-----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, V+FQoTcnyW5+xV+tZ2RhLCZHk8W+yO/LVmeIIWaRcAhxznEi2J6qialgKvQe1b+B OGVQlCipgLLRCh1DV/ufdQ== /in/edgar/work/0000086759-00-000020/0000086759-00-000020.txt : 20000930 0000086759-00-000020.hdr.sgml : 20000930 ACCESSION NUMBER: 0000086759-00-000020 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000928 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: 730676 BUSINESS ADDRESS: STREET 1: 11315 RANCHO BERNARDO ROAD, SUITE 129 CITY: SAN DIEGO STATE: CA ZIP: 92127-1463 BUSINESS PHONE: 8586734722 MAIL ADDRESS: STREET 1: P.O. BOX 270828 CITY: SAN DIEGO STATE: CA ZIP: 92198-2828 10KSB 1 0001.txt SANTA FE FINANCIAL CORPORATION FORM 10-KSB 6/30/00 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-KSB [ ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or [X] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from January 1, 2000 to June 30, 2000. 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) (858) 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 the six months ended June 30, 2000 were $4,424,934. 1 of 44 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 September 15, 2000 was $5,675,034. The number of shares outstanding of issuer's $.10 Par Value Common Stock, as of September 15, 2000, was 1,192,310. DOCUMENTS INCORPORATED BY REFERENCE NONE TABLE OF CONTENTS PART I PAGE Item 1. Description of Business. 3 Item 2. Description of Property. 4 Item 3. Legal Proceedings. 7 Item 4. Submission of Matters to a Vote of Security Holders. 7 PART II Item 5. Market For Common Equity and Related 8 Stockholder Matters. Item 6. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations. Item 7. Financial Statements and Supplementary Data. 13 Item 8. Changes in and Disagreements with Accountants on 27 Accounting and Financial Disclosure. PART III Item 9. Directors, Executive Officers, Promoters and 27 Control Persons; Compliance with Section 16(a) of The Exchange Act. Item 10. Executive Compensation. 29 Item 11. Security Ownership of Certain Beneficial Owners and 30 Management. Item 12. Certain Relationships and Related Party Transactions. 32 Item 13. Exhibits, Financial Statement Schedules, and 33 Reports on Form 8-K. SIGNATURES 43 2 of 44 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 68.8% 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. The Company also owns a controlling 55.4% equity interest in Intergroup Woodland Village, Inc. ("Woodland Village"), which owns a 27-unit multi-family apartment complex located in Los Angeles, California. The complex was acquired in July 1999 at an initial cost of $4,075,000 in a tax-deferred exchange. 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. On February 15, 2000, the Board of Directors amended the Bylaws of the Company to give the Board the discretion to determine, each year, the date, time and place of the annual meeting of shareholders. Previously, the Bylaws provided that the annual meeting was to be held only on a specific date. The amendment provides the Company with the flexibility to set a date for the annual meeting which is more consistent with its public reporting requirements and which would allow the Company greater time to transmit proxy material and its annual report to shareholders. BUSINESS OF ISSUER The Company's principal business is conducted through Portsmouth'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 include a controlling interest in a 27-unit multi-family apartment complex located in Los Angeles, California. 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. 3 of 44 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 business meetings, having meeting and dining facilities for groups of up to 400 people. Management believes that the hotel, garage and apartments are in a competitive 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 June 30, 2000, the Company had two full-time employees. 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 June 30, 2000, Santa Fe's investments in real property consisted of its 49.8% interest in Justice Investors through the Company's 68.8% 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. On March 15, 1995, Justice Investors entered into an amended and restated lease 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 required 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 June 30, 2000, the partnership had paid all of its $2 million commitment. Rehabilitation and renovation of the guest rooms, hallways, elevators and safety systems was completed during 1999. 4 of 44 Further improvements are expected to be made in the future to meet standards for Holiday Inn Select hotels. The 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. Los Angeles, California Apartment Complex The property owned by the Company's 55.4% subsidiary Woodland Village, is a 27- unit apartment complex located Los Angeles, California. The Company's equity interest in Woodland Village was acquired on December 31, 1997 at a cost of $858,600. For the six months ended June 30, 2000, real estate property taxes were approximately $12,915. Depreciation is recorded on the straight-line method based upon an estimated useful life of 40 years. As of June 30, 2000, the outstanding mortgage balance was $1,943,663. The mortgage carries an interest rate of 7.73% and matures in October 2029. In addition to the mortgage, as part of the initial purchase of the property, Woodland Village obtained two 5-year interest only loans of $201,928 and $162,563 from the Company and the Company's parent, The InterGroup Corporation ("InterGroup"), respectively. Both notes mature in September 2004. The $201,928 note was eliminated in consolidation. 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 $975. As of June 30, 2000, the property was 100% occupied. 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 Company's Chairman and President. The Company will primarily invest in 5 of 44 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 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. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. During 1999, the Company increased the turnover of its investment portfolio and engaged in increased trading activities designed to maximize the overall return on investment activities in the near term. This resulted in portions of the Company's investments in marketable securities being classified as "trading" as defined by generally accepted accounting principles. After consultation with the Investment Committee of the Board of Directors, management determined that the classification of the entire portfolio as trading beginning July 1, 1999 would be more consistent with the Company's overall investment objectives and activities. As a result, beginning July 1, 1999, all unrealized gains and losses on the Company's investment portfolio were recorded through the income statement. 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 additional return opportunities. In addition, the Company utilizes 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. 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 the Company's subsidiary, Portsmouth, and the Company's parent, Intergroup, and directs the investment activity of those companies. An employee of InterGroup helps manage the portfolios of the Company in consultation with Mr. Winfield. The Company reimburses 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. 6 of 44 Item 3. Legal Proceedings. The following is furnished to update information previously reported in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999 and in its Form 10-QSB Report for the quarterly period ended March 31, 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. Item 4. Submission of Matters to a Vote of Shareholders. The Annual Meeting of the Shareholders of the Company was held on May 16, 2000, at the Luxe Summit Hotel Bel-Air, 11461 Sunset Blvd., Los Angeles, California 90049. At that meeting, all of management's nominees: John V. Winfield, William J. Nance and John C. Love, were elected as Directors of the Company to serve until the next Annual Meeting, with each nominee receiving in excess of 99% of the shares voted. At that Meeting, the shareholders also voted in favor of the ratification of PricewaterhouseCoopers LLP as the independent accountants of the Company. A tabulation of the vote follows: Proposal (1) - Directors: Votes For Against Abstained --------- ------- --------- John V. Winfield 1,080,547 0 5,200 John C. Love 1,080,347 0 5,400 William J. Nance 1,080,347 0 5,400 Proposal (2) - Accountants: PricewaterhouseCoopers LLP 1,078,099 408 7,240 7 of 44 PART II Item 5. Market For Common Equity and Related Stockholder Matters. MARKET INFORMATION Santa Fe's common stock trades on the Small-Cap Market tier of The Nasdaq Stock Market, Inc. ("Nasdaq")under the symbol SFEF. The following table sets forth the range of high and low sales prices for Santa Fe's common stock for the first two quarters of 2000 and for every quarterly period in the years 1999 and 1998 as reported by Nasdaq. 