SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB/A
(Amendment No. 1)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
Commission file number 0-4057
PORTSMOUTH SQUARE, INC.
------------------------------
(Name of Small Business Issuer in Its Charter)
California 94-1674111
------------------------------ ---------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2251 San Diego Avenue, Suite A-151
San Diego, California 92110-2926
---------------------------------- ---------------------
(Address of Principal Executive Offices) (Zip Code)
(619) 298-7201
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
Title of Class
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $2,585,792.
The aggregate market value of the common equity held by non-affiliates
of issuer computed by reference to the price at which the stock sold on March
11, 1998 was $4,612,073.
The number of shares outstanding of issuers No Par Value Common Stock, as
of March 13, 1998, was 734,183.
<PAGE> 9
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS PAGE
Report of Independent Accountants-Price Waterhouse LLP 10
Report of Ernst & Young LLP, Independent Auditors 10(a)
Balance Sheet - December 31, 1997 11
Statements of Income - Years Ended 12
December 31, 1997 and 1996
Statements of Shareholders' Equity 13
Statements of Cash Flows - Years Ended 14
December 31, 1997 and 1996
Notes to the Financial Statements 15
<PAGE> 10
Report of Independent Accountants
March 25, 1998
To the Board of Directors and Shareholders of
Portsmouth Square, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of cash flows, and changes in shareholders' equity present fairly, in
all material respects, the financial position of Portsmouth Square, Inc. at
December 31, 1997, and the results of its operations and their cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above. The financial
statements of Portsmouth Square, Inc. for the year ended December 31, 1996
were audited by other independent accountants whose report dated February 21,
1997 expressed an unqualified opinion on those statements.
/s/ Price Waterhouse LLP
<PAGE> 10(a)
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Portsmouth Square, Inc.
We have audited the accompanying statement of income, shareholders' equity and
cash flows for the year ended December 31, 1996 of Portsmouth Square, Inc.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows for the
year ended December 31, 1996 of Portsmouth Square, Inc., in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
February 21, 1997
<PAGE> 11
<TABLE>
<CAPTION>
PORTSMOUTH SQUARE, INC.
Balance Sheet
- ------------------------------------------------------------------------------
December 31, 1997
-----------------
<S> <C>
Assets
Cash and cash equivalents $ 56,348
Investment in marketable securities 1,877,532
Investment in Justice Investors 1,334,114
Other investments 87,500
Note receivable 60,000
Other assets 155,844
----------
Total assets $ 3,571,338
==========
Liabilities and Shareholders' Equity
Liabilities
Due to securities broker $ 664,211
Accounts payable and accrued expenses 40,489
Due to Santa Fe Financial Corporation 17,503
Other liabilities 145,916
----------
Total liabilities 868,119
----------
Commitments and contingencies
Shareholders' equity
Common stock, no par value:
Authorized shares - 750,000
Issued and outstanding shares - 734,183 2,092,300
Additional paid-in-capital 915,676
Unrealized gain on investment securities,
net of deferred taxes 96,476
Accumulated deficit (401,233)
----------
Total shareholders equity 2,703,219
----------
Total liabilities and shareholders' equity $ 3,571,338
=========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
PORTSMOUTH SQUARE, INC.
Statements of Income
- ------------------------------------------------------------------------------
Years ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues
Equity in net income of Justice Investors $ 2,560,805 $ 1,860,190
Dividend and interest income 115,586 81,252
Net investment losses (119,100) (5,596)
Other income 28,501 24,872
--------- ---------
2,585,792 1,960,718
--------- ---------
Costs and expenses
General and administrative 322,474 220,185
Professional and outside services 128,678 65,726
Margin interest expense 32,810 -
--------- ---------
483,962 285,911
--------- ---------
Income before income taxes 2,101,830 1,674,807
Income taxes 831,193 670,694
--------- ---------
Net income $ 1,270,637 $ 1,004,113
========= =========
Basic earnings per share $ 1.71 $ 1.34
========= =========
Weighted average number of shares outstanding 744,027 750,000
========= =========
See accompanying notes to financial statements
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
PORTSMOUTH SQUARE, INC.
