-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QdFJrlbqX/hpIDmJnDEYCH2rqLdFfdBk/L2wS/S6TGj+3ntRlbSeq6op4Ew2mwX4 u1eHF3kdI4gtcw5938zTeA== 0000069422-98-000027.txt : 19980929 0000069422-98-000027.hdr.sgml : 19980929 ACCESSION NUMBER: 0000069422-98-000027 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERGROUP CORP CENTRAL INDEX KEY: 0000069422 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 133293645 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-10324 FILM NUMBER: 98716031 BUSINESS ADDRESS: STREET 1: 2121 AVE OF THE STARS STREET 2: STE 2020 CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3105561999 MAIL ADDRESS: STREET 1: 2121 AVE OF THE STARS SUITE 2020 CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: MUTUAL REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19860408 10KSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB ( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 1-10324 THE INTERGROUP CORPORATION (Name of small business issuer in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 13-3293645 (I.R.S. Employer Identification No.) 2121 Avenue of the Stars, Suite 2020 Los Angeles, California 90067 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (310) 556-1999 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock - Par Value $.01 Per Share (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $15,460,000 The aggregate market value of the voting stock held by non-affiliates of the registrant at August 31, 1998, was $12,856,000 (based on the price at which the stock closed on such date). Solely for purposes of this calculation affiliates of the registrant have been deemed to include only directors, executive officers and the Employee Stock Ownership Plan and Trust of the registrant. The number of shares outstanding of the issuer's Common Stock, $.01 par value, as of September 2, 1998 was 1,415,950 shares. Documents incorporated by reference: Proxy Statement, Part III, Items 9 through 12. Transitional Small Business Disclosure Format (check one): Yes No [X] TABLE OF CONTENTS PART I Page Items 1. DESCRIPTION OF BUSINESS 3 Items 2. DESCRIPTION OF PROPERTIES 4 Items 3. LEGAL PROCEEDINGS 7 Items 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8 PART II Items 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9 Items 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 Items 7. FINANCIAL STATEMENTS 13 Items 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 25 PART III Items 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 26 Items 10. EXECUTIVE COMPENSATION 26 Items 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 26 Items 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26 Items 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K 26 PART I Item 1. Description of Business. GENERAL THE INTERGROUP CORPORATION ("Intergroup" or the "Company") is a Delaware corporation formed in 1985, as the successor to Mutual Real Estate Investment Trust ("M-REIT"), a New York real estate investment trust created in 1965. The Company has been a publicly-held company since M-REIT's first public offering of shares in 1966 and has been a reporting company pursuant to Section 12(g) of the Securities Exchange Act of 1934 since that time. 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 broadened its social impact to engage in any opportunity which would offer the potential to increase shareholder value within the Company's underlying commitment to social responsibility, which it redefined to encompass investments in any area which can have a socially redeeming value and can lead to the establishment of a fair, equal and better society. See Item 2 for a description of the Company's current investments in and investment policies concerning real property. A portion of the Company's assets are invested under the direction of Mr. John V. Winfield ("Mr. Winfield"), the Company's Chairman and President, in securities and partnerships. The Company considers investing in equity and debt securities of companies which are either publicly or privately held if such an investment will offer growth or profit potential and not conflict with management's perception of social responsibility. The Company's general investment strategy regarding marketable securities is to identify both national and international companies which management considers to be currently out of favor or undervalued because of being misunderstood by the general investing community and/or companies that potentially could go through restructuring or reorganization. The Company will also invest in start up entities, especially those involved in high technology where potential for growth is perceived. Although the majority of the Company's marketable securities investments are listed on either the New York or American Stock exchanges the overall investment portfolio and the Company's investment strategies could be viewed as highly risky and the market values of the portfolio may be subject to large fluctuations. The Company may realize gains and losses in its overall investment portfolio from time to time to take advantage of market conditions and/or manage the portfolio's resources and the Company's tax liability. The Company may also 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. In addition, the Company utilizes margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms. The use of available leverage is guided by the business judgment of management. The Company's Chairman and President directs the investment activity of the Company, Santa Fe and Portsmouth in public and private markets pursuant to authority granted by the Board of Directors of each entity. Depending on certain market conditions and various risk factors, the President and members of his immediate family may at times invest in the same companies in which the Company, Santa Fe and Portsmouth invest. The Company, Santa Fe and Portsmouth encourage such investments because it places personal resources of the President and his family members at risk in connection with investment decisions made on behalf of the Company, Santa Fe and Portsmouth. Following allegations concerning the President made by a former officer and director of the Company, the Board of Directors authorized committees of the Board to conduct a thorough and independent review of such matters, including the Company's practices in this regard. The committee advised the Board of Directors that it found the material allegations of improprieties made by the former officer and director could not be substantiated. The committee made recommendations that the Company institute certain modifications to its existing procedures to reduce the potential for conflicts of interest. The Company's Board of Directors has adopted these recommendations. 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 has a controlling interest in Santa Fe Financial Corporation ("Santa Fe") which derives its revenue primarily through an indirect interest in a 566-room Holiday Inn in San Francisco, California. In addition, Santa Fe's operations include a marketable securities portfolio and an interest in an apartment complex. For further information see Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements. COMPETITION All of the properties owned by the Company are in areas where there is substantial competition. However, management believes that the apartments and hotel are generally in a competitive position in their respective communities. The Company intends to continue upgrading and improving the physical condition of its existing properties and to consider selling existing properties and re-investing in new properties to remain competitive. EMPLOYEES As of June 30, 1998, the Company had a total of ten full-time employees. The employees and the Company are not party to any collective bargaining agreement, and the Company believes that its employee relations are satisfactory. Item 2. Description of Properties. PROPERTIES At June 30, 1998, the Company's investment in real estate consisted of properties located throughout the United States. These properties include eleven apartment complexes wholly owned by the Company and one apartment complex owned by the Company and its majority owned subsidiary Santa Fe. All twelve apartment complexes are completed, operating properties. The Company also owns approximately 22.4 acres and 5.4 acres primarily comprised of unimproved real estate in St. Louis, Missouri and Houston, Texas, respectively. In the opinion of management, each of the properties is adequately covered by insurance. None of the properties are subject to foreclosure proceedings or litigation other than that incurred in the normal course of business. The Company's rental property leases are short-term leases, with no lease extending beyond one year. 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, 1998 were approximately $141,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $5,195,000 at June 30, 1998 and the maturity date of the mortgage is January 1, 2006. St. Louis, Missouri. The Company's St. Louis properties consist of three properties, two of which are apartment complexes and one is primarily unimproved land. The first apartment complex 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, 1998, real estate property taxes were approximately $92,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 35 years. The outstanding mortgage balance was approximately $6,000,000 at June 30, 1998 and the maturity date of the mortgage is July 1, 2008. The second apartment complex is a two-story project with 176 units on approximately 14 acres. The Company reacquired the complex through foreclosure on May 11, 1989, and recorded the asset at $3,480,000 representing the Company's total cost of the mortgage note receivable. For the year ended June 30, 1998, real estate property taxes were approximately $46,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $4,799,000 at June 30, 1998 and the maturity date of the mortgage is April 1, 2003. The Company also owns approximately 22.4 acres of land adjacent to the first apartment complex, which was acquired by the Company in March 1974 with additional acquisitions in June and July 1995 for the aggregate price of approximately $841,000. At June 30, 1998, there was no outstanding mortgage balance. The property taxes for the year ended June 30, 1998 were approximately $43,000. The additional parcels were acquired to provide better access to the larger parcel. The site has been rezoned to enhance the value and salability. The Company intends to sell all or a portion of its unimproved land. Middletown, Ohio. The Middletown property is a two-story apartment complex with 150 units on approximately 5.5 acres. The Company acquired the complex on May 31, 1972 at an initial cost of approximately $1,670,000. For the year ended June 30, 1998, real estate property taxes were approximately $44,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 35 years. The outstanding mortgage balance was approximately $2,490,000 at June 30, 1998 and the maturity date of the mortgage is December 1, 2008. Cincinnati, Ohio. The Cincinnati property is a three-story apartment complex with 100 units on approximately 5.8 acres. The Company acquired the complex on October 20, 1972 at an initial cost of approximately $1,416,000. For the year ended June 30, 1998, real estate property taxes were approximately $45,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $1,237,000 at June 30, 1998 and the maturity date of the mortgage is July 1, 2004. 