<PAGE>
FORM-10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
--------------------------------------------------
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------------
Commission file number 33-15932
---------------------------------------------------------
SOUTHMARK SAN JUAN, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 71-2132723
- ----------------------------------------- -----------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ISLA VERDE AVENUE, CAROLINA, PUERTO RICO 00979
- ----------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (809) 791-6100
-----------------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----------- ----------
Indicate the number of shares of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 24, 1997
- ----------------------------------- --------------------------------
COMMON STOCK, $0.001 PAR VALUE 262,680 SHARES
1
<PAGE>
PART I: FINANCIAL INFORMATION
- ------------------------------
Introductory Note to Financial Statements
- -----------------------------------------
The financial statements as of September 30, 1996, and for the three months
ended September 30, 1996 and 1995 have been prepared by Southmark San Juan, Inc.
(the"Company") without audit, pursuant to the rules and regulations of the
Securities and Exchanges Commission. In the opinion of management, these
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1996, results of its operation for the three months
ended September 30, 1996 and 1995 and its cash flows for the three months ended
September 30, 1996 and 1995.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1996 Annual Report on Form 10-K.
The Company's principal operating asset is the Sands Hotel and Casino
located in San Juan, Puerto Rico (the"Sands San Juan"). Historically, the Sands
San Juan's operation have been highly seasonal in nature, with peak activity
occurring from December to April; consequently, the results of operations for
the three month period ending September 30 are not necessarily indicative of the
operating results for a full year.
2
<PAGE>
SOUTHMARK SAN JUAN, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 480,000 $ 536,000
Certificates of deposit - 2,150,000
Accounts receivable, net of allowances for uncollectible
accounts of $319,000 and $304,000, respectively 1,414,000 1,585,000
Inventories 512,000 509,000
Prepaid expenses and other current assets 1,138,000 274,000
----------- -----------
Total current assets 3,544,000 5,054,000
----------- -----------
Property and equipment:
Land 4,543,000 4,543,000
Buildings 33,682,000 33,682,000
Furniture and equipment 9,962,000 9,901,000
----------- -----------
48,187,000 48,126,000
Less - accumulated depreciation and amortization 18,686,000 18,290,000
----------- -----------
Net property and equipment 29,501,000 29,836,000
----------- -----------
$33,045,000 $34,890,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
3
<PAGE>
SOUTHMARK SAN JUAN, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,260,000 $ 1,251,000
Accrued interest 541,000 2,120,000
Accrued liabilities 2,066,000 2,020,000
Obligation under capital lease 48,000 48,000
------------ ------------
Total current liabilities 4,915,000 5,439,000
------------ ------------
Long term liabilities:
Accrued interest 606,000 1,063,000
Obligations under capital lease 78,000 107,000
Senior Secured Industrial Revenue Bonds,
1992 series A:
Class A, maturing December 1, 1997 11,727,000 11,727,000
Class B, maturing December 1, 1997
through 2001 19,257,000 19,257,000
Senior Secured PIK Bonds 2,281,000 1,628,000
Term Note 3,000,000 3,000,000
Deferred Incentive Fees 1,503,000 1,505,000
------------ ------------
Total long term liabilities 38,452,000 38,287,000
------------ ------------
Shareholders' deficit:
Common stock, $0.001 par value per share;
992,000 shares authorized; 262,680
shares issued and outstanding - -
Additional paid in-capital 27,763,000 27,763,000
Accumulated deficit (38,085,000) (36,599,000)
------------ ------------
Total shareholders' deficit (10,322,000) (8,836,000)
------------ ------------
$ 33,045,000 $ 34,890,000
============ ============
</TABLE>
The accompanying introductory notes and notes to
financial statements are an integral part of these balance sheets.
