UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 2008
[ ] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 1-10324
THE INTERGROUP CORPORATION
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(Name of Small Business Issuer in its Charter)
Delaware 13-3293645
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
820 Moraga Drive, Los Angeles, California 90049-1632
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (310) 889-2500
Securities registered under Section 12(b) of the Exchange 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 under Section 12(g) of the Exchange Act: None
Check whether the issuer is not required to file reports pursuant to section
13 or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will 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-
KSB or any amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer's revenues for its most recent fiscal year were $50,413,000.
The aggregate market value of the common equity held by non-affiliates of the
issuer, computed by reference to the price the common equity last sold on
September 4, 2008 was $13,315,663.
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of September 10, 2008 was 2,351,273.
Transitional Small Business Disclosure Format (check one): Yes No [X]
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business 4
Item 2. Description of Properties 10
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market For Common Equity and Related Stockholder Matters 19
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7. Financial Statements 30
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 58
Item 8A. Controls and Procedures 58
Item 8B. Other Information 58
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act 59
Item 10. Executive Compensation 62
Item 11. Security Ownership of Certain Beneficial Owners
and Management 68
Item 12. Certain Relationships and Related Transactions 70
Item 13. Exhibits. 71
Item 14. Principal Accountant Fees and Services 74
SIGNATURES 75
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB 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-
QSB 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 hotel industry, including competition,
increases in wages, labor relations, energy and fuel costs, actual and
threatened terrorist attacks, and downturns in 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 and
* 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-KSB, 10-
QSB, and 8-K reports to the Securities and Exchange Commission.
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PART I
Item 1. Description of Business.
GENERAL
The InterGroup Corporation ("InterGroup" or the "Company") 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, which it redefined to encompass investments in any area
which can have a socially redeeming value and promote the establishment of a
fair, equal and better society.
As of June 30, 2008, the Company has voting control over 79.9%, of the 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 is limited partner, and one of two general partners in Justice
Investors, a California limited partnership ("Justice" or the "Partnership").
In April 2006, Portsmouth purchased a 0.20% limited partnership interest in
Justice from another limited partner, which brought Portsmouth's limited
partnership interest in Justice to exactly 50.0%. The other general partner,
Evon Corporation ("Evon"), acts as the managing general partner. All
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, 2008, there were 111 limited partners in Justice
(not including multiple family accounts).
In accordance with guidance set forth in Financial Accounting Standards
Board(FASB)Statement of Position(SOP) 78-9-1, Portsmouth has applied the
principles of accounting applicable for investments in subsidiaries due to its
"kick out rights" and "substantive participating rights" arising from its
limited partnership and general partnership interest and has consolidated the
financial statements of Justice with those of the Company, effective with the
first reporting period of its fiscal year beginning July 1, 2006. In prior
years, Portsmouth's interest in Justice was recorded on the equity basis.
Please see Item 7. "Financial Statements." - Note 2 to the consolidated
financial statements for a further discussion.
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BUSINESS
The Company's principal business is conducted through Portsmouth's limited and
general partnership interest in Justice. Justice owns a 544 room hotel
property located at 750 Kearny Street, San Francisco, California 94108, now
known as the "Hilton San Francisco Financial District" (the "Hotel") and
related facilities, including a five level underground parking garage.
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", NYSE: FCH) 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.
The Partnership also derives income from its lease of the parking garage to
Evon and the lease of approximately 5,400 square feet on the lobby level of
the Hotel to Tru Spa, LLC for the operation of a health and beauty spa. The
garage and Tru Spa remained open during the renovation work.
The Company also derives income from management fees paid to Portsmouth as a
general partner in Justice. In addition to the operations of the Hotel, the
Company also generates income from the ownership and management of real
estate. Properties include eighteen apartment complexes, two commercial real
estate properties and two single-family houses as strategic investments. The
properties are located throughout the United States, but are concentrated in
Texas and Southern California. The Company also has investments in unimproved
real property. All of the Company's residential rental properties, with
exception to the Irving and San Antonio, Texas properties, are managed by
professional third party property management companies.
The Company acquires its investments in real estate and other investments
utilizing cash, securities or debt, subject to approval or guidelines of the
Board of Directors. The Company also invests in income-producing instruments,
equity and debt securities and will consider other investments if such
investments offer growth or profit potential. See Item 2 "Description of
Properties" for a description of the Company's current investments in real
estate and its investment policies concerning real property and marketable
securities.
HILTON HOTELS FRANCHISE LICENSE AGREEMENT
With the termination of the Hotel Lease to Felcor, the Partnership was able to
actively pursue a franchise agreement with a new nationally recognized brand
in an effort to move the Hotel up-market and become more competitive. After
considering and negotiating with several brands, the Partnership entered into
a Franchise License Agreement with Hilton Hotels Corporation (the "Hilton
Franchise Agreement") on December 10, 2004 for the right to operate the Hotel
as a Hilton brand hotel. The term of the Hilton 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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The Partnership will pay 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 will be 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 and an
information technology recapture charge of 0.75% of the Hotel's gross revenue.
The amount of the monthly program fee is subject to change; however, the
monthly program fee will not exceed five percent of gross room revenue.
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 herein, the Partnership has been able
to secure adequate financing, collateralized by the Hotel, to meet those
commitments.
HOTEL MANAGEMENT COMPANY AGREEMENTS
In February 2007, the Partnership 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, 2008 and 2007.
Management fees paid to Prism during the years ended June 30, 2008 and 2007
were $571,000 and $212,000, respectively.
Prior to the Prism management agreement, the Hotel was managed and operated by
Dow Hotel Company, LLC ("DOW") from July 1, 2004 until February 9, 2007. On
February 9, 2007, Justice entered into an agreement with Dow Hotel Company, to
mutually terminate its management agreement and to transition the day-to-day
management responsibilities of the Hotel to Prism. The management agreement
with Dow was on the same basic terms and conditions as the agreement with
Prism, with the exception of certain provisions that were unique to the
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renovation and transition of the Hotel. No incentive management fees were
earned by Dow during the fiscal year ended June 30, 2007. Management fees paid
to DOW during the year ended June 30, 2007 were $311,000.
GARAGE LEASE AND OPERATIONS
The garage lease between the Partnership and Evon provides for a monthly
rental of sixty percent (60%) of gross parking revenues with a minimum rent of
$20,000 per month. That lease expires in November 2010. The garage lessee,
Evon, is 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 Management, Inc. ("Ace Parking") pursuant to a parking
facility management agreement with the garage lessee.
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.
COMPENSATION OF GENERAL PARTNERS AND REPOSITIONING FEES
Effective May 31, 2004, and as amended on February 23, 2006, Justice entered
into a new General Partner Compensation Agreement (the "Compensation
Agreement") with its two general partners, Evon and Portsmouth, to compensate
them for their services to the Partnership. In order to plan, implement, and
administer the repositioning and major changes in the operations of the Hotel,
it is necessary for Evon and Portsmouth to devote substantial time, expertise,
and effort in the renovation and in managing the Partnership's assets. The
Compensation Agreement is structured to provide adequate compensation to Evon
and Portsmouth and provide incentives to the general partners to encourage
excellence in the performance of their responsibilities.
The Compensation Agreement provides that the general partners will receive
annual base compensation of 1.5% of gross revenues, with a minimum annual base
compensation of $262,000, adjusted for inflation. From the minimum annual base
compensation, 80% will be paid to Evon for its services as the managing
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general partner and 20% will be paid to Portsmouth as the other general
partner. Base annual compensation in excess of the minimum is payable in equal
amounts to Evon and Portsmouth. The maximum base annual compensation that can
be earned by the general partners is 1.5% of $40,000,000 of gross revenues.
The Compensation Agreement also provides for incentive compensation to the
general partners in a sum equal to the 5.0% of the annual net operating income
of Justice, that is in excess of $7,000,000. Incentive compensation shall be
payable in equal amounts to Evon and Portsmouth. The Compensation Agreement
will continue to remain in effect until otherwise amended by the Partnership.
During the years ended June 30, 2008 and 2007, the general partners were paid
$285,000 and $283,000, respectively, for the minimum base compensation. For
the years ended June 30, 2008 and 2007, additional compensation earned above
the minimum base compensation was $232,000 and $184,000, respectively. No
incentive compensation was earned during the years ended June 30, 2008 and
2007.
In accordance with the Compensation Agreement, the general partners were also
entitled to certain fees for services rendered to the Partnership with respect
to repositioning the Hotel, which were to be paid equally to both general
partners. The payments were due after six milestones in the restoration of the
Hotel. As of June 30, 2007, all milestones had been achieved and all
repositioning fees had been paid. There were no repositioning fees earned
during the year ended June 30, 2008. For the year ended June 30, 2007,
repositioning fees earned totaled $376,000.
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 as described more fully under Item 2. "Description of Property."
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. Because the Hotel operates in an
upper scale segment of the market, we could 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. As a result, there could be
pressure to lower average daily rates during such periods to compete for these
guests.
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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, pandemic or other medical events or warnings which may
result in decreases in business and leisure travel; and
* adverse effects of down turns in international, national and/or local
economies and market conditions.
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
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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.
EMPLOYEES
As of June 30, 2008, 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 12
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.
Although the employees of Portsmouth and Justice are not unionized, most
employees of the Hotel are part of Local 2 of the Hotel Employees and
Restaurant Employees Union ("UNITE HERE"). In September 2007, a new contract
was reached with Local 2 that expires on August 14, 2009. As part of that
agreement, Justice also settled all claims with Local 2 arising out of the
temporary closing of the hotel for renovations. The Hotel also has labor
agreements with Stationary Engineers, Local 39 and Teamsters, Local 856. Those
contracts expire on January 11, 2009 and December 31, 2008, respectively.
Item 2. Description of Properties.
SAN FRANCISCO HOTEL PROPERTY
The Hotel is owned directly by the Partnership. The Hotel is centrally located
near the Financial District, 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.
The Hotel is located in an area of intense competition from other hotels in
the Financial District. 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 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. Management, in conjunction with its management company
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Prism and Hilton, will make every effort to market the Hotel as an upscale
property to business travelers, leisure customers and small to medium size
groups. While it may take some time for the Hotel to be fully recognized and
reach its full potential, Management believes that the substantial renovations
made to the Hotel, coupled with the strength of the Hilton brand and its
Hilton Honors program, have provided the foundation for the Hotel to meet or
exceed all of its competition.
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 PERFORMANCE
The following table presents certain statistical data and certain performance
information for the Hotel for the years ended June 30, 2008 and 2007. For
additional information, see Item 6. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7. "Financial
Statements" - Note 2 to the Company's consolidated financial statements.
Fiscal Year Ended Average Average
June 30, Daily Rate Occupancy% RevPar
----------------- ---------- ---------- ---------
2008 $175 84.1% $148
2007 $160 75.8% $122
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.
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.
From the proceeds of the Second Prudential Loan, Justice retired its existing
line of credit facility with United Commercial Bank ("UCB") paying off the
outstanding balance of principal and interest of approximately $16,403,000 on
March 27, 2007.
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The Partnership also obtained a new unsecured $3,000,000 revolving line of
credit facility from UCB to be utilized by the Partnership to meet any
emergency or extraordinary cash flow needs.
As a condition of the Second Prudential Loan, Justice was required to utilize
$1,500,000 of its line of credit with UCB to obtain a standby letter of credit
to serve as security for potential liabilities arising out of the litigation
then pending between the Partnership and Allied Construction Management, Inc.
and its subcontractors (the "Allied Litigation") over disputed construction
change orders. That standby letter of credit was released with the settlement
of the Allied Litigation in June 2008. The annual fee for the letter of credit
was one and one half percent of $1,500,000, which fee was paid in quarterly
installments for the periods in which the letter of credit was in effect.
The term of the new line of credit facility with UCB matures on February 2,
2009 and has an annual interest rate, based on an index selected by Justice at
the time of advance, equal to the Wall Street Journal Prime Rate or the Libor
Rate plus two percent (4.50% as of June 30, 2008). As of June 30, 2008, there
was $1,513,000 outstanding under the line of credit.
MORTGAGES
Information with respect to mortgage notes payable of the Company is set forth
in Note 10 of the Notes to Consolidated Financial Statements.
REAL ESTATE PROPERTIES
At June 30, 2008, 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, one of which serves as the Company's
corporate headquarters. All properties are operating properties with
exception of the Company's corporate office. 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, 2008 were approximately
$560,000. The outstanding mortgage balance was approximately $19,089,000 at
June 30, 2008 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, 2008 were approximately $181,000.
-12-
Depreciation is recorded on the straight-line method, based upon an estimated
useful life of 40 years. The outstanding mortgage balance was approximately
$9,788,000 at June 30, 2008 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, 2008, real estate property taxes were approximately $179,000. Depreciation
is recorded on the straight-line method, based upon an estimated useful life
of 40 years. The outstanding mortgage balance was approximately $5,700,000 at
June 30, 2008 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, 2008, 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 $4,146,000 at June 30, 2008 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, 2008, real estate taxes
were approximately $117,000. Depreciation is recorded on the straight-line
method, based upon an estimated useful life of 40 years. The outstanding
mortgage balance was approximately $2,816,000 at June 30, 2008 and the
maturity date of the mortgage is December 1, 2008.