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, 1998, real estate property taxes were approximately $28,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $2,994,000 at June 30, 1998 and the maturity date of the mortgage is May 1, 2006. Harrisburg, Pennsylvania. The Harrisburg property is a two-story apartment complex with 150 units on approximately 6.0 acres. The Company reacquired the complex by a deed in lieu of foreclosure on July 1, 1992, and reclassified the mortgage note receivable and closing costs of approximately $1,386,000 to investment in real estate. For the year ended June 30, 1998, real estate property taxes were approximately $65,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance at June 30, 1998 was approximately $1,767,000 and the maturity date of the mortgage is September 1, 2004. On August 18, 1998 the Company entered into a contract to sell this property for a gross sales price of $3,763,000. See "Note 14 Subsequent Events - Notes to Consolidated Financial Statements". Irving, Texas. The Irving property is a two-story apartment with 224 units on approximately 9.9 acres. The Company acquired the property on September 16,1994 at an initial cost of approximately $4,150,000. For the year ended June 30, 1998, real estate property taxes were approximately $146,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $4,606,000 at June 30, 1998 and the maturity dates of the mortgage is January 1, 2008. San Antonio, Texas. The San Antonio properties include three apartment complexes. The first apartment complex is a two-story project with 228 units on approximately 23.8 acres. The Company acquired the complex on December 3, 1992 at an initial cost of $2,300,000. For the year ended June 30, 1998, real estate taxes were approximately $119,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $1,899,000 at June 30, 1998 and the maturity date of the mortgage is May 1, 2000. The second apartment complex is a two-story project with 132 units on approximately 4.3 acres. The Company acquired the complex on June 29, 1993 for $2,752,000. For the year ended June 30, 1998, real estate taxes were approximately $89,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $2,187,000 at June 30, 1998 and the maturity date of the mortgage is December 1, 2003. The third apartment complex is a two- story project with 160 units on approximately 5.6 acres. The Company acquired the complex on June 27, 1994 for $3,500,000. For the year ended June 30, 1998, real estate taxes were approximately $87,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 27.5 years. The outstanding mortgage balance was approximately $2,348,000 at June 30, 1998 and the maturity date of the mortgage is July 1, 2004. Houston, Texas. The Houston property is a two-story apartment complex with 442 units on approximately 23.4 acres. In December 1996, the Company became the General partner of a Kansas limited partnership, which owns the apartment complex in Houston, Texas, by obtaining the 30% interest in the Partnership held by the former General Partner. Prior to December 1996, the Company was a Limited Partner, and owned a 15% interest in the Partnership. During the quarter ended March 31, 1997, the Company acquired all of the remaining Limited Partners' interests. The cost basis of the complex, including closing costs, was $4,970,000 and the outstanding mortgage at the acquisition date was $3,596,000. The property taxes for the year ended June 30, 1998 were approximately $94,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balances were approximately $3,495,000 and $26,000 at June 30, 1998 and the maturity dates of the mortgages are June 1, 2000 and February 2, 2001, respectively. REAL ESTATE INVESTMENT POLICY The most significant investment activity of the Company has been to acquire, operate and, when appropriate, sell income-producing residential real estate. The Company has, in the past, concentrated on owning and operating integrated multi-family apartment buildings. Through its marketable securities portfolio the Company has indirectly invested in additional real estate related investments such as hotels, office buildings and shopping centers where financial benefit could inure to its shareholders. The Company is presently looking for new real estate investment opportunities and plans to continue to concentrate its real estate investments in developed properties. The acquisition of 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. The Company plans to borrow funds to leverage its investment capital. The amount of this mortgage debt will depend on a number of factors including, but not limited to, the availability of financing and the ability of projected property cash flows to support its operations and debt service. Additionally, the Company may make investments and loans in connection with real property owned by partnerships, corporations or individuals. MORTGAGES Information with respect to mortgage notes payable of the Company is set forth in Note 6 of the Notes to Consolidated Financial Statements. POTENTIAL RENTAL RATES 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 effective annual rental rate per unit for each of the Company's properties for fiscal year ended June 30, 1998 (i.e., gross annual rental revenues based on 100% occupancy divided by the total number of apartment units) and the occupancy rate for fiscal year ended June 30, 1998 (i.e., vacancy loss divided by total gross potential rent) are provided below. Effective Annual Physical Property Rental Rate Per Unit Occupancy Rate Morris County, NJ $9,549 99% Harrisburg, PA 6,476 85% Middletown, OH 5,687 68% Cincinnati, OH 6,573 81% Florence, KY 5,805 91% St. Louis County, MO I 4,887 94% St. Louis County, MO II 7,281 90% Irving, TX 6,388 92% San Antonio, TX I 6,197 75% San Antonio, TX II 5,948 90% San Antonio, TX III 5,174 86% Houston, TX (1) 5,590 52% (1) This property was acquired in February 1997 and was in the final phase of renovation as of June 30, 1998. MANAGEMENT OF THE PROPERTIES The Company utilizes two third party management companies with national operations to manage all of the Company's properties. Item 3. Legal Proceedings Guinness Peat Group plc, et al. v. Robert N. Gould,et al., Case No. 685760, was filed on February 22, 1995, in the Superior Court of the State of California for the County of San Diego. The lawsuit is a shareholders derivative suit brought by Guinness Peat Group plc and its wholly-owned subsidiary Allied Mutual Insurance Services Limited (collectively "GPG") against Intergroup, certain directors of Santa Fe and Santa Fe as a nominal defendant. The complaint alleged certain breaches of fiduciary duties by the directors in causing Santa Fe to enter into a December 20, 1994 Securities Purchase Agreement (the "Agreement") with Intergroup and fraud on the part of Intergroup in inducing the director defendants to enter into the Agreement. The complaint sought declaratory relief, rescission or reformation of the Agreement, injunctive relief and unspecified general and punitive damages. The director defendants requested indemnification from Santa Fe, including the advancement of costs for defense of the litigation to the full extent permitted by law, which was granted by Santa Fe. On April 14, 1995, the Superior Court granted motions by the director defendants and Intergroup requiring GPG to posts bonds to secure payment of their attorneys' fees should they prevail in the litigation. The required bonds, totaling $800,000, were posted by GPG. On July 3, 1997, the Court of Appeal, Fourth Appellate District, Division One of the State of California granted the director defendants' petition for a writ of mandate and directed the trial court to vacate its prior order denying the director defendants' motion for summary judgment and to enter a new order granting the motion. The Court of Appeal's decision became final on August 2, 1997; however, plaintiffs filed a petition for review to the California Supreme Court on August 12, 1997. That petition was denied by the Supreme Court on October 15, 1997. In its ruling, the Court of Appeal determined that the director defendants properly exercised their business judgment in connection with Santa Fe entering into the Securities Purchase Agreement with Intergroup. That decision effectively disposed of the remaining liability claims brought by plaintiffs in this action. Previously, on December 31, 1996, the trial court entered a summary judgment in favor of Intergroup, ruling that there was no fraud in connection with that transaction. That summary judgment, including a subsequent award of attorneys' fees and costs in favor of in the amount of $296,000, has been appealed by GPG. That appeal has now been fully briefed; however, oral argument and a subsequent decision on that appeal are not expected to occur for at least another twelve to eighteen months. As prevailing parties, the director defendants and Santa Fe also made application to the Superior Court for recovery of the attorneys' fees and costs expended in their successful defense of this litigation. On March 13, 1998, the trial court confirmed a prior tentative ruling and granted the applications for attorneys' fees and costs in the total amount of $936,000. On March 24, 1998 a judgment was entered in favor of the director defendants and Santa Fe which made the award of costs effective as of February 20, 1998. That judgment was appealed by GPG and is waiting to be briefed. On March 27, 1998, a wrongful termination action was filed in the Los Angeles County Superior Court entitled, Howard A. Jaffe v. The Corporation, et al., Case No. BC188323. The Complaint was filed by an ex-employee, officer and director against the Company and its President and Chairman. The Complaint, as originally filed, sought an award of back and future pay, employee benefits, restitution, unspecified punitive and special damages and attorneys' fees. In June of 1998, a demurrer to the Complaint was sustained without leave to amend, with respect to plaintiff's tort claim for breach of implied covenant of good faith. On or about August 3, 1998, a demurrer to a First Amended Complaint was sustained without leave to amend with respect to plaintiff's claim of violation of section 17200 et seq. of the California Business and Professions Code. The case is in its very early stages and discovery has just commenced, so it is not possible to predict the outcome at this time. As an officer and director, the Company's President and Chairman has requested indemnification from the Company as permitted by law and under the Bylaws and Articles of the Company. The case will be vigorously defended and there may be insurance coverage for all or part of the costs of the defense of this action and for all or part of any liability that may be imposed on the Company. 