and the rental properties outside of
California are managed by the Company. The commercial real estate in California
is also managed by the Company.
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.
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Fiscal Year Ended June 30, 2010 Compared to Fiscal Year Ended June 30, 2009
The Company had a net loss of $4,575,000 for the year ended June 30, 2010
compared to a net loss of $238,000 for the year ended June 30, 2009. The
increase in the net loss is primarily attributable to the current year net loss
on marketable securities of $747,000 compared to a net gain on marketable
securities of $6,132,000 in the prior year. This change was partially offset
by the income tax benefit in the current year and improved hotel operations.
The Company had a loss on hotel operations of $2,390,000 for the year ended
June 30, 2010, compared to a loss of $2,722,000 for the year ended June 30,
2009. The reduction in the loss was primarily attributable to a one-time loss
related to the termination of the hotel garage lease in the amount of $684,000
which was incurred during fiscal 2009, partially offset by an increase in
depreciation and amortization expense due to improvements to the Hotel during
the current year, including upgrades to the guest rooms and installation of
energy saving controls and devices.
The following table sets forth a more detailed presentation of Hotel operations
for the years ended June 30, 2010 and 2009.
For the years ended June 30, 2010 2009
--------------------------- ----------- ----------
Hotel revenues:
Hotel rooms $ 24,848,000 $ 25,237,000
Food and beverage 4,703,000 4,911,000
Garage 2,507,000 2,104,000
Other operating departments 622,000 569,000
---------- ----------
Total hotel revenues 32,680,000 32,821,000
Operating expenses excluding interest, depreciation
and amortization (27,223,000) (28,015,000)
---------- ----------
Operating income before interest, depreciation and
amortization 5,457,000 4,806,000
Interest expense (2,902,000) (2,873,000)
Depreciation and amortization expense (4,945,000) (4,655,000)
---------- ----------
Loss from hotel operations $(2,390,000) $(2,722,000)
========== ==========
For the fiscal year ended June 30, 2010, the Hotel generated operating income
of approximately $5,457,000 before interest, depreciation and amortization, on
operating revenues of approximately $32,680,000 compared to operating income of
approximately $4,806,000 before interest, depreciation and amortization, on
operating revenues of approximately $32,821,000 for the fiscal year ended June
30, 2009. The increase in Hotel operating income from fiscal 2009 to 2010 is
primarily attributable to a one-time loss on the termination of the garage
lease in the amount of $684,000 which was included in operating expenses in
fiscal 2009, partially offset by a $141,000 decline in total hotel revenues in
fiscal 2010.
-23-
Room revenues decreased by approximately $389,000 for the fiscal year ended
June 30, 2010 when compared to fiscal year ended June 30, 2009 and food and
beverage revenues decreased by approximately $208,000 for the same period. The
decrease in room revenues was primarily attributable to a significant decline
in average daily room rates during fiscal 2010 as hotels in the San Francisco
market continued to reduce room rates in an effort to maintain occupancy levels
in a very competitive market. Many hotels have been forced to adopt this
strategy due to a severe reduction in higher rated corporate and group business
travel, which has been replaced by discounted business from Internet channels.
The decrease in food and beverage revenues is primarily attributable to decline
in banquet and catering business as companies continue with cuts in business
travel, corporate meetings and events. The declines in room and food and
beverage revenue were partially offset by a $403,000 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.
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, 2010 and 2009.
Fiscal Year Ended Average Average
June 30, Daily Rate Occupancy% RevPar
----------------- ---------- --------- --------
2010 $143 87% $125
2009 $157 81% $127
The operations of the Hotel continued to be impacted by the significant
downturn in the domestic and international economies and markets. Room rates
continue to be the toughest challenge as the Hotel's average daily room rate
was approximately $14 lower for the fiscal year ended June 30, 2010 compared to
the fiscal year ended June 30, 2009. However, due to increased sales and
marketing efforts in the face of difficult economic conditions and greater
competition, the Hotel was able to boost occupancy rates by approximately 6%
over the comparable period. As a result, the Hotel was able to achieve a
RevPar number that compared very favorably to its competitive set.
In this highly competitive market, management has also continued to focus on
ways to enhance the guest experience as well as improve operating efficiencies.
The Hotel has recently upgraded its guest room with newer flat panel television
systems that provide guests with greater entertainment options. The Hotel has
also installed many energy saving controls and devices as part of its efforts
to become greener and reduce operating costs. Management will continue to
explore new and innovative ways to improve operations and attract new guests to
the Hotel at higher room rates.
While operating in a difficult economy, management was able to improve its real
estate operations by reducing operating expenses and interest expense. The
Company had real estate revenues of $12,155,000 for the year ended June 30,
2010 compared with revenues of $12,787,000 for the year ended June 30, 2009.
While revenues declined by $632,000 as the result of operating in a more
challenging economy, management was able to reduce real estate operating
expenses by $480,000 to $5,857,000 for the year ended June 30, 2010 from
$6,337,000 for the year ended June 30, 2009. Management's decision during the
second half of the fiscal year ended June 30, 2009 to terminate its property
management agreement with Productive Management and to bring the management of
its four remaining properties located outside of California back in-house
reduced operating expenses of approximately $154,000. Interest expense also
decreased to $3,186,000 from $3,381,000 as the result of management refinancing
several of the Company's mortgage loans to lower interest rates during fiscal
-24-
2009 and variable interest rates resetting lower on a certain number of our
properties located in Los Angeles, California. Management continues to review
and analyze the Company's real estate operations to improve occupancy and
rental rates and to reduce expenses and improve efficiencies.
As of June 30, 2010, 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.
The Company had a net loss on marketable securities of $747,000 for the year
ended June 30, 2010 as compared to a net gain on marketable securities of
$6,132,000 for the year ended June 30, 2009. For the year ended June 30, 2010,
the Company had a net realized gain of $3,993,000 and a net unrealized loss of
$4,740,000. 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. 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 and other company guidelines, 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, 2010, the Company had net other
investments of $6,651,000. Included in other investments are investments in
corporate debt and equity instruments which had attached warrants that were
considered derivative instruments. The Company recorded an unrealized gain of
$181,000 related to these warrants during the year ended June 30, 2010. During
the years ended June 30, 2010 and 2009, 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 $1,805,000 and
$1,300,000, respectively.
Dividend and interest income increased to $425,000 from the year ended June 30,
2010 from $205,000 for the year ended June 30, 2009 due to the increased
investment in income yielding securities.
Margin interest and trading expenses increased to $1,398,000 for the year ended
June 30, 2010 from $1,186,000 for the year ended June 30, 2009. The increase
is primarily due to the increase in margin interest expense to $435,000 for the
year ended June 30, 2010 from $211,000 for the year ended June 30, 2009. The
increase is the result of the maintenance of higher margin balances.
During the year ended June 30, 2010, the Company had an income tax benefit of
$1,639,000 on both continuing and discontinued operations compared to a tax
expense of $944,000. The effective tax rate is significantly higher for the
year ended June 30, 2010 as compared to the year ended June 30, 2009 primarily
due to a lower loss from Justice which resulted in a lower amount of
noncontrolling interest that was reconciled against the net loss of the Company
for income tax calculation purposes.
-25-
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As of June 30, 2010 and 2009, the Company had investments in marketable equity
securities of $7,712,000 and $13,920,000, respectively. The following table
shows the composition of the Company's marketable securities portfolio by
selected industry groups as:
June 30, 2010 % of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Investment funds $ 3,271,000 42.4%
REITs 1,946,000 25.2%
Healthcare 668,000 8.7%
Financial services 551,000 7.1%
Other 1,276,000 16.6%
---------- ------
$ 7,712,000 100.0%
========== ======
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%
---------- ------
$ 13,920,000 100.0%
========== ======
The Company's investment portfolio is diversified with 46 different equity
securities. The Company has four individual positions that comprise more than
5% of the equity value of the portfolio with the largest being 19% 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, 2010 2009
------------ ------------
Net investment (loss)gain $ (747,000) $ 6,132,000
Net unrealized gain on other investments 181,000 -
Impairment loss on other investments (1,805,000) (1,300,000)
Dividend and interest income 425,000 205,000
Margin interest (435,000) (211,000)
Trading expenses (963,000) (975,000)
------------ ------------
$ (3,344,000) $ 3,851,000
============ ============
-26-
The Company may also invest, with the approval of the Securities Investment
Committee and other Company guidelines, 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, 2010 and 2009, the Company had net other investments of
$6,651,000 and $6,567,000, respectively. Included in the net other investments
are notes and convertible notes in Comstock Mining, Inc., a public company,
that had a carrying value of $1,875,000 (net of impairment adjustments) as of
June 30, 2010. The face value of these notes and convertible notes as of June
30, 2010 totaled approximately $12,946,000, which includes $8,972,000 of
principal and $3,974,000 of accrued interest. Comstock Mining is currently
working with its debt holders, including the Company, to restructure its debt
and capital structure.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated from its Hotel operations and
general partner fees from Justice. The Company also receives revenues generated
from the investment of its cash and marketable securities and other
investments. 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. 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 and 2010. As a result, no Partnership distributions were paid in
fiscal 2010. Since no significant improvement in economic conditions is
expected in the lodging industry until sometime during 2011, 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, 2010 increased to $264,000, compared to $222,000 for the year ended June
30, 2009.
-27-
Despite the downturns in the economy, the Hotel has continued to generate
positive cash flows. While the debt service requirements related to the two
Prudential loans, as well as the new term loan to pay off the line of credit,
may create some additional risk for the Company and its ability to generate
cash flows in the future since the Partnership's assets had been virtually debt
free for a number of years, management believes that cash flows from the
operations of the Hotel and the garage will continue to be sufficient to meet
all of the Partnership's current and future obligations and financial
requirements. Management also believes that there is sufficient equity in the
Hotel assets to support future borrowings, if necessary, to fund any new
capital improvements and other requirements.
In March 2009, the Company refinanced its $1,054,000 loan on its corporate
office building and obtained a new loan in the amount of $1,200,000. The
interest rate on the loan is fixed at 5.02% and the loan matures in March 2014.
In October 2008, the Company refinanced the mortgage on its 132-unit apartment
located in San Antonio, Texas and obtained a new mortgage loan in the amount of
$2,850,000. The interest rate on the loan is fixed at 5.26% and the loan
matures in October 2011. In December 2008, the Company modified this loan and
borrowed an additional $504,000. As part of the loan modification, the fixed
interest rate was reduced to 5.0% with no change to the maturity date.
In July 2008, the Company modified the mortgage on its 264-unit apartment
complex located in St. Louis, Missouri and borrowed an additional $500,000 on
the note. The term and the interest rate on the note remain the same.
During the year ended June 30, 2010, the Company improved real estate
properties in the aggregate amount of $310,000. Management believes the
improvements to the properties should enhance market values, maintain the
competitiveness of the Company's properties and potentially enable the Company
to obtain a higher yield through higher rents.
The Company has invested in short-term, income-producing instruments and in
equity and debt securities when deemed appropriate. The Company's marketable
securities are classified as trading with unrealized gains and losses recorded
through the statement of operations.
Management believes that its cash, securities assets, and the cash flows
generated from those assets and from partnership distributions and management
fees, will be adequate to meet the Company's current and future obligations.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company's material financial
obligations which also includes interest.
Total Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter
------------ ---------- ---------- ---------- ----------- ---------- -----------
Mortgage notes payable $140,794,000 $7,779,000 $11,769,000 $39,521,000 $ 7,268,000 $9,055,000 $65,402,000
Other notes payable 4,274,000 1,234,000 708,000 694,000 1,629,000 9,000 -
Operating leases 792,000 270,000 103,000 87,000 107,000 111,000 114,000
----------- --------- --------- --------- ---------- --------- ----------
Total $145,860,000 $9,283,000 $12,580,000 $40,302,000 $ 9,004,000 $9,175,000 $65,516,000
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
-29-
IMPACT OF INFLATION
Hotel room rates are typically impacted by supply and demand factors, not
inflation, since rental of a hotel room is usually for a limited number of
nights. Room rates can be, and usually are, adjusted to account for
inflationary cost increases. Since Prism has the power and ability under the
terms of its management agreement to adjust hotel room rates on an ongoing
basis, there should be minimal impact on partnership revenues due to inflation.
Partnership revenues are also subject to interest rate risks, which may be
influenced by inflation. For the two most recent fiscal years, the impact of
inflation on the Company's income is not viewed by management as material.
The Company's residential rental properties provide income from short-term
operating leases and no lease extends beyond one year. Rental increases are
expected to offset anticipated increased property operating expenses.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most significant to the
portrayal of our financial position and results of operations and require
judgments by management in order to make estimates about the effect of matters
that are inherently uncertain. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts in
our consolidated financial statements. We evaluate our estimates on an on-going
basis, including those related to the consolidation of our subsidiaries, to our
revenues, allowances for bad debts, accruals, asset impairments, other
investments, income taxes and commitments and contingencies. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
The actual results may differ from these estimates or our estimates may be
affected by different assumptions or conditions.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Registered Public Accounting Firm 31
Consolidated Balance Sheets - June 30, 2010 and 2009 32
Consolidated Statements of Operations - For
Years Ended June 30, 2010 and 2009 33
Consolidated Statements of Shareholders' Equity(Deficit) - For
Years Ended June 30, 2010 and 2009 34
Consolidated Statements of Cash Flows - For
Years Ended June 30, 2010 and 2009 35
Notes to the Consolidated Financial Statements 36 - 64
-30-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of The Intergroup Corporation:
We have audited the accompanying consolidated balance sheets of The Intergroup
Corporation and its subsidiaries (the Company) as of June 30, 2010 and 2009,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the years then ended. The Company's management
is responsible for these financial statements. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Intergroup
Corporation and its subsidiaries as of June 30, 2010 and 2009, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for noncontrolling interests effective
July 1, 2009.
Burr Pilger Mayer, Inc.
