UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO 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
(State or Other Jurisdiction of
Incorporation or Organization)
13-3293645
(I.R.S. Employer
Identification No.)
12121 Wilshire Boulevard, Suite 610, Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
(310) 889-2500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock $.01 par value
Name of each exchange on which registered
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
(cid:95) Yes (cid:133) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K.
(cid:95) Yes (cid:133) No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
Emerging growth company
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Accelerated Filer
Smaller reporting company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
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The aggregate market value of the Common Stock, no par value, held by non-affiliates computed by reference to the average bid and asked price on December
31, 2018 was $26,115,000.
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common stock
Trading Symbol(s)
INTG
Name of each exchange on which registered
NASDAQ CAPITAL MARKET
The number of shares outstanding of registrant’s Common Stock, as of August 30, 2019 was 2,309,962.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Signatures
PART IV
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation reform Act of 1995.
Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” “may,” “could,”
“might” and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance. From time to time we
also provide forward-looking statements in our Forms 10-Q and 8-K, Annual Reports to Shareholders, press releases and other materials we may release to the
public. Forward looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in
circumstances that may cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. Consequently, no
forward-looking statement can be guaranteed and our actual future results may differ materially.
Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
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risks associated with the lodging industry, including competition, increases in wages, labor relations, energy and fuel costs, actual and threatened
pandemics, actual and threatened terrorist attacks, and downturns in domestic and international economic and market conditions, particularly in the
San Francisco Bay area;
risks associated with the real estate industry, including changes in real estate and zoning laws or regulations, increases in real property taxes, rising
insurance premiums, costs of compliance with environmental laws and other governmental regulations;
the availability and terms of financing and capital and the general volatility of securities markets;
changes in the competitive environment in the hotel industry;
economic volatility and potential recessive trends;
risks related to natural disasters;
litigation; and
other risk factors discussed below in this Report.
We caution you not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any
further disclosures we make on related subjects on our Forms 10-K and 10-Q, and Current Reports on Form 8-K filed, as well as other filings, with the
Securities and Exchange Commission.
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Item 1. Business.
GENERAL
PART I
The InterGroup Corporation (“InterGroup” or the “Company” and may also be referred to as “we” “us” or “our” in this report) is a Delaware corporation
formed in 1985, as the successor to Mutual Real Estate Investment Trust ("M-REIT"), a New York real estate investment trust created in 1965. The Company
has been a publicly-held company since M-REIT's first public offering of shares in 1966.
The Company was organized to buy, develop, operate, rehabilitate and dispose of real property of various types and descriptions, and to engage in such other
business and investment activities as would benefit the Company and its shareholders. The Company was founded upon, and remains committed to, social
responsibility. Such social responsibility was originally defined as providing decent and affordable housing to people without regard to race. In 1985, after
examining the impact of federal, state and local equal housing laws, the Company determined to broaden its definition of social responsibility. The Company
changed its form from a REIT to a corporation so that it could pursue a variety of investments beyond real estate and broaden its social impact to engage in
any opportunity which would offer the potential to increase shareholder value within the Company's underlying commitment to social responsibility.
As of June 30, 2019, the Company owned approximately 82.2% of the common shares of Santa Fe Financial Corporation (“Santa Fe”), a public company
(OTC Market Inc.’s Pink: SFEF). Santa Fe’s revenue is primarily generated through its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a
public company (OTC Market Inc.’s Pink: PRSI). InterGroup also directly owns approximately 13.4% of Portsmouth. Portsmouth’s primary business is
conducted through its general and limited partnership interest in Justice Investors, a California limited partnership (“Justice” or the “Partnership”). Portsmouth
has a 93.3% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated with those of the
Company.
Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”), 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. Kearny Street Parking LLC (“Parking”) is the operator of the garage. Mezzanine is a wholly-owned
subsidiary of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of
Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service
Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton). Justice had a ten-year management agreement with
Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. Prism’s management agreement was terminated upon its expiration
date of February 2, 2017. Justice entered into a hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage
the Hotel with an effective takeover date of February 3, 2017. The term of the HMA is for an initial period of ten years commencing on the takeover date and
automatically renews for successive one (1) year periods, not to exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA,
base management fee payable to Interstate shall be one and seven-tenths (1.70%) of total Hotel revenue.
In addition to the operations of the Hotel, the Company also generates income from the ownership, management and, when appropriate, sale of real estate.
Properties include sixteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the
United States but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property. As of June 30, 2019,
all of the Company’s operating real estate properties are managed in-house.
The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of
Directors and its Real Estate Investment Committee. The Company may also look for new real estate investment opportunities in hotels, apartments, office
buildings and development properties. The acquisition of any new real estate investments will depend on the Company’s ability to find suitable investment
opportunities and the availability of sufficient financing to acquire such investments. To help fund any such acquisition, the Company may borrow funds to
leverage its investment capital. The amount of any such debt will depend on a number of factors including, but not limited to, the availability of financing and
the sufficiency of the acquisition property’s projected cash flows to support the operations and debt service.
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The Company also may derive income from the investment of its cash and investment securities assets. The Company has invested in income-producing
instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential. See Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the Company’s marketable securities and other investments.
HILTON HOTELS FRANCHISE LICENSE AGREEMENT
The Partnership entered into a Franchise License Agreement (the “License Agreement”) with the HLT Existing Franchise Holding LLC (“Hilton”) on
December 10, 2004. The term of the License Agreement was for an initial period of fifteen years commencing on the date the Hotel began operating as a
Hilton hotel, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, Operating and Hilton
entered into an amended franchise agreement that, among other things, extended the License Agreement through 2030, and also provided the Partnership with
certain key money cash incentives to be earned through 2030.
HOTEL MANAGEMENT COMPANY AGREEMENT
On February 1, 2017, Justice entered into a hotel management agreement with Interstate Management Company, LLC to manage the Hotel with an effective
takeover date of February 3, 2017. The term of the hotel management agreement is for an initial period of ten years commencing on the takeover date and
automatically renews for successive one (1) year periods, not to exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA,
base management fee payable to Interstate shall be one and seven-tenths (1.70%) of total Hotel revenue. For the fiscal years ended June 30, 2019 and 2018,
Interstate management fees were $1,206,000 and $957,000, respectively, and are included in Hotel operating expenses in the consolidated statements of
operations. As part of the HMA, Interstate, through the Partnership’s wholly-owned subsidiary, Kearny Street Parking LLC, manages the parking garage in-
house.
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 Culture Center, which the Foundation had right to occupy pursuant to a 50-year nominal rent lease
that began in 1967.
The amended lease, among other things, 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. As of June 30, 2019, monthly event space fee is $6,200. 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. Subject to certain conditions as set forth in
the amended lease, the Foundation is entitled to reserve for a maximum of 75 days per calendar year for use of the event space. In the event that the
Partnership needs the event space during one of the dates previously reserved by the Foundation, the Partnership shall pay the Foundation $4,000 per day for
using the event space. During the fiscal years ended June 30, 2019 and 2018, the Partnership paid the Foundation $13,000 and $50,000, respectively, for using
the event space on previously reserved dates by the Foundation.
SALES AND REFINANCINGS OF REAL ESTATE PROPERTIES
In July 2015, the Company purchased a residential house in Los Angeles, California as a strategic asset for $1,975,000 in cash. In August 2016, the Company
obtained a $1,000,000 mortgage note payable on this property and received net proceeds of $983,000. The interest on the note is 5.75% with interest only
payments for twenty-three months. In September 2018, the Company refinanced the mortgage note payable with a new mortgage in the amount of $1,000,000.
The interest rate on the mortgage is 4.75% and matures in October 2048.
In July 2018, the Company obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). The RLOC carries a variable interest
rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest are due in July 2019. On July 31, 2018,
$2,969,000 was drawn from the RLOC to pay off the mortgage note payable at our 27-unit apartment complex in Los Angeles. In July 2019, the Company
obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. As of June
30, 2019, outstanding balance of the RLOC is $2,985,000.
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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, publicly traded investment funds, mortgage backed securities, securities issued by REITs 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”).
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 generally follows certain 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 MKT, NYSE Arca or the Nasdaq Stock Market (NASDAQ);
(ii) the issuer of the listed securities should be in compliance with the listing standards of the applicable national securities exchange; and (iii) investment in a
particular issuer should not exceed 10% of the market value of the total portfolio. The investment guidelines 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. The Committee has in the past
approved non-conforming investments and may in the future approve non-conforming investments. The Committee may modify these guidelines from time to
time.
The Company may also invest, with the approval of the Securities Investment Committee, in unlisted securities, such as convertible notes, through private
placements including private equity investment funds. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as
part of other investments and reviewed for impairment on a periodic basis. As of June 30, 2019 and 2018, the Company had other investments of $612,000
and $813,000, respectively.
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, 2019 and 2018, the
Company had obligations for securities sold (equities short) of $1,225,000 and $1,935,000, respectively.
In addition, the Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage
firms. 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. Margin balances due at June 30, 2019 and 2018 were $1,629,000 and $1,887,000, respectively.
As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), 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 the Portsmouth and Santa Fe and oversees the investment activity of those companies. Depending on certain market conditions and
various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such
investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and
the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on
behalf of the Company.
Further information with respect to investment in marketable securities and other investments of the Company is set forth in Management Discussion and
Analysis of Financial Condition and Results of Operations section and Notes 5 and 6 of the Notes to Consolidated Financial Statements.
Seasonality
Hotel’s operations historically have been seasonal. Like most hotels in the San Francisco area, the Hotel generally maintains high occupancy and room rates
during the entire year except for the weeks starting Thanksgiving through the end of the calendar year due to the holiday season. These seasonal patterns can
be expected to cause fluctuations in the quarterly revenues of the Hotel.
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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 San Francisco market is a very competitive market with a high supply of guest rooms and meeting space in the area. During fiscal
year 2019, we installed an advanced state-of-the-art internet system which included a rewiring of the entire hotel with the best possible Ethernet cabling and
fiber. Specifically, the complete overhaul of the infrastructure of the Internet in the guest rooms and meeting space will enable the Hotel to compete in this
market from a technology perspective. This investment is allowing the Hotel to go to market with measurable statistics that will help win the much-coveted
technology company meetings. We installed 55” and 65” 4K smart televisions in all guest rooms and common areas during fiscal year 2019. In fiscal 2018, an
architecture firm was contracted to design the new guest rooms which have recently been approved by Hilton and the model rooms are underway. We plan to
bring back into service 14 guest rooms on the 5th floor as part of the initial phase of this renovation project and the next phase will include additional rooms
being added on the 26th and 27th floors. We anticipate our window washing equipment to be completed within the second quarter of fiscal year 2020.
Our highest priority is guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition and is critical to the
Hotel’s objective of building sustainable guest loyalty. In order to make a large impact on guest experience, the Hotel will continue training team members on
Hilton brand standards and guest satisfaction, hiring and retaining talents in key operations, and enhancing the arrival experience.
The Hotel’s location in the San Francisco Financial District lends itself to greater opportunities over its competitors when it comes to developing relationships
with the Financial District entities and the customers who regularly do business in the downtown area. The ability to capitalize on the strong midweek demand
of the individual business traveler to the Financial District has been the focus during the timeframe of strong growth in the market. The Hotel will continue to
focus on self-contained group business that contributes to the Food and Beverage operation and make use of the properties meeting space capabilities. Closure
of the Moscone Convention Center has limited banquet revenue contribution in fiscal year 2019 but assisted in strong rate growth year over year. With the
Moscone Convention Center returning to full capacity in calendar year 2019, we hope to see more growth in citywide room nights.
The Hotel is also subject to certain operating risks common to all of the hotel industry, which could adversely impact performance. These risks include:
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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, pandemics or other medical events or warnings which may result in
decreases in business and leisure travel;
natural disasters; and
adverse effects of downturns and recessionary conditions in international, national and/or local economies and market conditions.
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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,
2014 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 December 2013. 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 property 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 is in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations
regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on the Company. The
Company has not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental matters in connection with any of its present properties.
Competition – Rental Properties
The ownership, operation and leasing of multifamily rental properties are highly competitive. The Company competes with domestic and foreign financial
institutions, other REITs, life insurance companies, pension trusts, trust funds, partnerships and individual investors. In addition, The Company competes for
tenants in markets primarily on the basis of property location, rent charged, services provided and the design and condition of improvements. The Company
also competes with other quality apartment owned by public and private companies. The number of competitive multifamily properties in a particular market
could adversely affect the Company’s ability to lease its multifamily properties, as well as the rents it is able to charge. In addition, other forms of residential
properties, including single family housing and town homes, provide housing alternatives to potential residents of quality apartment communities or potential
purchasers of for-sale condominium units. The Company competes for residents in its apartment communities based on resident service and amenity offerings
and the desirability of the Company’s locations. Resident leases at the Company’s apartment communities are priced competitively based on market
conditions, supply and demand characteristics, and the quality and resident service offerings of its communities.
EMPLOYEES
As of June 30, 2019, the Company had a total of 28 full-time employees. Effective August 2014, the Company entered into a client service agreement with
ADP, a professional employer organization serving as an off-site, full service human resource department for its employees. ADP personnel management
services are delivered by entering into a co-employment relationship with the Company’s employees. The employees and the Company are not party to any
collective bargaining agreement, and the Company believes that its employee relations are satisfactory.
Effective February 3, 2017, the Partnership had no employees. On February 3, 2017, Interstate assumed all labor union agreements and retained employees of
their choice to continue providing services to the Hotel. As of June 30, 2019, approximately 85% of those employees were represented by one of four labor
unions, and their terms of employment were determined under various collective bargaining agreements (“CBAs”) to which the Partnership was a party.
During the fiscal year ended June 30, 2019, the Partnership renewed the CBA for Local 39 (Stationary Engineers), and Local 665 (Parking Employees). CBA
for Local 2 (Hotel and Restaurant Employees) expired on August 13, 2018 and was renewed in August 2019. CBA for Local 856 (International Brotherhood
of Teamsters) will expire on December 31, 2022.
Negotiation of collective bargaining agreements, which includes not just terms and conditions of employment, but scope and coverage of employees, is a
regular and expected course of business operations for the Partnership and Interstate. The Partnership expects and anticipates that the terms of conditions of
CBAs will have an impact on wage and benefit costs, operating expenses, and certain hotel operations during the life of each CBA, and incorporates these
principles into its operating and budgetary practices.
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ADDITIONAL INFORMATION
The Company files annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and
Exchange Commission (“SEC” or the “Commission”). The public may read and copy any materials that we file with the Commission at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain
information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the
Commission.
Other information about the Company can be found on its website www.intgla.com. Reference in this document to that website address does not constitute
incorporation by reference of the information contained on the website.
Item 1A. Risk Factors.
Adverse changes in the U.S. and global economies could negatively impact our financial performance.
Due to a number of factors affecting consumers, the outlook for the lodging industry remains uncertain. These factors have resulted at times in the past and
could continue to result in the future in fewer customers visiting, or customers spending less, in San Francisco, as compared to prior periods. Leisure travel
and other leisure activities represent discretionary expenditures, and participation in such activities tends to decline during economic downturns, during which
consumers generally have less disposable income. As a result, in those times customer demand for the luxury amenities and leisure activities that we offer may
decline. Furthermore, during periods of economic contraction, revenues may decrease while some of our costs remain fixed or even increase, resulting in
decreased earnings.
Weakened global economic conditions may adversely affect our industry, business and results of operations.
Our overall performance depends in part on worldwide economic conditions which could adversely affect the tourism industry. According to current
economic news reports, the United States and other key international economies may be subject to a recession, characterized by falling demand for a variety of
goods and services, restricted credit, going concern threats to financial institutions, major multinational companies and medium and small businesses, poor
liquidity, declining asset values, reduced corporate profitability, and volatility in credit, equity and foreign exchange markets. These conditions affect
discretionary and leisure spending and could adversely affect our customers’ ability or willingness to travel to destinations for leisure and cutback on
discretionary business travel, which could adversely affect our operating results. In addition, in a weakened economy, companies that have competing
properties may reduce room rates and other prices which could also reduce our average revenues and harm our operating results.
We operate a single property located in San Francisco and rely on the San Francisco market. Changes adversely impacting this market could have a material
effect on our business, financial condition and results of operations.
Our business has a limited base of operations and substantially all of our revenues are currently generated by the Hotel. Accordingly, we are subject to greater
risks than a more diversified hotel or resort operator and the profitability of our operations is linked to local economic conditions in San Francisco. The
combination of a decline in the local economy of San Francisco, reliance on a single location and the significant investment associated with it may cause our
operating results to fluctuate significantly and may adversely affect us and materially affect our total profitability.
We face intense local and increasingly national competition which could impact our operations and adversely affect our business and results of operations.
We operate in the highly-competitive San Francisco hotel industry. The Hotel competes with other high-quality Northern California hotels and resorts. Many
of these competitors seek to attract customers to their properties by providing food and beverage outlets, retail stores and other related amenities, in addition to
recently renovated hotel accommodations. To the extent that we seek to enhance our revenue base by offering our own various amenities, we compete with the
service offerings provided by these competitors. Many of the competing properties have themes and attractions which draw a significant number of visitors
and directly compete with our operations. Some of these properties are operated by subsidiaries or divisions of large public companies that may have greater
name recognition and financial and marketing resources than we do and market to the same target demographic group as we do. Various competitors are
expanding and renovating their existing facilities. We believe that competition in the San Francisco hotel and resort industry is based on certain property-
specific factors, including overall atmosphere, range of amenities, price, location, technology infrastructure, entertainment attractions, theme and size. Any
market perception that we do not excel with respect to such property-specific factors could adversely affect our ability to compete effectively. If we are unable
to compete effectively, we could lose market share, which could adversely affect our business and results of operations.
9
The San Francisco hotel and resort industry is capital intensive; financing our renovations and future capital improvements could reduce our cash flow and
adversely affect our financial performance.
The Hotel has an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture,
fixtures and equipment. We will also need to make capital expenditures to comply with applicable laws and regulations.
Renovations and other capital improvements of hotels require significant capital expenditures. In addition, renovations and capital improvements of hotels
usually generate little or no cash flow until the project’s completion. We may not be able to fund such projects solely from cash provided from our operating
activities. Consequently, we will rely upon the availability of debt or equity capital and reserve funds to fund renovations and capital improvements and our
ability to carry them out will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on, among other things, market
conditions. No assurances can be made that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on
favorable terms.
Renovations and other capital improvements may give rise to the following additional risks, among others: construction cost overruns and delays; increased
prices of materials due to tariffs; temporary closures of all or a portion of the Hotel to customers; disruption in service and room availability causing reduced
demand, occupancy and rates; and possible environmental issues.
As a result, renovations and any other future capital improvement projects may increase our expenses, reduce our cash flows and our revenues. If capital
expenditures exceed our expectations, this excess would have an adverse effect on our available cash.
We have substantial debt, and we may incur additional indebtedness, which may negatively affect our business and financial results.
