SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ] 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
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(Name of Small Business Issuer in Its Charter)
Nevada 95-2452529
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
11315 Rancho Bernardo Road, Suite 129
San Diego, California 92127-1463
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(Address of Principal Executive Offices) (Zip Code)
(619) 673-4722
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(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
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(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 $2,045,234.
<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 10,
1999 was $5,470,658.
The number of shares outstanding of issuer's $.10 Par Value Common Stock, as
of March 26, 1999, was 1,240,214.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference: Proxy Statement for
Annual Meeting of Shareholders to be held May 4, 1999 which is incorporated by
reference into Part III, Items 9 through 12. The Company's definitive Proxy
Statement will be filed within one hundred twenty (120) days of the end of the
fiscal year covered by this Form 10-KSB pursuant to Regulation 14A.
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business. 3
Item 2. Description of Property. 4
Item 3. Legal Proceedings. 6
Item 4. Submission of Matters to a Vote of Security Holders. 7
PART II
Item 5. Market For Common Equity and Related 7
Stockholder Matters.
Item 6. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations.
Item 7. Financial Statements and Supplementary Data. 11
Item 8. Changes in and Disagreements With Accountants on 25
Accounting and Financial Disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and 26
Control Persons; Compliance With Section 16(a)
of The Exchange Act.
Item 10. Executive Compensation. 26
Item 11. Security Ownership of Certain Beneficial Owners and 26
Management.
Item 12. Certain Relationships and Related Party Transactions. 26
Item 13. Exhibits, Financial Statement Schedules, and 26
Reports on Form 8-K.
SIGNATURES 35
<PAGE> 3
PART I
Item 1. Description of Business.
BUSINESS DEVELOPMENT
Santa Fe Financial Corporation ("Santa Fe" or the "Company") was incorporated
under the name of Tri Financial Corporation in the State of Nevada on July 25,
1967 as a wholly-owned subsidiary of Crateo, Inc, a public company. On
October 31, 1969, Crateo issued a one-for-one stock dividend of all of its
shares of Tri Financial to its common shareholders. On September 17, 1970,
the name of the Corporation was changed to Santa Fe Financial Corporation.
Since 1988, the Company's principal source of revenue has been, and continues
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% limited partnership interest in
Justice Investors and also serves as one of the two general partners. The
other general partner, Evon Garage Corporation ("Evon"), acts as the managing
general partner. There are approximately 91 limited partners in Justice
Investors.
On December 31, 1997, the Company expanded its operations to include
multifamily real property when it acquired a controlling 55.4% equity interest
in Intergroup Woodland Village, Inc. ("Woodland Village"), a 100-unit
apartment complex located in Cincinnati, Ohio.
On May 5, 1988, the Company's Board of Directors approved a two-for-one stock
split of the Company's $.10 par value Common Stock in the form of a stock
dividend. The stock dividend was paid on June 15, 1998 to shareholders of
record as of May 22, 1998.
BUSINESS OF ISSUER
The Company's principal business is conducted through its subsidiary's general
and limited partnership interest in Justice Investors. Justice Investors owns
the land improvements and leaseholds at 750 Kearny Street, San Francisco,
California commonly known as the Holiday Inn Financial District/Chinatown
("Holiday"). The most significant income source is a lease between the
partnership and Felcor Lodging Trust, Inc. ("Felcor, NYSE: FCH) for the hotel
portion of the property. The partnership also derives income from its lease
of the garage portion of the property to Evon. As a general partner,
Portsmouth has become more active in monitoring the operations of the hotel
and the parking garage as part of its effort to improve revenues.
The Company's operations also includes a controlling interest in a 100 unit
apartment complex. The Company also derives income from the investment of its
cash and securities assets. The Company has invested in income-producing
instruments, equity and debt securities and will consider other investments if
such an investment will offer growth or profit potential.
COMPETITION
The hotel enjoys a favorable year-round occupancy rate and is part of
Holiday's worldwide reservation system. It was designed to Holiday's
specifications to serve both business persons and tourists and caters to both
individuals and tour groups. It also handles conference and meeting business,
having meeting and dining facilities for groups of up to 400 people.
Management believes that the hotel, garage and apartments are in a competitive
<PAGE> 4
position in their respective markets; however, some competitors may have
better financial resources and newer facilities. The Company intends, where
appropriate, to continue in its efforts to find ways to improve the physical
condition of the hotel, garage and apartment properties to remain competitive.
EMPLOYEES
As of December 31, 1998, the Company had two full-time employees and one
part-time employee. The employees are not part of any collective bargaining
agreement, and the Company believes that its employee relations are
satisfactory.
Item 2. Description of Property.
PROPERTIES
As of December 31, 1998, Santa Fe's investments in real property consisted
of its 49.8% interest in Justice Investors through the Company's 67.2% owned
subsidiary, Portsmouth, and its 55.4% owned subsidiary, Woodland Village.
San Francisco, California Hotel.
The San Francisco hotel property owned by Justice Investors is located near
the Financial District, one block from the Transamerica Pyramid. Embarcadero
Center is within walking distance. Chinatown is directly across the bridge
that runs from the hotel to Portsmouth Square Park. The hotel is a
31-storied, steel and concrete, A-frame building which contains 566 guest
rooms situated on 22 floors. One floor houses the Chinese Culture Center
pursuant to a long-term, nominal-rent lease, and three floors are devoted to a
reservation desk, lobby shops, dining room, coffee shop, hotel support
facilities, a fitness center, a guest business center, meeting and banquet
rooms and offices. Other features of the Holiday Inn include a rooftop
swimming pool, 5-storied underground garage and pedestrian bridge across
Kearny Street connecting the hotel and the Chinese Culture Center with
Portsmouth Square Park in Chinatown. The bridge, built and owned by the
partnership, is included in the lease to the Chinese Culture Center.
The property is subject to a first deed of trust securing a loan from Wells
Fargo Bank. As of December 31, 1998, the principal balance on the note was
$2,604,686. The loan provides for a maximum borrowing of $6.8 million and has
the characteristics of a line of credit with certain decreasing maximum
borrowings available at the end of each year. The major portion of the debt
is carried at LIBOR plus 2% and there is a monthly adjustment to that rate.
The remainder of the debt is carried at the prime rate and also adjusted
monthly.
On March 15, 1995, an amended and restated lease was entered into by Justice
Investors with an effective date of January 1, 1995. That lease was assumed
by Felcor, effective July 28, 1998. The initial term of the new lease is for
a 10-year term expiring on December 31, 2004. The lessee also has an option to
renew the lease for one additional term of five years which would extend the
lease to December 31, 2009. The lease requires the lessee to pay an annual
rent of the greater of twenty percent (20%) of gross room revenues or
$2,500,000 plus fifty percent (50%) of total revenues from the demised
premises less operating expenses, base rent and capital requirements.
