-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JoEhz9XXHGGnM9IjUU8NnGzhR2z56aIC5UHqX/XwiAqKPIiYN4r4nLMke+iUzR0s yZGh95i173FqBkkaqG+mog== 0000086759-10-000022.txt : 20101112 0000086759-10-000022.hdr.sgml : 20101111 20101112163802 ACCESSION NUMBER: 0000086759-10-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20100930 FILED AS OF DATE: 20101112 DATE AS OF CHANGE: 20101112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERGROUP CORP CENTRAL INDEX KEY: 0000069422 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 133293645 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10324 FILM NUMBER: 101187256 BUSINESS ADDRESS: STREET 1: 10940 WILSHIRE BLVD. STREET 2: SUITE 2150 CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: (310) 889-2500 MAIL ADDRESS: STREET 1: 10940 WILSHIRE BLVD. STREET 2: SUITE 2150 CITY: LOS ANGELES STATE: CA ZIP: 90024 FORMER COMPANY: FORMER CONFORMED NAME: MUTUAL REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19860408 10-Q 1 ig10q93010.txt INTERGROUP 10-Q 9-30-10 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2010 [ ] 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 -------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-3293645 ------------------------------ ------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 10940 Wilshire Blvd., Suite 2150, Los Angeles, California 90024 --------------------------------------------------------- -------- (Address of principal executive offices) (Zip Code) (310) 889-2500 ----------------------------- (Registrant's telephone number) Indicate by check mark whether the registrant (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. [x] Yes [ ] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [x] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) [ ] Yes [x] No The number of shares outstanding of issuer's Common Stock, as of November 10, 2010, was 2,424,164. INDEX THE INTERGROUP CORPORATION PART I. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets As of September 30, 2010(Unaudited) and June 30, 2010 3 Condensed Consolidated Statements of Operations(Unaudited) For the Three Months ended September 30, 2010 and 2009 4 Condensed Consolidated Statements of Cash Flows(Unaudited) For the three months ended September 30, 2010 and 2009 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 4. Controls and Procedures 24 PART II. OTHER INFORMATION Item 6. Exhibits 24 SIGNATURES 25 -2- PART I FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements THE INTERGROUP CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2010 June 30, 2010 (Unaudited) -------------- ------------- ASSETS Investment in hotel, net $ 41,121,000 $ 41,961,000 Investment in real estate, net 61,171,000 61,184,000 Properties held for sale 7,306,000 7,193,000 Investment in marketable securities 8,672,000 7,712,000 Other investments, net 6,462,000 6,651,000 Cash and cash equivalents 1,869,000 1,140,000 Restricted cash 1,854,000 1,641,000 Other assets, net 4,097,000 4,645,000 ----------- ----------- Total assets $132,552,000 $132,127,000 =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIT Liabilities Accounts payable and other liabilities $ 10,876,000 $ 10,473,000 Due to securities broker 3,203,000 2,235,000 Obligations for securities sold 1,413,000 1,698,000 Other notes payable 3,397,000 3,688,000 Mortgage notes payable - hotel 45,791,000 45,990,000 Mortgage notes payable - real estate 59,521,000 59,842,000 Mortgage notes payable - property held for sale 10,393,000 10,450,000 Deferred income taxes 1,157,000 1,135,000 ----------- ----------- Total liabilities 135,751,000 135,511,000 ----------- ----------- Commitments and contingencies Shareholders' deficit: Preferred stock, $.01 par value, 100,000 shares authorized; none issued - - Common stock, $.01 par value, 4,000,000 shares authorized; 3,310,588 and 3,290,872 issued; 2,421,600 and 2,401,884 Outstanding, respectively 33,000 33,000 Additional paid-in capital 9,218,000 9,109,000 Retained earnings 4,199,000 4,190,000 Treasury stock, at cost, 888,988 shares (9,564,000) (9,564,000) ----------- ----------- Total Intergroup shareholders' equity 3,886,000 3,768,000 Noncontrolling interest (7,085,000) (7,152,000) ----------- ----------- Total shareholders' deficit (3,199,000) (3,384,000) ----------- ----------- Total liabilities and shareholders' deficit $132,552,000 $132,127,000 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. -3- THE INTERGROUP CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the three months ended September 30, 2010 2009 ----------- ----------- Revenues: Hotel $ 9,526,000 $ 8,530,000 Real estate 3,090,000 3,045,000 ----------- ----------- Total revenues 12,616,000 11,575,000 ----------- ----------- Costs and operating expenses: Hotel operating expenses (7,317,000) (6,876,000) Real estate operating expenses (1,568,000) (1,446,000) Depreciation and amortization expense (1,764,000) (1,669,000) General and administrative expense (472,000) (478,000) ----------- ----------- Total costs and operating expenses (11,121,000) (10,469,000) ----------- ----------- Income from operations 1,495,000 1,106,000 ----------- ----------- Other income(expense): Interest expense (1,475,000) (1,543,000) Net gain(loss) on marketable securities 353,000 (1,322,000) Net unrealized income on other investments 41,000 - Impairment loss on other investments (230,000) - Dividend and interest income 139,000 77,000 Trading and margin interest expense (303,000) (376,000) ----------- ----------- Net other expense (1,475,000) (3,164,000) ----------- ----------- Income(loss) before income taxes 20,000 (2,058,000) Income tax benefit 10,000 699,000 ----------- ----------- Net income(loss) from continuing operations 30,000 (1,359,000) ----------- ----------- Discontinued operations Income from discontinued operations 78,000 53,000 Provision for income tax expense (32,000) (21,000) ----------- ----------- Income from discontinued operations 46,000 32,000 ----------- ----------- Net income(loss) 76,000 (1,327,000) Less: Net (income)loss attributable to the noncontrolling interest (67,000) 396,000 ----------- ----------- Net income(loss) attributable to Intergroup $ 9,000 $ (931,000) =========== =========== Net income(loss) per share from continuing operations Basic $ 0.03 $ (0.58) Diluted $ 0.03 $ (0.58) Net income per share from discontinued operations Basic $ 0.02 $ 0.01 Diluted $ 0.02 $ 0.01 Net income(loss) per share attributable to InterGroup Basic $ 0.00 $ (0.57) Diluted $ 0.00 $ (0.57) Weighted average shares outstanding 2,409,809 2,347,528 =========== =========== Diluted weighted average shares outstanding 2,484,809 2,397,303 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- THE INTERGROUP CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the three months ended September 30, 2010 2009 ----------- ----------- Cash flows from operating activities: Net income(loss) $ 76,000 $(1,327,000) Adjustments to reconcile net income(loss) to cash provided by operating activities: Depreciation and amortization 1,764,000 1,669,000 Net unrealized (gain)loss on marketable securities (466,000) 1,470,000 Impairment loss on other investments 230,000 - Net unrealized gain on other investments (41,000) - Stock compensation expense 109,000 72,000 Changes in assets and liabilities: Investment in marketable securities (494,000) (3,305,000) Other asset 401,000 (502,000) Accounts payable and other liabilities 534,000 404,000 Due to securities broker 968,000 338,000 Obligation for securities sold (285,000) 3,456,000 Deferred tax liability 22,000 (678,000) ----------- ----------- Net cash