SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB/A
AMENDMENT NO.1
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number 0-6877
SANTA FE FINANCIAL CORPORATION
------------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 95-2452529
------------------------------- ------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2251 San Diego Avenue, Suite A-151
San Diego, California 92110-2926
--------------------------------------- ------------------
(Address of Principal Executive Offices) (Zip Code)
(619) 298-7201
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
$.10 Par Value Common Stock
----------------------------
(Title of Class)
Check whether the issuer: (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
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $3,048,216.
<PAGE> 2
The aggregate market value of the common equity held by non-affiliates of
issuer computed by reference to the price at which the stock sold on March
25, 1998 was $11,670,253.
The number of shares outstanding of issuers's $.10 Par Value Common Stock,
as of March 13, 1997, was 638,019.
<PAGE> 11
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS PAGE
Report of Independent Accountants-Price Waterhouse LLP 12
Report of Ernst & Young LLP, Independent Auditors 12(a)
Consolidated Balance Sheet - December 31, 1997 13
Consolidated Statements of Income - Years Ended 14
December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity 15
Consolidated Statements of Cash Flows - Years Ended 16
December 31, 1997 and 1996
Notes to Consolidated Financial Statements 17
<PAGE> 12
Report of Independent Accountants
March 25, 1998
To the Board of Directors and
Shareholders of Santa Fe Financial Corporation
In our opinion, the accompanying consolidated balance sheet and the related
statements of income, of cash flows, and changes in shareholders' equity
present fairly, in all material respects, the financial position of the Santa
Fe Financial Corporation and its subsidiaries at December 31, 1997, and the
results of their operations and their cash flows for the year ended December
31, 1997, in conformity with generally accepted accounting principles. These
consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. The consolidated financial statements of Santa Fe
Financial Corporation for the year ended December 31, 1996 were audited by
other independent accountants whose report dated February 21, 1997 expressed
an unqualified opinion on those statements.
/s/ Price Waterhouse LLP
<PAGE> 12(a)
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Santa Fe Financial Corporation
We have audited the accompanying statement of income, shareholders' equity and
cash flows for the year ended December 31, 1996 of Santa Fe Financial
Corporation. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
for the year ended December 31, 1996 of Santa Fe Financial Corporation,
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
February 21, 1997
<PAGE> 13
<TABLE>
<CAPTION>
SANTA FE FINANCIAL CORPORATION
Balance Sheet
- ------------------------------------------------------------------------------
December 31, 1997
-----------------
<S> <C>
Assets
Cash and cash equivalents $ 382,021
Restricted cash 129,264
Investment in marketable securities 14,438,617
Investment in Justice Investors 5,605,110
Rental property 1,917,021
Other investments 352,432
Note receivables 275,888
Other Assets 356,663
----------
Total assets $ 23,457,016
==========
Liabilities and Shareholders' Equity
Liabilities
Due to securities broker $ 5,666,507
Mortgage payable 1,246,613
Accounts payable and accrued expenses 223,044
Other liabilities 233,621
----------
Total liabilities 7,369,785
----------
Minority interest 3,403,939
----------
Commitments and contingencies
Shareholders' equity:
6% Cumulative, convertible, voting preferred
stock, par value $.10 per share
Authorized shares - 1,000,000
Issued and outstanding - 31,800
Liquidation preference of $858,600 3,180
Common stock, par value $.10 per share
Authorized shares - 2,000,000
Issued and outstanding - 638,019 63,802
Additional paid-in-capital 8,807,942
Unrealized gain on investment securities,
net of deferred taxes 187,269
Retained earnings 3,621,099
----------
Total shareholders' equity 12,683,292
----------
Total liabilities and shareholders' equity $ 23,457,016
==========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
SANTA FE FINANCIAL CORPORATION.
