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
For the fiscal year ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6673
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 and non-voting common
equity held by nonaffiliates computed by reference to the price at
which the common equity was sold, or the average bid and asked price
of such common equity, as of a specified date within the past 60 days.
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, 1998, the registrant had outstanding 1,172,488 shares of
common stock, no par value ($3 stated value) and 7,000 shares of
Redeemable Class A preferred stock, $100 par value.
Documents incorporated by reference: none.
<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 7A. Quantitative and Qualitative Disclosures About
Market Risk
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, 1998 and
1997 were $31,038,039 and $32,294,907, respectively, and real
estate contracts and loans represent approximately 36% and 34% of
the respective asset totals. The Company presently primarily
originates contracts to facilitate the sale of real estate held
for sale or development and originates commercial loans. Many of
the contracts have fixed contractual interest rates, while the
newly originated interim and construction real estate loans have
variable rates. 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. The
total amount invested in real estate contracts and loans of
$11,246,755 as of July 31, 1998 is $275,055 more than at the end
of the prior year. The percentage of contracts which were
delinquent over 90 days was 2.2% as of July 31, 1998 and 0.4% as
of July 31, 1997. Management continues to emphasize enforcement
of the Company's credit and collection policies.
In fiscal 1998, the Company's newly formed subsidiary,
Cornerstone Realty Advisors, Inc., began making construction and
interim loans. Bank lines of credit were increased to provide
additional funds for this purpose.
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
<PAGE>
approximately $2.3 million. See further information on this
business segment in Notes 5 and 6 to the consolidated financial
statements.
Additionally, in fiscal 1997, the Company continued developing
certain land for residential development. The project, known as
Tanglewood Ranch Park Estates (The Crest) offered approximately
21 ten-acre parcels suitable for home construction. The Company
began marketing these parcels in fiscal 1998 and has
approximately 14 ten-acre parcels remaining for sale.
Investments in rental properties totaled $13,588,145 and
$13,487,085 as of July 31, 1998 and 1997, respectively. The
increase is primarily the net result of increased capitalized
costs that more than offset depreciation and sales. Other real
property held for sale and development totaled $2,775,542 and
$4,039,208 as of July 31, 1998 and 1997, 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 $2,714,563
in fiscal 1996 to $2,220,979 in fiscal 1998. During the same
period, interest income, including the amortization of discounts
on real estate contracts, has declined from 26% of total income
in fiscal 1996 to 23% of total income in fiscal 1998. The
Company expects to continue its emphasis on the development,
leasing and sale of commercial real estate in fiscal 1999 along
with the continued operation of Birdies, marketing of the
Tanglewood (The Crest) parcels and originating construction and
interim commercial real estate loans. There are no contractual
commitments other than the remaining remodeling costs associated
with improvements for commercial buildings. The Company's fiscal
1999 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, originating loans collateralized by real estate,
developing real estate for sale or lease and the operation of
Birdies. The Company is in competition with financial
institutions who originate or invest in real estate
<PAGE>
collateralized contracts and commercial property owners located
primarily in or near Spokane, Washington. As of July 31, 1998,
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.
Item 2. Properties
----------
As of July 31, 1998, 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:
-------------------------------------------------
<TABLE>
<CAPTION>
July 31, 1998
----------------------------------------
Rental/ Net Mortgage
Date Development Carrying or Contract
Acquired Description of Property Status Value Obligation
-------- ------------------------------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
COMMERCIAL:
1979 The Peyton Building at N. 10 Post Substantially $4,095,102 $ 756,042
Street contains approximately 85,000 leased
square feet of rentable space.
Substantial improvements have been
made to the building since its
acquisition. Remodeling of this
office building continues as new
occupancy warrants. The Company's
offices are located in this building.
1979 The Hutton Building at S. 10 Washing- Substantially
ton contains approximately 56,000 leased $3,677,907
square feet of rentable space.
Substantial improvements have been
made to the building since its
acquisition. Remodeling of this
building continues as new occupancy
warrants. The Company also acquired
25,000 square feet for parking
near this building.
1984 Bank Branch Building at W. 102 Leased $ 414,035 $ 599,150
Indiana Avenue is under a long-term
lease.
1992 The Pier One Building is a commercial Leased $3,307,281 $ 1,458,610
building. The building has two major
tenants, who occupy over 60% of the
space, and several other smaller
tenants for the remaining space.
1992 The Cellular One Building is a Leased $ 751,366 $ 834,132
commercial building constructed by
the Company on the north river
bank in Spokane.
</TABLE>
<PAGE>
Properties Located in Spokane County, Washington, Continued:
------------------------------------------------------------
<TABLE>
<CAPTION>
July 31, 1998
----------------------------------------
Rental/ Net Mortgage
Date Development Carrying or Contract
Acquired Description of Property Status Value Obligation
-------- ------------------------------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
COMMERCIAL, CONTINUED:
1990 The Nevada-Holland property consists Under $ 780,629 $ 850,416
of approximately 12 remaining acres development
of raw land in a location where there
has been substantial commercial and
residential development.
1995 Birdies Golf Center, constructed on Constructed $2,070,994
14 acres of the Nevada-Holland
property, features a 56-tee driving
and operating range, a fully con-
toured fairway with 5 target greens,
a pro shop, teaching studios and an
8,000-square-foot putting green.
1991 Tanglewood Ranch Park Estates (The Being $1,137,546
Crest) in south Spokane County was marketed
acquired through a judicial fore-
closure. The area consisted of
approximately 300 acres of
undeveloped land. In fiscal 1998,
several lots were sold, leaving
approximately 14 lots available for
sale.
1990 The north river bank in Spokane Sale pending $ 684,980
consists of a parcel of undeveloped
commercial real estate.
MULTI-FAMILY HOUSING:
1969 The Broadmoor Apartments, formerly Occupied $ 911,056
the Aqua View Apartments, is a 129-
unit apartment complex.
1991 The Southridge Apartments, formerly Fully $ 432,403 $ 542,424
the City View Apartments, is a 21- occupied
unit apartment complex.
1993 Approximately six acres in Auburn, Being $ 167,136
Washington zoned for multi-family marketed
housing were acquired through a
foreclosure.
</TABLE>
<PAGE>
Projects Located Outside Spokane County, Washington:
----------------------------------------------------
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, 1998, 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 1998.
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 -- 1,145 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, 1998, the Company
also has issued 7,000 shares of Redeemable Class A preferred
stock owned by two holders. These shares receive cumulative
dividends of 6% when declared by the Board of Directors. During
the fiscal year ended July 31, 1998, a dividend totaling $42,000
<PAGE>
was declared and accrued on these shares. 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 3, 1998, August 1, 1997 and August 2, 1996,
respectively. These preferred shares require redemption by the
Company at par value plus accrued dividends in 2004; however, the
Board has proposed a plan to remove the redemption provision for
$500,000 face amount (5,000 shares) of the preferred stock in
connection with the redemption of $200,000 face amount (2,000
shares) in August 1998.
