U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 Or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
[ ] Transition Report Under Section 13 Or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from ______ to _____
Commission file number 1-10324
THE INTERGROUP CORPORATION
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(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-3293645
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
820 Moraga Drive Los Angeles, CA 90049
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(Address of Principal Executive Offices)
(310) 889-2500
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(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of October 31, 2000 was 1,905,587 shares.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
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THE INTERGROUP CORPORATION
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet (unaudited)
As of September 30, 2000 3
Consolidated Statements of Operations and
Comprehensive Income (unaudited)
For the Three Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows (unaudited)
For the Three Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information 11
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
As of September 30, 2000
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<S> <C>
Assets
Investment in real estate, at cost:
Land $ 21,225,000
Buildings, improvements and equipment 44,855,000
Property held for sale or development 319,000
-----------
66,399,000
Less: accumulated depreciation (13,940,000)
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52,459,000
Cash and cash equivalents 974,000
Restricted cash 1,219,000
Investment in marketable securities 79,380,000
Investment in Justice Investors 11,246,000
Other investments 1,202,000
Prepaid expenses and other assets 2,061,000
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Total assets $148,541,000
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Liabilities and Shareholders' Equity
Liabilities
Mortgage notes payable $ 52,690,000
Obligation for securities sold 32,426,000
Due to securities broker 17,779,000
Accounts payable and accrued expenses 2,655,000
Deferred income taxes 10,165,000
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Total liabilities 115,715,000
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Minority interest 11,594,000
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Commitments and contingencies
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, 1,932,987 outstanding 21,000
Common stock, class A $.01 par value, 2,500,000 authorized;
none issued -
Additional paid-in capital 8,686,000
Retained earnings 16,674,000
Note receivable - stock options ( 1,438,000)
Treasury stock, at cost, 196,301 shares ( 2,711,000)
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Total shareholders' equity 21,232,000
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Total liabilities and shareholders' equity $148,541,000
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months ended September 30, 2000 1999
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<S> <C> <C>
Real estate operations:
Rental income $ 3,141,000 $ 2,842,000
Rental expenses:
Mortgage interest expense (863,000) (632,000)
Property operating expenses (1,264,000) (1,219,000)
Real estate taxes (235,000) (185,000)
Depreciation (552,000) (458,000)
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227,000 348,000
Gain on sale of real estate - 7,628,000
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Income from real estate operations 227,000 7,976,000
Investment transactions:
Net investment gains 1,663,000 13,227,000
Dividend and interest income 551,000 348,000
Margin interest, trading & management expenses ( 951,000) ( 626,000)
Equity in net income of Justice Investors 1,206,000 1,063,000
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Income from investment transactions 2,469,000 14,012,000
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Other income(expense):
General and administrative expenses ( 422,000) ( 406,000)
Miscellaneous income(expense) 147,000 ( 22,000)
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Other expense ( 275,000) ( 428,000)
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Income before provision for income taxes
and minority interest 2,421,000 21,560,000
Provision for income tax expense ( 618,000) (9,062,000)
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Income before minority interest 1,803,000 12,498,000
Minority interest (939,000) (1,191,000)
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Net income $ 864,000 $11,307,000
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Basic earnings per share $ .45 $ 5.62
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Weighted average number of shares outstanding 1,929,237 2,011,587
========== ==========
Diluted earnings per share $ .42 $ 5.42
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Diluted weighted average number of shares
outstanding 2,078,937 2,086,162
========== ==========
Comprehensive Income:
Net income $ 864,000 $11,307,000
Adjustment for reclassification of the
accumulated unrealized holding gains prior
to July 1, 1999 to earnings - (13,467,000)
Income tax benefit related to other
comprehensive income - 5,387,000
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Total comprehensive income $ 864,000 $ 3,227,000
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<TABLE>
<CAPTION>
THE INTEGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended September 30, 2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 864,000 $ 11,307,000
Adjustments to reconcile net income
to cash provided by(used in) operating
activities:
Depreciation of real estate 552,000 458,000
Gain on sale of real estate - ( 7,628,000)
Net unrealized gain on investments (2,879,000) (21,547,000)
Equity in net income from Justice
Investors ( 1,206,000) ( 1,063,000)
Minority interest 939,000 1,191,000
Changes in assets and liabilities:
Restricted cash (238,000) (30,000)
Investment in marketable securities 10,555,000 11,691,000
Other investments (385,000) 294,000
Prepaid expenses and other assets 3,000 1,747,000
Accounts payable and other liabilities 529,000 ( 1,854,000)
Due to broker (12,197,000) 2,221,000
Obligations for securities sold 3,060,000 511,000
