<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 December 31, 1997
( ) 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 No.)
2121 Avenue of the Stars, Suite 2020
Los Angeles, California 90067
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 556-1999
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 January 31, 1998 was 948,149 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)
December 31, 1997 3
Consolidated Statements of Operations (unaudited)
Six Months Ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended December 31, 1997 and 1996 5
Consolidated Statements of Operations (unaudited)
Three Months Ended December 31, 1997 and 1996 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31,
ASSETS 1997
Investment in real estate, at cost:
Land $6,272,945
Buildings, improvements and equipment 33,867,455
Property held for sale or development 2,077,644
------------
42,218,044
Less: accumulated depreciation (12,851,379)
------------
29,366,665
Cash and cash equivalents 274,185
Restricted cash 1,629,843
Marketable securities, at market value 21,486,298
Investment in Santa Fe Financial Corporation 7,609,369
Other investments 1,062,006
Rent and other receivables 503,399
Prepaid expenses and other assets 1,185,061
-----------
Total Assets $63,116,826
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $34,557,392
Due to securities broker 5,990,224
Accounts payable and other liabilities 3,676,374
Deferred income taxes 4,597,092
-----------
Total Liabilities 48,821,082
-----------
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; 948,149 shares outstanding 14,948
Additional paid-in capital 13,658,449
Retained earnings 2,510,615
Unrealized gain on marketable securities, net of deferred taxes 6,304,860
Note receivable - stock options (1,437,500)
Treasury stock, at cost, 546,675 shares (6,755,628)
-----------
Total Shareholders' Equity 14,295,744
-----------
Total Liabilities and Shareholders' Equity $63,116,826
===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended December 30, 1997 1996
Real estate operations: --------- ---------
Rental income $5,822,469 $5,559,926
Rental expenses:
Mortgage interest expense 1,846,405 1,364,464
Property operating expenses 3,080,097 2,627,883
Real estate taxes 505,164 461,826
Depreciation 927,849 838,524
--------- ---------
(537,046) 267,229
Gain on sale of real estate 630,438
--------- ---------
Income (loss) from real estate operations (537,046) 897,667
--------- ---------
Investment transactions:
Dividend and interest income 191,120 52,847
Investment gains 3,842,692 709,601
Investment losses (1,443,149) (378,301)
Margin interest, trading and management expenses (426,865) (451,407)
---------- ---------
Income (loss) from investment transactions 2,163,798 (67,260)
---------- ---------
Other income (expenses):
General and administrative expenses (471,935) (462,153)
Miscellaneous income (expense) (71,751) 72,316
---------- ---------
Other expenses (543,686) (389,837)
---------- ---------
Income before provision for income taxes 1,083,066 440,570
Provision for income taxes 519,321 81,407
---------- ---------
Net Income $563,745 $359,163
========== =========
Net Income per share, basic and diluted $0.59 $0.37
========== =========
Weighted average number of shares outstanding 953,100 959,349
========== =========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended December 31, 1997 1996
Cash flows from operating activities: --------- ---------
Net Income $563,745 $359,163
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Depreciation of real estate 927,849 838,524
Amortization of other assets 69,156 73,938
Equity in net income from Santa Fe Financial Corp. (129,545) (117,765)
Gain on sale of real estate 0 (630,438)
Changes in assets and liabilities:
Receivables (118,688) (104,866)
Prepaid expenses and other assets (155,330) (54,122)
Accounts payable and other liabilities 775,540 (604,945)
Income taxes payable 280,903 33,790
---------- ---------
Net cash provided by (used for) operating activities 2,213,630 (206,721)
---------- ---------
Cash flows from investing activities:
Additions to buildings, improvements and equipment (2,481,125) (473,032)
Investment in real estate (265,371) 0
Proceeds from sale of real estate 0 1,603,825
Investment in Santa Fe Financial Corporation (312,810) (421,033)
Investment in marketable securities (3,778,857) (783,480)