San Francisco, California
September 24, 2010
-31-
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2010 June 30, 2009
-------------- -------------
ASSETS
Investment in hotel, net $ 41,961,000 $ 44,791,000
Investment in real estate, net 61,184,000 63,536,000
Properties held for sale 7,193,000 7,145,000
Investment in marketable securities 7,712,000 13,920,000
Other investments, net 6,651,000 6,567,000
Cash and cash equivalents 1,140,000 1,024,000
Restricted cash 1,641,000 1,598,000
Other assets, net 4,645,000 3,761,000
----------- -----------
Total assets $132,127,000 $142,342,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Liabilities
Accounts payable and other liabilities $ 10,473,000 $ 9,939,000
Due to securities broker 2,235,000 4,840,000
Obligations for securities sold 1,698,000 2,105,000
Line of credit - 1,811,000
Other notes payable 3,688,000 1,280,000
Mortgage notes payable - hotel 45,990,000 46,757,000
Mortgage notes payable - real estate 59,842,000 61,061,000
Mortgage notes payable - property held for sale 10,450,000 10,670,000
Deferred income taxes 1,135,000 2,839,000
----------- -----------
Total liabilities 135,511,000 141,302,000
----------- -----------
Commitments and contingencies
Shareholders' equity(deficit):
Preferred stock, $.01 par value, 100,000 shares
authorized; none issued - -
Common stock, $.01 par value, 4,000,000 shares authorized;
3,290,872 and 3,216,653 issued; 2,401,884 and 2,327,665
Outstanding, respectively 33,000 32,000
Additional paid-in capital 9,109,000 8,959,000
Retained earnings 4,190,000 6,739,000
Treasury stock, at cost, 888,988 shares (9,564,000) (9,564,000)
----------- -----------
Total Intergroup shareholders' equity 3,768,000 6,166,000
Noncontrolling interest (7,152,000) (5,126,000)
----------- -----------
Total shareholders' equity(deficit) (3,384,000) 1,040,000
----------- -----------
Total liabilities and shareholders' equity(deficit) $132,127,000 $142,342,000
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-32-
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30, 2010 2009
----------- -----------
Revenues
Hotel $ 32,680,000 $ 32,821,000
Real estate 12,155,000 12,787,000
----------- -----------
Total revenues 44,835,000 45,608,000
----------- -----------
Costs and operating expenses
Hotel operating expenses (27,223,000) (27,331,000)
Real estate operating expenses (5,857,000) (6,337,000)
Loss on termination of garage lease - (684,000)
Depreciation and amortization expense (6,905,000) (6,777,000)
General and administrative expense (1,814,000) (1,663,000)
----------- -----------
Total costs and operating expenses (41,799,000) (42,792,000)
----------- -----------
Income from operations 3,036,000 2,816,000
----------- -----------
Other income(expense)
Interest expense (6,088,000) (6,254,000)
Net gain(loss) on marketable securities (747,000) 6,132,000
Unrealized gain on other investments 181,000 -
Impairment loss on other investments (1,805,000) (1,300,000)
Dividend and interest income 425,000 205,000
Trading and margin interest expense (1,398,000) (1,186,000)
----------- -----------
Net other expense (9,432,000) (2,403,000)
----------- -----------
Income(loss) before income tax (6,396,000) 413,000
Income tax benefit(expense) 1,713,000 (827,000)
----------- -----------
Loss from continuing operations (4,683,000) (414,000)
----------- -----------
Discontinued operations:
Income from discontinued operations 182,000 293,000
Provision for income tax expense (74,000) (117,000)
----------- -----------
Income from discontinued operations 108,000 176,000
----------- -----------
Net loss (4,575,000) (238,000)
Less: Net loss attributable to the
noncontrolling interest 2,026,000 627,000
----------- -----------
Net (loss)income attributable to Intergroup $(2,549,000) $ 389,000
----------- -----------
Net loss per share from continuing operations
Basic and diluted $ (1.96) $ (0.18)
Net income per share from discontinued operations
Basic and diluted $ 0.05 $ 0.07
Net loss per share attributable to InterGroup
Basic and diluted $ (1.07) $ 0.16
Weighted average shares outstanding 2,383,602 2,361,882
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-33-
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(DEFICIT)
Additional Intergroup Total
Common paid-in Retained Treasury Shareholders' Noncontrolling Shareholders'
Shares stock capital earnings stock Equity Interest Equity
---------- ------- ---------- ----------- ----------- ----------- -------------- ------------
Balance at
June 30, 2008 3,200,093 $32,000 $8,791,000 $ 6,775,000 $(9,151,000) $ 6,447,000 $ (4,499,000) $ 1,948,000
Net income (loss) 389,000 389,000 (627,000) (238,000)
Distributions to
noncontrolling
interest (425,000) (425,000) (425,000)
Issuance of stock 4,560 72,000 72,000 72,000
Exercise of stock
options 12,000 96,000 96,000 96,000
Purchase of
treasury stock (413,000) (413,000) (413,000)
---------- ------- ---------- ----------- ----------- ----------- -------------- -----------
Balance at
June 30, 2009 3,216,653 32,000 8,959,000 6,739,000 (9,564,000) 6,166,000 (5,126,000) 1,040,000
Net loss (2,549,000) (2,549,000) (2,026,000) (4,575,000)
Issuance of stock 6,004 72,000 72,000 72,000
Conversion of RSU
To stock 65,215 1,000 (1,000) -
Exercise of stock
options 3,000 36,000 36,000 36,000
Stock options issued 43,000 43,000 43,000
---------- ------- ---------- ----------- ----------- ----------- -------------- -----------
Balance at
June 30, 2010 3,290,872 $33,000 $9,109,000 $ 4,190,000 $(9,564,000) $ 3,768,000 $ (7,152,000) $(3,384,000)
========= ======= ========== =========== =========== =========== ============== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-34-
THE INTERGROUP COPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2010 2009
----------- -----------
Cash flows from operating activities:
Net loss $(4,575,000) $ (238,000)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation and amortization 6,905,000 6,777,000
Net unrealized (gain)loss on investments 4,740,000 (4,942,000)
Net unrealized gain on other investments (181,000) -
Impairment loss on other investments 1,805,000 1,300,000
Gain on insurance recovery (178,000) -
Loss on termination of garage lease - 684,000
Stock compensation expense 115,000 72,000
Changes in assets and liabilities:
Other assets (257,000) 171,000
Investment in marketable securities 1,468,000 (2,272,000)
Accounts payable and other liabilities 558,000 (824,000)
Due to securities broker (2,605,000) 2,207,000
Obligations for securities sold (407,000) 2,105,000
Deferred taxes (1,704,000) 753,000
----------- ------------
Net cash provided by operating activities 5,684,000 5,793,000
----------- ------------
Cash flows from investing activities:
Investment in hotel (1,329,000) (1,185,000)
Investment in real estate (161,000) (443,000)
Investment in Other investments (1,708,000) (1,069,000)
Investment in Santa Fe - (17,000)
Investment in Portsmouth - (12,000)
Restricted cash (43,000) 55,000
----------- -----------
Net cash used in investing activities (3,241,000) (2,671,000)
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable - 1,147,000
Principal payments on mortgage notes payable (2,206,000) (1,887,000)
Borrowings from note payable/line of credit 689,000 (3,164,000)
(Payments)borrowings of other notes payable (846,000) 642,000
Purchase of treasury stock - (413,000)
Distribution to noncontrolling interest - (425,000)
Proceeds from exercise of stock options 36,000 96,000
----------- -----------
Net cash used in financing activities (2,327,000) (4,004,000)
----------- -----------
Net increase(decrease) in cash and
cash equivalents 116,000 (882,000)
Cash and cash equivalents at beginning of
year 1,024,000 1,906,000
----------- -----------
Cash and cash equivalents at end of year $ 1,140,000 $ 1,024,000
=========== ===========
Supplemental information:
Income tax paid $ 103,000 $ 162,000
========== ==========
Interest paid $ 7,115,000 $ 7,077,000
========== ==========
Conversion of line of credit into other notes
Payable $ 2,500,000 $ -
========== ==========
Fixed assets acquired through capital lease $ 754,800 $ -
========== ==========
Note payable issued under the installment
sale agreement $ - $ 727,000
========== ==========
Fixed assets acquired and note payable assumed
under the installment sale agreement $ - $ (43,000)
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-35-
THE INTERGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
Description of the Business
The InterGroup Corporation, a Delaware corporation, ("InterGroup" or the
"Company") was formed to buy, develop, operate and dispose of real property and
to engage in various investment activities to benefit the Company and its
shareholders.
As of June 30, 2010, the Company had the power to vote 80% of the voting shares
of Santa Fe Financial Corporation ("Santa Fe"), a public company (OTCBB: SFEF).
This percentage includes the power to vote an approximately 4% interest in the
common stock in Santa Fe owned by the Company's Chairman and President pursuant
to a voting trust agreement entered into on June 30, 1998.
Santa Fe's revenue is primarily generated through the management of its 68.8%
owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), a public company
(OTCBB: PRSI). InterGroup also directly owns approximately 11.7% of the common
stock of Portsmouth. Portsmouth has a 50.0% limited partnership interest in
Justice and serves as one of the two general partners. The other general
partner, Evon Corporation ("Evon"), served as the managing general partner
until December 1, 2008 at which time Portsmouth assumed the role of managing
general partner. As discussed in Note 2, the financial statements of Justice
are consolidated with those of the Company.
Justice owns a 544-room hotel property located at 750 Kearny Street, San
Francisco California, known as the Hilton San Francisco Financial District (the
Hotel) and related facilities including a five level underground parking
garage. The Hotel is operated by the partnership as a full service Hilton brand
hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation.
Justice also has a Management Agreement with Prism Hospitality L.P. (Prism) to
perform the day-to-day management functions of the Hotel.
Justice leased the parking garage to Evon through September 30, 2008.
Effective October 1, 2008, Justice and Evon entered into an Installment Sale
Agreement whereby Justice purchased all of Evon's right, title, and interest in
the remaining term of its lease of the parking garage, which was to expire on
November 30, 2010, and other related assets. Justice also agreed to assume
Evon's contract with Ace Parking Management, Inc. ("Ace Parking") for the
management of the garage and any other liabilities related to the operation of
the garage commencing October 1, 2008. The Partnership also leases a day spa
on the lobby level to Tru Spa.
Due to the temporary closing of the Hotel to undergo major renovations from May
2005 until January 2006 to transition and reposition the Hotel from a Holiday
Inn to a Hilton, and the substantial depreciation and amortization expenses
resulting from the renovations and operating losses incurred as the Hotel
ramped up operations after reopening, Justice has recorded net losses. These
losses were anticipated and planned for as part of the Partnership's renovation
and repositioning plan for Hotel and management considers those net losses to
be temporary. The Hotel has been generating positive cash flows from operations
-36-
since June 2006 and net income is expected to improve in the future, especially
since depreciation and amortization expenses attributable to the renovation
will decrease substantially. Despite the significant downturn in the economy,
management believes that the revenues expected to be generated from the Hotel,
garage and the Partnership's leases will be sufficient to meet all of the
Partnership's current and future obligations and financial requirements.
Management also believes that there is significant equity in the Hotel to
support additional borrowings, if necessary.
In addition to the operations of the Hotel, the Company also generates income
from the ownership of real estate. Properties include apartment complexes,
commercial real estate, 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. The Company's residential rental properties located
in California are managed by a professional third party property management
company.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all controlled subsidiaries. All significant inter-company transactions and
balances have been eliminated.
Investment in Hotel, Net
The Hotel property and equipment are stated at cost less accumulated
depreciation. Building and improvements are being depreciated on a straight-
line basis over their estimated useful lives ranging from 5 to 39 years.
Furniture, fixtures and equipment are being depreciated on a straight-line
basis over their estimated useful lives ranging from 5 to 7 years.
Repairs and maintenance are charged to expense as incurred, and costs of
significant renewals and improvements are capitalized. Costs of significant
renewals and improvements are capitalized and depreciated over the shorter of
its remaining estimated useful life or life of the asset.
The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable in accordance with generally accepted accounting principles
(GAAP). If the carrying amount of the asset, including any intangible assets
associated with that asset, exceeds its estimated undiscounted net cash flow,
before interest, the Company will recognize an impairment loss equal to the
difference between its carrying amount and its estimated fair value. If
impairment is recognized, the reduced carrying amount of the asset will be
accounted for as its new cost. For a depreciable asset, the new cost will be
depreciated over the asset's remaining useful life. Generally, fair values are
estimated using discounted cash flow, replacement cost or market comparison
analyses. The process of evaluating for impairment requires estimates as to
future events and conditions, which are subject to varying market and economic
factors. Therefore, it is reasonably possible that a change in estimate
resulting from judgments as to future events could occur which would affect the
recorded amounts of the property. No impairment losses were recorded for the
years ended June 30, 2010 and 2009.
-37-
Investment in Real Estate, Net
Rental properties are stated at cost less accumulated depreciation.
Depreciation of rental property is provided on the straight-line method based
upon estimated useful lives of 5 to 40 years for buildings and improvements and
5 to 10 years for equipment. Expenditures for repairs and maintenance are
charged to expense as incurred and major improvements are capitalized.
The Company also reviews its rental property assets for impairment. No
impairment losses on the investment in real estate have been recorded for the
years ended June 30, 2010 and 2009.
Investment in Marketable Securities
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. Marketable
securities are classified as trading securities with all unrealized gains and
losses on the Company's investment portfolio recorded through the consolidated
statements of operations.
Other Investments, Net
Other investments include non-marketable securities that are carried at cost
net of any impairment loss and non-marketable warrants carried at fair value.
The Company has no significant influence or control over the entities that
issue these investments. These investments are reviewed on a periodic basis
for other-than-temporary impairment. The Company reviews several factors to
determine whether a loss is other-than-temporary. These factors include but are
not limited to: (i) the length of time an investment is in an unrealized loss
position, (ii) the extent to which fair value is less than cost, (iii) the
financial condition and near term prospects of the issuer and (iv) our ability
to hold the investment for a period of time sufficient to allow for any
anticipated recovery in fair value. For the years ended June 30, 2010 and
2009, the Company recorded impairment losses related to other investments of
$1,805,000 and $1,300,000, respectively.
Derivative Financial Instruments
The Company has investments in stock warrants that are considered derivative
instruments.
Derivative financial instruments, as defined in ASC 815-10-15-83, "Derivatives
and Hedging"(pre-Codification SFAS No. 133 Accounting for Derivative Financial
Instruments and Hedging Activities ), consist of financial instruments or other
contracts that contain a notional amount and one or more underlying (e.g.
interest rate, security price or other variable), require no initial net
investment and permit net settlement. Derivative financial instruments may be
free-standing or embedded in other financial instruments. Further, derivative
financial instruments are initially, and subsequently, measured at fair value
on the Company's consolidated balance sheet with the related unrealized gain or
loss recorded in the Company's consolidated statement of operations. The
Company used the Black-Scholes option valuation model to estimate the fair
value these instruments which requires management to make significant
assumptions including trading volatility, estimated terms, and risk free rates.
Estimating fair values of derivative financial instruments requires the
development of significant and subjective estimates that may, and are likely
to, change over the duration of the instrument with related changes in internal
and external market factors. In addition, option-based models are highly
volatile and sensitive to changes in the trading market price of the underlying
-38-
common stock, which has a high-historical volatility. Since derivative
financial instruments are initially and subsequently carried at fair values,
the Company's consolidated statement of operations will reflect the volatility
in these estimate and assumption changes.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased and are carried at cost, which
approximates fair value.
Restricted Cash
Restricted cash is comprised of amounts held by lenders for payment of real
estate taxes, insurance, replacement reserves for the operating properties and
tenant security deposits that are invested in certificates of deposit.
Other Assets, Net
Other asset includes loan fees, franchise fees and license fees. Loan fees are
stated at cost and amortized over the term of the loan using the effective
interest method. Franchise fees are stated at cost and amortized over the life
of the agreement (15 years). License fees are stated at cost and amortized over
10 years.
Accounts receivable from the Hotel and rental property customers are carried at
cost less an allowance for doubtful accounts that is based on management's
assessment of the collectability of accounts receivable. The Company extends
unsecured credit to its customers but mitigates the associated credit risk by
performing ongoing credit evaluations of its customers.
Due to Securities Broker
The Company may utilize margin for its marketable securities purchases through
the use of standard margin agreements with national brokerage firms. Various
securities brokers have advanced funds to the Company for the purchase of
marketable securities under standard margin agreements. These advanced funds
are recorded as a liability.
Obligation for Securities Sold
Obligation for securities sold represents the fair market value of shares sold
with the promise to deliver that security at some future date and the fair
market value of shares underlying the written call options with the obligation
to deliver that security when and if the option is exercised. The obligation
may be satisfied with current holdings of the same security or by subsequent
purchases of that security. Unrealized gains and losses from changes in the
obligation are included in the statement of operations.
Accounts Payable and Other Liabilities
Accounts payable and other liabilities include trade payables, advance deposits
and other liabilities.
Of the total accounts payable and other liabilities balance of $10,473,000,
$7,417,000 is accounts payable related to Justice Investors and its hotel
operations.
-39-
Treasury Stock
The Company records the acquisition of treasury stock under the cost method.
Fair Value of Financial Instruments
The Company accounts for its assets and liabilities under accounting standards
of fair value measurement. Under these standards, fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability
(i.e., the "exit price") in an orderly transaction between market participants
at the measurement date. Accounting standards for fair value measurement
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. Observable
inputs are inputs that market participants would use in pricing the asset or
liability developed based on market data obtained from sources independent of
the Company. Unobservable inputs are inputs that reflect the Company's
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances. The hierarchy is broken down into three levels based on the
observability of inputs as follows:
Level 1-inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Level 2-inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for
the assets or liability, either directly or indirectly, for substantially the
full term of the financial instruments.
Level 3-inputs to the valuation methodology are unobservable and significant to
the fair value.
Revenue Recognition
Room revenue is recognized on the date upon which a guest occupies a room
and/or utilizes the Hotel's services. Food and beverage revenues are recognized
upon delivery. Garage revenue is recognized when a guest uses the garage space.
Rental revenue is recognized on the straight-line method of accounting whereby
contractual rent payment increases are recognized evenly over the lease term,
regardless of when the rent payments are received by Justice. The leases
contain provisions for base rent plus a percentage of the lessees' revenues,
which are recognized when earned.
Revenue recognition from apartment rentals commences when an apartment unit is
placed in service and occupied by a rent-paying tenant. Apartment units are
leased on a short-term basis, with no lease extending beyond one year.
Income Taxes
Deferred income taxes are calculated under the liability method. Deferred
income tax assets and liabilities are based on differences between the
financial statement and tax basis of assets and liabilities at the current
enacted tax rates. Changes in deferred income tax assets and liabilities are
included as a component of income tax expense. Changes in deferred income tax
assets and liabilities attributable to changes in enacted tax rates are charged
-40-
or credited to income tax expense in the period of enactment. Valuation
allowances are established for certain deferred tax assets where realization is
not likely.
Assets and liabilities are established for uncertain tax positions taken or
positions expected to be taken in income tax returns when such positions are
judged to not meet the "more-likely-than-not" threshold based on the technical
merits of the positions.
Environmental Remediation Costs
Liabilities for environmental remediation costs are recorded and charged to
expense when it is probable that obligations have been incurred and the amounts
can be reasonably estimated. Recoveries of such costs are recognized when
received. As of June 30, 2010 and 2009, there were no liabilities for
environmental remediation.
Earnings Per Share
Basic income(loss) per share is computed by dividing net income(loss) available
to common stockholders by the weighted average number of common shares
outstanding. The computation of diluted income(loss) per share is similar to
the computation of basic earnings per share except that the weighted-average
number of common shares is increased to include the number of additional common
shares that would have been outstanding if potential dilutive common shares had
been issued. The Company's only potentially dilutive common shares are stock
options. As of June 30, 2010, the Company had 75,000 stock options that were
considered potentially dilutive common shares and 117,000 stock options that
were considered anti-dilutive. As of June 30, 2009, the Company had 45,000
stock options that were considered potentially dilutive common shares and
57,000 stock options that were considered anti-dilutive. However, the basic
and diluted earnings per share were the same for the years ended June 30, 2010
and 2009 because of the Company's net loss from continuing operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year presentation.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles,
which was primarily codified into Accounting Standards Codification (ASC) Topic
105. This standard became the single source of authoritative nongovernmental
U.S. generally accepted accounting principles (GAAP). The Codification was
effective for interim or annual financial periods ended after September 15,
-41-
2009. The Company adopted ASC 105 beginning the quarter ended September 30,
2009. The adoption of ASC 105 did not have a material impact on our
consolidated financial position, results of operations and cash flows.