The lease also requires the lessee and Justice Investors to make substantial
capital improvements and renovations to the hotel property. A rehabilitation
budget of more than $8 million was set forth in the new lease agreement, of
which the partnership was responsible for $2 million and the lessee was
responsible for the remainder. As of December 31, 1998, the partnership had
paid all of its $2 million commitment. Rehabilitation and renovation of the
<PAGE> 5
guest rooms, hallways, elevators and safety systems was substantially
completed during 1998. Renovation of the lobby and other public areas
commenced in December of 1998 and further improvements are expected to be made
in the future to meet standards for Holiday Inn Select hotels. The financial
responsibility for those improvements rests with Felcor.
Under the terms of the lease, the lessee is responsible for all maintenance
and repairs to the property, certain capital improvements, taxes and
insurance. In the opinion of management the property is adequately covered by
insurance.
The garage lease between the partnership and Evon provides for a monthly
rental of sixty percent (60%) of gross parking revenues with a minimum rent of
$21,750 per month. That lease expires in November 2010. The lessee is
responsible for insurance, repairs and maintenance, utilities and all taxes
assessed against the improvements to the leased premises. The garage is
operated by Ampco Parking pursuant to a sublease agreement with Evon.
Cincinnati, Ohio Apartment Complex
The Cincinnati property, owned by the Company's 55.4% subsidiary Woodland
Village, is a 100 unit apartment complex consisting of ten three-story
buildings on approximately 5.8 acres. The apartment complex is of brick and
aluminum siding over wood frame construction and opened in 1970. The
Company's equity interest in Woodland Village was acquired on December 31,
1997 at a cost of $858,600. For the year ended December 31, 1998, real estate
property taxes were approximately $105,000. Depreciation is recorded on the
straight-line method based upon an estimated useful life of 40 years. The
outstanding mortgage balance was $1,227,534 as of December 31, 1998 and the
maturity date is July 1, 2004.
Woodland Village leases units in the apartment complex on a short-term basis,
with no lease extending beyond one year. The effective rental rate per rental
unit was approximately $588 for the year ended December 31, 1998 and the
physical occupancy rate was approximately 96%. Woodland Village uses a third
party management company, with national operations, to manage the property. In
the opinion of management the property is adequately covered by insurance.
INVESTMENT POLICIES
The most significant real estate investment of the Company has been through
its investment in Portsmouth. The Company will continue to explore ways to
increase the value of that investment and to improve operations of the
underlying asset. The Company has also invested in multifamily residential
property through its controlling interest in Woodland Village.
The Company may also look for new real estate investment opportunities in
hotels, apartments, office buildings and shopping centers. The acquisition of
any new real estate investments will depend on the Company's ability to find
suitable investment opportunities and the availability of sufficient financing
to acquire such investments. To help fund any such acquisition, the Company
plans to borrow funds to leverage its investment capital. The amount of this
mortgage debt will depend on a number of factors including, but not limited
to, the availability of financing and the sufficiency of the project's
projected cash flows to support the operations and debt service.
The Company has also invested in income producing instruments, equity and debt
securities, which may include interests in real estate based companies and
REITs, where financial benefit could inure to its shareholders through income
and/or capital gain. Those investments are made under the direction of the
<PAGE> 6
Company's Chairman and President. The Company will primarily invest in
securities priced above $5.00 a share of companies listed on the New York and
American Stock Exchanges and the Nasdaq National Stock Market. Although most
of the Company's investments in marketable securities are companies listed in
major stock markets, the overall investment portfolio and some of the
Company's investment strategies could be viewed as risky and the market values
of the portfolio may be subject to large fluctuations. The Company may
realize gains and losses in its overall investment portfolio from time to time
to take advantage of market conditions and/or manage the portfolio's resources
and the Company's tax liability. The Company may also assume short positions
in marketable securities. Short sales are used by the Company to potentially
offset normal market risks undertaken in the course of its investing
activities or to provide for additional return opportunities. In addition,
the Company may utilize margin for its marketable securities purchases through
the use of standard margin agreements with national brokerage firms. The use
of available leverage is guided by the business judgment of management.
Item 3. Legal Proceedings.
On February 22, 1995, Guinness Peat Group plc and its wholly-owned subsidiary
Allied Mutual Insurance Services Limited (collectively "GPG") filed a
shareholders derivative suit in the Superior Court of the State of California
for the County of San Diego (Case No. 685760) against the directors of Santa
Fe, The InterGroup Corporation ("InterGroup") and Santa Fe as a nominal
defendant. The complaint alleged certain breaches of fiduciary duties by the
directors in causing Santa Fe to enter into a December 20, 1994 Securities
Purchase Agreement (the "Agreement") with InterGroup. That Agreement was
ratified by the Board on December 27, 1994 after receipt and review of an
appraisal and fairness opinion from an independent valuation expert.
The complaint sought declaratory relief, rescission or reformation of the
Agreement, injunctive relief and unspecified general and punitive damages.
The director defendants requested indemnification from Santa Fe, including the
advancement of costs for defense of the litigation to the full extent
permitted by law, which was granted by the Company.
On April 14, 1995, the Superior Court granted motions by the director
defendants and InterGroup requiring GPG to posts bonds to secure payment of
their attorneys' fees should they prevail in the litigation. The required
bonds, totaling $800,000, were posted by GPG.
On July 3, 1997, the Court of Appeal, Fourth Appellate District, Division One
of the State of California granted the director defendants' petition for a
writ of mandate and directed the trial court to vacate its prior order denying
the director defendants' motion for summary judgment and to enter a new order
granting the motion. The Court of Appeal's decision became final on August 2,
1997; however, plaintiffs filed a petition for review to the California
Supreme Court on August 12, 1997. That petition was denied by the Supreme
Court on October 15, 1997.
In its ruling, the Court of Appeal determined that the director defendants
properly exercised their business judgment in connection with the Company
entering into the Securities Purchase Agreement with InterGroup. That decision
effectively disposed of the remaining liability claims brought by plaintiffs
in this action. Previously, on December 31, 1996, the trial court entered a
summary judgment in favor of InterGroup, ruling that there was no fraud in
connection with that transaction. That summary judgment, including a
subsequent award of attorneys' fees and costs in favor of InterGroup in the
amount of $295,964, has been appealed by GPG.
<PAGE> 7
As prevailing parties, the director defendants and the Company also made
application to the Superior Court for recovery of the attorneys' fees and
costs expended in their successful defense of this litigation. On March 13,
1998, the trial court confirmed a prior tentative ruling and granted the
applications for attorneys' fees and costs in the total amount of $936,025.97.
