[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
Commission File Number 0-4057
California 94-1674111
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
11315 Rancho Bernardo Road, Suite 129
San Diego, CA 92127-1463
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(Address of Principal Executive Offices) (Zip Code)
(858) 673-4722
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(Issuer's Telephone Number, Including Area Code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $4,005,719.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of issuer computed by reference to the price at which the common equity was sold on March 23, 2000 was $4,328,926.
The number of shares outstanding of issuer's No Par Value Common Stock, as of March 23, 2000, was 734,183.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference: Proxy Statement for Annual Meeting of Shareholders to be held May 16, 2000 which is incorporated by reference into Part III, Items 9 through 12. The Company's definitive Proxy Statement will be filed within one hundred twenty (120) days of the end of the fiscal year covered by this Form 10-KSB pursuant to Regulation 14A.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I PAGE
------ ----
Item 1. Description of Business. 3
Item 2. Description of Property. 4
Item 3. Legal Proceedings. 6
Item 4. Submission of Matters to a Vote of Security Holders. 6
PART II
-------
Item 5. Market For Common Equity and Related 6
Stockholder Matters.
Item 6. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations.
Item 7. Financial Statements and Supplementary Data. 9
Item 8. Changes in and Disagreements With Accountants on 18
Accounting and Financial Disclosure.
PART III
--------
Item 9. Directors, Executive Officers, Promoters and 18
Control Persons; Compliance With Section 16(a)
of The Exchange Act.
Item 10. Executive Compensation. 18
Item 11. Security Ownership of Certain Beneficial Owners and 18
Management.
Item 12. Certain Relationships and Related Party Transactions. 18
Item 13. Exhibits, Financial Statement Schedules, and 19
Reports on Form 8-K.
SIGNATURES 28
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PART I
Item 1. Description of Business.
BUSINESS DEVELOPMENT
Portsmouth Square, Inc. ("Portsmouth" or the "Company") is a California corporation, incorporated on July 6, 1967, to purchase a substantial interest in a California limited partnership known as Justice Investors. Justice Investors was formed to purchase certain real property in San Francisco, California and to construct a hotel thereon.
Portsmouth has a 49.8% limited partnership interest in Justice Investors and also serves as one of the two general partners. The other general partner, Evon Garage Corporation ("Evon"), acts as the managing general partner. There are approximately 91 limited partners in Justice Investors.
On February 16, 2000, the Board of Directors amended the Bylaws of the Company to give the Board the discretion to determine, each year, the date, time and place of the annual meeting of shareholders. Previously, the Bylaws provided that the annual meeting was to be held only on a specific date. The amendment provides the Company with the flexibility to set a date for the annual meeting which is more consistent with its public reporting requirements and which would allow the Company greater time to transmit proxy material and its annual report to shareholders. The text of that amendment is set forth as Exhibit 3 (ii) to this Report.
BUSINESS OF ISSUER
The Company's principal business is conducted through its general and limited partnership interest in Justice Investors. Justice Investors owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California commonly known as the Holiday Inn Financial District/Chinatown. The most significant income source is a lease between the partnership and Felcor Lodging Trust, Inc. ("Felcor", NYSE: FCH) for the hotel portion of the property. The partnership also derives income from its lease of the garage portion of the property to Evon. As a general partner, Portsmouth has become more active in monitoring the operations of the hotel and the parking garage as part of its effort to improve revenues.
The Company also derives income from management fees as a general partner in Justice Investors and from the investment of its cash and securities assets. The Company has invested in income-producing instruments, equity and debt securities and will consider other investments if such an investment will offer growth or profit potential.
COMPETITION
The hotel enjoys a favorable year-round occupancy rate and is part of Holiday's worldwide reservation system. It was designed to Holiday's specifications to serve both business persons and tourists and caters to both individuals and tour groups. It also handles conferences and business meetings, having meeting and dining facilities for groups of up to 400 people. Management believes that the hotel and garage are in a competitive position in their respective markets; however, some competitors may have better financial resources and newer facilities. The Company intends, where appropriate, to continue in its efforts as a general partner to find ways to improve the physical condition of the hotel and garage properties to remain competitive.
EMPLOYEES
As of December 31, 1999, the Company had two full-time employees. The employees are not part of any collective bargaining agreement, and the Company believes that its employee relations are satisfactory.
Item 2. Description of Property.
PROPERTIES
The San Francisco, California hotel property owned by Justice Investors is located near the Financial District, one block from the Transamerica Pyramid. The Embarcadero Center is within walking distance. Chinatown is directly across the bridge that runs from the hotel to Portsmouth Square Park. The hotel is a 31-storied, steel and concrete, A-frame building which contains 566 guest rooms situated on 22 floors. One floor houses the Chinese Culture Center pursuant to a long-term, nominal-rent lease, and three floors are devoted to a registration desk, lobby shops, dining room, coffee shop, hotel support facilities, a fitness center, a guest business center, meeting and banquet rooms and offices. Other features of the Holiday Inn include a rooftop swimming pool, 5-storied underground garage and pedestrian bridge across Kearny Street connecting the hotel and the Chinese Culture Center with Portsmouth Square Park in Chinatown. The bridge, built and owned by the partnership, is included in the lease to the Chinese Culture Center.