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, 2008, real estate taxes were approximately $141,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of
40 years. The outstanding mortgage balance was approximately $7,497,000 at
June 30, 2008 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 serves as the Company's corporate offices. The Company acquired
the building on March 4, 1999 for $1,876,000. The property taxes for the year
ended June 30, 2008 were approximately $27,000. Depreciation is recorded on
the straight-line method, based upon an estimated useful life of 40 years.
The outstanding mortgage balance was approximately $1,081,000 at June 30, 2008
and the maturity date of the mortgage is April 15, 2009.
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, 2008 were
approximately $12,000. Depreciation is recorded on the straight-line method,
based upon an estimated useful life of 40 years. The outstanding mortgage
balance was approximately $719,000 at June 30, 2008 and the maturity date of
the mortgage is December 15, 2030.
-13-
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,
2006, 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 $985,000 at June
30, 2008 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, 2008,
real estate property taxes were approximately $55,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of
40 years. The outstanding mortgage balance was approximately $1,751,000 at
June 30, 2008 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, 2008, real
estate property taxes were approximately $31,000. Depreciation is recorded on
the straight-line method, based upon an estimated useful life of 40 years.
The outstanding mortgage balance was approximately $1,034,000 at June 30, 2008
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, 2008,
real estate property taxes were approximately $24,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of
40 years. The outstanding mortgage balance was approximately $774,000 at June
30, 2008 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,
2008, real estate property taxes were approximately $96,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of
40 years. The outstanding mortgage balance was approximately $3,848,000 at
June 30, 2008 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,
2008, real estate property taxes were approximately $61,000. 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 in the amount of $6,850,000. This amount
is the outstanding balance of the mortgage as of June 30, 2008. The maturity
date of the mortgage is September 1, 2022.
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, 2008,
real estate property taxes were approximately $15,000. Depreciation is
-14-
recorded on the straight-line method, based upon an estimated useful life of
40 years. The outstanding mortgage balance was approximately $414,000 at June
30, 2008 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,
2008, real estate property taxes were approximately $14,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of
40 years. The outstanding mortgage balance was approximately $693,000 at June
30, 2008 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, 2008, 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 $1,018,000 at June 30, 2008
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,
2008, real estate property taxes were approximately $40,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of
40 years. The outstanding mortgage balance was approximately $1,640,000 at
June 30, 2008 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,
2008, real estate property taxes were approximately $17,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of
40 years. The outstanding mortgage balance was approximately $539,000 at June
30, 2008 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, 2008, 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 $424,000 at June 30, 2008 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, 2008, real estate
property taxes were approximately $9,000. Depreciation is recorded on the
straight-line method, based upon an estimated useful life of 40 years. The
outstanding mortgage balance was approximately $449,000 at June 30, 2008 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, 2008, 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 $491,000 at June 30, 2008 and
the maturity date of the mortgage is November 1, 2033.
-15-
REAL ESTATE INVESTMENT POLICIES
The most significant investment activity of the Company has been to acquire,
renovate, operate, and when appropriate, sell income-producing real estate.
Through its marketable securities portfolio, the Company has indirectly
invested in additional real estate related investments such as hotels and
office buildings.
The Company may also look for new real estate investment opportunities in
hotels, apartments, office buildings and shopping centers. 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
plans to 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.
MORTGAGES
Information with respect to mortgage notes payable of the Company is set forth
in Note 10 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, 2008 are
provided below.
Economic Physical
Property Occupancy Occupancy
-------- --------- ----------
Apartments:
1. Las Colinas,TX 72% 92%
2. Morris County, NJ 95% 99%
3. St. Louis, MO 84% 93%
4. Florence, KY 89% 96%
5. San Antonio, TX 72% 86%
6. Austin, TX 73% 96%
7. Los Angeles, CA (1) 82% 97%
8. Los Angeles, CA (2) 71% 100%
9. Los Angeles, CA (3) 93% 98%
10. Los Angeles, CA (4) 89% 100%
11. Los Angeles, CA (5) 74% 98%
12. Los Angeles, CA (6) 81% 91%
13. Los Angeles, CA (7) 93% 100%
14. Los Angeles, CA (8) 94% 94%
15. Los Angeles, CA (9) 89% 94%
16. Los Angeles, CA (10) 85% 98%
17. Los Angeles, CA (11) 91% 96%
18. Los Angeles, CA (12) 100% 100%
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.
-16-
MANAGEMENT OF THE PROPERTIES
The Company may engage third party management companies as agents to manage
certain of Company's residential rental properties. Effective December 2006,
the Company terminated its property management agreement with JPI Management
Services, L.P. and transitioned the management of its properties to Productive
Property Management, Inc., effective January 2007 for all of its properties
located outside of California with exception to the San Antonio and Las
Colinas, Texas properties. The Agreement provides for a management fee equal
to 3.5% of the gross monthly receipts of each property. The management
agreements are for a term of one year, but can be terminated by either party
upon thirty days written notice. During the years ended June 30, 2008 and
2007, the management fees were $236,000 and $338,000, respectively.
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, 2008 and 2007, the management fees were $168,000 and $122,000,
respectively.
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, 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.
-17-
The Company's investment portfolio is diversified with 26 different equity
securities. The Company has three individual positions that comprise more
than 5% of the equity value of the portfolio with the largest being 23% of the
value of the portfolio. The amount of the Company's investment in any
particular issue may increase or decrease, and additions or reductions to its
securities portfolio may occur, at any time. While it is the internal policy
of the Company to limit its initial investment in any single equity to less
than 5% of its total portfolio value, that investment could eventually exceed
5% as a result of equity appreciation or reductions in other positions.
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. As of June
30, 2008, the fair market value of the Company's marketable securities was
$6,706,000.
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, 2008, the Company had other investments of $6,798,000.
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,
2008, the Company had no obligations for securities sold (equities short).
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, 2008, the Company had a
margin balance of $2,633,000 and incurred $302,000 and $671,000 in margin
interest expense during the year ended June 30, 2008 and 2007, respectively.
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
terms of that compensation arrangement are discussed in detail in Item 10
"Executive Compensation" of this Report. During the years ended June 30, 2008
and 2007, no performance based compensation was earned by the Company's CEO.
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
-18-
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.
Item 3. Legal Proceedings
Bacon Plumbing Co., Inc. and Golden Electric Company v. Allied Construction,
et al., San Francisco County Superior Court, Case No. 06-455401 (the "Allied
Litigation").
This is to update matters previously reported regarding the litigation and
lien claims filed by Allied Construction Management, Inc. ("Allied") and
eight subcontractors arising out of the renovation work performed on the San
Francisco hotel property. As previously reported, the lien claims of Allied
were reduced by the court from $2,062,000 to $1,167,000 as a result of
settlements paid to subcontractors by Justice in November 2007. The balance of
the dispute between Justice and Allied was submitted to arbitration pursuant
to the terms of the construction contract.
On May 27, 2008, Justice, Evon and Portsmouth entered into a settlement and
release agreement with Allied to settle all remaining claims asserted by
Allied for the sum of $588,000. On June 5, 2008, the settlement payment was
made by Justice at which time a release of Allied's lien claim was recorded
and the action was dismissed with prejudice as to all parties.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
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, 2008 and 2007.
Fiscal 2008 High Low
----------- ----- -----
First Quarter 7/1 - 9/30 $18.48 $15.90
Second Quarter 10/1 - 12/31 $18.94 $17.52
Third Quarter 1/1 - 3/31 $18.50 $16.53
Fourth Quarter 4/1 - 6/30 $18.19 $15.78
Fiscal 2007 High Low
----------- ----- -----
First Quarter 7/1 - 9/30 $17.75 $14.50
Second Quarter 10/1 - 12/31 $19.98 $15.50
Third Quarter 1/1 - 3/31 $20.83 $18.30
Fourth Quarter 4/1 - 6/30 $20.00 $15.82
-19-
As of September 10, 2008, the number of holders of record of the Company's
Common Stock was approximately 705. 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 1,100 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.
The following table sets forth information as of June 30, 2008, 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(1) 390,000 $9.13 60,000
----------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders None N/A None
----------------------------------------------------------------------------
Total 390,000 $9.13 60,000
----------------------------------------------------------------------------
(1) The Company also has 53,652 shares of Common Stock available for future
issuance pursuant to the 2007 Stock Compensation Plan for Non-Employee
Directors, which plan was approved by security holders on February 21,
2007. 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.
-20-
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(c)Total Number (d)Maximum Number
(a)Total (b) of Shares Purchased of Shares that May
Fiscal Number of Average as Part of Publicly Yet Be Purchased
2008 Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
--------------------------------------------------------------------------------------
Month #1
(April 1- - - - 16,648
April 30)
--------------------------------------------------------------------------------------
Month #2
(May 1- - - - 16,648
May 31)
--------------------------------------------------------------------------------------
Month #3
(June 1- 28 $17.11 28 16,620
June 30)
--------------------------------------------------------------------------------------
Total 28 $17.11 28 16,620
--------------------------------------------------------------------------------------
The Company currently has only one stock repurchase program. The program was
initially announced on January 13, 1998 and was first amended on February 10,
2003. The total number of shares authorized to be repurchased was 720,000,
adjusted for stock splits. On October 12, 2004, the Board of Directors
authorized the Company to purchase up to an additional 150,000 shares of
Company's common stock, increasing the total remaining number of shares
authorized for repurchase to 152,941. The program has no expiration date and
can be amended from time to time in the discretion of the Board of Directors.
No plan or program expired during the period covered by the table.
-21-
Item 6. Management Discussion and Analysis of Financial Condition
and Results of Operations.
RESULTS OF OPERATIONS
The Company's principal business is conducted through Portsmouth's general and
limited partnership interest in Justice, rental income from its investments in
multi-family real estate properties and income received from investment of its
cash and securities assets. Portsmouth has a 50.0% ownership interest in
Justice and serves as one of the general partners. Justice owns the land,
improvements and leaseholds at 750 Kearny Street, San Francisco, California,
known as the Hilton San Francisco Financial District hotel (the "Hotel"). The
financial statements of Justice have been consolidated with those of the
Company, effective as of July 1, 2006. 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.
The Partnership also derives income from the lease of the garage portion of
the property to Evon Corporation ("Evon"), the managing general partner of
Justice, and from a lease with Tru Spa for a portion of the lobby level of the
Hotel. The Company also receives management fees as a general partner of
Justice for its services in overseeing and managing the Partnership's assets.
Those fees are eliminated in consolidation.
In addition to the operations of the Hotel, the Company also generates income
from the ownership and management of real estate. Properties include eighteen
apartment complexes, two commercial real estate properties, and two single-
family houses as strategic investments. The properties are located throughout
the United States, but are concentrated in Texas and Southern California. The
Company also has investments in unimproved real property. All of the
Company's residential rental properties with exception of the San Antonio and
Las Colinas, Texas properties, are managed by professional third party
property management companies.
The Company acquires its investments in real estate and other investments
utilizing cash, securities or debt, subject to approval or guidelines of the
Board of Directors. The Company also invests in income-producing instruments,
equity and debt securities and will consider other investments if such
investments offer growth or profit potential.
For the Year Ended June 30, 2008 as compared to June 30, 2007.
The Company had a net loss of $301,000 for the year ended June 30, 2008
compared to a net loss of $3,592,000 for the year ended June 30, 2007. The
decrease in the net loss is primarily attributable to the significant decrease
in the loss from Hotel operations, the significant gain recognized on the sale
of real estate and improvement in the Company's real estate operations,
partially offset by the significant loss incurred from investment
transactions.
-22-
The following table sets forth a more detailed presentation of Hotel
operations for the years ended June 30, 2008 and 2007.
For the years ended June 30, 2008 2007
---------- ----------
Hotel revenues:
Hotel rooms $ 29,426,000 $24,431,000
Food and beverage 6,017,000 5,110,000
Garage 1,602,000 1,533,000
Other operating departments 733,000 641,000
---------- ----------
Total hotel revenues 37,778,000 31,715,000
---------- ----------
Operating expenses excluding interest, depreciation
and amortization (32,067,000) (29,411,000)
---------- ----------
Operating income 5,711,000 2,304,000
Interest expense (2,858,000) (2,919,000)
Depreciation and amortization expense (4,463,000) (4,172,000)
---------- ----------
Loss from hotel operations $(1,610,000) $(4,787,000)
========== ==========
For the year ended June 30, 2008, the Hotel generated operating income of
approximately $5,711,000, before interest, depreciation and amortization, on
operating revenues of approximately $37,778,000 compared to operating income
of approximately $2,304,000 before interest, depreciation and amortization, on
operating revenues of approximately $31,715,000 for the year ended June 30,
2007. The increase in Hotel operating income is primarily due to a higher
average daily room rate and an increase in occupancy percentage resulting in
an approximately $6,063,000 increase in Hotel revenues.
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
years ended June 30, 2008 and 2007.
Year Ended Average Average
June 30, Daily Rate Occupancy% RevPar
----------------- ---------- ---------- ---------
2008 $175 84.1% $148
2007 $160 75.8% $122
Average daily room rates and occupancy have continued to improve since the
Hotel's reopening in January 2006 as the Hotel approaches full stabilization
and gets further penetration into the Financial District hotel market. As a
result, the Hotel was able to achieve an increase in RevPar of $26 for the
year ended June 30, 2008 compared the year ended June 30, 2007. While we
expect operating revenues of the Hotel to continue to grow, that growth will
probably be at a slower pace due to the uncertain economy and the impact of
rising fuel costs on travel.
