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, 2000
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)
(858) 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: 1,192,310 shares of issuer's
$.10 Par Value Common Stock were outstanding as of May 10, 2000.
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, 2000 (Unaudited) 3
Consolidated Statements of Income and Comprehensive Income
(Unaudited)--Three Months ended March 31, 2000 and
March 31, 1999 4
Consolidated Statements of Cash Flows (Unaudited)--
Three Months ended March 31, 2000 and March 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Santa Fe Financial Corporation
Consolidated Balance Sheet
(Unaudited)
As of March 31, 2000
-------------
<S> <C>
ASSETS
Cash and cash equivalents $ 511,497
Investment in marketable securities 30,224,422
Investment in Justice Investors 7,157,215
Rental property 4,051,027
Other investments 350,000
Other assets 290,654
----------
Total assets $ 42,584,815
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Due to securities broker $ 9,292,711
Obligations for securities sold 9,021,531
Mortgage payable 2,110,966
Accounts payable and accrued expenses 2,096,459
----------
Total liabilities 22,521,667
----------
Minority interest 5,091,225
----------
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 1,276,038 and outstanding 1,207,710 127,604
Additional paid-in capital 8,807,941
Retained earnings 6,672,288
Treasury stock, at cost, 68,328 shares (642,270)
-----------
Total shareholders' equity 14,971,923
-----------
Total liabilities & shareholders' equity $ 42,584,815
===========
</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, 2000 1999
--------- ---------
<S> <C> <C>
Revenues
Equity in net income of Justice
Investors $ 890,679 $ 564,399
Dividend and interest income 217,304 199,565
Net gains (losses) on marketable
securities 3,019,729 (992,962)
Rental income 75,696 153,478
Other income(loss) 67,043 (1,966)
--------- ---------
4,270,451 (77,486)
--------- ---------
Costs and expenses
Property operating expense 32,068 42,400
Mortgage interest expense 44,638 48,909
Depreciation expense 13,354 44,472
Margin interest and trading expenses 266,048 129,183
Litigation 7,448 -
General and administrative 216,715 181,210
--------- ---------
580,271 446,174
--------- ---------
Income (loss) before income taxes
and minority interest 3,690,180 (523,660)
Income tax (expense) benefit (1,476,072) 189,900
--------- ---------
Income before minority interest 2,214,108 (333,760)
Minority interest (299,968) (242,321)
--------- ---------
Net income (loss) $ 1,914,140 (576,081)
Preferred stock dividends (12,704) -
--------- ---------
Income available to common shareholders $ 1,901,436 $ (576,081)
========= =========
Basic earnings (loss) per share $ 1.57 $ (0.45)
========= =========
Weighted average number of shares
outstanding 1,212,079 1,270,376
========= =========
Comprehensive income
Net income (loss) $ 1,914,140 $ (576,081)
Other comprehensive income:
Unrealized holding loss
on marketable securities - (427,133)
Reclassification adjustment for holding
loss included in net earnings - 992,962
Income tax benefit related to
other comprehensive income - 122,038
--------- ---------
Total comprehensive income $ 1,914,140 $ 111,786
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
Santa Fe Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
For the three months ended March 31, 2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,914,140 $ (576,081)
Adjustments to reconcile net income(loss) to
net cash provided by (used in) operating
activities:
Equity in net income of Justice Investors (890,679) (564,399)
Net unrealized (gain)loss on marketable
securities (1,730,622) 992,962
Minority interest 299,968 195,039
Amortization of excess of market value
over carrying value (22,176) (22,176)
Depreciation expense 13,354 44,472
Changes in operating assets and liabilities:
Investment in marketable securities 1,996,421 -
Other assets 43,791 (414,541)
Accounts payable and accrued expenses 1,373,138 486,275
Due to securities broker (5,861,451) -
Obligations for securities sold 2,771,328 -
---------- ----------
Net cash (used in) provided by operating
activities (92,788) 141,551
---------- ----------
Cash flows from investing activities:
Cash distributions from Justice Investors 627,480 418,320
Purchase of marketable securities - (7,194,092)
Proceeds from sale of marketable securities - 6,036,521
Purchase of other investments - (50,000)
Purchase of property, furniture and fixtures - (6,296)
---------- ----------
Net cash provided by (used in) investing
activities 627,480 (795,547)
---------- ----------
Cash flows from financing activities:
Decrease in due to securities broker - (1,894,709)
Increase in obligations for securities sold - 2,845,334
Principal payments on mortgage payable (4,237) (6,760)
Purchase of treasury stock (112,430) -
Dividends paid to preferred shareholders (12,704) -
Dividends paid to minority shareholders (63,331) (63,357)
---------- ----------
Net cash (used in) provided by financing
activities (192,702) 880,508
---------- ----------
Net increase in cash and cash equivalents 341,990 226,512
Cash and cash equivalents at beginning of period 169,507 162,906
---------- ----------
Cash and cash equivalents at end of period $ 511,497 $ 389,418
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
SANTA FE FINANCIAL CORPORATION
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 to 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, 1999.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of results to be expected for the full fiscal year
ending December 31, 2000.