2000 High Low - ---- ----- ----- First Quarter (1/1 to 3/31) $10.63 $ 8.50 Second Quarter (4/1 to 6/30) $10.50 $ 8.75 1999 - ----- First Quarter (1/1 to 3/31) $11.50 $ 8.50 Second Quarter (4/1 to 6/30) $ 9.00 $ 8.63 Third Quarter (7/1 to 9/30) $ 9.50 $ 8.50 Fourth Quarter (10/1/12/31) $10.75 $ 8.63 1998 - ---- First Quarter (1/1 to 3/31) $17.63 $12.25 Second Quarter (4/1 to 6/30) $19.50 $14.13 Third Quarter (7/1 to 9/30) $14.00 $ 9.25 Fourth Quarter (10/1/12/31) $ 8.50 $ 7.50 As of September 15, 2000 the approximate number of holders of record of the Company's Common Stock was 541. Such number of record owners was determined from the Company's shareholders records and does not include beneficial owners of the Company's Common Stock whose shares are held in the names of various brokers, clearing agencies or other nominees. There are approximately 710 beneficial shareholders of the Company's Common Stock. DIVIDENDS The Company has not paid any cash dividends to the common stock holders since April 1996. In July of 1996, the Board of Directors elected to suspend payment of any dividends pending final resolution of the derivative suit, at which time the Company will re-examine its dividend policy. 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, the number of Preferred Shares was adjusted to 63,600. 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 elected to forego any dividend payments on the preferred stock for the year ended December 31, 1998. Beginning October 1, 1999, Intergroup informed the Board that they will no longer forgo dividend payments on its preferred stock. During the fiscal year ended 1999, the Company paid dividends of $12,880 to Intergroup. For the six months ended June 30, 2000, the Company paid dividends of $25,405. 8 of 44 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 68.8% owned subsidiary, Portsmouth, in the Justice Investors limited partnership, rental income from its investment in a 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 Garage Corporation. 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. Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Comparison of operating results for the six months ended June 30, 2000 shows net income of $1,433,486 as compared to a net loss of $1,222,447. The significant increase in net income is primarily attributable to an increase in total revenue to $4,424,934 from a loss of $391,344, while total costs and expenses increased moderately to $1,227,863 from $1,110,173. The increase in total revenue to $4,424,933 from a loss of $391,344 is due to a change in net gains on marketable securities of $1,742,972 from net losses of $2,577,620, a 31% increase in partnership income from Justice Investors to $2,001,018 from $1,525,683, and an increase in dividend and interest income to $429,989 from $290,490. The increases are partially offset by a decrease in rental income to $147,732 from $306,065. The change in net gains on marketable securities of $1,742,972 from net losses on marketable securities of $2,577,620 is due to the inclusion of net unrealized gains on marketable securities of $1,218,374 in the current period earnings and from management's continuing effort to reposition the Company's investment portfolio. During the fiscal year 1999, the Company increased the turnover of its investment portfolio and engaged in increased trading activities designed to maximize the overall return on investment activities in the near term. This resulted in portions of the Company's investments in marketable securities being classified as "trading" as defined by generally accepted accounting principles. After consultation with the Investment Committee of the Board of Directors, management determined that the classification of the entire portfolio as trading beginning July 1, 1999 would 9 of 44 be more consistent with the Company's overall investment objectives and activities. As a result, beginning July 1, 1999, all unrealized gains and losses on the Company's investment portfolio were recorded through the income statement. 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 analytical value. The increase in partnership income is primarily attributable to a 27% increase in hotel rental income as a result of an increase in the average daily room rate without a significant reduction in occupancy rates. Rental income decreased to $147,732 from $306,065 and total property related costs decreased to $182,760 from $314,118 as a result of the sale of the Cincinnati, Ohio property with 100 units and the acquisition of a smaller Los Angeles, California property with 27 units in September 1999. The transaction was completed in a tax-deferred exchange. Mortgage interest expense increased to $89,967 from $59,989 as a result of a higher mortgage balance related to the purchase of the new property. The increase in margin interest and trading related expenses to $536,540 from $331,986 is due to the maintenance of a higher margin balance in the current period and increased investment trading activity. The 10% increase in general and administrative expenses to $493,894 from $449,597 is due to the increase in accounting and other miscellaneous expenses. Income tax expense changed to an expense of $1,350,438 from a tax benefit of $605,673 as a result of the significant increase in income. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Comparison of operating results for the year ended December 31, 1999 to the year ended December 31, 1998 shows net income of $1,609,438 as compared to a net loss of $379,824. The significant increase in net income is primarily attributable to a 292% increase in total revenue while total costs and expenses remained consistent with the prior year. The 292% increase in total revenue to $8,011,230 from $2,045,234 is due to a 14% increase in partnership income from Justice Investors of $3,459,786 from $3,021,878, a 76% increase in dividend and interest income to $799,792 from $455,541, a change in investment income to net gains on marketable securities of $2,006,923 from net losses on marketable securities of $1,813,378, a gain on sale of real estate of $1,176,292 compared to none and a change in other income to income of $145,449 compared to losses of $238,961, partially offset by the decrease in rental income to $422,988 from $620,154. The increase in partnership income is primarily attributable to a 12% increase in hotel rental income as a result of an increase in the average daily room rate without a significant reduction in occupancy rates. The increase in dividend and interest income reflects management's continuing efforts to reposition the Company's investment portfolio. The change in investment income from net losses of $1,813,378 to net gains of $2,006,923 is primarily due to a recognized gain of $4,113,680 related to the reclassification of all available-for-sale securities to trading securities effective July 1, 1999. 10 of 44 Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. During the year, the Company increased the turnover of its investment portfolio and engaged in increased trading activities designed to maximize the overall return on investment activities in the near term. After consultation with the Investment Committee of the Board of Directors, management determined that the classification of the entire portfolio as trading beginning July 1, 1999 would be more consistent with Company's overall investment objectives and activities. As a result, beginning July 1, 1999, all unrealized gains and losses on the Company's investment portfolio were recorded through the income statement. For the twelve months ended December 31, 1999, the Company recognized a net unrealized gain of $4,113,680 related to the reclassification of all available- for-sale securities to trading securities effective July 1, 1999. Realized gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a meaningful effect on the Company's net earnings. However, the amount of realized gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. The change in other income/loss to income of $145,449 compared to a loss of $238,961 is primarily due to a $307,665 reserve for investment loss taken in the prior year. In July 1999, the Company's 55.4%-owned