10KSB 1 ig10k63002.txt THE INTERGROUP CORPORATION FORM 10-KSB FYE JUNE 30, 2002 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, 2002 [ ] 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 13-3293645 ------------------------------- ------------------ (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 820 Moraga Drive, Los Angeles, California 90049-1632 ----------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number: (310) 889-2500 Securities registered under Section 12(b) of the Exchange Act: Common Stock-$.01 Par Value Pacific Exchange, Inc. ------------------- ----------------------------------------- Title of Each Class Name of Each Exchange On Which Registered 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] The issuer's revenues for its most recent fiscal year were $14,960,000. Page 1 of 49 The aggregate market value of the common equity held by non-affiliates of issuer, computed by reference to the price the common equity was sold on September 13, 2002 was $10,766,478. The number of shares outstanding of the issuer's Common Stock, $.01 par value, as of September 13, 2002 was 1,850,077. Transitional Small Business Disclosure Format (check one): Yes No [X] DOCUMENTS INCORPORATED BY REFERENCE: None TABLE OF CONTENTS PART I PAGE Item 1. Description of Business 3 Item 2. Description of Properties 4 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market For Common Equity and Related Stockholder Matters 13 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7. Financial Statements 18 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 36 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act 36 Item 10. Executive Compensation 39 Item 11. Security Ownership of Certain Beneficial Owners and Management 43 Item 12. Certain Relationships and Related Transactions 45 Item 13. Exhibits and Reports on Form 8-K 46 SIGNATURES 48 Page 2 of 49 PART I Item 1. Description of Business. BUSINESS DEVELOPMENT 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 broaden its social impact to engage in any opportunity which would offer the potential to increase shareholder value within the Company's underlying commitment to social responsibility, which it redefined to encompass investments in any area which can have a socially redeeming value and promote the establishment of a fair, equal and better society. The Company's principal sources of revenue have been, and continue to be, derived from the operations of its multi-family residential properties, from the sales and disposition of its real property assets, from the operations of its majority owned subsidiary, Santa Fe Financial Corporation ("Santa Fe"), and from the investment of its cash and securities assets. Santa Fe's revenue is primarily generated through its holdings of the Holiday Inn Financial District/Chinatown, a 566-room hotel in San Francisco, California. Santa Fe and its 68.8% owned subsidiary, Portsmouth Square, Inc. ("Portsmouth"), jointly oversee their interest in the operations of the hotel. Portsmouth is a general partner and a 49.8% limited partner in Justice Investors ("Justice"), a California limited partnership, which owns the land, improvements and leaseholds. BUSINESS OF ISSUER The Company's principal business is the ownership and management of real estate. Properties include twenty-two apartment complexes, a hotel, two commercial real estate properties, and a single-family house as a strategic investment. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has investments in unimproved real property that is held for sale or development. 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. See Item 2 for a description of the Company's current investments in and investment policies concerning real property. The Company has invested in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential. The Company also has a controlling interest in Santa Fe, which derives its revenue primarily through an interest in a 566- Page 3 of 49 room Holiday Inn in San Francisco, California. In addition, Santa Fe's operations also include an interest in two of the apartment complexes and a marketable securities portfolio. 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 its apartments, hotel, and commercial properties 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, which the Company believes have realized their potential, and re-investing in properties that may require renovation but that offer greater appreciation potential. EMPLOYEES As of June 30, 2002, the Company had a total of 13 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, 2002, the Company's investment in real estate consisted of properties located throughout the United States, but which are concentrated in Texas and Southern California. These properties include twenty two apartment complexes, one single-family house as a strategic investment, and two commercial real estate properties, one of which serves as the Company's corporate headquarters. All apartment complexes and the single-family house are completed, operating properties. One of the commercial real estate properties is being prepared for operation. The Company owns approximately 9.5 acres of unimproved real estate in Texas. The Company also owns an interest in a San Francisco hotel property through its subsidiaries' interest, in Justice Investors. 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 (see further discussion on Houston, Texas property). 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, 2002 were approximately $169,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $4,925,000 at June 30, 2002 and the maturity date of the mortgage is January 1, 2006. Page 4 of 49 St. Louis, Missouri. The St. Louis property is a two-story project with 264 units on approximately 17.5 acres. The Company acquired the complex on November 1, 1968 at an initial cost of $2,328,000. For the year ended June 30, 2002, real estate property taxes were approximately $104,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 35 years. The outstanding mortgage balance was approximately $5,722,000 at June 30, 2002 and the maturity date of the mortgage is July 1, 2008. On August 2, 2001, the Company was awarded $13,862,000 from the Circuit court of St. Louis County, Missouri, which granted the City of St. Louis permission to take possession of the Company's previously owned St. Louis property, a 176-unit apartment complex, in a condemnation action filed by the City of St. Louis. The Company realized a gain of $10,277,000 and received net proceeds of $9,255,000 after payment of the mortgage on the property, costs and attorneys' fees. On August 10, 2001, the City of St. Louis filed Exceptions to Commissioners' Report challenging the amount of the award to the Company and requesting a jury trial on the matter. On August 21, 2002, the Company and the City of Saint Louis entered into a settlement of the matter before trial. Pursuant to the terms of the settlement, the Company is to pay back to the City the amount of $762,000, which is included in accounts payable and other liabilities, from the condemnation award of $13,862,000. Payments are to be made in twelve monthly installments without interest. Collateral for the obligation and penalties in the event of default are still being negotiated by the parties. 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, 2002, real estate property taxes were approximately $24,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $4,111,000 at June 30, 2002 and the maturity date of the mortgage is May 1, 2006. Irving, Texas. The Company's Irving properties consist of two apartment complexes. The first apartment complex 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, 2002, real estate property taxes were approximately $214,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $4,391,000 at June 30, 2002 and the maturity date of the mortgage is January 1, 2008. The second apartment complex consists of two-story town homes with 54 units on approximately 3.0 acres. The Company acquired the property on November 3, 2000 at an initial cost of approximately $1,980,000. For the year ended June 30, 2002, real estate property taxes were approximately $60,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $1,213,000 at June 30, 2002 and the maturity date of the mortgage is July 1, 2006. San Antonio, Texas. The San Antonio property is a two-story project with 132 units on approximately 4.3 acres. The Company acquired the complex on June 29, 1993 for $2,752,000. For the year ended June 30, 2002, real estate taxes were approximately $127,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $3,138,000 at June 30, 2002 and the maturity date of the mortgage is December 1, 2008. Page 5 of 49 Houston, Texas. The Houston property is a two-story apartment complex with 442 units on approximately 23.4 acres. The Company acquired the complex in February 1997 for an initial cost of $4,970,000. For the year ended June 30, 2002, real estate taxes were approximately $215,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The property has an outstanding mortgage balance and a line of credit balance of approximately $3,575,000 and $4,000,000, respectively, at June 30, 2002. Both encumbrances have maturity dates of September 15, 2002. The Company requested and was granted a ninety-day extension of the maturity dates of the mortgage and line of credit to December 15, 2002, while the Company negotiates with the lender and explores other options. The Company also owns approximately 5 acres of unimproved land adjacent to this property. The land was purchased initially for $267,000 in July 1997. Austin, Texas. The Company's Austin properties consist of two apartment complexes. The first Austin property is a 169,000 square foot, two-story project with 190 units. The Company acquired the complex on November 18, 1999 for $4,150,000. The Company also acquired an adjacent complex with 59 units on January 8, 2002 for $1,681,000. For the year ended June 30, 2002, real estate taxes were approximately $160,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $5,446,000 at June 30, 2002 and the maturity date of the mortgage is January 2, 2003. The Company also owns approximately 4 acres of land adjacent to this property. The Company is currently negotiating with the lender to extend the maturity dates. The second apartment complex consists of a 87,700 square foot, two-story project with 112 units. The Company acquired the complex on September 5, 2001 for $3,824,000. For the period ended June 30, 2002, real estate taxes were approximately $50,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $2,254,000 at June 30, 2002 and the maturity date of the mortgage is September 1, 2009. Los Angeles, California. The Company owns two commercial properties, thirteen apartment complexes, and a single-family house in the general area of West Los Angeles. The first Los Angeles commercial property is a 5,500 square foot, two story building that serves as the Company's corporate offices. The Company acquired the building on March 4, 1999 for $1,876,000. The property taxes for the year ended June 30, 2002 were approximately $21,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $1,246,000 at June 30, 2002 and the maturity date of the mortgage is April 15, 2009. The second Los Angeles commercial property is a 5,900 square foot commercial building. The Company acquired the building on September 15, 2000 for $1,758,000. The property taxes for the year ended June 30, 2002 were approximately $10,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $848,000 at June 30, 2002 and the maturity date of the mortgage is December 15, 2013. The first Los Angeles apartment complex is a 10,600 square foot two-story apartment with 12 units. The Company acquired the property on July 30, 1999 at an initial cost of approximately $1,305,000. For the year ended June 30, 2002, real estate property taxes were approximately $15,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of Page 6 of 49 30 years. The outstanding mortgage balance was approximately $755,000 at June 30, 2002 and the maturity date of the mortgage is August 1, 2029. The second Los Angeles apartment complex is a 29,000 square foot three-story apartment with 27 units. This complex is held by Intergroup Woodland Village, Inc. ("Woodland Village"), which is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The property was acquired on September 29, 1999 at an initial cost of approximately $4,075,000. For the year ended June 30, 2002, real estate property taxes were approximately $45,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $1,906,000 at June 30, 2002 and the maturity date of the mortgage is October 1, 2029. The third Los Angeles apartment complex is a 12,700 square foot apartment with 14 units. The Company acquired the property on October 20, 1999 at an initial cost of approximately $2,150,000. For the year ended June 30, 2002, real estate property taxes were approximately $25,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $1,123,000 at June 30, 2002 and the maturity date of the mortgage is December 1, 2029. The fourth Los Angeles apartment complex is a 10,500 square foot apartment with 10 units. The Company acquired the property on November 10, 1999 at an initial