-----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, Sn/F3LvuWXS+XhuHrL3RC3gshrWrQ3nyDhS0EsXGcK9EshJt+b2QrxaY/RzP0Jns 4kFgReI7B98gyR1OgoBwuw== 0000086759-04-000003.txt : 20040213 0000086759-04-000003.hdr.sgml : 20040213 20040213160440 ACCESSION NUMBER: 0000086759-04-000003 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANTA FE FINANCIAL CORP CENTRAL INDEX KEY: 0000086759 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 952452529 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-06877 FILM NUMBER: 04599132 BUSINESS ADDRESS: STREET 1: 820 MORAGA DRIVE CITY: LOS ANGELES STATE: CA ZIP: 90049 BUSINESS PHONE: (310) 889-2500 MAIL ADDRESS: STREET 1: 820 MORAGA DRIVE CITY: LOS ANGELES STATE: CA ZIP: 90049 10QSB 1 sf10q123103.txt SANTA FE FINANCIAL CORPORATION 10-QSB 12-31-2003 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 December 31, 2003 [ ] 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 February 12, 2003. Transitional Small Business Disclosure Format (check one): Yes ( ) No (X) INDEX SANTA FE FINANCIAL CORPORATION PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheet - December 31, 2003 (Unaudited) 3 Consolidated Statements of Operations (Unaudited) - Three Months ended December 31, 2003 and December 31, 2002 4 Consolidated Statements of Operations (Unaudited) - Six Months ended December 31, 2003 and December 31, 2002 5 Consolidated Statements of Cash Flows (Unaudited) - Six Months ended December 31, 2003 and December 31, 2002 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Controls and Procedures 20 PART II. OTHER INFORMATION Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 -2- PART I FINANCIAL INFORMATION Item 1. Financial Statements Santa Fe Financial Corporation Consolidated Balance Sheet (Unaudited) As of December 31, 2003 ----------- ASSETS Cash and cash equivalents $ 204,952 Investment in marketable securities 33,515,083 Investment in Justice Investors 5,492,028 Rental property, net 4,690,806 Other investments 300,000 Deferred income tax asset 982,560 Other assets 310,541 ----------- Total assets $ 45,495,970 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Due to securities broker $ 10,614,030 Obligations for securities sold 12,852,563 Mortgage notes payable 2,326,250 Accounts payable and accrued expenses 700,700 ----------- Total liabilities 26,493,543 ----------- Minority interest 5,428,090 ----------- 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 5,583,269 Treasury stock, at cost, 97,828 shares (950,838) ----------- Total shareholders' equity 13,574,337 ----------- Total liabilities & shareholders' equity $ 45,495,970 =========== See accompanying notes to consolidated financial statements. -3- Santa Fe Financial Corporation Consolidated Statements of Operations (Unaudited) For the three months ended December 31, 2003 2002 ---------- ---------- Real estate operations: Rental income $ 87,615 $ 108,828 Property operating expense (39,755) (51,465) Mortgage interest expense (50,649) (58,213) Depreciation expense (18,294) (17,961) ---------- ---------- Loss from real estate operations (21,083) (18,811) ---------- ---------- General and administrative expenses (235,617) (240,391) ---------- ---------- Equity in net income of Justice Investors 273,925 371,444 --------- ---------- Other income (loss): Net gains on marketable securities 1,849,507 551,413 Dividend and interest income 88,793 35,415 Margin interest and trading expenses (362,337) (63,540) Other income, net 14,703 14,523 ---------- ---------- Total other income 1,590,666 537,811 ---------- ---------- Income before income taxes and minority interest 1,607,891 650,053 Income tax expense (643,156) (269,081) ---------- ---------- Income before minority interest 964,735 380,972 Minority interest (229,448) (86,253) ---------- ---------- Net income $ 735,287 $ 294,719 Preferred stock dividend (12,879) (12,879) ---------- ---------- Income available to common shareholders $ 722,408 $ 281,840 ========== ========== Basic income per share $ 0.61 $ 0.24 ========== ========== Weighted average number of shares outstanding 1,178,210 1,178,210 ========== ========== See accompanying notes to consolidated financial statements. -4- Santa Fe Financial Corporation Consolidated Statements of Operations (Unaudited) For the six months ended December 31, 2003 2002 ---------- ---------- Real estate operations: Rental income $ 195,138 $ 207,426 Property operating expense (96,736) (103,496) Mortgage interest expense (101,312) (102,395) Depreciation expense (36,496) (35,362) ---------- ---------- Loss from real estate operations (39,406) (33,827) ---------- ---------- General and administrative expenses (454,140) (456,700) ---------- ---------- Equity in net income of Justice Investors 520,270 870,731 --------- ---------- Other income (loss): Net gains(losses) on marketable securities 2,527,416 (612,509) Dividend and interest income 151,032 104,501 Margin interest and trading expenses (469,793) (101,646) Other income, net 27,371 37,555 ---------- ---------- Total other income(loss) 2,236,026 (572,099) ---------- ---------- Income(loss) before income taxes and minority interest 2,262,750 (191,895) Income tax (expense)benefit (905,100) 62,606 ---------- ---------- Income(loss) before minority interest 1,357,650 (129,289) Minority interest (330,961) (30,944) ---------- ---------- Net income(loss) $1,026,689 $ (160,233) Preferred stock dividend (25,758) (25,758) ---------- ---------- Income(loss) available to common shareholders $1,000,931 $ (185,991) ========== ========== Basic income(loss) per share $ 0.85 $ (0.16) ========== ========== Weighted average number of shares outstanding 1,178,210 1,178,210 ========== ========== See accompanying notes to consolidated financial statements. -5- Santa Fe Financial Corporation Consolidated Statements of Cash Flows (Unaudited) For the six months ended December 31, 2003 2002 ---------- ---------- Cash flows from operating activities: Net income(loss) $ 1,026,689 $ (160,233) Adjustments to reconcile net income(loss) to net cash used in operating activities: Equity in net income of Justice Investors (520,270) (870,731) Net unrealized gains on marketable securities (1,265,572) (1,448,243) Minority interest 330,961 30,944 Depreciation expense 36,496 35,362 Changes in operating assets and liabilities: Investment in marketable securities (9,774,267) (2,810,766) Other assets 648,221 (241,157) Deferred tax asset 177,088 (147,205) Accounts payable and accrued expenses (285,175) 79,177 Due to securities broker 4,779,072 3,107,951 Obligations for securities sold 4,448,509 839,623 ---------- ---------- Net cash used in operating activities (398,248) (1,585,278) ---------- ---------- Cash flows from investing activities: Cash distributions from Justice Investors 635,846 1,003,968 ---------- ---------- Net cash provided by investing activities 635,846 1,003,968 ---------- ---------- Cash flows from financing activities: Principal payments on mortgage note payable (14,002) (12,997) Dividends paid to preferred shareholders (25,758) (25,758) Dividends paid to minority shareholders (114,455) (63,103) Notes receivable - (162,564) ---------- ---------- Net cash used in financing activities (154,215) (264,422) ---------- ---------- Net increase(decrease) in cash and cash equivalents 83,383 (845,732) Cash and cash equivalents at beginning of period 121,569 1,544,656 ---------- ---------- Cash and cash equivalents at end of period $ 204,952 $ 698,924 ========== ========== See accompanying notes to consolidated financial statements. -6- SANTA FE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Significant Accounting Policies --------------------------------------------------------- The consolidated financial statements included herein have been prepared by Santa Fe Financial Corporation ("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. The Company's operations primarily consist of managing a hotel property through its managing interest in Justice Investors and its rental properties. The Company also derives income from the investment of its cash and securities assets. 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 70.5% of the voting stock of the Company. Woodland Village's major asset is a 27-unit apartment complex located in Los Angeles, California. The Company also owns a three-unit apartment building in Los Angeles. 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, 2003. The results of operations for the three and six months ended December 31, 2003 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2004. 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. -7- 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" or "the partnership") 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. 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. The Company amortizes the difference between the cost basis of its investment in Justice Investors and its share of the net assets allocable to depreciable assets of Justice Investors over 40 years. 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 investment would be considered permanently impaired and the carrying value of the asset would be reduced to its fair value. -8- Condensed financial statements for Justice Investors are as follows: JUSTICE INVESTORS CONDENSED BALANCE SHEET As of December 31, 2003 ---------- Assets Total current assets $ 170,315 Loan fees and deferred lease costs, net of accumulated amortization of $272,362 38,050 Property, plant and equipment, net of accumulated depreciation of $12,951,516 5,873,328 Construction in progress 138,788 Land 1,124,128 ---------- Total assets $ 7,344,609 ========== Liabilities and partners' capital Total current liabilities $ 399,774 Long term debt 3,902,200 Partners' capital 3,042,635 ---------- Total liabilities and partners' capital $ 7,344,609 ========== JUSTICE INVESTORS CONDENSED STATEMENTS OF OPERATIONS For the three months ended December 31, 2003 2002 ---------- ---------- Revenues $ 1,305,260 $ 901,594 Costs and expenses (712,211) (155,722) ---------- ---------- Net income $ 593,049 $ 745,872 ========== ========== For the six months ended December 31, 2003 2002 ---------- ---------- Revenues $ 2,317,141 $ 2,093,067 Costs and expenses (1,186,419) (344,610) ---------- ---------- Net income $ 1,130,722 $ 1,748,457 ========== ========== -9- 3. Investment in Marketable Securities ----------------------------------- The Company's investment portfolio consists primarily of corporate equities. The Company has also invested in 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. 