UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000
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 000-06673
PACIFIC SECURITY FINANCIAL, INC.
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0669906
- -------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
N. 10 Post Street
525 Peyton Building
Spokane, Washington 99201 (509) 444-7700
- -------------------------------- ---------------------------------
(Address of principal (Registrant's telephone number,
executive offices) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
January 31, July 31,
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Cash and cash equivalents:
Unrestricted $ 491,474 $ 512,472
Restricted 18,458 16,321
----------- -----------
509,932 528,793
----------- -----------
Receivables:
Contracts, mortgages, notes and loans
receivable, net:
Related parties 208,977 214,795
Unrelated 17,778,183 17,710,543
----------- -----------
17,987,160 17,925,338
Accrued interest 104,955 98,319
Other 37,226 31,475
----------- -----------
18,129,341 18,055,132
----------- -----------
Investment in rental properties, net 14,725,497 14,807,679
----------- -----------
Other investments:
Property held for sale and development 1,998,520 2,031,448
Marketable securities 41,724 242,168
----------- -----------
2,040,244 2,273,616
----------- -----------
Other assets:
Vehicles and equipment, net 30,453 33,590
Prepaid and other, net 198,215 247,412
----------- -----------
228,668 281,002
----------- -----------
Total assets $35,633,682 $35,946,222
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
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Pacific Security Financial, Inc. and Subsidiaries
Consolidated Balance Sheets, Continued
January 31, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
----------- -----------
Liabilities:
Notes payable to banks $13,130,881 $13,925,405
----------- -----------
Installment contracts, mortgage notes
and notes payable:
Related parties 272,732 337,695
Unrelated 3,075,710 3,158,285
----------- -----------
3,348,442 3,495,980
----------- -----------
Debenture bonds 9,811,281 9,643,548
----------- -----------
Accrued expenses and other liabilities:
Related parties 200,244 254,590
Unrelated 977,723 874,602
----------- -----------
1,177,967 1,129,192
----------- -----------
Income taxes 122,728 59,131
Deferred income taxes 712,470 712,273
----------- -----------
Total liabilities 28,303,769 28,965,529
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Class A preferred stock, $100 par
value; authorized 20,000 shares;
issued and outstanding, 3,000
shares $ 300,000 $ 300,000
Preferred stock, authorized
10,000,000 no par value shares;
no shares issued and outstanding -- --
Common stock:
Original class, authorized 2,500,000
no par value shares, $3 stated
value; issued and outstanding, 1,139,985
and 1,152,532 shares 3,419,954 3,457,597
Class B, authorized 30,000 no par
value shares; no shares issued and
outstanding
3
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Pacific Security Financial, Inc. and Subsidiaries
Consolidated Balance Sheets, Continued
January 31, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
----------- -----------
Stockholders' equity, Continued:
Additional paid-in capital $ 1,822,203 1,804,009
Retained earnings 1,787,756 1,418,705
Accumulated comprehensive income,
net -- 382
----------- -----------
Total stockholders' equity 7,329,913 6,980,693
----------- -----------
Total liabilities and stockholders'
equity $35,633,682 $35,946,222
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------- -------------------------
2000 1999 2000 1999
---------- ------- ---------- ------
<S> <C> <C> <C> <C>
Income:
Rental $ 552,466 $ 561,286 $ 1,105,254 $ 1,105,064
Interest and loan fees 644,712 522,128 1,332,426 1,005,043
Amortization of discounts on
real estate contracts 1,134 2,723 5,730 13,986
Gain on sales of real estate -- 624,349 755,071 624,349
Gain on sales of securities -- -- 1,834 29,962
Other, net 36,487 18,144 42,491 14,528
----------- ----------- ----------- -----------
1,234,799 1,728,630 3,242,806 2,792,932
----------- ----------- ----------- -----------
Expenses:
Rental operations:
Depreciation and amortization 172,738 163,854 342,708 325,067
Interest 96,797 90,972 167,835 183,214
Other 228,255 247,128 480,368 510,182
----------- ----------- ----------- -----------
497,790 501,954 990,911 1,018,463
Interest, net of amount capitalized 450,508 489,080 962,259 917,219
Salaries and commissions 201,107 173,524 414,963 364,127
General and administrative 126,412 144,970 254,563 209,255
Depreciation and amortization 9,833 9,603 19,617 19,325
Provision for loan loss -- -- 50,025 --
----------- ----------- ----------- -----------
1,285,650 1,319,131 2,692,338 2,528,389
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before federal income tax provision
(benefit) (50,851) 409,499 550,468 264,543
Federal income tax provision (benefit) (20,362) 126,431 181,417 81,989
----------- ----------- ----------- -----------
Income (loss) from continuing operations (30,489) 283,068 369,051 182,554
Discontinued operations (Note 2):
Loss from discontinued operations of
golf center (less federal income
tax benefit of $--, $44,631
$-- and $60,189) -- (99,339) -- (133,969)
----------- ----------- ----------- -----------
Net income (loss) (30,489) 183,729 369,051 48,585
Less accretion of discount on
preferred stock -- (6,250) -- (72,500)
----------- ----------- ----------- -----------