provided by operating activities 2,818,000 1,597,000 ----------- ----------- Cash flows from investing activities: Investment in hotel (434,000) (336,000) Investment in real estate (574,000) (29,000) Other investments - (650,000) Restricted cash (213,0000 (43,000) ----------- ----------- Net cash used in investing activities (1,221,000) (1,058,000) ----------- ----------- Cash flows from financing activities: Payment on other notes payable (291,000) (175,000) Principal payments on mortgage notes payable (577,000) (509,000) ----------- ----------- Net cash used in financing activities (868,000) (684,000) ----------- ----------- Net increase(decrease) in cash and cash equivalents 729,000 (145,000) Cash and cash equivalents at beginning of period 1,140,000 1,024,000 ----------- ----------- Cash and cash equivalents at end of period $ 1,869,000 $ 879,000 =========== =========== Supplemental information: Interest paid $ 1,697,000 $ 1,692,000 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. -5- THE INTERGROUP CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements included herein have been prepared by The InterGroup Corporation ("InterGroup" or the "Company"), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, the consolidated financial statements reflect, in the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial statements and the notes therein included in the Company's Form 10-K for the year ended June 30, 2010. The June 30, 2010 Condensed Consolidated Balance Sheet was obtained from the Company's audited Form 10-K for the year ended June 30, 2010. The results of operations for the three months ended September 30, 2010, are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2011. As of September 30, 2010, the Company had the power to vote 80% of the voting shares of Santa Fe Financial Corporation ("Santa Fe"), a public company (OTCBB: SFEF). This percentage includes the power to vote an approximately 4% interest in the common stock in Santa Fe owned by the Company's Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998. Santa Fe's revenue is primarily generated through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), a public company (OTCBB: PRSI). InterGroup also directly owns approximately 11.7% of the common stock of Portsmouth. Portsmouth has a 50.0% limited partnership interest in Justice and serves as one of the two general partners. The other general partner, Evon Corporation ("Evon"), served as the managing general partner until December 1, 2008 at which time Portsmouth assumed the role of managing general partner. Justice owns a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the Hotel) and related facilities including a five level underground parking garage. The Hotel is operated by the partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation. Justice also has a Management Agreement with Prism Hospitality L.P. (Prism) to perform the day-to-day management functions of the Hotel. Justice leased the parking garage to Evon through September 30, 2008. Effective October 1, 2008, Justice and Evon entered into an Installment Sale Agreement whereby Justice purchased all of Evon's right, title, and interest in the remaining term of its lease of the parking garage, which was to expire on November 30, 2010, and other related assets. Justice also agreed to assume -6- Evon's contract with Ace Parking Management, Inc. ("Ace Parking") for the management of the garage and any other liabilities related to the operation of the garage commencing October 1, 2008. The Partnership also leases a day spa on the lobby level to Tru Spa. Due to the temporary closing of the Hotel to undergo major renovations from May 2005 until January 2006 to transition and reposition the Hotel from a Holiday Inn to a Hilton, and the substantial depreciation and amortization expenses resulting from the renovations and operating losses incurred as the Hotel ramped up operations after reopening, Justice has recorded net losses. These losses were anticipated and planned for as part of the Partnership's renovation and repositioning plan for Hotel and management considers those net losses to be temporary. The Hotel has been generating positive cash flows from operations since June 2006 and net income is expected to improve in the future, especially since depreciation and amortization expenses attributable to the renovation will decrease substantially. Despite the significant downturn in the economy, management believes that the revenues expected to be generated from the Hotel, garage and the Partnership's leases will be sufficient to meet all of the Partnership's current and future obligations and financial requirements. Management also believes that there is significant equity in the Hotel to support additional borrowings, if necessary. In addition to the operations of the Hotel, the Company also generates income from the ownership of real estate. Properties include apartment complexes, commercial real estate, and two single-family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has investments in unimproved real property. The Company's residential rental properties located in California are managed by a professional third party property management company. In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures About Fair Value Measurements." Effective January 1, 2010, ASU 2010-06 requires the separate disclosure of significant transfers into and out of the Level 1 and Level 2 categories and the reasons for such transfers, and also requires fair value measurement disclosures for each class of assets and liabilities as well as disclosures about valuation techniques and inputs used for recurring and nonrecurring Level 2 and Level 3 fair value measurements. Effective in fiscal years beginning after December 31, 2010, ASU 2010-06 also requires Level 3 disclosure of purchases, sales, issuances and settlements activity on a gross rather than a net basis. These amendments resulted in additional disclosures in the Company's condensed consolidated financial statements. The Consolidation Topic of the FASB ASC 810 provides a new accounting provision regarding the consolidation of variable interest entities ("VIEs"). The new accounting provision modifies the existing quantitative guidance used in determining the primary beneficiary of a VIE by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. Additionally, the accounting provision requires an ongoing reconsideration of the primary beneficiary and provides a framework for the events that triggers a reassessment of whether an entity is a VIE. The new accounting update became effective for the Company on July 1, 2010. The adoption of this guidance did not have a material effect on the Company's condensed consolidated financial statements. Effective February 2010, the Company adopted new accounting provisions which remove the requirement for the Company to disclose the date through which subsequent events have been evaluated in issued financial statements. The Company has evaluated subsequent events through the date the condensed consolidated financial statements were issued. -7- 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 September 30, 2010, 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. During the three months ended September 30, 2009, three properties were classified as held for sale. However, since then, one of the properties was no longer considered held for sale. As the result, the operations of the this property for the three months ended September 30, 2010 was reclassified from discontinued operations to continuing operations to conform to current quarter presentation. Under the provisions of the SFAS No.144, Accounting for Impairment or Disposal of Long-Lived Assets, which was primarily codified into ASC Topic 205-20 "Presentation of Financial Statements - Discontinued Operations, 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 these properties have been reclassified from continuing operations for the three months ended September 30, 2010 and 2009 and reported as income from discontinued operations in the consolidated statements of operations. 