The Hotel's food and beverage operations remained challenging. Although
management was able to trim the losses in that department to approximately
$214,000 for the year ended June 30, 2008 from approximately $510,000 for the
year ended June 30, 2007. The Hotel's food and beverage operations will
continue to be an area of concern due to brand requirements of maintaining a
three-meal, full service restaurant, the associated costs of union labor, and
the intense competition in the San Francisco market for restaurants.
Management will continue to focus on this area and will explore new and
innovative ways to improve operations. One new concept that Management has
recently initiated is the opening of a new wine bar "Flyte" in the lobby of
the Hotel in August 2008.
-23-
With an uncertain economy, higher fuel prices and the possibility of a decline
in business, group and leisure travel, management will also continue to focus
on ways to improve efficiencies and reduce operating costs and other expenses
in its efforts to increase the operating income of the Hotel. In the last two
quarters of the year ended June 30, 2008, we have seen an improvement in
operating costs of the Hotel as a percentage Hotel revenues as well as a
reduction in general and administrative costs at the Partnership level for
legal and consulting fees.
Minority interest related to Justice Investors decreased to $802,000 for the
year ended June 30, 2008 from $2,423,000 for the year ended June 30, 2007.
The decrease is due to the reduced loss from the hotel operations to
$1,610,000 for the year ended June 30, 2008 from $4,787,000 for the year ended
June 30, 2007.
The Company had income from real estate operations of $795,000 for the year
ended June 30, 2008 as compared to a loss from real estate operations of
$2,048,000 for the year ended June 30, 2007. The significant improvement in
the real estate operations is primarily the result of the increase in rental
income coupled with the decrease in property operating expenses. Rental income
from the Company's properties located outside of California increased by
$868,000 while income from the Company's California portfolio increased by
$718,000. The increase in the rental income from the properties located
outside of California was primarily due to improved occupancy and rental rates
as the result of management's efforts to improve the competitiveness of the
Company's Las Colinas, Texas property through improvements and better service.
The overall rental market has also improved across the country. The increase
in rental income from the California real estate portfolio is primary
attributable to the significant increase in the occupancy of the Company's
newly renovated 30-unit apartment complex located in Los Angeles, California
and the improvement in the occupancy and rental rates in the Los Angeles area.
Property operating expenses decreased to $4,896,000 for the year ended June
30, 2008 from $5,832,000 for the year ended June 30, 2007 as the result of the
$560,000 in real estate related legal expenses incurred during the year ended
June 30, 2007 and management's overall effort to reduce property operating
expenses across the Company's entire real estate portfolio and run the
operations more efficiently during the year ended June 30, 2008. Property
taxes decreased to $1,400,000 from $1,530,000 primarily as the result of
management filing for a tax reassessment and decrease in property taxes at the
Company's largest property located in Las Colinas, Texas. During the year
ended June 30, 2008, there was an accidental fire in one of the Company's
apartments. The Company received insurance proceeds of approximately $198,000
related to the fire damage. These proceeds were recorded as other income as
the property that was damaged had been fully depreciated and had no book
value.
In August 2007, the Company sold its 224-unit apartment complex located in
Irving, Texas for $8,050,000 and realized a gain on the sale of real state of
$4,074,000 which is included in discontinued operations. As of June 30, 2007,
this property was classified as property held for sale on the consolidated
balance sheet. During the year ended June 30, 2008, the Company listed two
additional properties for sale. These two properties are classified as
properties held for sale on the consolidated balance sheet as of June 30,
2008. The gain on the sale of the 224-unit apartment complex and the related
revenues and expenses for the two classified as properties held for sale are
included under discontinued operations in the consolidated statements of
operations.
-24-
The Company had a net loss on marketable securities of $1,561,000 for the year
ended June 30, 2008 as compared to a net gain on marketable securities of
$2,769,000 for the year ended June 30, 2007. For the year ended June 30,
2008, the Company had a net realized gain of $1,879,000 and a net unrealized
loss of $3,440,000. For the year ended June 30, 2007, the Company had a net
realized gain of $3,436,000 and a net unrealized loss of $667,000. 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.
Dividend and interest income decreased to $199,000 for the year ended June 30,
2008 from $561,000 for the year ended June 30, 2007 as a result of the
decreased investment in income yielding securities during the fiscal year
ended June 30, 2008.
Margin interest and trading expenses decreased to $1,625,000 for the year
ended June 30, 2008 from $2,146,000 for the year ended June 30, 2007 primarily
as the result of the decrease in margin interest expense to $302,000 from
$671,000. The decrease is the result of the maintenance of lower margin
balances.
The Company may also invest, with the approval of the Securities Investment
Committee, in private investment equity funds and other unlisted securities,
such as convertible notes through private placements. Those investments in
non-marketable securities are carried at cost on the Company's balance sheet
as part of other investments net of other than temporary impairment losses. As
of June 30, 2008, the Company had net other investments of $6,798,000. During
the years ended June 30, 2008 and 2007, 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 $1,253,000
and $1,012,000, respectively.
The total provision for income tax decreased to $297,000 for the year ended
June 30, 2008 from $1,381,000 for the year ended June 30, 2007 primarily as
the result of the Company having a significantly lower pre-tax loss for the
year ended June 30, 2008.
Minority interest, net of tax related to the Company's other subsidiaries
increased to $1,147,000 for the year ended June 30, 2008 from $954,000 for the
year ended June 30, 2007 primarily as the result of the higher net losses
incurred by the Company's subsidiaries.
-25-
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As of June 30, 2008, the Company had investments in marketable equity
securities of $6,706,000. The following table shows the composition of the
Company's marketable securities portfolio by selected industry groups as of
June 30, 2008:
% of Total
Investment
Industry Group Market Value Securities
-------------- ------------ ----------
Dairy products $ 1,540,000 23.0%
Communications 1,123,000 16.7%
Financial 721,000 10.8%
Basic materials 654,000 9.8%
Medical 467,000 7.0%
Transportation 442,000 6.6%
Others 1,759,000 26.1%
---------- ------
$ 6,706,000 100.0%
========== ======
The Company's investment portfolio is diversified with 26 different equity
securities. The Company has three individual positions that comprise more
than 5% of the equity value of the portfolio with the largest being 23% of the
value of the portfolio. The amount of the Company's investment in any
particular issue may increase or decrease, and additions or reductions to its
securities portfolio may occur, at any time. While it is the internal policy
of the Company to limit its initial investment in any single equity to less
than 5% of its total portfolio value, that investment could eventually exceed
5% as a result of equity appreciation or reductions in other positions.
The following table shows the net gain(loss) on the Company's marketable
securities and the associated margin interest and trading expenses for the
respective years:
For the years ended June 30, 2008 2007
------------ ------------
Net investment (losses)gains $(1,561,000) $ 2,769,000
Impairment loss on other investments (1,253,000) (1,012,000)
Dividend and interest income 199,000 561,000
Margin interest (302,000) (671,000)
Trading expenses (1,323,000) (1,475,000)
------------ ------------
$ (4,240,000) $ 172,000
============ ============
The Company may also invest, with the approval of the Securities Investment
Committee, in private investment equity funds and other unlisted securities,
such as convertible notes through private placements. Those investments in
non-marketable securities are carried at cost on the Company's balance sheet
as part of other investments, net of other than temporary impairment losses.
As of June 30, 2008, the Company had net other investments of $6,798,000.
During the years ended June 30, 2008 and 2007, the Company made investments in
corporate debt instruments of a public company in the basic materials sector
totaling $1,275,000 and $675,000, respectively.
-26-
During the years ended June 30, 2008 and 2007, the Company received common
stock issued upon conversion or as payment of interest and penalties on
convertible notes in this company. Through sales of this common stock, the
Company was able to recover approximately $1,683,000 and $793,000 of its
investments during the years ended June 2008 and 2007, respectively. The
sales of this common stock were recognized as realized gains in the
consolidated statement of operations in the respective years. As of June 30,
2008, Intergroup had $654,000 of this company's common stock included in its
investment in marketable securities balance of $6,706,000. As of June 30,
2008, the Company still holds notes and convertible notes of this company
totaling approximately $7,975,000, which includes $5,290,000 of principal and
$2,685,000 of accrued interest and penalties.
In June 2008, the Company entered into an agreement to make additional
investments in corporate debt instruments in the aggregate amount of
$1,250,000. In addition, the Company's chairman agreed to invest in a like
amount and on the same terms as the Companies. As of June 30, 2008, a total
of $250,000 of the investment was made by the Company, leaving an aggregate
remaining commitment from the Companies of $1,000,000. Subsequent to year end,
additional investment funding was made in July and August 2008 in the total
amount of $500,000, reducing the remaining commitment to $500,000.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated from the operations of
Justice Investors. The Company also receives revenues generated from its real
estate operations and from the investment of its cash and securities assets.
Since the operations of the Hotel were temporarily suspended on May 31, 2005,
and significant amounts of money were expended to renovate and reposition the
Hotel as a Hilton, Justice did not pay any partnership distributions until the
end of March 2007. As a result, the Company had to depend more on the revenues
generated from the investment of its cash and marketable securities during
that transition period.
The Hotel started to generate cash flows from its operations in June 2006,
which have continued to improve since that time. As a result, Justice was
able to pay a total of $1,450,000 ($725,000 to the Company and $725,000 to
minority partners) in limited partnership distributions for the year ended
June 30, 2008 compared to $1,000,000 ($500,000 to the Company and $500,000 to
minority partners) for the year ended June 30, 2007. The general partners
expect to conduct regular reviews to set the amount of any future
distributions that may be appropriate based on the results of operations of
the Hotel and other factors. If cash flows from the Hotel operations continue
to improve, the Partnership could be in a position to increase distributions
to its limited partners in fiscal 2009.
To meet its substantial financial commitments for the renovation and
transition of the Hotel to a Hilton, Justice had to rely on borrowings to meet
its obligations. On July 27, 2005, Justice entered into a first mortgage loan
with The Prudential Insurance Company of America in a principal amount of
$30,000,000 (the "Prudential Loan"). The term of the Prudential Loan is for
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
Prudential 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
-27-
Prudential Loan is without recourse to the limited and general partners of
Justice. As of June 30, 2008 the Prudential Loan balance was approximately
$28,735,000.
On March 27, 2007, Justice entered into a second mortgage loan with Prudential
(the "Second Prudential Loan") in the 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 without recourse to the limited and general partners of Justice. As of
June 30, 2008, the Second Prudential Loan balance was approximately
$18,747,000.
From the proceeds of the Second Prudential Loan, Justice retired its existing
line of credit facility with United Commercial Bank ("UCB") paying off the
outstanding balance of principal and interest of approximately $16,403,000 on
March 27, 2007.
The Partnership also obtained a new unsecured $3,000,000 revolving line of
credit facility from UCB to be utilized by the Partnership to meet any
emergency or extraordinary cash flow needs. The new line of credit facility
matures on February 2, 2009 and the annual interest rate is based on an index
selected by Justice at the time of advance, equal to the Wall Street Journal
Prime Rate less 0.5%, or the LIBOR Rate plus 2%. As of June 30, 2008, there
was a balance of $1,513,000 drawn by Justice under the new line of credit,
with an annual interest rate at LIBOR plus two percent (4.50% as of June 30,
2008). During part of fiscal 2008 and 2007, Justice also utilized
approximately $1,500,000 of the amount available under the line of credit in
the form of a standby letter of credit related to the Allied Litigation. That
letter of credit was retired with the settlement of the Allied Litigation in
June 2008.
While the debt service requirements related to the two Prudential loans, as
well as the utilization of the UCB 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 an number of
years, management believes that cash flows from the operations of the Hotel
and the garage lease 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 May 2008, the Company refinanced its $5,136,000 mortgage note on its 264-
unit complex located in St. Louis, Missouri and obtained a new mortgage note
payable in the amount of $5,700,000. The term of the note is 5 years with a
fixed interest rate of 6.16%. In July 2008, the Company modified this note
and borrowed an additional $500,000. The term and interest rate on the
amended note of $6,194,000 remain the same.
In August 2007, the Company sold its 224-unit apartment complex located in
Irving, Texas for $8,050,000 and received net proceeds of approximately
$7,739,000 after selling related costs. This property was classified as
property held for sale on the consolidated balance sheet as of June 30, 2007.
-28-
In August 2007, the Company refinanced its $7,203,000 construction loan on its
30-unit apartment complex located in Los Angeles, California and obtained a
mortgage note payable in the amount of $6,850,000. The term of the note is 15
years, with interest only for the first two years. The interest is fixed at
5.97%.
During the year ended June 30, 2008, the Company improved real estate
properties in the aggregate amount of $1,111,000. 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's Board of Directors has given the Company the authority to
repurchase, from time to time, shares of its Common Stock. Such repurchases
may be made at the discretion of management and depending upon market
conditions. During the year ended June 30, 2008, the Company acquired an
additional 5,708 shares of its Common Stock for $99,000. Approximately 16,600
shares remain eligible for the Company to repurchase under that authorization.
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 Company does not have any material contractual obligations or commercial
commitments other than Justice's mortgage loans with Prudential, its revolving
line of credit facility with UCB and notes payable on its rental properties.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
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.
