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, 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 0-6673
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 No.)
incorporation of organization)
N. 10 Post Street
325 Peyton Building
Spokane, Washington 99201
------------------------------- ----------------------------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (509) 444-7700
------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange on which
Title of each class registered
------------------------------ ------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value shares
---------------------------------
(Title of class)
<PAGE>
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, 2000, the registrant had outstanding 1,138,795 shares of common
stock, no par value ($3 stated value) and 3,000 shares of Class A preferred
stock, $100 par value.
Documents incorporated by reference: none.
<PAGE>
PACIFIC SECURITY FINANCIAL, INC.
FORM 10-K ANNUAL REPORT
Table of Contents
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 9
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 40
</TABLE>
<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 (the "Company")
as of the date of the merger. Pacific Security Companies changed its
name to Pacific Security Financial, Inc, in 1999.
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 Company at July 31, 2000 and 1999 were $40,416,395
and $35,946,222, respectively, and real estate contracts and loans
represent approximately 49% and 50% of the respective asset totals. The
Company presently primarily originates commercial loans. The Company
also originates contracts to facilitate the sale of real estate held
for sale or development. Some of the contracts have fixed contractual
interest rates while commercial (interim and construction) loans
generally have variable rates. Most contracts have been purchased by
the Company at a discount from the contract balance which increases the
effective yield. The total amount invested in real estate contracts and
loans of $19,713,117 as of July 31, 2000 is $1,789,788 more than at the
end of the prior year. The percentage of contracts which were
delinquent over 90 days was 7.0% as of July 31, 2000 and 1.9% as of
July 31, 1999. 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 short-term (generally one to two
years including extensions) construction and interim loans. Bank lines
of credit were increased to provide additional funds for this purpose.
The permanent financing for these short-term loans is obtained from the
secondary market and includes such sources as banks, savings and loan
institutions, life insurance companies, credit unions and conduits.
The Company has 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 has been minimal, other than for
Company financed sales of its real estate. The Company developed
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 9 ten-acre
parcels remaining for sale at July 31, 2000.
In fiscal 1996, the Company completed construction of Birdies Golf
Center (Birdies) and discontinued this operation in fiscal 1999. See
further information on this discontinued business segment in Note 4 to
the consolidated financial statements.
Investments in rental properties totaled $17,783,847 and $14,807,679 as
of July 31, 2000 and 1999, respectively. The increase is primarily the
net result of the acquisition of two commercial buildings in Boise,
Idaho, construction of a new building for lease in the Cornerstone
Office Park and additional capitalized costs that more than offset
depreciation expense and the cost of real estate that was sold. Other
real property held for sale and development totaled $1,796,607 and
$2,031,448 as of July 31, 2000 and 1999, 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 or exchanged 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 only increased from $2,220,979
in fiscal 1998 to $2,285,947 in fiscal 2000. During the same period,
interest income, including the amortization of discounts on real estate
contracts, has increased from
1
<PAGE>
27% of total income in fiscal 1998 to 47% of total income in fiscal
2000. The Company expects to continue its emphasis on originating
construction and interim commercial real estate loans and the
development, leasing and sale of commercial real estate in fiscal 2001,
and marketing of the Tanglewood (The Crest) parcels. There are no
contractual commitments other than the remaining remodeling costs
associated with improvements for commercial buildings and the
construction of a new building at the Cornerstone Office Park. The
Company's fiscal 2001 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 rental properties.
The Company is in competition with financial institutions who originate
or invest in real estate collateralized contracts and commercial
property owners located primarily in or near Spokane, Washington.
As of July 31, 2000, the Company employed approximately 21 people on a
full-time equivalent basis, 18 of whom are in its office at N. 10 Post
Street in Spokane, Washington.
Item 2. Properties
As of July 31, 2000, 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 (unless otherwise noted):
<TABLE>
<CAPTION>
July 31, 2000
------------------------------------------
Rental/ Net Mortgage
Date Development Carrying or Contract
Acquired Description of Property Status Value Obligation
-------- ------------------------------------------------------- -------------- ---------- ------------
Commercial:
<S> <C> <C> <C>
1979 The Peyton Building at N. 10 Post Street contains Substantially $4,496,233 $ 2,422,444
approximately 85,000 square feet of rentable space. leased
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 Washington contains Substantially $3,422,006 $ 2,482,500
approximately 56,000 square feet of rentable space. leased
Substantial improvements have been made to the
building since its acquisition. The Company also
acquired 25,000 square feet for parking near this
building.
1992 The Pier One Building is a commercial building. Leased $3,055,814 $ 1,294,456
The building has two major tenants, who occupy
over 60% of the space, and several other smaller
tenants for the remaining space.
