U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
( ) 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
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(Name of small business issuer in its charter)
DELAWARE
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(State or other jurisdiction of incorporation or organization)
13-3293645
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(I.R.S. Employer Identification No.)
2121 Avenue of the Stars, Suite 2020
Los Angeles, California 90067
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(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 April 30, 1998 was 944,149 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)
March 31, 1998 3
Consolidated Statements of Operations (unaudited)
Nine Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended March 31, 1998 and 1997 5
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
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 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
ASSETS 1998
Investment in real estate, at cost:
Land $6,272,945
Buildings, improvements and equipment 34,259,994
Property held for sale or development 2,077,769
-----------
42,610,708
Less: accumulated depreciation (13,314,325)
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29,296,383
Cash and cash equivalents 1,352,056
Restricted cash 1,674,310
Marketable securities, at market value 28,209,192
Investment in Santa Fe Financial Corporation 8,569,823
Other investments 1,062,006
Rent and other receivables 544,532
Prepaid expenses and other assets 1,144,020
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Total Assets $71,852,322
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $35,800,085
Due to securities broker 12,808,991
Accounts payable and other liabilities 3,931,556
Deferred income taxes 4,916,171
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Total Liabilities 57,456,803
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; 944,149 shares outstanding 14,948
Additional paid-in capital 13,698,659
Retained earnings 3,471,221
Unrealized gain on marketable securities
net of deferred tax 5,545,002
Note receivable - stock options (1,437,500)
Treasury stock, at cost, 550,675 shares (6,896,811)
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Total Shareholders' Equity 14,395,519
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Total Liabilities and Shareholders' Equity $71,852,322
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The accompanying notes are an integral part of the consolidated
financial statements.
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THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended March 31, 1998 1997
Real estate operations: ---------- ---------
Rental revenue $8,564,202 $8,455,641
Rental expenses:
Mortgage interest expense 2,640,145 2,072,600
Property operating expenses 4,508,130 3,949,029
Real estate taxes 749,066 659,511
Depreciation 1,391,572 1,235,849
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(724,711) 538,652
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Gain on sale of real estate 0 630,438
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Income (loss) from real estate operations (724,711) 1,169,090
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Investment transactions:
Dividend and interest income 277,681 199,376
Investment gains 6,787,866 2,215,514
Investment losses (2,036,574) (662,512)
Margin interest, trading and management expenses (715,749) (646,069)
------------ ---------
Income from investment transactions 4,313,224 1,106,309
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Other income (expenses):
General and administrative expenses (813,063) (674,187)
Miscellaneous income (expense) (160,410) 105,034
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Other expenses (973,473) (569,153)
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Income before provision for income taxes 2,615,040 1,706,246
Provision for income taxes 1,090,689 578,893
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Net Income $1,524,351 $1,127,353
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Net Income per share, basic and diluted $1.60 $1.18
========== ==========
Weighted average number of shares outstanding 950,702 959,349
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
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THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended March 31, 1998 1997
Cash flows from operating activities:
Net Income $1,524,351 $1,127,353
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Depreciation of real estate 1,391,572 1,235,849
Amortization of other assets 230,705 116,225
Equity in net income from Santa Fe Financial Corp. (275,075) (159,053)
Options issued for services 40,210 0
Gain on sale of real estate 0 (630,438)
Changes in assets and liabilities:
Receivables (153,073) (124,068)
Prepaid expenses and other assets (73,482) (88,899)
Accounts payable and other liabilities 125,283 (548,915)
Income taxes payable 839,872 516,982
Net cash provided by (used for) operating activities 3,650,363 1,445,036
Cash flows from investing activities:
Additions to buildings, improvements and equipment (2,815,786) (770,585)
Investment in real estate (265,361) (4,970,147)
Proceeds from sale of real estate 0 1,603,825
Investment in Santa Fe Financial Corporation (988,189) (471,163)
Investment in marketable securities (11,001,500) (2,677,276)
Reduction in other investments 1,077,956 1,059,884
Net cash provided by (used for) investing activities (13,992,880) (6,225,462)
Cash flows from financing activities:
Principal payments on mortgage notes payable (376,099) (295,810)
Increase in notes payable from real estate financing 3,067,184 0
Increase in notes payable from real estate acquired 0 3,595,714
Decrease in restricted cash 139,543 681,279
Increase in due to securities broker 7,891,751 29,812
Increase (decrease) in other liabilities related
to other investments (500,000) 0
Purchase of treasury stock (338,613) 0
Net cash provided by financing activities 9,883,766 4,010,995
Net increase (decrease) in cash and cash equivalents (458,751) (769,431)
Cash and cash equivalents at beginning of period 1,810,807 933,936
Cash and cash equivalents at end of period $1,352,056 $164,505
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.