Additionally, the FASB now uses Accounting Standards Updates (ASU) to amend
ASC.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS 167), which has been codified into ASC Topic 810-10,
"Consolidation". It clarifies that related parties should be considered when
evaluating the criteria for determining whether a decision maker's or service
provider's fee represents a variable interest. In addition, the amendments
clarify that a quantitative calculation should not be the sole basis for
evaluating whether a decision maker's or service provider's fee represents a
variable interest. This guidance will be effective at the start of a reporting
entity's first fiscal year beginning after November 15, 2009. Early application
is not permitted. Management does not anticipate that the adoption of this
guidance will have a material effect on the Company's consolidated financial
statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was
primarily codified into ASC Topic 855 and updated by ASU 2010-09. The Company
adopted ASC Topic 855 which requires an entity to recognize in the financial
statements the effects of all subsequent events that provide additional
evidence about conditions that existed at the date of the balance sheet. For
non-recognized subsequent events that must be disclosed to keep the financial
statements from being misleading, an entity will be required to disclose the
nature of the event as well as an estimate of its financial effect, or a
statement that such an estimate cannot be made. ASC Topic 855 is consistent
with current practice and did not have any impact on the Company's consolidated
financial statements. Subsequent events were evaluated through the date the
consolidated financial statements were issued.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements-an amendment of ARB No. 51" which was
primarily codified into ASC Topic 810, "Consolidation." ASC Topic 810 states
that accounting and reporting for minority interests will be recharacterized as
noncontrolling interests and classified as a component of equity. This standard
also establishes reporting requirements that provide disclosures that identify
and distinguish between the interests of the parent and the interests of the
noncontrolling owners. ASC Topic 810 required retrospective adoption of the
presentation and disclosure requirements for previously existing minority
interests. All other requirements are to be applied prospectively. This
standard is effective for fiscal years beginning after December 15, 2008. The
Company adopted the provisions beginning July 1, 2009. Prior to adopting this
standard, the Company absorbed 100% of the net loss and accumulated deficit of
Justice Investors as of June 30, 2009. Effective July 1, 2009 under ASC Topic
810, losses attributable to the parent and the noncontrolling interest in a
subsidiary shall be attributed to those respective interests. That is, the
noncontrolling interest shall continue to be attributed its share of losses
even if that attribution results in a deficit noncontrolling interest balance.
As a result, upon adoption, the Company recalculated the accumulated deficit
pertaining to noncontrolling interest totaling $5,126,000 and $4,499,000 as of
June 30, 2009 and 2008, respectively, and reclassified such amount as a
separate component of the shareholders' equity (deficit). However, the losses
attributed to the noncontrolling interest were not adjusted in the consolidated
statement of operations for the year ended June 30, 2009.
-42-
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
which was primarily codified into ASC Topic 825, "Financial Instruments." ASC
Topic 825 provides entities with an irrevocable option to report selected
financial assets and financial liabilities at fair value. It also establishes
presentation and disclosure requirements that are designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. The Company adopted ASC Topic 825 on
July 1, 2008 and chose not to elect the fair value option for its financial
assets and liabilities that had not been previously carried at fair value.
Therefore, material financial assets and liabilities not carried at fair value,
such as other assets, accounts payable, line of credit, other notes payable and
mortgage payables are reported at their carrying values.
In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures About Fair
Value Measurements." Effective January 1, 2010, ASU 2010-06 requires the
separate disclosure of significant transfers into and out of the Level 1 and
Level 2 categories and the reasons for such transfers, and also requires fair
value measurement disclosures for each class of assets and liabilities as well
as disclosures about valuation techniques and inputs used for recurring and
nonrecurring Level 2 and Level 3 fair value measurements. Effective in fiscal
years beginning after December 31, 2010, ASU 2010-06 also requires Level 3
disclosure of purchases, sales, issuances and settlements activity on a gross
rather than a net basis. These amendments resulted in additional disclosures in
the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations",
which was primarily codified into ASC Topic 805, "Business Combinations". It
establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any controlling
interest; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. This standard is to be
applied prospectively to business combinations for which the acquisition date
is on or after an entity's fiscal year that begins after December 15, 2008. The
Company adopted this standard beginning July 1, 2009 and adoption of this
standard had no material impact on the Company's consolidated financial
statements.
NOTE 2 - JUSTICE INVESTORS
On July 14, 2005, the FASB issued Staff Position (FSP) SOP 78-9-1, "Interaction
of AICPA Statement of Position 78-9 and EITF Issue No. 04-5" which was codified
into ASC Topic 910-810, "Real Estate - General - Consolidation", to amend the
guidance in AICPA Statement of Position 78-9, "Accounting for Investments in
Real Estate Ventures" (SOP 78-9) to be consistent with the consensus in
Emerging Issues Task Force Issue No. 04-5 "Determining Whether a
General Partner, or General Partners as a Group, Controls a Limited Partnership
or Similar Entity When the Limited Partners Have Certain Rights" which was
codified into ASC 810-20, "Consolidation", eliminated the concept of "important
rights"(ASC Topic 970-810) and replaces it with the concepts of "kick out
rights" and "substantive participating rights". In accordance with guidance
set forth in ASC Topic 970-20, Portsmouth has applied the principles of
accounting applicable for investments in subsidiaries due to its substantial
limited partnership interest and general partnership rights and has
-43-
consolidated the financial statements of Justice with those of the Company
effective as of July 1, 2006. For the years ended June 30, 2010 and 2009, the
results of operations for Justice were consolidated with those of the Company.
On December 1, 2008, Portsmouth and Evon, as the two general partners of
Justice, entered into a 2008 Amendment to the Limited Partnership Agreement
(the "Amendment") that provides for a change in the respective roles of the
general partners. Pursuant to the Amendment, Portsmouth assumed the role of
Managing General Partner and Evon continued on as the Co-General Partner of
Justice. The Amendment was ratified by approximately 98% of the limited
partnership interests. The Amendment also provides that future amendments to
the Limited Partnership Agreement may be made only upon the consent of the
general partners and at least seventy five percent (75%) of the interests of
the limited partners. Consent of at least 75% of the interests of the limited
partners will also be required to remove a general partner pursuant to the
Amendment.
Concurrent with the Amendment to the Limited Partnership Agreement, a new
General Partner Compensation Agreement (the "Compensation Agreement") was
entered into on December 1, 2008, among Justice, Portsmouth and Evon to
terminate and supersede all prior compensation agreement for the general
partners. Pursuant to the Compensation Agreement, the general partners of
Justice will be entitled to receive an amount equal to 1.5% of the gross annual
revenues of the Partnership (as defined), less $75,000 to be used as a
contribution toward the cost of Justice engaging an asset manager. In no event
shall the annual compensation be less than a minimum base of approximately
$285,000, with eighty percent (80%) of that amount being allocated to
Portsmouth for its services as managing general partner and twenty percent
(20%) allocated to Evon as the co-general partner. Compensation earned by the
general partners in each calendar year in excess of the minimum base, will be
payable in equal fifty percent (50%) shares to Portsmouth and Evon.
NOTE 3 - INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
June 30, 2010 Accumulated Net Book
Cost Depreciation Value
------------ ------------ ------------
Land $ 2,738,000 $ - $ 2,738,000
Furniture and equipment 18,393,000 (14,710,000) 3,683,000
Building and improvements 54,782,000 (19,242,000) 35,540,000
------------ ------------ ------------
$ 75,913,000 $(33,952,000) $ 41,961,000
============ ============ ============
June 30, 2009 Accumulated Net Book
Cost Depreciation Value
------------ ------------ ------------
Land $ 2,738,000 $ - $ 2,738,000
Furniture and equipment 16,939,000 (11,262,000) 5,677,000
Building and improvements 54,266,000 (17,890,000) 36,376,000
------------ ------------ ------------
$ 73,943,000 $(29,152,000) $ 44,791,000
============ ============ ============
-44-
Depreciation expense for the years ended June 30, 2010 and 2009 was $4,890,000
and $4,600,000 respectively.
The Partnership leases certain equipment under agreements that are classified
as capital leases. The cost of equipment under capital leases was $2,108,000
and $959,000 as of June 30, 2010 and 2009, respectively. The accumulated
amortization on capital leases was $1,046,000 and $670,000 as of June 30, 2010
and 2009, respectively.
NOTE 4 - INVESTMENT IN REAL ESTATE, NET
At June 30, 2010, the Company's investment in real estate consisted of twenty-
four properties located throughout the United States. These properties include
eighteen apartment complexes, two single-family houses as strategic
investments, and two commercial real estate properties, one of which served as
the Company's corporate headquarters through October 2009. The Company also
owns two unimproved real estate properties located in Austin, Texas and Maui,
Hawaii.
Investment in real estate included the following:
As of June 30, 2010 2009
---------- ----------
Land $ 24,735,000 $ 24,735,000
Buildings, improvements and equipment 60,758,000 61,149,000
Less: accumulated depreciation (24,309,000) (22,348,000)
---------- ----------
$ 61,184,000 $ 63,536,000
========== ==========
Depreciation expense from continuing operations for the years ended June 30,
2010 and 2009, was $1,960,000 and $2,122,000, respectively.
Three of the Company's properties located in Texas sustained damages due to
hailstorm and fire. The Company's properties are covered by insurance. The
Company estimated and reduced the carrying value of the properties damaged by
approximately $651,000 during the year ended June 30, 2010. As of June 30,
2010, the Company received $147,000 from the insurance company for one of the
properties. The Company also recorded an insurance receivable totaling
$682,000 (which is included in the "Other Assets, net") for insurance claim
made for the other two properties because the realizability of such amount was
probable as of June 30, 2010. The proceeds and receivable from insurance
totaling $829,000 exceeded the amount of property damage by $178,000. The
excess amount was recorded as net gain from insurance recovery and was included
in the "Real estate operating expenses" in the consolidated statements of
operations during the year ended June 30, 2010. In July 2010, the Company
subsequently received a total of $682,000 in insurance recovery from the
insurance company.
NOTE 5 - PROPERTIES HELD FOR SALE AND DISCONTINUED OPERATIONS
As of June 30, 2010, the Company had two properties located in Texas classified
as held for sale. The revenues and expenses from the operation for these
properties along with the properties that were sold and/or listed as held for
sale for the years ended June 30, 2010 and 2009, respectively, have been
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reclassified from continuing operations and reported as income from
discontinued operations in the consolidated statements of operations for the
respective years.
Revenues and expenses from the operation of these properties for the years
ended June 30, 2010 and 2009 are summarized as follows:
For the years ended June 30, 2010 2009
---------- ----------
Revenues $ 2,377,000 $ 2,608,000
Expenses (2,195,000) (2,315,000)
---------- ----------
Income from discontinued operations $ 182,000 $ 293,000
========== ==========
NOTE 6 - INVESTMENT IN MARKETABLE SECURITIES
The Company's investment portfolio consists primarily of corporate equities.
The Company has also invested in income producing securities, which may include
interests in real estate based companies and REITs, where financial benefit
could inure to its shareholders through income and/or capital gain.
At June 30, 2010 and June 30, 2009, all of the Company's marketable securities
are classified as trading securities. The change in the unrealized gains and
losses on these investments are included in earnings.
As of June 30, 2010
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- ------------
Corporate
Equities $ 6,311,000 $ 2,273,000 ($872,000) $ 1,401,000 $ 7,712,000
As of June 30, 2009
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- ------------
Corporate
Equities $ 8,170,000 $ 7,075,000 ($1,325,000) $ 5,750,000 $13,920,000
As of June 30, 2010 and 2009, the Company had $679,000 and $968,000,
respectively, of unrealized losses related to securities held for over one
year.
Net gain(loss)on marketable securities on the statement of operations are
comprised of realized and unrealized gain(loss). Below is the composition of
the two components for the years ended June 30, 2010 and 2009.
-46-
For the years ended June 30, 2010 2009
----------- -----------
Realized gain on marketable securities $ 3,993,000 $ 1,190,000
Unrealized (loss)gain on marketable securities (4,740,000) 4,942,000
----------- -----------
Net (loss)gain on marketable securities $ (747,000) $ 6,132,000
=========== ===========
As part of the investment strategies, the Company may assume short positions in
marketable securities. Short sales are used by the Company to potentially
offset normal market risks undertaken in the course of its investing activities
or to provide additional return opportunities. As of June 30, 2010 and 2009,
the Company had obligations for securities sold (equities short) of $1,698,000
and $2,105,000, respectively.
NOTE 7 - OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the Securities Investment
Committee and other Company guidelines, 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, 2010 and 2009, the Company had net other investments of
$6,651,000 and $6,567,000, respectively, which consist of the following:
Type June 30, 2010 June 30, 2009
--------------------------- ----------------- ----------------
Private equity hedge fund $ 3,712,000 $ 5,517,000
Corporate debt instruments 2,358,000 1,050,000
Warrants - at fair value 581,000 -
----------------- ----------------
$ 6,651,000 $ 6,567,000
================= ================
During the years ended June 30, 2010 and 2009, the Company recorded impairment
losses of $1,805,000 and $1,300,000, respectively.
As of June 30, 2010, the Company had investments in corporate debt and equity
instruments which had attached warrants that were considered derivative
instruments. These warrants have an allocated cost basis of $400,000 and a
fair market value of $581,000 as of June 30, 2010. During the year ended June
30, 2010, the Company had an unrealized gain of $181,000 related to these
warrants.
NOTE 8 - FAIR VALUE MEASUREMENTS
The carrying values of the Company's non-financial instruments approximate fair
value due to their short maturities(i.e., accounts receivable, other assets,
accounts payable and other liabilities, due to securities broker, obligations
for securities sold, line of credit) or the nature and terms of the
obligation(i.e., other notes payable and mortgage note payable).
-47-
The assets measured at fair value on a recurring basis as of June 30, 2010 are
as follows:
Assets: Level 1 Level 2 Level 3 June 30, 2010
----------- --------- --------- --------- --------------
Cash $ 1,140,000 $ - $ - $ 1,140,000
--------- ----------
Restricted cash 1,641,000 - - 1,641,000
--------- ----------
Other investments - warrants - 581,000 - 581,000
-------- ----------
Investment in marketable securities
Investment funds 3,271,000 3,271,000
REITs 1,946,000 1,946,000
Healthcare 668,000 668,000
Financial services 551,000 551,000
Other 1,276,000 1,276,000
---------- ----------
7,712,000 7,712,000
---------- -------- -------- ----------
$10,493,000 $ 581,000 $ - $11,074,000
========== ======== ======== ==========
The assets measured at fair value on a recurring basis as of June 30, 2009 are
as follows:
Assets: Level 1 Level 2 Level 3 June 30, 2009
----------- --------- --------- --------- ------------------
Cash $ 1,024,000 $ - $ - $ 1,024,000
--------- ----------
Restricted cash 1,598,000 - - 1,598,000
--------- ----------
Investment in marketable securities
Dairy products 5,433,000 5,433,000
REITs and financial 3,835,000 3,835,000
Basic materials and energy 1,733,000 1,733,000
Electronic traded funds 1,328,000 1,328,000
Services 376,000 376,000
Other 1,215,000 1,215,000
---------- ----------
13,920,000 13,920,000
---------- -------- -------- ----------
$16,542,000 $ - $ - $16,542,000
========== ======== ======== ==========
The fair values of investments in marketable securities are determined by the
most recently traded price of each security at the balance sheet date. The fair
value of the warrants was determined based upon a Black-Scholes option
valuation model.
Financial assets that are measured at fair value on a non-recurring basis and
are not included in the tables above include "Other investments in non-
marketable securities," that were initially measured at cost and have been
-48-
written down to fair value as a result of impairment. The following table shows
the fair value hierarchy for these assets measured at fair value on a non-
recurring basis as of June 30, 2010:
Loss for the
year ended
Assets: Level 1 Level 2 Level 3 June 30, 2010 June 30, 2010
----------- ------- ------- --------- ------------------ ------------------
Other non-marketable investments $ - $ - $6,070,000 $6,070,000 $ (1,805,000)
Loss for the
year ended
Assets: Level 1 Level 2 Level 3 June 30, 2009 June 30, 2009
----------- ------- ------- --------- ------------------ ------------------
Other non-marketable investments $ - $ - $6,567,000 $6,567,000 $ (1,300,000)
Other investments in non-marketable securities are carried at cost net of any
impairment loss. The Company has no significant influence or control over the
entities that issue these investments. These investments are reviewed on a
periodic basis for other-than-temporary impairment. The Company reviews several
factors to determine whether a loss is other-than-temporary. These factors
include but are not limited to: (i) the length of time an investment is in an
unrealized loss position, (ii) the extent to which fair value is less than
cost, (iii) the financial condition and near term prospects of the issuer and
(iv) our ability to hold the investment for a period of time sufficient to
allow for any anticipated recovery in fair value.
NOTE 9 - OTHER ASSETS, NET
Other assets consist of the following as of June 30,:
2010 2009
----------- -----------
Accounts receivable, net $ 1,573,000 $ 1,271,000
Prepaid expenses 1,088,000 779,000
Inventory 534,000 483,000
Miscellaneous assets, net 1,450,000 1,228,000
----------- -----------
Total other assets $ 4,645,000 $ 3,761,000
=========== ===========
Amortization expense of loan fees and franchise costs for the years ended June
30, 2010 and 2009 was $55,000 for each year.
NOTE 10 - OTHER NOTES PAYABLE AND LINE OF CREDIT
The Partnership had a $2,500,000 unsecured revolving line of credit facility
with a bank that was to mature on April 30, 2010. Borrowings under that line of
credit bore interest at Prime plus 3.0% per annum or based on the Wall Street
Journal Prime Rate (3.25%) plus 3.0% per annum, floating, (but subject to a
minimum floor rate at 5.0% per annum). Borrowings under the line of credit were
subject to certain financial covenants, which are measured annually at June
30th and December 31st based on the credit arrangement. Effective April 29,
-49-
2010, the Partnership obtained a modification from the bank which converted its
revolving line of credit facility to a term loan. The Partnership also obtained
a waiver of any prior noncompliance with financial covenants.