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 and restricted stock units. As of September 30, 2010, the Company had 75,000 stock options that were considered potentially dilutive common shares. As of September 30, 2009, the Company had 15,000 stock options that were considered potentially dilutive common shares and 34,775 restricted stock units that were considered anti-dilutive. NOTE 2 - INVESTMENT IN HOTEL, NET Hotel property and equipment consisted of the following: Accumulated Net Book As of September 30, 2010 Cost Depreciation Value ------------ ------------ ------------ Land $ 2,738,000 $ - $ 2,738,000 Furniture and equipment 18,569,000 (15,640,000) 2,929,000 Building and improvements 55,015,000 (19,561,000) 35,454,000 ------------ ------------ ------------ $ 76,322,000 $(35,201,000) $ 41,121,000 ============ ============ ============ -8- June 30, 2010 Accumulated Net Book Cost Depreciation Value ------------ ------------ ------------ Land $ 2,738,000 $ - $ 2,738,000 Furniture and equipment 18,393,000 (14,710,000) 3,683,000 Building and improvements 54,782,000 (19,242,000) 35,540,000 ------------ ------------ ------------ $ 75,913,000 $(33,952,000) $ 41,961,000 ============ ============ ============ NOTE 3 - INVESTMENT IN REAL ESTATE, NET Investment in real estate included the following: September 30, 2010 June 30, 2010 -------------- ------------- Land $ 24,735,000 $ 24,735,000 Buildings, improvements and equipment 61,219,000 60,758,000 Accumulated depreciation (24,783,000) (24,309,000) ---------- ---------- $ 61,171,000 $ 61,184,000 ========== ========== NOTE 4 - PROPERTY HELD FOR SALE AND DISCONTINUED OPERATIONS As of September 30, 2010, the Company had two properties located in Texas classified as held for sale. The revenues and expenses from the operation for these two properties have been reclassified from continuing operations and reported as income from discontinued operations in the consolidated statements of operations for the respective periods. The revenues and expenses from the operation of these two properties during the three ended September 30, 2010 and 2009, are summarized as follows: For the three months ended September 30, 2010 2009 ---------- ---------- Revenues $ 603,000 $ 603,000 Expenses (525,000) (550,000) ---------- ---------- Income $ 78,000 $ 53,000 ========== ========== NOTE 5 - INVESTMENT IN MARKETABLE SECURITIES The Company's investment in marketable securities consists primarily of corporate equities. The Company has also invested in corporate bonds and income producing securities, which may include interests in real estate based companies and REITs, where financial benefit could inure to its shareholders through income and/or capital gain. At September 30, 2010 and June 30, 2010, all of the Company's marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows: -9- As of September 30, 2010 Gross Gross Net Market Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value - ---------- ----------- --------------- --------------- --------------- ------------ Corporate Equities $ 6,774,000 $ 2,981,000 ($1,083,000) $ 1,898,000 $ 8,672,000
As of June 30, 2010 Gross Gross Net Market Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value - ---------- ----------- --------------- --------------- --------------- ------------ Corporate Equities $ 6,311,000 $ 2,273,000 ($872,000) $ 1,401,000 $ 7,712,000
As of September 30, 2010 and June 30, 2010, the Company had unrealized losses of $795,000 and $679,000, respectively, related to securities held for over one year. Net gain(loss) on marketable securities on the statement of operations is comprised of realized and unrealized gains(losses). Below is the composition of the net gain(loss) for the three months ended September 30, 2010 and 2009, respectively. For the three months ended September 30, 2010 2009 ----------- ----------- Realized (loss)gain on marketable securities $ (113,000) $ 148,000 Unrealized gain(loss) on marketable securities 466,000 (1,470,000) ----------- ----------- Net gain(loss) on marketable securities $ 353,000 $(1,322,000) =========== ===========
NOTE 6 - OTHER INVESTMENTS, NET The Company may also invest, with the approval of the Securities Investment Committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company's balance sheet as part of other investments, net of other than temporary impairment losses. As of September 30, 2010 and June 30, 2010, the Company had net other investments of $6,462,000 and $6,651,000, respectively, which consist of the following: Type September 30, 2010 June 30, 2010 --------------------------- ----------------- ---------------- Private equity hedge fund $ 3,482,000 $ 3,712,000 Corporate debt instruments 2,336,000 2,358,000 Warrants - at fair value 644,000 581,000 ----------------- ---------------- $ 6,462,000 $ 6,651,000 ================= ================ During the three months ended September 30, 2010 and 2009, the Company recorded impairment losses on other investments of $230,000 and $0, respectively. As of September 30, 2010, the Company had investments in corporate debt and equity instruments which had attached warrants that were considered derivative instruments. These warrants have an allocated cost basis of $400,000 and a fair market value of $644,000. During the three months ended September 30, 2010, the Company had an unrealized gain of $41,000 related to these warrants. -10- NOTE 7 - FAIR VALUE MEASUREMENTS The carrying values of the Company's non-financial instruments approximate fair value due to their short maturities(i.e., accounts receivable, other assets, accounts payable and other liabilities, due to securities broker, and obligations for securities sold) or the nature and terms of the obligation(i.e., other notes payable and mortgage note payable). The assets measured at fair value on a recurring basis as of September 30, 2010 and June 30, 2010 are as follows: Assets: Level 1 Level 2 Level 3 September 30, 2010 - ----------- --------- --------- --------- -------------- Cash $ 1,869,000 $ - $ - $ 1,869,000 --------- ---------- Restricted cash 1,854,000 - - 1,854,000 --------- ---------- Other investments - warrants - 644,000 - 644,000 -------- ---------- Investment in marketable securities Investment funds 3,214,000 3,214,000 REITs 1,554,000 1,554,000 Financial services 1,147,000 1,147,000 Basic materials 902,000 902,000 Other 1,855,000 1,855,000 ---------- ---------- 8,672,000 8,672,000 ---------- -------- -------- ---------- $12,395,000 $ 644,000 $ - $13,039,000 ========== ======== ======== ==========
The assets measured at fair value on a recurring basis as of June 30, 2010 are as follows: Assets: Level 1 Level 2 Level 3 June 30, 2010 - ----------- --------- --------- --------- -------------- Cash $ 1,140,000 $ - $ - $ 1,140,000 --------- ---------- Restricted cash 1,641,000 - - 1,641,000 --------- ---------- Other investments - warrants - 581,000 - 581,000 -------- ---------- Investment in marketable securities Investment funds 3,271,000 3,271,000 REITs 1,946,000 1,946,000 Healthcare 668,000 668,000 Financial services 551,000 551,000 Other 1,276,000 1,276,000 ---------- ---------- 7,712,000 7,712,000 ---------- -------- -------- ---------- $10,493,000 $ 581,000 $ - $11,074,000 ========== ======== ======== ==========