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THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 1998 1997
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Real estate operations:
Rental revenue $2,741,733 $2,895,715
Rental expenses:
Mortgage interest expense 793,740 708,136
Property operating expenses 1,428,033 1,321,146
Real estate taxes 243,902 197,685
Depreciation 463,723 397,325
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(187,665) 271,423
Gain on sale of real estate 0 0
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Income (loss) from real estate operations (187,665) 271,423
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Investment transactions:
Dividend and interest income 86,561 146,529
Investment gains 2,945,174 1,505,913
Investment losses (593,425) (284,211)
Margin interest, trading and management expenses (288,884) (194,662)
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Income from investment transactions 2,149,426 1,173,569
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Other income (expenses):
General and administrative expenses (341,128) (212,034)
Miscellaneous income (expense) (88,659) 32,718
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Other expenses (429,787) (179,316)
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Income before provision for income taxes 1,531,974 1,265,676
Provision for income taxes 571,368 497,486
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Net Income $960,606 $768,190
========== ==========
Net Income per share, basic and diluted $1.02 $0.80
========= ==========
Weighted average number of shares outstanding 945,727 959,349
========= ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Nine Months Ended March 31, 1998
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 March 31, 1998, marketable securities included $955,000
of debt securities. At March 31, 1998, the aggregate market value of
marketable securities exceeded the aggregate cost by $9,396,000. The net
unrealized gain is comprised of gross unrealized gains of $11,071,000
reduced by gross unrealized losses of $1,675,000. The net unrealized gain,
net of deferred taxes of $3,851,000, is included as a separate item in
shareholders' equity. During the nine months ended March 31, 1998,
proceeds from sales of securities were $26,183,000. Gross realized gains
and losses are determined using first in first out ("FIFO") costs. At
March 31, 1998, 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 March 31, 1998, the Company owned 42.4% 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 March 31, 1998, were $1,315,000
and $381,000, respectively, and $723,000 and $117,000 for the prior year,
respectively. Revenues and net income for Santa Fe for the nine months ended
March 31, 1998, were $3,026,000 and $736,000, respectively, and
$2,285,000 and $455,000 for the prior year, respectively. The Company
records its investment in Santa Fe on the equity basis and recorded earnings
of $275,000 and $159,000 for the nine month period ended March 31, 1998
and 1997, respectively.
Santa Fe's revenue is primarily generated through its 65.7% 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 $.10 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 which expires December
31, 2005.
4. Commitments and Contingencies:
On February 22, 1995, the Company was named as a defendant in a
shareholders' derivative suit filed against Santa Fe Financial Corporation
("Santa Fe") and certain directors of Santa Fe, arising out of the Company's
investment in Santa Fe. On December 31, 1996, a final Judgment was entered
in favor of the Company. On June 9, 1997, the Company was awarded $295,964
in attorneys' fees and costs as a prevailing party in that litigation,
effective as of April 25, 1997. The judgment and the award of attorneys'
fees have been appealed. The action will continue to be vigorously defended
and every effort will be made by the Company to recover the fees and costs
it incurred.
In March, 1996, an action was filed against the Company and others arising
out of alleged construction defects in two Indio, California apartment
complexes formerly owned by the Company. The Complaint alleges damages in
the amount of $2,000,000. The Company has filed cross-complaints against
several contractors and subcontractors. The case is still in its early
stages and only limited discovery has taken place. Accordingly, it is not
possible to assess what exposure, if any, the Company may have at this time.
There may be insurance coverage for all or part of the costs of defense and
for all or part of any liability that may be imposed on the Company. On
January 5, 1998, the Company was served with a Complaint filed by the
insurance carrier for declaratory relief respecting coverage on the two
Indio, California properties, which alleges that the Company has no coverage
on at least one of the properties. The Company has filed a cross-complaint
against the carrier in that action. Both actions will continue to be
vigorously defended by the Company.