The modification provides that Justice will pay the $2,500,000 balance on its
line of credit facility over a period of four years, to mature on April 30,
2014. This term loan calls for monthly principal and interest payments of
$41,000, calculated on a six-year amortization schedule, with interest only
from May 1, 2010 to August 31, 2010. Pursuant to the modification, the annual
floating interest rate was reduced by 0.5% to the WSJ Prime Rate plus 2.5%
(with a minimum floor rate of 5.0% per annum). The modification includes
financial covenants written to reflect financial conditions that all hotels are
facing. The covenants include specific financial ratios and a return to minimum
profitability by June 2011. Management believes that the Partnership has the
ability to meet the specific covenants and the Partnership was in compliance
with the covenants as of June 30, 2010. The Partnership paid a loan
modification fee of $10,000. The loan continues as unsecured. As of June 30,
2010, the interest rate was 5.75% and the outstanding balance was $2,500,000.
As of June 30, 2009, the interest rate was 6.25% and the outstanding balance on
the line of credit was $1,811,000.
The Partnership has short-term financing agreements with a financial
institution for the payment of its general, property, and workers' compensation
insurance. The notes payable under these financing agreements bear interest at
3.8% per annum and payable in equal monthly installments (principal and
interest) through December 2010. The notes payable at June 30, 2010 and 2009,
were $176,000 and $246,000, respectively.
As of June 30, 2010 and 2009, the Partnership also has a note payable due to
Evon Corporation in the amount of $143,000 and $480,000, respectively. This
note has an annual fixed interest rate of 2.5% and matures on November 15,
2010. As of June 30, 2010 and 2009, the Partnership also has a note payable to
Ace Parking Management, Inc., in the amount of $36,000 and $104,000,
respectively. This note has an annual fixed interest rate of 8.5% and matures
on October 31, 2010.
Justice leases certain equipment under capital leases expiring in various years
through 2012. The capital lease obligations at June 30, 2010 and 2009, were
$833,000 and $450,000, respectively. These notes were included as part of
accounts payable and other liabilities on the consolidated balance sheets
Minimum future lease payments for assets under capital leases as of June 30,
2010 for each of the next five years and in aggregate are:
Year ending June 30
2011 $ 441,000
2012 213,000
2013 199,000
2014 140,000
2015 9,000
--------
Total minimum lease payments: 1,002,000
Less interest on capital leases (169,000)
--------
Present value of minimum lease payments $ 833,000
========
-50-
NOTE 11 - MORTGAGE NOTES PAYABLE
Mortgage notes payable secured by real estate as of June 30, 2010 is summarized
as follows:
Number Note Note Mortgage Interest
Property of Units Origination Maturity Balance Rate
Date Date
----------- ----------- -------------- ------------ --------- -----
SF Hotel 544 Rooms July 2005 August 2015 $27,723,000 5.22%
SF Hotel 544 Rooms March 2005 August 2015 18,267,000 6.42%
-----------
Mortgage notes payable - hotel $45,990,000
===========
Florence 157 June 2005 July 2014 $ 4,018,000 4.96%
Las Colinas 358 April 2004 May 2013 18,414,000 4.99%
Morris County 151 April 2003 May 2013 9,420,000 5.43%
St. Louis 264 May 2008 May 2013 5,989,000 6.16%
Los Angeles 24 May 2001 April 2031 1,578,000 7.15%
Los Angeles 4 September 2000 August 2030 399,000 7.59%
Los Angeles 2 January 2002 February 2032 407,000 6.45%
Los Angeles 1 February 2001 December 2030 435,000 8.44%
Los Angeles 31 September 2003 August 2033 3,608,000 4.35%
Los Angeles 30 August 2007 September 2022 6,787,000 5.97%
Los Angeles 27 October 1999 October 2029 1,660,000 7.73%
Los Angeles 14 December 1999 November 2029 984,000 7.89%
Los Angeles 12 November 2003 December 2018 952,000 6.38%
Los Angeles 9 February 2000 December 2029 735,000 7.95%
Los Angeles 8 May 2001 November 2029 518,000 7.00%
Los Angeles 7 November 2003 December 2018 984,000 6.38%
Los Angeles 4 November 2003 December 2018 669,000 6.38%
Los Angeles 1 October 2003 November 2033 470,000 5.75%
Los Angeles Office March 2009 March 2014 1,155,000 5.02%
Los Angeles Office September 2000 December 2013 660,000 6.71%
-----------
Mortgage notes payable - real estate $59,842,000
===========
Austin 249 June 2003 July 2023 $ 7,202,000 5.46%
San Antonio 132 December 2008 October 2011 3,248,000 5.00%
-----------
Mortgage notes payable - properties held for sale $10,450,000
===========
-51-
Mortgage notes payable secured by real estate as of June 30, 2009 is summarized
as follows:
Number Note Note Mortgage Interest
Property of Units Origination Maturity Balance Rate
Date Date
----------- ----------- -------------- ------------ --------- -----
SF Hotel 544 Rooms July 2005 August 2015 $28,242,000 5.22%
SF Hotel 544 Rooms March 2005 August 2015 18,515,000 6.42%
-----------
Mortgage notes payable - hotel $46,757,000
===========
Florence 157 June 2005 July 2014 $ 4,084,000 4.96%
Las Colinas 358 April 2004 May 2013 18,760,000 4.99%
Morris County 151 April 2003 May 2013 9,610,000 5.43%
St. Louis 264 May 2008 May 2013 6,098,000 6.16%
Los Angeles 24 May 2001 April 2031 1,610,000 7.15%
Los Angeles 5 September 2000 August 2030 407,000 7.59%
Los Angeles 2 January 2002 February 2032 415,000 6.45%
Los Angeles 1 February 2001 December 2030 442,000 8.44%
Los Angeles 31 September 2003 August 2033 3,750,000 4.35%
Los Angeles 30 August 2007 September 2022 6,850,000 5.97%
Los Angeles 27 October 1999 October 2029 1,717,000 7.73%
Los Angeles 14 December 1999 November 2029 1,015,000 7.89%
Los Angeles 12 November 2003 December 2018 969,000 6.38%
Los Angeles 9 February 2000 December 2029 760,000 7.95%
Los Angeles 8 May 2001 November 2029 529,000 7.00%
Los Angeles 7 November 2003 December 2018 1,001,000 6.38%
Los Angeles 4 November 2003 December 2018 681,000 6.38%
Los Angeles 1 October 2003 November 2033 482,000 5.75%
Los Angeles Office March 2009 March 2014 1,191,000 5.02%
Los Angeles Office September 2000 December 2013 690,000 6.71%
-----------
Mortgage notes payable - real estate $61,061,000
===========
Austin 249 June 2003 July 2023 $ 7,353,000 5.46%
San Antonio 132 December 2008 October 2011 3,317,000 5.00%
-----------
Mortgage notes payable - properties held for sale $10,670,000
===========
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 120 months at
a fixed interest rate of 5.22% per annum. The Prudential Loan calls for monthly
installments of principal and interest in the amount of approximately $165,000,
calculated on a 30-year amortization schedule. The Loan is collateralized by a
first deed of trust on the Partnership's Hotel property, including all
improvements and personal property thereon and an assignment of all present and
future leases and rents. The Prudential Loan is without recourse to the limited
and general partners of Justice.
In March 2007, Justice entered into a second mortgage loan with The Prudential
Insurance Company of America (the "Second Prudential Loan") in a principal
amount of $19,000,000. The term of the Second Prudential Loan is for
-52-
approximately 100 months and matures on August 5, 2015, the same date as the
Partnership's first mortgage loan with Prudential. The Second Prudential Loan
is at a fixed interest rate of 6.42% per annum and calls for monthly
installments of principal and interest in the amount of approximately $119,000,
calculated on a 30-year amortization schedule. The Loan is collateralized by a
second deed of trust on the Partnership's Hotel property, including all
improvements and personal property thereon and an assignment of all present and
future leases and rents. The Loan is without recourse to the limited and
general partners of Justice.
In March 2009, the Company refinanced its $1,054,000 loan on its corporate
office building and obtained a new loan in the amount of $1,200,000. The
interest rate on the loan is fixed at 5.02% and the loan matures in March 2014.
In October 2008, the Company refinanced the mortgage on its 132-unit apartment
located in San Antonio, Texas and obtained a new mortgage loan in the amount of
$2,850,000. The interest rate on the loan is fixed at 5.26% and the loan
matures in October 2011. In December 2008, the Company modified this loan and
borrowed an additional $504,000. As part of the loan modification, the fixed
interest rate was reduced to 5.0% with no change to the maturity date.
In July 2008, the Company modified the mortgage on its 264-unit apartment
complex located in St. Louis, Missouri and borrowed an additional $500,000 on
the note. The term and the interest rate on the note remain the same.
Future minimum payments for all notes payable (including the $3,688,000 other
notes payable less the $833,000 capital lease obligations) are as follows:
For the year ending June 30,
2011 $ 3,115,000
2012 6,241,000
2013 34,727,000
2014 4,986,000
2015 5,693,000
Thereafter 64,375,000
-----------
$119,137,000
===========
NOTE 12 - HOTEL RENTAL INCOME AND TERMINATION OF GARAGE LEASE
The Partnership had a lease agreement with Evon for the use of the parking
garage, which was to expire in November 2010. Effective October 1, 2008,
Justice and Evon entered into an installment sale agreement whereby Justice
purchased all of Evon's right, title, and interest in the remaining term of the
garage lease and other related assets. Justice also agreed to assume Evon's
contract with Ace Parking Management, Inc. (Ace) for the management of the
garage and note payable to Ace related to the operation of the garage
commencing October 1, 2008. The purchase price for the garage lease and related
assets was $755,000, payable in one down payment of $28,000 and 26 equal
monthly installments of $29,000, which includes interest at the rate of 2.4%
per annum. For the year ended June 30, 2009, the Partnership recorded a loss on
termination of the garage lease of $684,000.
-53-
Prior to the installment sale agreement, the garage lease had provided for a
monthly rental equal to the greater of the sum of $20,000, or an amount equal
to 60% of gross parking revenues as defined by the lease. For the three months
ended September 30, 2008, the Partnership recorded rental income from Evon of
$402,000.
The Partnership has a lease agreement with Tru Spa, LLC (Tru Spa) for the use
of the spa facilities expiring in May 2013. The lease provides the Partnership
with minimum monthly payments of $14,000, subject to increases based on the
Consumer Price Index. Minimum future rentals to be received under this non-
cancellable lease as of June 30, 2010 are as follows:
For the year ending June 30,
2011 $ 165,000
2012 165,000
2013 151,000
--------------
$ 481,000
==============
NOTE 13 - MANAGEMENT AGREEMENT
On February 2, 2007, the Partnership entered into an agreement with Prism to
manage and operate the Hotel as its agent. The agreement is effective for a
term of ten years, unless the agreement is extended or earlier terminated as
provided in the agreement. Under the management agreement, the Partnership is
required to pay the base management fees of 2.5% of gross operating revenues of
the Hotel (i.e., room, food and beverage, and other operating departments) for
the fiscal year. However, 0.75% of the stated management fee is due only if the
partially adjusted net operating income of the hotel for the fiscal year
exceeds the amount of the Hotel return for the fiscal year. Prism is also
entitled to an incentive management fee if certain milestones are accomplished.
No incentive fees were paid during the years ended June 30, 2010 and 2009. In
support of the Partnership's efforts to reduce costs in this difficult economic
environment, Prism agreed to reduce its management fees by fifty percent from
January 1, 2009, through December 31, 2010, after which the original fee
arrangement will remain in effect. Management fees paid to Prism during the
years ended June 30, 2010 and 2009 were $246,000 and $398,000, respectively.
NOTE 14 - INCOME TAXES
The provision for the Company's income tax benefit(expense) is comprised of the
following:
For the years ended June 30, 2010 2009
------------------------------------ -------------------------------------
Discontinued Discontinued
Operations Operations Total Operations Operations Total
----------- ----------- ---------- ----------- ------------ ----------
Federal
Current tax expense $ 14,000 $ - $ 14,000 $ (15,000) $ - $ (15,000)
Deferred tax benefit 1,467,000 (57,000) 1,410,000 (598,000) (100,000) (698,000)
----------- ----------- ---------- ----------- ------------ -----------
1,481,000 (57,000) 1,424,000 (613,000) (100,000) (713,000)
----------- ----------- ---------- ----------- ------------ -----------
State
Current tax expense (62,000) (17,000) (79,000) (159,000) (17,000) (176,000)
Deferred tax benefit 294,000 - 294,000 (55,000) - (55,000)
----------- ----------- --------- ------------ ----------- ----------
232,000 (17,000) 215,000 (214,000) (17,000) (231,000)
----------- ----------- --------- ----------- ----------- ----------
$ 1,713,000 $ (74,000) $1,639,000 $ (827,000) $ (117,000) $ (944,000)
=========== =========== ========== =========== ============ ===========
-54-
The provision for income taxes differs from the amount of income tax computed
by applying the federal statutory income tax rate to income(loss) before taxes
as a result of the following differences:
For the years ended June 30, 2010 2009
--------- ---------
Income tax at federal statutory rates $2,106,000 $(140,000)
State income taxes, net of federal benefit 190,000 (132,000)
Dividend received deduction 69,000 31,000
Noncontrolling interest (419,000) (469,000)
Valuation allowance (237,000) (27,000)
Other adjustments 4,000 (90,000)
--------- --------
Total income tax (expense)benefit $1,713,000 $(827,000)
========= ========
The components of the deferred tax asset and liabilities are as follows:
As of June 30, 2010 2009
---------- ----------
Deferred tax assets
Net operating loss carryforwards $ 9,819,000 $ 9,264,000
Capital loss carryforwards 615,000 -
Other investment impairment reserve 1,543,000 1,062,000
Accruals and reserves 70,000 916,000
Valuation allowance (1,484,000) (1,197,000)
---------- ----------
10,563,000 10,045,000
Deferred tax liabilities
Deferred real estate gains (8,814,000) (8,858,000)
Unrealized gains on marketable securities (516,000) (2,421,000)
Depreciation (286,000) (209,000)
Equity earnings (1,683,000) (1,109,000)
State taxes (399,000) (287,000)
---------- -----------
(11,698,000) (12,884,000)
---------- -----------
Net deferred tax liability $(1,135,000) $ (2,839,000)
========== ===========
As of June 30, 2010, the Company had net operating losses(NOLs) of $23,941,000
and $21,762,000 for federal and state purposes, respectively. Below is the
break-down of the NOLs for Intergroup, Santa Fe and Portsmouth. The
carryforward expires in varying amounts through the year 2030.
Federal State
---------- ----------
Intergroup $ 6,767,000 $ 8,130,000
Santa Fe 4,959,000 1,808,000
Portsmouth 12,215,000 11,824,000
---------- ----------
$23,941,000 $21,762,000
========== ==========
-55-
NOTE 15 - SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the hotel
("Hotel Operations"), the operation of its multi-family residential properties
("Real Estate Operations") and the investment of its cash in marketable
securities and other investments ("Investment Transactions"). These three
operating segments, as presented in the financial statements, reflect how
management internally reviews each segment's performance. Management also
makes operational and strategic decisions based on this information.
Information below represents reported segments for the years ended June 30,
2010 and 2009. Operating income(loss) from hotel operations consist of the
operation of the hotel and operation of the garage. Operating income for
rental properties consist of rental income. Operating income for investment
transactions consist of net investment gain(loss) and dividend and interest
income.
As of and
For the year ended Hotel Real estate Investment Discontinued
June 30, 2010 Operations operations Transactions Other Subtotal Operations Total
----------- ----------- ----------- ----------- ------------ ------------ ------------
Operating income $32,680,000 $12,155,000 $ - $ - $ 44,835,000 $ 2,377,000 $ 47,212,000
Operating expenses (32,168,000) (7,817,000) - (1,814,000) (41,799,000) (1,603,000) (43,402,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Income(loss) from
operations 512,000 4,338,000 - (1,814,000) 3,036,000 774,000 3,810,000
Interest expense (2,902,000) (3,186,000) - - (6,088,000) (592,000) (6,680,000)
Loss from investments - - (3,344,000) - (3,344,000 - (3,344,000)
Income tax expense - - - 1,713,000 1,713,000) (74,000) 1,639,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $(2,390,000) $ 1,152,000 $(3,344,000) $ (101,000) $ (4,683,000) $ 108,000 $ (4,575,000)
=========== =========== =========== =========== ============ ============ ============
Total Assets $41,961,000 $61,184,000 $14,363,000 $ 7,426,000 $ 124,934,000 $ 7,193,000 $132,127,000
=========== =========== =========== =========== ============ ============ ============
As of and
For the year ended Hotel Real estate Investment Discontinued
June 30, 2009 Operations operations Transactions Other Subtotal Operations Total
----------- ----------- ----------- ----------- ------------ ------------ ------------
Operating income $32,821,000 $12,787,000 $ - $ - $ 45,608,000 $ 2,608,000 $ 48,216,000
Operating expenses (32,670,000) (8,459,000) - (1,663,000) (42,792,000) (1,703,000) (44,495,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Income(loss) from
operations 151,000 4,328,000 - (1,663,000) 2,816,000 905,000 3,721,000
Interest expense (2,873,000) (3,381,000) - - (6,254,000) (612,000) (6,866,000)
Income from investments - - 3,851,000 - 3,851,000 - 3,851,000
Income tax expense - - - (827,000) (827,000) (117,000) (944,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $(2,722,000) $ 947,000 $ 3,851,000 $(2,490,000) $ (414,000) $ 176,000 $ (238,000
=========== =========== =========== =========== ============ ============ ============
Total Assets $44,791,000 $63,536,000 $20,487,000 $ 6,383,000 $ 135,197,000 $ 7,145,000 $142,342,000
=========== =========== =========== =========== ============ ============ ============
-56-
NOTE 16 - STOCK-BASED COMPENSATION PLANS
The Company follows the Statement of Financial Accounting Standards 123
(Revised), "Share-Based Payments" ("SFAS No. 123R"), which was primarily
codified into ASC Topic 718 "Compensation - Stock Compensation", which
addresses accounting for equity-based compensation arrangements, including
employee stock options and restricted stock units.
