-----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, DqG46ffiTqRuNbisatf+XdR7dbFhb3i0oLhXt1Ddp132K35VLe0+gPTsARHKF7Qv XVPKlsY1CVxQeGaAb1YB0w== 0000086759-07-000022.txt : 20071114 0000086759-07-000022.hdr.sgml : 20071114 20071113173306 ACCESSION NUMBER: 0000086759-07-000022 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071114 DATE AS OF CHANGE: 20071113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANTA FE FINANCIAL CORP CENTRAL INDEX KEY: 0000086759 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] 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: 071239770 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 sf10qsb93007.txt UNITED STATES 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, 2007 [ ] 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 ( ) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date: 1,241,810 shares of issuer's $.10 Par Value Common Stock were outstanding as of November 13, 2007. Transitional Small Business Disclosure Format (check one): Yes ( ) No (X) INDEX SANTA FE FINANCIAL CORPORATION PART I FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements Consolidated Balance Sheet As of September 30, 2007 (Unaudited) 3 Consolidated Statements of Operations (Unaudited) For the Three Months ended September 30, 2007 and 2006 4 Consolidated Statements of Cash Flows (Unaudited) For the Three Months ended September 30, 2007 and 2006 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 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 20 Item 6. Exhibits. 20 SIGNATURES 21 -2- PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements SANTA FE FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED) As of September 30, 2007 ----------- ASSETS Cash and cash equivalents $ 881,000 Restricted cash 1,500,000 Investment in marketable securities 6,891,000 Other investments 4,175,000 Accounts receivable, net 1,167,000 Other assets, net 1,585,000 Deferred tax asset 2,860,000 Minority interest of Justice Investors 5,545,000 Investment in real estate, net 5,428,000 Investment in hotel, net 45,110,000 ----------- Total assets $ 75,142,000 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and other liabilities $ 9,857,000 Due to securities broker 1,770,000 Obligations for securities sold 199,000 Mortgage notes payable - real estate 2,204,000 Mortgage notes payable - hotel 48,000,000 ----------- Total liabilities 62,030,000 ----------- Minority interest 3,926,000 Commitments and contingencies Shareholders' equity Common stock - par value $.10 per share Authorized - 2,000,000 Issued 1,339,638 and outstanding 1,241,810 134,000 Additional paid-in capital 8,808,000 Retained earnings 1,195,000 Treasury stock, at cost, 97,828 shares (951,000) ----------- Total shareholders' equity 9,186,000 ----------- Total liabilities & shareholders' equity $ 75,142,000 =========== The accompanying notes are an integral part of the consolidated financial statements. -3- SANTA FE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the three months ended September 30, 2007 2006 ---------- ----------- Hotel operations: Hotel and garage revenue $ 9,786,000 $ 7,592,000 Operating expense (8,335,000) (6,360,000) Interest expense (702,000) (749,000) Real estate taxes (177,000) (180,000) Depreciation and amortization (1,083,000) (1,034,000) ---------- ---------- Loss from Justice Investors operations (511,000) (731,000) ---------- ---------- Real estate operations: Rental income 138,000 115,000 Property operating expense (49,000) (70,000) Mortgage interest expense (43,000) (43,000) Depreciation expense (20,000) (19,000) ---------- ---------- Income(loss) from real estate operations 26,000 (17,000) ---------- ---------- General and administrative expenses (237,000) (221,000) Other expense (21,000) (21,000) ---------- --------- (258,000) (242,000) ---------- --------- Investment transactions: Net losses on marketable securities (936,000) (509,000) Impairment loss on other investments (90,000) - Dividend and interest income 43,000 43,000 Margin interest and trading expenses (162,000) (180,000) ---------- ---------- Total other loss (1,145,000) (646,000) ---------- ---------- Loss before income taxes and minority interest (1,888,000) (1,636,000) Minority interest - Justice Investors, pretax 278,000 373,000 ---------- ---------- Loss before income taxes (1,610,000) (1,263,000) Income tax benefit 642,000 642,000 ---------- ---------- Loss before minority interest (968,000) (621,000) Minority interest benefit, net of tax 212,000 147,000 ---------- ---------- Net loss (756,000) (474,000) ========== ========== Basic loss per share $ (0.61) $ (0.38) ========== ========== Weighted average number of shares outstanding 1,241,810 1,241,810 ========== ==========