<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,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental income $ 2,220,979 $ 2,398,369 $ 2,714,563 $ 2,832,139 $ 2,653,958
Interest income 903,718 1,005,072 1,138,935 1,375,420 1,476,881
Gains on sales of real estate 514,141 1,611,195 486,469 584,657 186,109
Interest expense, net 1,580,820 1,548,173 1,650,559 1,681,213 1,682,355
Cumulative effect of change in
accounting principle -- -- -- -- (61,894)
Net income (loss) (596,936) 472,000 39,266 159,310 71,558
Income (loss) applicable to
common stockholders (757,936) 357,600 (75,134) 44,910 71,558
Income (loss) per common share - basic
and diluted:
Income (loss) before cumulative effect
of change in accounting principle (.48) .19 (.04) .02 .07
Cumulative effect of change in
accounting principle -- -- -- -- (.03)
----------- ----------- ----------- ----------- -----------
Income (loss) per common share (.48) .19 (.04) .02 .04
=========== =========== =========== =========== ===========
Cash dividends per common share -- -- -- -- --
Weighted-average number of common
shares outstanding 1,591,484 1,895,105 1,938,076 1,960,746 1,977,889
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended July 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT YEAR END):
Contracts, mortgages and finance notes
receivable, net $11,246,755 $10,971,700 $10,492,944 $13,457,896 $14,457,958
Total assets 31,038,039 32,294,907 32,840,107 35,351,486 34,842,679
Notes and contracts payable 12,255,178 10,028,531 11,055,919 13,107,725 13,679,068
Debentures 9,839,936 9,898,351 9,718,260 9,179,484 8,567,231
Stockholders' equity 6,647,479 9,689,896 9,397,005 9,544,017 9,563,355
</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
and loans, originating construction and interim loans, 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, in fiscal 1998, began originating loans
secured by real estate, including construction and interim loans
through its subsidiary, Cornerstone Realty Advisors, Inc.
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 revenues.
The Company finances its investments in real estate and loans 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 collateralized line-of-credit arrangements with local
banks. The Company intends to continue using these funding sources in
the future.
RESULTS OF OPERATIONS
For the years ended July 31, 1998, 1997 and 1996, the Company's net
income (loss) was approximately $(597,000), $472,000 and $39,000,
respectively. Due to dividends and the accretion of the discount on
the issuance of preferred stock, the income (loss) applicable to
common stockholders was approximately $(758,000), $358,000 and
$(75,000) in fiscal 1998, 1997 and 1996, respectively.
Rental real estate activities have decreased due to sales of rental
properties. Total rental income has decreased from approximately
$2,715,000 in fiscal 1996 to $2,221,000 in fiscal 1998. Reduced
rental income could continue as a result of 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 $1,265,000 and $1,031,000 in fiscal 1996 and 1997,
respectively, to approximately $946,000 in fiscal 1998. 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 exceeded new
acquisitions in each of the last three fiscal years. These funds were
used to remodel and develop existing real estate projects. In the
last half of fiscal 1998, the Company began originating new commercial
real property construction and interim loans through its subsidiary,
Cornerstone Realty Advisors, Inc. Loan fees and net interest income
are expected to significantly increase as the loan portfolio grows.
<PAGE>
Gains on the sale of real estate were approximately $514,000,
$1,611,000 and $486,000 in fiscal 1998, 1997 and 1996, 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
$333,000 in fiscal 1998 compared to $294,000 in its first year of
operations. Overall, the golf center recorded losses from operations
of approximately $116,000, $189,000 and $143,000 in fiscal 1998, 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 $2.0 million in fiscal 1998 from approximately $2.5
million in fiscal 1996. 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 $1,212,000, $1,188,000 and
$1,216,000 in fiscal 1998, 1997 and 1996, respectively. The decline
in interest costs from fiscal 1996 to fiscal 1997 has been primarily
as a result of a decrease in outstanding average borrowings during
these periods. In the last half of fiscal 1998, outstanding
borrowings increased significantly due to advances drawn under the
Company's lines of credit to fund the origination of construction and
interim loans and in connection with notes payable issued to redeem
common stock. See further discussion of this common stock redemption
in Note 14 to the consolidated financial statements..
Salaries and commissions have fluctuated 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. In fiscal 1998,
additional staffing for Cornerstone Realty Advisors, Inc. increased
salaries and commissions.
In addition to the payroll related costs associated with the increase
in number of employees from fiscal 1996 to fiscal 1998, general and
administrative expenses in fiscal 1998 were significantly higher than
fiscal 1997 due to legal fees incurred of approximately $300,000
related to a minority stockholder lawsuit. General and administrative
expenses increased from fiscal 1996 to fiscal 1997 also due to a
significant increase in real estate taxes for Birdies and other
properties.
The Company's effective income tax rate as a percentage of loss before
income tax benefit was 29% in fiscal 1998, compared to a provision of
32% and 35% in fiscal 1997 and 1996, respectively.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the Company had total stockholders' equity of
approximately $6,647,000 and a total liabilities to equity ratio of
3.60 to 1, which increased from 2.27 to 1 a year before. The increase
in this ratio was due primarily to the purchase and retirement of the
Company's common stock in fiscal 1998. In fiscal 1998, the Company's
primary sources of funds were approximately $.6 million from the sale
of real estate, $7.2 million in real estate contract collections, $.4
from the sale of debentures and $1.7 million from net line-of-credit
and note borrowings. The primary uses of funds were approximately
$1.7 million used for the acquisition and improvements of real estate
projects, $6.5 million used to acquire new contracts and mortgage
notes, $1.0 in repayment of maturing debentures, $.6 million for
purchase and retirement of common stock and preferred stock, and
approximately $.3 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 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 $19,000,000 line-of-credit and loan arrangements,
of which only approximately $6,644,000 was outstanding at July 31,
1998, 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
and the origination of commercial real estate loans. The Company does
not anticipate any significant capital expenditures during fiscal
1999, other than the completion of the remodeling of the Broadmoor
Apartments.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Notes 1 and 6 to the consolidated financial statements for a
discussion of new accounting standards.
YEAR 2000 ISSUES
Throughout the information technology industry, the use of two-digit
fields was common practice in the design of hardware, systems
software, proprietary applications and system interfaces. The Year
2000 problem is pervasive and complex. The issue is whether computer
systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
<PAGE>
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures and has assessed
Year 2000 risks. This assessment includes the identification of
necessary changes to computer hardware and software applications that
will attempt to ensure availability and integrity of the Company's
information systems and the reliability of its financial and
operational systems.
The Company has reviewed its financial, information and operational
systems in order to identify those products, services or systems that
are not Year 2000 compliant. As a result of this review, the Company
has determined that it will be required to modify or replace certain
information and operational systems so they will be Year 2000
compliant. These modifications and replacements are being, and will
continue to be, made in conjunction with the Company's overall systems
initiatives. The total cost of these Year 2000 compliance activities
is not anticipated to be material to the Company's financial position
or its results of operations.