We have substantial debt service obligations. Our substantial debt may negatively affect our business and operations in several ways, including: requiring us
to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce funds available for operations
and capital expenditures, future business opportunities and other purposes; making us more vulnerable to economic and industry downturns and reducing our
flexibility in responding to changing business and economic conditions; limiting our flexibility in planning for, or reacting to, changes in the business and the
industry in which we operate; placing us at a competitive disadvantage compared to our competitors that have less debt; limiting our ability to borrow more
money for operations, capital or to finance acquisitions in the future; and requiring us to dispose of assets, if needed, in order to make required payments of
interest and principal.
Our business model involves high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a timely manner in response
to a reduction in our revenues.
The costs associated with owning and operating the Hotel are significant. Some of these costs (such as property taxes and insurance costs) are fixed, meaning
that such costs may not be altered in a timely manner in response to changes in demand for services. Failure to adjust our expenses may adversely affect our
business and results of operations. Our real property taxes may increase as property tax rates change and as the values of properties are assessed and
reassessed by tax authorities. Our real estate taxes do not depend on our revenues, and generally we could not reduce them other than by disposing of our real
estate assets.
Insurance premiums have increased significantly in recent years, and continued escalation may result in our inability to obtain adequate insurance at
acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of the Hotel. If we do not obtain adequate insurance,
to the extent that any of the events not covered by an insurance policy materialize, our financial condition may be materially adversely affected.
In the future, our property may be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and
maintenance and administrative expenses, which could reduce our cash flow and adversely affect our financial performance. If our revenues decline and we
are unable to reduce our expenses in a timely manner, our business and results of operations could be adversely affected.
Risk of declining market values in marketable securities.
The Company invests from time to time in marketable securities. As a result, the Company is exposed to market volatility in connection with these
investments. The Company's financial position and financial performance could be adversely affected by worsening market conditions or sluggish
performance of such investments.
Illiquidity risk in nonmarketable securities
Nonmarketable securities are, by definition, instruments that are not readily salable in the capital markets, and when sold are usually at a substantial discount.
Thus, the holder is limited to return on investment from any income producing feature of the instrument, as any sale of such an instrument would be subject to
a substantial discount. Thus, a holder may need to hold such instruments for long period of time and not be able to realize a return of their cash investment
should there be a need to liquidate to obtain cash at any given time.
10
Litigation and legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.
We are a party, from time to time, to various litigation claims and legal proceedings, government and regulatory inquiries and/or proceedings, including, but
not limited to, intellectual property, premises liability and breach of contract claims. Material legal proceedings are described more fully in Note 18,
Commitments and Contingencies, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.
Litigation is inherently unpredictable, and defending these proceedings can result in significant ongoing expenditures and the diversion of our management’s
time and attention from the operation of our business, which could have a negative effect on our business operations. Our failure to successfully defend or
settle any litigation or legal proceedings could result in liabilities that, to the extent not covered by our insurance, could have a material adverse effect on our
financial condition, revenue and profitability.
The threat of terrorism could adversely affect the number of customer visits to the Hotel.
The threat of terrorism has caused, and may in the future cause, a significant decrease in customer visits to San Francisco due to disruptions in commercial and
leisure travel patterns and concerns about travel safety. We cannot predict the extent to which disruptions in air or other forms of travel as a result of any
further terrorist act, outbreak of hostilities or escalation of war would adversely affect our financial condition, results of operations or cash flows. The
possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.
We depend in part, on third party management companies for the future success of our business and the loss of one or more of their key personnel could have
an adverse effect on our ability to manage our business and operate successfully and competitively, or could be negatively perceived in the capital markets.
The Hotel is managed by Interstate. Their ability to manage the Hotel and to operate successfully and competitively is dependent, in part, upon the efforts and
continued service of their managers. The departure of key personnel of current or future management companies could have an adverse effect on our business
and our ability to operate successfully and competitively, and it could be difficult to find replacements for these key personnel, as competition for such
personnel is intense.
Seasonality and other related factors such as weather can be expected to cause quarterly fluctuations in revenue at the Hotel.
The hotel and resort industry is seasonal in nature. This seasonality can tend to cause quarterly fluctuations in revenues at the Hotel. Our quarterly earnings
may also be adversely affected by other related factors outside our control, including weather conditions and poor economic conditions. As a result, we may
have to enter into short-term borrowings in certain quarters in order to offset these quarterly fluctuations in our revenues.
The hotel industry is heavily regulated and failure to comply with extensive regulatory requirements may result in an adverse effect on our business.
The hotel industry is subject to extensive regulation and the Hotel must maintain its licenses and pay taxes and fees to continue operations. Our property is
subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol. We are also subject to laws governing
our relationship with our employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees
and work permits. Also, our ability to remodel, refurbish or add to our property may be dependent upon our obtaining necessary building permits from local
authorities. The failure to obtain any of these permits could adversely affect our ability to increase revenues and net income through capital improvements of
our property. In addition, we are subject to the numerous rules and regulations relating to state and federal taxation. Compliance with these rules and
regulations requires significant management attention. Furthermore, compliance costs associated with such laws, regulations and licenses are significant. Any
change in the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or
gaming license could require us to make substantial expenditures or could otherwise negatively affect our gaming operations. Any failure to comply with all
such rules and regulations could subject us to fines or audits by the applicable taxation authority.
Violations of laws could result in, among other things, disciplinary action. If we fail to comply with regulatory requirements, this may result in an adverse
effect on our business.
11
Uninsured and underinsured losses could adversely affect our financial condition and results of operations.
There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not
economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. We will use our discretion in
determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, with a view to maintaining appropriate
insurance coverage on our investments at a reasonable cost and on suitable terms. Uninsured and underinsured losses could harm our financial condition and
results of operations. We could incur liabilities resulting from loss or injury to the Hotel or to persons at the Hotel. Claims, whether or not they have merit,
could harm the reputation of the Hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which
could harm our results of operations.
In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost
investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in the Hotel, as
well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial
obligations related to the Hotel. In the event of a significant loss, our deductible may be high and we may be required to pay for all such repairs and, as a
consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations
and other factors might also keep us from using insurance proceeds to replace or renovate the Hotel after it has been damaged or destroyed. Under those
circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.
It has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our current insurance
policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our property at the same levels of coverage and under
similar terms. Such insurance may be more limited and for some catastrophic risks (for example, earthquake, flood and terrorism) may not be generally
available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current
policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we were unable to obtain
adequate insurance on the Hotel for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual
commitments that require us to maintain adequate insurance on the Hotel to protect against the risk of loss. If this were to occur, or if we were unable to obtain
adequate insurance and the Hotel experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our
financial condition and the operations of the Hotel.
In addition, insurance coverage for the Hotel and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages.
As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or
similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.
You may lose all or part of your investment.
There is no assurance that the Company’s initiatives to improve its profitability or liquidity and financial position will be successful. Accordingly, there is
substantial risk that an investment in the Company will decline in value.
The price of the Company’s common stock may fluctuate significantly, which could negatively affect the Company and holders of its common stock.
The market price of the Company’s common stock may fluctuate significantly from time to time as a result of many factors, including: investors’ perceptions
of the Company and its prospects; investors’ perceptions of the Company’s and/or the industry’s risk and return characteristics relative to other investment
alternatives; difficulties between actual financial and operating results and those expected by investors and analysts; changes in our capital structure; trading
volume fluctuations; actual or anticipated fluctuations in quarterly financial and operational results; volatility in the equity securities market; and sales, or
anticipated sales, of large blocks of the Company’s common stock.
The concentrated beneficial ownership of our common stock and the ability it affords to control our business may limit or eliminate other shareholders' ability
to influence corporate affairs.
The Company’s President, Chief Executive Officer, and Chairman of the Board of Directors, John V. Winfield, owns more than 60% of the Company’s
outstanding common stock. Because of this concentrated stock ownership, Mr. Winfield will be in a position to significantly influence the election of the
Company’s board of directors and all other decisions on all matters requiring shareholder approval. As a result, the ability of other shareholders to determine
the management and policies of the Company is significantly limited. The interests of the Company’s largest shareholder may differ from the interests of other
shareholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of officers and directors and other
business decisions. This level of control may also have an adverse impact on the market value of our shares because our largest shareholder may institute or
undertake transactions, policies or programs that may result in losses, may not take any steps to increase our visibility in the financial community and/or may
sell sufficient numbers of shares to significantly decrease our price per share.
12
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
SAN FRANCISCO HOTEL PROPERTY
The Hotel is owned by the Partnership through its wholly-owned subsidiary, Justice Operating Company, LLC, a Delaware limited liability company
(“Operating”). The Hotel is centrally located in the Financial District in San Francisco, one block from the Transamerica Pyramid. The Embarcadero Center is
within walking distance and North Beach is two blocks away. Chinatown is directly across the bridge that runs from the Hotel to Portsmouth Square Park.
The Hotel is a 31-story (including parking garage), steel and concrete, A-frame building, built in 1970. The Hotel has 544 well-appointed guest rooms and
luxury suites situated on 22 floors. The third floor houses the Chinese Culture Center and grand ballroom. The Hotel has approximately 22,000 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 Partnership expects either to expend or to set aside, at least 4% of gross annual Hotel revenues each year for capital improvements or renovations as
required by its senior lender. In the opinion of management, the Hotel is adequately covered by insurance.
HOTEL FINANCINGS
On December 18, 2013: (i) Operating entered into a loan agreement (“Mortgage Loan Agreement”) with Bank of America (“Mortgage Lender”); and (ii)
Justice Mezzanine Company, LLC, a Delaware limited liability company (“Mezzanine”), entered into a mezzanine loan agreement (“Mezzanine Loan
Agreement” and, together with the Mortgage Loan Agreement, the “Loan Agreements”) with ISBI San Francisco Mezz Lender LLC (“Mezzanine Lender”
and, together with Mortgage Lender, the “Lenders”). The Partnership is the sole member of Mezzanine, and Mezzanine is the sole member of Operating.
The Loan Agreements provide for a $97,000,000 Mortgage Loan and a $20,000,000 Mezzanine Loan. The proceeds of the Loan Agreements were used to
fund the redemption of limited partnership interests and the pay-off of the prior mortgage.
The Mortgage Loan is secured by the Partnership’s principal asset, the Hotel. The Mortgage Loan bears an interest rate of 5.275% per annum and matures in
January 2024. The term of the loan is ten years with interest only due in the first three years and principal and interest payments to be made during the
remaining seven years of the loan based on a thirty-year amortization schedule. The Mortgage Loan also requires payments for impounds related to property
tax, insurance and capital improvement reserves. As additional security for the Mortgage Loan, there is a limited guaranty (“Mortgage Guaranty”) executed by
the Company in favor of Mortgage Lender.
The Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The Mezzanine Loan
bears interest at 9.75% per annum and matures on January 1, 2024. Interest only payments are due monthly. As additional security for the Mezzanine Loan,
there is a limited guaranty executed by the Company in favor of Mezzanine Lender (the “Mezzanine Guaranty” and, together with the Mortgage Guaranty, the
“Guaranties”).
The Guaranties are limited to what are commonly referred to as “bad boy” acts, including: (i) fraud or intentional misrepresentations; (ii) gross negligence or
willful misconduct; (iii) misapplication or misappropriation of rents, security deposits, insurance or condemnation proceeds; and (iv) failure to pay taxes or
insurance. The Guaranties are full recourse guaranties under identified circumstances, including failure to maintain “single purpose” status which is a factor in
a consolidation of Operating or Mezzanine in a bankruptcy of another person, transfer or encumbrance of the Property in violation of the applicable loan
documents, Operating or Mezzanine incurring debts that are not permitted, and the Property becoming subject to a bankruptcy proceeding. Pursuant to the
Guaranties, the Partnership is required to maintain a certain minimum net worth and liquidity. Effective as of May 12, 2017, InterGroup agreed to become an
additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s
$97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain a certain net worth and
liquidity. As of June 30, 2019, management believes that InterGroup is in compliance with both requirements.
13
Each of the Loan Agreements contains customary representations and warranties, events of default, reporting requirements, affirmative covenants and
negative covenants, which impose restrictions on, among other things, organizational changes of the respective borrower, operations of the Property,
agreements with affiliates and third parties. Each of the Loan Agreements also provides for mandatory prepayments under certain circumstances (including
casualty or condemnation events) and voluntary prepayments, subject to satisfaction of prescribed conditions set forth in the Loan Agreements.
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term
of two years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The proceeds of the
loan were applied to the July 2014 payments to Justice Holdings Company, LLC (“Holdings”) in connection with the redemption of limited partnership
interests. The loan was extended to December 31, 2019. As of June 30, 2019, the balance of the loan was $3,000,000.
In April 2017, Portsmouth obtained from InterGroup an unsecured short-term loan in the principal amount of $1,000,000 at 5% per year fixed interest, with a
term of five months and maturing September 6, 2017. Accrued interest and monthly principal installments in the amount of $200,000 were due and payable
commencing on May 1, 2017 and continuing on the first day of each calendar month thereafter, until five months after the date of the loan at which time any
unpaid balance of principal and interest on the note was due and payable. The loan was extended to September 15, 2017 and paid off on September 13, 2017.
On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with
Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off without any prepayment penalty. Interest rate on the new
mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. See Note 19 – Subsequent Events.
RENTAL PROPERTIES
As June 30, 2019, the Company's investment in real estate consisted of twenty properties located throughout the United States, with a concentration in Texas
and Southern California. These properties include sixteen apartment complexes, three single-family houses as strategic investments and one commercial real
estate property. All properties are operating properties. In addition to the properties, the Company owns approximately 2 acres of unimproved land in Maui,
Hawaii. As of June 30, 2019, all of the Company’s operating real estate properties are managed in-house.
Description of Properties
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, 2019 were approximately
$1,014,000. The outstanding mortgage balance was approximately $16,974,000 at June 30, 2019 with an interest rate of 3.73% and the maturity date of the
mortgage is December 1, 2022.
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, 2019 were approximately $241,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life
of 40 years. The outstanding mortgage balance was approximately $8,737,000 at June 30, 2019 and the maturity date of the mortgage is July 31, 2022 with
interest rate fixed at 3.51%. In June 2014, the Company obtained a second mortgage on this property in the amount of $2,701,000. The term of the loan is
approximately 8 years with the interest rate fixed at 4.51%. The outstanding mortgage balance was approximately $2,512,000 at June 30, 2019. The loan
matures in August 2022.
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, 2019, real estate property taxes were approximately $197,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $5,365,000 at
June 30, 2019 with an interest rate of 4.05% and the maturity date of the mortgage is May 31, 2023.
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, 2019, real estate property taxes were
approximately $64,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In March 2015, the Company
refinanced the $3,636,000 mortgage note payable for a new mortgage in the amount of $3,492,000. The Company paid down approximately $210,000 of the
old mortgage as part of the refinancing. The new mortgage has a fixed interest rate of 3.87% for ten years and matures in April 2025. The outstanding
mortgage balance was approximately $3,222,000 at June 30, 2019.
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Los Angeles, California. The Company owns one commercial property, twelve apartment complexes, and three single-family houses in the general area of
West Los Angeles.
The first Los Angeles commercial property is a 5,500 square foot, two story building that served as the Company's corporate offices until it was leased out,
effective October 1, 2009 and the Company leased a new space for its corporate office. The Company acquired the building on March 4, 1999 for $1,876,000.
The property taxes for the year ended June 30, 2019 were approximately $31,000. Depreciation is recorded on the straight-line method, based upon an
estimated useful life of 40 years. In April 2016, the Company refinanced the $1,007,000 mortgage note payable for a new mortgage in the amount of
$921,000. The new mortgage has a fixed interest rate swap with the floating rate loan. By combing both rates rate through maturity of the credit facility
(1.49% swap + 2.50% credit spread), the all-in fixed rate is 3.99%. The outstanding mortgage balance was approximately $806,000 at June 30, 2019 and the
note matures in January 2021.
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, 2019, real estate property taxes were approximately $22,000. Depreciation is recorded
on the straight-line method, based upon an estimated useful life of 40 years. In June 2016, the Company refinanced the $2,095,000 mortgage note payable for
a new mortgage in the amount of $2,300,000 with an interest rate of 3.59%. The outstanding mortgage balance was approximately $2,172,000 at June 30,
2019 and the maturity date of the mortgage is June 23, 2026.
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, 2019, real estate property taxes were approximately $66,000.
Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately
$2,843,000 at June 30, 2018 with an interest rate of 4.85% and the maturity date of the mortgage was December 1, 2020. In July 2018, InterGroup obtained a
revolving $5,000,000 line of credit (“RLOC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage.
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, 2019, real estate property taxes were approximately $37,000. Depreciation is recorded
on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $1,632,000 at June 30,
2019 with an interest rate of 5.89% and the maturity date of the mortgage is March 1, 2021.
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, 2019, real estate property taxes were approximately $29,000. Depreciation is recorded
on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $1,112,000 at June 30,
2019 with an interest rate of 5.89% and the maturity date of the mortgage is March 1, 2021.
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, 2019, real estate property taxes were approximately $115,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $4,927,000 at
June 30, 2019 with an interest rate of 4.85% and the maturity date of the mortgage is December 1, 2020.
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, 2019, real estate property taxes were approximately $74,000. Depreciation is recorded
on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $5,765,000 at June 30,
2019 with an interest rate of 5.97% and 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, 2019, 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 $343,000 at June 30, 2019 with an
interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.
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, 2019, real estate property taxes were approximately $16,000. Depreciation is recorded
on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $579,000 at June 30, 2019
with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.
15
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, 2019, real estate property taxes were approximately $22,000. Depreciation is recorded on the
straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $846,000 at June 30, 2019 with an
interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.
The tenth 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, 2019, real estate property taxes were approximately $20,000. Depreciation is recorded
on the straight-line method, based upon an estimated useful life of 40 years. In July 2013, the Company refinanced its $466,000 adjustable rate mortgage note
payable on this property for a new 30-year mortgage in the amount of $500,000. The interest rate on the new loan is fixed at 3.75% per annum for the first five
years and variable for the remaining of the term. The note matures in July 2043. The outstanding mortgage balance was approximately $440,000 at June 30,
2019.
The eleventh 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, 2019, real estate property
taxes 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 $347,000 at June 30, 2019 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.
The twelfth apartment which is located in Marina del Rey, California, is a 6,316 square foot two-story apartment with 9 units. The Company acquired the
property on April 29, 2011 at an initial cost of approximately $4,000,000. For the year ended June 30, 2019, real estate property taxes were approximately
$55,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 27.5 years. The outstanding mortgage balance was
approximately $1,303,000 at June 30, 2019 with an interest rate of 5.60% and the maturity date of the mortgage is May 1, 2021.
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, 2019, real estate property taxes were approximately $11,000. Depreciation is recorded on the straight-
line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $373,000 at June 30, 2019 with an interest
rate of 3.75% and the maturity date of the mortgage is September 1, 2042.
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, 2019, real estate property taxes 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 $399,000 at June 30, 2019 with an interest
rate of 3.75% and the maturity date of the mortgage is September 1, 2042.