Deferred income taxes 215,000 3,336,000
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Net cash (used in)provided by operating
activities (188,000) 634,000
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Cash flows from investing activities:
Additions to buildings, improvements
and equipment (538,000) ( 226,000)
Investment in real estate (10,557,000) ( 5,387,000)
Proceeds from sale of real estate - 11,524,000
Distributions from Justice Investors 627,000 488,000
Investment in Portsmouth Stock (1,000) (130,000)
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Net cash (used in)provided by investing
activities (10,469,000) 6,269,000
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Cash flows from financing activities:
Principal payments on mortgage notes payable ( 3,915,000) ( 3,771,000)
Borrowings from mortgage notes payable 10,949,000 2,733,000
Increase(decrease) in line of credit 4,000,000 (2,000,000)
Purchase of treasury stock - ( 236,000)
Dividends paid to minority shareholders (63,000) (61,000)
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Net cash provided by(used in) financing
activities 10,971,000 ( 3,335,000)
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Net increase in cash and cash equivalents 314,000 3,568,000
Cash and cash equivalents at beginning of
period 660,000 514,000
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Cash and cash equivalents at end of period $ 974,000 $ 4,082,000
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2000 audited consolidated financial statements and notes thereto.
As of September 30, 2000, the Company had the power to vote 54.3% of the
voting shares of Santa Fe Financial Corporation ("Santa Fe"), a public company
(Nasdaq SmallCap: SFEF). Santa Fe's revenue is primarily generated through
its 68.8% interest in Portsmouth Square, Inc. ("PSI"), which derives its
revenue primarily through its 49.8% interest in Justice Investors ("Justice"),
a California limited partnership. Justice owns the land, improvements and
leaseholds known as the Holiday Inn Financial District/Chinatown, a 566-room
hotel in San Francisco, California.
Certain reclassifications have been made to the financial statements as of
September 30, 1999 and for the three months then ended to conform with the
current quarter presentation.
2. Investment in Real Estate
In July 2000, the Company purchased three apartment complexes located in Los
Angeles, California for a total of $6,493,000. To finance the purchases, the
Company obtained three mortgage notes aggregating $3,824,000.
In August 2000, the Company purchased two apartment complexes located in Los
Angeles, California for a total of $2,306,000. To finance the purchases, the
Company obtained two mortgage notes aggregating $1,180,000.
In September 2000, the Company purchased a commercial real estate property
located in Los Angeles, California for $1,758,000. As part of the purchase,
the Company assumed an $875,000 mortgage note.
In August 2000, the Company obtained a second mortgage on one of its
properties in the amount of $1,270,000. In the same period, the Company
refinanced one of its mortgage notes in the amount of $3,787,000 and obtained
a new mortgage note payable in the amount of $3,800,000 and entered into a
line of credit agreement with an available balance of $4,000,000. Both the
$3,800,000 mortgage note and the $4,000,000 line of credit are collateralized
by the same property. As of September 30, 2000, the outstanding balance on
the line of credit was $4,000,000.
3. 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. Marketable
securities are classified as trading with net unrealized gains or losses
included in earnings. Included in net gains on marketable securities of
$1,663,000 are net realized losses of $1,216,000 and net unrealized gains of
$2,879,000.
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4. 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 566-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
September 30, 2000
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Assets
Total current assets $3,599,276
Property, plant and equipment, net of
accumulated depreciation of $11,653,103 4,922,579
Loan fees and deferred lease costs,
net of accumulated amortization of $171,107 139,306
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Total assets $8,661,161
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Liabilities and partners' capital
Total current liabilities $ 270,487
Partners' capital 8,390,674
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Total liabilities and partners' capital $8,661,161
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JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended September 30, 2000 1999
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Revenues $2,627,850 $2,344,385
Costs and expenses (206,903) (209,301)
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Net income $2,420,947 $2,135,084
========= =========
5. Commitments and Contingencies:
Guinness Peat Group plc, et al. v. Robert N. Gould, et al., Case No. 685760,
filed on February 22, 1995 in the Superior Court of the State of California
for the County of San Diego. As previously reported, the Company was awarded
its attorneys' fees and costs as the prevailing party in that litigation and
on appeal. Including interest, the total amount of the attorney fee awards
was in excess of $465,000 as of May 25, 2000. On June 30, 2000, the Company
received $250,000 on a security bond posted by plaintiffs. On January 21,
2000, the Court of Appeal also affirmed an award of attorneys' fees and costs
in favor of the Company's subsidiary, Santa Fe, and the director defendants in
the amount of $936,000, plus interest at the statutory rate of 10%. On March
1, 2000, the plaintiffs filed a Petition for Review of that decision with the
California Supreme Court. On September 20, 2000, the California Supreme Court
entered an order dismissing the Petition for Review. As of September 30,
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2000, the total amount due on Santa Fe's judgment was $1,179,404. Santa Fe
will also make application to recover its attorneys' fees and costs incurred
in successfully defending its judgment on appeal. The Company will not record
the awards of attorneys' fees until received.