2. Investment in Justice Investors
-------------------------------
The Company's principal source of revenue continues to be derived from the
investment of its 68.1%-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
derives most of its income from a lease of its San Francisco, California hotel
property to Felcor Lodging Trust, Inc. ("Felcor") and from a lease with Evon
Garage Corporation ("Evon"). 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, 2000
--------------
Assets
Total current assets $1,055,648
Property, plant and equipment, net of
accumulated depreciation of $11,465,896 5,108,904
Loan fees and deferred lease costs,
net of accumulated amortization of $155,585 154,827
---------
Total assets $6,319,379
=========
Liabilities and partners' capital
Total current liabilities $ 59,248
Partners' capital 6,260,131
---------
Total liabilities and partners' capital $6,319,379
=========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2000 1999
---------- ----------
Revenues $2,012,139 $1,358,686
Costs and expenses 223,626 225,354
--------- ---------
Net income $1,788,513 $1,133,332
========= =========
3. Investment in Marketable Securities
-----------------------------------
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. During 1999,
the Company increased the turnover of its investment portfolio and engaged in
increased trading activities designed to maximize the overall return on
investment activities in the near term. This resulted in portions of the
Company's investments in marketable securities being classified as "trading" as
defined by generally accepted accounting principles. After consultation with
the Investment Committee of the Board of Directors, management determined that
the classification of the entire portfolio as trading beginning July 1, 1999
would be more consistent with the Company's overall investment objectives and
activities. As a result, beginning with its third quarter ending September 30,
1999, all unrealized gains and losses on the Company's investment portfolio
<PAGE> 8
were recorded through the income statement. For the three months ended March
31, 2000, net unrealized gains on trading securities included in earnings were
$1,730,622.
4. Related Party Transactions
--------------------------
Certain costs and expenses, primarily salaries, rent and insurance, are
allocated among the Company and its subsidiary, Portsmouth, and the Company's
parent, InterGroup, based on management's estimate of the utilization of
resources. For the three months ended March 31, 2000, the Company and
Portsmouth made payments to InterGroup of approximately $54,610 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.
6. 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 plus
interest at the statutory rate of 10% per annum. On January 21, 2000, the Court
of Appeal affirmed that award of attorney's fees and costs. On March 1, 2000,
the plaintiffs filed a Petition for Review of that decision with the California
Supreme Court. On April 12, 2000, the California Supreme Court granted the
Petition for Review, but deferred further action pending consideration and
disposition of a related issue in another case before the Court, or pending
further order of the Court.
<PAGE> 9
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, 1999, 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 68.1% owned subsidiary, Portsmouth, in the Justice Investors
limited partnership, rental income from its multi-family real estate property
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.
Three Months Ended March 31, 2000 Compared to Three Months
Ended March 31, 1999
Comparison of operating results for the three months ended March 31, 2000 to
the three months ended March 31, 1999 shows net income of $1,914,140 as
compared to a net loss of $576,081. The significant increase in net income is
primarily attributable to the increase in total revenue to $4,270,451 from a
loss of $77,486 offset by a moderate increase in total costs and expenses to
$580,271 from $446,174.
The increase in total revenue to $4,270,451 from a loss of $77,486 is due to a
58% increase in partnership income from Justice Investors to $890,679 from
$564,399, a change in investment income to net gains on marketable securities
of $3,019,729 from net losses on marketable securities of $992,962, partially
offset by the decrease in rental income to $75,696 from $153,478.