Statements of Income
- ------------------------------------------------------------------------------
Years ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues
Equity in net income of Justice Investors $ 2,560,805 $ 1,860,190
Dividend and interest income 824,524 610,878
Net investment losses (539,615) (32,514)
Other income 202,502 113,506
--------- ---------
3,048,216 2,552,060
--------- ---------
Costs and expenses
Litigation 265,863 440,235
General and administrative 597,390 419,187
Professional and outside services 175,270 92,137
Margin interest expense 134,298 -
Depreciation expense 3,885 7,847
--------- ---------
1,176,706 959,406
--------- ---------
Income before taxes and minority interest 1,871,510 1,592,654
Income taxes 831,993 671,494
--------- ---------
Income before minority interest 1,039,517 921,160
Minority interest 448,168 360,477
--------- ---------
Net income $ 591,349 $ 560,683
========= =========
Basic earnings per share $ 0.93 $ 0.90
========= =========
Weighted average number of shares outstanding 638,019 620,559
========= =========
See accompanying notes to financial statements
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
SANTA FE FINANCIAL CORPORATION
Statement of Shareholders' Equity
- -----------------------------------------------------------------------------------------------
Preferred Stock Common Stock
------------------------------------- Unrealized
Shares Shares Additional gain on
out- out- paid-in marketable Retained
standing Amount standing Amount capital securities earnings Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995 - - 548,019 $54,802 $5,856,137 $ - $2,606,077 $ 8,517,016
Issuance
of common
stock 90,000 9,000 2,421,000 2,430,000
Net income 560,683 560,683
Dividends
paid (137,010) (137,010)
Increase in
unrealized
gain on
marketable
securities,
net of tax 203,991 203,991
------------------------------------------------------------------------------------
Balance at
December 31,
1996 - - 638,019 63,802 8,277,137 203,991 3,029,750 11,574,680
Issuance of
preferred
stock 31,800 3,180 855,420 858,600
Purchase and
retirement of
Portsmouth
Square,Inc.
stock (324,615) (324,615)
Net income 591,349 591,349
Decrease in
unrealized
gain on
marketable
securities,
net of tax (16,722) (16,722)
-----------------------------------------------------------------------------------
Balance at
December 31,
1997 31,800 3,180 638,019 $63,802 $8,807,942 $187,269 $3,621,099 $12,683,292
-----------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
SANTA FE FINANCIAL CORPORATION
Statements of Cash Flows
- ------------------------------------------------------------------------------
For the years ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Operating activities
Net income $ 591,349 $ 560,683
Adjustments to reconcile net income to
net cash used by operating activities:
Equity in net income of Justice Investors (2,560,805) (1,860,190)
Minority interest 448,168 360,477
Amortization of excess of market value
Over carrying value (88,706) (88,706)
Depreciation 3,885 7,847
Loss on fixed asset disposal 154 -
Net investment losses 539,615 32,514
Change in operating assets and liabilities:
Other assets (80,338) (156,968)
Accounts payable and accrued expenses 808 33,526
Other liabilities 3,086 (3,063)
---------- ----------
Net cash used in operating activities (1,142,784) (1,113,880)
Investing activities
Cash distributions from Justice Investors 2,196,180 1,254,960
Purchase of investment securities (31,338,454) (11,692,895)
Purchase of other investments (400,000) -
Proceeds from sales of investment securities 25,690,738 2,532,702
Purchases of property, furniture and equipment - (3,392)
Purchase of interest in Woodland Village, Inc.
consolidation of cash balance at 12/31/97 25,599 -
---------- ---------
Net cash used in investing activities (3,825,937) (7,908,625)
---------- ---------
Financing activities
Increase in due to securities broker 5,666,507 -
Purchase and retirement of common stock (324,615) -
Notes receivables 14,794 15,073
Proceeds from the issuance of common stock - 2,430,000
Dividends paid - (137,010)
Dividends paid to minority shareholders of
Portsmouth Square, Inc. (133,295) (175,011)
---------- ----------
Net cash provided by financing activities 5,223,391 2,133,052
---------- ---------
Net increase (decrease) in cash and
cash equivalents 254,670 (6,889,453)
Cash and cash equivalents at the
beginning of the year 127,351 7,016,804
---------- ----------
Cash and cash equivalents at end of year $ 382,021 $ 127,351
========== ==========
Supplemental information
Income taxes paid, net of refunds $ 815,000 $ 685,003
========== ==========
Margin interest paid $ 134,298 $ -
========== ==========
Noncash activities
Issuance of preferred stock in
exchange for Woodland $ 858,600 $ -
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE> 17
SANTA FE FINANCIAL CORPORATION
Notes to the Consolidated Financial Statements
- ------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Santa Fe Financial Corporation's (the Company) operations have been primarily
limited to partnership income from its investment in Justice Investors (see
Note 3) and income from various investment activities. On December 31, 1997,
the Company acquired a controlling 55.4% interest in Intergroup Woodland
Village, Inc. (Woodland) from a related party (See Note 10), The InterGroup
Corporation (InterGroup). Woodland's major asset is a 100-unit apartment
complex located in Cincinnati, Ohio.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
65.5% owned subsidiary, Portsmouth Square, Inc. (PSI), and its 55.4% owned
subsidiary, Woodland Village, Inc. All material intercompany accounts and
transactions have been eliminated in consolidation.