The accompanying notes are an integral part of the consolidated financial Statements. -4- SANTA FE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the three months ended September 30, 2007 2006 ---------- ---------- Cash flows from operating activities: Net loss $ (756,000) $ (474,000) Adjustments to reconcile net loss to net cash provided by operating activities: Net unrealized losses on marketable securities 683,000 372,000 Impairment loss on other investments 90,000 - Minority interest (490,000) (520,000) Depreciation and amortization 1,103,000 1,052,000 Changes in assets and liabilities: Investment in marketable securities 6,119,000 3,045,000 Other investments and other assets 106,000 (844,000) Accounts payable and other liabilities 1,303,000 393,000 Due to securities broker (4,131,000) (1,390,000) Obligations for securities sold (857,000) (528,000) Deferred tax asset (642,000) (642,000) ---------- ---------- Net cash provided by operating activities 2,528,000 464,000 ---------- ---------- Cash flows from investing activities: Capital expenditures for furniture, equipment and building improvements (1,348,000) (358,000) Investment in real estate (973,000) - ---------- ---------- Net cash used in investing activities (2,321,000) (358,000) ---------- ---------- Cash flows from financing activities: Principal payments on mortgage note payable (177,000) (111,000) ---------- ---------- Net cash used in financing activities (177,000) (111,000) ---------- ---------- Net increase(decrease) in cash and cash equivalents 30,000 (5,000) Cash and cash equivalents at beginning of period 851,000 2,614,000 ---------- ---------- Cash and cash equivalents at end of period $ 881,000 $ 2,609,000 ========== ========== Supplemental information: Margin interest paid $ 67,000 $ 97,000 Mortgage interest paid $ 745,000 $ 792,000
The accompanying notes are an integral part of the consolidated financial statements. -5- SANTA FE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 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 the consolidated 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 for a fair statement of the financial position, cash flows and results of operations as of and for the periods indicated. The Company's operations primarily consist of owning and managing a hotel property through its 68.8%-owned consolidated subsidiary, Portsmouth Square, Inc. ("Portsmouth"), in Justice Investors ("Justice" or the "Partnership"), a California limited partnership. Santa Fe is a 75.1%-owned subsidiary of The InterGroup Corporation ("InterGroup"), a public company. InterGroup also directly owns approximately 10.9% of the common stock of Portsmouth. Portsmouth has a 50.0% interest in Justice in which Portsmouth serves as both a general and limited partner. The other general partner, Evon Corporation ("Evon"), serves as the managing general partner of Justice. In accordance with guidance set forth in the Financial Accounting Standards Board directed Staff Position (FSP) SOP 78-9-1, the Company has applied the principles of accounting applicable for investments in subsidiaries due to its "kick out rights" and "substantive participating rights" arising from its limited partnership and general partnership interest and has consolidated the financial statements of Justice with those of the Company, effective with the first reporting period of its fiscal year beginning July 1, 2006. The Company also derives income from its rental properties and 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, InterGroup. Woodland Village's major asset is a 27-unit apartment complex located in Los Angeles, California. The Company also owns a two-unit apartment building in Los Angeles, California. Woodland Village is consolidated in the Company's financial statements. Minority interest on the balance sheet represents the interest in subsidiaries not owned by the Company. Minority interest on the statement of operations represents the minority owner's share of income. As of September 30, 2007, the Company had a minority interest asset balance on the balance sheet as the result of the accumulated deficit at Justice Investors. Management believes the accumulated deficit is considered temporary as the Hotel was temporary closed to undergo major renovations from May 2005 to January 2006. The Company expects the Hotel to be profitable, thereby reversing the accumulated deficit in the future. Of the total minority interest liability of $3,926,000 on the balance sheet, $3,208,000 is related to the minority shareholders of Portsmouth and $718,000 is related to the minority shareholders of Woodland Village. -6- Certain prior quarter balances have been reclassified to conform with the current quarter presentation. It is suggested that these financial statements be read in conjunction with the audited financial statements and the notes therein included in the Company's Form 10-KSB for the year ended June 30, 2007. The results of operations for the three months ended September 30, 2007 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2008. In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize the impact of a tax position in the Company's financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company's 2008 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of FIN 48 did not to have a material impact on the Company's consolidated financial statements. The Company recognizes interest and penalties related to uncertain income tax positions in income tax expense. There were no interest and penalties related to uncertain income tax positions that were accrued as of September 30, 2007 and during the period there were no changes in individual or aggregate unrecognized tax positions. The Company's income tax returns for the years ended June 30, 2004 up to present are subject to examination by major taxing authorities. In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for as of the beginning of the Company's 2009 fiscal year. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("SFAS 159"), which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective as of the beginning of the Company's 2009 fiscal year. The Company is still evaluating the impact of SFAS 157 and 159 on the Company's consolidated financial statements. NOTE 2 - INVESTMENT IN HOTEL, NET Justice owns a 544 room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the "Hilton San Francisco Financial District" (the "Hotel") and related facilities, including a five level underground parking garage. Justice serves as the owner/operator of the Hotel with the assistance of a third party management company. The Partnership also derives income from the lease of the garage portion of the property to Evon and from a lease with Tru Spa for a portion of the lobby level of the Hotel. -7- For the three months ended September 30, 2007 and 2006, the results of operations for Justice were consolidated with those of the Company. For comparative purposes, the statement of operations for the Hotel (on a standalone basis) for the three months ended September 30, 2007 and 2006, are included below. For the three months ended September 30, 2007 2006 ---------- ---------- Revenues: Hotel rooms $ 7,915,000 $ 5,881,000 Food and beverage 1,289,000 1,015,000 Other operating departments 146,000 178,000 ---------- ---------- Total revenues 9,350,000 7,074,000 ---------- ---------- Operating expenses: Hotel rooms (2,211,000) (1,917,000) Food and beverage (1,447,000) (1,300,000) General and administrative (679,000) (489,000) Advertising and sales (614,000) (410,000) Franchise fees (554,000) (412,000) Repairs and maintenance (529,000) (395,000) Utilities (323,000) (265,000) Insurance (239,000) (286,000) CEP fee (373,000) (213,000) Other operating departments (300,000) (185,000) Credit card commissions (222,000) (172,000) Property taxes (177,000) (180,000) Management fees (162,000) (124,000) Other expenses (83,000) (14,000) Start-up costs - reopening of Hotel - (69,000) ---------- ---------- Total operating expenses (7,913,000) (6,431,000) ---------- ---------- Hotel net income 1,437,000 643,000 Income(expense) at Justice Garage rent 415,000 430,000 General and administrative (1,083,000) (334,000) Interest expense (702,000) (749,000) Depreciation and amortization expense (1,083,000) (1,034,000) Other income 505,000 313,000 ---------- ---------- Justice net loss $ (511,000) $ (731,000) ========== ========== Property and equipment as of September 30, 2007 consisted of the following: Accumulated Net Book Cost Depreciation Value ------------ ------------ ------------ Land $ 1,896,000 $ - $ 1,896,000 Furniture and equipment 15,699,000 (5,595,000) 10,104,000 Building and improvements 47,881,000 (14,771,000) 33,110,000 ------------ ------------ ------------ $ 65,476,000 $(20,366,000) $ 45,110,000 ------------ ------------ ------------ -8- NOTE 3 - INVESTMENT IN MARKETABLE SECURITIES The Company's investment in marketable securities consists primarily of corporate equities. The Company has also invested in corporate bonds and 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. At September 30, 2007, all of the Company's marketable securities are classified as trading securities. In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows: As of September 30, 2007: Gross Gross Net Market Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value - ---------- ----------- --------------- --------------- --------------- ------------ Corporate Equities $ 4,354,000 $ 4,019,000 ($1,482,000) $ 2,537,000 $ 6,891,000
As of September 30, 2007, the Company had $383,000 of unrealized losses related to securities held for over one year. As part of the investment strategies, the Company may assume short positions against its long 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, 2007, the Company had obligations for securities sold (equities short) of $199,000. Net gains on marketable securities on the statement of operations are comprised of realized and unrealized gains(losses). Below is the composition of the two components for the three months ended September 30, 2007 and 2006, respectively. For the three months ended September 30, 2007 2006 ----------- ----------- Realized losses on marketable securities $ (253,000) $ (137,000) Unrealized losses on marketable securities (683,000) (372,000) ----------- ----------- Net