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 March 31, 1999
( ) 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
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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 May 14, 1999 was 2,085,187 shares.
Transitional Small Business Disclosure Format (check one): YES__ NO X
<PAGE> 2
THE INTERGROUP CORPORATION
INDEX TO FORM 10-QSB
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet (unaudited)
March 31, 1999 3
Consolidated Statements of Operations (unaudited)
Nine Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 1999 and 1998 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 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
<PAGE> 3
<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 1999
----
<S> <C>
ASSETS
Investment in real estate, at cost:
Land $ 7,825,000
Buildings, improvements and equipment 37,209,000
Property held for sale or development 2,185,000
-----------
47,219,000
Less: accumulated depreciation (16,188,000)
-----------
31,031,000
Cash and cash equivalents 767,000
Restricted cash 1,428,000
Marketable securities:
Available for sale 44,397,000
Trading 8,455,000
Investment in Justice Investors 9,502,000
Other investments 1,757,000
Rent and other receivables 298,000
Prepaid expenses and other assets 2,863,000
-----------
Total Assets $ 100,498,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $39,327,000
Due to securities broker 18,797,000
Obligations for securities sold 16,107,000
Accounts payable and other liabilities 2,834,000
Note payable 2,000,000
Deferred income taxes 1,650,000
-----------
Total Liabilities 80,715,000
-----------
Minority interest 10,091,000
-----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par - 2,500,000 shares authorized;
none issued -
Common stock, $.01 par - 4,000,000 shares authorized;
2,129,288 shares issued; 2,094,987 shares 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 (1,164,000)
Accumulated other comprehensive income,
net of deferred taxes 4,104,000
Note receivable - stock options (1,438,000)
Treasury stock, at cost, 39,601 shares (517,000)
-----------
Total Shareholders' Equity 9,692,000
-----------
Total Liabilities and Shareholders' Equity $ 100,498,000
===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended March 31, 1999 1998
---------- ---------
<S> <C> <C>
Real estate operations:
Rental revenue $9,718,000 $ 8,690,000
Rental expenses:
Mortgage interest expense 2,297,000 2,318,000
Property operating expenses 4,757,000 4,613,000
Real estate taxes 669,000 749,000
Depreciation 1,568,000 1,419,000
---------- ----------
427,000 (409,000)
Gain on sale of real estate 2,266,000 -
---------- ----------
Income (loss) from real estate operations 2,693,000 (409,000)
---------- ----------
Investment transactions:
Dividend and interest income 621,000 807,000
Investment gains 7,866,000 6,598,000
Investment losses (12,995,000) (2,037,000)
Margin interest, trading and management expenses (1,079,000) (977,000)
Equity in net income from Justice Investors 2,132,000 2,056,000
------------ ---------
Income (loss) from investment transactions (3,455,000) 6,447,000
----------- ---------
Other expenses:
General and administrative expenses (1,256,000) (1,478,000)
Miscellaneous (expense) income (333,000) 14,000
----------- ---------
Other expenses (1,589,000) (1,464,000)
----------- ---------
Income (loss) before provision for income taxes (2,351,000) 4,574,000
Provision for income tax benefit (expense) 940,000 (2,052,000)
---------- ----------
Income (loss) before minority interest (1,411,000) 2,522,000
Minority interest (127,000) (785,000)
---------- ----------
Income (loss) before extraordinary item (1,538,000) 1,737,000
Extraordinary loss due to early extinguishment
of debt less applicable income tax benefit
of $199,000 and $142,000 for March 31, 1999
and 1998 (298,000) (213,000)
---------- ----------
Net (loss) income $(1,836,000) $1,524,000
========= =========
Basic (loss) earnings per share $ (0.88) $ .71
========== ==========
Weighted average number of shares outstanding 2,089,687 2,139,079
========== ==========
Comprehensive income:
Net income (loss) $(1,836,000) $1,524,000
Unrealized gain (loss) on securities arising
during period (8,641,000) 1,566,000
Reclassification adjustment for holding loss
included in net earnings 5,129,000 (1,553,000)
Income tax benefit (expense) related to other
comprehensive income 2,469,000 (447,000)
---------- ---------
Total comprehensive (loss) income $(2,879,000) $1,090,000
