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, 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 January 31, 1999 was 2,085,187 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, 1998 3
Consolidated Statements of Operations (unaudited)
Six Months Ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended December 31, 1998 and 1997 5
Consolidated Statements of Operations (unaudited)
Three Months Ended December 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 16
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
As of December 31, 1998
---------
Assets
Investment in real estate, at cost:
Land $ 6,283,000
Buildings, improvements and equipment 36,379,000
Property held for sale or development 2,141,000
-----------
44,803,000
Less: accumulated depreciation (15,769,000)
-----------
29,034,000
Cash and cash equivalents 1,930,000
Restricted cash 1,287,000
Marketable securities:
Available-for-sale 44,490,000
Trading 7,580,000
Investment in Justice Investors 9,454,000
Other investments 2,298,000
Rent and other receivables 404,000
Prepaid expenses and other assets 2,317,000
-----------
Total assets $ 98,794,000
===========
Liabilities and Shareholders' Equity
Liabilities:
Mortgage notes payable $ 38,146,000
Obligation for securities sold 13,117,000
Due securities broker 20,552,000
Accounts payable and accrued expenses 2,467,000
Note payable 2,000,000
Deferred income taxes 2,230,000
-----------
Total liabilities 78,512,000
-----------
Minority interest 10,119,000
-----------
Commitments and contingencies
<PAGE>
Shareholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized;
none issued -
Common stock, $.01 par value, 4,000,000 shares authorized;
2,129,288 issued, 2,099,487 outstanding 21,000
Common stock, class A $.01 par value, 2,500,000 authorized;
None issued -
Additional paid-in capital 8,686,000
Accumulated deficit ( 59,000)
Unrealized gain on investment securities,
net of deferred taxes 3,338,000
Note receivable - stock options ( 1,438,000)
Treasury stock, at cost, 29,801 shares ( 385,000)
----------
Total shareholders' equity 10,163,000
----------
Total liabilities & shareholders' equity $ 98,794,000
==========
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Restated)
For the Six Months ended December 31, 1998 1997
-------- --------
Real estate operations:
Rental income $ 6,526,000 $ 5,822,000
Rental expenses:
Mortgage interest expense 1,532,000 1,491,000
Property operating expenses 3,224,000 3,080,000
Real estate taxes 431,000 505,000
Depreciation 1,048,000 930,000
---------- ----------
291,000 (184,000)
Gain on sale of real estate 2,266,000 -
---------- ----------
Income (loss) from real estate operations 2,557,000 (184,000)
---------- ----------
Investment transactions:
Dividend and interest income 231,000 559,000
Investment gains 3,925,000 4,706,000
Investment losses (6,778,000) (2,906,000)
Margin interest, trading & management expenses ( 471,000) ( 561,000)
Equity in net income from Justice Investors 1,568,000 1,450,000
---------- ----------
Income (loss) from investment transactions (1,525,000) 3,248,000
---------- ----------
Other income (expense):
General and administrative ( 866,000) ( 817,000)
Miscellaneous income (expense) ( 15,000) 14,000
---------- ----------
( 881,000) ( 803,000)
---------- ----------
Income before provision for income taxes
and minority interest 151,000 2,261,000
Provision for income taxes 58,000 1,205,000
---------- ----------
Income before minority interest 93,000 1,056,000
Minority interest ( 142,000) ( 490,000)
---------- ----------
Income (loss) before Extraordinary Item ( 49,000) 566,000
Extraordinary loss due to early extinguishment
of debt less applicable income tax
benefit of $199,000 and $142,000 for
December 31, 1998 and 1997 ( 298,000) ( 213,000)
---------- ----------
Net income (loss) $( 347,000) $ 353,000
========== ==========
Basic earnings (loss) per share $( .16) $ .16
========== ==========
Weighted average number of shares outstanding 2,108,950 2,144,475
========== ==========
<PAGE>
Comprehensive Income:
Net income (loss) $( 347,000) $ 353,000
Unrealized gain (loss) on securities arising
during period (2,719,000) 341,000
Income tax benefit(expense) 910,000 ( 132,000)
---------- ----------
Comprehensive income (loss) $(2,156,000) $ 562,000
========== ==========
The accompanying notes are an integral part of the consolidated financial
statement
<PAGE>
THE INTEGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Restated)
For the Six Months Ended December 31, 1998 1997
Cash flows from operating activities: ------------- ------------
Net income (loss) $ ( 347,000) $ 353,000
Adjustments to reconcile net income
(loss) to cash provided by (used for)
operating activities:
Depreciation of real estate 1,048,000 930,000
Amortization of investments and other
assets 4,000 ( 8,000)
Equity in net income from Justice
Investors ( 1,568,000) ( 1,450,000)
Equity in net loss from other investments 196,000 161,000
Minority interest 142,000 490,000
Gain on sale of real estate ( 2,266,000) -
Changes in assets and liabilities:
Receivables ( 37,000) ( 44,000)
Prepaid expenses and other assets ( 993,000) ( 350,000)
Accounts payable and other liabilities ( 530,000) 385,000
Income taxes payable 93,000 238,000
------------ ------------
Net cash provided by (used for)
operating activities ( 4,258,000) 705,000
------------ ------------
Cash flows from investing activities
Additions to buildings, improvements
and equipment ( 1,023,000) ( 2,481,000)
Investment in real estate - ( 265,000)
Proceeds from sale of real estate 3,547,000 -
Reduction (increase)in other investments ( 61,000) 1,259,000
Distributions from Justice Investors 1,673,000 1,390,000
Investment in marketable securities (22,866,000) ( 9,132,000)
Investment in Santa Fe stock ( 314,000) ( 183,000)
Investment in Portsmouth stock ( 165,000) ( 325,000)
---------- ----------
Net cash used for investing activities (19,209,000) ( 9,737,000)
---------- -----------
<PAGE>
Cash flows from financing activities:
Principal payments on mortgage notes payable ( 241,000) ( 253,000)
Increase in mortgage notes payable from real
estate financing 3,274,000 1,701,000
Decrease in mortgage notes payable due to
refinancing and sale of real estate ( 3,931,000) -
Increase in note payable 2,000,000 -
Decrease in restricted cash 495,000 184,000
Increase in securities sold 2,497,000 1,051,000
Increase in due to securities brokers 16,348,000 3,147,000
Dividends paid to minority shareholders ( 63,000) ( 133,000)
Purchase of treasury stock ( 295,000) ( 197,000)
---------- ----------
Net cash provided by financing activities 20,084,000 5,500,000
---------- ----------
Net decrease in cash and cash equivalents ( 3,383,000) ( 3,532,000)
Cash and cash equivalents at beginning of
period 5,313,000 4,188,000
---------- -----------
Cash and cash equivalents at end of period $ 1,930,000 $ 656,000
========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Restated)
For the Three Months ended December 31, 1998 1997
-------- --------
Real estate operations:
Rental income $ 3,191,000 $ 2,871,000
Rental expenses:
Mortgage interest expense 743,000 766,000
Property operating expenses 1,554,000 1,662,000
Real estate taxes 161,000 253,000
Depreciation 519,000 498,000
---------- ---------
214,000 ( 308,000)
Gain on sale of real estate 2,266,000 -
---------- ---------
Income (loss) from real estate operations 2,480,000 ( 308,000)
---------- ---------
Investment transactions:
Dividend and interest income 156,000 263,000
Investment gains 2,870,000 1,720,000
Investment losses (5,220,000) (1,849,000)
Margin interest, trading & management expenses ( 285,000) ( 345,000)
Equity in net income from Justice Investors 787,000 695,000
---------- ----------
Income (loss) from investment transactions (1,692,000) 484,000
---------- ----------
Other income (expense):
General and administrative ( 472,000) ( 407,000)
Miscellaneous income (expense) 83,000 ( 20,000)
---------- ----------
( 389,000) ( 427,000)
---------- ----------
Income(loss)before provision for income taxes
and minority interest 399,000 ( 251,000)
Provision for income taxes ( 395,000) ( 163,000)
---------- ---------
Income (loss) before minority interest 4,000 ( 414,000)
Minority interest ( 53,000) ( 277,000)
---------- ---------
Loss before Extraordinary Item ( 49,000) ( 691,000)
Extraordinary loss due to early extinguishment
of debt less applicable income tax benefit
of $199,000 and $142,000 for December 31, 1998
and 1997 ( 298,000) ( 213,000)
---------- ----------
Net loss $( 347,000) $( 904,000)
========== =========
Basic loss per share $( .17) $( .42)
========== =========
Weighted average number of shares outstanding 2,106,988 2,155,614
========== ==========
<PAGE>
Comprehensive income (loss):
Net loss $( 347,000) $( 904,000)
Unrealized gain (loss) on securities arising
during period 2,089,000 (3,035,000)
Income tax benefit(expense) ( 827,000) 995,000
---------- ---------
Comprehensive income (loss) $ 915,000 $(2,944,000)
========== =========
The accompanying notes are an integral part of the consolidated financial
statement
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended December 31, 1998
1. General:
The consolidated financial statements included herein are 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 include the accounts of the Company
and its subsidiaries and should be read in conjunction with the Company's June
30, 1998 audited consolidated financial statements and notes thereto.