Income (loss) applicable to common
stockholders $ (30,489) $ 177,479 $ 369,051 $ (23,915)
=========== =========== =========== ===========
</TABLE>
5
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Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Operations, Continued
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------- -------------------------------
2000 1999 2000 1999
---------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations
applicable to common stockholders $ (30,489) $ 276,818 $ 369,051 $ 110,054
=============== =============== =============== =============
Income (loss) per common share - basic
and diluted $ (.03) $ .15 $ .32 $ (.02)
=============== =============== =============== =============
Income (loss) from continuing operations
per common share - basic and diluted $ (.03) $ .24 $ .32 $ .09
=============== =============== =============== =============
Weighted average common shares
outstanding 1,149,985 1,166,849 1,151,164 1,168,887
=============== =============== =============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
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Pacific Security Financial Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended Six Months Ended
January 31, January 31,
---------------------- ----------------------
2000 1999 2000 1999
--------- ----- --------- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (30,489) $ 183,729 $ 369,051 $ 48,585
Other comprehensive income (loss)
before income taxes:
Changes in unrealized gains/losses
on marketable securities -- -- (579) 12,573
--------- --------- --------- ---------
Other comprehensive income (loss)
before income taxes (30,489) 183,729 368,472 61,158
Less deferred income tax
provision (benefit) -- -- (197) 4,274
--------- --------- --------- ---------
Comprehensive income (loss) $ (30,489) $ 183,729 $ 368,669 $ 56,884
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
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<CAPTION>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
January 31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from rentals $ 1,392,498 $ 1,441,191
Interest received 1,018,188 715,249
Cash paid to suppliers and employees (1,291,222) (786,736)
Interest paid, net of amounts capitalized (825,258) (769,761)
Income taxes paid (117,820) --
----------- -----------
Net cash provided by operating activities 176,386 599,943
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities 252,476 71,198
Proceeds from sales of real estate and fixed assets 662,468 223,521
Purchase of marketable securities (50,000) --
Collections on contracts, mortgages, notes and loans
receivable 8,246,454 3,141,006
Investment in contracts, mortgages, notes and loans
receivable (7,975,317) (8,923,302)
Additions to rental properties, property held for sale,
property under development, golf center, vehicles and
equipment (838,582) (293,767)
----------- -----------
Net cash provided by (used in) investing activities 297,499 (5,781,344)
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements (794,524) 4,923,471
Proceeds from installment contracts, mortgages and notes
payable 700,000 1,914,773
Payments on installment contracts, mortgage notes and
notes payable (277,679) (1,027,650)
Proceeds from sales of debenture bonds 146,051 76,912
Redemption of debenture bonds (249,282) (371,544)
Purchase and retirement of common stock (19,449) (25,531)
Purchase and retirement of preferred stock -- (200,000)
----------- -----------
Net cash provided by (used in) financing activities (494,883) 5,290,431
----------- -----------
Net increase (decrease) in cash and cash equivalents (20,998) 109,030
Cash and cash equivalents, beginning of period 512,472 318,026
----------- -----------
Cash and cash equivalents, end of period $ 491,474 $ 427,056
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
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<CAPTION>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
Six Months Ended
January 31,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 369,051 $ 48,585
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 362,325 377,447
Deferred financing income realized (5,730) (13,986)
Interest accrued on debenture bonds 270,964 273,926
Gain on sales of real estate (755,071) (559,430)
Gain on sales of securities (1,835) (29,962)
Provision for loan losses 50,025 --
Change in assets and liabilities:
Accrued interest receivable (6,637) (84,305)
Prepaid expenses 49,197 (77,905)
Inventories -- 42,457
Accrued expenses (151,225) 574,059
Income taxes payable 63,597 21,800
Other, net (68,275) 27,257
----------- -----------
Net cash provided by operating
activities $ 176,386 $ 599,943
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Company financed sale of property $ 129,750 $ 1,035,358
Accretion of discount on preferred stock -- 12,500
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
9
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Pacific Security
Financial, Inc. (formerly Pacific Security Companies, Inc.) and its subsidiaries
(the "Company"). In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Company's
financial position, results of operations and cash flows for the periods
presented.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and the related disclosures contained in the
Company's annual report on Form 10-K for the year ended July 31, 1999, filed
with the Securities and Exchange Commission.