-29-
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 7. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
----
Report of Independent Registered Public Accounting Firm
Burr, Pilger & Mayer LLP 31
Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP 32
Consolidated Balance Sheet at June 30, 2008 33
Consolidated Statements of Operations for the
years ended June 30, 2008 and 2007 34
Consolidated Statements of Shareholders' Equity for the years
ended June 30, 2008 and 2007 35
Consolidated Statements of Cash Flows for the years ended
June 30, 2008 and 2007 36
Notes to Consolidated Financial Statements 37 - 57
-30-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
BURR, PILGER & MAYER LLP
To the Board of Directors and
Shareholders of The Intergroup Corporation:
We have audited the accompanying consolidated balance sheet of The Intergroup
Corporation and its subsidiaries (the "Company") as of June 30, 2008, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit 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 have we been engaged to perform, an audit of the
Company's internal control over financial reporting for the year ended June
30, 2008. An audit includes 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 for the year ended June 30, 2008. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides 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
Company and its subsidiaries as of June 30, 2008, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
We have also audited the adjustments to the 2007 consolidated financial
statements to retrospectively apply the change in accounting for discontinued
operations, as described in Note 5 to the consolidated financial statements.
In our opinion, such adjustments are appropriate and have been properly
applied. We were not engaged to audit, review, or apply any procedures to the
2007 financial statements of the Company other than with respect to the
adjustments for discontinued operations, and, accordingly, we do not express
an opinion or any form of assurance on the 2007 financial statements taken as
a whole.
/s/ Burr, Pilger & Mayer LLP
San Francisco, California
September 24, 2008
-31-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The InterGroup Corporation
In our opinion, the consolidated statements of operations, of shareholders'
equity and of cash flows for the year ended June 30, 2007, before the effects
of the adjustments to retrospectively reflect the discontinued operations
described in Note 5, present fairly, in all material respects, the results of
operations and cash flows of The InterGroup Corporation and its subsidiaries
for the year ended June 30, 2007, in conformity with accounting principles
generally accepted in the United States of America (the 2007 financial
statements before the effects of the adjustments discussed in Note 5 are not
presented herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit, before the
effects of the adjustments described above, of these statements 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. An audit 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,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
We were not engaged to audit, review, or apply any procedures to the
adjustments to retrospectively reflect discontinued operations described in
Note 5 and accordingly, we do not express an opinion or any other form of
assurance about whether such adjustments are appropriate and have properly
applied. Those adjustments were audited by other auditors.
/s/ PricewaterhouseCoopers LLP
Irvine, California
September 28, 2007
-32-
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
As of June 30, 2008
-----------
ASSETS
Investment in hotel, net $ 48,122,000
Investment in real estate, net 65,296,000
Properties held for sale 7,064,000
Investment in marketable securities 6,706,000
Other investments 6,798,000
Cash and cash equivalents 1,906,000
Restricted cash 1,653,000
Other assets, net 3,796,000
Minority interest of Justice Investors 6,793,000
-----------
Total assets $148,134,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 10,462,000
Due to securities broker 2,633,000
Lines of credit 4,975,000
Mortgage notes payable - hotel 47,482,000
Mortgage notes payable - real estate 61,433,000
Mortgage notes payable - property held for sale 10,313,000
Deferred income taxes 2,086,000
-----------
Total liabilities 139,384,000
-----------
Minority interest 3,621,000
-----------
Commitments and contingencies (Note 19)
Shareholders' equity:
Preferred stock, $.01 par value, 100,000 shares
authorized; none issued -
Common stock, $.01 par value, 4,000,000 shares authorized;
3,200,093 issued, 2,346,713 outstanding 32,000
Additional paid-in capital 8,791,000
Retained earnings 5,457,000
Treasury stock, at cost, 853,380 shares (9,151,000)
-----------
Total shareholders' equity 5,129,000
-----------
Total liabilities and shareholders' equity $148,134,000
===========
The accompanying notes are an integral part of these consolidated financial
statements.
-33-
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30, 2008 2007
----------- -----------
Hotel operations:
Hotel and garage revenues $ 37,778,000 $ 31,715,000
Operating expenses (31,359,000) (28,850,000)
Real estate taxes (708,000) (561,000)
Interest expense (2,858,000) (2,919,000)
Depreciation and amortization (4,463,000) (4,172,000)
----------- -----------
Loss from hotel operations (1,610,000) (4,787,000)
----------- -----------
Real estate operations:
Rental income 12,635,000 11,049,000
Property operating expense (4,896,000) (5,832,000)
Real estate taxes (1,400,000) (1,530,000)
Mortgage interest expense (3,497,000) (3,548,000)
Depreciation (2,245,000) (2,187,000)
Other income 198,000 -
----------- -----------
Income(loss) from real estate operations 795,000 (2,048,000)
----------- -----------
Investment transactions:
Net (loss)gain on marketable securities (1,561,000) 2,769,000
Impairment loss on other investments (1,253,000) (1,012,000)
Dividend and interest income 199,000 561,000
Margin interest and trading expenses (1,625,000) (2,146,000)
----------- -----------
Income(loss) from investment transactions (4,240,000) 172,000
----------- -----------
General and administrative expense (1,817,000) (1,747,000)
----------- -----------
Loss before provision for income taxes and
minority interest (6,872,000) (8,410,000)
Minority interest - Justice Investors, pre-tax 802,000 2,423,000
----------- -----------
Loss before income taxes (6,070,000) (5,987,000)
Provision for income tax benefit 2,005,000 1,391,000
----------- -----------
Loss before minority interest (4,065,000) (4,596,000)
Minority interest, net of tax 1,147,000 954,000
----------- -----------
Loss from continuing operations (2,918,000) (3,642,000)
----------- -----------
Discontinued operations:
Income from discontinued operations 251,000 60,000
Gain on sale of real estate 4,074,000 -
Provision for income tax expense (1,708,000) (10,000)
----------- -----------
Income from discontinued operations 2,617,000 50,000
----------- -----------
Net loss $ (301,000) $ (3,592,000)
=========== ===========
Basic and diluted loss per share
from continuing operations $ (1.24) $ (1.55)
=========== ===========
Basic and diluted income per share
from discontinued operations $ 1.11 $ 0.02
=========== ===========
Basic and diluted loss per share $ (0.13) $ (1.53)
=========== ===========
Weighted average number of common shares
outstanding 2,350,591 2,353,695
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-34-
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common paid-in Retained Treasury
Shares stock capital earnings stock Total
---------- ------- ---------- ----------- ----------- -----------
Balance at
June 30, 2006 3,193,745 $32,000 $8,675,000 $9,350,000 $(8,814,000) $ 9,243,000
Net loss (3,592,000) (3,592,000)
Issuance of stock 2,400 44,000 44,000
Purchase of
treasury stock (238,000) (238,000)
---------- ------- ---------- ----------- ----------- -----------
Balance at
June 30, 2007 3,196,145 32,000 8,719,000 5,758,000 (9,052,000) 5,457,000
Net loss (301,000) (301,000)
Issuance of stock 3,948 72,000 72,000
Purchase of
treasury stock (99,000) (99,000)
---------- ------- ---------- ----------- ----------- -----------
Balance at
June 30, 2008 3,200,093 $32,000 $8,791,000 $ 5,457,000 $(9,151,000) $ 5,129,000
========= ======= ========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-35-
THE INTERGROUP COPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2008 2007
----------- -----------
Cash flows from operating activities:
Net loss $ (301,000) $ (3,592,000)
Adjustments to reconcile net loss
to cash provided by operating activities:
Gain on sale of real estate (4,074,000) -
Depreciation and amortization 6,708,000 6,849,000
Net unrealized loss on investments 3,440,000 667,000
Impairment loss on other investments 1,253,000 1,012,000
Minority interest (1,949,000) (3,377,000)
Stock compensation expense 72,000 44,000
Changes in assets and liabilities:
Other assets (218,000) 571,000
Investment in marketable securities 7,617,000 10,756,000
Other investments (2,757,000) (1,962,000)
Accounts payable and other liabilities (1,935,000) 2,273,000
Due to securities broker (5,502,000) (3,397,000)
Obligations for securities sold (1,485,000) (5,150,000)
Deferred taxes (404,000) (1,391,000)
----------- ------------
Net cash provided by operating activities 465,000 3,303,000
----------- ------------
Cash flows from investing activities:
Investment in hotel (2,931,000) (2,355,000)
Investment in real estate (1,111,000) (920,000)
Net proceeds from sale of real estate 7,739,000 -
Investment in Santa Fe (154,000) (239,000)
Investment in Portsmouth (216,000) (77,000)
Restricted cash 2,456,000 (1,397,000)
----------- -----------
Net cash provided by(used in) investing
activities 5,783,000 (4,988,000)
----------- -----------
Cash flows from financing activities:
Borrowings from mortgage notes payable 12,550,000 19,325,000
Principal payments on mortgage notes payable (18,943,000) (17,679,000)
Net draw on line of credit 717,000 -
Purchase of treasury stock (99,000) (238,000)
Distribution to minority partners (725,000) (500,000)
----------- -----------
Net cash (used in)provided by financing
activities (6,500,000) 908,000
----------- -----------
Net decrease in cash and cash equivalents (252,000) (777,000)
Cash and cash equivalents at beginning of
year 2,158,000 2,935,000
----------- -----------
Cash and cash equivalents at end of year $ 1,906,000 $ 2,158,000
=========== ===========
Supplemental information:
Income tax paid $ 193,000 $ 125,000
========== ==========
Interest paid $ 7,569,000 $ 8,079,000
========== ==========
Supplemental disclosure of non-cash activities:
Consolidation of Justice Investors as of July 1, 2006
Gross components:
Assets(including cash of $2,352,000) $(42,975,000)
Liabilities 52,366,000
Investment in Justice (7,321,000)
Minority interest (2,343,000)
The accompanying notes are an integral part of these consolidated financial
statements.
-36-
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, 2008, the Company had the power to vote 79.9% 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"), serves as the managing general partner. As
discussed in Note 2, the financial statements of Justice are consolidated with
those of the Company, effective the fiscal year beginning July 1, 2006.
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 parking garage.
The Hotel was temporarily closed for major renovations from May 2005 to
January 2006. The total construction costs related to the renovation project
was approximately $37 million.
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. The Partnership
also derives income from the lease of the parking garage to Evon and a lease
of 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 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. Most of the Company's residential rental
properties, are managed by professional third party property management
companies.
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.
-37-
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.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144
"Accounting for Impairment or Disposal of Long-Lived Assets", the Company
reviews its investment in Hotel for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If expected future cash flows (undiscounted and excluding
interest costs) are less than the carrying value of the asset, the asset is
written down to its estimated fair value. The estimation of expected future
net cash flows is inherently uncertain and relies to a considerable extent on
assumptions regarding current and future economic and market conditions, and
the availability of capital. If, in future periods, there are changes in the
estimates or assumptions incorporated into the impairment review analysis, the
changes could result in an adjustment to the carrying amount of the long-lived
asset. No impairment losses on the investment in Hotel have been recorded for
the years ended June 30, 2008 and 2007.
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.
In accordance with SFAS No. 144, 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, 2008 and 2007.
Properties held for sale - Discontinued Operations
Properties are classified as held for sale when management commits to a plan
to sell the asset, the asset is available for immediate sale, an active
program to locate a buyer has been initiated, the sale of the asset is
probable, the sale of the asset is actively marketed and it is unlikely that
significant changes to the sale plan will be made or withdrawn. As of June 30,
2008, the Company had two properties classified as held for sale in accordance
with SFAS No. 144, which requires that depreciation on these properties be
stopped.
Under the provisions of the Statement of Financial Accounting Standards
No.144, Accounting for Impairment or Disposal of Long-Lived Assets, for
properties disposed of during the year or for properties for which the Company
actively markets for sale at a price that is reasonable in relation to its
market value, the properties are required to be classified as held for sale on
the balance sheet and accounted for under discontinued operations in the
statement of operations. The revenues and expenses from the operation of
-38-
these properties have been reclassified from continuing operations for the
years ended June 30, 2008 and 2007 and reported as income from discontinued
operations in the consolidated statements of operations.
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
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. For the years ended June
2008 and 2007, the Company recorded impairment losses related to other
investments of $1,253,000 and $1,012,000, respectively.
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. The Company maintains most of its cash balances at
one financial institution. The Federal Deposit Insurance Corporation insures
balances up to $100,000 in the aggregate per depositor.
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 assets include accounts receivable from Hotel and rental property,
inventory, prepaid expenses, loan fees and franchise fees. Loan fees are
stated at cost and amortized over the term of the loan using the straight-line
method which approximates the effective interest method. Franchise fees are
stated at cost and amortized over the life of the agreement of 15 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 collectibility 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.
-39-
Minority Interest
Minority interests in the net assets and earnings or losses of consolidated
subsidiaries are reflected in the caption "Minority interest" in the Company's
consolidated balance sheet and consolidated statements of operations. Minority
interest adjusts the Company's consolidated results of operations to reflect
only the Company's share of the earnings or losses of the consolidated
subsidiaries. As of June 30, 2008, the Company reported the minority interest
of Justice Investors as an asset in the consolidated balance sheet as the
result of the accumulated deficit at Justice Investors. Management believes
the accumulated deficit is considered temporary as the Hotel was temporarily
closed to undergo major renovations from May 2005 to January 2006. The
Company expects the Hotel to be profitable, thereby reversing the accumulated
deficit in the future.