The acquisition of PSI was accounted for as a purchase and the assets and
minority interest of PSI were recorded at their fair values. The Company's
cost was less than its pro rata interest in the fair value of PSI's net assets
by approximately $3.6 million. The excess of fair value over the allocated
carrying amount of the investment in PSI is being amortized to other income
over 40 years. The remaining unamortized amount at December 31, 1997 and 1996
was approximately $2.7 million and $2.8 million respectively.
The Company acquired Woodland on December 31, 1997 and accounted for the
transaction under the purchase method of accounting. Therefore, Woodland's
revenues and expenses for 1997 and 1996 are not included in the Company's
consolidated statements of income. The December 31, 1997 balances of
Woodland's asset and liability accounts are included in the consolidated
balance sheet.
Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with maturity of three
months or less when purchased to be cash equivalents. Restricted cash is
comprised of amounts held by lenders for payment of real estate taxes,
insurance, repairs and replacements of the rental property, and tenant
security deposits.
Investment in Marketable Securities
The Company has classified its portfolio of marketable investment securities
as available-for-sale and reported it at fair value, as primarily determined
by quoted market prices, with unrealized gains and losses, net of deferred
taxes, reported in a separate component of shareholders' equity. Any
unrealized gains or losses related to "naked" short positions are recognized
in earnings in the current period. The Company borrows funds from securities
brokers to purchase marketable securities under standard margin agreements.
The cost of securities sold is based on the first-in, first out basis.
Realized gains and losses are included in net investment income losses.
Interest on securities classified as available-for-sale is included in
investment and interest income.
<PAGE> 18
Rental Property
Rental property is stated at cost. Depreciation of rental property is
provided on the straight-line method based upon estimated useful lives of five
to forty years for buildings and improvements and five to ten years for
equipment. Expenditures for repairs and maintenance are charged to expense as
incurred and major improvements are capitalized.
The carrying value of real estate is assessed regularly by management based on
operating performance of the property, including the review of occupancy
levels, operating budgets, estimated useful life and estimated future cash
flows. An impairment loss would be recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. No such
impairment losses have been recognized.
Furniture and Fixtures
Furniture and fixtures are stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which range from three to five years.
Revenue Recognition
During 1997 and 1996, the major source of the Company's revenue was its 49.8%
interest in Justice Investors, a limited partnership which owns and leases a
hotel in San Francisco, California in which the Company's subsidiary, PSI, is
both a limited and general partner. PSI and the Company account for the
investment on the equity basis.
Earnings per Share
Effective December 31, 1997, the Company adopted a new accounting standard
which replaces retroactively the presentation of primary earnings per share
(EPS) and fully diluted EPS. The new basic EPS represents net income divided
by the weighted average common shares outstanding during the period excluding
any potential dilutive effects. Diluted EPS gives effect to all potential
issuances of common stock that would have caused basic EPS to be lower as if
the issuance had already occurred. As of December 31, 1997 and 1996, the
Company did not have any potentially dilutive securities outstanding.