Reduction in other investments 1,079,956 529,784
----------- ---------
Net cash provided by (used for) investing activities (5,758,207) 456,064
----------- ---------
Cash flows from financing activities:
Principal payments on mortgage notes payable (253,278) (180,687)
Increase in notes payable from real estate financing 1,701,670 0
Decrease in restricted cash 184,009 608,416
Increase in due to securities broker 1,072,984 117,685
Increase (decrease) in other liabilities related
to other investments (500,000) 150,000
Purchase of treasury stock (197,430) 0
Net cash provided by financing activities 2,007,955 695,414
---------- ----------
Net increase (decrease) in cash and cash equivalents (1,536,622) 944,757
Cash and cash equivalents at beginning of period 1,810,807 933,936
---------- ----------
Cash and cash equivalents at end of period $274,185 $1,878,693
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Information
Non-cash investing and financing activities due to
exchange of equity interest in real estate:
Decrease in land, buildings and improvements $882,336 $0
Decrease in other net assets 364,278 0
Decrease in mortgage notes payable (1,246,614) 0
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 December 31, 1997 1996
Real estate operations: ---------- ----------
Rental income $2,871,463 $2,784,688
Rental expenses:
Mortgage interest expense 1,120,562 681,482
Property operating expenses 1,662,450 1,298,281
Real estate taxes 253,752 234,952
Depreciation 496,461 419,877
---------- ----------
(661,762) 150,096
Gain on sale of real estate 0 630,438
---------- ----------
Income (loss) from real estate operations (661,762) 780,534
---------- ----------
Investment transactions:
Dividend and interest income 88,691 23,500
Investment gains 1,058,797 78,723
Investment losses (997,190) (102,551)
Margin interest, trading and management expenses (210,805) (205,449)
----------- ---------
Loss from investment transactions (60,507) (205,777)
----------- ---------
Other income (expenses):
General and administrative expenses (250,437) (239,730)
Miscellaneous income (expense) (105,635) 28,491
---------- ---------
Other expenses (356,072) (211,239)
---------- ---------
Income (loss) before provision for income taxes (1,078,341) 363,518
Provision for income taxes (benefit) (381,575) 43,607
---------- ---------
Net Income (loss) ($696,766) $319,911
========== =========
Net Income (Loss) per share, basic and diluted ($0.73) $0.33
========== =========
Weighted average number of shares outstanding 958,051 959,349
========== =========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended December 31, 1997
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, 1997 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 December 31, 1997, marketable securities included $1,072,141
of debt securities. At December 31, 1997, the aggregate market value of
marketable securities exceeded the aggregate cost by $10,396,089. The net
unrealized gain is comprised of gross unrealized gains of $11,482,536
reduced by gross unrealized losses of $1,086,447. The net unrealized gain,
net of deferred taxes of $4,091,229, is included as a separate item in
shareholders' equity. During the six months ended December 31, 1997,
proceeds from sales of securities were $18,508,976. Gross realized gains
and losses are determined using first in first out ("FIFO") costs. At
December 31, 1997, 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 December 31, 1997, the Company owned 41.0% and the Company's chairman
and president owned an additional 3.7% of the outstanding common stock of
Santa Fe Financial Corporation ("Santa Fe"), respectively. Revenues and net
income for Santa Fe for the quarter ended December 31, 1997, were $1,076,248
and $229,890, respectively, and $730,590 and $149,383 for the prior year,
respectively. Revenues and net income for Santa Fe for the six months ended
December 31, 1997, were $1,710,602 and $355,503, respectively, and
$1,561,723 and $338,171 for the prior year, respectively. The Company
records its investment in Santa Fe on the equity basis and recorded earnings
of $129,545 and $117,765 for the six months period ended December 31, 1997
and 1996, respectively.
Santa Fe's revenue is primarily generated through its 65.5% interest in
Portsmouth Square, Inc. ("PSI"), which derives its revenue primarily through
<PAGE>
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.
