<PAGE>
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 June 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 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: 734,183 shares of issuer's
No Par Value Common Stock were outstanding as of August 10, 1998.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Page 1 of 13
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INDEX
PORTSMOUTH SQUARE, INC.
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Balance Sheet--June 30, 1998 (Unaudited) 3
Statements of Income (Unaudited)--Three Months
ended June 30, 1998 and 1997 and for the Six Months
ended June 30, 1998 and 1997 4
Statement of Cash Flows (Unaudited)--Six Months
ended June 30, 1998 and 1997 5
Notes to Financial Statements--June 30, 1998 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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Page 2 of 13
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PORTSMOUTH SQUARE, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1998
------------
<S> <C>
Assets
Cash and cash equivalents $ 298,086
Investment in marketable securities 733,561
Investment in Justice Investors 1,951,583
Other investments 187,500
Note receivable -
Other assets 135,824
----------
Total assets $ 3,306,554
==========
Liabilities and Shareholders' Equity
Due to securities broker $ -
Accounts payable and accrued expenses 32,257
Due to Santa Fe Financial Corp. 51,612
Other liabilities 117,299
----------
Total liabilities 201,168
----------
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
Retained earnings 39,902
Unrealized gain on investment securities,
net of deferred taxes 57,508
----------
Total shareholders' equity 3,105,386
----------
Total liabilities and shareholders' equity $ 3,306,554
==========
</TABLE>
See accompanying notes.
Page 3 of 13
<PAGE>
PORTSMOUTH SQUARE, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended June 30 Six Months ended June 30
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Equity in net income of Justice
Investors $ 847,709 $ 611,273 $ 1,454,109 $ 1,110,985
Dividend and interest income 6,455 33,430 25,233 65,552
Net investment gain (loss) (164,021) (60,535) (87,481) (78,772)
Other income 12,000 6,000 18,000 12,000
--------- --------- --------- ---------
702,143 590,168 1,409,861 1,109,765
--------- --------- --------- ---------
Cost and expenses:
General and administrative 97,728 90,422 182,488 166,516
Professional and outside services 45,476 27,397 96,028 81,466
Margin interest expense 14,866 - 29,153 -
--------- --------- --------- ---------
158,070 117,819 307,669 247,982
--------- --------- --------- ---------
Income before income taxes 544,073 472,349 1,102,192 861,783
Income taxes 284,215 189,591 477,511 345,903
--------- --------- --------- ---------
Net income $ 259,858 $ 282,758 $ 624,681 $ 515,880
========= ========= ========= =========
Basic earnings per share $ 0.35 $ 0.38 $ 0.85 $ 0.69
========= ========= ========= =========
Dividends per share $ - $ - $ 0.25 $ 0.25
========= ========= ========= =========
Weighted average number of
shares outstanding 734,183 748,328 734,183 748,328
========= ========= ========= =========
Comprehensive income:
Net income $ 259,858 $ 282,758 $ 624,681 $ 515,880
Unrealized (losses) gains on
securities arising during
period, net of taxes (73,852) 68,952 (38,968) 45,984
--------- --------- -------- --------
$ 186,006 $ 351,710 $ 585,713 $ 561,864
========= ========= ======== ========
</TABLE>
See accompanying notes.
Page 4 of 13
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PORTSMOUTH SQUARE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended June 30,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Net income $ 624,681 $ 515,880
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in net income of Justice Investors (1,454,109) (1,110,985)
Changes in assets and liabilities:
Other assets 20,020 (185)
Deferred taxes and taxes payable - (44,239)
Due to Santa Fe Financial Corporation 34,109 -
Accounts payable and other liabilities (10,720) 25,322
---------- ----------
Net cash used in operating activities (786,019) (614,207)
---------- ----------
Investing activities
Cash distributions from Justice Investors 836,640 806,281
Decrease in notes receivable 60,000 -
Purchases of investment securities (2,937,547) (1,120,576)
Purchase of other investments (100,000) (100,000)
Proceeds from sales of investment securities 4,016,421 1,010,556
---------- ----------
Net cash provided by investing activities 1,875,514 596,261
---------- ----------
Financing activities
Increase (decrease)in amounts due broker (664,211) 479,135
Purchase and retirement of common stock - (102,645)
Dividends paid (183,546) (187,500)
---------- ----------
Net cash provided by (used in) financing
activities (847,757) 188,990
---------- ----------
Net increase in cash and cash
equivalents 241,738 171,044
Cash and cash equivalents at the beginning
of the year 56,348 21,225
---------- ----------
Cash and cash equivalents at the end of the
period $ 298,086 $ 192,269
========== ==========
</TABLE>
See accompanying notes.
Page 5 of 13
<PAGE>
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 six months ended June 30, 1998 are not
necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1998.
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS No. 129") issued by the FASB is effective for
financial statements with fiscal years ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principals Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company does not expect the adoption of SFAS
No. 129 to have a material effect on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. The Company has adopted SFAS No. 130.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial statements beginning after December 15, 1997. The new
standard requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. The Company does not expect the adoption of SFAS No. 131 to have
a material effect on its financial position or results of operations.