Based on available information, the Company does not believe any
material exposure to significant business interruption exists as a
result of Year 2000 compliance issues. These costs and the timing in
which the Company plans to complete its Year 2000 modifications are
based on management's best estimates. However, there can be no
assurance that the Company will timely identify and remediate all
significant Year 2000 problems, that remedial efforts will not involve
significant time and expense, or that such problems will not have a
material adverse effect on the Company's business, results of
operations or financial position.
The Company also faces risk to the extent that its borrowers, vendors,
service providers and others with whom the Company transacts business
may not comply with Year 2000 requirements. The Company will initiate
formal communications with significant borrowers, vendors and service
providers to determine the extent to which the Company is vulnerable
to these third parties failure to remediate their own Year 2000
issues. In the event any such third parties are not Year 2000
compliant, the Company's results of operations could be materially
adversely affected.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises principally from interest
rate risk in its lending and borrowing activities. Management
actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks, as in credit quality and
liquidity risk, in the normal course of business, management considers
interest rate risk to be its most significant market risk and could
potentially have the largest material effect on the Company's
<PAGE>
financial condition and results of operations. Other types of market
risks, such as foreign currency exchange rate risk and commodity price
risk, do not arise in the normal course of the Company's business
activity.
The Company's profitability is affected by fluctuations in the
interest rates. Management's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings. A sudden
and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-
earning assets and interest-bearing liabilities do not change at the
same speed, to the same extent or on the same basis.
<PAGE>
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected
maturity, and the instruments' fair values at July 31, 1998.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Balance Fair Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Contracts, mortgages,
finance notes, and
loans receivable $4,296,087 $1,513,128 $1,601,842 $1,651,795 $1,705,894 $ 478,009 $11,246,755 $11,246,755
Interest-sensitive
liabilities:
Notes payable to banks 6,643,826 6,643,826 6,643,826
Installment contracts,
mortgage notes and
notes payable 288,525 310,441 334,175 360,479 387,424 3,930,308 5,611,352 5,611,352
Debenture bonds 1,223,924 1,259,987 765,492 672,356 752,901 5,165,276 9,839,936 9,839,936
Off-balance sheet items:
Undisbursed loans
receivable 837,272 837,272 837,272
</TABLE>
Expected maturities are contractual maturities adjusted for
prepayments of principal. The Company uses certain assumptions to
estimate fair values and expected maturities. For assets, expected
maturities are based upon contractual maturity, projected repayments
and prepayment of principal.
<PAGE>
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, 1998 or any
interim period after July 31, 1998.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
September 18, 1998
Board of Directors and Stockholders
Pacific Security Companies and Subsidiaries
Spokane, Washington
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity
and cash flows present fairly, in all material respects, the financial
position of Pacific Security Companies and its subsidiaries (the
Company) at July 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the
period ended July 31, 1998, in conformity with generally accepted
accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its accounting for impaired loans in fiscal 1996.
/s/PricewaterhouseCoopers LLP
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1998 and 1997
1998 1997
----------- -----------
ASSETS
Cash and cash equivalents:
Unrestricted $ 318,026 $ 325,058
Restricted 11,289 84,684
----------- -----------
329,315 409,742
----------- -----------
Receivables:
Contracts, mortgages, finance notes
and loans receivable, net:
Related parties 427,183 728,436
Unrelated 10,819,572 10,243,264
----------- -----------
11,246,755 10,971,700
Accrued interest 391,076 91,919
Income taxes 154,857 454,621
Other 2,415 30,541
----------- -----------
11,795,103 11,548,781
----------- -----------
Investment in rental properties, net 13,588,145 13,487,085
----------- -----------
Investment in golf center, net 2,070,994 2,142,247
----------- -----------
Other investments:
Property held for sale and development 2,775,542 4,039,208
Marketable securities 88,062 87,004
Restricted investments 278,154
----------- -----------
2,863,604 4,404,366
----------- -----------
Other assets:
Vehicles and equipment, net 35,957 25,760
Prepaid and other, net 296,590 221,425
Golf center inventories 58,331 55,501
----------- -----------
390,878 302,686
----------- -----------
Total assets $31,038,039 $32,294,907
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
July 31, 1998 and 1997
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable to banks $ 6,643,826 $ 5,404,999
----------- -----------
Installment contracts, mortgage notes
and notes payable:
Related parties 1,028,758 191,462
Unrelated 4,582,594 4,432,070
----------- -----------
5,611,352 4,623,532
----------- -----------
Debenture bonds 9,839,936 9,898,351
----------- -----------
Accrued expenses and other liabilities:
Related parties 207,240 246,994
Unrelated 1,011,334 733,657
----------- -----------
1,218,574 980,651
----------- -----------
Deferred income taxes 586,872 1,121,478
----------- -----------
Total liabilities 23,900,560 22,029,011
----------- -----------
Commitments and contingencies (Notes 3,
4, 10 and 12)
Redeemable Class A preferred stock, $100
par value; $100 redemption value;
authorized 20,000 shares; issued and
outstanding, 7,000 and 9,400 shares 700,000 940,000
Less: Net discount on issuance of
preferred stock (210,000) (364,000)
----------- -----------
490,000 576,000
----------- -----------
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
July 31, 1998 and 1997
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY,
CONTINUED
Stockholders' equity:
Common stock:
Original class, authorized 2,500,000
no par value shares, $3 stated
value; issued and outstanding,
1,172,488 and 1,872,125 shares $ 3,517,464 $ 5,616,375
Class B, authorized 30,000 no par
value shares; no shares issued and
outstanding
Additional paid-in capital 1,776,951 1,906,642
Retained earnings 1,361,363 2,175,875
Unrealized loss on marketable securi-
ties, net of deferred income taxes (8,299) (8,996)
----------- -----------
Total stockholders' equity 6,647,479 9,689,896
----------- -----------
Total liabilities and stockholders'
equity $31,038,039 $32,294,907
=========== ===========
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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Rental $2,220,979 $2,398,369 $2,714,563
Interest 903,718 1,005,072 1,138,935
Loan and service fees 59,579 27,775
Amortization of discounts on real estate
contracts 41,992 25,856 126,044
Gain on sales of real estate 514,141 1,611,195 486,469
Gain on sale of marketable securities 30,959
Golf center sales (including lessons of $33,481,
$13,527 and $31,937) 332,815 343,528 294,276
Other, net 49,412 (32,757) 153,376
---------- ---------- ----------
4,122,636 5,379,038 4,944,622
---------- ---------- ----------
Expenses:
Rental operations:
Depreciation and amortization 628,149 640,105 714,474
Interest 369,276 360,632 434,397
Other 1,038,890 1,097,046 1,311,200
---------- ---------- ----------
2,036,315 2,097,783 2,460,071
Interest, net of amount capitalized 1,211,544 1,187,541 1,216,162
Salaries and commissions 726,970 626,675 651,416
General and administrative 795,619 575,463 422,455
Depreciation and amortization 122,221 100,875 82,797
Cost of golf merchandise sales 64,540 98,105 53,503
Uncollectible accounts 2,199 2,788 1,412
---------- ---------- ----------
4,959,408 4,689,230 4,887,816
---------- ---------- ----------
Income (loss) before income taxes (836,772) 689,808 56,806
Income tax provision (benefit) (239,836) 217,808 17,540
---------- ---------- ----------
Net income (loss) (596,936) 472,000 39,266
Less: Preferred stock dividends (42,000) (62,400) (62,400)
Accretion of discount on preferred stock (119,000) (52,000) (52,000)
---------- ---------- ----------