On December 31, 1997, Intergroup exchanged a 55.4% equity interest in
Intergroup Woodland Village, Inc. ("Woodland") for 31,800 shares of a
newly-created convertible voting preferred stock of Santa Fe with a 6.0%
coupon and a $27.00 par value. Each share is convertible into one share of
restricted $.10 par value Common Stock of Santa Fe at an exercise price of
$27.00, with an eight year conversion exercise period. The Preferred Stock
will have voting rights as if converted into Common Stock. Woodland's
primary asset is a 100-unit apartment complex located in Cincinnati, Ohio.
4. Commitments and Contingencies:
On February 22, 1995, Guinness Peat Group PLC ("GPG") and its subsidiary
("Plaintiffs") filed a complaint in the Superior Court of the State of
California, County of San Diego (Case No. 685760) against the Company, Santa
Fe Financial Corporation ("Santa Fe") and certain directors of Santa Fe,
arising out of the Company's investment in Santa Fe. A summary judgment was
granted in favor of the Company, which became final on December 31,1996.
That judgment was appealed by Plaintiffs. On June 9, 1997, the trial court
filed an order awarding the Company $295,964 in attorneys' fees and costs as
the prevailing party, effective as of April 25, 1997. That award was also
appealed by Plaintiffs and the Court of Appeal has ordered the consolidation
of the two appeals. The action will continue to be vigorously defended and
every effort will be made by the Company to recover the fees and costs it
incurred.
In March 1996, a complaint was filed by 7709 Lankershim Ltd., a California
Limited Partnership ("Plaintiff") in the Superior Court of the State of
California, County of Riverside (Case No. 088325) against the Company and
others for damages allegedly suffered by Plaintiff arising out of alleged
construction defects in two Indio, California apartment complexes formerly
owned by the Company. Plaintiff acquired the properties from a financial
institution to whom the properties were returned by the Company. The
complaint alleges damages in the amount of $2,000,000. The case is in its
early stages and only limited discovery has taken place. Accordingly, it is
not possible to assess what exposure, if any, the Company may have at this
time. There may be insurance coverage for all or a part of the costs of
defense and indemnification for all or part of any liabilities suffered by
the Company. That action, as well as the action for declaratory relief
discussed below, will be vigorously defended. On January 5, 1998, the
Company was served with a complaint filed by the insurance carrier for
declaratory relief respecting the coverage on the two Indio, California
apartment complexes. That complaint, which was also filed in the Superior
Court, Riverside County, (Case No. INC 004158) puts at issue all aspects of
the insurance coverage for the properties.
<PAGE>
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 (8.50% at December 31, 1997) with interest payable quarterly. The
balance of the note receivable of $1,437,500 is reflected as a reduction of
shareholders' equity at December 31, 1997.
The Company's Chief Executive Officer directs the investment activity of the
Company in public and private markets pursuant to the authority granted by
the Board of Directors. Mr. Winfield also serves as Chief Executive Officer
of Santa Fe Financial Corporation and Portsmouth Square, Inc., and directs
the investment activity of those Companies. Depending on certain market
conditions and various risk factors, the Chief Executive Officer, members of
his immediate 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. Following allegations concerning the Chief Executive
Officer made by a former officer and director of the Company, the Board of
Directors authorized committees of the Board to conduct a thorough and
independent review of such matters, including the Company's practices in
this regard. That review has not been completed (see Report on Form 8-K
dated August 4, 1997).
6. Financial Accounting Standard No.128, Earnings Per Share:
During the quarter ended December 31, 1997 the Company adopted Financial
Accounting Standards No.128, Earnings Per Share ("SFAS 128"). SFAS 128
specifies the computation, presentation and disclosure requirements for
basic and fully-diluted earnings per share. The Company reported earnings
per share in accordance with SFAS 128 for the three and six month period
ended December 31, 1997 and 1996.
<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 six months ended December 31, 1997 vs. 1996
The loss from real estate operations for the six months ended December 31,
1997 was $537,046 compared to income of $897,667 for the six months ended
December 31, 1996, which included a $630,438 gain on sale of real estate.