Statement of Shareholders' Equity
- ------------------------------------------------------------------------------
Common Stock Unrealized
--------------------- Additional gain on
Shares paid-in marketable Accumulated
outstanding Amount capital securities deficit Total
----------- --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 750,000 $2,092,300 $1,240,291 $ - $(1,814,809) $1,517,782
Net income 1,004,113 1,004,113
Dividends paid (487,500) (487,500)
Increase in
unrealized gain
on marketable
securities, net
of tax 23,207 23,207
-------- --------- --------- --------- --------- ---------
Balance at
December 31, 1996 750,000 2,092,300 1,240,291 23,207 (1,298,196) 2,057,602
Net income 1,270,637 1,270,637
Dividends paid (373,674) (373,674)
Purchase and
retirement of
common stock (15,817) (324,615) (324,615)
Increase in
unrealized gain
on marketable
securities, net
of tax 73,269 73,269
------- ---------- ---------- --------- ----------- ----------
Balance at
December 31, 1997 734,183 $2,092,300 $ 915,676 $ 96,476 $ (401,233) $2,703,219
See accompanying notes to financial statements.
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
PORTSMOUTH SQUARE, INC.
Statements of Cash Flows
- ------------------------------------------------------------------------------
For the years ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Operating activities
Net income $ 1,270,637 $ 1,004,113
Adjustments to reconcile net income to
net cash used by operating activities:
Equity in net income of Justice Investors (2,560,805) (1,860,190)
Net investment losses 119,100 5,596
Change in assets and liabilities:
Other assets (78,176) (12,981)
Due to Santa Fe Financial Corporation (29,628) -
Accounts payable and other liabilities 36,060 15,487
---------- ----------
Net cash used in operating activities (1,242,812) (847,975)
Investing activities
Cash distributions from Justice Investors 2,196,180 1,254,960
Purchase of investment securities (3,129,471) (1,532,172)
Purchase of other investments (100,000) -
Proceeds from sales of investment securities 2,345,304 427,774
---------- ---------
Net cash provided by investing activities 1,312,013 150,562
Financing activities
Increase in due to securities broker 664,211 -
Purchase and retirement of common stock (324,615) -
Dividends paid (373,674) (487,500)
---------- ---------
Net cash used in financing activities (34,078) (487,500)
---------- ---------
Net increase (decrease) in cash and
cash equivalents 35,123 (1,184,913)
Cash and cash equivalents at the
beginning of the year 21,225 1,206,138)
---------- ----------
Cash and cash equivalents at end of year $ 56,348 $ 21,225
========== ==========
Supplemental information
Income taxes paid, net of refunds $ 815,000 $ 684,203
========== ==========
Margin interest paid $ 32,810 -
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 15
PORTSMOUTH SQUARE, INC.
Notes to the Financial Statements
- ------------------------------------------------------------------------------
NOTE 1 - OWNERSHIP AND SIGNIFICANT ACCOUNTING POLICIES
Ownership
As of December 31, 1997, Santa Fe Financial Corporation (Santa Fe) holds
480,757 shares, or 65.5%, of Portsmouth Square, Inc.'s (the Company)
outstanding shares.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Investment in 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 a separate component of shareholders' equity.
Any unrealized gains or losses related to "naked" 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.
The cost of securities sold is based on a first-in, first-out basis.
Realized gains and losses are included in net investment losses.
Interest on securities classified as available-for-sale is included in
investment and interest income.
Revenue Recognition
During 1997 and 1996, the Company's major source of revenue was its 49.8%
interest in Justice Investors, a limited partnership which owns and leases a
hotel in San Francisco, California, in which the Company is both a limited
and general partner (see Note 3). The Company accounts for its investment in
Justice Investors on the equity basis.
Earnings per Share
Effective December 31, 1997, the Company adopted a new accounting standard
which replaces retroactively the presentation of primary earnings per share
(EPS) and fully diluted EPS. The new basic EPS represents net income divided
by the weighted average common shares outstanding during the period excluding
any potential dilutive effects. Diluted EPS gives effect to all potential
issuances of common stock that would have caused basic EPS to be lower as if
the issuance had already occurred. As of December 31, 1997 and 1996, the
Company did not have any potentially dilutive securities outstanding.
