-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S9aHY45glOQ8r6nb0/kvLRfEiCZs8ZpzWpt8nXCHuPWpVlolSUuqvto+/2OQ1dIX oyHD+8Xtq+II47fHW4iDOA== 0000086759-99-000006.txt : 19990413 0000086759-99-000006.hdr.sgml : 19990413 ACCESSION NUMBER: 0000086759-99-000006 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANTA FE FINANCIAL CORP CENTRAL INDEX KEY: 0000086759 STANDARD INDUSTRIAL CLASSIFICATION: 6799 IRS NUMBER: 952452529 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-06877 FILM NUMBER: 99584399 BUSINESS ADDRESS: STREET 1: 11315 RANCHO BERNARDO ROAD, SUITE 129 CITY: SAN DIEGO STATE: CA ZIP: 92127-1463 BUSINESS PHONE: (619) 673-4722 MAIL ADDRESS: STREET 1: P.O. BOX 270828 CITY: SAN DIEGO STATE: CA ZIP: 92198-2828 10KSB 1 SANTA FE FINANCIAL CORPORATION 10-KSB 12/31/98 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 ------------------------------ (Name of Small Business Issuer in Its Charter) Nevada 95-2452529 ------------------------------- ------------------ (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 11315 Rancho Bernardo Road, Suite 129 San Diego, California 92127-1463 --------------------------------------- ------------------ (Address of Principal Executive Offices) (Zip Code) (619) 673-4722 --------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: $.10 Par Value Common Stock ---------------------------- (Title of Class) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. [X] The issuer's revenues for its most recent fiscal year were $2,045,234. 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 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 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 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 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. 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 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 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 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. 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 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 13
SANTA FE FINANCIAL CORPORATION Consolidated Balance Sheet - - ------------------------------------------------------------------------------ December 31, 1998 ----------------- Assets 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 ==========
See accompanying notes to financial statements. 14
SANTA FE FINANCIAL CORPORATION. Consolidated Statements of Income and Comprehensive Income - - ------------------------------------------------------------------------------ Years ended December 31, 1998 1997 ----------- ----------- Revenues 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 ========= =========
See accompanying notes to financial statements 15
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 ------------------------------------------------------------------------------------------------------ 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 ----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. 1
SANTA FE FINANCIAL CORPORATION Consolidated Statements of Cash Flows - - ------------------------------------------------------------------------------ For the years ended December 31, 1998 1997 ----------- ----------- 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 ========== ==========
See accompanying notes to financial statements. 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. 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. 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. 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. 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. 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 ========= 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 ========= ======= 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. 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. 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 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. 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 29
JUSTICE INVESTORS (A LIMITED PARTNERSHIP) BALANCE SHEETS December 31, 1998 and 1997 -------------------------- 1998 1997 ---- ---- ASSETS ------ 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 ========= =========
LIABILITIES AND PARTNERS' CAPITAL --------------------------------- 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 ========= =========
The accompanying notes are an integral part of these financial statements. 30
JUSTICE INVESTORS (A LIMITED PARTNERSHIP) STATEMENTS OF INCOME AND PARTNERS' CAPITAL Years Ended December 31, 1998 and 1997 -------------------------------------- 1998 1997 ---- ---- 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 ========= =========
The accompanying notes are in integral part of these financial statements. 31
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 ---- ---- 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
The accompanying notes are an integral part of these financial statements. 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. 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: 1998 1997 ---- ---- 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 ========= =========
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 ========= 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. 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 EX-27 2
5 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. 0000086759 SANTA FE FINANCIAL CORPORATION YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 162906 18010714 134542 0 0 18602929 3343201 1460769 28131346 11508489 0 0 6360 124272 11760164 28131346 3642032 2045234 0 0 2060038 0 0 (14804) 43342 (379824) 0 0 0 (379824) (.30) (.30)
-----END PRIVACY-ENHANCED MESSAGE-----