On March 23, 1998, a judgment was entered in favor of the director defendants
and the Company which made the award of costs and fees effective as of
February 20, 1998. That award bears interest at the statutory rate of 10% per
annum. The award of attorneys' fees and costs has been appealed by GPG.
On May 30, 1996, the Company's 67.2%-owned subsidiary, Portsmouth, was served
with a personal injury action entitled Taylor v. Raybestos-Manhattan et al.,
San Francisco Superior Court Case No. 977148. The suit, which was filed on
March 26, 1996, named more than 60 defendants, including Evon Garage
Corporation, and alleged injuries suffered as a result of exposure to
asbestos-containing materials. The complaint sought an unspecified amount of
damages including recovery for loss of income and medical expenses. Portsmouth
was defended through its insurance carrier under a reservation of rights. On
September 16, 1997, the trial court granted Portsmouth's motion for summary
judgment. That judgment became final on April 13, 1998 and was not appealed.
Item 4. Submission of Matters to a Vote of Shareholders.
No matters were submitted to a vote of shareholders during the fourth quarter
of Registrant's fiscal year ended December 31, 1998.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
MARKET INFORMATION
Santa Fe's common stock trades on the Nasdaq Small-Cap Market tier of
the Nasdaq Stock Market under the symbol SFEF. The following table sets forth
the range of high and low sales prices (adjusted for the June 15, 1998 stock
split)for Santa Fe's common stock for each full quarterly period within the
two most recent fiscal years as reported by the Nasdaq Stock Market Summary of
Activity and Statistical Summary reports.
1998 High Low
- - ---- ----- -----
First Quarter (1/1 to 3/31) $18.00 $12.25
Second Quarter (4/1 to 6/30) 22.00 14.00
Third Quarter (7/1 to 9/30) 14.00 8.87
Fourth Quarter (10/1/12/31) 9.75 7.50
1997
- - ----
First Quarter (1/1 to 3/31) $13.25 $11.94
Second Quarter (4/1 to 6/30) 12.75 11.88
Third Quarter (7/1 to 9/30) 12.75 12.13
Fourth Quarter (10/1/12/31) 12.75 12.13
<PAGE> 8
DIVIDENDS
The Company has not paid any dividends since April 1996. In July of 1996, the
Board of Directors elected to suspend payment of any dividends pending final
resolution of the GPG action, at which time the Company will re-examine its
dividend policy.
RECENT SALES OF UNREGISTERED SECURITIES
On December 31, 1997, the Company issued 31,800 shares of newly-created 6%
cumulative convertible voting preferred stock (the Preferred Stock") to
InterGroup in exchange for a 55.4% equity interest in Woodland Village. As a
result of the Company's two-for-one stock split of its Common Stock on June
15, 1998, the number of Preferred Shares was adjusted to 63,800. Each share
of Preferred Stock has a liquidation preference of $13.50 and is convertible
into one share of restricted common stock of the Company at an exercise price
of $13.50 per share, with an eight year conversion exercise period. The
preferred stock has voting rights as if converted into common stock. This
private offering transaction was valued at $858,600 and was exempt from
registration under Section 4(2) of the Securities Act.
Item 6. 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, 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.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Comparison of operating results for the year ended December 31, 1998 to the
year ended December 31, 1997 shows a net loss of $379,824 as compared to net
income of $591,349. That result is primarily attributable to net losses on
marketable securities of $1,813,378 and a write-down of certain investments of
$307,665 offset by an increase partnership income from Justice Investors from
$2,560,805 to $3,021,878 and an increase in rental income of $620,154 from its
<PAGE> 9
real estate investment. The net loss on marketable securities reflect
management's continuing efforts to reposition the Company's investment
portfolio by selling certain underperforming securities. The increase in
partnership income from Justice Investors is primarily attributable to a 13.3%
increase in hotel rental income as a result of an increase in average daily
room rate without significant reduction in the occupancy rates. The increase
in rental income was due to the acquisition of Woodland the consolidation of
its revenues for the year ended December 31, 1998. There were no revenues and
expenses related to Woodland included in the consolidated income statements
for 1997.
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 75.1% increase in costs and expenses from $1,176,706 to $2,060,038 is
primarily attributable to property operating, mortgage interest, and
depreciation expenses totaling $787,530 related to the consolidation of its
investment in real estate, an increase in margin interest and investment
related expenses from $134,298 to $355,120, an increase in professional and
outside service fees from $175,270 to $252,204, offset by a decrease in
litigation expenses related to GPG from $265,863 to $47,647. The increase in
expenses attributable Woodland Village was due to the first year consolidation
of the property's revenues and expenses into the Company. The increase in the
margin interest and investment related expenses was due to the maintenance of
a higher margin balance in the current year and greater investing activities.
The increase in professional and outside service fees reflects the accrual for
the annual audit and an increase in professional consulting fees related to
the Company's investment activities.
Beginning July 1, 1998, certain accounting and administrative functions of the
Company and its subsidiary, Portsmouth, were consolidated with the Los
Angeles, California offices of the Intergroup Corporation, the parent company.
Effective October 31, 1998, the Santa Fe and Portsmouth also terminated their
office lease and moved to a much smaller space in an effort to reduce
expenses.
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, the Company 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. In February 1998,
the general partners decided to continue monthly distributions at the higher
monthly rate for another year. 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
<PAGE> 10
an appropriate monthly distribution for the ensuing year. At that time, the
monthly distribution could be decreased or increased. In addition, Portsmouth
received $557,760 as its share of a special distribution paid to the limited
partners on December 10, 1997 and $697,200 as its share of a special
distribution paid on December 10, 1998. Those additional distributions were
also clearly identified as special, and the limited partners were informed
that there was no guarantee that such distributions would continue, especially
if the partnership was to participate financially in the future upgrading of
the public areas of the hotel. During 1998, the Company received
distributions totaling $2,509,920 from Justice Investors.
The Company has invested in short-term, income-producing instruments and in
equity and debt securities when deemed appropriate. The Company's securities
investments are classified as available-for-sale and trading. Unrealized
gains and losses, net of deferred taxes, are included in accumulated other
comprehensive income. As of December 31, 1998, the Company had a net
unrealized gain on marketable securities, net of tax of $88,563, which
consists of pre-tax unrealized gains of $5,155,891 and pre-tax unrealized
losses of $5,008,101.
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 $2,267,071 and $36,153, 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 December 31, 1998, the
Company had repurchased 33,324 of its shares in open market and private
transactions for an aggregate amount of $313,966.
At December 31, 1998, the Company's current assets were $18,602,929. The
Company remains liquid and management believes that its capital resources are
currently adequate to meet its short and long-term obligations.