4
<PAGE>
SOUTHMARK SAN JUAN, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Rooms $ 2,606,000 $ 2,781,000
Casino 982,000 935,000
Food and beverage 863,000 1,164,000
Other 311,000 342,000
----------- -----------
4,762,000 5,222,000
Less - promotional allowances (137,000) (151,000)
----------- -----------
Net revenues 4,625,000 5,071,000
----------- -----------
Departmental Expenses:
Rooms 909,000 886,000
Casino 765,000 800,000
Food and Beverage 954,000 1,018,000
Other 183,000 182,000
Depreciation and amortization 436,000 396,000
Interest 738,000 736,000
General and administrative 2,133,000 2,357,000
----------- -----------
Total expenses 6,118,000 6,375,000
----------- -----------
Net profit (loss) $(1,493,000) $(1,304,000)
=========== ===========
Net loss per common and common equivalent share $ (5.68) $ (4.96)
=========== ===========
Weighed average number of common and common
equivalent shares outstanding 262,680 262,680
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
5
<PAGE>
SOUTHMARK SAN JUAN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,493,000) $(1,304,000)
Adjustments to reconcile net cash to net cash used in
operating activities
Depreciation and amortization 396,000 396,000
Provision for doubtful accounts 17,000 9,000
Increase in accounts receivable 153,000 113,000
Increase in inventories, prepaid expenses and other
current assets (862,000) (792,000)
Increases in accounts payable, accrued liabilities,
and other liabilities (357,000) (869,000)
----------- -----------
Net cash used in operating activities (2,146,000) (2,447,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (60,000) (342,000)
----------- -----------
Increase (decrease) in cash and cash equivalents (2,206,000) (2,789,000)
Cash and cash equivalents, beginning of period 2,686,000 3,382,000
----------- -----------
Cash and cash equivalents, end of period $ 480,000 $ 593,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
6
<PAGE>
SOUTHMARK SAN JUAN, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Southmark San Juan, Inc. (the"Company"), a Delaware corporation, was
incorporated during April 1986 for the purpose of acquiring and renovating the
Sands Hotel and Casino in San Juan, Puerto Rico, (the "Sands San Juan"). The
Company's outstanding Common Shares are owned by Southmark Corporation
("Southmark"), (48.2%); SJPR Management, Inc. ("SJPR"), (46.3%); and bondholders
who have exercised warrants, (5.5%). SJPR is a wholly owned subsidiary of Pratt
Hotel Corporation ("Pratt"). The operations of the Sands San Juan are managed by
SJPR, Inc., also a wholly owned subsidiary of Pratt.
NOTE 2 - SENIOR SECURED INDUSTRIAL REVENUE BONDS, 1992 SERIES A
On December 1, 1992, the Company entered into a loan agreement with AFICA
for the issuance of $31,000,000 principal amount of Senior Secured Industrial
Revenue Bonds, 1992 Series A (the"Senior Secured Bonds") which, together with
warrants to acquire from 496,000 shares to 744,000 shares of the Company's
Common Stock, replaced previously issued Industrial Revenue Bonds, 1987 Series A
(the"Old Bonds") in the principal amount of $38,000,000 and related accrued
interest of $7,836,000. The Senior Secured Bonds are secured by a first mortgage
on the Sands San Juan and consist of $11,727,000 principal amount of Class A
Bonds which mature on December 1, 1997 and $19,257,000 principal amount of Class
B bonds which require principal payments of 10% of the outstanding balance
annually, beginning December 1, 1997 with the balance due December 1, 2001.
The Senior Secured Bonds bear interest at 8.5% of which 6.5% must be paid
annually in cash. The remaining 2.0% must be paid in cash to the extent there
exists Available Cash, as defined in the Trust Agreement. In the event that
Available Cash is insufficient to pay all or a portion of the 2.0% interest
annually, the insufficiency will be paid by the issuance of Senior Secured PIK
Bonds which bear interest at the same rate and terms and are secured by the same
collateral as the Senior Secured Bonds. The Company incurred $708,000 and
$693,000 of interest expense on the Senior Secured Bonds during the three month
periods ended September 30, 1996 and 1995, respectively.
Interest is payable semi-annually on July 31 and January 31. The Company
made the mandatory interest payments of $2,120,000 and $2,078,000 due on July
31, 1996 and 1995, respectively, but did not have sufficient Available Cash to
satisfy the remaining 2% of bond interest due and accordingly was obliged to
issue Senior Secured PIK Bonds in the amounts of $653,000 and $639,000 at July
31, 1996 and 1995, respectively. The related accrued interest converted into
Senior Secured PIK Bonds has been classified as accrued interest as of June 30,
1996 under long-term liabilities on the accompanying balance sheets. No interest
payments were made on January 31, 1996 or 1995, based upon the Available Cash
restrictions, as defined in the Trust Agreement.
Warrants to acquire 496,000 shares of Common Stock were issued to
bondholders upon execution of the Senior Secured Bonds and warrants to acquire
248,000 shares of Common Stock (the"Escrowed Warrants") were escrowed with the
trustee for the Senior Secured Bonds.
On June 1, 1996, holders of the Senior Secured Bonds received Escrowed
Warrants to acquire, in the aggregate, an additional 99,200 shares of Common
Stock as no Redemption, as defined, had occurred with respect to all Senior
Secured Bonds, Senior Secured PIK Bonds and the Warrants.
7
<PAGE>
SOUTHMARK SAN JUAN, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SENIOR SECURED INDUSTRIAL REVENUE BONDS, 1992 SERIES A (CONTINUED)
Due to the sale of the Sands San Juan as described in Note 6, which
constitutes a Redemption, the remaining 148,800 Escrowed Warrants will be
returned to the Company.