The third Los Angeles single-family house is a 2,387 square foot home. The company acquired the property in July of 2015 as a strategic asset for $1,975,000
in cash. In August 2016, the Company obtained a $1,000,000 mortgage note payable and received net proceeds of $983,000. The interest on note is 4.50%
with interest only payments for twenty-three months. On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off the mortgage note payable. On
September 28, 2018, the Company obtained a new mortgage note payable in the amount of $1,000,000 for this property with interest rates fixed at 4.75% per
annum for the first five years and variable for the remaining of the term. The mortgage note payable matures in October 2048. $995,000 received as a result of
the refinance was used to pay down the RLOC. The outstanding mortgage balance was approximately $990,000 at June 30, 2019. For the year ended June 30,
2019, real estate property taxes were approximately $25,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40
years.
In August 2004, the Company purchased an approximately two-acre parcel of unimproved land in Kihei, Maui, Hawaii for $1,467,000. The Company has
engaged the services of certain professionals to develop the property. After the completion of this predevelopment phase, we will determine whether it is more
advantageous to sell the entitled property or to commence with construction.
16
MORTGAGES
Further information with respect to mortgage notes payable of the Company is set forth in Note 11 of the Notes to Consolidated Financial Statements.
ECONOMIC AND PHYSICAL OCCUPANCY RATES
The Company leases units in its residential rental properties on a short-term basis, with no lease extending beyond one year. The economic occupancy (gross
potential less rent below market, vacancy loss, bad debt, discounts and concessions divided by gross potential rent) and the physical occupancy (gross
potential rent less vacancy loss divided by gross potential rent) for each of the Company's operating properties for fiscal year ended June 30, 2019 are
provided below.
Property
1. Las Colinas, TX
2. Morris County, NJ
3. St. Louis, MO
4. Florence, KY
5. Los Angeles, CA (1)
6. Los Angeles, CA (2)
7. Los Angeles, CA (3)
8. Los Angeles, CA (4)
9. Los Angeles, CA (5)
10. Los Angeles, CA (6)
11. Los Angeles, CA (7)
12. Los Angeles, CA (8)
13. Los Angeles, CA (9)
14. Los Angeles, CA (10)
15. Los Angeles, CA (11)
16. Los Angeles, CA (12)
17. Los Angeles, CA (13)
18. Los Angeles, CA (14)
19. Los Angeles, CA (15)
Economic
Occupancy
Physical
Occupancy
95 %
94 %
83 %
94 %
87 %
35 %
87 %
100 %
71 %
96 %
90 %
100 %
98 %
100 %
87 %
79 %
32 %
100%
100 %
100 %
95 %
91 %
97 %
96 %
51 %
82 %
96 %
87 %
97 %
92 %
100 %
98 %
100 %
89 %
85 %
32 %
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.
Item 3. Legal Proceedings.
In April 2014, the Partnership commenced an arbitration action against Glaser Weil Fink Howard Avchen & Shapiro, LLP (formerly known as Glaser Weil
Fink Jacobs Howard Avchen & Shapiro, LLP), Brett J. Cohen, Gary N. Jacobs, Janet S. McCloud, Paul B. Salvaty, and Joseph K. Fletcher III (collectively,
the “Respondents”) in connection with the redemption transaction. The arbitration alleged legal malpractice against the Respondents and sought declaratory
relief regarding provisions of the option agreement in the redemption transaction and regarding the engagement letter with Respondents. Prior to arbitration
proceedings, the parties agreed in principle to settle the matter, and entered into a settlement agreement and mutual general release in April 2018. The
Respondents agreed to pay $8,300,000 to the Partnership, which was received in May 2018. For the fiscal year ended June 30, 2018, $5,575,000 was recorded
as a recovery of legal settlement cost and $2,725,000 was recorded as a reduction of legal expense.
The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against
any such claims. 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.
Item 4. Mine Safety Disclosures.
Not applicable.
17
Item 5. Market for Common Equity and Related Stockholder Matters.
MARKET INFORMATION
PART II
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, 2019 and
2018 as reported by NASDAQ.
Fiscal 2019
High
Low
First Quarter (7/ 1 to 9/30)
Second Quarter (10/1 to 12/31)
Third Quarter (1/1 to 3/31)
Fourth Quarter (4/1 to 6/30)
First Quarter (7/ 1 to 9/30)
Second Quarter (10/1 to 12/31)
Third Quarter (1/1 to 3/31)
Fourth Quarter (4/1 to 6/30)
Fiscal 2018
$
$
$
$
$
$
$
$
High
39.35
35.00
33.60
32.09
27.65
24.80
25.17
27.00
$
$
$
$
$
$
$
$
Low
27.25
29.26
29.20
29.97
23.10
22.70
22.45
23.10
As of June 30, 2019, the approximate number of holders of record of the Company’s Common Stock was 220. 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.
DIVIDENDS
The Company has not declared any cash dividends on its common stock and does not foresee issuing cash dividends in the near future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
This information appears in Part III, Item 12 of this report.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table reflects purchases of InterGroup’s common stock made by The InterGroup Corporation, for its own account, during the fourth quarter of
its fiscal year ending June 30, 2019.
18
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Fiscal
2019
Period
Month #1 (April 1- April 30)
Month #2 (May 1- May 31)
Month #3 (June 1- June 30)
TOTAL:
(a) Total
Number of
Shares
Purchased
(b)
Average
Price Paid
Per Share
(c) Total Number
of Shares Purchased
as Part of Publicly
Announced Plans
or Programs
(d) Maximum Number
of shares that May
Yet be Purchased
Under the Plans
or Programs
-
6,400 $
11,000 $
17,400 $
-
31.07
31.12
31.10
-
6,400
11,000
17,400
22,072
15,672
4,672
4,672
The Company has only one stock repurchase program. The program was initially announced on January 13, 1998 and was amended on February 10, 2003 and
October 12, 2004. The total number of shares authorized to be repurchased pursuant to those prior authorizations was 870,000, adjusted for stock splits. On
June 3, 2009, the Board of Directors authorized the Company to purchase up to an additional 125,000 shares of Company’s common stock. On November 15,
2012, the Board of Directors authorized the Company to purchase up to an additional 100,000 shares of Company’s common stock. The purchases will be
made, in the discretion of management, from time to time, in the open market or through privately negotiated third party transactions depending on market
conditions and other factors. The Company’s repurchase program has no expiration date and can be amended and increased, from time to time, in the
discretion of the Board of Directors. No plan or program expired during the period covered by the table.
Item 6. Selected Financial Data.
Not required for smaller reporting companies.
Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
As of June 30, 2019, the Company owned approximately 82.2% of the common shares of its subsidiary, Santa Fe, and Santa Fe owned approximately 68.8%
of the common shares of Portsmouth Square, Inc. Intergroup also directly owns approximately 13.4% of the common shares of Portsmouth. The Company's
principal sources of revenue continue to be derived from the general and limited partnership interests of its subsidiary, Portsmouth, in the Justice Investors
limited partnership (“Justice” or the “Partnership”), rental income from its investments in multi-family and commercial real estate properties, and income
received from investment of its cash and securities assets. Justice owns a 544-room hotel property located at 750 Kearny Street, San Francisco, California
94108, known as the “Hilton San Francisco Financial District” (the “Hotel” or the “Property”) and related facilities, including a five-level underground
parking garage. 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 License Agreement with Hilton. The Partnership entered into the
License Agreement on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the reopening date, upon
completion of a major renovation, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the
Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate,
extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030 in the form
of a self-exhausting, interest free note. The key money cash incentive of $4,750,000 was received on July 1, 2015. As of June 30, 2019 and 2018, the balance
of the note was $3,325,000 and $3,642,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets.
On February 1, 2017, Justice entered into a hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the
Hotel with an effective takeover date of February 3, 2017. The term of HMA is for an initial period of 10 years commencing on the takeover date and
automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to
advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a
separate key money agreement.
19
In addition to the operations of the Hotel, the Company also generates income from the ownership and management of its real estate. Properties include
sixteen apartment complexes, one commercial real estate property, and three 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 an investment in unimproved real property in
Hawaii.
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.
Fiscal Year Ended June 30, 2019 Compared to Fiscal Year Ended June 30, 2018
The Company had a net income of $2,814,000 for the year ended June 30, 2019 compared to a net income of $5,813,000 for the year ended June 30, 2018.
The decrease in net income was primarily attributable to the $8,300,000 settlement proceeds received related to the Glaser matter which was credited to
operating expenses and restructuring costs in fiscal year 2018. The $8,300,000 increase in expenses was offset by increase in revenue and decrease in income
taxes.
Hotel Operations
The Company had net income from Hotel operations of $5,277,000 for the year ended June 30, 2019 compared to net income of $12,827,000 for the year
ended June 30, 2018. The decrease in net income was primarily attributable to the $8,300,000 settlement proceeds received related to the Glaser matter which
was credited to operating expenses and restructuring costs in fiscal year 2018.
The following table sets forth a more detailed presentation of Hotel operations for the years ended June 30, 2019 and 2018.
For the year ended June 30,
Hotel revenues:
Hotel rooms
Food and beverage
Garage
Other operating departments
Total hotel revenues
Operating expenses, excluding non-recurring charges, interest, depreciation and amortization
Operating income before non-recurring charges, interest, depreciation and amortization
Recovery of legal settlement costs
Income before interest, depreciation and amortization
Loss on disposal of assets
Interest expense – mortgage
Depreciation and amortization expense
Net income from Hotel operations
$
2019
2018
$
51,243,000
5,353,000
2,875,000
410,000
59,881,000
(44,466,000)
15,415,000
-
15,415,000
(398,000 )
(7,234,000)
(2,506,000)
46,475,000
7,222,000
3,011,000
391,000
57,099,000
(40,103,000)
16,996,000
5,775,000
22,771,000
-
(7,237,000)
(2,707,000)
$
5,277,000
$
12,827,000
For the year ended June 30, 2019, the Hotel generated operating income of $15,415,000 before non-recurring charges, interest, depreciation, and amortization
on total operating revenues of $59,881,000 compared to operating income of $16,996,000 before non-recurring charges, interest, depreciation, and
amortization on total operating revenues of $57,099,000 for the year ended June 30, 2018. Room revenues increased by $4,768,000 for the year ended June
30, 2019 compared to the year ended June 30, 2018 primarily as a result of increased occupancy due to changes of our sales strategy along with maximizing
midweek rate by limiting group business over peak days. The Hotel focused on sellout efficiency specifically on shoulder days and months. Food and
beverage revenue decreased by $1,869,000 for the year ended June 30, 2019 compared to the year ended June 30, 2018 primarily due to the strategy of
capturing higher rated transient rooms midweek and limiting group discounted business offered which reduced the number of banquet events.
Operating expenses increased by $4,363,000 for the year ended June 30, 2019 to $44,466,000 compared to the year ended June 30, 2018 of $40,103,000
primarily due to the receipt of settlement proceeds related to the Glaser matter in fiscal year 2018. Settlement proceeds of $8,300,000 were received during
fiscal year ended June 30, 2018, of which $2,725,000 was credited to legal expense. Rooms department operating expenses also increased in fiscal year 2019
by $1,198,000 primarily due to increased group commissions and labor costs as occupancy increased.
20
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 year ended June 30, 2019 and 2018.
For the Year
Ended June 30,
2019
2018
Average
Daily Rate
Average
Occupancy %
RevPAR
$
$
268
250
96% $
94% $
257
235
The Hotel was able to grow occupancy while increasing rate resulting in a 9% RevPAR growth, far exceeding market performance. The Hotel successfully
grew midweek rate while slightly increasing occupancy in a market that is seeing occupancy declines.
We believe that enhancing the Hotel’s technology is critical to remain competitive in the market place and to that end, we are currently working with all
Hilton approved vendors to upgrade all technical aspects of the Hotel. Implementation of state-of-the-art systems such as the new internet system from Cisco
and 4K smart televisions that are in every room and common areas will set us apart from our competitors. We have made ten additional rooms available by
eliminating the Justice administrative office from the Hotel and relocating the accounting department to administrative space and eliminated the unprofitable
Wellness Center that was added by previous management. We anticipate that the additional ten rooms will be placed into service within the fiscal year ending
June 30, 2020 as design delays pushed the project into our next fiscal year. Additionally, the fitness center which is occupying the equivalent of five rooms
and the executive lounge which is occupying the equivalent of three rooms, will be relocated to a different area within the Hotel. The eight equivalent rooms
will be placed back into service. Part of this renovation will be funded by the Hotel’s furniture, fixture and equipment reserve account with our lender as well
as the $2,000,000 key money incentive provided by Interstate. Lastly, we anticipate the completion of the installation of a complete exterior building
maintenance system by the end of our quarter ending December 31, 2019 which will enable periodic window washing.
Real Estate Operations
Revenue from real estate operations increased to $14,872,000 for the year ended June 30, 2019 from $14,480,000 for the year ended June 30, 2018 primarily
as a result of increased occupancy. Real estate operating expenses increased to $7,810,000 from $7,579,000 primarily as a result of increased utility cost and
real estate taxes. 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.
Investment Transactions
The Company had a net loss on marketable securities of $1,733,000 for the year ended June 30, 2019 compared to a net loss on marketable securities of
$1,777,000 for the year ended June 30, 2018. For the year ended June 30, 2019, the Company had a net unrealized loss of $254,000 and zero realized loss,
related to the Company’s investment in the common stock of Comstock Mining Inc. (“Comstock” - NYSE MKT: LODE). For the year ended June 30, 2018,
the Company had an unrealized loss of $2,337,000 and a realized loss of $6,007,000, related to the Company’s investment in the common stock of Comstock.
As of June 30, 2019 and 2018, investments in Comstock represent approximately 7% of the Company’s investment portfolio. For the year ended June 30,
2019, the Company had a net realized loss of $806,000 and a net unrealized loss of $927,000. For the year ended June 30, 2018, the Company had a net
realized loss of $5,375,000 and a net unrealized gain of $3,598,000. 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 see the Marketable Securities section below.
During the years ended June 30, 2019 and 2018, the Company performed an impairment analysis of its other investments and determined that its investments
had other than temporary impairment and recorded impairment losses of $98,000 and $200,000, respectively.
The Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial
reporting. The income tax benefit (expense) during the years ended June 30, 2019 and 2018 represents primarily the combined income tax effect of
Portsmouth’s pretax income which includes its share in net income from the Hotel and the pre-tax loss from Intergroup (standalone).
21
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As of June 30, 2019 and 2018, the Company had investments in marketable equity securities of $9,696,000 and $13,841,000, respectively. The following table
shows the composition of the Company’s marketable securities portfolio by selected industry groups:
As of June 30, 2019
Industry Group
REITs and real estate companies
Consumer cyclical
Corporate bonds
Financial services
Energy
Other
As of June 30, 2018
Industry Group
REITs and real estate companies
Corporate bonds
Technology
Healthcare
Communications
Other
Fair Value
% of Total
Investment
Securities
3,069,000
1,448,000
1,420,000
951,000
950,000
1,858,000
9,696,000
31.7%
14.9%
14.6%
9.8%
9.8%
19.2%
100.0%
Fair Value
% of Total
Investment
Securities
4,300,000
2,282,000
1,813,000
1,777,000
1,071,000
2,598,000
13,841,000
31.1%
16.5%
13.1%
12.8%
7.7%
18.8%
100.0%
$
$
$
$
The Company’s investment portfolio is diversified with 29 different equity positions The Company holds three equity securities that comprised more than
10% of the equity value of the portfolio. The largest security position represents 17.9% of the portfolio and consists of the common stock of American Realty
Investors, Inc. which is included in the REITs and real estate companies industry group.
The following table shows the net 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,
Net loss on marketable securities
Net unrealized loss on other investments
Impairment loss on other investments
Dividend and interest income
Margin interest expense
Trading expenses
FINANCIAL CONDITION AND LIQUIDITY
2019
2018
$
$
(1,733,000) $
-
(98,000)
484,000
(576,000)
(574,000)
(2,497,000) $
(1,777,000)
(42,000)
(200,000)
277,000
(632,000)
(555,000)
(2,929,000)
The Company’s cash flows are primarily generated from its Hotel operations, general partner management fees from Justice Investors, and its real estate
operations. The Company may also receive cash generated from the investment of its cash and marketable securities and other investments.
22
To fund the redemption of limited partnership interests and to repay the prior mortgage, Justice obtained a $97,000,000 mortgage loan and a $20,000,000
mezzanine loan in December of 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of
5.275% per annum and matures in January 2024. As additional security for the mortgage loan, there is a limited guaranty executed by the Company in favor of
Mortgage Lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The
mezzanine loan bears interest at 9.75% per annum and matures in January 2024. As additional security for the mezzanine loan, there is a limited guaranty
executed by the Company in favor of mezzanine lender. Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited
guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the
$20,000,000 mezzanine loan. On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New
Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new
mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. See Note 19 – Subsequent Events.
Management believes that its cash, securities assets, real estate and the cash flows generated from those assets and from partnership management fees, will be
adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel and
other real estate properties to support additional borrowings if necessary.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company’s material financial obligations which also includes interest.
Mortgage notes payable
Other notes payable
Interest
Total
Total
$ 172,589,000
9,732,000
38,131,000
$ 220,452,000
$
Year 1
3,054,000
4,005,000
9,054,000
$ 16,113,000
Year 2
$ 12,483,000
1,006,000
8,601,000
$ 22,090,000
$
Year 3
3,095,000
1,022,000
8,148,000
$ 12,265,000
Year 4
$ 37,812,000
744,000
7,013,000
$ 45,569,000
Year 5
$ 107,656,000
567,000
3,401,000
$ 111,624,000
Thereafter
$
8,489,000
2,388,000
1,914,000
$ 12,791,000
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 Interstate has the power and ability under the terms of its
management agreement to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership
revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the
Company's income is not viewed by management as material.
The Company's residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are
expected to offset anticipated increased property operating expenses.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by
management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an ongoing 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.
23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2019 and 2018
Consolidated Statements of Operations - For years ended June 30, 2019 and 2018
Consolidated Statements of Shareholders’ Deficit - For years ended June 30, 2019 and 2018
Consolidated Statements of Cash Flows - For years ended June 30, 2019 and 2018
Notes to the Consolidated Financial Statements
24
25
26
27
28
29
30
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
The Intergroup Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Intergroup Corporation and its subsidiaries (the “Company”) as of June 30, 2019 and
2018, the related consolidated statements of operations, shareholders’ deficit and cash flows for the years then ended, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Company as of June 30, 2019 and 2018, and the consolidated results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Changes in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, effective July 1, 2018 the Company changed its method of accounting for revenue recognition
due to the adoption of Accounting Standards Codification Topic No. 606.
The Company adopted ASU 2016-18, Restricted Cash, effective July 1, 2018. The adoption of ASU 2016-18 impacted the presentation of cash flows with
inclusion of restricted cash flows for each of the presented periods.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Moss Adams LLP
Irvine, California
August 30, 2019
We have served as the Company’s auditor since 2017.