Intergroup Corporation 2010 Omnibus Employee Incentive Plan
On February 24, 2010, the shareholders of the Company approved The Intergroup
Corporation 2010 Omnibus Employee Incentive Plan (the "2010 Plan"), which was
formally adopted by the Board of Directors following the annual meeting of
shareholders. The Company believes that such awards better align the interests
of its employees with those of its shareholders. Option awards are generally
granted with an exercise price equal to the market price of the Company's stock
at the date of grant; those option awards generally vest based on 5 years of
continuous service. Certain option and share awards provide for accelerated
vesting if there is a change in control, as defined in the 2010 Plan. The 2010
plan authorizes a total of up to 200,000 shares of common stock to be issued as
equity compensation to officers and employees of the Company in an amount and
in a manner to be determined by the Compensation Committee in accordance with
the terms of the 2010 Plan. The 2010 Plan authorizes the awards of several
types of equity compensation including stock options, stock appreciation
rights, performance awards and other stock based compensation. The 2010 Plan
will expire on February 23, 2020, if not terminated sooner by the Board of
Directors upon recommendation of the Compensation Committee. Any awards issued
under the 2010 Plan will expire under the terms of the grant agreement.
On March 16, 2010, the Compensation Committee authorized the grant of 100,000
stock options to the Company's Chairman, President and Chief Executive, John V.
Winfield to purchase up to 100,000 shares of the Company's common stock
pursuant to the 2010 Plan. The exercise price of the options is $10.30, which
is 100% of the fair market value of the Company's Common Stock as determined by
reference to the closing price of the Company's Common Stock as reported on the
NASDAQ Capital Market on March 16, 2010, the date of grant. The options expire
ten years from the date of grant, unless earlier terminated in accordance with
the terms of the 2010 Plan. The options shall be subject to both time and
performance based vesting requirements, each of which must be satisfied before
options are fully vested and eligible to be exercised. Pursuant to the time
vesting requirements, the options vest over a period of five years, with 20,000
options vesting upon each one year anniversary of the date of grant. Pursuant
to the performance vesting requirements, the options vest in increments of
20,000 shares upon each increase of $2.00 or more in the market price of the
Company's common stock above the exercise price ($10.30) of the options. To
satisfy this requirement, the common stock must trade at that increased level
for a period of at least ten trading days during any one quarter.
On March 16, 2010, the Compensation Committee also authorized a grant of 5,000
stock options to the Company's Vice President Real Estate, David C. Gonzalez,
to purchase up to 5,000 shares of the Company's common stock pursuant to the
2010 Plan. The exercise price of the options is $10.30 and the options expire
ten years from the date of grant, unless earlier terminated in accordance with
the terms of the 2010 Plan. The options vest as follows: March 16, 2011 - 2,500
shares; and March 16, 2012 - 2,500 shares.
The fair value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model that uses the assumptions noted in the
table below. Because Black-Scholes option valuation models incorporate ranges
-57-
of assumptions for inputs, those ranges are disclosed. Expected volatilities
are based on historical volatility of the Company's stock, and other factors.
The Company uses historical data to estimate option exercise and employee
termination within the valuation model; The expected term of options granted is
derived from the output of the option valuation model and represents the period
of time that options granted are expected to be outstanding; The risk-free rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
The fair value of options is measured by applying the Black-Scholes model on
grant date, using the following assumptions for the year ended June 30, 2010:
Expected volatility 51.6%
Expected term 7 years
Expected dividend yield 0%
Risk-free interest rate 2.36%
During the year ended June 30, 2010, the Company recorded stock option
compensation cost of $43,000 related to issuance of stock options. As of June
30, 2010, there was a total of $266,000 of unamortized compensation related to
stock options which is expected to be recognized over the weighted-average of 5
years.
The following table summarizes the stock options outstanding as of June 30,
2010:
Aggregate
Number of Weighted-average Weighted Average Intrinsic
Shares Exercise Price Remaining Life Value
---------- --------------- ---------------- ---------
Outstanding at June 30, 2008 390,000 9.13
Granted - -
Exercised (12,000) 8.00
Forfeited - -
Exchanged (276,000) 7.94
---------- ---------------
Outstanding at June 30, 2009 102,000 (a) $12.47 3.15 years $ 52,000
Granted 105,000 10.30
Exercised (3,000) 12.00
Forfeited - -
Exchanged (12,000(a) 12.00
---------- ---------------
Outstanding at June 30, 2010 192,000 $11.32 6.44 years $ 790,000
========== =============== ================ =========
Exercisable at June 30, 2010 87,000 $12.55 2.52 years $ 269,000
========== =============== ================ =========
(a) These options were issued prior to July 1, 2006 from the now terminated
Intergroup 1998 Stock Option Plan for Key Officers and Employees and 1998 Non-
Employee Director Plan. Please see below for more information.
The weighted-average grant-date fair value of options granted during the year
end June 30, 2010 was $5.62. No options were issued for the year ended June
30, 2009. There were no options exercised under the 2010 Plan during the year
ended June 30, 2010. The stock option exercise during the year ended June 30,
2010 pertains to options outstanding under the 1998 Non-Employee Director Plan
(see below) and the intrinsic value amounted to $10,000. The stock option
exercise during the year ended June 30, 2009 pertains to options outstanding
under the 1998 Non-Employee Director Plan (see below) and the intrinsic value
amounted to $18,000.
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Intergroup 1998 Stock Option Plan for Key Officers and Employees and Intergroup
1998 Stock Option Plan for Non-Employee Directors
On December 7, 2008, the Company's 1998 Stock Option Plan for Key Officers and
Employees (1998 Employee Plan) expired; however, any outstanding options issued
under that plan remain effective in accordance with their terms.
The Company's 1998 Stock Option Plan for Non-Employee Directors (1998 Non-
Employee Director Plan) was terminated upon shareholder approval, and Board
adoption, of the 2007 Stock Compensation Plan for Non-Employee Directors;
however, any outstanding options under that plan remained effective in
accordance with their terms. Those stock compensation plans are more fully
described in Note 17 of the Company's Form 10-K/A for the fiscal year ended
June 30, 2009. Please see description of the 2007 Stock Compensation Plan for
Non-Employee Directors below.
As of June 30, 2010, there were a total of 102,000 options outstanding related
to the 1998 Employee Plan and 1998 Non-Employee Director Plan. No stock
options were issued by the Company after July 1, 2006 under the 1998 Employee
Plan and 1998 Non-Employee Director Plan. Additionally, compensation expense
for unvested stock options that were outstanding at July 1, 2006 were
recognized over the requisite service period based on the fair value of those
options as previously calculated at the grant date under the pro-forma
disclosures of SFAS 123.
The InterGroup Corporation 2007 Stock Compensation Plan for Non-Employee
Directors
The InterGroup Corporation 2007 Stock Compensation Plan for Non-Employee
Directors (the "2007 Plan") was approved by the shareholders of the Company on
February 21, 2007, and was thereafter adopted by the Board of Directors. The
2007 Plan will terminate upon the earlier of the date all shares reserved for
issuance have been awarded or February 21, 2017, if not sooner terminated by
the Board upon recommendation by the Compensation Committee. The stock to be
available for issuance under the 2007 Plan shall be unrestricted shares of the
Company's Common Stock, par value $.01 per share, which may be unissued shares
or treasury shares. Subject to certain adjustments upon changes in
capitalization, a maximum of 60,000 shares of the Common Stock will be
available for issuance to participants under the 2007 Plan.
All non-employee directors are eligible to participate in the 2007 Plan. Each
non-employee director as of the adoption date of the 2007 Plan was granted an
award of 600 unrestricted shares of the Company's Common Stock. On each July 1
following the adoption date of the 2007 Plan, each non-employee director shall
receive an automatic grant of a number of shares of Company's Common Stock
equal in value to $18,000 based on 100% of the fair market value (as defined)
of the Common Stock on the date of grant, provided he or she holds such
position on that date and the number of shares of Common Stock available for
grant under the 2007 Plan is sufficient to permit such automatic grant. Any
fractional shares resulting from such grant will be rounded up to next highest
whole share. All stock awards to non-employee directors will be fully vested
on the date of grant. The dollar amount of the annual grant is subject to
further adjustment by the Board of Directors upon recommendation by the
Compensation Committee.
The stock awards granted under the 2007 Plan are shares of unrestricted Common
Stock and are fully vested on the date of grant. The right of the non-employee
director to receive his or her annual grant of Common is personal to the
director and is not transferable. Once received, shares of Common Stock awarded
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to the non-employee director are freely transferable subject to any
requirements of Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). On June 28, 2007, Company filed a registration
statement on Form S-8 to register the shares subject to the 2007 Plan and the
Company's two prior stock option plans under the Securities Act of 1933, as
amended (the "Securities Act").
Upon recommendation of the Compensation Committee, the Board may, at any time
and from time to time and in any respect, amend or modify the 2007 Plan. The
Board must obtain stockholder approval of any material amendment to the 2007
Plan if required by any applicable law, regulation or stock exchange rule. The
Board of Directors may amend the 2007 Plan or any award agreement, which
amendment may be retroactive, in order to conform it to any present or future
law, regulation or ruling relating to plans of this or similar nature. No
amendment or modification of the 2007 Plan or any award agreement may adversely
affect any outstanding award without the written consent of the participant
holding the award.
For the year ended June 30, 2010 and 2009, the four non-employee directors of
the Company received a total grant of 6,004 and 4,560 shares of Common Stock
pursuant to the 2007 Plan.
The InterGroup Corporation 2008 Restricted Stock Unit Plan
On December 3, 2008, the Board of Directors of the Company adopted, a new
equity compensation plan for its officers, directors and key employees
entitled, The InterGroup Corporation 2008 Restricted Stock Unit Plan (the "RSU
Plan"). The Plan was adopted, in part, to replace the stock option plans that
expired on December 7, 2008. The Plan was approved by shareholders at the
Company's Annual Meeting of Shareholders on February 18, 2009.
The RSU Plan authorizes the Company to issue restricted stock units ("RSUs") as
equity compensation to officers, directors and key employees of the Company on
such terms and conditions established by the Compensation Committee of the
Company. RSUs are not actual shares of the Company's common stock, but rather
promises to deliver common stock in the future, subject to certain vesting
requirements and other restrictions as may be determined by the Committee.
Holders of RSUs have no voting rights with respect to the underlying shares of
common stock and holders are not entitled to receive any dividends until the
RSUs vest and the shares are delivered. No awards of RSUs shall vest until at
least nine months after shareholder approval of the RSU Plan on February 18,
2009. Subject to certain adjustments upon changes in capitalization, a maximum
of 200,000 shares of the common stock are available for issuance to
participants under the RSU Plan. The RSU Plan will terminate ten (10) years
from December 3, 2008, unless terminated sooner by the Board of Directors.
After the RSU Plan is terminated, no awards may be granted but awards
previously granted shall remain outstanding in accordance with the Plan and
their applicable terms and conditions.
Under the RSU Plan, the Compensation Committee also has the power and authority
to establish and implement an exchange program that would permit the Company to
offer holders of awards issued under prior shareholder approved compensation
plans to exchange certain options for new RSUs on terms and conditions to be
set by the Committee. The exchange program is designed to increase the
retention and motivational value of awards granted under prior plans. In
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addition, by exchanging options for RSUs, the Company will reduce the number of
shares of common stock subject to equity awards, thereby reducing potential
dilution to stockholders in the event of significant increases in the value of
its common stock.
Pursuant to an exchange offer authorized by the Compensation Committee, a total
of 5,812 RSUs were issued to four holders of Non-Employee Director stock
options in exchange for a total of 36,000 stock options which were surrendered
to the Company on December 7, 2008. The number of RSUs issued was determined by
multiplying the number of options that were surrendered by the difference
between the exercise price of the options surrendered ($8.00) and the closing
price of the Company's common stock on December 5, 2008 of $9.54, with that
product divided by the closing price of the common stock on December 5, 2009.
No additional compensation expense was recognized related to the exchange as
the fair market value of the options immediately prior to the exchange,
approximated the fair value of the RSUs on the day of issuance. In August
2009, the 5,812 RSUs vested and the Company issued common stock.
Pursuant to a further exchange offer authorized by the Compensation Committee,
a total of 4,775 RSUs were issued to five holders of Non-Employee Director
stock options in exchange for a total of 15,000 stock options which were
surrendered to the Company on June 30, 2009. The number of RSUs issued was
determined by multiplying the number of options that were surrendered by the
difference between the exercise price of the options surrendered ($8.17) and
the closing price of the Company's common stock on June 30, 2009 of $11.99,
with that product divided by the closing price of the common stock on June 30,
2009. No additional compensation expense was recognized related to the exchange
as the fair market value of the options immediately prior to the exchange,
approximated the fair value of the RSUs on the day of issuance. In January
2010, the 4,775 RSUs vested and the company issued common stock. In June 2010,
three non-employee directors exchanged a total of 12,000 stock options for
2,564 RSUs. No compensation expense was recognized related to the exchange as
the fair market value of the options immediately prior to the exchange,
approximated the fair value of the RSUs on the day of issuance.
On December 15, 2008, the Compensation Committee authorized a similar exchange
offer to the Company's Chief Executive Officer ("CEO"), respecting 225,000
stock options issued to him under the 1998 Key Officer and Employee Plan that
were to expire on December 21, 2008. Pursuant to that exchange offer, the
Company's CEO surrendered his 225,000 options to the Company on December 21,
2008 in exchange for 84,628 RSUs. The number of RSUs issued was based on an
exercise price of the options surrendered of $7.917 and the closing price of
the Company's common stock on December 19, 2008 of $12.69, using the same
formula as the exchange offer to the holders of the Non-Employee Director
options. No additional compensation expense was recognized related to the
exchange as the fair market value of the options immediately prior to the
exchange, approximated the fair value of the RSUs on the day of issuance. In
September 2009, 54,628 RSUs vested and the Company issued common stock. No
stock compensation was recognized as compensation expense for this conversion
as they were previously calculated at the grant date under the pro-forma
disclosures of SFAS 123(codified into ASC 718-10).
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The table below summarizes the RSUs granted and outstanding.
Weighted Average
Grant Date
Number of RSUs Fair Value
-------------- ----------------
RSUs outstanding as of June 30, 2009 95,215 $12.46
Granted 2,564 $15.26
Converted to common stock (65,215) $ 8.42
-------------- ----------------
RSUs outstanding as of June 30, 2010 32,564 $12.89
============== ================
During the year ended June 30, 2010 and 2009, no additional compensation
expense was recognized related to the exchange of previously issued stock
options to RSUs as the fair market value of the options immediately prior to
the exchange, approximated the fair value of the RSUs on the day of issuance.
NOTE 17 - RELATED PARTY TRANSACTIONS
The contractor that was selected to oversee the garage and the first four
floors' renovation (excluding room upgrades) of the Hotel is the contractor who
originally constructed the Hotel. He is also a limited partner in the
Partnership and is a director of Evon Corporation, the co-general partner of
the Partnership. There were no payables to the contractor at June 30, 2010 and
2009. Services performed by the contractor were capitalized as fixed assets
which totaled $0 and $103,000 for the years ended June 30, 2010 and 2009,
respectively. Management believes these renovations were competitively priced.
Through September 30, 2008, Evon, was the lessee of the parking garage. Evon
paid the Partnership $402,000 for the three months ended September 30, 2008,
under the terms of the lease agreement. The lease agreement with Evon was
terminated effective October 1, 2008. Concurrently, an installment sale
agreement was entered between Justice and Evon. Justice had a note payable to
Evon totaling $143,000 and $480,000 as of June 30, 2010 and 2009, respectively.
As Chairman of the Securities Investment Committee, the Company's President and
Chief Executive Officer, John V. Winfield, directs the investment activity of
the Company in public and private markets pursuant to authority granted by the
Board of Directors. Mr. Winfield also serves as Chief Executive Officer
and Chairman of InterGroup and oversees the investment activity
of the Company. Depending on certain market conditions and various risk
factors, the Chief Executive Officer, his family and the Company may, at
times, invest in the same companies in which the Company invests. The Company
encourages such investments because it places personal resources of the Chief
Executive Officer and his family members, and the resources of InterGroup, at
risk in connection with investment decisions made on behalf of the Company.
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NOTE 18 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Partnership leases equipment and office space under operating leases with
expiration dates through 2017. The future minimum payments under these operating
leases as of June 30, 2010 are as follows:
For the year ending June 30,
2011 $ 270,000
2012 103,000
2013 87,000
2014 107,000
2015 111,000
Thereafter 114,000
-----------
$ 792,000
===========
Operating Leases - Tenant
The Company leases its two commercial properties to tenants under noncancelable
leases for base rent. Future base rentals on the two leases at June 30, 2010
were as follows:
For the year ending June 30,
2011 $ 389,000
2012 275,000
2013 209,000
2014 215,000
2015 54,000
-----------
$ 1,142,000
===========
Administrative fees - General Partners
During the each of the years ended June 30, 2010 and 2009, the general partners
of Justice were paid a total of $417,000 and $425,000, respectively. The total
amounts paid represents the minimum base compensation of $285,000 each year
plus $131,000 and $140,000, respectively, based upon the agreement. The
amounts paid to the Company were eliminated in the consolidation.
Franchise Agreements
The Partnership entered into a Franchise License agreement (the License
agreement) with the Hilton Hotels Corporation (Hilton) on December 10, 2004.