cost of approximately $1,675,000. For the year ended June 30, 2002, real estate property taxes were approximately $20,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $839,000 at June 30, 2002 and the maturity date of the mortgage is December 31, 2029. The fifth Los Angeles apartment complex is a 26,100 square foot two-story apartment with 31 units. The Company acquired the property on May 26, 2000 at an initial cost of approximately $7,500,000. For the year ended June 30, 2002, real estate property taxes were approximately $79,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 30 years. The outstanding mortgage balance was approximately $2,234,000 at June 30, 2002 and the maturity date of the mortgage is June 1, 2030. The sixth Los Angeles apartment complex is a 27,600 square foot two-story apartment with 30 units. The Company acquired the property on July 7, 2000 at an initial cost of approximately $4,411,000. For the year ended June 30, 2002, real estate property taxes were approximately $58,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $2,703,000 at June 30, 2002 and the maturity date of the mortgage is August 10, 2028. The seventh Los Angeles apartment complex is a 3,000 square foot apartment with 4 units. The Company acquired the property on July 19, 2000 at an initial cost of approximately $1,070,000. For the year ended June 30, 2002, real estate property taxes were approximately $13,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $449,000 at June 30, 2002 and the maturity date of the mortgage is August 1, 2030. The eighth Los Angeles apartment complex is a 4,500 square foot two-story apartment with 4 units. The Company acquired the property on July 28, 2000 at an initial cost of approximately $1,005,000. For the year ended June 30, 2002, real estate property taxes were approximately $12,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $591,000 at June 30, 2002 and the maturity date of the mortgage is August 1, 2030. Page 7 of 49 The ninth Los Angeles apartment complex is a 7,500 square foot apartment with 7 units. The Company acquired the property on August 9, 2000 at an initial cost of approximately $1,308,000. For the year ended June 30, 2002, real estate property taxes were approximately $34,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $664,000 at June 30, 2002 and the maturity date of the mortgage is August 15, 2030. The tenth Los Angeles apartment complex is a 4,700 square foot two-story apartment with 5 units. The Company acquired the property on August 15, 2000 at an initial cost of approximately $997,000. For the year ended June 30, 2002, real estate property taxes were approximately $12,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $490,000 at June 30, 2002 and the maturity date of the mortgage is September 15, 2030. The eleventh Los Angeles apartment complex is a 32,800 square foot two-story apartment with 24 units. The Company acquired the property on March 8, 2001 at an initial cost of approximately $2,859,000. For the year ended June 30, 2002, real estate property taxes were approximately $39,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $1,779,000 at June 30, 2002 and the maturity date of the mortgage is April 1, 2031. The twelfth Los Angeles apartment complex is a 13,000 square foot two-story apartment with 8 units. The Company acquired the property on May 1, 2001 at an initial cost of approximately $1,206,000. For the year ended June 30, 2002, real estate property taxes were approximately $14,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $585,000 at June 30, 2002 and the maturity date of the mortgage is May 1, 2031. The thirteenth Los Angeles apartment complex, which is owned 100% by the Company's subsidiary Santa Fe, is a 4,200 square foot two-story apartment with 3 units. Santa Fe acquired the property on February 1, 2002 at an initial cost of approximately $785,000. For the year ended June 30, 2002, real estate property taxes were approximately $13,000. Depreciation is recorded on the straight-line method based upon an estimated useful Life of 39 years. The outstanding mortgage balance was approximately $461,000 at June 30, 2002 and the maturity date of the mortgage is February 1, 2032. The Los Angeles single-family house is a 2,771 square foot home. The Company acquired the property on November 9, 2000 at an initial cost of approximately $660,000. For the year ended June 30, 2002, real estate property taxes were approximately $8,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 39 years. The outstanding mortgage balance was approximately $481,000 at June 30, 2002 and the maturity date of the mortgage is December 1, 2030. Page 8 of 49 San Francisco, California Hotel. The San Francisco hotel property owned by Justice Investors is located near the Financial District, one block from the Transamerica Pyramid. Embarcadero Center is within walking distance. Chinatown is directly across the bridge that runs from the hotel to Portsmouth Square Park. The hotel is a 31 story, steel and concrete, A-frame building which contains 566 guest rooms situated on 22 floors. One floor houses the Chinese Culture Center pursuant to a long- term, nominal-rent lease, and three floors are devoted to a reservation desk, lobby shops, dining room, coffee shop, hotel support facilities, a fitness center, a guest business center, meeting and banquet rooms and offices. Other features of the Holiday Inn include a rooftop swimming pool, 5-storied underground garage and pedestrian bridge across Kearny Street connecting the hotel and the Chinese Culture Center with Portsmouth Square Park in Chinatown. The bridge, built and owned by the partnership, is included in the lease to the Chinese Culture Center. On March 15, 1995, Justice Investors, as lessor, entered into an amended and restated lease with Holiday Inn, as lessee, for the hotel portion of the project, with an effective date of January 1, 1995. Effective July 28, 1998, Felcor Lodging Trust, Inc. ("Felcor", NYSE: FCH) assumed the obligations of the lessee under the lease. The initial term of the new lease is for a 10- year term expiring on December 31, 2004. The lessee also has an option to renew the lease for one additional term of five years, which would extend the lease to December 31, 2009. The lease requires the lessee to pay an annual rent of the greater of twenty percent (20%) of gross room revenues or $2,500,000 plus fifty percent (50%) of total revenues from the demised premises less operating expenses, base rent and capital requirements. Under the terms of the lease, the lessee is responsible for all maintenance and repairs to the property, certain capital improvements, taxes and insurance. In the opinion of management the property is adequately covered by insurance. The garage lease between Justice Investors and Evon provides for a monthly rental of sixty percent (60%) of gross parking revenues with a minimum rent of $21,750 per month. That lease expires in November 2010. The lessee is responsible for insurance, repairs and maintenance, utilities and all taxes assessed against the improvements to the leased premises. The garage is operated by Ampco Parking pursuant to a sublease agreement with Evon. REAL ESTATE INVESTMENT POLICIES The most significant investment activity of the Company has been to acquire, renovate, operate and, when appropriate, sell income-producing real estate. Through its marketable securities portfolio the Company has indirectly invested in additional real estate related investments such as hotels and office buildings. The Company 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 the 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. Page 9 of 49 MORTGAGES Information with respect to mortgage notes payable of the Company is set forth in Note 5 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 (gross annual rental revenues based on 100% occupancy divided by the total number of units) and the occupancy rate (total gross potential rent less vacancy loss divided by total gross potential rent) for each of the Company's operating properties for fiscal year ended June 30, 2002 are provided below. Effective Annual Physical Property Rental Rate Per Unit Occupancy Rate -------- -------------------- -------------- Apartments: 1. Morris County, NJ $11,405 96% 2. St. Louis, MO $ 6,269 48% 3. Florence, KY $ 6,698 88% 4. Irving, TX (1) $ 7,623 91% 5. Irving, TX (2) $ 9,126 92% 6. San Antonio, TX $ 6,140 96% 7. Houston, TX $ 6,354 95% 8. Austin, TX (1) $11,173 41% 9. Austin, TX (2) $ 8,056 69% 10. Los Angeles, CA (1) $12,010 80% 11. Los Angeles, CA (2) $13,377 93% 12. Los Angeles, CA (3) $15,347 93% 13. Los Angeles, CA (4) $15,923 91% 14. Los Angeles, CA (5) $17,308 89% 15. Los Angeles, CA (6) $15,557 67% 16. Los Angeles, CA (7) $17,884 99% 17. Los Angeles, CA (8) $21,296 98% 18. Los Angeles, CA (9) $16,522 92% 19. Los Angeles, CA (10) $17,132 97% 20. Los Angeles, CA (11) $11,566 91% 21. Los Angeles, CA (12) $11,128 92% 22. Los Angeles, CA (13) $20,488 10% Single family: 23. Los Angeles, CA $82,200 72% MANAGEMENT OF THE PROPERTIES All properties are managed by the Company. The Company has a client service agreement with a professional employer organization, which establishes a three-party relationship whereby the Company and the professional employer organization act as co-employers of the employees who work at the properties. Page 10 of 49 MARKETABLE SECURITIES INVESTMENT POLICIES In addition to real estate, the Company also invests from time to time in income producing instruments, corporate debt and equity securities, mortgage backed securities, securities issued by REIT's and other companies which invest primarily in real estate. The Company's securities investments are made under the supervision of a Securities Investment Committee of the Board of Directors. The Committee currently has three members and is chaired by the Company's Chairman of the Board and President, John V. Winfield. The Committee has delegated authority to manage the portfolio to the Company's Chairman and President together with such assistants and management committees he may engage. The Committee has established investment guidelines for the Company's investments. These guidelines presently include: (i) corporate equity securities should be listed on the New York or American Stock Exchanges or the Nasdaq NMS Market; (ii) securities should be priced above $5.00 per share; and (iii) investment in a particular issuer should not exceed 5% of the market value of the total portfolio. The investment policies do not require the Company to divest itself of investments, which initially meet these guidelines but subsequently fail to meet one or more of the investment criteria. Non-conforming investments require the approval of the Securities Investment Committee. The Committee has in the past approved non-conforming investments and may in the future approve non-conforming investments. The Securities investment Committee may modify these guidelines from time to time. The Company's investment portfolio is diversified with 44 different equity and fixed income positions. Only six individual securities comprise more than 5% of the equity value of the portfolio, with the largest being 17%. The amount of the Company's investment in any particular issue may increase or decrease, and additions or reductions to its securities portfolio may occur, at any time. While it is the internal policy of the Company to limit its initial investment in any single equity to less than 5% of its total portfolio value, that investment could eventually exceed 5% as a result of equity appreciation or reductions in other positions. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. As of June 30, 2002, the market value of the Company's marketable securities was $6,437,000. The Company may also invest, with the approval of the Securities Investment Committee, in unlisted companies, through private placements. Those investments in non-marketable securities are carried at cost on the Company's balance sheet as part of other investments and are reviewed for impairment on a periodic basis. The Company may also use exchange traded funds, options and futures to hedge against certain stock positions and index futures to hedge against market risk and enhance the performance of the Company's portfolio while reducing the overall portfolio's risk and volatility. As part of its investment strategies, the Company may assume short positions in marketable securities. Short sales are used by the Company to potentially offset normal market risks undertaken in the course of its investing activities or to provide additional return opportunities. As of June 30, 2002, the Company had obligations for securities sold (equities short) of $491,000 and had no naked short positions. In addition, the Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms. The use of available leverage is guided by the business judgment of management and is subject to any internal investment guidelines, which may be imposed by the Securities Investment Committee. The margin used by the Company may fluctuate depending on market conditions. The use of Page 11 of 49 leverage could be viewed as risky and the market values of the portfolio may be subject to large fluctuations. As of June 30, 2002, the Company had a margin balance of $579,000 and incurred $482,000 and $2,047,000 in margin interest during the fiscal years ended June 30, 2002 and June 30, 2001, respectively. On June 28, 2001, the Company, its subsidiary, Santa Fe, and Portsmouth entered into an agreement with an investment advisory company, for the management of their securities portfolios. That was the first time that the Company had relied on an investment advisor to manage its investments on a discretionary basis. The results were not acceptable, and the Company terminated its agreement with the investment advisor on November 7, 2001. As Chairman of the Securities Investment Committee, the Company's President and Chief Executive officer, John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of Santa Fe and Portsmouth and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, his family, Santa Fe and Portsmouth may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and his family members, and the resources of Santa Fe and Portsmouth, at risk in connection with investment decisions made on behalf of the Company. Item 3. Legal Proceedings Continental Casualty Company v. The InterGroup Corporation and John V. Winfield; United States District Court, Central District of California, Case No. 01-01034. On February 2, 2001, a Complaint for Declaratory Relief was filed by the Company's Directors and Officers' Liability insurance carrier, Continental Casualty Company ("CNA"), respecting certain coverage claims relating to litigation filed by a former employee, officer and director, which was settled by the Company. Although CNA is the named plaintiff for purposes of the declaratory relief cause of action, it is the Company and Mr. Winfield who are seeking monetary awards for the settlement payment and the unreimbursed portion of the attorneys' fees incurred in that action. The Company and Mr. Winfield have filed answers, affirmative defenses and counter-claims for breach of written contract, breach of the implied covenant of good faith and fair dealing and for promissory fraud. In response, CNA filed two motions to dismiss the counterclaims, which were ultimately denied by the Court. Subsequently, CNA filed a motion for summary judgment, the hearing on which has been taken off-calendar due to the assignment of the case to a new judge. As a result of that reassignment, the trial date was also vacated, with no new date having been set. The outcome of this case cannot be reasonably predicted at this time. City of St. Louis, Missouri v. The InterGroup Corporation, Intergroup Bridgeton, Inc., et al., Circuit Court of St. Louis County, State of Missouri, Cause No. 01CC000945. This was a condemnation action filed on April 17, 2001, whereby the City of St. Louis sought to acquire the Company's 176-unit apartment complex located in St. Louis, Missouri by eminent domain for an airport expansion. Following a hearing, a Commissioners' Report was filed on August 2, 2001 awarding the Company the amount of $13,862,000 and granting the City of St. Louis Page 12 of 49 permission to take possession of the property. On August 10, 2001, the City of St. Louis filed Exceptions to Commissioners' Report challenging the amount of the award to the Company and requesting a jury trial de novo on the matter. On August 21, 2002, the Company and the City of Saint Louis entered into a settlement of the matter before trial. Pursuant to the terms of the settlement, the Company is to pay back to the City the amount of $762,000 from the condemnation award of $13,862,000. Payments are to be made in twelve monthly installments without interest. Collateral for the obligation and penalties in the event of default are still being negotiated by the parties. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5. Market for Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on The National Market System of the Nasdaq Stock Market, Inc. ("Nasdaq-NMS") and is also listed on the Pacific Exchange, Inc. The following table sets forth the high and low sales prices (adjusted for stock splits) for the Company's common shares for each quarter of the last two fiscal years as reported by the National Quotation Bureau Incorporated or Nasdaq, Inc. Fiscal 2002 High Low ----------- ----- ----- First Quarter 7/1 - 9/30 $19.20 $18.20 Second Quarter 10/1 - 12/31 $19.72 $18.05 Third Quarter 1/1 - 3/31 $20.20 $18.15 Fourth Quarter 4/1 - 6/30 $18.60 $15.25 Fiscal 2001 High Low ----------- ----- ----- First Quarter 7/1 - 9/30 $24.00 $18.75 Second Quarter 10/1 - 12/31 $21.00 $18.87 Third Quarter 1/1 - 3/31 $20.87 $18.75 Fourth Quarter 4/1 - 6/30 $20.00 $16.00 As of September 13, 2002, there were approximately 756 shareholders of record. DIVIDENDS The Company has not declared any cash dividends on its common stock and does not foresee issuing cash dividends in the near future. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The following table sets forth information as of September 13, 2002, with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance, aggregated as follows: Page 13 of 49 Plan Category Number of Weighted-average Number of securities securities to exercise price remaining available be issued of outstanding for future issuance upon exercise options, under equity of outstanding warrants and compensation plans options, rights (excluding warrants and securities rights reflected in column (a)) _____________________________________________________________________________ (a) (b) (c) _____________________________________________________________________________ Equity compensation plans approved by security holders 232,000 $13.04 68,000 _____________________________________________________________________________ Equity compensation plans not approved by security holders None N/A None _____________________________________________________________________________ Total 232,000 $13.04 68,000 _____________________________________________________________________________ Item 6. Management 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 the impact of terrorism and war on the national and international economies, including tourism and the securities markets, 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. Page 14 of 49 RESULTS OF OPERATIONS For the Year Ended June 30, 2002 as compared to June 30, 2001. Net loss increased to $4,204,000 for the year ended June 30, 2002, from $2,511,000 in the prior year. This was primarily due to increased losses from investment transactions, a decrease in equity in net income of Justice Investors and an increase in rental expenses, partially offset by a gain on sale of real estate. Income from real estate operations increased to $9,162,000 from $166,000. This was primarily due to the $10,277,000 gain on sale of the St. Louis, Missouri property, and partially offset by a decrease in rental income and an increase in rental expenses. Rental income decreased to $12,800,000 from $13,151,000. This was primarily due to the decrease in rental income from a property sold in August 2001 and decreases in occupancy rates at the St. Louis, Missouri property and one of the Austin, Texas properties. The St. Louis property was being converted to a senior community. This change was reconsidered in the fourth quarter of fiscal 2002 and is no longer being pursued. The Austin property was under renovation. These decreases were partially offset by the increase in rental income by two new properties purchased during the year, as well as the Company's other properties increased rental income due to higher rents and/or reduced vacancies. Property operating expenses increased to $6,545,000 from $5,520,000. The increase was primarily due to the operating expenses from two new properties purchased during the year. In addition, the St. Louis, Missouri property and an Austin, Texas property increased operating expenses due to the repositioning and renovation work done during the current year. Other increases were due to higher repair and maintenance, salaries, cleaning and insurance expenses. These increases were partially offset by the decrease in operating expenses from a property sold in August 2001. Mortgage interest expenses decreased to $3,371,000 from $3,813,000. This was primarily due to a decrease in mortgage interest expenses for the Houston, Texas and Austin, Texas properties as a result of the significant decline in the prime interest rate compared to the prior year and the sale of the St. Louis property. This was partially offset by the increase due to the property acquisitions. Real estate taxes increased to $1,506,000 from $1,237,000. This was primarily due to the acquisition of properties, partially offset by the sale of the St. Louis property. The decrease in equity in net income of Justice Investors to $2,160,000 from $3,928,000 was primarily attributable to a 48% decrease in the total hotel and garage revenue. This was primarily due to a decrease in both occupancy and room rates of the hotel during the current year as a result of a slow down in the San Francisco area economy, increased competition and the continuing impact that the terrorist attacks of September 11, 2001 have had on tourism and the hospitality industry in San Francisco. The Company had a loss from investment transactions of $21,087,000 for the year ended June 30, 2002 as compared to a loss of $2,184,000 for the year ended June 30, 2001. The change in loss from investment transactions was primarily due to the increase in net investment loss to $19,447,000 from a gain of $86,000 and decrease in interest and dividend income to $312,000 from $1,563,000. This was partially offset by margin interest, trading and management expenses decreasing to $1,952,000 from $3,833,000. Page 15 of 49 The decrease in dividend and interest income to $312,000 from $1,563,000 was primarily due to a decrease of income producing securities in the Company's investment portfolio, which consisted mainly of equity securities. The decrease in margin interest, trading and management expenses to $1,952,000 from $3,833,000 was primarily due to a decrease in margin interest to $482,000 from $2,047,000 as a result of a decrease in the size of the investment portfolio and a lower average daily margin balance during the year ended June 30, 2002. The Company also had a decrease in investment advisory fees to $110,000 from $275,000. Investment gains and losses on investments may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net earnings. However, the amount of investment gains or losses for any given period may have no predictive value and variations in amount from period to period may have no analytical value. As previously discussed, on June 28, 2001, the Company, Santa Fe and Portsmouth entered into an agreement with an investment advisory company, for the management of their securities portfolios. That was the first time that the Company had relied on an investment advisor to manage its investments on a discretionary basis. The results were not acceptable, and the Company terminated its agreement with the investment advisor on November 7, 2001. During that period of time, the Company's investment portfolio had a significant concentration in computer software, computer technology, internet technology and services, telecommunications, and aircraft industry sectors. The securities in those sectors, especially those traded on The Nasdaq Stock Market, greatly declined in that quarter and were particularly hard hit by the events of September 11, 2001. As a result, the Company had a significant net decline in the market value of its securities portfolio. Since the Company resumed management of its securities portfolio on November 8, 2001, it has sought to reposition and diversify its portfolio by individual securities as well as by industry sectors to mitigate against market risk. Despite those efforts, the Company's securities portfolio suffered additional losses, especially during the fourth quarter of the fiscal year ended June 30, 2002, when securities markets further declined in the wake of corporate and accounting scandals and loss of general investor confidence in the overall markets. The increase in general and administrative expenses to $1,928,000 from $1,619,000 was primarily due to increased insurance costs, professional and consulting fees and accrued wages. Other expense decreased to $680,000 from $1,047,000 primarily as a result of legal settlement expenses and attorneys' fees paid by the Company in the prior year, partially offset by recovery of attorney's fees in another matter. The provision for income tax benefit increased to $5,094,000 from $308,000 due to the greater loss before taxes incurred during the year ended June 30, 2002. Minority interest changed to a minority benefit of $3,075,000 from a minority expense of ($2,063,000) as a result of a net loss generated by the Company's subsidiary, Santa Fe, during fiscal 2002 compared to net income generated in fiscal 2001. Page 16 of 49 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 used cash flow of $5,111,000 from operating activities, generated net cash flow of $9,530,000 from investing activities, and used net cash flow of $3,414,000 in financing activities during the year ended June 30, 2002. During the year ended June 30, 2002, the Company improved properties in the aggregate amount of $2,734,000. Management believes the improvements to the properties should enhance market values, maintain the competitiveness of the Company's properties and potentially enable the Company to obtain a higher yield through higher rents. The Company's Board of Directors has given the Company the authority to repurchase, from time to time, up to a total of 333,000 shares of its Common Stock. Such repurchases may be made at the discretion of management and depending upon market conditions. During the year ended June 30, 2002, the Company acquired an additional 36,655 shares of its Common Stock for $685,000. Approximately 50,000 shares remain eligible for Company to repurchase under that authorization. The events of September 11, 2001, had a dramatic impact on the domestic and global economies resulting in a significant decline in securities markets. Although the Company's investment portfolio felt part of that impact, 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 in fiscal year 2003. Management also anticipates that the net cash flow generated from future operating activities will be sufficient to meet its long-term debt service requirements. The Company has no off balance sheet arrangements. The Company's contractual obligations and commercial commitments are its mortgages, a line of credit and a settlement payment (other obligations). The annual principal payments on the mortgages, the line of credit and the settlement for the five-year period commencing July 1, 2002 are approximately as follows:
Contractual Less Than 1 - 3 4 - 5 Over 5 Obligations Total 1 year years years years ----------- ---------- --------- --------- ---------- Long-Term Debt $51,929,000 $ 9,630,000 $1,362,000 $9,836,000 $31,101,000 Line of Credit 4,000,000 4,000,000 - - - Other Obligations 762,000 762,000 - - - ---------- ---------- --------- --------- ---------- Total Contractual Cash Obligations $56,691,000 $14,392,000 $1,362,000 $9,836,000 $31,101,000 ===============================================================
Page 17 of 49 IMPACT OF INFLATION The Company's residential and commercial 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 Investors 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. CRITICAL ACCOUNTING POLICIES The Company reviews its long-lived assets and other investments for impairment when circumstances indicate that a potential loss in carrying value may have occurred. To the extent that projected future undiscounted cash flows from the operation of the hotel property, owned through the Company's investment in Justice Investors, and rental properties are less than the carrying value of the assets, the carrying value of the assets are reduced to their fair value. For other investments, the Company reviews the investment's operating results, financial position and other relevant factors to determine whether the estimated fair value of the asset is less than the carrying value of the asset. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading with net change in unrealized gains or losses included in earnings. The Company's other accounting policies are straightforward in their application. Item 7. Financial Statements. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants 19 Consolidated Balance Sheet at June 30, 2002 20 Consolidated Statements of Operations for the years ended June 30, 2002 and June 30, 2001 21 Consolidated Statements of Shareholders' Equity for the years ended June 30, 2002 and June 30, 2001 22 Consolidated Statements of Cash Flows for the years ended June 30, 2002 and June 30, 2001 23 Notes to Consolidated Financial Statements 24 Page 18 of 49 Report of Independent Accountants To the Board of Directors and Shareholders of The InterGroup Corporation In our opinion, based on our audit, the accompanying consolidated balance sheet and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of The InterGroup Corporation at June 30, 2002 and the results of its operations and its cash flows for the years ended June 30, 2002, and June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audits 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 our opinion. /s/ PricewaterhouseCoopers LLP Los Angeles, California September 19, 2002 Page 19 of 49 THE INTERGROUP CORPORATION CONSOLIDATED BALANCE SHEET As of June 30, 2002 ----------- ASSETS Investment in real estate, at cost: Land $ 25,704,000 Buildings, improvements and equipment 53,350,000 Property held for sale or development 866,000 ----------- 79,920,000 Less: accumulated depreciation (15,978,000) ----------- 63,942,000 Investment in Justice Investors 9,857,000 Cash and cash equivalents 1,883,000 Restricted cash 972,000 Investment in marketable securities 6,437,000 Prepaid expenses and other assets 1,219,000 ----------- Total Assets $ 84,310,000 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 55,929,000 Obligation for securities sold 491,000 Due to securities brokers 579,000 Accounts payable and other liabilities 4,248,000 Deferred income taxes 1,529,000 ---------- Total Liabilities 62,776,000 ---------- Minority Interest 9,478,000 ---------- Commitments and Contingencies Shareholders' Equity: Preferred stock, $.01 par value, 2,500,000 shares authorized; none issued - Common stock - Class A, $.01 par value, 2,500,000 shares authorized: none issued - Common stock, $.01 par value, 4,000,000 shares authorized; 2,129,288 shares issued and 1,850,077 outstanding 21,000 Additional paid-in capital 8,686,000 Retained earnings 9,095,000 Note receivable - stock options (1,438,000) Treasury stock, at cost, 279,211 shares (4,308,000) ----------- Total Shareholders' Equity 12,056,000 ----------- Total Liabilities and Shareholders' Equity $ 84,310,000 =========== The accompanying notes are an integral part of the consolidated financial statements. Page 20 of 49
THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended June 30, 2002 2001 ----------- ----------- Real estate operations: Rental income $ 12,800,000 $ 13,151,000 Rental expenses: Property operating expenses (6,545,000) (5,520,000) Mortgage interest expense (3,371,000) (3,813,000) Real estate taxes (1,506,000) (1,237,000) Depreciation (2,493,000) (2,415,000) ----------- ----------- (1,115,000) 166,000 Gain on sale of real estate 10,277,000 - ----------- ----------- Income from real estate operations 9,162,000 166,000 ----------- ----------- Equity in net income of Justice Investors 2,160,000 3,928,000 ----------- ----------- Investment transactions: Net investment (losses) gains (19,447,000) 86,000 Dividend and interest income 312,000 1,563,000 Margin interest, trading & management expenses (1,952,000) (3,833,000) ----------- ----------- Loss from investment transactions (21,087,000) (2,184,000) ----------- ----------- Other expense: General and administrative expenses (1,928,000) (1,619,000) Other expense (680,000) (1,047,000) ----------- ----------- Other expense (2,608,000) (2,666,000) ----------- ----------- Loss before provision for income taxes and minority interest (12,373,000) (756,000) Provision for income tax benefit 5,094,000 308,000 ----------- ----------- Loss before minority interest (7,279,000) (448,000) Minority interest 3,075,000 (2,063,000) ----------- ----------- Net loss $ (4,204,000) $ (2,511,000) =========== =========== Basic loss per share $ (2.26) $ (1.31) =========== =========== Weighted average number of shares outstanding 1,859,317 1,922,065 =========== =========== Diluted loss per share $ (2.26) $ (1.31) =========== =========== Diluted weighted average number of shares outstanding 1,859,317 1,922,065 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 21 of 49
THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Note Common paid-in Retained Treasury receivable stock capital earnings Stock stock options Total ------- ---------- ----------- ----------- ------------- ---------- Balance at June 30, 2000 $21,000 $8,686,000 $15,810,000 $(2,711,000) $(1,438,000) $20,368,000 Net loss (2,511,000) (2,511,000) Purchase of treasury stock (912,000) (912,000) ------- ----------- ----------- ----------- ---------- ----------- Balance at June 30, 2001 21,000 8,686,000 13,299,000 (3,623,000) (1,438,000) 16,945,000 Net loss (4,204,000) (4,204,000) Purchase of treasury stock (685,000) (685,000) ------- --------- ----------- ----------- ----------- ----------- Balance at June 30, 2002 $21,000 $8,686,000 $ 9,095,000 $(4,308,000) $(1,438,000) $12,056,000 ======= ========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 22 of 49 THE INTERGROUP COPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended June 30, 2002 2001 ----------- ----------- Cash flows from operating activities: Net loss $(4,204,000) $(2,511,000) Adjustments to reconcile net loss to cash (used in) provided by operating activities: Depreciation of real estate 2,493,000 2,415,000 Gain on sale of real estate (10,277,000) - Equity in net income of Justice Investors (2,160,000) (3,928,000) Net unrealized loss on investments 12,814,000 5,812,000 Minority interest (3,075,000) 2,063,000 Changes in assets and liabilities: Restricted cash 170,000 (161,000) Prepaid expenses and other assets 437,000 336,000 Investment in marketable securities 24,080,000 37,183,000 Other investments 892,000 (76,000) Accounts payable and other liabilities (1,351,000) 2,471,000 Due to securities broker (2,288,000) (27,109,000) Obligations for securities sold (18,186,000) (10,689,000) Deferred taxes (4,456,000) (3,965,000) ----------- ------------ Net cash (used in) provided by operating activities (5,111,000) 1,841,000 ----------- ------------ Cash flows from investing activities: Additions to buildings, improvements and equipment (2,734,000) (2,622,000) Investment in real estate (4,861,000) (19,228,000) Proceeds from sale of real estate 13,862,000 - Investment in Portsmouth - (2,000) Distributions from Justice Investors 3,263,000 4,392,000 ----------- ----------- Net cash provided by (used in) investing activities 9,530,000 (17,460,000) ----------- ----------- Cash flows from financing activities: Principal payments on mortgage notes payable (5,335,000) (4,429,000) Borrowings from mortgage notes payable 2,732,000 17,305,000 Increase in borrowings - 4,000,000 Dividends paid to minority shareholders (126,000) (127,000) Purchase of treasury stock (685,000) (912,000) ----------- ----------- Net cash (used in) provided by financing activities (3,414,000) 15,837,000 ----------- ----------- Net increase in cash and cash equivalents 1,005,000 218,000 Cash and cash equivalents at beginning of period 878,000 660,000 ----------- ----------- Cash and cash equivalents at end of period $ 1,883,000 $ 878,000 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. Page 23 of 49 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. As of June 30, 2002 and 2001, the Company had the power to vote 57.2% and 54.9%, respectively, of the voting shares of Santa Fe Financial Corporation ("Santa Fe"), a public company (Nasdaq SmallCap: SFEF). Santa Fe's revenue is primarily generated through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. ("PSI"), which derives its revenue primarily as a general partner and a 49.8% limited partner in Justice Investors ("Justice"), a California limited partnership. Justice owns the land, improvements and leaseholds known as the Holiday Inn Financial District/Chinatown, a 566-room hotel in San Francisco, California. On June 30, 1998, the Company's Chairman and President entered into a voting trust giving the Company the power to vote the shares of Santa Fe common stock that he owned. As a result of this agreement, the Company had the power to vote on an additional 3.9% of the voting shares of Santa Fe. Principles of Consolidation 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. Use of Estimates 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 disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Investment in Real Estate 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 forty years for buildings and improvements and five to ten years for equipment. Expenditures for repairs and maintenance are charged to expense as incurred and improvements are capitalized. The Company reviews for the impairment of its rental property assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If expected future cash flows (undiscounted and excluding interest costs) are less than the carrying value of the rental asset, the asset is written down to its fair value. The estimation of expected future net cash flows is inherently uncertain and relies to a Page 24 of 49 considerable extent on assumptions regarding current and future economic and market conditions, and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the long-lived asset. No impairment losses have been recorded in fiscal year 2002 or 2001. Cash and Cash Equivalents The Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement reserves for the operating properties and tenant security deposits that are invested in certificates of deposit. Marketable Securities Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading securities with all unrealized gains and losses on the Company's investment portfolio recorded through the statement of operations. Due to Securities Broker Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. Obligation