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, 1998
OR
[ ] 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 270828
San Diego, CA 92198-2828
Street Address: 11315 Rancho Bernardo Road, Suite 129
San Diego, CA 92127
(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: 734,183 shares of issuer's
No Par Value Common Stock were outstanding as of November 10, 1998.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 2
INDEX
PORTSMOUTH SQUARE, INC.
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Balance Sheet--September 30, 1998 (Unaudited) 3
Statements of Income (Unaudited)-Three Months
ended September 30, 1998 and 1997 and for the Nine Months
ended September 30, 1998 and 1997 4
Statement of Cash Flows (Unaudited)--Nine Months
ended September 30, 1998 and 1997 5
Notes to Financial Statements--September 30, 1998 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Portsmouth Square, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Assets
Cash and cash equivalents $ 75,850
Investment in marketable securities:
Held for sale 649,197
Trading 19,000
Investment in Justice Investors 2,314,560
Other investments 200,000
Other assets 128,022
------------
Total assets $ 3,386,629
============
Liabilities and Shareholders' Equity
Liabilities
Due securities broker $ -
Accounts payable and accrued expenses 24,312
Obligation for securities sold 124,150
Due to Santa Fe Financial Corporation 30,966
------------
Total liabilities 179,428
------------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value
Authorized - 750,000
Issued and outstanding - 734,183 2,092,300
Additional paid-in capital 915,676
Retained earnings 221,735
Unrealized loss on investment securities,
net of deferred tax benefit ( 22,510)
------------
Total shareholders' equity 3,207,201
------------
Total liabilities & shareholders' equity $ 3,386,629
============
</TABLE>
See Notes to Financial Statements
<PAGE> 4
Portsmouth Square, Inc.
Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Equity in net income of Justice
Investors $ 781,297 $ 755,033 $2,235,406 $1,866,018
Dividend and interest income 16,056 29,611 41,289 95,163
Investment gain (loss) (127,518) ( 51,572) (214,999) (130,344)
Other income 6,000 6,000 24,000 18,000
--------- --------- --------- ---------
675,835 739,072 2,085,696 1,848,837
--------- --------- --------- ---------
Costs and expenses:
General and administrative 68,411 76,825 250,899 243,341
Professional and outside
services 35,499 24,549 131,527 106,015
Margin and trading expenses 15,219 - 44,372 -
--------- --------- --------- ---------
119,129 101,374 426,789 349,356
--------- --------- --------- ---------
Income before income taxes 556,706 637,698 1,658,898 1,499,481
Income taxes 191,328 255,959 668,839 601,862
--------- --------- --------- ---------
Net income $ 365,378 $ 381,739 $ 990,059 $ 897,619
========= ========= ========= =========
Net income per share $ .50 $ 0.51 $ 1.35 $ 1.20
========= ========= ========= =========
Dividends per Share $ .25 $ .25 $ 0.50 $ .50
========= ========= ========= =========
Weighted average number of
shares outstanding 734,183 743,423 734,183 746,694
========= ========= ========= =========
Comprehensive Income
Net Income $ 365,378 $ 381,739 $ 990,059 $ 897,619
Unrealized gain (loss) on
Securities arising during
Period net of taxes ( 80,018) 134,099 (118,986) 180,083
--------- --------- --------- --------
$ 285,360 $ 515,838 $ 871,073 $1,077,702
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements
Portsmouth Square, Inc.
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
September 30
1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Net income $ 990,059 $ 897,619
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in net income of Justice Investors (2,235,406) (1,866,018)
Increase deferred taxes & taxes payable 62,755 1,720
Decrease in receivable, Justice Investors 87,822 -
Decrease in other current assets ( 131,615) 8,703
Net decrease in current liabilities - 10,699
---------- ----------
Net cash used in operating activities (1,226,385) ( 947,277)
---------- ----------
Investing activities
Cash distributions from Justice Investors 1,254,960 1,224,601
Purchase of investment securities (3,287,518) (1,782,051)
Proceeds from sale of investment securities 4,618,539 1,439,115
Purchase of other investments ( 100,000) ( 190,203)
---------- ----------
Net cash provided by investing activities 2,485,981 691,462
---------- ----------
Financing activities
Increase (decrease) in amount due securities
Broker ( 664,211) 1,196,411
Dividends paid ( 367,091) ( 373,673)
Purchase of Portsmouth stock - ( 187,938)
Decrease in securities sold ( 208,792) -
---------- ----------
Net cash provided by (used in)
financing activities (1,240,094) 634,800
---------- ----------
Net increase (decrease) in cash and cash
Equivalents 19,502 378,985
Cash and cash equivalents at beginning
of the year 56,348 21,225
---------- ----------
Cash and cash equivalents at the end of the
Period $ 75,850 $ 400,210
========== ===========
</TABLE>
See Notes to Financial Statements
<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-KSB for the year ended December 31, 1997.