Accounting Standard on Impairment of Long-Lived Assets
During 1996, the Company adopted an accounting standard for the impairment of
long-lived assets and for long-lived assets to be disposed of. This standard
requires the Company to record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than their
carrying amount. There was no effect on the financial statements from the
adoption of this standard.
<PAGE> 16
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts or revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and /or liability
for deferred taxes.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 2 - INVESTMENT IN MARKETABLE SECURITIES
The following is a summary of the Company's investment in marketable
securities:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997
Equity securities $1,478,681 $ 278,599 $ (152,448) $1,604,832
Debt securities 237,688 35,012 - 272,700
--------- --------- --------- ---------
$1,716,369 $ 313,611 $ (152,448) $1,877,532
========= ========= ========= =========
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
December 31, 1996
Equity securities $ 563,048 $ 47,673 $ (19,908) $ 590,813
Debt securities 475,753 12,310 (1,307) 486,756
--------- --------- --------- ---------
$1,038,801 $ 59,983 $ (21,215) $1,077,569
========= ========= ========= =========
</TABLE>
Gross realized gains and losses on sales of investments totaled $200,608 and
$319,708, respectively, during the year ended December 31, 1997, and $28,102
and $33,698, respectively, during the year ended December 31, 1996.
<PAGE> 17
At December 31, 1997, the company had short investment positions totaling
approximately $356,000 all of which were covered by long positions.
The amortized cost and fair value of debt securities at December 31, 1997, by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
Cost Fair Value
--------- ----------
<S> <C> <C>
Due after one year through five years $ 100,400 $ 102,000
Due after five years through ten years 60,339 69,450
Due after ten years 76,949 101,250
--------- ---------
$ 237,688 $ 272,700
========= =========
</TABLE>
NOTE 3 - INVESTMENT IN JUSTICE INVESTORS
Condensed financial statements for Justice Investors, a limited partnership,
in which Portsmouth Square, Inc. has a 49.8% interest, are as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
1997 1996
---- ----
<S> <C> <C>
Assets
Total current assets - Note A $ 500,374 $ 420,220
Property, plant and equipment, net of accumulated
depreciation of $10,607,195 in 1997 and
$10,188,059 in 1996 5,968,488 6,220,506
Loan fees and deferred lease costs, net of accumulated
amortization of $85,741 in 1997 and $54,696 in 1996 224,671 255,716
--------- ---------
$6,693,533 $6,896,442
========= =========
Liabilities and partners' equity
Total current liabilities $ 293,166 $ 568,093
Long-term liabilities - Note B 2,624,127 3,284,288
Partners' capital - Note C 3,776,240 3,044,061
--------- ---------
$6,693,533 $6,896,442
========= =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
December 31,
1997 1996
---- ----
<S> <C> <C>
Revenues - Note A $6,194,532 $4,758,778
Costs and expenses 1,052,354 1,023,457
--------- ---------
Net income $5,142,178 $3,735,321
========= =========
</TABLE>
Note A - Revenues include $1,212,491 and $1,116,019 for the years ended
December 31, 1997 and 1996, respectively, of garage rental income from the
garage lessee who is also the managing general partner of Justice Investors.
<PAGE> 18
Justice Investors and the hotel lessee entered into a new lease agreement
effective January 1, 1995. The hotel lease provides for Justice Investors to
20% of hotel room revenue, as defined in the lease, or an annual minimum
guaranteed rent of $2,500,000 plus 50% of available cash, as defined in the
lease, and expires December 31, 2004, with a five-year renewal option.
The parking garage lease for which revenue is based upon a percentage of
parking receipts, expires on November 30, 2010.