The loss for the six months ended December 31, 1997 was impacted primarily
by a $355,000 prepayment penalty in connection with the refinancing of the
Irving, Texas property and higher than anticipated operating costs and lower
than anticipated revenues in connection with the lease-up phase of the
Houston, Texas property acquired during the third quarter of fiscal 1997 and
by reduced revenues and expenses in connection with the disposition of the
Atlanta, Georgia property in December 1996.
Rental income from real estate operations increased 5% to $5,822,469 from
$5,559,926. The increase was primarily due to increased revenues at the
Irving, Texas and Parsippany, New Jersey properties and to the acquisition
of the Houston Texas property in the third quarter of 1997. The increase
was primarily offset by a decrease in revenues due to the sale of the
Atlanta, Georgia property in December 1996, a decrease in revenues at one of
the San Antonio, Texas properties and one of the Ohio properties.
Subsequent to December 31, 1997, the Company entered into a new property
management agreement with a third party management company in connection
with the two Ohio properties, and terminated the previous management in
order to improve the performance at the two Ohio properties.
Mortgage interest expense increased 35% to $1,846,405 from $1,364,464
primarily due to a $355,000 prepayment penalty associated with the
<PAGE>
refinancing of the Irving, Texas property in December 1997, from a 10.375%
interest rate to a 7.01% interest rate and mortgage interest expense
associated with the Houston, Texas property acquired during the third
quarter of fiscal 1997.
Property operating expenses increased 17% to $3,080,097 from $2,627,883
primarily due to operating costs in connection with the Houston, Texas
property, and to a lesser extent, increased operating costs at the Ohio and
Pennsylvania properties. The increase was partially offset by operating
expenses associated with the Atlanta, Georgia property sold in December 1996.
Real estate taxes increased 9% to $505,164 from $461,826 due to increased
real estate taxes at the Houston, Texas property, offset by real estate
taxes associated with the Atlanta, Georgia property sold in December 1996.
Depreciation increased 11% to $927,849 from $838,524 due to the Houston,
Texas property acquired during the third quarter of fiscal 1997 and
capitalized improvements throughout the real estate portfolio.
On December 31, 1996, the Company sold its Atlanta, Georgia property for
$1,800,000. The sales price, less closing costs and other expenses, resulted
in net proceeds of $1,603,825 and a gain from the sale of real estate of
$630,438. There were no sales of real estate during the six months ended
December 31, 1997.
Investment gains increased 441% to $3,842,692 from $709,601 and investment
losses increased 282% to $1,443,149 from $378,301. Investment gains, net of
losses, increased 624% to $2,399,543 compared to $331,300 as a result of the
sale of certain securities which generated higher net investment gains
during the six months ended December 31, 1997. 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 the 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 5% to $426,865 from $451,406 due to a decrease in
trading-related and management expenses of $107,317 primarily due to lower
legal costs associated with investments which were offset by an increase in
margin interest expense of $82,776. The overall investment portfolio, which
includes marketable securities, the Company's investment in Santa Fe and
other investments, had a positive return of 14.0% for the six months ended
December 31, 1997 and a positive return of 17.3% for the six months ended
December 31, 1996, based on the net realized and unrealized gains and losses
and after expenses divided by the monthly average investment balance of the
overall investment portfolio. For the five years ended December 31, 1997,
the overall investment portfolio achieved a positive average annual
compounded return of 19.0%. 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
<PAGE>
investments until such gains or losses are realized or there is an other
than temporary decline in value below the cost of the investment.
General and administrative expenses increased 2% to $471,935 from $462,153
due to increased professional fees offset by lower personnel costs.
Miscellaneous expense increased to $71,751 in expense compared to $72,316 in
miscellaneous income due to legal and professional fees incurred during the
current period in connection with an independent review of allegations made
by a former officer and director of the Company, offset by miscellaneous
income.
Income tax expense of $519,321 and $81,407 were provided for the six months
ended December 31, 1997 and 1996, respectively. The increase results from
increased revenues during the current period compared to the previous year.
For the three months ended December 31, 1997 vs. 1996
The loss from real estate operations for the three months ended December 31,
1997 was $661,762 compared to income of $780,534 for the three months ended
December 31, 1996, which included a $630,438 gain on sale of real estate.
