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, 1999
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 Small Business Issuer 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) 673-4722
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, 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 2, 1999.
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--June 30, 1999 (Unaudited) 3
Statements of Income and Comprehensive Income
(Unaudited)--Three Months ended June 30, 1999
and 1998 4
Statements of Income and Comprehensive Income
(Unaudited)--Six Months ended June 30, 1999
and 1998 5
Statements of Cash Flow (Unaudited)--Six Months
ended June 30, 1999 and 1998 6
Notes to Financial Statements--June 30, 1999 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
<PAGE> 3
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
PORTSMOUTH SQUARE, INC.
BALANCE SHEET
(Unaudited)
As of June 30, 1999
------------
<S> <C>
Assets
Cash and cash equivalents $ 94,932
Investment in marketable securities 2,762,091
Investment in Justice Investors 2,535,115
Other investments 100,000
Other assets 345,428
----------
Total assets $ 5,837,566
==========
Liabilities and Shareholders' Equity
Liabilities
Due to securities broker $ 1,058,109
Obligations for securities sold 86,286
Income taxes payable 118,530
Accounts payable and accrued expenses 85,085
----------
Total liabilities 1,348,010
----------
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
Accumulated other comprehensive income,
net of deferred taxes 72,905
Retained earnings 1,408,675
----------
Total shareholders' equity 4,489,556
----------
Total liabilities and shareholders' equity $ 5,837,566
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
PORTSMOUTH SQUARE, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the three months ended June 30, 1999 1998
----------- -----------
<S> <C> <C>
Revenues
Equity in net income of Justice
Investors $ 961,284 $ 847,709
Dividend and interest income 48,758 6,455
Net losses on marketable securities (25,817) (164,021)
Other income 6,000 12,000
--------- ---------
990,225 702,143
--------- ---------
Cost and expenses
General and administrative 108,374 143,204
Margin interest expense 16,727 14,866
--------- ---------
125,101 158,070
--------- ---------
Income before income taxes 865,124 544,073
Income taxes 291,494 284,215
--------- ---------
Net income $ 573,630 $ 259,858
========= =========
Basic earnings per share $ 0.78 $ 0.35
========= =========
Weighted average number of
shares outstanding 734,183 734,183
========= =========
Comprehensive income
Net income $ 573,630 $ 259,858
Other comprehensive income:
Unrealized holding gain (loss) 149,948 (333,022)
on marketable securities
Reclassification adjustment for holding
loss included in net earnings 25,817 164,021
Income tax (expense) benefit related to
other comprehensive income (42,842) 95,149
--------- ---------
Total comprehensive income $ 706,553 $ 186,006
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
PORTSMOUTH SQUARE, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the six months ended June 30, 1999 1998
----------- -----------
<S> <C> <C>
Revenues
Equity in net income of Justice
Investors $1,525,683 $1,454,109
Dividend and interest income 79,465 25,233
Net gains (losses) on
marketable securities 86,834 (87,481)
Other income 18,000 18,000
--------- ---------
1,709,982 1,409,861
--------- ---------
Cost and expenses
General and administrative 240,901 278,516
Margin interest expense 30,610 29,153
--------- ---------
271,511 307,669
--------- ---------
Income before income taxes 1,438,471 1,102,192
Income taxes 489,080 477,511
--------- ---------
Net income $ 949,391 $ 624,681
========= =========
Basic earnings per share $ 1.29 $ 0.85
========= =========
Weighted average number of
shares outstanding 734,183 734,183
========= =========
Comprehensive income
Net income $ 949,391 $ 624,681
Other comprehensive income:
Unrealized holding gain (loss)
on marketable securities 294,724 (177,029)
Reclassification adjustment for holding
(gain) loss included in net earnings (86,834) 87,481
Income tax benefit (expense) related to
other comprehensive income (84,207) 50,580
--------- ---------
Total comprehensive income $1,073,074 $ 585,713
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
<TABLE>
<CAPTION>
PORTSMOUTH SQUARE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended June 30, 1999 1998
------------ ------------
<S> <C> <C>
Operating activities
Net income $ 949,391 $ 624,681
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in net income of Justice Investors (1,525,683) (1,454,109)
Net (gains) losses on marketable securities (86,834) 87,481
Changes in assets and liabilities:
Income tax payable 118,530 -
Other assets (55,509) 54,129
Accounts payable and accrued expenses 19,260 (10,720)
---------- ----------
Net cash used in operating activities (580,845) (698,538)
---------- ----------
Investing activities
Cash distributions from Justice Investors 836,640 836,640
Decrease in notes receivable - 60,000
Purchase of marketable securities (1,915,592) (2,937,547)
Proceeds from sales of marketable securities 1,751,063 3,928,940
Purchase of other investments - (100,000)
---------- ----------
Net cash provided by investing activities 672,111 1,788,033
---------- ----------
Financing activities
Increase (decrease) in due to securities broker 39,330 (664,211)
Increase obligations for securities sold 73,416 -
Dividends paid (183,546) (183,546)
---------- ----------
Net cash used in financing activities (70,800) (847,757)
---------- ----------
Net increase in cash and cash
equivalents 20,466 241,738
Cash and cash equivalents at the beginning
of the period 74,466 56,348
---------- ----------
Cash and cash equivalents at the end of the
period $ 94,932 $ 298,086
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
PORTSMOUTH SQUARE, INC.
