10QSB 1 sf10q93002.txt SANTA FE FINANCIAL CORPORATION FORM 10-QSB 9-30-2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2002 [ ] Transition Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from ________ to _________. Commission file number 0-6877 SANTA FE FINANCIAL CORPORATION ------------------------------ (Exact Name of Small Business Issuer as Specified in Its Charter) Nevada 95-2452529 ------------------------------- ------------------ (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 820 Moraga Drive Los Angeles, CA 90049 --------------------------------------- ------------------ (Address of Principal Executive Offices) (Zip Code) (310) 889-2500 --------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes (x) No ( ) State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date: 1,178,210 shares of issuer's $.10 Par Value Common Stock were outstanding as of November 11, 2002. Transitional Small Business Disclosure Format (check one): Yes ( ) No (X) Page 1 of 18 INDEX SANTA FE FINANCIAL CORPORATION PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheet - September 30, 2002 (Unaudited) 3 Consolidated Statements of Operations (Unaudited) - Three Months ended September 30, 2002 and September 30, 2001 4 Consolidated Statements of Cash Flows (Unaudited) - Three Months ended September 30, 2002 and September 30, 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Controls and Procedures 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 16 Page 2 of 18 PART I FINANCIAL INFORMATION Item 1. Financial Statements Santa Fe Financial Corporation Consolidated Balance Sheet (Unaudited) As of September 30, 2002 ----------- ASSETS Cash and cash equivalents $ 2,624,088 Investment in marketable securities 2,481,518 Investment in Justice Investors 6,109,638 Rental property 4,758,642 Other investments 300,000 Deferred income tax asset 2,635,597 Other assets 254,119 ----------- Total assets $ 19,163,602 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Obligations for securities sold 564,133 Mortgage notes payable 2,360,302 Accounts payable and accrued expenses 308,739 ----------- Total liabilities 3,233,174 ----------- Minority interest 4,764,938 ----------- Commitments and contingencies Shareholders' equity 6% Cumulative, convertible, voting preferred stock par value $.10 per share Authorized shares - 1,000,000 Issued and outstanding - 63,600 Liquidation preference of $858,600 6,360 Common stock - par value $.10 per share Authorized - 2,000,000 Issued 1,276,038 and outstanding 1,178,210 127,604 Additional paid-in capital 8,807,942 Retained earnings 3,174,422 Treasury stock, at cost, 97,828 shares (950,838) ----------- Total shareholders' equity 11,165,490 ----------- Total liabilities & shareholders' equity $ 19,163,602 =========== See accompanying notes to consolidated financial statements. Page 3 of 18 Santa Fe Financial Corporation Consolidated Statements of Operations (Unaudited) For the three months ended September 30, 2002 2001 ---------- ---------- Revenues Equity in net income of Justice Investors $ 499,287 $ 1,088,400 Net losses on marketable securities (1,163,922) (5,354,762) Dividend and interest income 69,086 69,148 Rental income 98,598 84,468 Other income 23,032 37,351 ---------- ---------- (473,919) (4,075,395) ---------- ---------- Costs and expenses Property operating expense (52,031) (36,305) Mortgage interest expense (44,182) (45,069) Depreciation expense (17,401) (13,276) Margin interest, trading and management expenses (38,106) (153,346) General and administrative (216,309) (192,871) ---------- ---------- (368,029) (440,867) ---------- ---------- Loss before income taxes and minority interest (841,948) (4,516,262) Income tax benefit 331,687 1,325,208 ---------- ---------- Loss before minority interest (510,261) (3,191,054) Minority interest 55,309 202,565 ---------- ---------- Net loss $ (454,952) $(2,988,489) Preferred stock dividend (12,879) (12,879) ---------- ---------- Loss available to common shareholders $ (467,831) $(3,001,368) ========== ========== Basic loss earnings per share $ (.40) $ (2.55) ========== ========== Weighted average number of shares outstanding 1,178,210 1,178,810 ========== ========== See accompanying notes to consolidated financial statements. Page 4 of 18 Santa Fe Financial Corporation Consolidated Statements of Cash Flows (Unaudited) For the three months ended September 30, 2002 2001 ---------- ---------- Cash flows from operating activities: Net loss $ (454,952) $(2,988,489) Adjustments to reconcile net income to net cash used in operating activities: Equity in net income of Justice Investors (499,287) (1,088,400) Net unrealized (gains) losses on marketable securities (352,486) 5,500,404 Minority interest (55,309) (202,565) Depreciation