On March 27, 1998, a wrongful termination action was filed against the
Company and its President and Chairman by a former employee, officer and
director. The Complaint seeks an award of back and future pay, employee
benefits, restitution, unspecified compensatory and punitive damages and
attorneys' fees. The litigation is in its very early stages so it is not
possible to assess at this time what exposure, if any, the Company may have;
however, the case will be vigorously defended.
<PAGE>
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 March 31, 1998) with interest payable quarterly. The
balance of the note receivable of $1,437,500 is reflected as a reduction of
shareholders' equity at March 31, 1998.
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 oversees
the investment activity of those companies. Effective April 1, 1998 the
Company assigned one of its employees to manage the portfolios for these
two companies in consulation with Mr. Winfield. Santa Fe Financial
Corporation and Portsmouth Square, Inc. reimburse the Company for an
allocated portion of the compensation and benefits of such employee.
Depending on certain market conditions and various risk factors, the Chief
Executive Officer and members of his immediate family 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 at risk in connection with investment
decisions made on behalf of the Company. Additionally, Santa Fe Financial
Corporation and Portsmouth Square, Inc. may at times invest in such
companies. 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.
The committee completed its review, and on March 10, 1998 advised the board
of directors that it found the material allegations of improprieties made by
the former officer and director could not be substantiated. The committee
made recommendations that the Company institute certain modifications to its
existing procedures to reduce the potential for conflicts of interest. The
Company's Board of Directors has adopted these recommendations.
6. Financial Accounting Standards
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements with fiscal years ending after December
15, 1997. The new standard reinstates various securities disclosure
requirements previously in effect under Accounting Principals Board Opinion
No. 15, which has been superseded by SFAS No. 128. The Company has
adopted SFAS No. 129 and does not expect it to have a material effect on its
financial position or results of operations.
<PAGE>
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The Company has not determined
the effect on its financial position or results of operations from the
adoption of this statement.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by
the FASB is effective for financial statements beginning after December 15,
1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of
interim periods issued to shareholders. The Company does not expect the
adoption of SFAS No. 131 to have a material effect on its financial position
or results of operations.
<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 Nine Months Ended March 31, 1998 vs. 1997
The loss from real estate operations for the nine months ended March 31,
1998 was $780,000 compared to income of $1,169,000 for the nine months ended
March 31, 1997, which included a $630,000 gain on sale of real estate. The
loss for the nine months ended March 31, 1998 was impacted 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 revenue from real estate operations increased 1% to $8,564,000 from
$8,455,000. 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 offset by a decrease in revenues due to the sale of the Atlanta, Georgia
property in December 1996 and to decreases in revenues in certain other
properties. In addition, the Woodland Village property in Cincinnati, Ohio
is no longer consolidated with the Company due to the stock exchange which
occurred in December 1997.
Mortgage interest expense increased 27% to $2,640,000 from $2,073,000
primarily due to a $355,000 prepayment penalty associated with the
refinancing of the Irving, Texas property in December 1997, from a 10.375%
interest rate to a 7.01% interest rate and the write off of $57,000 in
<PAGE>
unamortized loan costs in connection with refinancing the Bridgeton,
Missouri property from a 9.625% interest rate to a 7.45% interest rate. The
increase is also due to mortgage interest expense associated with the
Houston, Texas property acquired during March 1997.
Property operating expenses increased 14% to $4,508,000 from $3,949,000
primarily due to operating costs in connection with the Houston, Texas
property, and to a lesser extent, increased operating costs at the Ohio,
Kentucky 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 14% to $749,000 from $660,000 due to increased
real estate taxes at the Houston and Irving, Texas properties which are
offset by real estate taxes associated with the Atlanta, Georgia property
sold in December 1996.
Depreciation increased 13% to $1,392,000 from $1,236,000 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 nine months ended
March 31, 1998.
Investment gains increased 206% to $6,788,000 from $2,216,000 and investment
losses increased 208% to $2,037,000 from $663,000. Investment gains, net of
losses, increased 206% to $4,751,000 compared to $1,553,000 as a result of
the sale of certain securities which generated higher net investment gains
during the nine months ended March 31, 1998. 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 increased 11% to $716,000 from $646,000.
