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
SANTA FE FINANCIAL CORPORATION
----------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 95-2452529
------------------------------- ------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
11315 Rancho Bernardo Road, Suite 129
San Diego, California 92127-1463
--------------------------------------- ------------------
(Address of Principal Executive Offices) (Zip Code)
(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: 1,240,183 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
SANTA FE FINANCIAL CORPORATION
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet--March 31, 1999 (Unaudited) 3
Consolidated Statement of Income and Comprehensive Income
(Unaudited)--Three Months ended March 31, 1999 and 1998 4
Consolidated Statement of Cash Flows (Unaudited)--
Three Months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements -March 31, 1999 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Santa Fe Financial Corporation
Consolidated Balance Sheet
(Unaudited)
March 31,
1999
-------------
<S> <C>
Assets
Cash and cash equivalents $ 305,793
Restricted cash 83,625
Investment in marketable securities
Available for sale 14,369,229
Trading 4,569,800
Investment in Justice Investors 6,339,325
Rental property 1,844,256
Other investments 344,766
Note receivables 125,393
Other assets 1,822,769
----------
Total assets $ 29,804,956
==========
Liabilities and Shareholders' Equity
Liabilities
Due to securities broker $ 6,025,043
Obligations for securities sold 6,033,737
Mortgage payable 1,220,774
Accounts payable and accrued expenses 886,609
----------
Total liabilities 14,166,163
----------
Minority interest 3,636,209
----------
Commitments and contingencies
Shareholders' equity:
6% Cumulative, convertible, voting preferred stock
par value $.10 per share
Authorized shares - 1,000,000
Issued and outstanding - 63,600
Liquidation preference of $858,600 6,360
Common stock - par value $.10 per share
Authorized - 2,000,000
Issued and outstanding - 1,242,714 124,272
Additional paid-in capital 8,807,942
Accumulated other comprehensive income,
net of deferred taxes 776,430
Retained earnings 2,598,214
Treasury stock, at cost, 33,324 shares (310,634)
-----------
Total shareholders' equity 12,002,584
-----------
Total liabilities & shareholders' equity $ 29,804,956
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
Santa Fe Financial Corporation
Consolidated Statement of Income and Comprehensive Income
(Unaudited)
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 199,565 161,030
Net (losses) gains on marketable
securities (992,962) 393,677
Rental income 153,478 126,144
Other income (1,966) 28,176
--------- ---------
(77,486) 1,315,427
--------- ---------
Costs and expenses
Property operating expense 62,961 104,904
Mortgage interest expense 28,348 32,876
Depreciation expense 44,472 26,967
Margin interest and investment
related expenses 129,183 127,375
Professional and outside services 63,366 79,652
Litigation - 20,275
General and administrative 117,844 158,390
--------- ---------
446,174 550,439
--------- ---------
Income (loss) before income taxes
and minority interest (523,660) 764,988
Income tax benefits (expense) 189,900 (275,800)
--------- ---------
Income (loss) before minority interest (333,760) 489,188
Minority interest (242,321) (108,498)
--------- ---------
Net (loss) income $(576,081) $ 380,690
========= =========
Basic (loss) earnings per share $ (0.45) $ 0.30
========= =========
Weighted average number of shares
outstanding 1,270,376 1,276,038
========= =========
Comprehensive income
Net (loss) income $ (576,081) $ 380,690
Other comprehensive income:
Unrealized holding (loss) gain
on marketable securities (427,133) 1,627,643
Reclassification adjustment for holding
gain (loss) included in net earnings 992,962 (393,677)
Income tax benefit (expense) related to
other comprehensive income 122,038 (465,041)
--------- ---------
Total comprehensive income $ 111,786 $1,149,615
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
Santa Fe Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
1999 1998
----------- -----------
<S> <C> <C>
Operating activities
Net (loss) income $ (576,081) $ 380,690
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Equity in net income of Justice Investors (564,399) (606,400)
Net loss (gain) on marketable securities 992,962 (393,677)
Minority interest 242,231 108,498
Amortization of excess of market value
over carrying value 22,176 22,176
Depreciation expense 44,472 26,967
Changes in operating assets and liabilities
Other assets (468,044) 89,508
Decrease in notes receivable 9,152 165,620
Accounts payable and accrued expenses 486,275 153,513
---------- ----------
Net cash provided by (used in) operating
activities 188,834 (53,105)
---------- ----------
Investing activities
Cash distributions from Justice Investors 418,320 418,320
Purchase of Portsmouth Square stock - (36,133)
Purchase of marketable securities (7,241,375) (13,274,186)
Purchase of other investments (50,000) (275,000)
Proceeds from sale of marketable securities 6,036,521 11,577,297
Purchase of property, furniture and fixtures (6,296) (16,475)
---------- ----------
Net cash (used in) provided by investing
activities (842,830) (1,606,177)
---------- ----------
Financing activities
Increase (decrease) in due to securities broker (1,894,709) 1,529,628
Increase in obligations for securities sold 2,845,334 -
Mortgage principal payment (6,760) (4,606)
Dividends paid to minority shareholders
of Portsmouth Square (63,357) (63,357)
---------- ----------
Net cash provided by financing activities 880,508 1,461,665
---------- ----------
Net increase (decrease) in cash and
cash equivalents 226,512 (197,617)
---------- ----------
Cash and cash equivalents at beginning of period 162,906 382,021
---------- ----------
Cash and cash equivalents at end of period $ 389,418 $ 184,404
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<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.
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 the
investment of its 67.2%-owned subsidiary, Portsmouth Square, Inc.
("Portsmouth") in the Justice Investors limited partnership ("Justice
Investors"). Portsmouth has a 49.8% interest in the limited partnership which
owns and leases a Holiday Inn in San Francisco, California. Portsmouth also
serves as one of the two general partners of Justice Investors. Portsmouth
records its investment on the equity basis.
<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
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. Investment in Marketable Securities
-----------------------------------
The Company has classified its portfolio of marketable investment securities as
available-for-sale and has reported it at fair value, as primarily determined
by quoted market prices, with unrealized gains and losses, net of deferred
taxes, reported in accumulated other comprehensive income. Any unrealized gains
or losses related to 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.
<PAGE> 8
Certain securities may be classified as trading securities to correspond with
obligations of the same securities sold short. These securities and the
related obligations are marked to market with unrealized holding gains and
losses included in earnings.
Realized gains and losses are included in net losses on marketable securities.
The cost of securities sold is determined based on the specific identification
method. Interest and dividends from securities classified as available-for-
sale are included in investment and interest income.
4. Related Party Transactions
--------------------------
As of March 31, 1999, InterGroup owned approximately 45.5% of the Company's
outstanding common stock and 100% of the Company's preferred stock for a total
of 48.2% of all outstanding voting stock. In addition, the Chairman and Chief
Executive Officer of InterGroup, who is also the Company's Chairman and Chief
Executive Officer, owned approximately 4% of the Company's outstanding common
stock as of March 31, 1999. Effective June 30, 1998, the Company's Chairman
and Chief Executive Officer entered into a voting trust agreement with
InterGroup, giving InterGroup the power to vote the shares that he owns in the
Company. As a result of that agreement, InterGroup now has the power to vote
in excess of 52% of the voting shares of the Company.
Certain costs and expenses, primarily salaries, rent and insurance, are
allocated among the Company and its subsidiary, Portsmouth, and the Company's
parent, The InterGroup Corporation ("InterGroup"), based on management's
estimate of the utilization of resources. For the three months ended March 31,
1999, the Company and Portsmouth made payments to InterGroup of approximately
$83,500 for administrative costs and reimbursement of direct and indirect costs
associated with the management of the Companies and their investments,
including the partnership asset.
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 Portsmouth and InterGroup and directs the investment
activity of those companies. Effective April 1, 1998, an employee of
InterGroup was assigned to manage the portfolios of the Company and Portsmouth
in consultation with Mr. Winfield. The Company and Portsmouth 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, Portsmouth 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 Portsmouth and
InterGroup, at risk in connection with investment decisions made on behalf of
the Company. All of the Company's Directors serve as directors of InterGroup
and all three of the Company's Directors serve on the Board of Portsmouth.
<PAGE> 9
5. 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. That
award bears interest at the statutory rate of 10% per annum and has been
appealed by the plaintiffs in that action.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
and 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 the
investment of its 67.2% owned subsidiary, Portsmouth, in the Justice Investors
limited partnership, rental income from its multi-family real estate property
investment and income received from 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> 10
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 a net loss of $576,081 as
compared to net income of $380,690. That result is primarily attributable to
net losses on marketable securities of $992,962 and a 7% decline in partnership
income from Justice Investors from $606,400 to $564,399, partially offset by a
23.9% increase in dividend and interest income from $161,030 to $199,565 and
a 21.7% increase in rental income from $126,144 to $153,478 from Woodland
Village.
The net loss on marketable securities reflect management's continuing efforts
to reposition the Company's investment portfolio by selling certain
underperforming securities. 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 practical analytical
value.
The 18.9% decrease in costs and expenses from $550,439 to $446,174 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 lower property operating expenses attributable to
Woodland Village.
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 its lease with Felcor and a lease with Evon. In addition to the
monthly limited partnership distributions it receives from Justice Investors,
Portsmouth also receives monthly management fees as a general partner. The
Company also derives revenue from its investment in a multi-family real estate
property and 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,
Portsmouth received cash distributions of $418,320 from Justice Investors.
<PAGE> 11
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 gross unrealized gains of
$5,756,950 and gross unrealized losses of $4,469,212 on marketable securities.
Certain securities may be classified as trading securities to correspond with
obligations of the same securities sold short. These securities and the
related obligations are marked to market with unrealized holding gains and
losses included in earnings. Gross realized gains and losses related to
trading securities totaled $2,078,727 and $2,065,231 respectively.
On August 14, 1998 the Company authorized a limited buy-back program of its
Common Stock. The Company may from time to time, in the discretion of
management, buy back up to a total of 50,000 shares of its Common Stock,
depending on market conditions and other factors consistent with corporate
policy and as limited by state and federal law. As of March 31, 1999, the
Company had repurchased 33,324 of its shares in open market and private
transactions for an aggregate amount of $313,966.
At March 31, 1998, the Company's current assets were $19,798,606. The Company
remains liquid and management believes that its capital resources are currently
adequate to meet its short and long-term obligations.
YEAR 200O 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.
<PAGE> 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on May 4, 1999,
at he Park Hyatt Hotel in Los Angeles, California. At that meeting all of
management's nominees, John V. Winfield, John C. Love 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 Price-
waterhouseCoopers LLP as the Company's independent accountants for the year
ending December 31, 1999. A tabulation of the votes is as follows:
Proposal (1) - Directors: Votes for Against Abstained
--------- ------- ---------
John V. Winfield 800,098 - 4,380
John C. Love 800,778 - 3,700
William J. Nance 800,098 - 4,380
Proposal (2) - Accountants: 799,362 2,408 2,708
Price Waterhouse LLP
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 filed no 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 13, 1999 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: May 13, 1999 by /s/ David Nguyen
-----------------------------
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
SANTA FE FINANCIAL CORPORATION AND SUBSIDIARIES 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> 0000086759
<NAME> SANTA FE FINANCIAL CORPORATION
<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> 389418
<SECURITIES> 18939029
<RECEIVABLES> 125393
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19798606
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 29804956
<CURRENT-LIABILITIES> 12945389
<BONDS> 0
0
0
<COMMON> 124272
<OTHER-SE> 11878312
<TOTAL-LIABILITY-AND-EQUITY> 29804956
<SALES> 717977
<TOTAL-REVENUES> (77486)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 446174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (523660)
<INCOME-TAX> 189900
<INCOME-CONTINUING> (576081)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (576081)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