The increase in partnership income is primarily attributable to a 48% increase
in hotel rental income as a result of the renovation of the common areas of the
hotel during first quarter of 1999, which reduced occupancy and other revenues
generated by the hotel, and an increase in the average daily room rate for the
quarter ended March 31, 2000.
The change in investment income to net gains on marketable securities of
$3,019,729 from net losses on marketable securities of $992,962 is primarily
due to the inclusion of net unrealized gains on trading securities of
$1,730,622 in earnings for the quarter ended March 31, 2000 and management's
efforts to reposition the portfolio. In the quarter ended March 31, 1999, all
unrealized gains and losses on marketable securities were included in
<PAGE> 10
comprehensive income. 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 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 analytical value.
The decrease in rental income to $75,696 from $153,478 is primarily due to the
sale of the Company's 100-unit complex located in Cincinnati, Ohio in July 1999
and the purchase of a smaller 27-unit apartment complex located in Los Angeles,
California in September 1999. The 27-unit apartment complex generates less
revenue and incurs less expenses. Accordingly, property operating and
depreciation expenses also decreased.
The change in other income/(loss) to income of $67,044 compared to a loss of
$1,966, is primarily due to the increase in other interest income and
miscellaneous income.
The increase in margin interest and trading expenses to $266,048 from $129,183
is due to the maintenance of a higher margin balance in the current quarter and
the increased size of the Company's portfolio.
The increase in general and administrative expenses to $216,715 from $181,210
is due to the increase in accounting and other expenses.
Income tax expense changed to an expense of $1,476,072 from a tax benefit of
$189,900 as a result of the significant increase in income.
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,
and lower interest expenses due to the reduction in notes payable, the general
partners of Justice Investors decided to increase the monthly distribution to
limited partners effective with the September 1999 distribution. As a result,
Portsmouth's monthly distribution increased to $209,160 from $139,440. The
increase in monthly distributions can be characterized 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 quarter ended March 31, 2000, the Company received cash distributions
of $627,480 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 marketable
securities are classified as trading with unrealized gains and losses recorded
through the statement of income.
<PAGE> 11
On August 17, 1999, the Board of Directors increased the number of shares that
the Company is authorized to repurchase under its stock buy-back program by an
additional 50,000 shares to a total of 100,000 shares. As of March 31, 2000,
the Company had repurchased 68,328 shares of its Common Stock, of which 10,700
shares were purchased in the current quarter for $117,719.
As of March 31, 2000, the Company's current assets and current liabilities were
$31,026,573 and $20,410,701, respectively. 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
All of the Company's critical computer software and hardware are
year 2000 compliant.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The following is furnished to update information previously reported in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
Guinness Peat Group plc, et al. v. Robert N. Gould, et al., Case No. 685760,
filed on February 22, 1995 in the Superior Court of the State of California for
the County of San Diego. As previously reported, on March 24, 1998, the trial
court entered a judgment awarding attorneys fees and costs in favor of the
director defendants and Santa Fe in the total amount of $936,000, plus interest
at the statutory rate of 10%, as the prevailing parties in that action. That
judgment was appealed by the plaintiffs. On January 21, 2000, the Court of
Appeal affirmed the award of attorney's fees and costs. On March 1, 2000,
plaintiffs filed a Petition for Review of that decision with the California
Supreme Court. On April 12, 2000, the California Supreme Court granted the
Petition for Review, but deferred further action pending consideration and
disposition of a related issue in another case before the Court, or pending
further order of the Court.
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:
<PAGE> 12
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 10, 2000 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: May 10, 2000 by /s/ Michael G. Zybala
----------------------------
Michael G. Zybala
Vice President and Secretary
Date: May 10, 2000 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, 2000 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-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> MAR-30-1999
<CASH> 511497
<SECURITIES> 30224422
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31026573
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 42584815
<CURRENT-LIABILITIES> 20410701
<BONDS> 0
0
0
<COMMON> 127604
<OTHER-SE> 14844319
<TOTAL-LIABILITY-AND-EQUITY> 42584815
<SALES> 0
<TOTAL-REVENUES> 4270451
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 580271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3690180
<INCOME-TAX> 1476072
<INCOME-CONTINUING> 1914140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1914140
<EPS-BASIC> 1.57
<EPS-DILUTED> 1.57
</TABLE>