subsidiary, Intergroup Woodland Village, sold its 100-unit apartment complex located in Cincinnati, Ohio for $3,125,000 resulting a gain on sale of real estate of $1,176,292. There were no such gains in the prior year. As the result of the sale, rental income decreased to $422,988 from $620,154, property operating expense decreased to $233,324 from $491,043, and depreciation expense decreased to $117,816 from $174,034. In September 1999, proceeds from the sale of the property were used to purchase a 27-unit multi-family apartment complex located in Los Angeles, California for $4,075,000, in a 1031 tax-deferred exchange. The 71% increase in margin interest and investment related expenses is due to the maintenance of a higher margin balance in the current year and increased investment trading activity. The 12% increase in general and administrative expenses is primarily due to the increase in insurance expenses, wages and salaries, and miscellaneous expenses. Minority interest increased to $1,577,247 from $408,362 as a result of greater net income generated by the Company's two subsidiaries, Portsmouth and Woodland Village. Income tax expense changed to an expense of $2,768,146 from a tax benefit of $43,342 as a result of the significant increase in income. FINANCIAL CONDITION AND LIQUIDITY The Company's cash flows are primarily generated by its subsidiary's investment in the Justice Investors limited partnership, which derives the majority of its income from its lease with Felcor and a lease with Evon. In addition to the monthly limited partnership distributions it receives from Justice Investors, the Company's subsidiary 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. 11 of 44 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 six months ended June 30, 2000, the Company received cash distributions of $1,254,960 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. 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 June 30, 2000, the Company had repurchased 83,728 shares of its Common Stock for an aggregate consideration of $784,735. At June 30, 2000, the Company's current assets and current liabilities were $32,974,159 and $23,420,159 respectively. 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 Because 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. 12 of 44 Item 7. Financial Statements INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Accountants 13 Consolidated Balance Sheet - June 30, 2000 14 Consolidated Statements of Income - Six Months Ended June 30, 2000 and Years Ended December 31, 1999 and 1998 15 Consolidated Statements of Shareholders' Equity - Six Months Ended June 30, 2000 and Years Ended December 31, 1999 and 1998 16 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and Years Ended December 31, 1999 and 1998 17 Notes to Consolidated Financial Statements 18 Report of Independent Accountants 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, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Santa Fe Financial Corporation and its subsidiaries at June 30, 2000, and the results of its operations and its cash flows for the six months ended June 30, 2000 and the years ended December 31, 1999 and 1998, in conformity with accounting principles generally accepted in the United States. 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 audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, 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 financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Los Angeles, California September 22, 2000 13 of 44
SANTA FE FINANCIAL CORPORATION Consolidated Balance Sheet - ------------------------------------------------------------------------------ June 30, 2000 ------------- Assets Cash and cash equivalents $ 62,617 Investment in marketable securities 32,538,045 Investment in Justice Investors 7,477,162 Rental property 4,039,083 Other investments 300,000 Other assets 373,497 ---------- Total assets $ 44,790,404 ========== Liabilities and Shareholders' Equity Liabilities Due to securities broker $ 10,308,691 Obligations for securities sold 11,826,894 Accounts payable and accrued expenses 1,284,574 Notes payable 2,106,227 ---------- Total liabilities 25,526,386 ---------- Minority interest 4,927,914 ---------- Shareholders' equity: 6% Cumulative, convertible, redeemable at the option of the holder, 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 1,276,038 shares issued and 1,192,310 outstanding 127,604 Additional paid-in-capital 8,807,942 Retained earnings 6,178,933 Treasury stock, at cost, 83,728 shares (784,735) ---------- Total shareholders' equity 14,336,104 ---------- Total liabilities and shareholders' equity $ 44,790,404 ==========
See accompanying notes to consolidated financial statements. 14 of 44
SANTA FE FINANCIAL CORPORATION. Consolidated Statements of Income and Comprehensive Income - ------------------------------------------------------------------------------ For the 6 Months For the Years Ended Ended December 31, June 30, 2000 1999 1998 ------------- ----------- ----------- Revenues Equity in net income of Justice Investors $ 2,001,018 $ 3,459,786 $ 3,021,878 Rental income 147,732 422,988 620,154 Dividend and interest income 429,989 799,792 455,541 Net gains(losses) on marketable securities 1,742,972 2,006,923 (1,813,378) Gain on sale of real estate - 1,176,292 - Other income(loss) 103,223 145,449 (238,961) --------- --------- ---------- 4,424,934 8,011,230 2,045,234 --------- --------- ---------- Costs and expenses Property operating expense 66,086 233,324 491,043 Mortgage interest expense 89,967 106,483 122,453 Depreciation expense 26,707 117,816 174,034 Margin interest and trading expenses 536,540 608,094 355,120 General and administrative 493,894 976,011 869,741 Litigation 14,669 14,671 47,647 --------- --------- ---------- 1,227,863 2,056,399 2,060,038 --------- --------- ---------- Income(loss) before taxes and minority interest 3,197,071 5,954,831 (14,804) Provision for income tax (expense)benefit (1,350,438) (2,768,146) 43,342 --------- --------- ---------- Income before minority interest 1,846,633 3,186,685 28,538 Minority interest (413,147) (1,577,247) (408,362) --------- --------- ---------- Net income(loss) 1,433,486 1,609,438 (379,824) Preferred stock dividends (25,405) (12,879) - --------- --------- ---------- Income(loss) available to common shareholders $ 1,408,081 $ 1,596,559 $ (379,824) ========= ========= ========= Basic earnings(loss) per share $ 1.17 $ 1.30 $ (0.30) ========= ========= ========= Weighted average number of shares outstanding 1,202,533 1,231,359 1,270,376 ========= ========= ========= Comprehensive income Net income(loss) $ 1,433,486 $ 1,609,438 $ (379,824) Other comprehensive income: Unrealized holding gain(loss) on marketable securities - 4,261,285 (2,676,918) Reclassification adjustment for holding loss included in net earnings - - 1,813,378 Income tax (expense)benefit related to other comprehensive income - (59,042) 764,834 Adjustment for the reclassification of the accumulated unrealized holding gains prior to July 1, 1999 to current earnings - (4,113,680) - --------- --------- --------- Total comprehensive income(loss) $ 1,433,486 $ 1,698,001 $ (478,530) ========= ========= =========
See accompanying notes to consolidated financial statements. 15 of 44
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, 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 (313,966) (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 1,276,038 $127,604 $8,807,942 $ 88,563 $3,174,293 $(313,966) $11,890,796 Net income 1,609,438 1,609,438 Purchase of treasury stock (215,874) (215,874) Dividend paid to preferred shareholders (12,879) ( 12,879) Reclass unrealized holding gain to income (88,563) ( 88,563) ---------------------------------------------------------------------------------------------------- Balance at December 31, 1999 63,600 $6,360 1,276,038 $127,604 $8,807,942 $ - $4,770,852 $(529,840) $13,182,918 Net income 1,433,486 1,433,486 Purchase of treasury stock (254,895) (254,895) Dividend paid to preferred shareholders (25,405) (25,405) ---------------------------------------------------------------------------------------------------- Balance at June 30, 2000 63,600 $6,360 1,276,038 $127,604 $8,807,942 $ - $6,178,933 $(784,735) $14,336,104 -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 16 of 44