The results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1998.
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
September 30, 1998
------------------
Assets
Total current assets $1,403,611
Property, plant and equipment, net of
accumulated depreciation of $10,901,403 5,674,279
Loan fees and deferred lease costs,
net of accumulated amortization of $109,023 201,390
---------
$7,279,280
=========
<PAGE> 7
Liabilities and partners' capital
Total current liabilities $ 100,219
Long-term debt 1,434,054
Partners' capital 5,745,007
Total liabilities and ---------
partners' capital $7,279,280
=========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
Nine Months ended
September 30,
1998 1997
---------- ----------
Revenues $5,231,500 $4,543,178
Costs and expenses 742,733 805,192
--------- ---------
Net income $4,488,767 $3,737,986
========= =========
3. Marketable Securities
---------------------
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. All
marketable securities are defined as trading or available-for-sale
securities. The Company determines the appropriate classification of
marketable securities at the time of purchase and reevaluates such
designation at each balance sheet date.
Securities classified as available-for-sale are carried at fair market value,
with the unrealized holding gains and losses reported as a separate component
of shareholders' equity. Certain securities are classified as trading
securities when they are transferred to cover corresponding obligations of
the same security sold short. Those securities and the related obligations
are marked to market with unrealized holding gains and losses included in
earnings. The cost of investments sold is determined on the specific
identification or the first-in, first-out method.
<PAGE> 8
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. Effective June 30, 1998, certain accounting and administrative
functions of the Company and its parent corporation, Santa Fe, were
transferred to the Los Angeles, California offices of The InterGroup
Corporation ("InterGroup"). InterGroup presently controls more than 50% of
the voting power of Santa Fe. During the nine months ended September 30,
1998, the Company made payments to InterGroup in the amount of $32,557 for
administrative costs and reimbursement of direct and indirect costs
associated with the management of the Company's and its investments,
including its partnership asset. Effective October 31, 1998, the Company and
Santa Fe also terminated their office lease. The Company continues to
maintain a corporate presence in San Diego, California, but on a reduced
basis.
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. Effective April 1, 1998, an employee
of InterGroup was assigned to manage the portfolios of the Company and Santa
Fe in consultation with Mr. Winfield. The Company and Santa Fe reimburse
InterGroup for an allocated portion of the compensation and benefits of such
employee. 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 invests. 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. Four of the Company's Directors serve as directors
of InterGroup and three of the Company's Directors serve on the Board of
Santa Fe.
<PAGE> 9
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
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 natural disasters
those discussed below and in the Company's Form 10-KSB for the year ended
December 31, 1997, 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 was assumed by Bristol Hotel Company ("Bristol"). Effective July 31,
1998, Bristol merged into Felcor Suite Hotels, Inc. ("Felcor") with Bristol
Hotel Management Company continuing as the manager of the hotel.
Three Months Ended September 30, 1998 Compared to Three Months
Ended September 30, 1997
Comparison of operating results for the three months ended September 30, 1998
to the three months ended September 30, 1997, shows that total revenues
decreased 8.6% from $739,072 to $675,835, primarily due to a $127,518 net
investment loss in the current period. However, partnership income increased
3.5% from $755,033 to $781,297, resulting in a decrease in net income of only
4.3% from $381,739 to $365,378.
The increase in partnership income is primarily attributable to a 7.4%
increase in garage rental income, while hotel rental income remained
relatively flat when compared to the very favorable third quarter of 1997.
The net investment loss reflects a write-down on one of the Company's
investments and management's continuing efforts to reposition the Company's
investment portfolio by selling certain of its underperforming securities.