losses on marketable securities $ (936,000) $ (509,000) =========== =========== NOTE 4 - INVESTMENT IN REAL ESTATE In August 2007, Portsmouth agreed to acquire 50% interest in Intergroup Uluniu, Inc., a Hawaiian corporation ("Uluniu") and a 100% owned subsidiary of InterGroup, for $973,000, which represents an amount equal to the costs paid by InterGroup for the acquisition and carrying costs of approximately 2 acres of unimproved land located in Maui, Hawaii owned by Uluniu. In September 2007, the Portsmouth paid $758,000 of the $973,000. With the proceeds, Uluniu paid off the $750,000 mortgage note on the land including accrued interest. As a related party transaction, the fairness of the financial terms of the -9- transaction were reviewed and approved by the independent director of Portsmouth. As of September 30, 2007, Portsmouth has an unpaid balance in the amount of $215,000 related to this transaction. This amount is included in accounts payable and other liabilities. As Portsmouth is a controlled subsidiary of InterGroup and Portsmouth does not have any independent directors on the board of Uluniu, that entity will continue to be consolidated into InterGroup. NOTE 5 - SEGMENT INFORMATION The Company operates in three reportable segments, the operations of Justice Investors, its multi-family residential properties 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, 2007 and 2006, respectively. Operating income for rental properties consist of rental income. Operating income from Justice Investors consists of the operations of the hotel and garage. Operating income from investment transactions consist of net investment gains (losses) and dividend and interest income. REAL ESTATE ------------------------- Three months ended Hotel Rental Investment September 30, 2007 Operations Properties Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income $ 9,786,000 $ 138,000 $ (983,000) $ - $ 8,941,000 Operating expenses (8,512,000) (49,000) (162,000) - (8,723,000) ----------- ----------- ----------- ----------- ------------ 1,274,000 89,000 (1,145,000) - 218,000 Mortgage interest expense (702,000) (43,000) - - (745,000) Depreciation and amort. (1,083,000) (20,000) - - (1,103,000) General and administrative Expense - - - (237,000) (237,000) Other expense (21,000) - - - (21,000) Income tax benefit - - - 642,000 642,000 Minority interest 278,000 - - 212,000 490,000 ----------- ----------- ----------- ----------- ------------ Net income (loss) $ (254,000) $ 26,000 $ (1,145,000) $ 617,000 $ (756,000) =========== =========== =========== =========== ============ Total Assets $51,625,000 $ 5,428,000 $11,066,000 $ 7,023,000 $ 75,142,000 =========== =========== =========== =========== ============
-10- REAL ESTATE ------------------------- Three months ended Hotel Rental Investment September 30, 2006 Operations Properties Transactions Other Total ----------- ----------- ------------ ----------- ------------ Operating income(loss) $ 7,592,000 $ 115,000 $ (466,000) $ - $ 7,240,000 Operating expenses (6,540,000) (70,000) (180,000) - (6,790,000) ----------- ----------- ----------- ----------- ------------ 1,052,000 45,000 (646,000) - 450,000 Mortgage interest expense (749,000) (43,000) - - (792,000) Depreciation and amort. (1,034,000) (19,000) - - (1,052,000) General and administrative Expense - - - (221,000) (221,000) Amortization of excess purchase price (21,000) - - - (21,000) Income tax benefit - - - 642,000 642,000 Minority interest 373,000 - - 147,000 520,000 ----------- ----------- ----------- ----------- ------------ Net income (loss) $ (379,000) $ (17,000) $ (646,000) $ 568,000 $ (474,000) =========== =========== =========== =========== ============ Total Assets $42,586,000 $ 4,537,000 $18,199,000 $12,058,000 $ 77,380,000 =========== =========== =========== =========== ============
NOTE 6 - RELATED PARTY TRANSACTIONS Certain shared costs and expenses primarily administrative expenses including 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 pro rata utilization of resources. For the three months ended September 30, 2007 and 2006, the Company and Portsmouth made payments to InterGroup of $36,000 for each respective period. The garage lessee, Evon, is the Partnership's managing general partner. Evon paid the Partnership $415,000 and $430,000 for the three months ended September 30, 2007 and 2006, respectively, under the terms of the lease agreement. 