<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from ______ to ______
Commission file number 1-10324
THE INTERGROUP CORPORATION
- ------------------------------------------------------
(Name of small business issuer in its charter)
DELAWARE
- ------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
13-3293645
-------------------------------------------
(I.R.S. Employer Identification)
2121 Avenue of the Stars, Suite 2020
Los Angeles, California 90067
- ------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 556-1999
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 __
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of October 31, 1996 was 959,349 shares.
Transitional Small Business Disclosure Format (check one): YES __ NO X
<PAGE>
THE INTERGROUP CORPORATION
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet (unaudited)
September 30, 1996 3
Consolidated Statements of Operations (unaudited)
Three Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION 10
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1996
ASSETS -----------
Investment in real estate, at cost:
Land $4,585,808
Buildings, improvements and equipment 31,257,865
Property held for sale or development 1,670,838
-----------
37,514,511
Less: accumulated depreciation (12,584,891)
-----------
24,929,620
Marketable securities, at market value 10,062,200
Investment in Santa Fe Financial Corporation 5,967,493
Other investments 3,597,006
Cash and cash equivalents 638,632
Restricted cash 2,052,505
Rent and other receivables 303,130
Prepaid expenses 1,119,744
Other assets 170,596
-----------
Total Assets $48,840,926
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $31,101,498
Due to securities broker 2,998,608
Accounts payable and other liabilities 2,915,851
Deferred income taxes 1,748,921
-----------
Total Liabilities 38,764,878
-----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.10 par - 100,000 shares authorized;
none issued
Common stock, $.01 par - 1,500,000 shares authorized;
1,494,824 shares issued; 959,349 shares outstanding 14,948
Paid-in capital 13,658,449
Retained earnings 116,856
Unrealized gain on marketable securities, net of deferred taxes 4,170,681
Note receivable - stock options (1,482,013)
Treasury stock, at cost, 535,475 shares (6,402,873)
-----------
Total Shareholders' Equity 10,076,048
-----------
Total Liabilities and Shareholders' Equity $48,840,926
===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended September 30, 1996 1995
-----------------------
Real estate operations:
Rental income $2,775,238 $2,777,795
Rental expenses:
Mortgage interest expense 682,982 705,813
Property operating expenses 1,329,602 1,352,130
Real estate taxes 226,874 205,564
Depreciation 418,647 386,355
------------------------
Income from real estate operations 117,133 127,932
------------------------
Investment transactions:
Dividend and interest income 29,347 51,370
Investment gains 630,878 887,929
Investment losses (275,750) (204,916)
Margin interest, trading and management expenses (245,958) (406,256)
------------------------
Income from investment transactions 138,517 328,127
------------------------
Other expenses:
General and administrative expenses (222,423) (300,868)
Miscellaneous income (expense) 43,825 (272,970)
------------------------
Other expenses (178,598) (573,839)
------------------------
Income (Loss) before provision (benefit)
for income taxes 77,052 (117,779)
Provision for income taxes (benefit) 37,800 (46,639)
------------------------
Net Income (Loss) $39,252 ($71,140)
========================
Net Income (Loss) per share $0.04 ($0.08)
========================
Weighted average number of shares outstanding 959,349 919,550
========================
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended September 30, 1996 1995
------------------------
Cash flows from operating activities:
Net Income (Loss) $39,252 ($71,140)
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation of real estate 418,647 386,355
Amortization of other assets 39,764 34,864
Equity in net income from Santa Fe Financial Corp. (65,284) (28,717)
Increase in receivables, net (63,963) (141,458)
Increase in prepaid expenses (136,480) (155,797)
Increase in other assets (15,609) (595)
Increase (decrease) in accounts payable and
other liabilities (247,644) 245,430
Increase (decrease) in income taxes (9,793) 55,825
------------------------
Net cash provided by (used for) operating activities (41,110) 324,766
------------------------
Cash flows from investing activities:
Additions to buildings, improvements and equipment (296,596) (183,497)
Investment in real estate 0 (596,842)
Investment in Santa Fe Financial Corporation (370,503) (137,309)
Reduction (investment) in marketable securities 173,860 (738,690)
Reduction (investment) in other investments 684,784 (250,000)
------------------------
Net cash provided by (used for) investing activities 191,545 (1,906,338)
------------------------
Cash flows from financing activities:
Principal payments on mortgage notes payable (85,893) (94,766)
Increase in mortgage notes payable due
to real estate acquisition 0 595,000
Decrease (increase) in restricted cash 114,824 (29,634)
(Decrease) increase in due to securities broker (474,671) 1,723,903
Decrease in accounts payable related to short
positions and other investments 0 (34,186)
Purchase of treasury stock 0 (440,213)
------------------------
Net cash provided by (used for) financing activities (445,740) 1,720,104
------------------------
Net increase (decrease) in cash and cash equivalents (295,305) 138,532
Cash and cash equivalents at beginning of period 933,936 63,291
------------------------
Cash and cash equivalents at end of period $638,632 $201,823
========================
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
THE INTERGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three months ended September 30, 1996
1. General:
The interim financial information is unaudited; however, in the opinion of
The Intergroup Corporation (the "Company"), the interim financial
information contains all adjustments, including normal recurring
adjustments, necessary to present fairly the results for the interim period.