The loss for the three months ended December 31, 1997 was impacted primarily
by a $355,000 prepayment penalty in connection with the refinancing of the
Irving, Texas property in December 1997, and higher than anticipated
operating costs and lower than anticipated revenues in connection with the
lease-up phase of the Houston, Texas property acquired during the third
quarter of fiscal 1997 and by reduced revenues and expenses in connection
with the disposition of the Atlanta, Georgia property in December 1996.
Rental income from real estate operations increased 3% to $2,871,463 from
$2,784,688 primarily due to increased revenues at the Irving, Texas property
and to the acquisition of the Houston, Texas property during the third
quarter of fiscal 1997. The increase was offset primarily by reduced
revenues due to the sale of the Atlanta, Georgia property in December 1996,
and reduced revenues at the Ohio, Kentucky and one of the San Antonio, Texas
properties.
Mortgage interest expense increased 64% to $1,120,562 from $681,482
primarily due to a $355,000 prepayment penalty associated with refinancing
of the Irving, Texas property in December 1997, from a 10.375% interest rate
to a 7.01% interest rate, and mortgage interest expense associated with the
Houston, Texas property acquired during the third quarter of fiscal 1997.
Property operating expenses increased 28% to $1,662,450 from $1,298,281
primarily due to operating costs in connection with the Houston, Texas
property, and to a lesser extent, increased operating costs at the Ohio and
Pennsylvania properties. The increase was partially offset by operating
expenses associated with the Atlanta, Georgia property sold in December 1996.
Real estate taxes increased 8% to $253,752 from $234,952 due to increased
<PAGE>
real estate taxes at the Houston, Texas property acquired in the third
quarter of fiscal 1997, offset by real estate taxes associated with the
Atlanta, Georgia property sold in December 1996.
Depreciation increased 18% to $496,461 from $419,877 due to the Houston,
Texas property acquired during the third quarter of fiscal 1997 and
capitalized improvements throughout the real estate portfolio.
On December 31, 1996, the Company sold its Atlanta, Georgia property for
$1,800,000. The sales price, less closing costs and other expenses, resulted
in net proceeds of $1,603,825 and a gain from the sale of real estate of
$630,438. There were no sales of real estate during the three months ended
December 31, 1997.
Investment gains increased 1245% to $1,058,797 from $78,723 and investment
losses increased 872% to $997,190 from $102,551. Investment gains, net of
losses, increased 358% to $61,607 compared to investment losses, net of
gains of $23,828 as a result of the sale of certain securities which
generated higher net investment gains during the three months ended
December 31, 1997. 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 increased 3%
to $210,805 from $205,449 due to an increase in margin interest expense of
$56,237 and a decrease in trading related and management expenses of $50,880
relating primarily to a decrease in legal costs associated with investments.
The overall investment portfolio, which includes marketable securities, the
Company's investment in Santa Fe and other investments, had a negative
return of 7.1% for the three months ended December 31, 1997 and a negative
return of 15.6% for the three months ended December 31, 1996, based on the
net realized and unrealized gains and losses and after expenses divided by
the monthly average investment balance of the overall investment portfolio.
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.
General and administrative expenses increased 4% to $250,437 from $239,730
due to increased professional fees, offset by lower personnel costs.
Miscellaneous expense increased to $105,635 in expense compared to $28,491
in miscellaneous income due to legal and professional fees incurred during
the current period in connection with an independent review of allegations
made by a former officer and director of the Company, offset by
miscellaneous income.
<PAGE>
Income tax benefit of $381,575 and income tax expense of $43,607 were
provided for the three months ended December 31, 1997 and 1996,
respectively. The change results from the loss realized during the current
quarter, as compared to income for the prior year.
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 provided net cash flow of $2,213,630 from operating activities,
used net cash flow of $5,758,207 for investing activities and generated
net cash flow of $2,007,955 from financing activities.