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.
Certain reclassifications have been made to the financial statements as of June
30, 1999 and for the six months then ended to conform with the current quarter
presentation.
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, 1998.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1999.
2. Investment in Justice Investors
-------------------------------
The Company's principal source of revenue continues to be derived from its 49.8%
interest in the Justice Investors limited partnership ("Justice Investors").
Portsmouth serves as one of the two general partners of Justice Investors. The
partnership derives most of its income from a lease of its San Francisco,
California hotel property to Felcor Lodging Trust, Inc. ("Felcor") and from a
lease with Evon Garage Corporation ("Evon"). Portsmouth records its investment
on the equity basis.
<PAGE> 8
Condensed financial statements for Justice Investors are as follows:
JUSTICE INVESTORS
CONDENSED BALANCE SHEET
June 30, 1999
--------------
Assets
Total current assets $1,153,482
Property, plant and equipment, net of
accumulated depreciation of $11,182,242 5,389,139
Loan fees and deferred lease costs,
net of accumulated amortization of $102,739 178,109
---------
$6,720,730
=========
Liabilities and partners' equity
Total current liabilities $ 32,843
Long-term debt 500,000
Partners' equity 6,187,887
Total liabilities and ---------
partners' equity $6,720,730
=========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For the six months ended June 30, 1999 1998
---------- ----------
Revenues $3,500,010 $3,429,431
Costs and expenses 436,388 509,533
--------- ---------
Net income $3,063,622 $2,919,898
========= =========
3. Related Party Transactions
--------------------------
Certain shared costs and expenses, primarily administrative salaries, rent and
insurance are allocated among the Company, the Company's parent, Santa Fe
Financial Corporation ("Santa Fe"), and The InterGroup Corporation
("InterGroup"), parent of Santa Fe, based on management's estimate of the pro
rata utilization of resources. For the six months ended June 30, 1999, these
expenses were approximately $43,350.
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
<PAGE> 9
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, 1998, that could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, 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 of its hotel property to Felcor and from a lease with
Evon Garage Corporation.
Three Months Ended June 30, 1999 Compared to Three Months
Ended June 30, 1998
Comparison of operating results for the three months ended June 30, 1999 to
the three months ended June 30, 1998, shows that net income increased
approximately 121% to $573,630 from $259,858, resulting from a 41% increase in
total revenues and 20.9% decrease in costs and expenses.
<PAGE> 10
The 41% increase in total revenues to $990,225 from $702,143 was primarily
attributable to a 13.4% increase in partnership income, an increase in dividend
and interest income to $48,758 from $6,455 and a decrease in losses on
marketable securities to $25,817 from $164,021. The increase in dividend and
interest income and the reduction of losses on marketable securities reflects
management's efforts to reposition the Company's investment portfolio. The
increase in partnership income is attributable to greater hotel rental income,
primarily as a result of higher room rates, and to increased garage rental
income.
Realized gains and losses on marketable securities 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 gain or loss on
marketable securities for any given period may have no predictive value and
variations in amount from period to period may have no analytical value.
The 20.9% decrease in costs and expenses to $125,101 from $158,070 primarily
reflects a 24.3% savings in general and administrative expenses due to the
consolidation of certain accounting and administrative functions of the Company
and Santa Fe to the Los Angeles, California offices of Santa Fe's parent
corporation, InterGroup, and by moving to a much smaller office space.
