Item 1. BUSINESS
(a) General Development of Business ------------------------------- Portsmouth Square, Inc. ("Portsmouth" or the "Company") is a California corporation, incorporated on July 6, 1967, to purchase a substantial interest in the 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, acts as the managing general partner. There are approximately 91 limited partners in Justice Investors.
Portsmouth's primary asset continues to be its interest in Justice Investors. Justice Investors owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California known as the Financial District Holiday Inn. The most significant income source is a lease between the partnership and Holiday Inns, Inc. ("Holiday"). The partnership also derives income from its lease of the garage portion of the hotel to Evon Garage Corporation ("Evon"). Portsmouth also derives income from the investment of its cash, investment securities and from general partner fees.
Most of the Company's funds are invested under the direction of the Company's Chairman and President. During 1996, the Company began diversifying its investment of its cash and securities assets in an effort to obtain an overall higher yield while seeking to minimize the associated increased degree of risk. The Company has invested in short-term income-producing instruments, equity and debt securities and will consider other investments if such an investment will offer growth or profit potential.
In December 1996, the Board of Directors authorized a limited buy-back program of the Company's common stock. The Company may, from time to time, in the discretion of management, purchase those shares depending on market conditions and other factors consistent with Company policy and as limited by state and federal law. In instituting the buy-back program, the Company reaffirmed its intention of continuing with its reporting requirements under the Exchange Act and the program is not intended to directly or indirectly cause the cessation of those requirements. As of December 31, 1996, no repurchases of the Company's stock had been made.
During 1994, the Company adopted a business plan to merge and/or consolidate Portsmouth into its parent company, Santa Fe Financial Corporation ("Santa Fe"), in order to obtain certain tax benefits and reduce administrative expenses. Due to litigation affecting Santa Fe, no action to implement that plan has been taken. It is expected that the respective Boards will reexamine the issue of reorganization when the litigation is resolved.
(b) Financial Information About Industry Segments --------------------------------------------- For years ended December 31, 1996, 1995 and 1994, over 94% of the Company's gross revenue was derived from its investment in Justice Investors. See the related Financial Statements and notes included under Item 8 of this report.
(c) Narrative Description of Business --------------------------------- The Company's principal business is conducted through its general and limited partnership interest in Justice Investors. Its most significant source of income has been a lease between the partnership and Holiday Inns, Inc. The partnership also derives income by virtue of its lease of the hotel's garage premises.
On March 15, 1995, Holiday entered into an amended and restated lease with Justice Investors with an effective date of January 1, 1995. The initial term of the new lease is for a 10-year term expiring on December 31, 2004. Holiday 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 Holiday to pay an annual rent 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 ("cash available").
The lease also requires Holiday and Justice Investors to make substantial capital improvements and renovations to the hotel property. The total rehabilitation budget is approximately $8 million, of which the partnership is responsible for $2 million and Holiday is responsible for the remainder. As of December 31, 1996, the partnership had paid approximately $1.54 million against its $2 million commitment. Completion of all rehabilitation and renovation of the hotel is scheduled for the end of 1997.
The garage lease between Justice Investors 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 garage is operated by Ampco Parking pursuant to a sublease agreement with Evon.
COMPETITION
The hotel is situated near the Financial District of San Francisco and North Beach. Embarcadero Center is within walking distance. Chinatown is across the bridge that runs from the hotel to Portsmouth Square Park. 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 convention business, having meeting and dining facilities for groups of up to 400 people. Management believes that the hotel is in a competitive position in its respective market; 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 property to remain competitive.
EMPLOYEES
As of December 31, 1996, the Company had three full-time employees and two part-time employees. The employees are not part of any collective bargaining agreement, and the Company believes that its employee relations are satisfactory.
Item 2.
Item 2. PROPERTIES
The partnership's real property is located at 750 Kearny Street, San Francisco, California and is more commonly known as the Financial District Holiday Inn. The hotel is a 31-storied, steel and concrete, A-frame building which contains 566 guest rooms situated on 22 floors. One floor houses the Chinese Culture Center pursuant to a long-term, nominal-rent lease, and three floors are devoted to a reservation desk, lobby shops, dining room, coffee shop, hotel support facilities, a fitness center, a guest business center, meeting and banquet rooms and offices. Other features of the Holiday Inn include a rooftop swimming pool, 5-storied underground garage and pedestrian bridge across Kearny Street connecting the hotel and the 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, 1996 the principal balance on the note was $3,284,288. The loan provides for a maximum borrowing of $7.3 million and has the characteristics of a line of credit with certain maximum borrowings available at the end of each year. The major portion of the debt is carried at LIBOR plus 2% and there is a monthly adjustment to this allocation. The remainder of the debt is carried at the prime rate and also adjusted monthly.