7709 Lankershim Ltd. v. Carreon Villa Apartments I, et al., Riverside County Superior Court Case No. 088325 was filed on March 27, 1996 against the Company and others. The action arises out of alleged construction defects in two Indio, California apartment complexes formerly owned by the Company. The Complaint alleges damages in the amount of $2,000,000. The Company has filed cross-complaints against the subcontractors and the architect. The case is still in its early stages and only limited discovery has taken place. Accordingly, it is not possible to assess what exposure, if any, the Company may have at this time. There may be insurance coverage for all of part of the costs of defense and for all or part of any liability that may be imposed on the Company. On October 15, 1997, a related action for Declaratory Relief was filed by the insurance carrier entitled, Truck Insurance Exchange v. Carreon Villa Apartments I, et al., Riverside County Superior Court Case No. 004158. In its Complaint, the carrier alleges that the Company has no coverage with respect to at least one of the Carreon entities. The Company has filed an answer and cross-complaint for breach of contract, breach of the covenant of good faith and fair dealing and for declaratory relief. Truck has filed a motion to strike the punitive damages claims in the cross-complaint, which was heard on September 10, 1998 and was taken under submission by the court. To date, no discovery has occurred. The Company intends to vigorously defend against the complaint and prosecute its cross-complaint in this action. It is not possible to predict the outcome of this action at this time. The Company is a defendant or co-defendant in various other legal actions involving various claims incident to the conduct of its business. Most of these claims are covered by insurance. Management does not anticipate the Company to suffer any material liability by reason of such actions. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for Common Equity and Related Stockholder Matters. MARKET As of June 30, 1998, there were 1,502 shareholders of record. The Company's Common Stock is traded on The NASDAQ Stock Market and is listed on the Pacific Exchange, Inc. The following table sets forth the high and low sales prices for the shares for the fiscal quarters indicated as reported by the National Quotation Bureau Incorporated or NASDAQ, Inc. High Low 1998 First Quarter 7/1 - 9/30 $28.00 $22.50 Second Quarter 10/1 - 12/31 $29.00 $22.50 Third Quarter 1/1 - 3/31 $29.50 $22.50 Fourth Quarter 4/1 - 6/30 $40.00 $26.50 1997 First Quarter 7/1 - 9/30 $38.50 $24.00 Second Quarter 10/1 - 12/31 $35.00 $25.50 Third Quarter 1/1 - 3/31 $28.50 $24.00 Fourth Quarter 4/1 - 6/30 $25.50 $18.00 DIVIDENDS On June 5, 1998 the Board of Directors approved a three-for-two stock split of the Company's $.01 par value Common Stock in the form of a stock dividend. The dividend was paid in shares of the Company's Common Stock on June 30, 1998 to shareholders of record as of June 16, 1998. In the future the Company may elect to declare dividends or retain all or a portion of the annual earnings to finance expansions or acquisitions or to establish a reserve for unexpected contingencies, capital requirements and operating expenses. On August 31, 1998 the Board of Directors authorized, subject to shareholder approval of an amendment to the Company's Certificate of Incorporation, an additional three-for-two forward stock split in the form of a stock dividend. See "Subsequent Events Note 14 - Notes to Consolidated Financial Statements". Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations. INTRODUCTION The discussion below and elsewhere in the Report includes forward-looking statements about the future business results and activities of the Company, which, by their very nature, involve a number of risks and uncertainties. When used in this discussion, the words "estimate", "project", "anticipate" and similar expressions, are subject to certain risks and uncertainties, such as changes in general economic conditions, local real estate markets, and competition, as well as uncertainties relating to uninsured losses, securities markets, and litigation, including those discussed below that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ACQUISITION During the year ended June 30, 1998 the Company acquired an additional 87,396 shares of Santa Fe for cash and 63,600 shares of Santa Fe in exchange for a 55.4% interest in the Company's Cincinnati, Ohio property resulting in a 46.9% ownership in Santa Fe. 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 the shares of the Santa Fe common stock that he owns. As a result of this agreement, the Company now has the power to vote 50.6% of the voting shares as of June 30, 1998 and accordingly has consolidated Santa Fe. Santa Fe's revenue is primarily generated through its 65.5% interest in Portsmouth Square, Inc. ("PSI"), which derives its revenue primarily through its 49.8% interest in Justice Investors ("Justice"), a limited partnership. Justice owns the land improvements and leasehold known as the Financial District Holiday Inn, a 556-room hotel in San Francisco, California. The acquisitions were accounted for under the purchase method. The results of operations of Santa Fe have been consolidated with those of the Company as if it had occurred at the beginning of the current fiscal year. RESULTS OF OPERATIONS For the Year Ended June 30, 1998 vs. 1997 The loss from real estate operations for the year ended June 30, 1998 compared to the income from real estate operations for the year ended June 30, 1997, was impacted by the acquisition of its Houston, Texas property and disposition of its Atlanta, Georgia property. The Company experienced higher than anticipated operating costs and lower than anticipated revenues in connection with the lease-up phase of its Houston, Texas property which was in its final phase of renovation as of June 30, 1998. The Company also experienced higher vacancy levels and operating expenses at certain other properties. Rental income from real estate operations increased by 2.7% to $11,876,000 for the year ended June 30, 1998 compared to $11,559,000 for the year ended June 30, 1997. The increase was primarily due to the Houston, Texas property acquired in February 1997 and an increase in the overall average rental rates. The increase was offset by lower occupancy levels at certain properties and by the disposition of the Atlanta, Georgia property in December 1996. Mortgage interest expense increased by 7.5% to $3,000,000 for the year ended June 30, 1998 compared to $2,791,000 for the year ended June 30, 1997. This is primarily due to a full year of mortgage interest expense associated with the Houston, Texas property acquired in February 1997. In addition, during the year ended June 30, 1998 the Company refinanced three of its properties. The principal amount borrowed against each of the three properties is higher than the previous outstanding mortgage balance; and, although the new interest rates are significantly lower, interest expense increased due to the higher principal balances. The mortgage interest rate on the Irving, Texas property was reduced to 7.01% from 10.375%, the mortgage interest rate on the St. Louis, Missouri II property was reduced to 7.45% from 9.625%. The mortgage interest rate on the St. Louis, Missouri I property was reduced to 6.734% from 8.875%. See "Note 15 Extraordinary Item - Notes to Consolidated Financial Statements". Property operating expenses increased 22.8% to $6,507,000 for the year ended June 30, 1998 compared to $5,300,000 for the year ended June 30, 1997 primarily due to a full year of expenses associated with the Houston, Texas property acquired in February 1997. Operating expenses also increased due to rehabilitation and lease-up activity associated with the Houston, Texas property which include personnel, leasing, cleaning, decorating and repairs and maintenance expenses. Additional expenses were incurred at certain other properties in connection with actions taken to raise occupancy levels. These expense increases were partially offset by the disposition of the Atlanta, Georgia property. Real estate taxes increased 20.7% to $1,093,000 for the year ended June 30, 1998 compared to $905,000 for the year ended June 30, 1997 due to the Ohio properties and the acquisition of the Houston, Texas property. Reduced expenses at the San Antonio and New Jersey properties and disposition of the Atlanta, Georgia property in December 1996 offset these ncreases. Depreciation increased 17.3% to $1,938,000 for the year ended June 30, 1998 compared to $1,652,000 for the year ended June 30, 1997 due primarily to the Houston, Texas property and additional depreciable basis in connection with capitalized property improvements, offset by the disposition of the Atlanta, Georgia property. On December 31, 1996, the Company sold its Atlanta, Georgia property for $1,800,000. The sales price, less closing costs and other expenses, resulted in net proceeds of $1,604,000 and a gain on sale of real estate of $631,000. Investment gains increased 221.1% to $12,864,000 for the year ended June 30, 1998 compared to $4,006,000 for the year ended June 30, 1997 and investment losses increased 1070.6% to $10,512,000 for the year ended June 30, 1998 compared to $898,000 for the year ended June 30, 1997. Realized investment gains and losses may fluctuate significantly from period to period, with a meaningful effect upon the Company's net earnings. However, in the opinion of management the amount of realized investment gain or loss for any given period has no predictive value, and variations in amounts from period to period have no practical analytical value, particularly in view of the net unrealized gain in the Company's overall investment portfolio. Margin interest, trading, and management expenses increased 66.4% to $1,468,000 for the year ended June 30, 1998 compared to $882,000 for the year ended June 30, 1997 due to an increase in margin interest expense to $994,000 from $368,000 respectively. The increase is partially offset by lower trading- related and management expenses, which were $474,000 and $514,000 for the year, ended June 30, 1998 and 1997, respectively. The Company's overall investment portfolio, which includes marketable securities, the Company's investment in Santa Fe based on the equity method and other investments, had a positive return of 7.84% for the year ended June 30, 1998 and a positive return of 41.1% for the year ended June 30, 1997. The return is calculated by dividing the net realized and unrealized gains and losses net of associated expenses by the average monthly investment balance of the overall investment portfolio. For the five years ended June 30, 1998, the overall investment portfolio achieved a positive average annual compounded return of 11.3%. It should be noted that other investments are investments that are not traded on any exchange and, accordingly, the return calculations do not reflect any increases or decreases in value of other investments until such gains or losses are realized or