Portsmouth Square, Inc. (referred to as “Portsmouth” or the “Company” and may also be referred to as “we” “us” or “our”) is a California corporation, incorporated on July 6, 1967, for the purpose of acquiring a hotel property in San Francisco, California through a California limited partnership, Justice Investors (“Justice” or the “Partnership”). As of June 30, 2011,2013, approximately 68.8% of the outstanding common stock of Portsmouth was owned by Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF). Santa Fe is a 77%80.5%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a public company (NASDAQ: INTG). InterGroup also directly owns approximately 11.7%12.9% of the common stock of Portsmouth.
The Company's principal business is conducted through its general and limited partnership interest in the Justice Investors limited partnership (“Justice” or the “Partnership”). The Company has a 50.0% limited partnership interest in Justice and serves as one of the Managing General Partner. The other general partners.partner is Evon Corporation (“Evon”). Justice owns a 544543 room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the “Hilton San Francisco Financial District” (the “Hotel”) and related facilities, including a five level underground parking garage. The financial statements of Justice are consolidated with those of the Company. See Note 2 to the consolidated financial statements.
Most significant partnership decisions require the active participation and approval of both general partners. Pursuant to the terms of the partnership agreement, voting rights of the partners are determined according to the partners’ entitlement to share in the net profit and loss of the partnership. The Company is not entitled to any additional voting rights by virtue of its position as a general partner. The partnership agreement also provides that no portion of the partnership real property can be sold without the written consent of the general partners and the limited partners entitled to more than 72% of the net profit. The partnership agreement also provides that amendments to the agreement may be made only upon the consent of the general partners and at least seventy 75% of the interests of the limited partners and the consent of at least 75% of the interests of the limited partners will also be required to remove a general partner. As of June 30, 2011,2013, there were 113 limited partners in Justice, including Portsmouth and Evon.
The Company also derives income from the investment of its cash and investment securities assets. The Company has invested in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the Company’s marketable securities and other investments.
RECENT BUSINESS DEVELOPMENTS
Garage Installment Sale Agreement and Parking Facilities Management AgreementLimited Partnership Redemption Proposal
Effective October 1, 2008,By letter dated June 12, 2013, Portsmouth advised the limited partners of Justice andthat it would not be extending its March 29, 2013 Redemption proposal, but would instead be working together with Evon, entered into an Installment Sale Agreementthe co-general partner, towards a redemption transaction that both general partners could support. The Company has been engaged in discussions with representatives of Evon concerning possible transactions whereby partners in Justice, other than Portsmouth, would be afforded the Partnership purchased all of Evon’s right title and interestopportunity to have their holdings in the remaining term of its leaseJustice redeemed by Justice through a proposed refinancing of the parking garage, which wasHotel. These discussions are continuing. While Portsmouth is hopeful that the discussions will result in a transaction that, on consummation, would result in Portsmouth significantly increasing its proportionate ownership of Justice on terms acceptable to expire on November 30, 2010,Portsmouth and other related assets. The partnership also agreed to assume Evon’s contract with Ace Parking Management, Inc. (“Ace Parking”) forits becoming the managementsole general partner of the garage and any other liabilities related to the operation of the garage commencing October 1, 2008. The purchase price for the garage lease and related assets was approximately $755,000, payable in one down payment of approximately $28,000 and 26 equal monthly installments of approximately $29,000, which included interest at the rate of 2.4% per annum. The Note was fully paid as of November 2010. See Note 9 to the Consolidated Financial Statements.
On October 31, 2010, Justice, Investors and Ace Parking entered into an amendment of the Parking Agreement to extend the term forno assurance can be given that such a period of sixty two (62) months, commencing on November 1, 2010 and terminating December 31, 2015, subject to either party’s right to terminate the agreement without cause on ninety (90) days written notice. The monthly management fee of $2,000 and the accounting fee of $250 remain the same, but the amendment modified how the Excess Profit Fee to be paid to Ace would be calculated. The amendment provides that, if net operating income (“NOI”) from the garage operations exceeds $1,800,000 but is less than $2,000,000, Acetransaction will be entitled to an Excess Profit Fee of one percent (1%) of the total annual NOI. If the annual NOI is $2,000,000 or higher, Ace will be entitled to an Excess Profit Fee equal to two percent (2%) of the total annual NOI. The prior Excess Profit Fee entitled Ace to receive three percent of NOI in excess of $150,000.accomplished.
Amendments to Justice Investors Limited Partnership Agreement
On December 1, 2008, Portsmouth and Evon, as the two general partners of Justice, entered into a 2008 Amendment to the Limited Partnership Agreement (the “Amendment”) that provides for a change in the respective roles of the general partners. Pursuant to the Amendment, Portsmouth assumed the role of Managing General Partner and Evon continued on as the Co-General Partner of Justice. The Amendment was ratified by approximately 98% of the limited partnership interests. The Amendment also provides that future amendments to the Limited Partnership Agreement may be made only upon the consent of the general partners and at least seventy five percent (75%) of the interests of the limited partners. Consent of at least 75% of the interests of the limited partners will also be required to remove a general partner pursuant to the Amendment.
Effective November 30, 2010, the general and limited partners of Justice Investors entered into an Amended and Restated Agreement of Limited Partnership, which was approved and ratified by more than 98% of the limited partnership interests of Justice. The Partnership Agreement was amended and restated in its entirety to comply with the new provisions of the California Corporations Code known as the “Uniform Limited Partnership Act of 2008”. The amendment did not result in any material modifications of the rights or obligations of the general and limited partners.
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New General Partner Compensation Agreement
Concurrent with the December 2008 Amendment to the Limited Partnership Agreement, a new General Partner Compensation Agreement (the “Compensation Agreement”) was entered into on December 1, 2008, among Justice, Portsmouth and Evon to terminate and supersede all prior compensation agreement for the general partners. Pursuant to the Compensation Agreement, the general partners of Justice are entitled to receive an amount equal to 1.5% of the gross annual revenues of the Partnership (as defined), less $75,000 to be used as a contribution toward the cost of Justice engaging an asset manager. In no event shall the annual compensation be less than a minimum base of approximately $285,000, with eighty percent (80%) of that amount being allocated to Portsmouth for its services as managing general partner and twenty percent (20%) allocated to Evon as the co-general partner. Compensation earned by the general partners in each calendar year in excess of the minimum base, will be payable in equal fifty percent (50%) shares to Portsmouth and Evon. During the years ended June 30, 20112013 and 2010,2012, the general partners were paid approximately $468,000$620,000 and $417,000$562,000 respectively, under the applicable compensation agreements. Of those amounts, approximately $323,000$401,000 and $264,000$366,000 was paid to Portsmouth for fiscal 20112013 and 2010.2012.
Comstock Mining, Inc. Debt Restructuring
On October 20, 2010, as part of a debt restructuring of one of its investments, the Company exchanged approximately $4,410,000 in notes, convertible notes and debt instruments that it held in Comstock Mining, Inc. (“Comstock” - OTCBB: LODE)) for 4,410 shares ($1,000 stated value) of newly created 7 1/2% Series A-1 Convertible Preferred Stock (the “A-1 Preferred”) of Comstock. Prior to the exchange, those notes and convertible debt instruments had a carrying value of $724,000, net of impairment adjustments. The Company accounted for the transaction as an exchange of its debt securities and recorded the new instruments (A-1 Preferred) received based on their fair value. The Company estimated the fair value of the A-1 Preferred at $1,000 per share, which was the stated value of the instrument, for a total of $4,410,000. The fair value of the A-1 Preferred had a similar value to the Series B preferred stock financing (stated value of $1,000 per share) by which Comstock concurrently raised $35.7 million in new capital from other investors in October 2010. The Company recorded an unrealized gain of $3,686,000 related to the preferred stock received as part of the debt restructuring. See Note 6 to the Consolidated Financial Statements.
HILTON HOTELS FRANCHISE LICENSE AGREEMENT
On December 10, 2004, the Partnership entered into a Franchise License Agreement with Hilton Hotels Corporation (the “Franchise Agreement”) for the right to operate the Hotel as a Hilton brand hotel. The term of the Franchise Agreement is for 15 years commencing on the opening date of the Hotel, January 12, 2006, with an option to extend that Agreement for another five years, subject to certain conditions.
Pursuant to the Franchise Agreement, the Partnership paid monthly royalty fees for the first two years of three percent (3%) of the Hotel’s gross room revenue, as defined, for the preceding calendar month; the third year was at four percent (4%) of the Hotel’s gross room revenue; and the fourth year until the end of the term will be five percent (5%) of the Hotel’s gross room revenue. Justice also pays a monthly program fee of four percent (4%) of the Hotel’s gross room revenue. The amount of the monthly program fee is subject to change; however, the increase cannot exceed one percent (1%) of the Hotel gross room revenue in any calendar year, and the cumulative increases in the monthly fees will not exceed five percent (5%) of gross room revenue. The Partnership also pays a monthly information technology recapture charge of 0.75% of the Hotel’s gross revenue. Due to the difficult economic environment, Hilton agreed to reduce its information technology fees to 0.65% for the 2010 calendar year.
Prior to operating the Hotel as a Hilton hotel, the Partnership was required to make substantial renovations to the Hotel to meet Hilton standards in accordance with a product improvement plan (“PIP”) agreed upon by Hilton and the Partnership, as well as comply with other brand standards. That project included a complete renovation and upgrade of all of the Hotel’s guestrooms, meeting rooms, common areas and restaurant and bar. As of January 12, 2006, the Hotel renovation work was substantially completed, at which time Justice obtained approval from Hilton to open the Hotel as the “Hilton San Francisco Financial District”. The Hotel opened with a limited number of rooms available to rent, which increased as the Hotel transitioned into full operations by the end of February 2006.
The total cost of the construction-renovation project of the Hotel was approximately $37,030,000, which includes approximately $630,000 in interest costs incurred during the construction phase that were capitalized. To meet those substantial financial commitments, and the costs of operations during the renovation period and for the first five months when the Hotel ramped up its operations, the Partnership has relied on additional borrowings to meet its obligations. As discussed in Item 2. Properties, the Partnership was able to secure adequate financing, collateralized by the Hotel, to meet those commitments.
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HOTEL MANAGEMENT COMPANY AGREEMENT
In February 2007, the Partnership terminated its prior hotel management agreement with Dow Hotel Company and entered into a management agreement with Prism Hospitality (“Prism”) to manage and operate the Hotel as its agent, effective February 10, 2007. Prism is an experienced Hilton approved operator of upscale and luxury hotels throughout the Americas. The agreement is effective for a term of ten years, unless the agreement is extended as provided in the agreement, and the Partnership has the right to terminate the agreement upon ninety days written notice without further obligation. Under the management agreement, the Partnership is to pay base management fees of 2.5% of gross operating revenues for the fiscal year. However, 0.75% of the stated management fee is due only if the partially adjusted net operating income for the subject fiscal year exceeds the amount of a minimum Partnership’sPartnership return ($7 million) for that fiscal year. Prism is also entitled to an incentive management fee if certain milestones are accomplished. No incentive fees were earned during the fiscal years ended June 30, 20112013 and 2010. In support of the Partnership’s efforts to reduce costs in this difficult economic environment, Prism agreed to reduce its management fees by fifty percent from January 1, 2009 through December 31, 2010, after which the original fee provision went back into effect.2012. Management fees paid to Prism during the years ended June 30, 20112013 and 20102012 were $469,000$754,000 and $246,000,$626,000, respectively.
GARAGE OPERATIONS
As discussed above, until September 30, 2008, the garage portion of the Hotel property was leased by the Partnership to Evon. Effective October 1, 2008, Justice and Evon entered into an Installment Sale Agreement whereby the Partnership purchased all of Evon’s right title and interest in the remaining term of its lease of theThe parking garage which was to expire on November 30, 2010, and other related assets. The Partnership also agreed to assume Evon’s contract withis operated by Ace Parking Management, Inc. (“Ace Parking”) for the management of the garage and any other liabilities related to the operation of the garage commencing October 1, 2008.
The garage is currently operated by Ace Parking for the Partnership pursuant to a Parking Facilities Management Agreement (the “Parking Agreement”). with Justice. The initial term of the Parking Agreement was to expire on October 31, 2010, with an option to renew for another five-year term. Pursuant to that agreement, the Partnership paid Ace Parking a management fee of $2,000 per month, an accounting fee equal to $250 per month, plus “Excess Profit Fee” equal to three percent (3%) of annual net profits in excess of $150,000.
On October 31, 2010, Justice Investors and Ace Parking entered into an amendment of the Parking Agreement to extend the term for a period of sixty two (62) months, commencing on November 1, 2010 and terminating December 31, 2015, subject to either party’s right to terminate the agreement without cause on ninety (90) days written notice. The monthly management fee of $2,000 and the accounting fee of $250 remain the same, but the amendment modified how the Excess Profit Fee to be paid to Ace would be calculated. The amendment provides that, if net operating income (“NOI”) from the garage operations exceeds $1,800,000 but is less than $2,000,000, Ace will be entitled to an Excess Profit Fee of one percent (1%) of the total annual NOI. If the annual NOI is $2,000,000 or higher, Ace will be entitled to an Excess Profit Fee equal to two percent (2%) of the total annual NOI.