expense 17,401 13,276 Changes in operating assets and liabilities: Restricted cash - 14,732 Investment in marketable securities 2,597,615 6,399,167 Other assets 25,844 (494,970) Deferred tax asset (707,329) (1,065,397) Accounts payable and accrued expenses 79,794 (208,203) Due to securities broker (92,273) (2,334,424) Obligations for securities sold 263,413 (1,188,496) ---------- ---------- Net cash provided by operating activities 822,431 2,356,635 ---------- ---------- Cash flows from investing activities: Cash distributions from Justice Investors 501,984 627,480 ---------- ---------- Net cash provided by investing activities 501,984 627,480 ---------- ---------- Cash flows from financing activities: Principal payments on mortgage payable (6,438) (4,756) Dividends accrued (paid) to preferred shareholders (12,879) (12,879) Dividends paid to minority shareholders (63,102) (63,118) Notes Receivable (162,564) - Purchase of treasury stock - (6,488) ---------- ---------- Net cash used in financing activities (244,983) (87,241) ---------- ---------- Net increase in cash and cash equivalents 1,079,432 2,896,874 Cash and cash equivalents at beginning of period 1,544,656 167,694 ---------- ---------- Cash and cash equivalents at end of period $ 2,624,088 $ 3,064,568 ========== ========== See accompanying notes to consolidated financial statements. Page 5 of 18 SANTA FE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Significant Accounting Policies --------------------------------------------------------- The consolidated financial statements included herein have been prepared by Santa Fe Financial Corporation ("Santa Fe" or the "Company"), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, the consolidated financial statements reflect, in the opinion of management, all adjustments (which included only normal recurring adjustments) necessary to state fairly the financial position and results of operations as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial statements and the notes therein included in the Company's Form 10-KSB for the year ended June 30, 2002. Certain reclassifications have been made to the financial statements as of September 30, 2002 and for the three months then ended to conform to the financial statements as of and for the three months ended September 30, 2001 presentation. The results of operations for the three months ended September 30, 2002 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2003. 2. Investment in Justice Investors ------------------------------- The Company's principal source of revenue is derived from the management of its 68.8%-owned subsidiary Portsmouth Square, Inc. ("Portsmouth"). Portsmouth has a 49.8% interest in Justice Investors, a California limited partnership ("Justice Investors") and also serves as one of the two general partners. The other general partner, Evon Garage Corporation ("Evon"), serves as the managing general partner. As a general and limited partner, Portsmouth has significant control over the management and operation of the assets of Justice Investors. All significant partnership decisions require the active participation and approval of both general partners. The Company and Evon jointly consult and determine the amount of partnership reserves and the amount of cash to be distributed to the limited partners. The partnership derives most of its income from a lease of its San Francisco, California hotel property to Felcor Lodging Trust, Inc. ("Felcor") and from a lease of the garage portion of the property to Evon. Santa Fe and Portsmouth jointly manage and oversee their interest in the operation of the hotel and the parking garage. Page 6 of 18 Pursuant to the terms of the partnership agreement, voting rights of the partners are determined according to the partners' entitlement to share in the net profit and loss of the partnership. The Company is not entitled to any additional voting rights by virtue of its position as a general partner. The partnership agreement also provides that no portion of the partnership real property can be sold without the written consent of the general and limited partners entitled to more than 72% of the net profit. Condensed financial statements for Justice Investors are as follows: JUSTICE INVESTORS CONDENSED BALANCE SHEET As of September 30, 2002 ---------- Assets Total current assets $ 310,006 Property, plant and equipment, net of accumulated depreciation of $12,355,738 4,423,588 Loan fees and deferred lease costs, net of accumulated amortization of $233,560 76,852 ---------- Total assets $ 4,810,446 ========== Liabilities and partners' capital Total current liabilities $ 760,181 Partners' capital 4,050,265 ---------- Total liabilities and partners' capital $ 