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.
Treasury Stock
The Company records the acquisition of treasury stock under the cost method.
Fair Value of Financial Instruments
The recorded values of cash and cash equivalents, accounts receivable,
marketable securities, amounts due to securities brokers, accounts payable and
accrued expenses approximate their fair values based on their short-term
nature. As of June 30, 2008, the recorded value of mortgage notes payable
approximates the fair value as the related interest rate is in line with
market rates.
Revenue Recognition
Room revenues are 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.
Rental revenues from the garage and other are recognized on the straight-line
method of accounting under which 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.
-40-
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
The provision for income tax expense or benefit differs from the amounts of
income taxes currently payable because certain items of income and expense
included in the consolidated financial statements are recognized in different
time periods by taxing authorities. Deferred income taxes are determined
using the liability method. A deferred tax asset or liability is determined
based on the difference between the financial statement and tax basis of
assets and liabilities as measured by the enacted tax rates. Deferred tax
expense is the result of changes in the amount of deferred income taxes during
the period. Deferred tax assets, including net operating loss and tax credit
carry forwards, are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that any portion of these tax
attributes will not be realized. As of June 30, 2008, a valuation allowance
of $1,171,000 was recorded against the Company's deferred tax assets.
From time to time, management must assess the need to accrue or disclose a
possible loss contingency for proposed adjustments from various federal, state
and foreign tax authorities that regularly audit the company in the normal
course of business. In making these assessments, management must often analyze
complex tax laws of multiple jurisdictions.
The Company adopted Financial Accounting Standards Board(FASB) Interpretation
No. 48(FIN 48), Accounting for Uncertainty in Income Taxes - an interpretation
of FASB Statement No. 109, effective July 1, 2007. FIN 48 clarifies the
accounting for uncertainty in tax positions. FIN 48 requires that the Company
recognize the impact of a tax position in the Company's financial statements
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The adoption of FIN 48 did not have a
material impact on the Company's consolidated financial statements. The
Company recognizes interest and penalties related to uncertain income tax
positions in income tax expense. There were no interest and penalties related
to uncertain income tax positions that were accrued as of June 30, 2008 and
during the period there were no changes in individual or aggregate
unrecognized tax positions. The Company's income tax returns for the years
ended June 30, 2004 to the present are subject to examination by major taxing
authorities.
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, 2008, there were no liabilities for
environmental remediation.
Stock-Based Compensation Plans
As of June 30, 2008, the Company currently has two stock compensation plans,
which are more fully described in Note 17. On July 1, 2006, the Company
implemented Statement of Financial Accounting Standards 123 (Revised), "Share-
Based Payments" ("SFAS No. 123R") which replaced SFAS No. 123 and supersedes
-41-
Opinion No. 25 and the related implementation guidance. SFAS No. 123R
addresses accounting for equity-based compensation arrangements, including
employee stock options. The Company adopted the "modified prospective method"
where stock-based compensation expense is recorded beginning on the adoption
date and prior periods are not restated. Under this method, compensation
expense is recognized using the fair-value based method for all new awards
granted after July 1, 2006. Additionally, compensation expense for unvested
stock options that are outstanding at July 1, 2006 is 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 fair value of each grant is estimated using the Black-Scholes
option pricing model.
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, 2008, the Company
had 373,500 stock options that were considered potentially dilutive common
shares and 16,500 stock options that were considered anti-dilutive. As of
June 30, 2007, the Company had 371,250 stock options that were considered
potentially dilutive common shares and 33,750 stock options that were
considered anti-dilutive. However, the basic and diluted loss per share are
the same as the result of the Company having a net loss from continuing
operations for the years ended June 30, 2008 and 2007.
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 May 2008, the Financial Accounting Standards Board(FASB) issued Statement of
Financial Accounting Standards No. 162(SFAS No. 162), The Hierarchy of
Generally Accepted Accounting Principles. This new standard is intended to
improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with GAAP for
nongovernmental entities. SFAS No. 162 will become effective 60 days following
-42-
the Securities and Exchange Commission's (SEC) approval of the Public Company
Accounting Oversight Board amendments (PCAOB) to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles.
The Company is currently evaluating the potential impact of SFAS No. 162 on its
financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, and amendment to Accounting Research
Bulletin (ARB) No. 51," (SFAS No. 160). This standard prescribes the
accounting by a parent company for minority interests held by other parties in
a subsidiary of the parent company. SFAS No. 160 is effective for the Company
for fiscal year ending June 30, 2010. The Company is currently assessing the
impact of SFAS No. 160 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities(SFAS No. 159). SFAS No. 159
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 provisions of SFAS No. 159 are
effective for the Company for the fiscal year ending June 30, 2009. The Company
is currently evaluating the impact of the provisions of SFAS No. 159 on its
financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"), which replaces SFAS No. 141. SFAS 141R
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. SFAS 141R 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
provisions of SFAS 141R are effective for the Company for the fiscal year
ending June 30, 2010. The Company is currently assessing the impact of SFAS
141R on its 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" 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"
(Issue 04-5). FSP SOP 78-9-1 eliminated the concept of "important rights" in
paragraph .09 of SOP 78-9 and replaces it with the concepts of "kick out
rights" and "substantive participating rights" as defined in Issue 04-5. In
accordance with guidance set forth in FSP SOP 78-9-1, 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 consolidated the financial statements of Justice with those of the
Company effective as of July 1, 2006. For the year ended June 30, 2008 and
2007, the results of operations for Justice were consolidated with those of
the Company.
-43-
Since the Hotel was temporarily closed to undergo major renovations from May
31, 2005 through January 12, 2006, there was no income from operations of the
Hotel. Management anticipated losses during that period and for a period of
time after the reopening as the Hotel ramped up its operations. To meet its
substantial financial commitments for the renovation and repositioning of the
Hotel, the Partnership had to rely on additional borrowings to meet its
obligations. The value of the Hotel was adequate to serve as collateral for
such lending facilities which provided the financial resources to meet its
obligations. As a result of the renovation and repositioning of the Hotel and
the operating losses incurred during the temporary closure and transition of
the Hotel to a Hilton, the Partnership had an accumulated deficit as of June
30, 2008. Management considers that accumulated deficit to be temporary as the
Hotel is now generating operating income before depreciation and amortization
which has continued to improve since the Hotel's reopening. For the year ended
June 30, 2008, the Partnership had a net loss of $1,610,000, which included
approximately $4.5 million in non cash charges for depreciation and
amortization. For the year ended June 30, 2007, the Partnership had a net loss
of $4,787,000, which included approximately $4.2 million in non cash charges
for depreciation and amortization. Management also believes that the revenues
expected to be generated from the operations of the Hotel and the
Partnership's leases will be sufficient to meet all of the Partnership's
current and future obligations and financial requirements.
NOTE 3 - INVESTMENT IN HOTEL, NET
Hotel property and equipment as of June 30, 2008 consisted of the following:
Accumulated Net Book
Cost Depreciation Value
------------ ------------ ------------
Land $ 2,738,000 $ - $ 2,738,000
Furniture and equipment 16,279,000 (8,005,000) 8,274,000
Building and improvements 53,486,000 (16,376,000) 37,110,000
------------ ------------ ------------
$ 72,503,000 $(24,381,000) $ 48,122,000
============ ============ ============
Depreciation expense for the years ended June 30, 2008 and 2007 were
$4,408,000 and $4,128,000 respectively.
The Partnership leases certain equipment under agreements that are classified
as capital leases. The cost of equipment under capital leases was $958,000 as
of June 30, 2008. The accumulated amortization on capital leases was $478,000
as of June 30, 2008.
NOTE 4 - INVESTMENT IN REAL ESTATE, NET
At June 30, 2008, 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 serves as
the Company's corporate headquarters. The Company also owns two unimproved
real estate properties located in Austin, Texas and Maui, Hawaii.
-44-
As of June 30, 2008, investment in real estate included the following:
Land $ 24,735,000
Buildings, improvements and equipment 60,778,000
Less: accumulated depreciation (20,217,000)
----------
$ 65,296,000
==========
Depreciation expense from continuing operations for the years ended June 30,
2008 and 2007, was $2,245,000 and $2,187,000, respectively.
NOTE 5 - PROPERTIES HELD FOR SALE AND DISCONTINUED OPERATIONS
As of June 30, 2008, 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, 2008 and 2007, respectively, have
been 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, 2008 and 2007 are summarized as follows:
For the years ended June 30, 2008 2007
---------- ----------
Revenues $ 2,823,000 $ 3,814,000
Expenses (2,572,000) (3,754,000)
---------- ----------
Income from discontinued operations $ 251,000 $ 60,000
========== ==========
Depreciation and amortization expense from discontinued operations for the
years ended June 30, 2008 and 2007, was $172,000 and $490,000, respectively.
In August 2007, the Company sold its 224-unit apartment complex located in
Irving, Texas for $8,050,000 and recognized a gain on the sale of real estate
of $4,074,000 which is included in discontinued operations. This property was
classified as property held for sale on the consolidated balance sheet as of
June 30, 2007. The Company received net proceeds after selling costs of
$7,739,000 and paid off the related outstanding mortgage note payable of
$4,007,000.
NOTE 6 - INVESTMENT IN MARKETABLE SECURITIES
At June 30, 2008, all of the Company's marketable securities are classified as
trading securities. In accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the change in the unrealized gains
and losses on these investments are included the statement of operations.
Trading securities are summarized as follows:
As of June 30, 2008
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- ------------
Corporate
Equities $ 5,869,000 $ 2,127,000 ($1,290,000) $ 837,000 $ 6,706,000
-45-
As of June 30, 2008, the Company had $708,000 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, 2008 and 2007.
For the years ended June 30, 2008 2007
----------- -----------
Realized gain on marketable securities $ 1,879,000 $ 3,436,000
Unrealized loss on marketable securities (3,440,000) (667,000)
----------- -----------
Net (loss)gain on marketable securities $(1,561,000) $ 2,769,000
=========== ===========
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,
2008, the Company had no obligations for securities sold (equities short) and
had no naked short positions.
NOTE 7 - OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the Securities Investment
Committee, in private investment equity funds and other unlisted securities,
such as convertible notes through private placements. Those investments in
non-marketable securities are carried at cost on the Company's balance sheet
as part of other investments net of other than temporary impairment losses.
As of June 30, 2008, the Company had net other investments of $6,798,000,
which consist of the following:
Type Other Investments, Net
--------------------------- ----------------------
Private equity hedge fund $ 6,434,000
Corporate debt instruments 64,000
Other 300,000
-----------------
$ 6,798,000
=================
In accordance with Emerging Issues Task Force No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments",
the Company recorded impairment losses $1,253,000 and $1,012,000,
respectively, during the years ended June 30, 2008 and 2007.
In June 2008, the Company entered into an agreement to make additional
investments in corporate debt instruments in the aggregate amount of
$1,250,000. In addition, the Company's chairman agreed to invest in a like
amount and on the same terms as the Companies. As of June 30, 2008, a total
of $250,000 of the investment was made by the Company, leaving an aggregate
remaining commitment from the Companies of $1,000,000. Subsequent to year end,
additional investment funding was made in July and August 2008 in the total
amount of $500,000, reducing the remaining commitment to $500,000.
-46-
NOTE 8 - OTHER ASSETS, NET
Other assets consist of the following as of June 30, 2008:
Accounts receivable, net $ 1,140,000
Prepaid expenses 1,001,000
Inventory 539,000
Miscellaneous assets, net 1,116,000
-----------
Total other assets $ 3,796,000
===========
NOTE 9 - LINE OF CREDIT:
In April 2004, the Company obtained a revolving $5,000,000 line of credit
("LOC"). The LOC carries a variable interest rate of 6.25% (lender's base
rate plus 1%) as of June 30, 2008. Interest is paid on a monthly basis. As
of June 30, 2008, the balance of the LOC was $3,462,000. The LOC was
subsequently paid off as of September 10, 2008.
The Partnership has available a line of credit with a bank for $3,000,000 that
expires on February 2, 2009. The interest rate is LIBOR plus 2% per annum or
is based on the Wall Street Journal Prime Rate less 0.5% per annum, floating,
as selected by the Partnership for each advance. The interest rate at June
30, 2008 was 4.50%. As of June 30, 2008, the outstanding balance on the line
of credit was $1,513,000. Borrowings under the line of credit are subject to
certain financial covenants, which are measured annually at December 31 of
each year. The Partnership was not in compliance with certain covenants at
December 31, 2007. The Partnership received a waiver of such non-compliance
from the bank in June 2008.
NOTE 10 - MORTGAGE NOTES PAYABLE
As of June 30, 2008, the Company had mortgage debt outstanding of
$119,228,000. The two Hotel mortgages both carry fixed rates. The property
mortgages carry variable rates from 6.70% to 8.44% and fixed rates ranging
from 4.35% to 7.95%.