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended March 31, 1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,836,000) $ 1,524,000
Adjustments to reconcile net income
(loss) to cash provided by (used for)
operating activities:
Depreciation of real estate 1,568,000 1,421,000
Amortization of investments and other
Assets 421,000 163,000
Equity in net income from Justice
Investors (2,132,000) (2,056,000)
Equity in net loss from other
investments 233,000 -
Minority interest 127,000 785,000
Gain on sale of real estate (2,266,000) -
Changes in assets and liabilities:
Receivables (69,000) (153,000)
Prepaid expenses and other assets (1,963,000) (24,000)
Accounts payable and other liabilities (140,000) 264,000
Income taxes payable (1,396,000) 946,000
---------- -----------
Net cash provided by (used for)
operating activities (7,453,000) 2,870,000
---------- ----------
Cash flows from investing activities:
Additions to buildings, improvements
and equipment (1,560,000) (2,833,000)
Investment in real estate (1,876,000) (265,000)
Proceeds from sale of real estate 3,547,000 -
Reduction (increase) in other investments (108,000) 26,000
Distributions from Justice Investors 2,191,000 1,808,000
Investment in marketable
securities (20,921,000) (16,579,000)
Investment in Santa Fe (314,000) (988,000)
Investment in Portsmouth (165,000) (258,000)
---------- ----------
Net cash used for investing activities (19,206,000) (19,089,000)
---------- ----------
Cash flows from financing activities:
Principal payments on mortgage notes payable (366,000) (381,000)
Increase in mortgage notes payable from real
estate financing 3,274,000 3,067,000
Decrease in notes from real estate financing
and sale of real estate (3,931,000) -
Decrease in restricted cash 303,000 181,000
Increase in mortgage notes payable 1,306,000 -
Increase in due to securities brokers 14,593,000 11,495,000
Increase in obligations for securities sold 5,487,000 -
Increase (decrease) in note payable 2,000,000 (327,000)
Dividends paid to minority shareholders (126,000) (130,000)
Purchase of treasury stock (427,000) (339,000)
---------- ----------
Net cash provided by financing activities 22,113,000 13,566,000
---------- ----------
Net decrease in cash and cash equivalents (4,546,000) (2,653,000)
Cash and cash equivalents at beginning of
period 5,313,000 4,189,000
---------- -----------
Cash and cash equivalents at end of period $ 767,000 $ 1,536,000
========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 6
<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 1999 1998
--------- ----------
<S>
Real estate operations: <C> <C>
Rental revenue $3,192,000 $2,868,000
Rental expenses:
Mortgage interest expense 765,000 827,000
Property operating expenses 1,533,000 1,534,000
Real estate taxes 238,000 244,000
Depreciation 520,000 491,000
--------- ---------
Income (loss) from real estate operations 136,000 (228,000)
--------- ---------
Investment transactions:
Dividend and interest income 390,000 248,000
Investment gains 3,941,000 3,193,000
Investment losses (6,217,000) (593,000)
Margin interest, trading and management expenses (608,000) (416,000)
Equity in net income from Justice Investors 564,000 606,000
---------- ---------
Income (loss) from investment transactions (1,930,000) 3,038,000
---------- ---------
Other expenses:
General and administrative expenses (395,000) (599,000)
Miscellaneous expense (311,000) (60,000)
---------- --------
Other expenses (706,000) (659,000)
---------- ---------
Income (loss) before provision for income taxes
and minority interest (2,500,000) 2,151,000
Provision for income tax benefit (expense) 998,000 (847,000)
---------- ---------
Income (loss) before minority interest (1,502,000) 1,304,000
Minority interest 16,000 (343,000)
---------- ---------
Net (loss) income $(1,486,000) $ 961,000
========== =========
Basic (loss) earnings per share $ (.71) $ .45
========= =========
Weighted average number of shares outstanding 2,099,423 2,127,886
========= =========
Comprehensive income:
Net (loss) income $(1,486,000) $ 961,000
Unrealized loss on securities arising
during period (2,114,000) (7,715,000)
Reclassification adjustment for holding loss
Included in net earnings 2,276,000 4,751,000
Income tax benefit related to other
Comprehensive income 604,000 2,204,000
---------- ---------
Total comprehensive (loss) income $ (720,000) $ 201,000
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Nine Months Ended March 31, 1999
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.