2
</TABLE>
<PAGE>
Properties Located in Spokane County, Washington (unless otherwise noted),
Continued: <TABLE>
<CAPTION>
July 31, 2000
-------------------------------------------
Rental/ Net Mortgage
Date Development Carrying or Contract
Acquired Description of Property Status Value Obligation
-------- ------------------------------------------------------- -------------- ---------- ------------
Commercial, Continued:
<S> <C> <C> <C>
1992 The AT&T Wireless Building is a commercial Leased $ 696,061 $ 796,016
building constructed by the Company on the north
river bank in Spokane.
1995 Cornerstone Office Building is the remodeled Birdies
Golf Center, constructed on 2 acres of the Cornerstone Leased $ 1,552,701 $ 690,644
Office Park property. It has approximately 8,300 square
feet of rental space occupied by two tenants.
2000 Apex Physical Therapy is a commercial building
constructed by the Company in the Cornerstone Leased $ 553,270 $ 529,028
Office Park.
2000 Boise, Idaho: Calderwood- Overland Building-
Commercial Building with approximately 10,896 Leased $ 1,597,389 (1)
square feet of rentable space.
2000 Boise, Idaho: Calderwood- Ardene Building-
Commercial Building with approximately 8,292 Leased $ 1,197,959 (1)
square feet of rentable space.
Multi-Family Housing:
1969 The Broadmoor Apartments, formerly the Aqua View Occupied $ 1,212,413 $ 2,074,435
Apartments, is a 128-unit apartment complex.
Land:
1990 Cornerstone Office Park and property consists of
approximately 10 remaining acres of raw land in a Under $ 812,971 $ ---
location where there has been substantial commercial development
and residential development.
1991 Tanglewood Ranch Park Estates (The Crest) in south Being $ 686,250 $ ---
Spokane County was acquired through a judicial fore- marketed
closure. The area consisted of approximately 300 acres
of undeveloped land. In fiscal 2000, three lots were sold,
leaving approximately 9 lots available for sale.
1993 Approximately six acres in Auburn, Washington Being $ 172,386 $ ---
zoned for single-family housing were acquired marketed
through a foreclosure.
2000 Calderwood lots (2), Boise Idaho Under $ 125,000 (1)
development
(1) Total obligation of $1,742,250 is secured by two commercial buildings and land as noted above.
</TABLE>
3
<PAGE>
Item 3. Legal Proceedings
As of July 31, 2000, 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 2000.
4
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Principal Market.
There is no established market for trading in the Company's common
stock. Periodically, the Company will purchase and retire its common
stock, but does not solicit such transactions.
(b) Stock Price and Dividend Information.
There is no market information relative to the common stock price of
the Company's stock as it is not actively traded. No dividends have
been declared since 1990.
(c) Approximate Number of Holders of Common Stock.
Common no par value -- 1,111 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, 2000, the Company also has issued 3,000
shares of 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 years ended July 31, 2000 and 1999,
dividends totaling $18,000 and $18,000 were declared and accrued on
these shares, respectively. During the fiscal years ended July 31, 1998
and 1997, dividends totaling $42,000 and $62,400, respectively, were
declared and accrued on these shares. The dividends were paid on August
3, 2000, August 3, 1999, August 3, 1998, and August 1, 1997,
respectively.
5
<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,
------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Rental income $ 2,285,947 $ 2,268,810 $ 2,220,979 $2,398,369 $ 2,714,563
Interest income, including loan fees 2,885,338 2,183,276 963,297 1,032,847 1,138,935
Gains on sales of real estate 1,038,694 1,128,628 514,141 1,611,195 486,469
Interest expense, net 2,364,846 2,208,858 1,580,820 1,548,173 1,650,559
Income (loss) from continuing operations,
before income taxes 845,791 853,559 (720,371) 879,238 182,114
Net income (loss) 561,491 285,342 (596,936) 472,000 39,266
Income (loss) applicable to common
stockholders 543,491 57,342 (757,936) 357,600 (75,134)
Income (loss) per common share - basic
and diluted .48 .05 (.48) .19 (.04)
========= ========== ========== ========== =========
Income (loss) from continuing operations
per common share - basic and diluted .48 .27 (.42) .26 (.03)
========= ========== ========== ========== =========
Cash dividends per common share -- -- -- -- --
Weighted-average number of common
shares outstanding 1,139,232 1,161,677 1,591,484 1,895,105 1,938,076
Balance Sheet Data (at year end):
Contracts, mortgages, finance notes and
loans receivable, net $ 19,713,117 $ 17,923,329 $ 11,149,009 $ 10,971,700 $ 10,492,944
Total assets 40,416,395 35,946,222 30,940,293 32,294,907 32,840,107
Notes and contracts payable 21,234,496 17,421,385 12,255,178 10,028,531 11,055,919
Debentures 9,867,649 9,643,548 9,839,936 9,898,351 9,718,260
Stockholders' equity 7,500,785 6,980,693 6,647,479 9,689,896 9,397,005
</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.