During fiscal year 1998 the Company's Chairman and President entered into a
voting trust agreement with the Company giving the Company the power to vote
the shares of Santa Fe common stock that he owns. As a result of this
agreement the Company has the power to vote 52.2% of the voting shares as of
December 31, 1998. Santa Fe's revenue is primarily generated through its
67.2% interest in Portsmouth Square, Inc. ("Portsmouth"), which derives its
revenues 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.
2. Marketable Securities:
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. All
marketable securities are defined as trading or available-for-sale securities.
The Company determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such designations at each balance
sheet date.
Securities classified as available-for-sale are carried at fair market value,
with the unrealized holding gains and losses reported as a separate component
of shareholders' equity. Certain securities are classified as trading
securities when they are transferred to cover corresponding obligations of the
same security sold short. These securities and the related obligations are
marked to market with unrealized holding gains and losses included in
earnings. The cost of investments sold is determined on the specific
identification or the first-in, first-out method.
At December 31, 1998, the aggregate market value of marketable securities
exceeded the aggregate cost by approximately $5,638,000. The net unrealized
gain is comprised of gross unrealized gains of approximately $9,179,000
reduced by gross unrealized losses of $3,541,000. The net unrealized gain,
net of deferred taxes of approximately $2,300,000, is included as a separate
item in shareholders' equity. As December 31, 1998 the Company had no
naked short positions.
<PAGE>
3. Investment in Justice Investors:
The consolidated accounts include a 49.8% interest in Justice Investors
("Justice"), a limited partnership. Justice owns the land, improvements and
leasehold known as the Financial District Holiday Inn, a 556-room hotel in San
Francisco, California. Portsmouth is both a limited and general partner in
Justice and records its investment in Justice on the equity basis.
Condensed financial statements for Justice Investors are as follows.
Justice Investors
Condensed Balance Sheet as of December 31, 1998
Total current assets $ 1,696,000
Property, plant and equipment
net of accumulated depreciation 5,576,000
Other assets 194,000
---------
Total Assets $ 7,466,000
=========
Liabilities and partners' capital
Total current liabilities $ 57,000
Long-term debt 2,605,000
Partners' capital 4,804,000
---------
Total Liabilities and Partners' Capital $ 7,466,000
=========
Justice Investors
Condensed Results of Operations
for the six months ended December 31,
1998 1997
-------- ---------
Revenues $ 3,607,000 $ 3,432,000
Net Income 3,148,000 2,920,000
<PAGE>
4. Investment in Healthy Planet Products, Inc.:
On August 5, 1998 the Company's Chairman and President became the Chairman of
Healthy Planet Products, Inc. ("Healthy Planet") and one of the Company's
directors became a director of Healthy Planet. As a result, the Company
exercises significant influence over Healthy Planet and, therefore, the
Company's consolidated operating results and cash flows for the six months
ended December 31, 1997, have been restated to account for the Company's 10.3%
ownership interest in Healthy Planet on the equity method. Previously the
Company accounted for its investment in Healthy Planet for this period on the
cost method. The effect of this restatement is to decrease previously
reported net income and retained earnings by $161,000. For the six months
ended December 31, 1998 investment losses include $196,000 in losses related
to the Company's investment in Healthy Planet.
<PAGE>
5. Commitments and Contingencies:
On February 22, 1995, the Company was named as a defendant in a shareholders'
derivative suit filed against Santa Fe and certain directors of Santa Fe,
arising out of the Company's investment in Santa Fe. On December 31, 1996, a
final judgment was entered in favor of the Company. On June 9, 1997, the
Company was awarded $296,000 in attorneys' fees and costs as a prevailing
party in that litigation, effective as of April 25, 1997. The judgment and
the award of attorneys 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.