TRU SPA LEASE
Approximately 5,400 square feet of space on the lobby level of the Hotel is leased to Tru Spa for the operation of a health and beauty spa. The lease expireswas scheduled to expire in May 2013, with a five year option to extend the term. The spa lease provides for minimum monthly rent of $14,000. Minimum rental amounts are subject to adjustment every three years based on increases in the Consumer Price Index. In April 2013, the Partnership and Tru Spa entered into a short term extension of the spa lease for a base rent of $5,900 per month from April 1, 2013 to December 31, 2013.
CHINESE CULTURE FOUNDATION LEASE
On March 15, 2005, the Partnership entered into an amended lease with the Chinese Culture Foundation of San Francisco (the “Foundation”) for the third floor space of the Hotel commonly known as the Chinese Cultural Center, which the Foundation had right to occupy pursuant to a 50-year nominal rent lease.
The amended lease requires the Partnership to pay to the Foundation a monthly event space fee in the amount of $5,000, adjusted annually based on the local Consumer Price Index. The term of the amended lease expires on October 17, 2023, with an automatic extension for another 10 year term if the property continues to be operated as a hotel. This amendment allowed Justice to incorporate the third floor into the renovation of the Hotel resulting in a new ballroom for the joint use of the Hotel and new offices and a gallery for the Chinese Culture Center.
Seasonality
Hotel’s operations historically have been seasonal. Like most hotels in the San Francisco area, the Hotel generally maintains higher occupancy and room rates during the first and second quarters of its fiscal year (July 1 through December 31) than it does in the third and fourth quarters (January 1 through June 30). These seasonal patterns can be expected to cause fluctuations in the quarterly revenues from the Hotel.
Competition
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Competition
The hotel industry is highly competitive. Competition is based on a number of factors, most notably convenience of location, brand affiliation, price, range of services and guest amenities or accommodations offered and quality of customer service. Competition is often specific to the individual market in which properties are located.
The Hotel is located in an area of intense competition from other hotels in the Financial District and San Francisco in general. After being closed for more than seven months for a substantial renovation project in fiscal year 2006, it has taken some time for the Hotel, now operating as a Hilton, to gain recognition as a totally upgraded and higher level property after being under the Holiday Inn brand for almost 35 years. The Hotel is also somewhat limited by having only 15,000 square feet of meeting room space. Other hotels, with greater meeting room space, may have a competitive advantage by being able to attract larger groups and small conventions. Increased competition from new hotels, or hotels that have been recently undergone substantial renovation, could have an adverse effect on occupancy, average daily rate (“ADR”) and room revenue per available room (“RevPar”) and put pressure on the Partnership to make additional capital improvements to the Hotel to keep pace with the competition.
The Hotel’s target market is business travelers, leisure customers and tourists, and small to medium size groups. Since the Hotel operates in an upper scale segment of the market, we also face increased competition from providers of less expensive accommodations, such as limited service hotels, during periods of economic downturn when leisure and business travelers become more sensitive to room rates. Like other hotels, we have experienced asome decrease in some higher rated corporate and business travel as many companies have cut their travel and entertainment budgets in response to economic conditions. As a result, there iscould be added pressure on all hotels in the San Francisco market to lower room rates in an effort to maintain occupancy levels during such periods. Although
Our highest priority remains guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition by building the most sustainable guest loyalty. During fiscal 2013, we completed a significant, “green” project that retrofits all of our guest room windows with new “double-pane” inserts that result in greater energy savings and better sound attenuation for our guests. We have also upgraded our common areas of the Hotel and improved our restaurant facilities, food and beverage services and now provide advanced technological amenities throughout our lobby. Our guest responses to these improvements have been very positive. The Hotel also remains a leader in implementing Hilton’s Huanying (“Welcome”) program that features a tailored experience for Chinese travelers. We continue taking steps that further develop our ties with the local Chinese community and the city of San Francisco, representing good corporate citizenship and promoting important, new business opportunities.
Moving forward, we will continue to focus on cultivating more international business, especially from China, and capturing a greater percentage of the higher rated business, leisure and group travel. We will also continue in our efforts to upgrade our guest rooms and facilities and explore new and innovative ways to differentiate the Hotel from its competition, as well as focusing on returning our food and beverage operations to profitability. During the last twelve months, we have seen some signs of recoverysteady improvement in business and leisure travel. If that trend in the San Francisco market duringand the 2011 fiscal year,hotel industry continues, it should translate into an increase in room revenues and profitability. However, like all hotels, weit will remain subject to the uncertain domestic and global economic environment.environment and other risk factors beyond our control, such as the effect of natural disasters.
In this highly competitive market, management has continued to focus on ways to enhance the guest experience as well as improve operating efficiencies. During the last two fiscal years, the Hotel has upgraded its guest rooms with newer flat panel televisions systems that provide guests with greater entertainment options. The Hotel has also installed many energy saving controls and devices as part of its efforts to become greener and reduce operating costs. Currently, we are working on a new executive lounge on the 26th floor of the Hotel that is expected to open in early October 2011. We have also taken steps to improve out internet connectivity throughout the Hotel and will be providing more technological amenities for our guests. Management will continue to explore new and innovative ways to improve operations and to attract new guests to the Hotel at higher room rates.
The Hotel is also subject to certain operating risks common to all of the hotel industry, which could adversely impact performance. These risks include:
| | · | Competition for guests and meetings from other hotels including competition and pricing pressure from internet wholesalers and distributors; |
| | · | increases in operating costs, including wages, benefits, insurance, property taxes and energy, due to inflation and other factors, which may not be offset in the future by increased room rates; |
| | · | labor strikes, disruptions or lock outs; |
| | · | dependence on demand from business and leisure travelers, which may fluctuate and is seasonal; |
| | · | increases in energy costs, cost of fuel, airline fares and other expenses related to travel, which may negatively affect traveling; |
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| | · | terrorism, terrorism alerts and warnings, wars and other military actions, pandemics or other medical events or warnings which may result in decreases in business and leisure travel; and |
| · | adverse effects of downturns and recessionary conditions in international, national and/or local economies and market conditions. |
Environmental Matters
In connection with the ownership of the Hotel, the Company is subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances.
Environmental consultants retained by the Partnership or its lenders conducted updated Phase I environmental site assessments in fiscal year ended June 30, 2008 on the Hotel property. These Phase I assessments relied, in part, on Phase I environmental assessments prepared in connection with the Partnership’s first mortgage loan obtained in July 2005. Phase I assessments are designed to evaluate the potential for environmental contamination on properties based generally upon site inspections, facility personnel interviews, historical information and certain publicly-available databases; however, Phase I assessments will not necessarily reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at the properties.
Although the Phase I assessments and other environmental reports we have reviewed disclose certain conditions on our properties and the use of hazardous substances in operation and maintenance activities that could pose a risk of
environmental contamination or liability, we are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial position, results of operations or cash flows.
The Company believes that the Hotel is in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on the Company. The Company has not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present properties.
EMPLOYEES
As of June 30, 2011,2013, Portsmouth had three full-time employees. The employees of the Company are not part of any collective bargaining agreement, and the Company believes that its employee relations are satisfactory.
Employees of Justice and management of the Hotel are not unionized and the Company believes that their relationships with the Hotel are satisfactory and consistent with the market in San Francisco. Most
As of June 30, 2013, the Partnership had approximately 244 employees. Approximately 80% of those employees were represented by one of three labor unions, and their terms of employment were determined under a collective bargaining agreement (CBA) to which the Partnership was a party. During the year ended June 30, 2013, the Partnership continued under an existing CBA for the Local 2 (Hotel and Restaurant Employees). As of June 30, 2013, the CBA for Local 856 (International Brotherhood of Teamsters) has expired and is currently under renegotiation. Negotiation of collective bargaining agreements, which includes not just terms and conditions of employment but scope and coverage of employees, is a regular and expected course of business operations for the Partnership.
The Partnership expects and anticipates that the terms of conditions of CBAs will have an impact on wage and benefit costs, operating expenses, and certain hotel operations during the life of the non-management employees of the Hotel are part of Local 2 of the Hotel Employeeseach CBA, and Restaurant Employees Union (“UNITE HERE”); Stationary Engineers, Local 39;incorporates these principles into its operating and the Teamsters Local 856. The Hotel’s contract with Local 2 expired on August 14, 2009. While Local 2 has sent a statutory letter to the Hotel to open negotiations, limited substantive discussions between the Hotel and union representatives have commenced to date. At this time, no disruptions to the operations of the Hotel have occurred and/or are expected resulting from the expired union contract and the unresolved contract negotiations. We expect substantive negotiations to begin in the near future.budgetary practices.
The Hotel has two other labor agreements. An extension agreement with Stationary Engineers, Local 39 was tentatively agreed to in May 2011 with an effective date retroactive to January 11, 2011, and an expiration date of July 31, 2013. A new contract with Teamsters Local 856 was reached on March 10, 2011 with an effective date retroactive to January 1, 2011, and an expiration date of December 31, 2012.
ADDITIONAL INFORMATION
The Company files annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The public may read and copy any materials that we file with the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.
Other information about the Company can be found on our parent company’s website www.intgla.com. Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.
Not required for smaller reporting companies.
None.
SAN FRANCISCO HOTEL PROPERTY
The Hotel is owned directly by the Partnership. The Hotel is centrally located near the Financial District in San Francisco, one block from the Transamerica Pyramid. The Embarcadero Center is within walking distance and North Beach is two blocks away. Chinatown is directly across the bridge that runs from the Hotel to Portsmouth Square Park. The Hotel is a 31-story (including parking garage), steel and concrete, A-frame building, built in 1970. The Hotel has 544543 well-appointed guest rooms and luxury suites situated on 22 floors as well as a 5,400 square foot Tru Spa health and beauty spa on the lobby level. The third floor houses the Chinese Culture Center and grand ballroom. The Hotel has approximately 15,000 square feet of meeting room space, including the grand ballroom. Other features of the Hotel include a 5-level underground parking 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.
Since the Hotel justrecently completed renovations, there is no present program for any further major renovations; however, the Partnership expects to reserve approximatelyexpend at least 4% of gross annual Hotel revenues each year for future capital improvements and requirements. In the opinion of management, the Hotel is adequately covered by insurance.
HOTEL FINANCINGS
On July 27, 2005, Justice entered into a first mortgage loan with The Prudential Insurance Company of America in a principal amount of $30,000,000 (the “Prudential Loan”). The term of the Prudential Loan is for 120 months at a fixed interest rate of 5.22% per annum. The Prudential Loan calls for monthly installments of principal and interest in the amount of approximately $165,000, calculated on a 30-year amortization schedule. The Loan is collateralized by a first deed of trust on the Partnership’s Hotel property, including all improvements and personal property thereon and an assignment of all present and future leases and rents. The Prudential Loan is without recourse to the limited and general partners of Justice. The principal balance of the Prudential Loan was $27,176,000$26,043,000 as of June 30, 2011.
2013.
On March 27, 2007, Justice entered into a second mortgage loan with Prudential (the “Second Prudential Loan”) in a principal amount of $19,000,000. The term of the Second Prudential Loan is for approximately 100 months and matures on August 5, 2015, the same date as the first Prudential Loan. The Second Prudential Loan is at a fixed interest rate of 6.42% per annum and calls for monthly installments of principal and interest in the amount of approximately $119,000, calculated on a 30-year amortization schedule. The Second Prudential Loan is collateralized by a second deed of trust on the Partnership’s Hotel property, including all improvements and personal property thereon and an assignment of all present and future leases and rents. The Second Prudential Loan is also without recourse to the limited and general partners of Justice. The principal balance of the Second Prudential Loan was $18,003,000$17,370,000 as of June 30, 2011.2013.
The Partnership had a $2,500,000 unsecured revolving line of credit facility with a bank that was to mature on April 30, 2010. Borrowings under that line of credit bore interest at Prime plus 3.0% per annum or based on the Wall Street Journal Prime Rate (3.25%) plus 3.0% per annum, floating, (but subject to a minimum floor rate at 5.0% per annum). Borrowings under the line of credit were subject to certain financial covenants, which are measured annually at June 30th and December 31st based on the credit arrangement. Effective April 29, 2010, the Partnership obtained a modification from the bank which converted its revolving line of credit facility to a term loan. The Partnership also obtained a waiver of any prior noncompliance with financial covenants.
The modification provides that Justice will pay the $2,500,000 balance on its line of credit facility over a period of four years, to mature on April 30, 2014. This term loan calls for monthly principal and interest payments of $41,000, calculated on a six-year amortization schedule, with interest only from May 1, 2010 to August 31, 2010. Pursuant to the modification, the annual floating interest rate was reduced by 0.5% to the WSJ Prime Rate plus 2.5% (with a minimum floor rate of 5.0% per annum). The modification provides for new financial covenants that include specific financial ratios and a return to minimum profitability after June 30, 2011. Management believes that the Partnership has the ability to meet the specific covenants and the Partnership was in compliance with the covenants as of June 30, 2011.2013 and 2012. The Partnership paid a loan modification fee of $10,000. The loan continues as unsecured. As of June 30, 20112013 and June 30, 2010,2012, the interest rate was 5.75% and the outstanding balances were $2,202,000$1,167,000 and $2,500,000,$1,702,000, respectively.