The Company was successful in eliminating its margin positions by the end of
the quarter and management believes that this more conservative approach
should reduce the Company's overall investment risk in what has become a very
challenging and difficult global economic environment.
<PAGE> 10
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.
The modest increase in costs and expenses from $101,374 to $119,129 is
primarily attributable to margin interest and trading expenses in the amount
of $15,219 associated with the Company's investing activities and an increase
in professional and outside service fees, offset in part by an 11% decrease
in general and administrative expenses. The increase in professional, and
outside service fees from $24,549 to $35,499 reflects the accrual of annual
audit and professional fees for the current fiscal year. The decrease in
general and administrative expenses from $76,825 to $68,411 reflects cost
savings resulting from the consolidation of certain accounting and
administrative functions of the Company and its parent corporation, Santa Fe,
with the Los Angeles, California offices of InterGroup beginning July 1,
1998. Effective October 31, 1998, the Company and Santa Fe also terminated
their office lease and moved to a much smaller space, which should result in
additional cost savings.
Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997
Comparison of operating results for the nine months ended September 30, 1998
to the nine months ended September 30, 1997, shows that net income increased
10.3% from $897,619 to $990,059, resulting from a 12.8% increase in total
revenues, partially offset by a 22.2% increase in costs and expenses.
The 12.8% increase in total revenues from $1,848,837 to $2,085,696 was
primarily attributable to a 19.8% increase in partnership income from
$1,866,018 to $2,235,406, partially offset by a $40,319 decrease in dividend
and interest income and a $214,999 net investment loss during the nine month
period. The increase in partnership income is primarily attributable to an
increase in the average daily room rate without a significant reduction in
occupancy rates and greater garage lease income.
The decline in dividend and interest income and the net investment loss
reflects management's decision to reduce the size of the Company's investment
portfolio and eliminate its margin positions beginning in the second quarter.
The net investment loss also reflects a write-down on one of the Company's
investments and management's continuing efforts to reposition Company's
investment portfolio by selling certain of its underperforming securities.
The Company was successful in an eliminating its margin positions by the end
of the quarter and management believes that this more conservative approach
should reduce the Company's overall investment risk in what has become a very
challenging and difficult global economic environment.
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.
<PAGE> 11
The increase in costs and expenses from $349,356 to $426,789 is primarily
attributable to margin interest and trading expenses in the amount of $44,372
associated with the Company's investing activities, an increase in
professional and outside service fees and a 3.1% increase in general and
administrative expenses. The increase in professional, and outside service
fees from $106,015 to $131,527 primarily reflects the accrual of annual audit
and professional fees for the current fiscal year. The modest 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.
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 Felcor 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. In February 1998,
the general partners decided to continue monthly distributions at the higher
monthly rate for another year. The increases in monthly distributions were
clearly identified as special distributions and, at any time, unforeseen
circumstances could dictate a change in the amount distributed. The general
partners will continue to conduct an annual review and analysis to determine
an appropriate monthly distribution for the ensuing year. At that time, the
monthly distribution could be increased or decreased, especially if the
partnership was to participate financially in the future upgrading of the
public areas of the hotel.
As of June 30, 1998, the Company was successful in eliminating its margin
positions in its securities portfolio. As a result the Company's current
liabilities were reduced to $179,428 as of September 30, 1998 with current
assets of $1,072,069. The Company remains liquid with a current ratio of
approximately 6 to 1 at the end of the third quarter of 1998. Management
believes that its capital resources are currently adequate to meet its short-
and long-term obligations.
<PAGE> 12
YEAR 2000 ISSUES
The Company has been aware of the potential implications that the "Year 2000"
issue could have on its business and, as a result, has started the process of
determining what, if any, steps the Company must take to cure any computer
software or hardware problems associated with the year 2000. Based on
preliminary discussions with the Company's outside service providers and the
software and hardware vendors, the Company has determined that it should not
incur any material liability to upgrade computer software and hardware to
accommodate the year 2000. The Company expects to be fully year 2000
compliant by June of 1999.
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: November 13, 1998
by /s/ John V. Winfield
- -------------------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: November 13, 1998
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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 75850
<SECURITIES> 868197
<RECEIVABLES> 0
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1072069
<PP&E> 0
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<TOTAL-ASSETS> 3386629
<CURRENT-LIABILITIES> 179428
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 3386629
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</TABLE>