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. -11- 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 "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "may," "could," "might" and similar expressions, are intended to identify forward-looking statements. These 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, natural disasters, general economic conditions and competition in the hotel industry in the San Francisco area, seasonality, labor relations and labor disruptions, partnership distributions, the ability to obtain financing at favorable interest rates and terms, securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company's Form 10-KSB Report for the fiscal year ended June 30, 2007, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS The Company's principal sources of revenue continue to be derived from the investment of its 68.8% owned subsidiary, Portsmouth, in the Justice Investors limited partnership ("Justice" or the "Partnership"), rental income from its investments in multi-family real estate properties and income received from investment of its cash and securities assets. Portsmouth has a 50.0% limited partnership interest in Justice and serves as one of the general partners. Justice owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California, known as the Hilton San Francisco Financial District hotel (the "Hotel"). The financial statements of Justice have been consolidated with those of the Company, effective as of July 1, 2006. See Note 1 to the Consolidated Financial Statements. The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation. The term of the Agreement is for a period of 15 years commencing on January 12, 2006, with an option to extend the license term for another five years, subject to certain conditions. Justice also has a Management Agreement with Prism Hospitality L.P. ("Prism") to perform the day-to-day management functions of the Hotel. The Partnership also derives income from the lease of the garage portion of the property to Evon Corporation ("Evon"), the managing general partner of Justice, and from a lease with Tru Spa for a portion of the lobby level of the Hotel. The Company also receives management fees as a general partner of Justice for its services in overseeing and managing the Partnership's assets. Those fees are eliminated in consolidation. -12- Recent Developments On October 1, 2007, Justice paid a special distribution to its limited partners in a total amount of $400,000, of which $200,000 was received by Portsmouth. The general partners expect to conduct regular reviews to set the amount of any future distributions that may be appropriate based on the results of operations of the Hotel and other factors. On August 29, 2007, the Board of Directors of Portsmouth authorized an investment of $973,000 for Portsmouth to acquire a 50% equity interest in Intergroup Uluniu, Inc., a Hawaii corporation ("Uluniu") in a related party transaction. Uluniu is a 100% owned subsidiary of The InterGroup Corporation ("InterGroup"). Uluniu owns an approximately two-acre parcel of unimproved land located in Kihei, Maui, Hawaii which is held for development. The Company's investment in Uluniu represents an amount equal to the costs paid by InterGroup for the acquisition and carrying costs of the property through August 2007. The fairness of the financial terms of the transaction were reviewed and approved by the independent director of the Company. Uluniu intends to obtain the entitlements and permits necessary for the joint development of the parcel with an adjoining landowner into residential units. After the completion of this predevelopment phase, the Uluniu will determine whether it more advantageous to sell the entitled property or to commence with construction. In September 5, 2007, $758,000 of the investment amount had been paid by Portsmouth and the proceeds were used by Uluniu to retire the mortgage on the property in the approximate amount of $750,000. The balance of the proceeds is expected to be used to fund predevelopment costs and to meet other requirements to try to enhance the value of the property. As of September 30, 2007, the Company has an unpaid balance in the amount of $215,000 related to this transaction. This amount is included in accounts payable and other liabilities. Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006 The Company had a net loss of $756,000 for the three months ended September 30, 2007 compared to a net loss of $474,000 for the three months ended September 30, 2006. As discussed below, the increase in the loss was primarily due to the increase in the net losses from marketable securities partially offset by the reduction in the net loss from the operations of Justice Investors and income generated from the Company's real estate operations. The net loss from the operations of Justice Investors was $511,000 for the three months ended September 30, 2007, compared to a net loss of $731,000 for the three months ended September 30, 2006. The decrease in the net loss was primarily attributable to greater net income generated from the operations of the Hotel during the current period, partially offset by higher general and administrative expenses at the Justice level primarily due to certain nonrecurring legal and consulting fees in the current period related to the Allied litigation and zoning issues in the approximate amount of $577,000. -13- For the three months ended September 30, 2007, the operations of the Hotel on a standalone basis (see Note 2) generated net income of $1,437,000 on total operating revenues of approximately $9,350,000 compared to net income from