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 December 31, 2003, the Company had obligations for securities sold (equities short) of $12,852,563. 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 change in unrealized gains or losses included in earnings. Included in the net gains on marketable securities of $1,849,507 for the three months ended December 31, 2003 are net unrealized gains of $578,379 and net realized gains of $1,271,128. Included in the net gains on marketable securities of $551,413 for the three months ended December 31, 2002 are net unrealized gains of $1,095,757 and net realized losses of $544,344. Included in the net gains on marketable securities of $2,527,416 for the six months ended December 31, 2003 are net unrealized gains of $1,265,572 and net realized gains of $1,261,844. Included in the net losses on marketable securities of $612,509 for the six months ended December 31, 2002 are net unrealized gains of $1,448,243 and net realized losses of $2,060,752. 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 December 31, 2003, rental property included the following: Land $ 2,429,950 Buildings, improvements, and equipment 2,522,851 Accumulated depreciation on buildings, improvements, and equipment (261,995) ---------- $ 4,690,806 ========== 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, -10- 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 and six months ended December 31, 2003 and for the three and six months ended December 31, 2002. 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 December 31, 2003 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income $ 87,615 $ 273,925 $ 1,938,300 $ - $ 2,299,840 Operating expenses (39,755) - (362,337) - (402,092) ----------- ----------- ----------- ----------- ------------ 47,860 273,925 1,575,963 - 1,897,748 Mortgage interest expenses (50,649) - - - (50,649) Depreciation (18,294) - - - (18,294) General and administrative expenses - - - (235,617) (235,617) Other income - - - 14,703 14,703 Income tax expense - - - (643,156) (643,156) Minority interest - - - (229,448) (229,448) ----------- ----------- ----------- ----------- ------------ Net income (losses) $ (21,083) $ 273,925 $ 1,575,963 $(1,093,518) $ 735,287 =========== =========== =========== =========== ============ Total Assets $ 4,690,806 $ 5,492,028 $33,815,083 $ 1,498,053 $ 45,495,970 =========== =========== =========== =========== ============
REAL ESTATE ------------------------- Three months ended Rental Justice Investment December 31, 2002 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income $ 108,828 $ 371,444 586,828 $ - $ 1,067,100 Operating expenses (51,465) - (63,540) - (115,005) ----------- ----------- ----------- ----------- ------------ 57,363 371,444 523,288 - 952,095 Mortgage interest expenses (58,213) - - - (58,213) Depreciation (17,961) - - - (17,961) General and administrative expenses - - - (240,391) (240,391) Other income - - - 14,523 14,523 Income tax expense - - - (269,081) (269,081) Minority interest - - - (86,253) (86,253) ----------- ----------- ----------- ----------- ------------ Net income (losses) $ (18,811) $ 371,444 $ 523,288 $ (581,202) $ 294,719 =========== =========== =========== =========== ============ Total Assets $ 4,756,309 $ 5,979,098 $ 9,285,656 $ 3,279,889 $ 23,300,952 =========== =========== =========== =========== ============
-11- REAL ESTATE ------------------------- Six months ended Rental Justice Investment December 31, 2003 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income $ 195,138 $ 520,270 $ 2,678,448 $ - $ 3,393,856 Operating expenses (96,736) - (469,793) - (566,529) ----------- ----------- ----------- ----------- ------------ 98,402 520,270 2,208,655 - 2,827,327 Mortgage interest expenses (101,312) - - - (101,312) Depreciation (36,496) - - - (36,496) General and administrative expenses - - - (454,140) (454,140) Other income - - - 27,371 27,371 Income tax expense - - - (905,100) (905,100) Minority interest - - - (330,961) (330,961) ----------- ----------- ----------- ----------- ------------ Net income (losses) $ (39,406) $ 520,270 $ 2,208,655 $(1,662,830) $ 1,026,689 =========== =========== =========== =========== ============ Total Assets $ 4,690,806 $ 5,492,028 $33,815,083 $ 1,498,053 $ 45,495,970 =========== =========== =========== =========== ============
REAL ESTATE ------------------------- Six months ended Rental Justice Investment December 31, 2002 Properties Investors Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income(loss) $ 207,426 $ 870,731 $ (508,008) $ - $ 570,149 Operating expenses (103,496) - (101,646) - (205,142) ----------- ----------- ----------- ----------- ------------ 103,930 870,731 (609,654) - 365,007 Mortgage interest expenses (102,395) - - - (102,395) Depreciation (35,362) - - - (35,362) General and administrative expenses - - - (456,700) (456,700) Other income - - - 37,555 37,555 Income tax benefit - - - 62,606 62,606 Minority interest - - - (30,944) (30,944) ----------- ----------- ----------- ----------- ------------ Net income(losses) $ (33,827) $ 870,731 $ (609,654) $ (387,483) $ (160,233) =========== =========== =========== =========== ============ Total Assets $ 4,756,309 $ 5,979,098 $ 9,285,656 $ 3,279,889 $ 23,300,952 =========== =========== =========== =========== ============