The hotel property is managed by Holiday pursuant to the terms of its lease agreement with Justice Investors. 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.
Item 3.
Item 3. LEGAL PROCEEDINGS
On May 30, 1996, Portsmouth was served with a personal injury action entitled Taylor v. Raybestos-Manhattan, et al., San Francisco Superior Court Case No. 977148. The suit, which was filed on March 26, 1996, names more than 60 defendants, including Evon Garage Corporation, and alleges injuries suffered as a result of exposure to asbestos-containing materials. Portsmouth and Evon Garage Corporation are named among the "premises defendants" as opposed to the "manufacturing/distributing defendants." The Complaint seeks an unspecified amount of damages including recovery for loss of income and medical expenses. Portsmouth is being defended through its insurance carrier under a reservation of rights. Due to General Orders imposed by the San Francisco Superior Court, only limited discovery has been conducted in that action. Upon the expiration of those orders, discovery will be propounded to elicit specific information regarding plaintiffs' claims against Portsmouth. Due to the limited discovery taken to date, it is impossible to evaluate the eventual outcome of the action or to estimate a potential range of loss, if any.
Item 4.
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, 1996.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information ------------------ 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.
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 12, 1997, the last sale price reported by the National Quotation Bureau was $19.25.
(b) Holders ------- As of March 12, 1997, there were 332 record holders of the common stock of Portsmouth with 750,000 share issued and outstanding.
(c) 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 paid at the established intervals since September 1, 1982.
In addition to the regular $.25 per share semi-annual dividends paid to shareholders, the Company declared and paid the following special dividends on its common equity during the two most recent fiscal years:
Item 6.
Item 6. SELECTED FINANCIAL DATA
- ----------------------- (1) Per-share data is based upon the number of shares of common stock outstanding during each year which remained constant at 750,000 shares.
QUARTERLY FINANCIAL DATA (Unaudited)
- ------------------------ (1) Total revenues, net income and net income per share reflects the inclusion of an estimated $262,000 in partnership income for the third quarter of 1996 relating to additional rents due, as determined on an annual basis, in accordance with the lease with Holiday Inn. In 1995, additional rents due of approximately $159,000 were recorded in partnership income for the fourth quarter.
(2) Net income per share is based on 750,000 common shares issued and outstanding for all periods presented.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "estimate," "project," "anticipate" and similar expressions, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, such as partnership distributions, general economic conditions of the hotel industry in the San Francisco area, securities markets, litigation and other factors, including 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 investment of its cash and securities assets. The partnership derives most of its income from its lease with Holiday Inn and from a lease with Evon Garage Corporation.
The new partnership lease with Holiday Inn, which became effective January 1, 1995, provides the partnership with two formulas to determine Holiday's rent and the partnership may elect the more favorable formula at any time. One formula provides for 20% of gross room revenues. The second formula provides for a minimum guaranteed rent of $2.5 million per year plus 50% of cash available, as defined by the lease. For the fiscal years 1995 and 1996, the latter formula proved more beneficial and was utilized to determine Holiday's rent obligations.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Comparison of operating results of the year ended December 31, 1996 to the year ended December 31, 1995 shows that total revenues increased 19.3%, cost and expenses increased 42.2% and net income increased 16.2%.
The 19.3% increase in total revenues from $1,643,418 to $1,960,719 was primarily due to a 19.9% increase in partnership income. The increase in partnership income reflects an 18.4% increase in hotel rental income and a 4.4% increase in garage rental income. The increase in hotel rental income is attributable to both higher occupancy rates and an increase in the average daily room rate. During 1996, the Company assumed a more active role, as a general partner in Justice Investors, in monitoring of the operations of the hotel and the parking garage as part of its efforts to improve revenues.