for Securities Sold Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in 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. Page 25 of 49 Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, restricted cash, marketable securities, other investments, prepaid expenses and other assets, accounts payable and liabilities approximates fair value. The fair value of mortgage notes payable is estimated using discounted cash flows of future payments based on the borrowing rates available to the Company for debt with similar terms and maturities. Stock-Based Compensation Plans Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No.25 (APB 25), Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock option plan have no intrinsic value at the grant date, and under APB 25 no compensation cost is recognized. The Company has elected to continue with the accounting methodology in APB 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied. Earnings Per Share Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. The Company's only potentially dilutive common shares are stock options. Stock options are included in diluted earnings per share by application of the treasury stock method. As the Company reported a loss for the year ended June 30, 2002, the inclusion of potentially dilutive common shares related to stock options (192,000 shares at June 30, 2002), would be anti-dilutive. Therefore, basic and diluted earnings per share for the year ended June 30, 2002 are the same. Recently Issued Accounting Standards In October 2001, the Financial Accounting Standards Board ("FASB" or the "Board") issued FASB Statement No. 144 ("FAS No. 144") Accounting for the Impairment or Disposal of Long-Lived Assets. The objectives of FAS No. 144 are to address significant issues relating to the implementation of FASB Statement No. 121 ("FAS No. 121), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, and to develop a single accounting model, based on the framework established in FAS No. 121, for long- lived assets to be disposed of by sale, whether previously held and used or newly acquired. FAS No. 144 must be adopted in the first quarter of fiscal years beginning after December 15, 2001. The Company does not expect that the adoption of this statement will have a material impact on the Company's financial statements. Page 26 of 49 In July 2001, the FASB issued Statements on Financial Accounting Standards FAS No. 141 (Business Combination) and FAS No. 142 (Goodwill and Other Intangible Assets). FAS No. 141 among other things, eliminates the use of the pooling of interest method of accounting for business combination. Under the provision of FAS No. 142, goodwill will no longer be amortized, but will be subject to a periodic test for impairment based upon fair value. FAS No. 141 is effective for all business combinations initiated after June 30, 2001. FAS No. 142 must be adopted in the first quarter of fiscal years beginning after December 15, 2001. The Company does not expect that the adoption of these statements will have a material impact on the Company's financial statements. 2. Investment in Real Estate: At June 30, 2002, the Company's investment in real estate consisted of properties located throughout the United States. These properties include twenty two apartment complexes, one single-family house as a strategic investment, and two commercial real estate properties, one of which serves as the Company's corporate headquarters. All apartment complexes and the single- family house are completed, operating properties. One of the commercial real estate properties is being prepared for operation. In July 2001, the Company purchased a property held for sale or development located in Austin, Texas for $194,000. In September 2001, the Company purchased an apartment complex located in Austin, Texas for $3,824,000. To finance the purchase, the Company assumed a mortgage note of $2,300,000. In February 2002, the Company purchased through its majority owned subsidiary, Santa Fe, an apartment complex located in Los Angeles, for $785,000. To finance the purchase, the Company obtained a $463,000 mortgage note. On August 2, 2001, the Company was awarded $13,862,000 from the Circuit court of St. Louis County, Missouri, which granted the City of St. Louis permission to take possession of the 176-unit St. Louis, Missouri apartment complex in a condemnation action filed by the City of St. Louis. The Company realized a gain of $10,277,000 and received net proceeds of $9,255,000 after payment of the mortgage on the property, costs and attorneys' fees. On August 10, 2001, the City of St. Louis filed Exceptions to the Commissioners' Report challenging the amount of the award to the Company and requesting a jury trial on the matter, see further discussion in Note 12. 3. Marketable Securities: Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading with net change in unrealized gains or losses included in earnings. For the year ended June 30, 2002, net investment losses of $19,447,000 included net unrealized losses of $12,814,000 and net realized losses of $6,633,000. For the year ended June 30, 2001, net gains on marketable securities of $86,000 included net unrealized losses of $5,812,000 and net realized gains of $5,898,000. The Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms. The use of available leverage is guided by the business judgment of management. Page 27 of 49 The Company's investment portfolio consists primarily of corporate equities. The Company has also invested in corporate bonds and income producing securities, which may include interests in real estate based companies and REITs, where financial benefit could inure to its shareholders through income and/or capital gain. The Company may also use exchange traded funds (such as SPYders), options and futures to hedge concentrated stock positions and index futures to hedge against market risk and enhance the performance of the Company's portfolio while reducing the overall portfolio's risk and volatility. The Company's current investment portfolio as of June 30, 2002 is composed of following types of investment securities: % of Total Market Value Portfolio ------------ --------- Fixed income: Corporate bonds $ 753,000 11.7% Mortgage securities 58,000 0.9% Corporate securities: Common stocks 4,734,000 73.5% Preferred stocks 561,000 8.7% REIT's 326,000 5.1% Warrants 5,000 0.1% ---------- ------- TOTAL SECURITIES ASSETS $ 6,437,000 100.0% ========== ======= As part of the investment strategies, the Company may assume short positions in marketable securities. Short sales are used by the Company to potentially offset normal market risks undertaken in the course of its investing activities or to provide additional return opportunities. As of June 30, 2002, the Company had obligations for securities sold (equities short) of $491,000 and had no naked short positions. Page 28 of 49 4. Investment in Justice Investors: 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 566-room hotel in San Francisco, California. Portsmouth is both a general and limited partner in Justice that oversees operations and shares management responsibilities. Portsmouth records its investment in Justice on the equity basis. Condensed financial statements for Justice Investors are as follows: CONDENSED BALANCE SHEET As of June 30, 2002 ---------- Assets Total current assets $ 161,000 Property, plant and equipment, net of accumulated depreciation of $12,272,000 4,304,000 Loan fees and deferred lease costs, net of accumulated amortization of $226,000 85,000 ---------- Total assets $ 4,550,000 ========== Liabilities and partners' equity Total current liabilities $ 4,000 Long term debt 490,000 Partners' capital 4,056,000 ---------- Total liabilities and partner's capital $ 4,550,000 ========== CONDENSED STATEMENTS OF OPERATIONS For the years ended June 30, 2002 2001 ---------- ---------- Revenues $ 5,180,000 $ 8,760,000 Costs and expenses (843,000) (873,000) ---------- ---------- Net income $ 4,337,000 $ 7,887,000 ========== ========== 5. Mortgage Notes Payable: At June 30, 2002, the Company had mortgage debt outstanding of $55,929,000. The mortgages carry variable rates from 4.13% and fixed rates ranging from 6.34% to 9.22%. In August 2000, the Company obtained a second mortgage on one of its properties in the amount of $1,270,000. In the same period, the Company refinanced one of its mortgage notes in the amount of $3,787,000 and obtained a new mortgage note payable in the amount of $3,800,000 and entered into a line of credit agreement with an available balance of $4,000,000. Both the $3,800,000 mortgage note and the $4,000,000 line of credit are collateralized by the same property. Page 29 of 49 As of June 30, 2002, the outstanding balance on the line of credit was $4,000,000. Each mortgage is secured by its respective land and building. Mortgage notes payable secured by real estate are comprised of the following information as of June 30, 2002: Number Acquisition Note Mortgage Interest Property of Units Date Maturity Balance Rate Date ------------ ----------- -------------- ------------ --------- ------ Morris County 151 September 1967 January 2006 $4,925,000 7.335% St. Louis 264 November 1968 July 2008 5,722,000 6.734% Florence 157 December 1972 May 2006 4,111,000 7.925% Irving 224 September 1994 January 2008 4,391,000 7.010% Irving 54 November 2000 July 2006 1,213,000 9.220% San Antonio 132 June 1993 December 2008 3,138,000 6.615% Houston 442 February 1997 September 2002 3,575,000 4.360% September 2002 4,000,000 4.360% Austin 249 November 1999 January 2003 5,446,000 4.130% Austin 112 September 2001 September 2009 2,254,000 8.225% Los Angeles 12 July 1999 August 2029 755,000 7.930% Los Angeles 27 September 1999 October 2029 1,906,000 7.730% Los Angeles 14 October 1999 December 2029 1,123,000 7.890% Los Angeles 10 November 1999 December 2029 839,000 7.950% Los Angeles 31 May 2000 June 2030 2,234,000 4.753% Los Angeles 30 July 2000 August 2028 2,703,000 7.576% Los Angeles 4 July 2000 August 2030 591,000 7.590% Los Angeles 4 July 2000 August 2030 449,000 7.590% Los Angeles 5 August 2000 September 2030 490,000 5.778% Los Angeles 7 August 2000 August 2030 664,000 5.778% Los Angeles 1 November 2000 December 2030 481,000 8.435% Los Angeles 24 March 2001 April 2031 1,779,000 7.150% Los Angeles 8 May 2001 May 2031 585,000 7.000% Los Angeles 3 February 2002 February 2032 461,000 6.450% Los Angeles Office March 1999 April 2009 1,246,000 8.260% Los Angeles Office September 2000 December 2013 848,000 7.500% The annual combined aggregate principal payments on the mortgage notes payable for the five-year period commencing July 1, 2002 are as follows: Year ending June 30, 2003 $13,630,000 2004 656,000 2005 706,000 2006 9,197,000 2007 639,000 Thereafter 31,101,000 ----------- Total $55,929,000 =========== At June 30, 2002, the total outstanding mortgage balance approximates the estimated fair value of the outstanding debt. Page 30 of 49 6. Income Taxes: The provision for the Company's income tax benefit is comprised of the following: Year Ended June 30, 2002 2001 ---------- ---------- Current tax benefit (expense) $ 3,085,000 $(3,675,000) Deferred tax benefit 2,009,000 3,983,000 ---------- ---------- $ 5,094,000 $ 308,000 ========== ========== The components of the deferred tax liability as of June 30, 2002, are as follows: Deferred real estate gains $ 7,641,000 Unrealized loss on marketable securities (1,734,000) Depreciation and fixed asset differences (280,000) Equity earnings of subsidiaries 357,000 ---------- Gross deferred tax liabilities 5,984,000 ---------- Capital loss carryforwards (866,000) Net operation loss carryforwards (3,568,000) Other (21,000) ---------- Gross deferred tax (assets) (4,455,000) ---------- Net deferred tax liability $ 1,529,000 ========== 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, 2002 2001 ----------- ----------- Income tax at federal statutory rates $ (4,189,000) $ (257,000) State income taxes, net of federal benefit (739,000) (45,000) Other (166,000) (6,000) ----------- ----------- Total income tax benefit $ (5,094,000) $ (308,000) =========== =========== As of June 30, 2002, the Company had a net federal operating losses available for carryforward of approximately $9,852,000. The carryforward expires in varying amounts through the year 2021. The Company also has capital losses available for carryforward of $2,165,000 that expire in varying amounts through 2006. Page 31 of 49 7. Segment Information The Company operates in three reportable segments, the operations of its multi-family residential properties, the operation of Justice Investors, and the investment of its cash and securities assets. These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment's performance. Management also makes operational and strategic decisions based on this same information. Information below represents reported segments for the years ended June 30, 2002 and 2001. Operating income for rental properties consist of rental income. Operating income from Justice Investors consist of the operations of the hotel and garage included in the equity in net income of Justice Investors. Operating income (losses) for investment transactions consist of net investment gains (losses) and dividend and interest income.
