UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x
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ANNUAL
REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2012
or
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¨
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TRANSITION
REPORT PURSUANT
TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
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For the transition period from _______
to_________
Commission File Number 0-4057
PORTSMOUTH
SQUARE, INC
.
(Exact name of registrant as specified
in its charter)
CALIFORNIA
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94-1674111
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(State or other jurisdiction of
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(I.R.S. Employer
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Incorporation or organization)
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Identification No.)
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10940 Wilshire Blvd., Suite 2150, Los Angeles,
California 90024
(Address of principal executive offices)(Zip
Code)
(310) 889-2500
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, No Par Value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Act.
¨
Yes
x
No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
x
Yes
¨
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
x
Yes
¨
No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer
¨
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
x
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act):
¨
Yes
x
No
The aggregate market value of the Common Stock, no par value,
held by non-affiliates computed by reference to the average bid and asked price on December 30, 2011 (the last business day of
registrant’s most recently completed second fiscal quarter ended December 31, 2011) was $2,156,503.
The number of shares outstanding of registrant’s Common
Stock, as of September 5, 2012, was 734,183.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
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Page
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PART I
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Item 1.
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Business.
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4
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Item 1A.
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Risk Factors.
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10
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Item 1B.
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Unresolved Staff Comments.
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10
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Item 2.
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Properties.
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10
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Item 3.
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Legal Proceedings.
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11
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Item 4.
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Mine Safety Disclosures
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11
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
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12
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Item 6.
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Selected Financial Data.
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12
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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13
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk.
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18
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Item 8.
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Financial Statements and Supplementary Data.
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18
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
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39
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Item 9A.
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Controls and Procedures.
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39
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Item 9B.
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Other Information.
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39
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance.
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40
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Item 11.
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Executive Compensation.
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43
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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45
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence.
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46
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Item 14.
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Principal Accounting Fees and Services
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47
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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48
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Signatures
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50
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain “forward-looking
statements” within the meaning of the Private Securities Litigation reform Act of 1995. Forward-looking statements give
our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They contain words such as “anticipate,” “estimate,” “expect,”
“project,” “intend,” “plan,” “believe” “may,” “could,”
“might” and other words or phrases of similar meaning in connection with any discussion of future operating or financial
performance. From time to time we also provide forward-looking statements in our Forms 10-Q and 8-K, Annual Reports to Shareholders,
press releases and other materials we may release to the public. Forward looking statements reflect our current views about future
events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause actual results or outcomes
to differ materially from those expressed in any forward looking statement. Consequently, no forward looking statement can be
guaranteed and our actual future results may differ materially.
Factors that may cause actual results to differ materially
from current expectations include, but are not limited to:
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risks
associated with
the lodging industry,
including competition,
increases in wages,
labor relations,
energy and fuel
costs, actual and
threatened pandemics,
actual and threatened
terrorist attacks,
and downturns in
domestic and international
economic and market
conditions, particularly
in the San Francisco
Bay area;
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risks
associated with
the real estate
industry, including
changes in real
estate and zoning
laws or regulations,
increases in real
property taxes,
rising insurance
premiums, costs
of compliance with
environmental laws
and other governmental
regulations;
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the
availability and
terms of financing
and capital and
the general volatility
of securities markets;
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changes
in the competitive
environment in
the hotel industry;
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risks
related to natural
disasters;
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other
risk factors discussed
below in this Report.
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We caution you not to place undue reliance on these forward-looking
statements, which speak only as to the date hereof. We undertake no obligation to publicly update any forward looking statements,
whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures
we make on related subjects on our Forms 10-K, 10-Q, and 8-K reports to the Securities and Exchange Commission.
PART I
Item 1. Business.
GENERAL
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, 2012,
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 79.9%-owned subsidiary of The InterGroup Corporation (“InterGroup”),
a public company (NASDAQ: INTG). InterGroup also directly owns approximately 12.5% 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 the Managing General Partner. The other general
partner is Evon Corporation (“Evon”). Justice owns a 543 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 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, 2012,
there were 113 limited partners in Justice, including Portsmouth and Evon.
Historically, the Partnership’s most significant source
of income was a lease between Justice and Holiday Inn for the Hotel portion of the property. That lease was amended in 1995, and
ultimately assumed by Felcor Lodging Trust, Inc. (“Felcor”) in 1998. The lease of the Hotel to Felcor was terminated
effective June 30, 2004. With the termination of the Hotel lease, Justice assumed the role of an owner/operator with the assistance
of a third party management company. Effective July 1, 2004, the Hotel was operated as a Holiday Inn Select brand hotel pursuant
to a short-term franchise agreement until it was temporarily closed for major renovations on May 31, 2005. The Hotel was reopened
on January 12, 2006 to operate as a full service Hilton 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.
Until September 30, 2008, the Partnership also derived income
from the lease of the parking garage to Evon. As discussed below, 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 at which time the garage
became a part of the Partnership’s operations. Justice also leases a portion of the lobby level of the Hotel to a day spa
operator. Portsmouth also receives management fees as the Managing General Partner of Justice for its services in overseeing and
managing the Partnership’s assets and limited partnership distributions as may be declared by Justice.
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 Agreement
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 the parking garage, which was to expire on November 30, 2010, and other related assets. The partnership also agreed
to assume Evon’s 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 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.
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. The prior Excess Profit Fee entitled Ace to receive three
percent of NOI in excess of $150,000.
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.
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,
2012 and 2011, the general partners were paid approximately $562,000 and $468,000 respectively, under the applicable compensation
agreements. Of those amounts, approximately $366,000 and $323,000 was paid to Portsmouth for fiscal 2012 and 2011.
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” – 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, 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 in an exchange for debt 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.
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 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, 2012 and 2011. 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. Management fees paid to Prism during the years ended June 30, 2012 and 2011 were $626,000 and $469,000,
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 the parking garage, which was to expire on November 30, 2010, and other related assets. The Partnership also agreed to assume
Evon’s 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 garage is currently operated by Ace Parking for the Partnership
pursuant to a Parking Facilities Management Agreement (the “Parking Agreement”). 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 expires 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.
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
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. The Hotel is 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
some 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 could 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 we have seen some signs of recovery in the
San Francisco market during the 2012 fiscal year, like all hotels, we will remain subject to the uncertain domestic and global
economic environment.
In this highly competitive market, we continue with our efforts
to upgrade our guest rooms and facilities and explore new and innovative ways to differentiate the Hotel from its competition.
During fiscal 2012, we completed several projects to enhance the guest experience, including our new executive lounge on the 26
th
floor of the Hotel and the upgrading of the lobby and common areas of the Hotel. We have also made improvements to our restaurant
facilities and food and beverage services and have upgraded internet connectivity throughout the Hotel and are providing more
technological amenities for our guests. We continue to make the Hotel more energy efficient and have enhanced our recycling program
to support the concept of a greener world while reducing our operating costs. The Hotel also became a groundbreaker in implementing
Hilton’s Huanying (“Welcome”) program which features a tailored experience for Chinese travelers. We have also
taken important steps to further develop our ties to the local Chinese community and the City as part of being a good corporate
citizen and to promote new business.
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. During the last twelve months, we have seen 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, it will remain subject to the uncertain domestic and global economic environment.
The Hotel is also subject to certain operating risks common
to all of the hotel industry, which could adversely impact performance. These risks include:
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Competition
for guests and
meetings from other
hotels including
competition and
pricing pressure
from internet wholesalers
and distributors;
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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;
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labor
strikes, disruptions
or lock outs;
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dependence
on demand from
business and leisure
travelers, which
may fluctuate and
is seasonal;
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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
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adverse
effects of downturns
and recessionary
conditions in international,
national and/or
local economies
and market conditions.
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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, 2012, 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 of the non-management employees of the Hotel are part of three different unions: (1) Local 2 of the Hotel Employees and Restaurant
Employees Union (“UNITE HERE”); (2) Stationary Engineers, Local 39; and (3) the Teamsters Local 856.
The Hotel’s contract with Local 2 expired on August 14,
2009. The Parties met on February 28, 2012 and negotiated the terms of a successor collective bargaining agreement. The parties
reached a tentative agreement on that date and are awaiting receipt of the final, ratified agreement from Local 2. The new agreement
is scheduled to expire on August 14, 2013.
The Hotel has two other labor agreements. An extension agreement
with the Stationary Engineers, Local 39 was agreed to in May 2011 with an expiration date of July 31, 2013. A new contract with
Teamsters Local 856 was reached on March 10, 2011 with an expiration date of December 31, 2012. Local 856 is required to send
notice of intent to negotiate an agreement 60 days before its expiration.
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.
Item 1A. Risk Factors.
Not required for smaller reporting companies.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
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 543 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 just completed renovations, there is no present
program for any further major renovations; however, the Partnership expects to expend at least 4% of gross annual Hotel revenues
each year for 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 $26,599,000 as of June 30, 2012.
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 $17,722,000 as of June 30, 2012.
The Partnership had a $2,500,000 unsecured revolving line of
credit facility with a bank that was to mature on April 30, 2010. 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, 2012. The Partnership paid
a loan modification fee of $10,000. The loan continues as unsecured. As of June 30, 2012 and 2011, the interest rate was 5.75%
and the outstanding balances were $1,702,000 and $2,202,000, 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.
PART II
|
Item 5.
|
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, 2012 and 2011. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and
may not represent actual transactions.