Accounting Standard on Impairment of Long-Lived Assets
During 1996, the Company adopted an accounting standard for the impairment of
long-lived assets and for long-lived assets to be disposed of. This standard
requires the Company to record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash
flows estimated to be generated by those assets are less than their carrying
amount. There was no effect on the financial statements from the adoption of
this standard.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
<PAGE> 19
Income Taxes
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and /or liability
for deferred taxes.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 2 - INVESTMENT IN MARKETABLE SECURITIES
The following is a summary of the Company's investment in marketable
securities:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997
Equity securities $11,511,052 $1,527,232 $(1,341,717) $11,696,567
Mutual funds 634,431 7,955 - 642,386
Corporate bonds 1,827,369 127,406 (5,985) 1,948,790
Government debt
securities 152,933 246 (2,305) 150,874
---------- --------- --------- ----------
$14,125,785 $1,662,839 $(1,350,007) $14,438,617
========== ========= ========= ==========
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
December 31, 1996
Equity securities $ 4,441,423 $ 319,531 $ (89,176) $ 4,671,778
Corporate bonds 4,279,664 135,981 (23,761) 4,391,884
Government debt
securities 246,595 645 (2,450) 244,790
---------- --------- --------- ----------
$ 8,967,682 $ 456,157 $ (115,387) $ 9,308,452
========== ========= ========= ==========
</TABLE>
Gross realized gains and losses on sales of investments totaled $1,364,437 and
$1,904,052 respectively, during the year ended December 31, 1997, and $126,062
and $158,576, respectively, during the year ended December 31, 1996. At
December 31, 1997, the Company had short investment positions totaling
approximately $1,863,000, all of which were covered by long positions.
<PAGE> 20
The amortized cost and fair value of debt securities at December 31, 1997, by
contractual maturity, are shown below:
Cost Fair Value
--------- ----------
Due in one year or less $ 738,822 $ 794,313
Due after one year through five years 291,389 292,740
Due after five years through ten years 533,648 578,350
Due after ten years 416,443 425,261
--------- ---------
$1,980,302 $2,099,664
========= =========
NOTE 3 - INVESTMENT IN JUSTICE INVESTORS
The major source of revenue of PSI is its 49.8% interest in Justice Investors,
a limited partnership which owns and leases a hotel in San Francisco,
California, and in which PSI is both a limited and general partner. PSI
records its investment on the equity basis. Condensed financial statements for
Justice Investors are presented below.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
1997 1996
---- ----
<S> <C> <C>
Assets
Total current assets - Note A $ 500,374 $ 420,220
Property, plant and equipment, net of accumulated
depreciation of $10,607,195 in 1997 and
$10,188,059 in 1996 5,968,488 6,220,506
Loan fees and deferred lease costs, net of accumulated
amortization of $85,741 in 1997 and $54,696 in 1996 224,671 255,716
--------- ---------
$6,693,533 $6,896,442
========= =========
Liabilities and partners' equity
Total current liabilities $ 293,166 $ 568,093
Long-term liabilities - Note B 2,624,127 3,284,288
Partners' capital - Note C 3,776,240 3,044,061
--------- ---------
$6,693,533 $6,896,442
========= =========
CONDENSED STATEMENTS OF OPERATIONS
December 31,
1997 1996
---- ----
Revenues - Note A $6,194,532 $4,758,778
Costs and expenses 1,052,354 1,023,457
--------- ---------
Net income $5,142,178 $3,735,321
========= =========
</TABLE>
<PAGE> 21
Note A - Revenues include $1,212,491 and $1,116,019 for the years ended
December 31, 1997 and 1996, respectively, of garage rental income from the
garage lessee who is also the managing general partner of Justice Investors.
Justice Investors and the hotel lessee entered into a new lease agreement
effective January 1, 1995. The hotel lease provides for Justice Investors to
receive 20% of hotel room revenue, as defined in the lease, or an annual
minimum guaranteed rent of $2,500,000 plus 50% of available cash, as defined
in the lease, and expires December 31, 2004, with a five-year renewal option.
The parking garage lease for which revenue is based upon a percentage of
parking receipts, expires on November 30, 2010.