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 and six months ended December 31, 2003, the Company and Portsmouth made payments to InterGroup of approximately $41,700 and $83,400, respectively, for administrative costs and reimbursement of direct and indirect costs associated with the management of the Companies and their -12- investments, including the partnership asset. For the three and six months ended December 31, 2002, the Company and Portsmouth made payments to InterGroup of approximately $43,328 and $86,656, 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. -13- 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 and in the Company's Form 10-KSB for the year ended June 30, 2003, 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 December 31, 2003 Compared to Three Months Ended December 31, 2002 The Company had net income of $735,287 for the three months ended December 31, 2003 compared to a net income of $294,719 for the three months ended December 31, 2002. The increase was primarily due to the increase in gains on marketable securities and the increase in dividend and interest income partially offset by the increase in margin interest and trading expenses and the decrease in equity in income of Justice Investors. Rental income decreased to $87,615 from $108,828 and property operating expenses decreased accordingly to $39,755 from $51,465 as the result of several units becoming vacant during the current quarter. The equity in net income of Justice Investors decreased to $273,925 from $371,444. That decrease was primarily attributable to increased partnership costs in the current quarter for consultants, experts and legal services relating to the partnership's enforcement of the lessee's obligations under the lease and additional depreciation and interest costs related to the build-out of the new spa and meeting rooms in the hotel and other capital improvements. -14- Although partnership revenues increased to approximately $1,305,260 for the three months ended December 31, 2003 from $901,594 for the three months ended, December 31, 2002, that increase was primarily attributable to a $296,000 payment by the hotel lessee in December 2003, for part of the replacement costs of the sloped window system of the hotel, which amount was recorded as other income by Justice Investors. Absent that additional nonrecurring payment, partnership revenues increased about $100,000. Many of the factors identified in fiscal 2003 continued to significantly impact the hotel operations in fiscal 2004. Unlike other areas in California, the Bay Area has been especially slow to recover from the devastating impact that the terrorist attacks of September 11, 2001, had on tourism and the hospitality industry. The continued weakness in the Bay Area due to the failure of numerous internet and technology companies, has also resulted in a decrease in business travel and a reduction by airlines in the number of flights into San Francisco. The hotel has also faced more competition from new properties and from higher end properties that provide greater amenities to its guests, especially for the business traveler. These properties have also reduced room rates as hotel operators struggle to obtain occupancy. Average daily room rates for the three months ended December 31, 2003 increased modestly to approximately $92, compared to $89 for the three months ended December 31, 2002 and average monthly occupancy rates increased to approximately 64% compared to 62% during the same three month period of fiscal 2002. Based on industry reports, management is expecting a slow recovery in the San Francisco hotel marketplace. Net gains on marketable securities increased to $1,849,507 for the three months ended December 31, 2003 from $551,413 for the three months ended December 31, 2002. For the three months ended December 31, 2003, the Company had net unrealized gains of $578,379 and net realized gains of $1,271,128. For the three months ended December 31, 2002, the Company had net unrealized gains of $1,095,757 and net realized losses of $544,344. 