6
<PAGE>
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 rental properties as
its primary activities. In fiscal 1999, the Company expanded its lending
activities associated with interim construction loans. During the past two
years, the Company has also focused on the development and lease of its rental
properties as demand for the available space in these projects has increased.
Much of the Company's development of the 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. The Company also constructed a new building in the
Cornerstone Office Park. This building is fully leased to a tenant who has a two
year option to buy the building.
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 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. These loans have involved properties located in the
western United States.
The Company finances its investments in real estate and loans primarily through
collateralized line-of-credit arrangements with local banks, real estate notes
or mortgages, and the sale of fixed rate debentures with terms ranging from one
to ten years. The Company intends to continue using these funding sources in the
future.
Results of Operations
For the years ended July 31, 2000, 1999 and 1998, the Company's net income
(loss) was approximately $561,000, $285,000, and $(597,000), 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
$543,000, $57,000, and $(758,000) in fiscal 2000, 1999, and 1998, respectively.
Rental real estate revenues have remained relatively flat due to sales of rental
properties offsetting rent increases in existing properties and rent from
newly-constructed or acquired properties. Total rental income has increased from
$2,221,000 in fiscal 1998 to $2,286,000 in fiscal 2000. Rental income is
expected to increase as vacancies are reduced.
The total interest income, including loan fees and amortization of discounts on
acquired real estate contracts and loans, has increased from approximately
$2,211,000 and $1,005,000 in fiscal 1999 and 1998, respectively, to
approximately $2,958,000 in fiscal 2000. This increase corresponds directly with
the increase in the Company's origination of construction and interim commercial
loans. 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 of $600,000 and net interest income
of $539,000 have significantly increased as the loan portfolio has grown in
fiscal 2000.
Gains on the sale of real estate were approximately $1,039,000, $1,129,000, and
$514,000 in fiscal 2000, 1999 and 1998, 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.
The expenses associated with rental operations have decreased to approximately
$1,996,000 in fiscal 2000 from approximately $2,036,000 in fiscal 1998. The
rental activities of the Company are expected to continue to contribute to its
profitability, but sales of rental properties may offset rental increases from
newly-acquired or newly-constructed properties.
7
<PAGE>
Interest expense, exclusive of interest on rental properties, net of amounts
capitalized, was approximately $2,011,000, $1,842,000 and $1,212,000 in fiscal
2000, 1999 and 1998, respectively. In the last half of fiscal 1998 and through
fiscal 2000, outstanding borrowings increased significantly due to advances
drawn under the Company's lines of credit to fund the origination of
construction and interim loans. These increased borrowings resulted in the
increase in interest expense in fiscal 2000.
Salaries and commissions have increased in absolute dollar amounts for each of
the last three fiscal years. In fiscal 2000, salaries and commissions increased
$154,600. Additional staffing for Cornerstone Realty Advisors, Inc. resulted in
increased salaries and commissions were higher due to increased loan activity.
General and administrative expenses in fiscal 2000 were higher by approximately
$83,000 than in fiscal 1999 due to the growth of the company.
The Company's effective income tax rate as a percentage of income (loss) from
continuing operations before income taxes was 34% in fiscal 2000, compared to a
provision of 37% and a benefit of 29% in fiscal 1999 and 1998, respectively.
Liquidity and Capital Resources
At July 31, 2000, the Company had total stockholders' equity of approximately
$7,501,000 and a total liabilities to equity ratio of 4.39 to 1, which increased
from 4.15 to 1 the year before. The increase in this ratio was primarily due to
the increase in bank borrowings to fund new interim and construction loans in
fiscal 2000. In fiscal 2000, the Company's primary sources of funds were
approximately $2.0 million from the sale of real estate, $17.5 million in real
estate contract collections, $.7 million from operating activities and $4.9
million from net line-of-credit and note borrowings. The primary uses of funds
were approximately $4.6 million used for the acquisition and improvements of
real estate projects, $19.4 million used to originate new loans and acquire new
contracts, $.7 in repayment of maturing debentures, and approximately $1.0
million in repayment of outstanding long-term debt. As a holder of monetary
assets and liabilities, the Company's performance may be significantly affected
by changes in 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. The interim and construction loans originated by the Company have
variable interest rates and are primarily funded by variable interest rate loans
so that the spread between the loans receivable interest rate and debt interest
rate is maintained regardless of whether rates are increasing or decreasing. The
Company will be affected by changes in the real estate market in Washington and
other western states where it originates loans.
The Company anticipates that sales of debentures and the availability of funds
under its $23,432,500 line-of-credit and loan arrangements, of which
approximately $15,715,057 was outstanding at July 31, 2000, will be sufficient
to fund its short- and intermediate-term needs to retire maturing debentures and
mortgage obligations, to continue development of its real estate projects as
demand warrants, and to originate commercial real estate loans. The Company does
not anticipate any significant capital expenditures during fiscal 2001, other
than the completion of the remodeling of rental properties and the construction
of a building and other improvements to the Cornerstone Office Park.