Fiscal 2012
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
HOLDERS
As of June 30, 2012, 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 Board of Directors of Portsmouth, decided
to discontinue the payment of dividends since Justice was to cease payments of partnership distributions to help fund the renovation
of the Hotel. 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 last quarter of its fiscal year ending June 30, 2012 and does not have any publicly announced repurchase
program.
Item 6. Selected financial Data.
Not required for smaller reporting companies.
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 General partner of Justice. Evon Corporation
(“Evon”) serves as the other general partner. Justice owns a 543 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 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.
The parking garage that is part of the Hotel property is managed
by Ace Parking pursuant to a contract with the 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, 2012 Compared to Fiscal Year
Ended June 30, 2011
The Company had net income of $2,102,000 for the year ended
June 30, 2012 compared to net income of $3,077,000 for the year ended June 30, 2011. The decrease in net income is primarily attributable
to the recording of an unrealized gain of $3,686,000 in fiscal 2011 related to the preferred stock of Comstock received by the
Company in exchange for debt as part of the debt restructuring, losses from investing activities in the current year, partially
offset by a significant improvement in hotel operations.
The Company had net income from hotel operations of $4,110,000
for the fiscal year ended June 30, 2012, compared to net income of $710,000 for the fiscal year ended June 30, 2011. The significant
increase in net income from hotel operations is primarily attributable to a $5,054,000 increase in room revenues and a $1,304,000
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 following table sets forth a more detailed presentation
of Hotel operations for the years ended June 30, 2012 and 2011.
For the years ended June 30,
|
|
2012
|
|
|
2011
|
|
Hotel revenues:
|
|
|
|
|
|
|
|
|
Hotel rooms
|
|
$
|
32,893,000
|
|
|
$
|
27,839,000
|
|
Food and beverage
|
|
|
5,779,000
|
|
|
|
5,028,000
|
|
Garage
|
|
|
2,765,000
|
|
|
|
2,599,000
|
|
Other operating departments
|
|
|
1,025,000
|
|
|
|
816,000
|
|
Total hotel revenues
|
|
|
42,462,000
|
|
|
|
36,282,000
|
|
Operating expenses excluding interest,
depreciation and amortization
|
|
|
(33,465,000
|
)
|
|
|
(29,299,000
|
)
|
Operating income before interest, depreciation and
amortization
|
|
|
8,997,000
|
|
|
|
6,983,000
|
|
Interest
|
|
|
(2,724,000
|
)
|
|
|
(2,806,000
|
)
|
Depreciation and amortization
|
|
|
(2,163,000
|
)
|
|
|
(3,467,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income from hotel operations
|
|
$
|
4,110,000
|
|
|
$
|
710,000
|
|
For the fiscal year ended June 30, 2012, the Hotel generated
operating income of $8,997,000 before interest, depreciation and amortization, on total operating revenues of $42,462,000 compared
to operating income of $6,983,000 before interest, depreciation and amortization, on operating revenues of $36,282,000 for the
fiscal year ended June 30, 2011. The increase in income from Hotel operations is primarily attributable to increases in room,
food and beverage, and other revenues in the current year, partially offset by an increase in operating expenses due to higher
labor costs and increased staffing to improve guest satisfaction as well as greater franchise and management fees which are based
on a percentage of revenues.
Room revenues increased by $5,054,000 for the fiscal year ended
June 30, 2012 compared to the fiscal year ended June 30, 2011 and food and beverage revenues increased by $751,000 for the same
period. The increase in room revenues was primarily attributable to a significant increase in average daily room rates during
fiscal 2012 as the Hotel continued 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, 2012 and 2011.
Fiscal Year
ended June 30,
|
|
|
Average
Daily Rate
|
|
|
Average
Occupancy %
|
|
|
RevPar
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
$
|
191
|
|
|
|
87
|
%
|
|
$
|
166
|
|
|
2011
|
|
|
$
|
163
|
|
|
|
86
|
%
|
|
$
|
140
|
|
The operations of the Hotel experienced an increase in the
higher rated business, leisure and group travel segments in the fiscal 2012 as the hospitality industry in the San Francisco market
continued to show signs of recovery. As a result, the Hotel’s average daily rate increased significantly by $28 for the
fiscal year ended June 30, 2012 compared to the fiscal year ended June 30, 2011. The increase in occupancy of 1% 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 was able to reduce the amount of discounted Internet business that it
was forced to take in prior years to maintain occupancy in a very competitive market and recessionary economic conditions. As
a result, the Hotel was able to achieve a RevPar number that was $26 higher than fiscal 2011.
During the past couple of years, we have seen our management
team guide our Hotel through a difficult economic period by taking bold steps to reduce expenses and implement innovative strategies
in order to improve operations and enhance our competitiveness in the market. As a result, we were well positioned to take advantage
of the gradual recovery that took place in the San Francisco market. We saw a significant improvement in room rates as the Hotel
was able to expand its share of the higher rated business and leisure travel which increased our operating revenues and profitability.
Those results made it possible for Justice Investors to declare its first limited partnership distribution since September 2008
as the Partnership made a total distribution in the amount of $1,000,000 in December 2011, 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.
We will continue in our efforts to upgrade our guest rooms
and facilities and explore new and innovative ways to differentiate the Hotel from its competition. During fiscal 2012, we completed
several projects to enhance the guest experience, including our new executive lounge on the 26
th
floor of the Hotel
and the upgrading of the lobby and common areas of the Hotel. We have also made improvements to our restaurant facilities and
food and beverage services and have upgraded internet connectivity throughout the Hotel and are providing more technological amenities
for our guests. We continue to make the Hotel more energy efficient and have enhanced our recycling program to support the concept
of a greener world while reducing our operating costs. The Hotel also became a groundbreaker in implementing Hilton’s Huanying
(“Welcome”) program which features a tailored experience for Chinese travelers. We have also taken important steps
to further develop our ties to the local Chinese community and the City as part of being a good corporate citizen and to promote
new business.
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. During the last twelve months, we have seen 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, it will remain subject to the uncertain domestic and global economic environment.
The Company had a net loss on marketable securities of $1,045,000
for the year ended June 30, 2012 compared to a net gain on marketable securities of $1,030,000 for the year ended June 30, 2011.
For the year ended June 30, 2012, the Company had a net realized loss of $247,000 and a net unrealized loss of $798,000. For the
year ended June 30, 2011, the Company had a net realized loss of $35,000 and a net unrealized gain of $1,065,000. 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.
During the year ended June 30, 2012, the Company had an unrealized
loss of $187,000 related to other investments compared to an unrealized gain of $3,777,000 for the year ended June 30, 2011. The
significant difference is due to an unrealized gain of $3,686,000 related to the Company’s Comstock investment in the prior
comparable year. Comstock had undergone a restructuring which resulted in the unrealized gain for the Company.
During the years ended June 30, 2012 and
2011, 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 $335,000 and $356,000, for each respective period.
Dividend and interest income decreased
to $385,000 for the year ended June 30, 2012 from $486,000 for the year ended June 30, 2011 primarily as the result of the decreased
investment in income yielding instruments.
The
Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its 50% non-controlling interest in
the Hotel. The income tax benefit during the year ended June 30, 2012 compared to the significant tax expense for the same period
ended June 30, 2011 represents the income tax effect on the Company
’
s
pretax income which include its share in net income of the Hotel (i.e., 50%).
MARKETABLE SECURITIES
As of June 30, 2012 and 2011, the Company
had investments in marketable equity securities of $2,683,000 and $4,866,000, respectively. The following table shows the composition
of the Company’s marketable securities portfolio by selected industry groups as:
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
|
%
|
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
|
%
|
The Company’s investment portfolio is diversified with
28 different equity positions. The Company holds one equity security that comprises more than 10% of the equity value of the portfolio.
The security represents 61.9% of the portfolio and consists of the 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 10% of its total portfolio
value, that investment could eventually exceed 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.
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 Investors. The Company
also receives cash 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 positive cash flows from its operations. As a result, Justice
was able to pay some limited partnership distributions in fiscal years 2008 and 2009. However, due 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 had 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 significant improvement in the operations of the Hotel, and the San Francisco market in general, Justice was in a position
to pay a limited partnership distribution in December 2011 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.
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 increases in Hotel gross revenues in fiscal 2012, total general partner fees
paid to Portsmouth for the year ended June 30, 2012 increased to $366,000, compared to $323,000 for the year ended June 30,
2011.
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 $26,599,000
as of June 30, 2012.
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 $17,722,000 as of June 30, 2012.
Effective April 29, 2010, the Partnership obtained a modification
of its $2,500,000 unsecured revolving line of credit facility with East West 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, 2012. As
of June 30, 2012, the interest rate was 5.75% and the outstanding balance was $1,702,000.
Despite an 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 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,
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
|
|
$
|
44,321,000
|
|
|
$
|
907,000
|
|
|
$
|
960,000
|
|
|
$
|
1,015,000
|
|
|
$
|
41,439,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other notes payable
|
|
|
2,072,000
|
|
|
|
372,000
|
|
|
|
1,695,000
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
|
|
|
8,188,000
|
|
|
|
2,877,000
|
|
|
|
2,522,000
|
|
|
|
2,396,000
|
|
|
|
393,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
54,581,000
|
|
|
$
|
4,156,000
|
|
|
$
|
5,177,000
|
|
|
$
|
3,416,000
|
|
|
$
|
41,832,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
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.
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk.