Income (loss) applicable to common stockholders $ (757,936) $ 357,600 $ (75,134)
========== ========== ==========
Income (loss) per common share - basic and diluted $ (.48) $ .19 $ (.04)
========== ========== ==========
Weighted average common shares outstanding - basic
and diluted 1,591,484 1,895,105 1,938,076
========== ========== ==========
</TABLE>
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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
Additional Gain (Loss)
Common Paid-In Retained on Marketable
Stock Capital Earnings Securities Total
---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
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 market-
able 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)
---------- ---------- ---------- ---------- ----------
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 market-
able 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
Net loss (596,936) (596,936)
Unrealized gain on market-
able securities 697 697
Purchase and retirement
of common stock (699,637
shares) (2,098,911) (94,691) (56,576) (2,250,178)
Cash dividend declared on
preferred stock (42,000) (42,000)
Accretion of discount on
preferred stock (35,000) (37,500) (72,500)
Redemption of preferred
stock (2,400 shares) (81,500) (81,500)
---------- ---------- ---------- ---------- ----------
Balances, July 31, 1998 $3,517,464 $1,776,951 $1,361,363 $ (8,299) $6,647,479
========== ========== ========== ========== ==========
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from contracts, rentals and
golf center sales $2,690,419 $2,759,659 $3,119,937
Interest received 879,135 1,003,265 1,168,493
Cash paid to suppliers and employees (2,590,272) (2,269,308) (3,029,296)
Interest paid, net of amounts capitalized (1,040,047) (995,036) (1,141,198)
Income taxes paid (643,000) (112,500)
---------- ---------- ----------
Net cash from operating activities (60,765) (144,420) 5,436
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of real estate 566,628 2,032,279 259,435
Proceeds from sales of marketable securities 41,553
Collections on contracts, mortgages, finance
notes and loans receivable 7,208,934 2,462,229 4,166,338
Investment in contracts, mortgages, finance
notes and loans receivable (6,471,596) (1,535,634) (51,106)
Additions to rental properties, property
held for sale, property under develop-
ment, golf center, vehicles and equipment (1,673,150) (1,353,211) (2,477,696)
Change in restricted investments and
cash equivalents 351,549 11,348 84,974
Other 16,335 28,837
---------- ---------- ----------
Net cash from investing activities (17,635) 1,633,346 2,052,335
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) under
line-of-credit agreement 1,238,827 956,989 (2,231,388)
Proceeds from installment contracts,
mortgage notes and notes payable 434,688 1,270,858
Payments on installment contracts,
mortgage notes and notes payable (300,868) (1,984,377) (1,091,276)
Proceeds from sales of debenture bonds 340,657 447,223 863,142
Redemption of debenture bonds (954,296) (814,535) (855,614)
Redemption of preferred stock (240,000) (100,000)
Payment of dividends on preferred stock (62,400) (62,400) (62,400)
Purchase and retirement of common stock (385,240) (71,239) (61,973)
---------- ---------- ----------
Net cash from financing activities 71,368 (1,628,339) (2,168,651)
---------- ---------- ----------
Net decrease in cash and cash equivalents (7,032) (139,413) (110,880)
Cash and cash equivalents, beginning of year 325,058 464,471 575,351
---------- ---------- ----------
Cash and cash equivalents, end of year $ 318,026 $ 325,058 $ 464,471
========== ========== ==========
</TABLE>
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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of net income (loss) to net cash
from operating activities:
Net income (loss) $ (596,936) $ 472,000 $ 39,266
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 750,370 740,980 797,271
Deferred income tax provision (benefit) (534,967) 274,374 (328,187)
Deferred financing income realized (41,992) (25,856) (126,044)
Interest accrued on debenture bonds 555,224 547,403 531,248
Gain on sales of marketable securities (30,959)
Gain on sales of real estate (514,141) (1,611,195) (486,469)
Uncollectible accounts 2,199 2,788 1,412
Change in assets and liabilities:
Accrued interest receivable (299,157) (1,808) 18,685
Income taxes receivable 299,764 (699,565) 228,095
Prepaid expenses 35,252 61,617 52,025
Golf center inventories (2,830) 27,851 (83,352)
Accrued expenses and other liabilities 258,323 29,047 (583,245)
Other, net 28,126 37,944 (24,310)
---------- ---------- ----------
Net cash from operating activities $ (60,765) $ (144,420) $ 5,436
========== ========== ==========
Supplemental schedule of noncash investing
and financing activities:
Company financed sale of property $ 486,300 $1,379,495 $1,025,648
Accretion of discount on preferred stock 119,000 52,000 52,000
Stock dividend declared and unpaid 42,000 62,400 62,400
Deferred gain recognized on sale of property 41,516 507,703
Related party note issued in exchange for non-
competition agreement 125,000
Exchange of real estate for purchase and redemp-
tion of common shares 1,143,500
Notes payable issued for purchase and redemption
of common shares 729,000
</TABLE>
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 financing contracts and loans,
collateralized by real estate. Most of the Company's real estate
activities are concentrated within the state of Washington.
During the year ended July 31, 1998, the Company began
originating commercial real estate loans. 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 the 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 subsidiaries, Aqua View
Apartments, Inc. (operating as the Broadmoor Apartments) and
Cornerstone Realty Advisors, Inc. which was formed in March
1998. 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.
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.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
CONTRACTS, MORTGAGES, FINANCE NOTES AND LOANS RECEIVABLE
--------------------------------------------------------
Contracts, mortgages, finance notes and loans receivable are
stated at unpaid principal balance, plus accrued interest, less
acquisition discounts, unearned loan fees 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 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 adoption of this standard on
August 1, 1995 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.
LOAN ORIGINATION FEES
---------------------
Loan origination fees, net of direct origination costs, are
deferred and recognized as interest income using the level
interest yield method over the contractual term of each loan.
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
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INVESTMENT IN RENTAL PROPERTIES, CONTINUED
------------------------------------------
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, is 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
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 and $205,000 were capitalized during the
years ended July 31, 1997 and 1996, 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.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
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 marketable 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.
INTANGIBLE ASSETS
-----------------
The amount paid under a covenant not-to-compete is being
amortized on a straight-line basis over the five-year term of
the related agreement. Accumulated amortization at July 31,
1998 associated with this agreement was $11,441.
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
$198,073 and $191,547 at July 31, 1998 and 1997, 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.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
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. 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 (loss) per share - basic is computed by dividing income
(loss) applicable to common stockholders by the weighted-
average number of common shares outstanding during the period.
Income (loss) per share - diluted is computed by dividing
income (loss) applicable to common stockholders by the
weighted-average number of common shares outstanding increased
by the additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued. The Company did not have any potentially dilutive
common shares outstanding during the years ended July 31, 1998,
1997 and 1996; therefore, diluted earnings per share amounts
are identical to basic earnings per share.