These consolidated financial statements should be read in conjunction with
the Company's June 30, 1996 audited consolidated financial statements and
notes thereto.
2. Marketable Securities:
All securities are classified as available-for-sale except short positions,
which represent obligations of the Company and are classified as trading
activity. At September 30, 1996, marketable securities included $646,996 of
debt securities. At September 30, 1996, the aggregate market value of
marketable securities exceeded the aggregate cost by $7,068,950. The net
unrealized gain is comprised of gross unrealized gains of $7,833,010 reduced
by gross unrealized losses of $764,060. The net unrealized gain, net of
deferred taxes of $2,898,269, is included as a separate item in
shareholders' equity. During the three months ended September 30, 1996,
proceeds from sales of securities were $4,371,643. Gross realized gains and
losses are determined using FIFO costs. At September 30, 1996, the Company
had no naked short positions. Any unrealized gains or losses relating to
naked short positions are recognized in earnings in the current period. The
dividends on short positions are recorded on the ex-dividend date.
3. Investment in Santa Fe Financial Corporation:
As of September 30, 1996, the Company owned 35.5% and the Company's chairman
and president owned an additional 3.9% of the outstanding common stock of
Santa Fe Financial Corporation ("Santa Fe"). Revenues and net income for
Santa Fe for the quarter ended September 30, 1996, were $831,133 and
$188,788, respectively, and $556,402 and $142,293 for the prior year,
respectively. The Company records its investment in Santa Fe on the equity
basis.
Santa Fe's revenue is primarily generated through its 64.1% interest in
Portsmouth Square, Inc. ("PSI"), which derives its revenue primarily through
its 49.8% interest in Justice Investors ("Justice"), a limited partnership.
Justice owns the land, improvements and leasehold known as the Financial
District Holiday Inn, a 556-room hotel in San Francisco, California. PSI is
both a limited and general partner in Justice and records its investment in
Justice on the equity basis.
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4. Commitments and Contingencies:
In February 1995, a complaint was filed by Guinness Peat Group plc and its
subsidiary against the Company arising out of the Company's investment in
Santa Fe, and which seeks recision of the purchase and unspecified money
damages. The Company was originally charged with aiding and abetting Santa
Fe's Directors to breach their fiduciary duty to Santa Fe's shareholders by
selling control of Santa Fe for a sum below its value in order to maintain
their management positions. The Company was granted summary judgment on this
complaint in April 1996. Plaintiff, however, subsequently filed an amended
complaint charging the Company with fraud in promising that Santa Fe's
management would maintain their positions, which the Company believes is
also baseless. A tentative ruling granting the Company summary judgment on
this amended complaint was made in October 1996. The Court is presently
considering whether this ruling should be made permanent with a decision
anticipated in late November 1996. Discovery in this action is continuing
and the trial date originally scheduled for November 15, 1996 has been
vacated and a new date has not yet been set. These actions, should they
survive the motion for summary judgment, will be vigorously defended, and in
management's opinion, the Company will not suffer any material liability
relating to such actions.
In March 1996, a complaint was filed by 7709 Lankershim Ltd., a California
Limited Partnership, against the Company in which it claimed damages in
excess of $2,000,000 arising out of alleged latent construction defects
discovered in the two Indio, California properties, formerly owned by the
Company. The case is in its very early stages, discovery has not as yet
taken place, and it is not possible to assess what the exposure, if any, is
at this time. It is management's preliminary belief, however, that any
action with regard to one of the Indio, California properties is legally
barred. Insurance coverage, covering liability, if any, on the second
property has been preliminary denied by the insurance company which is still
studying the matter. The action will be vigorously defended.
The Company is a defendant or co-defendant in various legal actions
involving various claims incident to the conduct of its businesses.
Management does not expect the Company to suffer any material liability by
reason of such actions.