there is an other than temporary decline in value below the cost of the investment. The Company's equity in the net income of Justice Investors was $2,904,000 for the year ended June 30, 1998 compared to zero for the year ended June 30, 1997. This increase is due to the consolidation of Santa Fe's operations for the year ended June 30, 1998. General and administrative expenses increased 131.2% to $1,907,000 for the year ended June 30, 1998 compared to $825,000 for the year ended June 30, 1997. The increase includes $834,000 attributable to Santa Fe as well as increased professional fees. Miscellaneous expense increased to $434,000 for the year ended June 30, 1998 compared to miscellaneous income of $80,000 for the year ended June 30, 1997. The increase in expense is primarily due to the legal and professional fees incurred by the Company in connection with an independent review and defense of allegations made by a former officer and director of the Company. The current year includes approximately $108,000 in net miscellaneous income attributable to Santa Fe which includes approximately $209,000 in various income items offset by $101,000 in legal fee expenses incurred as a result of litigation filed by GPG against Santa Fe. Income tax expense of $934,000 and $1,439,000 was provided by the Company for the years ended June 30, 1998 and 1997, respectively. The decrease was primarily due to lower taxable income during the current period. Minority interest was $453,000 for the year ended June 30, 1998 compared to zero for the year ended June 30, 1997. This is due to the consolidation of Santa Fe's operations for the year ended June 30, 1998. The extraordinary loss of $328,000 (net of income tax effect) for the year ended June 30, 1998 includes approximately $436,000 in prepayment penalties incurred in connection with refinancing the mortgages on the Irving, Texas and St. Louis, Missouri I properties, approximately $111,000 in amortization expense related to the loan origination costs associated with the original mortgages which were repaid in connection with refinancing the St. Louis I and II properties and an income tax benefit of $219,000. See "Note 15 Extraordinary Item - Notes to Consolidated Financial Statements". FINANCIAL CONDITION AND LIQUIDITY The Company's cash flows are generated primarily from its real estate activities, sales of investment securities and borrowings related to both. The Company and Santa Fe generated net cash flow of $448,000 from operating activities, generated net cash flow of $4,057,000 from investing activities and used net cash flow of $1,003,000 from financing activities during the year ended June 30, 1998. The Company intends to sell all or a portion of its unimproved land. Should the Company consummate a sale, all or a portion of the proceeds may be utilized to provide additional funds to take advantage of other investment opportunities. During the year ended June 30, 1998, the Company improved properties in the aggregate amount of $3,757,000, which includes $109,000 of capitalized costs, related to property held for sale or development. Management believes the improvements to the properties should enhance market values, maintain the competitiveness of the Company's properties and potentially enable the Company to obtain a higher yield through higher rents. Marketable securities decreased $4,034,000 during the year ended June 30, 1998 compared to an increase of $3,107,000 for the year ended June 30, 1997. The decrease in securities sold was $629,000 and $1,037,000 for the year ended June 30, 1998 and 1997, respectively. Unrealized gains decreased 15.3% to $8,356,000 as of June 30, 1998 compared to $9,861,000 as of June 30, 1997. The Company's outstanding indebtedness represents mortgages on real estate, which amounted to $39,044,000 as of June 30, 1998. During the year ended June 30, 1998, the Company refinanced three of its mortgages, which produced $5,920,000 in net cash proceeds to the Company. Management will pursue refinancing activities as considered necessary or when deemed economically favorable to the Company. During the year ended June 30, 1998, the Company acquired approximately 5.4 acres of unimproved land adjacent to the Houston, Texas property for approximately $265,000. Management anticipates that its net cash flow from real estate operations, securities transactions and real estate financing activities will be sufficient to fund any property acquisitions, property improvements, debt service requirements and operating expenses during fiscal year 1999. Management also anticipates that the net cash flow generated from future operating activities will be sufficient to meet its long-term debt service requirements. During the year ended June 30, 1998 the Company granted options to a consultant to purchase 15,000 shares of its Common Stock, at exercise prices ranging from $33 to $67 per share giving effect to the three-for-two stock split which occurred in June 1998. The options vested immediately and expire on February 22, 2001. YEAR 2000 ISSUES The Company has been aware of the potential implications of the "Year 2000" issue could have on its business and as a result, has been in the process of determining what, if any, steps the Company must take to cure any potential computer software or hardware problems associated with the year 2000. Based on preliminary discussions with the Company's outside service providers and software and hardware vendors, the Company has determined that it should not incur any material liability to upgrade computer software and hardware to accommodate the year 2000. IMPACT OF INFLATION 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. The Company's revenue from its interest in Justice is primarily dependent on hotel revenues. Hotel room rates are typically impacted by supply and demand factors, not inflation, because rental of a hotel room is usually for a limited number of nights. Room rates are usually adjusted to account for inflationary cost increases, therefore; the impact of inflation should be minimal. Item 7. Financial Statements. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Accountants 13 Consolidated Balance Sheet at June 30, 1998 14 Consolidated Statements of Operations for the year ended June 30, 1998 and June 30, 1997 15 Consolidated Statements of Shareholders' Equity for the year ended June 30, 1998 and June 30, 1997 16 Consolidated Statements of Cash Flows for the year ended June 30, 1998 and June 30, 1997 17 Notes to Consolidated Financial Statements 18 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of The Intergroup Corporation In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 7 present fairly, in all material respects, the financial position of The Intergroup Corporation and its subsidiaries at June 30, 1998, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Los Angeles, California September 2, 1998 THE INTERGROUP CORPORATION CONSOLIDATED BALANCE SHEET As of June 30, 1998 ASSETS -------------- Investment in real estate, at cost: Land $ 6,445,000 Buildings, improvements and equipment 37,089,000 Property held for sale or development 2,129,000 ----------- 45,663,000 Less: accumulated depreciation (15,200,000) ----------- 30,463,000 Cash and cash equivalents 5,313,000 Restricted cash 1,731,000 Marketable equity securities: Available-for-sale 26,328,000 Trading 6,378,000 Investment in Justice 9,472,000 Other investments 1,649,000 Rent and other receivables 367,000 Prepaid expenses and other assets 1,321,000 ----------- Total Assets $ 83,022,000 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 39,044,000 Obligation for securities sold 10,620,000 Due to securities brokers 4,204,000 Accounts payable and other liabilities 2,974,000 Deferred income taxes 3,046,000 ---------- Total Liabilities 59,888,000 Minority Interest 10,515,000 Commitments and Contingencies Shareholders' Equity: Preferred stock, $.10 par value, 100,000 shares authorized; none issued - Common stock, $.01 par value, 1,500,000 shares authorized; 1,419,700 shares issued and 1,415,950 outstanding 14,000 Additional paid-in capital 8,686,000 Retained earnings 300,000 Unrealized gain on marketable securities, net of deferred taxes 5,147,000 Note receivable - stock options (1,438,000) Treasury stock, at cost, 3,750 shares (90,000) ----------- Total Shareholders' Equity 12,619,000 ----------- Total Liabilities and Shareholders' Equity $ 83,022,000 =========== The accompanying notes are an integral part of the consolidated financial statements. THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended June 30, 1998 1997 Real estate operations: ----------- ------------ Rental income $ 11,876,000 $ 11,559,000 Rental expenses: Mortgage interest expense 3,000,000 2,791,000 Property operating expenses 6,507,000 5,300,000 Real estate taxes 1,093,000 905,000 Depreciation 1,938,000 1,652,000 ----------- ----------- 12,538,000 10,648,000 Gain on sale of real estate - 630,000 ---------- ----------- (Loss) income from real estate operations (662,000) 1,541,000 ---------- ----------- Investment transactions: Dividend and interest income 1,084,000 286,000 Investment gains 12,864,000 4,006,000 Investment losses (10,512,000) (898,000) Margin interest, trading and management expenses (1,468,000) (882,000) Equity in net income of Justice Investors 2,904,000 - ----------- --------- Income from investment transactions 4,872,000 2,512,000 ----------- --------- Other income (expenses): General and administrative expenses (1,907,000) (825,000) Other income (expenses) (434,000) 80,000 ----------- ----------- Other expenses (2,341,000) (745,000) ----------- ----------- Income before provision for income taxes 1,869,000 3,308,000 Provision for income taxes 934,000 1,439,000 Minority interest 453,000 - ---------- ---------- Income Before Extraordinary Item 482,000 1,869,000 Extraordinary Loss due to early extinguishment of debt less applicable income tax benefit of $219,000 328,000 - ---------- ----------- Net Income $ 154,000 $ 1,869,000 ========== =========== Basic earnings per share: $ .11 $ 1.30 ========== =========== Weighted average number of shares outstanding 1,423,602 1,437,852 ========== =========== Comprehensive Income (Loss): Net Income $ 154,000 $ 1,869,000 Unrealized gain (loss) on securities arising during period (2,422,000) 4,559,000 Income tax benefit (expense) 884,000 (1,809,000) ----------- ------------ Comprehensive (Loss) Income $(1,384,000) $ 4,619,000 =========== ============ The accompanying notes are an integral part of the consolidated financial statements. THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Unrealized Note Additional Gain on Receivable Common Paid-in Retained Marketable Treasury Stock Stock Capital Earnings Securities Stock Options Total ------ --------- -------- ------------ -------- --------- ------ Balance at June 30,1996 $15,000 $13,658,000 $78,000 $3,230,000 ($6,403,000)($1,452,000) $9,126,000 Net Income 1,869,000 1,869,000 Purchase of treasury stock (155,000) (155,000) Net payments relating to accrued interest on Note receivable - Stock Options 14,000 14,000 Inrease in unrealized Gain on marketable Securities, net of tax 2,750,000 