SANTA FE FINANCIAL CORPORATION Consolidated Statements of Cash Flows - ------------------------------------------------------------------------------ For the 6 Months For the Years Ended Ended December 31, June 30, 2000 1999 1998 ------------- ------------- ------------- Operating activities Net income(loss) $ 1,433,486 $ 1,609,438 $ (379,824) Adjustments to reconcile net income(loss) to net cash used in operating activities: Equity in net income of Justice Investors (2,001,018) (3,459,786) (3,021,878) Gain on sale of real estate - (1,176,292) - Minority interest 413,147 1,350,931 408,362 Amortization of excess market value over carrying value (44,352) (88,706) (88,706) Depreciation 26,707 117,816 174,034 Net losses on marketable securities - 1,796,767 1,813,378 Net unrealized gain on marketable securities (1,218,374) - - Write-down of other investments - - 307,665 Change in operating assets and liabilities: Restricted cash - 53,423 (53,423) Investment in marketable securities (778,580) (12,480,234) - Other investments - (55,233) - Other assets (40,341) 1,162,777 (856,716) Accounts payable and accrued expenses 561,254 322,987 (56,331) Due to securities broker (4,845,471) 7,234,411 - Obligations for securities sold 5,576,691 3,061,800 - ---------- ---------- --------- Net cash used in operating activities (916,851) (549,901) (1,753,439) --------- --------- --------- Investing activities Cash distributions from Justice Investors 1,254,960 2,997,960 2,509,920 Purchase of marketable securities - (14,217,839) (48,406,976) Purchase of other investments - - (250,000) Proceeds from sales of marketable securities - 12,421,072 45,844,651 Purchase of Portsmouth stock (92,392) - - Purchases of property, furniture and equipment - - (139,445) Net proceeds from sale of real estate - 2,951,528 - Purchase of real estate - (4,075,000) - ---------- ---------- ---------- Net cash provided by(used in) investing activities 1,162,568 77,721 (441,850) ---------- --------- --------- Financing activities Increase in due to securities broker - - 2,253,245 Payments on notes payable (8,976) (1,229,896) (19,079) Borrowings from note payable - 2,117,564 - Purchase of treasury stock (254,895) (215,874) (313,966) Dividends paid to minority shareholders of Portsmouth (63,331) (126,711) (126,713) Dividends paid to preferred shareholders of Santa Fe (25,405) (12,879) - ---------- ---------- ---------- Net cash (used in)provided by financing activities (352,607) 532,204 1,793,487 ---------- ---------- ---------- Net (decrease)increase in cash and cash equivalents (106,890) 60,024 (401,802) Cash and cash equivalents at the beginning of the year 169,507 109,483 511,285 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 62,617 $ 169,507 $ 109,483 ========== ========== ========== Supplemental information Income taxes paid, net of refunds $ 797,800 $ 967,171 $ 1,097,800 ========== ========== ========== Interest paid $ 500,018 $ 714,577 $ 279,520 ========== ========== ==========
See accompanying notes to consolidated financial statements. 17 of 44 SANTA FE FINANCIAL CORPORATION Notes to the Consolidated Financial Statements - ------------------------------------------------------------------------------ NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Description of Business 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. Santa Fe Financial Corporation's (the "Company") operations have been primarily limited to partnership income from its investment in Justice Investors and income from various investment activities. On December 31, 1997, the Company acquired a controlling 55.4% interest in Intergroup Woodland Village, Inc. ("Woodland Village") from a related party, The InterGroup Corporation ("InterGroup"), which controls approximately 54.3% of the voting stock of the Company. Woodland Village's major asset is a 27-unit apartment complex located in Los Angeles, California. 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. Principles of Consolidation The consolidated financial statements include the accounts of the Company, its 68.8% owned subsidiary, Portsmouth Square, Inc. ("PSI"), and its 55.4% owned subsidiary, Woodland Village. 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 June 30, 2000 was $2.5 million. 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 During 1999, the Company increased the turnover of its investment portfolio and engaged in increased trading activities designed to maximize the overall return on investment activities in the near term. This resulted in portions of the Company's investments in marketable securities being classified as "trading" as defined by generally accepted accounting principles. After consultation with the Investment Committee of the Board of Directors, management determined that the classification of the entire portfolio as trading beginning July 1, 1999 would be more consistent with the Company's overall investment objectives and 18 of 44 activities. As a result, beginning July 1, 1999, all unrealized gains and losses on the Company's investment portfolio were recorded through the income statement. The cost of marketable securities sold is determined by the specific identification method. Obligations for Securities Sold Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. 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 the income statement. Rental Property Rental property is stated at cost. Depreciation of rental property is provided on the straight-line method based upon estimated useful lives 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. Accounting for Impairment of Long-lived Assets 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 undiscounted future net cash flows is less than the carrying amount of the asset. No such impairment losses have been recognized during the six months ended June 30 and years ended December 31, 1999 and 1998. 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. Treasury Stock The Company records the acquisition of treasury stock under the cost method. Revenue Recognition 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. 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. 19 of 44 Earnings per Share Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. The Company's only potentially dilutive common shares are the 6% cumulative, convertible, voting preferred stock. As of June 30, 2000 and December 31, 1999 and 1998, the conversion price is above the market value of the Company's common stock, consequently, the preferred stock is not considered dilutive. Therefore, basic and diluted earnings per share for the six months ended June 30, 2000 and the years ended December 31, 1999 and 1998 are the same. 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. Reclassifications Certain prior year balances have been reclassified to conform with the current presentation. NOTE 2 - TRANSITION PERIOD COMPARATIVE DATA 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. 20 of 44 The following schedule presents certain financial information for the six months ended June 30, 2000 and 1999. 2000 1999 ---------- ---------- Revenues Equity in net income of Justice Investors $ 2,001,018 $ 1,525,683 Rental income 147,732 306,065 Dividend and interest income 429,989 290,490 Net gains(losses) on marketable securities 1,742,972 (2,577,620) Other income 103,223 64,038 --------- ---------- 4,424,934 (391,344) --------- ---------- Costs and expenses Property operating expense 66,086 165,856 Mortgage interest expense 89,967 59,989 Depreciation expense 26,707 88,273 Margin interest and trading expenses 536,540 331,986 General and administrative 493,894 449,597 Litigation 14,669 14,472 --------- ---------- 1,227,863 1,110,173 --------- ---------- Income(loss) before taxes and minority interest 3,197,071 (1,501,517) Provision for income tax(expense) benefit (1,350,438) 605,673 --------- ---------- Income(loss) before minority interest 1,846,633 (895,844) Minority interest (413,147) (326,603) --------- ---------- Net income(loss) 1,433,486 (1,222,447) Preferred stock dividends (25,405) - --------- ---------- Income available to common shareholders $ 1,408,881 $(1,222,447) ========= ========== Basic earnings(loss) per share $ 1.17 $ (0.99) ========= =========== Weighted average number of shares outstanding 1,202,533 1,237,774 ========= =========== Comprehensive income Net income(loss) $ 1,433,486 $(1,222,447) Other comprehensive income: Unrealized holding loss on marketable securities - (1,970,349) Reclassification adjustment for holding loss included in net earnings - 2,577,620 Income tax benefit related to other comprehensive income - 562,957 --------- ----------- Total comprehensive income $ 1,433,486 $ (52,219) ========= =========== NOTE 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. Beginning July 1, 1999, all marketable securities were classified as "trading securities" as defined by generally accepted accounting principles. As a result, all unrealized gains and losses on the Company's investment portfolio were recorded through the income statement. 