The overall investment portfolio, which includes marketable securities, the
Company's investment in Santa Fe and other investments, had a positive
return of 27.7% for the nine months ended March 31, 1998 and a positive
return of 22.2% for the nine months ended March 31, 1997, 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 March 31, 1998, the overall investment portfolio
achieved a positive average annual compounded return of 19.7%. 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
<PAGE>
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 21% to $813,000 from $674,000
primarily due to increased professional, consulting and legal fees.
Miscellaneous expense increased to $160,000 compared to $105,000 in
miscellaneous income primarily due to legal and professional fees incurred
in connection with an independent review of allegations made by a former
officer and director of the Company and to the settlement of a lawsuit.
Income tax expense of $1,091,000 and $579,000 was provided for during the
nine months ended March 31, 1998 and 1997, respectively. The increase is
primarily due to an increase in net realized gains during the current period
compared to the previous year. In addition, the current net operating loss
carryforward is less than that available in the prior year.
For the Three Months Ended March 31, 1998 vs. 1997
The loss from real estate operations for the three months ended March 31,
1998 was $187,000 compared to income of $271,000 for the three months ended
March 31, 1997. The loss for the three months ended March 31, 1998 was
impacted by a $57,000 write off of unamortized loan costs in connection
with refinancing the Bridgeton, Missouri 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.
Rental revenue from real estate operations decreased 5% to $2,742,000 from
$2,895,000 primarily due to the exclusion of the Cincinnati, Ohio property
as a result of the exchange which occurred in December 1997. There were also
reduced revenues at certain other properties. These reductions are
partially offset by the addition of the Houston, Texas property which was
acquired in March 1997.
Mortgage interest expense increased 12% to $794,000 from $708,000 primarily
due to a $57,000 write off of unamortized loan costs in connection with
refinancing the Bridgeton, Missouri property from a 9.625% interest rate to a
7.45% interest rate in March 1998 and mortgage interest expense associated
with the Houston, Texas property acquired during the third quarter of fiscal
1997.
Property operating expenses increased 8% to $1,428,000 from $1,321,000
primarily due to operating costs in connection with the Houston, Texas
property, and to a lesser extent, increased operating costs at the Middleton,
Ohio property. The increase is partially offset by lower expenses due to the
exclusion of the Cincinnati, Ohio property as a result of the exchange which
occurred in December 1997.
<PAGE>
Real estate taxes increased 23% to $244,000 from $197,000 due to increased
real estate taxes at the Houston, Texas property acquired in March 1997.
Depreciation increased 16% to $464,000 from $397,000 due to the Houston,
Texas property acquired during the March 1997 and capitalized improvements
throughout the real estate portfolio.
Investment gains increased 96% to $2,945,000 from $1,506,000 and investment
losses increased 109% to $593,000 from $284,000. Investment gains, net of
losses, increased 92% to $2,352,000 compared to $1,222,000 as a result of
the sale of certain securities which generated higher net investment gains
during the three months ended March 31, 1998. 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 48% to $289,000 from $195,000.
The overall investment portfolio, which includes marketable securities, the
Company's investment in Santa Fe and other investments, had a positive
return of 12.0% for the three months ended March 31, 1998 and a positive
return of 5.8% for the three months ended March 31, 1997, 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 61% to $341,000 from $212,000
primarily due to increased professional, consulting and legal fees.
Miscellaneous expense increased to $89,000 compared to $33,000 in
miscellaneous income due to legal and professional in connection with an
independent review of allegations made by a former officer and director of
the Company and to the settlement of a lawsuit.
Income tax expenses of $571,000 and $498,000 were provided for the three
months ended March 31, 1998 and 1997, respectively. The increase is
primarily due to an increase in net realized gains during the quarter ended
March 31, 1998 compared to June 30, 1997.
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 $3,650,000 from operating activities,
<PAGE>
used net cash flow of $13,993,000 for investing activities and generated
net cash flow of $9,884,000 from financing activities.
On November 3, 1997, the Company entered into a contingent contract to sell
15.1 acres of its unimproved land outside St. Louis, Missouri for
$4,500,000. The initial contract was extended until June 1998 due to
certain requirements imposed by the City of Florissant. Should the Company
consummate a sale, all or a portion of the proceeds may be utilized to
acquire other real estate investments.
During the nine months ended March 31, 1998, the Company improved
properties in the aggregate amount of $2,815,786, which include $1,765,000 in
connection with the renovation of the Houston, Texas property and $58,000
capitalized costs associated with property held for sale or development.