Hotel operations of $643,000 on total operating revenues of $7,074,000 for the three months ended September 30, 2006 primarily due to higher average daily room rates and higher average occupancy rates. The following table sets forth the average daily room rate ("ADR"), average occupancy percentage and room revenue per available room ("RevPar") of the Hotel for the three months ended September 30, 2007 and 2006. Three Months Ended Average Average September 30, Daily Rate Occupancy% RevPar - ----------------- ---------- ---------- --------- 2007 $177.31 88.8% $157.75 2006 $151.03 77.0% $116.68 Average daily room rates and occupancy have continued to improve since the Hotel's reopening in January 2006. As a result, the Hotel was able to achieve an approximately $41 increase in RevPar for the three months ended September 30, 2007 compared the three months ended September 30, 2006. We believe that many of the new programs implemented to increase revenues and efficiencies at the Hotel, as well as certain management personnel changes, have helped improve operations. While the Hotel's food and beverage operations remain challenging, management was able to reduce losses in that department during the current period to approximately $158,000 from approximately $285,000 for the comparable period in 2006. Due to brand requirements of maintaining a three-meal, full service restaurant, the associated costs of union labor, and the intense competition in the San Francisco market for restaurants, food and beverage operations will continue to be challenging. Management will continue to work to address those issues and to explore all options, including new concepts, to improve the operations of the Hotel. We expect that the operating results of the Hotel will continue to improve over fiscal 2007 as the Hotel approaches full stabilization and gets further penetration into the Financial District hotel market. We anticipate a reduction in Partnership general and administrative expenses for legal and consulting fees in fiscal 2008, as many of those expenses were attributable to certain nonrecurring legal matters that originated in fiscal 2007 and which we expect to be resolved in fiscal 2008. If cash flows from the Hotel operations continue to improve, we also expect that the Partnership will start making more regular distributions to its limited partners in fiscal 2008. Income(loss) from real estate operations improved to income of $26,000 for the three months ended September 30, 2007 from a loss of $17,000 for the three months ended September 30, 2006. The improvement in the real estate operations is primarily due to increasing the rental income from the Company's two multi- family apartments to $138,000 from $115,000 while reducing operating expenses to $49,000 from $70,000. Net losses on marketable securities increased to $936,000 for the three months ended September 30, 2007 from $509,000 for the three months ended September 30, 2006. For the three months ended September 30, 2007, the Company had net realized losses of $253,000 and net unrealized losses of $683,000. For the -14- three months ended September 30, 2006, the Company had net realized losses of $137,000 and net unrealized losses of $372,000. 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. During the three months ended September 30, 2007, the Company performed an impairment analysis of its other investments and determined that one of its investments had an other than temporary impairment and recorded an impairment loss on other investments of $90,000. There was no impairment loss recorded for the three months ended September 30, 2006. Minority interest related to Justice Investors decreased to $278,000 from $373,000 primarily as the result of the reduction in the loss from the Justice Investors operations to $511,000 from $731,000. MARKETABLE SECURITIES The Company's investment portfolio is diversified with 17 different equity positions. The portfolio contains six equity securities that are more than 5% of the equity value of the portfolio, with the largest being 22.0% of the value of the portfolio. 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 September 30, 2007, the Company had investments in marketable equity securities of $6,891,000. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups as of September 30, 2007. % of Total Investment Industry Group Market Value Securities -------------- ------------ ---------- Technology $ 1,513,000 22.0% Services 1,494,000 21.7% Dairy products 1,151,000 16.7% Insurance, banks and brokers 810,000 11.8% Telecommunications and media 517,000 7.5% Holding companies 508,000 7.4% REITs and building materials 291,000 4.2% Pharmaceutical and healthcare 246,000 3.6% Other 361,000 5.1% ------------ ---------- $ 6,891,000 100.0% ============ ========== -15- 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 respective period. For the three months ended September 30, 2007 2006 ----------- ----------- Net losses on marketable securities $ (936,000) $ (509,000) Impairment loss