8
<PAGE>
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 a significant market risk and could
potentially have a material effect on the Company's 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 can be affected by fluctuations in 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. In
addition, real estate lending may slow in a rising interest rate environment.
The Company mitigates interest rate risk on the interim and construction loans
it originates by having variable interest rates on these loans tied to the
variable interest rates on its borrowings to fund the loans. These loans are
short-term loans (generally one to two years, including extensions). Permanent
financing for these loans is obtained from the secondary market and includes
such sources as banks, savings and loan institutions, life insurance companies,
credit unions and conduits.
9
<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' estimated fair values at July 31, 2000.
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Contracts, mortgages, finance notes
and loans receivable $16,107,903 $ 208,405 $ 230,228 $ 254,335 $ 279,966
Interest-sensitive liabilities:
Notes payable to banks 11,158,122 4,556,935
Installment contracts, mortgage notes
and notes payable 210,045 1,961,627 207,946 190,224 201,044
Debenture bonds 1,194,800 1,031,553 1,130,738 2,031,557 1,925,564
Off-balance sheet items:
Undisbursed loans receivable 9,431,626
</TABLE>
[RESTUBBED]
<TABLE>
<CAPTION>
Thereafter Balance Fair Value
----------- ----------- ----------
<S> <C> <C> <C>
Interest-sensitive assets:
Contracts, mortgages, finance notes
and loans receivable $ 3,154,586 $ 20,235,423 $20,235,423
Interest-sensitive liabilities:
Notes payable to banks 15,715,057 15,715,057
Installment contracts, mortgage notes
and notes payable 2,748,553 5,519,439 5,519,439
Debenture bonds 2,553,437 9,867,649 9,867,649
Off-balance sheet items:
Undisbursed loans receivable 9,431,626 9,431,626
</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.
10
<PAGE>
Item 8. Financial Statements and Supplementary Data Page
----
Report of independent accountants 12
Financial statements:
Consolidated balance sheets 13
Consolidated statements of operations 15
Consolidated statements of comprehensive income (loss) 16
Consolidated statements of stockholders' equity 17
Consolidated statements of cash flows 18
Notes to consolidated financial statements 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
11
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders
Pacific Security Financial, Inc. and Subsidiaries
Spokane, Washington
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Pacific Security Financial, Inc. (formerly Pacific
Security Companies) and its subsidiaries (the Company) at July 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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
auditing standards generally accepted in the United States of America 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 our opinion.
/s/ PricewaterhouseCoopers LLP
-------------------------------
September 19, 2000
Spokane, Washington
12
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
July 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Assets:
Cash and cash equivalents:
Unrestricted $ 442,208 $ 512,472
Restricted 19,825 16,321
----------- -----------
462,033 528,793
----------- -----------
Receivables:
Contracts, mortgages, finance notes and loans
receivable, net:
Related parties 202,028 214,795
Unrelated 19,511,089 17,708,534
----------- -----------
19,713,117 17,923,329
Accrued interest 250,025 98,319
Other 60,549 33,484
----------- -----------
20,023,691 18,055,132
----------- -----------
Investment in rental properties, net 17,783,847 14,807,679
Other investments:
Property held for sale and development 1,796,607 2,031,448
Marketable securities 41,724 242,168
----------- -----------
1,838,331 2,273,616
----------- -----------
Other assets:
Vehicles and equipment, net 63,340 33,590
Prepaid and other, net 245,153 247,412
----------- -----------
308,493 281,002
----------- -----------
Total assets $40,416,395 $35,946,222
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Balance Sheets, Continued
July 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Liabilities:
Notes payable to banks 15,715,057 $13,925,405
Installment contracts, mortgage notes and notes payable:
Related parties 152,286 337,695
Unrelated 5,367,153 3,158,285
----------- -----------
5,519,439 3,495,980
----------- -----------
Debenture bonds 9,867,649 9,643,548
Accrued expenses and other liabilities:
Related parties 106,097 254,590
Unrelated 819,287 874,602
----------- -----------
925,384 1,129,192
----------- -----------
Income taxes 241,511 59,131
Deferred income taxes 646,570 712,273
----------- -----------
Total liabilities 32,915,610 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,
1,138,795 and 1,152,532 shares 3,416,386 3,457,597
Class B, authorized 30,000 no par value shares;
no shares issued and outstanding -- --
Additional paid-in capital 1,822,203 1,804,009
Retained earnings 1,962,196 1,418,705
Accumulated comprehensive income, net -- 382
----------- -----------
Total stockholders' equity 7,500,785 6,980,693
----------- -----------
Total liabilities and stockholders' equity $40,416,395 $35,946,222
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Operations
for the years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Income:
Rental $ 2,285,947 $ 2,268,810 $ 2,220,979
Interest, including loan fees of $599,878,
$450,285 and $59,979 2,885,338 2,183,276 963,297
Amortization of discounts on real estate contracts 72,777 27,633 41,992
Gain on sales of real estate 1,038,694 1,128,628 514,141
Gain on sale of marketable securities 1,834 279,082 --
Other, net 69,619 45,897 49,412
----------- ----------- -----------
6,354,209 5,933,326 3,789,821
----------- ----------- -----------
Expense:
Rental operations:
Depreciation and amortization 698,769 663,272 628,149
Interest 353,852 366,817 369,276
Other 943,149 1,064,448 1,038,890
----------- ----------- -----------
1,995,770 2,094,537 2,036,315
Interest, net of amount capitalized 2,010,994 1,842,041 1,211,544
Salaries and commissions 889,720 735,120 710,660
General and administrative 451,941 368,848 523,443
Depreciation and amortization 39,968 39,014 26,031
Provision for loan loss 120,025 207 2,199
----------- ----------- -----------
5,508,418 5,079,767 4,510,192
----------- ----------- -----------
Income (loss) from continuing operations before
income taxes 845,791 853,559 (720,371)
Income tax provision (benefit) 284,300 312,565 (206,429)
----------- ----------- -----------
Income (loss) from continuing operations 561,491 540,994 (513,942)
----------- ----------- -----------
Discontinued operations:
Loss from discontinued operations of golf center
(less federal income tax benefit of $0,
$147,584 and $33,407) -- (255,652) (82,994)
----------- ----------- -----------
Net income (loss) 561,491 285,342 (596,936)
Less: Preferred stock dividends (18,000) (18,000) (42,000)
Accretion of discount on preferred stock -- (210,000) (119,000)
----------- ----------- -----------
Income (loss) applicable to common stockholders $ 543,491 $ 57,342 $ (757,936)
=========== =========== ===========
Income (loss) from continuing operations applicable
to common stockholders $ 543,491 $ 312,994 $ (674,942)
=========== =========== ===========
Income (loss) per common share - basic and diluted $ 0.48 $ 0.05 $ (.48)
=========== =========== ===========
Income (loss) from continuing operations per
common share - basic and diluted $ 0.48 $ 0.27 $ (.42)
=========== =========== ===========
Loss from discontinued operations per common
share - basic and diluted $ -- $ (0.22) $ (.05)
=========== =========== ===========
Weighted average common shares per outstanding
basic and diluted 1,139,232 1,161,677 1,591,484
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
for the years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net income (loss) $ 561,491 $ 285,342 $(596,936)
Other comprehensive income (loss) before income taxes:
Changes in unrealized gains/losses on marketable
securities (579) 13,152 1,058
--------- --------- ---------
Other comprehensive income (loss) before income taxes 560,912 298,494 (595,878)
Less deferred income tax provision (benefit) (197) 4,471 361
--------- --------- ---------
Comprehensive income (loss) $ 561,109 $ 294,023 $(596,239)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Additional Accumulated
Preferred Common Paid-in Retained Comprehensive
Stock Stock Capital Earnings Income (Loss) Total
---------- ------------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 marketable
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, including
redemption of 2,400 shares (35,000) (119,000) (154,000)
------------ ------------ ----------- ----------- ----------- -----------
Balances, July 31, 1998 3,517,464 1,776,951 1,361,363 (8,299) 6,647,479
Net income 285,342 285,342
Unrealized gain on marketable
securities 8,681 8,681
Purchase and retirement of
common stock
(19,956 shares) (59,867) 27,058 (32,809)
Cash dividend declared on
preferred stock (18,000) (18,000)
Accretion of discount on
preferred stock, including
redemption of 4,000 shares
and conversion of 3,000
shares (210,000) (210,000)
Conversion of redeemable
preferred stock 300,000 300,000
------------ ------------ ----------- ----------- ----------- -----------
Balances, July 31, 1999 300,000 3,457,597 1,804,009 1,418,705 382 6,980,693
Net income 561,491 561,491
Unrealized gain on marketable
securities (382) (382)
Purchase and retirement of
common stock
(13,737 shares) (41,211) 18,194 (23,017)
Cash dividend declared on
preferred stock (18,000) (18,000)
------------ ------------ ----------- ----------- ----------- -----------
Balances, July 31, 2000 300,000 $ 3,416,386 $ 1,822,203 $ 1,962,196 $ 0 $ 7,500,785
============ ============ =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from rentals and other $ 2,275,926 $ 2,836,790 $ 2,690,419
Interest received 2,733,632 1,775,529 879,135
Cash paid to suppliers and employees (2,366,855) (2,297,644) (2,590,272)
Interest paid, net of amounts capitalized (1,759,175) (1,610,269) (1,040,047)
Income taxes refunded (paid) (167,820) 170,330 --
------------ ------------ ------------
Net cash from operating activities 715,708 874,736 (60,765)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales of real estate 1,999,051 1,140,122 566,628
Proceeds from sales and maturities of marketable
securities 252,093 337,796 --
Purchase of marketable securities (50,000) (200,062) --
Collections on contracts, mortgages, finance
notes and loans receivable 17,546,549 13,461,784 7,208,934
Origination of loans receivable and investment in
contracts, mortgages and finance notes (19,415,924) (18,521,619) (6,471,596)
Additions to rental properties, property held for
sale, property under development, golf center,
vehicles and equipment (4,574,922) (847,658) (1,673,150)
Change in restricted investments (3,504) (5,032) 351,549
------------ ------------ ------------
Net cash from investing activities (4,246,657) (4,634,669) (17,635)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 1,789,652 7,281,579 1,238,827
Proceeds from installment contracts, mortgage
notes and notes payable 3,072,710 283,333 434,688
Payments on installment contracts, mortgage
notes and notes payable (1,049,251) (2,598,705) (300,868)
Proceeds from sales of debenture bonds 361,266 76,912 340,657
Redemption of debenture bonds (672,675) (813,931) (954,296)
Redemption of preferred stock -- (200,000) (240,000)
Payment of dividends on preferred stock (18,000) (42,000) (62,400)
Purchase and retirement of common stock (23,017) (32,809) (385,240)
------------ ------------ ------------
Net cash from financing activities 3,460,685 3,954,379 71,368
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (70,264) 194,446 (7,032)
Cash and cash equivalents, beginning of year 512,472 318,026 325,058
------------ ------------ ------------
Cash and cash equivalents, end of year $ 442,208 $ 512,472 $ 318,026
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Reconciliation of net income (loss) to net cash from
operating activities:
Net income (loss) $ 561,491 $ 285,342 $ (596,936)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 738,737 743,802 750,370
Deferred income tax provision (benefit) (65,900) 121,324 (534,967)
Deferred financing income realized (72,777) (27,633) (41,992)
Interest accrued on debenture bonds 535,510 540,631 555,224
Gain on sales of marketable securities (1,834) (279,082) --
Gain on sales of real estate (1,038,694) (1,128,628) (514,141)
Uncollectible accounts 120,025 -- 2,199
Change in assets and liabilities:
Accrued interest receivable (151,706) 42,537 (299,157)
Income taxes 182,380 213,988 299,764
Prepaid expenses (22,741) 49,178 35,252
Golf center inventories -- 58,331 (2,830)
Accrued expenses and other liabilities (203,808) 282,584 258,323
Other, net 135,025 (27,638) 28,126
----------- ----------- -----------
Net cash from operating activities $ 715,708 $ 874,736 $ (60,765)
=========== =========== ===========
Supplemental schedule of noncash investing and
financing activities:
Company financed sale of property $ 129,750 $ 1,775,358 $ 486,300
Accretion of discount on preferred stock -- 150,000 119,000
Stock dividend declared and unpaid 18,000 18,000 42,000
Transfer of investment in golf center to investment
in rental properties -- 1,366,683 --
Transfer of investments in golf center to property
held for sale or development -- 460,182 --
Note payable issued for purchase and redemption
of preferred shares -- 200,000 --
Deferred gain recognized on sale of property -- -- 41,516
Related party note issued in exchange for non-
competition agreement -- -- 125,000
Exchange of real estate for purchase and redemption
of common stock -- -- 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.
19
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
for the years ended July 31, 2000, 1999 and 1998
1. Organization and Summary of Significant Accounting Policies:
Pacific Security Financial, Inc. (formerly 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. The Company
also originates commercial real estate loans on properties located in the
western United States.
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, Pacific Realty Management
and Cornerstone Realty Advisors, Inc. which was formed in fiscal years
2000 and 1998, respectively. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
The Company deposits all cash and cash equivalents with high quality
financial institutions. At times, the deposits may exceed the federal
insured limit.
The Company considers highly liquid debt instruments, if any, purchased
with a remaining maturity of three months or less to be cash
equivalents.
Contracts, Mortgages, 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.
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.
20
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
1. Organization and Summary of Significant Accounting Policies, Continued:
Investment in Rental Properties
Rental properties, including land, buildings and improvements and
furniture and equipment, are recorded at cost. Expenditures for
maintenance and repairs are charged to operations as incurred. Renewals
and betterments are capitalized.
Depreciation is provided on the straight-line method over estimated
useful lives as summarized below:
Years
Buildings and improvements 15-40
Furniture and equipment 5-10
Upon sale or retirement of depreciable properties, the related cost and
accumulated depreciation are removed from the accounts and any
resultant gain or loss is reflected in operations.
Interest Capitalization
All costs associated with self-constructed assets, including interest,
incurred during the construction period, are capitalized. Interest
costs of approximately $55,000 were capitalized during the year ended
July 31, 2000.
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.
21
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
1. Organization and Summary of Significant Accounting Policies, Continued:
Marketable Securities
The Company's investments, consisting of debt and equity securities,
are classified as "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 accumulated comprehensive income
(loss), net of related income taxes.
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 associated with this agreement was $61,441 and
$36,441 at July 31, 2000 and 1999, respectively.
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 $227,332 and $213,850 at July 31, 2000 and
1999, 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.
Sales of Real Estate
Profit on sale of real estate is recognized when the buyers' initial
and continuing investment is adequate to demonstrate (1) a commitment
to fulfill the terms of the transaction, (2) that collectibility of the
remaining sales price due is reasonably assured, and (3) the Company
maintains no continuing involvement or obligation in relation to the
property sold and has transferred all the risk and rewards of ownership
to the buyer.
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.
Recognition of Rental Income
Rental income on cancelable operating leases is recognized as it
becomes receivable in accordance with the provisions of the lease.
Rental income on noncancelable operating leases which contain fixed
escalation clauses is recognized on the straight-line method over the
term of the lease. The difference between income earned and lease
payments received from the tenants is included in the other assets on
the consolidated balance sheet.
22
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
1. Organization and Summary of Significant Accounting Policies, Continued:
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.
The Company allocates income taxes between continuing and discontinued
operations in proportion to their individual effects on the
consolidated income tax provision (benefit) at the Company's effective
tax rate for the respective period.
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, 2000, 1999 and 1998;
therefore, diluted earnings per share amounts are identical to basic
earnings per share. The Company also presents income (loss) per share
for continuing and discontinued operations.
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, 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.
Off-Balance-Sheet Instruments
The Company has outstanding commitments to extend credit to commercial
borrowers. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or
received.
The Company has also entered into participation agreements with other
lenders to reduce its credit risk on certain commercial loans. The use
of participations enables the Company to diversify its portfolio among
its borrowers and lenders and mitigate significant geographical and
credit concentration.
23
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
1. Organization and Summary of Significant Accounting Policies, Continued:
Comprehensive Income
During the year ended July 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income". 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 required the Company 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 the consolidated balance sheet. Prior periods'
financial statements have been presented and reclassified to conform to
this Statement.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
Reclassifications
Certain amounts in the 1999 and 1998 consolidated financial statements
have been reclassified to conform with the current year's presentation.
These reclassifications had no effect on net income (loss) or retained
earnings as previously reported.
2. Contracts, Mortgages, Finance Notes and Loans Receivable:
The components of contracts, mortgages, finance notes and loans receivable
at July 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Contracts, mortgages and finance notes receivable $ 4,315,025 $ 6,607,188
Originated loans receivable 25,352,024 16,457,191
Undisbursed portion of loans receivable (9,431,626) (4,828,082)
--------------- ----------------
20,235,423 18,236,297
Unamortized discounts, net (40,703) (113,479)
Unearned loan fees, net (362,143) (194,581)
Allowance for loan losses (119,460) (4,908)
--------------- ----------------
Contracts, mortgages, finance notes and loans
receivable, net $ 19,713,117 $ 17,923,329
=============== ================
</TABLE>
24
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
2. Contracts, Mortgages, Finance Notes and Loans Receivable, Continued:
At July 31, 2000 and 1999, three individual receivable balances
represented approximately 15%, 9% and 8% and 13%, 9% and 8% of the gross
outstanding receivable, respectively. Additionally, aggregate amounts
receivable from two separate borrowers represented approximately 12% and
9% of the gross outstanding receivable at July 31, 2000 and 14% and 13% of
the gross outstanding receivable at July 31, 1999.
At July 31, 2000 and 1999, the aging of the gross amounts due on
contracts, mortgages, finance notes and loans receivable was as follows:
2000 1999
Current $ 18,403,247 $ 17,890,976
31 to 60 days 415,462 6,785
61 to 90 days 4,618 --
Over 90 days 1,412,096 338,536
--------------- ----------------
$ 20,235,423 $ 18,236,297
=============== ================
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, 2000
and 1999, an allowance of $119,460 and $4,908, respectively, was provided.
The receivables are collateralized primarily by residential and commercial
real estate located in the western United States. These estimates can be
affected by changes in the economic environment in the western United
States 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.
3. Investments in Rental Properties:
Following is a summary of investments in rental properties at July 31,
2000 and 1999:
2000 1999
Land $ 3,012,129 $ 2,389,128
Buildings and improvements 20,463,126 17,842,108
Furniture and equipment 1,370,021 1,267,220
---------------- -----------------
24,845,276 21,498,456
Less accumulated depreciation (7,061,429) (6,690,777)
---------------- -----------------
$ 17,783,847 $ 14,807,679
================ =================
25
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
3. Investments in Rental Properties, Continued:
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
noncancelable operating leases as of July 31, 2000:
Year Ending
July 31,
--------------
2001 $ 1,473,932
2002 953,293
2003 748,869
2004 323,872
2005 69,328
--------------
$ 3,569,294
==============
These properties are primarily located in the greater Spokane, Washington
geographical area. Losses on investments in rental properties are
recognized if the anticipated undiscounted 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.