2,750,000 Balance at June 30, 1997 ------ ---------- --------- ---------- ----------- ---------- ---------- 15,000 13,658,000 1,947,000 5,980,000 (6,558,000) (1,438,000)13,604,000 Net Income 154,000 154,000 Purchase of treasury stock (339,000) (339,000) Retirement of treasury stock (5,000) (5,005,000)(1,797,000) 6,807,000 - Three-for-two stock 4,000 (7,000) (4,000) (7,000) Issuance of Common Stock Options 40,000 40,000 Decrease in unrealized Gain on marketable Securities, net of tax (1,538,000) (1,538,000) Increase in unrealized Gain due to Acquisition 705,000 705,000 Balance at June 30, 1998 ------- ---------- -------- ---------- -------- ----------- ----------- $14,000 $8,686,000 $300,000 $5,147,000 ($90,000) ($1,438,000) $12,619,000 ======= ========== ======== ========== ======== ============ =========== The accompanying notes are an integral part of the consolidated financial statements. THE INTERGROUP COPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended June 30, 1998 1997 ___________ __________ Cash flows from operating activities: Net Income $ 154,000 $ 1,869,000 Adjustments to reconcile net income to cash provided by operating activities: Depreciation of real estate 1,938,000 1,652,000 Amortization of investments and other assets 193,000 203,000 Equity in net income from Santa Fe Financial Corporation - (232,000) Gain on sale of real estate - (630,000) Equity in net income of Justice Investors (2,904,000) - Minority Interest 453,000 - Changes in assets and liabilities: Receivables (71,000) (108,000) Prepaid expenses and other assets 164,000 (52,000) Accounts payable and other liabilities 827,000 (628,000) Income taxes payable (306,000) 1,365,000 ----------- ------------ Net cash provided by operating activities 448,000 3,439,000 ---------- ------------ Cash flows from investing activities: Additions to buildings, improvements and equipment (3,757,000) (1,057,000) Investment in real estate (265,000) (4,970,000) Net proceeds from sale of real estate - 1,604,000 Investment in Santa Fe (1,230,000) (675,000) Reduction (investment) in marketable securities 4,034,000 (3,107,000) Reduction in other investments 1,006,000 1,999,000 Distributions from Justice Investors 2,096,000 - Cash of business acquired 2,173,000 - ----------- ---------- Net cash provided by (used for) investing activities 4,057,000 (6,206,000) ----------- ------------ Cash flows from financing activities: Principal payments on mortgage notes payable (1,232,000) (428,000) Proceeds from real estate refinancing 5,920,000 - Borrowings from mortgage notes payable - 3,596,000 Decrease in restricted cash 212,000 224,000 Decrease in securities sold (629,000) (1,037,000) (Decrease) increase in due to securities brokers (4,306,000) 1,444,000 Decrease in other liabilities (500,000) - Dividends paid to minority shareholders (129,000) - Purchase of treasury stock (339,000) (155,000) ----------- ----------- Net cash provided by (used for) financing activities (1,003,000) 3,644,000 ----------- ----------- Net increase in cash and cash equivalents 3,502,000 877,000 Cash and cash equivalents at beginning of period 1,811,000 934,000 ----------- ----------- Cash and cash equivalents at end of period $ 5,313,000 $1,811,000 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. THE INTERGROUP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business and Significant Accounting Policies and Practices: Description of the Business The Intergroup 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. The Company's Chairman and President is the Chairman and President of Santa Fe Financial Corporation ("Santa Fe") and two of the Company's directors and officers serve as directors of the three member Board of Directors of Santa Fe. As of June 30, 1997, the Company owned 37.5% and the Company's Chairman and President owned an additional 3.7% of the outstanding Common Stock of Santa Fe. Santa Fe was previously accounted for under the equity method. During the year ended June 30, 1998 the Company acquired an additional 87,396 shares of Santa for cash and an additional 63,600 shares in exchange for a 55.4% interest in the Company's Cincinnati, Ohio property resulting in a 46.9% ownership in Santa Fe. 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 the shares of the Santa Fe common stock that he owns. As a result of this agreement, the Company now has the power to vote 50.6% of the voting shares as of June 30, 1998 and accordingly has consolidated Santa Fe. Santa Fe's revenue is primarily generated through its 65.5% interest in Portsmouth Square, Inc. ("PSI"), which derives its revenue primarily through its 49.8% interest in Justice Investors ("Justice"), a limited partnership. Justice owns the land improvements and leasehold known as the Financial District Holiday Inn, a 556-room hotel in San Francisco, California. The acquisitions were accounted for under the purchase method. The results of operations of Santa Fe have been consolidated with those of the Company as if it had occurred at the beginning of the current fiscal year. Minority nterest includes preacquisition income of non Intergroup shareholders of both Santa Fe and Portsmouth prior to June 30, 1998. Equity income or (loss) of Santa Fe prior to June 30, 1998 included in earnings aggregated ($22,000) and $232,000 for the year ended June 30, 1998 and 1997, respectively. Principles of Consolidation and Significant Accounting Policies The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation. Investments in companies in which the Company maintains an ownership interest of 20% to 50% or exercises significant influence are accounted for under the equity method. The cost method is used where the Company maintains ownership interest of less than 20% and does not exercise significant influence over the investee. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the reporting period. Actual results could differ from those estimates. On June 5, 1998, the Company's Board of Directors approved a three-for-two stock split of the company's $.01 par value Common Stock in the form of a 50% stock dividend. The dividend was paid on June 30, 1998 to shareholders of record as of June 16, 1998. The result of the stock split increased the number of outstanding shares of the Company's $.01 par value Common Stock from 944,149 to 1,419,950 as of June 30, 1998. Where applicable, the Company's financial statements have been restated to reflect the impact of the stock split. During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No.128 specifies the computation, presentation and disclosure requirements for basic and fully diluted earnings per share. The Company reported earnings per share in accordance with SFAS 128 for the year ended June 30, 1998 and 1997. During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"). SFAS No. 129 reinstates various securities disclosure requirements previously in effect under Accounting Principals Board Opinion No. 15, which has been superseded by SFAS No. 128. The adoption of SFAS No. 129 did not have a material effect on the financial position or results of operations of the Company. During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The adoption of SFAS No. 130 did not have a material effect on the financial position or results of operations of the Company. During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. The adoption of SFAS No. 131 did not have a material effect on the financial position or results of operations of the Company. During the year ended June 30, 1998 the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 addresses the accounting for derivative instruments, including derivative instruments embedded in other contracts and hedging activities. The adoption of SFAS No. 133 did not have a material effect on the financial position or results of operations of the Company. Real Estate and Depreciation Investments in real estate are stated at cost. Depreciation of buildings, improvements and equipment is provided on the straight-line method based upon estimated useful lives of five to ten years for buildings and improvements and five to forty years for equipment. Expenditures for repairs and maintenance are charged to expense as incurred and improvements are capitalized. The carrying value of real estate is assessed regularly by management based on the operating performance of each property, including the review of occupancy levels, operating budgets, estimated useful life and estimated future cash flows. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. No such impairment losses have been recognized during the years ended June 30, 1998 and 1997. Marketable Securities Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. All marketable securities are defined as trading securities or available-for-sale securities under the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity Securities". The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designations at each balance sheet date. Securities classified as available-for-sale are carried at fair market value, with the unrealized holding gains and losses reported as a separate component of shareholders' equity. Certain securities are classified as trading securities when they are transferred to cover corresponding obligations of the same security sold short. These securities and the related obligations are marked to market with unrealized holding gains and losses included in earnings. The cost of investments sold is determined on the specific identification or the first-in, first-out method. 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. 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 earnings. Rental Income Rental income is recognized as earned. Revenue recognition from apartment rentals commences when an apartment unit is placed in service and occupied by a rent-paying tenant. Income Taxes Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by statutory tax rates. Deferred tax expense is the result of changes in the asset and/or liability for deferred taxes. Basic Earnings Per Share Basic earnings per share is calculated based upon the weighted average number of common shares outstanding during each fiscal year. Cash Equivalents and Restricted Cash For purposes of the statement of cash flows, the Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement reserves of the operating properties and tenant security deposits that are invested in certificates of deposit. 