The income (loss) per share disclosures have been made in
accordance with SFAS No. 128, "Earnings per Share," which was
applied by the Company in fiscal 1998. In accordance with SFAS
No. 128, all prior income (loss) per share data has been
restated to conform to this presentation. Basic and diluted
earnings per share amounts for periods prior to 1998 are
identical in amount to primary and fully diluted earnings per
share amounts that were previously presented.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INTEREST RATE RISK
------------------
The results of operations of the Company may be materially and
adversely affected by changes in prevailing economic
conditions, including rapid changes in interest rates. The
Company's financial assets (primarily contracts, mortgages,
finance notes and loans receivable) and liabilities (primarily
notes payable to banks, installment contracts, mortgage notes
and notes payable and debenture bonds) are subject to interest
rate risk. Management is aware of the sources of interest rate
risk and endeavors to actively monitor and manage its interest
rate risk, although there can be no assurance regarding the
management of interest rate risk in future periods.
COMPREHENSIVE INCOME
--------------------
In June 1997, Statement of Financial Accounting Standards No.
130 (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 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 does not believe that the application of this statement
will have a material effect on the presentation of its
financial statements.
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>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2. RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENTS:
At July 31, 1998 and 1997, the Company holds cash and cash
equivalents and investments which are restricted for the
following purposes:
<TABLE>
<CAPTION>
1998 1997
----------- ----------------------
Cash and Cash and U.S.
Cash Cash Treasury
Equivalents Equivalents Notes
----------- ----------- --------
<S> <C> <C> <C>
Tenant security deposits $ 11,289 $ 13,250
Mortgage reserves 21,437
Apartment complex replacement
reserve required by the Depart-
ment of Housing and Urban Develop-
ment (HUD) 36,558 $129,330
Apartment complex residual receipts
as required by HUD 13,439 148,824
-------- -------- --------
$ 11,289 $ 84,684 $278,154
======== ======== ========
</TABLE>
The U.S. Treasury notes held in the replacement and residual
receipt reserves at July 31, 1997 bore interest at 5.75% to
6.00%. The restricted investments were liquidated upon full
repayment of the related mortgage loan during the year ended
July 31, 1998.
3. CONTRACTS, MORTGAGES AND FINANCE NOTES AND LOANS RECEIVABLE:
The components of contracts, mortgages, finance notes and loans
receivable at July 31, 1998 and 1997 are as follows:
1998 1997
----------- -----------
Contracts, mortgages and finance
notes receivable $ 7,293,800 $11,154,805
Originated loans receivable 4,931,340
Undisbursed portion of loans
receivable (837,272)
Discounts, net (141,113) (183,105)
----------- -----------
Contracts, mortgages, finance notes
and loans receivable, net $11,246,755 $10,971,700
=========== ===========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
3. CONTRACTS, MORTGAGES AND FINANCE NOTES AND LOANS RECEIVABLE,
CONTINUED:
One contract and two individual loans included above each
represent approximately 15%, 13% and 13%, respectively, of the
total outstanding contracts, mortgages, finance notes and loans
receivable at July 31, 1998.
At July 31, 1998 and 1997, the aging of amounts due on contracts,
mortgages, finance notes and loans receivable was as follows:
1998 1997
----------- -----------
Current $11,081,593 $11,049,018
31 to 60 days 53,552 46,506
60 to 90 days 9,756
Over 90 days 252,723 49,525
----------- -----------
11,387,868 11,154,805
Less unearned acquisition discounts (141,113) (183,105)
----------- -----------
$11,246,755 $10,971,700
=========== ===========
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, 1998 and 1997, 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 residential and commercial real
estate located in the Pacific Northwest. These estimates can be
affected by changes in the economic environment in the Pacific
Northwest and the resultant effect on real estate values. As a
result of changing economic conditions, the amount of the
allowance for loan losses could change in the near term.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
4. INVESTMENTS IN RENTAL PROPERTIES:
Following is a summary of investments in rental properties at
July 31, 1998 and 1997:
1998 1997
----------- -----------
Land $ 2,417,729 $ 2,467,862
Buildings and improvements 16,130,418 15,780,141
Furniture and equipment 1,166,014 945,714
----------- -----------
19,714,161 19,193,717
Less accumulated depreciation (6,126,016) (5,706,632)
----------- -----------
$13,588,145 $13,487,085
=========== ===========
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, 1998:
Year Ending
July 31,
-----------
1999 $ 1,384,809
2000 1,006,180
2001 798,971
2002 614,745
2003 452,390
Thereafter 98,150
-----------
Total minimum future rentals $ 4,355,245
===========
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, these estimates
could change in the near term.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
4. INVESTMENTS IN RENTAL PROPERTIES, CONTINUED:
At July 31, 1997, 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 the
classification of approximately $159,000 as investments in rental
properties at July 31, 1997. At July 31, 1997, the Company had
deferred gains of approximately $41,000 associated with these
sales. These gains were recognized during the year ended July
31, 1998 when the criterion for a sale was met.
5. INVESTMENT IN GOLF CENTER:
The Company constructed 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, 1998 and 1997:
1998 1997
----------- -----------
Land $ 350,000 $ 350,000
Building and improvements 1,696,175 1,687,503
Furniture and equipment 271,896 259,757
----------- -----------
2,318,071 2,297,260
Less accumulated depreciation (247,077) (155,013)
----------- -----------
$ 2,070,994 $ 2,142,247
=========== ===========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
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, 1998, 1997 and 1996
is as follows:
Real Estate
Birdies Rental and
Golf Receivable
Center Operations Total
----------- ----------- -----------
1998:
Revenue $ 332,815 $ 3,789,821 $ 4,122,636
Loss from operations (116,400) (720,372) (836,772)
Identifiable assets,
net 2,129,325 28,908,714 31,038,039
Depreciation and
amortization 96,190 654,180 750,370
Capital expenditures 27,873 1,645,277 1,673,150
1997:
Revenue $ 343,528 $ 5,035,510 $ 5,379,038
Income (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:
Revenue $ 294,276 $ 4,650,346 $ 4,944,622
Income (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, Statement of Financial Accounting Standards No. 131
(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. It also
establishes standards for related disclosures about products and
services, geographic areas and 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>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
7. MARKETABLE SECURITIES:
A summary of investments in marketable securities at July 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Market/ Market/
Unrealized Carrying Unrealized Carrying
Cost Loss Value Cost Loss Value
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Marketable equity securities $ 41,235 $(12,573) $ 28,662 $ 41,235 $(13,631) $ 27,604
Debt securities 59,400 59,400 59,400 59,400
-------- -------- -------- -------- -------- --------
$100,635 $(12,573) $ 88,062 $100,635 $(13,631) $ 87,004
======== ======== ======== ======== ======== ========
</TABLE>
The debt securities matured during the year ended July 31, 1998.