The term of the License agreement is for a period of 15 years commencing on the
opening date, with an option to extend the license agreement for another five
years, subject to certain conditions.
Beginning on the opening date in January 2006, the Partnership paid monthly
royalty fees for the first two years of three percent (3%) of the Hotel's gross
room revenue for the preceding calendar month; the third year was at four
percent (4%) of the Hotel's gross room revenue; and the fourth year until the
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end of the term will be five percent (5%) of the Hotel's gross room revenue.
The Partnership also pays a monthly program fee of four percent (4%) of the
Hotel's gross revenue. The amount of the monthly program fee is subject to
change; however, the increase cannot exceed one percent (1%) of the Hotel gross
room revenue in any calendar year, and the cumulative increases in the monthly
fees will not exceed five percent (5%) of gross room revenue. Franchise fees
for the years ended June 30, 2010 and 2009 were $2,239,000 and $2,128,000,
respectively.
The Partnership also pays Hilton a monthly information technology recapture
charge of 0.75% of the Hotel's gross revenues. In this difficult economic
environment, Hilton agreed to reduce its information technology fees to 0.65%
for the 2010 calendar year. For the years ended June 30, 2010 and 2009, those
charges were $139,000 and $166,000, respectively.
The Company is involved from time to time in various claims in the ordinary
course of business. Management does not believe that the impact of such matters
will have a material effect on the financial conditions or result of operations
when resolved.
NOTE 19 - EMPLOYEE BENEFIT PLAN
Justice has a 401(k) Profit Sharing Plan (the Plan) for employees who have
completed six months of service. Justice provides a matching contribution up to
4% of the contribution to the Plan based upon a certain percentage on the
employees' elective deferrals. Justice may also make discretionary
contributions to the Plan each year. Contributions made to the Plan amounted to
$64,000 and $73,000 during the years ended June 30, 2010 and 2009,
respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Principal Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the
fiscal period covered by this Annual Report on Form 10-K. Based upon such
evaluation, the Chief Executive Officer and Principal Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed in this filing is accumulated and communicated to management and is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, for the Company. In establishing
adequate internal control over financial reporting, management has developed
and maintained a system of internal control, policies and procedures designed
to provide reasonable assurance that information contained in the accompanying
consolidated financial statements and other information presented in this
annual report is reliable, does not contain any untrue statement of a material
fact or omit to state a material fact, and fairly presents in all material
respects the financial condition, results of operations and cash flows of the
Company as of and for the periods presented in this annual report.
Management conducted an evaluation of the effectiveness of Company's internal
control over financial reporting using the framework in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its evaluation under that framework, management
believes that the Company's internal control over financial reporting was
effective as of June 30, 2010.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over financial
reporting during the last quarterly period covered by this Annual Report on
Form 10-K that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Item 9B. Other Information.
None to report.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth certain information with respect to the
Directors and Executive Officers of the Company as of June 30, 2010:
Position with
Name the Company Age Term to Expire
------------------ ------------------ --- -----------------
Class A Directors:
John V. Winfield Chairman of the Board; 63 Fiscal 2012 Annual Meeting
(1)(4)(6)(7) President and Chief
Executive Officer
Josef A. Grunwald Director and Vice 62 Fiscal 2012 Annual Meeting
(2)(3)(5)(7) Chairman of the Board
Class B Directors:
Gary N. Jacobs
(1)(2)(6)(7) Secretary; Director 65 Fiscal 2010 Annual Meeting
William J. Nance (1)
(2)(3)(4)(6)(7) Director 66 Fiscal 2010 Annual Meeting
Class C Director:
John C. Love Director 70 Fiscal 2011 Annual Meeting
(3)(4)(5)
Other Executive Officers:
David C. Gonzalez Vice President 43 N/A
Real Estate
Michael G. Zybala Asst. Secretary 58 N/A
and Counsel
David T. Nguyen Treasurer and 37 N/A
Controller
------------------
(1) Member of the Executive Committee
(2) Member of the Administrative and Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Real Estate Investment Committee
(5) Member of the Nominating Committee
(6) Member of the Securities Investment Committee
(7) Member of the Special Strategic Options Committee
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Business Experience:
The principal occupation and business experience during the last five years for
each of the Directors and Executive Officers of the Company are as follows:
John V. Winfield -- Mr. Winfield was first appointed to the Board in 1982. He
currently serves as the Company's Chairman of the Board, President and Chief
Executive Officer, having first been appointed as such in 1987. Mr. Winfield
also serves as President, Chairman and Chief Executive Officer of Santa Fe
Financial Corporation ("Santa Fe") and Portsmouth Square, Inc. ("Portsmouth")
both public companies. Mr. Winfield's extensive experience as an entrepreneur
and investor, as well as his managerial and leadership experience from serving
as a chief executive officer and director of public companies, led to the
Board's conclusion that he should serve as a director of the Company.
Josef A. Grunwald -- Mr. Grunwald is an industrial, commercial and residential
real estate developer. He serves as Chairman of PDG N.V. (Belgium), a hotel
management company, and President of I.B.E. Services S.A. (Belgium), an
international trading company. Mr. Grunwald was first elected to the Board in
1987 and named Vice Chairman on January 30, 2002. Mr. Grunwald is also a
Director of Portsmouth. Mr. Grunwald's extensive experience in business and
finance in the real estate industry, his experience in hotel management, as
well as his experience as an entrepreneur and manager of his own companies, led
to the Board's conclusion that he should serve as a director of the Company.
William J. Nance -- Mr. Nance is a Certified Public Accountant and private
consultant to the real estate and banking industries. He is also President of
Century Plaza Printers, Inc. Mr. Nance was first elected to the Board in 1984.
He served as the Company's Chief Financial Officer from 1987 to 1990 and as
Treasurer from 1987 to June 2002. Mr. Nance is also a Director of Santa Fe and
Portsmouth. Mr. Nance also serves as a director and Chairman of the Board of
Comstock Mining, Inc. (formerly Goldspring, Inc.), a public company. Mr.
Nance's extensive experience as a CPA and in numerous phases of the real estate
industry, his business and management experience gained in running his own
businesses, his service as a director and audit committee member for other
public companies and his knowledge and understanding of finance and financial
reporting, led to the Board's conclusion that he should serve as a director of
the Company.
Gary N. Jacobs -- Mr. Jacobs is an attorney at law and "Of Counsel" to the law
firm of Glaser, Weil, Fink, Jacobs Howard & Shapiro, LLP. He was appointed to
the Board and as Secretary of the Company in 1998. Mr. Jacobs also served as a
Director and General Counsel of MGM MIRAGE (NYSE: MGM) from 2000, as Secretary
of MGM MIRAGE from 2002 and as Executive Vice President from 2000 to August
2009, when he became President Corporate Strategy. Mr. Jacobs retired from all
of his positions with MGM MIRAGE effective, December 15, 2009. Mr. Jacob's
extensive experience as an attorney and as an executive officer and director of
a large public company, and his knowledge and understanding of business
transactions, finance, public company reporting and corporate governance, led
to the Board's conclusion that he should serve as a director of the Company.
John C. Love -- Mr. Love was appointed to the Board in 1998. Mr. Love is an
international hospitality and tourism consultant. He is a retired partner in
the national CPA and consulting firm of Pannell Kerr Forster and, for the last
30 years, a lecturer in hospitality industry management control systems and
competition & strategy at Golden Gate University and San Francisco State
University. He is Chairman Emeritus of the Board of Trustees of Golden Gate
University and the Executive Secretary of the Hotel and Restaurant Foundation.
-67-
Mr. Love is also a Director of Santa Fe and Portsmouth. Mr. Love's extensive
experience as a CPA and in the hospitality industry, including teaching at the
university level for the last 30 years in management control systems, and his
knowledge and understanding of finance and financial reporting, led to the
Board's conclusion that he should serve as a director of the Company.
David C. Gonzalez -- Mr. Gonzalez was appointed Vice President Real Estate of
the Company on January 31, 2001. Over the past 20 years, Mr. Gonzalez has
served in numerous capacities with the Company, including Controller and
Director of Real Estate.
David T. Nguyen - Mr. Nguyen was appointed as Treasurer of the Company on
February 26, 2003. Mr. Nguyen also serves as Treasurer of Santa Fe and
Portsmouth, having been appointed to those positions on February 27, 2003. Mr.
Nguyen is a Certified Public Accountant and, from 1995 to 1999, was employed by
PricewaterhouseCoopers LLP where he was a Senior Accountant specializing in
real estate. Mr. Nguyen served as the Company's Controller from 1999 to 2001
and from 2003 to the present.
Michael G. Zybala -- Mr. Zybala is an attorney at law and has served as
Assistant Secretary and legal counsel of the Company since January 1999. Mr.
Zybala is also the Vice President and Secretary of Santa Fe and Portsmouth and
has served as their General Counsel since 1995. Mr. Zybala has provided legal
services to Santa Fe and Portsmouth since 1978.
Family Relationships: There are no family relationships among directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers.
Involvement in Certain Legal Proceedings: No director or executive officer, or
person nominated or chosen to become a director or executive officer, was
involved in any legal proceeding requiring disclosure.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and each beneficial owner of more than ten percent of
the Common Stock of the Company, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than ten-percent shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of Forms 3 and 4 and amendments
thereto furnished to the Company during its most recent fiscal year, or written
representations from certain reporting persons that no Forms 5 were required
for those persons, the Company believes that during fiscal 2010 all filing
requirements applicable to its officers, directors, and greater than ten-
percent beneficial owners were complied with.
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Code of Ethics.
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of the Code of
Ethics is posted on the Company's website at www.intergroupcorporation.com. The
Company will provide to any person without charge, upon request, a copy of its
Code of Ethics by sending such request to: The InterGroup Corporation, Attn:
Treasurer, 10940 Wilshire Blvd., Suite 2150, Los Angeles, CA 90024. The Company
will promptly disclose any amendments or waivers to its Code of Ethics on Form
8-K.
BOARD AND COMMITTEE INFORMATION
InterGroup's common stock is listed on the NASDAQ Capital Market tier of the
NASDAQ Stock Market, LLC ("NASDAQ"). InterGroup is a Smaller Reporting Company
under the rules and regulations of the Securities and Exchange Commission
("SEC"). With the exception of the Company's President and CEO, John V.
Winfield, all of InterGroup's Board of Directors consists of "independent"
directors as independence is defined by the applicable rules of the SEC and
NASDAQ.
Nominating Committee
The Company's Nominating Committee is comprised of two "independent" directors
as independence is defined by the applicable rules of the SEC and NASDAQ.
Directors Love and Grunwald serve as the current members of the Nominating
Committee. The Company has not established a charter for the Nominating
Committee and the Committee has no policy with regard to consideration of any
director candidates recommended by security holders. As a smaller reporting
company whose directors own in excess of fifty percent of the voting shares of
the Company, InterGroup has not deemed it appropriate to institute such a
policy. There have not been any material changes to the procedures by which
security holders may recommend nominees to the Company's board of directors.
Audit Committee and Audit Committee Financial Expert
The Company is a Smaller Reporting Company under SEC rules and regulations.
The Company's Audit Committee is currently comprised of three members:
Directors Nance (Chairperson), Grunwald and Love, each of who meet the
independence requirements of the SEC and NASDAQ as modified or supplemented
from time to time. The Company's Board of Directors has determined that
Directors Nance and Love also meet the Audit Committee Financial Expert
requirement as defined by the SEC and NASDAQ.
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Item 11. Executive Compensation.
The following table provides certain summary information concerning
compensation awarded to, earned by, or paid to the Company's principal
executive officer and other named executive officers of the Company whose total
compensation exceeded $100,000 for all services rendered to the Company and its
subsidiaries for each of the Company's last two completed fiscal years ended
June 30, 2010 and June 30, 2009. There was no non-equity incentive plan
compensation or nonqualified deferred compensation earnings. There are
currently no employment contracts with the executive officers.
SUMMARY COMPENSATION TABLE
Name and Principal Fiscal Stock Option All Other
Position Year Salary Bonus Awards Awards Compensation Total
----------------------- ---- ---------- ----- --------- ---------- ------------ ----------
John V. Winfield 2010 $522,000(1) $ - $450,681(2) $294,292(3) $172,000(4) $1,438,973
Chairman, President and 2009 $522,000(1) $ - $ - - $166,000(4) $ 688,000
Chief Executive Officer
David C. Gonzalez 2010 $180,000 $ - $ - $ 14,708(5) $ - $ 194,708
Vice President 2009 $180,000 $ - $ - $ - $ - $ 180,000
Real Estate
David T. Nguyen 2010 $180,000(6) $ - $ - $ - $ - $ 180,000
Treasurer and 2009 $180,000(6) $ - $ - $ - $ - $ 180,000
Controller
Michael G. Zybala 2010 $155,000(7) $ - $ - $ - $ - $ 155,000
Asst. Secretary 2009 $138,000(7) $ - $ - $ - $ - $ 138,000
and Counsel
-----------------------
(1) Mr. Winfield also serves as President and Chairman of the Board of the
Company's subsidiary, Santa Fe, and Santa Fe's subsidiary, Portsmouth. Mr.
Winfield received a salary from Santa Fe and Portsmouth in the aggregate amount
of $255,000 from those entities for each of fiscal years 2010 and 2009, as well
as director's fees totaling $12,000 for each year. Those amounts are included
in this item.
(2) Dollar amount reflects the fair market value of 54,628 shares of common
stock issued to Mr. Winfield upon the vesting of 54,628 Restricted Stock Units
("RSUs") on September 10, 2009 as determined by reference to the closing price
of the Company's common stock as reported on the NASDAQ Capital Market on the
vesting date. The RSUs were issued pursuant to The InterGroup Corporation 2008
Restricted Stock Unit Plan (the "RSU Plan"). On December 21, 2008, Mr. Winfield
surrendered to the Company 225,000 fully vested stock options in exchange for
84,628 RSUs pursuant to an exchange offer made by the Compensation Committee as
authorized by 2008 RSU Plan. Each RSU represents a promise to deliver, in the
future, one share of Common Stock, subject to certain vesting requirements and
other restrictions. The number of RSUs to be issued under the exchange offer
was determined by multiplying the number of options that were surrendered by
the difference between the exercise price of the options surrendered ($7.917)
and the closing price of the Company's common stock on December 19, 2008 of
$12.69, with that product divided by the closing price of the common stock on
December 19, 2008. Since the value of the RSUs issued equaled the value of the
options surrendered, no dollar compensation amount was recognized for fiscal
2009. The RSUs are taxable as ordinary income to Mr. Winfield upon vesting and
issuance of the shares of Common Stock. Mr. Winfield's remaining RSUs vest, and
the shares of common stock are issuable, as follow: September 10, 2010 -
15,000; and September 10, 2011 - 15,000 shares.
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(3) Dollar amount reflects aggregate grant date fair value, computed in
accordance with FASB ASC Topic 718, of 100,000 stock options granted to Mr.
Winfield on March 16, 2010 pursuant to the Company's 2010 Omnibus Employee
Incentive Plan (the "2010 Incentive Plan"). The options expire 10 years from
the date of grant and have an exercise price of $10.30 per share, which was
100% of the fair market value of the Company's common stock as determined by
reference to the closing price as reported on the NASDAQ Capital Market on
March 16, 2010, the date of grant. The options are subject to both time and
performance based vesting requirements, each of which must be satisfied before
the options are fully vested and eligible to be exercised. Pursuant to the time
vesting requirements, the options vest over a period of five years, with 20,000
options vesting upon each one year anniversary of the date of grant. Pursuant
to the performance vesting requirements, the options vest in increments of
20,000 shares upon each increase of $2.00 or more in the market price of the
Company's common stock above the exercise price ($10.30) of the options. To
satisfy this requirement, the common stock must trade at that increased level
for a period of at least ten trading days during any one quarter.
(4) Amounts include an auto allowance and compensation for a portion of the
salary of an assistant. The auto allowance was $30,000 and $29,000 during
fiscal years 2010 and 2009, respectively. The amount of compensation related
to the assistant was approximately $57,000 and $52,000 for fiscal years 2010
and 2009, respectively. During fiscal 2010 and 2009, the Company and its
subsidiaries also paid annual premiums in the total amount of $85,000 for split
dollar whole life insurance policies owned by, and the beneficiary of which
are, a trust for the benefit of Mr. Winfield's family. Of the $85,000 in
premiums paid each year, Santa Fe and Portsmouth paid $43,000 of that amount.
The Company has a secured right to receive, from any proceeds of the policies,
reimbursement of all premiums paid prior to any payment to the beneficiary.
(5) Dollar amount reflects aggregate grant date fair value computed in
accordance with FASB ASC Topic 718 of 5,000 stock options granted to Mr.
Gonzalez on March 16, 2010 pursuant to the Company's 2010 Omnibus Employee
Incentive Plan. The options expire 10 years from the date of grant and have an
exercise price of $10.30 per share. The options vest as follow: 2,500 options
vest on March 16, 2011; and 2,500 options vest on March 16, 2012.
(6) Mr. Nguyen's salary is allocated approximately 50% to the Company and 25%
each to Santa Fe and Portsmouth.
(7) For fiscal 2010 and 2009, respectively, these amounts include $105,000 and
$94,800 in salary allocated to and paid by Portsmouth and $18,750 and $16,200
in salary allocated to Santa Fe.