On July 3, 1997, the Court of Appeal, granted the director defendants'
petition for a writ of mandate and directed the trial court to vacate its
prior order denying the director defendants' motion for summary judgment and
to enter a new order granting the motion. As prevailing parties, the director
defendants and Santa Fe made applications for recovery of the attorneys' fees
and costs expended in their successful defense of this litigation. On March
13, 1998, the trial court granted the applications for attorneys' fees and
costs in the total amount of $936,000. On March 24, 1998 a judgment was
entered in favor of the director defendants and Santa Fe which made the award
of costs effective as of February 20, 1998. That judgment is on appeal.
On March 27, 1998, a wrongful termination action was filed by an ex-employee,
officer and director against the Company and its President and Chairman. The
Complaint, as originally filed, sought an award of back and future pay,
employee benefits, restitution, unspecified punitive and special damages and
attorneys' fees. In June of 1998, a demurrer to the Complaint was sustained
without leave to amend, with respect to plaintiff's tort claim for breach of
implied covenant of good faith. On or about August 3, 1998, a demurrer to a
First Amended Complaint was sustained without leave to amend with respect to
plaintiff's claim of violation of section 17200 et seq. of the California
Business and Professions Code. Plaintiff filed a petition for a writ of
mandate challenging that decision, which was summarily denied by the Court of
Appeal. A subsequent petition to the California Supreme Court was also
denied. Plaintiff also filed an appeal from an order denying his motion to
disqualify the law firm representing the Company and its Chairman and
President. The filing of that appeal has resulted in a stay of all trial
court proceedings in that action. The case is in its very early stages and
discovery has just commenced, so it is not possible to predict the outcome at
this time.
As an officer and director, the Company's President and Chairman has requested
indemnification from the Company as permitted by law and under the Bylaws and
Articles of the Company. The case will be vigorously defended and there may
be insurance coverage for all or part of the costs of the defense of this
action and for all or part of any liability that may be imposed on the
Company.
<PAGE>
On March 27, 1996 an action was filed against the Company and others arising
out of alleged construction defects in two Indio, California apartment
complexes formerly owned by the Company. The Complaint alleges damages in the
amount of $2,000,000. The Company has filed cross-complaints against the
subcontractors and the architect. A motion for summary judgment was also
filed by the Company, which was joined by the other defendants. That motion
is scheduled to be heard on March 2, 1999. 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 October 15, 1997, a related action for Declaratory Relief was filed by the
insurance carrier alleging that the Company has no coverage with respect to at
least one of the apartment complexes. The Company has filed an answer and
cross-complaint for breach of contract, breach of the covenant of good faith
and fair dealing and for declaratory relief. The insurance company filed a
motion to strike the punitive damages claims in the cross-complaint, which was
granted. To date, limited discovery has occurred. The Company intends to
vigorously defend against the complaint and prosecute its cross-complaint in
this action. It is not possible to predict the outcome of this action at this
time.
6. Related Party Transactions:
In May 1996, the Company's Chairman and President exercised options to
purchase 281,250 shares (adjusted for split) of the Company's Common Stock at
an exercise price of $5.11 per share (adjusted for split) through a full
recourse note due to 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
(7.75% at December 31, 1998) with interest payable quarterly. The balance of
the note receivable of $1,438,000 is reflected as a reduction of shareholders'
equity at December 31, 1998.
The Company's Chairman and President directs the investment activity of the
Company, Santa Fe and Portsmouth in public and private markets pursuant to
authority granted by the Board of Directors of each entity. Depending on
certain market conditions and various risk factors, the President and members
of his immediate family may at times invest in the same companies in which the
Company, Santa Fe and Portsmouth invest. The Company, Santa Fe and Portsmouth
encourage such investments because it places personal resources of the
President and his family members at risk in connection with investment
decisions made on behalf of the Company, Santa Fe and Portsmouth. Following
allegations concerning the President made by a former officer and director of
the Company, the Board of Directors authorized committees of the Board to
conduct a thorough and independent review of such matters, including the
Company's practices in this regard. The committee advised the Board of
Directors that it found the material allegations of improprieties made by the
former officer and director could not be substantiated. The committee made
recommendations that the Company institute certain modifications to its
existing procedures to reduce the potential for conflicts of interest. The
Company's Board of Directors has adopted these recommendations.