On June 30, 1998, the Company's Chairman and President entered into a
voting trust agreement with the Company giving the Company the power to vote
the shares of Santa Fe Financial Corporation ("Santa Fe")common stock that he
owns. As a result of that agreement, the Company has the power to vote 52.2%
of the voting shares of Santa Fe and accordingly has consolidated Santa Fe
as of June 30, 1998. Certain reclassifications have been made to the financial
statements as of March 31, 1999 and for the three and nine months then ended to
conform with the current quarter presentation.
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:
The Company has classified its portfolio of marketable investment securities as
available-for-sale and has reported it at fair value, as primarily determined
by quoted market prices, with unrealized gains and losses, net of deferred
taxes, reported in accumulated other comprehensive income. Any unrealized
gains or losses related to short positions are recognized in earnings in the
current period. The Company borrows funds from securities brokers to purchase
marketable securities under standard margin agreements.
Certain securities may be classified as trading securities to correspond with
obligations of the same securities sold short. These securities and the
related obligations are marked to market with unrealized holding gains and
losses included in earnings.
Realized gains and losses are included in net losses on marketable securities.
The cost of securities sold is determined based on the specific identification
method. Interest and dividends from securities classified as available-for-
sale are included in investment and interest income.
At March 31, 1999, the aggregate market value of marketable securities
exceeded the aggregate cost by approximately $5,311,000 The net unrealized
gain is comprised of gross unrealized gains of approximately $11,816,000
reduced by gross unrealized losses of $6,505,000. The net unrealized gain,
net of deferred taxes of approximately $4,104,000, is included in accumulated
other comprehensive income.
<PAGE> 8
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
March 31, 1999
--------------
Assets
Total current assets $ 550,425
Property, plant and equipment, net of
accumulated depreciation of $11,093,009 5,482,674
Loan fees and deferred lease costs,
net of accumulated amortization of $124,543 185,869
---------
$6,218,968
=========
Liabilities and partners' equity
Total current liabilities $ 21,371
Long-term debt 1,100,000
Partners' equity 5,097,597
Total liabilities and ---------
partners' equity $6,218,968
=========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
Three Months Nine Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues $1,358,686 $1,495,605 $4,966,000 $4,928,000
Costs and expenses 225,354 277,934 684,000 790,000
--------- --------- --------- ---------
Net income $1,133,332 $1,217,671 $4,282,000 $4,138,000
========= ========= ========= =========
<PAGE> 9
4. 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> 10
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
was denied on April 22, 1999 and the Company filed a petition for a writ on
May 14, 1999 challenging that ruling. 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.
5. Related Party Transactions:
In May 1996, the Company's Chairman and President exercised an 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
(8.5% at March 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 March 31, 1999.
On January 4, 1999, the Executive Committee of the Company authorized a short-
term loan from the Company to the Company's Chairman and President in the
amount of $350,000 at an interest rate equal to the prime rate, as of the date
of the loan, plus one percent. All principal and interest under the loan was
repaid in full on the due date of March 31, 1999.
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 that 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> 11
6. 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.
7. Purchase of Real Estate:
On March 4, 1999, the Company acquired a commercial real estate property
located at 820 Moraga Drive, Los Angeles, California 90049 for $1,876,000.
The property will serve as the Company's new corporate headquarters beginning
in June of 1999.
8. Subsequent Event:
On April 20, 1999, the Company sold its 160 unit apartment complex in San
Antonio, Texas for $4,000,000. The Company realized a net gain of $618,000 and
cash proceeds from the sale of $1,573,000 were used to pay down amounts due to
securities brokers.
Item 2 - 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 and in the Company's
Form 10-KSB for the fiscal year ended June 30, 1998, 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> 12
RESULTS OF OPERATIONS
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998.