Compensation Committee and Executive Compensation
The Company's Administrative and Compensation Committee (the "Compensation
Committee") is comprised of three "independent" members of the Board of
Directors as independence is defined by the applicable rules of the SEC and
NASDAQ. Mr. Nance serves as Chairman of the Compensation Committee. The
Company has not established a charter for the Compensation Committee. The
Compensation Committee reviews and recommends to the Board of Directors the
compensation for the Company's Chief Executive Officer and other executive
officers, including equity or performance based compensation and plans. The
Compensation Committee seeks to design and set compensation to attract and
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retain highly qualified executive officers and to align their interests with
those of long-term owners of the Company. The Compensation Committee may also
make recommendations to the Board of Directors as to the amount and form of
director compensation. The Compensation Committee has not engaged any
compensation consultants in determining the amount or form of executive of
director compensation, but does review and monitor published compensation
surveys and studies. The Compensation Committee may delegate to the Company's
Chief Executive Officer the authority determine the compensation of certain
executive officers. The Compensation Committee also oversees the Company's
2007 Stock Compensation Plan, the 2008 RSU Plan and the 2010 Employee Incentive
Plan.
On July 18, 2003, the disinterested members of the respective Boards of
Directors of the Company's subsidiary, Santa Fe and Santa Fe's subsidiary,
Portsmouth, established a performance based compensation program for the
Company's CEO, John V. Winfield, to keep and retain his services as a direct
and active manager of the securities portfolios of those companies. On January
12, 2004, the disinterested members of the Securities Investment Committee of
InterGroup also established a performance based compensation program for Mr.
Winfield, which was ratified by the Board of Directors. The Company's previous
experience and results with outside money managers was not acceptable.
Pursuant to the criteria established the Board of Directors, Mr. Winfield is
entitled to performance compensation for his management of the securities
portfolios of the Company and its subsidiaries equal to 20% of all net
investment gains generated in excess of an annual return equal to the Prime
Rate of Interest (as published by the Wall Street Journal) plus 2%.
Compensation amounts are earned, calculated and paid quarterly based on the
results of the Company's investment portfolio for that quarter. Should the
companies have a net investment loss during any quarter, Mr. Winfield would not
be entitled to any further performance-based compensation until any such
investment losses are recouped by the Company. This performance based
compensation program may be modified or terminated at the discretion of the
respective Boards of Directors. No performance based compensation was earned or
paid for fiscal years ended June 30, 2010 or 2009.
Internal Revenue Code Limitations
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
provides that, in the case of a publicly held corporation, the corporation is
not generally allowed to deduct remuneration paid to its chief executive
officer and certain other highly compensated officers to the extent that such
remuneration exceeds $1,000,000 for the taxable year. Certain remuneration,
however, is not subject to disallowance, including compensation paid on a
commission basis and, if certain requirements prescribed by the Code are
satisfied, other performance based compensation. Since InterGroup, Santa Fe
and Portsmouth are each public companies, the $1,000,000 limitation applies
separately to the compensation paid by each entity. Stock option expenses are
also amortized over a several years. For fiscal years 2010 and 2009, no
compensation paid by the Company to its CEO or other executive officers was
subject the deduction disallowance prescribed by Section 162(m) of the Code.
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Outstanding Equity Awards at Fiscal Year End.
The following table sets forth information concerning option awards and stock
awards for each named executive officer that were outstanding as of the end of
the Company's last competed fiscal year ended June 30, 2010. There were no
other equity incentive plan awards that were outstanding.
Outstanding Equity Awards as of Fiscal Year Ended June 30, 2010
OPTION AWARDS STOCK AWARDS
-------------------------------------------------- ------------------------
Number of Number of Number of Market value
securities securities shares or of shares or
underlying underlying units of units of
unexercised unexercised Option Option stock that stock that
options(#) options(#) exercise expiration have not have not
Name exercisable unexercisable price($) date vested vested(3)
-------- ----------- ------------- -------- ---------- ---------- ----------
John V. Winfield - 100,000(1) $10.30 03/15/2020 30,000(2) $457,800
David C. Gonzalez 15,000 - $13.17 01/30/2011 - -
- 5,000(4) $10.30 03/15/2020 - -
-----------------
(1) Stock options issued to Mr. Winfield pursuant to the Company's 2010
Employee Incentive Plan are subject to both time and performance based
vesting requirements, each of which must be satisfied before the options
are fully vested and eligible to be exercised. Pursuant to the time vesting
requirements, the options vest over a period of five years, with 20,000
options vesting upon each one year anniversary of the date of grant.
Pursuant to the performance vesting requirements, the options vest in
increments of 20,000 shares upon each increase of $2.00 or more in the
market price of the Company's common stock above the exercise price
($10.30) of the options. To satisfy this requirement, the common stock must
trade at that increased level for a period of at least ten trading days
during any one quarter.
(2) On December 21, 2008, Mr. Winfield surrendered to the Company 225,000
fully vested stock options in exchange for 84,628 Restricted Stock Units
("RSUs") pursuant to an exchange offer made by the Compensation Committee
as authorized by the Company's RSU Plan. On September 10, 2009, 54,628
of those RSUs vested and Mr. Winfield was issued 54,628 shares of common
stock. The balance of the RSUs vest, and the shares of Common Stock are
issuable as follow: September 10, 2010 - 15,000 shares; and September 10,
2011 - 15,000 shares.
(3) Market value was calculated based on the closing price of the Company's
Common Stock on June 30, 2010 of $15.26 per share as reported on the
NASDAQ Capital Market.
(4) Mr. Gonzalez's options vest as follow: 2,500 options vest on March 16,
2011; and 2,500 options vest on March 16, 2012
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EQUITY COMPENSATION PLANS
The Company currently has three equity compensation plans, each of which has
been approved by the Company's stockholders. The Company's 1998 Stock Option
Plan for Selected Key Officers, Employees and Consultants (the "Key Employee
Plan") expired on December 8, 2008 and no options under the Key Employee Plan
were granted in fiscal 2009. The Key Employee Plan was replaced by The
InterGroup Corporation 2008 Restricted Stock Unit Plan (the "RSU Plan"),
described below. The Company's 1998 Stock Option Plan for Non-Employee
Directors (the "Non-Employee Director Plan") was terminated upon shareholder
approval, and Board adoption, of The InterGroup Corporation 2007 Stock
Compensation Plan for Non-Employee Directors (the "2007 Plan"), described
below, since all options authorized to be issued under the Non-Employee
Director Plan were exhausted in fiscal 2006. Any outstanding options issued
under the Key Employee Plan or the Non-Employee Director Plan remain effective
in accordance with their terms.
The purpose of the Company's equity compensation plans is to provide a means
whereby officers, directors and key employees of the Company develop a sense of
proprietorship and personal involvement in the development and financial
success of the Company, and to encourage them to devote their best efforts to
the business of the Company, thereby advancing the interests of the Company and
its shareholders. A further purpose of these plan is to provide a means through
which the Company may attract able individuals to become employees or serve as
directors of the Company and to provide a means for such individuals to acquire
and maintain stock ownership in the Company, thereby strengthening their
concern for the welfare of the Company.
The InterGroup Corporation 2007 Stock Compensation Plan for Non-Employee
Directors
The InterGroup Corporation 2007 Stock Compensation Plan for Non-Employee
Directors (the "2007 Plan") was approved by the shareholders of the Company on
February 21, 2007, and was thereafter adopted by the Board of Directors. The
2007 Plan will terminate upon the earlier of the date all shares reserved for
issuance have been awarded or February 21, 2017, if not sooner terminated by
the Board upon recommendation by the Compensation Committee. The stock to be
available for issuance under the 2007 Plan shall be unrestricted shares of the
Company's Common Stock, par value $.01 per share, which may be unissued shares
or treasury shares. Subject to certain adjustments upon changes in
capitalization, a maximum of 60,000 shares of the Common Stock will be
available for issuance to participants under the 2007 Plan.
All non-employee directors are eligible to participate in the 2007 Plan. Each
non-employee director as of the adoption date of the 2007 Plan was granted an
award of 600 unrestricted shares of the Company's Common Stock. On each July 1
following the adoption date of the 2007 Plan, each non-employee director
shall receive an automatic grant of a number of shares of Company's Common
Stock equal in value to $18,000 based on 100% of the fair market value (as
defined) of the Common Stock on the date of grant, provided he or she holds
such position on that date and the number of shares of Common Stock available
for grant under the 2007 Plan is sufficient to permit such automatic grant. Any
fractional shares resulting from such grant will be rounded up to next highest
whole share. All stock awards to non-employee directors will be fully vested
on the date of grant. The dollar amount of the annual grant is subject to
further adjustment by the Board of Directors upon recommendation by the
Compensation Committee.
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The stock awards granted under the 2007 Plan are shares of unrestricted Common
Stock and are fully vested on the date of grant. The right of the non-employee
director to receive his or her annual grant of Common is personal to the
director and is not transferable. Once received, shares of Common Stock awarded
to the non-employee director are freely transferable subject to any
requirements of Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). On June 28, 2007, Company filed a registration
statement on Form S-8 to register the shares subject to the 2007 Plan and the
Company's two prior stock option plans under the Securities Act of 1933, as
amended (the "Securities Act").
Upon recommendation of the Compensation Committee, the Board may, at any time
and from time to time and in any respect, amend or modify the 2007 Plan. The
Board must obtain stockholder approval of any material amendment to the 2007
Plan if required by any applicable law, regulation or stock exchange rule. The
Board of Directors may amend the 2007 Plan or any award agreement, which
amendment may be retroactive, in order to conform it to any present or future
law, regulation or ruling relating to plans of this or similar nature. No
amendment or modification of the 2007 Plan or any award agreement may adversely
affect any outstanding award without the written consent of the participant
holding the award.
For the fiscal year ended June 30, 2010, the four non-employee directors of the
Company, Josef A. Grunwald, Gary N. Jacobs, John C. Love and William J. Nance,
each received a grant of 1,501 shares of Common Stock pursuant to the 2007
Plan.
The Intergroup Corporation 2008 Restricted Stock Unit Plan
On December 3, 2008, the Board of Directors adopted, subject to shareholder
approval, a new equity compensation plan for its officers, directors and key
employees entitled, The InterGroup Corporation 2008 Restricted Stock Unit Plan
(the "RSU Plan"). The RSU Plan was approved and ratified by the shareholders on
February 18, 2009.
The RSU Plan authorizes the Company to issue restricted stock units ("RSUs") as
equity compensation to officers, directors and key employees of the Company on
such terms and conditions established by the Compensation Committee of the
Company. RSUs are not actual shares of the Company's common stock, but rather
promises to deliver common stock in the future, subject to certain vesting
requirements and other restrictions as may be determined by the Committee.
Holders of RSUs have no voting rights with respect to the underlying shares of
common stock and holders are not entitled to receive any dividends until the
RSUs vest and the shares are delivered. No awards of RSUs shall vest until at
least six months after shareholder approval of the Plan. Subject to certain
adjustments upon changes in capitalization, a maximum of 200,000 shares of the
common stock are available for issuance to participants under the RSU Plan.
The RSU Plan will terminate ten (10) years from December 3, 2008, unless
terminated sooner by the Board of Directors. After the RSU Plan is terminated,
no awards may be granted but awards previously granted shall remain outstanding
in accordance with the Plan and their applicable terms and conditions.
The shares of common stock to be delivered upon the vesting of an award of RSUs
have been registered under the Securities Act, pursuant to a registration
statement filed on Form S-8 by the Company on June 16, 2010. The grant of RSUs
is personal to the recipient and is not transferable. Once received, shares of
common stock issuable upon the vesting of the RSUs are freely transferable
subject to any requirements of Section 16(b) of the Exchange Act.
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Under the RSU Plan, the Compensation Committee also has the power and authority
to establish and implement an exchange program that would permit the Company to
offer holders of awards issued under prior shareholder approved compensation
plans to exchange certain options for new RSUs on terms and conditions to be
set by the Committee. The exchange program is designed to increase the
retention and motivational value of awards granted under prior plans. In
addition, by exchanging options for RSUs, the Company will reduce the number of
shares of common stock subject to equity awards, thereby reducing potential
dilution to stockholders in the event of significant increases in the value of
its common stock.
Pursuant to an exchange offer authorized by the Compensation Committee, a total
of 2,564 RSUs were issued to four holders of Non-Employee Director stock
options in exchange for a total of 12,000 stock options which were surrendered
to the Company on June 30, 2010. The number of RSUs issued was determined by
multiplying the number of options that were surrendered by the difference
between the exercise price of the options surrendered ($12.00) and the closing
price of the Company's common stock on June 30, 2010 of $15.26, with that
product divided by the closing price of the common stock on June 30, 2010. The
2,564 RSUs issued pursuant to that exchange offer vest on October 1, 2010.
The InterGroup Corporation 2010 Omnibus Employee Incentive Plan
On February 24, 2010, the shareholders of the Company approved The Intergroup
Corporation 2010 Omnibus Employee Incentive Plan (the "2010 Plan"), which was
formally adopted by the Board of Directors following the annual meeting of
shareholders. The 2010 Plan authorizes a total of up to 200,000 shares of
common stock to be issued as equity compensation to officers and employees of
the Company in an amount and in a manner to be determined by the Compensation
Committee in accordance with the terms of the 2010 Plan. The 2010 Plan
authorizes the awards of several types of equity compensation including stock
options, stock appreciation rights, performance awards and other stock based
compensation. The 2010 Plan will expire on February 23, 2020, if not terminated
sooner by the Board of Directors upon recommendation of the Compensation
Committee. Any awards issued under the 2010 Plan will expire under the terms of
the grant agreement.
The shares of common stock to be issued under the 2010 Plan have been
registered under the Securities Act, pursuant to a registration statement filed
on Form S-8 by the Company on June 16, 2010. Once received, shares of common
stock issued under the 2010 Plan will be freely transferable subject to any
requirements of Section 16(b) of the Exchange Act.
On March 16, 2010, the Compensation Committee authorized the grant of 100,000
stock options to the Company's Chairman, President and Chief Executive, John V.
Winfield to purchase up to 100,000 shares of the Company's common stock
pursuant to the 2010 Plan. The exercise price of the options is $10.30, which
equals 100% of the fair market value of the Company's Common Stock as
determined by reference to the closing price of the Company's Common Stock as
reported on the NASDAQ Capital Market on March 16, 2010, the date of grant. The
options expire ten years from the date of grant, unless earlier terminated in
accordance with the terms of the 2010 Plan. The options shall be subject to
both time and performance based vesting requirements, each of which must be
satisfied before options are fully vested and eligible to be exercised.
Pursuant to the time vesting requirements, the options vest over a period of
five years, with 20,000 options vesting upon each one year anniversary of the
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date of grant. Pursuant to the performance vesting requirements, the options
vest in increments of 20,000 shares upon each increase of $2.00 or more in the
market price of the Company's common stock above the exercise price ($10.30) of
the options. To satisfy this requirement, the common stock must trade at that
increased level for a period of at least ten trading days during any one
quarter.
On March 16, 2010, the Compensation Committee also authorized a grant of 5,000
stock options to the Company's Vice President Real Estate, David C. Gonzalez,
to purchase up to 5,000 shares of the Company's common stock pursuant to the
2010 Plan. The exercise price of the options is $10.30 and the options expire
ten years from the date of grant, unless earlier terminated in accordance with
the terms of the 2010 Plan. The options vest as follows: March 16, 2011 - 2,500
shares; and March 16, 2012 - 2,500 shares.
Change in Controls Provisions in Equity Compensation Plans.
Under the Company's RSU Plan and its 2010 Plan, RSUs, stock options and other
incentive awards may vest upon a change in control of the Company in accordance
with their respective grant agreements. Outstanding unvested RSUs issued to the
Company's CEO and to its Directors will immediately vest upon a change in
control. Outstanding stock options issued to the Company's CEO and to its Vice
President of Real Estate will also immediately vest and become exercisable upon
a change in control. Except for the foregoing, there are no employment
contracts between the Company and its Officers and the Directors or any change
in control arrangements.
DIRECTOR COMPENSATION
Set forth below is a table setting forth the compensation of the directors of
the Company for the fiscal year ended June 30, 2010. There were no stock option
awards, non-equity incentive plan compensation or nonqualified deferred
compensation earnings during fiscal 2010.
DIRECTOR COMPENSATION
Fiscal Year Ended June 30, 2010
Fees
Earned
or Paid Stock All Other
Name in Cash(1) Awards Compensation Total
----------------- --------- ---------- ------------ --------
Josef A. Grunwald $22,000(2) $37,335(6) - $ 59,335
Gary N. Jacobs $16,000 $36,053(7) - $ 52,053
John C. Love $66,000(3) $36,053(8) - $102,053
William J. Nance $68,000(4) $44,542(9) - $112,542
John V. Winfield(5)
--------------
(1) Amounts shown include board retainer fees, committee fees and meeting
fees.
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(2) Mr. Grunwald also serves as a director of the Company's subsidiary,
Portsmouth. This amount includes $6,000 in regular board fees paid
to Mr. Grunwald by Portsmouth.
(3) Mr. Love also serves as a director of the Company's subsidiaries, Santa
Fe and Portsmouth. Amounts shown include $8,000 in regular board and audit
committee fees paid by Santa Fe and $8,000 in regular board and audit
committee fees paid by Portsmouth. These amounts also include $30,000 in
special hotel committee fees paid by Portsmouth related to the oversight
its Hotel asset.
(4) Mr. Nance also serves as a director of the Company's subsidiaries, Santa
Fe and Portsmouth. Amounts shown include $8,000 in regular board and audit
committee fees paid by Santa Fe and $8,000 in regular board and audit
committee fees paid by Portsmouth. These amounts also include $30,000 in
special hotel committee fees paid by Portsmouth related to the oversight
its Hotel asset.
(5) As Chief Executive Officer, the Company's Chairman, John V. Winfield, was
not paid any board, committee or meetings fees. Mr. Winfield did receive a
a total of $12,000 in regular board fees from the Company's subsidiaries,
which is reported on the Summary Compensation Table.