NOTE 3 - TERM NOTE
On December 1, 1992, the Company executed a $3,000,000 Term Note with a
Puerto Rico bank, secured by a second mortgage on the Sands San Juan and
maturing on November 1, 1999, in exchange for a note payable in the principal
amount of $4,980,000 and related accrued interest of $692,000. The Term Note
bears interest initially at 3%, increasing to 6% effective November 1, 1997. The
company incurred $30,000 of interest expense on the Term Note during each of the
three month periods ended September 30, 1995 and 1994.
Accrued interest is payable semi-annually commencing July 31, 1993, to the
extent there exists Available Cash after payment of interest on the Senior
Secured Bonds and redemption of any outstanding Senior Secured PIK Bonds.
Available Cash, if any, remaining after payment of all accrued interest on the
Term Note must be used for redemption of the Senior Secured Bonds previously
described. No interest payments have been made on the Term Note due to the
Available Cash restrictions relating to the Senior Secured Bonds (Note 2).
NOTE 4 - INCOME TAXES
The Company has qualified for exemption from taxation by the Commonwealth
of Puerto Rico under the Tourism Incentive Act of 1983 (as amended). As a
result, for the first five years of operations, the Company is 90% exempt from
Puerto Rico income and property taxes attributable to its hotel operations
(reducing to a 75% exemption for the second five year period) and 100% of
municipal and excise taxes on its exempt functions. Income from casino
operations is not exempt from taxation.
The ten year tax exemption grant was effective beginning January 1, 1987,
except with respect to income tax, which effective date has not been elected by
the Company.
The Company's hotel and casino operations have incurred losses since
inception, accordingly, no income taxes have been provided for the three months
ended September 30, 1996 or 1995.
NOTE 5 - NET INCOME (LOSS) PER COMMON SHARE
Net income per common and common equivalent share is calculated using the
weighted average number of common shares outstanding and on the net additional
number of shares which would be issuable upon the exercise of stock warrants.
Such additional shares are not considered in the calculation of net loss per
share since the effect would be anti-dilutive.
8
<PAGE>
SOUTHMARK SAN JUAN, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - SALE OF SANDS SAN JUAN
On February 6, 1997, the Company consummated the sale of the Sands San Juan
and all related assets. As part of the transaction, the purchaser assumed or
discharged substantially all liabilities of the Company. Proceeds of the sale
consisted of (1) $20,599,356 principal amount of Senior Secured Bonds and Senior
Secured PIK Bonds tendered by the purchaser together with the $3,000,000 Term
Note; (2) $13,361,118 deposited with the Trustee of the Senior Secured Bonds to
discharge all remaining Senior Secured Bonds ($11,796,323) and Senior Secured
PIK Bonds ($868,077) at par plus interest accrued through the redemption date of
February 24, 1997; (3) $14,940 cash to the Company. Concurrently with the
foregoing transaction, SJPR, Inc. entered into an agreement with the purchaser
concerning modification and termination of its management agreement. SJPR, Inc.
received $1,475,000 as a termination fee and forgave outstanding incentive fees
amounting to $1,505,000 at December 31, 1996.
It is the Company's intention to liquidate within 180 days of consummation
of the sale of the Sands San Juan in accordance with the terms of its current
warrant agreement. As the Company only received approximately $15,000 in cash
proceeds, it is anticipated that the two major shareholders, SJPR and Southmark,
will be obliged to make additional capital contributions to wind up the affairs
of the Company. Accordingly, it is not anticipated that there will be any funds
available for a liquidating distribution to shareholders and warrant holders.
9
<PAGE>
SOUTHMARK SAN JUAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The company's primary source of liquidity and capital resources to
meet its debt service obligations and fund capital expenditures is cash flow
generated from operations of the Sands San Juan. Historically, the Sands San
Juan's cash flow results have been highly seasonal in nature, with peak activity
occurring from January to June; consequently the results for the three month
period ending September 30, 1996 are not necessarily indicative of the cash flow
results for a full year. During the first quarter of fiscal 1997, the company
funded capital additions of $60,000 and paid mandatory interest of 6.5% accrued
on the Senior Secured Bonds amounting to $2,120,000 from existing cash at June
30, 1996 and cash flow generated by operations.
The plan provides that the Senior Secured PIK Bonds may be issued for
annual bond interest up to a maximum of 2% in the event that Available Cash is
insufficient to pay such interest in cash. The company did not generate
sufficient Available Cash to require payment of the remaining 2% of bond
interest due. Accordingly, the company issued Senior Secured PIK Bonds in the
amount of $653,000 as payment in kind of the remaining bond interest on July 31,
1996. In addition, at July 31, 1996 no interest payment was made to the Term
Note holder based upon Available Cash restrictions.