21 of 44 During 1999, the Company increased the turnover of its investment portfolio and engaged in increased trading activities designed to maximize the overall return on investment activities in the near term. This resulted in portions of the Company's investments in marketable securities being classified as "trading" as defined by generally accepted accounting principles. After consultation with the Investment Committee of the Board of Directors, management determined that the classification of the entire portfolio as trading beginning July 1, 1999 would be more consistent with the Company's overall investment objectives and activities. As a result, beginning July 1, 1999, all unrealized gains and losses on the Company's investment portfolio were recorded through the income statement. For the twelve months ended December 31, 1999, the Company recognized a net unrealized gain of $4,113,680 related to the reclassification of all available-for-sale securities to trading securities. Gross unrealized gains and losses included in earnings from the transfer of securities from available-for-sale to trading totaled $7,118,996 and $3,005,316 respectively, for the year ended December 31, 1999. The net unrealized gain on trading securities included in earnings during the years ended December 31, 1999 and 1998 were $3,579,665 and $184,989, respectively. Proceeds from sales of available-for-sale securities for the year ended December 31, 1999 were $12,421,072. Gross realized gains and losses on those sales for the year ended December 31, 1999 were $1,632,440 and $3,317,340, respectively. NOTE 4 - 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. CONDENSED BALANCE SHEET As of June 30, 2000 ---- Assets Total current assets $2,304,287 Property, plant and equipment, net of accumulated depreciation of $11,554,786 5,015,742 Loan fees and deferred lease costs, net of accumulated amortization of $8,124 147,067 --------- $7,467,096 ========= Liabilities and partners' equity Total current liabilities $ 237,369 Partners' capital 7,229,727 --------- $7,467,096 ========= 22 of 44 CONDENSED STATEMENTS OF OPERATIONS For the 6 Months For the Years Ended Ended December 31, June 30, 2000 1999 1998 ------------- ------- ------- Revenues $4,445,597 $7,791,402 $7,036,744 Costs and expenses (427,488) (844,039) (968,716) --------- --------- --------- Net income $4,018,109 $6,947,363 $6,068,028 ========= ========= ========= NOTE 5 - RENTAL PROPERTY In July 1999, the Company's subsidiary, Woodland Village, completed the sale of its 100-unit apartment complex located in Cincinnati, Ohio for $3,125,000 and realized a gain on the sale of real estate of $1,176,292. In September 1999, proceeds from the sale were used by Woodland Village to purchase a 27-unit multi-family apartment complex located in Los Angeles, California for $4,075,000 in a 1031 tax-deferred exchange. To complete the purchase, Woodland Village obtained a $1,955,000 30-year mortgage note and two 5-year interest only loans of $201,928 and $162,563 from the Company and InterGroup, respectively. The mortgage note has a 7.73% interest rate and the interest rates for the 5-year loans are at 7.75%. The $201,928 loan from the Company was eliminated in consolidation. At June 30, 2000, rental property included the following: Investment in real estate: Land $ 1,996,750 Buildings, improvements and equipment 2,084,620 Accumulated depreciation on buildings, improvements and equipment ( 42,287) --------- $4,039,083 ========= NOTE 6 - DUE TO SECURITIES BROKER Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. NOTE 7 - NOTES PAYABLE In July 1999, the Company's subsidiary, Woodland Village, completed the sale of its 100-unit apartment complex located in Cincinnati, Ohio for $3,125,000. A portion of the proceeds from the sale were used to pay-off the outstanding mortgage payable on the property of $1,215,565. The mortgage carried an interest rate of 9.25%. At June 30, 2000, the balance on notes payable was $2,106,227. Included in notes payable balance is a mortgage in the amount of $1,943,664 and a note payable to InterGroup in the amount of $162,563. The 30-year mortgage is collateralized by a trust deed on the apartment complex. The interest rate on the loan is 7.73% for the first 120 months. Principal and interest payments of 23 of 44 $13,978.85 are required monthly until September 23, 2009, at which point, the monthly payments will be recalculated based on a new interest rate of 2.15% in excess of the twelve-month average annual yield of United States Treasury Securities. The new interest rate cannot exceed 11.879%. The $162,563 note payable to Intergroup carries an interest rate of 7.75% per annum payable at the end of each quarter. All unpaid principal and interest under the note are due on September 29, 2004. The annual principal payments on the mortgage and note payable for the five-year period commencing July 1, 2000 are approximately as follows: Year ending June 30, -------------------- 2001 $ 18,136 2002 19,589 2003 21,158 2004 22,853 2005 187,247 Thereafter 1,837,244 --------- Total $2,106,227 ========= NOTE 8 - 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 For the 6 Months December 31, Ended June 30, 2000 1999 1998 ------------------- ---- ---- Federal Current $ 535,156 $ 997,383 $ 799,995 Deferred 612,717 1,422,974 (824,114) --------- --------- --------- 1,147,873 2,420,357 (24,119) --------- --------- --------- State Current 94,439 279,192 213,550 Deferred 108,126 68,597 (232,773) --------- --------- --------- 202,565 347,789 (19,223) --------- --------- --------- $1,350,438 $2,768,146 $ (43,342) ========= ========= =========
Statutory federal tax rate 34.0% 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 6.1 6.1 (164.5) Operating losses for which no benefit has been provided, net of change in the valuation allowance - - 174.7 Other 2.1 6.3 (5.5) ----- ----- ----- 42.2% 46.4% 292.8% ===== ===== ===== 24 of 44 The components of the Company's deferred tax assets and (liabilities) as of June 30, 2000 are as follows: Deferred tax assets Net operating loss carryforwards $ 530,972 State income taxes 2,056 Capital loss carryforwards 1,400,700 ---------- Gross deferred tax asset 1,933,728 Valuation allowance (360,949) ---------- Net deferred tax asset 1,572,779 Deferred tax liability related to Unrealized gain on marketable securities (1,572,779) Deferred gain on real estate sale (852,000) ---------- Net deferred (liabilities) (2,424,779) ---------- Net deferred tax (liabilities) $ (852,000) ========== As of June 30, 2000, the Company had net capital losses available for carryforward for income tax purposes totaling approximately $3,501,751. The carryforward expires in varying amounts through 2003. As of June 30, 2000, the Company also had a net operating loss available for carryforward of $1,921,890. The net operating loss carryforward expires in varying amounts through 2016. NOTE 9 - SHAREHOLDERS' EQUITY 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, the number of Preferred Shares was adjusted to 63,600. 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 elected to forego any dividend payments on the preferred stock for the year ended December 31, 1998. Beginning October 1, 1999, Intergroup will no longer forgo dividend payments on its preferred stock. For the six months ended June 30, 2000 and the year ended December 31, 1999, the Company paid preferred stock dividends of $25,405 and $12,880, respectively, to Intergroup. 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 10 - RELATED PARTY TRANSACTIONS As of June 30, 2000, InterGroup owned approximately 47.7% of the Company's outstanding common stock and 100% of the Company's preferred stock for a total of 50.4% of all outstanding voting stock. In addition, the Chairman and Chief Executive Officer of InterGroup, who is also the Company's Chairman and Chief
Present Position Director Name Age With the Company Since Term to Expire - -------------------------------------------------------------------------------------- John V. Winfield 53 Chairman, President 1995 2000 Annual Meeting and Chief Executive Officer (1) William J. Nance 56 Director (1)(2) 1996 2000 Annual Meeting John C. Love 60 Director (1)(2) 1998 2000 Annual Meeting Michael G. Zybala 48 Vice President, Secretary, Treasurer and General Counsel N/A N/A - ---------------------------