Each mortgage is secured by its respective land and building. Mortgage notes
payable secured by real estate are comprised of the following information as
of June 30, 2008:
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Number Note Note Mortgage Interest
Property of Units Origination Maturity Balance Rate
Date Date
----------- ----------- -------------- ------------ --------- -----
SF Hotel 544 Rooms July 2005 August 2015 $28,735,000 5.22%
SF Hotel 544 Rooms March 2005 August 2015 18,747,000 6.42%
-----------
Mortgage notes payable - hotel $47,482,000
===========
Florence 157 June 2005 July 2014 $ 4,146,000 4.96%
Las Colinas 358 April 2004 May 2013 19,089,000 4.99%
Morris County 151 April 2003 May 2013 9,788,000 5.43%
St. Louis 264 May 2008 May 2013 5,700,000 6.73%
Los Angeles 24 May 2001 April 2031 1,640,000 7.15%
Los Angeles 5 September 2000 August 2030 414,000 7.59%
Los Angeles 2 January 2002 February 2032 424,000 6.45%
Los Angeles 1 February 2001 December 2030 449,000 8.44%
Los Angeles 31 September 2003 August 2033 3,848,000 4.35%
Los Angeles 30 August 2007 September 2022 6,850,000 5.97%
Los Angeles 27 October 1999 October 2029 1,751,000 7.73%
Los Angeles 14 December 1999 November 2029 1,034,000 7.89%
Los Angeles 12 November 2003 December 2018 985,000 6.38%
Los Angeles 9 February 2000 December 2029 774,000 7.95%
Los Angeles 8 May 2001 November 2029 539,000 7.00%
Los Angeles 7 November 2003 December 2018 1,018,000 6.38%
Los Angeles 4 November 2003 December 2018 693,000 6.38%
Los Angeles 1 October 2003 November 2033 491,000 5.75%
Los Angeles Office May 1999 April 2009 1,081,000 7.76%
Los Angeles Office September 2000 December 2013 719,000 6.71%
-----------
Mortgage notes payable - real estate $61,433,000
===========
Austin 249 June 2003 July 2023 $ 7,497,000 5.46%
San Antonio 132 November 1998 December 2008 2,816,000 6.62%
-----------
Mortgage notes payable - properties held for sale $10,313,000
===========
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
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
-48-
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. From the proceeds of the Second
Prudential Loan, Justice retired its existing line of credit facility with
United Commercial Bank ("UCB") paying off the outstanding balance of principal
and interest of approximately $16,403,000 on March 27, 2007.
In May 2008, the Company refinanced its $5,136,000 mortgage note on its 264-
unit complex located in St. Louis, Missouri and obtained a new mortgage note
payable in the amount of $5,700,000. The term of the note is 5 years with a
fixed interest rate of 6.16%. In July 2008, the Company modified this note
and borrowed an additional $500,000. The term and interest rate on the
amended note of $6,194,000 remain the same.
In August 2007, the Company refinanced its $7,203,000 construction loan on its
30-unit apartment complex located in Los Angeles, California and obtained a
mortgage note payable in the amount of $6,850,000. The term of the note is 15
years, with interest only for the first two years. The interest is fixed at
5.97%.
The annual combined aggregate principal payments on the mortgage notes payable
for the five-year period commencing July 1, 2008, and thereafter, are as
follows:
Year ending June 30,
2009 $ 1,927,000
2010 5,814,000
2011 2,153,000
2012 2,293,000
2013 2,413,000
Thereafter 104,628,000
-----------
Total $ 119,228,000
===========
NOTE 11 - HOTEL RENTAL INCOME
The Partnership has a lease agreement with Evon for the use of the parking
garage expiring in November 2010. The lease provides the Partnership with
minimum monthly payments of $20,000 and additional contingent rental income
based on 60% of the gross parking revenues. For the years ended June 30, 2008
and 2007, the Partnership recorded rental income from Evon of $1,602,000 and
$1,533,000, respectively. This income is included with the hotel and garage
revenue on the consolidated statements of operations.
The Partnership has a lease agreement with Tru Spa, LLC 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.
Future minimum rentals to be received under existing non-cancelable operating
leases as of June 30, 2008 for each of the next five years and in the
aggregate are:
-49-
For the year ending June 30, Parking Garage Spa Facilities Total
-------------- -------------- ----------
2009 $ 237,000 $ 165,000 $ 402,000
2010 237,000 165,000 402,000
2011 99,000 165,000 264,000
2012 - 165,000 165,000
2013 - 151,000 151,000
-------------- -------------- ----------
$ 573,000 $ 811,000 $1,384,000
============== ============== ==========
NOTE 12 - HOTEL 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 terminated earlier 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
for the fiscal year. However, 0.75% of the stated management fee is due only
if the partially adjusted net operating income for the fiscal year exceeded
the amount of the Partnership's return for the fiscal year. Prism is also
entitled to an incentive management fee if certain milestones are
accomplished. No incentive fees were earned during the year ended June 30,
2008. Management fees paid to Prism during the years ended June 30, 2008 and
2007 were $571,000 and $212,000, respectively.
Prior to the Prism management agreement, the Hotel was managed and operated by
Dow Hotel Company LLC (Dow). Under the Dow management agreement, the
Partnership was 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 fiscal year
exceeded the amount of the Partnership's return ($7 million). Dow was also
entitled to incentive management fees if certain milestones were accomplished.
No incentive management fees were paid during the year ended June 30, 2007.
Management fees paid to Dow during the year ended June 30, 2007 was $311,000.
NOTE 13 - HILTON FRANCHISE LICENSE AGREEMENT
Partnership entered into a Franchise License Agreement with Hilton Hotels
Corporation (the "Hilton Franchise Agreement") on December 10, 2004 for the
right to operate the Hotel as a Hilton brand hotel. The term of the Hilton
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.
Beginning on the opening date, the Partnership pays 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 will be 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. 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 can not exceed one percent 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. For the years ended June 30,
2008 and 2007, the royalty fees and program fees (collectively "Franchise
fees") were $2,181,528 and $1,702,000, respectively.
-50-
The Partnership also pays Hilton a monthly information technology recapture
charge of 0.75% of the Hotel's gross revenues. For the years ended June 30,
2008 and 2007, those charges were $221,000 and $183,000, respectively.
NOTE 14 - GENERAL PARTNERS COMPENSATION
Effective May 31, 2004, and as amended on February 23, 2006, the Partnership
entered into a new General Partner Compensation Agreement (the "Compensation
Agreement") with its two general partners, Evon and Portsmouth, to compensate
them for their services to the Partnership, including the repositioning of the
Hotel, the active oversight of its operations and the management of the
Partnership's assets. The Compensation Agreement provides for annual base
compensation equal to 1.5% of gross revenues for the fiscal year, payable in
monthly installments, with a minimum annual base compensation of $262,000,
subject to CPI percentage adjustments. From the minimum annual base
compensation, 80% is to be paid to Evon as the managing general partner, and
20% is to be paid to Portsmouth as the other general partner. Base annual
compensation in excess of the minimum is payable in equal amounts to Evon and
Portsmouth. The maximum annual compensation that can be earned by the general
partners is 1.5% of $40,000,000 of gross revenues, subject to CPI percentage
adjustments. The Compensation Agreement will continue to remain in effect
until otherwise amended by the Partnership.
During the years ended June 30, 2008 and 2007, the general partners were paid
$285,000 and $283,000, respectively, for the minimum base compensation. For
the years ended June 30, 2008 and 2007, additional compensation earned above
the minimum base compensation was $232,000 and $184,000, respectively.
Pursuant to the Compensation Agreement, the general partners are also eligible
for incentive compensation based upon 5% of net operating income of the
Partnership in excess of $7 million. No incentive compensation was earned
during the years ended June 30, 2008 and 2007.
In accordance with the Compensation Agreement as restated on February 23,
2006, the general partners were entitled to certain fees for services rendered
to the Partnership with the respect to repositioning the Hotel, which were to
be paid equally to both general partners. The payments were due after six
milestones in the restoration of the Hotel. As of June 30, 2007, all
milestones had been achieved and all repositioning fees had been paid. There
were no repositioning fees earned during the year ended June 30, 2008. For
the year ended June 30, 2007, repositioning fees earned totaled $379,000.
NOTE 15 - INCOME TAXES
The provision for the Company's income tax benefit(expense) is comprised of
the following:
For the years ended June 30, 2008 2007
------------------------------------ -------------------------------------
Discontinued Discontinued
Operations Operations Total Operations Operations Total
----------- ----------- ---------- ----------- ------------ ----------
Current tax expense $ (107,000) $ - $ (107,000) $ - $ (10,000) $ (10,000)
Deferred tax benefit 2,112,000 (1,708,000) 404,000 1,391,000 - 1,391,000
----------- ----------- --------- ------------ ------------ ----------
$ 2,005,000 $(1,708,000) $ 297,000 $ 1,391,000 $ (10,000) $ 1,381,000
=========== =========== ========== ============ ============ ==========
-51-
The provision for income taxes differs from the amount of income tax computed
by applying the federal statutory income tax rate to income before taxes as a
result of the following differences:
For the years ended June 30, 2008 2007
-------- --------
Income tax at federal statutory rates 34.0% 34.0%
State income taxes, net of federal benefit 12.4% 5.2%
Dividend received deduction 1.5% 1.5%
Other adjustments (11.9%) (3.2%)
Valuation allowance (19.0%) (14.2%)
-------- --------
Total income tax benefit 17.0% 23.3%
======== ========
The components of the deferred tax asset and liabilities as of June 30, 2008,
are as follows:
Deferred tax assets
Net operating loss carryforwards $ 8,435,000
Other investment impairment reserve 649,000
Accruals and reserves 929,000
Valuation allowance (1,171,000)
----------
8,842,000
Deferred tax liabilities
Deferred real estate gains (8,831,000)
Unrealized gains on marketable securities (363,000)
Depreciation (47,000)
Equity earnings (1,380,000)
State taxes (307,000)
-----------
(10,928,000)
-----------
Net deferred tax liability $ (2,086,000)
===========
As of June 30, 2008, the Company had net operating losses(NOLs) of $20,562,000
and $18,840,000 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 2025.
Federal State
---------- ----------
Intergroup $ 5,747,000 $ 7,369,000
Santa Fe 4,514,000 1,445,000
Portsmouth 10,301,000 10,026,000
---------- ----------
$20,562,000 $18,840,000
========== ==========
-52-
NOTE 16 - SEGMENT INFORMATION
The Company operates in three reportable segments, the operations of its
multi-family residential properties, the operation of the hotel, and the
investment of its cash and securities assets. 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 same information.
Information below represents reported segments for the years ended June 30,
2008 and 2007. Operating income for rental properties consist of rental
income. Operating income(loss) from hotel operations consist of the
operations of the hotel and garage. 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, 2008 Operations operations Transactions Other Subtotal Operations Total
----------- ----------- ----------- ----------- ------------ ------------ ------------
Operating income $37,778,000 $12,833,000 $(1,362,000) $ - $ 49,249,000 $ 2,823,000 $ 52,072,000
Operating expenses (39,388,000) (12,038,000) (2,878,000) - (54,304,000) (2,572,000) (56,876,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income (1,610,000) 795,000 (4,240,000) - (5,055,000) 251,000 (4,804,000)
Gain on sale of real estate - - - - - 4,074,000 4,074,000
General and administrative
expense - - - (1,817,000) (1,817,000) - (1,817,000)
Income tax benefit(expense) - - - 2,005,000 2,005,000 (1,708,000) 297,000
Minority interest 802,000 - - 1,147,000 1,949,000 - 1,949,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $ (808,000) $ 795,000 $(4,240,000) $ 1,335,000 $ (2,918,000) $ 2,617,000 $ (301,000)
=========== =========== =========== =========== ============ ============ ============
Total assets $51,153,000 $65,296,000 $13,504,000 $11,117,000 $ 141,070,000 $ 7,064,000 $148,134,000
=========== =========== =========== =========== ============ ============ ============
As of and
For the year ended Hotel Real estate Investment Discontinued
June 30, 2007 Operations operations Transactions Other Subtotal Operations Total
----------- ----------- ----------- ----------- ------------ ------------ ------------
Operating income $31,715,000 $11,049,000 $ 3,330,000 $ - $ 46,094,000 $ 3,814,000 $ 49,908,000
Operating expenses (36,502,000) (13,097,000) (3,158,000) - (52,757,000) (3,754,000) (56,511,000)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net operating income(loss) (4,787,000) (2,048,000) 172,000 - (6,663,000) 60,000 (6,603,000)
General and administrative
expense - - - (1,747,000) (1,747,000) - (1,747,000)
Income tax benefit(expense) - - - 1,391,000 1,391,000 (10,000) 1,381,000
Minority interest 2,423,000 - - 954,000 3,377,000 - 3,377,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
Net income(loss) $(2,364,000) $(2,048,000) $ 172,000 $ 598,000 $ (3,642,000) $ 50,000 $ (3,592,000)
=========== =========== =========== =========== ============ ============ ============
Total assets $49,599,000 $74,671,000 $23,057,000 $10,028,000 $ 157,355,000 $ 2,488,000 $159,843,000
=========== =========== =========== =========== ============ ============ ============
-53-
NOTE 17 - STOCK-BASED COMPENSATION PLANS
The Company currently has two equity based compensation plans, The InterGroup
Corporation 2007 Stock Compensation Plan for Non-Employee Directors (the "2007
Plan") and the 1998 Stock Option Plan for Selected Key Officers, Employees and
Consultants (the "1998 Key Employee Plan"). Both plans were approved by the
shareholders of the Company and adopted by the Board of Directors.