<PAGE>
7. Stock Options:
On January 27, 1999 the Company entered into a Stock Option Agreement with its
President and Chairman granting him options to purchase up to 150,000 shares
of the Company's Common Stock at an exercise price of $11.875 per share. The
grant of options was issued pursuant to a 1998 Stock Option Plan for Selected
Key Officers, Employees and Consultants, which was approved by the
shareholders of the Company at its Annual Meeting of Shareholders on January
27, 1999. The term of the options is for the period beginning December 22, 1998
ending on December 21, 2008. No options may be exercised prior to June 8,
1999. The options vest according to the following schedule: December 22,
1998 - 37,500 shares; January 27, 1999 - 37,500 shares; December 22, 1999 -
37,500 shares; December 22, 2000 - 37,500 shares.
8. Sale of Real Estate:
On October 2, 1998 the Company sold its Harrisburg, Pennsylvania property for
$3,763,000. The sales price less closing costs and other expenses resulted in
net proceeds of $3,547,000 and a gain from the sale of real estate of
$2,266,000. Mortgage debt in the amount of $1,760,000 was repaid in
connection with the sale. Approximately $1,575,000 of the remaining
proceeds are being held in escrow pending a tax free exchange on a
commercial building the Company is currently under contract to acquire.
9. Note Payable:
On September 21, 1998, the Company entered into an agreement to borrow up to
$2,000,000 at the rate equal to the prime rate at the time the funds are
borrowed. Payment, including accrued interest, is due on September 21, 1999.
The loan is secured by the Company's unimproved land in St. Louis, Missouri.
As of December 31, 1998, the amount borrowed on the line of credit was
$2,000,000. The prime rate at December 31, 1998 was 7.75%.
THE INTERGROUP CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The discussion below and elsewhere in this report includes forward-looking
statements about the future business results and activities of the Company,
which, by their very nature, involve a number of risks and uncertainties.
When used in this discussion, the words "estimate", "project", "anticipate"
and similar expressions, are subject to certain risks and uncertainties, such
as changes in general economic conditions, local real estate markets, and
competition, as well as uncertainties relating to uninsured losses, securities
markets, and litigation, including those discussed below that could cause
actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to publicly release the results of any
revisions to those forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
RESULTS OF OPERATIONS
For the six months ended December 31, 1998 compared to December 31, 1997
(Restated)
Income from real estate operations for the six months ended December 31, 1998
was $2,557,000 compared to a loss of $184,000 for the six months ended
December 31, 1997. The income from real estate operations for the six months
ended December 31, 1998 was impacted primarily by a $2,266,000 gain on the
sale of the Company's property in Harrisburg, Pennsylvania.
Rental income from real estate operations increased 12% to $6,526,000 from
$5,822,000. The increase was primarily due to increased revenues at the
Houston, Texas property offset by the sale of the Harrisburg, Pennsylvania
property.
Mortgage interest expense increased 2.7% to $1,532,000 from $1,491,000 due to
higher mortgage payments associated with four properties refinanced with
higher leverage offset by lower interest rates including one of the San
Antonio, Texas properties refinanced in November, 1998 with a 6.7% interest
rate compared with 8.625% on the previous mortgage. This increase is offset
by the disposition of the Harrisburg, Pennsylvania property.
Property operating expenses increased 4.7% to $3,224,000 from $3,080,000
primarily due to increased operating costs in connection with the Houston,
Texas property, and to a lesser extent, increased operating costs at one of
the Ohio properties. These increases are partially offset by the disposition
of the Pennsylvania property.
Real estate taxes decreased 14.7% to $431,000 from $505,000 due to the
disposition of the Pennsylvania property and negotiated reductions in assessed
property values at certain properties offset by increased real estate taxes at
the Houston, Texas property.
Depreciation increased 12.7% to $1,048,000 from $930,000 due to capital
improvements throughout the real estate portfolio offset by the disposition of
the Pennsylvania property.
On October 2, 1998, the Company sold its Harrisburg, Pennsylvania property for
$3,763,000. The sales price, less closing costs and other expenses, resulted
in net proceeds of $3,547,000 and a gain from the sale of real estate of
$2,266,000. The proceeds are being held in escrow pending a tax free exchange
on a commercial property the Company is currently under contract to acquire.
There were no sales of real estate during the six months ended December 31,
1997.