2. Investment in Real Estate: At June 30, 1998, investments in real estate consisted of twelve multi-family apartment projects located throughout the United States and approximately 27.8 acres of primarily unimproved land held for sale or development. All of the projects are completed operating properties that are directly owned by the Company and its subsidiary, Santa Fe. 3. Marketable Equity Securities: Available-for-Sale At June 30, 1998, the aggregate market value of marketable equity securities held for sale exceeded the aggregate cost by $8,356,000. The net unrealized gain is comprised of gross unrealized gains of $11,145,000 reduced by gross unrealized losses of $2,789,000. The net unrealized gain of $5,147,000, net of deferred taxes of $3,209,000, is included as a separate item in shareholders' equity. Proceeds from sales of securities were $48,591,000 and $16,422,000 during the years ended June 30, 1998 and 1997, respectively. Gross realized gains and losses, determined using FIFO costs, were $12,864,000 and $10,513,000, respectively. Trading For the year ended June 30, 1998 and 1997 gross gains from transfers of marketable equity securities from available-for-sale classification to a trading classification aggregated $1,069,000 and $3,297,000 respectively. Proceeds from sales of securities were $7,228,000 and $3,256,000 during the years ended June 30, 1998 and 1997, respectively. The net unrealized holding gain or (loss) for both the trading securities and the corresponding obligation for sale of securities aggregated ($1,449,000) and $39,000 at June 30, 1998 and 1997, respectively. Securities sold but not yet purchased included $16,000 related to naked short positions as of June 30, 1998. There were no naked positions as of June 30, 1997. 4. Investment in Justice: The consolidated accounts include a 49.8% interest in Justice Investors ("Justice"), a limited partnership. Justice owns the land improvements and leasehold known as the Financial District Holiday Inn, a 556-room hotel in San Francisco, California. PSI is both a limited and general partner in Justice and records its investment in Justice on the equity basis. Condensed financial statements for Justice Investors are as follows. Justice Investors Condensed Balance Sheet as of June 30, 1998 Total current assets $ 1,126,000 Property, plant and equipment, net of accumulated depreciation 5,772,000 Loan fees and deferred lease costs, net of accumulated depreciation 209,000 Total Assets ----------- $ 7,107,000 =========== Liabilities and partners' capital $ 79,000 Total current liabilities 2,012,000 Long-term debt 5,016,000 ----------- Total Liabilities and Partners' Capital $ 7,107,000 =========== Justice Investors Condensed Results of Operations for the year ended June 30, 1998 1997 ----------- ------------ Revenues $ 6,861,000 $ 5,727,000 Net Income 5,840,000 4,605,000 5. Other Investments: Other investments primarily consist of investments in corporations and securities that are not traded on any exchange. 6. Mortgage Notes Payable: At June 30, 1998, the Company had mortgage debt outstanding of $39,044,000. Mortgage debt includes amortizing first mortgages maturing from May 2000 through December 2008 of $39,018,000 at fixed rates ranging from 6.734% to 9.500%, and an amortizing second mortgage of $26,000 maturing in February 2001. Each mortgage is secured by its respective land and building. The annual combined aggregate principal payments on the mortgage notes payable for the five-year period commencing July 1, 1998 are as follows: Year Ending June 30, 1999 $ 523,000 2000 5,784,000 2001 508,000 2002 543,000 2003 4,981,000 Thereafter 26,705,000 ----------- Total $ 39,044,000 =========== 7. Due to Securities Broker: Various security brokers have advanced funds for the purchase of, and secured by, marketable securities under standard margin agreements in accordance with and subject to the limitations of 17CFR Section 240.15c3-3 under the Securities Exchange Act of 1934 and Section #220.6 of Regulation T issued by the Board of Governors of the Federal Reserve System. The interest rate on advances or cash on deposit can vary daily with money market rates. The interest rate on margin balances is based on the Federal Funds rate plus 0.875% (7.125% at June 30, 1998). The interest rate on cash or deposits is based on the Federal Funds rate less 0.5% (5.75% at June 30, 1998). The interest rate on interest rebates in connection with short positions is based on the Federal Funds rate less 0.375% (5.875% at June 30, 1998). 8. Income Taxes: The provision for the Company's income taxes is comprised of the following: Year Ended June 30, 1998 1997 ----------- ----------- Current tax expense $ 978,000 $ 106,000 Deferred taxes expense (benefit) (44,000) 1,333,000 ----------- ----------- $ 934,000 $ 1,439,000 =========== =========== The components of the deferred tax liability as of June 30, 1998, are as follows: Marketable securities basis differences $ 2,519,000 Depreciation and fixed asset basis differences 1,530,000 Minority interests 235,000 ---------- Gross deferred tax liabilities 4,284,000 ---------- State income taxes (48,000) NOL and credit carryovers (870,000) Miscellaneous (320,000) ----------- Gross deferred tax (assets) (1,238,000) Net deferred tax liability $ 3,046,000 ============ 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: Year Ended June 30, 1998 1997 ---------- ----------- Income tax at federal statutory rates $ 635,000 $ 1,125,000 State income taxes, net of federal benefit 122,000 203,000 Change in valuation allowance and restatement of deferred liabilities 2,000 111,000 Other 175,000 - --------- ----------- Total income tax expense $ 934,000 $ 1,439,000 ========= =========== At June 30, 1998, the Company has federal and state net operating loss carryforwards of approximately $2,313,000 and $2,446,000, respectively. The carryforwards expire in varying amounts through the year 2011. The tax laws related to the utilization of loss carryforwards are complex and the amount of the Company's loss carryforward that will ultimately be available to offset future taxable income may be limited. 9. Supplemental Cash Flow Information: Cash paid for margin interest for the year ended June 30, 1998 and 1997 was $994,000 and $368,000, respectively. Cash paid for interest on mortgage notes payable for the year ended June 30, 1998 and 1997 was $2,972,000 and $2,742,000, respectively. Cash paid for income taxes aggregated $1,126,000 and $162,000 for the year ended June 30, 1998 and 1997, respectively. 10. Stock Options and Employee Stock Ownership Plan and Trust: During the year ended June 30, 1998 the Company granted options to a consulting firm to purchase 15,000 shares of its Common Stock, at exercise prices ranging from $33 to $67 per share giving effect to the three-for-two stock split which occurred in June 1998. The options vested immediately and expire on February 22, 2001. In April 1986, the Company established an Employee Stock Ownership Plan and Trust ("ESOP" or the "Plan"), effective July 1985, which enabled eligible employees to receive an ownership interest in stock of the Company. The Company did not make ESOP contributions during fiscal 1998 or 1997. The Company distributed 777 shares to terminated employees during fiscal 1998 and made no stock distributions during fiscal year 1997. 11. Stock Split in the Form of a Dividend: On June 5, 1998 the Board of Directors approved a three-for-two stock split of the Company's $.01 par value Common Stock in the form of a stock dividend. The dividend was paid in shares of the Company's Common Stock on June 30, 1998 to shareholders of record as of June 16, 1998. In the future the Company may elect to declare dividends or retain all or a portion of the annual earnings to finance expansions or acquisitions or to establish a reserve for unexpected contingencies, capital requirements and operating expenses. 12. Commitments and Contingencies: The lease on the Company's corporate headquarters expires May 31, 1999. Rent expense was approximately $166,000 in 1998 and $162,000 in 1997. Minimum annual rentals under all leases aggregate $172,000 for the year ending June 30, 1999. On February 22, 1995, the Company was named as a defendant in a shareholders' derivative suit filed against Santa Fe and certain directors of Santa Fe, arising out of the Company's investment in Santa Fe. On December 31, 1996, a final judgment was entered in favor of the Company. On June 9, 1997, the Company was awarded $296,000 in attorneys' fees and costs as a prevailing party in that litigation, effective as of April 25, 1997. The judgment and the award of attorneys have been appealed. The action will continue to be vigorously defended and every effort will be made by the Company to recover the fees and costs it incurred. On July 3, 1997, the Court of Appeal, granted the director defendants' petition for a writ of mandate and directed the trial court to vacate its prior order denying the director defendants' motion for summary judgment and to enter a new order granting the motion. The Court of Appeal's decision became final on August 2, 1997; however, plaintiffs filed a petition for review to the California Supreme Court on August 12, 1997. That petition was denied by the Supreme Court on October 15, 1997. As prevailing parties, the director defendants and Santa Fe also made application to the Superior Court for recovery of the attorneys' fees and costs expended in their successful defense of this litigation. On March 13, 1998, the trial court confirmed a prior tentative ruling and granted the applications for attorneys' fees and costs in the total amount of $936,000. On March 24, 1998 a judgment was entered in favor of the director defendants and Santa Fe which made the award of costs effective as of February 20, 1998. That judgment was appealed and is waiting to be briefed. On March 27, 1998, a wrongful termination action was filed. The Complaint was filed by an ex-employee, officer and director against the Company and its President and Chairman. The Complaint, as originally filed, sought an award of back and future pay, employee benefits, restitution, unspecified punitive and special damages and attorneys' fees. In June of 1998, a demurrer to the Complaint was sustained without leave to amend, with respect to plaintiff's tort claim for breach of implied covenant of good faith. On or about August 3, 1998, a demurrer to a First Amended Complaint was sustained without leave to amend with respect to plaintiff's claim of violation of section 17200 et seq. of the California Business and Professions Code. The case is in its very early stages and discovery has just commenced, so it is not possible to predict the outcome at this time. As an officer and director, the Company's President and Chairman has requested indemnification from the Company as permitted by law and under the Bylaws and Articles of the Company. The case will be vigorously defended and there may be insurance coverage for all or part of the costs of the defense of this action and for all or part of any liability that may be imposed on the Company. On March 27, 1996 an action was filed against the Company and others arising out of alleged construction defects in two Indio, California apartment complexes formerly owned by the Company. The Complaint alleges damages in the amount of $2,000,000. The Company has filed cross-complaints against the subcontractors and the architect. The case is still in its early stages and only limited discovery has taken place. Accordingly, it is not possible to assess what exposure, if any, the Company may have at this time. There may be insurance coverage for all of part of the costs of defense and for all or part of any liability that may be imposed on the Company. On October 15, 1997, a related action for Declaratory Relief was filed by the insurance carrier alleging that the Company has no coverage with respect to at least one of the apartment complexes. The Company has filed an answer and cross-complaint for breach of contract, breach of the covenant of good faith and fair dealing and for declaratory relief. Truck Insurance Company has filed a motion to strike the punitive damages claims in the cross-complaint, which was heard on September 10, 1998 and was taken under submission by the court. To date, no discovery has occurred. The Company intends to vigorously defend against the complaint and prosecute its cross-complaint in this action. It is not possible to predict the outcome of this action at this time. The Company maintains a "phantom" stock program, which provides for the issuance of 60,000 units with each unit equivalent to one share of Common Stock. Participating members of the program are credited with the incremental value in shares of Common Stock and dividend equivalents over a five-year period from the date of award. One-fifth of such credits in the participants' accounts will vest on the first anniversary date of the award and an additional one-fifth vest on each of the next four anniversary dates. As of June 30, 1998, no granted units are outstanding. On January 13, 1998 the Company's Board of Directors approved the repurchase, from time to time, of up to 150,000 shares of its Common Stock. Such repurchases, together with previously authorized repurchases of up to 72,000 shares which remain under a prior repurchase program, may be made in the discretion of management and depending upon market conditions. The Company acquired 14,250 and 8,550 shares during the years ended June 30, 1998 and 1997, respectively. 