The stock to be available for issuance under the 2007 Plan shall be 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. 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 of
Directors.
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 shall be
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. All stock awards to
non-employee directors will be unrestricted shares and are 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 2007 Plan was adopted to replace the 1998 Stock Option Plan for Non-
Employee Directors (the "1998 Non-Employee Director Plan") since all options
authorized to be issued under the 1998 Non-Employee Director Plan were
exhausted in fiscal 2006. Although the 1998 Non-Employee Director Plan was
terminated upon shareholder approval, and Board adoption, of the 2007 Plan,
any outstanding options under the 1998 Non-Employee Director Plan remain
effective in accordance with their terms.
For the years ended June 30, 2008 and 2007, the four non-employee directors of
the Company each received a grant of 987 (3,948 total issued) and 600 (2,400
total issued) shares of Common Stock, respectively, pursuant to the 2007 Plan.
For the years ended June 30, 2008 and 2007, the Company recorded expenses of
approximately $72,000 and $44,000, respectively, related to the issuance of
the Company's Common Stock.
The 1998 Key Employee Plan provides for the granting of stock options to
purchase shares of the Company's common stock to key officers of the Company.
The aggregate number of shares to be delivered upon exercise of all options
granted under the Plan may not exceed 300,000 (adjusted for stock split).
The Key Employee Plan shall terminate on the earliest to occur of (i) the
dates when all of the Common Stock available under the Key Employee Plan shall
have been acquired through the exercise of options granted under the Key
Employee Plan; (ii) 10 years after the date of adoption of the Key Employee
Plan by the Board; or (iii) such other date that the Board may determine.
The exercise price of any options granted shall be determined at the time of
grant and shall not be less than 100% of the fair market value of the Common
Stock at the time of the grant of the option. The term of the option shall
not exceed 10 years from the date on which the option is granted. The vesting
schedule for the options and the method or time that when the option may be
exercised in whole or in part shall be determined by the Committee. However,
-54-
in no event shall an option be exercisable within six months of the date of
grant in the case of an optionee subject to Section 16(b) of the Exchange Act.
Subject to certain exceptions, the option shall terminate six months after the
optionee's employment with the Company terminates. No options to purchase
shares were granted pursuant to the Key Employee Plan during fiscal 2008.
During the year ended June 30, 2008 and 2007, there were no options granted or
exercised under the 1998 Key Employee Plan and the 1998 Non-Employee Director
Plan. Accordingly, no stock-based compensation expense was recognized during
the period related to these two stock option plans. Additionally, since
inception of the 1998 Key Employee Plan and the 1998 Non-Employee Director
Plan, there have been no options exercised. For the year ended June 30, 2008,
2,250 employee options were vested. However, the fair value of the vested
options is considered immaterial.
The following table summarizes the stock options outstanding as of June 30,
2008:
Number of Weighted-average
Shares Exercise Price
---------- ---------------
Unexercised options
Outstanding at June 30, 2006 405,000 $9.91
Granted - -
Exercised - -
Forfeited - -
---------- ---------------
Unexercised options
Outstanding at June 30, 2007 405,000 $9.91
Granted - -
Exercised - -
Forfeited (15,000) $35.11
---------- ---------------
Unexercised options
Outstanding at June 30, 2008 390,000 $9.13
========== ===============
As of June 30, 2008, of the total 390,000 unexercised options outstanding,
4,500 were not yet vested.
Unexercised Range of Weighted Average Weighted Average
Options Exercise Price Exercise Price Remaining Life
---------------- -------------- ---------------- ----------------
June 30, 2008 $7.92-$18.00 $ 9.13 1.50 years
NOTE 18 - RELATED PARTY TRANSACTIONS
The contractor that was selected to oversee the garage and the first four
floors' renovation (excluding room upgrades) of the Hotel was the contractor
who originally constructed the Hotel. He is also a partner in the Partnership
and is a director of Evon Corporation, the managing general partner of the
Partnership. The contractor is also a board member of Evon Corporation. At
June 30, 2008 and 2007, there were $67,000 and $33,000, respectively, payable
to the contractor. Services performed by the contractor are capitalized as
fixed assets which totaled $399,000 and $1,256,000 for the year ended June 30,
2008 and 2007, respectively. Management believes these renovations were
competitively priced.
-55-
The garage lessee, Evon, is the Partnership's managing general partner. Evon
paid the Partnership $1,602,000 and $1,533,000 for the years ended June 30,
2008 and 2007, respectively, under the terms of the lease agreement. Rent
receivable from Evon as of June 30, 2008 and 2007 was $15,000 and $33,000,
respectively.
During the year ended June 30, 2008, the Company made additional investments
in Santa Fe and Portsmouth totaling $154,000 and $216,000, 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.
On July 18, 2003, the Company's subsidiaries 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.
During the year ended June 30, 2008 and 2007, Mr. Winfield did not receive any
performance based compensation.
-56-
NOTE 19 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under capital leases expiring in various
years through 2012. Capital lease obligations as of June 30, 2008 were
$638,000 and are included in the accounts payable and other liabilities
balance in the consolidated balance sheet.
Minimum future lease payments for assets under capital leases as of June 30,
2008 for each of the next five years and in aggregate are:
Year ending June 30
2009 $ 243,000
2010 243,000
2011 243,000
2012 14,000
--------
Total minimum lease payments: 743,000
Less interest on capital leases (105,000)
--------
Present value of minimum lease payments $ 638,000
========
The Company leases equipment from an unrelated third party under operating
leases with expiration dates through 2010. Minimum future operating lease
commitments for equipment leases as of June 30, 2008 are as follows:
Year ended June 30,
2009 $ 196,000
2010 10,000
--------
$ 206,000
========
The Partnership was involved with a contract claim with one of its general
contractors who recorded a mechanic's lien against the Partnership property
arising out of the renovation work performed on the Hotel. The contractor had
failed to pay a number of subcontractors who also filed mechanic's lien claims
against the property. In November 2007, the Partnership entered into
settlement agreements with the subcontractors and their liens were released.
The balance of the dispute with the general contractor was submitted to
arbitration pursuant to the terms of the construction contract. All remaining
claims asserted by the general contractor were settled by the Partnership on
June 5, 2008 for the sum of $588,000 and a release of the lien claim was
recorded and the action dismissed. Management believes that all claims against
the Partnership or on the property had been settled as of June 30, 2008.
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.
-57-
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Disclosure of the appointment of Burr, Pilger & Mayer LLP as the Company's
independent registered public accounting firm in October 2007 was previously
reported and no additional disclosure is required under this Item.
Item 8A(T). 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-KSB. 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.
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, 2008.
This Annual Report on Form 10-KSB does not include an attestation report of
the Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management's report in this Annual Report
on Form 10-KSB.
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-KSB that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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Item 8B. Other Information.
None to report.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons and
Corporate Governance; Compliance with Section 16(a) of the
Exchange Act.
The following table sets forth certain information with respect to the
Directors and Executive Officers of the Company as of June 30, 2008:
Position with
Name the Company Age Term to Expire
------------------ ------------------ --- -----------------
Class A Directors:
John V. Winfield Chairman of the Board; 61 Fiscal 2009 Annual Meeting
(1)(4)(6)(7) President and Chief
Executive Officer
Josef A. Grunwald Director and Vice 60 Fiscal 2009 Annual Meeting
(2)(3)(5)(7) Chairman of the Board
Class B Directors:
Gary N. Jacobs
(1)(2)(5)(6)(7) Secretary; Director 63 Fiscal 2010 Annual Meeting
William J. Nance (1)
(2)(3)(4)(6)(7) Director 63 Fiscal 2010 Annual Meeting
Class C Director:
John C. Love Director 68 Fiscal 2008 Annual Meeting
(3)(4)
Other Executive Officers:
David C. Gonzalez Vice President 41 N/A
Real Estate
Michael G. Zybala Asst. Secretary 56 N/A
and Counsel
David T. Nguyen Treasurer and 35 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.
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.
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 of Goldspring,
Inc., a public company.
Gary N. Jacobs -- Mr. Jacobs was appointed to the Board and as Secretary in
1998. Mr. Jacobs is Executive Vice President, General Counsel, Secretary and a
Director of MGM MIRAGE (NYSE: MGM) and has held those positions since 2000.
John C. Love -- Mr. Love was appointed to the Board in 1998. Mr. Love is an
international hospitality and tourism consultant and a hotel broker. He was
formerly a partner in the national CPA and consulting firm of Pannell Kerr
Forster. He is Chairman Emeritus of the Board of Trustees of Golden Gate
University in San Francisco. Mr. Love is also a Director of Santa Fe and
Portsmouth.
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 was appointed Vice President Operations and
Assistant Secretary of the Company on January 27, 1999 and served as Vice
President Operations until July 15, 2002. Mr. Zybala is an attorney at law
and has served as a special legal consultant to the Company. 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.
-60-
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 2008 all
filing requirements applicable to its officers, directors, and greater than
ten-percent beneficial owners were complied with.
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 filed as Exhibit 14 to this Report. 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, 820 Moraga
Drive, Los Angeles 90049. The Company does not maintain an Internet website.
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 small business issuer
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 small business
issuer 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.
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Audit Committee and Audit Committee Financial Expert
The Company is a small business issuer under SEC rules. 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.
Item 10. 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, 2008 and June 30, 2007. There are currently no employment
contracts with the executive officers and no stock awards, long-term
compensation, options or stock appreciation rights were granted to any of the
named executive officers during the last two fiscal years.
SUMMARY COMPENSATION TABLE
Fiscal All Other
Name and Principal Position Year Salary Bonus Compensation Total
--------------------------- ---- ---------- ---------- ------------ ------------
John V. Winfield 2008 $522,000(1) $ - $166,000(2) $ 688,000
Chairman, President and 2007 $522,000(1) $ - $153,000(2) $ 675,000
Chief Executive Officer
David C. Gonzalez 2008 $180,000 $ - $ - $ 180,000
Vice President 2007 $180,000 $ - $ - $ 180,000
Real Estate
David T. Nguyen 2008 $180,000(3) $ - $ - $ 180,000
Treasurer and 2007 $180,000(3) $ - $ - $ 180,000
Controller
Michael G. Zybala 2008 $138,000(4) $ - $ - $ 138,000
Asst. Secretary 2007 $162,000(4) $ - $ - $ 162,000
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 2008 and 2007,
as well as director's fees totaling $12,000 for each year. Those amounts are
included in this item.
(2) Amounts include an auto allowance and compensation for a portion of the
salary of an assistant. The auto allowance was $29,000 and $23,000 during
fiscal years 2008 and 2007, respectively. The amount of compensation related
to the assistant was approximately $52,000 and $42,000 during fiscal years
2008 and 2007, respectively. During fiscal 2008 and 2007, 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.
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(3) Mr. Nguyen's salary is allocated approximately 50% to the Company and 50%
to Santa Fe and Portsmouth.
(4) For fiscal 2008, this amount includes $94,800 in salary and Special Hotel
Committee fees allocated to and paid by Portsmouth and $16,200 in salary
allocated to Santa Fe. For fiscal 2007, this amount includes $118,800 in
salary and Special Hotel Committee fees allocated to Portsmouth and $16,200 in
salary allocated Santa Fe.
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, 2008 or 2007.
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 $1,000,000 limitation applies
separately to the compensation paid by each entity. For fiscal years 2008 and
2007, no compensation paid by the Company to its CEO or other executive
officers was subject the deduction disallowance prescribed by Section 162(m)
of the Code.
Outstanding Equity Awards at Fiscal Year End.
The following table sets forth information concerning unexercised options for
each named executive officer outstanding as of the end of the Company's last
competed fiscal year ended June 30, 2008. There were no stock awards issued or
outstanding to any named executive officer.
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Outstanding Equity Awards at Fiscal Year End
Number of Number of
securities securities
underlying underlying
unexercised unexercised Option Option
options(#) options(#) exercise expiration
Name exercisable unexercisable price($) date
-------- ----------- ------------- -------- -----------
John V. Winfield 225,000 - $ 7.92 12/21/2008
David C. Gonzalez 10,500 4,500(1) $13.17 01/30/2011
-----------------
(1) Mr. Gonzalez's options vest at a rate of 2,250 shares per year on each
January 31 for the next two years.
EQUITY COMPENSATION PLANS
The Company currently has two equity compensation plans, each of which has
been approved by the Company's stockholders. Set forth below is a summary of
those plans.
1998 Stock Option Plan for Selected Key Officers, Employees and Consultants
On December 8, 1998, the Board of Directors of the Company adopted, subject to
shareholder approval and ratification, a 1998 Stock Option Plan for selected
key officers, employees and consultants (the "Key Employee Plan"). The Key
Employee Plan was ratified by the stockholders on January 27, 1999.
The stock to be offered under the Key Employee Plan shall be 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, the aggregate number of shares to be delivered upon exercise
of all options granted under the Key Employee Plan shall not exceed 300,000
shares (adjusted for stock split). The Key Employee Plan shall terminate on
the earliest to occur of (i) the dates when all of the Common Stock available
under the Key Employee Plan shall have been acquired through the exercise of
options granted under the Key Employee Plan; (ii) 10 years after the date of
adoption of the Key Employee Plan by the Board; or (iii) such other date that
the Board may determine.