On March 27, 1998, a wrongful termination action was filed in the Los Angeles
County Superior Court by an ex-employee, officer and director against the
Company and its President and Chairman. The Complaint seeks an award of back
and future pay, employee benefits, restitution, unspecified punitive and
special damages and attorneys' fees. 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.
Due to a delay caused by plaintiff filing an unsuccessful appeal of an order
denying his motion to disqualify the law firm representing the defendants, the
case is still in its early stages and discovery has just recently recommenced.
It is not possible to predict the outcome at this time. 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.
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.
6. Related Parties
The Company's President and Chief Executive Officer, John V. Winfield, directs
the investment activity of the Company in public and private markets pursuant
to authority granted by the Board of Directors. Mr. Winfield also serves as
Chief Executive Officer of Portsmouth and Santa Fe and directs the investment
activity of those companies. Depending on certain market conditions and
various risk factors, the Chief Executive Officer, his family, Portsmouth and
Santa Fe may, at times, invest in the same companies in which the Company
invests. The Company encourages such investments because it places personal
resources of the Chief Executive Officer and his family members, and the
resources of Portsmouth and Santa Fe, at risk in connection with investment
decisions made on behalf of the Company.
7. Earnings Per Share
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding. The computation of diluted earnings per share is similar to the
computation of basic earnings per share except that the weighted-average
number of common shares is increased to include the number of additional
common shares that would have been outstanding if potential dilutive common
shares had been issued. The Company's only potentially dilutive common shares
are stock options. Stock options are included in diluted earnings per share
by application of the treasury stock method. Included in the diluted weighted
average number of common shares outstanding as of September 30, 2000 are
149,700 stock options.
8. Subsequent Events
In October 2000, the Company received $222,754 in recovery of the balance of
its judgment for attorneys' fees and interest thereon. The amount will be
recorded as other income in the next quarter.
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In November 2000, the Company's subsidiary, Santa Fe, received $1,188,618 in
recovery of its judgment for attorneys' fees and interest thereon. The amount
will be recorded as other income in the next quarter.
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, 2000, 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.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2000 Compared to the
Three Months Ended September 30, 1999
Income from real estate operations was $227,000 for the three months ended
September 30, 2000 as compared to $7,976,000 for the three months ended
September 30, 1999. The decrease in income from real estate operations is
primarily due to the decrease in gains on sale of real estate. During the
three months ended September 30, 1999, the Company sold three properties for a
cumulative gain on sale of real estate of $7,628,000. During the quarter
ended September 30, 2000, the Company did not sell any properties. Rental
income increased to $3,141,000 from $2,842,000 and total rental expenses
increased to $2,914,000 from $2,494,000, respectively, as result of the
purchase of six additional properties. Mortgage notes payable increased to
$52,690,000 at September 30, 2000 from $35,837,000 at September 30, 1999 as
result of the Company's purchases of additional properties from September 30,
1999 to September 30, 2000. This resulted in the increase in mortgage interest
expense to $863,000 from $632,000.
Income from investment transactions was $2,469,000 for the three months ended
September 30, 2000 as compared $14,012,000 for the three months ended
September 30, 1999. The decrease in income from investment transactions is
primarily due to the decrease in net investments gains to $1,663,000 from
$13,227,000 as a result of the reclassification of holding gains on marketable
securities during the quarter ended September 30, 1999. During the three
months ended September 30, 1999, the Company reclassified its accumulated
unrealized holding gains on marketable securities of $13,467,000 from the
balance sheet to earnings. The unrealized holding gains were accumulated over
the years up to June 30, 1999 and recognized in the earnings for the quarter
ended September 30, 1999. Investment gains and losses on marketable securities
may fluctuate significantly from period to period in the future and could have
a significant impact on the Company's net earnings. However, the amount of
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investment gains or losses on marketable securities for any given period may
have no predictive value and variations in amount from period to period may
have no analytical value.