(1) Member of Securities Investment Committee (2) Member of Audit Committee BUSINESS EXPERIENCE: The principal occupation and business experience during the last five years for each of the Directors and Executive Officers of the Company are as follows: John V. Winfield - Mr. Winfield was first elected to the Board in May of 1995 and currently serves as the Company's Chairman of the Board, President and Chief Executive Officer, having been appointed as such in April 1996. Mr. Winfield is also the Chairman of the Board, President and Chief Executive Officer of the Company's subsidiary Portsmouth, having held those positions since May of 1996. Mr. Winfield is Chairman of the Board, President and Chief Executive Officer of InterGroup, a public company, and has held those positions since 1987. Mr. Winfield is also a director of Healthy Planet Products, Inc. ("HPP"), a public company, having first been appointed on September 17, 1997. Mr. Winfield was elected Chairman of the Board of HPP on August 5, 1998. Mr. Winfield also serves as Chairman of the Board of Etz Lavud, Ltd., a public company. 27 of 44 William J. Nance - Mr. Nance was first elected to the Board in May of 1996. Mr. Nance is also a director of Portsmouth. Mr. Nance is the President and CEO of Century Plaza Printers, Inc., a company he founded in 1979. He has also served as a consultant in the acquisition and disposition of multi-family and commercial real estate. Mr. Nance is a Certified Public Accountant and, from 1970 to 1976, was employed by Kenneth Leventhol & Company where he was a Senior Accountant specializing in the area of REITS and restructuring of real estate companies, mergers and acquisitions, and all phases of real estate development and financing. Mr. Nance is a Director and the Treasurer of The InterGroup Corporation, a public company, and has held such positions since 1984. Mr. Nance also serves as a Director of HPP, having first been elected on August 5, 1998. John C. Love - Mr. Love was appointed a Director of the Company on March 5, 1998. Mr. Love is an international hospitality and tourism consultant based in Orinda, California. He was formerly a partner in the national CPA and consulting firm of Pannell Kerr Forster. Mr. Love has extensive experience in hotel development, acquisition and operations. He is chairman emeritus of Golden Gate University in San Francisco. Mr. Love is also a Director of Portsmouth, having first been appointed in March 1998, and a Director of InterGroup, having first been appointed in January 1998. Michael G. Zybala - Mr. Zybala was appointed as Vice President and Secretary of the Company on February 20, 1998 and was appointed Treasurer on May 16, 2000. He is also Vice President, Secretary, Treasurer and General Counsel of Portsmouth. Mr. Zybala has served as the Company's General Counsel since 1995 and has represented the Company as its corporate counsel since August 1993. Mr. Zybala is a Director of HPP and serves as the company's Secretary. He was first appointed as a Director of HPP on June 17, 1998 and elected as Secretary on August 5, 1998. Mr. Zybala also serves as Vice President Operations of InterGroup, having been appointed to that position in January 1999. Family Relationships: There are no family relationships among directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Involvement in Certain Legal Proceedings: No director or executive officer, or person nominated or chosen to become a director or executive officer, was involved in any legal proceeding requiring disclosure. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and each beneficial owner of more than ten percent of the Common Stock of the Company, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that during fiscal 2000 all filing requirements applicable to its officers, directors, and greater than ten-percent beneficial owners were complied with. SUMMARY COMPENSATION TABLE Annual Compensation --------------------------------------------- Name and Principal Other Annual Position Year Salary Bonus Compensation - ------------------ ---- ------ ----- ------------- John V. Winfield 2000 $240,000(1) $ 0 $12,000(2) Chairman, President and 1999 $188,282(1) $ 0 $12,000(2) Chief Executive Officer 1997 $121,319(1) $ 0 $12,000(2) Michael G. Zybala 2000 $ 97,466(3) $15,000 - Vice President, Secretary, Treasurer and General Counsel - -----------------------------
(1) Includes salary received from the Company's subsidiary, Portsmouth, in the amounts of $90,000, $63,907, and $35,115 for the fiscal years 2000, 1999 and 1998 respectively. (2) Amounts shown reflect regular annual director's fees paid by Santa Fe and Portsmouth, each in the amount of $6,000. During fiscal 2000 and 1999, the Company and Portsmouth also paid annual premiums of $24,900 and $16,600, respectively, for a split dollar whole life insurance policy, owned by, and the beneficiary of which is, a trust for the benefit of Mr. Winfield's family. The Company has a secured right to receive, from any proceeds of the policy, reimbursement of all premiums paid prior to any payments to the beneficiary. (3) Approximately $84,000 of Mr. Zybala's salary and bonus was allocated to Portsmouth. As a small business issuer, Santa Fe has no compensation committee. Executive Officer compensation is set by disinterested members of the Board of Directors. Santa Fe has no stock option plan or stock appreciation rights for its executive officers. The Company has no pension or long-term incentive plans. There are no employment contracts between Santa Fe and any executive officer, nor are there any termination-of-employment or change-in-control arrangements. DIRECTOR COMPENSATION The bylaws of Santa Fe permit directors to be paid a fixed sum for attendance at each meeting of the Board or a stated salary as director. Each director is paid a fee of $1,500 per quarter for a total annual compensation of $6,000. This policy has been in effect since July 1, 1985. 29 of 44 Item 11. Security Ownership of Certain Beneficial Owners and Management (a) Security ownership of Certain Beneficial Owners The following table sets forth, as of September 15, 2000, certain information with respect to the beneficial ownership of the Company's voting securities owned by those persons or groups known by the Company to own more than five percent of any class of the Company's voting securities.
Name and Address of Amount and Nature Percent of Beneficial Owner of Beneficial Owner (1) Class (2) - ------------------- ---------------------- ---------- Guinness Peat Group plc ("GPG") 82,858(3) 6.95% Allied Mutual Insurance Services ("AMI") Second Floor, 21-26 Garlick Hill London ECHV 2AU, England The InterGroup Corporation 632,596(4) 50.40% 820 Moraga Drive Los Angeles, CA 90049 John V. Winfield 49,400 4.14% 820 Moraga Drive Los Angeles, CA 90049 The InterGroup Corporation and 681,996(5) 54.30% John V. Winfield as a group - ------------------------------ (1) Unless otherwise indicated, and subject to applicable community property laws, each person has sole voting and investment power with respect to the shares beneficially owned. (2) Percentages are calculated on the basis of 1,192,310 shares of Common Stock issued and outstanding as of September 15, 2000, plus any securities that person has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. (3) Based on their Statement on Schedule 13D (Amendment No. 5) dated January 4, 1995, GPG and its wholly-owned subsidiary AMI claim shared power to vote, or to direct the vote, and to dispose of, or to direct the disposition of, 82,858 shares (post stock split) of Santa Fe's Common Stock owned beneficially and of record by GPG and through AMI. Of that amount, 52,858 shares are beneficially owned by GPG and 30,000 by AMI. (4) InterGroup is the beneficial owner of 568,996 shares of Common Stock and 63,600 shares of convertible, voting preferred stock, which shares are entitled to vote as if converted to Common Stock. (5) Pursuant to Voting Trust Agreement dated June 30, 1998, InterGroup has the power to vote the 49,400 shares of Common Stock owned by Mr. Winfield. As President, Chairman of the Board and a 50.1% shareholder of InterGroup, Mr. Winfield has voting and dispositive power over the shares owned of record and beneficially by InterGroup. As of September 15, 2000, there were 1,192,310 shares of the Company's Common Stock outstanding, which were held by approximately 528 shareholders of record. 30 of 44 (b) Security Ownership of Management The following table sets forth, as of September 15, 2000, certain information with respect to the beneficial ownership as to each class of the Company's equity securities beneficially owned by all directors, each of the named executive officers and directors and executive officers as a group.