The property is subject to a first deed of trust securing a loan from Wells Fargo Bank. As of December 31, 1999, the principal balance on the note was $1,591,547. The loan provides for a maximum borrowing of approximately $6.5 million and has the characteristics of a line of credit with certain declining maximum borrowings available at the end of each year. The note provides for interest at prime rate per annum and matures December 31, 2004.
On March 15, 1995, an amended and restated lease was entered into by Justice Investors with an effective date of January 1, 1995. That lease was assumed by Felcor, effective July 28, 1998. The initial term of the new lease is for a 10-year term expiring on December 31, 2004. The lessee also has an option to renew the lease for one additional term of five years which would extend the lease to December 31, 2009. The lease requires the lessee to pay an annual rent of the greater of twenty percent (20%) of gross room revenues or $2,500,000 plus fifty percent (50%) of total revenues from the demised premises less operating expenses, base rent and capital requirements.
The lease also required the lessee and Justice Investors to make substantial capital improvements and renovations to the hotel property. A rehabilitation budget of more than $8 million was set forth in the new lease agreement, of which the partnership was responsible for $2 million and the lessee was responsible for the remainder. As of December 31, 1999, the partnership had paid all of its $2 million commitment. Rehabilitation and renovation of the guest rooms, hallways, elevators and safety systems was completed during 1999. Further improvements are expected to be made in the future to meet standards for Holiday Inn Select hotels. The responsibility for those improvements rests with Felcor.
Under the terms of the lease, the lessee is responsible for all maintenance and repairs to the property, certain capital improvements, taxes and insurance. In the opinion of management the property is adequately covered by insurance.
The garage lease between the partnership and Evon provides for a monthly rental of sixty percent (60%) of gross parking revenues with a minimum rent of $21,750 per month. That lease expires in November 2010. The lessee is responsible for insurance, repairs and maintenance, utilities and all taxes assessed against the improvements to the leased premises. The garage is operated by Ampco Parking pursuant to a sublease agreement with Evon.
INVESTMENT POLICIES
The most significant real estate investment of the Company has been through its investment in Justice Investors. The Company will continue to explore ways to increase the value of that investment and to improve operations of the underlying asset.
The Company may also look for new real estate investment opportunities in hotels, apartments, office buildings and shopping centers. The acquisition of any new real estate investments will depend on the Company's ability to find suitable investment opportunities and the availability of sufficient financing to acquire such investments. To help fund any such acquisition, the Company plans to borrow funds to leverage its investment capital. The amount of this mortgage debt will depend on a number of factors including, but not limited to, the availability of financing and the sufficiency of the project's projected cash flows to support the operations and debt service.
The Company has also invested in income producing instruments, equity and debt securities, which may include interests in real estate based companies and REITs, where financial benefit could inure to its shareholders through income and/or capital gain. Those investments are made under the direction of the Company's Chairman and President. The Company primarily will invest in securities priced above $5.00 a share of companies listed on the New York and American Stock Exchanges and The Nasdaq National Stock Market, Inc. Although most of the Company's marketable securities investments are in companies listed on those stock markets, the overall investment portfolio and some of the Company's investment strategies could be viewed as risky and the market values of the portfolio may be subject to large fluctuations. The Company may realize gains and losses in its overall investment portfolio from time to time to take advantage of market conditions and/or manage the portfolio's resources and the Company's tax liability. The Company may also assume short positions in marketable securities. Short sales are used by the Company to potentially offset normal market risks undertaken in the course of its investing activities or to provide additional return opportunities. In addition, the Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms. The use of available leverage is guided by the business judgment of management.
Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. During the year, the Company increased the turnover of its investment portfolio and engaged in increased trading activities designed to maximize the overall return on investment activities in the near term. This resulted in portions of the Company's investments in marketable securities being classified as "trading" as defined by generally accepted accounting principles. After consultation with the Investment Committee of the Board of Directors, management determined that the classification of the entire portfolio as trading beginning July 1, 1999 would be more consistent with Company's overall investment objectives and activities. As a result, beginning July 1, 1999, all unrealized gains and losses on the Company's investment portfolio were recorded through the statement of income.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. Submission of Matters to a Vote of Shareholders.
No matters were submitted to a vote of shareholders during the fourth quarter of Registrant's fiscal year ended December 31, 1999.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters
MARKET
Portsmouth's common stock is traded over-the-counter. Quotes for its stock are printed in the National Quotation Bureau's Non-NASDAQ Price Report. The Company's trading symbol is PRSI.