LAND HELD FOR DEVELOPMENT
On August 29, 2007, the Board of Directors authorized an investment of $973,000 for Portsmouth to acquire a 50% equity interest in Intergroup Uluniu, Inc., a Hawaii corporation (“Uluniu”) in a related party transaction. Uluniu was a 100% owned subsidiary of The InterGroup Corporation (“InterGroup”). Uluniu owns an approximately two-acre parcel of unimproved land located in Kihei, Maui, Hawaii which is held for development. The Company’s investment in Uluniu represents an amount equal to the costs paid by InterGroup for the acquisition and carrying costs of the property through August 2007. The fairness of the financial terms of the transaction were reviewed and approved by the independent director of the Company.
Uluniu intends to obtain the entitlements and permits necessary for the joint development of the parcel with an adjoining landowner into residential units. After the completion of this predevelopment phase, the Uluniu will determine whether it more advantageous to sell the entitled property or to commence with construction. Due to current economic conditions, the project is on hold.
Item 3. Legal Proceedings.
The Company is not subject to any legal proceedings requiring disclosure.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
MARKET INFORMATION
Portsmouth’s common stock is traded on the OTC Bulletin Board (“OTCBB”) under the symbol: PRSI.OB. The following table sets forth the range of the high and low bid quotations as reported by the OTCBB for Portsmouth’s common stock for each full quarterly period for the years ended June 30, 20112013 and 2010.2012. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions.
| Fiscal 2011 | | High | | | Low | |
| | | | | | | |
| First Quarter (7/ 1 to 9/30) | | $ | 23.99 | | | $ | 17.50 | |
| Second Quarter (10/1 to 12/31) | | $ | 27.00 | | | $ | 22.00 | |
| Third Quarter (1/1 to 3/31) | | $ | 24.00 | | | $ | 22.00 | |
| Fourth Quarter (4/1 to 6/30) | | $ | 25.00 | | | $ | 23.00 | |
| | | | | | | | | |
| Fiscal 2010 | | | | | | | | |
| | | | | | | | | |
| First Quarter (7/ 1 to 9/30) | | $ | 35.00 | | | $ | 17.00 | |
| Second Quarter (10/1 to 12/31) | | $ | 17.25 | | | $ | 17.10 | |
| Third Quarter (1/1 to 3/31) | | $ | 25.00 | | | $ | 17.25 | |
| Fourth Quarter (4/1 to 6/30) | | $ | 24.99 | | | $ | 17.55 | |
| | | | | | |
| Fiscal 2013 | | High | | Low | |
| | | | | | | | |
| First Quarter (7/ 1 to 9/30) | | $ | 30.00 | | $ | 21.10 | |
| Second Quarter (10/1 to 12/31) | | $ | 30.00 | | $ | 30.00 | |
| Third Quarter (1/1 to 3/31) | | $ | 35.00 | | $ | 25.00 | |
| Fourth Quarter (4/1 to 6/30) | | $ | 35.00 | | $ | 26.00 | |
| | | | | | | | |
| Fiscal 2012 | | | | | | | |
| | | | | | | | |
| First Quarter (7/ 1 to 9/30) | | $ | 25.00 | | $ | 23.00 | |
| Second Quarter (10/1 to 12/31) | | $ | 23.00 | | $ | 21.00 | |
| Third Quarter (1/1 to 3/31) | | $ | 28.00 | | $ | 21.00 | |
| Fourth Quarter (4/1 to 6/30) | | $ | 28.00 | | $ | 25.00 | |
HOLDERS
As of September 13, 2011,June 30, 2013, the number of holders of record of the Company’s Common Stock was approximately 195. Such number of 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. Including beneficial holders there are approximately 370 shareholders of the Company's Common Stock.
DIVIDENDS
On April 20, 2004, the BoardIn December 2012, Portsmouth declared a special cash dividend of Directors$0.25 per common share or $184,000, which was paid on December 28, 2012 to shareholders of Portsmouth, decided to discontinue the paymentrecord as of dividends sinceDecember 21, 2012 based on Partnership distributions made by Justice was to cease payments of partnership distributions to help fund the renovation of the Hotel.during that particular year and other factors. It is expected that the Company will not consider a return to a regular dividend policy until such time that Partnership cash flows, distributions and other economic factors warrant such consideration. The Company will continue to review and modify its dividend policy as needed to meet such strategic and investment objectives as may be determined by the Board of Directors.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Portsmouth has no securities authorized for issuance under equity compensation plans.
PURCHASES OF EQUITY SECURITIES
Portsmouth did not repurchase any of its own securities during the lastfourth quarter of its fiscal year ending June 30, 20112013 and does not have any publicly announced repurchase program.
Not required for smaller reporting companies.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
12
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
The Company's principal business is conducted through its general and limited partnership interest in the Justice Investors limited partnership (“Justice” or the “Partnership”). The Company has a 50.0% limited partnership interest in Justice and serves as the managing generalManaging General partner of Justice. Evon Corporation (“Evon”) serves as the other general partner. Justice owns the land, improvements and leaseholdsa 543 room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the Hilton“Hilton San Francisco Financial DistrictDistrict” (the “Hotel”). and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company. See Note 2 to the Consolidated Financial Statements.
The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation. The term of the Agreement is for a period of 15 years commencing on January 12, 2006, with an option to extend the license term for another five years, subject to certain conditions. Justice also has a Management Agreement with Prism Hospitality L.P. (“Prism”) to perform the day-to-day management functions of the Hotel.
Until September 30, 2008, the Partnership also derived income from the leaseThe parking garage that is part of the parking garageHotel property is managed by Ace Parking pursuant to Evon. Effective October 1, 2008, Justice entered into an installment sale agreement with Evon to purchase the remaining term of the garage lease and related garage assets, and assumed thea contract with Ace Parking for the operations of the garage.Partnership. Justice also leases a portion of the lobby level of the Hotel to a day spa operator. Portsmouth also receives management fees as a general partner of Justice for its services in overseeing and managing the Partnership’s assets. Those fees are eliminated in consolidation.
Fiscal Year Ended June 30, 20112013 Compared to Fiscal Year Ended June 30, 20102012
The Company had net income of $3,077,000$1,820,000 for the year ended June 30, 20112013 compared to a net lossincome of $2,954,000$2,102,000 for the year ended June 30, 2010.2012. The changedecrease in net income is primarily attributable to the substantialdecrease in income generatedfrom hotel operations partially offset by the decrease in losses from investing activities and the significant improvement in the operations of the hotel during the current year.activities.
The Company had net income from hotel operations of $710,000$3,061,000 for the fiscal year ended June 30, 2011,2013, compared to a net lossincome of $2,192,000$4,110,000 for the fiscal year ended June 30, 2010.2012. The change todecrease in net income from hotel operations from a net loss is primarily attributable to a $1,280,000 decrease in depreciation and amortization expense as many of the furniture and fixture improvements from the renovation of the Hotel reached full deprecation during fiscal 2011. The Hotel also had a significant increase in operating expenses in the current period and a decrease in other revenues, partially offset by an increase in room, food and beverage and garage revenues room compared to the prior year.
The following table sets forth a more detailed presentation of Hotel operations for the years ended June 30, 20112013 and 2010.2012.
| For the years ended June 30, | | 2011 | | | 2010 | |
| Hotel revenues: | | | | | | |
| Hotel rooms | | $ | 27,839,000 | | | $ | 24,848,000 | |
| Food and beverage | | | 5,028,000 | | | | 4,703,000 | |
| Garage | | | 2,599,000 | | | | 2,507,000 | |
| Other operating departments | | | 816,000 | | | | 622,000 | |
| Total hotel revenues | | | 36,282,000 | | | | 32,680,000 | |
| Operating expenses excluding interest, depreciation and amortization | | | (29,299,000 | ) | | | (27,223,000 | ) |
| Operating income before interest, depreciation and amortization | | | 6,983,000 | | | | 5,457,000 | |
| Interest | | | (2,806,000 | ) | | | (2,902,000 | ) |
| Depreciation and amortization | | | (3,467,000 | ) | | | (4,747,000 | ) |
| | | | | | | | | |
| Net income (loss) from hotel operations | | $ | 710,000 | | | $ | (2,192,000 | ) |
| For the years ended June 30, | | 2013 | | 2012 | |
| Hotel revenues: | | | | | | | |
| Hotel rooms | | $ | 36,378,000 | | $ | 32,893,000 | |
| Food and beverage | | | 6,617,000 | | | 5,779,000 | |
| Garage | | | 2,786,000 | | | 2,765,000 | |
| Other operating departments | | | 784,000 | | | 1,025,000 | |
| Total hotel revenues | | | 46,565,000 | | | 42,462,000 | |
| Operating expenses excluding interest, depreciation and amortization | | | (38,635,000) | | | (33,465,000) | |
| Operating income before interest, depreciation and amortization | | | 7,930,000 | | | 8,997,000 | |
| Interest | | | (2,612,000) | | | (2,724,000) | |
| Depreciation and amortization | | | (2,257,000) | | | (2,163,000) | |
| | | | | | | | |
| Income from hotel operations | | $ | 3,061,000 | | $ | 4,110,000 | |
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For the fiscal year ended June 30, 2011,2013, the Hotel generated operating income of $6,983,000$7,930,000 before interest, depreciation and amortization, on total operating revenues of $36,282,000$46,565,000 compared to operating income of $5,457,000$8,997,000 before interest, depreciation and amortization, on total operating revenues of $32,680,000$42,462,000 for the fiscal year ended June 30, 2010. The increase in income from Hotel operations is primarily attributable2012. Room revenues increased by $3,485,000 for the fiscal year ended June 30, 2013 compared to increases in room,the year ended June 30, 2012, food and beverage revenues increased by $838,000 and garage revenues increased by $21,000, while other revenues decreased by $241,000 for the same period. Despite the increase in total hotel revenues, operating income was negatively impacted by a significant increase of $5,170,000 in operating expenses during the current year partially offset by andue to several factors.
Major factors for the increase in operating expenses duewere an increase in contractual union wages and benefits in all operating departments, a reserve established for other wage costs, higher group insurance costs and higher commissions on certain group and city-wide convention business in the current year. There was also an operating loss of approximately $1,102,000 in the Hotel’s food and beverage operations for the fiscal year ended June 30, 2013 compared to a loss of $379,000 for fiscal year ended June 30, 2012. That loss was primarily attributable to higher labor costs and increased staffing for new food operations as part of a plan to improve guest satisfactioncapture anticipated business from the newly constructed City College of San Francisco campus next to the Hotel. That business did not materialize as well as greater franchiseCity College opened with an enrollment of only 20% of its expected capacity of 5,000 to 7,000 students per day during the week. In addition, Hurricane Sandy resulted in cancellations of higher rated corporate and group business in October and November 2012 that was replaced by lower rated crew and transient business that did not utilize the Hotel’s food and beverage outlets or banquet and catering services. In the prior fiscal year, the Hotel also recorded a credit for property taxes in the amount of $270,000 for an over accrual of taxes related to the reassessment of the improvements of the Hotel that was less than anticipated. Franchise and management fees, which are based on a percentage of revenues.revenues, also increased as well as costs for certain promotions for Hilton Honors members during the current period.
Room revenues increased by $2,991,000 for the fiscal year ended June 30, 2011 compared to the fiscal year ended June 30, 2010 and food and beverage revenues increased by $325,000 for the same period. The increase in room revenues was primarily attributable to a significant increase in average daily room rates during fiscal 2011 as the Hotel began to see an increase in higher rated leisure, corporate and group business travel, which also resulted in higher in food and beverage revenues.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPar”) of the Hotel for the fiscal years ended June 30, 20112013 and 2010.2012.
Fiscal Year ended June 30, | | Average Daily Rate | | | Average Occupancy % | | | RevPar | |
| | | | | | | | | | |
| 2011 | | $ | 163 | | | | 86 | % | | $ | 140 | |
| 2010 | | $ | 143 | | | | 87 | % | | $ | 125 | |
| Fiscal Year | | Average | | Average | | | | | |
| ended June 30, | | Daily Rate | | Occupancy % | | | RevPar | |
| | | | | | | | | | | | | |
| | 2013 | | $ | 205 | | | 90 | % | | $ | 184 | |
| | 2012 | | $ | 191 | | | 87 | % | | $ | 166 | |
The operationsoperating results of the Hotel experienced an increase in the higher rated business and group travel segments in fiscal 2011Hotel’s rooms department remained strong as the hospitality industry beganSan Francisco market continued to see someshow signs of recovery. As a result, theThe Hotel’s average daily rate average increased significantly by $20$14 for the fiscal year ended June 30, 20112013 compared to the fiscal year ended June 30, 2010.2012. The modest decreaseincrease in occupancy of 1%3% was due to continued increased demand for hotel rooms in San Francisco and the Hotel’s ability to capture a greater share of those rooms within its market set. Due to that increased demand, the Hotel beingwas also able to reduce the amount of discounted Internet business that it was forced to take in the prior yearyears to maintain occupancy in a very competitive market.market and recessionary economic conditions. As a result, the Hotel was able to achieve a RevPar number that was $15$18 higher than fiscal 2010.
