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 September 30, 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.)
820 Moraga Drive
Los Angeles, CA 90049
--------------------------------------- ------------------
(Address of Principal Executive Offices) (Zip Code)
(310) 889-2500
---------------------------------------------------
(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 October 30, 2000.
Transitional Small Business Disclosure Format (check one): Yes ( ) No (X)
-1-
<PAGE>
INDEX
SANTA FE FINANCIAL CORPORATION
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet--September 30, 2000 (Unaudited) 3
Consolidated Statements of Income and Comprehensive Income
(Unaudited)--Three Months ended September 30, 2000 and
September 30, 1999 4
Consolidated Statements of Cash Flows (Unaudited)--
Three Months ended September 30, 2000 and September 30, 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
-2-
<PAGE>
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Santa Fe Financial Corporation
Consolidated Balance Sheet
(Unaudited)
As of September 30, 2000
-------------
<S> <C>
ASSETS
Cash and cash equivalents $ 400,391
Investment in marketable securities 32,796,681
Investment in Justice Investors 8,082,964
Rental property 4,025,850
Other investments 300,000
Other assets 226,395
----------
Total assets $ 45,832,281
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Due to securities broker $ 6,136,985
Obligations for securities sold 15,024,616
Mortgage payable 2,101,824
Accounts payable and accrued expenses 1,683,262
----------
Total liabilities 24,946,687
----------
Minority interest 5,155,844
----------
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 1,192,310 127,604
Additional paid-in capital 8,807,941
Retained earnings 7,572,580
Treasury stock, at cost, 83,728 shares (784,735)
-----------
Total shareholders' equity 15,729,750
-----------
Total liabilities & shareholders' equity $ 45,832,281
===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
Santa Fe Financial Corporation
Consolidated Statement of Income and Comprehensive Income
(Unaudited)
For three months ended September 30, 2000 1999
--------- ---------
<S> <C> <C>
Revenues
Equity in net income of Justice
Investors $ 1,205,632 $ 1,063,272
Net gains on marketable securities 1,281,609 3,703,201
Dividend and interest income 232,250 92,300
Rental income 75,167 42,335
Gain on sale of real estate - 1,176,292
Other income 55,171 30,707
--------- ---------
2,849,829 6,108,107
--------- ---------
Costs and expenses
Property operating expense 37,081 35,535
Mortgage interest expense 45,382 18,838
Depreciation expense 13,501 13,963
Margin interest and trading expenses 279,348 159,108
Litigation 3,796 3,705
General and administrative 206,729 237,099
--------- ---------
585,837 468,248
--------- ---------
Income before income taxes
and minority interest 2,263,992 5,639,859
Income tax expense (570,952) (2,261,010)
--------- ---------
Income before minority interest 1,693,040 3,378,849
Minority interest (286,548) (1,093,474)
--------- ---------
Net income $ 1,406,492 2,285,375
Preferred stock dividends (12,844) -
--------- ---------
Income available to common shareholders $ 1,393,648 $ 2,285,375
========= =========
Basic earnings per share $ 1.17 $ 1.86
========= =========
Weighted average number of shares
outstanding 1,192,310 1,227,298
========= =========
Comprehensive income(loss)
Net income $ 1,406,492 $ 2,285,375
Other comprehensive income:
Reclassification adjustment for holding
gain included in net earnings - (4,113,680)
Income tax benefit related to
other comprehensive income - 1,645,472
--------- ---------
Total comprehensive income(loss) $ 1,406,492 $ (182,833)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
Santa Fe Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
For the three months ended September 30, 2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,406,492 $ 2,285,375
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in net income of Justice Investors (1,205,632) (1,063,272)
Net unrealized gains on marketable securities (2,195,440) (4,113,680)
Gain on sale of real estate - (1,176,292)
Minority interest 286,548 1,093,474
Amortization of excess of market value
over carrying value (22,176) (22,176)
Depreciation expense 13,501 13,963
Changes in operating assets and liabilities:
Restricted cash - 46,902