Note B - During 1995, Justice Investors refinanced its long-term debt
obligations. The long-term debt at December 31, 1996 and 1995 consists of
revolving, reducing line of credit agreement payable to Wells Fargo Bank which
is collateralized by a trust deed on land, hotel property and the Partnership's
interest in hotel and garage leases. The line of credit agreement provides
for maximum borrowings at December 31, 1997 of approximately $7,100,000 with
an annual reduction of the maximum borrowings to approximately $4,500,000 at
the December 31, 2004 maturity date and generally provides for interest at
LIBOR plus 2% per annum (the annual rate on $4,000,000 of principal is
guaranteed not to exceed 11.5%).
Note C - During each of the years ended December 31, 1997 and 1996, total
annual distributions to partners amounted to approximately $4,410,000 and
$2,520,000.
NOTE 4 - DUE TO SECURITIES BROKER
A securities broker has advanced funds for the purchase of marketable
securities under standard margin agreements. The interest rate on advances
or cash on deposit can vary daily with money market rates. The interest
rate on margin balances is based on the Federal Funds rate plus 0.875%
(7.625% at December 31, 1997). The interest rate on cash or deposits is based
on the Federal Funds rate less 0.5% (6.25% at December 31, 1997). The
interest rate on interest rebates in connection with short positions is
based on the Federal Funds rate less 0.375% (6.375% at December 31, 1997).
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Federal
Current $ 689,632 $ 524,879
Deferred (credit) (53,883) (9,848)
--------- ---------
635,749 515,031
========= =========
State
Current 206,598 156,261
Deferred (credit) (11,154) (598)
--------- ---------
195,444 155,663
--------- ---------
$ 831,193 $ 670,694
========= =========
</TABLE>
<PAGE> 19
A reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Statutory federal tax rate 34.0% 34.0%
State income taxes, net of federal tax benefit 6.1 6.1
Other (O.5) -
----- -----
Effective tax rate 39.6% 40.1%
===== =====
</TABLE>
The components of the Company's deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
State income taxes $ 70,243 $ 53,345
Capital loss carryforwards 50,052 2,247
Other miscellaneous differences 1,875 1,541
--------- ---------
Deferred tax assets $ 122,170 $ 57,133
========= =========
Deferred tax liabilities
Unrealized gains on marketable securities $ 64,687 $ 15,560
========= =========
</TABLE>
NOTE 6 - RELATED PARTY TRANSACTIONS
Certain shared costs and expenses, primarily administrative salaries, rent and
insurance, are allocated between the Company and Santa Fe based on
management's estimate of the pro rata utilization of resources. Total shared
costs and expenses allocated to the Company approximated $188,000 and $157,000
during the years ended December 31, 1997 and 1996, respectively. In addition,
The InterGroup Corporation allocates corporate expenses to the Company based
on InterGroup's management's estimate of the pro rata utilization of
resources. In 1997, these expenses were approximately $75,000.
<PAGE> 20
NOTE 7 - COMMITMENTS AND CONTINGENCIES
During 1996, the Company was served with a personal injury action in the San
Francisco Superior Court. The suit 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. PSI's insurance carrier is
defending PSI under a reservation of rights. During 1997, the trial court
granted Portsmouth's motion for summary judgment; however a final judgment has
not been entered to date. Management of the Company believes that the
ultimate resolution of this claim will not have a material adverse effect on
the Company's consolidated financial position.
<PAGE> 30
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
PORTSMOUTH SQUARE, INC.
Date: April 1, 1998 By /s/ John V. Winfield
-------------- ----------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: April 1, 1998 /s/ John V. Winfield
-------------- ---------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Date: April 1, 1998 /s/ L. Scott Shields
-------------- ---------------------------------------
L. Scott Shields, Treasurer
and Chief Financial Officer
Date: April 1, 1998 /s/ John C. Love
-------------- ---------------------------------------
John C. Love,
Director
Date: April 1, 1998 /s/ William J. Nance
-------------- ---------------------------------------
William J. Nance,
Director
Date: April 1, 1998 /s/ Jerold R. Babin
-------------- ---------------------------------------
Jerold R. Babin,
Director
Date: April 1, 1998 /s/ Josef A. Grunwald
-------------- ---------------------------------------
Josef A. Grunwald
Director
