<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from _______ to ________
Commission File Number 0-4057
PORTSMOUTH SQUARE, INC.
(Exact Name of Registrant as Specified in its Charter)
California 94-1674111
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
Mailing Address: P.O. Box 80037
San Diego, CA 92138
Street Address: 2251 San Diego Avenue, Suite A-151
San Diego, CA 92110
(619) 298-7201
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months, and (2) has been subject to such filing requirements for the past 90
days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 736,383 shares of issuer's
No Par Value Common Stock were outstanding as of October 22, 1997.
Transitional Small Business Disclosure Format (check one): Yes No X
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INDEX
PORTSMOUTH SQUARE, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Balance Sheet--September 30, 1997 (Unaudited) 3
Statements of Income (Unaudited)--Three Months
ended September 30, 1997 and 1996 and for the
Nine Months ended September 30, 1997 and 1996 4
Statements of Cash Flow (Unaudited)--Nine Months
ended September 30, 1997 and 1996 5
Notes to Financial Statements--September 30, 1997 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
</TABLE>
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Portsmouth Square, Inc.
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION> September 30
1997
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 400,210
Investment securities 1,721,337
Other investments 250,203
Deferred income taxes 53,345
Other current assets 11,832
----------
Total current assets 2,436,927
----------
Investment in Justice Investors 1,610,906
Deferred income taxes 3,788
----------
Total assets $ 4,051,621
==========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 15,620
Income taxes payable 79,860
Amount owed to Santa Fe Financial Corp. 49,728
Due securities broker 1,196,411
Deferred income taxes 136,308
----------
Total current liabilities 1,477,927
----------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value:
Authorized shares - 750,000
Issued and outstanding shares - 737,583 2,092,300
Additional paid - in capital 1,052,353
Unrealized gain on investment securities,
net of deferred taxes 203,290
Accumulated deficit (774,249)
----------
Total shareholders' equity 2,573,694
----------
Total liabilities and shareholders' equity $ 4,051,621
==========
See accompanying notes.
</TABLE>
<PAGE> 4
Portsmouth Square, Inc.
Statements of Income
(Unaudited)
<TABLE>
<CAPTION> Three Months ended Nine Months ended
September 30 September 30
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Equity in net income of Justice
Investors $ 755,033 $ 630,553 $ 1,866,018 $ 1,304,101
Dividend and interest income 29,611 24,516 95,163 57,272
Investment gain (loss) (51,572) - (130,344) -
Other income 6,000 6,000 18,000 18,872
--------- --------- --------- ---------
739,072 661,069 1,848,837 1,380,245
--------- --------- --------- ---------
Cost and expenses:
General and administrative 76,825 41,238 243,341 153,590
Professional and outside services 24,549 16,398 106,015 41,978
--------- --------- --------- ---------
101,374 57,636 349,356 195,568
--------- --------- --------- ---------
Income before income taxes 637,698 603,433 1,499,481 1,184,677
Income taxes 255,959 242,205 601,862 475,505
--------- --------- --------- ---------
Net income $ 381,739 $ 361,228 $ 897,619 $ 709,172
========= ========= ========= =========
Net income per share $ 0.51 $ 0.48 $ 1.20 $ 0.95
========= ========= ========= =========
Dividends per share $ .25 $ 0.25 $ 0.50 $ 0.65
========= ========= ========= =========
Weighted average number of
shares outstanding 743,423 750,000 746,694 750,000
========= ========= ========= =========
See accompanying notes.
</TABLE>
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Portsmouth Square, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION> Nine Months ended
September 30
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Net income $ 897,619 $ 709,172
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in net income of Justice Investors (1,866,018) (1,304,101)
Increase deferred taxes & taxes payable 1,720 -
Decrease in receivable, Justice Investors - 18,000
Decrease in other current assets 8,703 -
Net decrease in current liabilities 10,699 51,790
---------- ----------
Net cash used in operating activities (947,277) (525,139)
---------- ----------
Investing activities
Cash distribution from Justice Investors 1,224,601 941,220
Purchases of investment securities (1,782,051) (928,574)
Purchase of other investments (190,203) -
Proceeds from sale of investment securities 1,439,115 -
---------- ----------
Net cash provided by investing activities 691,462 12,646
---------- ----------
Financing activities
Increase in amount due securities broker 1,196,411 -
Dividends paid (373,673) (487,500)
Purchase of Portsmouth stock (187,938) -
---------- ----------
Net cash provided by (used in)
financing activities 634,800 (487,500)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 378,985 (999,993)
Cash and cash equivalents at the beginning
of the year 21,225 1,206,138
---------- ----------
Cash and cash equivalents at the end of the
period $ 400,210 $ 206,145
========== ==========
See accompanying notes.