Note B - During 1995, Justice Investors refinanced its long-term debt
obligations. The long-term debt at December 31, 1997 and 1996 consists of a
revolving, reducing line of credit agreement payable to Wells Fargo Bank. The
line of credit is collateralized by a trust deed on land, hotel property and
the Partnership's interest in hotel and garage leases. The line of credit
agreement provides for maximum borrowings at December 31, 1997 of
approximately $7,100,000 with an annual reduction of the maximum borrowings to
approximately $4,500,000 at the December 31, 2004 maturity date and generally
provides for interest at LIBOR plus 2% per annum (the annual rate on
$4,000,000 of principal is guaranteed not to exceed 11.5%).
Note C - During each of the years ended December 31, 1997 and 1996, total
annual distributions to partners amounted to approximately $4,410,000 and
$2,520,000, respectively.
NOTE 4 - RENTAL PROPERTY
At December 31, 1997, rental property consisted of a 100-unit apartment
complex named Woodland Apartments located in Cincinnati, Ohio and which is
held by the Company's 55.4%-owned subsidiary Woodland. The property is
accounted for at cost and includes the following:
December 31,
1997
------------
Investment in real estate:
Land $ 283,476
Buildings, improvements and equipment 2,920,653
Accumulated depreciation on buildings,
improvements and equipment (1,287,108)
---------
$1,917,021
=========
NOTE 5 - DUE TO SECURITIES BROKER
Various securities brokers have advanced funds for the purchase of marketable
securities under standard margin agreements. The interest rate on advances or
cash on deposit can vary daily with money market rates. The interest rate on
margin balances is based on the Federal Funds rate plus 0.875% (7.625% at
December 31, 1997). The interest rate on cash or deposits is based on the
Federal Funds rate less 0.5% (6.25% at December 31, 1997). The interest rate
on interest rebates in connection with short positions is based on the Federal
Funds rate less 0.375% (6.375% at December 31, 1997).
<PAGE> 22
NOTE 6 - MORTGAGE NOTE PAYABLE
At December 31, 1997, the balance on Woodland's mortgage note payable was
$1,246,613. The mortgage is collateralized by a trust deed on the apartment
complex. Principal and interest payments of $11,133 are required monthly
until maturity in July of 2004. The fixed interest rate on the loan is
9.25%. The annual principal payments on the mortgage note payable for the
five-year period commencing January 1, 1998 are approximately as follows:
Year ending December 31,
------------------------
1998 $ 19,000
1999 21,000
2000 23,000
2001 25,000
2002 28,000
Thereafter 1,131,000
---------
Total $1,247,000
=========
NOTE 7 - INCOME TAXES:
The Company and PSI file separate tax returns for both federal and state
purposes. The provision for income taxes (primarily based on the operations
of PSI), consist of the following:
Year ended
December 31,
1997 1996
---- ----
Federal
Current $ 689,632 $ 524,879
Deferred (credit) (53,883) (9,848)
--------- ---------
635,749 515,031
========= =========
State
Current 207,398 157,061
Deferred (credit) (11,154) (598)
--------- ---------
196,244 156,463
--------- ---------
$ 831,993 $ 671,494
========= =========
A reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows:
Year ended
December 31,
1997 1996
---- ----
Statutory federal tax rate 34.0% 34.0%
State income taxes, net of federal tax benefit 6.9 6.5
Operating losses for which no tax benefit is derived 1.7 -
Other 1.9 1.7
---- ----
Effective tax rate 44.5% 42.2%
==== ====
<PAGE> 23
The components of the Company's deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
December 31,
1997 1996
---- ----
Deferred tax assets
Net operating loss carryforwards $ 595,500 $ 479,800
State income taxes 70,515 53,345
Capital loss carryforwards 229,643 13,051
Other miscellaneous differences 9,406 23,882
------- -------
Gross deferred tax asset 905,064 570,078
Valuation allowance-deferred tax assets (782,894) (512,945)
------- -------
Net deferred tax asset $ 122,170 $ 57,133
======= =======
Deferred tax liabilities
Unrealized gain on marketable securities $ 125,564 $ 136,777
======= =======
At December 31, 1997, the Company had net operating losses available for
carryforward for federal and state income tax purposes of approximately
$1,666,897 and $309,198, respectively. The federal income tax loss
carryforward will begin expiring in 2004, unless previously utilized. In
1993, California reduced the carryover period allowed for utilization of net
operating loss carryovers from 15 years to 5 years. Accordingly, the
California tax loss carryforward began expiring in 1995. The realization of
future benefits from net operating loss carryforwards may be limited under the
Internal Revenue Code if certain cumulative changes occur in the Company's
ownership. The Company has recorded a valuation allowance against those
deferred tax assets which, in management's estimation, may not be realizable.