Dividend and interest income increased to $551,000 from $348,000 as a result
of management investing in more income yielding investments.
The increase in margin interest, trading and management expenses to $951,000
from $626,000 is due to the maintenance of higher margin balances in the
current quarter and the increased size of the Company's portfolio.
The increase equity in net income of Justice Investors to $1,206,000 from
$1,063,000 was primarily attributable to the increase in the average daily
room rate and an increase in occupancy of the hotel during the current
quarter.
Miscellaneous income/(loss) changed to income of $147,000 from a loss of
$22,000 is primarily due to the receipt of approximately $121,000 in legal
reimbursements from our insurance carriers and a reduction in legal costs.
The provision for income taxes decreased to $618,000 from $9,062,000 due to
the decrease in income.
Minority interest decreased to $939,000 from $1,191,000 as result of the
reduced income generated by Santa Fe.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are generated primarily from its real estate
activities, sales of investment securities and borrowings related to both.
The Company used net cash flow of $188,000 from operating activities, used net
cash flow of $10,469,000 from investing activities and generated net cash flow
of $10,971,000 from financing activities during the three months ended
September 30, 2000.
During the three months ended September 30, 2000, the Company purchased six
real estate properties in Los Angeles, California for a total of $10,557,000.
To complete the purchases, the Company borrowed $5,879,000 in the form of
mortgage notes. During the quarter, the Company also refinanced one of its
mortgages and obtained a new line of credit of $4,000,000 on the same
property. The line of credit was fully drawn on as of September 30, 2000. In
addition, the Company obtained a second mortgage on one of its properties in
the amount of $1,270,000. Management will continue to refinance its mortgage
notes as considered necessary or when deemed economically favorable to the
Company.
During the three months ended September 30, 2000, the Company made property
improvements on existing and new properties in the aggregate amount of
$538,000. Management believes the improvements to the properties will 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 Board of Directors has given the Company the authority to
repurchase, from time to time, up to a total of 333,000 shares (adjusted for
two stock splits) of its Common Stock. Such repurchases may be made at the
discretion of management and depending upon market conditions. There were no
purchases of treasury stock during the quarter. As of September 30, 2000, the
Company had current assets of $83,634,000 and current liabilities of
$52,860,000. Current assets consist of cash, marketable securities, prepaid
expenses and other assets. Current liabilities consist of due to securities
broker, obligations for securities sold, and accounts payable and accrued
expenses. The Company remains liquid and management believes that its capital
resources are currently adequate to meet its short and long-term obligations.
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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,
2000.
Guinness Peat Group plc, et al. v. Robert N. Gould, et al., Case No. 685760,
filed on February 22, 1995 in the Superior Court of the State of California
for the County of San Diego. As previously reported, the Company was awarded
its attorneys' fees and costs as the prevailing party in that litigation and
on appeal. Including interest, the total amount of the attorney fee awards
was in excess of $465,000 as of May 25, 2000. On June 30, 2000, the Company
received $250,000 on a security bond posted by plaintiffs and on October 13,
2000 received an additional $222,754 as a result of levying on certain
accounts of plaintiffs.
On January 21, 2000, the Court of Appeal also affirmed an award of attorneys'
fees and costs in favor of the Company's subsidiary, Santa Fe, and the
director defendants in the amount of $936,000, plus interest at the statutory
rate of 10%. On March 1, 2000, the plaintiffs filed a Petition for Review of
that decision with the California Supreme Court. On September 20, 2000, the
California Supreme Court entered an order dismissing the Petition for Review.
On November 2, 2000, Santa Fe received $1,188,618 from plaintiffs, which
represented the total amount of attorneys' fees and accrued interest due on
its original judgment. Santa Fe has also made application to recover its
attorneys' fees and costs incurred in successfully defending its judgment on
appeal.
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 September 30, 2000.
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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: November 8, 2000 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: November 8, 2000 by /s/ Gregory C. McPherson
-----------------------------
Gregory C. McPherson,Executive
Vice President and Assistant
Treasurer
Date: November 8, 2000 by /s/ Michael G. Zybala
-----------------------------
Michael G. Zybala
Vice President Operations and
Assistant Secretary
Date: November 8, 2000 by /s/ David Nguyen
-----------------------------
David Nguyen, Controller
(Principal Accounting Officer)
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