<PAGE> 1
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, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from _______ to ________
Commission File Number 0-6877
SANTA FE FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 95-2452529
(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: 638,019 shares of issuer's
$.10 Par Value Common Stock were outstanding as of May 8, 1997.
Transitional Small Business Disclosure Format (check one): Yes No X
<PAGE> 2
INDEX
SANTA FE FINANCIAL CORPORATION
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet--March 31, 1997 (Unaudited) 3
Consolidated Statements of Income (Unaudited)--Three
Months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited)--
Three Months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements---March 31, 1997 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Santa Fe Financial Corporation
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
March 31
1997
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 204,676
Investment securities 9,250,738
Deferred income taxes 53,185
Current portion of notes receivable 12,250
Other current assets 105,152
-----------
Total currents assets 9,626,001
-----------
Investments:
Investment in Justice Investors 5,285,708
Other investments 2,431
-----------
5,288,139
-----------
Furniture and fixtures:
Furniture and fixtures 97,649
Less allowances for depreciation (84,106)
-----------
13,543
-----------
Other assets:
Notes receivable, less current portion 114,491
Deferred income taxes 3,788
-----------
118,279
-----------
Total assets $ 15,045,962
===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 226,670
Income taxes payable 128,998
Deferred income taxes 673
----------
Total current liabilities 356,341
----------
Minority interest 3,247,205
----------
Commitments and contingencies
Shareholders' equity:
Common stock - par value $.10 per share;
Authorized - 1,500,000
Issued & outstanding - 638,019 63,802
Additional paid-in capital 8,230,760
Unrealized gain on investment securities,
net of deferred taxes 1,242
Retained earnings 3,146,612
-----------
Total shareholders' equity 11,442,416
-----------
Total liabilities & shareholders' equity $ 15,045,962
===========
See accompanying notes.
</TABLE>
<PAGE> 4
Santa Fe Financial Corporation
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31
1997 1996
------ ------
<S> <C> <C>
Revenues:
Equity in net income of Justice
Investors $ 499,712 $ 332,619
Net Investment and interest income 195,242 99,294
Other income 28,176 29,048
--------- ---------
723,130 460,961
--------- ---------
Costs and expenses:
Litigation - GPG 149,945 68,531
General and administrative 159,162 101,007
Legal and professional 83,499 27,250
Depreciation 971 1,962
--------- ---------
393,577 198,750
--------- ---------
Income before income taxes
and minority interest 329,553 262,211
Income taxes 129,000 102,000
--------- ---------
Income before minority interest 200,553 160,211
Minority interest 83,691 64,057
--------- ---------
Net income $ 116,862 $ 96,154
========= =========
Net income per share $ 0.18 $ 0.17
========= =========
Weighted average shares
outstanding 638,019 567,799
========= =========
See accompanying notes.
</TABLE>
<PAGE> 5
Santa Fe Financial Corporation & Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION> Three Months ended March 31
1997 1996
----------- -----------
<S> <C> <C>
Operating Activities
Net income $ 116,862 $ 96,154
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in net income of limited partnership (499,712) (332,619)
Minority interest 83,691 64,057
Amortization of excess of market value
over carrying value of investment (22,176) (22,176)
Depreciation 972 1,962
Changes in operating assets and
liabilities:
Other current assets 64,615 20,266
Accounts payable and accrued expenses 124,981 2,772
Income taxes payable 50,858 20,797
---------- ----------
Net cash used in operating activities (79,909) (148,787)
---------- ----------
Investing Activities
Cash distributions from limited partnership 387,961 313,740
Purchase of investment securities (5,456,569) -
Proceeds from sale of investment securities 5,335,589 -
Purchase of property, furniture and fixtures - (3,392)
---------- ----------
Net cash provided by investing activities 266,981 310,348
---------- ----------
Financing Activities
Proceeds from sale of common stock, net - 2,430,000
Decrease in notes receivable 3,941 3,696
Dividends paid to Portsmouth Square, Inc.,
minority shareholders (67,311) (107,697)
Purchase of Portsmouth stock (46,377) -
---------- ----------
Net cash provided by (used in)
financing activities (109,747) 2,325,999
Increase in cash and
cash equivalents 77,325 2,487,560
---------- ----------
Cash and cash equivalents at
beginning of period 127,351 7,016,804
---------- ----------
Cash and cash equivalents at end of period $ 204,676 $ 9,504,364
========== ==========
See accompanying notes.