During 1996, the Company received fees totaling $24,872 for its services as a general partner of Justice Investors, pursuant to an agreement with the other general partner. For the year ended December 31, 1995, those fees totaled $24,000. The compensation agreement remains in effect only until the partnership gross revenues reach $5 million annually, at which time the general partners will again determine their compensation arrangement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
General and administrative expenses increased 34.45% from $163,767 to $220,185 primarily due to higher costs associated with the Company's 1996 annual meeting of shareholders and the payment of directors' fees to both incoming and outgoing directors during the second quarter of 1996. The increase in expenses also reflects costs associated with the Company's more active role as a general partner of Justice Investors and an adjustment in the Company's proportionate share of operating expenses with its parent, Santa Fe. The 76% increase in fees for professional services, from $37,253 to $65,726 is primarily attributable to the retention of a consultant to advise the Company on certain operational and partnership matters. The total increase in expenses of $84,891 is considered by management to be quite modest in light of the 16.2% increase in net income from $864,137 to $1,004,113.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Comparison of the operating results of the year ended December 31, 1995 to year ended December 31, 1994 shows that total revenues increased 1.4%, costs and expenses declined 5.1% and net income increased 2.3%.
The slight increase in total revenues is primarily attributable to an increase in interest income and higher fees paid to the Company as a general partner of the Justice Investors limited partnership.
At the partnership level, revenues for 1995 decreased 1.2% due to a 4.7% decrease in lease revenues from Holiday Inn, which was mostly offset by a 14.2% increase in garage lease revenues. The decline in hotel revenues was partially attributable to the rehabilitation project, which caused a percentage of the rooms to be out of service during the year.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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 a lease with Holiday Inn and a lease with Evon Garage Corporation. 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.
Rehabilitation of the hotel property continued during 1996 with remodeling and upgrading of all the guest rooms and hallways on the room floors having been completed by July 1996. All of the regulatory work relating to the life and safety systems was also completed during 1996. Upgrading and renovation of the lobby, meeting rooms, common areas and elevators is expected to be completed during 1997. The hotel rehabilitation budget is approximately $8 million, of which the partnership is obligated for $2 million. As of December 31, 1996, the partnership had paid approximately $1.54 million against its $2 million commitment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
The partnership's hotel property is subject to a first deed of trust securing a loan from Wells Fargo Bank. The loan provides for a maximum borrowing $7.3 million and has the characteristics of a line of credit with certain maximum borrowings available at the end of each year. The major portion of the debt is carried at LIBOR plus 2% and there is a monthly adjustment to that rate. The remainder of the debt is carried at the prime rate and also adjusted monthly. During 1996 the partnership was able to reduce the principal balance on the Wells Fargo notes from $3,819,975 as of December 31, 1995 to $3,284,288 as of December 31, 1996. This principal reduction of $535,687 was able to be achieved at the same time the partnership was making additional payments of approximately $1.4 million toward the rehabilitation of the hotel primarily due to increased cash flows generated from the hotel and garage leases and low interest rates.
During 1996, the Company started diversifying its investment of its cash and securities assets in an effort to obtain an overall higher yield while seeking to minimize the associated increased degree of risk. The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company's securities investments are classified as available-for-sale and unrealized gains and losses, net of deferred taxes, are included in shareholders' equity. As of December 31, 1996, the Company had a net unrealized gain on investments of $23,207 after tax, which consists of pre-tax unrealized gains of $59,982 and pre-tax unrealized losses of $21,215.
Cash flow to the partnership remains dependent on the operating results of the hotel and garage leases and interest rates. With an increased role in the monitoring of the operations of the hotel and parking garage by the Company, and with the renovation of the guest rooms having been completed, it is anticipated that revenues to the partnership will continue to increase.
As a result of increases in the amount of rental income from the hotel lease, the general partners of Justice Investors decided that there would be a special one-third increase in the monthly distribution to limited partners effective with the February 1997 distribution. As a result, Portsmouth's monthly distribution will increase to $139,440 from $109,580. Although it is planned that the distribution at the higher level will continue for a period of 12 months, the increase was clearly identified as a special distribution and, at any time, unforeseen circumstances could dictate a change in the amount distributed. The general partners will conduct an annual review and analysis to determine an appropriate monthly distribution for the ensuing year. At that time, the monthly distribution could be decreased or increased.