<PAGE>
Investment gains decreased 16.6% to $3,925,000 from $4,706,000 and investment
losses increased 133.3% to $6,778,000 from $2,906,000. Investment gains, net
of losses, decreased 258.5% to a loss of $2,853,000 compared to a gain of
$1,800,000 as a result certain securities which generated higher net
investment losses during the six months ended December 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 decreased 16.1% to $471,000 from $561,000 due to a
decrease in trading-related and management expenses of $90,000 primarily due
to a decrease in margin interest expense offset by an increase in trading
expenses. The overall investment portfolio, which includes marketable
securities, the Company's investment in Santa Fe and other investments, had a
negative return of 28.3% for the six months ended December 31, 1998 and a
positive return of 14.0% for the six months ended December 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 December 31, 1998, the overall investment portfolio
achieved a negative average annual compounded return of 8.7%. 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
increases or decreases in value of other investment until such gains or losses
are realized or there is an other than temporary decline in value below the
cost of the investment. The Company's equity in the net income of Justice
Investors increased 8.l7% to $1,568,000 from $1,450,000 for the six months
ended December 31, 1998 and 1997, respectively.
General and administrative expenses increased 6.0% to $866,000 from $817,000
due to increased professional fees and personnel costs.
Miscellaneous expensess increased to $15,000 compared to income of $14,000 due
to legal fees associated with the Indio, California property litigation and
amortization of film production costs. These items were offset by a $121,000
escrow refund from a property sold several years ago, negative goodwill
amortization and a reduction in legal fees associated with the Guinness Peat
litigation and defense of allegations made by a former officer and director of
the Company.
Income tax expense of $58,000 and $1,205,000 were provided for the six months
ended December 31, 1998 and 1997, respectively. Minority interest was
$142,000 and $490,000 for the six months ended December 31, 1998 and 1997,
respectively.
<PAGE>
The extraordinary loss of $298,000 (net of income tax effect) for the six
months ended December 31, 1998 includes approximately $376,000 in prepayment
penalties incurred in connection with refinancing the San Antonio mortgage and
repayment of the Pennsylvania mortgage upon disposition of the property. The
loss also includes approximately $121,000 in amortization expense related to
loan origination costs associated with these two mortgages and a $199,000
income tax benefit. The extraordinary loss of $213,000 (net of income tax
effect) for the six months ended December 31, 1997 includes approximately
$355,000 in prepayment penalties incurred in connection with refinancing the
mortgages on the Irving, Texas property, and an income tax benefit of
$142,000.
For the three months ended December 31, 1998 compared to December 31, 1997
(Restated)
Income from real estate operations for the three months ended December 31,
1998 was $2,480,000 compared to a loss of $308,000 for the three months ended
December 31, 1997 was primarily impacted by a $2,266,000 gain on the sale of
the Company's property in Harrisburg, Pennsylvania.
Rental income from real estate operations increased 11.1% to $3,191,000 from
$2,871,000 for the three months ended December 31, 1998 and 1997,
respectively. The increase was primarily due to the Houston, Texas property
which experienced significantly lower vacancy levels following the
rehabilitation which was substantially complete as of December 31, 1998. The
increase was partially offset by the sale of the Pennsylvania property.
Mortgage interest expense decreased 3.0% to $743,000 from $766,000 for the
three months ended December 31, 1998 and 1997, respectively. This is due to
the sale of the Pennsylvania property and lower interest rates offset by
interest expense associated with higher mortgage payments associated with four
properties refinanced between December 31, 1997 and December 31, 1998 with
higher leverage.
Property operating expenses decreased 6.5% to $1,554,000 from $1,662,000 for
the three months ended December 31, 1998 and 1997, respectively. This is
primarily due to the sale of the Pennsylvania property and to a lesser extent
to lower expenses at the Company's Cincinnati, Ohio properties.
Real estate taxes decreased 36.5% to $161,000 from $253,000 for the three
months ended December 31, 1998 and 1997, respectively. This decrease is due
to the sale of the Pennsylvania property and decreases in assessed property
values.
Depreciation expense increased 4.0% to $519,000 from $498,000 for the three
months ended December 31, 1998 and 1997, respectively. This increase is due
to property improvements offset by the sale of the Pennsylvania property.
<PAGE>
Investment gains decreased 66.9% to $2,870,000 from $1,720,000 for the three
months ended December 31, 1998 and 1997, respectively and investment losses
increased 182.3% to $5,220,000 from $1,849,000 for the three months ended
December 31, 1998 and 1997, respectively. Realized gains and losses may
fluctuate significantly from period to period, with a meaningful effect upon
the Company's net earnings. However, in the opinion of management the amount
of realized investment gain or loss for any given period has no predictive
value, and variations in amounts from period to period have no practical
analytical value, particularly in view of the net unrealized gain in the
Company's overall investment portfolio.