</TABLE>
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
---------------------------------------------------------
The consolidated financial statements included herein have been prepared by
Santa Fe Financial Corporation (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
consolidated 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-K for the year ended December 31, 1996.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, (Earnings per Share) which will be required to be adopted on
December 31, 1997. The impact of Statement 128 on the calculation of earnings
per share for these quarters is not expected to be material.
2. Litigation
----------
During January 1995, Santa Fe completed a private placement of 90,000 shares
of common stock and granted warrants for the purchase of an additional 90,000
shares for gross proceeds of $2,340,000. The underlying agreement also
granted certain additional rights to the acquiring company, The InterGroup
Corporation ("InterGroup"). The warrants were exercisable at prices ranging
from $26.50 to $27.50 per share at dates through December 30, 1997. On March
11, 1996, the warrants were exercised to purchase 90,000 shares of the
Company's common stock at $27.00 per share for proceeds of $2,430,000.
On February 22, 1995, a shareholders' derivative suit was filed against the
Company, its directors and others challenging the private placement
agreement. The complaint seeks declaratory relief, rescission or reformation
of the agreement, injunctive relief and unspecified general and punitive
damages.
During 1996, the court granted InterGroup summary judgment, which effectively
disposed of rescission or reformation as a remedy in this action. The
plaintiffs are seeking appellate review of this summary judgment. The Company
and its directors are vigorously contesting this lawsuit and believe that the
actions taken by them respecting this transaction were proper, in good faith
and in a manner believed to be in the best interests of the Company and its
shareholders. Management believes that the ultimate resolution of this claim
will not have a material adverse effect on the Company's consolidated
financial position.
<PAGE> 7
On May 30, 1996, the Company's 64.3%-owned subsidiary, Portsmouth Square, Inc.
("Portsmouth") was served with a personal injury action in the San Francisco
Superior Court. The suit, which was filed on March 26, 1996, names 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 seeks an unspecified amount of damages including
recovery for loss of income and medical expenses. Portsmouth is being
defended through its insurance carrier under a reservation of rights. Due to
the limited discovery taken to date, the Company is not in a position to
evaluate the eventual outcome of the action or to estimate a potential range
of loss, if any.
3. Related Party Transactions
--------------------------
Certain costs and expenses, primarily salaries, rent and insurance, are
allocated between the Company and its subsidiary, Portsmouth, based on
management's estimate of the utilization of resources.
During the quarter ended March 31, 1997, the Company and its subsidiary made
payments to InterGroup totaling $43,117 for administrative costs and
reimbursement of direct and indirect costs associated with the management of
the Company's investments, including its subsidiary's partnership asset. The
Company's funds are invested under the direction of its Chairman and President,
John V. Winfield. Mr. Winfield is also President and Chairman of Santa Fe and
Intergroup. One of the Company's other Directors also serves as a Director of
InterGroup.
<PAGE> 8
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, such as partnership distributions, general
economic conditions of the hotel industry in the San Francisco area,
securities markets, litigation and other factors, including those discussed
below and in the Company's Form 10-K for the year ended December 31, 1996,
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 the
investment of its 64.3%-owned subsidiary, Portsmouth Square, Inc., in the
Justice Investors limited partnership and income received from investment of
its cash and securities assets. The partnership derives most of its income
from its lease with Holiday Inn, Inc. ("Holiday") and from a lease with Evon
Garage Corporation.
