-----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, Eha3T6/KKoYQ/7nYKEm95rmvjq5mAMmHxuHQS8d+nRCXfIJ5C/nFFpD5Jc82EpsG 2sOcjuYISTPsGIXNE6uwgw== 0000086759-99-000010.txt : 19990524 0000086759-99-000010.hdr.sgml : 19990524 ACCESSION NUMBER: 0000086759-99-000010 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990521 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: SEC FILE NUMBER: 001-10324 FILM NUMBER: 99631801 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 THE INTERGROUP CORPORATION 10-QSB 3/31/99 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 - ------------------------------------------------------------------------------ (State or other jurisdiction of incorporation or organization) 13-3293645 - ------------------------------------------------------------------------------ (I.R.S. Employer Identification No.) 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 May 14, 1999 was 2,085,187 shares. Transitional Small Business Disclosure Format (check one): YES__ NO X 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 3
THE INTERGROUP CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited) March 31, 1999 ---- 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 ===========
The accompanying notes are an integral part of the consolidated financial statements. 4
THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Nine Months Ended March 31, 1999 1998 ---------- --------- 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 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. 5
THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended March 31, 1999 1998 ----------- ----------- 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 ========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 6
THE INTERGROUP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended March 31, 1999 1998 --------- ---------- Real estate operations: 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 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. 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. 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 ========= ========= ========= ========= 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. 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. 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. 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. 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. 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. 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. 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. 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. 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) EX-27 2
5 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. 0000069422 THE INTERGROUP CORPORATION 1 9-Mos Jun-30-1999 Jul-01-1998 Mar-31-1999 2195000 52852000 298000 0 0 57910000 47219000 16188000 100498000 77065000 0 0 0 21000 9671000 100498000 9718000 6263000 0 11626000 333000 0 2297000 (2351000) 940000 (1411000) 0 298000 0 (1836000) (.88) (.88)
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