Investment in marketable securities 1,936,992 447,741
Other assets 146,833 982,639
Accounts payable and accrued expenses 398,688 (801,878)
Due to securities broker (4,171,706) 1,524,882
Obligations for securities sold 3,197,722 697,875
---------- ----------
Net cash used in operating activities (208,178) (84,447)
---------- ----------
Cash flows from investing activities:
Cash distributions from Justice Investors 627,480 488,040
Investment in real estate - (4,079,960)
Net proceeds from sale of real estate - 3,013,440
Purchase of Portsmouth stock (950) (107,190)
---------- ----------
Net cash provided by (used in) investing
activities 626,530 (685,670)
---------- ----------
Cash flows from financing activities:
Principal payments on mortgage payable (4,403) (1,217,315)
Borrowings from mortgage payable - 2,117,563
Dividends paid to preferred shareholders (12,844) -
Dividends paid to minority shareholders (63,331) (63,331)
Purchase of treasury stock - (84,230)
---------- ----------
Net cash (used in) provided by financing
activities (80,578) 752,687
---------- ----------
Net increase(decrease) in cash and cash
equivalents 337,774 (17,430)
Cash and cash equivalents at beginning of period 62,617 172,719
---------- ----------
Cash and cash equivalents at end of period $ 400,391 $ 155,289
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
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.
On May 16, 2000, the Board of Directors of Santa Fe approved a change in fiscal
year end of the Company from December 31 to June 30 to coincide with the fiscal
year end of its parent company, The Intergroup Corporation.
Certain reclassifications have been made to the financial statements as of
September 30, 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 six months ended June 30, 2000.
The results of operations for the three months ended September 30, 2000 are not
necessarily indicative of results to be expected for the full fiscal year
ending June 30, 2001.
2. Investment in Justice Investors
-------------------------------
The Company's principal source of revenue continues to be derived from the
investment of its 68.8%-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.
-6-
<PAGE>
Condensed financial statements for Justice Investors are as follows:
JUSTICE INVESTORS
CONDENSED BALANCE SHEET
September 30, 2000
--------------
Assets
Total current assets $3,599,276
Property, plant and equipment, net of
accumulated depreciation of $11,653,103 4,922,579
Loan fees and deferred lease costs,
net of accumulated amortization of $171,107 139,306
---------
Total assets $8,661,161
=========
Liabilities and partners' capital
Total current liabilities $ 270,487
Partners' capital 8,390,674
---------
Total liabilities and partners' capital $8,661,161
=========
JUSTICE INVESTORS
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended September 30, 2000 1999
---------- ----------
Revenues $2,627,850 $2,344,385
Costs and expenses (206,903) (209,301)
--------- ---------
Net income $2,420,947 $2,135,084
========= =========
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. Marketable
securities are classified as trading with net unrealized gains or losses
included in earnings. Included in net gains on marketable securities of
$1,281,609 are net realized losses of $913,831 and net unrealized gains of
$2,195,440.
-7-
<PAGE>
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 September 30, 2000, the Company and
Portsmouth made payments to InterGroup of approximately $57,325 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. 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 serve on the Board of Portsmouth.
6. Commitments and Contingencies
-----------------------------
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
of 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 September 20, 2000, the California Supreme Court
entered an order dismissing the Petition for Review. As of September 30, 2000,
the total amount due on the judgement was $1,179,404. The Company will also
make application to recover its attorneys' fees and costs incurred in
successfully defending its judgment on appeal.
7. Subsequent Events
-----------------
In November 2000, the Company received $1,188,618 in recovery of its judgment
for attorneys' fees and interest thereon. The amount will be recorded as other
income in the next quarter.