On November 1, 1996, the Company entered into a contract for the sale
of all of its assets together with the assumption or discharge of substantially
all of its liabilities, including payment of all Senior Secured Bonds and Senior
Secured PIK Bonds not owned by the Purchaser at par plus accrued interest.
Concurrently, SJPR, Inc., the manager of the Sands San Juan, entered into an
agreement with the purchaser concerning modification and termination of the
management agreement.
On February 6, 1997, the foregoing transactions were consummated as
described in Note 6 and consequently, it is the Company's intention to liquidate
within 180 days of consummation in accordance with the terms of its current
Warrant agreement.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Hotel Operations
- ----------------
Room revenues $2,606,000 $2,781,000
Paid occupancy rate 60.80% 61.70%
Average daily rate $ 113.17 $ 118.25
Departmental expenses $ 909,000 $ 886,000
</TABLE>
Room revenues decreased by $175,000 (6.3%) during the three months
ended September 30, 1996 as compared to the same period in 1995, mainly due to a
$5.08 decrease in paid occupancy rate. In September the Island of Puerto Rico
sustained damages resulting from Hurricane Hortense. Although the hotel
suffered no physical damages the financial results were affected by the negative
publicity about Puerto Rico. The occupancy for the month of September included
a high percentage of rooms from federal
10
<PAGE>
SOUTHMARK SAN JUAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
emergency aid organizations such as the Small Business Administration and the
Federal Emergency Management Agency. These government agencies had a rate of
$96.
Departmental expenses for the month increased by $23,000 (2.6%).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
-------- ----------
<S> <C> <C>
Food and Beverage Operations
- ----------------------------
Food and beverage revenues $982,000 $1,164,000
Departmental expenses $954,000 $1,018,000
</TABLE>
Revenues decreased by $182,000 (15.6%) during the first quarter of
fiscal year 1996 as compared to the same period in 1995 primarily due to a
production decrease of the M.A.P. segment of the wholesale business and the
increase, due to Hurricane Hortense, in government business which produces a
lower food and beverage capture ratio.
Expenses decreased by $64,000 (6.2%) for the three month ended
September 30, 1996 as compared to the same period in 1995 as a result of the
decrease in revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
---------- ---------
<S> <C> <C>
Casino Operations
- -----------------
Table games:
Gross wagering $2,864,000 $2,826,000
Win Percentage 16.90% 18.30%
Revenues $ 485,000 $ 518,000
Slot machine revenues 378,000 417,000
Departmental expenses 765,000 800,000
Promotional allowances 137,000 151,000
</TABLE>
Gross table game revenues decreased $38,000 (6.3%) for the three month
period ended September 30, 1996 as compared to the same period in 1995, due to a
1.4% decline in gross wagering. Slot machine revenues decreased $39,000 (9.3%)
in the first quarter of fiscal 1997 as compared to the corresponding quarter of
fiscal 1996 due to the decrease in hotel occupancy and the increase of
government rooms.
Departmental expenses decreased by $35,000 (4.4%) for the three month
period ended September 30, 1996 as compared to the same period in 1995 due to
the reduction in revenues.
11
<PAGE>
SOUTHMARK SAN JUAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Promotional allowances represent the retail value of complimentary
goods and services provided to casino customers under various marketing
programs. These allowances decreased by $14,000 (9.3%) for the three month
period ended September 30, 1996 as compared to the same period in 1995 primarily
due to the decline in gross wagering.
12
<PAGE>
SOUTHMARK SAN JUAN, INC.
PART II: OTHER INFORMATION
- ---------------------------
No reports on Form 8-K were filed during the quarter.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHMARK SAN JUAN, INC.
------------------------
Registrant
Date: February 25, 1997 By: /s/ John C. Hull
---------------------- -------------------------
John C. Hull
Vice President and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHMARK SAN JUAN, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 480
<SECURITIES> 0
<RECEIVABLES> 1,733
<ALLOWANCES> 319
<INVENTORY> 512
<CURRENT-ASSETS> 3,544
<PP&E> 48,187
<DEPRECIATION> 18,686
<TOTAL-ASSETS> 33,045
<CURRENT-LIABILITIES> 4,915
<BONDS> 36,265
0
0
<COMMON> 0
<OTHER-SE> (10,322)
<TOTAL-LIABILITY-AND-EQUITY> 33,045
<SALES> 0
<TOTAL-REVENUES> 4,625
<CGS> 0
<TOTAL-COSTS> 2,794
<OTHER-EXPENSES> 2,569
<LOSS-PROVISION> 17
<INTEREST-EXPENSE> 738
<INCOME-PRETAX> (1,493)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,493)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,493)
<EPS-PRIMARY> (5.68)
<EPS-DILUTED> 0
</TABLE>