(6) Dollar amounts shown reflect the following: fair market value of $18,000
for 1,501 shares of common stock issued on July 1, 2009 pursuant to the
Company's 2007 Plan; fair market value of $9,555 for 955 shares of common
stock issued on January 7, 2010 upon the vesting of 955 RSUs issued
pursuant to the RSU Plan; and $9,780 equaling the dollar amount realized
upon the exercise of 3,000 stock options on June 30, 2010, based on
difference between the exercise price ($12.00) and the market price of the
Company's stock on that date of $15.26. As of June 30, 2010, Mr. Grunwald
also had an aggregate of 14,400 vested stock options outstanding.
(7) Dollar amounts shown reflect the following: fair market value of $18,000
for 1,501 shares of common stock issued on July 1, 2009 pursuant to the
Company's 2007 Plan; fair market value of $8,498 for 969 shares of common
stock issued on August 19, 2009 upon the vesting of 969 RSUs issued
pursuant to the RSU Plan; and fair market value of $9,555 for 955 shares of
common stock issued on January 7, 2010 upon the vesting of 955 RSUs issued
pursuant to the RSU Plan. As of June 30, 2010, Mr. Jacobs also had an
aggregate of 14,400 vested stock options outstanding and 641 RSUs that do
not vest until October 1, 2010.
(8) Dollar amounts shown reflect the following: fair market value of $18,000
for 1,501 shares of common stock issued on July 1, 2009 pursuant to the
Company's 2007 Plan; fair market value of $8,498 for 969 shares of common
stock issued on August 19, 2009 upon the vesting of 969 RSUs issued
pursuant to the RSU Plan; and fair market value of $9,555 for 955 shares of
common stock issued on January 7, 2010 upon the vesting of 955 RSUs issued
pursuant to the RSU Plan. As of June 30, 2010, Mr. Love also had an
aggregate of 14,400 vested stock options outstanding and 641 RSUs that do
not vest until October 1, 2010.
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(9) Dollar amounts shown reflect the following: fair market value of $18,000
for 1,501 shares of common stock issued on July 1, 2009 pursuant to the
Company's 2007 Plan; fair market value of $16,987 for 1,937 shares of
common stock issued on August 19, 2009 upon the vesting of 1,937 RSUs
issued pursuant to the RSU Plan; and fair market value of $9,555 for 955
shares of common stock issued on January 7, 2010 upon the vesting of 955
RSUs issued pursuant to the RSU Plan. As of June 30, 2010, Mr. Nance also
had an aggregate of 14,400 vested stock options outstanding and 641 RSUs
that do not vest until October 1, 2010.
Each non-employee director of the Company receives an annual cash retainer in
the amount of $16,000, to be paid in equal quarterly payments. With the
exception of members of the Audit Committee, non-employee directors will not
receive any additional fees for attending Board or Committee meetings, but will
be entitled to reimbursement of their reasonable expenses to attend such
meetings. Members of the Audit Committee are paid a fee of $1,000 per quarter,
with the Chair of that Committee to receive $1,500 per quarter. As an executive
officer, the Company's Chairman has elected to forego his annual board fees.
Non-employee directors are also eligible for grants of equity compensation
under the Company's 2007 Plan and RSU Plan. Pursuant to the 2007 Plan, each
non-employee director is entitled to an annual grant of a number of shares of
Common Stock of the Company equal in value to $18,000 based on the fair market
value of the Common Stock on the date of grant. Non-employee directors may also
be eligible to participate in exchange offers as may be authorized by the
Compensation Committee under the RSU Plan to exchange previously issued stock
options for RSUs.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth, as of September 10, 2010, certain information
with respect to the beneficial ownership of Common Stock of the Company by (i)
those persons or groups known by the Company to own more than five percent of
the outstanding shares of Common Stock, (ii) each Director and Executive
Officer, and (iii) all Directors and Executive Officers as a group.
Name and Address of Amount and Nature
Beneficial Owner (1) of Beneficial Owner(2) Percentage(3)
-------------------- ---------------------- -------------
John V. Winfield 1,458,581(4) 60.2%
Josef A. Grunwald 130,223(5) 5.3%
William J. Nance 57,737(6) 2.4%
Gary N. Jacobs 25,747(7) 1.1%
John C. Love 22,372(8) 0.9%
David C. Gonzalez 30,750(9) 1.3%
Michael G. Zybala 0 *
David T. Nguyen 120 *
All Directors and
Executive Officers as a
Group (8 persons) 1,725,530 69.2%
------------------
* Ownership does not exceed 1%.
(1) Unless otherwise indicated, the address for the persons listed is
10940 Wilshire Blvd., Suite 2150, Los Angeles, CA 90024.
(2) Unless otherwise indicated, and subject to applicable community property
laws, each person has sole voting and investment power with respect to the
shares beneficially owned.
(3) Percentages are calculated on the basis of 2,421,600 shares of Common Stock
outstanding at September 10, 2010, plus any securities that person has the
right to acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights.
(4) Includes 15,000 Restricted Stock Units ("RSUs") that vested on September
10, 2010 and were converted to 15,000 shares of common stock.
(5) Includes 14,400 shares that Mr. Grunwald has a right to acquire pursuant to
vested stock options.
(6) Includes 14,400 shares that Mr. Nance has a right to acquire pursuant to
vested stock options and 641 RSUs that vest on October 1, 2010 and will be
converted to 641 shares of common stock on that date.
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(7) Includes 14,400 shares that Mr. Jacobs has a right to acquire pursuant to
vested stock options and 641 RSUs that vest on October 1, 2010 and will be
converted to 641 shares of common stock on that date. Other than his options,
and unvested RSUs, all shares of Mr. Jacobs are held by the Gary and Robin
Jacobs Family Trust.
(8) Includes 14,400 shares that Mr. Love has a right to acquire pursuant to
vested stock options and 641 RSUs that vest on October 1, 2010 and will be
converted to 641 shares of common stock on that date.
(9) Includes 15,000 shares which Mr. Gonzalez has the right to acquire pursuant
to vested stock options.
Changes in Control Arrangements
There are no arrangements that may result in a change in control of the
Company.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following table sets forth information as of June 30, 2010 with respect to
compensation plans (including individual compensation arrangements) under which
equity securities of the Company are authorized for issuance, aggregated as
follows:
Plan category Securities to Weighted average Remaining available
be issued exercise price for future issuance
upon exercise of outstanding under equity
of outstanding options compensation plans
options, warrants and (excluding
warrants and rights securities
rights reflected in
column (a))
(a) (b) (c)
------------------- ------------ ------------- -------------------
Equity compensation
plans approved by
security holders 224,564(1) $11.32(2) 240,309(3)
----------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders None N/A None
----------------------------------------------------------------------------
Total 224,564(1) $11.32(2) 240,309(3)
----------------------------------------------------------------------------
(1) There were 192,000 stock options outstanding as of June 30, 2010. Also
included are 32,564 Restricted Stock Units issued pursuant to the 2008
RSU Plan that were outstanding, but not vested, as of June 30, 2010.
(2) Reflects the weighted average exercise price of all outstanding options.
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(3) As of June 30, 2010 the Company had 43,088 shares of Common Stock
available for future issuance pursuant to its 2007 Stock Compensation Plan
for Non-Employee Directors. Pursuant to the 2007 Plan, each non-employee
director will receive, on July 1 of each year, an annual grant of a number
of shares of Common Stock of the Company equal in value to $18,000 based on
the fair market value of the Common Stock on the date of grant. The Company
also had 102,221 RSUs available for future issuance under the 2008 RSU
Plan and 95,000 shares available for future issuance under the 2010 Omnibus
Employee Incentive Pan.
Item 13. Certain Relationships and Related Transactions, and
Director Independence
On December 4, 1998, the Administrative and Compensation Committee authorized
the Company to obtain whole life and split dollar insurance policies covering
the Company's President and Chief Executive Officer, Mr. Winfield. During
fiscal 2010 and 2009, the Company paid annual premiums in the amount of
approximately $85,000 for the split dollar insurance policy owned by, and the
beneficiary of which is, a trust for the benefit of Mr. Winfield's family.
The Company has a secured right to receive, from any proceeds of the policy,
reimbursement of all premiums paid prior to any payments to the beneficiary.
On June 30, 1998, the Company's Chairman and President entered into a voting
trust agreement with the Company giving the Company the power to vote his 4.0%
interest in the outstanding shares of the Santa Fe common stock.
As Chairman of the Securities Investment Committee, the Company's President and
Chief Executive officer, John V. Winfield, oversees the investment activity of
the Company in public and private markets pursuant to authority granted by the
Board of Directors. Mr. Winfield also serves as Chief Executive Officer and
Chairman of Santa Fe and Portsmouth and oversees the investment activity of
those companies. Depending on certain market conditions and various risk
factors, the Chief Executive Officer, his family, Santa Fe and Portsmouth may,
at times, invest in the same companies in which the Company invests. The
Company encourages such investments because it places personal resources of the
Chief Executive Officer and his family members, and the resources of Santa Fe
and Portsmouth, at risk in connection with investment decisions made on behalf
of the Company. Under the direction of the Securities Investment Committee,
the Company has instituted certain modifications to its procedures to reduce
the potential for conflicts of interest.
The Company, its subsidiary Santa Fe and Santa Fe's subsidiary, Portsmouth,
have established performance based compensation programs for Mr. Winfield's
management of the securities portfolios of those companies. The performance
based compensation program was approved by the disinterested members of the
respective Boards of Directors of the Company and its subsidiaries. No
performance bonus compensation was paid to Mr. Winfield for the fiscal years
ended June 30, 2010 and 2009.
Director Independence
InterGroup's common stock is listed on the NASDAQ Capital Market tier of the
NASDAQ Stock Market LLC ("NASDAQ"). InterGroup is a Smaller Reporting Company
under the rules and regulations of the SEC. The Board of Directors of
InterGroup currently consists of five members. With the exception of the
Company's President and CEO, John V. Winfield, all of InterGroup's Board of
Directors consists of "independent" directors as independence is defined by the
applicable rules of the SEC and NASDAQ. There are no members of the Company's
compensation, nominating or audit committees that do not meet those
independence standards.
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Item 14. Principal Accounting Fees and Services.
Audit Fees - The aggregate fees billed for each of the last two fiscal years
ended June 30, 2010 and 2009 for professional services rendered by Burr Pilger
Mayer, Inc., the independent registered public accounting firm for the audit of
the Company's annual financial statements and review of financial statements
included in the Company's Form 10-Q reports or services normally provided by
the independent registered public accounting firm in connection with statutory
and regulatory filings or engagements for those fiscal years, were as follows:
Fiscal Year
-------------------------
2010 2009
-------- --------
Audit Fees $286,000 $286,000
Audit Related Fees - -
Tax Fees - -
All Other Fees - -
-------- --------
TOTAL: $286,000 $286,000
======== ========
Audit Committee Pre-Approval Policies
The Audit Committee shall pre-approve all auditing services and permitted non-
audit services (including the fees and terms thereof) to be performed for the
Company by its independent registered public accounting firm, subject to any de
minimus exceptions that may be set for non-audit services described in Section
10A(i)(1)(B) of the Exchange Act which are approved by the Committee prior to
the completion of the audit. The Committee may form and delegate authority to
subcommittees consisting of one or more members when appropriate, including the
authority to grant pre-approvals of audit and permitted non-audit services,
provided that decisions of such subcommittee to grant pre-approvals shall be
presented to the full Committee at its next scheduled meeting. All of the
services described herein were approved by the Audit Committee pursuant to its
pre-approval policies.
None of the hours expended on the independent registered public accounting
firms' engagement to audit the Company's financial statements for the most
recent fiscal year were attributed to work performed by persons other than the
independent registered public accounting firm's full-time permanent employees.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The following financial statements of the Company are included in Part II,
Item 8 of this report at pages 30 through 64:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2010 and 2009
Consolidated Statements of Operations for Years Ended
June 30, 2010 and 2009
Consolidated Statements of Shareholders' Equity for
Years Ended June 30, 2010 and 2009
Consolidated Statements of Cash Flows for Years Ended June 30,
2010 and 2009
Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All other schedules for which provision is made in Regulation S-X
have been omitted because they are not required or are not applicable
or the required information is shown in the consolidated financial
statements or notes to the consolidated financial statements.
(a)(3) Exhibits
Set forth below is an index of applicable exhibits filed with this report
according to exhibit table number.
Exhibit No. Description
----------- -----------------------------------------------------------
3. (i) Articles of Incorporation
3.1 Certificate of Incorporation, dated September 11, 1985, incorporated
by reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-4, filed on September 6, 1985 (Registration No. 33-00126) and
Amendment 1 to that Registration Statement filed on October 23, 1985.
3.2 Restated Certificate of Incorporation, dated March 9, 1998,
incorporated by reference to Exhibit 3 of the Company's Amended
Quarterly Report on Form 10-QSB/A for the period ended March 31, 1998,
as filed on May 19, 1998.
3.3 Certificate of Amendment to Certificate of Incorporation, dated
October 2, 1998, incorporated by reference to Exhibit 3 of the
Company's Quarterly report of Form 10-QSB for the period ended
September 30, 1998, as filed on November 11, 1998.
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3.4 Certificate of Amendment of Certificate of Incorporation filed with
the Delaware Secretary of State on August 6, 2007, incorporated by
reference to Exhibit 3.4 of the Company's Annual Report on Form 10-KSB
for the year ended June 30, 2007 as filed on September 28, 2007.
3 (ii) By-Laws
3.5 Amended and Restated By-Laws of The InterGroup Corporation, effective
as of December 10, 2007, incorporated by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K as filed on December 12, 2007.
4. Instruments defining the rights of security holders, including
indentures *
9. Voting Trust Agreement
Voting Trust Agreement dated June 30, 1998 between John V. Winfield
and The InterGroup Corporation is incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission on September 28, 1998.
10. Material Contracts
10.1 1998 Stock Option Plan for Non-Employee Directors approved by the
Board of Directors on December 8, 1998 and ratified by the
shareholders on January 27, 1999 (incorporated by reference to
the Company's Proxy Statement on Schedule 14A filed with the Commission
on December 21, 1998).
10.2 1998 Stock Option Plan for Selected Key Officers, Employees and
Consultants approved by the Board of Directors on December 8, 1998
and ratified by the shareholders on January 27, 1999 incorporated by
reference to the Company's Proxy Statement on Schedule 14A filed with
the Commission on December 21, 1998).
10.3 The InterGroup Corporation 2007 Stock Compensation Plan for Non-
Employee Directors (incorporated by reference to the Company's Proxy
Statement on Schedule 14A filed with the Commission on January 26,
2007).
10.4 2008 Amendment to the Justice Investors Limited Partnership Agreement,
dated December 1, 2008 (incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q Report for the quarterly period ended
December 31, 2008 filed with the Commission on February 12, 2009).
10.5 General Partner Compensation Agreement, dated December 1, 2008,
(incorporated by reference to Exhibit 10.2 to Company's Form 10-Q Report
for the quarterly period ended December 31, 2008, filed with the
Commission on February 12, 2009).
10.6 The InterGroup Corporation 2008 Restricted Stock Unit Plan, adopted
by the Board of Directors on December 3, 2008, and ratified by the
shareholders on February 18, 2009 (incorporated by reference to the
Company's Proxy Statement on Schedule 14A, filed with the Commission
on January 21, 2009).
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10.7 Restricted Stock Unit Agreement, dated February 18, 2009, between The
InterGroup Corporation and John V. Winfield (incorporated by reference
to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2009, as filed with the Commission on October
13, 2009).
10.8 The InterGroup Corporation 2010 Omnibus Employee Incentive Plan,
approved by the shareholders and adopted by the Board of Directors on
February 24, 2010 (incorporated by reference to the Company's Proxy
Statement on Schedule 14A, filed with the Commission on January 27,
2010).
10.9 Employee Stock Option Agreement, dated March 16, 2010, between The
InterGroup Corporation and John V. Winfield (filed herewith).
14. Code of Ethics (filed herewith)
21. Subsidiaries (filed herewith)
23.1 Consent of Independent Registered Public Accounting Firm - Burr
Pilger Mayer, Inc. (filed herewith)
31.1 Certification of Principal Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a) (filed herewith).
31.2 Certification of Principal Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a) (filed herewith)
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350 (filed herewith).
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350. (filed herewith).
* All Exhibits marked by one asterisk are incorporated herein by reference to
the Trust's Registration Statement on Form S-4 as filed with the Securities and
Exchange Commission on September 6, 1985, Amendment No. 1 to Form S-4 as filed
with the Securities and Exchange Commission on October 23, 1985, Exhibit 14 to
Form 8 Amendment No. 1 to Form 8 filed with the Securities & Exchange
Commission November 1987 and Form 8 Amendment No. 1 Item 4 filed with the
Securities & Exchange Commission October 1988.
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SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE INTERGROUP CORPORATION
(Registrant)
Date: September 24, 2010 by /s/ John V. Winfield
------------------ ---------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Date: September 24, 2010 by /s/ David T. Nguyen
------------------ ---------------------------------------
David T. Nguyen, Treasurer and Controller
Controller (Principal Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: September 24, 2010 /s/ John V. Winfield
------------------ ---------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Date: September 24, 2010 /s/ Josef A. Grunwald
------------------ ----------------------------------------
Josef A. Grunwald, Vice Chairman of Board
Date: September 24, 2010 /s/ Gary N. Jacobs
------------------ ---------------------------------------
Gary N. Jacobs, Director
Date: September 24, 2010 /s/ John C. Love
------------------ ---------------------------------------
John C. Love, Director
Date: September 24, 2010 /s/ William J. Nance
------------------ ---------------------------------------
William J. Nance, Director
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