The following table sets forth the high and low bid prices as of the end of each full quarterly period for the last two fiscal years as reported on the National Quotation Bureau's Non-NASDAQ Price Report.
1999 High Low
---- ---- ---
First Quarter (1/1 to 3/31) $ 19.00 $ 19.00
Second Quarter (4/1 to 6/30) $ 19.50 $ 18.50
Third Quarter (7/1 to 9/30) $ 20.25 $ 19.25
Fourth Quarter (10/1 to 12/31) $ 20.00 $ 18.00
1998 High Low
---- ---- ---
First Quarter (1/1 to 3/31) $ 24.00 $ 21.75
Second Quarter (4/1 to 6/30) $ 34.00 $ 23.25
Third Quarter (7/1 to 9/30) $ 32.00 $ 19.13
Fourth Quarter (10/1 to 12/31) $ 18.25 $ 17.50
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Such over-the-counter market quotations reflect inter-dealer prices and do not include retail markup, markdown or commission and may not necessarily represent actual transactions.
As of March 23, 2000, the approximate number of holders of record of the Company's Common Stock was 283. Such number of record owners was determined from the Company's shareholders records and does not include beneficial owners of the Company's Common Stock whose shares are held in the names of various brokers, clearing agencies or other nominees. There are approximately 390 beneficial shareholders of the Company's Common Stock.
DIVIDENDS
On January 13, 1982, the Board of Directors established a regular semi-annual dividend of $.25 per share payable on March 1 and September 1 to shareholders of record February 1 and August 1, respectively. These regular semi-annual dividends have been declared and paid at the established intervals since September 1, 1982.
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "estimate," "project," "anticipate" and similar expressions, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including partnership distributions, general economic conditions of the hotel industry in the San Francisco area, securities markets, litigation and other factors, including natural disasters and those discussed below, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company's principal sources of revenue continue to be derived from its 49.8% interest in the Justice Investors limited partnership and income received from the investment of its cash and securities assets. The partnership derives most of its income from a lease of its hotel property to Felcor and from a lease with Evon Garage Corporation.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net income for the Company increased 37.5% to $1,940,342 for the year ended December 31, 1999 compared to $1,411,154 for the year ended December 31, 1998. The increase in net income is due to a 37% increase in total revenues while costs and expenses remained consistent with the prior year.
The 37% increase in total revenues to $4,005,719 from $2,923,747 was primarily due to a 14.4% increase in partnership income from Justice Investors to $3,459,786 from $3,021,878, a change in investment income to a gain on marketable securities of $363,408 from losses on marketable securities of $89,796, and a 310% increase in dividend income to $152,525 from $49,165.
The increase in partnership income is primarily attributable to a 12.1% increase in hotel rental income as a result of an increase in the average daily room rate without a significant reduction in occupancy rates. The increase in dividend and interest income and investment gains is due to management's continuing efforts to reposition the Company's investment portfolio and the reclassification of all available-for-sale securities to trading which resulted in a net recorded gain of $121,508 in the income statement.
Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. During the year, the Company increased the turnover of its investment portfolio and engaged in increased trading activities designed to maximize the overall return on investment activities in the near term. After consultation with the Investment Committee of the Board of Directors, management determined that the classification of the entire portfolio as trading beginning July 1, 1999 would be more consistent with Company's overall investment objectives and activities. As a result, beginning July 1, 1999, all unrealized gains and losses on the Company's investment portfolio were recorded through the income statement. For the twelve months ended December 31, 1999, the Company recognized a net unrealized gain of $121,508 related to the reclassification of all available- for-sale securities to trading securities effective July 1, 1999.
Realized gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a meaningful effect on the Company's net earnings. However, the amount of realized gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value.
Income taxes increased 58.8% to $1,490,652 from $938,294 due to the increase in revenues.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's cash flows are primarily generated by its investment in the Justice Investors limited partnership, which derives the majority of its income from its lease with Felcor and a lease with Evon. In addition to its monthly limited partnership distributions from Justice Investors, the Company also receives monthly management fees as a general partner. The Company also derives revenue from the investment of its cash and securities assets.
As a result of increases in the amount of rental income from the hotel lease, and lower interest expenses due to the reduction in notes payable, the general partners of Justice Investors decided to increase the monthly distribution to limited partners effective with the September 1999 distribution. As a result, Portsmouth's monthly distribution increased to $209,160 from $139,440. The increase in monthly distributions can be characterized as special distributions and, at any time, unforeseen circumstances could dictate a change in the amount distributed. The general partners will continue to conduct an annual review and analysis to determine an appropriate monthly distribution for the ensuing year. At that time, the monthly distribution could be increased or decreased. During the year, the Company received cash distributions of $2,997,960 from Justice Investors.
The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company's marketable securities are classified as trading with unrealized gains and losses recorded through the statement of income.