Management believes the improvements to the properties should enhance market
values, maintain the competitiveness of the Company's properties and
potentially enable the Company to obtain a higher yield through higher rents.
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 $.10 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.
For the nine months ended March 31, 1997, the overall investment portfolio
increased approximately 64% to $28,209,000 from $17,172,000 at June 30,
1997, primarily due to increased market value of securities and additional
investments. The Company's balance due to securities broker increased
$7,892,000 during the nine months ended March 31, 1998. Net unrealized
gains, before taxes, decreased 4.7% to $9,396,000 from $9,861,000 at June 30,
1997.
The Company's outstanding indebtedness includes mortgages on real estate
which amounted to $35,800,000 at March 31, 1997. During the nine months
ended March 31, 1998, the Company refinanced its Irving, Texas property for
$4,625,000 and its Bridgeton, Missouri property for $4,810,000. Management
will pursue additional refinancing activities as considered necessary or
when deemed economically favorable to the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On March 27, 1998, a wrongful termination action was filed in the Los
Angeles County Superior Court entitled, Howard A. Jaffe v. The Intergroup
Corporation, et al., Case No. BC188323, against the Company and its
President, and Chairman. The Complaint was filed by a former employee,
officer and director and purports to seek an award of back and future pay,
employee benefits, restitution, unspecified compensatory and punitive
damages and attorneys' fees arising out of his alleged wrongful termination
from the Company. The Company intends to vigorously defend this case.
The following is an update on material developments in litigation previously
reported in the Company's Form 10-KSB for the fiscal year ended June 30, 1997
and in its quarterly reports filed on Form 10-QSB:
Guinness Peat Group, plc v. R.N. Gould, et al, San Diego Superior Court Case
No. 685760. On March 20, 1998, plaintiffs' filed their opening brief from
the summary judgment and award of attorneys fees and costs entered in favor
of the Company. Plaintiffs' also filed a writ of error coram vobis
requesting the appellate court to command the trial court to reconsider its
decision based on purported new evidence. The Company will vigorously
oppose that writ and the appeal.
7709 Lankershim Ltd. v. Carreon Villa Apartments I, et al, Riverside County
Superior Court Case No. 088325. In February 1998, the Company filed
cross-complaints in this construction defect suit against various
contractors and subcontractors. On October 15, 1997, a related action for
Declaratory Relief was filed by the insurance carrier entitled, Truck
Insurance Exchange v. Carreon Villa Apartments I, et al. Riverside County
Superior Court Case No. 004158. In its Complaint, the carrier alleges that
the Company has no coverage with respect to at least one of the Carreon
entities. The Company has filed an answer and cross-complaint in response
to that action, which will be vigorously defended.
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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit No. 3, Restated Certificate of Incorporation
- Exhibit No. 27, Financial Data Schedule
(b) Form 8-K - Filed during the quarter ended March 31, 1998
March 10, 1998 - relating to allegations by a former officer
and director of the Company by the Company's President and Chairman
and various other personnel.
<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: May 14, 1998
By /s/John V. Winfield
- ------------------------------------------------------
John V. Winfield
Chairman, President and Chief Executive Officer
Date: May 14, 1998
By /s/Gregory C. McPherson
- ------------------------------------------------------
Gregory C. McPherson
Executive Vice President, Assistant Treasurer
and Assistant Secretary
Date: May 14, 1998
By /s/Mary E. Arnold
- ------------------------------------------------------
Mary E. Arnold
Vice President of Finance
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,352,056
<SECURITIES> 28,209,192
<RECEIVABLES> 544,532
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,450,159
<PP&E> 42,610,708
<DEPRECIATION> (13,314,325)
<TOTAL-ASSETS> 71,852,322
<CURRENT-LIABILITIES> 21,656,718
<BONDS> 35,800,085
<COMMON> 14,948
0
0
<OTHER-SE> 14,380,571
<TOTAL-LIABILITY-AND-EQUITY> 71,852,322
<SALES> 0
<TOTAL-REVENUES> 13,593,175
<CGS> 0
<TOTAL-COSTS> 7,364,517
<OTHER-EXPENSES> 973,473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,640,145
<INCOME-PRETAX> 2,615,040
<INCOME-TAX> 1,090,689
<INCOME-CONTINUING> 1,524,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,524,351
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.60
</TABLE>