25
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30,
ASSETS
Investment in Hotel, net
Investment in real estate, net
Investment in marketable securities
Other investments, net
Cash and cash equivalents
Restricted cash
Other assets, net
Deferred tax asset
Total assets
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities:
Accounts payable and other liabilities
Accounts payable and other liabilities - Hotel
Due to securities broker
Obligations for securities sold
Related party and other notes payable
Capital leases
Line of credit payable
Mortgage notes payable - Hotel
Mortgage notes payable - real estate
Deferred tax liability
Total liabilities
Commitments and contingencies - Note 18
Shareholders' deficit:
Preferred stock, $.01 par value, 100,000 shares authorized; none issued
Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 and 3,395,616 issued; 2,309,962 and
2,334,197 outstanding as of June 30, 2019 and 2018
Additional paid-in capital
Accumulated deficit
Treasury stock, at cost, 1,095,020 and 1,061,419 shares as of June 30, 2019 and 2018
Total Intergroup shareholders' deficit
Noncontrolling interest
Total shareholders' deficit
Total liabilities and shareholders' deficit
The accompanying notes are an integral part of these consolidated financial statements.
26
2019
2018
$
$
39,836,000
51,773,000
9,696,000
612,000
11,837,000
13,295,000
2,362,000
1,468,000
40,961,000
53,369,000
13,841,000
813,000
8,053,000
9,458,000
5,185,000
-
$
130,879,000
$
131,680,000
$
$
3,819,000
11,245,000
1,629,000
1,225,000
5,261,000
1,486,000
2,985,000
113,087,000
58,571,000
-
199,308,000
3,299,000
9,946,000
1,887,000
1,935,000
5,735,000
1,355,000
-
114,372,000
62,873,000
245,000
201,647,000
-
-
33,000
10,342,000
(39,760,000)
(14,347,000)
(43,732,000)
(24,697,000)
(68,429,000)
33,000
10,522,000
(41,217,000)
(13,268,000)
(43,930,000)
(26,037,000)
(69,967,000)
$
130,879,000
$
131,680,000
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
Revenues:
Hotel
Real estate
Total revenues
Costs and operating expenses:
Hotel operating expenses
Recovery of legal settlement costs
Real estate operating expenses
Depreciation and amortization expense
General and administrative expense
Total costs and operating expenses
Income from operations
Other income (expense):
Interest expense - mortgage
Loss on disposal of assets
Net loss on marketable securities
Net unrealized loss on other investments
Impairment loss on other investments
Dividend and interest income
Trading and margin interest expense
Net other expense
Income before income taxes
Income tax benefit (expense)
Net income
Less: Net income attributable to the noncontrolling interest
Net income attributable to InterGroup
Net income per share
Basic
Diluted
Net income per share attributable to InterGroup
Basic
Diluted
Weighted average number of common shares outstanding
Weighted average number of diluted shares outstanding
The accompanying notes are an integral part of these consolidated financial statements.
27
2019
2018
$
$
59,881,000
14,872,000
74,753,000
57,099,000
14,480,000
71,579,000
(44,466,000)
-
(7,810,000)
(4,935,000)
(2,346,000)
(40,103,000)
5,775,000
(7,579,000)
(5,054,000)
(3,053,000)
(59,557,000)
(50,014,000)
15,196,000
21,565,000
(9,788,000)
(398,000)
(1,733,000)
-
(98,000)
484,000
(1,150,000)
(12,683,000)
2,513,000
301,000
2,814,000
(1,357,000)
1,457,000
1.21
1.06
0.63
0.55
$
$
$
$
$
(9,767,000)
-
(1,777,000)
(42,000)
(200,000)
277,000
(1,187,000)
(12,696,000)
8,869,000
(3,056,000)
5,813,000
(1,732,000)
4,081,000
2.47
2.18
1.73
1.53
2,328,156
2,658,551
2,354,489
2,672,489
$
$
$
$
$
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated Deficit
Treasury
Stock
InterGroup
Shareholders'
Deficit
Noncontrolling
Interest
Total
Shareholders'
Deficit
Balance at July 1, 2017
3,395,616
33,000
10,346,000
(45,298,000)
(12,626,000)
(47,545,000)
(27,773,000)
(75,318,000)
Net Income
Stock options expense
Investment in Santa Fe
Purchase of treasury stock
-
-
-
-
-
-
-
-
-
4,081,000
184,000
(8,000)
-
-
-
-
-
-
-
4,081,000
1,732,000
5,813,000
184,000
-
184,000
(8,000)
4,000
(4,000)
(642,000)
(642,000)
-
(642,000)
Balance at June 30, 2018
3,395,616
$
33,000
$
10,522,000
$
(41,217,000)
$ (13,268,000)
$ (43,930,000)
$
(26,037,000)
$ (69,967,000)
Net Income
Issuance of stock
Stock options expense
Investment in Santa Fe
Investment in Justice
Purchase of treasury stock
-
9,366
-
-
-
-
-
-
-
-
-
-
76,000
(256,000)
-
1,457,000
-
-
-
-
-
-
-
-
1,457,000
1,357,000
2,814,000
-
76,000
-
-
-
76,000
(256,000)
133,000
(123,000)
(150,000)
(150,000)
(1,079,000)
(1,079,000)
-
(1,079,000)
Balance at June 30, 2019
3,404,982
$
33,000
$
10,342,000
$
(39,760,000)
$ (14,347,000)
$ (43,732,000)
$
(24,697,000)
$ (68,429,000)
The accompanying notes are an integral part of these consolidated financial statements.
28
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30,
Cash flows from operating activities:
Net income
Adjustments to reconcile net loss to net cash provided by operating activities:
2019
2018
$
2,814,000
$
5,813,000
Net unrealized loss (gain) on marketable securities
Deferred taxes
Loss on disposal of assets
Unrealized loss on other investments
Impairment loss on other investments
Depreciation and amortization
Stock compensation expense
Changes in assets and liabilities:
Investment in marketable securities
Other assets, net
Accounts payable and other liabilities
Due to securities broker
Obligations for securities sold
Net cash provided by operating activities
Cash flows from investing activities:
Investment in Hotel, net
Investment in real estate, net
Proceeds from other investments
Investment in Santa Fe
Investment in Justice
Net cash used in investing activities
Cash flows from financing activities:
Net payments of mortgage and other notes payable
Proceeds from line of credit
Purchase of treasury stock
Net cash used in financing activities
Net increase in cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash at the beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Supplemental information:
Income taxes paid (refunds received)
Interests paid
Non-cash transactions:
Additions to Hotel equipment through capital lease
The accompanying notes are an integral part of these consolidated financial statements.
29
927,000
(1,713,000)
398,000
-
98,000
4,777,000
76,000
3,218,000
2,823,000
1,819,000
(258,000)
(710,000)
14,269,000
(1,397,000)
(833,000)
103,000
(123,000)
(150,000)
(2,400,000)
(6,154,000)
2,985,000
(1,079,000)
(4,248,000)
(3,598,000)
4,352,000
-
42,000
200,000
4,776,000
184,000
6,934,000
(1,820,000)
(2,535,000)
(1,125,000)
(1,775,000)
11,448,000
(212,000)
(732,000)
156,000
(4,000)
-
(792,000)
(2,776,000)
-
(642,000)
(3,418,000)
7,621,000
17,511,000
25,132,000
$
7,238,000
10,273,000
17,511,000
(1,239,000) $
$
10,011,000
171,000
10,399,000
382,000
$
1,364,000
$
$
$
$
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, 2019, the Company had the power to vote 86.1% 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 primary business is conducted through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a public company
(OTCBB: PRSI). Portsmouth has a 93.3% limited partnership interest in Justice and is the sole general partner. InterGroup also directly owns approximately
13.4% of the common stock of Portsmouth.
Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”), 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. Kearny Street Parking LLC (“Parking”) is the operator of the garage. Mezzanine is a wholly-owned
subsidiary of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of
Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service
Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton). Justice had a ten-year management agreement with
Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. Prism’s management agreement was terminated upon its expiration
date of February 3, 2017. Effective December 1, 2013, GMP Management, Inc. (“GMP”), a company owned by a Justice limited partner and a related party,
also provided management services for the Partnership pursuant to a management services agreement, with a three-year term, subject to the Partnership’s right
to terminate earlier for cause. In June 2016, GMP resigned. On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate
Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is
for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate
subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the form of
a self-exhausting, interest free note payable in the amount of $2,000,000 in a separate key money agreement. The $2,000,000 is included in restricted cash
balances in the consolidated balance sheets as of June 30, 2019 and 2018. As of June 30, 2019 and 2018, unamortized portion of the key money was
$1,896,000 and $2,000,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets.
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 three 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 are
managed in-house.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and Santa Fe. All significant inter-company transactions and balances have been
eliminated.
Investment in Hotel, Net
Property and equipment are stated at cost. Building improvements are depreciated on a straight-line basis over their useful lives ranging from 3 to 39 years.
Furniture, fixtures, and equipment are depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years.
30
Repairs and maintenance are charged to expense as incurred. Costs of significant renewals and improvements are capitalized and depreciated over the shorter
of its remaining estimated useful life or life of the asset. The cost of assets sold or retired and the related accumulated depreciation are removed from the
accounts; any resulting gain or loss is included in other income (expenses).
The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable in accordance with generally accepted accounting principles (“GAAP”). If the carrying amount of the asset, including any intangible assets
associated with that asset, exceeds its estimated undiscounted net cash flow, before interest, the Partnership will recognize an impairment loss equal to the
difference between its carrying amount and its estimated fair value. If impairment is recognized, the reduced carrying amount of the asset will be accounted
for as its new cost. For a depreciable asset, the new cost will be depreciated over the asset’s remaining useful life. Generally, fair values are estimated using
discounted cash flow, replacement cost or market comparison analyses. The process of evaluating for impairment requires estimates as to future events and
conditions, which are subject to varying market and economic factors. Therefore, it is reasonably possible that a change in estimate resulting from judgments
as to future events could occur which would affect the recorded amounts of the property. No impairment losses were recorded for the years ended June 30,
2019 and 2018.
Investment in Real Estate, Net
Rental properties are stated at cost less accumulated depreciation. Depreciation of rental property is provided on the straight-line method based upon estimated
useful lives of 5 to 40 years for buildings and improvements and 5 to 10 years for equipment. Expenditures for repairs and maintenance are charged to
expense as incurred and major improvements are capitalized.
The Company also reviews its rental property assets for impairment. No impairment losses on the investment in real estate have been recorded for the years
ended June 30, 2019 and 2018.
The fair value of the tangible assets of an acquired property, which includes land, building and improvements, is determined by valuing the property as if they
were vacant, and incorporates costs during the lease-up periods considering current market conditions and costs to execute similar leases such lost rental
revenue and tenant improvements. The value of tangible assets is depreciated using straight-line method based upon the assets estimated useful lives.
Investment in Marketable Securities
Marketable securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities
are classified as trading securities with all unrealized gains and losses on the Company's investment portfolio recorded through the consolidated statements of
operations.
Other Investments, Net
Other investments include non-marketable securities (carried at cost, net of any impairments loss) and non-marketable debt instruments. The Company has no
significant influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary
impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the
length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term
prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the
years ended June 30, 2019 and 2018, the Company recorded impairment losses related to other investments of $98,000 and $200,000, respectively. As of June
30, 2019 and 2018, the allowance for impairment losses was $6,367,000 and $6,269,000, 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. As of June 30, 2019 and 2018, the Company does not have any cash equivalents.
Restricted Cash
Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel. It
also includes key money received from Interstate that is restricted for capital improvements.
Other Assets, Net
Other assets include prepaid insurance, accounts receivable, franchise fees, tax refund receivable, and other miscellaneous assets. Franchise fees are stated at
cost and amortized over the life of the agreement (15 years).
31
Accounts receivable from the Hotel and rental property customers are carried at cost less an allowance for doubtful accounts that is based on management’s
assessment of the collectability of accounts receivable. The Company extends unsecured credit to its customers but mitigates the associated credit risk by
performing ongoing credit evaluations of its customers.
Due to Securities Broker
The Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms.
Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced
funds are recorded as a liability.
Obligation for Securities Sold
Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market
value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be
satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are
included in the statement of operations.
Accounts Payable and Other Liabilities
Accounts payable and other liabilities include trade payables, advance customer deposits, accrued wages, accrued real estate taxes, and other liabilities.
Treasury Stock
The Company records the acquisition of treasury stock under the cost method. During the years ended June 30, 2019 and 2018, the Company purchased
33,601 and 25,527 shares of treasury stock, respectively.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between
market participants at the measurement date. Accounting standards for fair value measurement establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three
levels based on the observability of inputs as follows:
Level 1–inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2–inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3–inputs to the valuation methodology are unobservable and significant to the fair value.
Revenue Recognition
On July 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach to all contracts resulting
in no cumulative adjustment to accumulated deficit. The adoption of this standard did not impact the timing of our revenue recognition based on the short-
term, day-to-day nature of our operations. See Note 2 – Revenue.
Advertising Costs
Advertising costs are expensed as incurred and are included in Hotel operating expenses in the consolidated statements of operations. Advertising costs were
$282,000 and $302,000 for the years ended June 30, 2019 and 2018, respectively.
32
Income Taxes
Deferred income taxes are calculated under the liability method. Deferred income tax assets and liabilities are based on differences between the financial
statement and tax basis of assets and liabilities at the current enacted tax rates. Changes in deferred income tax assets and liabilities are included as a
component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to
income tax expense in the period of enactment. Valuation allowances are established for certain deferred tax assets where realization is not likely.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The
Tax Act significantly revises the future ongoing corporate income tax by, among other things, lowering corporate income tax rates. As the Company has a
June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a statutory federal rate of approximately 28% for our fiscal year ending
June 30, 2018, and 21% for subsequent fiscal years. The decrease in corporate tax rate reduced the Company’s deferred tax assets and liabilities to the lower
federal base rate of 21%. As a result, a provisional net credit of $404,000 was included in the income tax expense for the year ended June 30, 2018.
Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to
not meet the “more-likely-than-not” threshold based on the technical merits of the positions.
Earnings Per Share
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares
outstanding. The computation of diluted net income per share is similar to the computation of basic net income 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires the
use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to the recording of
allowance for doubtful accounts and allowance for impairment losses which are based on management’s assessment of the collectability of accounts
receivable and the fair market value of nonmarketable securities, respectively, as of the end of the fiscal year. Actual results may differ from those estimates.
Debt Issuance Costs
Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the
debt liability and are amortized over the life of the debt. Loan amortization costs are included in interest expense in the consolidated statement of operations.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which
amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities
to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from
Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the
implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a
specified good or service before it is transferred to the customers. The new standard permits two methods of adoption: retrospectively to each prior reporting
period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial
application (the modified retrospective method). We applied the modified retrospective transition method to all contracts upon the adoption of ASU 2014-09
effective July 1, 2018. We provided the additional required disclosures, but the cumulative adjustment from our comparative periods was zero in our
consolidated financial statements. See Note 2 – Revenue.
33
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-18, Restricted Cash. ASU 2016-
18 requires companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. Additionally, ASU 2016-18 requires a disclosure of a reconciliation between the statement
of financial position and the statement of cash flows when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and
restricted cash equivalents. ASU 2016-18 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be
applied retrospectively to all periods presented. The Company adopted ASU 2016-18 effective July 1, 2018. The adoption of ASU 2016-18 impacted the
presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which supersedes existing guidance on accounting for leases in
Leases (Topic 840) and generally requires all leases, including operating leases, to be recognized in the statement of financial position as right-of-use assets
and lease liabilities by lessees. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting
periods beginning after December 15, 2018; early adoption is permitted. We adopted ASU 2016-02 on July 1, 2019. The Company is currently reviewing the
effect of ASU No. 2016-02.
On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology,
which will result in the timelier recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2020. The Company is currently reviewing
the effect of ASU No. 2016-13.
NOTE 2 - REVENUE
Our revenue from real estate is primarily rental income from residential and commercial property leases which is recorded when due from residents and is
recognized monthly as earned. The following table present our Hotel revenue disaggregated by revenue streams.
For the year ended June 30,
Hotel revenues:
Hotel rooms
Food and beverage
Garage
Other operating departments
Total Hotel revenue
Performance obligations
2019
2018
$
$
51,243,000
5,353,000
2,875,000
410,000
59,881,000
$
$
46,475,000
7,222,000
3,011,000
391,000
57,099,000
We identified the following performance obligations for which revenue is recognized as the respective performance obligations are satisfied, which results in
recognizing the amount we expect to be entitled to for providing the goods or services:
•
•
•
•
Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally
when the room stay occurs.
Noncancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and
satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate
performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance
obligations and are satisfied as set forth above.
Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations),
food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have
been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the
transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.
We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our
business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if
the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the
transaction price at the time the hotel stay occurs or services are rendered.
34
Contract assets and liabilities
We do not have any material contract assets as of June 30, 2019 and 2018, other than trade and other receivables, net on our consolidated balance sheets. Our
receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts
that will not be collected.
We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable
and other liabilities on our consolidated balance sheets. Contract liabilities increased to $1,215,000 as of June 30, 2019 from $571,000 as of June 30, 2018.
The increase for the fiscal year ended June 30, 2019 was primarily driven by deposits received from upcoming groups, offset by $563,000 revenue recognized
that was included in the advanced deposits balance as of June 30, 2018.
Contract costs
We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as
incurred as our contracts with customers are less than one year.
NOTE 3 - JUSTICE INVESTORS
Justice Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”), was formed in 1967 to acquire real property in San
Francisco, California, for the development and lease of the Hotel and related facilities. The Partnership has one general partner, Portsmouth Square, Inc., a
California corporation (“Portsmouth”) and approximately 23 voting limited partners, including Portsmouth.
Management believes that the revenues and cash flows expected to be generated from the operations of the Hotel, garage and 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 appreciated value in the
Hotel property in excess of the net book value to support additional borrowings, if necessary.
NOTE 4 – INVESTMENT IN HOTEL, NET
Investment in Hotel consisted of the following as of:
June 30, 2019
Land
Furniture and equipment
Building and improvements
June 30, 2018
Land
Furniture and equipment
Building and improvements
Cost
2,738,000
31,106,000
63,879,000
97,723,000
Cost
2,738,000
29,350,000
64,336,000
96,424,000
$
$
$
$
Accumulated
Depreciation
Net Book
Value
$
-
(26,877,000)
(31,010,000)
(57,887,000) $
2,738,000
4,229,000
32,869,000
39,836,000
Accumulated
Depreciation
Net Book
Value
$
-
(25,876,000)
(29,587,000)
(55,463,000) $
2,738,000
3,474,000
34,749,000
40,961,000
$
$
$
$
35
NOTE 5 - INVESTMENT IN REAL ESTATE, NET
At June 30, 2019, the Company's investment in real estate consisted of twenty properties located throughout the United States. These properties include
sixteen apartment complexes, three single-family houses as strategic investments, and one commercial real estate property. The Company also owns
unimproved land located in Maui, Hawaii.
Investment in real estate included the following:
As of June 30,
Land
Buildings, improvements and equipment
Accumulated depreciation
NOTE 6 - INVESTMENT IN MARKETABLE SECURITIES
2019
25,033,000
68,369,000
(41,629,000)
51,773,000
$
$
2018
25,033,000
67,536,000
(39,200,000)
53,369,000
$
$
The Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically invested in corporate bonds
and income producing securities, which may include interests in real estate-based companies and REITs, where financial benefit could insure to its
shareholders through income and/or capital gain.