on other investments (90,000) - Dividend and interest income 43,000 43,000 Margin interest expense (67,000) (97,000) Trading and management expenses (95,000) (83,000) ---------- ---------- $(1,145,000) $ (646,000) ========== ========== FINANCIAL CONDITION AND LIQUIDITY The Company's cash flows are primarily generated from the operations of Justice Investors. The Company also receives revenues generated from its real estate operations and from the investment of its cash and securities assets. Since the operations of the Hotel operations of the Hotel were temporarily closed down on May 31, 2005, and significant amounts of money were expended to renovate and reposition the Hotel as a Hilton, Justice did not pay any partnership distributions until the end of March 2007. As a result, the Company had to depend more on the revenues generated from the investment of its cash and securities assets during that transition period. Prior to operating the hotel as a Hilton, the Partnership was required to make substantial renovations to the hotel to meet Hilton standards in accordance with a product improvement plan agreed upon by Hilton and the Partnership, as well as complying with other brand standards. The total cost of the construction-renovation project of the Hotel was approximately $37,030,000, which includes approximately $630,000 in interest costs incurred during the construction phase that were capitalized. To meet its substantial financial commitments for the renovation project and transition of the Hotel to a Hilton, Justice had to rely on borrowings to meet its obligations. On July 27, 2005, Justice entered into a first mortgage loan (the "Prudential Loan") with The Prudential Insurance Company of America in a principal amount of $30,000,000. The term of the Loan is for 120 months at a fixed interest rate of 5.22% per annum. The Loan calls for monthly installments of principal and interest in the amount of approximately $165,000, calculated on a 360 month amortization schedule. The Loan is collateralized by a first deed of trust on the Partnership's Hotel property, including all improvements and personal property thereon and an assignment of all present and future leases and rents. The Loan is without recourse to the limited and general partners of Justice. As of September 30, 2007, the total amount outstanding of the Prudential Loan was approximately $29,088,000. On March 27, 2007, Justice entered into a second mortgage loan with The Prudential Insurance Company of America (the "Second Prudential Loan") in a principal amount of $19,000,000. The term of the Second Prudential Loan is for approximately 100 months and matures on August 5, 2015, the same date as the -16- Partnership's first mortgage loan with Prudential. The Second Prudential Loan is at a fixed interest rate of 6.42% per annum and calls for monthly installments of principal and interest in the amount of approximately $119,000, calculated on a 360 month amortization schedule. The Loan is collateralized by a second deed of trust on the Partnership's Hotel property, including all improvements and personal property thereon and an assignment of all present and future leases and rents. The Loan is without recourse to the limited and general partners of Justice. As of September 30, 2007, the total amount outstanding of the Second Prudential Loan was approximately $18,912,000. From the proceeds of the Second Prudential Loan, Justice retired its existing line of credit facility with United Commercial Bank ("UCB") paying off the outstanding balance of principal and interest of approximately $16,403,000 on March 27, 2007. The Partnership also obtained a new unsecured $3,000,000 revolving line of credit facility from UCB to be utilized by the Partnership to meet any emergency or extraordinary cash flow needs arising from any disruption of business due to labor issues, natural causes affecting tourism and other unexpected events. The term of the new line of credit facility is for 60 months at an annual interest rate, based on an index selected by Justice at the time of advance, equal to the Wall Street Journal Prime Rate or the Libor Rate plus two percent. As of September 30, 2007, there were no amounts borrowed by Justice under the new line of credit; however, $1,500,000 of that line was utilized in the form of a standby letter of credit related for the Allied Litigation. The annual fee for the letter of credit is one and one half percent of $1,500,000, which fee is to be paid in quarterly installments for the periods in which the letter of credit is in effect. The Hotel started to generate net income from its operations in June 2006, which continued to improve during the Company's fiscal year ended June 30, 2007. As a result, Justice was able to pay a special limited partnership distribution in a total amount of $1,000,000 on March 28, 2007, of which Portsmouth received $500,000. The general partners believed that operations of the Hotel had stabilized under the Hilton brand and new management, and that cash