At December 31, 1996, the Company's current assets were $1,232,674. The Company remains liquid with a current ratio of approximately 8.3 to 1 at the end of 1996. Management believes that its capital resources are currently adequate to meet its short- and long-term obligations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
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 dependent on lease revenue from Holiday Inn. To the extent that Holiday adjusts room rates to meet operating costs and market conditions, there may be a minor impact partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks which may be influenced by inflation. For the three most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE
Report of Independent Auditors 12 Balance Sheets - December 31, 1996 and 1995 13 Statements of Income and Accumulated Deficit - 14 Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows - Years Ended 15 December 31, 1996, 1995 and 1994 Notes to Financial Statements - December 31, 1996 16
Report of Independent Auditors
Board of Directors and Shareholders Portsmouth Square, Inc.
We have audited the accompanying balance sheets of Portsmouth Square, Inc. as of December 31, 1996 and 1995, and the related statements of income and accumulated deficit and cash flows for each of the three years in the period ended December 31, 1996. 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 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 Portsmouth Square, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California February 21, 1997
Portsmouth Square, Inc.
Notes to Financial Statements
December 31, 1996
1. Ownership and Significant Accounting Policies
Ownership
Santa Fe Financial Corporation ("Santa Fe") holds 480,757 shares, or 64%, of Portsmouth Square, Inc.'s (the "Company") outstanding shares.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Investment Securities
All investment securities are classified as available-for-sale, except short positions, and are carried at fair value, as primarily determined by quoted market prices, with unrealized gains and losses, net of deferred taxes, reported in a separate component of shareholders' equity. Any unrealized gains or losses related to "naked" short positions are recognized in earnings in the current period. The Company utilizes margin for their investment purchases.
The cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment and interest income. Realized gains and losses are included in investment and interest income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in investment and interest income.
Revenue Recognition
The major source of revenue of the Company is 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 on the equity basis.
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.
Portsmouth Square, Inc.
Notes to Financial Statements (continued)
Accounting Standard on Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996. SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long- lived assets that are expected to be disposed of. There was no effect on the financial statements from the adoption of SFAS No. 121.
2. Investment Securities
The following is a summary of investment securities:
Gross realized gains and losses on sales of investments totaled $28,102 and $33,698, respectively, during the year ended December 31, 1996.
At December 31, 1996, the Company had short investment positions totaling approximately $97,000, all of which are covered by long positions. Short investment positions can result in off balance sheet risk as losses can be incurred in excess of the reported obligation if market prices of the securities subsequently increase.
The cost and fair value of debt securities at December 31, 1996, by contractual maturity, are shown below:
Portsmouth Square, Inc.
Notes to Financial Statements (continued)
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:
5. Related Party Transactions
Certain costs and expenses, primarily salaries, rent and insurance, were allocated between the Company and Santa Fe based on Management's estimate of the utilization of resources. During 1996, the allocation to the Company increased based on this estimate. Total costs and expenses allocated to the Company approximated $157,000, $77,000 and $82,000 during the years ended December 31, 1996, 1995 and 1994, respectively.
Portsmouth Square, Inc.
Notes to Financial Statements (continued)
6. Contingencies
On May 30, 1996, the Company was served with a personal injury action in the San Francisco Superior Court. The suit, which was filed on March 26, 1996, names more than 60 defendants, including the managing general partner of Justice Investors, and alleges injuries suffered as a result of exposure to asbestos-containing materials. The Company and the managing general partner of Justice Investors are named among the defendants. The Complaint seeks an unspecified amount of damages, including recovery for loss of income and medical expenses. The Company is being defended through its insurance carrier under a reservation of rights. Due to the limited discovery taken to date, the Company's legal counsel is not in a position to evaluate the eventual outcome of the action or to estimate a potential range of loss, if any.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11.
Item 11. EXECUTIVE COMPENSATION
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information for Part III, Items 10 through 13, are hereby incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 1997, which will be filed with the Commission within one hundred twenty (120) days of the close of the fiscal year pursuant to Regulation 14A.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Form 10-K
(1) Financial Statements
The following financial statements of Registrant are included in Item 8:
INDEX TO FINANCIAL STATEMENTS Page
Report of Independent Auditors 12 Balance Sheets - December 31, 1996 and 1995 13 Statements of Income and Accumulated Deficit - Years 14 Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows - Years Ended December 31, 1996 15 1995 and 1994 Notes to Financial Statements - December 31, 1996 16
(2) Financial Statement Schedules
All 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.
(3) Listing of Exhibits by Table Number
Set forth below is an index of applicable exhibits filed with this report according to exhibit table number.