</TABLE>
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
---------------------------------------------------------
The financial statements included herein have been prepared by Portsmouth
Square, Inc. (the "Company"), without audit, according to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures that are made are adequate to make the
information presented not misleading. Further, the financial statements
reflect, in the opinion of management, all adjustments (which included only
normal recurring adjustments) necessary to state fairly the financial
position and results of operations as of and for the periods indicated.
It is suggested that these financial statements be read in conjunction with
the audited financial statements and the notes therein included in the
Company's Form 10-K for the year ended December 31, 1996.
The results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, (Earnings per Share) which will be required to be adopted on
December 31, 1997. The impact of Statement 128 on the calculation of earnings
per share for these quarters is not expected to be material.
2. Investment in Justice Investors
-------------------------------
The Company's principal sources of revenue continue to be derived from its
49.8% interest in the Justice Investors limited partnership which owns and
leases a Holiday Inn in San Francisco, California. The Company also serves as
one of the two general partners of Justice Investors. Portsmouth records its
investment on the equity basis.
Condensed financial statements for Justice Investors are as follows:
JUSTICE INVESTORS
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1997
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<S> <C>
Assets
Total current assets $1,325,082
Property, plant and equipment, net of
accumulated depreciation of $10,496,135 6,068,037
Loan fees and deferred lease costs,
net of accumulated amortization of $77,980 232,433
---------
$7,625,552
=========
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Liabilities and partners' capital
Total current liabilities $ 72,171
Long-term debt 3,221,334
Partners' capital 4,332,047
Total liabilities and ---------
partners capital $7,625,552
=========
</TABLE>
<TABLE>
<CAPTION>
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
Three Months ended Nine Months ended
September 30 September 30
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $1,780,605 $1,495,360 $4,543,178 $3,290,129
Costs and expenses 264,475 229,189 805,192 671,452
--------- --------- --------- ---------
Net income $1,516,130 $1,266,171 $3,737,986 $2,618,677
========= ========= ========= =========
</TABLE>
3. Contingencies
-------------
On May 30, 1996, the Company was served with a personal injury action in the
San Francisco Superior Court. The suit, which was filed on March 26, 1996,
names more than 60 defendants, including the managing general partner of
Justice Investors, and alleges injuries suffered as a result of exposure to
asbestos-containing materials. The Complaint seeks an unspecified amount of
damages, including recovery for loss of income and medical expenses. The
Company is being defended through its insurance carrier under a reservation of
rights. On September 16, 1997, an order granting a motion for summary judgment
was entered in favor of the Company. At this time it is not known whether
plaintiff will seek appellate or other review of that order.
4. Related Party Transactions
--------------------------
Certain costs and expenses, primarily salaries, rent and insurance, are
allocated between the Company and its parent company, Santa Fe Financial
Corporation ("Santa Fe") based on management's estimate of the utilization of
resources. During the nine months ended September 30, 1997, the Company also
made payments to The InterGroup Corporation ("InterGroup") in the amount of
$41,899 for administrative costs and reimbursement of direct and indirect
costs associated with the management of the Company's investments, including
its partnership asset.
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 Santa Fe and InterGroup and directs the investment
activity of those companies. Depending on certain market conditions and
various risk factors, the Chief Executive Officer, his family, Santa Fe and
InterGroup may, at times, invest in the same companies in which the Company
<PAGE> 8
has invested. The Company encourages such investments because it places
personal resources of the Chief Executive Officer and his family members, and
the resources of Santa Fe and InterGroup, at risk in connection with
investment decisions made on behalf of the Company. Three of the Company's
Directors serve as directors of InterGroup and three of the Company's Directors
serve on the Board of Santa Fe.