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date. The fair value of the warrants was determined based upon a Black-Scholes option valuation model. -11- Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include "Other investments in non- marketable securities," that were initially measured at cost and have been written down to fair value as a result of impairment. The following table shows the fair value hierarchy for these assets measured at fair value on a non- recurring basis are as follows: Loss for the three months ended Assets: Level 1 Level 2 Level 3 September 30, 2010 September 30, 2010 - ----------- ------- ------- --------- ------------------ ------------------ Other non-marketable investments $ - $ - $5,818,000 $5,818,000 $ (230,000)
Loss for the three months ended Assets: Level 1 Level 2 Level 3 June 30, 2010 September 30, 2009 - ----------- ------- ------- --------- ------------------ ------------------ Other non-marketable investments $ - $ - $6,070,000 $6,070,000 $ -
Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. NOTE 8 - STOCK BASED COMPENSATION PLANS The Company follows the Statement of Financial Accounting Standards 123 (Revised), "Share-Based Payments" ("SFAS No. 123R"), which was primarily codified into ASC Topic 718 "Compensation - Stock Compensation", which addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units. Please refer to NOTE 16 - STOCK-BASED COMPENSATION PLANS in the Company's Form 10-K for the year ended June 30, 2010 for more detail information on the Company's stock-based compensation plans. During the three months ended September 30, 2010, the Company recorded stock option compensation cost of $37,000 related to issuance of stock options. As of September 30, 2010, there was a total of $229,000 of unamortized compensation related to stock options which is expected to be recognized over the weighted-average of 5 years. The fair value of options is measured by applying the Black-Scholes model on grant date. Expected volatility 51.6% Expected term 7 years Expected dividend yield 0% Risk-free interest rate 2.36% -12- The following table summarizes the stock options outstanding as of September 30, 2010: Aggregate Number of Weighted-average Weighted Average Intrinsic Shares Exercise Price Remaining Life Value ---------- --------------- ---------------- --------- Outstanding at June 30, 2009 102,000 $12.47 3.15 years $ 52,000 Granted 105,000 10.30 Exercised (3,000) 12.00 Forfeited - - Exchanged (12,000) 12.00 ---------- --------------- Outstanding at June 30, 2010 192,000 $11.32 6.44 years $ 790,000 Granted - - Exercised - - Forfeited - - Exchanged - - ---------- --------------- Outstanding at September 30, 2010 192,000 $11.32 6.19 years $1,087,000 ========== =============== ================ ========= Exercisable at September 30, 2010 87,000 $12.55 2.27 years $ 269,000 ========== =============== ================ =========
The table below summarizes the RSUs granted and outstanding. Weighted Average Grant Date Number of RSUs Fair Value -------------- ---------------- RSUs outstanding as of June 30, 2009 95,215 $12.46 Granted 2,564 $15.26 Converted to common stock (65,215) $ 8.42 -------------- ---------------- RSUs outstanding as of June 30, 2010 32,564 $12.89 Granted - - Converted to common stock (15,000) $15.50 -------------- ---------------- RSUs outstanding as of September 30, 2010 17,564 $13.07 ============== ================ On July 1 of every year, as part of the Stock Compensation Plan for Non- employee Directors, each non-employee director received an automatic grant of a number of shares of Company's Common Stock equal in value to $18,000 ($72,000 total recorded as stock compensation expense) based on 100% of the fair market value of the Company's stock on the day of grant. During the three months ended, September 30, 2010 and 2009, the four non-employee directors of the Company received a total grant of 4,716 and 6,004 shares of common stock. NOTE 9 - SEGMENT INFORMATION The Company operates in three reportable segments, the operation of the hotel ("Hotel Operations"), the operation of its multi-family residential properties ("Real Estate Operations") and the investment of its cash in marketable securities and other investments("Investment Transactions"). These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment's performance. Management also makes operational and strategic decisions based on this information. Information below represents reported segments for the three months ended September 30, 2010 and 2009. Operating income(loss) from hotel operations consist of the operation of the hotel and operation of the garage. Operating income for rental properties consist of rental income. Operating income for investment transactions consist of net investment gain(loss) and dividend and interest income. -13- As of and for the Three months ended Hotel Real Estate Investment Discontinued September 30, 2010 Operations Operations Transactions Other Subtotal Operations Total ----------- ----------- ------------ ----------- ------------ ------------ ------------ Revenues $ 9,526,000 $ 3,090,000 $ - $ - $ 12,616,000 $ 603,000 $ 13,219,000 Operating expenses (8,605,000) (2,044,000) - (472,000) (11,121,000) (378,000) (11,499,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Income(loss)from operations 921,000 1,046,000 - (472,000) 1,495,000 225,000 1,720,000 Interest expense (703,000) (772,000) - - (1,475,000) (147,000) (1,622,000) Loss from investments - - - - - - - Income tax benefit(expense) - - - 10,000 10,000 (32,000) (22,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net income(loss) $ 218,000 $ 274,000 $ - $ (462,000) $ 30,000 $ 46,000 $ 76,000 =========== =========== =========== =========== ============ ============ ============ Total Assets $41,121,000 $61,171,000 $15,134,000 $ 7,820,000 $125,246,000 $ 7,306,000 $132,552,000 =========== =========== =========== =========== ============ ============ ============ As of and for the Three months ended Hotel Real Estate Investment Discontinued September 30, 2009 Operations Operations Transactions Other Subtotal Operations Total ----------- ----------- ------------ ----------- ------------ ------------ ------------ Revenues $ 8,530,000 $ 3,045,000 $ - $ - $ 11,575,000 $ 603,000 $ 12,178,000 Operating expenses (8,058,000) (1,934,000) - (477,000) (10,469,000) (401,000) (10,870,000) ----------- ----------- ----------- ----------- ------------ ------------ ------------ Income(loss)from operations 472,000 1,111,000 - (477,000) 1,106,000 202,000 1,308,000 Interest expense (713,000) (830,000) - - (1,543,000) (149,000) (1,692,000) Depreciation and amortization expense - - - - - - - Income(loss) from investments - - (1,621,000) - (1,621,000) - (1,621,000) Income tax benefit(expense) - - - 699,000 699,000 (21,000) 678,000 ----------- ----------- ----------- ----------- ------------ ------------ ------------ Net income(loss) $ (241,000) $ 281,000 $(1,621,000) $ 222,000 $ (1,359,000) $ 32,000 $ (1,327,000) =========== =========== =========== =========== ============ ============ ============ Total Assets $43,946,000 $61,184,000 $22,972,000 $ 8,664,000 $136,766,000 $ 7,155,000 $143,921,000 =========== =========== =========== =========== ============ ============ ============