At June 30, 2019 and 2018, 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:
Investment
As of June 30, 2019
Corporate Equities
As of June 30, 2018
Corporate Equities
Cost
Gross
Unrealized Gain
Gross
Unrealized Loss
Net
Unrealized Loss
Fair
Value
$
$
19,204,000
22,388,000
$
$
1,753,000
2,450,000
$
$
(11,261,000) $
(9,508,000) $
9,696,000
(10,997,000) $
(8,547,000) $
13,841,000
As of June 30, 2019 and 2018, approximately 7% of the investment marketable securities balance above is comprised of the common stock of Comstock
Mining Inc (“Comstock”).
As of June 30, 2019 and 2018, the Company had $11,088,000 and $10,819,000, respectively, of unrealized losses related to securities held for over one year;
of which $10,900,000 and $10,646,000 are related to its investment in Comstock, respectively.
Net loss on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the two
components for the years ended June 30, 2019 and 2018, respectively.
For the year ended June 30,
Realized loss on marketable securities related to Comstock
Realized (loss) gain on marketable securities
Unrealized loss on marketable securities related to Comstock
Unrealized (loss) gain on marketable securities
Net loss on marketable securities
NOTE 7 – OTHER INVESTMENTS, NET
$
2019
2018
- $ (6,007,000)
632,000
(2,337,000)
5,935,000
$ (1,733,000) $ (1,777,000)
(806,000)
(254,000)
(673,000)
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. 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.
36
Other investments, net consist of the following:
Private equity hedge fund, at cost
Other investments
Type
NOTE 8 - FAIR VALUE MEASUREMENTS
June 30, 2019
$
376,000 $
236,000
612,000 $
$
June 30, 2018
554,000
259,000
813,000
The carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis 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 notes payable). The assets measured at fair value on a recurring basis are as follows:
As of June 30, 2019
Assets:
Investment in marketable securities:
REITs and real estate companies
Consumer cyclical
Corporate bonds
Financial services
Energy
Other
As of June 30, 2018
Assets:
Investment in marketable securities:
REITs and real estate companies
Corporate bonds
Technology
Healthcare
Communications
Other
Level 1
3,069,000
1,448,000
1,420,000
951,000
950,000
1,858,000
9,696,000
Level 1
4,300,000
2,282,000
1,813,000
1,777,000
1,071,000
2,598,000
13,841,000
$
$
$
$
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.
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 or adjusted to record the fair value of new
instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments). The following table shows the fair value hierarchy for
these assets measured at fair value on a non-recurring basis as follows:
Assets
Other non-marketable investments
Assets
Other non-marketable investments
Level 3
June 30, 2019
Net loss for the year
ended June 30, 2019
612,000 $
612,000 $
(98,000)
Level 3
June 30, 2018
Net loss for the year
ended June 30, 2018
813,000 $
813,000 $
(242,000)
$
$
37
For fiscal years ended June 30, 2019 and 2018, we received distribution from other non-marketable investments of $103,000 and $131,000, respectively.
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. When determining the fair
value of these investments on a non-recurring basis, the Company uses valuation techniques such as the market approach and the unobservable inputs include
factors such as conversion ratios and the stock price of the underlying convertible instruments. The Company reviews several factors to determine whether a
loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to
which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of
time sufficient to allow for any anticipated recovery in fair value.
NOTE 9 – OTHER ASSETS, NET
Other assets consist of the following as of June 30:
Accounts receivable, net
Prepaid expenses
Miscellaneous assets, net
Tax Refund Receivable
Total other assets
2019
852,000
747,000
763,000
-
2,362,000
$
$
2018
1,843,000
490,000
1,159,000
1,693,000
5,185,000
$
$
As mentioned in Note 6 – Investment in Marketable Securities, the Company had realized loss of $6,007,000 in fiscal year ended June 30, 2018 related to the
sale of common stock of Comstock. During fiscal year 2019, the Company filed a carry back claim to carry back this loss to fiscal year ended June 30, 2015.
The carry back claim generated a federal income tax refund of approximately $1,860,000 which is included in other assets in the consolidated balance sheet as
of June 30, 2018. The $1,860,000 refund was received in March 2019.
NOTE 10 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
Included in the balance of the related party note payable at June 30, 2019 and 2018 is the obligation to Hilton (Franchisor) in the form of a self-exhausting,
interest free development incentive note which will be reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a
Franchisee with Hilton. As of June 30, 2019 and 2018, the balance of the note was $3,325,000 and $3,642,000, respectively.
On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the
Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover
date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for
Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions
described in a separate key money agreement. The key money contribution is a self-exhausting, interest free note and shall be amortized in equal monthly
amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. The $2,000,000 is included in restricted cash balances
in the consolidated balance sheets as of June 30, 2019 and 2018. As of June 30, 2019 and 2018, unamortized portion of the key money was $1,896,000 and
$2,000,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets.
As of June 30, 2019, the Company had capital lease obligations outstanding of $1,486,000. These capital leases expire in various years through 2023 at rates
ranging from 5.77% to 6.25% per annum. Minimum future lease payments for assets under capital leases as of June 30, 2019 are as follows:
38
For the year ending June 30,
2020
2021
2022
2023
$
Total minimum lease payments
Less interest on capital lease
Present value of future minimum lease payments $
493,000
492,000
482,000
182,000
1,649,000
(163,000)
1,486,000
In July 2018, the Company obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). The RLOC carries a variable interest
rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest are due in July 2019. On July 31, 2018,
$2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Woodland Village. In July 2019, the Company obtained a modification from
CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. As of June 30, 2019, outstanding balance
of the RLOC was $2,985,000.
Future minimum principal payments for all related party and other financing transactions are as follows:
For the year ending June 30,
2020
2021
2022
2023
2024
Thereafter
$
$
4,005,000
1,006,000
1,022,000
744,000
567,000
2,388,000
9,732,000
NOTE 11 - MORTGAGE NOTES PAYABLE
On December 18, 2013: (i) Justice Operating Company, LLC, a Delaware limited liability company (“Operating”), entered into a loan agreement (“Mortgage
Loan Agreement”) with Bank of America (“Mortgage Lender”); and (ii) Justice Mezzanine Company, a Delaware limited liability company (“Mezzanine”),
entered into a mezzanine loan agreement (“Mezzanine Loan Agreement” and, together with the Mortgage Loan Agreement, the “Loan Agreements”) with
ISBI San Francisco Mezz Lender LLC (“Mezzanine Lender” and, together with Mortgage Lender, the “Lenders”). The Partnership is the sole member of
Mezzanine, and Mezzanine is the sole member of Operating.
The Loan Agreements provide for a $97,000,000 Mortgage Loan and a $20,000,000 Mezzanine Loan. The proceeds of the Loan Agreements were used to
fund the redemption of limited partnership interests and the pay-off of the prior mortgage.
The Mortgage Loan is secured by the Partnership’s principal asset, the Hilton San Francisco-Financial District (the “Property”). The Mortgage Loan bears an
interest rate of 5.275% per annum and matures in January 2024. The term of the loan is 10 years with interest only due in the first three years and principal
and interest on the remaining seven years of the loan based on a thirty-year amortization schedule. The Mortgage Loan also requires payments for impounds
related to property tax, insurance and capital improvement reserves. As additional security for the Mortgage Loan, there is a limited guaranty (“Mortgage
Guaranty”) executed by the Company in favor of Mortgage Lender.
The Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The Mezzanine Loan
bears interest at 9.75% per annum and matures on January 1, 2024. Interest only, payments are due monthly. As additional security for the Mezzanine Loan,
there is a limited guaranty executed by the Company in favor of Mezzanine Lender (the “Mezzanine Guaranty” and, together with the Mortgage Guaranty, the
“Guaranties”). The Guaranties are limited to what are commonly referred to as “bad boy” acts, including: (i) fraud or intentional misrepresentations; (ii) gross
negligence or willful misconduct; (iii) misapplication or misappropriation of rents, security deposits, insurance or condemnation proceeds; and (iv) failure to
pay taxes or insurance. The Guaranties are full recourse guaranties under identified circumstances, including failure to maintain “single purpose” status which
is a factor in a consolidation of Operating or Mezzanine in a bankruptcy of another person, transfer or encumbrance of the Property in violation of the
applicable loan documents, Operating or Mezzanine incurring debts that are not permitted, and the Property becoming subject to a bankruptcy proceeding.
Pursuant to the Guaranties, the Partnership is required to maintain a certain minimum net worth and liquidity. As of June 30, 2019 and 2018, the Partnership is
in compliance with both requirements.
39
Each of the Loan Agreements contains customary representations and warranties, events of default, reporting requirements, affirmative covenants and
negative covenants, which impose restrictions on, among other things, organizational changes of the respective borrower, operations of the Property,
agreements with affiliates and third parties. Each of the Loan Agreements also provides for mandatory prepayments under certain circumstances (including
casualty or condemnation events) and voluntary prepayments, subject to satisfaction of prescribed conditions set forth in the Loan Agreements.
In April 2016, the Company entered into an interest rate agreement on its $923,000 mortgage note payable on its commercial property located in Los Angeles,
California in order to settle the variable rate as of March 31, 2016 of 4.22% into a fixed rate of 3.99%. The swap agreement matures in January 2021. A swap
is a contractual agreement to exchange interest rate payments. As of June 30, 2019, the fair market value of the swap agreement is immaterial.
In June 2016, The Company refinanced its $1,929,000 mortgage note payable on its 12-unit apartment complex located in Los Angeles, California and
obtained a new mortgage in the amount of $2,300,000. The interest rate on the new mortgage is 3.59% and matures in June 2026.
On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with
Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off with no prepayment penalty. Interest rate on the new mezzanine
loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.
In August 2018, $1,005,000 was drawn from the Company’s RLOC with CIBC to pay off a mortgage note payable on its single-family house located in Los
Angeles, California. In September 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the
new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. $995,000 received
as a result of the refinance was used to pay down the RLOC.
40
Each mortgage notes payable is secured by real estate or the Hotel. As of June 30, 2019 and 2018, the mortgage notes payables are summarized as follows:
Property
SF Hotel
SF Hotel
Florence
Las Colinas
Morris County
Morris County
St. Louis
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
As of June 30, 2019
Number
of Units
Note
Origination Date
Note
Maturity Date
Mortgage Balance
Interest Rate
544 rooms December
544 rooms December
2013 January
2013 January
Mortgage notes payable - Hotel
Debt issuance costs
Total mortgage notes payable - Hotel
157 March
358 November
151 July
151 June
264 May
4 September
2 September
1 August
31 November
30 August
14 April
12 June
9 April
9 April
8 July
7 August
4 August
1 September
1 September
Office April
2015 April
2012 December
2012 August
2014 August
2013 May
2012 September
2012 September
2012 September
2010 December
2007 September
2011 March
2016 June
2011 May
2011 March
2013 July
2012 September
2012 September
2012 September
2018 October
2016 January
Mortgage notes payable - real estate
Debt issuance costs
Total mortgage notes payable - real estate
41
2024 $
2024
$
2025 $
2022
2022
2022
2023
2042
2042
2042
2020
2022
2021
2026
2021
2021
2043
2042
2042
2042
2048
2021
$
93,746,000
20,000,000
113,746,000
(659,000)
113,087,000
3,222,000
16,974,000
8,737,000
2,512,000
5,365,000
343,000
347,000
373,000
4,927,000
5,765,000
1,632,000
2,172,000
1,303,000
1,112,000
440,000
846,000
579,000
399,000
990,000
806,000
58,844,000
(273,000)
58,571,000
5.28%
9.75%
3.87%
3.73%
3.51%
4.51%
4.05%
3.75%
3.75%
3.75%
4.85%
5.97%
5.89%
3.59%
5.60%
5.89%
3.75%
3.75%
3.75%
3.75%
4.75%
4.91%
As of June 30, 2018
Number
of Units
Note
Origination Date
Note
Maturity Date
Mortgage Balance
Interest Rate
Property
SF Hotel
SF Hotel
Florence
Las Colinas
Morris County
Morris County
St. Louis
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
544 rooms December
544 rooms December
2013 January
2013 January
Mortgage notes payable - Hotel
Debt issuance costs
Total mortgage notes payable - Hotel
157 March
358 November
151 July
151 June
264 May
4 September
2 September
1 August
31 November
30 August
27 November
14 April
12 June
9 April
9 April
8 July
7 August
4 August
1 September
1 August
Office April
2015 April
2012 December
2012 August
2014 August
2013 May
2012 September
2012 September
2012 September
2010 December
2007 September
2010 December
2011 March
2016 June
2011 May
2011 March
2013 July
2012 September
2012 September
2012 September
2016 August
2016 January
Mortgage notes payable - real estate
Debt issuance costs
Total mortgage notes payable - real estate
Future minimum payments for all mortgage notes payable are as follows:
For the year ending June 30,
2020
2021
2022
2023
2024
Thereafter
42
5.28%
9.75%
3.87%
3.73%
3.51%
4.51%
4.05%
3.75%
3.75%
3.75%
4.85%
5.97%
4.85%
5.89%
3.59%
5.60%
5.89%
3.75%
3.75%
3.75%
3.75%
5.75%
4.55%
2024 $
2024
$
2025 $
2022
2022
2022
2023
2042
2042
2042
2020
2022
2020
2021
2026
2021
2021
2043
2042
2042
2042
2018
2021
$
$
$
95,018,000
20,000,000
115,018,000
(646,000)
114,372,000
3,291,000
17,404,000
9,068,000
2,563,000
5,491,000
352,000
356,000
383,000
5,048,000
5,907,000
2,843,000
1,665,000
2,218,000
1,331,000
1,135,000
451,000
868,000
594,000
409,000
1,000,000
842,000
63,219,000
(346,000)
62,873,000
3,054,000
12,483,000
3,095,000
37,812,000
107,656,000
8,489,000
172,589,000
NOTE 12 – MANAGEMENT AGREEMENTS
On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the
Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover
date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for
Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions
described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period
commencing on the second (2nd) anniversary of the takeover date. The $2,000,000 is included in restricted cash balances in the consolidated balance sheets as
of June 30, 2019 and 2018. As of June 30, 2019 and 2018, unamortized portion of the key money was $1,896,000 and $2,000,000, respectively, and are
included in related party and other notes payable in the consolidated balance sheets. During the years ended June 30, 2019 and 2018, Interstate management
fees were $1,206,000 and $957,000, respectively, and are included in Hotel operating expenses in the consolidated statements of operations.
NOTE 13 – CONCENTRATION OF CREDIT RISK
As of June 30, 2019 and 2018, all accounts receivables are related to Hotel customers. The Hotel had one account that accounted for 32%, or $272,000 of
accounts receivable at June 30, 2019, and two customers that accounted for 32%, or $572,000 of accounts receivable at June 30, 2018.
The Partnership maintains its cash and cash equivalents and restricted cash with various financial institutions that are monitored regularly for credit quality. At
times, such cash and cash equivalents holdings may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) or other federally insured limits.
NOTE 14 – INCOME TAXES
The provision for the Company’s income tax expense is comprised of the following:
For the years ended June 30,
Federal
Current tax (expense) benefit
Deferred tax benefit (expense)
State
Current tax expense
Deferred tax expense
2019
2018
$
(1,387,000) $
2,563,000
1,176,000
1,455,000
(3,567,000)
(2,112,000)
(25,000)
(850,000)
(875,000)
(227,000)
(717,000)
(944,000)
Income Tax Benefit (expense)
$
301,000 $
(3,056,000)
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,
Statutory federal tax rate
State income taxes, net of federal tax benefit
Dividend received deduction
Valuation allowance
Basis difference in investments
Carryback tax payable
Other
2019
2018
$
$
(457,000) $
(972,000)
16,000
2,158,000
815,000
(1,140,000)
(119,000)
301,000
$
(2,218,000)
(623,000)
24,000
(330,000)
-
-
91,000
(3,056,000)
43
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The
Tax Act significantly revises the future ongoing corporate income tax by, among other things, lowering corporate income tax rates. As the Company has a
June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a statutory federal rate of approximately 28% for our fiscal year ending
June 30, 2018, and 21% for subsequent fiscal years. The decrease in corporate tax rate reduced the Company’s deferred tax assets and liabilities to the lower
federal base rate of 21%. As a result, a provisional net credit of $404,000 was included in the income tax expense for the year ended June 30, 2018.
The components of the deferred tax asset and liabilities are as follows:
June 30, 2019
June 30, 2018
Deferred tax assets:
Net operating loss carryforwards
Capital loss carryforwards
Investment impairment reserve
Accruals and reserves
Interest expense
Tax credits
Unrealized loss on marketable securities
Other
Valuation allowance
Deferred tax liabilities:
Equity earnings
Deferred gains on real estate sale and depreciation
Unrealized gains on marketable securities
State taxes
$
6,810,000 $
1,283,000
1,295,000
1,095,000
162,000
619,000
547,000
231,000
(524,000)
11,518,000
(3,188,000)
(6,844,000)
-
(18,000)
(10,050,000)
Net deferred tax asset (liability)
$
1,468,000 $
7,413,000
1,132,000
1,276,000
766,000
-
733,000
-
190,000
(2,610,000)
8,900,000
(2,564,000)
(5,638,000)
(765,000)
(178,000)
(9,145,000)
(245,000)
Management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of June 30, 2019,
because of tax planning to generate taxable income in the future, management has determined that there is sufficient positive evidence to conclude that a
significant portion of its deferred tax assets are realizable. As a result, the valuation allowance decreased by $2,086,000 and $778,000, respectively, during the
fiscal years ended June 30, 2019 and 2018.
As of June 30, 2019, the Company had estimated net operating losses (NOLs) of $25,447,000 and $16,583,000 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 2037.
InterGroup
Santa Fe
Portsmouth
Federal
State
$
$
- $
9,735,000
15,712,000
25,447,000 $
-
3,913,000
12,670,000
16,583,000
Utilization of the net operating loss carryover may be subject a substantial annual limitation if it should be determined that there has been a change in the
ownership of more than 50 percent of the value of the Company's stock, pursuant to Section 382 of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating loss carryovers before utilization.
Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to
not meet the “more-likely-than-not” threshold based on the technical merits of the positions. As of June 30, 2019, it has been determined there are no
uncertain tax positions likely to impact the Company.
The Partnership files tax returns as prescribed by the tax laws of the jurisdictions in which it operates and is subject to examination by federal, state and local
jurisdictions, were applicable.
As of June 30, 2019, tax years beginning in fiscal 2013 remain open to examination by the major tax jurisdictions and are subject to the statute of limitations.
44
NOTE 15 – SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the Hotel (“Hotel Operations”), the operation of its multi-family residential properties
(“Real Estate Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These three operating
segments, as presented in the financial statements, reflect how management internally reviews each segment’s performance. Management also makes
operational and strategic decisions based on this information.
Information below represents reported segments for the years ended June 30, 2019 and 2018. Segment income from Hotel operations consists of the operation
of the Hotel and operation of the garage. Segment income from real estate operations consists of the operation of the rental properties. Loss from investments
consists of net investment loss, dividend and interest income and investment related expenses.