13. Related Party Transactions: In May 1996, the Company's President exercised options to purchase 250,000 shares of Common Stock at a price of $11.50 per share through a full recourse note due the Company on demand, but in no event later than May 2001. The note bears interest floating at the lower of 10% or the prime rate (8.50% at June 30, 1998) with interest payable quarterly. The balance of the note receivable of $1,437,500 is reflected as a reduction of shareholders' equity at June 30, 1998. During the fiscal year ended June 30, 1998 and 1997, the President of the Company made interest payments of approximately $122,000 and $134,000, respectively in connection with the note relating to his 1996 exercise of stock options. The Company's President is the trustee of the Employee Stock Ownership Plan. In his role as trustee, he has the power to vote the shares of stock allocated to participants' accounts when directions are not provided to the trustee on a timely basis. 14. Subsequent Event: On August 18, 1998 the Company entered into a contract to sell its Harrisburg, Pennsylvania property for gross sales price of $3,763,000. The sale is expected to close in early October, 1998. On August 31, 1998 the Company's Board of Directors authorized, subject to shareholder approval, an amendment to the Company's Certificate of Incorporation which would increase the number of shares of Common Stock, $.01 par value per share that the Company is authorized to issue from 1,500,000 shares to 4,000,000 shares. The proposed amendment would also increase the authorized number of shares of Preferred Stock and authorize a Class A Common Stock. The Board of Directors also set a date of October 2, 1998, for a Special Meeting of Shareholders to consider and vote on the proposed amendment. On August 31, 1998 the Company's Board of Directors declared a three-for-two forward stock split of the Company's Common Stock, $.01 par value per share, to be paid in the form of a stock dividend on October 9, 1998 to shareholders of record as of September 23, 1998. The payment of the stock dividend will be subject to shareholder approval of the amendment to the Company's Certificate of Incorporation. These actions are being taken to help the Company achieve and sustain long term compliance with the applicable maintenance criteria for continued listing on the NASDAQ National Market. 15. Extraordinary Item: During the year ended June 30, 1998 the Company refinanced three of its properties. The Company incurred $436,000 in prepayment penalties and $111,000 in expense related to the write-off of deferred loan costs associated with loans paid off in connection with the refinancings. These expenses are partially offset by a $219,000 income tax benefit. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Item 10. Executive Compensation. Item 11. Security Ownership of Certain Beneficial Owners and Management. Item 12. Certain Relationships and Related Transactions. The information for Part III, Items 9 through 12 are hereby incorporated by reference from the Company's Proxy Statement, which will be filed with the commission within one hundred twenty days (120) of the close of the fiscal year pursuant to regulation 14A. Item 13. Exhibits, List and Reports on Form 8-K. (a) Exhibits: 3. Certificate of Incorporation and By-Laws ** Restated Certificate of Incorporation dated February 20, 1998 4. Instruments defining the rights of security holders, including indentures ** 9. Voting Trust Agreement (a) Voting Trust Agreement dated June 30, 1998 between John V. Winfield and The Intergroup Corporation 10. Material Contracts (a) Stock Option Agreement dated December 19, 1984 between the Trust and John V. Winfield * (b) Share of Beneficial Interest Unit Plan ("phantom stock program") as approved by the shareholders on February 11, 1985 * (c) Employee Stock Ownership Plan and Trust Agreement *** (d) Stock Appreciation Rights Agreement dated April 22, 1987 as approved by shareholders on August 1, 198 **** (e) Note and Exercise Agreement from Mr. John V. Winfield dated May 17, 1996 ***** 21. Subsidiaries: (1) Intergroup Summit Hills, Inc. (incorporated on August 12, 1993 in TX) (2) Intergroup Mariposa, Inc. (incorporated on June 23, 1994 in TX) (3) Intergroup Arlington Arms, Inc. (incorporated on August 5, 1993 in OH) (4) Intergroup Woodland Village, Inc. (incorporated on August 5, 1993 in OH) (5) Intergroup Cross Keys, Inc. (incorporated on April 1, 1994 in MO) (6) Intergroup Bridgeton, Inc. (incorporated on May 12, 1994 in MO) (7) Intergroup Whisperwood, Inc. (incorporated on June 20, 1994 in PA) (8) Intergroup Eagle Creek, Inc. (incorporated on April 15, 1994 in TX) (9) Intergroup Entertainment Corp. (incorporated on December 23, 1993 in DE) (10) Mutual Real Estate Corp. (incorporated on March 10, 1994 in TX) (11) WinGroup Capital (incorporated on September 21, 1994 in CA) (12) Broadview Enterprises, Inc. (incorporated April 14, 1995 in MO) (13) Wayward, Inc. (incorporated April 18, 1995 in MO) (14) Golden West Entertainment, Inc. (incorporated February 15, 1990 in CA) (15) Golden West Television Productions, Inc. (incorporated September 17, 1991 in CA) (16) Golden West Television Productions, Inc. (incorporated March 17, 1986 in NY) (17) Intergroup The Trails, Inc. (incorporated on September 14, 1994 in TX) (18) Intergroup Meadowbrook Gardens, Inc. (incorporated on June 23, 1994 in NJ) (19) Intergroup Pine Lake, Inc. (incorporated on February 9, 1996 in KY) (20) Bellagio Capital Fund, LLC (established on June 18, 1997 in CA) (21) Intergroup Casa Maria, Inc. (incorporated on April 3, 1997 in TX) (22) Casa Maria Limited Partnership (established August 19, 1993 in KS) (23) Healthy Planet Communications, Inc. (incorporated July 3, 1997 in CA) 27. Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. * All Exhibits marked by an asterisk are incorporated herein by reference to the Trust's Form 10-K Annual Report filed with the Securities and Exchange Commission on September 20, 1985. ** All Exhibits marked by two asterisks are incorporated herein by reference to the Trust's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission on September 6, 1985, Amendment No. 1 to Form S-4 as filed with the Securities and Exchange Commission on October 23, 1985, Exhibit 14 to Form 8 Amendment No. 1 to Form 8 filed with the Securities & Exchange Commission November 1987 and Form 8 Amendment No. 1 Item 4 filed with the Securities & Exchange Commission October 1988. *** All Exhibits marked by three asterisks are incorporated herein by reference to the Company's Form 10-K Annual Report filed with the Securities and Exchange Commission on September 26, 1986. **** All Exhibits marked by four asterisks are incorporated herein by reference to the Company's Form 10-K Annual Report filed with the Securities and Exchange Commission on September 28, 1988. ***** All Exhibits marked by five asterisks are incorporated herein by reference to the Company's Form 10-KSB Annual Report filed with the Securities and Exchange Commission on September 16, 1996. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE INTERGROUP CORPORATION (Registrant) Date: September 23, 1998 By:_____________________ /s/ John V. Winfield John V. Winfield, Chairman of the Board; President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: September 23, 1998 By:_______________________ /s/ John V. Winfield John V. Winfield, Chairman of the Board; President and Chief Executive Officer Date: September 23, 1998 By:________________________ /s/ William J. Nance William J. Nance, Director and Treasurer Date: September 23, 1998 By:______________________ /s/ Josef A. Grunwald Josef A. Grunwald, Director Date: September 23, 1998 By:________________________ /s/ Mildred Bond Roxborough Mildred Bond Roxborough, Director Date: September 23, 1998 By:_________________________ /s/ Gary N. Jacobs, Esq. Gary N. Jacobs, Esq., Director and Secretary Date: September 23, 1998 By:___________________________ /s/ Dr. John C. Love Dr. John C. Love, Director Date: September 23, 1998 By:____________________________ /s/ Gregory C. McPherson Gregory C. McPherson, Executive Vice President Date: September 23, 1998 By:__________________________ /s/ Mary E. Arnold Mary E. Arnold, Vice President Finance EX-3 2 RESTATED CERTIFICATE OF INCORPORATION OF THE INTERGROUP CORPORATION THE INTERGROUP CORPORATION, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is "The Intergroup Corporation". 2. The date of filing of its original Certificate of Incorporation with the Secretary of State was the 10th day of September, 1985. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Certificate of Incorporation of his corporation as heretofore amended or supplemented and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. 3. The text of the Certificate of Incorporation as amended or supplemented heretofore is hereby restated without further amendments or changes to read as herein set forth in full: FIRST The name of the corporation is as follows: THE INTERGROUP CORPORATION. SECOND The address of its registered office in the State of Delaware is No. 