The results of operations for the six months ended January 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
Note 2. Birdies Business Segment
In September 1995, the Company completed construction of and began operating
Birdies Golf Center (Birdies). The facility consisted of a driving range,
lighted fairway with five target greens, a pro shop, a putting green and
teaching studios.
On December 1, 1998, management decided to close Birdies and commenced a
liquidation of assets. Management leased the Birdies building and intends to
sell the driving range land. The consolidated financial statements of the
Company have been reclassified to reflect the disposition of Birdies Golf Center
as discontinued operations for all periods presented herein.
Information about the discontinued operations of the Birdie's business segment
is as follows:
10
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
Note 2. Birdies Business Segment, Continued
Three Months Six Months
Ended Ended
January 31, January 31,
1999 1999
------------ -----------
<S> <C> <C>
Operating revenues $ 29,297 $ 95,667
Loss before federal income taxes 143,970 194,158
Loss from discontinued operations,
net of federal income taxes 99,339 133,969
</TABLE>
Total assets from discontinued operations were $1,944,963 at January 31, 1999.
Note 3. Business Segment Reporting:
Information about the Company's separate continuing business segments as of and
for the six months ended January 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Real Estate
Commercial Rental and
Lending Receivable
Operations Operations Total
----------- ----------- -----------
<S> <C> <C> <C>
2000:
Revenue $ 1,073,833 $ 2,168,973 $ 3,242,806
Income from continuing
operations before tax 305,280 245,188 550,468
Identifiable assets, net 13,171,661 22,462,021 35,633,682
Depreciation and
amortization 738 361,587 362,325
Capital expenditures -- 838,582 838,582
</TABLE>
11
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
Note 3. Business Segment Reporting, Continued:
Real Estate
Commercial Rental and
Lending Receivable
Operations Operations Total
----------- ----------- -----------
<S> <C> <C> <C>
1999:
Revenue $ 652,804 $ 2,140,128 $ 2,792,932
Income from continuing
operations before tax 200,090 64,453 264,543
Identifiable assets, net 10,737,626 26,389,172 37,126,798
Depreciation and
amortization 394 343,998 344,392
Capital expenditures 4,524 289,243 293,767
</TABLE>
The Company has determined that its reportable business segments are those that
are based on its method of disaggregated internal reporting. The Company's
reportable business segments are its commercial loan origination business and
its rental and receivable operations. Its commercial loan origination business,
operated as Cornerstone Realty Advisors, Inc., originates commercial
construction loans throughout the western United States. The rental and
receivable operations represent the selling and leasing of real properties and
the financing of contracts and loans collateralized by real estate.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At January 31, 2000, the Company had total stockholders' equity of approximately
$7,330,000 and a total liabilities to equity ratio of 3.86 to 1, which decreased
from 4.15 to 1 at July 31, 1999. During the quarter, the Company's primary
sources of funds were approximately $700,000 from the issuance of notes payable
to banks and others, approximately $252,000 from sales of marketable securities,
$662,000 from sales of real estate and $8,246,000 in real estate contract and
loan collections. The primary uses of funds were approximately $839,000 for
property improvements, approximately $7,975,000 for investments in contracts and
loans receivable, and approximately $1,175,000 for net debt reduction.
The Company anticipates that cash flows from operations, and the availability of
funds under its lines-of-credit and other banking agreements totalling
$23,432,500 of which $13,131,000 was outstanding at January 31, 2000, will be
sufficient to provide for the retirement of maturing debentures and mortgage
obligations. The Company plans to continue using funds to make improvements to
its existing rental properties, to improve property held for sale and
development and to originate interim and construction loans.
Results of Operations (Three Months)
The Company's net loss for the quarter ended January 31, 2000 was approximately
$30,000 compared with net income of approximately $184,000 for the quarter ended
January 31, 1999. Loss from continuing operations before tax was approximately
$51,000 in 2000 compared with income from continuing operations of $409,000 in
1999, a difference of approximately $460,000. The difference was primarily
attributable to a $624,000 decrease in gain on sale of real estate partially
offset by an increase of approximately $160,000 in net interest and loan fee
income. Excluding the $624,000 gain on sale of real estate in 1999, income from
continuing operations improved by $164,000 in 2000.
Rental income decreased by approximately $9,000 (1.6%) to approximately $552,000
in the quarter ended January 31, 2000 from approximately $561,000 in 1999. This
decrease primarily resulted from the sales of two rental properties that
provided rental income in 1999 but not in the current year.
Rental property expenses were approximately $4,000 (.8%) lower in 2000 than for
the comparable three months in 1999. This decrease was due to decreased
operating expense of $18,873 (7.6%), which more than offset increased
depreciation of $8,884 (5.4%) and interest expense of $5,825 (6.4%).
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Salaries and commissions were $27,583 (15.9%) higher in the quarter ended
January 31, 2000 than for the comparable three months in 1999, primarily because
of additional personnel expense for Cornerstone Realty Advisors.
Interest income and amortized discount increased approximately $218,000 (50.8%)
for the three months ended January 31, 2000 compared with the similar period in
1999 as amortized loan fees and interest earned on the average outstanding
balance in contracts and loans receivable increased during the period primarily
due to the new loans originated by Cornerstone Realty Advisors. In addition,
interest rates on loans tied to bank prime rates increased.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, decreased approximately $39,000 (7.9%)
in the second quarter of 2000 compared with the comparable 1999 period primarily
due to capitalizing approximately $16,000 in interest and reduced borrowings in
2000.
The Company's effective income tax rate as a percentage of income (loss) before
federal income tax was approximately 40% in 2000 compared to 31% in 1999.
Results of Operations (Six Months)
The Company's net income for the six months ended January 31, 2000 was
approximately $369,000 compared with net income of approximately $49,000 for the
six months ended January 31, 1999. Income from continuing operations before tax
was approximately $550,000 in 2000 compared with income of $265,000 in 1999, an
improvement of approximately $286,000. The increase was primarily attributable
to an increase of approximately $274,000 in net interest and loan fee income and
an increase of approximately $131,000 in gain on sales of real estate in 2000
compared to 1999. This was partially offset by an increase in general and
adminstrative expense of approximately $45,000 and a $50,000 provision for loan
loss.
Rental income remained at approximately $1,105,000 in the six months ended
January 31, 2000 and 1999. This primarily resulted from increased rents due to
higher occupancy levels in a multifamily apartment building renovated in the
prior year offsetting reduced rents due to the sale of two rental properties.
Rental property expenses were $27,552 (2.7%) lower in 2000 than for the
comparable six months in 1999. This resulted from decreased operating expense of
$29,814 (5.8%) and interest expense of $15,379 (8.4%) which more than offset an
increase in depreciation of $17,641 (5.4%).
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Results of Operations (Six Months)(Continued)
Interest income and amortized discount was $524,616 (64.5%) more for the six
months ended January 31, 2000 compared with the similar period in 1999 as
amortized loan fees and interest earned on the average outstanding balance in
contracts and notes receivable increased during the period, primarily due to new
loans originated by Cornerstone Realty Advisors.
Salaries and commissions were $50,836 (14.0%) higher in the six months ended
January 31, 2000 than for the comparable six months in 1999, primarily because
of additional personnel expense for Cornerstone Realty Advisors.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was $45,040 (4.9%) more in 2000 than in
1999 primarily due to an increase in borrowings to fund the loans originated by
Cornerstone Realty Advisors.
The Company's effective income tax rate as a percentage of income (loss) before
federal income tax was approximately 33% in the current fiscal year compared to
31% in the prior fiscal year.
15
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company does not believe that there has been a material change in its market
risk since the end of its last fiscal year.
16
<PAGE>
Part II. Other Information
Items 1, 2, 3, 4 and 5 -- Not applicable.
Item 6 -- Exhibit 27 - Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC SECURITY FINANCIAL, INC.
/s/ David L. Guthrie
- ---------------------------------
David L. Guthrie
President/Chief Executive Officer
/s/ Donald J. Migliuri
- ---------------------------------
Donald J. Migliuri, Secretary/
Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 510
<SECURITIES> 42
<RECEIVABLES> 18129
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30
<DEPRECIATION> 0
<TOTAL-ASSETS> 35634
<CURRENT-LIABILITIES> 0
<BONDS> 9811
0
300
<COMMON> 3420
<OTHER-SE> 3610
<TOTAL-LIABILITY-AND-EQUITY> 35634
<SALES> 0
<TOTAL-REVENUES> 3243
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1130
<INCOME-PRETAX> 550
<INCOME-TAX> 181
<INCOME-CONTINUING> 369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 369
<EPS-BASIC> .32
<EPS-DILUTED> .32
</TABLE>