At December 31, 1999, the Company's current assets and current liabilities were $5,638,844 and $2,951,486, respectively. Management believes that its capital resources are currently adequate to meet its short and long-term obligations.
YEAR 2000 ISSUES
All of the Company's critical computer software and hardware are year 2000 compliant.
IMPACT OF INFLATION
Since the Company's primary source of revenue is its partnership investment in Justice Investors, the impact of inflation on Portsmouth should be viewed at the partnership level. As discussed above, partnership income is primarily dependent on hotel lease revenues. 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.
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS PAGE
Report of Independent Accountants 9 Balance Sheet - December 31, 1999 10 Statements of Income and Comprehensive Income - Years Ended December 31, 1999 and 1998 11 Statements of Shareholders' Equity 12 Statements of Cash Flows - Years Ended December 31, 1999 and 1998 13 Notes to the Financial Statements 14 |
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Portsmouth Square, Inc.
In our opinion, the accompanying balance sheet and the related statements of income and comprehensive income, of cash flows, and of changes in shareholders' equity present fairly, in all material respects, the financial position of Portsmouth Square, Inc. at December 31, 1999, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP Los Angeles, California March 23, 2000 |
PORTSMOUTH SQUARE, INC.
BALANCE SHEET
As of December 31, 1999
----
ASSETS
Cash and cash equivalents $ 107,706
Investment in marketable securities 5,531,138
Investment in Justice Investors 2,307,898
Other investments 100,000
Other assets 128,801
---------
Total assets $ 8,175,543
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Due to securities broker $ 2,726,140
Accounts payable and accrued expenses 109,452
Obligations for securities sold 115,894
---------
Total liabilities 2,951,486
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Commitments and contingencies
Shareholders' equity
Common stock, no par value:
Authorized shares - 750,000
Issued and outstanding shares - 734,183 2,092,300
Additional paid-in-capital 915,676
Retained earnings 2,216,081
---------
Total shareholders equity 5,224,057
---------
Total liabilities and shareholders' equity $ 8,175,543
=========
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See accompanying notes to financial statements.
PORTSMOUTH SQUARE, INC.
STATEMENT OF INCOME AND OTHER COMPREHENSIVE INCOME
For years ended December 31, 1999 1998
----------- ----------
Revenues
Equity in net income of Justice Investors $ 3,459,786 $ 3,021,878
Dividend and interest income 152,525 49,165
Net gains(losses) on marketable securities 363,408 (89,796)
Other income (loss) 30,000 (57,500)
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4,005,719 2,923,747
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Costs and expenses
General and administrative 504,026 503,604
Margin interest expense 70,699 70,695
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574,725 574,299
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Income before income taxes 3,430,994 2,349,448
Income taxes (1,490,652) (938,294)
--------- ---------
Net income $ 1,940,342 $ 1,411,154
========= =========
Basic earnings per share $ 2.64 $ 1.92
========= =========
Weighted average number of shares outstanding 734,183 734,183
========= =========
Net income $ 1,940,342 $ 1,411,154
Other comprehensive income:
Unrealized holding gain (loss)
on marketable securities 36,880 (331,868)
Reclassification adjustment for holding
loss included in net earnings - 89,796
Income tax benefit related to
other comprehensive income 33,851 94,819
Adjustment for reclassification of the
accumulated unrealized holding gains
prior to July 1, 1999 to current earnings (121,508) -
--------- ---------
Total comprehensive income $ 1,889,565 $ 1,263,901
========= =========
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See accompanying notes to financial statements
PORTSMOUTH SQUARE, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Accumulated Retained
---------------- Additional other earnings
Common Paid-in comprehensive (accumulated
Stock Amount Capital income deficit) Total
------ ------ --------- ------------- ----------- -----
Balance at
December 31, 1997 734,183 2,092,300 915,676 96,476 (401,233) 2,703,219
Net income 1,411,154 1,411,154
Dividends paid (367,091) (367,091)
Unrealized holding
loss on marketable
securities, net
of tax (147,253) (147,253)
------- --------- --------- ------- --------- --------
December 31, 1998 734,183 $2,092,300 $ 915,676 $(50,777) $ 642,830 $3,600,029
Net income 1,940,342 1,940,342
Dividends paid (367,091) (367,091)
Unrealized holding
loss on marketable
securities, net
of tax 50,777 50,777
------- --------- --------- ------- --------- --------
December 31, 1999 734,183 $2,092,300 $ 915,676 $ - $2,216,081 $5,224,057
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See accompanying notes to financial statements.