Name and Address of Amount and Nature Percent of Beneficial Owner of Beneficial Owner(1) Class (2) - ------------------- ------------------- ---------- John V. Winfield 681,996(3) 54.30% 820 Moraga Drive Los Angeles, CA 90049 John C. Love 0 * 820 Moraga Drive Los Angeles, CA 90049 William J. Nance 0(4) * 820 Moraga Drive Los Angeles, CA 90049 Michael G. Zybala 0 * 820 Moraga Drive Los Angeles, CA 90049 All of the above as a group 681,996 54.30% - --------------------------- * Ownership does not exceed 1% (1) Unless otherwise indicated, and subject to applicable community property laws, each person has sole voting and investment power with respect to the shares beneficially owned. (2) Percentages are calculated on the basis of 1,192,310 shares of Common Stock issued and outstanding as of September 15, 2000, plus any securities that person has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. (3) John V. Winfield is the sole beneficial owner of 49,400 shares of Common Stock. InterGroup is the beneficial owner of 568,996 shares of Common Stock and 63,600 shares of convertible, voting preferred stock. As the President, Chairman of the Board and a 50.1% shareholder of InterGroup, Mr. Winfield has voting and dispositive power with respect to the shares of Santa Fe owned of record and beneficially by InterGroup. (4) William J. Nance is a 2.4% shareholder of InterGroup as well as a Director and Treasurer thereof. John C. Love is also a Director of InterGroup and a less than 1% shareholder. Security Ownership of Management in Subsidiary As of September 15, 2000, Santa Fe was the record and beneficial owner of 505,042 shares of the common stock of its 68.8%-owned subsidiary, Portsmouth Square, Inc. The President and Chairman of the Board of Santa Fe has voting power with respect to common shares of Portsmouth owned by Santa Fe. No other director or executive officer of Santa Fe has a beneficial interest in Portsmouth's shares. 31 of 44 (c) Changes in Control There are no arrangements which may result in a change in control of the Company. Item 12. Certain Relationships and Related Transactions As of September 15, 2000, Santa Fe owned 68.8% of the common stock of Portsmouth, and InterGroup and John V. Winfield, in the aggregate, owned approximately 54.3% of the voting stock of Santa Fe. Certain costs and expenses, primarily salaries, rent and insurance, are allocated between the Company, its subsidiary, Portsmouth, and InterGroup 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 fiscal years ended June 30, 2000 and 1999, the Company and Portsmouth made payments to InterGroup in the total amount of approximately $226,000 and $178,000, 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. In September 1999, the Company's subsidiary, Woodland Village, obtained a 5- year interest only note in the amount of $162,563 from InterGroup. The note carries a 7.75% interest rate and matures on September 29, 2004. During fiscal 2000, the Company paid $25,760 preferred stock dividends to Intergroup. 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. An employee of InterGroup helps 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. In December 1998, Board of Directors authorized the Company to obtain whole life insurance and split dollar insurance policies covering the Company's President and Chief Executive Officer, Mr. Winfield. During fiscal years 2000 and 1999, the Company paid annual premiums of 24,900 for the split dollar whole life insurance policy, owned by, and the beneficiary of which is, a trust for the benefit of Mr. Winfield's family. The Company has a secured right to receive, from any proceeds of the policy, reimbursement of all premiums paid prior to any payments to the beneficiary. During fiscal 2000 and 1999, Portsmouth paid annual premiums of $16,600 for a split dollar policy also covering Mr. Winfield. There are no other relationships or related transactions between the Company and any of its officers, directors, five-percent security holders or their families which require disclosure. 32 of 44 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 (Amended February 15, 2000) **** 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. (68.8%) Incorporated on July 6, 1967 in California (2) Intergroup Woodland Village, Inc. (55.4%) Incorporated on August 5, 1993 in Ohio 27. Financial Data Schedule 44 * 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. **** Amendment to Bylaws are incorporated herein by reference to the Company's Form 10-KSB filed with the Commission March 29, 2000. 33 of 44 (b) Reports on Form 8-K ------------------- The following report on Form 8-K was filed during the last quarter of the period covered by this report: Date of Report Description of Items Reported -------------- ----------------------------- May 16, 2000 Election of Directors and ratification of independent accountants; increase in stock buy-back program; change in fiscal year end. (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 35 Balance Sheet - December 31, 1999 and 1998 36 Statements of Income and Partners' Capital - Years 37 Ended December 31, 1999 and 1998 Statements of Cash Flows - Years Ended 38 December 31, 1999 and 1998 Notes to Financial Statements - December 31, 1999 and 1998 39 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. 34 of 44 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 28, 2000 To the Partners 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, 1999, and 1998, and the related statements of income and partners' capital and cash flows for the 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, 1999 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ COLLIER AND MARKOWITZ Certified Public Accounts 35 of 44
JUSTICE INVESTORS (A LIMITED PARTNERSHIP) BALANCE SHEETS December 31, 1999 and 1998 -------------------------- 1999 1998 ---- ---- ASSETS ------ Current assets Cash $ 15,453 $ 3,265 Rents receivable 2,198,898 1,688,253 Prepaid expenses 5,221 4,886 --------- -------- Total current assets 2,219,572 1,696,404 --------- -------- Fixed assets Office equipment (net of accumulated depreciation of $4,757 in 1999 and $3,846 in 1998) 796 1,707 Building and improvements (net of accumulated depreciation of $11,369,228 in 1999 and $10,995,627 in 1998) 4,076,774 4,450,375 Land 1,124,128 1,124,128 --------- --------- Total fixed assets 5,201,698 5,576,210 --------- --------- Other assets Loan fees (net of accumulated amortization of $140,440 in 1999 and $110,875 in 1998) 147,817 177,382 Deferred lease costs (net of accumulated amortization of $7,016 in 1999 and $5,908 in 1998) 15,140 16,247 --------- --------- Total other assets 162,957 193,629 --------- --------- Total assets $7,584,227 $7,466,243 ========= =========
LIABILITIES AND PARTNERS' CAPITAL --------------------------------- Current liabilities Trade accounts payable and accrued expenses $ 45,520 $ 50,539 Rents received in advance 206,250 200 Accrued interest 9,292 6,553 --------- --------- Total current liabilities 261,062 57,292 Long-term liabilities Notes payable 1,591,547 2,604,686 --------- --------- Total liabilities 1,852,609 2,661,978 Commitment - Lease commission --------- --------- Partners' capital 5,731,618 4,804,265 --------- --------- Total liabilities and partners' capital $7,584,227 $7,466,243 ========= =========
44 The accompanying notes are an integral part of these financial statements. 36 of