3. Articles of Incorporation and Bylaws *
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 6, 1997, 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
* 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) Exhibits Required by Item 601 of Regulation S-K
The exhibits required by Item 601 of regulation S-K which are listed in Item 14(a)(3) above are filed as part of this Report. Exhibits not listed are inapplicable or have been previously filed and are incorporated herein by reference.
(d) Financial Statements and Schedules Required by Regulation S-X
The following financial statements of Justice Investors are included in Item 14(d): Page
Independent Auditor's Report 25 Balance Sheets - December 31, 1996 and 1995 26 Statements of Income and Partners' Capital - Years Ended 27 December 31, 1996, 1995 and 1994 Statements of Cash Flows - Years Ended December 31, 1996, 28 1995 and 1994 Notes to Financial Statements - December 31, 1996, 1995 29 and 1994
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
February 5, 1997
Justice Investors (A Limited Partnership) San Francisco, California
Independent Auditor's Report ---------------------------
We have audited the accompanying balance sheets of Justice Investors ( A Limited Partnership) as of December 31, 1996, and 1995, and the related statements of income and partners' capital and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ COLLIER AND MARKOWITZ Certified Public Accounts
JUSTICE INVESTORS (A LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1996 and 1995 --------------------------
The accompanying notes are an integral part of these financial statements.
The accompanying notes are in integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
JUSTICE INVESTORS (A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994 -------------------------------
SIGNIFICANT ACCOUNTING POLICIES - -------------------------------
Organization - ------------ Justice Investors, a Limited Partnership (the "Partnership") was formed in 1967 to acquire real property in San Francisco, California, for the development and lease of hotel and related facilities. The leases became effective during 1970 upon completion of the hotel and parking garage. The lease of the hotel provided for the Partnership to receive certain percentages of hotel revenue, as defined, to December 31, 2004, with a five year renewal option. The parking garage lease provided for payments of certain percentages of parking receipts to November 30, 2010.
Rents Receivable - ---------------- Management believes that all rents receivable as of December 31, 1996 and 1995, were fully collectible. Therefore, no allowance for doubtful accounts was recorded.
Depreciation - ------------ Depreciation on the hotel facilities is computed using the straight line method over a useful life of 40 years. Building improvements are being depreciated on a straight line basis over their useful lives ranging from 5 to 39 years. Office equipment is being depreciated using the 150% declining balance method with a useful life of 5 years.
Amortization - ------------ Loan fees are amortized using the straight line method over 10 years. Deferred lease costs are amortized using the straight line method over 15 years.
Income Tax - ---------- No income taxes have been provided in the accompanying financial statements since the Partnership profits and losses are reportable by the partners on their individual income tax returns.
Statement of Cash Flows - ----------------------- For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. Use of Estimates - ---------------- The process of preparing financial statements in conformity with generally accepted accounting principles required the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
JUSTICE INVESTORS (A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994 --------------------------------
LONG-TERM DEBT - -------------- At December 31, 1996 and 1995, long-term debt consisted of the following:
1996 1995 ---- ---- 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 provided 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 $3,200,000 $3,400,000
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 provided for interest at prime rate per annum due December 31, 2004 84,288 419,975 --------- --------- $3,284,288 $3,819,975 --------- --------- --------- ---------
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, 1995 $7,500,000 December 31, 1996 7,290,567 December 31, 1997 7,057,050 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
Maturities of long-term debt for each of the next five years are as follows:
1997 $ - 1998 - 1999 - 2000 - 2001 - Subsequent to 2001 3,284,288 --------- $3,284,288 --------- ---------
JUSTICE INVESTORS (A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994 --------------------------------
MINIMUM FUTURE RENTALS - ---------------------- Minimum future rentals to be received on non-cancelable leases as of December 31, 1996 for each of the next five years and in the aggregate are:
1997 $ 2,761,000 1998 2,761,000 1999 2,761,000 2000 2,761,000 2001 2,761,000 Subsequent to 2001 9,827,250 --------- $23,632,250 ---------- ----------
COMMITMENT - LEASE COMMISSION - -----------------------------
The Partnership was obligated to pay a lease commission of 2% of the rentals received under the primary lease of the hotel property for the initial 25-year term of the lease which expired on October 31, 1995. In addition, the Partnership is obligated to pay a lease commission of 1% of rentals received to December 31, 2004 plus Holiday Inn lease extension, if any, to December 31, 2025.
RELATED PARTY TRANSACTIONS - -------------------------- Expenses were incurred for services rendered by related parties as follows: