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 March 31, 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 May 10, 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--March 31, 1999 (Unaudited) 3
Statements of Income and Comprehensive Income
(Unaudited)--Three Months ended March 31, 1999
and 1998 4
Statements of Cash Flow (Unaudited)--Three Months
ended March 31, 1999 and 1998 5
Notes to Financial Statements--March 31, 1999 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 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
PORTSMOUTH SQUARE, INC.
BALANCE SHEET
(Unaudited)
As of March 31, 1999
------------
<S> <C>
Assets
Cash and cash equivalents $ 176,037
Investment in marketable securities 2,231,907
Investment in Justice Investors 1,992,151
Other investments 100,000
Other assets 337,254
----------
Total assets $ 4,837,349
==========
Liabilities and Shareholders' Equity
Liabilities
Due to securities broker $ 809,223
Income taxes payable 134,422
Accounts payable and accrued expenses 63,226
Due to Santa Fe Financial Corp. 15,963
Obligations for securities sold 31,512
----------
Total liabilities 1,054,346
----------
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 (60,017)
Retained earnings 835,044
----------
Total shareholders' equity 3,783,003
----------
Total liabilities and shareholders' equity $ 4,837,349
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
PORTSMOUTH SQUARE, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For three months ended March 31, 1999 1998
----------- -----------
<S> <C> <C>
Revenues
Equity in net income of Justice
Investors $ 564,399 $ 606,400
Dividend and interest income 30,707 18,778
Net gains on marketable securities 112,651 76,540
Other income 12,000 6,000
--------- ---------
719,757 707,718
--------- ---------
Cost and expenses
General and administrative 69,161 84,760
Professional and outside services 63,366 50,552
Margin interest expense 13,883 14,287
--------- ---------
146,410 149,599
--------- ---------
Income before income taxes 573,347 558,119
Income taxes 197,586 193,296
--------- ---------
Net income $ 375,761 $ 364,823
========= =========
Basic earnings per share $ 0.51 $ 0.50
========= =========
Weighted average number of
shares outstanding 734,183 734,183
========= =========
Comprehensive income
Net income $ 375,761 $ 364,823
Other comprehensive income:
Unrealized holding gain (loss)
on marketable securities (170,647) (58,318)
Reclassification adjustment for holding
gain (loss) included in net earnings 112,651 76,540
Income tax benefit (expense) related to
other comprehensive income 48,756 16,662
--------- ---------
Total comprehensive income $ 366,521 $ 399,707
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
PORTSMOUTH SQUARE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended 1999 1998
------------ ------------
<S> <C> <C>
Operating activities
Net income $ 375,761 $ 364,823
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in net income of Justice Investors (564,399) (606,400)
Net gains on marketable securities (112,651) (76,540)
Changes in assets and liabilities:
Income tax payable 134,422 -
Other assets (60,001) 13,628
Due to Santa Fe Financial Corporation 28,629 15,253
Accounts payable and accrued expenses (2,599) 96,436
---------- ----------
Net cash used in operating activities (200,838) (192,800)
---------- ----------
Investing activities
Cash distributions from Justice Investors 418,320 418,320
Purchase of marketable securities (701,888) (1,791,597)
Proceeds from sales of marketable securities 960,437 1,577,812
Purchase of other investments - (75,000)
---------- ----------
Net cash provided by investing activities 676,869 129,535
---------- ----------
Financing activities
Increase (decrease) in due to securities broker (209,556) 237,772
Obligations for securities sold 18,642 -
Dividends paid (183,546) (183,546)
---------- ----------
Net cash (used in) provided by financing
activities (374,460) 54,226
---------- ----------
Net increase (decrease) in cash and cash
equivalents 101,571 (9,039)
Cash and cash equivalents at the beginning
of the period 74,466 56,348
---------- ----------
Cash and cash equivalents at the end of the
period $ 176,037 $ 47,309
========== ==========
</TABLE>
See accompanying 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.
Certain reclassifications have been made to the financial statements as of
March 31, 1999 and for the three 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 three months ended March 31, 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 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.
<PAGE> 7
Condensed financial statements for Justice Investors are as follows:
JUSTICE INVESTORS
CONDENSED BALANCE SHEET
March 31, 1999
--------------
Assets
Total current assets $ 550,425
Property, plant and equipment, net of
accumulated depreciation of $11,093,009 5,482,674
Loan fees and deferred lease costs,
net of accumulated amortization of $124,543 185,869
---------
$6,218,968
=========
Liabilities and partners' equity
Total current liabilities $ 21,371
Long-term debt 1,100,000
Partners' equity 5,097,597
Total liabilities and ---------
partners' equity $6,218,968
=========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For three months ended March 31, 1999 1998
---------- ----------
Revenues $1,358,686 $1,495,605
Costs and expenses 225,354 277,934
--------- ---------
Net income $1,133,332 $1,217,671
========= =========
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 three months ended March 31, 1999,
these expenses were approximately $58,891.
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
<PAGE> 8
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 March 31, 1999 Compared to Three Months
Ended March 31, 1998
Comparison of operating results for the three months ended March 31, 1999 to
the three months ended March 31, 1998, shows that net income increased
approximately 3%, resulting from a 1.7% increase in total revenues and 2.1%
decrease in costs and expenses.
The 1.7% increase in total revenues from $707,718 to $719,757 was primarily
attributable to a 47% increase in net gains on marketable securities from
$76,540 to $112,651, a 63.5% increase in dividend and interest income from
<PAGE> 9
$18,778 to $30,707, partially offset by a 7% decline in partnership income from
Justice Investors from $606,400 to $564,399. The increase in dividend and
interest income and net gains on marketable securities reflects management's
efforts to reposition the Company's investment portfolio. The decrease in
partnership income was primarily attributable to a 14.6% decrease in hotel
rental income due to the loss of meeting room and other revenues while the
common areas of the hotel were being renovated in January and February 1999.
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 decrease in costs and expenses from $149,599 to $146,410 primarily reflects
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.
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 three months ended March 31, 1999, the
Company received cash distributions of $418,320 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 March 31, 1999, the Company had a gross unrealized gains of
$50,333 and gross unrealized losses of $150,361 on marketable securities.
At March 31, 1999, the Company's current assets were $2,845,198. The
Company remains liquid with a current ratio of approximately 2.7 at the
end of the first quarter of 1999. Management believes that its capital
resources are currently adequate to meet its short- and long-term obligations.
<PAGE> 10
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 preliminary 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.
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 Portsmouth 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 vote
follows:
Proposal (1) - Directors: Votes For Against Abstained
--------- ------- ---------
John V. Winfield 576,633 - 2,043
Jerold R. Babin 577,633 - 1,043
Josef A. Grunwald 576,630 - 2,046
John C. Love 576,630 - 2,046
William J. Nance 576,630 - 2,046
Proposal (2) Accountants:
PricewaterhouseCoopers LLP 578,358 3 315
<PAGE> 11
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: May 11, 1999 by /s/ John V. Winfield
---------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: May 11, 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 MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-QSB REPORT.
</LEGEND>
<CIK> 0000079661
<NAME> PORTSMOUTH SQUARE, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 176037
<SECURITIES> 2231907
<RECEIVABLES> 100000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2845198
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4837349
<CURRENT-LIABILITIES> 1054346
<BONDS> 0
0
0
<COMMON> 2092300
<OTHER-SE> 1690703
<TOTAL-LIABILITY-AND-EQUITY> 4837349
<SALES> 564399
<TOTAL-REVENUES> 719757
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 146410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 573347
<INCOME-TAX> 197586
<INCOME-CONTINUING> 375761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375761
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