Three Months Ended March 31, 1997 Compared to Three Months Ended
March 31, 1996
Comparison of operating results for the three months ended March 31, 1997 to
the three months ended March 31, 1996, shows that total revenues increased
56.9%, costs and expenses increased 98% and net income increased 21.5%.
The 56.9% increase in total revenues from $460,961 to $723,130 was primarily
due to a 50.2% increase in partnership income and a 96.6% increase in
investment and interest income. The increase in partnership income reflects a
47.9% increase in hotel rental income and a 5.6% increase in garage rental
income. The increase in hotel rental income is attributable to both higher
occupancy rates and an increase in the average daily room rate. The increase
in investment and interest income reflects additional cash received by the
Company as a result of InterGroup exercising its warrants on March 11, 1996
and managements efforts to diversify the Company's investments to provide for
an overall higher yield.
The 98% increase in costs and expenses from $198,750 to $393,577 is primarily
attributable to a 119% increase in the costs associated with the litigation
filed by GPG and higher general and administrative expenses. The increase in
legal and professional fees is attributable to higher annual audit fees and
the retention of a consultant by the Company's subsidiary to advise Portsmouth
on certain operational and partnership matters as part of Portsmouth's more
active role as a general partner in Justice Investors. The increase in general
and administrative expenses from $101,007 to $159,162 reflects higher
administrative costs and direct and indirect costs associated with the
management of the Company's investments, including its partnership asset and
increases in the salary of the Company's Chief Executive Officer.
<PAGE> 9
Expenses incurred by the Company as a result of the litigation filed by GPG
continue to adversely impact net income. The 119% increase in those expenses
from $68,531 to $149,945 is the primary reason why net income for the quarter
increased only $20,708. If the expenses associated with that litigation were
eliminated, the Company would have posted additional net income, after
estimated taxes, of approximately $91,500 which would have resulted in
earnings per share of $.32 for the three months ended March 31, 1997.
Effective April 28, 1997, Holiday merged with Bristol Hotel Company
("Bristol") of Dallas, Texas, a publicly held company listed on the New York
Stock Exchange. Bristol has agreed to assume and perform all of Holiday's
obligations under the lease with the partnership and will continue to operate
the hotel as a Holiday Inn.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated by its subsidiary's
investment in the Justice Investors limited partnership, which derives the
majority of its income from a lease with Holiday and a lease with Evon
Garage Corporation. In addition to its monthly limited partnership
distributions from Justice Investors, Portsmouth 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 will increase to $139,440 from $109,580. Although it is
planned that the distribution at the higher level will continue for a period
of 12 months, the increase was clearly identified as a special distribution
and, at any time, unforeseen circumstances could dictate a change in the
amount distributed. The general partners will conduct an annual review and
analysis to determine an appropriate monthly distribution for the ensuing
year. At that time, the monthly distribution could be decreased or increased.
The Company has been diversifying 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
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 March 31, 1997, the Company had a
net unrealized gain on investments of $1,242 after tax, which consists of
pre-tax unrealized gains of $309,929 and pre-tax unrealized losses of
$307,854.
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 March 31, 1997, the Company's current assets were $9,626,001 and it
remains liquid with a current ratio of approximately 27 to 1 at the end of the
quarter. Expenses inflicted on the Company as a result of the litigation
filed by GPG will continue to impact operating results. However, management
believes the Company's capital resources are currently adequate to meet its
short- and long-term obligations.
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, Guinness Peat Group plc ("GPG") and its subsidiary,
Allied Mutual Insurance Services Limited ("AMI") had filed a shareholders
derivative suit against certain directors of the Company, InterGroup and the
Company as a nominal defendant. The trial in that action was scheduled for
May 9, 1997.
A tentative ruling granting InterGroup summary judgment for the second time in
this action was issued in October 1996 and made final on December 31, 1996.