JUSTICE INVESTORS (A LIMITED PARTNERSHIP) STATEMENTS OF INCOME AND PARTNERS' CAPITAL Years Ended December 31, 1999 and 1998 -------------------------------------- 1999 1998 ---- ---- Revenues Rental income Hotel $6,368,921 $5,677,119 Garage 1,379,523 1,337,833 Other 2,400 2,400 --------- --------- Total rental income 7,750,844 7,017,352 Interest income 4,893 - Miscellaneous income 35,665 19,392 --------- --------- Total revenues 7,791,402 7,036,744 --------- --------- Expenses Interest 52,187 175,468 Depreciation and amortization 405,184 423,320 Lease commission 63,690 56,771 Property taxes 41,627 41,928 General and administrative Administrative expenses 150,000 150,000 Accounting fees 8,348 9,999 Audit and tax preparation 43,435 25,527 Business taxes 23,223 20,554 Bank charges 8,634 6,935 Consultants 1,050 5,005 Franchise taxes 800 800 Insurance expense 40,374 45,518 Legal fees 4,758 6,178 Office expense and miscellaneous 729 713 --------- --------- Total expenses 844,039 968,716 --------- --------- Net income 6,947,363 6,068,028 Partners' capital at beginning of year 4,804,265 3,776,240 Less distributions to partners (6,020,010) (5,040,003) --------- --------- Partners' capital at end of year $5,731,618 $4,804,265 ========= =========
The accompanying notes are in integral part of these financial statements. 37 of 44
JUSTICE INVESTORS (A LIMITED PARTNERSHIP) Years Ended December 31, 1999 and 1998 -------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 1999 1998 ---- ---- Cash flows from operating activities Cash received from tenants $ 7,446,249 $5,588,801 Interest received 4,893 - Miscellaneous income received 35,665 - Interest paid (49,448) (168,915) Cash paid for other operating activities (392,022) (357,178) Net cash provided by operating -------- -------- activities 7,045,337 5,062,708 --------- --------- Cash flows from financing activities Distributions to partners (6,020,010) (5,040,003) Proceeds from borrowing of long- term debt 3,043,509 3,992,727 Principal payments of long-term debt (4,056,648) (4,012,167) Net cash used in financing --------- --------- activities (7,033,149) (5,059,443) --------- --------- Net increase in cash and cash equivalents 12,188 3,265 Cash and cash equivalents at beginning of year 3,265 - --------- --------- Cash and cash equivalents at end of year $ 15,453 $ 3,265 ========= ========= Reconciliation of net income to net cash provided by operating activities Net income $6,947,363 $6,068,028 --------- --------- Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 405,184 423,320 Rents receivable (510,645) (1,222,502) Prepaid expenses (335) 29,737 Accounts payable (5,019) (36,378) Rents received in advance 206,050 (206,050) Interest payable 2,739 6,553 --------- --------- 97,974 (1,005,320) --------- --------- Net cash provided by operating activities $7,045,337 $5,062,708 ========= ========= Supplemental disclosures of cash flows information: Cash paid during the year for: Interest $ 49,448 $ 168,915
The accompanying notes are an integral part of these financial statements. 38 of 44 JUSTICE INVESTORS (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS December 31, 1999 and 1998 -------------------------- 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 provides 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 provides for payments of certain percentages of parking receipts to November 30, 2010. Rents Receivable - ---------------- Management believes that all rents receivable as of December 31, 1999 and 1998, 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. 39 of 44 JUSTICE INVESTORS (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS December 31, 1999 and 1998 -------------------------- SIGNIFICANT ACCOUNTING POLICIES (continued) - ------------------------------- Use of Estimates - ---------------- The process of preparing financial statements in conformity with generally accepted accounting principles requires 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. LONG-TERM DEBT - -------------- At December 31, 1999 and 1998, long-term debt consisted of the following: 1999 1998 ---- ---- 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 provides 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 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 provides for interest at prime rate per annum due December 31, 2004 1,591,547 14,686 --------- --------- $1,591,547 $2,604,686 ========= =========
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, 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 40 of 44 JUSTICE INVESTORS (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS December 31, 1999 and 1998 -------------------------- LONG-TERM DEBT (continued) - -------------- Maturities of long-term debt for each of the next five years are as follows: 2000 $ - 2001 - 2002 - 2003 - 2004 1,591,547 MINIMUM FUTURE RENTALS - ---------------------- Minimum future rentals to be received on non-cancelable leases as of December 31, 1999 for each of the next five years and in the aggregate are: 2000 $ 2,761,000 2001 2,761,000 2002 2,761,000 2003 2,761,000 2004 2,761,000 Subsequent to 2004 1,544,250 ---------- $15,349,250 ========== 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: 1999 1998 ---- ---- General partners $150,000 $150,000 Legal services 4,758 6,178 ------- ------- $154,758 $156,178 ======= ======= 41 of 44 JUSTICE INVESTORS (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS December 31, 1999 and 1998 -------------------------- RELATED PARTY TRANSACTIONS (continued) - -------------------------- The garage lessee, the managing general partner, paid the Partnership $1,379,523 and $1,337,833 during 1999 and 1998, respectively, under the terms of the rental agreement. Rents receivable from the garage lessee at December 31, 1999 and 1998 were $108,478 and $115,794, respectively. Accounts payable to general partners at December 31, 1999 and 1998 were $30,000 and $30,000, respectively. LITIGATION - ---------- The Partnership was 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 case was dismissed in 1998 without liability to the Partnership. 42 of 44 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 (Registrant) Date: September 25, 2000 by /s/ John V. Winfield --------------------------- John V. Winfield, President, Chairman of the Board and Chief Executive Officer Date: September 25, 2000 by /s/ Michael G. Zybala --------------------------- Michael G. Zybala, Vice President and Secretary and Treasurer Date: September 25, 2000 by /s/ David Nguyen -------------------------- David Nguyen Controller (Principal Accounting 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: September 25, 2000 /s/ John V. Winfield ------------------ --------------------------------------- John V. Winfield, Chairman of the Board, President and Chief Executive Officer Date: September 25, 2000 /s/ John C. Love ------------------ --------------------------------------- John C. Love, Director Date: September 25, 2000 /s/ William J. Nance, ------------------ --------------------------------------- William J. Nance, Director 43 of 44 EX-27 2 0002.txt
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 SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-KSB REPORT. 0000086759 SANTA FE FINANCIAL CORPORATION YEAR JUN-30-2000 JAN-01-2000 JUN-30-2000 62617 32538045 0 0 0 32974159 4039083 42287 44790404 23420159 0 0 6360 127604 14329744 44790404 0 4424934 0 0 1227863 0 0 3197071 1350438 1433486 0 0 0 1433486 1.17 1.17
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