PORTSMOUTH SQUARE, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999 1998
---- ----
Operating activities
Net income $ 1,940,342 $ 1,411,154
Adjustments to reconcile net income to
net cash used by operating activities:
Equity in net income of Justice Investors (3,459,786) (3,021,878)
Net (gains)losses on marketable securities (111,867) 89,796
Write-down of other investments - 87,500
Change in assets and liabilities:
Trading securities (3,093,315) -
Other assets 165,405 (61,409)
Accounts payable and other liabilities 39,340 (150,749)
Due to securities broker 1,707,361 -
Obligations for securities sold 103,024 -
--------- ---------
Net cash used in operating activities (2,709,496) (1,645,586)
--------- ---------
Investing activities
Cash distributions from Justice Investors 2,997,960 2,509,920
Purchase of marketable securities (1,621,961) (6,199,520)
Proceeds from sales of marketable securities 1,733,828 5,452,957
Purchase of other investments - (100,000)
--------- ---------
Net cash provided by investing activities 3,109,827 1,663,357
--------- ---------
Financing activities
Increase in due to securities broker - 354,568
Obligations for securities sold - 12,870
Dividends paid (367,091) (367,091)
--------- ---------
Net cash (used in) provided by financing activities (367,091) 347
--------- ---------
Net increase in cash and
cash equivalents 33,240 18,118
Cash and cash equivalents at the
beginning of the year 74,466 56,348
--------- --------
Cash and cash equivalents at end of year $ 107,706 $ 74,466
========= ========
Supplemental information:
Income taxes paid, net of refunds $ 966,371 $1,097,000
========= =========
Margin interest paid $ 70,699 $ 70,695
========= =========
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See accompanying notes to financial statements.
PORTSMOUTH SQUARE, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
As of December 31, 1999, Santa Fe Financial Corporation ("Santa Fe") owns approximately 68.1% of the outstanding common shares of Portsmouth Square, Inc. ("Portsmouth" or the "Company"). Portsmouth's primary source of revenues is from its 49.8% interest in Justice Investors, a California limited partnership in which Portsmouth serves as both a general and limited partner. Justice Investors owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California, commonly known as the Holiday Inn Financial District/Chinatown. Justice Investor's most significant income source is a lease between the partnership and Felcor Lodging Trust, Inc. for the hotel portion of the property. The partnership also derives income from the lease of the garage portion of the property to Evon Garage Corporation. The Company also derives revenue from management fees as a general partner and from the investment of its cash and securities assets.
Cash Equivalents
The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents.
Investment in Marketable Securities
Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading securities with all unrealized gains and losses on the Company's investment portfolio recorded through the income statement.
The cost of marketable securities sold is determined by the specific identification method.
Obligations for Securities Sold
Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the income statement.
Revenue Recognition
During 1999 and 1998, the Company's primary source of revenue is from its 49.8% interest in Justice Investors, a limited partnership which owns and leases a hotel in San Francisco, California, in which the Company is both a limited and general partner (see Note 3). The Company accounts for its investment in Justice Investors under the equity method.
Basic Earnings per Share
Basic earnings per share are calculated based upon the weighted average number of common shares outstanding during each fiscal year. As of December 31, 1999 and 1998, the Company did not have any potentially dilutive securities outstanding; and therefore, does not report diluted earnings per share.
Accounting for Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows generated by those assets are less that their carrying value. During 1999 and 1998, the Company did not record any impairment losses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates. Deferred tax expense is the result of changes in the amount of deferred income taxes during the period.
NOTE 2 - INVESTMENT IN MARKETABLE SECURITIES
Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. During the year, the Company increased the turnover of its investment portfolio and engaged in increased trading activities designed to maximize the overall return on investment activities in the near term. This resulted in portions of the Company's investments in marketable securities being classified as "trading" as defined by generally accepted accounting principles. After consultation with the investment Committee of the Board of Directors, management determined that the classification of the entire portfolio as trading beginning July 1, 1999 would be more consistent with Company's overall investment objectives and activities. As a result, beginning July 1, 1999, all unrealized gains and losses on the Company's investment portfolio were recorded through the income statement. For the twelve months ended December 31, 1999, the Company recognized a net unrealized gain of $121,508 related to the reclassification of all available-for-sale securities to trading securities.
Gross unrealized gains and losses included in earnings from the transfer of securities from available-for-sale to trading totaled $372,013 and $250,505 respectively, for the year ended December 31, 1999. There were no such transfers in 1998.
The net unrealized gain on trading securities included in earnings during 1999 was $97,771.
Proceeds from sales of available-for-sale securities during 1999 were $1,733,828. Gross realized gains and losses included on those sales during 1999 were $237,072 and $125,205, respectively.