As of and for the year
ended June 30, 2019
Revenues
Segment operating expenses
Segment income (loss) from operations
Interest expense - mortgage
Loss on disposal of assets
Depreciation and amortization expense
Loss from investments
Income tax benefit
Net income (loss)
Total assets
As of and for the year
ended June 30, 2018
Revenues
Segment operating expenses
Segment income (loss) from operations
Interest expense - mortgage
Recovery of legal settlement costs
Depreciation and amortization expense
Loss from investments
Income tax expense
Net income (loss)
Total assets
Hotel
Operations
Real Estate
Operations
Investment
Transactions
$
$
$
$
$
$
59,881,000
(44,466,000)
15,415,000
(7,234,000)
(398,000)
(2,506,000)
-
-
5,277,000
62,148,000
Hotel
Operations
57,099,000
(40,103,000)
16,996,000
(7,237,000)
5,775,000
(2,707,000)
-
-
12,827,000
58,019,000
$
$
$
$
$
$
14,872,000
(7,810,000)
7,062,000
(2,554,000)
-
(2,429,000)
-
-
2,079,000
51,773,000
Real Estate
Operations
14,480,000
(7,579,000)
6,901,000
(2,530,000)
(2,347,000)
-
-
2,024,000
53,369,000
$
$
$
$
$
$
$
-
-
-
-
-
-
(2,497,000)
-
(2,497,000) $
$
10,308,000
Investment
Transactions
$
-
-
-
-
-
(2,929,000)
-
(2,929,000) $
$
14,654,000
Other
$
-
(2,346,000)
(2,346,000)
-
-
-
-
301,000
(2,045,000) $
$
6,650,000
$
Other
-
(3,053,000)
(3,053,000)
-
-
-
(3,056,000)
(6,109,000) $
$
5,638,000
Total
74,753,000
(54,622,000)
20,131,000
(9,788,000)
(398,000)
(4,935,000)
(2,497,000)
301,000
2,814,000
130,879,000
Total
71,579,000
(50,735,000)
20,844,000
(9,767,000)
5,775,000
(5,054,000)
(2,929,000)
(3,056,000)
5,813,000
131,680,000
NOTE 16 – STOCK-BASED COMPENSATION PLANS
The Company follows the Statement of Financial Accounting Standards 123 (Revised), "Share-Based Payments" ("SFAS No. 123R"), which was primarily
codified into ASC Topic 718 “Compensation – Stock Compensation”, which addresses accounting for equity-based compensation arrangements, including
employee stock options and restricted stock units.
The Company currently has one equity compensation plan, which is the Intergroup 2010 Omnibus Employee Incentive Plan. The InterGroup Corporation
2008 Restricted Stock Unit Plan (the “2008 RSU Plan”) terminated on its expiration date of December 8th, 2018 as prescribed in the plan document. Both
plans have been approved by the Company’s stockholders and are described below. Any outstanding options issued under the Key Employee Plan or the Non-
Employee Director Plan remain effective in accordance with their terms.
45
The InterGroup Corporation 2008 Restricted Stock Unit Plan
On December 3, 2008, the Board of Directors adopted, subject to shareholder approval, an equity compensation plan for its officers, directors and key
employees entitled, The InterGroup Corporation 2008 Restricted Stock Unit Plan (the “2008 RSU Plan”). The 2008 RSU Plan was approved and ratified by
the shareholders on February 18, 2009.
The 2008 RSU Plan authorizes the Company to issue restricted stock units (“RSUs”) as equity compensation to officers, directors and key employees of the
Company on such terms and conditions established by the Compensation Committee of the Company. RSUs are not actual shares of the Company’s common
stock, but rather promises to deliver common stock in the future, subject to certain vesting requirements and other restrictions as may be determined by the
Committee. Holders of RSUs have no voting rights with respect to the underlying shares of common stock and holders are not entitled to receive any
dividends until the RSUs vest and the shares are delivered. No awards of RSUs shall vest until at least six months after shareholder approval of the Plan.
Subject to certain adjustments upon changes in capitalization, a maximum of 200,000 shares of the common stock are available for issuance to participants
under the 2008 RSU Plan. The 2008 RSU Plan will terminate ten (10) years from December 3, 2008, unless terminated sooner by the Board of Directors.
After the 2008 RSU Plan is terminated, no awards may be granted but awards previously granted shall remain outstanding in accordance with the Plan and
their applicable terms and conditions.
The shares of common stock to be delivered upon the vesting of an award of RSUs have been registered under the Securities Act, pursuant to a registration
statement filed on Form S-8 by the Company on June 16, 2010. The grant of RSUs is personal to the recipient and is not transferable. Once received, shares of
common stock issuable upon the vesting of the RSUs are freely transferable subject to any requirements of Section 16(b) of the Exchange Act. Under the 2008
RSU Plan, the Compensation Committee also has the power and authority to establish and implement an exchange program that would permit the Company to
offer holders of awards issued under prior shareholder approved compensation plans to exchange certain options for new RSUs on terms and conditions to be
set by the Committee. The exchange program is designed to increase the retention and motivational value of awards granted under prior plans. In addition, by
exchanging options for RSUs, the Company will reduce the number of shares of common stock subject to equity awards, thereby reducing potential dilution to
stockholders in the event of significant increases in the value of its common stock.
As of June 30, 2019, there were no RSUs outstanding.
Intergroup Corporation 2010 Omnibus Employee Incentive Plan
On February 24, 2010, the shareholders of the Company approved The Intergroup Corporation 2010 Omnibus Employee Incentive Plan (the “2010 Incentive
Plan”), which was formally adopted by the Board of Directors following the annual meeting of shareholders. The Company believes that such awards better
align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the
Company’s stock at the date of grant; those option awards generally vest based on 5 years of continuous service. Certain option and share awards provide for
accelerated vesting if there is a change in control, as defined in the 2010 Incentive Plan. The 2010 Incentive plan as modified in December 2013, authorizes a
total of up to 400,000 shares of common stock to be issued as equity compensation to officers and employees of the Company in an amount and in a manner to
be determined by the Compensation Committee in accordance with the terms of the 2010 Incentive Plan. The 2010 Incentive Plan authorizes the awards of
several types of equity compensation including stock options, stock appreciation rights, performance awards and other stock-based compensation. The 2010
Incentive Plan will expire on February 23, 2020, if not terminated sooner by the Board of Directors upon recommendation of the Compensation Committee.
Any awards issued under the 2010 Incentive Plan will expire under the terms of the grant agreement.
The shares of common stock to be issued under the 2010 Incentive Plan have been registered under the Securities Act, pursuant to a registration statement
filed on Form S-8 by the Company on June 16, 2010. Once received, shares of common stock issued under the Plan will be freely transferable subject to any
requirements of Section 16 (b) of the Exchange Act.
On March 16, 2010, the Compensation Committee authorized the grant of 100,000 stock options to the Company’s Chairman, President and Chief Executive,
John V. Winfield to purchase up to 100,000 shares of the Company’s common stock pursuant to the 2010 Incentive Plan. The exercise price of the options is
$10.30, which is 100% of the fair market value of the Company’s Common Stock as determined by reference to the closing price of the Company’s Common
Stock as reported on the NASDAQ Capital Market on March 16, 2010, the date of grant. The options expire ten years from the date of grant, unless terminated
earlier in accordance with the terms of the 2010 Incentive Plan. The options shall be subject to both time and market based vesting requirements, each of
which must be satisfied before options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest over a period of
five years, with 20,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the market vesting requirements, the options vest in
increments of 20,000 shares upon each increase of $2.00 or more in the market price of the Company’s common stock above the exercise price ($10.30) of the
options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading days during any one quarter. As of
June 30, 2019, all the market vesting requirements have been met.
46
In February 2012, the Compensation Committee awarded 90,000 stock options to the Company’s Chairman, President and Chief Executive, John V. Winfield
to purchase up to 90,000 shares of common stock. The per share exercise price of the options is $19.77 which is the fair value of the Company’s Common
Stock as reported on NASDAQ on February 28, 2012. The options expire ten years from the date of grant. The options are subject to both time and market
based vesting requirements, each of which must be satisfied before the options are fully vested and eligible to be exercised. Pursuant to the time vesting
requirements, the options vest over a period of five years, with 18,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the
market vesting requirements, the options vest in increments of 18,000 shares upon each increase of $2.00 or more in the market price of the Company’s
common stock above the exercise price ($19.77) of the options. To satisfy this requirement, the common stock must trade at that increased level for a period
of at least ten trading days during any one quarter. As of June 30, 2019, all of these options have met the market vesting requirements.
On December 26, 2013, the Compensation Committee authorized, subject to shareholder approval, a grant of non-qualified and incentive stock options for an
aggregate of 160,000 shares (the “Option Grant”) to the Company’s President and Chief Executive Officer, John V. Winfield. The stock option grant was
approved by shareholders on February 19, 2014. The grant of stock options was made pursuant to, and consistent with, the 2010 Incentive Plan, as proposed to
be amended. The non-qualified stock options are for 133,195 shares and have a term of ten years, expiring on December 26, 2023, with an exercise price of
$18.65 per share. The incentive stock options are for 26,805 shares and have a term of five years, expiring on December 26, 2018, with an exercise price of
$20.52 per share. In accordance with the terms of the 2010 Incentive Plan, the exercise prices were based on 100% and 110%, respectively, of the fair market
value of the Company’s common stock as determined by reference to the closing price of the Company’s common stock as reported on the NASDAQ Capital
Market on the date of grant. The stock options are subject to time vesting requirements, with 20% of the options vesting annually commencing on the first
anniversary of the grant date. In December 2018, Mr. Winfield exercised the 26,805 vested incentive stock options by surrendering 17,439 shares of the
Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation
expense was recorded related to the issuance.
In March 2017, the Compensation Committee awarded 18,000 stock options to the Company’s Vice President of Real Estate, David C. Gonzalez, to purchase
up to 18,000 shares of common stock. The per share exercise price of the options is $27.30 which is the fair value of the Company’s Common Stock as
reported on NASDAQ on March 2, 2017. The options expire ten years from the date of grant. Pursuant to the time vesting requirements, the options vest over
a period of five years, with 3,600 options vesting upon each one-year anniversary of the date of grant.
During the years ended June 30, 2019 and 2018, the Company recorded stock option compensation expense of $76,000 and $184,000, respectively, related to
stock options previously issued. As of June 30, 2019, there was an estimated total of $44,000 unamortized compensation related to stock options which is
expected to be recognized over the weighted-average of 2.67 years.
Option-pricing models require the input of various subjective assumptions, including the option’s expected life, estimated forfeiture rates and the price
volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history. The Company has selected to
use the simplified method for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with
the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any
dividends in the future.
47
The following table summarizes the stock options activity from July 1, 2017 through June 30, 2019:
Outstanding at
Granted
Exercised
Forfeited
Exchanged
Outstanding at
Exercisable at
Vested and Expected to vest at
Outstanding at
Granted
Exercised
Forfeited
Exchanged
Outstanding at
Exercisable at
Vested and Expected to vest at
Number of
Shares
Weighted Average Weighted Average
Exercise Price
Remaining Life
Aggregate
Intrinsic Value
July 1, 2017
June 30, 2018
June 30, 2018
June 30, 2018
July 1, 2018
June 30, 2019
June 30, 2019
June 30, 2019
368,000
-
-
-
-
368,000
318,000
368,000
368,000
-
(26,805)
-
-
341,195
330,395
341,195
$
$
$
$
$
$
$
$
17.21
-
-
-
-
17.21
16.47
17.21
17.21
-
20.52
-
-
16.95
16.62
16.95
5.17 years
$
3,046,000
4.17 years
3.79 years
4.17 years
4.17 years
3.07 years
2.92 years
3.07 years
$
$
$
$
$
$
$
3,505,000
3,257,000
3,505,000
3,505,000
4,680,000
4,643,000
4,680,000
NOTE 17 – RELATED PARTY TRANSACTIONS
In connection with the redemption of limited partnership interests of Justice, Justice Operating Company, LLC agreed to pay a total of $1,550,000 in fees to
certain officers and directors of the Company for services rendered in connection with the redemption of partnership interests, refinancing of Justice’s
properties and reorganization of Justice. This agreement was superseded by a letter dated December 11, 2013 from Justice, in which Justice assumed the
payment obligations of Justice Operating Company, LLC. As of June 30, 2018, $200,000 of these fees remained payable and are paid off as of June 30,
2019.
As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), 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 the Portsmouth and Santa Fe and oversees the investment activity of those companies. Depending on certain market conditions and
various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such
investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and
the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on
behalf of the Company.
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Franchise Agreements
The Partnership entered into a Franchise License Agreement (the “License Agreement”) with the HLT Existing Franchise Holding LLC (“Hilton”) on
November 24, 2004. The term of the License agreement was for an initial period of 15 years commencing on the date the Hotel began operating as a Hilton
hotel, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, Operating and Hilton entered
into an amended franchise agreement which amongst other things extended the License Agreement through 2030, and also provided the Partnership certain
key money cash incentives to be earned through 2030.
48
Since the opening of the Hotel in January 2006, the Partnership has incurred monthly royalties, program fees and information technology recapture charges
equal to a percentage of the Hotel’s gross room revenue. Fees for such services during fiscal year 2019 and 2018 totaled approximately $4.1 million and $3.8
million, respectively.
Hotel Employees
Effective February 3, 2017, the Partnership had no employees. On February 3, 2017, Interstate assumed all labor union agreements and retained employees of
their choice to continue providing services to the Hotel. As of June 30, 2019, approximately 85% of those employees were represented by one of four labor
unions, and their terms of employment were determined under a collective bargaining agreement (“CBA”) to which the Partnership was a party. During the
fiscal year ended June 30, 2019, the Partnership renewed the CBA for Local 39 (Stationary Engineers), and Local 665 (Parking Employees). CBA for Local 2
(Hotel and Restaurant Employees) expired on August 13, 2018 and was renewed in August 2019. CBA for Local 856 (International Brotherhood of
Teamsters) will expire on December 31, 2022.
Negotiation of collective bargaining agreements, which includes not just terms and conditions of employment, but scope and coverage of employees, is a
regular and expected course of business operations for the Partnership and Interstate. The Partnership expects and anticipates that the terms of conditions of
CBAs will have an impact on wage and benefit costs, operating expenses, and certain hotel operations during the life of each CBA, and incorporates these
principles into its operating and budgetary practices.
Legal Matters
In April 2014, the Partnership commenced an arbitration action against Glaser Weil Fink Howard Avchen & Shapiro, LLP (formerly known as Glaser Weil
Fink Jacobs Howard Avchen & Shapiro, LLP), Brett J. Cohen, Gary N. Jacobs, Janet S. McCloud, Paul B. Salvaty, and Joseph K. Fletcher III (collectively,
the “Respondents”) in connection with the redemption transaction. The arbitration alleged legal malpractice against the Respondents and also sought
declaratory relief regarding provisions of the option agreement in the redemption transaction and regarding the engagement letter with Respondents. Prior to
arbitration proceedings, the parties agreed in principle to settle the matter, and entered into a settlement agreement and mutual general release in April 2018.
The Respondents agreed to pay $8,300,000, which was received in May of 2018. $5,575,000 was recorded as a recovery of legal settlement cost and
$2,725,000 was recorded as a reduction of legal expense for the fiscal year ended June 30, 2018.
The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against
any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or result of operations
when resolved.
NOTE 19 – SUBSEQUENT EVENTS
On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with
Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan
matures on January 1, 2024. Interest only payments are due monthly.
In July 2019, the Company obtained a modification from CIBC Bank USA (“CIBC”) which increased its $5,000,000 revolving line of credit (“RLOC”) by
$3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the
fiscal period covered by this Annual Report on Form 10-K. Based upon such evaluation, management has concluded that the 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.
49
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)
of the Exchange Act. The internal control over financial reporting is a process, under the supervision of our Chief Executive Officer and Principal Financial
Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America.
The internal control over financial reporting include those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
• provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting
principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of
our management and our directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material
effect on the financial statements.
Management, including our Chief Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of our internal control over
financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework. Based on its evaluation, management concluded that there was a material weakness in our internal control over financial reporting as
of June 30, 2018 while it has been remediated as of June 30, 2019. A material weakness is a deficiency, or a combination of control deficiencies, in internal
control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis.
The material weakness was related to the Company’s preparation of its tax provision.
During the fourth quarter of fiscal 2017, we identified a material weakness in internal controls over financial reporting related to our accounting for deferred
income taxes and income tax expense. Specifically, we did not design and maintain effective controls to identify items within the deferred tax balances that
could be materially incorrect. We did not provide appropriate oversight of our third-party tax CPA firm preparer. This material weakness did not have, but
could have resulted in various material adjustments to deferred tax accounts for fiscal 2017 and 2016. Since the material weakness was identified, we have
undergone evaluation and improvements in our internal control over financial reporting. Management’s remediation activities have included the following:
In order to mitigate the material weakness to the fullest extent possible, management hired a new tax CPA specialist to review and do a detailed analysis
which was completed for the year ended June 30, 2017. The Company has also assigned to its audit committee oversight responsibilities with regard to this
analysis. The preparation of the Company’s deferred tax assets and liabilities will be reviewed annually by tax experts as well as the Principal Financial
Officer and the Chief Executive Officer.
As of June 30, 2018, these controls were not operating effectively as noted by a computational error in estimating the transition impact of the Tax Act on our
deferred tax balances. As of June 30, 2019, management concludes that the material weakness has been remediated by its active engagement in the provision
preparation process and will continue to enhance its controls over the preparation of its tax provision.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our independent registered public accounting firm, pursuant to provisions of the Dodd-Frank
Wall Street Reform and Consumer Protection Act that permit us to provide only management’s report in this Annual Report on Form 10-K.
This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not
incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in
such filing.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As stated in our report on internal control over financial reporting, the material weakness related to tax provision preparation has been remediated in fiscal
year 2019.
50
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The following table sets forth certain information with respect to the Directors and Executive Officers of the Company as of June 30, 2019:
Name
Position with the Company
Age
Term to Expire
Class A Directors:
John V. Winfield (1)(4)(6)(7)
Jerold R. Babin (2)(3)
Class B Directors:
Yvonne L. Murphy (1)(5)(7)
William J. Nance (1)(2)(3)(4)(6)
Class C Director:
Chairman of the Board; President
and Chief Executive Officer
Director
Director
Director
72
Fiscal 2019 Annual Meeting
85
Fiscal 2019 Annual Meeting
62
75
Fiscal 2020 Annual Meeting
Fiscal 2020 Annual Meeting
John C. Love (2)(3)(4)(5)(6)(7)
Director
79
Fiscal 2021 Annual Meeting
Executive Officers:
David C. Gonzalez
Danfeng Xu
Vice President Real Estate
Treasurer, Controller (Principal Financial Officer), and
Secretary
52
32
N/A
N/A
(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
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 the
Company’s subsidiaries, Santa Fe and Portsmouth, both public companies. Mr. Winfield’s extensive experience as an entrepreneur and investor, as well as his
managerial and leadership experience from serving as a chief executive officer and director of public companies, led to the Board’s conclusion that he should
serve as a director of the Company.