Six Months Ended June 30, 1999 Compared to Six Months
Ended June 30, 1998
Comparison of operating results for the six months ended June 30, 1999 to
the six months ended June 30, 1998, shows that net income increased
approximately 52% to $949,391 from $624,681, resulting from a 21.3% increase in
total revenues and 11.8% decrease in costs and expenses.
The 21.3% increase in total revenues to $1,719,982 from $1,409,861 was
attributable to a 4.9% increase in partnership revenues to $1,525,683 from
$1,454,109, an increase in dividend income to $79,465 from $25,233 and net gains
on marketable securities of $86,834 as compared to net losses of $87,481 during
the first six months of 1998. The increase in partnership income was primarily
attributable to a an increase in garage rental income and a small increase in
hotel rental income which was impacted by the loss of meeting rooms and other
revenues while the common areas of the hotel were being renovated in January and
February 1999. The increase in dividend and interest income and net gains on
marketable securities reflects management's efforts to reposition the Company's
investment portfolio.
Realized gains and losses on marketable securities 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 gain or loss on
marketable securities for any given period may have no predictive value and
variations in amount from period to period may have no analytical value.
The 11.8% decrease in costs and expenses to $271,511 from $307,669 primarily
reflects a 13.5% savings in general and administrative expenses due to the
consolidation of certain accounting and administrative functions of the Company
and Santa Fe to the Los Angeles, California offices of Santa Fe's parent
corporation, InterGroup, and by moving to a much smaller office space.
<PAGE> 11
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. 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. The general partners
decided to continue monthly distributions at the higher monthly rate for 1998
and 1999. 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. For the six months ended June 30, 1999, the Company received cash
distributions of $836,640 from Justice Investors.
The Company has invested in short-term, income-producing instruments and in
equity and debt securities when deemed appropriate. The Company's marketable
securities are classified as available-for-sale and unrealized gains and losses,
net of deferred taxes, are included in accumulated other comprehensive income.
As of June 30, 1999, the Company had gross unrealized gains of $354,440 and
gross unrealized losses of $257,965 on marketable securities.
At June 30, 1999, the Company's current assets were $3,302,450. The
Company remains liquid with a current ratio of approximately 2.5 at the
end of the second quarter of 1999. Management believes that its capital
resources are currently adequate to meet its short- and long-term obligations.
YEAR 2000 ISSUES
The Company is aware of the potential implications that the year 2000 ("Y2K")
issue could have on its business and as a result, is in the process of
determining what, if any, steps the Company must take to cure any potential
software or hardware problems associated with Y2K. The Company has hired
professional outside consultants to assist it in addressing its Y2K needs. The
Company's plans include upgrading existing software applications to make them
Y2K compliant, replacing some hardware required by software upgrades, purchasing
new computer hardware and upgrading its computer network and communication
systems. The Company has also contacted its suppliers of various services and
materials regarding their readiness and plans for Y2K.
Based on discussions with the Company's outside consultants, service providers
and software and hardware vendors, the Company has determined that its systems,
both information technology and non-information technology, are not reasonably
likely to be impacted by Y2K and that the costs to complete the Y2K compliance
will not have a material effect on the Company's financial position or results
of operations. Management expects to be Y2K compliant by September 30, 1999.
<PAGE> 12
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 4, 1999,
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 the Company to
serve until the next Annual Meeting. The shareholders also voted to ratify
the appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants for the year ending December 31, 1999. A tabulation of the votes at
that meeting for each of those proposals was reported in the Company's Form 10-
QSB for the quarterly period ended March 31, 1999.
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: August 2, 1999 by /s/ John V. Winfield
---------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: August 2, 1999 by /s/ David Nguyen
--------------------------
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENT OF INCOME AND COMPREHENSIVE INCOME OF
PORTSMOUTH SQUARE, INC. SET FORTH IN ITS FORM 10-QSB REPORT FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-QSB REPORT.
</LEGEND>
<CIK> 0000079661
<NAME> PORTSMOUTH SQUARE, INC.
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 94932
<SECURITIES> 2862091
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3302450
<PP&E> 0
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<TOTAL-ASSETS> 5837566
<CURRENT-LIABILITIES> 1348010
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0
0
<COMMON> 2092300
<OTHER-SE> 2397256
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</TABLE>
