-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KVlwUOwFbIzxHCXXYKOtojgFg2DXO94k0tc+Eimv4uM+uXBxDNmJ3mbb8i6cp2Dd v+dbx7lmNOQo2QaUPgrajw== 0000069422-97-000005.txt : 19970514 0000069422-97-000005.hdr.sgml : 19970514 ACCESSION NUMBER: 0000069422-97-000005 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERGROUP CORP CENTRAL INDEX KEY: 0000069422 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 133293645 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-10324 FILM NUMBER: 97602743 BUSINESS ADDRESS: STREET 1: 2121 AVE OF THE STARS STREET 2: STE 2020 CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3105561999 MAIL ADDRESS: STREET 1: 2121 AVE OF THE STARS SUITE 2020 CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: MUTUAL REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19860408 10QSB 1 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, 1997 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from ______ to ______ Commission file number 1-10324 THE INTERGROUP CORPORATION ------------------------------------------------------ (Name of small business issuer in its charter) DELAWARE ------------------------------------------------------ (State or other jurisdiction of incorporation or organization) 13-3293645 ------------------------------------------- (I.R.S. Employer Identification) 2121 Avenue of the Stars, Suite 2020 Los Angeles, California 90067 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) Issuer's telephone number: (310) 556-1999 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ The number of shares outstanding of the issuer's Common Stock, $.01 par value, as of April 30, 1997 was 959,349 shares. Transitional Small Business Disclosure Format (check one): YES __ NO X THE INTERGROUP CORPORATION INDEX TO FORM 10-QSB PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheet (unaudited) March 31, 1997 3 Consolidated Statements of Operations (unaudited) Nine Months Ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows (unaudited) Nine Months Ended March 31, 1997 and 1996 5 Consolidated Statements of Operations (unaudited) Three Months Ended March 31, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION 15 Item 1. Legal Proceedings 15 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 THE INTERGROUP CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited) March 31, 1997 ASSETS ---------- Investment in real estate, at cost: Land $6,442,545 Buildings, improvements and equipment 33,180,953 Property held for sale or development 1,731,398 ----------- 41,354,896 Less: accumulated depreciation (12,822,234) ----------- 28,532,662 Marketable securities, at market value 12,018,883 Investment in Santa Fe Financial Corporation 6,161,922 Other investments 3,221,906 Cash and cash equivalents 164,505 Restricted cash 1,486,050 Rent and other receivables 378,447 Prepaid expenses 1,047,447 Other assets 153,149 ----------- Total Assets $53,164,971 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $34,487,295 Due to securities broker 3,503,091 Accounts payable and other liabilities 2,614,529 Deferred income taxes 1,786,281 ----------- Total Liabilities 42,391,196 Commitments and Contingencies ----------- Shareholders' Equity: Preferred stock, $.10 par - 100,000 shares authorized; none issued Common stock, $.01 par - 1,500,000 shares authorized; 1,494,824 shares issued; 959,349 shares outstanding 14,948 Paid-in capital 13,658,449 Retained earnings 1,204,409 Unrealized gain on marketable securities, net of deferred taxes 3,765,643 Note receivable - stock options (1,466,801) Treasury stock, at cost, 535,475 shares (6,402,873) ----------- Total Shareholders' Equity 10,773,775 ----------- Total Liabilities and Shareholders' Equity $53,164,971 =========== The accompanying notes are an integral part of the consolidated financial statements. THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Nine Months Ended March 31, 1997 1996 Real estate operations: --------- ---------- Rental income $8,455,641 $8,309,988 Rental expenses: Mortgage interest expense 2,072,600 2,107,741 Property operating expenses 3,949,029 3,925,771 Real estate taxes 659,511 676,349 Depreciation 1,235,849 1,183,981 ---------- ---------- 538,652 416,146 Gain from sale of real estate 630,438 0 ---------- ---------- Income from real estate operations 1,169,090 416,146 ---------- ---------- Investment transactions: Dividend and interest income 199,376 132,341 Investment gains 2,215,514 4,738,384 Investment losses (662,512) (1,883,359) Margin interest, trading and management expenses (646,069) (1,273,101) ---------- ---------- Income from investment transactions 1,106,309 1,714,265 ---------- ---------- Other expenses: General and administrative expenses (674,187) (814,345) Miscellaneous income (expense) 105,034 (1,260,579) ---------- ---------- Other expenses (569,153) (2,074,924) ---------- ---------- Income