4,810,446 ========== JUSTICE INVESTORS CONDENSED STATEMENTS OF OPERATIONS For the three months ended September 30, 2002 2001 ---------- ---------- Revenues $1,191,473 $ 2,384,501 Costs and expenses (188,888) (198,959) ---------- ---------- Net income $1,002,585 $ 2,185,542 ========== ========== 3. Investment in Marketable Securities ----------------------------------- The Company's investment portfolio consists primarily of corporate equities. The Company has also invested in corporate bonds and income producing 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. The Company may also use exchange traded funds, options and futures to hedge concentrated stock positions and index futures to hedge against market risk and enhance the performance of the Company's portfolio while reducing the overall portfolio's risk and volatility. Page 7 of 18 The Company's current investment portfolio as of September 30, 2002 is composed of following types of investment securities: % of Total Market Value Portfolio ------------ --------- Fixed income: Corporate bonds $ 241,996 9.7% Corporate securities: Common stocks 1,569,884 63.3% Preferred stocks 610,900 24.6% REIT's 57,204 2.3% Options 1,534 0.1% ---------- ------- TOTAL SECURITIES ASSETS $ 2,481,518 100.0% ========== ====== As part of the investment strategies, the Company may 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. The Company has no naked short positions. As of September 30, 2002, the Company had obligations for securities sold of $564,133. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading with net unrealized gains or losses included in earnings. Included in the net losses on marketable securities of $1,163,922 for the three months ended September 30, 2002 are net unrealized gains of $352,486 and net realized losses of $1,516,408. Included in the net losses on marketable securities of $5,354,762 for the three months ended September 30, 2001 are net unrealized losses of $5,500,404 and net realized gains of $145,642. 4. Rental Property --------------- The Company owns and operates a 27 unit multi-family apartment complex and a 3 unit multi-family complex located in Los Angeles, California. Units are leased on a short-term basis with no lease extending beyond one year. At September 30, 2002, rental property included the following: Land $ 2,429,950 Buildings, improvements, and equipment 2,501,080 Accumulated depreciation on buildings, improvements, and equipment (172,388) ---------- $ 4,758,642 ========== Page 8 of 18 5. Segment Information ------------------- The Company operates in three reportable segments, the operations of its multi-family residential property, the operation of Justice Investors, and the investment of its cash and securities assets. These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment's performance. Management also makes operational and strategic decisions based on this same information. Information below represents reporting segments for the three months ended September 30, 2002 and the three months ended September 30, 2001. Operating income for rental properties consist of rental income. Operating income from Justice Investors consists of the operations of the hotel and garage included in the equity in net income of Justice Investors. Operating income (losses) for investment transactions consist of net investment gains (losses)and dividend and interest income.
REAL ESTATE ------------------------- Three months ended Rental Justice Investment September 30, 2002 Properties Investors Transactions Other Total ----------- ----------- ----------- ----------- ------------ Operating income(loss) $ 98,598 $ 499,287 $(1,094,836) $ - $ (496,951) Operating expenses (52,031) - (38,106) - (90,137) ----------- ----------- ----------- ----------- ------------ 46,567 499,287 (1,132,942) - (587,088) Mortgage interest expenses (44,182) - - - (44,182) Depreciation (17,401) - - - (17,401) General and administrative expenses - - - (216,309) (216,309) Other income - - - 23,032 23,032 Income tax benefit - - - 331,687 331,687 Minority interest - - - 55,309 55,309 ----------- ----------- ----------- ----------- ------------ Net income (losses) $ (15,016) $ 499,287 $(1,132,942) $ 193,719 $ (454,952) =========== =========== =========== =========== ============ Total Assets $ 4,758,642 $ 6,109,638 $ 2,781,518 $ 5,513,804 $ 19,163,602 =========== =========== =========== =========== ============
Page 9 of 18
REAL ESTATE ------------------------- Three months ended Rental Justice Investment September 30, 2001 Properties Investors Transactions Other Total ----------- ----------- ----------- ----------- ------------ Operating income(loss) $ 84,468 $ 1,088,400 $(5,285,614) $ - $ (4,112,746) Operating expenses (36,305) - (153,346) - (189,651) ----------- ----------- ----------- ----------- ------------ 48,163 1,088,400 (5,438,960) - (4,302,397) Mortgage interest expenses (45,069) - - - (45,069) Depreciation (13,276) - - - (13,276) General and administrative expenses - - - (192,871) (192,871) Other income - - - 37,351 37,351 Income tax benefit - - - 1,325,208 1,325,208 Minority interest - - - 202,565 202,565 ----------- ----------- ----------- ----------- ------------ Net income(losses) $ (10,182) $ 1,088,400 $(5,438,960) $ 1,372,253 $ (2,988,489) =========== =========== =========== =========== ============ Total Assets $ 3,985,348 $ 7,602,447 $12,812,021 $ 3,807,919 $ 28,207,735 =========== =========== =========== =========== ============
6. Related Party Transactions -------------------------- Certain costs and expenses, primarily salaries, rent and insurance, are allocated among the Company and its subsidiary, Portsmouth, and the Company's parent, InterGroup, based on management's estimate of the utilization of resources. For the three months ended September 30, 2002 and 2001, the Company and Portsmouth made payments to InterGroup of approximately $43,328 and $52,119, 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. John V. Winfield serves as Chief Executive Officer and Chairman of the Company, Portsmouth, and InterGroup. 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. Page 10 of 18 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND PROJECTIONS The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "estimate," "project," "anticipate" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, such as the impact of terrorism and war on the national and international economies, including tourism and securities markets, general economic conditions an increased competition in the hotel industry in the San Francisco area, partnership distributions, securities markets, litigation and other factors, including natural disasters, and those discussed below in the Company's Form 10-KSB for the year ended June 30, 2002, 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 are derived from the management of the real property assets of its 68.8% owned subsidiary, Portsmouth, rental income from its multi-family real estate properties and income received from investment of its cash and securities assets. Portsmouth serves as both a general and 49.8% limited partner of Justice Investors, which derives most of its income from a lease of its hotel property to Felcor and from a lease of the garage portion of the property to Evon. Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 The Company had net losses of $454,952 for the three months ended September 30, 2002 as compared to net losses of $2,988,489 for the three months ended September 30, 2001. This was primarily due to the decrease in net losses on marketable securities and a decrease in margin and trading expenses. These were partially offset by the decrease in net equity income of Justice Investors and the decrease in income tax benefit. Net losses on marketable securities decreased to net losses of $1,163,922 for the three months ended September 30, 2002 from net losses of $5,354,762 for the three months ended September 30, 2001. For the three months ended September 30, 2002, the Company had net unrealized gains of $352,486 and net realized losses of $1,516,408. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net income. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities and performance please see the section below. Page 11 of 18 The decrease in equity in net income of Justice Investors to $499,287 from $1,088,400 is attributable to a $600,000 arbitration settlement payment from the hotel lessee in the first quarter of fiscal 2001, of which approximately $300,000 impacted net income of Justice Investors. In addition, the terrorist attacks of September 11, 2001 had a dramatic impact on tourism and the hospitality industry. Those events, coupled with the weak economy and increased competition in the hotel industry in San Francisco, have resulted in a decline in hotel revenues. Average daily room rates declined 29% to $94 from $133 in the prior year's quarter, while average occupancy increased 5% to 81% from 77% in the prior year's quarter. The small increase in occupancy rate compared to the prior year period was attributable to a significant decline in occupancy from September 11, 2001 to the end of that quarter. Margin interest, trading and management expenses decreased to $38,106 from $153,346, which was primarily due to lower management expenses and the maintenance of lower average daily margin balances during the current quarter. Trading and management expenses deceased as a result of the termination of the third party management agreement in November 2001. Margin interest expense decreased to $21,947 for the three months ended September 30, 2002 from $75,353 for the three months ended September 30, 2002. Income taxes benefit decreased to $331,687 from tax benefit of $1,325,208 due to the decreased net loss produced in the current quarter. Minority benefit decreased to $55,309 from $202,565 as a result of a decline in net losses generated by the Company's subsidiary, Portsmouth during the current quarter. MARKETABLE SECURITIES The Company invests from time to time in corporate debt and equity securities, mortgage backed securities, securities issued by REIT's and other companies, which invest primarily in real estate. The following table sets forth the composition of the Company's investment securities portfolio as of September 30, 2002: % of Total Market Value Portfolio ------------ --------- Fixed income: Corporate bonds $ 241,996 9.7% Corporate securities: Common stocks 1,569,884 63.3% Preferred stocks 610,900 24.6% REIT's 57,204 2.3% Options 1,534 0.1% ---------- ------ TOTAL SECURITIES ASSETS $ 2,481,518 100.0% ========== ====== Page 12 of 18 The following table shows the composition of the Company's investment securities portfolio by selected industry groups as of September 30, 2002. % of Total Investment Industry Group Market Value Securities -------------- ------------ ---------- Metal and auto manufacturers 520,007 21.0% Telecommunication 917,500 36.9% Financial Services 44,281 1.8% Energy 149,412 6.0% Retail/Wholesale 111,694 4.5% Computer/Technologies 67,698 2.7% Real Estate Investment Trusts 57,204 2.3% Electric and Other Services 609,747 24.6% Pharmaceutical & Health Care 3,975 0.2% ---------- ------ $ 2,481,518 100.0% ========== ====== The Company's investment portfolio is diversified with 29 different equity positions. Only six individual equity securities comprise more than 5% of the equity value of the portfolio, with the largest being 25%. The amount of the Company's investment in any particular issuer may increase or decrease, and additions or deletions to its securities portfolio may occur, at any time. While it is the internal policy of the Company to limit its initial investment in any single equity to less than 5% of its total portfolio value, that investment could eventually exceed 5% as a result of equity appreciation or reduction of other positions. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. The following table shows the net gain or loss on the Company's marketable securities and the associated margin interest and trading expenses for the quarters ended September 30, 2002 and 2001. Quarter Ended Quarter Ended September 30, September 30, 2002 2001 ------------- ------------- Net gain (loss) on marketable securities $ (1,163,922) $ (5,354,762) Dividend & interest income 69,086 69,148 ---------- ---------- (1,094,836) (5,285,514) ---------- ---------- Margin interest (21,947) (75,353) Trading and Management expenses (16,159) (77,993) ---------- ---------- (38,106) (153,346) ---------- ---------- Investment income (loss) $(1,132,942) $(5,438,860) ========== ========== Page 13 of 18 FINANCIAL CONDITION AND LIQUIDITY The Company's cash flows are primarily generated by its subsidiary's ownership interest 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 multi-family real estate properties and the investment of its cash and securities assets. As a result of the significant decline in partnership revenues due to the slowdown in the San Francisco area economy, increased competition and the continuing impact that the terrorist attacks of September 11, 2001 have had on tourism and the hospitality industry, Justice Investors cut the monthly distribution to its limited partners by 20%, effective with the May 2002 distribution. As a result, Portsmouth's monthly distribution was reduced by $41,832 to $167,328. The limited partners have also been advised that it is unlikely that there will be any year-end special distributions in December 2002 if hotel occupancy and room rates do not improve, and further cuts in the monthly distributions may have to be made in the future. The general partners will continue to review and analyze the operations of the hotel to determine an appropriate monthly distribution. 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. In July 2002, Justice Investors entered into a lease with Tru Spa, LLC of approximately 4,000 square feet of space on the lobby level of the hotel for the construction and operation of a health and beauty spa. The term of the lease is for ten years commencing on May 1, 2003 or as soon as all of the improvements are completed, with a five year option to extend the term. The lease provides for minimum monthly rent of $6,767, additional rent of $2,072 (up to a total of $250,000 to help defray certain relocation construction costs) and other tenant fees. Justice will be responsible for up to $700,000 in leasehold improvements, which will be paid using the partnership's line of credit. It is expected that the spa lease will be essentially revenue neutral to the partnership, but should help the hotel to be more competitive in a difficult marketplace by providing greater amenities to its guests. The hotel industry in San Francisco was particularly hard hit by the impact that the terrorist attacks had on tourism and the hospitality industry in general. The impact of those attacks coupled with the slow down in the economy and increased competition have made for a very challenging environment. Because of that, the economic recovery in the Bay Area has lagged behind that of many other cities. Although the Company has suffered a significant decline in revenues as a result of those events, management believes that the net cash flow generated from future operating activities and its capital resources will be adequate to meet its current and future obligations. The Company has no off balance sheet arrangements. The Company also does not have any material contractual obligations or commercial commitments. Page 14 of 18 IMPACT OF INFLATION 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 the hotel lessee 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. CRITICAL ACCOUNTING POLICIES The Company reviews its long-lived assets and other investments for impairment when circumstances indicate that a potential loss in carrying value may have occurred. For the Company's investment in Justice, to the extent that projected future undiscounted cash flows from the operation of the Company's hotel property are less than the carrying value of the asset, the carrying value of the asset is reduced to its fair value. For other investments, the Company reviews the investment's operating results, financial position and other relevant factors to determine whether the estimated fair value of the asset is less than the carrying value of the asset. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading with net unrealized gains or losses included in earnings. The Company's other accounting policies are straightforward in their application. Item 3. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The management of the Company, including the Chief Executive Officer and the Treasurer (serving as Chief Financial Officer), have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this Quarterly Report on Form 10-QSB (the "Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Valuation Date, the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in the Company's periodic SEC filings. (b) Changes in internal controls. Subsequent to the date of the evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls, nor were there any corrective actions required with regard to significant deficiencies and material weaknesses. Page 15 of 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 99.1 - Certificates Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Registrant did not file any reports on Form 8-K during the period covered by this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SANTA FE FINANCIAL CORPORATION (Registrant) Date: November 13, 2002 by /s/ John V. Winfield --------------------------- John V. Winfield, President, Chairman of the Board and Chief Executive Officer Date: November 13, 2002 by /s/ Michael G. Zybala --------------------------- Michael G. Zybala, Vice President, Treasurer and Secretary Date: November 13, 2002 by /s/ Arnold Acebes -------------------------- Arnold Acebes Controller (Principal Accounting Officer) CERTIFICATIONS I, John V. Winfield, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Santa Fe Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; Page 16 of 18 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designated such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for registrant's auditors and material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ John V. Winfield ---------------------- John V. Winfield President and Chief Executive Officer ___________________________________________________________________________ I, Michael G. Zybala, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Santa Fe Financial Corporation; Page 17 of 18 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designated such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for registrant's auditors and material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Michael G. Zybala ---------------------- Michael G. Zybala Vice President, Secretary and Treasurer (serving as Chief Financial Officer) Page 18 of 18