Item 2 - 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
intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties, including partnership distributions,
general economic conditions of the hotel industry in the San Francisco area,
securities markets, litigation and other factors, including those discussed
below and in the Company's Form 10-K for the year ended December 31, 1996,
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
The Company's principal sources of revenue continue to be derived from its
49.8% interest in the Justice Investors limited partnership and income
received from the investment of its cash and securities assets. The
partnership derives most of its income from a lease with Holiday Inns, Inc.,
which has been assumed by Bristol Hotel Company ("Bristol") and from a lease
with Evon Garage Corporation.
Three Months Ended September 30, 1997 Compared to Three Months
Ended September 30, 1996
Comparison of operating results for the three months ended September 30, 1997
to the three months ended September 30, 1996, shows a net increase in total
revenues of 11.8% and that costs and expenses increased 75.9% and net income
increased 5.7%.
The 11.8% net increase in total revenues from $661,069 to $739,072 was
primarily due to a 19.7% increase in partnership income from $630,553 to
$755,033 and a 20.8% increase in dividend and interest income from $24,516 to
$29,611. The increase in partnership income is primarily attributable to a
21.6% increase in hotel rental income as a result of both higher occupancy
rates and an increase in the average daily room rate. The increase in
dividend and interest income reflects management's efforts to diversify the
Company's investments to provide for an overall higher yield. The realized
loss on investments of $51,572 should be considered in the context that the
Company had pre-tax unrealized gains on investments of $390,881 and pre-tax
unrealized losses in the amount of $51,283 as of September 30, 1997. The net
unrealized gain on investments of $203,290 after tax, is included in
shareholders' equity.
The 75.9% increase in costs and expenses from $57,636 to $101,374 reflects an
increase in general and administrative expenses from $41,238 to $76,825 and an
increase in professional and outside service fees from $16,398 to $24,549.
<PAGE> 9
The increase in general and administrative expenses reflects adjustments in
the Company's proportionate share of operating expenses with its parent, Santa
Fe, and higher administrative costs and direct and indirect costs associated
with the management of the Company's investments, including its partnership
asset. The increase in professional and outside service fees is primarily
attributable to the retention of a consultant by the Company to advise it on
certain operational and partnership matters as part of its more active role as
a general partner in Justice Investors.
Effective April 28, 1997, Holiday Inns, Inc. merged with Bristol of Dallas,
Texas, a publicly held company listed on the New York Stock Exchange. Bristol
has agreed to assume and perform all of Holiday's obligations under the lease
with the partnership and will continue to operate the hotel as a Holiday Inn
or one of Holiday's related brands. The partnership and Bristol have made
substantial improvements to the hotel property and further improvements are
expected to be made in the future in an effort to achieve Select or Crowne
Plaza status.
Nine Months Ended September 30, 1997 Compared to Nine Months
Ended September 30, 1996
Comparison of the results of operations for the first nine months of 1997 to
the first nine months of 1996 reveals a net increase in total revenues of
33.9% and that costs and expenses increased approximately 78.6%, and net
income increased 26.6%
The 33.9% net increase in total revenues from $1,380,245 to $1,848,837 was
primarily due to a 43.1% increase in partnership income from $1,304,101 to
$1,866,018 and a 66.2% increase in dividend and interest income from $57,272
to $95,163. The increase in partnership income is primarily attributable to a
48.7% increase in hotel rental income as a result of both higher occupancy
rates and an increase in the average daily room rate. The increase in
dividend and interest income reflects management's efforts to diversify the
Company's investments to provide for an overall higher yield. The realized
loss on investments of $130,344 should be considered in the context that the
Company had pre-tax unrealized gains on investments of $390,881 and pre-tax
unrealized losses in the amount of $51,283 as of September 30, 1997. The net
unrealized gain on investments of $203,290 after tax, is included in
shareholders' equity.
The 78.6% increase in costs and expenses from $195,568 to $349,356 reflects
an increase in general and administrative expenses from $153,590 to $243,341
and an increase in professional and outside service fees from $41,978 to
$106,015. The increase in general and administrative expenses reflects
adjustments in the Company's proportionate share of operating expenses with
its parent, Santa Fe, and higher administrative costs and direct and indirect
costs associated with the management of the Company's investments, including
its partnership asset. The increase in professional and outside service fees
is primarily attributable to the retention of a consultant by the Company to
advise it on certain operational and partnership matters as part of its more
active role as a general partner in Justice Investors and higher annual audit
fees.