5. Related Party Transactions:
In May 1996, the Company's president exercised an option to purchase 125,000
shares of common stock at a price of $11.50 per share through a full
recourse note due the Company on demand, but in no event later than May
2001. The note bears interest floating at the lower of 10% or the prime
rate (8.25% at September 30, 1996) with interest payable quarterly. The
balance of the note receivable and accrued interest receivable was
$1,482,013 and is reflected as a reduction of shareholders' equity.
<PAGE>
THE INTERGROUP CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and
projections concerning future expectations. When used in this discussion,
the words "estimate", "project", "anticipate" and similar expressions, are
subject to certain risks and uncertainties, such as changes in general
economic conditions, local real estate markets, and competition, as well as
uncertainties relating to uninsured losses, securities markets, and
litigation, including those discussed below that could cause actual results
to differ materially from those projected. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only
as to the date hereof. The Company undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements
which may be made to reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
For the three months ended September 30, 1996 vs. 1995
Rental income from real estate operations decreased less than 1% to
$2,775,238 from $2,777,795. The decrease was primarily due to reduced
revenues at the Atlanta, Georgia and Middletown, Ohio properties, offset by
increased revenues at the San Antonio, Texas and the Irving, Texas
properties. The decrease in revenues at the Atlanta, Georgia property were a
result of a program to upgrade the tenant profile which commenced in January
1996 and was completed in October 1996.
Mortgage interest expense decreased 3% to $682,982 from $705,813 primarily
due to lower mortgage interest expense associated with the refinancing of
the Parsippany, New Jersey property in December 1995, partially offset by
increased mortgage interest expense associated with the refinancing of the
Florence, Kentucky property in April 1996 at a lower interest rate but with
a higher loan balance.
Property operating expenses decreased 1% to $1,329,602 from $1,352,130
primarily due to reduced utility costs associated with the Atlanta, Georgia
property, lower management costs and lower leasing expenses, partially
offset by increased repairs and maintenance, salaries, and cleaning and
decorating expenditures.
Real estate taxes increased 11% to $226,874 from $205,564 due to increased
real estate taxes in the Texas properties as a result of reassessed property
values by the tax authorities.
Depreciation increased 8% to $418,647 from $386,355 due to capitalized
property improvements throughout the real estate portfolio, but primarily at
the Irving, Texas and Parsippany, New Jersey properties.
<PAGE>
Investment gains decreased 29% to $630,878 from $887,929 and investment
losses increased 35% to $275,750 from $204,916 as a result of the sale of
certain securities which generated lower net investment gains during the
three months ended September 30, 1996. Realized investment gains and losses
may fluctuate significantly from period to period, with a meaningful effect
upon the Company's net earnings. However, the amount of realized investment
gain or loss for any given period has no predictive value, and variations in
amount from period to period have no practical analytical value,
particularly in view of the net unrealized gain in the Company's overall
investment portfolio. Margin interest, trading, and management expenses
decreased 39% to $245,958 from $406,256 due to a decrease in margin interest
expense of $120,361 and a decrease in trading related and management
expenses of $39,937 relating primarily to fewer personnel and related
expenses, travel expenses and administrative costs, partially offset by
increased litigation costs associated with investments. The Company has
initiated a cost savings program in this area to reduce the management
expenses through reduction in personnel and overhead expenses. Management
believes that the Company will continue to realize savings in future
periods. The overall investment portfolio, which includes marketable
securities, investment in Santa Fe and other investments, had a positive
return of 38.8% for the three months ended September 30, 1996 and a positive
return of 20.3% for the three months ended September 30, 1995, based on the
net realized and unrealized gains and losses and after expenses over the
monthly average investment balance of the overall investment portfolio. For
the five years ended September 30, 1996, the overall investment portfolio
achieved a positive average annual compounded return of 19.4%. It should be
noted that other investments are investments that are not traded on any
exchange and, accordingly, the return calculations do not reflect any
increases or decreases in value of other investments until such gains or
losses are realized or there is an other than temporary decline in value
below the cost of the investment. The overall portfolio return includes the
entire increase in the market value of the Company's holdings in the newly
publicly traded Orckit Communications Ltd. of $5,843,016. However, the
stock is subject to both a 180 day lock-up agreement in conjunction with the
public offering and the limitations imposed by Rule 144.
General and administrative expenses decreased 26% to $222,459 from $300,868
due to fewer personnel and related expenses and other administrative
expenses.
Miscellaneous income (expense) changed to income of $43,825 from expense of
$272,970 due to the resolution of the Golden West Entertainment litigation
and increased interest income in connection with the note receivable from
the Company's president.
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 net cash flow of $41,110 from operating activities,
generated net cash flow of $191,545 from investing activities and used net
cash flow of $445,740 for financing activities.