Not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
|
PAGE
|
|
|
Report
of Independent Registered Public Accounting Firm
|
19
|
|
|
Consolidated Balance Sheets - June 30, 2012 and
2011
|
20
|
|
|
Consolidated Statements of Operations - For years
ended June 30, 2012 and 2011
|
21
|
|
|
Consolidated Statements of Shareholders’ Deficit
– For years ended June 30, 2012 and 2011
|
22
|
|
|
Consolidated Statements of Cash Flows - For
years ended June 30, 2012 and 2011
|
23
|
|
|
Notes to the Consolidated Financial Statements
|
24 – 38
|
Report
of Independent Registered Public Accounting Firm
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, 2012 and 2011, 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, 2012. The
Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these
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 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, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the years in the two-year
period ended June 30, 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ Burr Pilger Mayer, Inc.
|
|
San Francisco, California
|
September 20, 2012
|
PORTSMOUTH SQUARE, INC.
CONSOLIDATED BALANCE SHEETS
As of June 30,
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investment in hotel, net
|
|
$
|
32,822,000
|
|
|
$
|
32,089,000
|
|
Investment in real estate
|
|
|
973,000
|
|
|
|
973,000
|
|
Investment in marketable securities
|
|
|
2,683,000
|
|
|
|
4,866,000
|
|
Other investments, net
|
|
|
5,311,000
|
|
|
|
5,913,000
|
|
Cash and cash equivalents
|
|
|
1,032,000
|
|
|
|
610,000
|
|
Accounts receivable, net
|
|
|
1,641,000
|
|
|
|
1,683,000
|
|
Other assets, net
|
|
|
2,371,000
|
|
|
|
1,976,000
|
|
Deferred tax asset
|
|
|
3,236,000
|
|
|
|
3,199,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
50,069,000
|
|
|
$
|
51,309,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
$
|
8,438,000
|
|
|
$
|
7,961,000
|
|
Due to securities broker
|
|
|
53,000
|
|
|
|
1,835,000
|
|
Obligations for securities sold
|
|
|
188,000
|
|
|
|
153,000
|
|
Other notes payable
|
|
|
2,072,000
|
|
|
|
2,786,000
|
|
Mortgage notes payable - hotel
|
|
|
44,321,000
|
|
|
|
45,179,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,072,000
|
|
|
|
57,914,000
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Additional paid-in-capital
|
|
|
916,000
|
|
|
|
916,000
|
|
Retained earnings
|
|
|
263,000
|
|
|
|
29,000
|
|
Total Portsmouth shareholders' equity
|
|
|
3,271,000
|
|
|
|
3,037,000
|
|
Noncontrolling interest
|
|
|
(8,274,000
|
)
|
|
|
(9,642,000
|
)
|
Total shareholders' deficit
|
|
|
(5,003,000
|
)
|
|
|
(6,605,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' deficit
|
|
$
|
50,069,000
|
|
|
$
|
51,309,000
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
PORTSMOUTH SQUARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Revenue - Hotel
|
|
$
|
42,462,000
|
|
|
$
|
36,282,000
|
|
|
|
|
|
|
|
|
|
|
Costs and operating expenses
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
|
(33,465,000
|
)
|
|
|
(29,299,000
|
)
|
Depreciation and amortization expense
|
|
|
(2,163,000
|
)
|
|
|
(3,467,000
|
)
|
General and administrative expense
|
|
|
(595,000
|
)
|
|
|
(572,000
|
)
|
|
|
|
|
|
|
|
|
|
Total costs and operating expenses
|
|
|
(36,223,000
|
)
|
|
|
(33,338,000
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,239,000
|
|
|
|
2,944,000
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,724,000
|
)
|
|
|
(2,806,000
|
)
|
Net (loss) gain on marketable securities
|
|
|
(1,045,000
|
)
|
|
|
1,030,000
|
|
Net unrealized (loss) gain on other investments
|
|
|
(187,000
|
)
|
|
|
3,777,000
|
|
Impairment loss on other investments
|
|
|
(335,000
|
)
|
|
|
(356,000
|
)
|
Dividend and interest income
|
|
|
385,000
|
|
|
|
486,000
|
|
Trading and margin interest expense
|
|
|
(232,000
|
)
|
|
|
(271,000
|
)
|
|
|
|
|
|
|
|
|
|
Net other (expense) income
|
|
|
(4,138,000
|
)
|
|
|
1,860,000
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,101,000
|
|
|
|
4,804,000
|
|
Income tax benefit (expense)
|
|
|
1,000
|
|
|
|
(1,727,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2,102,000
|
|
|
|
3,077,000
|
|
Less: Net income attributable to the noncontrolling interest
|
|
|
(1,868,000
|
)
|
|
|
(188,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to Portsmouth
|
|
$
|
234,000
|
|
|
$
|
2,889,000
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share attributable to Portsmouth
|
|
$
|
0.32
|
|
|
$
|
3.93
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
734,183
|
|
|
|
734,183
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
PORTSMOUTH SQUARE, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
Earnings
|
|
|
Portsmouth
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
(Accumulated
|
|
|
Shareholders'
|
|
|
Noncontrolling
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Equity
|
|
|
Interest
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
234,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,868,000
|
|
|
|
1,868,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
PORTSMOUTH SQUARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30,
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
2,102,000
|
|
|
$
|
3,077,000
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Net unrealized loss (gain) on marketable securities
|
|
|
798,000
|
|
|
|
(1,065,000
|
)
|
Unrealized loss (gain) on other investments
|
|
|
187,000
|
|
|
|
(3,777,000
|
)
|
Impairment loss on other investments
|
|
|
335,000
|
|
|
|
356,000
|
|
Depreciation and amortization
|
|
|
2,163,000
|
|
|
|
3,467,000
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Investment in marketable securities
|
|
|
1,385,000
|
|
|
|
(1,478,000
|
)
|
Accounts receivable
|
|
|
42,000
|
|
|
|
(110,000
|
)
|
Other assets
|
|
|
(472,000
|
)
|
|
|
(490,000
|
)
|
Accounts payable and other liabilities
|
|
|
477,000
|
|
|
|
198,000
|
|
Due to securities broker
|
|
|
(1,782,000
|
)
|
|
|
1,609,000
|
|
Obligations for securities sold
|
|
|
35,000
|
|
|
|
74,000
|
|
Deferred income taxes
|
|
|
(37,000
|
)
|
|
|
1,692,000
|
|
Net cash provided by operating activities
|
|
|
5,233,000
|
|
|
|
3,553,000
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments for hotel furniture, equipment and building improvements
|
|
|
(2,819,000
|
)
|
|
|
(1,773,000
|
)
|
Other investments
|
|
|
80,000
|
|
|
|
21,000
|
|
Net cash used in investing activities
|
|
|
(2,739,000
|
)
|
|
|
(1,752,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling interest
|
|
|
(500,000
|
)
|
|
|
-
|
|
Payments on mortgage notes payable
|
|
|
(858,000
|
)
|
|
|
(811,000
|
)
|
Payments on other notes payable
|
|
|
(714,000
|
)
|
|
|
(902,000
|
)
|
Net cash used in financing activities
|
|
|
(2,072,000
|
)
|
|
|
(1,713,000
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
422,000
|
|
|
|
88,000
|
|
Cash and cash equivalents at beginning of year
|
|
|
610,000
|
|
|
|
522,000
|
|
Cash and cash equivalents at end of year
|
|
$
|
1,032,000
|
|
|
$
|
610,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Income tax refund (paid)
|
|
$
|
1,000
|
|
|
$
|
7,000
|
|
Interest paid
|
|
$
|
2,771,000
|
|
|
$
|
2,897,000
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
PORTSMOUTH
SQUARE, INC.
Notes
to the CONSOLIDATED Financial Statements
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
As of June 30, 2012, 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 79.9%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a
public company. InterGroup also directly owns approximately 12.5% 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, the financial statements of Justice are consolidated with those of the Company.
Justice owns a 543-room hotel property located at 750 Kearny
Street, San Francisco California, known as the
Hilton San Francisco Financial District
(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 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 lease of the parking garage, which was to expire on November
30, 2010, and other related assets. Justice also agreed to assume Evon’s 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 Partnership
also leases a day spa on the lobby level 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.
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 2006. For the fiscal years ended June 30, 2012 and 2011, the Partnership reversed that trend
as net income was $4,110,000 and $710,000, respectively. Hotel operations improved significantly during the last two fiscal years
and depreciation and amortization expenses decreased as many of the furniture and fixture improvements from the renovation of the
Hotel reached full deprecation during the fiscal 2011.
Management believes that the revenues expected to be generated
from the operations of the hotel, garage and 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 value in the Hotel to support additional
borrowings, if necessary.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and all controlled subsidiaries. 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, 2012 and 2011.
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 (carried
at cost, net of any impairments loss), non –marketable warrants (carried at fair value) and certain preferred securities,
received in exchange for debt instruments, carried at a book basis, initially determined using the estimated fair 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, 2012 and 2011, the Company recorded impairment losses related to other
investments of $335,000 and $356,000, 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.
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, 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.
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 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
Fair 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, 2012 and 2011, 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.
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 $445,000 and $337,000 for the years ended June 30, 2012 and 2011, respectively.
Basic and Diluted Income per Share
Basic income per share is calculated based upon the weighted
average number of common shares outstanding during each fiscal year. As of June 30, 2012 and 2011, 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 (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 May 2011, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update 2011-04 (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 has been applied on a prospective basis.
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’
deficit. ASU 2011-05 will be effective for the Company beginning July 1, 2012. For the years ended June 30, 2012 and 2011, the
Company had no components of Comprehensive Income other than Net Income (loss) 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 cash flows. The disclosures required by this ASU are presented in Note 17 to the consolidated 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, 2012 and 2011, 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% 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.
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. Pursuant to
the Compensation Agreement, the general partners of Justice will be 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.
NOTE 3 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
|
|
|
|
|
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
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
June 30, 2011
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,124,000
|
|
|
$
|
-
|
|
|
$
|
1,124,000
|
|
Furniture and equipment
|
|
|
19,583,000
|
|
|
|
(17,076,000
|
)
|
|
|
2,507,000
|
|
Building and improvements
|
|
|
46,982,000
|
|
|
|
(18,524,000
|
)
|
|
|
28,458,000
|
|
|
|
$
|
67,689,000
|
|
|
$
|
(35,600,000
|
)
|
|
$
|
32,089,000
|
|
Depreciation and amortization expense for the years ended June
30, 2012 and 2011 were $2,102,000 and $3,407,000 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 at June 30, 2012 and 2011, respectively.
The accumulated depreciation on capital leases was $1,668,000 and $1,405,000 as of June 30, 2012 and 2011, respectively.
NOTE 4 – INVESTMENT IN REAL ESTATE
In August 2007, the Company agreed to acquire 50% interest in
Intergroup Uluniu, Inc., a Hawaiian corporation and a 100% owned subsidiary of InterGroup, for $973,000, which represents an amount
equal to the costs paid by InterGroup for the acquisition and carrying costs of approximately 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, 2012 and 2011,
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, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
2,118,000
|
|
|
$
|
1,292,000
|
|
|
$
|
(727,000
|
)
|
|
$
|
565,000
|
|
|
$
|
2,683,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
3,336,000
|
|
|
$
|
2,084,000
|
|
|
$
|
(554,000
|
)
|
|
$
|
1,530,000
|
|
|
$
|
4,866,000
|
|
Equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012 and 2011, the Company had $579,000 and $412,000,
respectively, of unrealized losses related to securities held for over one year.
Net gain (loss) on marketable securities on the statement of
operations is comprised of realized and unrealized gains (losses). Below is the composition of the two components for the years
ended June 30, 2012 and 2011, respectively.
For the year ended June 30,
|
|
2012
|
|
|
2011
|
|
Realized loss on marketable securities
|
|
$
|
(247,000
|
)
|
|
$
|
(35,000
|
)
|
Unrealized (loss) gain on marketable securities
|
|
|
(798,000
|
)
|
|
|
1,065,000
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on marketable securities
|
|
$
|
(1,045,000
|
)
|
|
$
|
1,030,000
|
|
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, 2012
|
|
|
June 30, 2011
|
|
Preferred stock - Comstock, at cost
|
|
$
|
4,410,000
|
|
|
$
|
4,410,000
|
|
Private equity hedge fund, at cost
|
|
|
681,000
|
|
|
|
996,000
|
|
Corporate debt and equity instruments, at cost
|
|
|
101,000
|
|
|
|
201,000
|
|
Warrants - at fair value
|
|
|
119,000
|
|
|
|
306,000
|
|
|
|
$
|
5,311,000
|
|
|
$
|
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” – 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, 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 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 and $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 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 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% 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. 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, 2012 and 2011, 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 as of June 30, 2012 and 2011 and a fair market value of $119,000 and $306,000 as of June 30,
2012 and 2011, respectively. During the years ended June 30, 2012 and 2011, the Company had an unrealized gain (loss) of $(187,000)
and $91,000, respectively, related to these warrants.
NOTE 7 - FAIR VALUE MEASUREMENTS
The carrying values of the Company’s non-financial instruments
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, 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
|
|
As of June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents - money market
|
|
$
|
3,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,000
|
|
Other investments - warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
306,000
|
|
|
|
306,000
|
|
Investment in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic materials
|
|
|
1,687,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,687,000
|
|
Investment funds
|
|
|
924,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
924,000
|
|
Services
|
|
|
815,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
815,000
|
|
REITs and real estate companies
|
|
|
587,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
587,000
|
|
Financial services
|
|
|
443,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
443,000
|
|
Other
|
|
|
410,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
410,000
|
|
|
|
|
4,866,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,866,000
|
|
|
|
$
|
4,869,000
|
|
|
$
|
-
|
|
|
$
|
306,000
|
|
|
$
|
5,175,000
|
|
Warrants - Transfer into Level 3 Reconciliation
|
|
Level 3
|
|
Beginning balance as of June 30, 2011 - Level 3
|
|
$
|
-
|
|
Transfer in from Level 2 Other investments - warrants
|
|
|
306,000
|
|
Unrealized loss for the year ended June 30, 2012
|
|
|
(187,000
|
)
|
Ending balance as of June 30, 2012 - Level 3
|
|
$
|
119,000
|
|
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 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain for the year
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
June 30, 2011
|
|
|
ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,607,000
|
|
|
$
|
5,607,000
|
|
|
$
|
3,330,000
|
|
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. 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:
|
|
2012
|
|
|
2011
|
|
Inventory
|
|
|
907,000
|
|
|
|
543,000
|
|
Prepaid expenses
|
|
|
945,000
|
|
|
|
939,000
|
|
Miscellaneous assets, net
|
|
|
519,000
|
|
|
|
494,000
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
2,371,000
|
|
|
$
|
1,976,000
|
|
Amortization expense of loan fees and franchise costs for the
years ended June 30, 2012 and 2011 was $61,000 and $60,000, respectively.
NOTE 9 – OTHER NOTES PAYABLE
The Partnership had a $2,500,000 unsecured revolving line of
credit facility with a bank that was to mature on April 30, 2010. 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, 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. The Partnership was in compliance with the covenants as of June 30, 2012 and 2011. The
loan continues as unsecured. The Partnership made additional principal payments totaling $124,000 in fiscal year 2012. The outstanding
balance was $1,702,000 and $2,202,000 as of June 30, 2012 and 2011 respectively; the interest rate was 5.75% as of June 30, 2012.
The Partnership has short-term financing agreements with a financial
institution for the payment of its general, property, and workers’ compensation insurance. The notes payable under these
financing agreements bear interest at 3.8% per annum and payable in equal monthly installments (principal and interest) through
July 2012. The notes payable at June 30, 2012 and 2011, were $61,000 and $112,000, respectively.
As of June 30, 2012 and 2011, the Company had capital lease
obligations outstanding of $309,000 and $472,000, respectively, which were included in Other Notes Payable.
NOTE 10 – MORTGAGE NOTES PAYABLE
Each mortgage note payable is secured by its respective land
and building. As of June 30, 2012 and 2011, the Company had the following mortgages:
June 30, 2012
|
|
|
June 30, 2011
|
|
|
Interest Rate
|
|
|
Origination Date
|
|
|
Maturity Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,599,000
|
|
|
$
|
27,176,000
|
|
|
|
Fixed 5.22%
|
|
|
|
July 27, 2005
|
|
|
|
August 5, 2015
|
|
|
17,722,000
|
|
|
|
18,003,000
|
|
|
|
Fixed 6.42%
|
|
|
|
March 27, 2007
|
|
|
|
August 5, 2015
|
|
$
|
44,321,000
|
|
|
$
|
45,179,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
In March 2007, Justice entered into a second mortgage loan with
The Prudential Insurance Company of America (the “Second Prudential Loan”) in a principal amount of $19,000,000. The
term of the Second Prudential Loan is for approximately 100 months and matures on August 5, 2015, the same date as the Partnership’s
first mortgage loan with Prudential. The Second Prudential Loan is at a fixed interest rate of 6.42% per annum and calls for monthly
installments of principal and interest in the amount of approximately $119,000, calculated on a 30-year amortization schedule.
The Loan is collateralized by a second deed of trust on the Partnership’s Hotel property, including all improvements and
personal property thereon and an assignment of all present and future leases and rents. The Loan is without recourse to the limited
and general partners of Justice.
Future minimum payments for all notes payable are as follows:
|
For the year ending June 30,
|
|
|
|
|
|
|
2013
|
|
|
$
|
1,279,000
|
|
|
2014
|
|
|
|
2,655,000
|
|
|
2015
|
|
|
|
1,020,000
|
|
|
2016
|
|
|
|
41,439,000
|
|
|
|
|
|
$
|
46,393,000
|
|
NOTE 11 – HOTEL RENTAL INCOME
The Partnership has a lease agreement with Tru Spa, LLC (Tru
Spa) for the use of the spa facilities expiring in May 2013. The lease provides the Partnership with minimum monthly payments of
$14,000, subject to increases based on the Consumer Price Index. Minimum future rentals to be received under the terms of this
lease as of June 30, 2012 are $151,000.
NOTE 12 – MANAGEMENT AGREEMENT
On February 2, 2007, the Partnership entered into an agreement
with Prism to manage and operate the Hotel as its agent. The agreement is effective for a term of ten years, unless the agreement
is extended or earlier terminated as provided in the agreement. Under the management agreement, the Partnership is required to
pay the base management fees of 2.5% of gross operating revenues of the Hotel (i.e., room, food and beverage, and other operating
departments) for the fiscal year. However, 0.75% of the stated management fee is due only if the partially adjusted net operating
income of the hotel for the fiscal year exceeds the amount of the Hotel return for the fiscal year. Prism is also entitled to an
incentive management fee if certain milestones are accomplished. No incentive fees were paid during the years ended June 30, 2012
and 2011. 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 arrangement
went back into effect. Management fees paid to Prism during the years ended June 30, 2012 and 2011 were $626,000 and $469,000,
respectively.
NOTE 13 – CONCENTRATION OF CREDIT RISK
Travel agents and airlines made up 20% ($332,000) and 32%
($542,000) of accounts receivable at June 30, 2012 and 2011, respectively. The Hotel had two customers who accounted for
7% ($122,000) of accounts receivable at June 30, 2012. The Hotel had two customers who accounted for 14% ($235,000) of
accounts receivable at June 30, 2011. The Partnership maintains its cash and cash equivalents with various financial
institutions that are monitored regularly for credit quality. At times, such cash and cash equivalents holdings may be in
excess of FDIC or other federally insured limits.
NOTE 14 - INCOME TAXES
The provision for income taxes (expense) benefit consists of
the following:
For the years ended June 30,
|
|
2012
|
|
|
2011
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(24,000
|
)
|
|
$
|
-
|
|
Deferred
|
|
|
45,000
|
|
|
|
(1,319,000
|
)
|
|
|
|
21,000
|
|
|
|
(1,319,000
|
)
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
(12,000
|
)
|
|
|
(35,000
|
)
|
Deferred
|
|
|
(8,000
|
)
|
|
|
(373,000
|
)
|
|
|
|
(20,000
|
)
|
|
|
(408,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000
|
|
|
$
|
(1,727,000
|
)
|
A reconciliation of the statutory federal
income tax rate to the effective tax rate is as follows:
For the years ended June 30,
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Statutory federal tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
0.6
|
%
|
|
|
5.6
|
%
|
Noncontrolling interest
|
|
|
-30.4
|
%
|
|
|
-1.3
|
%
|
Other
|
|
|
-4.2
|
%
|
|
|
-2.3
|
%
|
|
|
|
0.0
|
%
|
|
|
36.0
|
%
|
The components of the Company’s deferred
tax assets and (liabilities) as of June 30, 2012 and 2011, are as follows:
|
|
2012
|
|
|
2011
|
|
Deferred tax assets
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
4,560,000
|
|
|
$
|
5,137,000
|
|
Investment reserve
|
|
|
1,315,000
|
|
|
|
1,171,000
|
|
Other
|
|
|
54,000
|
|
|
|
28,000
|
|
|
|
|
5,929,000
|
|
|
|
6,336,000
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Unrealized gains on marketable securities
|
|
|
(1,798,000
|
)
|
|
|
(2,220,000
|
)
|
State taxes
|
|
|
(239,000
|
)
|
|
|
(221,000
|
)
|
Basis difference in Justice
|
|
|
(656,000
|
)
|
|
|
(696,000
|
)
|
|
|
|
(2,693,000
|
)
|
|
|
(3,137,000
|
)
|
Net deferred tax assets
|
|
$
|
3,236,000
|
|
|
$
|
3,199,000
|
|
As of June 30, 2012, the Company had federal
and state operating loss carryforwards of $10,811,000 and $10,004,000, respectively. These carryforwards expire in varying amounts
through 2028.
The Company is subject to U.S. federal
income tax as well as to income tax in multiple state jurisdictions. Federal income tax returns of the Company are subject to IRS
examination for the 2008 through 2011 tax years. State income tax returns are subject to examination for the 2007 through 2011
tax years.
Utilization of the net operating loss carryover may be subject
a substantial annual limitation if it should be determined that there has been a change in the ownership of more than 50 percent
of the value of the Company's stock, pursuant to Section 382 of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating loss carryovers before utilization.
For the year ended June 30, 2012, there is no unrecognized tax
provision or benefit. Management does not anticipate any future adjustments in the next twelve months which would result in a material
change to its tax position. As of June 30, 2012 and 2011, the Company did not have any interest and penalties.
NOTE 15 - SEGMENT INFORMATION
The Company operates in two reportable segments, the operation
of the hotel (“Hotel Operations”) and the investment of its cash in marketable securities and other investments (“Investment
Transactions”). These two operating segments, as presented in the consolidated financial statements, reflect how management
internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this same
information.
Information below represents reporting segments for the year
ended June 30, 2012 and 2011, respectively. Operating income (loss) from Hotel operations consists of the operation of the hotel
and operation of the garage. Operating income (loss) for investment transactions consist of net investment gain (loss) and dividend
and interest income.
As of and for the year
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended June 30, 2012
|
|
Operations
|
|
|
Transactions
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
42,462,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
42,462,000
|
|
Operating expenses
|
|
|
(35,628,000
|
)
|
|
|
-
|
|
|
|
(595,000
|
)
|
|
|
(36,223,000
|
)
|
Income (loss) from operations
|
|
|
6,834,000
|
|
|
|
-
|
|
|
|
(595,000
|
)
|
|
|
6,239,000
|
|
Interest expense
|
|
|
(2,724,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,724,000
|
)
|
Income from investments
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Net income (loss)
|
|
$
|
4,110,000
|
|
|
$
|
(1,414,000
|
)
|
|
$
|
(594,000
|
)
|
|
$
|
2,102,000
|
|
Total assets
|
|
$
|
32,822,000
|
|
|
$
|
7,994,000
|
|
|
$
|
9,253,000
|
|
|
$
|
50,069,000
|
|
As of and for the year
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended June 30, 2011
|
|
Operations
|
|
|
Transactions
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
36,282,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
36,282,000
|
|
Operating expenses
|
|
|
(32,766,000
|
)
|
|
|
-
|
|
|
|
(572,000
|
)
|
|
|
(33,338,000
|
)
|
Income (loss) from operations
|
|
|
3,516,000
|
|
|
|
-
|
|
|
|
(572,000
|
)
|
|
|
2,944,000
|
|
Interest expense
|
|
|
(2,806,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,806,000
|
)
|
Income from investments
|
|
|
-
|
|
|
|
4,666,000
|
|
|
|
-
|
|
|
|
4,666,000
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,727,000
|
)
|
|
|
(1,727,000
|
)
|
Net income (loss)
|
|
$
|
710,000
|
|
|
$
|
4,666,000
|
|
|
$
|
(2,299,000
|
)
|
|
$
|
3,077,000
|
|
Total assets
|
|
$
|
32,089,000
|
|
|
$
|
10,779,000
|
|
|
$
|
8,441,000
|
|
|
$
|
51,309,000
|
|
NOTE 16 - RELATED PARTY TRANSACTIONS
Certain shared costs and expenses, primarily administrative
expenses, rent and insurance are allocated among the Company and InterGroup based on management's estimate of the pro rata utilization
of resources. For the years ended June 30, 2012 and 2011, these expenses were approximately $72,000 for each respective year.
Four of the Company’s Directors serve as directors of
InterGroup and three of the Company’s Directors serve on the Board of Santa Fe.
As Chairman of the Securities Investment Committee, the Company’s
President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private
markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman
of Santa Fe and InterGroup and oversees the investment activity of those companies. Depending on certain market conditions and
various risk factors, the Chief Executive Officer, his family, Santa Fe and InterGroup may, at times, invest in the same companies
in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive
Officer and his family members, and the resources of Santa Fe and InterGroup, at risk in connection with investment decisions made
on behalf of the Company.
In fiscal year ended June 30, 2004, the disinterested members
of the Board of Directors established a performance based compensation program for the Company’s CEO to keep and retain his
services as a direct and active manager of the Company’s securities portfolio. Pursuant to the current criteria established
by the Board, Mr. Winfield is entitled to performance based compensation for his management of the Company’s securities portfolio
equal to 20% of all net investment gains generated in excess of an annual return equal to the Prime Rate of Interest (as published
in the Wall Street Journal) plus 2%. Compensation amounts are calculated and paid quarterly based on the results of the Company’s
investment portfolio for that quarter. Should the Company have a net investment loss during any quarter, Mr. Winfield would not
be entitled to any further performance-based compensation until any such investment losses are recouped by the Company. This performance
based compensation program may be further modified or terminated at the discretion of the Board of Directors. The Company’s
CEO did not earn any performance based compensation for the years ended June 30, 2012 and 2011.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Partnership leases
equipment under operating leases with expiration dates through 2012.
Administrative
Fees–General Partners
During each of the
years ended June 30, 2012 and 2011, the general partners were paid a total of $562,000 and $468,000, respectively. The total amount
paid represents the minimum base compensation of $285,000 each year plus $277,000 and $183,000 respectively, based upon the agreement.
Franchise Agreements
The Partnership entered
into a Franchise License agreement (the License agreement) with the Hilton Hotels Corporation (Hilton) on December 10, 2004. The
term of the License agreement is for a period of 15 years commencing on the opening date, with an option to extend the license
agreement for another five years, subject to certain conditions.
Beginning on the opening
date in January 2006, the Partnership paid monthly royalty fees for the first two years of three percent (3%) of the Hotel’s
gross room revenue 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. The Partnership
also pays a monthly program fee of four percent (4%) of the Hotel’s gross 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. Franchise fees for the
years ended June 30, 2012 and 2011 were $3,008,000 and $2,574,000, respectively.
The Partnership also
pays Hilton a monthly information technology recapture charge of 0.75% of the Hotel’s gross revenues. Due to the difficult
economic environment, Hilton agreed to reduce its information technology fees to 0.65%. For the years ended June 30, 2012 and 2011,
those charges were $214,000 and $181,000, respectively, and are included as part of “General and administrative” expenses
in the Statements of Operations.
Legal Matters
The Partnership is
involved from time to time in various claims in the ordinary course of business. Management does not believe that the impact of
such matters will have a material effect on the financial conditions or result of operations when resolved.
NOTE 17 – EMPLOYEE BENEFIT
PLAN
Justice has a 401(k) Profit Sharing Plan (the Plan) for employees
who have completed six months of service. Justice provides a matching contribution up to 4% of the contribution to the Plan based
upon a certain percentage on the employees’ elective deferrals. Justice may also make discretionary contributions to the
Plan each year. Contributions made to the Plan amounted to $63,000 and $60,000 during the years ended June 30, 2012 and 2011, respectively.
Certain employees of Justice who are members of various unions
are covered by union-sponsored, collectively bargained, multi-employer health and welfare and benefit pension plans. Justice does
not contribute separately to those multi-employer plans.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
.
None.
Item 9A. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the
Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the fiscal
period covered by this Annual Report on Form 10-K. Based upon such evaluation, the Chief Executive Officer and Principal Financial
Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective
in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934,
for the Company. In establishing adequate internal control over financial reporting, management has developed and maintained a
system of internal control, policies and procedures designed to provide reasonable assurance that information contained in the
accompanying consolidated financial statements and other information presented in this annual report is reliable, does not contain
any untrue statement of a material fact or omit to state a material fact, and fairly presents in all material respects the financial
condition, results of operations and cash flows of the Company as of and for the periods presented in this annual report.
Management conducted an evaluation of the effectiveness of Company’s
internal control over financial reporting using the framework in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under that framework, management concluded that
the Company’s internal control over financial reporting was effective as of June 30, 2012.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company’s internal control
over financial reporting during the last quarterly period covered by this Annual Report on Form 10-K that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None to report.
PART III
Item 10. Directors, Executive Officers
and Corporate Governance
The following table sets forth certain
information with respect to the Directors and Executive Officers of the Company as of June 30, 2012:
Name
|
|
Position with the Company
|
|
Age
|
|
Term to Expire
|
|
|
|
|
|
|
|
John V. Winfield
|
|
Chairman of the Board; President
|
|
65
|
|
Fiscal 2012 Annual Meeting
|
|
|
and Chief Executive Officer
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Jerold R. Babin
|
|
Director
|
|
78
|
|
Fiscal 2012 Annual Meeting
|
|
|
|
|
|
|
|
Josef A. Grunwald
|
|
Director
|
|
64
|
|
Fiscal 2012 Annual Meeting
|
|
|
|
|
|
|
|
John C. Love
|
|
Director
(1)(2)(3)
|
|
72
|
|
Fiscal 2012 Annual Meeting
|
|
|
|
|
|
|
|
William J. Nance
|
|
Director
(1)(2)(3)
|
|
68
|
|
Fiscal 2012 Annual Meeting
|
|
|
|
|
|
|
|
Other Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael G. Zybala
|
|
Vice President, Secretary and General Counsel
|
|
60
|
|
N/A
|
|
|
|
|
|
|
|
David T. Nguyen
|
|
Treasurer and Controller (Principal Financial Officer)
|
|
38
|
|
N/A
|
(1)
Member of Securities Investment Committee
(2)
Member of Audit Committee
(3)
Member of Special Hotel Committee
Business Experience:
The principal occupation and business experience during the
last five years for each of the Directors and Executive Officers of the Company are as follows:
John V. Winfield —
Mr. Winfield was first elected
to the Board in May of 1996 and currently serves as the Company's Chairman of the Board, President and Chief Executive Officer.
Mr. Winfield is also Chairman of the Board, President and Chief Executive Officer of Portsmouth's parent company Santa Fe Financial
Corporation (“Santa Fe”), a public company, having held those positions since April 1996. Mr. Winfield is also Chairman
of the Board, President and Chief Executive Officer of Santa Fe’s parent company, The InterGroup Corporation (“InterGroup”),
a public company, and has held those positions since 1987. Mr. Winfield also serves as Chairman of the Board of Comstock Mining,
Inc. (NYSE MKT: LODE), a public company in which he was elected a Director on June 23, 2011. Mr. Winfield’s extensive experience
as an entrepreneur and investor, as well as his managerial and leadership experience from serving as a chief executive officer
and director of public companies, led to the Board’s conclusion that he should serve as a director of the Company.
Jerold R. Babin —
Mr. Babin was first appointed
as a Director of the Company on February 1996. Mr. Babin is a retail securities broker. From 1989 to June 30, 2010, he worked for
Prudential Securities (later Wachovia Securities and now Wells Fargo Advisors) where he held the title of First Vice-President.
Mr. Babin retired from his position at Wells Fargo advisors in June 2010. For the past 20 years, until present, Mr. Babin has also
served as an arbitrator for FINRA (formerly NASD). Mr. Babin’s extensive experience in the securities and financial markets
as well has his experience in the securities and public company regulatory industry led to the Board’s conclusion that he
should serve as a director of the Company.
Josef A. Grunwald
— Mr. Grunwald was elected as
a Director of the Company in May 1996. Mr. Grunwald is an industrial, commercial and residential real estate developer. He serves
as Chairman of PDG N.V. (Belgium), a hotel management company, and President of I.B.E. Services S.A. (Belgium), an international
trading company. Mr. Grunwald is also a Director of InterGroup, having held that position since 1987. Mr. Grunwald’s extensive
experience in business and finance in the real estate industry, his experience in hotel management, as well as his experience as
an entrepreneur and manager of his own companies, led to the Board’s conclusion that he should serve as a director of the
Company.
John C. Love
— Mr. Love was appointed a Director
of the Company on March 5, 1998. Mr. Love is an international hospitality and tourism consultant. He is a retired partner in the
national CPA and consulting firm of Pannell Kerr Forster and, for the last 30 years, a lecturer in hospitality industry management
control systems and competition & strategy at Golden Gate University and San Francisco State University. He is Chairman Emeritus
of the Board of Trustees of Golden Gate University and the Executive Secretary of the Hotel and Restaurant Foundation. Mr. Love
is also a Director of Santa Fe, having been appointed in March 2, 1999 and a Director of InterGroup, having been appointed in January
1998. Mr. Love’s extensive experience as a CPA and in the hospitality industry, including teaching at the university level
for the last 30 years in management control systems, and his knowledge and understanding of finance and financial reporting, led
to the Board’s conclusion that he should serve as a director of the Company.
William J. Nance
— Mr. Nance was first elected
to the Board in May 1996. Mr. Nance is also a Director of Santa Fe having held that position since May 1996. He is the President
and CEO of Century Plaza Printers, Inc., a company he founded in 1979. He has also served as a consultant in the acquisition and
disposition of multi-family and commercial real estate. Mr. Nance is a Certified Public Accountant and, from 1970 to 1976, was
employed by Kenneth Leventhal & Company where he was a Senior Accountant specializing in the area of REITS and restructuring
of real estate companies, mergers and acquisitions, and all phases of real estate development and financing. Mr. Nance is a Director
of InterGroup and has held such position since 1984. Mr. Nance also serves as a director of Comstock Mining, Inc. Mr. Nance’s
extensive experience as a CPA and in numerous phases of the real estate industry, his business and management experience gained
in running his own businesses, his service as a director and audit committee member for other public companies and his knowledge
and understanding of finance and financial reporting, led to the Board’s conclusion that he should serve as a director of
the Company.
Michael G. Zybala
- Mr. Zybala was appointed as Vice
President and Secretary of the Company on February 20, 1998. He is also Vice President, Secretary and General Counsel of Santa
Fe. Mr. Zybala is an attorney at law and has served as the Company’s General Counsel since 1995 and has represented the Company
as its corporate counsel since 1978. Mr. Zybala also serves as Assistant Secretary and Counsel to InterGroup having held those
positions since January 1999.
David T. Nguyen
– Mr. Nguyen was appointed as Treasurer
of the Company on February 27, 2003. Mr. Nguyen also serves as Treasurer of InterGroup and Santa Fe, having been appointed to those
positions on February 26, 2003 and February 27, 2003, respectively. Mr. Nguyen is a Certified Public Accountant and, from 1995
to 1999, was employed by PricewaterhouseCoopers LLP where he was a Senior Accountant specializing in real estate. Mr. Nguyen has
also served as the Company's Controller from 1999 to December 2001 and from December 2002 to present.
Family Relationships:
There are no family relationships
among directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers.
Involvement in Certain Legal Proceedings:
No director
or executive officer, or person nominated or chosen to become a director or executive officer, was involved in any legal proceeding
requiring disclosure.
Compliance with Section 16(a) of the Securities Exchange
Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company’s officers and directors, and each beneficial owner of more than ten percent of the Common Stock of the Company,
to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater
than ten-percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of Forms 3 and 4 and
amendments thereto furnished to the Company during its most recent fiscal year, or written representations from certain reporting
persons that no Forms 5 were required for those persons, the Company believes that during fiscal 2012 all filing requirements applicable
to its officers, directors, and greater than ten-percent beneficial owners were complied with.
Code of Ethics.
The Company has adopted a Code of Ethics that applies to its
principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar
functions. A copy of the Code of Ethics is filed as Exhibit 14 to this Report. A copy is also posted on the Portsmouth page of
its parent company’s website at
www.intgla.com
. The Company will provide to any person without charge, upon request,
a copy of its Code of Ethics by sending such request to: Portsmouth Square, Inc., Attn: Treasurer, 10940 Wilshire Blvd., Suite
2150, Los Angeles, CA 90024. The Company will promptly disclose any amendments or waivers to its Code of Ethics on Form 8-K.
BOARD AND COMMITTEE INFORMATION
Portsmouth is an unlisted company and a Smaller Reporting Company
under the rules and regulations of the Securities and Exchange Commission (“SEC”). With the exception of the Company’s
President and CEO, John V. Winfield, all of Portsmouth’s Board of Directors consists of “independent” directors
as independence is defined by the applicable rules of the SEC and NASDAQ.
Procedures for Recommendations of Nominees to Board of Directors
There have been no changes to the procedures previously disclosed
by which security holders may recommend nominees to the Company’s Board of Directors.
Audit Committee and Audit Committee Financial Expert
Portsmouth is an unlisted company and a Smaller Reporting Company
under SEC rules and regulations. The Company’s Audit Committee is currently comprised of Directors William J. Nance (Chairperson)
and John C. Love, each of whom are independent directors as independence is defined by the applicable rules of the SEC and NASDAQ,
and as may be modified or supplemented. Each of these directors also meets the audit committee financial expert requirement based
on their qualifications and business experience discussed above in this Item 10.
Item 11. Executive Compensation.
The following table provides certain summary
information concerning compensation awarded to, earned by, or paid to the Company’s principal executive officer and other
named executive officers of the Company whose total compensation exceeded $100,000 for all services rendered to the Company for
each of the Company’s last two completed fiscal years ended June 30, 2012 and 2011. No stock awards, long-term compensation,
options or stock appreciation rights were granted to any of the named executive officers during the last two fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
|
|
|
|
|
|
|
|
|
|
Name and
|
|
Fiscal
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John V. Winfield
|
|
|
2012
|
|
|
$
|
134,000
|
(1)
|
|
|
-
|
|
|
$
|
17,000
|
(2)
|
|
$
|
151,000
|
|
Chairman; President
|
|
|
2011
|
|
|
$
|
134,000
|
(1)
|
|
|
-
|
|
|
$
|
17,000
|
(2)
|
|
$
|
151,000
|
|
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael G. Zybala
|
|
|
2012
|
|
|
$
|
101,000
|
|
|
$
|
12,000
|
|
|
|
-
|
|
|
$
|
113,000
|
|
Vice President, Secretary
|
|
|
2011
|
|
|
$
|
98,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
98,000
|
|
and General Counsel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Amounts shown include $6,000 per year in regular
Directors fees.
(2)
During fiscal years 2012 and 2011, the Company
also paid annual premiums of $17,000 for a split dollar whole life insurance policy, owned by, and the beneficiary of which is,
a trust for the benefit of Mr. Winfield’s family. This policy was obtained in December 1998 and provides for a death benefit
of $1,000,000. The Company has a secured right to receive, from any proceeds of the policy, reimbursement of all premiums paid
prior to any payments to the beneficiary.
As a Smaller Reporting Company, Portsmouth has no compensation
committee. Executive Officer compensation is set by disinterested members of the Board of Directors. Portsmouth has no stock option
plan or stock appreciation rights for its executive officers. The Company has no pension or long-term incentive plans. There are
no employment contracts between Portsmouth and any executive officer, and there are no termination-of-employment or change-in-control
arrangements.
In fiscal year ended June 30, 2004, the disinterested members
of the Board of Directors established a performance based compensation program for the Company’s CEO to keep and retain his
services as a direct and active manager of the Company’s securities portfolio. Pursuant to the current criteria established
by the Board, Mr. Winfield is entitled to performance based compensation for his management of the Company’s securities portfolio
equal to 20% of all net investment gains generated in excess of an annual return equal to the Prime Rate of Interest (as published
in the Wall Street Journal) plus 2%. Compensation amounts are calculated and paid quarterly based on the results of the Company’s
investment portfolio for that quarter. Should the Company have a net investment loss during any quarter, Mr. Winfield would not
be entitled to any further performance-based compensation until any such investment losses are recouped by the Company. This performance
based compensation program may be further modified or terminated at the discretion of the Board of Directors. The Company’s
CEO did not earn any performance based compensation for the years ended June 30, 2012 and 2011.
Internal Revenue Code Limitations
Section 162(m) of the Internal Revenue Code of 1986, as amended
(the “Code”), provides that, in the case of a publicly held corporation, the corporation is not generally allowed to
deduct remuneration paid to its chief executive officer and certain other highly compensated officers to the extent that such remuneration
exceeds $1,000,000 for the taxable year. Certain remuneration, however, is not subject to disallowance, including compensation
paid on a commission basis and, if certain requirements prescribed by the Code are satisfied, other performance based compensation.
Since InterGroup, Santa Fe and Portsmouth are each public companies, the $1,000,000 limitation applies separately to the compensation
paid by each entity. Stock option expenses are also amortized over a several years. For fiscal years 2012 and 2011, no compensation
paid by the Company to its CEO or other executive officers was subject the deduction disallowance prescribed by Section 162(m)
of the Code.
DIRECTOR COMPENSATION
The following table provides information concerning compensation
awarded to, earned by, or paid to the Company’s directors for the fiscal year ended June 30, 2012.
DIRECTOR COMPENSATION TABLE
Name
|
|
Fees Earned
or Paid in Cash
|
|
|
All Other
Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Jerold R. Babin
|
|
$
|
6,000
|
|
|
|
-
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Josef A. Grunwald
|
|
$
|
6,000
|
|
|
|
-
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John C. Love
|
|
$
|
38,000
|
(1)
|
|
|
-
|
|
|
$
|
38,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Nance
|
|
$
|
38,000
|
(1)
|
|
|
-
|
|
|
$
|
38,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John V. Winfield
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
Amounts shown include regular Board fees, Audit
Committee fees and Hotel Committee fees.
(2)
As an executive officer, Mr. Winfield’s
directors fees are reported in the Summary Compensation Table.
Each director of the Company is paid a Board retainer fee of
$1,500 per quarter for a total annual compensation of $6,000. This policy has been in effect since July 1, 1985. Members of the
Company’s Audit Committee also receive a fee of $500 per quarter. Directors and Committee members are also reimbursed for
their out-of-pocket travel costs to attend meetings.
On February 26, 2004, the Board of Directors established a Special
Hotel Committee to actively oversee the Company’s interests in Justice Investors and the repositioning and operations of
the Hotel asset. The members of the Special Committee are Directors John C. Love (Chair), William J. Nance and the Company’s
Vice President, Secretary and General Counsel, Michael G. Zybala. For fiscal years ended June 30, 2012 each of the Committee members,
who are directors, received monthly fees of $2,500.
Change in Control or Other Arrangements
Except for the foregoing, there are no
other arrangements for compensation of directors and there are no employment contracts between the Company and its directors or
any change in control arrangements.
Outstanding Equity Awards at Fiscal
Year End.
The Company did not have any outstanding
equity awards at the end of its fiscal year ended June 30, 2012 and has no equity compensation plans in effect.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
The following table sets forth, as of August
31, 2012, certain information with respect to the beneficial ownership of Common Stock owned by (i) those persons or groups known
by the Company to own more than five percent of the outstanding shares of Common Stock, (ii) each Director and Executive Officer,
and (iii) all Directors and Executive Officers as a group.
Name and Address
of Beneficial Owner
|
|
Amount and Nature of
Beneficial Ownership
(1)
|
|
|
Percent of Class
(2)
|
|
|
|
|
|
|
|
|
John V. Winfield
|
|
|
0
|
|
|
|
-
|
|
10940 Wilshire Blvd., Suite 2150
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerold R. Babin
|
|
|
48,345
|
(3)
|
|
|
6.6
|
%
|
243 28
th
Street
|
|
|
|
|
|
|
|
|
San Francisco, CA 94121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Josef A. Grunwald
|
|
|
0
|
|
|
|
-
|
|
10940 Wilshire Blvd., Suite 2150
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John C. Love
|
|
|
0
|
|
|
|
-
|
|
10940 Wilshire Blvd., Suite 2150
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Nance
|
|
|
0
|
|
|
|
-
|
|
10940 Wilshire Blvd., Suite 2150
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael G. Zybala
|
|
|
0
|
|
|
|
-
|
|
10940 Wilshire Blvd., Suite 2150
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David T. Nguyen
|
|
|
0
|
|
|
|
-
|
|
10940 Wilshire Blvd., Suite 2150
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Fe Financial Corporation and
|
|
|
597,299
|
(4)
|
|
|
81.3
|
%
|
The InterGroup Corporation
|
|
|
|
|
|
|
|
|
10940 Wilshire Blvd., Suite 2150
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the above as a group
|
|
|
645,644
|
|
|
|
87.9
|
%
|
(1)
Unless otherwise indicated, and subject to applicable
community property laws, each person has sole voting and investment power with respect to the shares beneficially owned.
(2)
Percentages are calculated based of 734,183 shares
of Common Stock issued and outstanding as of August 31, 2012.
(3)
Jerold R. Babin claims sole voting power over
the 48,345 shares identified herein, of which he has sole dispositive power over 9,667 held in his retirement account. He claims
shared dispositive power with his wife over the 38,478 shares which they hold as trustees of a family trust.
(4)
Santa Fe Financial Corporation is the record
and beneficial owner of 505,437 shares of the Common Shares of Portsmouth and 91,852 shares are owned by Santa Fe’s parent
company, The InterGroup Corporation. As directors of Santa Fe and InterGroup, Messrs. Winfield, Nance and Love have the power to
direct the vote of the shares of Portsmouth owned by Santa Fe and InterGroup.
Security Ownership of Management in Parent Corporation.
As of August 31, 2012, John V. Winfield is the beneficial owner
of 49,400 shares of the common stock of Portsmouth’s parent corporation, Santa Fe. The InterGroup Corporation is the beneficial
owner of 992,248 shares of common stock of Santa Fe. Pursuant to a Voting Trust Agreement dated June 30, 1998, InterGroup also
has the power to vote the 49,400 shares of common stock owned by Mr. Winfield giving it a total of 1,041,648 voting shares, which
represents approximately 83.9% of the voting power of Santa Fe. As President, Chairman of the Board and a 62.6% beneficial shareholder
of InterGroup, Mr. Winfield has voting and dispositive power over the shares owned of record and beneficially by InterGroup. No
other director or executive officer of Portsmouth has a beneficial interest in Santa Fe’s shares.
Changes in Control Arrangements.
There are no arrangements that may result
in a change in control of Portsmouth.
Securities Authorized for Issuance Under
Equity Compensation Plans.
Portsmouth has no securities authorized
for issuance under any equity compensation plans.
Item 13. Certain Relationships and Related
Transactions, and Director Independence.
As of August 31, 2012, Santa Fe and InterGroup owned 81.3% of
the common stock of Portsmouth, and InterGroup and John V. Winfield, in the aggregate, owned approximately 83.9% of the voting
stock of Santa Fe. Certain costs and expenses, primarily rent, insurance and general administrative expenses, are allocated between
the Company, Santa Fe, and InterGroup based on management’s estimate of the utilization of resources. Effective June 30,
1998, certain accounting and administrative functions of the Company and its subsidiaries, were transferred to the Los Angeles,
California offices of InterGroup. During the fiscal years ended June 30, 2012 and 2011, the Company made payments to InterGroup
in the total amount of approximately $72,000 for each of those years, for administrative costs and reimbursement of direct and
indirect costs associated with the management of the Company and its investments, including the Partnership asset.
As Chairman of the Securities Investment Committee, the Company’s
President and Chief Executive officer, John V. Winfield, oversees the investment activity of the Company in public and private
markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer of Santa Fe
and InterGroup and oversees the investment activity of those companies. Depending on certain market conditions and various risk
factors, the Chief Executive Officer, his family, Santa Fe and InterGroup may, at times, invest in the same companies in which
the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer
and his family members, and the resources of Santa Fe and InterGroup, at risk in connection with investment decisions made on behalf
of the Company.
In December 1998, the Board of Directors authorized the Company
to obtain whole life insurance and split dollar insurance policies covering the Company’s President and Chief Executive Officer,
Mr. Winfield. During fiscal 2012 and 2011, the Company paid annual premiums of $17,000 for the split dollar whole life insurance
policy, owned by, and the beneficiary of which is, a trust for the benefit of Mr. Winfield’s family. The Company has a secured
right to receive, from any proceeds of the policy, reimbursement of all premiums paid prior to any payments to the beneficiary.
There are no other relationships or related transactions between
the Company and any of its officers, directors, five-percent security holders or their families that require disclosure.
Director Independence
Portsmouth is an unlisted company and a Smaller Reporting Company
under the rules and regulations of the SEC. With the exception of the Company’s President and CEO, John V. Winfield, all
of Portsmouth’s Board of Directors consists of “independent” directors as independence is defined by the applicable
rules and regulations of the SEC and NASDAQ.
Item 14. Principal Accounting Fees and
Services.
Audit Fees -
The aggregate fees billed for each of the
last two fiscal years ended June 30, 2012 and 2011 for professional services rendered by Burr Pilger Mayer, Inc., the independent
registered public accounting firm for the audit of the Company’s annual financial statements and review of financial statements
included in the Company’s Form 10-Q reports or services normally provided by the independent registered public accounting
firm in connection with statutory and regulatory filings or engagements for those fiscal years, were as follows:
|
|
Fiscal Year
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Audit fees
|
|
$
|
104,000
|
|
|
$
|
133,000
|
|
Audit related fees
|
|
|
-
|
|
|
|
-
|
|
Tax fees
|
|
|
-
|
|
|
|
-
|
|
All other fees
|
|
|
-
|
|
|
|
-
|
|
TOTAL:
|
|
$
|
104,000
|
|
|
$
|
133,000
|
|
Audit Committee Pre-Approval Policies
The Audit Committee shall pre-approve all auditing services
and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent registered
public accounting firm, subject to any de minimus exceptions that may be set for non-audit services described in Section 10A(i)(1)(B)
of the Exchange Act which are approved by the Committee prior to the completion of the audit. The Committee may form and delegate
authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented
to the full Committee at its next scheduled meeting. All of the services described herein were approved by the Audit Committee
pursuant to its pre-approval policies.
None of the hours expended on the independent registered public
accounting firms’ engagement to audit the Company’s financial statements for the most recent fiscal year were attributed
to work performed by persons other than the independent registered public accounting firm’s full-time permanent employees.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The following financial statements of the Company
are included in Part II, Item 8 of this Report at pages 18 through 38:
Report of Independent Registered Public Accounting
Firm
Consolidated Balance Sheets - June 30, 2012 and 2011
Consolidated Statements of Operations for years ended
June 30, 2012 and 2011
Consolidated Statements of Shareholders’ Deficit
for years ended June 30, 2012 and 2011
Consolidated Statements of Cash Flows for years ended
June 30, 2012 and 2011
Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All other schedules for which provision is made in
Regulation S-X have been omitted because they are not required or are not applicable or the required information is shown in the
consolidated financial statements or notes to the consolidated financial statements.
(a)(3) Exhibits
Set forth below is an index of applicable exhibits filed with
this report according to exhibit table number.
Exhibit
Number
|
|
Description
|
|
|
|
3.(i)
|
|
Articles of Incorporation*
|
|
|
|
3.(ii)
|
|
Bylaws (amended February 16, 2000) incorporated by reference to the Company’s Form 10-KSB filed with the Commission on March 19, 2000.
|
|
|
|
4.
|
|
Instruments defining the rights of security holders including indentures (See Articles of Incorporation and Bylaws)*
|
|
|
|
10.
|
|
Material Contracts:
|
|
|
|
10.1
|
|
Amended and Restated Agreement of Limited Partnership of Justice Investors, effective November 30, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q Report for the quarterly period ended December 31, 2010, filed with the Commission on February 11, 2011).
|
|
|
|
10.2
|
|
General Partner Compensation Agreement, dated December 1, 2008 (incorporated by reference to Exhibit 10.2 to Company’s Form 10-Q Report for the quarterly period ended December 31, 2008, filed with the Commission on February 12, 2009).
|
10.3
|
|
Franchise License Agreement, dated December 10, 2004, between Justice Investors and Hilton Hotels (incorporated by reference to Exhibit 10.10 of the Company’s amended report on Form 10-K/A for the fiscal year ended June 30, 2011, as filed with the Commission on August 24, 2012).
|
|
|
|
10.4
|
|
Management Agreement, dated February 2, 2012, between Justice Investors and Prism Hospitality, L.P. (incorporated by reference to Exhibit 10.11 of the Company’s amended report on Form 10-K/A for the fiscal year ended June 30, 2011, as filed with the Commission on August 24, 2012).
|
|
|
|
14.
|
|
Code of Ethics (filed herewith).
|
|
|
|
31.1
|
|
Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
|
|
|
|
31.2
|
|
Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
|
|
|
|
32.1
|
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
|
|
|
|
32.2
|
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
|
* All exhibits marked by an asterisk have been previously filed
with other documents, including Registrant's Form 10 filed on October 27, 1967, and subsequent filings on Forms 8-K, 10-K, 10-KSB,
10-Q and 10-QSB, which are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
PORTSMOUTH SQUARE, INC.
|
|
|
(Registrant)
|
|
|
|
Date:
September 20, 2012
|
by
|
/s/ John V. Winfield
|
|
|
John V. Winfield, President,
|
|
|
Chairman of the Board and
|
|
|
Chief Executive Officer
|
|
|
|
Date:
September 20, 2012
|
by
|
/s/ David T. Nguyen
|
|
|
David T. Nguyen, Treasurer
|
|
|
and Controller
|
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures
|
|
Title and Position
|
|
Date
|
|
|
|
|
|
/s/ John V Winfield
|
|
President, Chief Operating Officer and Chairman
|
|
September 20, 2012
|
John V. Winfield
|
|
of the Board (Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ David T. Nguyen
|
|
Treasurer and Controller (Principal Financial Officer)
|
|
September 20, 2012
|
David T. Nguyen
|
|
|
|
|
|
|
|
|
|
/s/ Michael G. Zybala
|
|
Vice President and Secretary
|
|
September 20, 2012
|
Michael G. Zybala
|
|
|
|
|
|
|
|
|
|
/s/ Jerold R. Babin
|
|
Director
|
|
September 20, 2012
|
Jerold R. Babin
|
|
|
|
|
|
|
|
|
|
/s/ Josef A. Grunwald
|
|
Director
|
|
September 20, 2012
|
Josef A. Grunwald
|
|
|
|
|
|
|
|
|
|
/s/ John C. Love
|
|
Director
|
|
September 20, 2012
|
John C. Love
|
|
|
|
|
|
|
|
|
|
/s/ William J. Nance
|
|
Director
|
|
September 20, 2012
|
William J. Nance
|
|
|
|
|
|
|
|
|
|
Portsmouth Square (PK) (USOTC:PRSI)
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