NOTE 3 - INVESTMENT IN JUSTICE INVESTORS
Condensed financial statements for Justice Investors, a limited partnership, in which Portsmouth Square, Inc. has a 49.8% interest, are as follows:
CONDENSED BALANCE SHEETS
December 31, 1999
----
Assets
Total current assets $2,219,572
Property, plant and equipment, net of accumulated
depreciation of $11,373,985 in 1999 5,201,698
Loan fees and deferred lease costs, net of accumulated
amortization of $147,456 in 1999 162,957
---------
$7,584,227
=========
Liabilities and partners' equity
Total current liabilities $ 261,062
Long-term liabilities 1,591,547
Partners' capital 5,731,618
---------
$7,584,227
=========
|
CONDENSED STATEMENTS OF OPERATIONS
December 31,
1999 1998
---- ----
Revenues $7,791,402 7,036,744
Costs and expenses (844,039) (968,716)
--------- ---------
Net income $6,947,003 6,068,028
========= =========
|
NOTE 4 - DUE TO SECURITIES BROKER
A securities broker has advanced funds for the purchase of, and secured by, marketable securities under standard margin agreements in accordance with and subject to the limitations of 17CFR Section 240 15c3-3 under the Securities Exchange Act of 1934 and Section #220.6 of Regulation T issued by the Board of Governors of the Federal Reserve System. The interest rate on advances or cash on deposit can vary daily with money market rates. The interest rate on margin balances is based on the Federal Funds rate plus 0.875%. The interest rate on cash or deposits is based on the Federal Funds rate less 0.5%. The interest rate on interest rebates in connection with short positions is based on the Federal Funds rate less 0.375%. As of December 31, 1999 and 1998, the Federal Funds rate was 5.25%.
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following:
Year ended
December 31,
1999 1998
---- ----
Federal
Current $ 994,839 $ 799,995
Deferred 211,555 (59,695)
--------- -------
1,206,394 740,300
--------- -------
State
Current 278,392 212,622
Deferred 5,866 (14,628)
--------- -------
284,258 197,994
--------- -------
$1,490,652 $ 938,294
========= =======
|
A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
Year ended
December 31,
1999 1998
Statutory federal tax rate 34.0 34.0%
State income taxes, net of federal tax benefit 6.1 6.1
Other 3.4 (0.2)
--- ---
43.4% 39.9%
==== ====
|
The components of the Company's deferred tax assets and liabilities as of December 31, 1999 and 1998 are as follows:
Year ended
December 31,
1999 1998
---- ----
Deferred tax assets
State income taxes $ 94,653 $ 75,913
Capital loss carryforwards - 149,988
Other miscellaneous differences - 1,391
------- -------
Deferred tax assets 94,653 227,292
Deferred tax liabilities
Unrealized (gains)losses on marketable
securities (39,108) 3,069
------- -------
Net deferred assets $ 55,545 $ 230,361
======= =======
|
NOTE 6 - RELATED PARTY TRANSACTIONS
Certain shared costs and expenses, primarily administrative salaries, rent and insurance, are allocated between the Company and Santa Fe based on management's estimate of the pro rata utilization of resources. Total shared costs and expenses allocated to the Company approximated $214,818 and $213,900 during the years ended December 31, 1999 and 1998, respectively. In addition, The InterGroup Corporation allocates corporate expenses to the Company based on InterGroup's management's estimate of the pro rata utilization of resources. For the years ended December 31, 1999 and 1998, these expenses were approximately $85,300 and $81,000 respectively.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a)of The Exchange Act.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. Certain Relationships and Related Party Transactions.
The information for Part III, Items 9 through 12, are hereby incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2000, which will be filed with the Commission within one hundred twenty (120) days of the close of the fiscal year pursuant to Regulation 14A.
Item 13. Exhibits and Reports on Form 8-K.
(a) Listing of Exhibits by Table Number
Set forth below is an index of applicable exhibits filed with this report according to exhibit table number.
Exhibit Page
------- ----
3.(i) Articles of Incorporation *
(ii) Bylaws (amended February 16, 2000) 29*
4. Instruments defining the rights of Security *
Holders, including indentures (see Articles
of Incorporation and Bylaws)
22. Published report regarding matters submitted to vote
of Security Holders - Proxy Statement for Annual
Meeting of Shareholders to be held May 16, 2000, which
will be filed with the Commission within one hundred
twenty (120) days of the fiscal year pursuant to
Regulation 14A
27. Financial Data Schedule 29
|
* All exhibits marked by an asterisk have been previously filed with other documents, including Registrant's Form 10 filed on October 27, 1967, and subsequent filings on Forms 8-K, 10-K and 10-Q which are incorporated herein by reference.
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the last quarter of the period covered by this Report.
(c) Financial Statements and Schedules Required by Regulation S-X
The following financial statements of Justice Investors are included in Item 13:
Independent Auditor's Report 20 Balance Sheets - December 31, 1999 and 1998 21 Statements of Income and Partners' Capital - Years 22 Ended December 31, 1999 and 1998 Statements of Cash Flows - Years Ended 23 December 31, 1999 and 1998 Notes to Financial Statements - December 31, 1999 and 1998 24 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
COLLIER & MARKOWITZ
CERTIFIED PUBLIC ACCOUNTANTS
(SUCCESSORS TO AARON, BLUM & COLLIER)
235 MONTGOMERY STREET, SUITE 1049
SAN FRANCISCO, CALIFORNIA 94104
TEL (415) 982-7852
FAX (415) 982-1429
January 28, 2000
To the Partners
Justice Investors
(A Limited Partnership)
San Francisco, California
We have audited the accompanying balance sheets of Justice Investors (A Limited Partnership) as of December 31, 1999, and 1998, and the related statements of income and partners' capital and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Justice Investors (A Limited Partnership) as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles.