During2012. Those results made it possible for Justice Investors to declare a limited partnership distribution in December 2012 in the past year we have seen our management team guide our Hotel throughtotal amount of $1,200,000, of which Portsmouth received $600,000. In December 2011, Justice declared a difficult economic period by taking bold stepslimited partnership distribution in the aggregate amount of $1,000,000, of which Portsmouth received $500,000. The general partners of Justice will continue to reduce expensesmonitor and implement innovative strategies in order to improvereview the operations and enhance our competitiveness in the market. Currently, we are working on a new executive lounge on the 26th floorfinancial results of the Hotel and to set the amount of any future distributions that is expected to openmay be appropriate based on operating results, cash flows and other factors, including establishment of reasonable reserves for debt payments and operating contingencies.
Our highest priority remains guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition by building the most sustainable guest loyalty. During fiscal 2013, we completed a significant, “green” project that retrofits all of our guest room windows with new “double-pane” inserts that result in early October 2011.greater energy savings and better sound attenuation for our guests. We have also taken actions to improve out internet connectivity throughoutupgraded our common areas of the Hotel and will be providing moreimproved our restaurant facilities, food and beverage services and now provide advanced technological amenities throughout our lobby. Our guest responses to these improvements have been very positive. The Hotel also remains a leader in implementing Hilton’s Huanying (“Welcome”) program that features a tailored experience for Chinese travelers. We continue taking steps that further develop our guests.ties with the local Chinese community and the city of San Francisco, representing good corporate citizenship and promoting important, new business opportunities.
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Moving forward, we will continue to focus on cultivating more international business, especially from China, and capturing a greater percentage of the higher rated business, leisure and group travel. We will also continue in our efforts to upgrade our guest rooms and facilities and explore new and innovative ways to differentiate the Hotel from its competition. Moving forward, we will also focuscompetition, as well as focusing on cultivating more international business, especially from China,returning our food and capturing a higher percentage of corporate and group travel.beverage operations to profitability. During the last twelve months, we have seen somesteady improvement in business and leisure travel. If that trend in the San Francisco market and the hotel industry continues, it should translate into an increase in room revenues and profitability. However, like all hotels, weit will remain subject to the uncertain domestic and global economic environment.
environment and other risk factors beyond our control, such as the effect of natural disasters.
The Company had a net gainloss on marketable securities of $1,030,000$507,000 for the year ended June 30, 20112013 compared to a net loss on marketable securities of $621,000$1,045,000 for the year ended June 30, 2010.2012. For the year ended June 30, 2011,2013, the Company had a net realized loss of $35,000$51,000 and a net unrealized gainloss of $1,065,000.$456,000. For the year ended June 30, 2010,2012, the Company had a net realized gainloss of $2,158,000$247,000 and a net unrealized loss of $2,779,000.$798,000. Gains and losses on marketable securities and other investments may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s net income. However, the amount of gain or loss on marketable securities and other investments for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities please see the Marketable Securities section below.
The Company may also invest, with the approval of the Securities Investment Committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses.
As of June 30, 2011, the Company had net other investments of $5,913,000. On October 20, 2010, as part of a debt restructuring of one of its investments, the Company exchanged approximately $4,410,000 in notes, convertible notes and debt instruments that it held in Comstock Mining, Inc. (“Comstock” – OTCBB: LODE) for 4,410 shares ($1,000 stated value) of newly created 7 1/2% Series A-1 Convertible Preferred Stock (the “A-1 Preferred”) of Comstock. Prior to the exchange, those notes and convertible debt instruments had a carrying value of $724,000, net of impairment adjustments. The Company accounted for the transaction as an exchange of its debt securities and recorded the new instruments (A-1 Preferred) received based on their fair value. The Company estimated the fair value of the A-1 Preferred at $1,000 per share, which was the stated value of the instrument, for a total of $4,410,000. The fair value of the A-1 Preferred had a similar value to the Series B preferred stock financing (stated value of $1,000 per share) by which Comstock concurrently raised $35.7 million in new capital from other investors in October 2010. The Company recorded an unrealized gain of $3,686,000 related to the preferred stock received as part of the debt restructuring. This gain is included in the net unrealized gain on other investments on the Consolidated Statement of Operations.
During the years ended June 30, 20112013 and 2010,2012, the Company performed an impairment analysis of its other investments and determined that one of its investments had other than temporary impairment and recorded impairment losses of $356,000$35,000 and $657,000,$335,000, for each respective period.
DividendThe Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its 50% non-controlling interest in the Hotel. The income increased to $486,000 fortax (expense) benefit during the year ended June 30, 2011 from $162,000 for2013 and 2012 represents the year ended June 30, 2010 primarily as the result of receiving a stock dividend of $282,000 from Comstock during the current year.
The provision for income tax (expense) benefit as a percentageeffect on the Company’s pretax income which include its share in net income of the income (loss) before taxes was higher for the year ended June 30, 2011 as compared to the year ended June 30, 2010 primarily due to having income from Justice, of whichHotel (i.e., 50% is taxable to Portsmouth, in the current year compared to significant loss from Justice in the previous comparable year. This resulted in a lower amount of noncontrolling interest that was reconciled against the net income (loss) of the Company for income tax calculation purposes.).
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As of June 30, 20112013 and 2010,2012, the Company had investments in marketable equity securities of $4,866,000$3,324,000 and $2,323,000,$2,683,000, respectively. The following table shows the composition of the Company’s marketable securities portfolio by selected industry groups as:
| As of June 30, 2013 | | | | | % of Total | |
| | | | | | Investment | |
| Industry Group | | Fair Value | | Securities | |
| | | | | | | | |
| Basic materials | | $ | 1,513,000 | | | 45.5 | % |
| Technology | | | 622,000 | | | 18.7 | % |
| Financial services | | | 526,000 | | | 15.8 | % |
| REITs and real estate companies | | | 255,000 | | | 7.7 | % |
| Other | | | 408,000 | | | 12.3 | % |
| | | $ | 3,324,000 | | | 100.0 | % |
| As of June 30, 2011 | | | | | % of Total | |
| | | | | | Investment | |
| Industry Group | | Fair Value | | | Securities | |
| | | | | | | |
| Basic materials | | $ | 1,687,000 | | | | 34.7 | % |
| Investment funds | | | 924,000 | | | | 19.0 | % |
| Services | | | 815,000 | | | | 16.7 | % |
| REITs and real estate companies | | | 587,000 | | | | 12.1 | % |
| Financial services | | | 443,000 | | | | 9.1 | % |
| Other | | | 410,000 | | | | 8.4 | % |
| | | $ | 4,866,000 | | | | 100.0 | % |
| As of June 30, 2010 | | | | | % of Total | |
| | | | | | Investment | |
| Industry Group | | Fair Value | | | Securities | |
| | | | | | | |
| Investment funds | | $ | 751,000 | | | | 32.3 | % |
| REITs and real estate companies | | | 493,000 | | | | 21.2 | % |
| Healthcare | | | 276,000 | | | | 11.9 | % |
| Services | | | 261,000 | | | | 11.2 | % |
| Financial services | | | 214,000 | | | | 9.2 | % |
| Other | | | 328,000 | | | | 14.2 | % |
| | | $ | 2,323,000 | | | | 100.0 | % |
| As of June 30, 2012 | | | | | % of Total | |
| | | | | | Investment | |
| Industry Group | | Fair Value | | Securities | |
| | | | | | | | |
| Basic materials | | $ | 1,660,000 | | | 61.9 | % |
| Technology | | | 266,000 | | | 9.9 | % |
| Financial services | | | 228,000 | | | 8.5 | % |
| REITs and real estate companies | | | 177,000 | | | 6.6 | % |
| Other | | | 352,000 | | | 13.1 | % |
| | | $ | 2,683,000 | | | 100.0 | % |
The Company’s investment portfolio is diversified with 3330 different equity positions. The Company holds three individualfour equity securities that comprise individuallyof more than 5%10% of the equity value of the portfolio. The largest security represents 41.7% of the portfolio withand consists of the largest being 33.7%.common stock of Comstock Mining, Inc. (“Comstock” - NYSE MKT: LODE) which is included in the basic materials industry group. The amount of the Company’s investment in any particular issuer may increase or decrease, and additions or deletions to its securities portfolio may occur, at any time. While it is the internal policy of the Company to limit its initial investment in any single equity to less than 5%10% of its total portfolio value, that investment could eventually exceed 5%10% as a result of equity appreciation or reduction of other positions. A significant percentage of the portfolio consists of common stock in Comstock that was obtained through dividend payments by Comstock on its 7.5% Series A-1 Convertible Preferred Stock. Marketable securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date.
The Company also holds a $4,410,000 investment in Comstock Series A-1 Convertible Preferred Stock which is carried at cost and included in Other investments, net.
LIQUIDITY AND SOURCES OF CAPITAL
The Company’s cash flows are primarily generated from its Hotel operations, and general partner management fees and limited partnership distributions from Justice.Justice Investors. The Company also receives revenuescash generated from the investment of its cash and marketable securities and other investments.
Following the temporary suspension of operations in May 2005 for major renovations, the Hotel started, and continues, to generate cash flows from its operations. As a result, Justice was able to pay some limited partnership distributions in fiscal years 2008 and 2009. However, dueDue to the significant downturn in the San Francisco hotel market beginning in September 2008 and the continued weakness in domestic and international economies, no Partnership distributions were paid in fiscal 2011 and 2010. During such periods, the Company hashad to depend more on the revenues generated from the investment of its cash and marketable securities and from its general partner management fees. Since we have seen some recent improvementsimprovement in the operations of the Hotel, and the San Francisco market in general, the Partnership may beJustice was in a position to considerpay a limited partnership distributionsdistribution in fiscal 2012.December 2012 in an aggregate amount of $1,200,000, of which Portsmouth received $600,000. In December 2011, Justice paid a limited partnership distribution in an aggregate amount of $1,000,000, of which Portsmouth received $500,000. The general partners of Justice will continue to monitor and review the operations and financial results of the Hotel and to set the amount of any future distributions that may be appropriate based on operating results, cash flows and other factors, including establishment of reasonable reserves for debt payments and operating contingencies.
In December 2012, Portsmouth declared a special cash dividend of $0.25 per common share or $184,000, which was paid on December 28, 2012 to shareholders of record as of December 21, 2012.
The new Justice Compensation Agreement that became effective on December 1, 2008, when Portsmouth assumed the role of managing general partner of Justice, has provided additional cash flows to the Company. Under the new Compensation Agreement, Portsmouth is now entitled to 80% of the minimum base fee to be paid to the general partners of $285,000, while under the prior agreement, Portsmouth was entitled to receive only 20% of the minimum base fee. As a result of that new agreement and the increaseincreases in Hotel gross revenues in fiscal 2011,2013, total general partner fees paid to Portsmouth for the year ended June 30, 20112013 increased to $323,000,$401,000, compared to $264,000$366,000 for the year ended June 30, 2010.2012.
To meet its substantial financial commitments for the renovation and transition of the Hotel to a Hilton, Justice had to rely on borrowings to meet its obligations. On July 27, 2005, Justice entered into a first mortgage loan with The Prudential Insurance Company of America in a principal amount of $30,000,000 (the “Prudential Loan”). The term of the Prudential Loan is for 120 months at a fixed interest rate of 5.22% per annum. The Prudential Loan calls for monthly installments of principal and interest in the amount of approximately $165,000, calculated on a 30-year amortization schedule. The Loan is collateralized by a first deed of trust on the Partnership’s Hotel property, including all improvements and personal property thereon and an assignment of all present and future leases and rents. The Prudential Loan is without recourse to the limited and general partners of Justice. The principal balance of the Prudential Loan was $27,176,000$26,043,000 as of June 30, 2011.2013.
On March 27, 2007, Justice entered into a second mortgage loan with Prudential (the “Second Prudential Loan”) in a principal amount of $19,000,000. The term of the Second Prudential Loan is for 100 months and matures on August 5, 2015, the same date as the first Prudential Loan. The Second Prudential Loan is at a fixed interest rate of 6.42% per annum and calls for monthly installments of principal and interest in the amount of $119,000, calculated on a 30-year amortization schedule. The Second Prudential Loan is collateralized by a second deed of trust on the Partnership’s Hotel property, including all improvements and personal property thereon and an assignment of all present and future leases and rents. The Second Prudential Loan is also without recourse to the limited and general partners of Justice. The principal balance of the Second Prudential Loan was $18,003,000$17,370,000 as of June 30, 2011.2013.
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Effective April 29, 2010, the Partnership obtained a modification of its $2,500,000 unsecured revolving line of credit facility with East West Bank (formerly United Commercial Bank) that was to mature on April 30, 2010, and converted that line of credit facility to an unsecured term loan. The modification provides that Justice will pay the $2,500,000 balance on its line of credit facility over a period of four years, to mature on April 30, 2014. This term loan calls for monthly principal and interest payments of $41,000, calculated on a nine-year amortization schedule, with interest only from May 1, 2010 to August 31, 2010. Pursuant to the modification, the annual floating interest rate was reduced by 0.5% to the Wall Street Journal Prime Rate plus 2.5% (with a minimum floor rate of 5.0% per annum). The modification provides for new financial covenants that include specific financial ratios and a return to minimum profitability after June 30, 2011. Management believes that the Partnership has the ability to meet the specific covenants and the Partnership was in compliance with the covenants as of June 30, 2011.2013. As of June 30, 2011,2013, the interest rate was 5.75% and the outstanding balance was $2,202,000.$1,167,000.
Despite the downturns in thean uncertain economy, the Hotel has continued to generate positive cash flows. While the debt service requirements related to the two Prudential loans, as well as the new term loan to pay off the line of credit, may create some additional risk for the Company and its ability to generate cash flows in the future, since the Partnership’s assets had been virtually debt free for a number of years, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements. Management also believes that there is sufficient equity in the Hotel assets to support future borrowings, if necessary, to fund any new capital improvements and other requirements.
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 consolidated statements of operations.
Management believes that its cash, marketable securities, and the cash flows generated from those assets and from partnership distributions and management fees, will be adequate to meet the Company’s current and future obligations.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company’s material financial obligations which also includes interest.
| | | Total | | | Year 1 | | | Year 2 | | | Year 3 | | | Year 4 | | | Year 5 | | | Thereafter | |
| Mortgage notes payable | | $ | 45,179,000 | | | $ | 858,000 | | | $ | 907,000 | | | $ | 960,000 | | | $ | 1,015,000 | | | $ | 41,439,000 | | | $ | - | |
| Other notes payable | | | 2,786,000 | | | | 651,000 | | | | 569,000 | | | | 1,558,000 | | | | 8,000 | | | | - | | | | - | |
| Interest | | | 10,660,000 | | | | 2,721,000 | | | | 2,628,000 | | | | 2,522,000 | | | | 2,395,000 | | | | 394,000 | | | | - | |
| Total | | $ | 58,625,000 | | | $ | 4,230,000 | | | $ | 4,104,000 | | | $ | 5,040,000 | | | $ | 3,418,000 | | | $ | 41,833,000 | | | $ | - | |
| | | Total | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter | |
| Mortgage notes payable | | $ | 43,413,000 | | $ | 960,000 | | $ | 1,015,000 | | $ | 41,438,000 | | $ | - | | $ | - | | $ | - | |
| Other notes payable | | $ | 1,595,000 | | | 1,392,000 | | | 60,000 | | | 45,000 | | | 51,000 | | | 47,000 | | | - | |
| Interest | | $ | 5,546,000 | | | 2,585,000 | | | 2,423,000 | | | 527,000 | | | 9,000 | | | 2,000 | | | - | |
| Total | | $ | 50,554,000 | | $ | 4,937,000 | | $ | 3,498,000 | | $ | 42,010,000 | | $ | 60,000 | | $ | 49,000 | | $ | - | |
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
IMPACT OF INFLATION
Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Prism has the power and ability under the terms of its management agreement to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material.
17
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Not required for smaller reporting companies.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | | PAGE |
| | | |
| | 2019 |
| | | |
| 2012 | | 2120 |
| | | |
| 2012 | 21 |
| |
| Consolidated Statements of Shareholders’ Deficit – For years ended June 30, 2013 and 2012 | 22 |
| | | |
| | 23 |
| | |
| 2012 | | 2423 |
| | | |
| | 2524 - 39 |
18
To the Board of Directors and Shareholders of
Portsmouth Square, Inc.:
We have audited the accompanying consolidated balance sheets of Portsmouth Square, Inc. and its subsidiary (the Company) as of June 30, 20112013 and 2010,2012, and the related consolidated statements of operations, shareholders’ deficit and cash flows for each of the years in the two-year period ended June 30, 2011. The2013. These consolidated financial statements are the responsibility of the Company’s management is responsible for these financial statements.Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Portsmouth Square, Inc. and its subsidiary as of June 30, 20112013 and 2010,2012, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended June 30, 20112013 in conformity with accounting principles generally accepted in the United States of America.
| /s/ Burr Pilger Mayer, Inc. | |
| |
| San Francisco, California | |
September 21, 201118, 2013 | |
CONSOLIDATED BALANCE SHEETS
| As of June 30, | | 2011 | | | 2010 | | | 2013 | | 2012 | |
| | | | | | | | | | | | | | |
| ASSETS | | | | | | | | | | | | | |
| Investment in hotel, net | | $ | 32,089,000 | | | $ | 33,708,000 | | | $ | 34,048,000 | | $ | 32,822,000 | |
| Investment in real estate | | | 973,000 | | | | 973,000 | | | | 973,000 | | | 973,000 | |
| Investment in marketable securities | | | 4,866,000 | | | | 2,323,000 | | | | 3,324,000 | | | 2,683,000 | |
| Other investments, net | | | 5,913,000 | | | | 2,513,000 | | | | 5,160,000 | | | 5,311,000 | |
| Cash and cash equivalents | | | 610,000 | | | | 522,000 | | | | 668,000 | | | 1,032,000 | |
| Accounts receivable, net | | | 1,683,000 | | | | 1,573,000 | | |
| Accounts receivable - hotel, net | | | | 1,957,000 | | | 1,641,000 | |
| Other assets, net | | | 1,976,000 | | | | 1,561,000 | | | | 2,004,000 | | | 2,371,000 | |
| Deferred tax asset | | | 3,199,000 | | | | 4,891,000 | | | | 3,193,000 | | | 3,236,000 | |
| | | | | | | | | | | | | | | | |
| Total assets | | $ | 51,309,000 | | | $ | 48,064,000 | | | $ | 51,327,000 | | $ | 50,069,000 | |
| | | | | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' DEFICIT | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | |
| Accounts payable and other liabilities | | $ | 7,961,000 | | | $ | 7,763,000 | | | $ | 9,176,000 | | $ | 8,438,000 | |
| Due to securities broker | | | 1,835,000 | | | | 226,000 | | | | 579,000 | | | 53,000 | |
| Obligations for securities sold | | | 153,000 | | | | 79,000 | | | | 531,000 | | | 188,000 | |
| Other notes payable | | | 2,786,000 | | | | 3,688,000 | | | | 1,595,000 | | | 2,072,000 | |
| Mortgage notes payable - hotel | | | 45,179,000 | | | | 45,990,000 | | | | 43,413,000 | | | 44,321,000 | |
| | | | | | | | | | | | | | | | |
| Total liabilities | | | 57,914,000 | | | | 57,746,000 | | | | 55,294,000 | | | 55,072,000 | |
| | | | | | | | | | | | | | | | |
| Commitments and contingencies | | | | | | | | | | | | | | | |
| Shareholders' deficit: | | | | | | | | | | | | | | | |
| Common stock, no par value: Authorized shares - 750,000; 734,183 shares issued and outstanding shares | | | 2,092,000 | | | | 2,092,000 | | | | 2,092,000 | | | 2,092,000 | |
| Additional paid-in-capital | | | 916,000 | | | | 916,000 | | | | 916,000 | | | 916,000 | |
| Retained earnings (accumulated deficit) | | | 29,000 | | | | (2,860,000 | ) | |
| Retained earnings | | | | 574,000 | | | 263,000 | |
| Total Portsmouth shareholders' equity | | | 3,037,000 | | | | 148,000 | | | | 3,582,000 | | | 3,271,000 | |
| Noncontrolling interest | | | (9,642,000 | ) | | | (9,830,000 | ) | | | (7,549,000) | | | (8,274,000) | |
| Total shareholders' deficit | | | (6,605,000 | ) | | | (9,682,000 | ) | | | (3,967,000) | | | (5,003,000) | |
| | | | | | | | | | | | | | | | |
| Total liabilities and shareholders' deficit | | $ | 51,309,000 | | | $ | 48,064,000 | | | $ | 51,327,000 | | $ | 50,069,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the years ended June 30, | | 2011 | | | 2010 | |
| | | | | | | |
| Revenue - Hotel | | $ | 36,282,000 | | | $ | 32,680,000 | |
| | | | | | | | | |
| Costs and operating expenses | | | | | | | | |
| Hotel operating expenses | | | (29,299,000 | ) | | | (27,223,000 | ) |
| Depreciation and amortization expense | | | (3,467,000 | ) | | | (4,747,000 | ) |
| General and administrative expense | | | (572,000 | ) | | | (606,000 | ) |
| | | | | | | | | |
| Total costs and operating expenses | | | (33,338,000 | ) | | | (32,576,000 | ) |
| | | | | | | | | |
| Income from operations | | | 2,944,000 | | | | 104,000 | |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| Interest expense | | | (2,806,000 | ) | | | (2,902,000 | ) |
| Net gain (loss) on marketable securities | | | 1,030,000 | | | | (621,000 | ) |
| Net unrealized gain on other investments | | | 3,777,000 | | | | 71,000 | |
| Impairment loss on other investments | | | (356,000 | ) | | | (657,000 | ) |
| Dividend and interest income | | | 486,000 | | | | 162,000 | |
| Trading and margin interest expense | | | (271,000 | ) | | | (292,000 | ) |
| | | | | | | | | |
| Net other income (expense) | | | 1,860,000 | | | | (4,239,000 | ) |
| | | | | | | | | |
| Income (loss) before income taxes | | | 4,804,000 | | | | (4,135,000 | ) |
| Income tax (expense) benefit | | | (1,727,000 | ) | | | 1,181,000 | |
| | | | | | | | | |
| Net income (loss) | | | 3,077,000 | | | | (2,954,000 | ) |
| Less: Net (income) loss attributable to the noncontrolling interest | | | (188,000 | ) | | | 1,234,000 | |
| | | | | | | | | |
| Net Income (loss) attributable to Portsmouth | | $ | 2,889,000 | | | $ | (1,720,000 | ) |
| | | | | | | | | |
| Basic and diluted income (loss) per share attributable to Portsmouth | | $ | 3.93 | | | $ | (2.34 | ) |
| | | | | | | | | |
| Weighted average number of common shares outstanding | | | 734,183 | | | | 734,183 | |
The accompanying notes are an integral part of these consolidated financial statements.
| For the years ended June 30, | | 2013 | | 2012 | |
| | | | | | | | |
| Revenue - Hotel | | $ | 46,565,000 | | $ | 42,462,000 | |
| | | | | | | | |
| Costs and operating expenses | | | | | | | |
| Hotel operating expenses | | | (38,635,000) | | | (33,465,000) | |
| Depreciation and amortization expense | | | (2,257,000) | | | (2,163,000) | |
| General and administrative expense | | | (642,000) | | | (595,000) | |
| | | | | | | | |
| Total costs and operating expenses | | | (41,534,000) | | | (36,223,000) | |
| | | | | | | | |
| Income from operations | | | 5,031,000 | | | 6,239,000 | |
| | | | | | | | |
| Other income (expense) | | | | | | | |
| Interest expense | | | (2,612,000) | | | (2,724,000) | |
| Loss on marketable securities | | | (507,000) | | | (1,045,000) | |
| Net unrealized loss on other investments | | | (116,000) | | | (187,000) | |
| Impairment loss on other investments | | | (35,000) | | | (335,000) | |
| Dividend and interest income | | | 349,000 | | | 385,000 | |
| Trading and margin interest expense | | | (231,000) | | | (232,000) | |
| | | | | | | | |
| Net other expense | | | (3,152,000) | | | (4,138,000) | |
| | | | | | | | |
| Income before income taxes | | | 1,879,000 | | | 2,101,000 | |
| Income tax (expense) benefit | | | (59,000) | | | 1,000 | |
| | | | | | | | |
| Net income | | | 1,820,000 | | | 2,102,000 | |
| Less: Net income attributable to the noncontrolling interest | | | (1,325,000) | | | (1,868,000) | |
| | | | | | | | |
| Net income attributable to Portsmouth | | $ | 495,000 | | $ | 234,000 | |
| | | | | | | | |
| Basic and diluted income per share attributable to Portsmouth | | $ | 0.67 | | $ | 0.32 | |
| | | | | | | | |
| Weighted average number of common shares outstanding | | | 734,183 | | | 734,183 | |
22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
| | | | | | | | | | | | Retained | | | Total | | | | | | | |
| | | | | | Additional | | | Earnings | | | Portsmouth | | | | | | Total | |
| | | Common Stock | | | Paid-in | | | (Accumulated | | | Shareholders' | | | Noncontrolling | | | Shareholders' | |
| | | Shares | | | Amount | | | Capital | | | Deficit) | | | Equity | | | Interest | | | Deficit | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | 734,183 | | | $ | 2,092,000 | | | $ | 916,000 | | | $ | (1,140,000 | ) | | $ | 1,868,000 | | | $ | (8,596,000 | ) | | $ | (6,728,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | (1,720,000 | ) | | | (1,720,000 | ) | | | | | | | (1,720,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noncontrolling interest | | | | | | | | | | | | | | | | | | | | | | | (1,234,000 | ) | | | (1,234,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 734,183 | | | | 2,092,000 | | | | 916,000 | | | | (2,860,000 | ) | | | 148,000 | | | | (9,830,000 | ) | | | (9,682,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | 2,889,000 | | | | 2,889,000 | | | | | | | | 2,889,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noncontrolling interest | | | | | | | | | | | | | | | | | | | | | | | 188,000 | | | | 188,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 734,183 | | | $ | 2,092,000 | | | $ | 916,000 | | | $ | 29,000 | | | $ | 3,037,000 | | | $ | (9,642,000 | ) | | $ | (6,605,000 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS' DEFICIT
| For the years ended June 30, | | 2011 | | | 2010 | |
| Cash flows from operating activities: | | | | | | |
| Net income (loss) | | $ | 3,077,000 | | | $ | (2,954,000 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
| Net unrealized (gain) loss on marketable securities | | | (1,065,000 | ) | | | 2,779,000 | |
| Unrealized gain on other investments | | | (3,777,000 | ) | | | (71,000 | ) |
| Impairment loss on other investments | | | 356,000 | | | | 657,000 | |
| Depreciation and amortization | | | 3,467,000 | | | | 4,747,000 | |
| Changes in assets and liabilities: | | | | | | | | |
| Investment in marketable securities | | | (1,478,000 | ) | | | 885,000 | |
| Accounts receivable | | | (110,000 | ) | | | (302,000 | ) |
| Other assets | | | (490,000 | ) | | | 170,000 | |
| Accounts payable and other liabilities | | | 198,000 | | | | 515,000 | |
| Due to securities broker | | | 1,609,000 | | | | (1,288,000 | ) |
| Obligations for securities sold | | | 74,000 | | | | (620,000 | ) |
| Deferred income taxes | | | 1,692,000 | | | | (1,182,000 | ) |
| Net cash provided by operating activities | | | 3,553,000 | | | | 3,336,000 | |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Payments for hotel furniture, equipment and building improvements | | | (1,773,000 | ) | | | (1,409,000 | ) |
| Other investments | | | 21,000 | | | | (690,000 | ) |
| Net cash used in investing activities | | | (1,752,000 | ) | | | (2,099,000 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from line of credit | | | - | | | | 689,000 | |
| Payments on mortgage notes payable | | | (811,000 | ) | | | (767,000 | ) |
| Payments on other notes payable | | | (902,000 | ) | | | (846,000 | ) |
| Net cash used in financing activities | | | (1,713,000 | ) | | | (924,000 | ) |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | 88,000 | | | | 313,000 | |
| Cash and cash equivalents at the beginning of the year | | | 522,000 | | | | 209,000 | |
| Cash and cash equivalents at the end of the year | | $ | 610,000 | | | $ | 522,000 | |
| | | | | | | | | |
| Supplemental information: | | | | | | | | |
| Income tax refund (paid) | | $ | 7,000 | | | $ | (1,000 | ) |
| Interest paid | | $ | 2,897,000 | | | $ | 3,019,000 | |
| Conversion of line of credit into other notes payable | | $ | - | | | $ | 2,500,000 | |
| Fixed assets acquired through capital leases | | $ | - | | | $ | 755,000 | |
| | | | | | | | | | | Retained | | Total | | | | | | | |
| | | | | Additional | | Earnings | | Portsmouth | | | | | Total | |
| | | Common Stock | | Paid-in | | (Accumulated | | Shareholders' | | Noncontrolling | | Shareholders' | |
| | | Shares | | Amount | | Capital | | Deficit) | | Equity | | Interest | | Deficit | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance at June 30, 2011 | | 734,183 | | $ | 2,092,000 | | $ | 916,000 | | $ | 29,000 | | $ | 3,037,000 | | $ | (9,642,000) | | $ | (6,605,000) | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 234,000 | | | 234,000 | | | 1,868,000 | | | 2,102,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Distributions to noncontrolling interest | | | | | | | | | | | | | | | | | (500,000) | | | (500,000) | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance at June 30, 2012 | | 734,183 | | | 2,092,000 | | | 916,000 | | | 263,000 | | | 3,271,000 | | | (8,274,000) | | | (5,003,000) | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 495,000 | | | 495,000 | | | 1,325,000 | | | 1,820,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Distributions to noncontrolling interest | | | | | | | | | | | | | | | | | (600,000) | | | (600,000) | |
| | | | | | | | | | | | | | | | | | | | | | |
| Dividends paid | | | | | | | | | | | (184,000) | | | (184,000) | | | | | | (184,000) | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance at June 30, 2013 | | 734,183 | | $ | 2,092,000 | | $ | 916,000 | | $ | 574,000 | | $ | 3,582,000 | | $ | (7,549,000) | | $ | (3,967,000) | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the years ended June 30, | | 2013 | | 2012 | |
| Cash flows from operating activities: | | | | | | | |
| Net income | | $ | 1,820,000 | | $ | 2,102,000 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Net unrealized loss on marketable securities | | | 456,000 | | | 798,000 | |
| Unrealized loss on other investments | | | 116,000 | | | 187,000 | |
| Impairment loss on other investments | | | 35,000 | | | 335,000 | |
| Depreciation and amortization | | | 2,257,000 | | | 2,163,000 | |
| Changes in assets and liabilities: | | | | | | | |
| Investment in marketable securities | | | (1,097,000) | | | 1,385,000 | |
| Accounts receivable - hotel, net | | | (316,000) | | | 42,000 | |
| Other assets, net | | | 243,000 | | | (472,000) | |
| Accounts payable and other liabilities | | | 738,000 | | | 477,000 | |
| Due to securities broker | | | 526,000 | | | (1,782,000) | |
| Obligations for securities sold | | | 343,000 | | | 35,000 | |
| Deferred income taxes | | | 43,000 | | | (37,000) | |
| Net cash provided by operating activities | | | 5,164,000 | | | 5,233,000 | |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Payments for hotel furniture, equipment and building improvements | | | (3,359,000) | | | (2,819,000) | |
| Other investments, net | | | - | | | 80,000 | |
| Net cash used in investing activities | | | (3,359,000) | | | (2,739,000) | |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Distributions and dividends to noncontrolling interest | | | (784,000) | | | (500,000) | |
| Payments on mortgage notes payable | | | (908,000) | | | (858,000) | |
| Payments on other notes payable | | | (477,000) | | | (714,000) | |
| Net cash used in financing activities | | | (2,169,000) | | | (2,072,000) | |
| | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (364,000) | | | 422,000 | |
| Cash and cash equivalents at beginning of year | | | 1,032,000 | | | 610,000 | |
| Cash and cash equivalents at end of year | | $ | 668,000 | | $ | 1,032,000 | |
| | | | | | | | |
| Supplemental information: | | | | | | | |
| Income tax (paid) refund | | $ | (119,000) | | $ | 1,000 | |
| Interest paid | | $ | 2,659,000 | | $ | 2,771,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
PORTSMOUTH SQUARE, INC.
NOTES TO THENotes to the CONSOLIDATED FINANCIAL STATEMENTSFinancial Statements
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
As of June 30, 2011, Santa Fe Financial Corporation (“Santa Fe”), a public company, owns approximately 68.8% of the outstanding common shares of Portsmouth Square, Inc. (“Portsmouth” or the “Company”). Santa Fe is a 77%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a public company. InterGroup also directly owns approximately 11.7% of the common stock of Portsmouth.
Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors, a California limited partnership (“Justice” or the “Partnership”). Portsmouth has a 50.0% limited partnership interest in Justice and serves as one of the two general partners. The other general partner, Evon Corporation (“Evon”), served as the managing general partner until December 1, 2008 at which time Portsmouth assumed the role of managing general partner. As discussed in Note 2, theThe financial statements of Justice are consolidated with those of the Company.
As of June 30, 2013, Santa Fe Financial Corporation (“Santa Fe”), a public company, owns approximately 68.8% of the outstanding common shares of Portsmouth Square, Inc. (“Portsmouth” or the “Company”). Santa Fe is an 80.5%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a public company. InterGroup also directly owns approximately 12.9% of the common stock of Portsmouth.
Justice owns a 544-room543-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District(the (the Hotel) and related facilities including a five level underground parking garage. The Hotel is operated by the partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation. Justice also has a Management Agreement with Prism Hospitality L.P. (Prism) to perform the day-to-day management functions of the Hotel.
Justice leased the The parking garage to Evon through September 30, 2008. Effective October 1, 2008, Justice and Evon entered into an Installment Sale Agreement whereby Justice purchased all of Evon’s right, title, and interest in the remaining term of its leasethat is part of the parking garage, which wasHotel property is managed by Ace Parking pursuant to expire on November 30, 2010, and other related assets. Justice also agreed to assume Evon’sa contract with Ace Parking Management, Inc. (“Ace Parking”) for the management of the garage and any other liabilities related to the operation of the garage commencing October 1, 2008. The management agreement with Ace Parking was extended for another 62 months, effective November 1, 2010. The PartnershipPartnership. Justice also leases a day spa onportion of the lobby level of the Hotel to Tru Spa. Portsmouth also receives management fees as a general partner of Justice for its services in overseeing and managing the Partnership’s assets. Those fees are eliminated in consolidation.day spa operator.
Due to the temporary closing of the Hotel to undergo major renovations from May 2005 until January 2006 to transition and reposition the Hotel from a Holiday Inn to a Hilton, and the substantial depreciation and amortization expenses resulting from the renovations and operating losses incurred as the Hotel ramped up operations after reopening, Justice has recorded net losses. These losses were anticipated and planned for as part of the Partnership’s renovation and repositioning plan for Hotel and management considers those net losses to be temporary. The Hotel has been generating positive cash flows from operations since June 20062006. For the fiscal years ended June 30, 2013 and 2012, the Partnership generated net income is expected to improve inof $3,061,000 and $4,110,000, respectively. Hotel operations improved significantly during the future, especially sincelast two fiscal years and depreciation and amortization expenses attributable todecreased as many of the furniture and fixture improvements from the renovation will decrease substantially. Forof the Hotel reached full deprecation during the fiscal year ended June 30, 2011, that trend of net losses was reversed as the Company recorded net income from hotel operations of $710,000. Despite the significant downturn in the economy, management2011.
Management believes that the revenues expected to be generated from the Hotel,operations of the hotel, garage and the Partnership’s leases will be sufficient to meet all of the Partnership’s current and future obligations and financial requirements. Management also believes that there is significant equityvalue in the Hotel to support additional borrowings, if necessary.
In December 2012, Portsmouth declared a special cash dividend of $0.25 per common share or $184,000, which was paid on December 28, 2012 to shareholders of record as of December 21, 2012.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all controlled subsidiaries.Justice Investors. All significant inter-company transactions and balances have been eliminated.
Investment in Hotel, Net
The Hotel property and equipment are stated at cost less accumulated depreciation. Building improvements are being depreciated on a straight-line basis over their useful lives ranging from 3 to 39 years. Furniture, fixtures, and equipment are being depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years.
Repairs and maintenance are charged to expense as incurred. Costs of significant renewals and improvements are capitalized and depreciated over the shorter of its remaining estimated useful life or life of the asset. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts; any resulting gain or loss is included in other income (expenses).
The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset, including any intangible assets associated with that asset, exceeds its estimated undiscounted net cash flow, before interest, the Partnership will recognize an impairment loss equal to the difference between its carrying amount and its estimated fair value. If impairment is recognized, the reduced carrying amount of the asset will be accounted for as its new cost. For a depreciable asset, the new cost will be depreciated over the asset’s remaining useful life. Generally, fair values are estimated using discounted cash flow, replacement cost or market comparison analyses. The process of evaluating for impairment requires estimates as to future events and conditions, which are subject to varying market and economic factors. Therefore, it is reasonably possible that a change in estimate resulting from judgments as to future events could occur which would affect the recorded amounts of the property. No impairment losses were recorded for the years ended June 30, 20112013 and 2010.2012.
Investment in Marketable Securities
Marketable securities are stated at fair 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 consolidated statements of operations.
Other Investments, Net
Other investments include non-marketable securities that are carried(carried at cost, net of any impairment lossimpairments loss), non –marketable warrants (carried at fair value) and non-marketable warrantscertain convertible preferred securities, received in exchange for debt instruments, carried at a book basis, initially determined using the estimated fair value.value on the exchange date. The Company has no significant influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the years ended June 30, 20112013 and 2010,2012, the Company recorded impairment losses related to other investments of $356,000$35,000 and $ 657,000,335,000, respectively. As of June 30, 2013 and 2012, the allowance for impairment losses was $1,679,000 and $1,644,000, respectively.
Derivative Financial Instruments
The Company has investments in stock warrants that are considered derivative instruments.
Derivative financial instruments, as defined in ASC 815-10-15-83, “Derivatives and Hedging”(pre-Codification SFAS No. 133 Accounting for Derivative Financial Instruments and Hedging Activities ), consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value on the Company’s consolidated balance sheet with the related unrealized gain or loss recorded in the Company’s consolidated statement of operations. The Company used the Black-Scholes option valuation model to estimate the fair value these instruments which requires management to make significant assumptions including trading volatility, estimated terms, and risk free rates. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based models are highly volatile and sensitive to changes in the trading market price of the underlying common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s consolidated statement of operations will reflect the volatility in these estimate and assumption changes.
26
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased and are carried at cost, which approximates fair value.
Accounts Receivable - Hotel, Net
Accounts receivable from Hotel customers are carried at cost less an allowance for doubtful accounts that is based on management’s assessment of the collectability of accounts receivable. The Company extends unsecured credit to its customers but mitigates the associated credit risk by performing ongoing credit evaluations of its customers. As of June 30, 2013 and 2012, the balance of allowance for doubtful accounts was $3,000 for each respective year.
Other Assets, Net
Other assets include prepaid insurance, loan fees, franchise fees, license fees and other miscellaneous assets. Loan fees are stated at cost and amortized over the term of the loan using the effective interest method. Franchise fees are stated at cost and amortized over the life of the agreement (15(15 years). License fees are stated at cost and amortized over 10 years.
Income Taxes
Deferred income taxes are calculated under the liability method. Deferred income tax assets and liabilities are based on differences between the financial statement and tax basis of assets and liabilities at the current enacted tax rates. Changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation allowances are established for certain deferred tax assets where realization is not likely.
Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions.
Due to Securities Broker
Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.
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 statement of operations.
Accounts Payable and Other Liabilities
Accounts payable and other liabilities include trade payables, advance deposits and other liabilities.
Fair Value of Financial Instruments
The Company accounts for its assets and liabilities under accounting standards of fair value measurement. Under these standards, fairFair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Accounting standards for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:
Level 1–inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2–inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3–inputs to the valuation methodology are unobservable and significant to the fair value.
Environmental Remediation Costs
Liabilities for environmental remediation costs are recorded and charged to expense when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Recoveries of such costs are recognized when received. As of June 30, 2011 and 2010, there were no liabilities for environmental remediation.
Revenue Recognition
Room revenue is recognized on the date upon which a guest occupies a room and/or utilizes the Hotel’s services. Food and beverage revenues are recognized upon delivery. Garage revenue is recognized when a guest uses the garage space. The Company records a liability for payments collected in advance of revenue recognition. This liability is included in Accounts payable and other liabilities.
Rental revenue is recognized on the straight-line method of accounting whereby contractual rent payment increases are recognized evenly over the lease term, regardless of when the rent payments are received by Justice. The leases contain provisions for base rent plus a percentage of the lessees’ revenues, which are recognized when earned.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were $337,000$419,000 and $278,000$415,000 for the years ended June 30, 20112013 and 2010,2012, respectively.
Basic and Diluted Income (Loss) per Share
Basic income (loss) per share is calculated based upon the weighted average number of common shares outstanding during each fiscal year. As of June 30, 20112013 and 2010,2012, the Company did not have any potentially dilutive securities outstanding.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP)(U.S. GAAP) requires 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.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Improving Disclosures About Fair Value Measurements.” Effective January 1, 2010, ASU 2010-06 requires the separate disclosure of significant transfers into and out of the Level 1 and Level 2 categories and the reasons for such transfers, and also requires fair value measurement disclosures for each class of assets and liabilities as well as disclosures about valuation techniques and inputs used for recurring and nonrecurring Level 2 and Level 3 fair value measurements. The Company adopted this amendment during fiscal year 2010, which resulted in additional disclosures in the Company’s condensed consolidated financial statements. Effective in fiscal years beginning after December 15, 2010, ASU 2010-06 also requires Level 3 disclosure of purchases, sales, issuances and settlements activity on a gross rather than a net basis.
The Consolidation Topic of the FASB ASC 810 provides a new accounting provision regarding the consolidation of variable interest entities (“VIEs”). The new accounting provision modifies the existing quantitative guidance used in determining the primary beneficiary of a VIE by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. Additionally, the accounting provision requires an ongoing reconsideration of the primary beneficiary and provides a framework for the events that triggers a reassessment of whether an entity is a VIE. The new accounting update became effective for the Company on July 1, 2010. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (International Financial Reporting Standard).” ASU 2011-04 attempts to improve the comparability of fair value measurements disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. Amendments in ASU 2011-04 clarify the intent of the application of existing fair value measurement and disclosure requirements, as well as change certain measurement requirements and disclosures. ASU 2011-04 is effective for the Company beginning January 1, 2012 and will be applied on a prospective basis. We do not believe that the adoption of ASU 2011-04 will have a material effect on our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 changes the way other comprehensive income (“OCI”) appears within the financial statements. Companies will be required to show net income, OCI and total comprehensive income in one continuous statement or in two separate but consecutive statements. Components of OCI may no longer be presented solely in the statement of changes in shareholders’ equity. Any reclassification between OCI and net income will be presented on the face of the financial statements.deficit. ASU 2011-05 iswas effective for the Company beginning JanuaryJuly 1, 2012. The adoptionFor the year ended June 30, 2013 and 2012, the Company had no components of ASU 2011-05 will not impact the measurement ofComprehensive Income other than net income itself.
In September 2011, the FASB issued ASU No. 2011-09, Compensation - Retirement Benefits - Multiemployer Plans (Subtopic 715-80) - Disclosures about an Employer's Participation in a Multiemployer Plan, which requires employers that participate in multiemployer pension plans to provide additional quantitative and qualitative disclosures in order to provide more information about an employer's involvement in multiemployer pension plans. Although the majority of the amendments in this ASU apply only to multiemployer pension plans, there are also amendments that require changes in disclosures for multiemployer plans that provide postretirement benefits other than pensions. The Company adopted this ASU on June 30, 2012. This ASU impacted the Company's disclosures only and did not have any impact on the Company's financial position, results of operations, or other comprehensive income.cash flows. The disclosures required by this ASU are presented in Note 17 and Note 18 to the financial statements.
NOTE 2 - JUSTICE INVESTORS
On July 14, 2005, the FASB issued Staff Position (FSP) SOP 78-9-1, “Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5” which was codified into ASC Topic 910-810, “Real Estate – General – Consolidation”, to amend the guidance in AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures” (SOP 78-9) to be consistent with the consensus in Emerging Issues Task Force Issue No. 04-5 “Determining Whether a General Partner, or General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” which was codified into ASC 810-20, “Consolidation”, eliminated the concept of “important rights”(ASC Topic 970-810) and replaces it with the concepts of “kick out rights” and “substantive participating rights”. In accordance with guidance set forth in ASC Topic 970-20, Portsmouth has applied the principles of accounting applicable for investments in subsidiaries due to its substantial limited partnership interest and general partnership rights and has consolidated the financial statements of Justice with those of the Company effective as of July 1, 2006. For the years ended June 30, 20112013 and 2010,2012, the results of operations for Justice were consolidated with those of the Company.
On December 1, 2008, Portsmouth and Evon, as the two general partners of Justice, entered into a 2008 Amendment to the Limited Partnership Agreement (the “Amendment”) that provides for a change in the respective roles of the general partners. Pursuant to the Amendment, Portsmouth assumed the role of Managing General Partner and Evon continued on as the Co-General Partner of Justice. The Amendment was ratified by approximately 98%98% of the limited partnership interests. The Amendment also provides that future amendments to the Limited Partnership Agreement may be made only upon the consent of the general partners and at least seventy five percent (75%(75%) of the interests of the limited partners. Consent of at least 75% of the interests of the limited partners will also be required to remove a general partner pursuant to the Amendment.
Effective November 30, 2010, the general and limited partners of Justice Investors entered into an Amended and Restated Agreement of Limited Partnership, which was approved and ratified by more than 98% of the limited partnership interests of Justice. The Partnership Agreement was amended and restated in its entirety to comply with the new provisions of the California Corporations Code known as the “Uniform Limited Partnership Act of 2008”. The amendment did not result in any material modifications of the rights or obligations of the general and limited partners.
Concurrent with the Amendment to the Limited Partnership Agreement, a new General Partner Compensation Agreement (the “Compensation Agreement”) was entered into on December 1, 2008, among Justice, Portsmouth and Evon to terminate and supersede all prior compensation agreement for the general partners.partners of Justice Investors. Pursuant to the Compensation Agreement, the general partners of Justice will be entitled to receive an amount equal to 1.5%1.5% of the gross annual revenues of the Partnership (as defined), less $75,000$75,000 to be used as a contribution toward the cost of Justice engaging an asset manager. In no event shall the annual compensation be less than a minimum base of approximately $285,000,$285,000, with eighty percent (80%(80%) of that amount being allocated to Portsmouth for its services as managing general partner of Justice and twenty percent (20%(20%) allocated to Evon as the co-general partner. Compensation earned by the general partners in each calendar year in excess of the minimum base, will be payable in equal fifty percent (50%(50%) shares to Portsmouth and Evon.
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NOTE 3 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
| | | | | | Accumulated | | | Net Book | | | | | | Accumulated | | Net Book | |
| June 30, 2011 | | Cost | | | Depreciation | | | Value | | |
| June 30, 2013 | | | Cost | | Depreciation | | Value | |
| | | | | | | | | | | | | | | | | | | | |
| Land | | $ | 1,124,000 | | | $ | - | | | $ | 1,124,000 | | | $ | 1,124,000 | | $ | - | | $ | 1,124,000 | |
| Furniture and equipment | | | 19,583,000 | | | | (17,076,000 | ) | | | 2,507,000 | | | | 22,270,000 | | | (19,312,000) | | | 2,958,000 | |
| Building and improvements | | | 46,982,000 | | | | (18,524,000 | ) | | | 28,458,000 | | | | 50,473,000 | | | (20,507,000) | | | 29,966,000 | |
| | | $ | 67,689,000 | | | $ | (35,600,000 | ) | | $ | 32,089,000 | | | $ | 73,867,000 | | $ | (39,819,000) | | $ | 34,048,000 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | Accumulated | | | Net Book | | |
| June 30, 2010 | | Cost | | | Depreciation | | | Value | | |
| | | | | | | | | | | | | | |
| Land | | $ | 1,124,000 | | | $ | - | | | $ | 1,124,000 | | |
| Furniture and equipment | | | 18,392,000 | | | | (14,711,000 | ) | | | 3,681,000 | | |
| Building and improvements | | | 46,400,000 | | | | (17,497,000 | ) | | | 28,903,000 | | |
| | | $ | 65,916,000 | | | $ | (32,208,000 | ) | | $ | 33,708,000 | | |
| | | | | | Accumulated | | Net Book | |
| June 30, 2012 | | Cost | | Depreciation | | Value | |
| | | | | | | | | | | |
| Land | | $ | 1,124,000 | | $ | - | | $ | 1,124,000 | |
| Furniture and equipment | | | 20,855,000 | | | (18,187,000) | | | 2,668,000 | |
| Building and improvements | | | 48,529,000 | | | (19,499,000) | | | 29,030,000 | |
| | | $ | 70,508,000 | | $ | (37,686,000) | | $ | 32,822,000 | |
Depreciation expense for the years ended June 30, 2011 and 2010 were $3,407,000 and $4,692,000 respectively.
The Partnership leases certain equipment under agreements that are classified as capital leases. The cost of equipment under capital leases was $2,131,000 and $2,108,000$2,131,000 at June 30, 20112013 and 2010, respectively.2012. The accumulated depreciation on capital leases was $1,405,000$1,930,000 and $1,046,000$1,668,000 as of June 30, 20112013 and 2010,2012, respectively.
NOTE 4 – INVESTMENT IN REAL ESTATE
In August 2007, the Company agreed to acquire 50%50% interest in Intergroup Uluniu, Inc., a Hawaiian corporation and a 100%100% owned subsidiary of InterGroup, for $973,000,$973,000, which represents an amount equal to the costs paid by InterGroup for the acquisition and carrying costs of approximately two acres of unimproved land held for development located in Maui, Hawaii. As a related party transaction, the fairness of the financial terms of the transaction were reviewed and approved by the independent director of the Company.
NOTE 5 - INVESTMENT IN MARKETABLE SECURITIES
The Company’s investment in marketable securities consists primarily of corporate equities. The Company has also invested in corporate bonds and income producing securities, which may include interests in real estate based companies and REITs, where financial benefit could insure to its shareholders through income and/or capital gain.
At June 30, 20112013 and 2010,2012, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:
| | | | | | Gross | | | Gross | | | Net | | | Fair | |
| Investment | | Cost | | | Unrealized Gain | | | Unrealized Loss | | | Unrealized Gain | | | Value | |
| | | | | | | | | | | | | | | | |
| As of June 30, 2011 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Corporate Equities | | $ | 3,336,000 | | | $ | 2,084,000 | | | $ | (554,000 | ) | | $ | 1,530,000 | | | $ | 4,866,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2010 | | | | | | | | | | | | | | | | | | | | |
| Corporate Equities | | $ | 2,015,000 | | | $ | 544,000 | | | $ | (236,000 | ) | | $ | 308,000 | | | $ | 2,323,000 | |
| | | | | | Gross | | Gross | | Net | | Fair | |
| Investment | | Cost | | Unrealized Gain | | Unrealized Loss | | Unrealized Gain | | Value | |
| | | | | | | | | | | | | | | | | |
| As of June 30, 2013 | | | | | | | | | | | | | | | | |
| Corporate | | | | | | | | | | | | | | | | |
| Equities | | $ | 3,104,000 | | $ | 992,000 | | $ | (772,000) | | $ | 220,000 | | $ | 3,324,000 | |
| | | | | | | | | | | | | | | | | |
| As of June 30, 2012 | | | | | | | | | | | | | | | | |
| Corporate | | | | | | | | | | | | | | | | |
| Equities | | $ | 2,118,000 | | $ | 1,292,000 | | $ | (727,000) | | $ | 565,000 | | $ | 2,683,000 | |
As of June 30, 20112013 and 2010,2012, the Company had $412,000$637,000 and $165,000,$579,000, respectively, of unrealized losses related to securities held for over one year.