Income from real estate operations for the nine months ended March 31, 1999
was $2,693,000 compared to a loss of $409,000 for the nine months ended
March 31, 1998. That increase was primarily attributable to a $2,266,000 gain
on the sale of the Company's property in Harrisburg, Pennsylvania and a 11.8%
increase in rental revenues. The increase in rental revenues from $8,690,000
to $9,718,00 was primarily due to increased revenues at the Houston, Texas
property offset by the sale of the Harrisburg, Pennsylvania property.
Property operating expenses increased 2.0% from $4,613,000 to $4,757,000
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 were partially offset by a decrease in
expenses due to the disposition of the Pennsylvania property.
Real estate taxes decreased 10.7% from $749,000 to $669,000 due to the
disposition of the Pennsylvania property and negotiated reductions in assessed
property values at certain properties.
Depreciation increased 10.5% from $1,419,000 to $1,568,000 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. A portion of the proceeds were used for the purchase of a
commercial real estate property located at 820 Moraga Drive, Los Angeles
California for $1,876,000. That transaction, which was a partial tax-free
exchange, closed on March 4, 1999. The property will serve as the Company's
new corporate headquarters beginning in June 1999. There were no sales of
real estate during the nine months ended March 31, 1998.
The Company had a loss of $3,455,000 from investment transactions for the nine
months ended March 31, 1999 compared to a gain of $6,447,000 for the nine months
ended March 31, 1998. That loss was primarily attributable to an increase in
investment losses from $2,037,000 to $12,995,000, partially offset by an
increase in investment gains from $6,598,000 to $7,866,000 and a decline in
dividend and interest income from $807,000 to $621,000. The net loss on
investments reflects management's continuing efforts to reposition the
Company's investment portfolio by selling certain underperforming securities.
The Company's equity in net income from Justice Investors was $2,132,000
for the nine months ended March 31, 1999 compared to $2,056,000 for the nine
months ended March 31, 1998.
<PAGE> 13
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. Unrealized gains and losses, net
of deferred taxes are included in accumulated other comprehensive income.
As of March 31, 1999, the Company had a net unrealized gain on investments,
net of tax, of $4,104,000.
General and administrative expenses decreased from $1,478,000 to $1,256,000
primarily due to savings associated with the consolidation of certain
accounting and administrative functions of Santa Fe with the Company.
The Company had miscellaneous expenses of $333,000 for the nine months ended
March 31, 1999 as compared to miscellaneous income of $14,000 for the nine
months ended March 31, 1998. The increase in expenses were primarily due to
legal fees associated with the defense of the Indio, California property
litigation and the wrongful termination lawsuit brought by a former employee,
as well as amortization of certain film production costs.
The Company recorded an income tax benefit of $940,000 for the nine months ended
March 31, 1999 compared to an income tax expense of $2,052,000 for the nine
months ended March 31, 1998.
Minority interest decreased from $785,000 to $127,000 for the nine months ended
March 31, 1999 due to lower income generated by Santa Fe.
The extraordinary loss of $298,000 (net of income tax effect) for the nine
months ended March 31, 1999 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 nine months ended March 31, 1998 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.
Three Months Ended March 31, 1999 Compared to the Three Months Ended
March 31, 1999
Income from real estate operations for the three months ended March 31, 1999
was $136,000 compared to a loss of $228,000 for the three months ended
March 31, 1998. That was primarily the result of a 11.3% increase in rental
revenue from $2,868,000 to $3,192,000.
The increase rental revenue is mainly attributable to the Houston, Texas
property which experienced significantly lower vacancy levels following the
rehabilitation which was substantially complete as of December 31, 1998. That
increase was partially offset by the sale of the Pennsylvania property. The
increased property operating expenses was primarily attributable to increased
payroll expenses associated with the termination of the Company's third party
property management contract and higher operating costs associated with the
Houston Texas property, offset in part by a decrease in expenses as a result of
the disposition of the Pennsylvania property.
<PAGE> 14
Mortgage interest expense decreased 7.5% from $827,000 to $765,000 for the
three months ended March 31, 1998 and 1999, respectively. The decrease was 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.