/s/ COLLIER AND MARKOWITZ Certified Public Accounts |
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1999 and 1998
--------------------------
1999 1998
---- ----
ASSETS
------
Current assets
Cash $ 15,453 $ 3,265
Rents receivable 2,198,898 1,688,253
Prepaid expenses 5,221 4,886
--------- ---------
Total current assets 2,219,572 1,696,404
--------- ---------
Fixed assets
Office equipment (net of accumulated
depreciation of $4,757 in 1999 and
$3,846 in 1998) 796 1,707
Building and improvements (net of accumulated
depreciation of $11,369,228 in 1999 and
$10,995,627 in 1998) 4,076,774 4,450,375
Land 1,124,128 1,124,128
--------- ---------
Total fixed assets 5,201,698 5,576,210
--------- ---------
Other assets
Loan fees (net of accumulated amortization
of $140,440 in 1999 and $110,875 in 1998) 147,817 177,382
Deferred lease costs (net of accumulated
amortization of $7,016 in 1999 and
$5,908 in 1998) 15,140 16,247
--------- ---------
Total other assets 162,957 193,629
--------- ---------
Total assets $7,584,227 $7,466,243
========= =========
|
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current liabilities
Trade accounts payable and accrued expenses $ 45,520 $ 50,539
Rents received in advance 206,250 200
Accrued interest 9,292 6,553
--------- ---------
Total current liabilities 261,062 57,292
Long-term liabilities
Notes payable 1,591,547 2,604,686
--------- ---------
Total liabilities 1,852,609 2,661,978
Commitment - Lease commission --------- ---------
Partners' capital 5,731,618 4,804,265
--------- ---------
Total liabilities and partners' capital $7,584,227 $7,466,243
========= =========
|
The accompanying notes are an integral part of these financial statements.
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
Years Ended December 31, 1999 and 1998
--------------------------------------
1999 1998
---- ----
Revenues
Rental income
Hotel $6,368,921 $5,677,119
Garage 1,379,523 1,337,833
Other 2,400 2,400
--------- ---------
Total rental income 7,750,844 7,017,352
Interest income 4,893 -
Miscellaneous income 35,665 19,392
--------- ---------
Total revenues 7,791,402 7,036,744
--------- ---------
Expenses
Interest 52,187 175,468
Depreciation and amortization 405,184 423,320
Lease commission 63,690 56,771
Property taxes 41,627 41,928
General and administrative
Administrative expenses 150,000 150,000
Accounting fees 8,348 9,999
Audit and tax preparation 43,435 25,527
Business taxes 23,223 20,554
Bank charges 8,634 6,935
Consultants 1,050 5,005
Franchise taxes 800 800
Insurance expense 40,374 45,518
Legal fees 4,758 6,178
Office expense and miscellaneous 729 713
--------- ---------
Total expenses 844,039 968,716
--------- ---------
Net income 6,947,363 6,068,028
Partners' capital at beginning of
year 4,804,265 3,776,240
Less distributions to partners (6,020,010) (5,040,003)
--------- ---------
Partners' capital at end of year $5,731,618 $4,804,265
========= =========
|
The accompanying notes are in integral part of these financial statements.
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
Years Ended December 31, 1999 and 1998
--------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
1999 1998
---- ----
Cash flows from operating activities
Cash received from tenants $ 7,446,249 $5,588,801
Interest received 4,893 -
Miscellaneous income received 35,665 -
Interest paid (49,448) (168,915)
Cash paid for other operating
activities (392,022) (357,178)
Net cash provided by operating -------- --------
activities 7,045,337 5,062,708
--------- ---------
Cash flows from financing activities
Distributions to partners (6,020,010) (5,040,003)
Proceeds from borrowing of long-
term debt 3,043,509 3,992,727
Principal payments of long-term
debt (4,056,648) (4,012,167)
Net cash used in financing --------- ---------
activities (7,033,149) (5,059,443)
--------- ---------
Net increase in cash and
cash equivalents 12,188 3,265
Cash and cash equivalents at
beginning of year 3,265 -
--------- ---------
Cash and cash equivalents at end
of year $ 15,453 $ 3,265
========= =========
Reconciliation of net income to net
cash provided by operating
activities
Net income $6,947,363 $6,068,028
--------- ---------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Depreciation and amortization 405,184 423,320
Rents receivable (510,645) (1,222,502)
Prepaid expenses (335) 29,737
Accounts payable (5,019) (36,378)
Rents received in advance 206,050 (206,050)
Interest payable 2,739 6,553
--------- ---------
97,974 (1,005,320)
--------- ---------
Net cash provided by operating
activities $7,045,337 $5,062,708
========= =========
Supplemental disclosures of cash
flows information:
Cash paid during the year for:
Interest $ 49,448 $ 168,915
|
The accompanying notes are an integral part of these financial statements.