<PAGE>
The Company intends to sell all or a portion of its unimproved land. Should
the Company consummate a sale, all or a portion of the proceeds may be
utilized to provide additional funds to take advantage of other investment
opportunities.
During the quarter ended September 30, 1996, the Company improved properties
in the aggregate amount of $296,596. The Company has budgeted approximately
$800,000 for improvements in 1997. 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.
At September 30, 1996, the overall investment portfolio increased
approximately 7% to $19,626,699 from $18,281,914 at June 30, 1996, primarily
due to increased market value of securities. Net unrealized gains increased
33% to $7,068,950 from $5,301,307 at June 30, 1996. Net unrealized gains at
September 30, 1996, include $1,587,500 relating to Orckit Communications
Ltd. in accordance with FAS 115 "Accounting for Certain Investments in Debt
and Equity Securities".
The Company's outstanding indebtedness is includes of mortgages on real
estate which amounted to $31,101,498 as of September 30, 1996. Management
will pursue additional refinancing activities as considered necessary or
when deemed economically favorable to the Company.
For fiscal 1997, 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. Management
also anticipates that the net cash flow generated from future operating
activities will be sufficient to meet its long-term debt service
requirements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 22, 1995, a complaint was filed in the Superior Court of
California, County of San Diego, by Guinness Peat Group plc and its
subsidiary against the Company arising out of the Company's investment in
Santa Fe, and which seeks recision of the purchase and unspecified money
damages. The Company was originally charged with aiding and abetting Santa
Fe's Directors to breach their fiduciary duty to Santa Fe's shareholders by
selling control of Santa Fe for a sum below its value in order to maintain
their management positions. The Company was granted summary judgment on this
complaint in April 1996. Plaintiff, however, subsequently filed an amended
complaint charging the Company with fraud in promising that Santa Fe's
management would maintain their positions, which the Company believes is
<PAGE>
also baseless. A tentative ruling granting the Company summary judgment on
this amended complaint was made in October 1996. The Court is presently
considering whether this ruling should be made permanent with a decision
anticipated in late November 1996. Discovery in this action is continuing
and the trial date originally scheduled for November 15, 1996 has been
vacated and a new date has not yet been set. These actions, should they
survive the motion for summary judgment, will be vigorously defended, and in
management's opinion, the Company will not suffer any material liability
relating to such actions.
On March 27, 1996, a complaint was filed in the Superior Court of the State
of California, Riverside County, by 7709 Lankershim Ltd., a California
Limited Partnership, against the Company in which it claimed damages in
excess of $2,000,000 arising out of alleged latent construction defects
discovered in the two Indio, California properties, formerly owned by the
Company. The case is in its very early stages, discovery has not as yet
taken place, and it is not possible to assess what the exposure, if any, is
at this time. It is management's preliminary belief, however, that any
action with regard to one of the Indio, California properties is legally
barred. Insurance coverage, covering liability, if any, on the second
property has been preliminary denied by the insurance company which is still
studying the matter. The action will be vigorously defended.
The Company is a defendant or co-defendant in various legal actions
involving various claims incident to the conduct of its businesses.
Management does not expect the Company to suffer any material liability by
reason of such actions.
Items 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
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SIGNATURES
In accordance with the requirements 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: November 12, 1996
By /s/ John V. Winfield
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John V. Winfield
Chairman, President and Chief Executive Officer
Date: November 12, 1996
By /s/ Howard A. Jaffe
- ------------------------------------------------------
Howard A. Jaffe
Chief Operating Officer and Secretary
Date: November 12, 1996
By /s/ Gregory C. McPherson
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Gregory C. McPherson
Executive Vice President, Assistant Treasurer
and Assistant Secretary
Date: November 12, 1996
By /s/ David C. Gonzalez
- ------------------------------------------------------
David C. Gonzalez
Controller
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 638,632
<SECURITIES> 10,062,200
<RECEIVABLES> 303,130
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,907,344
<PP&E> 37,514,511
<DEPRECIATION> 12,584,891
<TOTAL-ASSETS> 48,840,926
<CURRENT-LIABILITIES> 7,663,380
<BONDS> 31,101,498
<COMMON> 14,948
0
0
<OTHER-SE> 10,061,100
<TOTAL-LIABILITY-AND-EQUITY> 45,117,402
<SALES> 0
<TOTAL-REVENUES> 3,203,538
<CGS> 0
<TOTAL-COSTS> 2,221,081
<OTHER-EXPENSES> 222,423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 682,982
<INCOME-PRETAX> 77,052
<INCOME-TAX> 37,800
<INCOME-CONTINUING> 39,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,252
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