51
Jerold R. Babin — Mr. Babin was first appointed as a Director of the Portsmouth, a subsidiary of the Company, in February 1996. Mr. Babin was elected to
the Board of InterGroup in February 2014. Mr. Babin is a retail securities broker. From 1974 to 1989, he worked at Drexel Burnham and from 1989 to June
30, 2010, he worked for Prudential Securities (later Wachovia Securities and now Wells Fargo Advisors) where he held the title of First Vice-President. Mr.
Babin retired from his position at Wells Fargo advisors in June 2010. For the past 20 years, until present, Mr. Babin has also served as an arbitrator for FINRA
(formerly NASD). Mr. Babin’s extensive experience in the securities and financial markets as well has his experience in the securities and public company
regulatory industry led to the Board’s conclusion that he should serve as a director of the Company.
Yvonne L. Murphy — Mrs. Murphy was elected to the Board of InterGroup in February 2014 and to the Board of Portsmouth, a subsidiary of the Company,
in February 2019. She was a member of Governor Kenny C. Guinn’s executive staff in Nevada, and was employed for years by the prestigious Jones Vargas
law firm in Reno, Nevada. She served in nine legislative sessions during the most challenging years in Nevada’s history. Prior to starting her own lobbying
firm, Ms. Murphy worked for RR Partners in its corporate office in Las Vegas, Nevada and in the Government Affairs Division in Reno. She has a Doctorate
and a Master’s in Business Administration from the California Pacific University. Mrs. Murphy’s impressive experience in corporate management, legal
research and legislative lobbying led to the Board’s conclusion that she should serve as a director of the Company.
William J. Nance — Mr. Nance is a Certified Public Accountant and private consultant to the real estate and banking industries. He is also President of
Century Plaza Printers Inc. Mr. Nance was first elected to the Board in 1984. He served as the Company’s Chief Financial Officer from 1987 to 1990 and as
Treasurer from 1987 to June 2002. Mr. Nance is also a Director of Santa Fe and Portsmouth. Mr. Nance also serves as a director of Comstock Mining, Inc.
Mr. Nance’s extensive experience as a CPA and in numerous phases of the real estate industry, his business and management experience gained in running his
own businesses, his service as a director and audit committee member for other public companies and his knowledge and understanding of finance and
financial reporting, led to the Board’s conclusion that he should serve as a director of the Company.
John C. Love — Mr. Love was appointed to the Board in 1998. Mr. Love is an international hospitality and tourism consultant. He is a retired partner in the
national CPA and consulting firm of Pannell Kerr Forster and, for the last 30 years, a lecturer in hospitality industry management control systems and
competition & strategy at Golden Gate University and San Francisco State University. He is Chairman Emeritus of the Board of Trustees of Golden Gate
University and the Executive Secretary of the Hotel and Restaurant Foundation. Mr. Love is also a Director of Santa Fe and Portsmouth. Mr. Love’s extensive
experience as a CPA and in the hospitality industry, including teaching at the university level for the last 30 years in management control systems, and his
knowledge and understanding of finance and financial reporting, led to the Board’s conclusion that he should serve as a director of the Company.
David C. Gonzalez — Mr. Gonzalez was appointed Vice President Real Estate of the Company on January 31, 2001. Over the past 30 years, Mr. Gonzalez
has served in numerous capacities with the Company, including Controller and Director of Real Estate.
Danfeng Xu – Ms. Xu was appointed as Treasurer and Controller of the Company on October 16, 2017. Ms. Xu also serves as Treasurer and Controller of
Portsmouth and Santa Fe, having been appointed to those positions on October 16, 2017. On June 1, 2018, she was appointed Secretary of the Company,
Portsmouth and Santa Fe. Prior to joining the Company, she had served as Controller and worked in other positions at the Hotel from July 2010 to February
2017. She obtained her Bachelor of Science degree in Business Administration, Accounting and Finance from The Ohio State University and her Master of
Professional Accounting, with a concentration in Audit and Assurance from University of Washington.
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 and Forms 5
and amendments thereto furnished to the Company with respect to 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 2019 all filing requirements applicable to its officers, directors, and greater
than ten-percent beneficial owners were complied with.
52
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, including its Board of Directors. A copy of the Code of Ethics is posted on the Company’s website at
www.intgla.com. The Company will provide to any person without charge, upon request, a copy of its Code of Ethics by sending such request to: The
InterGroup Corporation, Attn: Treasurer, 12121 Wilshire Blvd., Suite 610, Los Angeles, CA, 90025. The Company will promptly disclose any amendments or
waivers to its Code of Ethics on Form 8-K and will post such information on its website.
BOARD AND COMMITTEE INFORMATION
InterGroup’s common stock is listed on the NASDAQ Capital Market tier of the NASDAQ Stock Market, LLC (“NASDAQ”). InterGroup is a Smaller
Reporting Company under the rules and regulations of the Securities and Exchange Commission (“SEC”). With the exception of the Company’s President and
CEO, John V. Winfield, all of InterGroup’s Board of Directors consists of “independent” directors as independence is defined by the applicable rules of the
SEC and NASDAQ.
Nominating Committee
The Company's Nominating Committee is comprised of two “independent” directors as independence is defined by the applicable rules of the SEC and
NASDAQ. Directors Love and Murphy serve as the current members of the Nominating Committee. The Company has not established a charter for the
Nominating Committee, and the Committee has no policy with regard to consideration of any director candidates recommended by security holders. As a
smaller reporting company whose directors own in excess of sixty percent of the voting shares of the Company, InterGroup has not deemed it appropriate to
institute such a policy. There have not been any material changes to the procedures by which security holders may recommend nominees to the Company’s
board of directors.
Audit Committee and Audit Committee Financial Expert
The Company is a Smaller Reporting Company under SEC rules and regulations. The Company’s Audit Committee is currently comprised of three members:
Directors Nance (Chairperson), Babin and Love, each of whom meets 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 based on their qualifications and business experience discussed above in this Item 10.
Administrative and Compensation Committee
The Company's Administrative and Compensation Committee (the “Compensation Committee”) is comprised of three “independent” members of the Board
of Directors as independence is defined by the applicable rules of the SEC and NASDAQ. Mr. Nance serves as Chairman of the Compensation Committee.
The Company has not established a charter for the Compensation Committee. The Compensation Committee reviews and recommends to the Board of
Directors the compensation for the Company’s Chief Executive Officer and other executive officers, including equity or performance-based compensation and
plans. The Compensation Committee seeks to design and set compensation to attract and retain highly qualified executive officers and to align their interests
with those of long-term owners of the Company. The Compensation Committee may also make recommendations to the Board of Directors as to the amount
and form of director compensation. The Compensation Committee has not engaged any compensation consultants in determining the amount or form of
executive of director compensation but does review and monitor published compensation surveys and studies. The Compensation Committee may delegate to
the Company’s Chief Executive Officer the authority to determine the compensation of certain executive officers. The Compensation Committee also oversees
the Company’s 2008 RSU Plan and the 2010 Incentive Plan.
Item 11. Executive Compensation
The following table provides certain summary information concerning compensation awarded to, earned by, or paid to the Company’s principal executive
officer and other named executive officers of the Company whose total compensation exceeded $100,000 for all services rendered to the Company and its
subsidiaries for each of the Company’s last two completed fiscal years ended June 30, 2019 and 2018. There was no non-equity incentive plan compensation
or nonqualified deferred compensation earnings. There are currently no employment contracts with the executive officers.
53
Name and Position
John V. Winfield
Chairman, President and
Chief Executive Officer
David C. Gonzalez
Vice President Real Estate
David T. Nguyen
Treasurer and Controller
(Principal Financial Officer, resigned October 2017)
Danfeng Xu
Treasurer and Controller
(Principal Financial Officer, effective October 2017)
SUMMARY COMPENSATION TABLE
Fiscal Year
Salary
Bonus
Other
Compensation
Total
2019 $
2018 $
844,000(1) $
844,000(1) $
-
-
2019 $
2018 $
2019 $
2018 $
324,000
324,000
$
$
270,000
200,000
$
-
70,000(3) $
-
-
2019 $
2018 $
144,000
130,000
$
$
8,000
6,000
$
$
$
$
$
$
$
$
64,000(2)
63,000(2)
-
-
-
180,000(4)
-
-
$
$
$
$
$
$
$
$
908,000
907,000
594,000
524,000
-
250,000
152,000(3)
136,000(3)
(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 $440,000 from those entities for the fiscal years 2019 and 2018,
respectively. The amounts include director’s fees totaling $12,000 for each year.
(2) Compensation for a portion of the salary of an assistant to Mr. Winfield.
(3) Compensation is allocated approximately 50% to the Company and 50% to Santa Fe and Portsmouth.
(4) Includes severance received from the Company’s subsidiary, Santa Fe, in the amount of $90,000. Mr. Nguyen resigned as Treasurer and Controller of the
Company, InterGroup and Portsmouth effective October 16, 2017 and received $180,000 in total severance pay.
Outstanding Equity Awards at Fiscal Year Ended June 30, 2019
The following table sets forth information concerning option awards and stock awards for each named executive officer that were outstanding as of the end of
the Company’s last completed fiscal year ended June 30, 2019. There were no other equity incentive plan awards that were outstanding.
Option Awards
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
Option
exercise
price $
100,000(1)
90,000(2)
133,195(3)
7,200
$
-
$
-
$
-
10,800(4) $
10.30
19.77
18.65
27.30
Option
expiration
date
3/16/20
2/28/22
12/26/23
3/2/27
Name
John V. Winfield
John V. Winfield
John V. Winfield
David C. Gonzalez
(1) Stock options issued to Mr. Winfield pursuant to the Company’s 2010 Incentive Plan are subject to both time and performance-based vesting requirements,
each of which must be satisfied before the options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest over
a period of five years, with 20,000 options vesting upon each one-year anniversary of the date of grant, March 16, 2010. Pursuant to the performance vesting
requirements, the options vest in increments of 20,000 shares upon each increase of $2.00 or more in the market price of the Company’s common stock above
the exercise price ($10.30) of the options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading
days during any one quarter. As of June 30, 2019, the performance vesting requirements of the options were satisfied.
54
(2) Stock options issued to Mr. Winfield pursuant to the Company’s 2010 Incentive Plan are subject to both time and performance-based vesting requirements,
each of which must be satisfied before the options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest over
a period of five years, with 18,000 options vesting upon each one-year anniversary of the date of grant, February 28, 2012. Pursuant to the performance
vesting requirements, the options vest in increments of 18,000 shares upon each increase of $2.00 or more in the market price of the Company’s common
stock above the exercise price ($19.77) of the options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least
ten trading days during any one quarter. As of June 30, 2019, all of these options have met the market vesting requirements.
(3) On December 26, 2013, the Compensation Committee authorized, subject to shareholder approval, a grant of non-qualified and incentive stock options for
an aggregate of 160,000 shares (the “Option Grant”) to the Company’s President and Chief Executive Officer, John V. Winfield. The stock option grant was
approved by shareholders on February 19, 2014. The grant of stock options was made pursuant to, and consistent with, the 2010 Incentive Plan, as proposed to
be amended. The non-qualified stock options are for 133,195 shares and have a term of ten years, expiring on December 26, 2023, with an exercise price of
$18.65 per share. The incentive stock options are for 26,805 shares and have a term of five years, expiring on December 26, 2018, with an exercise price of
$20.52 per share. In accordance with the terms of the 2010 Incentive Plan, the exercise prices were based on 100% and 110%, respectively, of the fair market
value of the Company’s common stock as determined by reference to the closing price of the Company’s common stock as reported on the NASDAQ Capital
Market on the date of grant. The stock options are subject to time vesting requirements, with 20% of the options vesting annually commencing on the first
anniversary of the grant date. In December 2018, Mr. Winfield exercised the 26,805 vested incentive stock options by surrendering 17,439 shares of the
Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation
expense was recorded related to the issuance.
(4) Mr. Gonzalez’s stock options vest over a period of five years, with 3,600 options vesting upon each one-year anniversary of the date of grant, March 2,
2017.
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 all public companies, the $1,000,000 limitation applies separately to the compensation paid by each entity. Stock option expenses are also
amortized over a several years. For fiscal years 2019 and 2018, 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.
EQUITY COMPENSATION PLANS
The Company currently has one equity compensation plan, which has been approved by the Company’s stockholders. However, any outstanding stock options
issued under the Company’s prior equity compensation plans remain effective in accordance with their terms.
The purpose of the Company’s equity compensation plans is to provide a means whereby officers, directors and key employees of the Company develop a
sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to devote their best efforts
to the business of the Company, thereby advancing the interests of the Company and its shareholders. A further purpose of these plans is to provide a means
through which the Company may attract able individuals to become employees or serve as directors of the Company and to provide a means for such
individuals to acquire and maintain stock ownership in the Company, thereby strengthening their concern for the welfare of the Company.
The InterGroup Corporation 2010 Omnibus Employee Incentive Plan
On February 24, 2010, the shareholders of the Company approved The InterGroup Corporation 2010 Omnibus Employee Incentive Plan (the “2010 Incentive
Plan”), which was formally adopted by the Board of Directors following the annual meeting of shareholders. The 2010 Incentive Plan as modified in
December 2013, authorizes a total of up to 400,000 shares of common stock to be issued as equity compensation to officers and employees of the Company in
an amount and in a manner to be determined by the Compensation Committee in accordance with the terms of the Plan. The 2010 Incentive Plan authorizes
the awards of several types of equity compensation including stock options, stock appreciation rights, performance awards and other stock-based
compensation. The 2010 Incentive Plan will expire on February 23, 2020, if not terminated sooner by the Board of Directors upon recommendation of the
Compensation Committee. Any awards issued under the Plan will expire under the terms of the grant agreement.
55
The shares of common stock to be issued under the 2010 Incentive Plan have been registered under the Securities Act, pursuant to a registration statement
filed on Form S-8 by the Company on June 16, 2010. Once received, shares of common stock issued under the Plan will be freely transferable subject to any
requirements of Section 16(b) of the Exchange Act.
On March 16, 2010, the Compensation Committee authorized the grant of 100,000 stock options to the Company’s Chairman, President and Chief Executive,
John V. Winfield to purchase up to 100,000 shares of the Company’s common stock pursuant to the 2010 Incentive Plan. The exercise price of the options is
$10.30, which is 100% of the fair market value of the Company’s Common Stock as determined by reference to the closing price of the Company’s Common
Stock as reported on the NASDAQ Capital Market on March 16, 2010, the date of grant. The options expire ten years from the date of grant, unless earlier
terminated in accordance with the terms of the 2010 Incentive Plan. The options shall be subject to both time and market based vesting requirements, each of
which must be satisfied before options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest over a period of
five years, with 20,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the market vesting requirements, the options vest in
increments of 20,000 shares upon each increase of $2.00 or more in the market price of the Company’s common stock above the exercise price ($10.30) of the
options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading days during any one quarter. As of
June 30, 2019, all the market vesting requirements have been met.
On February 28, 2012, the Compensation Committee authorized the grant of 90,000 stock options to the Company’s Chairman, President and Chief
Executive, John V. Winfield to purchase up to 90,000 shares of the Company’s common stock pursuant to the 2010 Incentive Plan. The exercise price of the
options is $19.77, which equals 100% of the fair market value of the Company’s common stock as determined by reference to the closing price of the
Company’s common stock as reported on the NASDAQ Capital Market on February 28, 2012 the date of grant. The options expire ten years from the date of
grant, unless earlier terminated in accordance with the terms of the 2010 Plan. The options shall be subject to both time and market based vesting
requirements, each of which must be satisfied before options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the
options vest over a period of five years, with 18,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the market vesting
requirements, the options vest in increments of 18,000 shares upon each increase of $2.00 or more in the market price of the Company’s common stock above
the exercise price ($19.77) of the options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading
days during any one quarter. As of June 30, 2019, all of these options have met the market vesting requirements.
On December 26, 2013, the Compensation Committee authorized, subject to shareholder approval, a grant of non-qualified and incentive stock options for an
aggregate of 160,000 shares (the “Option Grant”) to the Company’s President and Chief Executive Officer, John V. Winfield. The stock option grant was
approved by shareholders on February 19, 2014. The grant of stock options was made pursuant to, and consistent with, the 2010 Incentive Plan, as proposed to
be amended. The non-qualified stock options are for 133,195 shares and have a term of ten years, expiring on December 26, 2023, with an exercise price of
$18.65 per share. The incentive stock options are for 26,805 shares and have a term of five years, expiring on December 26, 2018, with an exercise price of
$20.52 per share. In accordance with the terms of the 2010 Incentive Plan, the exercise prices were based on 100% and 110%, respectively, of the fair market
value of the Company’s common stock as determined by reference to the closing price of the Company’s common stock as reported on the NASDAQ Capital
Market on the date of grant. The stock options are subject to time vesting requirements, with 20% of the options vesting annually commencing on the first
anniversary of the grant date. In December 2018, Mr. Winfield exercised the 26,805 vested incentive stock options by surrendering 17,439 shares of the
Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation
expense was recorded related to the issuance.
In March 2017, the Compensation Committee awarded 18,000 stock options to the Company’s Vice President of Real Estate, David C. Gonzalez, to purchase
up to 18,000 shares of common stock. The exercise price of the options is $27.30 which is the fair value of the Company’s Common Stock as reported on
NASDAQ on March 2, 2017. The options expire ten years from the date of grant. Pursuant to the time vesting requirements, the options vest over a period of
five years, with 3,600 options vesting upon each one-year anniversary of the date of grant.
Compensation of Directors
Effective as of fiscal year ended June 30, 2011, annual cash compensation payable to non-employee directors has been $12,000. With the exception of
members of the Audit Committee, non-employee directors do not receive any additional fees for attending Board or Committee meetings, but are entitled to
reimbursement of their reasonable expenses to attend such meetings. Members of the Audit Committee are paid a fee of $1,000 per quarter, with the Chair of
that Committee to receive $1,500 per quarter. As an executive officer, the Company’s Chairman has elected to forego his annual board fees.
56
The following table sets forth the compensation paid to directors during the fiscal year ended June 30, 2019:
Name
John C. Love
William J. Nance
Jerold R. Babin
Yvonne L. Murphy
John V. Winfield (5)
DIRECTOR COMPENSATION
Fees Earned or
Paid in Cash*
Stock Awards
All Other
Compensation
Total
$
$
$
$
54,000(1)
56,000(2)
44,000(3)
36,000(4)
-
-
-
-
-
-
54,000
56,000
44,000
36,000
$
$
$
$
-
-
-
-
-
*Amounts shown include board retainer fees, committee fees and meeting fees.
(1) 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.
(2) 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.
(3) Mr. Babin also serves as a director of the Company’s subsidiary, Portsmouth. Amounts shown include $6,000 in regular board fees paid by Portsmouth.
(4) Mrs. Murphy also serves as a director of the Company’s subsidiary, Portsmouth. Amounts shown include $1,500 in regular board fees paid by Portsmouth.
(5) As Chief Executive Officer, the Company’s Chairman, John V. Winfield, was not paid any board, committee or meetings fees. Mr. Winfield did receive a
total of $12,000 in regular board fees from the Company’s subsidiaries, which is reported on the Summary Compensation Table.