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1999 1998
---- ----
Note payable to Wells Fargo Bank collateralized
by first deed of trust on land, hotel property
and the Partnership's interest in hotel and
garage leases. The note provides for interest
at LIBOR plus 2% per annum to a total capped
rate of 11.5% up to $4,000,000 due December
31, 2004 $ - $2,590,000
Note payable to Wells Fargo Bank collateralized
by first deed of trust on land, hotel property
and the Partnership's interest in hotel and
garage leases. The note provides for interest
at prime rate per annum due December 31, 2004 1,591,547 14,686
--------- ---------
$1,591,547 $2,604,686
========= =========
|
Under the terms of the revolving reducing line of credit with Wells Fargo Bank, the above notes are subject to a maximum credit limit as follows:
December 31, 1998 $6,796,678 December 31, 1999 6,506,363 December 31, 2000 6,182,662 December 31, 2001 5,821,736 December 31, 2002 5,419,302 December 31, 2003 4,970,590 December 31, 2004 4,470,275 |
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
Maturities of long-term debt for each of the next five years are as follows:
2000 $ - 2001 - 2002 - 2003 - 2004 1,591,547 |
2000 $ 2,761,000
2001 2,761,000
2002 2,761,000
2003 2,761,000
2004 2,761,000
Subsequent to 2004 1,544,250
----------
$15,349,250
==========
|
1999 1998
---- ----
General partners $150,000 $150,000
Legal services 4,758 6,178
------- -------
$154,758 $156,178
======= =======
|
JUSTICE INVESTORS
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PORTSMOUTH SQUARE, INC.
(Registrant)
Date: March 28, 2000 by /s/ John V. Winfield
-------------- ---------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: March 28, 2000 by /s/ Michael G. Zybala
-------------- ---------------------------
Michael G. Zybala,
Vice President and Secretary
Date: March 28, 2000 by /s/ David Nguyen
-------------- --------------------------
David Nguyen
Controller
(Principal Accounting Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 28, 2000 /s/ John V. Winfield
-------------- ---------------------------------------
John V. Winfield, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 2000 /s/ Jerold R. Babin
-------------- ---------------------------------------
Jerold R. Babin,
Director
Date: March 28, 2000 /s/ Josef A. Grunwald
-------------- ---------------------------------------
Josef A. Grunwald,
Director
Date: March 28, 2000 /s/ William J. Nance
-------------- ---------------------------------------
William J. Nance,
Director
Date: March 28, 2000 /s/ John C. Love
-------------- ---------------------------------------
John C. Love,
Director
|
EXHIBIT 3 (ii)
On February 16, 2000 the Board of Directors of Portsmouth Square, Inc. amended ARTICLE VII, Section 2 of the Bylaws of the Company to read as follows:
"Section 2. Regular Meetings. The date, time and place of the Company's regular meeting of shareholders shall be determined and set each year by the Board of Directors in accordance with applicable law. At said regular meeting, directors of the corporation shall be elected to serve for the ensuing year and until their successors are elected and qualified."
| ARTICLE 5 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF PORTSMOUTH SQUARE, INC. SET FORTH IN ITS FORM 10-KSB REPORT FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-KSB REPORT. |
| CIK: 0000079661 |
| NAME: PORTSMOUTH SQUARE, INC. |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | DEC 31 1999 |
| PERIOD START | JAN 01 1999 |
| PERIOD END | DEC 31 1999 |
| CASH | 107706 |
| SECURITIES | 5531138 |
| RECEIVABLES | 0 |
| ALLOWANCES | 0 |
| INVENTORY | 0 |
| CURRENT ASSETS | 5638844 |
| PP&E | 0 |
| DEPRECIATION | 0 |
| TOTAL ASSETS | 8175543 |
| CURRENT LIABILITIES | 2951486 |
| BONDS | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 2092300 |
| OTHER SE | 5224057 |
| TOTAL LIABILITY AND EQUITY | 8175543 |
| SALES | 0 |
| TOTAL REVENUES | 4005719 |
| CGS | 0 |
| TOTAL COSTS | 0 |
| OTHER EXPENSES | 574725 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 0 |
| INCOME PRETAX | 3430994 |
| INCOME TAX | 1490652 |
| INCOME CONTINUING | 1940342 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 1940342 |
| EPS BASIC | 2.64 |
| EPS DILUTED | 2.64 |