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 please see the Marketable Securities section below. Dividend and interest income increased to $88,793 from $35,415 as a result of the increased investment in dividend yielding securities. Margin interest and trading expenses increased to $362,337 from $63,540 primarily due to a $228,303 in performance-based compensation earned by the Company's CEO for his management of the Company's investment portfolio for the six months ended December 31, 2003. The remaining increase was due to the increase in the average daily margin balances which resulted in the increase in margin interest expense to $88,495 from $4,739. The provision for income tax expense increased to $643,156 from $269,081 due to the higher income generated in the current quarter. Minority interest increase to $229,448 from $86,253 as the result of the higher income generated during the current quarter by the Company's subsidiary, Portsmouth. -15- Six Months Ended December 31, 2003 Compared to Six Months Ended December 31, 2002 The Company had net income of $1,026,689 for the six months ended December 31, 2003 compared to a net loss of $160,233 for the six months ended December 31, 2002. The change was primarily due to the increase in gains on marketable securities and the increase in dividend and interest income partially offset by the increase in margin interest and trading expenses and the decrease in equity in income of Justice Investors. The equity in net income of Justice Investors decreased significantly to $520,270 from $870,731. That decrease was primarily attributable to increased partnership costs during the first six months of the current fiscal year for consultants, experts and legal services relating the physical inspection of the hotel and the partnership's enforcement of the lessee's obligations under the lease and additional depreciation and interest costs related to the build-out of the new spa and meeting rooms in the hotel and other capital improvements. Although partnership revenues increased to approximately $2,317,141 for the six months ended December 31, 2003 from $2,093,067 for the six months ended, December 31, 2002, that increase was attributable to a to a $296,000 payment by the hotel lessee in December 2003, for part of the replacement costs of the sloped window system of the hotel, which amount was recorded as other income by Justice Investors. Absent that nonrecurring payment, partnership revenues would have been down approximately $72,000. Many of the factors identified in fiscal 2003 continued to significantly impact the hotel operations in fiscal 2004. Unlike other areas in California, the Bay Area has been especially slow to recover from the devastating impact that the terrorist attacks of September 11, 2001, had on tourism and the hospitality industry. The continued weakness in the Bay Area due to the failure of numerous internet and technology companies, has also resulted in a decrease in business travel and a reduction by airlines in the number of flights into San Francisco. The hotel has also faced more competition from new properties and from higher end properties that provide greater amenities to its guests, especially for the business traveler. These properties have also reduced room rates as hotel operators struggle to obtain occupancy. Average daily room rates declined slightly to approximately $91 for the six months ended December 31, 2003 from approximately $92 for the six months ended December 31, 2002 and average monthly occupancy rates remained the same at approximately 71%. Based on industry reports, management is expecting a slow recovery in the San Francisco hotel marketplace. Net gains (losses) on marketable securities changed to net gains of $2,527,416 for the six months ended December 31, 2003 from net losses of $612,509 for the six months ended December 31, 2002. For the six months ended December 31, 2003, the Company had net unrealized gains of $1,265,572 and net realized gains of $1,261,844. For the six months ended December 31, 2002, the Company had net unrealized gains of $1,1,448,243 and net realized losses of $2,060,752. 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 please see the Marketable Securities section below. -16- Dividend and interest income increased to $151,032 from $104,501 as a result of the increased investment in dividend yielding securities. Margin interest and trading expenses increased to $469,793 from $101,646 primarily due to a $228,303 in performance-based compensation earned by the Company's CEO for his management of the Company's investment portfolio for the six months ended December 31, 2003. The remaining increase was due to the increase in the average daily margin balances which resulted in the increase in margin interest expense to $161,280 from $32,874. The provision for income tax (expense) benefit changed to a tax expense of $905,100 from a tax benefit $62,606 due to the significantly higher income generated in the current quarter. Minority interest increase to $330,961 from $30,944 as the result of the higher income generated during the current quarter by the Company's subsidiary, Portsmouth. MARKETABLE SECURITIES The Company's investment portfolio is diversified with 127 different equity positions. Only two equity securities are more than 5% of the equity value of the portfolio, with the largest being 5.1%. 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. As of December 31, 2003, the Company had investments in marketable equity securities of $33,515,083. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups as of December 31, 2003. % of Total Investment Industry Group Market Value Securities -------------- ------------ ---------- Electric, pipelines, oil and gas $ 8,766,661 26.2% Telecommunications and media 5,971,216 17.8% Semiconductor, software, internet, and computer 4,533,151 13.5% REITs, lodging, home builders and hotels 3,030,520 9.0% Insurance, banks and brokers 2,754,610 8.2% Pharmaceuticals and medical 2,155,365 6.4% Airlines and defense 2,047,826 6.1% Apparel, food and consumer goods 1,707,153 5.1% Chemicals, materials, metals, and mining 1,442,829 4.3% Other 1,105,752 3.4% ---------- ------ $33,515,083 100.0% ========== ====== -17- 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 three and six months ended December 31, 2003 and December 31, 2002, respectively. Three months ended Three month ended December 31, 2003 December 31, 2002 ------------ ------------ Net gain(losses) on marketable securities $ 1,849,507 $ 551,413 Dividend & interest income 88,793 35,415 Margin interest expense (88,495) (4,739) Trading and management expenses (273,842) (58,801) ------------ ------------ Investment income (loss) $ 1,575,963 $ 523,288 ============ ============ Six months ended Six month ended December 31, 2003 December 31, 2002 ------------ ------------ Net gain(losses) on marketable securities $ 2,527,416 $ (612,509) Dividend & interest income 151,032 104,501 Margin interest expense (161,280) (32,874) Trading and management expenses (308,513) (68,772) ------------ ------------ Investment income (loss) $ 2,208,655 $ (609,654) ============ ============ 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. Beginning in December 2002, Justice Investors began reducing its monthly distributions due to the continuing decline in partnership revenues. In August 2003, Justice Investors determined that a further reduction in partnership distributions was appropriate due to the continuing poor performance of the hotel operation, costs advanced for the construction of the spa, new meeting rooms, the relocation of the hotels administrative offices and other anticipated expenses. Effective September 2003 through December 2003, monthly partnership distributions were cut an additional 50% reducing Portsmouth's monthly distribution amount from $158,961 to $79,480. As a result, cash distributions from Justice Investors decreased to $635,846 for the six months ended December 31, 2003 from $1,003,968 for the six months ended December 31, -18- 2002. Justice Investors also determined that it would not borrow further against its line of credit to support partnership distributions. The general partners will continue to closely monitor the operating results and partnership expenses and will make appropriate adjustments to partnership distributions as required. In the later part of fiscal 2003, Justice Investors conducted a comprehensive physical inspection of the hotel as permitted by the terms of the lease. In July 2003, Justice delivered to the hotel lessee, Felcor Lodging Trust, Inc. ("Felcor") and Holiday Inn a notice citing certain deficiencies in the physical condition of the hotel property and in its furniture, fixtures and equipment and requested that those deficiencies be corrected in accordance with the lessee's obligations under the lease. The initial term of the hotel lease expires on December 31, 2004; however, the lessee has the right to renew the lease for an additional term of five years, which would extend the lease to December 31, 2009. Under the terms of the lease, the lessee was required to notify Justice Investors of its intention to exercise the five-year option by December 31, 2003. To give the parties the opportunity to amicably resolve the issues concerning the alleged deficiencies in the condition of the hotel and other lease obligations, Justice and Felcor agreed to extend the date by which the lessee must give Justice notice of its intent to renew from December 31, 2003 to a date thirty days from the date that either party receives notice that the extension of time has been terminated. At this time, it is not certain whether Felcor will elect to exercise its option to extend the lease. The Company does not consider Felcor and Evon, the two significant lessees of the hotel property, to be a credit risk. Evon has been the garage lessee since the property became operational and has never missed a rent payment in over thirty years of operations. The garage is subleased by Evon to Ampco Parking, a major parking garage operating company. Felcor is a public company listed on the New York Stock Exchange (NYSE: FCH) and is one of the largest real estate investment trusts in the United States. The Company monitors Felcor's public filings on a regular basis. The hotel lease provides for significant minimum annual rent of $2,500,000. There is no indication that Felcor will not be able to meet its rental obligations in the future if it elects to remain as lessee of the hotel. If the relationship between Felcor and Justice Investors terminates, the partnership anticipates that it would renovate the hotel property and seek a third party to manage the hotel under a recognized brand. 