In connection with the reorganization of the issuer, these
securities are expected to be paid in the year ending July 31,
1999 at the full principal amount.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
8. NOTES PAYABLE TO BANKS:
Notes payable to banks consisted of the following at July 31,
1998 and 1997:
1998 1997
---------- ----------
U.S. Bank of Washington, short-term
line of credit, $8,000,000 commit-
ment, interest at the prime rate
plus 0.375%, expires December 15,
1998, collateralized by contracts,
mortgages and finance notes
receivable $4,163,189 $5,404,999
U.S. Bank of Washington, line of
credit, $3,000,000 commitment,
interest at the prime rate plus
0.375%, expires December 15, 1998,
collateralized by loans receivable 1,435,327
Western Bank, line of credit,
$8,000,000 commitment, interest at
the prime rate plus 0.50%, expires
December 1, 1998, collateralized
by contracts and loans receivable 1,045,310
---------- ----------
$6,643,826 $5,404,999
========== ==========
The prime rate referenced on the above notes was 8.50% at
July 31, 1998.
9. INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE:
Installment contracts, mortgage notes and notes payable consist
of the following at July 31, 1998 and 1997:
1998 1997
---------- ----------
Installment contracts and mortgage
notes payable, interest at 7.0% to
9.0%, aggregate monthly payments,
including interest of $54,269,
mature 1999 through 2021, collatera-
lized by various properties $4,643,887 $4,482,251
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
9. INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE:
1998 1997
---------- ----------
Notes payable to former stockholders,
interest at 7.0%, aggregate monthly
payments, including interest of
$5,317, mature 2003, collateralized
by property $ 850,416
Other notes payable 117,049 $ 141,281
---------- ----------
$5,611,352 $4,623,532
========== ==========
Scheduled future maturities of contracts, mortgage notes and
notes payable are as follows:
Year Ending
July 31,
-----------
1999 $ 288,525
2000 310,441
2001 334,175
2002 360,479
2003 387,424
Thereafter 3,930,308
-----------
$ 5,611,352
===========
The following assets were pledged as collateral for contracts,
mortgage notes and notes payable at July 31, 1998 and 1997:
1998 1997
----------- -----------
Contracts receivable $ 4,438,446 $ 3,952,479
Rental properties 4,905,085 8,116,950
----------- -----------
$ 9,343,531 $12,069,429
=========== ===========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
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 primarily used in making funds available
for contracts and 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.
Outstanding bonds by interest rate categories were as follows at
July 31, 1998 and 1997:
Bond Interest Rate 1998 1997
------------------ ----------- ------------
5.75% $ 141,530 $ 354,502
6.00 132,803
6.25 29,490 148,258
6.50 535,561 577,675
7.00 65,618 517,146
7.25 176,345 325,088
7.50 1,669,324 1,712,455
7.75 756,709 473,967
8.00 788,032 722,011
8.25 964,264 636,594
8.50 1,416,790 1,384,274
8.75 341,911 331,323
9.00 1,721,023 1,644,000
9.25 314,511 334,996
9.50 753,906 707,069
10.00 14,531 13,164
10.50 11,403 10,280
11.00 6,185 5,549
----------- -----------
$ 9,839,936 $ 9,898,351
=========== ===========
The weighted average annual interest rate on outstanding
debentures at July 31, 1998 and 1997 was 8.19% and 8.06%,
respectively.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
10. DEBENTURE BONDS, CONTINUED:
Estimated future contractual maturities of outstanding debenture
bonds are as follows:
Year Ending
July 31,
-----------
1999 $ 1,223,924
2000 1,259,987
2001 765,492
2002 672,356
2003 752,901
Thereafter 5,165,276
-----------
$ 9,839,936
===========
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.
(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.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
10. DEBENTURE BONDS, CONTINUED:
-- 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 was 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:
1998 1997 1996
----------- ----------- -----------
Current $ 295,131 $ (56,566) $ 345,727
Deferred (534,967) 274,374 (328,187)
----------- ----------- -----------
$ (239,836) $ 217,808 $ 17,540
=========== =========== ===========
The components of the net deferred tax liability at July 31, 1998
and 1997 are as follows:
Assets Liabilities Total
----------- ----------- -----------
1998:
Depreciation $ (324,403) $ (324,403)
Installment gains (330,106) (330,106)
Unrealized losses
on marketable
securities $ 4,274 4,274
Accrued expenses 46,297 46,297
Other, net 17,066 17,066
----------- ----------- -----------
$ 67,637 $ (654,509) $ (586,872)
=========== =========== ===========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
11. INCOME TAXES, CONTINUED:
Assets Liabilities Total
----------- ----------- -----------
1997:
Depreciation $ (318,282) $ (318,282)
Installment gains (854,093) (854,093)
Unrealized losses
on marketable
securities $ 4,635 4,635
Accrued expenses 35,317 35,317
Other, net 10,945 10,945
----------- ----------- -----------
$ 50,897 $(1,172,375) $(1,121,478)
=========== =========== ===========
The annual tax provision (benefit) is different from the amount
which would be provided by applying the statutory federal income
tax rate to the Company's pretax income (loss). The reasons for
the differences are:
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Computed statutory
provision
(benefit) $(284,502) (34.0)% $ 234,535 34.0% $ 19,314 34.0%
Meals and enter-
tainment 801 0.1 861 0.1 1,280 1.3
Change in tax
estimates (17,588) (2.5)
Nondeductible
stockholder
legal expenses 51,000 6.1
Effect of graduated
tax rate 5,941 0.7
Other (13,076) (1.6) (3,054) (5.4)
--------- ----- --------- ----- --------- -----
$(239,836) (28.7)% $ 217,808 31.6% $ 17,540 35.0%
========= ===== ========= ===== ========= =====
</TABLE>
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
12. REDEEMABLE PREFERRED STOCK:
In fiscal 1995, the Company issued 10,400 shares of $100 par
value redeemable Class A preferred stock. The Company has the
right to redeem any shares after three years from the date of
issuance. During the years ended July 31, 1998 and 1997, the
Company redeemed 2,400 and 1,000 shares, respectively, 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 $37,500 in the year ended July 31, 1998 and $52,000 in each
of the years ended July 31, 1997 and 1996. The accretion of the
discount on the shares redeemed during the years ended July 31,
1998 and 1997 was $81,500 and $35,000, respectively.
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 $742,000 and $996,400 at July 31, 1998
and 1997, respectively.
The 6% annual dividends on the Class A preferred stock are
cumulative. Dividends of $42,000, $62,400 and $62,400 were
declared on the preferred stock during the years ended July 31,
1998, 1997 and 1996, respectively, and were paid subsequent to
each respective year end.
At July 31, 1998, preferred stock with a face value of $400,000
has been pledged as collateral for a contract receivable from WCI
(see Note 14). In August 1998, $200,000 (2,000 shares) of
preferred stock was redeemed at par value and the contract
receivable from WCI was satisfied in full. In connection with
this redemption, the Board of Directors of the Company has
proposed a plan to remove the redemption provision on the
remaining 5,000 shares of outstanding preferred stock.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
13. COMMON STOCK:
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.