On November 3, 1997, the Company entered into a contingent contract to sell
15.1 acres of its unimproved land in St. Louis, Missouri for $4,500,000. The
sale is not contemplated to close prior to April 1, 1998. Should the
Company consummate a sale, all or a portion of the proceeds may be utilized
to acquire other real estate investments.
In July 1997, the Company acquired approximately 5.4 acres of unimproved
land parcel adjacent to the Houston, Texas property for $265,371.
During the six months ended December 31, 1997, the Company improved
properties in the aggregate amount of $2,481,125, which include $1,656,245
in connection with the renovation of the Houston, Texas property and $57,899
capitalized costs associated with property held for sale or development. The
Company funded the renovation of the Houston, Texas property with proceeds
from its investment portfolio, and did not utilize third party financing.
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.
For the six months ended December 31, 1997, the overall investment portfolio
increased approximately 25% to $21,486,298 from $17,172,066 at June 30,
1997, primarily due to increased market value of securities and additional
investments. Net unrealized gains, before taxes, increased 5% to
$10,396,089 from $9,860,714 at June 30, 1997.
On December 31, 1997, Intergroup exchanged a 55.4% equity interest in
Intergroup Woodland Village, Inc. ("Woodland") for 31,800 shares of a
newly-created convertible voting preferred stock of Santa Fe with a 6.0%
coupon and a $27.00 par value. Each share is convertible into one share of
restricted $.10 par value Common Stock of Santa Fe at an exercise price of
$27.00, with an eight year conversion exercise period. The Preferred Stock
will have voting rights as if converted into Common Stock. Woodland's
primary asset is a 100-unit apartment complex located in Cincinnati, Ohio.
The Company's outstanding indebtedness includes mortgages on real estate
which amounted to $34,557,392 at December 31, 1997. During the six months
<PAGE>
ended December 31, 1997, the Company refinanced its Irving, Texas property
for $4,625,000. Management will pursue additional refinancing activities as
considered necessary or when deemed economically favorable to the Company.
During the quarter ended December 31, 1997 the Company repurchased 5,500
shares of its common stock under its repurchase program. The aggregate
purchase price for such shares was $197,430.
For fiscal 1998, 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.
As previously reported, in May 1996, the Company initiated an action in the
District Court of Johnson County, Kansas (Case No. 96C6508) against the
General Partner, a number of the Limited Partners, the manager and a
prospective purchaser of the Casa Maria Limited Partnership. Numerous
cross-and couter-claims were also filed in that action. On December 8,
1997, an order of dismissal was filed in that action terminating all of
those remaining claims, which brought that litigation to a successful
conclusion.
On February 22, 1995, Guinness Peat Group plc ("GPG") and its subsidiary
("Plaintiffs") filed a complaint in the Superior Court of the State of
California, County of San Diego (Case No. 685760) against the Company, Santa
Fe Financial Corporation ("Santa Fe") and certain directors of Santa Fe,
arising out of the Company's investment in Santa Fe. A summary judgment was
granted in favor of the Company, which became final on December 31, 1996.
That judgment was appealed by Plaintiffs. On June 9, 1997, the trial court
filed an order awarding the Company $295,964 in attorneys' fees and costs as
the prevailing party, effective as of April 25, 1997. That award was also
appealed by Plaintiffs and the Court of Appeal has ordered the consolidation
of the two appeals. The action will continue to be vigorously defended and
every effort will be made by the Company to recover the fees and costs it
incurred.
On July 3, 1997, the Court of Appeal granted a petition for a writ of
mandate brought by the director defendants of Santa Fe and directed the
trial court to enter summary judgment in favor of those defendants.
Plaintiffs filed a petition for review to the California Supreme Court of
that decision, which was denied on October 15, 1997. The Court of Appeal's
decision disposed of the remaining claims brought by GPG and its subsidiary.
<PAGE>
On January 21, 1998, a final judgment was entered in favor of the director
defendants. Santa Fe and the director defendants, as prevailing parties,
have applied to the trial court to recover their attorneys' fees and costs.
In March 1996, a complaint was filed by 7709 Lankershim Ltd., a California
Limited Partnership ("Plaintiff") in the Superior Court of the State of
California, County of Riverside (Case No. 088325) against the Company and
others for damages allegedly suffered by Plaintiff arising out of alleged
construction defects in two Indio, California apartment complexes formerly
owned by the Company. Plaintiff acquired the properties from a financial
institution to whom the properties were returned by the Company. The
complaint alleges damages in the amount of $2,000,000. The case is in its
early stages and only limited discovery has taken place. Accordingly, it is
not possible to assess what exposure, if any, the Company may have at this
time. There may be insurance coverage for all or a part of the costs of
defense and indemnification for all or part of any liabilities suffered by
the Company. That action, as well as the action for declaratory relief
discussed below, will be vigorously defended. On January 5, 1998, the
Company was served with a complaint filed by the insurance carrier for
declaratory relief respecting the coverage on the two Indio, California
apartment complexes. That complaint, which was also filed in the Superior
Court, Riverside County, (Case No INC 004158) puts at issue all aspects of
the insurance coverage for the properties.
Items 2 and 3 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The 1997 Annual Meeting of the Stockholders of the Company was held on
January 13, 1998, at the Park Hyatt Los Angeles Hotel, 2151 Avenue of the
Stars, Century City, California, with the following results: (1) Mr. John
V. Winfield and Mr. Josef A. Grunwald were elected Class A Directors of the
Company to serve until the 2000 Annual Meeting with an excess of 99% of the
shares of Common Stock voted at the Annual Meeting. Mr. William J. Nance and
Mrs. Mildred Bond Roxborough continue to serve as Directors of the Company;
and (2) The ratification of Price Waterhouse LLP as independent accountants
of the Company was passed with a majority of votes. A tabulation of the
votes follows:
Proposal (1) - Class A Directors: Votes For Against Abstained
John V. Winfield 918,297 5,483 0
Josef A. Grunwald 915,390 8,390 0
Proposal (2) - Accountants:
Price Waterhouse LLP 916,109 3,976 3,695
In January 1998, the Board of Directors of the Company elected Gary N.
Jacobs, Esq. and Mr. John C. Love to serve as additional Class B and Class C
directors, respectively, thereby increasing the Board to six members.
<PAGE>
Item 5. Other Information
On January 13, 1998 the Board of Directors approved the repurchase, from
time to time, of up to 100,000 shares of its Common Stock. Such repurchases,
together with previously authorized repurchases of up to 48,000 shares which
remain under a prior repurchase program, may be made in the discretion of
management and depending upon market conditions.
Item 6. Exhibits and Reports on Form 8-K
There were no Form 8-K filings during the quarter ended December 31, 1997.
<PAGE>
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: February 13, 1998
By /s/ John V. Winfield
- ------------------------------------------------------
John V. Winfield
Chairman, President and Chief Executive Officer
Date: February 13, 1998
By /s/ Gregory C. McPherson
- ------------------------------------------------------
Gregory C. McPherson
Executive Vice President, Assistant Treasurer
and Assistant Secretary
Date: February 13, 1998
By /s/ David C. Gonzalez
- ------------------------------------------------------
David C. Gonzalez
Controller
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 274,185
<SECURITIES> 21,486,298
<RECEIVABLES> 503,399
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,486,279
<PP&E> 42,218,044
<DEPRECIATION> (12,851,379)
<TOTAL-ASSETS> 63,116,826
<CURRENT-LIABILITIES> 14,263,690
<BONDS> 34,557,392
<COMMON> 14,948
0
0
<OTHER-SE> 14,280,796
<TOTAL-LIABILITY-AND-EQUITY> 63,116,826
<SALES> 0
<TOTAL-REVENUES> 8,413,132
<CGS> 0
<TOTAL-COSTS> 4,939,975
<OTHER-EXPENSES> 543,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,846,405
<INCOME-PRETAX> 1,083,066
<INCOME-TAX> 519,321
<INCOME-CONTINUING> 563,745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 563,745
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
<PAGE>
</TABLE>