<PAGE> 10
LIQUIDITY AND SOURCES OF CAPITAL
The Company's cash flows are primarily generated by its investment in the
Justice Investors limited partnership, which derives the majority of its
income from its lease with Bristol and a lease with Evon Garage Corporation.
In addition to its monthly limited partnership distributions from Justice
Investors, the Company also receives monthly management fees as a general
partner. The Company also derives revenue from the investment of its cash and
securities assets.
As a result of increases in the amount of rental income from the hotel lease,
the general partners of Justice Investors decided that there would be a
special one-third increase in the monthly distribution to limited partners
effective with the February 1997 distribution. As a result, Portsmouth's
monthly distribution increased to $139,440 from $109,580. Although it is
planned that the distribution at the higher level will continue for a period
of 12 months, the increase was clearly identified as a special distribution
and, at any time, unforeseen circumstances could dictate a change in the
amount distributed. The general partners will conduct an annual review and
analysis to determine an appropriate monthly distribution for the ensuing
year. At that time, the monthly distribution could be decreased or increased.
The Company has diversified its investment of its cash and securities assets
in an effort to obtain an overall higher yield while seeking to minimize the
associated increased degree of risk. The Company has invested in short-term,
income-producing instruments and in equity and debt securities when deemed
appropriate. The Company's securities investments are classified as
available-for-sale and unrealized gains and losses, net of deferred taxes, are
included in shareholders' equity. As of September 30, 1997, the Company had a
net unrealized gain on investments of $203,290 after tax, which consists of
pre-tax unrealized gains of $390,881 and pre-tax unrealized losses of $51,283.
Realized investment gains and losses may fluctuate significantly from period
to period in the future and could have a meaningful effect on the Company's
net earnings. However, the amount of realized investment gain or loss for any
given period may have no predictive value, and variations in amount from
period to period may have no practical analytical value.
In December 1996, the Board of Directors authorized a limited buy-back program
of the Company's common stock. The Company may, from time to time, in the
discretion of management, purchase those shares depending on market conditions
and other factors consistent with Company policy and as limited by state and
federal law. In instituting the buy-back program, the Company reaffirmed its
intention of continuing with its reporting requirements under the Exchange Act
and the program is not intended to directly or indirectly cause the cessation
of those requirements. As of September 30, 1997, the Company had repurchased
12,417 of its common shares, primarily in open market transactions. On
October 28, 1997, the Board of Directors elected to terminate the limited
buy-back program to preserve the Company's capital as it considers other
investment options.
At September 30, 1997, the Company's current assets were $2,436,927. The
Company remains liquid with a current ratio of approximately 1.6 to 1 at the
end of the quarter. Management believes that its capital resources are
currently adequate to meet its short- and long-term obligations.
<PAGE> 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - the Financial Data Schedule is filed
as an exhibit to this report.
(b) Registrant did not file any reports on Form 8-K
during the period covered by this report.
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.
PORTSMOUTH SQUARE, INC.
(Registrant)
Date: October 30, 1997
by /s/ John V. Winfield
- -------------------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: October 30, 1997
by /s/ L. Scott Shields
- -------------------------------------
L. Scott Shields, Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BALANCE SHEET AND INCOME STATEMENT OF PORTSMOUTH
SQUARE, INC. SET FORTH IN ITS FORM 10-QSB REPORT FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-QSB REPORT.
<CIK> 0000079661
<NAME> PORTSMOUTH SQUARE, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 400210
<SECURITIES> 1721337
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2436927
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4051621
<CURRENT-LIABILITIES> 1477927
<BONDS> 0
0
0
<COMMON> 2092300
<OTHER-SE> 1959321
<TOTAL-LIABILITY-AND-EQUITY> 4051621
<SALES> 1866018
<TOTAL-REVENUES> 1848837
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 349356
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<INCOME-PRETAX> 1499481
<INCOME-TAX> 601862
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<NET-INCOME> 897619
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