Plaintiffs then filed a petition for a writ seeking expedited review from the
Court of Appeal which was summarily denied by that Court on April 2, 1997. On
March 3, 1997, plaintiffs also filed a Notice of Appeal from the order
granting summary judgment. As the prevailing party, InterGroup also filed a
motion for an award of attorneys' fees and costs against plaintiffs. On
April 25, 1997, the Superior Court issued a tentative ruling awarding
InterGroup $295,964 in attorneys' fees and costs. Plaintiffs have requested
oral argument on that ruling.
The granting of summary judgment in favor of InterGroup effectively disposed
of rescission or reformation of the InterGroup Agreement as a remedy in this
action. Unless that judgment is reversed on appeal, neither cancellation of
the shares issued to InterGroup nor a return of the proceeds received by Santa
Fe can be ordered by the Court, leaving only a potential money damage claim
against the director defendants.
On February 3, 1997, the director defendants filed a verified petition for a
peremptory writ of mandate with the Court of Appeal challenging the trial
court's order denying their motion for summary judgment. On April 2, 1997, the
Court of Appeal issued an order to show cause why the relief requested in the
director defendants' petition should not be granted. The Court of Appeal also
ordered the trial scheduled for May 9, 1997 stayed until further order of that
Court. On April 18, 1997, the Court of Appeal summarily denied plaintiffs'
request to submit additional evidence, including expert declarations, in
support of its opposition to the order to show cause. Oral argument on the
matter is expected to take place in June 1997.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on May 6, 1997,
at The Westgate Hotel in San Diego, California. At that meeting all of
management's nominees, John V. Winfield, Janice Braly-Nelsen and William J.
Nance, were elected Directors of Santa Fe to serve until the next Annual
Meeting. The shareholders also voted to ratify the appointment of Ernst &
Young LLP as the Company's independent auditor for the year ending
December 31, 1997. A tabulation of the votes is as follows:
<TABLE>
<CAPTION>
Proposal (1) - Directors: Votes for Against Abstained
--------- ------- ---------
<S> <C> <C> <C>
John V. Winfield 469,298 - 960
Janice Braly-Nelsen 469,423 - 835
William J. Nance 469,423 - 835
Proposal (2) - Accountants:
Ernst & Young LLP 467,283 500 2,475
</TABLE>
<PAGE> 11
Item 5. Other Information
At a meeting of the Board of Directors held on May 6, 1997, after the Annual
Meeting of Shareholders, the following persons were elected as officers of
the Company: John V. Winfield, President and Chairman of the Board;
William J. Nance, Vice President; and L. Scott Shields, Secretary and
Treasurer.
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.
SANTA FE FINANCIAL CORPORATION
(Registrant)
Date: May 8, 1997
by /s/ John V. Winfield
- ----------------------------------
John V. Winfield, President
and Chairman of the Board and
Chief Executive Officer
Date: May 8, 1997
by /s/ L. Scott Shields
- ----------------------------------
L. Scott Shields, Secretary,
Treasurer and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME
OF SANTA FE FINANCIAL CORPORATION AND SUBSIDIARY SET FORTH IN ITS
FORM 10-Q REPORT FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q REPORT.
<CIK> 0000086759
<NAME> SANTA FE FINANCIAL CORPORATION
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 204676
<SECURITIES> 9250738
<RECEIVABLES> 126741
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9626001
<PP&E> 97649
<DEPRECIATION> 84106
<TOTAL-ASSETS> 15045962
<CURRENT-LIABILITIES> 356341
<BONDS> 0
0
0
<COMMON> 63802
<OTHER-SE> 14982160
<TOTAL-LIABILITY-AND-EQUITY> 15045962
<SALES> 499712
<TOTAL-REVENUES> 723130
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 393577
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 329553
<INCOME-TAX> 129000
<INCOME-CONTINUING> 116862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116862
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