Margin interest, trading and management expenses decreased 17.4% to $285,000
from $345,000 due to a decrease in margin interest expense offset by an
increase in trading expenses. The Company's overall investment portfolio,
which includes marketable securities, the Company's investment in Santa Fe and
Healthy Planet based on the equity method and other investments, had a
negative return of 7.4% for the three months ended December 31, 1998 compared
to a positive return of 7.1% for the three months ended December 31, 1997.
The return is calculated by dividing the net realized and unrealized gains and
losses net of associated expenses by the average monthly investment balance of
the overall investment portfolio. It should be noted that other investments
primarily includes investments that are not traded on any exchange and,
accordingly, the return calculations do not reflect any increases or decreases
in value of other investments until such gains or losses are realized or there
is an other than temporary decline in value below the cost of the investment.
The Company's equity in the net income of Justice investors increased 13.2% to
$787,000 from $695,000 for the three months ended December 31, 1998 and 1997,
respectively.
General and administrative expenses increased 16.2% to $472,000 from $407,000
for the three months ended December 31, 1998 and 1997, respectively.
The Company had miscellaneous income of $83,000 compared to expense of
$20,000 for the three months ended December 31, 1998 and 1997, respectively.
The increase in income is primarily due to a $121,000 escrow refund from a
property sold several years ago.
Income tax expense of $395,000 and $163,000 were provided for the three months
ended December 31, 1998 and 1997, respectively. Minority interest was $53,000
and $277,000 for the three months ended December 31, 1998 and 1997,
respectively.
The extraordinary loss of $298,000 (net of income tax effect) for the six
months ended December 31, 1998 includes approximately $376,000 in prepayment
penalties incurred in connection with refinancing the San Antonio mortgage and
repayment of the Pennsylvania mortgage upon disposition of the property. The
loss also includes approximately $121,000 in amortization expense related to
loan origination costs associated with these two mortgages and a $199,000
income tax benefit. The extraordinary loss of $213,000 (net of income tax
effect) for the six months ended December 31, 1997 includes approximately
$355,000 in prepayment penalties incurred in connection with refinancing the
mortgages on the Irving, Texas property and an income tax benefit of $142,000.
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are generated primarily from its real estate
activities, sales of investment securities and borrowings related to both.
The Company and Santa Fe used net cash flow of $4,258,000 for operating
activities, used net cash flow of $19,209,000 from investing activities and
generated net cash flow of $20,084,000 for financing activities during the six
months ended December 31, 1998.
During the six months ended December 31, 1998 the Company improved properties
in the aggregate amount of $1,023,000. Management believes the improvements
to the properties should enhance market values, maintain the competitiveness
of the Company's properties and potentially enable the Company to obtain a
higher yield through higher rents.
The Company's outstanding indebtedness includes mortgages on real estate which
amounted to $38,146,000 as of December 31, 1998. In addition, the Company
refinanced one of its San Antonio, Texas properties for $3,274,000.
Management may pursue property refinancing activities as considered
necessary or when deemed economically favorable to the Company. The Company
borrowed $2,000,000 under an existing agreement during the six months ended
December 31, 1998. Payment, including accrued interest, is due on September
21, 1999. The loan is secured by the Company's unimproved land in St. Louis
Missouri.
In December, 1998 the Company entered into a contract to purchase a commercial
property in Los Angeles, California for $1,850,000 and is expected to close on
or before February 26, 1999. The Company plans to use the proceeds from the
sale of its Pennsylvania property to acquire this property in a tax-free
exchange.
YEAR 2000 ISSUES
The Company is aware of the potential implications of the year 2000
("Y2K") issue could have on its business and as a result,is in the process of
determining what, if any, steps the Company must take to cure any potential
computer software or hardware problems associated with the year 2000. The
Company has hired professional outside consultants to assist it in addressing
its Y2K needs. The Company's plan includes upgrading existing software
applications to make them Y2K compliant, replacing some hardware required by
the software upgrades, purchasing new computer hardware and upgrading its
computer network and communication systems. The Company has also contacted
suppliers of various services and materials regarding their readiness and
plans for Y2K. The cost incurred by the Company to date for consultants,
software and hardware applications has been approximately
$23,000. Management does not believe the remaining costs to complete the Y2K
compliance will have a material effect on the Company's financial position.