-8-
<PAGE>
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 six months
ended September 30, 2000, 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 68.8% 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 September 30, 2000 Compared to Three Months
Ended September 30, 1999
Net income for the Company decreased to $1,406,492 for the three months ended
September 30, 2000 from $2,285,375 for the three months ended September 30,
1999. The decrease in net income is primarily attributable to the decrease in
total revenue to $2,849,829 from $6,108,107 and the increase in total costs and
expenses to $585,837 from $468,248.
The decrease in total revenue to $2,849,829 from $6,108,107 is primarily due to
a decrease in net gains on marketable securities to $1,281,609 from $3,703,201.
The Company also had gains on the sale of real estate of $1,176,292 in the
prior year and there were no sales in the current period. These decreases were
partially offset by the increase in equity in net income of Justice Investors
to $1,205,632 from $1,063,272.
The increase equity in net income of Justice Investors to $1,205,632 from
$1,063,272 was primarily attributable to the increase in the average daily room
rate and an increase in occupancy of the hotel during the current quarter.
The decrease in net investment gains to $1,281,609 from $3,703,201 was
primarily due to the inclusion of net accumulated unrealized gains of
$4,113,680 in the earnings for the quarter ended September 30, 1999 as a result
of the change in the classification of the entire portfolio from available-for-
sale to trading. These gains were accumulated over the years and taken to
-9-
<PAGE>
earnings in the quarter ended September 30, 1999. The net gains recognized in
the current quarter reflect management's efforts to reposition the portfolio.
Gains and losses on marketable securities may fluctuate significantly from
period to period in the future and could have a significant impact on the
Company's net income. 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.
Dividend and interest income increased to $232,250 from $92,300 as a result of
management investing in more income producing instruments.
The increase in rental income to $75,167 from $42,335 is primarily due to the
inclusion of three months rent versus two months rent in the prior period. The
property was purchased in July 1999. The increase in mortgage interest expense
to $45,382 from $18,838 is a result of a higher mortgage balance. As a result
of the sale of a old property and purchase of a new property in July 1999, the
Company paid-of its old mortgage balance of $1,216,000 and obtained a new
mortgage of $1,955,000 as part of the purchase.
The increase in margin interest and trading expenses to $279,348 from $159,108
is due to the maintenance of a higher margin balance in the current quarter and
the increased size of the Company's portfolio.
Income tax expense decreased to $570,952 from $2,261,010 as a result of the
significant decrease in income and the use of net operating loss carryforwards.
Minority interest expense decreased to $286,548 from $1,093,474 as a result of
reduced income generated by the Company's subsidiary, Woodland Village.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated by its subsidiary's investment
in the Justice Investors limited partnership, which derives the majority of its
income from its lease with Felcor and a lease with Evon. In addition to the
monthly limited partnership distributions it receives from Justice Investors,
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 September 30, 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.
-10-
<PAGE>
On May 16, 2000, 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 70,000 shares to a total of 170,000 shares. As of September 30,
2000, the Company had repurchased 83,728 shares of its Common Stock. There
were no purchases of treasury stock in the current quarter.
As of September 30, 2000, the Company's current assets and current liabilities
were $33,423,467 and $22,844,863, respectively. The Company remains liquid and
management believes that its capital resources are currently adequate to meet
its short and long-term obligations.
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 transition period ended June 30,
2000.
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
of 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 September 20, 2000, the California Supreme Court
entered an order dismissing the Petition for Review. On November 2, 2000, the
Company received $1,188,618 from plaintiffs, which represented the total amount
of attorneys' fees and accrued interest due on its original judgment. The
Company has also made application to recover its attorneys' fees and costs
incurred in successfully defending its judgment on appeal.
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:
-11-
<PAGE>
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: November 8, 2000 by /s/ John V. Winfield
----------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: November 8, 2000 by /s/ Michael G. Zybala
----------------------------
Michael G. Zybala
Vice President and Secretary
Date: November 8, 2000 by /s/ David Nguyen
-----------------------------
David Nguyen, Controller
(Principal Accounting Officer)