Page 6 of 13
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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>
JUNE 30, 1998
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<S> <C>
Assets
Total current assets $1,125,645
Property, plant and equipment, net of
accumulated depreciation of $10,803,334 5,772,348
Loan fees and deferred lease costs,
net of accumulated amortization of $101,262 209,151
---------
$7,107,144
=========
Liabilities and partners' capital
Total current liabilities $ 79,372
Long-term debt 2,011,634
Partners' capital 5,016,138
Total liabilities and ---------
partners' capital $7,107,144
=========
</TABLE>
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
--------- ----------
<S> <C> <C>
Revenues $3,429,431 $2,762,573
Costs and expenses 509,533 540,717
--------- ---------
Net income $2,919,898 $2,221,856
========= =========
</TABLE>
Page 7 of 13
<PAGE>
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
During 1996, the Company was served with a personal injury action in the San
Francisco Superior Court. The suit named 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 sought an
unspecified amount of damages. Portsmouth was defended by an insurance carrier
under a reservation of rights. During 1997, the trial court granted
Portsmouth's motion for summary judgment, which became final on April 13, 1998.
No appeal from that judgment was taken.
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 six months ended June 30, 1998, the Company also made
payments to The InterGroup Corporation ("InterGroup") in the amount of $25,588
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. 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.
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
Page 8 of 13
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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 JUNE 30, 1998 COMPARED TO THREE MONTHS
ENDED JUNE 30, 1997
Comparison of operating results for the three months ended June 30, 1998 to
the three months ended June 30, 1997, shows that total revenues increased 19%
from $590,168 to $702,143, primarily due to a 38.7% increase in partnership
income from $611,273 to $847,709, partially offset by a $164,021 net investment
loss. That net investment loss, and higher taxes associated with the increase
in operating income, were the primary factors that resulted in a 8.1% decrease
in net income.
The increase in partnership income is primarily attributable to a 27% increase
in hotel rental income as a result of an increase in the average daily room rate
without a significant reduction in occupancy rates. The net investment loss
reflects management's decision to prune the Company's investment portfolio of
certain of its underperforming securities in an effort to eliminate its margin
positions by the end of the quarter. 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 and
should result in future savings in margin interest expenses. As of June 30,
1998, the Company still showed a net unrealized gain on investments of $57,508,
after tax, which is included in shareholders' equity.
The increase in costs and expenses from $117,819 to $158,070 is primarily
attributable to margin interest and trading expenses in the amount of $14,866
associated with the Company's investing activities and an increase in
professional and outside service fees. The increase in professional, and
outside service fees from $27,397 to $45,476 reflects the accrual of annual
audit and professional fees for the current fiscal year. The modest increase in
general and administrative expenses from $90,422 to $97,728 primarily reflects
severance pay to certain staff employees. 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 InterGroup. InterGroup presently controls more than 50% of the voting power
of Santa Fe. It is expected that the Company will continue to maintain a
corporate presence in San Diego, California, but on a reduced basis.
Page 9 of 13
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
Comparison of operating results for the six months ended June 30, 1998 to
the six months ended June 30, 1997, shows that net income increased 21%,
resulting from a 27.% increase in total revenues, partially offset by a 24.1%
increase in costs and expenses.
The 27% increase in total revenues from $1,109,765 to $1,409,861 was primarily
attributable to a 30.9% increase in partnership income, partially offset by a
$40,319 decrease in dividend and interest income and a $87,481 net investment
loss. The increase in partnership income is primarily attributable to an
increase in the average daily room rate without a significant reduction in
occupancy rates.
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 in the second quarter. 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 and should result in future savings in margin interest
expenses. As of June 30, 1998, the Company still showed a net unrealized gain
on investments of $57,508, after tax, which is included in shareholders' equity.
The increase in costs and expenses from $247,982 to $307,669 is primarily
attributable to margin interest and trading expenses in the amount of $29,153
associated with the Company's investing activities and modest increases in
professional and outside service fees and general and administrative expenses
which reflect 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 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. 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.
Page 10 of 13
<PAGE>
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 June 30, 1998, the Company was
successful in eliminating its margin positions and, as a result, has reduced its
current liabilities to $201,168 while increasing its cash position to $298,086.
As of June 30, 1998, the Company also had a net unrealized gain on investments
of $57,508 after tax, which consists of pre-tax unrealized gains of $173,982 and
pre-tax unrealized losses of $77,915.
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.
At June 30, 1998, the Company's current assets were $1,354,971. The
Company remains liquid with a current ratio of approximately 6.7 to 1 at the
end of the second quarter of 1998. Management believes that its capital
resources are currently adequate to meet its short- and long-term obligations.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 5, 1998,
at the Park Hyatt Hotel in Los Angeles, California. At that meeting all of
management's nominees, John V. Winfield, Jerold R. Babin, Josef A. Grunwald,
John C. Love and William J. Nance were elected Directors of Portsmouth to serve
until the next Annual Meeting. The shareholders also voted to ratify the
appointment of Price Waterhouse LLP as the Company's independent accountants for
the year ending December 31, 1998. A tabulation of the vote at that meeting was
previously reported on Registrant's Form 10-QSB for the quarterly period ended
March 31, 1998.
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.
Page 11 of 13
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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: August 14, 1998
by /s/ John V. Winfield
- -------------------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: August 14, 1998
by /s/ L. Scott Shields
- -------------------------------------
L. Scott Shields, Treasurer
and Chief Financial Officer
Page 12 of 13
<TABLE> <S> <C>
<PAGE>
<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 JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH 10-QSB REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 298,086
<SECURITIES> 733,561
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,354,971
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,306,554
<CURRENT-LIABILITIES> 201,168
<BONDS> 0
0
0
<COMMON> 2,092,300
<OTHER-SE> 1,013,086
<TOTAL-LIABILITY-AND-EQUITY> 3,306,554
<SALES> 1,454,109
<TOTAL-REVENUES> 1,409,861
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 307,669
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,102,192
<INCOME-TAX> 477,511
<INCOME-CONTINUING> 624,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 624,681
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