The Key Employee Plan is administered by a Committee appointed by the Board of
Directors which consists of two or more disinterested persons within the
meaning of Rule 16b-3 promulgated pursuant to the Securities Exchange Act of
1934 (the "Exchange Act"). Persons eligible to receive options under the Key
Employee Plan shall be employees who are selected by the Committee. In
determining the Employees to whom options shall be granted and the number of
shares to be covered by each option, the Committee shall take into account the
duties of the respective employee, their present and potential contribution to
the success of the Company, their anticipated number of years of active
service remaining and other factors as it deems relevant in connection with
accomplishing the purposes of the Key Employee Plan. An employee who has been
granted an option may be granted an additional option or options as the
Committee shall so determine.
-64-
The exercise price of the option shall be determined at the time of grant and
shall not be less than 100% of the fair market value of the Common Stock at
the time of the grant of the option. The term of the option shall not exceed
10 years from the date on which the option is granted. The vesting schedule
for the options and the method or time that when the option may be exercised
in whole or in part shall be determined by the Committee. However, in no
event shall an option be exercisable within six months of the date of grant in
the case of an optionee subject to Section 16(b) of the Exchange Act. Subject
to certain exceptions, the option shall terminate six months after the
optionee's employment with the Company terminates. No options to purchase
shares were granted pursuant to the Key Employee Plan during fiscal 2008.
1998 Stock Option Plan for Non-Employee Directors
On December 8, 1998, the Board of Directors of the Company adopted, subject to
stockholder approval and ratification, a 1998 Stock Option Plan for Non-
employee Directors (the "Plan"). The stockholders ratified that plan on
January 27, 1999.
The stock offered under the Plan were 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, the aggregate
number of shares to be delivered upon exercise of all options granted under
the Plan were not to exceed 150,000 shares (adjusted for March 31, 2003 stock
split).
Since all options authorized to be issued under the Plan were exhausted in
fiscal 2006, the Plan was terminated upon shareholder approval, and Board
adoption, of the 2007 Stock Compensation Plan for Non-Employee Directors
described below; however, any outstanding options under the Plan remain
effective in accordance with their terms.
2007 Stock Compensation Plan for Non-Employee Directors
On February 21, 2007, the stockholders of the Company approved The InterGroup
Corporation 2007 Stock Compensation Plan for Non-Employee Directors (the "2007
Plan"), which 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
(subject to changes in capitalization or other adjustments for corporate
changes) 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 shall be
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
-65-
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 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 stock option plans.
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, 2008, 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 987 shares of Common Stock pursuant to the
2007 Plan.
DIRECTOR COMPENSATION
Fees
Earned
or Paid Stock All Other
Name in Cash(1) Awards(2) Compensation Total
----------------- --------- ---------- ------------ -------
Josef A. Grunwald $22,000(3) $18,000 - $40,000
Gary N. Jacobs $16,000 $18,000 - $34,000
John C. Love $66,000(4) $18,000 - $84,000
William J. Nance $68,000(5) $18,000 - $86,000
John V. Winfield(6)
--------------
(1) Amounts shown include board retainer fees, committee fees and meeting
fees.
(2) Amounts shown reflect value of 987 shares of Common Stock awarded on
July 2, 2007 pursuant to the 2007 Stock Compensation Plan for Non-Employee
Directors based on closing price of the Company's Common Stock of $18.24
on June 29, 2007.
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(3) 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.
(4) 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.
(5) 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.
(6) As Chief Executive Officer, the Company's Chairman, John 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.
Compensation of Directors
Until December 31, 2006, each director was paid a fee of $1,500 per quarter
for a total annual compensation of $6,000. Directors were also eligible to
receive $500 for each committee meeting attended and $600 for each committee
meeting chaired. Members of the Audit Committee also received a fee of $500
per quarter. Directors who are also executive officers did not receive any
fee for attending Board or Committee meetings. As an executive officer, the
Company's Chairman has also elected to forego his annual board fee. Non-
employee directors were eligible for grants of options to purchase shares of
the Company's Common Stock pursuant to the 1998 Stock Option Plan for Non-
Employee Directors. All of the options authorized to be issued under that Plan
were exhausted effective with the July 1, 2005 option grants and that Plan was
terminated.
On February 21, 2007, the 2007 Plan was adopted to replace the old 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 and a grant of 600 shares of Common Stock upon the formal adoption of
the 2007 Plan by the Board.
Based on recommendations of the Administrative and Compensation Committee, the
Board of Directors also approved a change in the amount and manner by which
non-employee directors are to be paid cash compensation. Effective January 1,
2007, each non-employee director 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. The previous
cash compensation policy had been in effect since 1986.
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Change in Control or Other Arrangements
Except for the foregoing, there are no other arrangements for compensation of
Directors and there are no employment contracts between the Company and its
Directors or any change in control arrangements.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth, as of September 10, 2008, certain information
with respect to the beneficial ownership of Common Stock of the Company
(adjusted for stock split) owned 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 1,613,953(4) 62.6%
Josef A. Grunwald 129,588(3) 5.4%
William J. Nance 80,424(3) 3.4%
Gary N. Jacobs 32,502(3)(5) 1.4%
John C. Love 29,027(3) 1.2%
David C. Gonzalez 26,250(6) 1.1%
Michael G. Zybala 0 *
David T. Nguyen 0 *
All Directors and
Executive Officers as a
Group (8 persons) 1,911,774 70.7%
------------------
* Ownership does not exceed 1%.
(1) Unless otherwise indicated, the address for the persons listed is
820 Moraga Drive, Los Angeles, CA 90049.
(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 2,351,273 shares of Common
Stock outstanding at September 10, 2008, plus any securities that person has
the right to acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights. The following options are included in director's
shares: Josef A. Grunwald-32,400; William J. Nance-32,400; Gary N. Jacobs-
26,400; John C. Love-26,400.
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(4) Includes 225,000 shares of which Mr. Winfield has the right to acquire
pursuant to options
(5) Other than his options, all shares of Mr. Jacobs are held by the Gary and
Robin Jacobs Family Trust.
(6) Includes 10,500 shares of which Mr. Gonzalez has the right to acquire
pursuant to 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, 2008 (adjusted for
March 31, 2003 stock split), 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(1) 390,000 $9.13 60,000
----------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders None N/A None
----------------------------------------------------------------------------
Total 390,000 $9.13 60,000
----------------------------------------------------------------------------
(1) The Company also has 53,652 shares of Common Stock available for future
issuance pursuant to the 2007 Stock Compensation Plan for Non-Employee
Directors, which plan was approved by security holders on February 21,
2007. 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.
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Item 12. 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 2008 and 2007, 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, 2008 and 2007.
In August 2007, Portsmouth agreed to make a $973,000 equity investment in the
Company's wholly subsidiary, Intergroup Uluniu, Inc., a Hawaii corporation
("Uluniu") in exchange for a 50% equity position in Uluniu. Uluniu owns an
approximately two-acre parcel of unimproved land located in Kihei, Maui,
Hawaii which is held for development. Portsmouth's investment in Uluniu
represents an amount equal to the costs paid by InterGroup for the acquisition
and carrying costs of the property through August 2007. As of September 5,
2007, $758,000 of the investment amount was paid by Portsmouth and the
proceeds were used by Uluniu to retire the mortgage on the property in the
approximate amount of $756,000. On June 25, 2008, the balance of $215,000 was
paid by Portsmouth to Uluniu.
Director Independence
InterGroup's common stock is listed on the NASDAQ Capital Market tier of the
NASDAQ Stock Market LLC ("NASDAQ"). InterGroup is a small business issuer
under the rules and regulations of the Securities and Exchange Commission
("SEC"). The Board of Directors of InterGroup currently consists of five
members. With the exception of the Company's President and CEO, John V.
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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.
Item 13. Exhibits.
(a) Listing of Exhibits by Table Number
-----------------------------------
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.
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 **
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 **
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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 the Commission on January 26, 2007.
14. Code of Ethics (filed herewith)
21. Subsidiaries:
(1) Intergroup Summit Hills, Inc. (incorporated on August 12, 1993 in TX)
(2) Intergroup Mariposa, Inc. (incorporated on June 23, 1994 in TX)
(3) Intergroup Arlington Arms, Inc. (incorporated on August 5, 1993 in TX)
(4) Intergroup Woodland Village, Inc. (incorporated on August 5, 1993 in OH)
(5) Intergroup Cross Keys, Inc. (incorporated on April 1, 1994 in MO)
(6) Intergroup Bridgeton, Inc. (incorporated on May 12, 1994 in MO)
(7) Intergroup Whisperwood, Inc. (incorporated on June 20, 1994 in PA)
(8) Intergroup Eagle Creek, Inc. (incorporated on April 15, 1994 in TX)
(9) Intergroup Entertainment Corp. (incorporated on December 23, 1993 in DE)
(10) Mutual Real Estate Corp. (incorporated on March 10, 1994 in TX)
(11) WinGroup Capital (incorporated on September 21, 1994 in CA)
(12) Broadview Enterprises, Inc. (incorporated April 14, 1995 in MO)
(13) Wayward, Inc. (incorporated April 18, 1995 in MO)
(14) Golden West Entertainment, Inc. (incorporated February 15, 1990 in CA)
(15) Golden West Television Productions, Inc. (incorporated September 17,
1991 in CA)
(16) Golden West Television Productions, Inc. (incorporated March 17, 1986 in
NY)
(17) Intergroup The Trails, Inc. (incorporated on September 14, 1994 in TX)
(18) Intergroup Meadowbrook Gardens, Inc. (incorporated on June 23, 1994 in
NJ)
(19) Intergroup Pine Lake, Inc. (incorporated on February 9, 1996 in KY)
(20) Bellagio Capital Fund, LLC (established on June 18, 1997 in CA)
(21) Intergroup Casa Maria, Inc. (incorporated on April 3, 1997 in TX)
(22) Healthy Planet Communications, Inc. (incorporated July 3, 1997 in CA)
(23) Santa Fe Financial Corporation (incorporated July 25, 1967 in NV)
(24) Portsmouth Square, Inc. (incorporated July 6, 1967 in CA)
(24) 2301 Bel-Air Equity, Inc. (incorporated May 25, 2000 in CA)
(26) 11378 Ovada Properties, Inc. (incorporated June 21, 2000 in CA)
(27) 11371 Ovada Properties, Inc. (incorporated May 25, 2000 in CA)
(28) 11361 Ovada Properties, Inc. (incorporated June 1, 2000 in CA)
(29) 11680 Bellagio Properties, Inc. (incorporated May 25, 2000 in CA)
(30) North Sepulveda Properties, Inc. (incorporated June 21, 2000 in CA)
(31) 11650 Bellagio Properties, Inc. (incorporated August 17, 2000 in CA)
(32) Intergroup Elwood, Inc. (incorporated October 12, 2000 in TX)
(33) 11720 Bellagio Properties, Inc. (incorporated January 17, 2001 in CA)
(34) 636 Acanto Properties, Inc. (incorporated February 15, 2001 in CA)
(35) Intergroup Tollgate Creek, Inc. (incorporated June 14, 2001 in TX)
(36) 614 Acanto Properties, Inc. (incorporated November 7, 2001 in CA)
(37) Intergroup Uluniu, Inc. (incorporated August 12, 2004 in HI)
23.1 Consent of Independent Registered Public Accounting Firm - Burr
Pilger & Mayer LLP (filed herewith)
23.2 Consent of Independent Registered Public Accounting Firm -
PricewaterhouseCoopers LLP (filed herewith)
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31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a) (filed herewith).
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a) (filed herewith)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 (filed herewith).
32.2 Certification of Chief 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.
** All Exhibits marked by two asterisks are incorporated herein by reference
to the Company's Schedule 14A filed with the Securities and Exchange
Commission on December 21, 1998.
(b) Reports on Form 8-K:
-------------------
The Company did not file any reports on Form 8-K during the last quarter of
the period covered by this Report.
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Item 14. Principal Accountant Fees and Services.
Audit Fees - The aggregate fees billed for each of the last two fiscal years
ended June 30, 2008 and 2007 for professional services rendered by Burr,
Pilger & Mayer, LLP (fiscal 2008) and PricewaterhouseCoopers LLP (fiscal
2007), the independent registered public accounting firms for the audit of the
Company's annual financial statements and review of financial statements
included in the Company's Form 10-QSB or services normally provided by the
independent registered public accounting firms in connection with statutory
and regulatory filings or engagements for those fiscal years, were as follows:
Fiscal Year
-------------------------
2008 2007
-------- --------
Audit Fees $277,000 $407,000
Audit Related Fees - -
Tax Fees - -
All Other Fees - -
-------- --------
TOTAL: $277,000 $407,000
======== ========
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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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 25, 2008 by /s/ John V. Winfield
------------------ ---------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Date: September 25, 2008 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 25, 2008 /s/ John V. Winfield
------------------ ---------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Date: September 25, 2008 /s/ Josef A. Grunwald
------------------ ----------------------------------------
Josef A. Grunwald, Vice Chairman of Board
Date: September 25, 2008 /s/ Gary N. Jacobs
------------------ ---------------------------------------
Gary N. Jacobs, Director
Date: September 25, 2008 /s/ John C. Love
------------------ ---------------------------------------
John C. Love, Director
Date: September 25, 2008 /s/ William J. Nance
------------------ ---------------------------------------
William J. Nance, Director
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