Depreciation increased 5.9% from $491,000 to $520,000 due to capital
improvements throughout the real estate portfolio offset by the disposition of
the Pennsylvania property.
The Company had a loss of $1,930,000 from investment transactions for the three
months ended March 31, 1999 compared to a gain of $3,038,000 for the three
months ended March 31, 1998. That loss was primarily attributable to an
increase in investment losses from $593,000 to $6,217,000 partially offset by
an increase in investment gains from $3,193,000 to $3,941,000 and an increase in
dividend and interest income from $248,000 to $390,000. The net loss on
investments reflects management's continuing efforts to reposition the Company's
investment portfolio by selling certain underperforming securities. The
Company's equity in net income from Justice Investors decreased from $606,000
to $564,000 for the three months ended March 31, 1999 due to improvements to the
hotel property during January and February 1999.
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. Unrealized gains and losses,
net of deferred taxes are included in accumulated other comprehensive income.
As of March 31, 1999, the Company had a net unrealized gain on investments,
net of tax, of $4,104,000.
General and administrative expenses decreased 34% from $599,000 to $395,000
primarily due to reduced professional fees and greater cost efficiencies as
a result of the consolidation of certain accounting and administrative
functions with Santa Fe.
Miscellaneous expenses increased from $60,000 to $311,000 primarily due to
legal fees associated with the defense of the Indio, California property
litigation and the wrongful termination lawsuit brought by a former employee,
as well as amortization of certain film production costs.
The Company recorded an income tax benefit of $998,00 for the three months
ended March 31, 1999 compared to an income tax expense of $847,000 for the
nine months ended March 31, 1998.
<PAGE> 15
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 $7,453,000 for operating
activities, used net cash flow of $19,206,000 from investing activities and
generated net cash flow of $22,113,000 from financing activities during the
nine months ended March 31, 1999.
During the nine months ended March 31, 1999, the Company improved properties
in the aggregate amount of $1,560,000. 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 $39,327,000 as of March 31, 1999. 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 nine months ended
March 31, 1999. 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 contingent contract to sell
approximately 18 acres of its unimproved land in St. Louis, Missouri for
$5,300,000. It is anticipated that the sales transaction will close on or
before July 12, 1999. Should the sale be consummated, all or a portion of the
proceeds may be utilized to acquire other real estate investments.
On March 4, 1999, the Company acquired a commercial real estate property
located at 820 Moraga Drive, Los Angeles, California 90049 for $1,876,000.
The property will serve as the Company's new corporate headquarters beginning in
June of 1999. The property was purchased using a portion of the proceeds from
the sale of the Company's Harrisburg, Pennsylvania as part of a partial
tax-free exchange.
As of March 31, 1999, the Company's current assets were $57,910,000. The
Company remains liquid and management believes that its capital resources are
currently adequate to meet its short and long-term obligations.
<PAGE> 16
YEAR 2000 ISSUES
The Company is aware of the potential implications that 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 $50,000. 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 September 30, 1999.
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 December 31, 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 all briefing completed.
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.
<PAGE> 17
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 was denied on April 22, 1999. On May 14, 1999, the
Company filed a petition for writ challenging that ruling.
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.
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. At that meeting, the
shareholders also ratified PricewaterhouseCoopers LLP as the independent
accountants of the Company, and approved two stock option plans. A tabulation
of the votes at that meeting for each of those proposals was reported in the
Company's Form 10-QSB for the quarterly period ended December 31, 1998.
<PAGE> 18
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
March 31, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE INTERGROUP CORPORATION
(Registrant)
Date: May 19, 1999 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: May 19, 1999 by /s/ Gregory C. McPherson
-----------------------------
Gregory C. McPherson, Executive
Vice President and Assistant
Treasurer
Date: May 19, 1999 by /s/ David Nguyen
-----------------------------
David Nguyen, Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND
COMPREHENSIVE INCOME OF THE INTERGROUP CORPORATION AND SUBSIDIARIES SET
FORTH IN ITS FORM 10-QSB REPORT FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-QSB REPORT.
</LEGEND>
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<NAME> THE INTERGROUP CORPORATION
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