NOTE 8 - COMMITMENTS:
The Company has an operating lease agreement for office space through June 30,
1999. The agreement provides for an annual rent increase based on changes in
the Consumer Price Index, not to exceed 5%. At December 31, 1997, minimal
rental payments due under the lease are as follows:
1998 $ 33,600
1999 16,900
-------
$ 50,500
=======
Rent expense for the years ended December 31, 1997 and 1996 totaled
approximately $33,600 and $35,000 respectively.
<PAGE> 24
NOTE 9 - SHAREHOLDERS' EQUITY
On August 12, 1997, shareholders approved an Amendment of the Company's
Articles of Incorporation to increase the number of authorized shares to
3,000,000, which included 2,000,000 shares of common stock at $.10 par value
and 1,000,000 shares of preferred stock at $.10 par value. The Amendment was
filed with the Nevada Secretary of State on December 4, 1997.
On December 31, 1997, the Company issued 31,800 shares of 6% cumulative,
convertible voting preferred stock in exchange for a 55.4% interest in
Woodland from InterGroup. The Preferred Stock has a liquidation preference
of $27.00 per share. Each share of preferred stock is convertible into one
share of restricted $.10 par value common stock at an exercise price of
$27.00, with an eight year conversion exercise period. The preferred stock
has voting rights as if converted into common stock.
NOTE 10 - RELATED PARTY TRANSACTIONS
As of December 31, 1997, InterGroup owned 38.6% of the Company's outstanding
common stock and 100% of the Company's preferred stock for a total of 41.6% of
all outstanding voting stock. In addition, the chairman and president of
InterGroup, who is also the Company's chairman and chief executive officer,
owned 3.9% of the Company's outstanding common stock at December 31, 1997.
During 1997, the Company purchased an interest in Woodland from InterGroup
(See Note 1). At December 31, 1997, the Company had a receivable of $27,200
from InterGroup relating to this transaction. Certain costs and expenses of
InterGroup are allocated to the Company and its subsidiary, PSI, based on
InterGroup's management's estimate of the pro rata utilization of resources.
In 1997, these expenses were approximately $149,000.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
During 1997, the Company and the director defendants prevailed in their defense
of a shareholders' derivative suit related to the private placement of 90,000
shares of common stock and warrants for the purchase of an additional 90,000
shares to InterGroup. As prevailing parties, the Company and the director
defendants made application to the Superior Court for recovery of the
attorney's fees and costs expended in the successful defense of this
litigation. During March 1998, the trial court entered a judgment in favor of
the Company and the director defendants and granted the applications for
attorneys' fees and costs in the total amount of approximately $936,000. It
is expected that the plaintiffs will appeal that award.
During 1996, the Company's subsidiary, PSI, was served with a personal injury
action in the San Francisco Superior Court. The suit 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. PSI's
insurance carrier is defending PSI under a reservation of rights. During
1997, the trial court granted Portsmouth's motion for summary judgment;
however a final judgment has not been entered to date. Management of the
Company believes that the ultimate resolution of this claim will not have a
material adverse effect on the Company's consolidated financial position.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SANTA FE FINANCIAL CORPORATION
Date: April 1, 1998 By /s/ John V. Winfield
-------------- ----------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: April 1, 1998 /s/ John V. Winfield
-------------- ---------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Date: April 1, 1998 /s/ L. Scott Shields
-------------- ---------------------------------------
L. Scott Shields, Treasurer
and Chief Financial Officer
Date: April 1, 1998 /s/ John C. Love
-------------- ---------------------------------------
John C. Love,
Director
Date: April 1, 1998 /s/ William J. Nance,
-------------- ---------------------------------------
William J. Nance,
Director