Based on preliminary discussions with its outside consultants, service
providers and software and hardware vendors, the Company has
determined that its systems, both information technology and non-information
technology, are not reasonably likely to be impacted by Y2K and the
Company anticipates that it will be Y2K compliant by June 30, 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The following is furnished to update information previously reported in the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1998
and in its Form 10-QSB for the period ended September 30, 1998.
Guinness Peat Group plc v. Robert N. Gould, et al., San Diego County Superior
Court Case No. 685760. The appeal from the summary judgement and the award of
attorneys' fees and costs in the amount of $296,000, which were granted in
favor of the Company, has now been fully briefed. Oral argument and a
subsequent decision on that appeal are not expected to occur for at least
another twelve to eighteen months. The appeal of the award of attorneys' fees
in favor of Santa Fe and the director defendants in the aggregate amount of
$936,000 also remains on appeal, with the opening brief and respondents' brief
having been filed. The parties also participated in a Court of Appeal
settlement program, but no progress was made as to settlement.
Howard A. Jaffe v. The InterGroup Corporation, et al., Los Angeles County
Superior Court Case No. BC188323. As previously reported, on or about August
3, 1998, a demurrer to plaintiff's First Amended Complaint was sustained
without leave to amend with respect to plaintiff's claim of violation of
section 17200 et seq. of the California Business and Professions Code.
Plaintiff filed a petition for a writ of mandate challenging that ruling which
was summarily denied by the Court of Appeal. A petition to the California
Supreme Court was also denied. Plaintiff also filed an appeal from an order
denying his motion seeking to disqualify the law firm representing the Company
and its President and Chairman. The filing of that appeal has resulted in a
stay of all trial court proceedings in that action.
7709 Lankershim Ltd. v. Carreon Villa Apartments I, et al., Riverside County
Superior Court Case No. 088325. A motion for summary judgment was filed by
the Company and the Carreon entities, which was joined in by the other
defendants. That motion is scheduled to be heard on March 2, 1999. That
action is still in its early stages and only limited discovery has taken place
to date.
Truck Insurance Exchange v. Carreon Villa Apartments I, et al., Riverside
County Superior Court No. 004158. Plaintiff's motion to strike the punitive
damages claims in the cross-complaint filed by defendants was granted. The
Company intends to vigorously defend against the complaint and to prosecute
the remaining claims in its cross-complaint and seek appellate review if
appropriate.
The Company is a defendant or co-defendant in various other legal actions
involving various claims incident to the conduct of its business. Most of
these claims are covered by insurance. Management does not anticipate the
Company to suffer any material liability by reason of such actions.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
The 1998 Annual Meeting of the Stockholders of the Company was held on January
27, 1999, at the Park Hyatt Los Angeles Hotel, 2151 Avenue of the Stars,
Los Angeles, California. At that Meeting, Mr. Gary N. Jacobs and Mr. William
J. Nance were elected class B Directors of the Company to serve until the 2001
Annual Meeting with an excess of 99% of the shares of Common Stock voted at
the Annual Meeting. Mr. John V. Winfield, Mr. John C. Love, Mr. Joseph A.
Grunwald and Mrs. Mildred Bond Roxborough continue to serve as Directors of
the Company. At that Meeting the shareholders also voted in favor of
ratification of PricewaterhouseCoopers LLP and independent accountants of
the Company, and two stock option plans. A tabulation of the votes follows:
Proposal (1) - Class B Directors: Votes For Against Abstained
Gary N. Jacobs 1,741,213 5,889 0
William J. Nance 1,741,145 5,957 0
Proposal (2) - Accountants:
PricewaterhouseCoopers LLP 1,718,200 24,007 4,895
Proposal (3) - Stock Option Plan for
Non-Employee Directors 1,252,049 80,946 10,319
Proposal (4) - Stock Option Plan for
Selected Key Officers, Employees and
Consultants 1,242,564 76,626 20,603
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit No. 27, Financial Data Schedule
(b) Form 8-K - There were no Form 8-K filings during the quarter ended
December 31, 1998
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 12, 1999
By ________________
John V. Winfield
Chairman, President and Chief Executive Officer
Date: February 12, 1999
By ____________________
Gregory C. McPherson
Executive Vice President, Assistant Treasurer and
Assistant Secretary
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