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 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners.
The following table sets forth, as of August 30, 2019, certain information with respect to the beneficial ownership of Common Stock of the Company owned
by those persons or groups known by the Company to own more than five percent of the outstanding shares of Common Stock.
Name and Address
of Beneficial Owner
Amount and Nature of
Beneficial Ownership (1)
Percent
of Class (2)
John V. Winfield
12121 Wilshire Boulevard, Suite 350
Los Angeles, CA 90025
1,721,468(3)
65.2%
(1) 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.
(2) Percentages are calculated on the basis of 2,309,962 shares of Common Stock outstanding at August 30, 2019, plus any securities that person has the right
to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.
(3) Includes 323,195 shares that Mr. Winfield has a right to acquire pursuant to vested stock options.
57
Security Ownership of Management.
The following table sets forth, as of August 30, 2019, certain information with respect to the beneficial ownership of Common Stock of the Company owned
by (i) each Director and each of the named Executive Officers, and (ii) all Directors and Executive Officers as a group.
Name of
Beneficial Owner
John V. Winfield
William J. Nance
John C. Love
David C. Gonzalez
Jerold R. Babin
Yvonne L. Murphy
Amount and Nature of
Beneficial Ownership (1)
Percent
of Class (2)
1,721,468(3)
47,946
19,161
33,969(4)
2,282
.
2,282
All Directors and Executive Officers as a Group (6 persons)
1,827,108
* Ownership does not exceed 1%.
65.2%
1.8%
0.7%
1.3%
*
*
69.2%
(1) 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.
(2) Percentages are calculated on the basis of 2,309,962 shares of Common Stock outstanding at August 30, 2019, plus any securities that person has the right
to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.
(3) Includes 323,195 shares that Mr. Winfield has a right to acquire pursuant to vested stock options.
(4) Includes 7,200 shares that Mr. Gonzalez has a right to acquire pursuant to vested stock options.
Changes in Control.
There are no arrangements that may result in a change in control of the Company.
58
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following table sets forth information as of June 30, 2019 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
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
(a)
Weighted-average
exercise price of
outstanding options
warrants and
rights
(b)
Remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
341,195 $
None
341,195 $
16.95
N/A
16.95
None
None
None
(a) There were 341,195 stock options outstanding as of June 30, 2019.
(b) Reflects the weighted average exercise price of all outstanding options.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
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.
In connection with the redemption of limited partnership interests of Justice Investors, Limited Partnership, Justice Operating Company, LLC agreed to pay a
total of $1,550,000 in fees to certain officers and directors of the Company for services rendered in connection with the redemption of partnership interests,
refinancing of Justice’s properties and reorganization of Justice Investors. This agreement was superseded by a letter dated December 11, 2013 from Justice
Investors, Limited Partnership, in which Justice Investors Limited Partnership assumed the payment obligations of Justice Operating Company, LLC. The first
payment under this agreement was made concurrently with the closing of the loan agreements, with the remaining payments due upon Justice Investor’s
having adequate available cash as described in the letter. As of June 30, 2018, $200,000 of these fees remained payable and are paid off as of June 30, 2019.
Two general partners provided services to the Partnership through December 17, 2013. On December 18, 2013, the Partnership redeemed Evon’s partnership
interest and Portsmouth Square became the sole general partner. The Partnership’s obligation to pay Evon, Justice’s former general partner, terminated as of
December 18, 2013. Under the terms of the Justice Partnership Agreement, its current general partner, Portsmouth, receives annual compensation of one
percent of Hotel Revenue. During each of the years ended June 30, 2019 and 2018, total compensation paid to Portsmouth under the new and previous
agreements was $598,000 and $570,000, respectively. Amounts paid to Portsmouth are eliminated in consolidation.
As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), 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 the Portsmouth and Santa Fe and oversees the investment activity of those companies. Depending on certain market conditions and
various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such
investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and
the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on
behalf of the Company.
Director Independence
InterGroup’s common stock is listed on the NASDAQ Capital Market tier of the NASDAQ Stock Market LLC (“NASDAQ”). InterGroup is a Smaller
Reporting Company under the rules and regulations of the SEC. The Board of Directors of InterGroup currently consists of five members. With the exception
of the Company’s President and CEO, John V. Winfield, all of InterGroup’s Board of Directors consists of “independent” directors as independence is defined
by the applicable rules of the SEC and NASDAQ. There are no members of the Company’s compensation, nominating or audit committees that do not meet
those independence standards.
59
Item 14. Principal Accounting Fees and Services
On November 16, 2017, the Audit Committee appointed Moss Adams LLP (“Moss Adams”) as the Company’s independent registered public accounting firm
for the fiscal year ended June 30, 2018. Prior to the appointment of Moss Adams, Hein & Associates LLP (“Hein”) provided services in connection with the
review of the Company’s quarterly financial statements for the three months ended September 30, 2017.
The aggregate fees billed for each of the last two fiscal years ended June 30, 2019 and 2018 for professional services rendered by the Company’s independent
registered public accounting firms are set forth in the tables below. These fees were billed for audit of the Company’s annual financial statements, review of
financial statements included in the Company’s Form 10-Q reports, and services provided in connection with statutory and regulatory filings and engagements
for those fiscal years.
Audit fees - Moss Adams
Audit fees - Hein
Tax fees - Moss Adams
TOTAL:
Audit Committee Pre-Approval Policies
Fiscal Year
2019
2018
$
$
$
255,000
-
82,000
337,000
$
240,000
32,000
43,000
315,000
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 minimis 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.
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
PART IV
The following financial statements of the Company are included in Part II, Item 8 of this Report at pages 25 through 50:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2019 and 2018
Consolidated Statements of Operations for Years Ended June 30, 2019 and 2018
Consolidated Statements of Shareholders’ Deficit for Years Ended June 30, 2019 and 2018
Consolidated Statements of Cash Flows for Years Ended June 30, 2019 and 2018
Notes to the Consolidated Financial Statements
60
(a)(2) Financial Statement Schedules
All other schedules for which provision is made in Regulation S-X have been omitted because they are not required or are not applicable or the
required information is shown in the consolidated financial statements or notes to the consolidated financial statements.
(a)(3) Exhibits
Set forth below is an index of applicable exhibits filed with this report according to exhibit table number.
Exhibit Number
Description
3.(i)
3.1
3.2
3.3
3.4
3.(ii)
4.
9.
10.
10.1
10.2
10.3
10.4
10.5
Articles of Incorporation:
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.
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.
Certificate of Amendment to Certificate of Incorporation, dated October 2, 1998, incorporated by reference to Exhibit 3 of the
Company’s Quarterly report on Form 10-QSB for the period ended September 30, 1998, as filed on November 13, 1998.
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.
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.
Instruments defining the rights of security holders including indentures*
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 Commission on September 28, 1998.
Material Contracts:
1998 Stock Option Plan for Non-Employee Directors approved by the Board of Directors on December 8, 1998 and ratified by the
shareholders on January 27, 1999 (incorporated by reference to the Company’s Proxy Statement on Schedule 14A filed with the
Commission on December 21, 1998).
1998 Stock Option Plan for Selected Key Officers, Employees and Consultants approved by the Board of Directors on December 8,
1998 and ratified by the shareholders on January 27, 1999 (incorporated by reference to the Company’s Proxy Statement on
Schedule 14A filed with the Commission on December 21, 1998).
The InterGroup Corporation 2007 Stock Compensation Plan for Non-Employee Directors (incorporated by reference to the
Company’s Proxy Statement on Schedule 14A filed with the Commission on January 26, 2007).
Amended and Restated Agreement of Limited Partnership of Justice Investors, effective November 30, 2010 (incorporated by
reference to Exhibit 10.1 to the Company’s Form 10-Q Report for the quarterly period ended December 31, 2010, filed with the
Commission on February 11, 2011).
General Partner Compensation Agreement, dated December 1, 2008 (incorporated by reference to Exhibit 10.2 to Company’s Form
10-Q Report for the quarterly period ended December 31, 2008, filed with the Commission on February 13, 2009).
61
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
14.
21.
31.1
31.2
32.1
32.2
The InterGroup Corporation 2008 Restricted Stock Unit Plan, adopted by the Board of Directors on December 3, 2008, and ratified
by the shareholders on February 18, 2009 (incorporated by reference to the Company’s Proxy Statement on Schedule 14A, filed with
the Commission on January 21, 2009).
Restricted Stock Unit Agreement, dated February 18, 2009, between The InterGroup Corporation and John V. Winfield
(incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009,
as filed with the Commission on October 13, 2009).
The InterGroup Corporation 2010 Omnibus Employee Incentive Plan, approved by the shareholders and adopted by the Board of
Directors on February 24, 2010 (incorporated by reference to the Company’s Proxy Statement on Schedule 14A, filed with the
Commission on January 27, 2010).
Employee Stock Option Agreement, dated March 16, 2010, between The InterGroup Corporation and John V. Winfield
(incorporated by reference to Exhibit 10.9 of the Company’s report on Form 10-K for the fiscal year ended June 30, 2010, as filed
with the Commission on September 27, 2010).
Franchise License Agreement, dated December 10, 2004, between Justice Investors and Hilton Hotels (incorporated by reference to
Exhibit 10.10 of the Company’s amended report on Form 10-K/A for the fiscal year ended June 30, 2011, as filed with the
Commission on August 24, 2012).
Management Agreement, dated February 2, 2012, between Justice Investors and Prism Hospitality, L.P. (incorporated by reference
to Exhibit 10.11 of the Company’s amended report on Form 10-K/A for the fiscal year ended June 30, 2011, as filed with the
Commission on August 24, 2012).
Management Agreement, dated August 1, 2005, between Century West Properties, Inc. and The InterGroup Corporation
(incorporated by reference to Exhibit 10.12 of the Company’s amended report on Form 10-K/A for the fiscal year ended June 30,
2011, as filed with the Commission on August 24, 2012).
Employee Stock Option Agreement, dated February 28, 2012, between The InterGroup Corporation and John V. Winfield
(incorporated by reference to Exhibit 10.13 of the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2014, as
filed with the Commission on September 20, 2012).
Property Management Agreement, effective June 17, 2013, between R & K Interests, Inc., a California Corporation, doing business
as Investors’ Property Services and The InterGroup Corporation (incorporated by reference to Exhibit 10.1 of the Company’s current
report on Form 8-K as filed with the Commission on June 20, 2013).
Asset Management Agreement, effective July 1, 2013, between The InterGroup Corporation and Delta Alliance Capital
Management, LLC, a California limited liability company (incorporated by reference to Exhibit 10.2 or the Company’s current
report on Form 8-K as filed with the Commission on June 20, 2013).
Management Agreement, dated February 1, 2017, between Justice Operating Company, LLC and Interstate Management Company,
LLC. (incorporated by reference to Exhibit 10.5 of the Company’s Form 10-K Report for the fiscal year ended June 30, 2017, as
filed with the Commission on October 13, 2017). *
Code of Ethics (filed herewith).
Subsidiaries (filed herewith).
Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a) (filed herewith).
Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a) (filed herewith).
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith).
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith).
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
* 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.
62
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: August 30, 2019
Date: August 30, 2019
THE INTERGROUP CORPORATION
(Registrant)
by /s/ John V. Winfield
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
by /s/ Danfeng Xu
Danfeng Xu, Treasurer
and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signatures
/s/ John V Winfield
John V. Winfield
/s/ Danfeng Xu
Danfeng Xu
/s/ Jerold R. Babin
Jerold R. Babin
/s/ John C. Love
John C. Love
/s/ Yvonne L. Murphy
Yvonne L. Murphy
/s/ William J. Nance
William J. Nance
Title and Position
President, Chief Operating Officer and Chairman
of the Board (Principal Executive Officer)
Date
August 30, 2019
Treasurer and Controller (Principal Financial Officer)
August 30, 2019
Director
Director
Director
Director
63
August 30, 2019
August 30, 2019
August 30, 2019
August 30, 2019
THE INTERGROUP CORPORATION
CODE OF ETHICS
FOR
SENIOR FINANCIAL OFFICERS
EXHIBIT 14
This Code of Ethics applies to The InterGroup Corporation (“InterGroup” or the “Company”) Senior Financial Officers. “Senior Financial Officers” shall
include the principal executive officer, the principal accounting officer or controller, or persons performing similar functions, including InterGroup’s President
and Chief Executive Officer, Chief Financial Officer, Treasurer, Controller, Vice President, the Company’s Board of Directors and such other individuals as
determined from time to time by the Audit Committee of the Company for purposes of this Code of Ethics. The Company expects all employees, in carrying
out their job responsibilities, to act in accordance with the highest standards of personal and professional integrity, to comply with all applicable laws, and to
abide by InterGroup’s other corporate policies and procedures adopted from time to time by the Company. This Code of Ethics supplements the foregoing
with respect to all Senior Financial Officers.
InterGroup’s Senior Financial Officers will:
1. Engage in and promote honest and ethical conduct, acting with integrity and exercising at all times their best independent judgment;
2. Avoid actual or apparent conflicts of interest between personal and professional relationships and disclose to the Company’s Audit Committee and
counsel any material transaction or relationship that reasonably could be expected to give rise to such a conflict;
3. Produce full, fair, accurate, timely and understandable disclosure in reports and documents that InterGroup files with, or submits to, the Securities
and Exchange Commission and in other public communications made by InterGroup;
4. Comply with applicable governmental laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations of which
InterGroup is a member;
5. Maintain the confidentiality of Company information, except when authorized or otherwise required to make any disclosure, and avoid the use of
any Company information for personal advantage;
6. Promote ethical and honest behavior among employees under your supervision; and
7. Promptly report any possible violation of this Code of Ethics to the Audit Committee and the Company’s counsel.
All Senior Financial Officers are prohibited from directly or indirectly taking any action to coerce, manipulate, mislead or fraudulently influence InterGroup’s
independent public accountant engaged in the performance of an audit or review of the financial statements of the Company for the purpose of rendering the
financial statements of InterGroup misleading.
The Audit Committee of the Board of Directors shall approve any waiver or amendment of this Code of Ethics, and any such waiver or amendment shall be
disclosed promptly as required by law and SEC regulations.
All Senior Financial Officers will be held accountable for their adherence to this Code of Ethics. Failure to observe the terms of this Code of Ethics may result
in disciplinary action, up to and including termination of employment. Violations of this Code of Ethics may also constitute violations of law, and may result
in civil and criminal penalties for the individual, his or her supervisor and/or InterGroup.
If a Senior Financial Officer has any questions regarding the best course of action in a particular situation, he or she should promptly contact the Chairman of
the Audit Committee or the Company’s counsel. An individual may choose to remain anonymous in reporting any possible violation of this Code of Ethics.
SUBSIDAIRIES OF THE INTERGROUP CORPORATION
EXHIBIT 21
(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 Entertainment Corp. (incorporated on December 23, 1993 in DE)
(9) Mutual Real Estate Corp. (incorporated on March 10, 1994 in TX)
(10) Broadview Enterprises, Inc. (incorporated April 14, 1995 in MO)
(11) Wayward, Inc. (incorporated April 18, 1995 in MO)
(12) Golden West Entertainment, Inc. (incorporated February 15, 1990 in CA)
(13) Golden West Television Productions, Inc. (incorporated September 17, 1991 in CA)
(14) Golden West Television Productions, Inc. (incorporated March 17, 1986 in NY)
(15) Intergroup Meadowbrook Gardens, Inc. (incorporated on June 23, 1994 in NJ)
(16) Intergroup Pine Lake, Inc. (incorporated on February 9, 1996 in KY)
(17) Bellagio Capital Fund, LLC (established on June 18, 1997 in NV)
(18) Healthy Planet Communications, Inc. (incorporated July 3, 1997 in CA)
(19) Santa Fe Financial Corporation (incorporated July 25, 1967 in NV) **
(20) Portsmouth Square, Inc. (incorporated July 6, 1967 in CA) ***
(21) 2301 Bel-Air Equity, Inc. (incorporated May 25, 2000 in CA)
(22) 11371 Ovada Properties, Inc. (incorporated May 25, 2000 in CA)
(23) 11361 Ovada Properties, Inc. (incorporated June 1, 2000 in CA)
(24) 11680 Bellagio Properties, Inc. (incorporated May 25, 2000 in CA)
(25) North Sepulveda Properties, Inc. (incorporated June 21, 2000 in CA)
(26) 11650 Bellagio Properties, Inc. (incorporated August 17, 2000 in CA)
(27) 11720 Bellagio Properties, Inc. (incorporated January 17, 2001 in CA)
(28) 636 Acanto Properties, Inc. (incorporated February 15, 2001 in CA)
(29) 614 Acanto Properties, Inc. (incorporated November 7, 2001 in CA)
(30) Intergroup Uluniu, Inc. (incorporated August 12, 2004 in HI) ****
(31) 850 Moraga Properties LLC (formed on October 19, 2010 in CA)
(32) 855 Moraga Properties LLC (formed on October 19, 2010 in CA)
(33) 11666 Bellagio Properties LLC (formed on July 8, 2015 in CA)
(34) 801 26th Street Properties LLC (formed on June 23, 2016 in CA)
Unless otherwise indicated, all subsidiaries are 100%-owned.
* The InterGroup Corporation owns 44.6% of Intergroup Woodland Village, Inc. and 55.4% is owned by Santa Fe Financial Corporation.
** Santa Fe Financial Corporation is an approximately 82.2%-owned subsidiary of The InterGroup Corporation.
*** Santa Fe owns approximately 68.8% of Portsmouth Square, Inc. and The InterGroup Corporation owns approximately 13.4% of Portsmouth Square.
**** The InterGroup Corporation owns 50% of Intergroup Uluniu, Inc. and Portsmouth Square, Inc. owns 50%.
EXHIBIT 31.1
I, John V. Winfield, certify that:
1. I have reviewed this annual report on Form 10-K of The InterGroup Corporation;
CERTIFICATION
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 the 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 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: August 30, 2019
/s/ John V. Winfield
John V. Winfield
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
I, Danfeng Xu, certify that:
1. I have reviewed this annual report on Form 10-K of The InterGroup Corporation;
CERTIFICATION
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 the 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 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: August 30, 2019
/s/ Danfeng Xu
Danfeng Xu
Treasurer and Controller
(Principal Financial Officer)
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act Of 2002
EXHIBIT 32.1
In connection with the Annual Report of The InterGroup Corporation (the "Company") on Form 10-K for the fiscal year ended June 30, 2019, 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:
(cid:120)
(cid:120)
The Report fully complies with the requirements of Section 13(a) or 5(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ John V. Winfield
John V. Winfield
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 30, 2019
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.
Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act Of 2002
EXHIBIT 32.2
In connection with the Annual Report of The InterGroup Corporation (the "Company") on Form 10-K for the fiscal year ended June 30, 2019, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Danfeng Xu, 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:
(cid:120)
(cid:120)
The Report fully complies with the requirements of Section 13(a) or 5(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Danfeng Xu
Danfeng Xu
Treasurer and Controller
(Principal Financial Officer)
Date: August 30, 2019
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.