Real Estate ------------------------- Year ended Rental Justice Investment June 30, 2002 Properties Investors Transactions Other Total ----------- ----------- ----------- ----------- ------------ Operating income (loss) $12,800,000 $ 2,160,000 $(19,135,000) $ - $ (4,175,000) Operating expenses (6,545,000) - (1,952,000) - (8,497,000) Real estate taxes (1,506,000) - - - (1,506,000) ----------- ----------- ----------- ----------- ------------ Income(loss) before mortgage interest and depreciation 4,749,000 2,160,000 (21,087,000) - (14,178,000) ----------- ----------- ----------- ----------- ------------ Mortgage interest expense (3,371,000) - - - (3,371,000) Depreciation (2,493,000) - - - (2,493,000) Gain of sale of real estate 10,277,000 - - - 10,277,000 General and administrative expenses - - - (1,928,000) (1,928,000) Other expense - - - (680,000) (680,000) Income tax benefit - - - 5,094,000 5,094,000 Minority interest - - - 3,075,000 3,075,000 ----------- ----------- ----------- ----------- ------------ Net income (loss) $ 9,162,000 $ 2,160,000 $(21,087,000) $ 5,561,000 $ (4,204,000) =========== =========== =========== =========== ============ Total Assets $63,942,000 $ 9,857,000 $ 6,437,000 $ 4,074,000 $ 84,310,000 =========== =========== =========== =========== ============
Real Estate ------------------------- Year ended Rental Justice Investment June 30, 2001 Properties Investors Transactions Other Total ----------- ----------- ----------- ----------- ------------ Operating income $13,151,000 $ 3,928,000 $ 1,649,000 $ - $ 18,728,000 Operating expenses (5,520,000) - (3,833,000) - (9,353,000) Real estate taxes (1,237,000) - - - (1,237,000) ----------- ----------- ----------- ----------- ------------ Income (loss) before mortgage interest and depreciation 6,394,000 3,928,000 (2,184,000) - 8,138,000 ----------- ----------- ----------- ----------- ------------ Mortgage interest expense (3,813,000) - - - (3,813,000) Depreciation (2,415,000) - - - (2,415,000) General and administrative expenses - - - (1,619,000) (1,619,000) Other expense - - - (1,047,000) (1,047,000) Income tax benefit - - - 308,000 308,000 Minority interest - - - (2,063,000) (2,063,000) ----------- ----------- ----------- ----------- ------------ Net income (loss) $ 166,000 $ 3,928,000 $(2,184,000) $ (4,421,000) $ (2,511,000) =========== =========== =========== =========== ============ Total Assets $61,337,000 $10,859,000 $44,725,000 $ 3,762,000 $120,683,000 =========== =========== =========== =========== ============
Page 32 of 49 8. Supplemental Cash Flow Information: Cash paid for margin interest for the year ended June 30, 2002 and 2001 was $492,000 and $2,094,000, respectively. Cash paid for interest on mortgage notes payable for the year ended June 30, 2002 and 2001 was $3,585,000 and $4,118,000, respectively. Cash paid for income taxes aggregated $564,000 and $1,423,000 for the year ended June 30, 2002 and 2001, respectively. 9. Stock Options and Employee Stock Ownership Plan and Trust: On December 8, 1998, the Company adopted and authorized a stock option plan (the "1998 Non-employee Directors Plan") for non-employee directors. The 1998 Non-employee Directors Plan provides for the granting of stock options to purchase shares of the Company's common stock to non-employee directors of the Company. The aggregate number of shares to be delivered upon exercise of all options granted under the Plan may not exceed 100,000. During fiscal years 2002 and 2001, the Company granted stock options of 10,000 shares in each respective year, to the directors of the Company. These options have exercise prices of $19.05 and $18.00 per share, respectively. Of the total options granted in fiscal year 2002, 10,000 options vested during the year. The options have a term of 10 years. On December 22, 1998, the Company adopted and authorized a stock option plan (the "1998 Key Officers Plan") for selected key officers. The 1998 Plan provides for the granting of stock options to purchase shares of the Company's common stock to key officers of the Company. The aggregate number of shares to be delivered upon exercise of all options granted under the Plan may not exceed 200,000. On December 22, 1998, the Board of Directors of the Company granted a total of 150,000 stock options to the President and Chairman of the Company at an exercise price of $11.875 per share. As of June 30, 2002, all 150,000 options are vested. Information relating to the stock options during the fiscal years ended June 30, 2002 and 2001 are as follows: Number of Weighted-average Shares Exercise Price ---------- --------------- Unexercised options outstanding at June 30, 2000: 207,000 $13.60 Granted 20,000 $18.88 Exercised - - Forfeited - - -------- -------- Unexercised options outstanding at June 30, 2001: 227,000 $14.06 Granted 10,000 $19.05 Exercised - - Forfeited - - -------- -------- Unexercised options outstanding at June 30, 2002: 237,000 $13.47 ======== ======== Unexercised Range of Weighted Average Weighted Average Options Exercise Price Exercise Price Remaining Life ---------------- -------------- ---------------- ---------------- June 30, 2001 $11.88-$44.44 $14.06 7.57 years June 30, 2002 $11.88-$44.44 $13.47 6.66 years Page 33 of 49 As required by FAS 123, the Company has determined the pro-forma information as if the Company had accounted for stock options granted since January 1, 1998, under the fair value method of FAS 123. The Black-Scholes option pricing model was used with the following weighted-average assumptions for 2002; risk- free interest rate of 1.78%; dividend yield of 0%; expected Common Stock market price volatility factor of 7.0; and a weighted-average expected life of the options of 6.66 years. The weighted-average fair value of options granted in fiscal years 2002 and 2001 were $2.61 and $8.00 per share, respectively. The aggregate fair value of the options granted in fiscal years 2002 and 2001 were $26,100 and $160,000, respectively. Stock based compensation is accounted for under APB 25 and accordingly, no compensation cost has been recognized for stock options in the financial statements. Had compensation cost been determined based upon the fair value of the stock options at grant date and consistent with FAS 123, the Company's pro forma net loss and net loss per share (based on 10,800 and 47,500 options vesting in fiscal years 2002 and 2001, respectively) are as follows: 2002 2001 ----------- ---------- Net loss - as reported $(4,204,000) $(2,511,000) Net loss - pro forma $(4,243,000) $(2,893,000) Loss per share - as reported $(2.26) $(1.31) Loss per share - pro forma $(2.28) $(1.50) 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 2000 or 1999. Effective November 15, 1998, the Plan was terminated and the interest of each participant was fully vested and nonforfeitable. After receiving a favorable determination letter from the Internal Revenue Service, all Plan benefits were distributed on November 27, 2000. The termination of the Plan did not have a material effect on the financial statements of the Company. 10. Commitments and Contingencies: On April 16, 2001 the City of St. Louis, Missouri, filed a condemnation action against the Company and its subsidiary in the Circuit Court of St. Louis County, State of Missouri, whereby the City of St. Louis sought to acquire the Company's 176 unit apartment complex located in St. Louis, Missouri by eminent domain for an airport expansion. Following a hearing, a Commissioners' Report was filed on August 2, 2001 awarding the Company the amount of $13,862,000 and granting the City of Saint Louis permission to take possession of the property. After payment of the mortgage on the property, costs and attorneys' fees, the Company received net proceeds of $9,255,000 on August 21, 2001. The Company intends to defer any taxable gain from the involuntary taking of the property through appropriate exchange transactions. On August 10, 2001, the City of St. Louis filed Exceptions to Commissioners' Report challenging the amount of the award to the Company and requesting a jury trial on the matter. On August 21, 2002, the Company and the City of Saint Louis entered into a settlement of the matter before trial. Pursuant to the terms of the settlement, the Company is to pay back to the City the amount of $762,000, which has been accrued for as of June 30, 2002, from the condemnation award of $13,862,000. Payments are to be made in twelve monthly installments without interest. Collateral for the obligation and penalties in the event of default are still being negotiated by the parties. Page 34 of 49 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. 11. Related Party Transactions: Gary N. Jacobs, a Director of the Company, is Of Counsel to the law firm of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP. Through May 31, 2000 he was a senior partner of said firm, which provided legal services to the Company during the years ended June 30, 2002 and 2001. During the years ended June 30, 2002 and 2001, the Company made payments of approximately $484,000 and $165,000, respectively to Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP. In May 1996, the Company's Chairman and President exercised options to purchase 187,500 shares of Common Stock at a price of $7.67 per share through a full recourse note due the Company on demand with an original due date of May 16 2001. On May 2, 2001, the Company extended the due date to May 16, 2003. The note bears interest floating at the lower of 10% or the prime rate (4.75% at June 30, 2002) with interest payable quarterly. The balance of the note receivable of $1,438,000 is reflected as a reduction of shareholders' equity at June 30, 2002. During the fiscal year ended June 30, 2002 and 2001, the President of the Company made interest payments of approximately $77,000 and $127,000, respectively, on the note. 12. Subsequent Events: On August 21, 2002, the Company and the City of Saint Louis entered into a settlement of the condemnation action which granted the City permission to take possession of the Company's 176-unit apartment complex in Saint Louis, Missouri. Pursuant to the terms of the settlement, the Company is to pay back to the City the amount of $762,000, which has been accrued for as of June 30, 2002, from the condemnation award of $13,862,000. Payments are to be made in twelve monthly installments without interest. Collateral for the obligation and penalties in the event of default are still being negotiated by the parties. Page 35 of 49 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. The following table sets forth certain information with respect to the Directors and Executive Officers of the Company as of June 30, 2002: Position with Name the Company Age Term to Expire ------------------ ------------------ --- ----------------- Class A Directors: John V. Winfield Chairman of the Board; 55 2003 Annual Meeting (1)(4)(6)(7)(8) President and Chief Executive Officer Josef A. Director and Vice 54 2003 Annual Meeting Grunwald (2)(7) Chairman of the Board Class B Directors: Gary N. Jacobs (1)(6)(7)(8)(9) Secretary; Director 57 2004 Annual Meeting William J. Nance (1) (2)(3)(4)(5)(6)(7)(9) Director 58 2004 Annual Meeting Class C Directors: Mildred Bond Roxborough Director 75 2002 Annual Meeting John C. Love Director 62 2002 Annual Meeting (3)(4)(8)(9) Other Executive Officers: Gregory C. McPherson Executive Vice 43 N/A President; Assistant Treasurer Michael G. Zybala Vice President 50 N/A Operations; Assistant Secretary David C. Gonzalez Vice President 35 N/A Real Estate ------------------ (1) Member of the Executive Committee (2) Member of the Administrative and Compensation Committee (3) Member of the Audit and Finance Committee (4) Member of the Real Estate Investment Committee (5) Member of the Nominating Committee Page 36 of 49 (6) Member of the Securities Investment Committee (7) Member of the Special Strategic Options Committee (8) Member of the Stock Option Administrative Committee (Non-employee Director Plan) (9) Member of the Stock option Administrative Committee (Key Officer, Employee Plan) Business Experience: The principal occupation and business experience during the last five years for each of the Directors and Executive Officers of the Company are as follows: John V. Winfield -- Mr. Winfield was first appointed to the Board in 1982. He currently serves as the Company's Chairman of the Board, President and Chief Executive Officer, having first been appointed as such in 1987. Mr. Winfield also serves as President, Chairman and Chief Executive Officer of Santa Fe Financial Corporation ("Santa Fe") and Portsmouth Square, Inc. ("Portsmouth"). Mr. Winfield is also a Director of Healthy Planet Products, Inc. ("Healthy Planet") and serves as its Chairman of the Board from August 5, 1998 until August 8, 2002. Mr. Winfield also serves as Chairman of the Board of Etz Lavud, Ltd. Santa Fe, Portsmouth, Healthy Planet and Etz Lavud, Ltd. are all public companies. Josef A. Grunwald -- Mr. Grunwald is an industrial, commercial and residential real estate developer. He serves as Chairman of PDG N.V. (Belgium), a hotel management company, and President of I.B.E. Services S.A. (Belgium), an international trading company. Mr. Grunwald was first elected to the Board in 1987. Mr. Grunwald is also a Director of Portsmouth and Etz Lavud, Ltd. William J. Nance -- Mr. Nance is a Certified Public Accountant and private consultant to the real estate and banking industries. He also serves as President of Century Plaza Printer, Inc. Mr. Nance was first elected to the Board in 1984. He was appointed Treasurer, Chief Operating Officer and Chief Financial Officer in 1987. Mr. Nance resigned as Chief Operating Officer and Chief Financial Officer in January 1990 but continued as Treasurer until June 30, 2002. Mr. Nance is also a Director of Santa Fe, Portsmouth and Healthy Planet. Mildred Bond Roxborough -- Ms. Roxborough was Director of Development and Special Programs of the National Association for the Advancement of Colored People (NAACP) from 1986 to 1997. She also served as Vice Chairman of the Board of Directors of America's Charities Federation, Chairman of its Membership and Personnel Committees and member of its Long Range Planning Committee; and Member of the Board of Directors of Morningside Health and Retirement Service, Member of Personnel Committee of Morningside Heights Housing Corporation. Since 1997 Ms. Roxborough has served as a consultant to the NAACP. Ms. Roxborough was first appointed to the Company's Board in 1984 and served as Vice Chairman from 1987 through 1994. Gary N. Jacobs -- Mr. Jacobs was appointed to the Board and as Secretary in 1998. Mr. Jacobs is Executive Vice President, General Counsel and Secretary of MGM MIRAGE (NYSE: MGG) and Of Counsel to the law firm of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP. Through May 31, 2000 he was a partner of said firm and the head of the corporate department. Page 37 of 49 John C. Love -- Dr. Love was appointed to the Board in 1998. He is an independent consultant to the hospitality and tourism industries and was formerly a general partner in the national CPA and consulting firm of Pannell Kerr Forster. He is Chairman Emeritus of the Board of Trustees of Golden Gate University in San Francisco. Dr. Love is also a Director of Santa Fe and Portsmouth. Gregory C. McPherson -- Mr. McPherson joined the Company in 1993. Prior to joining the Company, Mr. McPherson was a private financial and strategic advisor, served as Vice President in the Investment Banking and Corporate Finance Department of Kemper Securities Group, Inc., was with Prudential Bache Capital Funding in their Mergers and Acquisitions and Financial Restructuring Group and was a manager at the public accounting firm of Pricewaterhouse LLP. Mr. McPherson received an M.B.A. from the Harvard Business School and is a Certified Public Accountant. Effective March 23, 2000, Mr. McPherson was named as Interim President of Healthy Planet and as its Chairman of the Board on August 8, 2002. He also serves as a special consultant to Portsmouth and serves as an officer or consultant to other non- public InterGroup investments. Michael G. Zybala -- Mr. Zybala was appointed Vice President Operations and Assistant Secretary of the Company on January 27, 1999 and served as Vice President Operations until July 15, 2002. Mr. Zybala is an attorney at law and has served as a special legal consultant to the Company. Mr. Zybala is also the Vice President, Secretary and Treasurer of Santa Fe and Portsmouth and has served as their General Counsel since 1995. Mr. Zybala has provided legal services to Santa Fe and Portsmouth since 1978. Mr. Zybala is also a Director of Healthy Planet and has served as its Secretary since August 1998. David C. Gonzalez -- Mr. Gonzalez was appointed Vice President Real Estate of the Company on January 31, 2001. Over the past 12 years, Mr. Gonzalez has served in numerous capacities with the Company, including Controller and Director of Real Estate. Family Relationships: There are no family relationships among directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Involvement in Certain Legal Proceedings: No director or executive officer, or person nominated or chosen to become a director or executive officer, was involved in any legal proceeding requiring disclosure. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and each beneficial owner of more than ten percent of the Common Stock of the Company, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that during fiscal 2002 all filing requirements applicable to its officers, directors, and greater than ten-percent beneficial owners were complied with. Page 38 of 49 Item 10. Executive Compensation. The following table provides certain summary information concerning compensation awarded to, earned by, or paid to the named Executive Officers of the Company who earned more than $100,000 (salary and bonus) for all services rendered to the Company and its subsidiaries for fiscal years 2002, 2001 and 2000. There are currently no employment contracts with the Executive Officers.