Net gain (loss)loss on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses).losses. Below is the composition of the two components for the years ended June 30, 20112013 and 2010,2012, respectively.
| For the year ended June 30, | | 2011 | | | 2010 | |
| Realized (loss) gain on marketable securities | | $ | (35,000 | ) | | $ | 2,158,000 | |
| Unrealized gain (loss) on marketable securities | | | 1,065,000 | | | | (2,779,000 | ) |
| | | | | | | | | |
| Net gain (loss) on marketable securities | | $ | 1,030,000 | | | $ | (621,000 | ) |
| For the year ended June 30, | | 2013 | | 2012 | |
| Realized loss on marketable securities | | $ | (51,000) | | $ | (247,000) | |
| Unrealized loss on marketable securities | | | (456,000) | | | (798,000) | |
| | | | | | | | |
| Net loss on marketable securities | | $ | (507,000) | | $ | (1,045,000) | |
NOTE 6 – OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the Securities Investment Committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses.
Other investments, net consist of the following:
| Type | | June 30, 2011 | | | June 30, 2010 | | | June 30, 2013 | | June 30, 2012 | |
| Preferred stock - Comstock, at cost | | $ | 4,410,000 | | | $ | - | | | $ | 4,410,000 | | $ | 4,410,000 | |
| Private equity hedge fund, at cost | | | 996,000 | | | | 1,352,000 | | | | 646,000 | | | 681,000 | |
| Corporate debt and equity instruments, at cost | | | 201,000 | | | | 925,000 | | | | 101,000 | | | 101,000 | |
| Warrants - at fair value | | | 306,000 | | | | 236,000 | | | | 3,000 | | | 119,000 | |
| | | $ | 5,913,000 | | | $ | 2,513,000 | | | $ | 5,160,000 | | $ | 5,311,000 | |
During the years ended June 30, 2011 and 2010, the Company recorded impairment losses of $356,000 and $657,000, respectively.
On October 20, 2010, as part of a debt restructuring of one of its investments, the Company exchanged approximately $4,410,000$4,410,000 in notes, convertible notes and debt instruments that it held in Comstock Mining, Inc. (“Comstock” – OTCBB:now NYSE MKT: LODE)) for 4,410 shares ($1,000 stated value) of newly created 7 1/2% Series A-1 Convertible Preferred Stock (the “A-1 Preferred”) of Comstock. Prior to the exchange, those notes and convertible debt instruments had a carrying value of $724,000,$724,000, net of impairment adjustments. The Company accounted for the transaction as an exchange of its debt securities and recorded the new instruments (A-1 Preferred) received based on their fair value. The Company estimated the fair value of the A-1 Preferred at $1,000$1,000 per share, which was the stated value of the instrument, for a total of $4,410,000. The fair value of the A-1 Preferred had a similar value to the Series B preferred stock financing (stated value of $1,000 per share) by which Comstock concurrently raised $35.7$35.7 million in new capital from other investors in October 2010. The Company recorded an unrealized gain during fiscal year 2011 of $3,686,000$3,686,000 related to the preferred stock received in exchange for debt as part of the debt restructuring. This unrealized gain is included in the net unrealized gain on other investments in the Company’s consolidated statements of operations for the year ended June 30, 2011.
As part of that transaction, the Company’s parent companies, Santa Fe and InterGroup Corporation, also exchanged approximately $2,249,000$2,249,000 and $6,572,000$6,572,000 in notes, convertible notes and debt instruments for 2,249 and 6,572 shares of A-1 Preferred, respectively. The Company’s Chairman and President also exchanged approximately $7,681,000$7,681,000 in notes and convertible notes held personally by him for 7,681 shares of A-1 Preferred. Together, the Company, Santa Fe, InterGroup and Mr. Winfield will constitute all of the holders of the A-1 Preferred.
Each share of A-1 Preferred has a stated value of $1,000 per share and a liquidation and change of control preference equal to the stated value plus accrued and unpaid dividends. Commencing January 1, 2011, the holders are entitled to semi-annual dividends at a rate of 7.5%7.5% per annum, payable in cash, common stock, preferred stock or any combination of the foregoing, at the election of Comstock. At the holder’s election, each share of A-1 Preferred is convertible at a fixed conversion rate (subject to anti-dilution) into 1,536 shares of common stock of Comstock, therefore converting into common stock at a conversion price of $0.6510.$0.6510. Each share of A-1 Preferred will entitle the holder to vote with the holders of common stock as a single class on all matters submitted to the vote of the common stock (on an as converted basis) and, for purposes of voting only, each share of A-1 Preferred shall be entitled to five times the number of votes per common share to which it would otherwise be entitled. Each share of A-1 Preferred shall entitle its holder to one (1) vote in any matter submitted to vote of holders of Preferred Stock, voting as a separate class. The A-1 Preferred, in conjunction with the other series of newly created Preferred Stock of Comstock, also has certain rights requiring consent of the Preferred Stock holders for Comstock to take certain corporate and business actions. The holders will have registration rights with respect to the shares of common stock underlying the A-1 Preferred and also preemptive rights. The foregoing description of the A-1 Preferred and the specific terms of the A-1 Preferred is qualified in its entirety by reference to the provisions of the Series A Securities Purchase Agreement, the Certificate of Designation of Preferences and Rights and Limitations of 7 1/2% Series A-1 Convertible Preferred Stock and the Registration Rights Agreement for the Series A Preferred Stock, which were filed as exhibits to the Company’s Current Report on Form 8-K, dated October 20, 2010.
As of June 30, 20112013 and 2010,2012, the Company had investments in corporate debt and equity instruments which had attached warrants that were considered derivative instruments. These warrants have an allocated cost basis of $165,000$165,000 as of June 30, 20112013 and 20102012 and a fair market value of $306,000$3,000 and $236,000$119,000 as of June 30, 20112013 and 2010,2012, respectively. During the years ended June 30, 20112013 and 2010,2012, the Company had an unrealized gainloss of $91,000$116,000 and $71,000,$187,000, respectively, related to these warrants.
NOTE 7 - FAIR VALUE MEASUREMENTS
The carrying values of the Company’s non-financialfinancial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities, due to securities broker and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
The assets measured at fair value on a recurring basis are as follows:
| As of June 30, 2011 | | | | | | | | | | | | | |
| As of June 30, 2013 | | | | | | | | | | | | | | |
| Assets: | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total | |
| Cash and cash equivalents | | $ | 610,000 | | | $ | - | | | $ | - | | | $ | 610,000 | | |
| Cash equivalents - money market | | | $ | 3,000 | | $ | - | | $ | - | | $ | 3,000 | |
| Other investments - warrants | | | | | | | 306,000 | | | | - | | | | 306,000 | | | | - | | | - | | | 3,000 | | | 3,000 | |
| Investment in marketable securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic materials | | | 1,687,000 | | | | | | | | | | | | 1,687,000 | | | | 1,513,000 | | | - | | | - | | | 1,513,000 | |
| Investment funds | | | 924,000 | | | | | | | | | | | | 924,000 | | |
| Services | | | 815,000 | | | | | | | | | | | | 815,000 | | |
| Technology | | | | 622,000 | | | - | | | - | | | 622,000 | |
| Financial services | | | | 526,000 | | | - | | | - | | | 526,000 | |
| REITs and real estate companies | | | 587,000 | | | | | | | | | | | | 587,000 | | | | 255,000 | | | - | | | - | | | 255,000 | |
| Financial services | | | 443,000 | | | | | | | | | | | | 443,000 | | |
| Other | | | 410,000 | | | | | | | | | | | | 410,000 | | | | 408,000 | | | - | | | - | | | 408,000 | |
| | | | 4,866,000 | | | | | | | | - | | | | 4,866,000 | | | | 3,324,000 | | | - | | | - | | | 3,324,000 | |
| | | $ | 5,476,000 | | | $ | 306,000 | | | $ | - | | | $ | 5,782,000 | | | $ | 3,327,000 | | $ | - | | $ | 3,000 | | $ | 3,330,000 | |
| | | | | | | | | | | | | | | | | | |
| As of June 30, 2010 | | | | | | | | | | | | | | | | | |
| Assets: | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | |
| Cash and cash equivalents | | $ | 522,000 | | | $ | - | | | $ | - | | | $ | 522,000 | | |
| Other investments - warrants | | | | | | | 236,000 | | | | - | | | | 236,000 | | |
| Investment in marketable securities: | | | | | | | | | | | | | | | | | |
| Investment funds | | | 751,000 | | | | | | | | | | | | 751,000 | | |
| REITs | | | 493,000 | | | | | | | | | | | | 493,000 | | |
| Healthcare | | | 276,000 | | | | | | | | | | | | 276,000 | | |
| Services | | | 261,000 | | | | | | | | | | | | 261,000 | | |
| Financial services | | | 214,000 | | | | | | | | | | | | 214,000 | | |
| Other | | | 328,000 | | | | | | | | | | | | 328,000 | | |
| | | | 2,323,000 | | | | | | | | - | | | | 2,323,000 | | |
| | | $ | 2,845,000 | | | $ | 236,000 | | | $ | - | | | $ | 3,081,000 | | |
| As of June 30, 2012 | | | | | | | | | | | | | |
| Assets: | | Level 1 | | Level 2 | | Level 3 | | Total | |
| Cash equivalents - money market | | $ | 3,000 | | $ | - | | $ | - | | $ | 3,000 | |
| Other investments - warrants | | | - | | | - | | | 119,000 | | | 119,000 | |
| Investment in marketable securities: | | | | | | | | | | | | | |
| Basic materials | | | 1,660,000 | | | - | | | - | | | 1,660,000 | |
| Technology | | | 266,000 | | | - | | | - | | | 266,000 | |
| Financial services | | | 228,000 | | | - | | | - | | | 228,000 | |
| REITs and real estate companies | | | 177,000 | | | - | | | - | | | 177,000 | |
| Other | | | 352,000 | | | - | | | - | | | 352,000 | |
| | | | 2,683,000 | | | - | | | - | | | 2,683,000 | |
| | | $ | 2,686,000 | | $ | - | | $ | 119,000 | | $ | 2,805,000 | |
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date. The fair value of the warrants was determined based upon a Black-Scholes option valuation model.
Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments in non-marketable securities,” that were initially measured at cost and have been written down to fair value as a result of impairment or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments). The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:
| | | | | | | | | | | | | | | Net gain for the year | | | | | | | | | | | | | | | Net loss for the year | |
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | June 30, 2011 | | | ended June 30, 2011 | | | Level 1 | | Level 2 | | Level 3 | | June 30, 2013 | | ended June 30, 2013 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other non-marketable investments | | $ | - | | | $ | - | | | $ | 5,607,000 | | | $ | 5,607,000 | | | $ | 3,330,000 | | | $ | - | | $ | - | | $ | 5,157,000 | | $ | 5,157,000 | | $ | (35,000) | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Net loss for the year | | |
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | June 30, 2010 | | | ended June 30, 2010 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Other non-marketable investments | | $ | - | | | $ | - | | | $ | 2,277,000 | | | $ | 2,277,000 | | | $ | (657,000 | ) | |
| | | | | | | | | | | | | | | Net loss for the year | |
| Assets | | Level 1 | | Level 2 | | Level 3 | | June 30, 2012 | | ended June 30, 2012 | |
| | | | | | | | | | | | | | | | | |
| Other non-marketable investments | | $ | - | | $ | - | | $ | 5,192,000 | | $ | 5,192,000 | | $ | (335,000) | |
Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. When determining the fair value of these investments on a non-recurring basis, the Company uses valuation techniques such as the market approach and the unobservable inputs include factors such as conversion ratios and the stock price of the underlying convertible instruments. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
NOTE 8 – OTHER ASSETS, NET
Other assets consist of the following as of June 30:
| | | 2011 | | | 2010 | | | 2013 | | 2012 | |
| Inventory | | | 543,000 | | | | 534,000 | | |
| Inventory - hotel | | | $ | 918,000 | | $ | 907,000 | |
| Prepaid expenses | | | 939,000 | | | | 557,000 | | | | 581,000 | | | 945,000 | |
| Miscellaneous assets, net | | | 494,000 | | | | 470,000 | | | | 505,000 | | | 519,000 | |
| | | | | | | | | | | | | | | | |
| Total other assets | | $ | 1,976,000 | | | $ | 1,561,000 | | | $ | 2,004,000 | | $ | 2,371,000 | |
Amortization expense of loan fees and franchise costs for the years ended June 30, 20112013 and 20102012 was $60,000 and $55,000, respectively.$72,000 each year.