IMPACT OF INFLATION
Since the Company's primary source of revenue is from its subsidiary's 49.8%
investment in Justice Investors, the impact of inflation on the Company should
be viewed at the partnership level. As discussed above, partnership income is
primarily dependent on lease revenues from Felcor. Hotel room rates are
typically impacted by supply and demand factors, not inflation, since rental
of a hotel room is usually for a limited number of nights. Room rates can be,
and usually are, adjusted to account for inflationary cost increases. To the
extent that Felcor is able to adjust room rates, there should be minimal
impact on partnership revenues due to inflation. Partnership revenues are
also subject to interest rate risks which may be influenced by inflation. For
the two most recent fiscal years, the impact of inflation on the Company's
income is not viewed by management as material. The impact of inflation on
the Company's multifamily real estate is also not viewed by management as
material.
<PAGE> 11
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.
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS PAGE
Report of Independent Accountants 12
Consolidated Balance Sheet - December 31, 1998 13
Consolidated Statements of Income - Years Ended 14
December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity 15
Consolidated Statements of Cash Flows - Years Ended 16
December 31, 1998 and 1997
Notes to Consolidated Financial Statements 17
<PAGE> 12
Report of Independent Accountants
March 23, 1999
To the Board of Directors and
Shareholders of Santa Fe Financial Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and other comprehensive income,
shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of Santa Fe Financial Corporation and its
subsidiaries at December 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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 audits. We conducted our audits 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 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
<PAGE> 13
<TABLE>
<CAPTION>
SANTA FE FINANCIAL CORPORATION
Consolidated Balance Sheet
- - ------------------------------------------------------------------------------
December 31, 1998
-----------------
Assets
<S> <C>
Cash and cash equivalents $ 109,483
Restricted cash 53,423
Investment in marketable securities:
Available for sale 15,259,446
Trading 2,751,268
Investment in Justice Investors 6,291,260
Rental property 1,882,432
Other investments 294,767
Note receivables 134,542
Other assets 1,354,725
----------
Total assets $ 28,131,346
==========
Liabilities and Shareholders' Equity
Liabilities
Due to securities broker $ 7,919,752
Obligations for securities sold 3,188,403
Mortgage payable 1,227,534
Accounts payable and accrued expenses 400,334
----------
Total liabilities 12,736,023
----------
Minority interest 3,504,527
----------
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 shares - 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 88,563
Retained earnings 3,174,293
Treasury stock, at cost, 33,324 shares (310,634)
----------
Total shareholders' equity 11,890,796
----------
Total liabilities and shareholders' equity $ 28,131,346
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 14
<TABLE>
<CAPTION>
SANTA FE FINANCIAL CORPORATION.
Consolidated Statements of Income and Comprehensive Income
- - ------------------------------------------------------------------------------
Years ended
December 31,
1998 1997
----------- -----------
Revenues
<S> <C> <C>
Equity in net income of Justice Investors $ 3,021,878 $ 2,560,805
Rental income 620,154 -
Dividend and interest income 455,541 824,524
Net losses on marketable securities (1,813,378) (539,615)
Other income (238,961) 202,502
--------- ---------
2,045,234 3,048,216
--------- ---------
Costs and expenses
Property operating expense 491,043 -
Mortgage interest expense 122,453 -
Depreciation expense 174,034 3,885
Margin interest and investment
related expenses 355,120 134,298
Professional and outside services 252,204 175,270
Litigation 47,647 265,863
General and administrative 617,537 597,390
--------- ---------
2,060,038 1,176,706
--------- ---------
Income (loss) before taxes and minority interest (14,804) 1,871,510
Provision for income tax benefit (expense) 43,342 (831,993)
--------- ---------
Income (loss) before minority interest 28,538 1,039,517
Minority interest (408,362) (448,168)
--------- ---------
Net (loss) income $ (379,824) $ 591,349
========= =========
Basic earnings per share $ (0.30) $ 0.46
========= =========
Weighted average number of shares outstanding 1,270,376 1,276,038
========= =========
Comprehensive income
Net (loss) income $ (379,824) $ 591,349
Other comprehensive income:
Unrealized holding loss on
marketable securities (2,676,918) (778,871)
Reclassification adjustment for
holding loss included in net earnings 1,813,378 539,615
Income tax benefit (expense) related to
other comprehensive income 764,834 222,534
--------- ---------
Total comprehensive income $ (478,530) $ 574,627
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE> 15
<TABLE>
<CAPTION>
SANTA FE FINANCIAL CORPORATION
Consolidated Statement of Shareholders' Equity
- - -----------------------------------------------------------------------------------
Preferred Stock Common Stock
---------------------------------------- Accumulated
Shares Shares Additional other
out- out- paid-in comprehensive Retained Treasury
standing Amount standing Amount capital income earnings Stock Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Unrealized
holding loss
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
Stock dividend 31,800 3,180 638,019 63,802 (66,982) -
Purchase of
treasury stock (33,324) (3,332) (310,634) (313,966)
Net loss (379,824) (379,824)
Unrealized
holding loss
on marketable
securities,
net of tax (98,706) (98,706)
----------------------------------------------------------------------------------------------------
Balance at
December 31,
1998 63,600 $6,360 1,242,714 $124,272 $8,807,942 $ 88,563 $3,174,293 $(310,634) $11,890,796
----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 1
<TABLE>
<CAPTION>
SANTA FE FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
- - ------------------------------------------------------------------------------
For the years ended
December 31,
1998 1997
----------- -----------
<S> <C> <C>
Operating activities
Net (loss) income $ (379,824) $ 591,349
Adjustments to reconcile net income to
net cash used by operating activities:
Equity in net income of Justice Investors (3,021,878) (2,560,805)
Minority interest 408,362 448,168
Amortization of excess of market value
Over carrying value (88,706) (88,706)
Depreciation 174,034 3,885
Net losses on marketable securities 1,813,378 539,615
Write-down of other investments 307,665 -
Change in operating assets and liabilities:
Notes receivables 141,346 14,794
Other assets (998,062) 49,080
Accounts payable and accrued expenses (56,331) 3,894
---------- ----------
Net cash used in operating activities (1,700,016) (998,726)
Investing activities
Cash distributions from Justice Investors 2,509,920 2,196,180
Purchase of marketable securities (48,406,976) (31,338,454)
Purchase of other investments (250,000) (400,000)
Proceeds from sales of marketable securities 45,844,651 25,690,738
Purchases of property, furniture and equipment (139,445) -
Purchase of interest in Woodland Village, Inc. - 25,599
---------- ---------
Net cash used in investing activities (441,850) (3,825,937)
---------- ---------
Financing activities
Increase in due to securities broker 2,253,245 5,666,507
Purchase and retirement of common stock - (324,615)
Purchase of treasury stock (313,966) -
Dividends paid to minority shareholders of
Portsmouth Square, Inc. (126,713) (133,295)
Mortgage principle payment (19,079) -
---------- ----------
Net cash provided by financing activities 1,793,487 5,208,597
---------- ----------
Net increase (decrease) in cash and
cash equivalents (348,379) 383,934
Cash and cash equivalents at the
beginning of the year 511,285 127,351
---------- ----------
Cash and cash equivalents at end of year $ 162,906 $ 511,285
========== ==========
Supplemental information
Income taxes paid, net of refunds $ 1,097,800 $ 815,000
========== ==========
Margin interest paid $ 279,520 $ 134,298
========== ==========
Noncash activities
Issuance of preferred stock in
exchange for Woodland $ - $ 858,600
========== ==========
</TABLE>
See accompanying notes to financial statements.
<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
9), The InterGroup Corporation ("InterGroup"), which controls approximately
52% of the voting stock of the Company. 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
67.2% owned subsidiary, Portsmouth Square, Inc. (PSI), and its 55.4% owned
subsidiary, Woodland. 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, 1998 and 1997
was approximately $2.6 million and $2.7 million, respectively.
The Company acquired Woodland on December 31, 1997 and accounted for the
transaction under the purchase method of accounting. As the acquisition took
place on the last day of the year, Woodland's revenues and expenses for 1997
are not included in the Company's consolidated statement of income for that
year. Woodland's revenues and expenses for the year ended December 31, 1998
are included in the consolidated statement of income for that year. The asset
and liability accounts of Woodland as of December 31, 1998 and 1997 are
included in the consolidated balance sheet.
On May 5, 1988, the Company's Board of Directors approved a two-for-one stock
split of the Company's $.10 par value Common Stock in the form of a stock
dividend. The stock dividend was paid on June 15, 1998 to shareholders of
record as of May 22, 1998. Where applicable, the Company's financial
statements have been restated to reflect the impact of the stock split.
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 established standards for disclosure about
operating segments and related disclosures about products and services,
geographic areas and major customers. The Company currently operates in one
business segment, as the parent company of PSI and Woodland Village.
<PAGE> 18
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133). SFAS No. 133 addresses the accounting for derivative instruments,
including derivative instruments imbedded in other contracts and hedging
activities. The adoption of SFAS No. 133 did not have a material effect on
the financial position or results of operations of the Company.
Cash Equivalents and Restricted Cash
The Company considers all investments purchased with an original maturity of
three months or less 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 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.
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.
Obligations for Securities Sold
Obligation for securities sold represents the fair value of securities sold
short. The obligation may be satisfied with current holdings of the same
security or by subsequent purchases of that security. Unrealized gains and
losses from changes in the obligation are included in earnings.
Rental Property
Rental property is stated at cost. Depreciation of rental property is
provided on the straight-line method based upon estimated useful life of 5
to 40 years for buildings and improvements and 5 to 10 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 in 1998 or 1997.
<PAGE> 19
Rental income is recognized when earned. Revenue recognition from apartment
rentals commences when an apartment unit is placed in service and occupied by
a rent-paying tenant.
Furniture and Fixtures
Furniture and fixtures are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, which
range from 3 to 5 years.
Revenue Recognition
During 1998 and 1997, 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 under the equity method.
Earnings per Share
Basic earnings per share are calculated based upon the weighted average number
of common shares outstanding during each fiscal year. As of December 31, 1998
and 1997, the Company did not have any potentially dilutive securities
outstanding; and therefore, does not report diluted earnings per share.
Accounting for Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the estimated undiscounted cash
flows generated by those assets are less than their carrying value. During
1998 and 1997, the Company did not record any impairment losses.
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 those estimates.
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.
As of December 31, 1998 and 1997, the Company had a reserve against deferred
tax assets of $510,576 and $782,894, respectively. Based on the Company's
earnings history and projections, management considers the Company's net
deferred tax asset to be realizable.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year presentation.
<PAGE> 20
NOTE 2 - INVESTMENT IN MARKETABLE SECURITIES
The following is a summary of the Company's investment in marketable
securities:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
December 31, 1998
Equity securities $17,219,058 $5,081,932 (5,004,701) $17,296,289
Debt securities 643,866 73,959 (3,400) 714,425
---------- --------- ---------- ----------
$17,862,924 $5,155,891 $(5,008,101) $18,010,714
========== ========= ========== ==========
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
Debt securities 1,980,302 127,652 (8,290) 2,099,664
---------- --------- --------- ----------
$14,125,785 $1,662,839 $(1,350,007) $14,438,617
========== ========= ========= ==========
Gross realized gains and losses on sales of marketable securities totaled
$4,393,859 and $6,207,237 respectively, during the year ended December 31,
1998, and $1,364,437 and $1,904,052, respectively, during the year ended
December 31, 1997.
Gross realized gains and losses included in earnings from the transfer of
securities from available-for-sale to trading totaled $2,267,071 and $36,153,
respectively, during the year ended December 31, 1998. There were no such
transfers in 1997.
The amortized cost and fair value of debt securities at December 31, 1998, by
contractual maturity, are shown below:
Cost Fair Value
--------- ----------
Due in one year or less $ 60,332 $ 64,200
Due after one year through five years 275,227 288,900
Due after five years through ten years 198,082 254,500
Due after ten years 110,225 106,825
--------- ---------
$ 643,866 $ 714,425
========= =========
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.
<PAGE> 21
CONDENSED BALANCE SHEETS
December 31,
1998 1997
---- ----
Assets
Total current assets $1,696,404 $ 500,374
Property, plant and equipment, net of accumulated
depreciation of $10,999,473 in 1998 and
$10,607,195 in 1997 5,576,210 5,968,488
Loan fees and deferred lease costs, net of accumulated
amortization of $116,783 in 1998 and $85,741 in 1997 193,629 224,671
--------- ---------
$7,466,243 $6,693,533
========= =========
Liabilities and partners' equity
Total current liabilities $ 57,292 $ 293,166
Long-term liabilities - Note B 2,604,686 2,624,127
Partners' capital - Note C 4,804,265 3,776,240
--------- ---------
$7,466,243 $6,693,533
========= =========
CONDENSED STATEMENTS OF OPERATIONS
December 31,
1998 1997
---- ----
Revenues - Note A $7,036,744 $6,194,532
Costs and expenses 968,716 1,052,354
--------- ---------
Net income $6,068,028 $5,142,178
========= =========
Note A - Revenues include $1,337,833 and $1,212,491 for the years ended
December 31, 1998 and 1997, 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, 1998 and 1997 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, 1998 and 1997, total
annual distributions to partners amounted to approximately $5,040,000 and
$4,410,000, respectively.
<PAGE> 22
NOTE 4 - RENTAL PROPERTY
At December 31, 1998 and 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,
1998 1997
------- -------
Investment in real estate:
Land $ 286,104 $ 283,476
Buildings, improvements and equipment 3,057,097 2,920,653
Accumulated depreciation on buildings,
improvements and equipment (1,460,769) (1,287,108)
--------- ---------
$1,882,432 $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% (6.125% at
December 31, 1998). The interest rate on cash or deposits is based on the
Federal Funds rate less 0.5% (4.75% at December 31, 1998). The interest rate
on interest rebates in connection with short positions is based on the Federal
Funds rate less 0.375% (4.875% at December 31, 1998).
NOTE 6 - MORTGAGE NOTE PAYABLE
At December 31, 1998, the balance on Woodland's mortgage note payable was
$1,227,534. 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, 1999 are approximately as follows:
Year ending December 31,
------------------------
1999 $ 21,000
2000 23,000
2001 25,000
2002 28,000
2003 33,000
Thereafter 1,098,000
---------
Total $1,228,000
=========
<PAGE> 23
NOTE 7 - INCOME TAXES
The Company and PSI file separate tax returns for both federal and state
purposes. The provision for income taxes consists of the following:
Year ended
December 31,
1998 1997
---- ----
Federal
Current $ 799,995 $ 689,632
Deferred (credit) (824,114) (53,883)
--------- ---------
(24,119) 635,749
========= =========
State
Current 213,550 207,398
Deferred (credit) (232,773) (11,154)
--------- ---------
(19,223) 196,244
--------- ---------
$ (43,342) $ 831,993
========= =========
A reconciliation of the statutory federal income tax rate to the effective tax
rate is as follows:
Years ended
December 31,
1998 1997
---- ----
Statutory federal tax rate 34.0% 34.0%
Amortization of excess of fair value over the
allocated carrying amount of the investment in PSI 203.7 -
Dividends received deduction 50.4 -
State income taxes, net of federal tax benefit (164.5) 6.9
Operating losses for which no benefit has been
provided, net of change in the valuation allowance 428.8 1.7
Other (5.5) 1.9
----- -----
292.8% 42.2%
===== =====
The components of the Company's deferred tax assets and liabilities as of
December 31, 1998 and 1997 are as follows:
December 31,
1998 1997
---- ----
Deferred tax assets
Net operating loss carryforwards $ 510,500 $ 595,500
State income taxes 20,000 70,515
Capital loss carryforwards 1,090,000 229,643
Other miscellaneous differences 69,133 9,406
--------- -------
Gross deferred tax asset 1,689,633 905,064
Valuation allowance (510,576) (782,894)
--------- -------
Net deferred tax asset $1,179,057 $ 122,170
========= =======
Deferred tax liabilities
Unrealized gain on marketable securities $ 93,097 $ 125,564
========= =======
<PAGE> 24
At December 31, 1998, the Company had net operating losses available for
carryforward for federal and state income tax purposes of approximately
$1,000,000 and $387,000, 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 - 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 (the "Preferred Stock")in exchange for a
55.4% interest in Woodland from InterGroup. As a result of the Company's
two-for-one stock split (see below), the number of Preferred Shares was
adjusted to 63,800. Each share of Preferred Stock has a liquidation
preference of $13.50 and is convertible into one share of restricted common
stock of the Company at an exercise price of $13.50 per share, with an eight
year conversion exercise period. The preferred stock has voting rights as if
converted into common stock. InterGroup has notified the Company that it has
elected to forego any dividend payments on the preferred stock for the year
ended December 31, 1998.
On June 15, 1998, the Company issued a two-for-one stock split in the form of
a stock dividend to its shareholders of record as of May 22, 1998. Where
applicable, the Company's financial statements have been restated to reflect
the impact of the stock split.
NOTE 9 - RELATED PARTY TRANSACTIONS
As of December 31, 1998, 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 December 31, 1998. 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 between the Company and its subsidiary, Portsmouth based on
management's estimate of the utilization of resources. Effective June 30,
1998, certain accounting and administrative functions of the Company and its
subsidiaries, were transferred to the Los Angeles, California offices of
InterGroup. During the years ended December 31, 1998 and 1997, the Company
and Portsmouth made payments to InterGroup of approximately $162,000 and
$150,000, respectively, for administrative costs and reimbursement of direct
and indirect costs associated with the management of the Companies and their
investments, including the partnership asset.
<PAGE> 25
During 1997, the Company purchased a controlling 55.4% interest in Woodland
from InterGroup (See Note 1). In exchange for that interest in Woodland, the
Company issued to InterGroup 31,800 shares (63,600 shares post stock split)of
6% cumulative, convertible, voting preferred stock.
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.
The Company had an operating lease agreement for office space through June 30,
1999. On October 31, 1998, the operating lease was terminated without further
obligation to the Company. At December 31, 1998, the Company had no minimal
rental payments due under the lease. Rent expense for the years ended
December 31, 1998 and 1997 totaled approximately $28,000 and $33,600,
respectively.
NOTE 10- 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.
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. Portsmouth
was defended through its insurance carrier under a reservation of rights.
During 1997, the trial court granted Portsmouth's motion for summary judgment.
That judgment became final on April 13, 1998 and was not appealed. Since
Portsmouth's insurance carrier paid for the cost of the defense, the
resolution of this claim did not have any effect on the Company's consolidated
financial position or results of operations.
Item 8. Changes in Accountants.
None.
<PAGE> 26
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a)of The Exchange Act.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. Certain Relationships and Related Party Transactions.
The information for Part III, Items 9 through 12, are hereby incorporated by
reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 4, 1999, which will be filed with the Commission
within one hundred twenty (120) days of the close of the fiscal year pursuant
to Regulation 14A.
Item 13. Exhibits and Reports on Form 8-K.
(a) Listing of Exhibits by Table Number
-----------------------------------
Set forth below is an index of applicable exhibits filed with this report
according to exhibit table number.
Exhibit Page
------- ----
3.(i) Articles of Incorporation ***
(ii) Bylaws *
4. Instruments defining he rights of Security Holders, *
including indentures (see Articles of Incorporation
and Bylaws)
10. Material Contracts
(a) Securities Purchase Agreement dated December 20, **
1994 between Santa Fe Financial Corporation and
The InterGroup Corporation
21. Subsidiaries:
(1) Portsmouth Square, Inc. (67.2%)
Incorporated on July 6, 1967 in California
(2) Intergroup Woodland Village, Inc. (55.4%)
Incorporated on August 5, 1993 in Ohio
22. Published report regarding matters
submitted to vote of Security Holders -
Proxy Statement for Annual Meeting of
Shareholders to be held May 4, 1999, which
will be filed with the Commission within
one hundred twenty (120) days of the fiscal
year pursuant to Regulation 14A
<PAGE> 27
27. Financial Data Schedule 36
* All exhibits marked by an asterisk have been previously filed with other
documents, including Registrant's Form 10 filed on October 27, 1967, and
subsequent filings on forms 8-K, 10-K and 10-Q which are incorporated
herein by reference.
** Securities Purchase Agreement dated December 20, 1994 between Santa Fe
Financial Corporation and The InterGroup Corporation was previously filed
on March 31, 1995 with Registrant's Form 10-K Annual Report for the year
ended December 31, 1994 and is incorporated herein by reference.
*** Restated Articles of Incorporation, dated August 12, 1997, were previously
filed on March 31, 1998 with Registrant's Form 10-KSB Annual Report for
the year ended December 31, 1997 and is incorporated herein by reference.
(b) Reports on Form 8-K
-------------------
Registrant filed no reports on Form 8-K during the last quarter of the period
covered by this report.
(c) Financial Statements and Schedules Required by Regulation S-X
-------------------------------------------------------------
The following financial statements of Justice Investors are included in
Item 13:
PAGE
Independent Auditor's Report 28
Balance Sheets - December 31, 1998 and 1997 29
Statements of Income and Partners' Capital - Years 30
Ended December 31, 1998 and 1997
Statements of Cash Flows - Years Ended 31
December 31, 1998 and 1997
Notes to Financial Statements - December 31, 1998 and 1997 32
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
<PAGE> 28
COLLIER & MARKOWITZ
CERTIFIED PUBLIC ACCOUNTANTS
(SUCCESSORS TO AARON, BLUM & COLLIER)
235 MONTGOMERY STREET, SUITE 1049
SAN FRANCISCO, CALIFORNIA 94104
TEL (415) 982-7852
FAX (415) 982-1429
January 27, 1999
Managing General Partner
Justice Investors
(A Limited Partnership)
San Francisco, California
Independent Auditor's Report
----------------------------
We have audited the accompanying balance sheets of Justice Investors ( A
Limited Partnership) as of December 31, 1998, and 1997, and the related
statements of income and partners' capital and cash flows years then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Justice Investors (A Limited
Partnership) as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for years then ended, in conformity with
generally accepted accounting principles.
/s/ COLLIER AND MARKOWITZ
Certified Public Accounts
<PAGE> 29
<TABLE>
<CAPTION>
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1998 and 1997
--------------------------
1998 1997
---- ----
ASSETS
------
<S> <C> <C>
Current assets
Cash $ 3,265 $ -
Rents receivable 1,688,253 465,751
Prepaid expenses 4,886 34,623
--------- --------
Total current assets 1,696,404 500,374
--------- --------
Fixed assets
Office equipment (net of accumulated
depreciation of $3,846 in 1998 and
$2,936 in 1997) 1,707 2,617
Building and improvements (net of accumulated
depreciation of $10,995,627 in 1998 and
$10,604,259 in 1997) 4,450,375 4,841,743
Land 1,124,128 1,124,128
--------- ---------
Total fixed assets 5,576,210 5,968,488
--------- ---------
Other assets
Loan fees (net of accumulated amortization
of $110,875 in 1998 and $81,310 in 1997) 177,382 206,947
Deferred lease costs (net of accumulated
amortization of $5,908 in 1998 and
$4,431 in 1997) 16,247 17,724
--------- ---------
Total other assets 193,629 224,671
--------- ---------
Total assets $7,466,243 $6,693,533
========= =========
</TABLE>
<TABLE>
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
<S> <C> <C>
Current liabilities
Trade accounts payable and accrued expenses $ 50,539 $ 86,916
Rents received in advance 200 206,250
Accrued interest 6,553 -
--------- ---------
Total current liabilities 57,292 293,166
Long-term liabilities
Notes payable 2,604,686 2,624,127
--------- ---------
Total liabilities 2,661,978 2,917,293
Commitment - Lease commission
Partners' capital 4,804,265 3,776,240
--------- ---------
Total liabilities and partners' capital $7,466,243 $6,693,533
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 30
<TABLE>
<CAPTION>
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
Years Ended December 31, 1998 and 1997
--------------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues
Rental income
Hotel $5,677,119 $4,977,471
Garage 1,337,833 1,212,491
Other 2,400 2,400
--------- ---------
Total rental income 7,017,352 6,192,362
Interest income - 2,170
Miscellaneous income 19,392 -
--------- ---------
Total revenues 7,036,744 6,194,532
--------- ---------
Expense
Interest 175,468 241,641
Depreciation and amortization 423,320 450,181
Lease commission 56,771 49,776
Property taxes 41,928 41,428
Repairs and maintenance - 3,208
General and administrative
Administrative expenses 150,000 150,000
Accounting fees 9,999 10,263
Audit and tax preparation 25,527 21,700
Business taxes 20,554 18,829
Bank charges 6,935 6,319
Consultants 5,005 2,210
Franchise taxes 800 800
Insurance expense 45,518 39,421
Legal fees 6,178 11,918
Office expense and miscellaneous 713 4,660
--------- ---------
Total expenses 968,716 1,052,354
--------- ---------
Net income 6,068,028 5,142,178
Partners' capital at beginning of
year 3,776,240 3,044,061
Less distributions to partners (5,040,003) (4,409,999)
--------- ---------
Partners' capital at end of year $4,804,265 $3,776,240
========= =========
</TABLE>
The accompanying notes are in integral part of these financial statements.
<PAGE> 31
<TABLE>
<CAPTION>
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
--------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from tenants $5,588,801 $6,079,723
Interest received - 2,170
Interest paid (168,915) (242,973)
Cash paid for other operating
activities (357,178 (349,956)
--------- ---------
Net cash provided by operating
activities 5,062,708 5,488,964
--------- ---------
Cash flows from investing activities
Capital expenditures - (447,793)
--------- ---------
Net cash used in
investing activities - (447,793)
--------- ---------
Cash flows from financing actives
Distributions to partners (5,040,003) (4,409,999)
Proceeds from borrowing of long-
term debt 3,992,727 4,375,802
Principal payments of long-term
debt (4,012,167) (5,035,964)
Payments (advances)-garage lessee - -
---------- ----------
Net cash used in financing
activities (5,059,443) (5,070,161)
Net decrease in cash and
cash equivalents 3,265 (28,990)
Cash and cash equivalents at
beginning of year - 28,990
--------- ---------
Cash and cash equivalents at end
of year $ 3,265 $ -
========= =========
Reconciliation of net income to net
cash provided by operating
activities
Net income $6,068,028 $5,142,178
--------- ---------
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 423,320 450,181
Rents receivable (1,222,502) (110,556)
Prepaid expenses 29,737 1,412
Accounts payable (36,378) 9,164
Rents paid in advance (206,050) (2,083)
Interest payable 6,553 (1,332)
--------- ---------
(1,005,320) 346,786
--------- ---------
Net cash provided by operating
activities $5,062,708 $5,488,964
========= =========
Supplemental disclosures of cash
flows information:
Cash paid during the year for:
Interest $ 168,915 $ 242,973
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 32
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
--------------------------
SIGNIFICANT ACCOUNTING POLICIES
- - -------------------------------
Organization
- - ------------
Justice Investors, a Limited Partnership (the "Partnership") was formed in
1967 to acquire real property in San Francisco, California, for the
development and lease of hotel and related facilities. The leases became
effective during 1970 upon completion of the hotel and parking garage. The
lease of the hotel provided for the Partnership to receive certain percentages
of hotel revenue, as defined, to December 31, 2004, with a five year renewal
option. The parking garage lease provided for payments of certain percentages
of parking receipts to November 30, 2010.