14. RELATED-PARTY TRANSACTIONS:
LITIGATION SETTLEMENT
---------------------
On January 5, 1998, in connection with pending litigation
between the Company and all of the Company's officers and
directors and certain minority stockholders of the Company
("the Minority Stockholders"), who are children of Wayne E.
Guthrie, the Company's Chief Executive Officer and largest
individual Company common stockholder, the Company agreed to
settle all claims of the Minority Stockholders and redeem all
Company common shares held by the Minority Stockholders by
paying approximately $317,000 in cash, distributing Company
real property with an estimated fair value of $643,500 and the
issuance of notes payable, bearing interest at 7% per annum,
aggregating approximately $729,000. The Company acquired
408,419 of its common shares pursuant to this agreement, which
were retired. In addition, the Company obtained a covenant
not-to-compete for five years from one of the Minority
Stockholders in return for the issuance of a $125,000 note
payable bearing interest at 7% per annum. Concurrently,
certain Company officers and directors issued notes payable
aggregating approximately $236,000 to one of the Minority
Stockholders. In connection with the settlement, the Company
also agreed to reimburse the Minority Stockholders for legal
costs aggregating $150,000. Total expenses incurred by the
Company during the year ended July 31, 1998 related to this
settlement were approximately $300,000.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
YELLOWFRONT BUILDING
--------------------
On July 31, 1998, the Company transferred its ownership of the
Yellowfront Building, a commercial property located in Coeur
d'Alene, Idaho, to a family trust formed by Wayne E. Guthrie in
exchange for 200,000 shares of Class A common stock. The
transfer was recorded at the fair value of the property and
resulted in a net gain to the Company of approximately
$420,000.
CONTRACTS AND NOTES RECEIVABLE
------------------------------
Certain former stockholders are indebted to the Company on
contracts or notes with the following terms:
1998 1997
-------- --------
Note secured by real estate or common
stock, bearing interest at 12.5%
(prime plus 4%) $227,183 $250,343
Notes secured by real estate and common
stock; interest at 8.5% to 13.75% 27,985
-------- --------
$227,183 $278,328
======== ========
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 $200,000 and $450,109 on July 31, 1998 and 1997,
respectively. The taxable gain on this sale was $932,348. The
balance owed was paid in full in August 1998.
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.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
HERITAGE VILLAGE APARTMENT COMPLEX, CONTINUED
---------------------------------------------
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 paid in full
during the year ended July 31, 1998.
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.
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. At July 31, 1998 and 1997, the only
significant assets and liabilities of WCI were the contracts
receivable 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. As a result of the redemption
of preferred shares during the years ended July 31, 1998 and
1997, the pledge was adjusted to $400,000 face value of the
Company's Class A Preferred Stock.
The contract receivable by the Company from WCI had balances
outstanding of $200,000 and $450,109 at July 31, 1998 and 1997,
respectively. This contract was repayable in $15,000 monthly
installments and bore interest at 8% per annum. The contract
was satisfied in full subsequent to July 31, 1998 in connection
with the redemption of preferred shares (see Note 12).
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
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.
INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE
-------------------------------------------------------
At July 31, 1998 and 1997, the following related-party notes
payable were outstanding:
<TABLE>
<CAPTION>
Interest Monthly
1998 1997 Rate Payment
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
John Guthrie $ 496,618 7.00% $2,917
Linda Welden 176,899 7.00% 1,200
Robert Guthrie 176,899 7.00% 1,200
Wayne E. Guthrie 176,658 $ 188,109 6.75% 2,000
John Guthrie 1,684 3,353 9.00% 219
---------- ----------
$1,028,758 $ 191,462
========== ==========
</TABLE>
The scheduled future maturities of these notes are as follows:
Year Ending
July 31,
-----------
1999 $ 22,412
2000 32,394
2001 355,662
2002 35,642
2003 477,170
Thereafter 105,478
-----------
$ 1,028,758
===========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
DEBENTURE BONDS
---------------
Included in debenture bonds at July 31, 1998 and 1997 is
approximately $135,000 and $199,000, 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
--------------------------------------
At July 31, 1998 and 1997, the following demand notes were
payable to related parties:
1998 1997
------------------ ------------------
Interest Interest
Amount Rate Amount Rate
-------- -------- -------- --------
Wayne E. Guthrie $ 82,990 7.50% $138,546 8.25%
Constance Guthrie 99,996 7.50 97,288 8.25
Other stockholders 24,254 7.50 11,160 8.25
-------- --------
$207,240 $246,994
======== ========
INTEREST INCOME AND EXPENSE
---------------------------
The approximate amount of related-party interest income and
expense included in the accompanying consolidated statements of
operations during the years ended July 31, 1998, 1997 and 1996
is as follows:
1998 1997 1996
------- ------- -------
Interest income $53,000 $68,000 $90,000
Interest expense 64,000 36,000 35,000
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.
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
15. 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, 1998 and 1997, the carrying values of these
financial instruments approximated their fair values.
NOTES PAYABLE TO BANKS - Fair value approximates the carrying
value because the notes bear variable interest rates.
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>
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following information as of July 31, 1998 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 78 1970 1999 Chairman of the Board and Chief Executive
Officer (January 17, 1970); Director
Kevin M. Guthrie 43 1980 2001 Vice President (May 2, 1985); Director
David L. Guthrie 34 1987 2001 Vice President (September 1, 1989); Director
Donald J. Migliuri 51 1992 1998 Secretary/Treasurer (May 29, 1990); Director
Raymond J. Fisher 75 1970 1999 Director
Constance M. Guthrie 64 1981 1999 Director
Robert N. Codd 68 1994 2001 Director
Julian Guthrie 33 1998 2001 Director
</TABLE>
FAMILY RELATIONSHIPS
Kevin M. Guthrie, David L. Guthrie and Julian Guthrie are the children
of Wayne E. Guthrie. Constance M. Guthrie is the wife of Wayne E.
Guthrie.
<PAGE>
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 18 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.
Julian Guthrie. Ms. Guthrie is a reporter for the San Francisco
Examiner. She covered general news for the paper for two years and
last year was named education reporter, responsible for covering all
education issues in the Bay Area. Before that, she was senior editor
of a lifestyle managzine in San Francisco and also worked as a
freelance writer for the Examiner, covering breaking business,
political and lifestyle stories. She currently lives in San
Francisco.
<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, 1998, 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, 1998:
<TABLE>
<CAPTION>
Annual Compensation*
Name of Individual --------------------
or Number of Fiscal
Persons in Group Capacities in Which Served Year Salary Bonus
------------------ ---------------------------- ------ -------- --------
<S> <C> <C> <C> <C>
David L. Guthrie Vice President and Director 1998 $ 98,580 $ 10,000
Kevin M. Guthrie Vice President and Director 1998 $ 98,862 $ 10,000
Officers and 1998 $382,223 $ 25,000
Directors
as a group (5)
</TABLE>
The Company has no qualified or nonqualified stock option plans as of
July 31, 1998.
*Annual compensation did not exceed $100,000 in 1996 and 1997.
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, 1998: none.