NOTE 10 - RELATED PARTY TRANSACTIONS Four of the Portsmouth directors serve as directors of Intergroup. Three of those directors also serve as directors of Santa Fe. The three Santa Fe directors also serve as directors of Intergroup. During the three months ended September 30, 2010, the Portsmouth received management fees from Justice Investors totaling $79,000 and $78,000, respectively. These amounts were eliminated in consolidation. John V. Winfield serves as Chief Executive Officer and Chairman of the Company, Portsmouth and Santa Fe. Depending on certain market conditions and various risk factors, the Chief Executive Officer, his family, Portsmouth and Santa Fe 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 Portsmouth and Santa Fe, at risk in connection with investment decisions made on behalf of the Company. -14- NOTE 11 - SUBSEQUENT EVENTS Other Investments On October 20, 2010, the Company exchanged approximately $13,231,000 in notes, convertible notes and debt instruments that it held in Comstock Mining, Inc. ("Comstock" - OTCBB: LODE)) for 13,231 shares of newly created 7 1/2% Series A- 1 Convertible Preferred Stock (the "A-1 Preferred") of Comstock. As of September 30, 2010, those notes and convertible debt instruments had a carrying value of $1,875,000 (net of impairment adjustments) which was included in the other investments, net amount of $6,462,000 on the Company's consolidated balance sheet. Each share of A-1 Preferred has a stated value of $1,000 per share and a liquidation and change of control preference equal to the stated value plus accrued and unpaid dividends. Commencing January 1, 2011, the holders are entitled to semi-annual dividends at a rate of 7.5% per annum, payable in cash, common stock, preferred stock or any combination of the foregoing, at the election of Comstock. At the holder's election, each share of A-1 Preferred is convertible at a fixed conversion rate (subject to anti-dilution) into 1,536 shares of common stock of Comstock, therefore converting into common stock at a conversion price of $0.6510. Each share of A-1 Preferred will entitle the holder to vote with the holders of common stock as a single class on all matters submitted to the vote of the common stock (on an as converted basis) and, for purposes of voting only, each share of A-1 Preferred shall be entitled to five times the number of votes per common share to which it would otherwise be entitled. Each share of A-1 Preferred shall entitle its holder to one (1) vote in any matter submitted to vote of holders of Preferred Stock, voting as a separate class. The A-1 Preferred, in conjunction with the other series of newly created Preferred Stock of Comstock, also has certain rights requiring consent of the Preferred Stock holders for Comstock to take certain corporate and business actions. The holders will have registration rights with respect to the shares of common stock underlying the A-1 Preferred and also preemptive rights. In addition, so long as the holders of the A-1 Preferred hold 25% or more of the total Preferred Stock of Comstock, (i) Mr. Winfield will be a member of Comstock's board of directors and (ii) the A-1 Preferred holders will have the right, upon written request to Comstock, to nominate a member of Comstock's board of directors who meet the definition of an "independent" director" and other requirements. The foregoing description of the A-1 Preferred and the specific terms of the A-1 Preferred is qualified in its entirety by reference to the provisions of the Series A Securities Purchase Agreement, the Certificate of Designation of Preferences and Rights and Limitations of 7 1/2% Series A-1 Convertible Preferred Stock and the Registration Rights Agreement for the Series A Preferred Stock, which were filed as exhibits to the Company's Current Report on Form 8-K, dated October 20, 2010. Refinancing In November 2010, the Company refinanced its $1,641,000 adjustable rate mortgage note payable on its 27-unit apartment building for a new 10-year fixed rate mortgage in the amount of $3,260,000. The new loan provided approximately $1,500,000 in cash back to Woodland Village. The interest rate on the new loan is fixed at 4.85% per annum, with monthly principal and interest payments based on a 30-year amortization schedule. The note matures in December 2020. In November 2010, the Company also refinanced its $3,569,000 adjustable rate mortgage note payable on its 31-unit apartment building for a new 10-year fixed rate mortgage in the amount of $5,787,000. The new loan provided approximately $2,069,000 in cash back to the Company. The interest rate on the new loan is fixed at 4.85% per annum, with monthly principal and interest payments based on a 30-year amortization schedule. The note matures in December 2020. -15- Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND PROJECTIONS The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "may," "could," "might" and similar expressions, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, such as national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry, the impact of terrorism and war on the national and international economies, including tourism and securities markets, energy and fuel costs, natural disasters, general economic conditions and competition in the hotel industry in the San Francisco area, seasonality, labor relations and labor disruptions, actual and threatened pandemics such as swine flu, partnership distributions, the ability to obtain financing at favorable interest rates and terms, securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2010, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS The Company's principal sources of revenue continue to be derived from the investment of its 68.8% owned subsidiary, Portsmouth, in the Justice Investors limited partnership ("Justice" or the "Partnership"), rental income from its investments in multi-family real estate properties and income received from investment of its cash and securities assets. Portsmouth has a 50.0% limited partnership interest in Justice and serves as the managing general partner of Justice. Evon Corporation ("Evon") serves as the other general partner. Justice owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California, known as the Hilton San Francisco Financial District (the "Hotel"). The financial statements of Justice have been consolidated with those of the Company. The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation. The term of the Agreement is for a period of 15 years commencing on January 12, 2006, with an option to extend the license term for another five years, subject to certain conditions. Justice also has a Management Agreement with Prism Hospitality L.P. ("Prism") to perform the day-to-day management functions of the Hotel. Until September 30, 2008, the Partnership also derived income from the lease of the parking garage to Evon. Effective October 1, 2008, Justice entered into an installment sale agreement with Evon to purchase the remaining term of the garage lease and related garage assets, and assumed the contract with Ace Parking for the operations of the garage. Justice also leases a portion of the lobby level of the Hotel to a day spa operator. Portsmouth also receives management fees as a general partner of Justice for its services in overseeing and managing the Partnership's assets. Those fees are eliminated in consolidation. -16- In addition to the operations of the Hotel, the Company also generates income from the ownership and management of real estate. Properties include eighteen apartment complexes, two commercial real estate properties, and two single- family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has investments in unimproved real property. All of the Company's residential rental properties in California are managed by professional third party property management companies and the rental properties outside of California are managed by the Company. The commercial real estate in California is also managed by the Company. The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential. Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009 The Company had net income of $76,000 for the three months ended September 30, 2010 compared to net loss of $1,327,000 for the three months ended September 30, 2009. The change is primarily attributable to the net gain on marketable securities during the most recent quarter compared to a significant net loss on marketable securities in the prior comparable quarter and the increase in income from hotel operations, partially offset by the impairment loss on other investments. The Company had income from hotel operations of $218,000 for the three months ended September 30, 2010, compared to a loss of $241,000 for the three months ended September 30, 2009. The following table sets forth a more detailed presentation of Hotel operations for the three months ended September 30, 2010 and 2009. For the three months ended September 30, 2010 2009 - ---------------------------------------- ---------- ---------- Hotel revenues: Hotel rooms $ 7,515,000 $ 6,732,000 Food and beverage 1,181,000 951,000 Garage 636,000 668,000 Other 194,000 179,000 ---------- ---------- Total hotel revenues 9,526,000 8,530,000 Operating expenses, excluding interest, depreciation and amortization (7,317,000) (6,876,000) ---------- ---------- Operating income before interest, depreciation and amortization 2,209,000 1,654,000 Interest expense (703,000) (713,000) Depreciation and amortization expense (1,288,000) (1,182,000) ---------- ---------- Income (loss) from hotel operations $ 218,000 $ (241,000) ========== ==========
For the three months ended September 30, 2010, the Hotel generated operating income of $2,209,000 before interest, depreciation and amortization, on operating revenues of $9,526,000 compared to operating income of $1,654,000 before interest, depreciation and amortization, on operating revenues of $8,530,000 for the three months ended September 30, 2009. The increase in -17- income from Hotel operations is primarily attributable to an increase in room and food and beverage revenues in the current period, partially offset by a decrease in garage revenues and an increase in depreciation and amortization expense due to improvements to the Hotel made after the prior period, including upgrades to the guest rooms and installation of energy saving controls and devices. Room revenues increased by $783,000 for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 and food and beverage revenues increased by $230,000 for the same period. The increase in room revenues was primarily attributable to a significant increase in average daily room rates during the three months ended September 30, 2010 as the Hotel began to see an increase in higher rated corporate and group business travel, which also resulted in higher in food and beverage revenues. The modest decrease in garage revenues was primarily attributable to slightly lower Hotel occupancy during the current period. 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 three months ended September 30, 2010 and 2009. Three Months Ended Average Average September 30, Daily Rate Occupancy% RevPar - ----------------- ---------- --------- -------- 2010 $168 89% $150 2009 $147 92% $135 The operations of the Hotel began to experience an increase in the higher rated business and group travel segments as the hospitality industry began so see some recovery. As a result, the Hotel's average daily rate increased by $21 for the three months ended September 30, 2010 compared to the three months ended September 30, 2010. The modest decrease in occupancy of 3% was due to the Hotel being able to displace some of the discounted Internet business that the Hotel was forced to take in the prior period to maintain occupancy in a very competitive market with higher rated business. As a result, the Hotel was able to achieve a RevPar number that was $15 higher than the prior period. In this highly competitive market, management has also continued to focus on ways to enhance the guest experience as well as improve operating efficiencies. The Hotel has recently upgraded its guest room with newer flat panel television systems that provide guests with greater entertainment options. The Hotel has also installed many energy saving controls and devices as part of its efforts to become greener and reduce operating costs. Management will continue to explore new and innovative ways to improve operations and attract new guests, including international travelers, to the Hotel at higher room rates. While operating in a challenging economy, real estate operations remained relatively consistent. The Company had real estate revenues of $3,090,000 for the three months ended September 30, 2010 compared with revenues of $3,045,000 for the three months ended September 30, 2009. While rental revenues increased by $45,000, real estate operating expenses also increased by $122,000. Interest expense decreased to $772,000 from $830,000 as the result of interest rates resetting lower on a certain number of our properties located in Los Angeles, California. Management continues to review and analyze the Company's real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies. As of September 30, 2010, the Company had listed for sale its 249-unit apartment building located in Austin, Texas and its 132-unit apartment located in San Antonio, Texas. These properties are classified as held for sale on the -18- Company's condensed consolidated balance sheet with the operations of these properties classified under discontinued operations in the condensed consolidated statements of operations. The Company had a net gain on marketable securities of $353,000 for the three months ended September 30, 2010 compared to a loss of $1,322,000 for the three months ended September 30, 2009. For the three months ended September 30, 2010, the Company had a net realized loss of $113,000 and a net unrealized gain of $466,000. For the three months ended September 30, 2009, the Company had a net realized gain of $148,000 and net unrealized loss of $1,470,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities please see the Marketable Securities section below. The Company may also invest, with the approval of the Securities Investment Committee and other company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company's balance sheet as part of other investments, net of other than temporary impairment losses. As of September 30, 2010, the Company had net other investments of $6,462,000. Included in other investments are investments in corporate debt and equity instruments which had attached warrants that were considered derivative instruments. The Company recorded an unrealized gain of $41,000 related to these warrants during the three months ended September 30, 2010. During the three months ended September 30, 2010 and 2009, the Company performed an impairment analysis of its other investments and determined that its investments had other than temporary impairments and recorded impairment losses of $230,000 for the three months ended September 30, 2010. Dividend and interest income increased to $139,000 for the three months ended September 30, 2010 from $77,000 for the three months ended September 30, 2009 as the result of the increased investment in income yielding investments. Margin interest and trading expenses decreased to $303,000 for the three months ended September 30, 2010 from $376,000 for the three months ended September 30, 2009 primarily as the result of the decrease in margin interest expense related to the decrease in the use of margin. The provision for income tax expense as a percentage of the income before taxes was higher for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009 primarily due to income from Justice which resulted in a lower amount of noncontrolling interest that was reconciled against the net income of the Company for income tax calculation purposes. MARKETABLE SECURITIES AND OTHER INVESTMENTS The Company's investment portfolio is diversified with 42 different equity positions. The portfolio contains four individual equity securities that are more than 5% of the equity value of the portfolio with the largest security being 17.5% of the value of the portfolio. The amount of the Company's investment in any particular issuer may increase or decrease, and additions or deletions 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 -19- eventually exceed 5% as a result of equity appreciation or reduction of 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 September 30, 2010 and June 30, 2010, the Company had investments in marketable equity securities of $8,672,000 and $7,712,000, respectively. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups as of September 30, 2010 and June 30, 2010. As of September 30, 2010 % of Total Investment Industry Group Fair Value Securities -------------- ------------ ---------- Investment funds $ 3,214,000 37.1% REITs 1,554,000 17.9% Financial services 1,147,000 13.2% Basic materials 902,000 10.4% Other 1,855,000 21.3% ------------ ---------- $ 8,672,000 100.0% ============ ========== June 30, 2010 % of Total Investment Industry Group Market Value Securities -------------- ------------ ---------- Investment funds $ 3,271,000 42.4% REITs 1,946,000 25.2% Healthcare 668,000 8.7% Financial services 551,000 7.1% Other 1,276,000 16.6% ---------- ------ $ 7,712,000 100.0% ========== ====== The Company may also invest, with the approval of the Securities Investment Committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company's balance sheet as part of other investments, net of other than temporary impairment losses. As of September 30, 2010, the Company had net other investments of $6,462,000. Included in the net other investments are notes and convertible notes in Comstock Mining, Inc. ("Comstock"), a public company, that had a carrying value of $1,875,000 (net of impairment adjustments) as of September 30, 2010. The face value of these notes and convertible notes as of September 30, 2010 totaled approximately $13,231,000, which includes principal and accrued interest. On October 20, 2010, the Company exchanged the $13,231,000 in notes, convertible notes and debt instruments that it held in Comstock for 13,231 shares of newly created 7 1/2% Series A-1 Convertible Preferred Stock of Comstock. Please see NOTE 11 - SUBSEQUENT EVENTS of the notes to the condensed consolidated financial statements for further discussion on the Company's other investments. -20- The following table shows the net gain or loss on the Company's marketable securities and the associated margin interest and trading expenses for the indicated periods. For the three months ended September 30, 2010 2009 -------------- -------------- Net gain(loss) on marketable securities $ 353,000 $ (1,322,000) Net unrealized gain on other investments 41,000 - Impairment loss on other investments (230,000) - Dividend & interest income 139,000 77,000 Margin interest expense (75,000) (136,000) Trading and management expenses (228,000) (240,000) ------------- ------------- $ - $ (1,621,000) ============= ============= FINANCIAL CONDITION AND LIQUIDITY The Company's cash flows are primarily generated from its Hotel operations and general partner fees from Justice. The Company also receives revenues generated from the investment of its cash and marketable securities and other investments. Since the operations of the Hotel were temporarily suspended on May 31, 2005, and significant amounts of money were expended to renovate and reposition the Hotel as a Hilton, Justice did not pay any partnership distributions until the end of March 2007. As a result, the Company had to depend more on the revenues generated from the investment of its cash and marketable securities during that transition period. The Hotel started to generate cash flows from its operations in June 2006. For the fiscal year ended June 30, 2009, Justice paid a total of $850,000 in limited partnership distributions, of which the Company received $425,000. The fiscal 2009 distributions were paid in September 2008, after which the San Francisco hotel market began to feel the full impact of the significant downturn in domestic and international economies that continued throughout fiscal 2009 and 2010. As a result, no Partnership distributions were paid in fiscal 2010. Since no significant improvement in economic conditions is expected in the lodging industry until sometime during 2011, no limited partnership distributions are anticipated in the foreseeable future. The general partners will continue to monitor and review the operations and financial results of the Hotel and to set the amount of any future distributions that may be appropriate based on operating results, cash flows and other factors, including establishment of reasonable reserves for debt payments and operating contingencies. The new Justice Compensation Agreement that became effective on December 1, 2008, when Portsmouth assumed the role of managing general partner of Justice, has provided additional cash flows to the Company. Under the new Compensation Agreement, Portsmouth is now entitled to 80% of the minimum base fee to be paid to the general partners of $285,000, while under the prior agreement, Portsmouth was entitled to receive only 20% of the minimum base fee. During the three months ended September 30, 2010 and 2009, the Company received management fees from Justice Investors totaling $79,000 and $78,000, respectively. 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 -21- 120 months at a fixed interest rate of 5.22% per annum. The Prudential Loan calls for monthly installments of principal and interest in the amount of approximately $165,000, calculated on a 30-year amortization schedule. The Loan is collateralized by a first deed of trust on the Partnership's Hotel property, including all improvements and personal property thereon and an assignment of all present and future leases and rents. The Prudential Loan is without recourse to the limited and general partners of Justice. The principal balance of the Prudential Loan was $27,589,000 as of September 30, 2010. On March 27, 2007, Justice entered into a second mortgage loan with Prudential (the "Second Prudential Loan") in a principal amount of $19,000,000. The term of the Second Prudential Loan is for 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 $119,000, calculated on a 30-year amortization schedule. The Second Prudential Loan is collateralized by a second deed of trust on the Partnership's Hotel property, including all improvements and personal property thereon and an assignment of all present and future leases and rents. The Second Prudential Loan is also without recourse to the limited and general partners of Justice. The principal balance of the Second Prudential Loan was $18,202,000 as of September 30, 2010. Effective April 29, 2010, the Partnership obtained a modification of its $2,500,000 unsecured revolving line of credit facility with East West Bank (formerly United Commercial Bank) that was to mature on April 30, 2010, and converted that line of credit facility to an unsecured term loan. The Partnership also obtained a waiver of any prior noncompliance with financial covenants and paid a loan modification fee of $10,000. The modification provides that Justice will pay the $2,500,000 balance on its line of credit facility over a period of four years, to mature on April 30, 2014. This term loan calls for monthly principal and interest payments of $41,000, calculated on a six-year amortization schedule, with interest only from May 1, 2010 to August 31, 2010. Pursuant to the modification, the annual floating interest rate was reduced by 0.5% to the WSJ Prime Rate plus 2.5% (with a minimum floor rate of 5.0% per annum). The modification includes financial covenants written to reflect financial conditions that all hotels are facing. The covenants include specific financial ratios and a return to minimum profitability by June 2011. Management believes that the Partnership has the ability to meet the specific covenants and the Partnership was in compliance with the covenants as of September 30, 2010. As of September 30, 2010 the outstanding balance was $2,470,000. Despite the downturns in the economy, the Hotel has continued to generate positive cash flows. While the debt service requirements related to the two Prudential loans, as well as the new term loan to pay off the line of credit, may create some additional risk for the Company and its ability to generate cash flows in the future since the Partnership's assets had been virtually debt free for a number of years, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership's current and future obligations and financial requirements. Management also believes that there is sufficient equity in the Hotel assets to support future borrowings, if necessary, to fund any new capital improvements and other requirements. In November 2010, the Company refinanced its $1,641,000 adjustable rate mortgage note payable on its 27-unit apartment building for a new 10-year fixed rate mortgage in the amount of $3,260,000. The new loan provided approximately $1,500,000 in cash back to Woodland Village. The interest rate on the new loan -22- is fixed at 4.85% per annum, with monthly principal and interest payments based on a 30-year amortization schedule. The note matures in December 2020. In November 2010, the Company also refinanced its $3,569,000 adjustable rate mortgage note payable on its 31-unit apartment building for a new 10-year fixed rate mortgage in the amount of $5,787,000. The new loan provided approximately $2,069,000 in cash back to the Company. The interest rate on the new loan is fixed at 4.85% per annum, with monthly principal and interest payments based on a 30-year amortization schedule. The note matures in December 2020. 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 consolidated statements of operations. Management believes that its cash, marketable securities, and the cash flows generated from those assets and from its real estate operations, partnership distributions and management fees, will be adequate to meet the Company's current and future obligations. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off balance sheet arrangements. MATERIAL CONTRACTUAL OBLIGATIONS The following table provides a summary of the Company's material financial obligations which also includes interest. Total Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter ------------ ---------- ---------- ---------- ----------- ---------- ----------- Mortgage notes payable $138,849,000 $5,834,000 $11,769,000 $39,521,000 $ 7,268,000 $9,055,000 $65,402,000 Other notes payable 3,966,000 926,000 708,000 694,000 1,629,000 9,000 - Operating leases 725,000 203,000 103,000 87,000 107,000 111,000 114,000 ----------- --------- ---------- ---------- ---------- --------- ---------- Total $143,540,000 $6,963,000 $12,580,000 $40,302,000 $ 9,004,000 $9,175,000 $65,516,000 =========== ========= ========== ========== ========== ========= ==========
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. -23- CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are most significant to the presentation 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 condensed 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 4. 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) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. 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. 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 Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II OTHER INFORMATION Item 6. Exhibits. (a) Exhibits 31.1 Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a). 31.2 Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. -24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE INTERGROUP CORPORATION (Registrant) Date: November 12, 2010 by /s/ John V. Winfield ---------------------------- John V. Winfield, President, Chairman of the Board and Chief Executive Officer Date: November 12, 2010 by /s/ David Nguyen ------------------------------ David Nguyen, Treasurer and Controller (Principal Financial Officer) -25- EX-31 2 igex311.txt EXHIBIT 31.1 PEO CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, John V. Winfield, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The InterGroup Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2010 /s/ John V. Winfield --------------------------- John V. Winfield, President and Chief Executive Officer EX-31 3 igex312.txt EXHIBIT 31.2 PFO CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, David T. Nguyen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The InterGroup Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2010 /s/ David T. Nguyen --------------------------- David T. Nguyen, Treasurer and Controller (serving as Principal Financial Officer) EX-32 4 igex321.txt EXHIBIT 32.1 PEO CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The InterGroup Corporation (the "Company") on Form 10-Q for the quarterly period ended September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John V. Winfield, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 12, 2010 /s/ John V. Winfield ---------------------------- John V. Winfield, President and Chief Executive Officer [A signed original of this written statement required by Section 906 has been provided to The InterGroup Corporation and will be retained by The InterGroup Corporation and furnished to the Securities and Exchange Commission or its staff upon request.] EX-32 5 igex322.txt EXHIBIT 32.2 PFO CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The InterGroup Corporation (the "Company") on Form 10-Q for the quarterly period ended September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David T. Nguyen, Treasurer and Controller of the Company, serving as its Principal Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 12, 2010 /s/ David T. Nguyen ---------------------------- David T. Nguyen, Treasurer and Controller (serving as Principal Financial Officer) [A signed original of this written statement required by Section 906 has been provided to The InterGroup Corporation and will be retained by The InterGroup Corporation and furnished to the Securities and Exchange Commission or its staff upon request.] -----END PRIVACY-ENHANCED MESSAGE-----