Rents Receivable
- - ----------------
Management believes that all rents receivable as of December 31, 1998 and
1997, were fully collectible. Therefore, no allowance for doubtful accounts
was recorded.
Depreciation
- - ------------
Depreciation on the hotel facilities is computed using the straight line
method over a useful life of 40 years. Building improvements are being
depreciated on a straight line basis over their useful lives ranging from 5 to
39 years. Office equipment is being depreciated using the 150% declining
balance method with a useful life of 5 years.
Amortization
- - ------------
Loan fees are amortized using the straight line method over 10 years. Deferred
lease costs are amortized using the straight line method over 15 years.
Income Tax
- - ----------
No income taxes have been provided in the accompanying financial statements
since the Partnership profits and losses are reportable by the partners on
their individual income tax returns.
Statement of Cash Flows
- - -----------------------
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of three months or less.
Use of Estimates
- - ----------------
The process of preparing financial statements in conformity with generally
accepted accounting principles required the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
<PAGE> 33
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
--------------------------
LONG-TERM DEBT
- - --------------
At December 31, 1998 and 1997, long-term debt consisted of the following:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Note payable to Wells Fargo Bank collateralized
by first deed of trust on land, hotel property
and the Partnership's interest in hotel and
garage leases. The note provided for interest
at LIBOR PLUS 2% per annum to a total capped
rate of 11.5% up to $4,000,000 due December
31, 2004 $2,590,000 $2,200,000
Note payable to Wells Fargo Bank collateralized
by first deed of trust on land, hotel property
and the Partnership's interest in hotel and
garage leases. The note provided for interest
at prime rate per annum due December 31, 2004 14,686 424,127
--------- ---------
$2,604,686 $2,624,127
========= =========
</TABLE>
Under the terms of the revolving reducing line of credit with Wells Fargo
Bank, the above notes are subject to a maximum credit limit as follows:
December 31, 1997 7,057,050
December 31, 1998 6,796,678
December 31, 1999 6,506,363
December 31, 2000 6,182,662
December 31, 2001 5,821,736
December 31, 2002 5,419,302
December 31, 2003 4,970,590
December 31, 2004 4,470,275
Maturities of long-term debt for each of the next five years are as follows:
1999 $ -
2000 -
2001 -
2002 -
Subsequent to 2003 2,604,686
---------
$2,604,686
=========
<PAGE> 34
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
--------------------------
MINIMUM FUTURE RENTALS
- - ----------------------
Minimum future rentals to be received on non-cancelable leases as of December
31, 1998 for each of the next five years and in the aggregate are:
1999 $ 2,761,000
2000 2,761,000
2001 2,761,000
2002 2,761,000
2003 2,761,000
Subsequent to 2003 4,305,250
----------
$18,110,250
==========
COMMITMENT - LEASE COMMISSION
- - -----------------------------
The Partnership was obligated to pay a lease commission of 2% of the rentals
received under the primary lease of the hotel property for the initial 25-year
term of the lease which expired on October 31, 1995. In addition, the
Partnership is obligated to pay a lease commission of 1% of rentals received
to December 31, 2004 plus Holiday Inn lease extension, if any, to December 31,
2010.
RELATED PARTY TRANSACTIONS
- - --------------------------
Expenses were incurred for services rendered by related parties as follows:
1998 1997
---- ----
General partners $150,000 $150,000
Legal services 6,178 11,918
------- -------
$156,178 $161,918
======= =======
The garage lessee, the managing general partner, paid the Partnership
$1,337,833 and $1,212,491 during 1998 and 1997, respectively, under the terms
of the rental agreement. Rents receivable from the garage lessee at December
31, 1998 and 1997 were $115,794 and $99,046, respectively. Accounts payable to
general partners at December 31, 1998 and 1997 were $30,000 and $30,000.
LITIGATION
- - ----------
The Partnership is a co-defendant in a lawsuit filed by a former employee of
the general contractor who constructed the hotel and garage facilities, for
alleged personal injuries resulting from exposure to asbestos-containing
materials. The suit seeks an unspecified amount of damages. Outside counsel
for the Partnership has advised that at this stage in the proceedings, they
cannot offer an opinion as to the probable outcome. The Partnership believes
the suit is without merit and is vigorously defending its position.
<PAGE> 35
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 30, 1999 By /s/ John V. Winfield
-------------- ----------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Date: March 30, 1999 /s/ L. Scott Shields
-------------- ---------------------------------------
L. Scott Shields, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, 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: March 30, 1999 /s/ John V. Winfield
-------------- ---------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
Date: March 30, 1999 /s/ L. Scott Shields
-------------- ---------------------------------------
L. Scott Shields, Treasurer
and Chief Financial Officer
Date: March 30, 1999 /s/ John C. Love
-------------- ---------------------------------------
John C. Love,
Director
Date: March 30, 1999 /s/ William J. Nance,
-------------- ---------------------------------------
William J. Nance,
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED INCOME STATEMENT OF SANTA
FE FINANCIAL CORPORATION SET FORTH IN ITS FORM 10-KSB REPORT FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-KSB REPORT.
</LEGEND>
<CIK> 0000086759
<NAME> SANTA FE FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 162906
<SECURITIES> 18010714
<RECEIVABLES> 134542
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18602929
<PP&E> 3343201
<DEPRECIATION> 1460769
<TOTAL-ASSETS> 28131346
<CURRENT-LIABILITIES> 11508489
<BONDS> 0
0
6360
<COMMON> 124272
<OTHER-SE> 11760164
<TOTAL-LIABILITY-AND-EQUITY> 28131346
<SALES> 3642032
<TOTAL-REVENUES> 2045234
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2060038
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14804)
<INCOME-TAX> 43342
<INCOME-CONTINUING> (379824)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (379824)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