<PAGE>
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of July 31, 1998 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:
<TABLE>
<CAPTION>
Amount and
Nature of
Title Beneficial Percent
of Class Name of Beneficial Owner Ownership of Class
------------ ------------------------------------- ---------- --------
<S> <C> <C> <C>
Common stock Wayne E. Guthrie 182,870 15.60%
Common stock Constance Guthrie 105,043 8.96
Common stock Kevin Guthrie 222,718 18.99*
Common stock David Guthrie 222,718 18.99*
Common stock Julian Guthrie 196,838 16.79
------- ------
Common stock All directors and officers as a group 930,187 79.33%
======= ======
Preferred
stock Wayne E. Guthrie 4,000 57.10
Preferred
stock Wayne E. or Constance Guthrie 2,000 28.60
Preferred
stock Constance Guthrie 1,000 14.30
------- ------
Preferred
stock All directors and officers as a group 7,000 100.00%
======= ======
</TABLE>
* Additionally, these parties exercise voting rights over an
additional 1.31% 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
September 18, 1998
Board of Directors and Stockholders
Pacific Security Companies and Subsidiaries
Spokane, Washington
Our report on the consolidated financial statements of Pacific
Security Companies and subsidiaries is included on page 13 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/PricewaterhouseCoopers LLP
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Schedule III
Real Estate and Accumulated Depreciation
July 31, 1998
<TABLE>
<CAPTION>
Life on Which
Depreciation
Cost in Latest
Capitalized Amount at Income
Subsequent Which Carried Accumulated Date Statement
Description Encumbrance Initial Cost to Acquisition at Close of Period Depreciation Acquired isComputed
------------------------ ----------- ------------ -------------- ------------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Residential and commer-
cial properties:
Rental buildings and
improvements:
SPOKANE, WASHINGTON
N. 10 Post Street
(Peyton Bldg.) $ 756,042 $ 2,209,343 $ 3,342,008 $ 5,551,351 $ 1,598,798 1979 25-40 years
S. 10 Washington
(Hutton Bldg.) 1,498,769 3,754,253 5,253,022 1,723,895 1979 25-40 years
Broadmoor Apart-
ments 1,385,074 656,761 2,041,835 1,130,779 1969 40 years
W. 102 Indiana 599,150 663,031 663,031 248,996 1984 30 years
South Ridge
Apartments 542,424 440,028 75,276 515,304 116,422 1991 25 years
Pier One Building 1,458,610 1,194,017 2,771,167 3,965,184 673,195 1992 25-40 years
Cellular One
Building 834,132 950,373 (2,811) 947,562 196,197 1992 25 years
Birdies Golf
Center 1,972,752 73,423 2,046,175 153,730 1995 15-40 years
Furniture related
to above 540,237 508,531 1,048,768 531,081 Various Various
----------- ----------- ----------- ----------- ----------
$ 4,190,358 $10,853,624 $11,178,608 $22,032,232 $6,373,093
=========== =========== =========== =========== ==========
</TABLE>
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Schedule III, CONTINUED
Real Estate and Accumulated Depreciation
July 31, 1998
Real estate:
Balance at beginning of period $21,038,629
Additions during period:
Purchases and capitalized costs 932,815
Sales recognized under deposit method 340,511
Deductions during period:
Cost of real estate sold (281,723)
-----------
Balance at close of period $22,032,232
===========
Accumulated depreciation:
Balance at beginning of period $ 5,861,645
Depreciation for the year 718,277
Charges to accumulated depreciation related to
real estate investments sold, net of other
adjustments (206,829)
-----------
Balance at close of period $ 6,373,093
===========
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
SCHEDULE IV
Mortgage Loans on Real Estate
July 31, 1998
<TABLE>
<CAPTION>
Principal
Amount of
Loans Subject
Face Carrying to 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 complex
(Evergreen Town House) 9% 2023 $16,973 per month,
including interest $ 1,682,209 $ 1,682,209
Loan (WAM) Prime + 3% 1999 Interest only monthly 1,435,328 1,435,328
Loan (Bengreen) Prime + 3% 1999 Interest only monthly 1,426,098 1,426,098
Loan (Decaro) Prime + 4% 1998 Interest only monthly 1,042,198 1,042,198
Real estate contract on
apartment building (East
Valley Terrace) 9.50% 2002 $8,492 per month,
including interest 957,828 957,828
Finance note 11.50% 2002 $5,900 per month,
including interest 496,220 496,220
Real estate contract on
Walker-McGough Building 8.50% 2016 $3,600 per month,
including interest 389,958 389,958
Other mortgage contracts
and notes receivable,
none of which individu-
ally exceed 3% of the
total carrying value of
mortgages Various Various Various 3,958,029 3,816,916
----------- -----------
$11,387,868 $11,246,755
=========== ===========
</TABLE>
<PAGE>
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
SCHEDULE IV, CONTINUED
Mortgage Loans on Real Estate
July 31, 1998
<TABLE>
<CAPTION> Principal
Amount of
Loans Subject
Face Carrying to 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 $10,971,700
Additions during period:
Mortgage loans originated
and purchased $ 7,444,196
Contract discounts realized 41,992
-----------
7,486,188
Deductions during period:
Collections of principal
and contract payoffs 7,208,934
Uncollectible accounts 2,199 7,211,133
----------- -----------
Balance at end of period $11,246,755
===========
</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: October 27, 1998 By: /s/ Wayne E. Guthrie
----------------------- -----------------------------
Wayne E. Guthrie
Chief Executive Officer
<PAGE>
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 October 27, 1998
----------------------- and Director ----------------
Wayne E. Guthrie
/s/Donald J. Migliuri Secretary-Treasurer October 27, 1998
----------------------- Chief Financial Officer ----------------
Donald J. Migliuri
/s/Kevin M. Guthrie Vice-President and October 27, 1998
----------------------- Director ----------------
Kevin M. Guthrie
/s/David L. Guthrie Vice-President and October 27, 1998
----------------------- Director ----------------
David L. Guthrie
/s/Constance M. Guthrie Director October 27, 1998
----------------------- ----------------
Constance M. Guthrie
/s/Raymond J. Fisher Director October 27, 1998
----------------------- ----------------
Raymond J. Fisher
/s/Robert N. Codd Director October 27, 1998
----------------------- ----------------
Robert N. Codd
/s/Julian Guthrie Director October 27, 1998
----------------------- ----------------
Julian Guthrie
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 329
<SECURITIES> 88
<RECEIVABLES> 11247
<ALLOWANCES> 0
<INVENTORY> 58
<CURRENT-ASSETS> 0
<PP&E> 20466
<DEPRECIATION> 6571
<TOTAL-ASSETS> 31038
<CURRENT-LIABILITIES> 1219
<BONDS> 9840
490
0
<COMMON> 3518
<OTHER-SE> 3130
<TOTAL-LIABILITY-AND-EQUITY> 31038
<SALES> 4123
<TOTAL-REVENUES> 4123
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1580
<INCOME-PRETAX> (837)
<INCOME-TAX> 240
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (597)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