flows were sufficient to warrant that special distribution, especially with the new financings in place to meet any additional capital needs. On October 1, 2007, Justice paid an additional special limited partnership distribution in the amount of $400,000, of which $200,000 was received by Portsmouth. The general partners expect to conduct regular reviews to set the amount of any future distributions that may be appropriate based on the results of operations of the Hotel and other factors. While the debt service requirements related to the two Prudential Loans, as well as any utilization of the UCB line of credit, may create some additional risk for the Company and its ability to generate cash flows in the future since the partnership's assets had been virtually debt free for an number of years, management believes that cash flows from the operations of the Hotel and the garage lease will continue to be sufficient to meet all of the Partnership's current and future obligations and financial requirements. Management also believes that there is sufficient equity in the Hotel assets to support future borrowings, if necessary, to fund any new capital improvements and other requirements. -17- 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. Management believes that its cash, securities assets, real estate operations and the cash flows generated from those assets and from partnership distributions and management fees, will be adequate to meet the Company's current and future obligations. MATERIAL CONTRACTUAL OBLIGATIONS The Company does not have any material contractual obligations or commercial commitments other than the mortgages of its rental properties and Justice Investors' mortgage loans with Prudential. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off balance sheet arrangements. 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. Since Prism has the power and ability under the terms of its management agreement to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material. The Company's residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are expected to offset anticipated increased property operating expenses. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. -18- 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. -19- PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Bacon Plumbing Co., Inc. and Golden Electric Company v. Allied Construction, et al., San Francisco County Superior Court, Case No. 06-455440. This is to update matters previously reported in the Company's Form 10-KSB for its fiscal year ended June 30, 2007, regarding the litigation and lien claims filed by Allied Construction Management, Inc. ("Allied") and eight subcontractors arising out of the renovation work performed on the San Francisco Hotel property. All of those claims were consolidated into the above entitled action. On October 23, 2007, the Superior Court entered an order approving settlements reached by Justice Investor with all of the subcontractors that filed liens against the Hotel property. The aggregate amount of those settlements was approximately $1,580,000 and the total amount of the liens filed by the subcontractors was approximately $1,756,000. The Court also reduced the lien claim of Allied from $2,061,544 to $1,166,649. Justice, Evon and Portsmouth dispute the amounts alleged to be owed to Allied and will vigorously defend the balance of this action against the Allied claims. Item 6. Exhibits. (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. -20- 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, 2007 by /s/ John V. Winfield --------------------------- John V. Winfield, President, Chairman of the Board and Chief Executive Officer Date: November 13, 2007 by /s/ Michael G. Zybala --------------------------- Michael G. Zybala, Vice President, and Secretary Date: November 13, 2007 by /s/ David Nguyen -------------------------- David Nguyen, Treasurer and Controller (Principal Accounting Officer -21- EX-31 2 ex311.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 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 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: November 13, 2007 /s/ John V. Winfield --------------------------- John V. Winfield, President and Chief Executive Officer EX-31 3 ex312.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 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 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: November 13, 2007 /s/ David T. Nguyen --------------------------- David T. Nguyen, Treasurer and Controller (serving as Chief Financial Officer) EX-32 4 ex321.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 September 30, 2007, 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: November 13, 2007 /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 5 ex322.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 September 30, 2007, 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: November 13, 2007 /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-----