UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------------- ----------------
Commission file number 0-6673
PACIFIC SECURITY COMPANIES
--------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0669906
------------------------------ ----------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
N. 10 Post Street
525 Peyton Building
Spokane, Washington 99201
------------------------------- ----------------------------
(Address of principal executive (Zip code)
offices)
Registrant's telephone number,
including area code: (509) 624-0183
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange on which registered
-------------------------------- -----------------------------
None None
<PAGE>
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value shares
---------------------------------
(Title of class)
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. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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 amendment to this Form 10-K. X
-----
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant: There is no regular, established
market for trading in the Company's common stock. Therefore, the
aggregate market value of the voting stock held by nonaffiliates of
the registrant is not determinable.
On July 31, 1997, the registrant had outstanding 1,872,125 shares of
common stock, no par value ($3 stated value) and 9,400 shares of
Redeemable Class A preferred stock, $100 par value.
Documents incorporated by reference: none.
Number of pages in this document is 48.
<PAGE>
PACIFIC SECURITY COMPANIES
FORM 10-K ANNUAL REPORT
Table of Contents
-----------------
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
<PAGE>
PART I
Item 1. Business
--------
(a) Pacific Security Companies was merged into Security Savesco, Inc.
as of May 31, 1985. The name of Security Savesco, Inc., the
surviving corporation, was changed to Pacific Security Companies
as of the date of the merger.
Prior to the merger, both corporations were engaged principally
in real estate contract financing and owning, leasing and selling
real properties. The merged corporation has continued these
activities. Total assets of the registrant at July 31, 1997 and
1996 were $32,294,907 and $32,840,107, respectively, and real
estate contracts represent approximately 34% and 32% of the
respective asset totals. The Company began curtailing its
contract acquisitions and presently primarily originates
contracts to facilitate the sale of real estate held for sale or
development. Many of the contracts have fixed contractual
interest rates from 5.25% to 14.25% and there is no provision for
changing these rates to current market rates. However, for real
estate contracts purchased by the Company, most contracts have
been purchased at a discount from the contract balance which
increases the effective yield. Newer contracts bear interest
rates based on current market conditions. The total amount
invested in real estate contracts and mortgages of $10,971,700 as
of July 31, 1997 is $478,756 more than at the end of the prior
year. The percentage of contracts which were delinquent over 90
days was 0.4% as of July 31, 1997 and 1.0% as of July 31, 1996.
Management continues to emphasize enforcement of the Company's
credit and collection policies.
In fiscal 1997, the Company continued to emphasize the
development of its rental properties and commenced new projects
primarily to improve the occupancy of its commercial buildings.
Correspondingly, the acquisition of additional real estate
contracts was minimal, other than for Company financed sales of
its real estate.
In fiscal 1996, the Company completed construction of Birdies
Golf Center (Birdies). The golf center features a 56-tee driving
range, a fully-lighted, contoured fairway with 5 target greens, a
pro shop, teaching studios and an 8,000-square-foot putting
green. Birdies serves as a practice and teaching center for all
levels of golfers and additionally sells golf clubs and related
golfing supplies. Birdies has been constructed on land held for
development by the Company since 1990. Cumulative costs incurred
to construct the facility, including land costs, were
approximately $2,297,000. See further information on this
business segment in Notes 5 and 6 to the consolidated financial
statements.
<PAGE>
Additionally, in fiscal 1997, the Company continued developing
certain land for residential development. The Company has
madestreet improvements and began underground and power line
utility construction. The project, known as Tanglewood Ranch Park
Estates(The Crest) offers approximately 21 ten-acre parcels
suitable for home construction. The Company anticipates marketing
these parcels extensively in the spring of 1998.
Investments in rental properties totaled $13,487,085 and
$14,930,040 as of July 31, 1997 and 1996, respectively. The
decrease is primarily the net result of increased additional
costs that are more than offset by depreciation and sales. Other
real property held for sale totaled $4,039,208 and $3,797,395 as
of July 31, 1997 and 1996, respectively. These properties will be
liquidated and/or developed at such time as market conditions
warrant, and in the judgment of management, when the Company can
maximize its return. The Company will continue to invest in and
hold real property on a long-term basis. These properties may
ultimately be sold on an installment basis for tax purposes in
order to minimize and defer related income taxes and to conserve
funds for additional investment purposes. These plans may be
modified as the result of future changes to the Internal Revenue
Code.
With the Company's sale of certain commercial real estate and
multi-family housing, rental income has decreased from $2,832,139
in fiscal 1995 to $2,398,369 in fiscal 1997. During the same
period, interest income, including the amortization of discounts
on real estate contracts, has declined from 30% of total income
in fiscal 1995 to 22% of total income in fiscal 1997. The Company
expects to continue its emphasis on the development, leasing and
sale of commercial real estate in fiscal 1998 along with the
continued operation of Birdies and marketing of the Tanglewood
parcels. There are no contractual commitments other than the
remaining remodeling costs associated with improvements for
commercial buildings. The Company's fiscal 1998 capital
expenditures may increase if demand for the rental of Company
properties continues or if the Company decides to further develop
any of its properties held for sale. A description of the
Company's significant properties is included in Item 2
Properties.
The Company's business is concentrated in financing real estate
contracts, developing real estate for sale or lease and the
operation of Birdies. The Company is in competition with
financial institutions who invest in real estate collateralized
contracts and commercial property owners located primarily in or
near Spokane, Washington. As of July 31, 1997, the Company
employed approximately 33 people on a full-time equivalent basis,
11 of whom are in its office at N. 10 Post Street in Spokane,
Washington.
<PAGE>
Item 2. Properties
----------
As of July 31, 1997, the Company owns the following properties. Some
of the properties are subject to real estate contracts or mortgages
that are collateralized by the property.
Properties Located in Spokane County, Washington:
July 31, 1997
--------------------------------------
Rental/ Net Mortgage
Date Description of Development Carrying or Contract
Acquired Property Status Value Obligation
-------- -------------------- ----------- -------- -----------
Commercial:
1979 The Peyton Building
at N. 10 Post Street Substantially $3,921,847 $ 848,447
contains approxi- Leased
mately 85,000 square
feet of rentable
space. Substantial
improvements have
been made to the
building since its
acquisition. Remodel-
ing of this office
building continues as
new occupancy warrants.
The Company's offices
are located in this
building.
1979 The Hutton Building Substantially $3,633,185
at S. 10 Washington Leased
contains approxi-
mately 56,000 square
feet of rentable
space. Substantial
improvements have
been made to the
building since its
acquisition. Remodel-
ing of this building
continues as new
occupancy warrants.
The Company also
acquired two other
buildings and 25,000
square feet for
parking near this
building.
<PAGE>
Properties Located in Spokane County, Washington, Continued:
July 31, 1997
--------------------------------------
Rental/ Net Mortgage
Date Description of Development Carrying or Contract
Acquired Property Status Value Obligation
-------- -------------------- ----------- -------- -----------
Commercial, Continued:
1984 Bank Branch Building Leased $ 431,820 $ 626,302
at W. 102 Indiana
Avenue is under a
long-term lease.
1992 The Pier One Build- Leased $3,437,038 $1,530,016
ing is a commercial
building. The build-
ing has two major
tenants, who occupy
over 60% of the
space, and several
other smaller tenants
for the remaining
space.
1992 The Cellular One Leased $ 779,427
Building is a
commercial building
constructed by the
Company on the north
river bank in Spokane.
1990 The Nevada-Holland Under $1,056,412
property consists of development
approximately 16
remaining acres of
raw land in a
location where there
has been substantial
commercial and
residential develop-
ment.
1995 Birdies Golf Center, Constructed $2,142,247
constructed on 14 and operating
acres of the Nevada-
Holland property,
features a 56-tee
driving range, a
fully contoured
fairway with 5
target greens, a pro
teaching studios and
an 8,000-square-foot
putting green.
<PAGE>
Properties Located in Spokane County, Washington, Continued:
July 31, 1997
--------------------------------------
Rental/ Net Mortgage
Date Description of Development Carrying or Contract
Acquired Property Status Value Obligation
-------- -------------------- ----------- -------- -----------
Commercial, Continued:
1991 Tanglewood Ranch Under $1,775,889
Park Estates (The development
Crest) in south
Spokane County was
acquired through a
judicial foreclosure.
The area consisted of
approximately 300
acres of undeveloped
land. In fiscal 1996,
the Company commenced
the development of
this property which,
when completed, will
result in approxi-
mately 21 fully
developed residen-
tial lots.
1990 The north river bank Undeveloped $1,034,061 $ 118,295
in Spokane consists
of parcels of un-
developed commercial
real estate.
Multi-Family Housing:
1969 The Aqua View Fully $ 607,317 $ 303,944
Apartments is a 129- Occupied
unit apartment
complex. The complex
is an FHA 221(d)3
project, receives
rent subsidies from
Spokane Housing
Authority and is
subject to a HUD-
insured mortgage.
<PAGE>
Projects Located Outside Spokane County, Washington:
July 31, 1997
--------------------------------------
Rental/ Net Mortgage
Date Description of Development Carrying or Contract
Acquired Property Status Value Obligation
-------- -------------------- ----------- -------- -----------
1991 The City View Apart- Fully $ 430,337 $ 549,737
ments is a 21-unit Occupied
apartment complex.
1976 Retail store in Leased $ 89,668
Coeur d'Alene, Idaho
containing 17,000
square feet. The
building is currently
leased.
1993 Approximately six Being $ 167,136
acres in Auburn, Marketed
Washington zoned for
multi-family housing
were acquired through
a foreclosure.
Additionally, the Company has other less significant investments in
real estate located primarily in the state of Washington.
Item 3. Legal Proceedings
-----------------
As of July 31, 1997, it is the opinion of management that there is no
pending litigation that would have a material adverse effect on the
financial condition or operations of the registrant.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the stockholders during the
fourth quarter of fiscal 1997.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
-----------------------------------------------------
(a) Principal Market.
There is no established market for trading in the Company's
common stock. Periodically, the Company will purchase and retire
its common stock, but does not solicit such transactions.
(b) Stock Price and Dividend Information.
There is no market information relative to the common stock price
of the Company's stock as it is not actively traded. A dividend
of $0.075 per common share totaling $150,786, declared as payable
to stockholders of record as of July 31, 1989, was paid
August 15, 1989. A dividend of $0.10 per common share or
$200,211, declared as payable to stockholders of record as of
July 31, 1990, was paid August 15, 1990. No dividends were
declared in any of the years since 1990.
(c) Approximate Number of Holders of Common Stock.
Common no par value -- 1,162 record holders.
(d) There is only one class of common stock outstanding. Any dividend
which may be declared would be payable at the same rate on each
share of common stock. At July 31, 1997, the Company also has
issued 9,400 shares of Redeemable Class A preferred stock owned
by five holders. These shares receive cumulative dividends of 6%
when declared by the Board of Directors. During the fiscal years
ended July 31, 1997 and 1996, dividends totaling $62,400 were
declared and accrued on these shares. The dividends were paid on
August 1, 1997 and August 2, 1996, respectively. These preferred
shares require redemption by the Company at par value plus
accrued dividends in 2004.
<PAGE>
Item 6. Selected Financial Data
-----------------------
The following selected financial data have been derived from the
Company's audited consolidated financial statements, and should be
read in conjunction with the consolidated financial statements and
notes thereto.
<TABLE>
<CAPTION>
Years Ended July 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Rental income $ 2,398,369 $ 2,714,563 $ 2,832,139 $ 2,653,958 $ 2,635,215
Interest income 1,005,072 1,138,935 1,375,420 1,476,881 1,714,348
Gains on sales of real estate 1,611,195 486,469 584,657 186,109 233,766
Interest expense, net 1,548,173 1,650,559 1,681,213 1,682,355 1,894,691
Cumulative effect of change in
accounting principle - - - (61,894) -
Net income (loss) 472,000 39,266 159,310 71,558 140,412
Income (loss) applicable to
common shareholders 357,600 (75,134) 44,910 71,558 140,412
Income (loss) per common share:
Income (loss) before cumula-
tive effect of change in
accounting principle .19 (.04) .02 .07 .07
Cumulative effect of change
in accounting principle - - - (.03) -
----------- ----------- ----------- ----------- -----------
Income (loss) per common share .19 (.04) .02 .04 .07
=========== =========== =========== =========== ===========
Cash dividends per common
share - - - - -
Weighted-average number of
common shares outstanding 1,895,105 1,938,076 1,960,746 1,977,889 1,986,911
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended July 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at year
end):
Contracts, mortgages and
finance notes receivable,
net $10,971,700 $10,492,944 $13,457,896 $14,457,958 $14,930,791
Total assets 32,294,907 32,840,107 35,351,486 34,842,679 35,898,448
Notes and contracts payable 10,028,531 11,055,919 13,107,725 13,679,068 14,951,242
Debentures 9,898,351 9,718,260 9,179,484 8,567,231 8,763,867
Stockholders' equity 9,689,896 9,397,005 9,544,017 9,563,355 9,521,032
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
GENERAL
This discussion contains some forward-looking statements. A forward-
looking statement may contain words such as "will continue to be,"
"will be," "continue to," "expect to," "anticipates that," "to be," or
"can impact." Management cautions that forward-looking statements are
subject to risks and uncertainties that could cause the Company's actual
results to differ materially from those projected in forward-looking
statements.
The Company engages in financing real estate collateralized contracts,
acquiring real estate that is either held for sale or developed and
leased or sold and operating Birdies Golf Center as its primary
activities. During the past two years, the Company has been emphasizing
the development and lease of its commercial office building projects as
demand for the available space in these projects has increased.
Virtually all of the Company's development of these commercial office
building projects has involved extensive remodeling efforts in
connection with preparation of previously unoccupied space for a new
tenant and structural changes as required by current building codes.
<PAGE>
The Company invests in real estate collateralized contracts and real
property primarily within the state of Washington, with a
concentration in Spokane County. The Company has concentrated its
efforts primarily on the development and sale of existing real estate
projects to maximize the return from those investments. The Company
has curtailed its contract acquisitions and now primarily originates
real estate contracts to facilitate the sale of its property held for
sale or development and makes loans secured by real estate.
Birdies Golf Center (Birdies) opened to the pubic in fiscal 1996. The
Company has focused on a marketing campaign to increase public
awareness and attraction to the facility. In addition to its many
unique amenities, Birdies has retained the services of a golf
professional. Birdies is expected to contribute an increasing portion
of the Company's income.
The Company finances its investments in real estate and contracts and
operates Birdies primarily through the sale of fixed rate debentures
with terms ranging from one to ten years, real estate notes or
mortgages, and a collateralized line-of-credit arrangement with a
local bank. The Company intends to continue using these funding
sources in the future.
RESULTS OF OPERATIONS
For the years ended July 31, 1997, 1996 and 1995, the Company's net
income was approximately $472,000, $39,000 and $159,000, respectively.
Due to dividends and the accretion of the discount on the issuance of
preferred stock, the income (loss) applicable to common shareholders
was approximately $358,000, $(75,000) and $45,000 in fiscal 1997, 1996
and 1995, respectively.
Rental real estate activities have decreased due to sales of rental
properties. Total rental income has decreased from approximately
$2,832,000 in fiscal 1995 to $2,398,000 in fiscal 1997. Reduced rental
income could continue as a result from sales of some rental
properties.
The total interest income and amortization of discounts on acquired
real estate contracts and loans has continued to decline from
approximately $1,458,000 and $1,265,000 in fiscal 1995 and 1996,
respectively, to approximately $1,031,000 in fiscal 1997. This decline
corresponds directly with the decline in the Company's investment in
real estate contracts. The Company has curtailed its real estate
contract acquisition activities to concentrate its efforts in
renovating and leasing commercial office buildings and developing real
estate. Collections on real estate contracts have significantly
exceeded new acquisitions in each of the last three fiscal years.
These funds were used to remodel and develop existing real estate
projects and repay outstanding obligations.
<PAGE>
Gains on the sale of real estate were approximately $1,611,000,
$486,000 and $585,000 in fiscal 1997, 1996 and 1995, respectively. The
Company anticipates that it will continue to recognize gains both on
the sale of real estate acquired through foreclosure and real estate
acquired for resale.
Sales of services and tangible products at Birdies were approximately
$344,000 in fiscal 1997 compared to $294,000 in its first year of
operations. Overall, the golf center recorded a loss from operations
of approximately $189,000 and $143,000 in fiscal 1997 and 1996,
respectively, primarily reflecting the initial start-up and staffing
costs. The Company anticipates that the margins from its golf center
will improve through increased sales and the non-recurrence of start-
up costs.
The expenses associated with rental operations have decreased to
approximately $2.1 million in fiscal 1997 from approximately $2.5
million in fiscal 1996 and 1995. The rental activities of the Company
are expected to continue to contribute significantly to its
profitability, but may be affected by sales of rental properties.
Interest expense, exclusive of interest on rental properties, net of
amounts capitalized, was approximately $1,188,000, $1,216,000 and
$1,263,000 in fiscal 1997, 1996 and 1995, respectively. The decline
in interest costs over the three-year period has been primarily as a
result of a decrease in outstanding borrowings.
Salaries and commissions have fluctuated modestly in absolute dollar
amounts for each of the last three fiscal years. The commencement of
the Birdies operation in early fiscal 1996 contributed to an increase
in the number of employees and related salaries and other general and
administrative costs. In addition, real estate taxes significantly
increased for Birdies and other properties.
The Company's effective income tax rate as a percentage of income
before federal income tax was 32% in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had total stockholders' equity of
approximately $9,690,000 and a total liabilities to equity ratio of
2.27 to 1, which decreased from 2.43 to 1 a year before. In fiscal
1997, the Company's primary sources of funds were approximately $2.0
million from the sale of real estate, $2.5 million in real estate
contract collections, $447,000 from the sale of debentures and
$957,000 from net line-of-credit borrowings. The primary uses of funds
were approximately $1.4 million used for the acquisition and
improvements of real estate projects, $1.5 million used to acquire new
contracts and mortgage notes, $815,000 in repayment of maturing
debentures and approximately $2.0 million in repayment of outstanding
long-term debt. As a holder of monetary assets and liabilities, the
Company's performance may be significantly affected by changes in
<PAGE>
interest rates. These changes are somewhat mitigated or delayed to the
extent that much of the Company's investment in real estate contracts,
and established real estate leases have fixed returns, as do the
Company's debentures. Additionally, the Company will be affected by
changes in the real estate market in Washington.
The Company anticipates that sales of debentures and the availability
of funds under its $8,000,000 line-of-credit arrangement, of which
only approximately $5,405,000 was outstanding at July 31, 1997, will
be sufficient to fund its short- and intermediate-term needs to retire
maturing debentures and mortgage obligations and continue development
of its real estate projects as demand warrants. The Company does not
anticipate any significant capital expenditurees during fiscal 1998.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Notes 1 and 6 to the consolidated financial statements for a
discussion of new accounting standards.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Report of independent accountants
Financial statements:
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
-----------------------------------------------------------
There were no disagreements on accounting issues or financial
statement disclosure during the fiscal year ended July 31, 1997 or any
interim period after July 31, 1997.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Pacific Security Companies
Spokane, Washington
We have audited the accompanying consolidated balance sheets of
Pacific Security Companies and subsidiaries as of July 31, 1997 and
1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended July 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Pacific Security Companies and subsidiaries as of July 31, 1997 and
1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended July 31, 1997,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for impaired loans in fiscal
1996.
/s/Coopers & Lybrand L.L.P.
Spokane, Washington
October 9, 1997
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 1997 and 1996
ASSETS 1997 1996
----------- -----------
Cash and cash equivalents:
Unrestricted $ 325,058 $ 464,471
Restricted 84,684 152,346
----------- -----------
409,742 616,817
----------- -----------
Receivables:
Contracts, mortgages and finance
notes receivable, net:
Related parties 728,436 845,672
Unrelated 10,243,264 9,647,272
----------- -----------
10,971,700 10,492,944
Accrued interest 91,919 90,111
Federal income taxes 454,621
Other 30,541 72,542
----------- -----------
11,548,781 10,655,597
----------- -----------
Investment in rental properties, net 13,487,085 14,930,040
----------- -----------
Investment in golf center, net 2,142,247 2,124,230
----------- -----------
Other investments:
Property held for sale and development 4,039,208 3,797,395
Marketable securities 87,004 75,880
Restricted investments 278,154 221,840
Other 20,931
----------- -----------
4,404,366 4,116,046
----------- -----------
Other assets:
Vehicles and equipment, net 25,760 30,983
Prepaid expenses 221,425 283,042
Golf center inventories 55,501 83,352
----------- -----------
302,686 397,377
----------- -----------
Total assets $32,294,907 $32,840,107
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
July 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------- -----------
Liabilities:
Note payable to bank $ 5,404,999 $ 4,448,010
Installment contracts, mortgage notes ----------- -----------
and notes payable:
Related parties 191,462 204,136
Unrelated 4,432,070 6,403,773
----------- -----------
4,623,532 6,607,909
----------- -----------
Debenture bonds 9,898,351 9,718,260
----------- -----------
Accrued expenses and other liabilities:
Related parties 246,994 165,438
Unrelated 733,657 786,166
----------- -----------
980,651 951,604
----------- -----------
Federal income taxes:
Currently payable 244,944
Deferred 1,121,478 848,375
----------- -----------
1,121,478 1,093,319
----------- -----------
Total liabilities 22,029,011 22,819,102
----------- -----------
Commitments and contingencies (Notes 10
and 12)
Redeemable Class A preferred stock,
$100 par value; $100 redemption value;
authorized 20,000 shares; issued and
outstanding, 9,400 and 10,400 shares 940,000 1,040,000
Less: Net discount on issuance of
preferred stock (364,000) (416,000)
----------- -----------
576,000 624,000
----------- -----------
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
July 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------- -----------
Stockholders' equity:
Common stock:
Original class, authorized 2,500,000
no par value shares, $3 stated
value; issued and outstanding,
1,872,125 and 1,918,085 shares $ 5,616,375 $ 5,754,255
Class B, authorized 30,000 no par
value shares; no shares issued and
outstanding
Additional paid-in capital 1,906,642 1,805,001
Retained earnings 2,175,875 1,853,275
Unrealized loss on marketable securities,
net of deferred income taxes (8,996) (15,526)
----------- -----------
Total stockholders' equity 9,689,896 9,397,005
----------- -----------
Total liabilities and
stockholders' equity $32,294,907 $32,840,107
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended July 31, 1997, 1996 and 1995
1997 1996 1995
---------- ---------- ----------
Income:
Rental $2,398,369 $2,714,563 $2,832,139
Interest 1,005,072 1,138,935 1,375,420
Gain on sale of securities 30,959 4,445
Service fees and options 27,775 3,600
Amortization of discounts on
real estate contracts 25,856 126,044 82,783
Gain on sales of real estate 1,611,195 486,469 584,657
Golf center sales (including
lessons of $13,527 and
$31,937) 343,528 294,276
Other, net (32,757) 153,376 (30,010)
---------- ---------- ----------
5,379,038 4,944,622 4,853,034
---------- ---------- ----------
Expenses:
Rental operations:
Depreciation and amortization 640,105 714,474 699,264
Interest 360,632 434,397 418,688
Other 1,097,046 1,311,200 1,332,205
---------- ---------- ----------
2,097,783 2,460,071 2,450,157
Interest, net of amount
capitalized 1,187,541 1,216,162 1,262,525
Salaries and commissions 626,675 651,416 565,245
General and administrative 575,463 422,455 311,557
Depreciation 100,875 82,797 18,190
Cost of golf merchandise sales 98,105 53,503
Uncollectible accounts 2,788 1,412 117
---------- ---------- ----------
4,689,230 4,887,816 4,607,791
---------- ---------- ----------
Income before federal income
tax provision 689,808 56,806 245,243
Federal income tax provision 217,808 17,540 85,933
---------- ---------- ----------
Net income 472,000 39,266 159,310
Less: Preferred stock dividends (62,400) (62,400) (62,400)
Accretion of discount on
preferred stock (52,000) (52,000) (52,000)
---------- ---------- ----------
Income (loss) applicable to
common stockholders $ 357,600 $ (75,134) $ 44,910
========== ========== ==========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
for the years ended July 31, 1997, 1996 and 1995
1997 1996 1995
---------- ---------- ----------
Income (loss) per common share $ .19 $ (.04) $ .02
========== ========== ==========
Weighted average common shares
outstanding 1,895,105 1,938,076 1,960,746
========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain(Loss)
Additional on
Common Paid-In Retained Marketable
Stock Capital Earnings Securities Total
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances, July 31, 1994 $5,896,785 $1,760,262 $1,883,499 $ 22,809 $9,563,355
Net income 159,310 159,310
Unrealized loss on marketable
securities (28,430) (28,430)
Purchase and retirement
of common stock (7,528
shares) (22,584) (13,234) (35,818)
Cash dividend declared on
preferred stock (62,400) (62,400)
Accretion of discount on
preferred stock (52,000) (52,000)
---------- ---------- ---------- ---------- ----------
Balances, July 31, 1995 5,874,201 1,747,028 1,928,409 (5,621) 9,544,017
Net income 39,266 39,266
Unrealized loss on marketable
securities (9,905) (9,905)
Purchase and retirement
of common stock
(39,982 shares) (119,946) 57,973 (61,973)
Cash dividend declared on
preferred stock (62,400) (62,400)
Accretion of discount on
preferred stock (52,000) (52,000)
---------- ---------- ---------- ----------- ----------
</TABLE>
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
for the years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional on
Common Paid-In Retained Marketable
Stock Capital Earnings Securities Total
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances, July 31, 1996 $5,754,255 $1,805,001 $1,853,275 $ (15,526) $9,397,005
Net income 472,000 472,000
Unrealized gain on marketable
securities 6,530 6,530
Purchase and retirement
of common stock
(45,960 shares) (137,880) 66,641 (71,239)
Cash dividend declared on
preferred stock (62,400) (62,400)
Accretion of discount on
preferred stock (52,000) (52,000)
Redemption of preferred stock
(1,000 shares) 35,000 (35,000)
---------- ---------- ---------- ----------- ----------
Balances, July 31, 1997 $5,616,375 $1,906,642 $2,175,875 $ (8,996) $9,689,896
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended July 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Cash flows from operating
activities:
Cash received from
contracts, rentals and
golf center sales $ 2,759,659 $ 3,119,937 $ 2,861,797
Interest received 1,003,265 1,168,493 1,390,814
Cash paid to suppliers
and employees (2,269,308) (3,029,296) (1,832,994)
Interest paid, net of
amounts capitalized (995,036) (1,141,198) (1,184,699)
Income taxes paid (643,000) (112,500) (97,500)
----------- ----------- -----------
Net cash provided by
(used in) operating
activities (144,420) 5,436 1,137,418
----------- ----------- -----------
Cash flows from investing
activities:
Proceeds from sales of
real estate 2,032,279 259,435 293,138
Proceeds from sales of
marketable securities
and other investments 41,553 2,300
Collections on contracts,
mortgages and finance
notes receivable 2,462,229 4,166,338 2,543,914
Investment in contracts,
mortgages and finance
notes receivable (1,535,634) (51,106) (242,399)
Additions to rental
properties, property
held for sale, property
under development, golf
center, vehicles and
equipment (1,353,211) (2,477,696) (3,146,582)
Change in restricted
investments and cash
equivalents 11,348 84,974 (46,473)
Other 16,335 28,837 (2,121)
----------- ----------- -----------
Net cash provided by
(used in) investing
activities 1,633,346 2,052,335 (598,223)
----------- ----------- -----------
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended July 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Cash flows from financing
activities:
Net borrowings (repayments)
under line-of-credit
agreement $ 956,989 $(2,231,388) $ (344,143)
Proceeds from installment
contracts, mortgage
notes and notes payable 1,270,858 1,911,000
Payments on installment
contracts, mortgage
notes and notes payable (1,984,377) (1,091,276) (2,138,200)
Proceeds from sales of
debenture bonds 447,223 863,142 1,107,171
Redemption of debenture
bonds (814,535) (855,614) (975,715)
Redemption of preferred
stock (100,000)
Payment of dividends on
preferred stock (62,400) (62,400)
Purchase and retirement
of common stock (71,239) (61,973) (35,818)
----------- ----------- -----------
Net cash used in
financing activities (1,628,339) (2,168,651) (475,705)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (139,413) (110,880) 63,490
Cash and cash equivalents,
beginning of year 464,471 575,351 511,861
----------- ----------- -----------
Cash and cash equivalents,
end of year $ 325,058 $ 464,471 $ 575,351
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended July 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Reconciliation of net income
to net cash provided by
(used in) operating
activities:
Net income $ 472,000 $ 39,266 $ 159,310
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 740,980 797,271 717,454
Deferred income tax
provision (benefit) 274,374 (328,187) (28,424)
Deferred financing
income realized (25,856) (126,044) (82,783)
Interest accrued on
debenture bonds 547,403 531,248 480,797
Gain on sales of
marketable securities (30,959)
Gain on sales of real
estate (1,611,195) (486,469) (584,657)
Loss on other investment 24,865
Uncollectible accounts 2,788 1,412 117
Change in assets and
liabilities:
Accrued interest
receivable (1,808) 18,685 16,251
Prepaid expenses 61,617 52,025 15,604
Inventories 27,851 (83,352)
Accrued expenses 29,047 (583,245) 412,613
Income taxes
payable (699,565) 228,095 (11,354)
Other, net 37,944 (24,310) 17,625
----------- ----------- -----------
Net cash
provided by
(used in)
operating
activities $ (144,420) $ 5,436 $ 1,137,418
=========== =========== ===========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended July 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Supplemental schedule of
noncash investing and
financing activities:
Company financed sale of
property $ 1,379,495 $ 1,025,648 $ 1,160,400
Accretion of discount on
preferred stock 52,000 52,000 52,000
Stock dividend declared
and unpaid 62,400 62,400 62,400
Additions to investment
in rental properties
and properties held for
sale through contract
foreclosures 6,060
Deferred gain recognized
on sale of property 507,703
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Pacific Security Companies and subsidiaries (the Company) is
incorporated under the laws of the state of Washington. The
Company is engaged in the business of owning, selling and leasing
real properties and in contract and loan financing,
collateralized by real estate. Most of the Company's real estate
activities are concentrated within the state of Washington.
Additionally, the Company completed construction and commenced
operations of a golf center during the year ended July 31, 1996.
The golf center, located in Spokane, Washington, serves as a
practice and teaching center and sells golf clubs and related
golf supplies.
A summary of significant accounting policies followed by the
Company is presented below:
CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Aqua View
Apartments, Inc. All significant intercompany accounts and
transactions have been eliminated.
The Company's wholly owned subsidiary, Henry George & Sons Co.,
Inc.(and its wholly owned subsidiary, Cooper George Company)
(Cooper George) was dissolved during the year ended July 31,
1996. Upon dissolution, all assets of Cooper George were
transferred to the Company for the redemption of the
outstanding common stock. Cooper George was included in the
accounts of the Company during the year ended July 31, 1995.
CASH AND CASH EQUIVALENTS
The Company deposits all cash and cash equivalents with high
quality financial institutions. At times, the deposits may
exceed the federal insured limit.
The Company considers highly liquid debt instruments, if any,
purchased with a remaining maturity of three months or less to
be cash equivalents.
CONTRACTS, MORTGAGES AND FINANCE NOTES RECEIVABLE
Contracts, mortgages and finance notes receivable are stated at
unpaid principal balance, plus accrued interest, less
acquisition discounts and an allowance for estimated
uncollectible amounts, as necessary. Management evaluates
receivables which may not be fully collectible to determine if
a provision for loss is necessary based on the present value of
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
CONTRACTS, MORTGAGES AND FINANCE NOTES RECEIVABLE, CONTINUED
expected future cash flows from the receivables in the ordinary
course of business or from amounts recoverable through
foreclosures and the subsequent resale of the collateral, in
accordance with Statement of Financial Accounting
Standards(SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." The Company adopted this standard on
August 1, 1995, which did not have a material effect on the
consolidated financial statements.
Interest continues to be accrued on non-performing receivables
until such amount is not expected to be recovered.
DISCOUNTS ON CONTRACTS
The Company amortizes discounts on purchased contracts using
the level-yield method over the expected term of the contracts.
INVESTMENT IN RENTAL PROPERTIES
Rental properties, including land, buildings and improvements
and furniture and equipment are recorded at cost. Expenditures
for maintenance and repairs are charged to operations as
incurred. Renewals and betterments are capitalized.
Depreciation is provided on the straight-line method over
estimated useful lives as summarized below:
Years
-----
Buildings and improvements 15-40
Furniture and equipment 5-10
Upon sale or retirement of depreciable properties, the related
cost and accumulated depreciation are removed from the accounts
and any resultant gain or loss is reflected in operations.
INVESTMENT IN GOLF CENTER
The golf center, including land, building and improvements and
furniture and equipment are recorded at cost. Depreciation is
provided on the straight-line method over the estimated useful
lives as summarized below:
Years
-----
Buildings and improvements 15-40
Furniture and equipment 3-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INTEREST CAPITALIZATION
All costs associated with self-constructed assets (including
interest and real estate taxes) incurred during the
construction period are capitalized. Interest costs of
approximately $98,000, $205,000 and $204,000 were capitalized
in fiscal 1997, 1996 and 1995, respectively.
PROPERTY HELD FOR SALE OR DEVELOPMENT
The Company acquires real estate through direct acquisition and
foreclosures and records these assets at the lower of fair
value less estimated costs to sell or cost. Losses on
properties held for sale or development are recognized if the
anticipated cash flows from disposition, less estimated selling
costs, are estimated to be less than the carrying value of the
related asset.
The Company evaluates its real estate assets for impairment in
value whenever events or circumstances indicate that the
carrying value of an asset may not be recoverable. In
performing the review, if expected future undiscounted cash
flows from the use of the asset or the fair value, less selling
costs, from the disposition of the asset is less than its
carrying value, an impairment loss is recognized.
MARKETABLE SECURITIES
The Company's investments, consisting of debt and equity
securities, are considered to be "available for sale" and,
therefore, are carried at market value. Realized gains and
losses on the sale of these securities are recognized on a
specific identification basis in the consolidated statement of
operations in the period the securities are sold. Unrealized
gains and losses are excluded from operations and reported as a
separate component of stockholders' equity, net of related
income taxes, until realized.
RESTRICTED INVESTMENTS
Restricted investments in U.S. Treasury bonds are carried at
amortized cost. Premiums or discounts at acquisition are
amortized using the interest method over the remaining term of
the investment.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
VEHICLES AND EQUIPMENT
Vehicles and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful
lives of 4 to 5 and 5 to 10 years, respectively. Accumulated
depreciation associated with vehicles and equipment was
$191,547 and $207,505 at July 31, 1997 and 1996, respectively.
Upon sale or retirement, the cost and related accumulated
depreciation are removed from the accounts and any resultant
gain or loss is reflected in operations.
GOLF CENTER INVENTORIES
Golf center inventories are stated at the lower of cost or
estimated net realizable value using the first-in, first-out
method.
SALES OF REAL ESTATE
Receipts on sales of real estate investments are accounted for
as customer deposits until the principal payments received on
the sales contracts exceed the minimum guidelines for gain
recognition (see Note 4). Losses arising from sales of real
estate are recognized immediately upon sale.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for
the expected future income tax consequences of events that have
been recognized in the financial statements. Under this method,
deferred tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the temporary
differences are expected to reverse.
INCOME OR LOSS PER SHARE
Income or loss per common share is based on net income or loss
after deducting preferred stock dividends and the accretion of
the discount on preferred stock divided by the weighted average
number of shares of common stock outstanding during each year.
In February 1997, Statement of Financial Accounting Standards
(SFAS) No. 128 , "Earnings Per Share," was issued. SFAS 128
establishes standards for computing and presenting earnings per
share (EPS) and simplifies the existing standards. This
standard replaces the presentation of primary EPS with a
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INCOME OR LOSS PER SHARE, CONTINUED
presentation of basic EPS. It also requires the dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of
the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December
15, 1997, including interim periods and requires restatement of
all prior-period EPS data presented. The Company does not
believe that the application of this standard will have a
material effect on the presentation of its earnings per share
disclosures.
COMPREHENSIVE INCOME
In June 1997, SFAS 130, "Reporting Comprehensive Income," was
issued. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose
financial statements. This Statement requires that all items
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This Statement does not require a
specific format for the financial statement, but requires an
enterprise to display an amount representing total
comprehensive income for the period in the financial statement.
This Statement requires an enterprise to classify items of
other comprehensive income by their nature in a financial
statement and display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement
of financial position. This Statement is effective for fiscal
years beginning after December 15, 1997. The Company has not
yet determined the financial statement effect of the
application of this Statement.
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
RECLASSIFICATIONS
Certain 1996 balances have been reclassified to conform with
the 1997 presentation with no effect on net income or retained
earnings as previously reported.
2. RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENTS:
At July 31, 1997 and 1996, the Company holds cash and cash
equivalents and investments which are restricted for the
following purposes:
1997 1996
--------------------- ---------------------
Cash and U.S. Cash and U.S.
Cash Treasury Cash Treasury
Equivalents Notes Equivalents Notes
----------- -------- ----------- --------
Tenant security
deposits $ 13,250 $ 25,948
Mortgage reserves 21,437 33,728
Apartment complex
replacement
reserve required
by the Department
of Housing and
Urban Development
(HUD) 36,558 $129,330 86,702 $128,588
Apartment complex
residual receipts
as required by
HUD 13,439 148,824 4,161 93,252
-------- -------- -------- --------
$ 84,684 $278,154 $152,346 $221,840
======== ======== ======== ========
The U.S. Treasury notes held in the replacement and residual
receipt reserves at July 31, 1997 and 1996 bear interest at 5.75%
to 6%, respectively, and mature October 31, 1997 and October 15,
1999.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. CONTRACTS, MORTGAGES AND FINANCE NOTES RECEIVABLE:
At July 31, 1997 and 1996, the aging of amounts due on contracts,
mortgages and finance notes receivable was as follows:
1997 1996
----------- -----------
Current $11,049,018 $10,474,252
31 to 60 days 46,506 46,448
60 to 90 days 9,756 85,767
Over 90 days 49,525 102,771
----------- -----------
11,154,805 10,709,238
Less unearned acquisition discounts (183,105) (216,294)
----------- -----------
$10,971,700 $10,492,944
=========== ===========
Substantially all of these receivables are collateralized by
land, commercial buildings and single and multi-family
residences. Interest rates on most loans are fixed and range from
5.25% and 14.25% at July 31, 1997 and 1996.
Management of the Company provides an allowance for losses based
upon estimates of the cash flows to be collected on the
receivable or the fair value of the underlying collateral, net of
selling costs. At July 31, 1997 and 1996, the fair value of the
underlying collateral, net of selling costs, is estimated to be
greater than the carrying value of the related receivables, and
thus, no allowance for loss has been provided. The receivables
are collateralized primarily by real estate located in the state
of Washington. These estimates can be affected by changes in the
economic environment in the state of Washington and the resultant
effect on real estate values. As a result of changing economic
conditions, it is reasonably possible that the amount of the
allowance for loan losses could change in the near term.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS IN RENTAL PROPERTIES:
Following is a summary of investments in rental properties at
July 31, 1997 and 1996:
1997 1996
----------- -----------
Land $ 2,467,862 $ 2,929,981
Buildings and improvements 15,784,229 17,432,278
Furniture and equipment 941,626 1,082,374
----------- -----------
19,193,717 21,444,633
Less accumulated depreciation (5,706,632) (6,514,593)
----------- -----------
$13,487,085 $14,930,040
=========== ===========
The Company leases office space in certain of the above buildings
under operating leases. Most of the lease agreements contain
renewal options and escalation provisions associated with
inflation over the term of the lease. The following is a schedule
by years of minimum future rentals on noncancellable operating
leases as of July 31, 1997:
Year Ending
July 31,
-----------
1998 $ 1,328,645
1999 1,076,776
2000 699,221
2001 624,481
2002 316,209
Thereafter 246,914
-----------
Total minimum future rentals $ 4,292,246
===========
These properties are primarily located in the greater Spokane,
Washington geographical area. Losses on investments in rental
properties are recognized if the anticipated cash flows from
operations or the sale of the rental property, net of selling
costs, are estimated to be less than the carrying value of the
related asset. These estimates can be affected by changes in the
economic environment of the Spokane, Washington area and the
resultant effect on the real estate rental and property values.
As a result of changing economic conditions, it is reasonably
possible that these estimates could change in the near term.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS IN RENTAL PROPERTIES, CONTINUED:
At July 31, 1997 and 1996, the sales of certain rental property
and land were subject to sales contracts, but had not met the
criterion to be recorded as a sale. Therefore, the deposit method
of accounting for these sales was applied, resulting in
approximately $159,000 and $185,000 being classified as
investments in rental properties at July 31, 1997 and 1996,
respectively. At July 31, 1997 and 1996, the Company had deferred
gains of approximately $41,000 and $42,000, respectively,
associated with these sales which will be recognized when the
criterion for a sale is ultimately met.
5. INVESTMENT IN GOLF CENTER:
The Company completed construction of Birdies Golf Center
(Birdies), which features a 56-tee driving range, a fully
lighted, contoured fairway with 5 target greens, a pro shop,
teaching studios and an 8,000-square-foot putting green.
The following is a summary of the investment in the golf center
at July 31, 1997 and 1996:
1997 1996
----------- -----------
Land $ 350,000 $ 350,000
Building and improvements 1,687,503 1,622,751
Furniture and equipment 259,757 223,985
----------- -----------
2,297,260 2,196,736
Less accumulated depreciation (155,013) (72,506)
----------- -----------
$ 2,142,247 $ 2,124,230
=========== ===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. BUSINESS SEGMENT REPORTING:
Information about the Company's separate business segments and in
total as of and for the years ended July 31, 1997 and 1996 is as
follows:
1997
-------------------------------------
Birdies Rental and
Golf Receivable
Center Operations Total
----------- ----------- -----------
Revenue $ 343,528 $ 5,035,510 $ 5,379,038
Earnings (loss) from
operations (189,429) 879,237 689,808
Identifiable assets,
net 2,197,928 30,096,979 32,294,907
Depreciation and
amortization 82,507 658,473 740,980
Capital expenditures 108,103 1,245,108 1,353,211
1996
-------------------------------------
Birdies Rental and
Golf Receivable
Center Operations Total
----------- ----------- -----------
Revenue $ 294,276 $ 4,650,346 $ 4,944,622
Earnings (loss) from
operations (142,848) 199,654 56,806
Identifiable assets,
net 2,207,582 30,632,525 32,840,107
Depreciation and
amortization 72,506 724,765 797,271
Capital expenditures 854,937 1,622,759 2,477,696
In June 1997, SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," was issued. SFAS 131
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. This Statement supersedes
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. BUSINESS SEGMENT REPORTING, CONTINUED:
FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report
information about major customers.
This Statement is effective for financial statements for periods
beginning after December 15, 1997. The Company has not yet
determined the effect that the application of this Statement will
have on its consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. MARKETABLE SECURITIES:
A summary of investments in marketable securities at July 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
Market/ Market/
Unrealized Carrying Unrealized Carrying
Cost Depreciation Value Cost Depreciation Value
-------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Marketable equity
securities $ 41,235 $(13,631) $ 27,604 $ 40,004 $(23,524) $ 16,480
Debt securities 59,400 59,400 59,400 59,400
-------- -------- -------- -------- -------- --------
$100,635 $(13,631) $ 87,004 $ 99,404 $(23,524) $ 75,880
======== ======== ======== ======== ======== ========
</TABLE>
8. NOTE PAYABLE TO BANK:
Note payable to bank represents borrowings outstanding under the
Company's $8,000,000 short-term, line-of-credit agreement with
U.S. Bank of Washington. Amounts drawn under the line bear
interest at the bank's prime rate plus 0.875%. The interest rate
was 9.125% (based on a prime rate of 8.25%) at July 31, 1997. The
agreement is subject to renewal on December 5, 1997. The
Company's principal stockholder provides a guarantee of up to
$1.2 million on outstanding borrowings under the line-of-credit
agreement. The following assets were pledged as collateral for
the note at July 31, 1997 and 1996:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. NOTE PAYABLE TO BANK, CONTINUED:
1997 1996
---------- ----------
Finance notes and real estate
contracts receivable $4,024,219 $3,267,367
Assignment of future rents 2,473,003 2,029,184
Equity in contracts with
underlying obligations 71,650 104,191
---------- ----------
$6,568,872 $5,400,742
========== ==========
9. INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE:
Installment contracts, mortgage notes and notes payable bear
interest at rates ranging from 6.0% to 9.0% per annum. Aggregate
monthly debt service payments, including interest, were
approximately $56,117 at July 31, 1997.
Scheduled future maturities of contracts, mortgage notes and
notes payable are as follows:
Year Ending
July 31,
-----------
1998 $ 322,355
1999 340,350
2000 366,074
2001 393,033
2002 378,125
Thereafter 2,823,595
----------
$4,623,532
==========
The following assets were pledged as collateral for contracts,
mortgage notes and notes payable at July 31, 1997 and 1996:
1997 1996
----------- -----------
Contracts receivable $ 3,952,479 $ 3,828,054
Rental properties 8,116,950 8,428,533
----------- -----------
$12,069,429 $12,256,587
=========== ===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. DEBENTURE BONDS:
The Company has issued unsecured investment bonds to residents of
the state of Washington under the Securities Act of Washington.
The proceeds have been used in making funds available for loans
and the development, improvement and acquisition of commercial
real property.
The outstanding bonds have original maturities ranging from one
to ten years and the interest rates vary depending upon the
maturity.
Estimated future contractual maturities of outstanding debenture
bonds are as follows:
Year Ending
July 31,
-----------
1998 $ 2,021,809
1999 911,675
2000 954,814
2001 708,334
2002 259,074
Thereafter 5,042,645
-----------
$ 9,898,351
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. DEBENTURE BONDS, CONTINUED:
Outstanding bonds by interest rate categories were as follows at
July 31, 1997 and 1996:
Bond Interest Rate 1997 1996
------------------ ----------- -----------
5.75% $ 354,502 $ 42,086
6.00 447,664
6.25 148,258 114,129
6.50 577,675 484,690
6.75 20,231
7.00 517,146 927,631
7.25 325,088 274,235
7.50 1,712,455 1,748,361
7.75 473,967 246,690
8.00 722,011 742,900
8.25 636,594 258,745
8.50 1,384,274 1,300,283
8.75 331,323 544,285
9.00 1,644,000 1,566,314
9.25 334,996 312,638
9.50 707,069 661,206
10.00 13,164 11,926
10.50 10,280 9,268
11.00 5,549 4,978
----------- -----------
$ 9,898,351 $ 9,718,260
=========== ===========
The weighted average interest rate for outstanding debentures at
July 31, 1997 and 1996 was 8.06% and 8.01%, respectively.
The Securities Act of Washington contains specific statutory and
regulatory requirements concerning companies selling debentures
in the state of Washington. These regulations require maintenance
of minimum net worth and liquidity levels, define debenture terms
and maturity limitations, describe financial reporting
requirements and prohibit certain activities by controlling
persons of the issuer of debentures. Failure to comply with these
requirements may jeopardize a company's ability to issue
debentures.
In November 1996, the Company obtained its permit to offer
debentures for sale under the Securities Act of Washington. The
permit is subject to the following conditions:
(a) Outstanding debentures, including accrued interest, may not
exceed $10,488,910 at any time during the period.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. DEBENTURE BONDS, CONTINUED:
(b) Normal quarterly reports will be supplemented with the
following information:
-- Copies of the Company's Form 10-Q.
-- Calculations of the ratio of earnings to fixed charges.
-- Schedules showing the real estate sold, proceeds received
and use of the proceeds during the quarter.
-- Schedules showing the amounts of debentures sold to new
investors, old debentures retired and renewals.
-- A discussion of the efforts which have been made during
the quarter to transfer a receivable from Washington
Capital, Inc. (WCI), a related party (see Note 14), to an
unaffiliated entity.
The permit may be renewed for an additional one year upon its
expiration in November 1997. However, the Company's continued
ability to sell additional debentures is dependent upon its
compliance with the preceding conditions.
11. INCOME TAXES:
The components of the income tax provision (benefit) are as
follows:
1997 1996 1995
----------- ----------- -----------
Current $ (56,566) $ 345,727 $ 114,357
Deferred 274,374 (328,187) (28,424)
----------- ----------- -----------
$ 217,808 $ 17,540 $ 85,933
=========== =========== ===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
The components of the net deferred tax liability at July 31, 1997
and 1996 were as follows:
Assets Liabilities Total
----------- ----------- -----------
1997:
Depreciation $ (318,282) $ (318,282)
Installment gains (854,093) (854,093)
Unrealized gains or
losses on marketable
securities $ 4,635 4,635
Accrued liabilities 35,317 35,317
Other, net 10,945 10,945
----------- ----------- -----------
$ 50,897 $(1,172,375) $(1,121,478)
=========== =========== ===========
1996:
Depreciation $ (182,538) $ (182,538)
Installment gains (937,642) (937,642)
Unrealized gains or
losses on marketable
securities $ 17,575 17,575
Deferred gain on sale
of real estate 220,000 220,000
Accrued liabilities 46,982 46,982
Other, net (12,752) (12,752)
----------- ----------- -----------
$ 284,557 $(1,132,932) $ (848,375)
=========== =========== ===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
The annual tax provision is different from the amount which would
be provided by applying the statutory federal income tax rate to
the Company's pretax income. The reasons for the differences are:
1997 % 1996 % 1995 %
-------- ----- -------- ----- -------- -----
Computed
statutory
provision $234,535 34.0% $ 19,314 34.0% $ 83,383 34.0%
Meals and
entertain-
ment 861 0.1 1,280 1.3 950 0.4
Change in tax
estimates (17,588) (2.5)
Other (3,054) (5.4) 1,600 0.6
-------- ----- -------- ----- -------- -----
$217,808 31.6% $ 17,540 35.0% $ 85,933 35.0%
======== ===== ======== ===== ======== =====
12. REDEEMABLE PREFERRED STOCK:
The 6% annual dividends on the Class A preferred stock are
cumulative. Dividends of $62,400 were declared on the preferred
stock during the years ended July 31, 1997 and 1996 and were paid
subsequent to each respective year end.
The Company has the right to redeem any shares after three years
from the date of issuance. During the year ended July 31, 1997,
the Company redeemed 1,000 shares of the preferred stock at par.
However, all shares are required to be redeemed by the Company
ten years after issuance at the par value plus accrued dividends
to date of redemption. Due to the mandatory ten-year redemption,
the discount on the issuance of the preferred stock is being
accreted using the interest method over the redemption period.
This accretion is recorded as an increase in the carrying value
of the preferred stock and as a charge against retained earnings.
The accretion of this discount was $52,000 in each of the years
ended July 31, 1997, 1996 and 1995.
Each share of Class A Preferred Stock is entitled to one vote on
each matter voted on at a stockholders' meeting. The preferred
stockholders have liquidation rights equal to the par value plus
accumulated and unpaid dividends. The liquidation preference of
the preferred stock was $1,002,400 and $1,102,400 at July 31,
1997 and 1996, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. REDEEMABLE PREFERRED STOCK, CONTINUED:
At July 31, 1997, preferred stock with a face value of $600,000
has been pledged as collateral for a contract receivable from WCI
(see Note 14).
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the
value of each class of financial instrument for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
CASH AND CASH EQUIVALENTS - Due to the nature of these
financial instruments, carrying value approximates fair value.
DEBENTURE BONDS, CONTRACTS RECEIVABLE AND INSTALLMENT CONTRACTS
PAYABLE - Fair values are determined using future cash flows
discounted at a rate of interest currently offered for debt or
receivables with similar remaining maturities and credit risks.
At July 31, 1997 and 1996, the carrying values of these
financial instruments approximated their fair values.
NOTE PAYABLE TO BANK - Fair value approximates the carrying
value because the loan bears variable interest rate.
MARKETABLE SECURITIES AND RESTRICTED INVESTMENTS - Fair value
approximates the carrying value based on quoted market prices.
LIMITATIONS - The fair value estimates are made at a discrete
point in time based on relevant market information and
information about the financial instruments. Because no market
exists for many of these financial instruments, fair value
estimates are based on judgments regarding current economic
conditions and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates. Accordingly, the estimates presented herein are not
necessarily indicative of what the Company could realize in a
current market exchange.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS:
CONTRACTS AND NOTES RECEIVABLE
Certain stockholders are indebted to the Company on contracts
or notes with the following terms:
1997 1996
-------- --------
Note secured by common stock, bearing
interest at 12.5% (prime plus 4%);
due in full by December 1, 2001 $250,343 $278,206
Notes secured by real estate and common
stock; interest at 8.5% to 13.75% 27,985 27,985
-------- --------
$278,328 $306,191
======== ========
HERITAGE VILLAGE APARTMENT COMPLEX
On February 1, 1974, Wayne E. Guthrie and his wife, Constance
Guthrie, purchased the Heritage Village apartment complex
located in King County, Washington for $2,100,000 from Pacific
National Capital Company (which subsequently merged into
Pacific Security Companies). The purchase was partially seller-
financed by a real estate contract bearing interest at 8% in an
original amount of $2,060,000. This contract was assigned to
WCI in 1990 (see below). The balance owed on this contract was
$450,109 and $539,481 on July 31, 1997 and 1996, respectively.
The taxable gain on this sale was $932,348.
On August 1, 1976, Wayne E. Guthrie and Constance Guthrie sold
the Heritage Village apartment complex for $2,650,000 to
Security Savesco, Inc., which subsequently merged with Pacific
Security Companies in 1985 and had its name changed to Pacific
Security Companies.
On November 29, 1979, Security Savesco, Inc. sold the Heritage
Village apartment complex for $6,000,000 to a non-related
party. The sale was partially seller-financed by a real estate
contract bearing interest at 9% in an original amount of
$5,200,000. The balance owed on this contract was $3,088,320
and $3,388,641 on July 31, 1997 and 1996, respectively. The
taxable gain on this sale was $2,732,811. The balance owed was
paid in full in September 1997.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
WASHINGTON CAPITAL, INC. (WCI)
In July 1990, certain contracts receivable from Company
officers, directors and stockholders were assigned by the
Company to WCI, a corporation whose sole stockholder was Wayne
E. Guthrie. In December 1991, Mr. Guthrie transferred his
ownership interest in WCI to his brother, who is now the sole
stockholder of WCI. Generally accepted accounting principles
include members of the immediate families of principal owners
or management as related parties.
The assignment of the contracts receivable from officers/
directors/stockholders of the Company was made at no gain or
loss as WCI executed installment notes payable to the Company
for the same principal amounts and interest rates as the
contracts assigned to WCI. In 1993, one of the contracts was
paid in full. At July 31, 1997 and 1996, the only significant
assets and liabilities of WCI were the contract receivable from
the officer/stockholder of the Company and the installment
contract payable to the Company.
In July 1994, Wayne E. Guthrie and/or WCI pledged $800,000 face
value of the Company's Class A Preferred Stock (see Note 12) to
guarantee performance and full payment of any account that he
or WCI may owe to the Company. In July 1997, as a result of the
redemption of preferred shares, the pledge was adjusted to
$600,000 face value of the Company's Class A Preferred Stock.
In the event the Company elects to redeem this preferred stock
at any time prior to 2002, the proceeds shall be applied to the
debt. Also, any dividends included therewith shall be applied
to accrued interest paid on the debt.
If the debt is not paid in full prior to July 5, 2002, the
Company shall become the owner of the preferred stock, and the
liquidation shall be at the Company's sole discretion with the
proceeds being applied to the debt along with accrued dividends
that may be declared.
The contract receivable by the Company from WCI had balances
outstanding of $450,109 and $539,481 at July 31, 1997 and 1996,
respectively. This contract is repayable in $15,000 monthly
installments and bears interest at 8% per annum.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
WASHINGTON CAPITAL, INC. (WCI), CONTINUED
The Securities Act of Washington prohibits a debenture
company's officers, directors or controlling persons from
directly or indirectly borrowing funds from a debenture company
or from indirectly or directly owning real property upon which
the debenture company holds a mortgage, deed of trust or
property contract. The Securities Division takes the position
that the holding of these receivables, whether by the Company
or WCI, violates this provision of the Securities Act. The
Company has agreed to work with WCI to move these receivables
to a party which may legally hold them subject to such
restrictions (see Notes 10 and 12).
INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE
At July 31, 1997 and 1996, the following related-party notes
payable were outstanding:
Interest Monthly
1997 1996 Rate Payment
-------- -------- -------- --------
Wayne E. Guthrie $188,303 $199,190 6.75% $ 2,000
John Guthrie 3,353 4,946 9.00% 219
-------- --------
$191,656 $204,136
======== ========
DEBENTURE BONDS
Included in debenture bonds at July 31, 1997 and 1996 is
approximately $199,000 and $101,000, respectively, that is
payable to related parties. These bonds bear interest at the
prevailing market rate on the date of purchase.
ACCRUED EXPENSES AND OTHER LIABILITIES
Included in accrued expenses and other liabilities at July 31,
1997 and 1996 are $138,546 and $57,283, respectively, payable
to Wayne E. Guthrie. Additionally, $97,288 and $98,885 was
payable to Constance Guthrie at July 31, 1997 and 1996,
respectively. Interest at 9.0% accrues on these advances.
Advances from other stockholders, who are children of Wayne E.
Guthrie, included in other liabilities amounted to $11,160 and
$9,269 at July 31, 1997 and 1996, respectively. These advances
bear interest at 9.0%.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
INTEREST INCOME AND EXPENSE
The approximate amount of related-party interest income and
expense included in the accompanying consolidated statements of
operations for each of the three years ended July 31, 1997,
1996 and 1995 is as follows:
1997 1996 1995
-------- -------- --------
Interest income $ 68,000 $ 90,000 $100,000
Interest expense 36,000 35,000 34,000
DEFERRED COMPENSATION AGREEMENT
During October 1991, the Company entered into a deferred
compensation agreement with its former president, Robert W.
Guthrie. In accordance with the terms of the agreement,
Mr. Guthrie was paid monthly compensation of $7,124 through
March 31, 1993.
The agreement also called for Robert W. Guthrie to be paid a
commission of $150,000 upon the sale or lease of certain real
estate for personal services he rendered on behalf of the
Company related to the acquisition and development of the
property. As of July 31, 1997, a commission of $147,876 had
been paid pursuant to the agreement.
Additionally, the agreement states that the Company will
provide Robert W. Guthrie with a line-of-credit loan of up to
$278,206 collateralized by Mr. Guthrie's pledge of his 158,975
shares of the Company's common stock. The line of credit
requires monthly interest payments only through October 1996 at
a rate of prime plus 4.0% (or 12.5% at July 31, 1997), then
monthly interest and principal payments of an amount necessary
to amortize the loan over the next five-year period. As of
July 31, 1997, $250,342 had been loaned to Robert W. Guthrie
pursuant to the agreement.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
SALE OF REAL ESTATE
On December 1, 1979, Pacific Security Companies sold land and a
mini-warehouse business to Security Savesco, Inc., an equity
method investee. Security Savesco, Inc. merged with Pacific
Security Companies in 1985 and had its name changed to Pacific
Security Companies. The gain on the sale of the property was
$727,703. The gain, net of $220,000 of income taxes, was
deferred for financial statement purposes until the property
was sold to an unrelated entity. During the year ended July 31,
1997, the property was sold and the net deferred gain of
$507,703 was recognized in the statement of operations.
15. COMMON STOCK:
On October 31, 1995, the Board of Directors of the Company
proposed the creation of a second class of common stock, Class
B common stock. This proposed action was ratified by the
stockholders of the Company on December 12, 1995, at which time
an amendment to the Articles of Incorporation was approved.
This class has authorized 30,000, no par value shares and
entitles the holder to 50 votes on each matter in all
proceedings in which actions are taken by the stockholders,
including the election of directors. Otherwise, the common
stock is identical to the original class in all respects and
for all purposes.
A suit filed in Superior Court of the State of Washington,
Spokane County, by Robert Guthrie has delayed the issuance of
Class B common stock. A trial date has been set for January
1998.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following information as ofJuly 31, 1997 is provided with respect
to each director and executive officer of the Company:
<TABLE>
<CAPTION>
Year First Term as
Elected as Director
Name Age Director Expires in Position (date elected to position)
---------------------- --- ---------- ---------- ------------------------------------------
<S> <C> <C> <C> <C>
Wayne E. Guthrie 77 1970 1999 Chairman of the Board and Chief Executive
Officer (January 17, 1970); Director
Kevin M. Guthrie 42 1980 1997 Vice President (May 2, 1985); Director
David L. Guthrie 33 1987 1997 Vice President (September 1, 1989);
Director
Donald J. Migliuri 50 1992 1998 Secretary/Treasurer (May 29, 1990);
Director
Raymond J. Fisher 74 1970 1999 Director
Constance M. Guthrie 63 1981 1999 Director
Robert N. Codd 67 1994 1997 Director
</TABLE>
<PAGE>
FAMILY RELATIONSHIPS
Kevin M. Guthrie and David L. Guthrie are the sons of Wayne E.
Guthrie. Constance M. Guthrie is the wife of Wayne E. Guthrie.
BUSINESS EXPERIENCE
Wayne E. Guthrie, Chairman of the Board of Pacific Security Companies.
Mr. Guthrie is also Chairman of the Board of Aqua View Apartments,
Inc. a Washington corporation and subsidiary of the registrant. Mr.
Guthrie has over 50 years of experience in areas of construction,
financing of real estate and personal property, and real estate
investments.
Kevin M. Guthrie, Vice President of Pacific Security Companies since
1985. Mr. Guthrie has served as property manager for the Company since
1976. Mr. Guthrie is also an officer and director of Aqua View
Apartments, Inc.
David L. Guthrie, Vice President of Pacific Security Companies since
1989. Mr. Guthrie was formerly a financial consultant with Merrill
Lynch in Spokane, Washington. Mr. Guthrie is also an officer and
director of Aqua View Apartments, Inc. Mr. Guthrie is a NASD licensed
securities sales person (registered representative) and broker-dealer
(general securities principal). He is a licensed real estate broker in
the state of Washington and has obtained the CCIM designation
(certified commercial investment member) awarded by the commercial
real estate investment institute.
Donald J. Migliuri, Treasurer of Pacific Security Companies since 1990
and secretary since 1991. Mr. Migliuri is a Certified Public
Accountant and has served as an accounting officer with various
diversified financial services companies for over 17 years. He also is
a certified management accountant (CMA) and has a Masters degree in
Business Administration.
Constance M. Guthrie. Mrs. Guthrie is a housewife and has not been
employed outside the home during the past nine years.
Raymond J. Fisher. Mr. Fisher, now retired, was Secretary of Pacific
Security Companies. He was a Certified Public Accountant and was
employed by the Company and its predecessor companies for 41 years.
Robert N. Codd. Mr. Codd is employed by Pacific Security Companies in
its leasing and real estate activities. He was employed by the
Company from 1970 to 1979 and was rehired in November 1992. Prior to
being rehired, he was a commercial realtor and property manager.
<PAGE>
Item 11. Executive Compensation
----------------------
REMUNERATION OF DIRECTORS AND OFFICERS
The following table lists, on an accrual basis, for each of the three
years ended July 31, 1997, the remuneration paid by the Company to any
officers or directors in excess of $100,000 and to all officers and
directors as a group who were officers or directors of the Company at
any time during the year ended July 31, 1997:
Name of Individual Annual Compensation
or Number of Capacities in Which Fiscal -------------------
Persons in Group Served Year Salary Bonus
------------------ --------------------- ------ -------- ---------
Wayne E. Guthrie Chairman of the Board
and Chief Executive 1997 $ *
Officer 1996 *
1995 113,000
Officers and 1997 253,144
Directors as a
group
The Company has no qualified or nonqualified stock option plans as of
July 31, 1997.
*Annual compensation did not exceed $100,000.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
---------------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information concerning parties,
excluding management, who are known by the Company to directly
own more than 5% of any class of the Company's voting shares on
July 31, 1997:
<PAGE>
Amount and
Nature of
Name and Address of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
-------------- ------------------------- ---------- --------
Common stock Linda Guthrie Welden
Bothell, WA 158,975 8.49%
Common stock Julie Guthrie Hable
San Francisco, CA 190,387 10.17
Common stock Robert Guthrie
Spokane, WA 158,975 8.49
Common stock John W. Guthrie
Olympia, WA 137,348 7.34
------- -----
Totals 645,685 34.49%
======= =====
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of July 31, 1997 information
concerning the direct ownership of each class of equity
securities by all directors and all directors and officers of the
Company as a group:
Amount and
Nature of
Name and Address of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
-------------- ------------------------- ---------- --------
Common stock Wayne E. Guthrie 453,027 24.20%
Common stock Constance Guthrie 105,043 5.61
Common stock Kevin Guthrie 216,267 11.55*
Common stock David Guthrie 216,267 11.55*
------- ------
Common stock All directors and
officers as a group 990,604 52.91%
======= ======
Preferred stock Wayne E. Guthrie 7,000 74.47%
Preferred stock Wayne E. or Constance
Guthrie 2,000 21.28
Preferred stock Kevin Guthrie 100 1.06
Preferred stock David Guthrie 100 1.06
Preferred stock Don Migliuri 200 2.13
------- ------
Preferred stock All directors and
officers as a group 9,400 100.00%
======= ======
* Additionally, these parties exercise voting rights over an
additional 1.38% of this class through the holdings of their
minor children.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Transactions with Company officers, directors and stockholders and
other related parties are summarized in Notes 12 and 14 to the
consolidated financial statements included herein.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
-----------------------------------------------------------
(a) 1. Financial Statements - See index under Item 8
(a) 2. Financial Statement Schedules:
Report of independent accountants
Schedule III - Real estate and accumulated depreciation
Schedule IV - Mortgage loans on real estate
All other schedules are omitted because they are not
applicable, or not required, or because the required
information is included in the financial statements or notes
thereto.
(a) 3. Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K during the last quarter:
None
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
Board of Directors and Stockholders
Pacific Security Companies
Spokane, Washington
Our report on the consolidated financial statements of Pacific
Security Companies and subsidiaries is included on page 10 of this
Form 10-K. In connection with our audits of such consolidated
financial statements, we have also audited the related financial
statement schedules listed under Item 14 of this Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as
a whole, present fairly, in all material respects, the information
required to be included therein.
/s/Coopers & Lybrand L.L.P.
Spokane, Washington
October 9, 1997
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
SCHEDULE III
Real Estate and Accumulated Depreciation
July 31, 1997
<TABLE>
<CAPTION>
Cost Amount at Life on Which
Capitalized Which Depreciation
Subsequent Carried at in Latest Income
Initial to Close of Accumulated Date Statement
Description Encumbrance Cost Acquisition Period Depreciation Acquired is Computed
----------------------- ----------- ------- ----------- ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Residential and
commercial
properties:
Rental build-
ings and
improvements:
Spokane,
Washington
N. 10 Post
Street
(Peyton Bldg.) $ 848,447 $ 2,209,343 $ 3,051,521 $ 5,260,864 $ 1,449,210 1979 25-40 years
S. 10
Washington
(Hutton
Bldg.) 1,498,769 3,554,102 5,052,871 1,565,003 1979 25-40 years
Aqua View
Apartments 303,944 1,385,074 290,919 1,675,993 1,068,677 1969 40 years
W. 102
Indiana 626,302 663,031 663,031 231,211 1988 30 years
City View
Apartments 549,737 440,028 58,743 498,771 100,529 1991 25 years
Pier One
Building 1,530,016 1,194,017 2,769,823 3,963,840 544,412 1992 25-40 years
Cellular One
Building 950,373 (2,811) 947,562 168,135 1992 25 years
Birdies Golf
Center 1,972,752 64,751 2,037,503 98,661 1995 15-40 years
</TABLE>
<PAGE>
SCHEDULE III, CONTINUED
Real Estate and Accumulated Depreciation
July 31, 1997
<TABLE>
<CAPTION>
Cost Amount at Life on Which
Capitalized Which Depreciation
Subsequent Carried at in Latest Income
Initial to Close of Accumulated Date Statement
Description Encumbrance Cost Acquisition Period Depreciation Acquired is Computed
----------------------- ----------- ------- ----------- ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Coeur d'Alene,
Idaho
Yellowfront
Building $ 281,723 $ 281,723 $ 192,055 1976 25 years
Furniture related
to above 540,237 401,389 941,626 443,752 Various Various
Held for resale:*
Alberta
Apartments 167,193 167,193 1988
----------- ----------- ----------- ----------- -----------
$ 3,858,446 $11,302,540 $10,188,437 $21,490,977 $ 5,861,645
=========== =========== =========== =========== ===========
</TABLE>
*Buildings sold, but not meeting criteria for recognition of gain
for financial statement reporting purposes.
<PAGE>
SCHEDULE III, Continued
Real Estate and Accumulated Depreciation
July 31, 1997
Real estate:
Balance at beginning of period $23,861,390
Additions during period:
Purchases and capitalized costs 960,522
Deductions during period:
Cost of real estate sold (3,330,935)
-----------
Balance at close of period $21,490,977
===========
Accumulated depreciation:
Balance at beginning of period $ 6,587,099
Depreciation for the year 731,902
Charges to accumulated depreciation related to
real estate investments sold, net of other
adjustments (1,457,356)
-----------
Balance at close of period $ 5,861,645
===========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
SCHEDULE IV
Mortgage Loans on Real EstateJuly 31, 1997
<TABLE>
<CAPTION>
Principal
Amount
of Loans
Subject to
Face Carrying Delinquent
Interest Maturity Periodic Amount of Amount of Principal
Description Rate Date Payment Terms Prior Liens Mortgages Mortgages or Interest
---------------------- -------- -------- ----------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate contract
on apartment build-
ing (Heritage $50,000 per month,
Village) 9% 2004 including interest $ 3,088,319 $ 3,088,319
Real estate contract
on apartment complex
(Evergreen Town $16,973 per month,
House) 9% 2023 including interest 1,732,027 1,732,027
Real estate contract
on apartment build-
ing (East Valley $8,492 per month,
Terrace) 9.50% 2002 including interest 968,716 968,716
Finance note loan 11.50% 2002 $5,900 per month,
including interest 509,136 509,136
Real estate contract
on Walker-McGough $3,600 per month,
Building 8.50% 2016 including interest 399,219 399,219
Other mortgage contracts
and notes receivable,
none of which indivi-
dually exceed 3% of
the total carrying
value of mortgages Various Various Various 4,431,744 4,274,283
----------- -----------
$11,129,161 $10,971,700
=========== ===========
</TABLE>
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
SCHEDULE IV, CONTINUED
Mortgage Loans on Real Estate, Continued
July 31, 1997
<TABLE>
<CAPTION>
Principal
Amount
of Loans
Subject to
Face Carrying Delinquent
Interest Maturity Periodic Amount of Amount of Principal
Description Rate Date Payment Terms Prior Liens Mortgages Mortgages or Interest
---------------------- -------- -------- ----------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period $10,492,944
Additions during period:
Mortgage loans origina-
ted and purchased $ 2,915,129
Contract discounts
realized 25,856
-----------
2,940,985
Deductions during period:
Collections of princi-
pal and contract
payoffs 2,462,229
-----------
Balance at end of period $10,971,700
===========
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, Pacific Security Companies has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PACIFIC SECURITY COMPANIES
(Registrant)
Dated: November 6, 1997 By: /s/ Wayne E. Guthrie
------------------------- -------------------------
Wayne E. Guthrie
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, which
include the Chief Executive Officer, the Chief Financial Officer, and
the Board of Directors, on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/Wayne E. Guthrie Chief Executive Officer November 6, 1997
----------------------- and Director ----------------
Wayne E. Guthrie
/s/Donald J. Migliuri Secretary-Treasurer November 6, 1997
----------------------- Chief Financial Officer ----------------
Donald J. Migliuri
/s/Kevin M. Guthrie Vice-President and November 6, 1997
----------------------- Director ----------------
Kevin M. Guthrie
/s/David L. Guthrie Vice-President and November 6, 1997
----------------------- Director ----------------
David L. Guthrie
/s/Constance M. Guthrie Director November 6, 1997
----------------------- ----------------
Constance M. Guthrie
/s/Raymond J. Fisher Director November 6, 1997
----------------------- ----------------
Raymond J. Fisher
/s/Robert N. Codd Director November 6, 1997
----------------------- ----------------
Robert N. Codd
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 410
<SECURITIES> 87
<RECEIVABLES> 10972
<ALLOWANCES> 0
<INVENTORY> 56
<CURRENT-ASSETS> 0
<PP&E> 21491
<DEPRECIATION> 5862
<TOTAL-ASSETS> 32295
<CURRENT-LIABILITIES> 0
<BONDS> 9898
576
0
<COMMON> 5616
<OTHER-SE> 4073
<TOTAL-LIABILITY-AND-EQUITY> 32295
<SALES> 0
<TOTAL-REVENUES> 5379
<CGS> 0
<TOTAL-COSTS> 3137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 1549
<INCOME-PRETAX> 690
<INCOME-TAX> 218
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472
<EPS-PRIMARY> .19
<EPS-DILUTED> 0
</TABLE>