before provision for income taxes 1,706,246 55,487 Provision for income taxes 578,893 11,954 ---------- --------- Net Income $1,127,353 $43,533 ========== ========== Net Income per share $1.18 $0.05 ========== ========== Weighted average number of shares outstanding 959,349 909,455 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended March 31, 1997 1996 Cash flows from operating activities: ----------- ---------- Net Income $1,127,353 $43,533 Adjustments to reconcile net income to cash provided by operating activities: Depreciation of real estate 1,235,849 1,183,981 Amortization of other assets 116,225 120,641 Equity in net income from Santa Fe Financial Corp. (159,053) (88,123) Gain from sale of real estate (630,438) 0 (Increase) decrease in receivables, net (124,068) 870,117 Increase in prepaid expenses (118,528) (185,043) (Increase) decrease in other assets 29,629 (32,038) Increase (decrease) in accounts payable and other liabilities (548,915) 940,471 Increase (decrease) in income taxes 516,982 (158,450) ---------- ---------- Net cash provided by operating activities 1,445,036 2,695,089 ---------- ---------- Cash flows from investing activities: Additions to buildings, improvements and equipment (770,585) (883,037) Investment in real estate (4,970,147) (596,841) Proceeds from sale of real estate 1,603,825 0 Investment in Santa Fe Financial Corporation (471,163) (2,581,276) Reduction (investment) in marketable securities (2,677,276) 5,040,977 Reduction (investment) in other investments 1,059,884 (1,417,065) ---------- ---------- Net cash used for investing activities (6,225,462) (437,242) ---------- ---------- Cash flows from financing activities: Principal payments on mortgage notes payable (295,810) (270,227) Proceeds from real estate financing 0 462,405 Increase in mortgage notes payable due to real estate acquisition 3,595,714 595,000 Decrease (increase) in restricted cash 681,279 (239,995) (Decrease) increase in due to securities broker 29,812 (3,471,889) Increase in accounts payable related to short positions and other investments 0 650,794 Sale of 16,500 shares of common stock 0 907,500 Purchase of treasury stock 0 (440,213) ---------- ---------- Net cash provided by (used for) financing activities 4,010,995 (1,806,625) ---------- ---------- Net increase (decrease) in cash and cash equivalents (769,431) 451,222 Cash and cash equivalents at beginning of period 933,936 63,291 ---------- ---------- Cash and cash equivalents at end of period $164,505 $514,513 =========== ========= The accompanying notes are an integral part of the consolidated financial statements. THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended March 31, 1997 1996 Real estate operations: ----------- ---------- Rental income $2,895,715 $2,764,804 Rental expenses: Mortgage interest expense 708,136 694,688 Property operating expenses 1,321,146 1,296,114 Real estate taxes 197,685 251,934 Depreciation 397,325 399,907 ---------- ---------- Income from real estate operations 271,423 122,161 ---------- ---------- Investment transactions: Dividend and interest income 146,529 48,986 Investment gains 1,505,913 2,893,529 Investment losses (284,211) (1,302,672) Margin interest, trading and management expenses (194,662) (382,316) ---------- ---------- Income from investment transactions 1,173,569 1,257,527 ---------- ---------- Other expenses: General and administrative expenses (212,034) (223,314) Miscellaneous income (expense) 32,718 (83,493) ---------- ---------- Other expenses (179,316) (306,807) ---------- ---------- Income before provision for income taxes 1,265,676 1,072,881 Provision for income taxes 497,486 418,991 ---------- ---------- Net Income $768,190 $653,890 ========== ========== Net Income per share $0.80 $0.71 ========== ========== Weighted average number of shares outstanding 959,349 916,349 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the nine months ended March 31, 1997 1. General: The interim financial information is unaudited; however, in the opinion of The Intergroup Corporation (the "Company"), the interim financial information contains all adjustments, including normal recurring adjustments, necessary to present fairly the results for the interim period. These consolidated financial statements should be read in conjunction with the Company's June 30, 1996 audited consolidated financial statements and notes thereto. 2. Marketable Securities: All securities are classified as available-for-sale except short positions, which represent obligations of the Company and are classified as trading activity. At March 31, 1997, marketable securities included $1,517,832 of debt securities. At March 31, 1997, the aggregate market value of marketable securities exceeded the aggregate cost by $6,174,497. The net unrealized gain is comprised of gross unrealized gains of $7,312,363 reduced by gross unrealized losses of $1,137,866. The net unrealized gain, net of deferred taxes of $3,765,643, is included as a separate item in shareholders' equity. During the nine months ended March 31, 1997, proceeds from sales of securities were $9,217,448. Gross realized gains and losses are determined using FIFO costs. At March 31, 1997, the Company had no naked short positions. Any unrealized gains or losses relating to naked short positions are recognized in earnings in the current period. The dividends on short positions are recorded on the ex-dividend date. 3. Investment in Santa Fe Financial Corporation: As of March 31, 1997, the Company owned 36.1% and the Company's chairman and president owned an additional 3.9% of the outstanding common stock of Santa Fe Financial Corporation ("Santa Fe"). Revenues and net income for Santa Fe for the quarter ended March 31, 1997, were $723,130 and $116,862, respectively, and $460,961 and $96,154 for the prior year, respectively. Revenues and net income for Santa Fe for the nine months ended March 31, 1997, were $2,319,697 and $490,994, respectively, and $1,678,298 and $380,493 for the prior year, respectively. The Company records its investment in Santa Fe on the equity basis. Santa Fe's revenue is primarily generated through its 64.3% interest in Portsmouth Square, Inc. ("PSI"), which derives its revenue 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. PSI is both a limited and general partner in Justice and records its investment in Justice on the equity basis. 4. Investment in Casa Maria Limited Partnership: In December 1996, the Company became the General Partner of a Kansas, Limited Partnership, which owns a 442-unit apartment complex in Houston, Texas, by obtaining the 30% interest in the Partnership held by the former General Partner. Prior to December 1996, the Company was a Limited Partner, and owned a 15% interest in the Partnership. During the quarter ended March 31, 1997, the Company acquired all of the remaining Limited Partners' interests. The cost basis of the complex, including closing costs, was $4,970,147, and the outstanding mortgage indebtedness was $3,595,714. 5. Commitments and Contingencies: In February 1995, a complaint was filed by Guinness Peat Group plc and its subsidiary ("GPG") against the Company arising out of the Company's investment in Santa Fe. The initial complaint was dismissed on the Company's motion for summary judgment in April 1996 but the Court permitted Plaintiff to replead. Plaintiff subsequently filed an amended complaint charging the Company with fraud in allegedly promising Santa Fe's management that they would maintain their positions in return for approving the investment. A tentative ruling granting the Company summary judgment on this amended complaint was issued in October 1996 and made final in December 1996. Plaintiff then sought expedited review and a reversal of this determination through a Writ filed with the Court of Appeals. Such Writ was denied but Plaintiff filed an appeal with the Court of Appeals which will be heard in the regular course by such Court. The Company was subsequently provisionally awarded $296,000 in attorneys fees and costs by the lower Court, but such award, should it become final, will also undoubtedly be appealed to the Court of Appeals which will hear both appeals on a consolidated basis. The action will continue to be vigorously defended and every effort will be made by the Company to recover as much of the fees and costs it incurred as is possible. In March 1996, a complaint was filed by 7709 Lankershim Ltd., a California Limited Partnership, against the Company in which it claimed damages in excess of $2,000,000 arising out of alleged latent construction defects discovered in the two Indio, California properties, formerly owned by the Company which it had purchased from the financial institution to whom the properties were returned. The case is in its very early stages and discovery has not as yet taken place. Accordingly, it is not possible to assess what the exposure, if any, is at this time. It is management's preliminary belief, however, that any action with regard to Carreon Villas I, one of the Indio, California properties is legally barred. Insurance coverage, subject to reservations, has been approved insofar as Carreon Villas I is concerned but denied as to Carreon Villas II. The action will be vigorously defended. The Company is a defendant or co-defendant in various legal actions involving various claims incident to the conduct of its businesses. Management does not expect the Company to suffer any material liability by reason of such actions. 6. Related Party Transactions: In May 1996, the Company's president exercised an option to purchase 125,000 shares of common stock at a price of $11.50 per share through a full recourse note due the Company on demand, but in no event later than May 2001. The note bears interest floating at the lower of 10% or the prime rate (8.50% at March 31, 1997) with interest payable quarterly. The balance of the note receivable and accrued interest receivable was $1,466,801 and is reflected as a reduction of shareholders' equity. THE INTERGROUP CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND PROJECTIONS The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "estimate", "project", "anticipate" and similar expressions, are subject to certain risks and uncertainties, such as changes in general economic conditions, local real estate markets, and competition, as well as uncertainties relating to uninsured losses, securities markets, and litigation, including those discussed below that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS For the nine months ended March 31, 1997 vs. 1996 Income from real estate operations for the nine months ended March 31, 1997, as compared to the nine months ended March 31, 1996, was impacted primarily by increased revenues and expenses associated with the acquisition of the Houston, Texas property during the quarter ended March 31, 1997, offset by reduced revenues and expenses in connection with the disposition of the Atlanta, Georgia property in December 1996. Rental income from real estate operations increased 2% to $8,455,641 from $8,309,988. The increase was primarily due to increased revenues at the new Houston, Texas property, one of the San Antonio, Texas properties, the New Jersey and the Missouri properties. The increase was primarily offset by a decrease in revenues associated with the Atlanta, Georgia property disposed in December 1996, and to a lesser extent, a decrease in revenues at the Ohio properties. Mortgage interest expense decreased 2% to $2,072,600 from $2,107,741 primarily due to lower mortgage interest expense associated with the refinancing of the Parsippany, New Jersey property in December 1995, offset by increased mortgage interest expense associated with the refinancing of the Florence, Kentucky property in April 1996 at a lower interest rate but with a higher loan balance and mortgage interest expense at the new Houston, Texas property. Property operating expenses increased less than 1% to $3,949,029 from $3,925,771 primarily due to increased expenses in connection with the new Houston, Texas property, offset primarily by reduced operating expenses associated with the disposition of the Atlanta, Georgia property, lower management costs and lower service expenses. Real estate taxes decreased 3% to $659,511 from $676,349 due to lower real estate taxes at the Irving, Texas property and reduced real estate taxes at the Atlanta, Georgia property disposed in December 1996. Depreciation increased 4% to $1,235,849 from $1,183,981 due to capitalized property improvements throughout the real estate portfolio, but primarily at the Irving, Texas and Parsippany, New Jersey properties. The increase was offset by the disposition of the Atlanta, Georgia property in December 1996. On December 31, 1996, the Company sold its Atlanta, Georgia property for $1,800,000. The sales price, less closing costs and other expenses, resulted in net proceeds of $1,603,825 and a gain from the sale of real estate of $630,438. Investment gains decreased 53% to $2,215,514 from $4,738,384 and investment losses decreased 64% to $662,512 from $1,883,359 as a result of the sale of certain securities which generated lower net investment gains during the nine months ended March 31, 1997. Realized investment gains and losses may fluctuate significantly from period to period, with a meaningful effect upon the Company's net earnings. However, the amount of realized investment gain or loss for any given period has no predictive value, and variations in amount from period to period have no practical analytical value, particularly in view of the net unrealized gain in the Company's overall investment portfolio. Margin interest, trading, and management expenses decreased 49% to $646,069 from $1,273,101 due to a decrease in margin interest expense of $334,829 and a decrease in trading related and management expenses of $292,203 relating primarily to fewer personnel and related expenses, travel expenses and administrative costs, partially offset by increased litigation costs associated with investments. The Company has initiated a cost savings program in this area to reduce the management expenses through reduction in personnel and overhead expenses. Management believes that the Company will continue to realize savings in future periods. The overall investment portfolio, which includes marketable securities, investment in Santa Fe and other investments, had a positive return of 22.2% for the nine months ended March 31, 1997 and a positive return of 2.3% for the nine months ended March 31, 1996, based on the net realized and unrealized gains and losses and after expenses over the monthly average investment balance of the overall investment portfolio. For the five years ended March 31, 1997, the overall investment portfolio achieved a positive average annual compounded return of 6.3%. It should be noted that other investments are investments that are not traded on any exchange and, accordingly, the return calculations do not reflect any increases or decreases in value of other investments until such gains or losses are realized or there is an other than temporary decline in value below the cost of the investment. The overall portfolio return includes the entire increase in the market value of the Company's holdings in Orckit Communications Ltd. of $2,944,512. However, this stock is subject to limitations imposed by Rule 144. General and administrative expenses decreased 21% to $674,187 from $814,345 due to fewer personnel and related expenses and reduction in other administrative expenses. Miscellaneous income (expense) changed to income of $105,034 from expense of $1,260,579 due to the resolution of the Golden West Entertainment litigation and increased interest income in connection with the note receivable from the Company's president. Income tax expense of $578,893 and $11,954 were provided for the nine months ended March 31, 1997 and 1996, respectively. The increase was due to higher income during the current period, partially offset by a lower book cost basis than tax cost basis in connection with the sale of the Atlanta, Georgia property. For the three months ended March 31, 1997 vs. 1996 Income from real estate operations for the three months ended March 31, 1997, as compared to the three months ended March 31, 1996, was impacted primarily by increased revenues and expenses associated with the acquisition of the Houston, Texas property during the quarter ended March 31, 1997, offset by reduced revenues and expenses in connection with the disposition of the Atlanta, Georgia property in December 1996. Rental income from real estate operations increased 5% to $2,895,715 from $2,764,804. The increase was due to increased revenues at the new Houston, Texas property and at all properties, except at the Ohio properties. The increase was offset by reduced revenues at the Atlanta, Georgia property disposed in December 1996. Mortgage interest expense increased 2% to $708,136 from $694,688 primarily due to the acquisition of the Houston, Texas property and increased mortgage interest expense associated with the refinancing of the Florence, Kentucky property in April 1996 at a lower interest rate but with a higher loan balance. Property operating expenses increased 2% to $1,321,146 from $1,296,114 primarily due to the new Houston, Texas property and increased cleaning and decorating expenditures, salary expenses, repairs and maintenance, and leasing expenses, offset by reduced expenses associated with the Atlanta, Georgia property, lower management costs and lower service expenses. Real estate taxes decreased 21% to $197,685 from $251,934 due to the disposition of the Atlanta, Georgia property, reduced real estate taxes at the Irving, Texas property, offset by increased real estate taxes associated with the new Houston, Texas property. Depreciation decreased less than 1% to $397,325 from $399,907 due to the disposition of the Atlanta, Georgia property in December 1996, offset by depreciation associated with property improvements throughout the real estate portfolio, but primarily at the Irving, Texas and Parsippany, New Jersey properties and the new Houston, Texas property. In December 1996, the Company became the General Partner of a Kansas, Limited Partnership, which owns a 442-unit apartment complex in Houston, Texas, by obtaining the 30% interest in the Partnership held by the former General Partner. Prior to December 1996, the Company was a Limited Partner, and owned a 15% interest in the Partnership. During the quarter ended March 31, 1997, the Company acquired all of the remaining Limited Partners' interests. The cost basis of the complex, including closing costs, was $4,970,147, and the outstanding mortgage indebtedness was $3,595,714. Investment gains decreased 48% to $1,505,913 from $2,893,529 and investment losses decreased 78% to $284,211 from $1,302,672 as a result of the sale of certain securities which generated lower net investment gains during the three months ended March 31, 1997. Realized investment gains and losses may fluctuate significantly from period to period, with a meaningful effect upon the Company's net earnings. However, the amount of realized investment gain or loss for any given period has no predictive value, and variations in amount from period to period have no practical analytical value, particularly in view of the net unrealized gain in the Company's overall investment portfolio. Margin interest, trading, and management expenses decreased 49% to $194,662 from $382,316 due to a decrease in margin interest expense of $84,010 and a decrease in trading related and management expenses of $103,644 relating primarily to fewer personnel and related expenses, travel expenses and administrative costs, partially offset by increased litigation costs associated with investments. The Company has initiated a cost savings program in this area to reduce the management expenses through reduction in personnel and overhead expenses. Management believes that the Company will continue to realize savings in future periods. The overall investment portfolio, which includes marketable securities, investment in Santa Fe and other investments, had a positive return of 5.8% for the three months ended March 31, 1997 and a positive return of 1.9% for the three months ended March 31, 1996, based on the net realized and unrealized gains and losses and after expenses over the monthly average investment balance of the overall investment portfolio. It should be noted that other investments are investments that are not traded on any exchange and, accordingly, the return calculations do not reflect any increases or decreases in value of other investments until such gains or losses are realized or there is an other than temporary decline in value below the cost of the investment. The overall portfolio return includes the entire increase in the market value of the Company's holdings in Orckit Communications Ltd. of $2,944,512. However, this stock is subject to the limitations imposed by Rule 144. General and administrative expenses decreased 5% to $212,034 from $223,314 due to fewer personnel and related expenses and other administrative expenses. Miscellaneous income (expense) changed to income of $32,718 from expense of $83,493 due to the resolution of the Golden West Entertainment litigation and increased interest income in connection with the note receivable from the Company's president. Income tax expense of $497,486 and $418,991 were provided for the three months ended March 31, 1997 and 1996, respectively. The increase results from higher income realized during the current quarter ended March 31, 1997. FINANCIAL CONDITION AND LIQUIDITY The Company's cash flows are generated primarily from its real estate activities, sales of investment securities and borrowings related to both. The Company provided net cash flow of $1,445,036 from operating activities, used net cash flow of $6,225,462 for investing activities and generated net cash flow of $4,010,995 from financing activities. The Company intends to sell all or a portion of its unimproved land. Should the Company consummate a sale, all or a portion of the proceeds may be utilized to provide additional funds to take advantage of other investment opportunities. During the nine months ended March 31, 1997, the Company improved properties in the aggregate amount of $770,585, which includes $104,250 capitalized costs associated with the property held for sale or development. Management believes the improvements to the properties should enhance market values, maintain the competitiveness of the Company's properties and potentially enable the Company to obtain a higher yield through higher rents. At March 31, 1997, the overall investment portfolio increased approximately 17% to $21,402,711 from $18,281,914 at June 30, 1996, primarily due to increased market value of securities. Net unrealized gains increased 16% to $6,174,497 from $5,301,307 at June 30, 1996. Net unrealized gains at March 31, 1997, include $1,600,000 relating to Orckit Communications Ltd. in accordance with FAS 115 "Accounting for Certain Investments in Debt and Equity Securities". The Company's outstanding indebtedness includes mortgages on real estate which amounted to $34,487,295 as of March 31, 1997. Management will pursue additional refinancing activities as considered necessary or when deemed economically favorable to the Company. For fiscal 1997, management anticipates that its net cash flow from real estate operations, securities transactions and real estate financing activities will be sufficient to fund any property acquisitions, property improvements, debt service requirements and operating expenses. Management also anticipates that the net cash flow generated from future operating activities will be sufficient to meet its long-term debt service requirements. PART II. OTHER INFORMATION Item 1. Legal Proceedings. On February 22, 1995, a complaint was filed in the Superior Court of California, County of San Diego, by Guinness Peat Group plc and its subsidiary ("GPG") against the Company arising out of the Company's investment in Santa Fe, which sought recision of the purchase and unspecified money damages. The initial complaint was dismissed upon the Company's motion for summary judgment in April 1996 but Plaintiff was permitted to replead. Plaintiff ultimately filed an amended complaint charging the Company with fraud in allegedly promising that Santa Fe's management would maintain their positions in return for approving the investment and then allegedly reneging on such promise. Summary judgment on this amended complaint was granted in favor of the Company and made final on December 31, 1996. Plaintiff then sought a Writ seeking expedited review from the Court of Appeals to reverse this decision. Such Writ was denied by the Court of Appeals, but an appeal by Plaintiff was filed with such Court which will be heard in due course. The Company moved in the Superior Court for payment of its legal fees and costs by GPG and on April 25, 1997 received a tentative award of $280,000 in attorney's fees and $16,000 in costs for a total award of $296,000. Oral argument to confirm such award has been set for May 16, 1997. GPG is likely to appeal any such award. GPG, as previously reported, was required earlier in the proceedings, by the Court, to post a $250,000 bond to secure payment. Such bond does not limit liability, it insures collection of the portion bonded. On March 27, 1996, a complaint was filed in the Superior Court of the State of California, Riverside County, by 7709 Lankershim Ltd., a California Limited Partnership, against the Company in which it claimed damages in excess of $2,000,000 arising out of alleged latent construction defects discovered in the two Indio, California properties, Carreon Villas I and Carreon Villas II formerly owned by the Company. The case is in its very early stages, discovery has not as yet taken place, and it is not possible to assess what the exposure, if any, is at this time. It is management's preliminary belief, however, that any action with regard to Carreon Villas I is legally barred. Insurance coverage with regard to Carreon Villas I has been granted, subject to reservations, by the Company's carrier. Insurance coverage, covering liability, if any, on the second property has been denied. The action will be vigorously defended. In May 1996, the Company initiated an action in the District Court of Johnson County, Kansas, against the General Partner, a number of the Limited Partners, the manager and prospective purchaser of the Casa Maria Limited Partnership, an entity in which the Company held a fifteen percent (15%) interest. Such partnership owns a 442-unit apartment complex in Pasadena, Texas. In such complaint the Company sought to remove the General Partner and the management company, enforce its right of first refusal to acquire the selling Limited Partners' interests, and to preclude the General Partner from disposing of its 30% interest in the Limited Partnership to a third party (who was a partner with the then property management company in this effort) without the Company's consent. While litigation continues with the previously intended third party purchaser of the selling General and Limited Partners' interests, the Company has acquired the interests of the General and Limited Partners, has discharged the manager and installed Pinnacle Realty Management Company in its stead. The prospective third party purchaser countersued the Company for interference with contractual relations and several other causes of action. The Company has succeeded in having all but the aforementioned claim of the prospective purchaser dismissed through motion practice. Management believes the remaining claim is not meritorious and will vigorously defend. Items 2, 3, 4 and 5 are not applicable. Item 6. Exhibits and Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1997. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE INTERGROUP CORPORATION (Registrant) Date: May 12, 1997 By /s/ John V. Winfield - ------------------------------------------------------ John V. Winfield Chairman, President and Chief Executive Officer Date: May 12, 1997 By /s/ Howard A. Jaffe - ------------------------------------------------------ Howard A. Jaffe Chief Operating Officer and Secretary Date: May 12, 1997 By /s/ Gregory C. McPherson - ------------------------------------------------------ Gregory C. McPherson Executive Vice President, Assistant Treasurer and Assistant Secretary Date: May 12, 1997 By /s/ David C. Gonzalez - ------------------------------------------------------ David C. Gonzalez Controller EX-27 2 ART 5 FDS FOR 3RD QUARTER 10-QSB
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS JUN-30-1997 MAR-31-1997 164,505 12,018,883 378,447 0 0 12,070,474 41,354,896 12,822,234 53,164,971 7,903,901 34,487,295 14,948 0 0 10,758,827 53,164,971 0 10,943,491 0 6,490,458 674,187 0 2,072,600 1,706,246 578,893 1,127,353 0 0 0 1,127,353 1.18 1.18
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