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation ------------------- ------------ Awards ------ Securities Name and Principal Other Annual Underlying Position Year Salary Bonus Compensation Options/SARs ------------------- ------ ------- ------ ------------- ------------ John V. Winfield Chairman; President 2002 $500,750(1) - $80,359(2) - and Chief Executive 2001 $522,000(1) - $69,322(2) - Officer 2000 $522,000(1) - $61,700(2) - Gregory C. McPherson 2002 $126,974(3) $ 4,000 - - Executive Vice President; 2001 $140,383(3) $ 20,000 - - and Assistant Treasurer 2000 $158,006(3) $ 25,000 - - Michael G. Zybala 2002 $117,400(4) $ 4,000 - Vice President Operations 2001 $131,028(4) $ 15,000 - - and Assistant Secretary 2000 $127,465(4) $ 20,000 - - David C. Gonzalez 2002 $186,672(5) $100,000 - - Vice President 2001 $141,608 $ 75,000 - 10,000(7) Real Estate 2000 $120,000 $100,000 $32,071(6) -
--------------------- (1) Mr. Winfield also serves as President and Chairman of the Board of the Company's subsidiary, Santa Fe, and Santa Fe's subsidiary, Portsmouth. Mr. Winfield received salary and directors fees of $242,000 $252,000 and $252,000 from those entities during fiscal years 2002, 2001 and 2000, respectively, which amounts are included in this item. (2) Amounts include an auto allowance and compensation for a portion of the salary of an assistant. The auto allowance was $33,607, $34,322, and $34,322 during fiscal years 2002, 2001 and 2000, respectively. The amount of compensation related to the assistant was approximately $46,752, $35,000 and $35,000 during fiscal years 2002, 2001 and 2000 respectively. During fiscal 2002, 2001 and 2000, the Company also paid annual premiums in the amount of $42,577 for a split dollar whole life insurance policy owned by, and the beneficiary of which is, a trust for the benefit of Mr. Winfield's family. The Company has a secured right to receive, from any proceeds of the policy, reimbursement of all premiums paid prior to any payment to the beneficiary. During fiscal years 2002, 2001 and 2000 Santa Fe and Portsmouth also paid annual premiums on split dollar policies in the total amount of $42,500. (3) Mr. McPherson is a consultant of Portsmouth and received annual consulting fees of $86,363 during fiscal year ended June 30, 2002 and $88,200 during fiscal years 2001 and 2000, which are included in this item. Also includes amounts for an auto allowance. Page 39 of 49 (4) Mr. Zybala became Vice President Operations in January 1999. His salary and bonuses are allocated approximately 25% to the Company and 75% to Santa Fe and Portsmouth. (5) Includes $17,922 for an auto lease. (6) Amounts shown relate to forgiveness of unpaid balance on promissory note due to the Company. (7) On January 31, 2001, Mr. Gonzalez was granted options to purchase up to 10,000 shares of the Common Stock of the Company at an exercise price of $19.75 per share, which was the closing price of the Common Stock on the date of grant. The term of the options is for the period beginning January 31, 2002 and ending on January 30, 2011. No options may be exercised prior to January 31, 2003 and vest at a rate of 1,000 shares per year between January 31, 2003 and January 31, 2006, and at a rate of 1,500 shares per year between January 31, 2007 and January 31, 2010. OPTIONS/SAR GRANTS IN LAST FISCAL YEAR The Company did not have any individual grants of stock options or Stock Appreciation Rights ("SARs") during the year ended June 30, 2002 to any named executive officer. AGGREGATE OPTIONS/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES The following table contains information concerning each exercise of stock options (or tandem SARs) and freestanding SARs during the last completed fiscal year by each of the named executive officers and the fiscal year-end value of unexercised options and SARs.
Number of Securities Shares Underlying Unexercised Value of Unexercised Acquired on Value Options/SARs as of In-the-Money Options/ Name Exercise (#) Realized ($) June 30, 2002 at June 30, 2002 ---- ------------ ----------- ----------------------- -------------------- Exercisable/Unexercisable Exercisable/Unexercisable ------------------------- ------------------------ John V. Winfield - $ - 150,000/0 $542,250/0(1) David C. Gonzalez - $ - 0/10,000 $ 0/0(1)
-------------- (1) Based on the closing price of the Company's Common Stock on June 28, 2002 of $15.49 per share. Page 40 of 49 1998 Stock Option Plan for Non-Employee Directors On December 8, 1998, the Board of Directors of the Company adopted, subject to stockholder approval and ratification, a 1998 Stock Option Plan for Non- employee Directors (the "Plan"). The stockholders ratified that plan on January 27, 1999. The stock to be offered under the Plan shall be shares of the Company's Common Stock, par value $.01 per share, which may be unissued shares or treasury shares. Subject to certain adjustments upon changes in capitalization, the aggregate number of shares to be delivered upon exercise of all options granted under the Plan shall not exceed 100,000 shares. The Plan shall terminate on the earliest to occur of (i) the dates when all of the Common Stock available under the Plan shall have been acquired through the exercise of options granted under the Plan; (ii) 10 years after the date of adoption of the Plan by the Board; or (iii) such other date that the Board may determine. Pursuant to the Plan, each non-employee director as of the adoption date of the Plan shall be granted on the date thereof: (i) if he or she became a non- employee director prior to January 1, 1998, an option to purchase 8,000 shares of Common Stock; and (ii) if he or she became a non-employee director on or after January 1, 1998, an option to purchase 4,000 shares of Common Stock. Each new non-employee director who is elected to the Board shall automatically be granted an option to purchase 4,000 shares of Common Stock upon the initial date of election to the Board. On each July 1 following the adoption date, each non-employee director shall be granted an option to purchase 2,000 shares of Common Stock provided he or she holds such position on that date and the number of Common Shares available for grant under the Plan is sufficient to permit such automatic grant. The exercise price of the option shall be determined at the time of grant and shall not be less than 100% of the fair market value of the Common Stock at the time of the grant of the option. The term of the option shall be for ten years. Options granted to any non-employee director will not vest 100% until such person has been a member of the Board for four (4) years or more. Non- employee directors who have been a member of the Board less than four (4) years, shall be vested with respect to 20% of the options on the date of grant and 20% on each anniversary of such person having become a member of the Board, provided that the optionee is on each such date serving as a member of the Board or as an employee or consultant to the Company. Pursuant to the plan, the following non-employee directors of the Company were granted options during fiscal 2002 to purchase shares of Common Stock: Josef A. Grunwald (2,000 shares); William J. Nance (2,000 shares); Mildred Bond Roxborough (2,000 shares); Gary N. Jacobs (2,000 shares); and John C. Love (2,000 shares). The exercise price for the options is $19.05 per share, which was the closing price of the Company's Common Stock on the Nasdaq National Market System as of the date of grant on July 2, 2001. Page 41 of 49 1998 Stock Option Plan for Selected Key Officers, Employees and Consultants On December 8, 1998, the Board of Directors of the Company adopted, subject to shareholder approval and ratification, a 1998 Stock Option Plan for selected key officers, employees and consultants (the "Key Employee Plan"). The Key Employee Plan was ratified by the stockholders on January 27, 1999. The stock to be offered under the Key Employee Plan shall be shares of the Company's Common Stock, par value $.01 per share, which may be unissued shares or treasury shares. Subject to certain adjustments upon changes in capitalization, the aggregate number of shares to be delivered upon exercise of all options granted under the Key Employee Plan shall not exceed 200,000 shares. The Key Employee Plan shall terminate on the earliest to occur of (i) the dates when all of the Common Stock available under the Key Employee Plan shall have been acquired through the exercise of options granted under the Key Employee Plan; (ii) 10 years after the date of adoption of the Key Employee Plan by the Board; or (iii) such other date that the Board may determine. The Key Employee Plan is administered by a Committee appointed by the Board of Directors which consists of two or more disinterested persons within the meaning of Rule 16b-3 promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"). Persons eligible to receive options under the Key Employee Plan shall be employees who are selected by the Committee. In determining the Employees to whom options shall be granted and the number of shares to be covered by each option, the Committee shall take into account the duties of the respective employee, their present and potential contribution to the success of the Company, their anticipated number of years of active service remaining and other factors as it deems relevant in connection with accomplishing the purposes of the Key Employee Plan. An employee who has been granted an option may be granted an additional option or options as the Committee shall so determine. The exercise price of the option shall be determined at the time of grant and shall not be less than 100% of the fair market value of the Common Stock at the time of the grant of the option. The term of the option shall not exceed 10 years from the date on which the option is granted. The vesting schedule for the options and the method or time that when the option may be exercised in whole or in part shall be determined by the Committee. However, in no event shall an option be exercisable within six months of the date of grant in the case of an optionee subject to Section 16(b) of the Exchange Act. Subject to certain exceptions, the option shall terminate six months after the optionee's employment with the Company terminates. No options to purchase shares were granted pursuant to the Key Employee Plan during fiscal 2002. Compensation of Directors Each director is paid a fee of $1,500 per quarter for a total annual compensation of $6,000. The Chairman of the Board of Directors is eligible to receive $9,000 per annum. Directors also are eligible to receive $500 for each committee meeting attended and $600 for each committee meeting chaired. Members of the Audit Committee receive a fee of $500 per quarter. Directors who are also Executive Officers do not receive any fee for attending Board or Committee meetings. As an Executive Officer, the Company's Chairman has also elected to forego his annual board fee. The Directors are also eligible for grants of options to purchase shares of the Company's Common Stock pursuant to the 1998 Stock Option Plan for Non-Employee Directors. Page 42 of 49 Except for the foregoing, there are no other arrangements for compensation of Directors and there are no employment contracts between the Company and its Directors. Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of September 13, 2002, certain information with respect to the beneficial ownership of Common Stock owned by (i) those persons or groups known by the Company to own more than five percent of the outstanding shares of Common Stock, (ii) each Director and Executive Officer, and (iii) all Directors and Executive Officers as a group. Name and Address of Amount and Nature Beneficial Owner of Beneficial Owner(1) Percentage(2) -------------------- ---------------------- ------------- John V. Winfield 1,075,938(3) 53.8% 820 Moraga Drive Los Angeles, CA 90049 Josef A. Grunwald 89,045(2) 4.8% 820 Moraga Drive Los Angeles, CA 90049 William J. Nance 54,250(2) 2.9% 820 Moraga Drive Los Angeles, CA 90049 Mildred Bond Roxborough 18,350(2) * 820 Moraga Drive Los Angeles, CA 90049 Gary N. Jacobs 14,250(2)(4) * 820 Moraga Drive Los Angeles, CA 90049 John C. Love 12,000(2) * 820 Moraga Drive Los Angeles, CA 90049 Gregory C. McPherson 8,993 * 820 Moraga Drive Los Angeles, CA 90049 Michael G. Zybala 0 * 820 Moraga Drive Los Angeles, CA 90049 David C. Gonzalez 10,500(5) * 820 Moraga Drive Los Angeles, CA 90049 All Directors and Executive Officers as a Group (9 persons) 1,283,326 61.9% ------------------ * Ownership does not exceed 1%. (1) Unless otherwise indicated and subject to applicable community property laws, each person has sole voting and investment power with respect to the shares beneficially owned. Page 43 of 49 (2) Percentages are calculated on the basis of 1,850,077 shares of Common Stock outstanding at September 13, 2002, plus any securities that person has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. The following options are included in directors shares: Josef A. Grunwald - 16,000; William J. Nance - 16,000; Mildred Bond Roxborough - 16,000; Gary N. Jacobs -12,000; John C. Love - 12,000. (3) Includes 150,000 shares of which Mr. Winfield has the right to acquire pursuant to options. (4) Other than his options, all shares of Mr. Jacobs are held by the Gary and Robin Jacobs Family Trust. (5) Does not include 10,000 options granted to Mr. Gonzalez, which do not start to vest until January 2003. Changes in Control Arrangements There are no arrangements that may result in a change in control of the Company. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The following table sets forth information as of September 13, 2002, with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance, aggregated as follows: Plan category Securities to Exercise price Remaining available be issued of outstanding for future issuance upon exercise options, under equity of outstanding warrants and compensation plans options, rights (excluding warrants and securities rights reflected in column (a)) (a) (b) (c) ------------------- ------------ ------------- ------------------- Equity compensation plans approved by security holders 232,000 $13.04 68,000 ---------------------------------------------------------------------------- Equity compensation plans not approved by security holders None N/A None ---------------------------------------------------------------------------- Total 232,000 $13.04 68,000 ---------------------------------------------------------------------------- Page 44 of 49 Item 12. Certain Relationships and Related Transactions. On December 4, 1998, the Administrative and Compensation Committee authorized the Company to obtain whole life and split dollar insurance policies covering the Company's President and Chief Executive Officer, Mr. Winfield. During fiscal 2002 and 2001, the Company paid annual premiums in the amount of approximately $43,000 for the split dollar insurance policy owned by, and the beneficiary of which is, a trust for the benefit of Mr. Winfield's family. The Company has a secured right to receive, from any proceeds of the policy, reimbursement of all premiums paid prior to any payments to the beneficiary. On June 30, 1998, the Company's Chairman and President entered into a voting trust agreement with the Company giving the Company the power to vote his 4.2% interest in the outstanding shares of the Santa Fe common stock. In May 1996, the Company's Chairman and President exercised options to purchase 187,500 shares of Common Stock at a price of $7.67 per share through a full recourse note due to the Company on demand with an original due date of May 16, 2001. On May 2, 2001, the Company extended the due date to May 16, 2003. The note bears interest floating at the lower of 10% or the prime rate (4.75% at June 30, 2002) 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, 2002. During the fiscal years ended June 30, 2002 and 2001, the President of the Company made interest payments of approximately $76,650 and $127,000 respectively in connection with the note relating to his 1996 exercise of stock options. As Chairman of the Securities Investment Committee, the Company's President and Chief Executive officer, John V. Winfield, oversees the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of Santa Fe and Portsmouth and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, his family, Santa Fe and Portsmouth may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and his family members, and the resources of Santa Fe and Portsmouth, at risk in connection with investment decisions made on behalf of the Company. Under the direction of the Securities Investment Committee, the Company has instituted certain modifications to its procedures to reduce the potential for conflicts of interest. Gary N. Jacobs, a Director of the Company, is Of Counsel to the law firm of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP. Through May 31, 2000 he was a senior partner of said firm, which provided legal services to the Company during the years ended June 30, 2002 and 2001. During the years ended June 30, 2002 and 2001, the Company made payments of approximately $484,000 and $165,000, respectively to Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP. Page 44 of 49 Item 13. Exhibits, List and Reports on Form 8-K. (a) Listing of Exhibits by Table Number ----------------------------------- 3. Certificate of Incorporation and By-Laws ** Restated Certificate of Incorporation dated February 20, 1998 is incorporated herein by reference to the Company's Form 10-QSB Report filed with the Securities and Exchange Commission on May 15, 1998. 4. Instruments defining the rights of security holders, including Indentures ** 9. Voting Trust Agreement Voting Trust Agreement dated June 30, 1998 between John V. Winfield and The Intergroup Corporation is incorporated by reference to the Company's Form 10-KSB Annual Report filed with the Securities and Exchange Commission on September 28, 1998. 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, 1988 **** (e) Note and Exercise Agreement from Mr. John V. Winfield dated May 17, 1996***** (f) 1998 Stock Option Plan for Non-Employee Directors approved by the Board of Directors on December 8, 1998 and ratified by the shareholders on January 27, 1999 ****** (g) 1998 Stock Option Plan for Selected Key Officers, Employees and Consultants approved by the Board of Directors on December 8, 1998 and ratified by the shareholders on January 27, 1999 ****** 21. Subsidiaries: (1) Intergroup Summit Hills, Inc. (incorporated on August 12, 1993 in TX) (2) Intergroup Mariposa, Inc. (incorporated on June 23, 1994 in TX) (3) Intergroup Arlington Arms, Inc. (incorporated on August 5, 1993 in TX) (4) Intergroup Woodland Village, Inc. (incorporated on August 5, 1993 in OH) (5) Intergroup Cross Keys, Inc. (incorporated on April 1, 1994 in MO) (6) Intergroup Bridgeton, Inc. (incorporated on May 12, 1994 in MO) (7) Intergroup Whisperwood, Inc. (incorporated on June 20, 1994 in PA) (8) Intergroup Eagle Creek, Inc. (incorporated on April 15, 1994 in TX) (9) Intergroup Entertainment Corp. (incorporated on December 23, 1993 in DE) (10) Mutual Real Estate Corp. (incorporated on March 10, 1994 in TX) (11) WinGroup Capital (incorporated on September 21, 1994 in CA) (12) Broadview Enterprises, Inc. (incorporated April 14, 1995 in MO) (13) Wayward, Inc. (incorporated April 18, 1995 in MO) (14) Golden West Entertainment, Inc. (incorporated February 15, 1990 in CA) Page 46 of 49 (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) (24) Santa Fe Financial Corporation (incorporated July 25, 1967 in NV) (25) Portsmouth Square, Inc. (incorporated July 6, 1967 in CA) (26) 2301 Bel-Air Equity, Inc. (incorporated May 25, 2000 in CA) (27) 11378 Ovada Properties, Inc. (incorporated June 21, 2000 in CA) (28) 11371 Ovada Properties, Inc. (incorporated May 25, 2000 in CA) (29) 11361 Ovada Properties, Inc. (incorporated June 1, 2000 in CA) (30) 11680 Bellagio Properties, Inc. (incorporated May 25, 2000 in CA) (31) North Sepulveda Properties, Inc. (incorporated June 21, 2000 in CA) (32) 11650 Bellagio Properties, Inc. (incorporated August 17, 2000 in CA) (33) Intergroup Elwood, Inc. (incorporated October 12, 2000 in TX) (34) 11720 Bellagio Properties, Inc. (incorporated January 17, 2001 in CA) (35) 636 Acanto Properties, Inc. (incorporated February 15, 2001 in CA) (36) Intergroup Tollgate Creek, Inc. (incorporated June 14, 2001 in TX) (37) 614 Acanto Properties, Inc. (incorporated November 7, 2001 in CA) 99.1 Certificates Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 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. ****** All Exhibits marked by six asterisks are incorporated herein by reference to the Company's Schedule 14A filed with the Securities and Exchange Commission on December 21, 1998. (b) Reports on Form 8-K: ------------------- Registrant filed no reports on Form 8-K during the last quarter of the period covered by this Report. Page 47 of 49 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 27, 2002 by /s/ John V. Winfield ------------------ --------------------------------------- John V. Winfield, Chairman of the Board, President and Chief Executive Officer Date: September 27, 2002 by /s/ Gregory C. McPherson ------------------ -------------------------------------- Gregory C. McPherson, Executive Vice President and Assistant Treasurer Date: September 27, 2002 by /s/ Michael G. Zybala ------------------ -------------------------------------- Michael G. Zybala, Assistant Secretary and Counsel Date: September 27, 2002 by /s/ David C. Gonzalez ------------------ -------------------------------------- David C. Gonzalez Vice President Real Estate 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 27, 2002 /s/ John V. Winfield -------------------- --------------------------------------- John V. Winfield, Chairman of the Board, President and Chief Executive Officer Date: September 27, 2002 /s/ Josef A. Grunwald ------------------ --------------------------------------- Josef A. Grunwald, Vice Chairman of Board Date: September 27, 2002 /s/ Gary N. Jacobs ------------------ --------------------------------------- Gary N. Jacobs, Director Date: September 27, 2002 /s/ John C. Love ------------------ --------------------------------------- John C. Love, Director Date: September 27, 2002 /s/ William J. Nance ------------------ --------------------------------------- William J. Nance, Director Date: September 27, 2002 /s/ Mildred Bond Roxborough ------------------ --------------------------------------- Mildred Bond Roxborough, Director Page 48 of 49 CERTIFICATIONS I, John V. Winfield, certify that: 1. I have reviewed this annual report on Form 10-KSB of The InterGroup Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in the light of the circumstances under which such statements are made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly represent in all material aspects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 27, 2002 /s/ John V. Winfield ------------------------------ John V. Winfield, President Chief Executive Officer ______________________________________________________________________________ I, Gregory C. McPherson certify that: 1. I have reviewed this annual report on Form 10-KSB of The InterGroup Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in the light of the circumstances under which such statements are made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly represent in all material aspects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 27, 2002 /s/ Gregory C. McPherson -------------------------------- Executive Vice President and Assistant Treasurer (Acting Principal Accounting and Financial Officer) Page 49 of 49 34 Page 11 of 11 Page 1 of 1