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD The nature of the business or purposes to be conducted or promoted are as follows: To acquire, hold, utilize, improve, deal with, lease, mortgage, or otherwise encumber and dispose of property of every type and description, wherever situated, and to operate such properties on a business-like basis and so as to provide opportunities to all without regard to race, creed or color; and To engage in any other lawful act or activity for which corporations may be organized under the General Corporation law of Delaware. FOURTH The total number of shares of stock which the corporation shall have the authority to issue is One Million Six Hundred Thousand (1,600,000) shares, which are divided into two classes as follows: One Million Five Hundred Thousand (1,500,000) shares of Common Stock, $0.01 par value per share, and One Hundred Thousand (100,000) shares of Preferred Stock, $0.10 par value per share. The Board of Directors shall have authority to fix from time to time by resolution or resolutions the designations, voting powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof, in respect of the number of shares of any series of Preferred Stock. Subject to the protective conditions and restrictions of any outstanding Preferred Stock, any amendment to this Certificate of Incorporation which increases or decreases the authorized capital stock of any class or classes may be adopted by the affirmative vote of the holders of a majority of the outstanding shares of the voting stock of the corporation. FIFTH The corporation is to have perpetual existence. SIXTH The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. SEVENTH In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized: (a) To make, alter, or repeal the by-laws of the corporation; (b) To direct and determine the use and disposition of any annual net profits or net assets in excess of capital; to set apart out of any of the funds of the corporation available for dividendsa reserve or reserves for any proper purpose; and to abolish any such reserve in the manner in which it was created; (c) To establish bonus, profit-sharing, stock option, retirement or other types of incentive or compensation plans for the employees (including officers and directors) of the corporation and to fix the amount of the profits to be distributed or shared and to determine the persons to participate in any such plans and the amounts of their respective participations; (d) From time to time to determine whether and under what conditions and regulations, the accounts and books of the corporation (other than the stock ledger), or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of the corporation, except as conferred by statute or authorized by the Board of Directors or by a resolution of the stockholders; (e) To authorize, and cause to be executed, mortgages and liens upon the real and personal property of the corporation; and (f) By a majority of the whole Board, to designate one or more committees, each committee to consist of one or more of the directors of the corporation. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending this Certificate ofIncorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation. EIGHTH The number of members of the Board of Directors will be fixed from time to time by the Board of Directors, but (subject to vacancies) in no event may there be less than five directors or more than nine. The Board of Directors shall be divided in three (3) classes as nearly equal in number as possible, with the term of office of Class A expiring at the 1985 annual meeting of stockholders, of Class B expiring at the 1986 annual meeting of stockholders, and Class C expiring at the 1987 annual meeting of stockholders. At each annual meeting of stockholders beginning with the 1985 annual meeting of stockholders, directors chosen to succeed those whose terms then expire shall be elected for a term of office expiring at the third succeeding annual meeting of stockholders after their election. When any director is elected by the remaining directors to fill a vacancy occasioned by the death, resignation or removal or a director; the successor director will hold office until the annual meeting of stockholders at which the director who died, resigned or was removed would have been required, in the regular order of business, to stand for reelection even though such term may extend beyond the next annual meeting. When the number of directors is changed, any newly created directorships or any decreases in directorships shall be so apportioned among the classes to make all classes as nearly equal in number as possible. When the number of directors is increased by the Board of Directors and the resultant vacancies are filled by the Board of Directors, such additional directors shall serve only until the next annual meeting of stockholders, at which time they shall be subject to election and classification by the stockholders. NINTH No holder of shares of the corporation shall be entitled as of right to subscribe for, purchase or receive any part of any new or additional issue of shares whether now or hereafter authorized, or of any bonds, debentures, warrants, options or other securities convertible into shares of any class. TENTH Except as set forth herein (a) any merger or consolidation of the corporation, or any of its subsidiaries, with or into any other trust, corporation or other entity; or (b) any purchase, lease or other acquisition by the corporation or any of its subsidiaries, of any assets or securities or combination thereof, from any other trust, corporation, person or entity, in exchange for voting securities (or securities convertible into voting securities or options, warrants or rights to purchase voting securities or securities convertible into voting securities) of the corporation, or any of its subsidiaries, shall require the affirmative vote of the holders of seventy-five (75%) percent of the directors and the affirmative vote or written consent of fifty one (51%) percent of the issued and outstanding shares entitled to vote thereon, or in the event of rejection of such proposal by the directors, an affirmative vote of seventy-five (75%) percent of the issued and outstanding shares entitled to vote thereon. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified, by law or in any agreement with any national securities exchange. The special voting requirements contained herein, shall not apply to any transaction which involves only the corporation, or any of its subsidiaries, and a corporation of which a majority of the outstanding shares of each class of capital stock entitled to vote in elections of directors is owned of record or beneficially by the corporation, or any of its subsidiaries. ELEVENTH Meetings of stockholders and directors may be held outside the State of Delaware, if the by- laws so provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the by-laws of the corporation. TWELFTH The corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or resolution of disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person; provided, that no director, officer or agent may satisfy any right of indemnity or reimbursement granted herein or to which he or she may be otherwise entitled except out of the property of the corporation, and no stock holder shall be personally liable with respect to any claim of a director, officer or agent for indemnity or reimbursement. THIRTEENTH Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders of any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. FOURTEENTH The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in any manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. FIFTEENTH No director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not operate so as to limit the liability of a director to an extent greater than permitted under Title 8, Section 102(b) (7), as the same may be amended or supplemented, or any successor provision thereto. 4. This Restated Certificate of Incorporation was duly adopted by the Board of Directors in accordance with Section 245 of the General Corporation Law of the State of Delaware. 5. This Restated Certificate of Incorporation shall be effective on February 20, 1998. IN WITNESS WHEREOF, said Board of Directors of THE INTERGROUP CORPORATION has caused this Certificate to be signed by John V. Winfield its Chairman, this 20th day of February, 1998. THE INTERGROUP CORPORATION By: /s/ John V. Winfield John V. Winfield President and Chairman of the Board EX-9 3 VOTING TRUST AGREEMENT This Agreement is entered into this 30th day of June 1998, by and between John V. Winfield ("Winfield") and The Intergroup Corporation, a Delaware corporation ("InterGroup" or the "Company"). WHEREAS, Winfield is the President, Chairman of the Board and Chief Executive Officer of InterGroup; and the record and beneficial owner of 49,400 shares of Common Stock, $.10 par value (the "Common Stock"), of Santa Fe Financial Corporation ("Santa Fe"); and WHEREAS, InterGroup is also a substantial shareholder of Santa Fe; and WHEREAS, the parties believe that it is in the best interests of the Company that InterGroup have voting control over the shares of Common Stock in order to effectuate a consolidation of Santa Fe and InterGroup for financial reporting purposes; NOW THEREFORE, for valuable consideration and the mutual covenants and conditions set forth herein, Winfield and InterGroup agree as follows: 1. Voting Rights. Winfield grants to InterGroup the exclusive right to vote the Common Stock, in any and all matters, for such period of time as Winfield owns said shares. Said grant of voting rights shall not be deemed a transfer of any ownership rights in the Common Stock. 2. Right of First Refusal. Before selling or transferring any of the Common Stock, Winfield must first offer the shares to InterGroup, in the following manner: (a) Winfield shall mail or personally deliver a copy of any written offer received by him to sell the Common stock, or a notice of intent to sell if there is no written offer, to the Secretary of the Company, stating the number of Common Shares and the price, terms, and conditions of the proposed sale or transfer, including the name of any proposed outside buyer. The Company shall then have the right to purchase any or all of those shares at the price and on the terms and conditions stated in the offer, or at the current market price if there is no written offer, by giving written notice of its election to purchase a specified number of shares. This notice shall be given by mail or personal delivery within two (2) business days after the date of receipt of any written offer to purchase or notice of intent to sell in the open market. (b) If the Company fails to give notice of its election to purchase within the prescribed period, or if it elects to purchase fewer than all of the shares being offered, than Winfield shall be free to sell or transfer the balance of the Common Stock according to the terms of the written offer or on the open market. THE INTERGROUP CORPORATION ____________________________ by __________________________________ JOHN V. WINFIELD GREGORY C. McPHERSON Executive Vice President EX-27 4
5 YEAR JUN-30-1998 JUN-30-1998 5,313,000 34,355,000 367,000 0 0 52,559,000 45,663,000 15,200,000 83,022,000 20,844,000 39,044,000 14,000 0 0 12,605,000 83,022,000 0 15,312,000 0 11,006,000 2,341,000 0 3,000,000 1,869,000 934,000 482,000 0 328,000 0 154,000 0.11 0.11
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