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 operations. The recovery of tourism, the hotel industry and general economy in the San Francisco Bay Area continues to lag behind that of many cities. The increase in competition has also added additional challenges to an already difficult business environment. Although the Company has suffered a significant decline in revenues and partnership distributions as a result of those factors, 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. -19- 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. Item 3. Controls and Procedures (a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Quarterly Report on Form 10-QSB. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations. (b) Internal Control Over Financial Reporting. There have been no changes in the Company's internal control over financial reporting during the last quarterly period covered by this Quarterly Report on Form 10-QSB that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -20- PART II. OTHER INFORMATION Item 5. Other Information By letter dated November 3, 2003, the Company") was notified by the Staff of The Nasdaq Stock Market ("Nasdaq") of its determination that the Company's securities would be delisted from the Nasdaq SmallCap Market at the opening of business on November 12, 2003. The Company had previously been notified by the Nasdaq Staff that it no longer meets the minimum 500,000 publicly held shares requirement for continued listing on the Nasdaq SmallCap Market as set forth in Marketplace Rule 4310(c)(7) and was required to submit a plan to achieve and sustain compliance with all Nasdaq SmallCap listing requirements. After consideration of the fees, additional listing requirements and related costs necessary to maintain the Company's Nasdaq SmallCap listing, and other factors, Santa Fe's Board of Directors decided that it would not be in the best interests of the Company and its shareholders to continue with that listing and the Company elected not to submit a plan of compliance. The Company's common stock became eligible for trading on the OTC Bulletin Board under its current symbol of SFEF, effective with the opening of business on November 12, 2003. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a). 31.2 Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. (b) The Company filed the following Report on Form 8-K - During the quarter ended December 31, 2003: Date of Report Items Reported Description ---------------- ------------------- ------------------ October 29, 2003 Item 5. Other Events Disclosure of delisting and Regulation FD of Company's securities Disclosure; Item 7 on Nasdaq SmallCap Market Exhibits and press release. -21- 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: February 13, 2004 by /s/ John V. Winfield --------------------------- John V. Winfield, President, Chairman of the Board and Chief Executive Officer Date: February 13, 2004 by /s/ Michael G. Zybala --------------------------- Michael G. Zybala, Vice President, and Secretary Date: February 13, 2004 by /s/ David Nguyen -------------------------- David Nguyen, Treasurer and Controller (Principal Accounting Officer) -22- EX-31 3 sf10qex311.txt EXHIBIT 31.1 CEO CERTIFICATION EXHIBIT 31.1 CERTIFICATION 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; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal control over financial reporting. Date: February 13, 2004 /s/ John V. Winfield --------------------------- John V. Winfield, President and Chief Executive Officer EX-31 4 sf10qex312.txt EXHIBIT 31.2 CFO CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, David T. Nguyen, 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; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal control over financial reporting. Date: February 13, 2004 /s/ David T. Nguyen --------------------------- David T. Nguyen, Treasurer and Controller (serving as Chief Financial Officer) EX-32 5 sf10qex321.txt EXHIBIT 32.1 CEO CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Santa Fe Financial Corporation (the "Company") on Form 10-QSB for the quarterly period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I John V. Winfield, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 13, 2004 /s/ John V. Winfield ---------------------------- John V. Winfield, President and Chief Executive Officer [A signed original of this written statement required by Section 906 has been provided to Santa Fe Financial Corporation and will be retained by Santa Fe Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request.] EX-32 6 sf10qex322.txt EXHIBIT 32.2 CFO CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Santa Fe Financial Corporation (the "Company") on Form 10-QSB for the quarterly period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I David T. Nguyen, Treasurer and Controller of the Company, serving as Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 13, 2004 /s/ David T. Nguyen ---------------------------- David T. Nguyen, Treasurer and Controller (serving as Chief Financial Officer) [A signed original of this written statement required by Section 906 has been provided to Santa Fe Financial Corporation and will be retained by Santa Fe Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request.] -----END PRIVACY-ENHANCED MESSAGE-----