Historically, 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 and deferred gains of approximately
$41,000 at July 31, 1997. These gains were recognized during the year
ended July 31, 1998 when the criterion for a sale was met.
4. Discontinued Operation:
In September 1995, the Company completed construction of and began
operating Birdies Golf Center (Birdies). The facility consisted of a
driving range, lighted fairways with five target greens, a pro shop, a
putting green and teaching studios.
On December 1, 1998, the Company decided to close Birdies and commenced a
liquidation of assets. The Company has leased the Birdies building and
plans to sell the driving range land. The consolidated financial
statements of the Company for the years ended July 31, 1999 and 1998
present the operations of Birdies Golf Center as a discontinued operation.
26
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
4. Discontinued Operation, Continued:
Information about the discontinued operations of the Birdie's business
segment is as follows:
Years Ended July 31,
-------------------------
1999 1998
----------- -----------
Operating revenues $ 103,848 $ 332,815
Loss from discontinued operations before
federal income tax benefit (403,236) (116,401)
Loss from discontinued operations, net of
federal income tax benefit (255,652) (82,994)
Total assets associated with the discontinued operation were $2,211,911 at
July 31, 1998. Proceeds from the sale of these assets during the year
ended July 31, 1999 were $188,592. At July 31, 2000 and 1999, the Birdies
building has been included in investment in rental properties, and the
excess land associated with Birdies has been included in property held for
sale and development.
5. Business Segment Reporting:
Information about the Company's separate continuing business segments and
in total as of and for the years ended July 31, 2000, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Real Estate
Commercial Rental and
Lending Receivable
Operations Operations Total
---------------- ----------------- ----------------
<S> <C> <C> <C>
2000:
Revenue $ 2,391,600 $ 3,962,609 $ 6,354,209
Income from continuing operations 703,362 142,429 845,791
Identifiable assets, net 16,006,450 24,409,945 40,416,395
Depreciation and amortization 1,485 737,252 738,737
Capital expenditures 539 4,574,383 4,574,922
1999:
Revenue $ 1,524,139 $ 4,409,187 $ 5,933,326
Income from continuing operations 476,088 377,471 853,559
Identifiable assets, net 11,683,670 24,262,552 35,946,222
Depreciation and amortization 1,075 742,727 743,802
Capital expenditures 3,440 844,218 847,658
1998:
Revenue $ 183,272 $ 3,606,549 $ 3,789,821
Income (loss) from continuing 3,245 (723,616) (720,371)
operations
Identifiable assets, net 4,473,573 26,466,720 30,940,293
Depreciation and amortization 277 750,093 750,370
Capital expenditures 4,524 1,668,626 1,673,150
</TABLE>
27
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
5. Business Segment Reporting, Continued:
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.
6. Marketable Securities:
A summary of investments in marketable securities at July 31, 2000 and
1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------- -----------------------------------------
Market/ Market/
Unrealized Carrying Unrealized Carrying
Cost Gain Value Cost Gain Value
------------- ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Equity securities $ -- $ -- $ -- $ 199,865 $ 579 $ 200,444
Debt securities 41,724 -- 41,724 41,724 -- 41,724
------------ ----------- ------------ ----------- ----------- ------------
$ 41,724 $ -- $ 41,724 $ 241,589 $ 579 $ 242,168
============ =========== ============ =========== =========== ============
</TABLE>
The debt securities matured during the year ended July 31, 1998. Proceeds
from the partial redemption of these securities of $17,676 were received
during the year ended July 31, 1999. In connection with the reorganization
of the issuer, the outstanding balance of these securities is expected to
be paid in the year ending July 31, 2001 at the full principal amount.
Proceeds from the sale of marketable securities during the years ended
July 31, 2000, and 1999 were $252,093 and $320,120, respectively,
resulting in gross realized gains of $1,834 and $279,082. Included in the
1999 sales were securities which had no carrying value as they had been
previously written down in connection with the issuer's bankruptcy
proceedings.
28
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
7. Notes Payable to Banks (Lines-of-Credit):
Notes payable to banks consisted of the following at July 31, 2000 and
1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
U.S. Bank of Washington, short-term line of credit, $8,000,000
commitment, interest at the prime rate plus 0.25%,
expires December 15, 2000, guaranteed by Wayne Guthrie:
Collateralized by contracts, mortgages and finance
notes receivable $ -- $ 3,075,149
Collateralized by loans receivable 4,117,541 5,116,210
Western Bank, line of credit, $8,000,000 commitment, interest
at the prime rate plus 0.25%, expires December 1, 2000,
collateralized by contracts and loans receivable and
guaranteed by Wayne and David Guthrie (stockholders of
the Company) 4,618,137 3,311,602
Sterling Savings Bank, line of credit, $2,482,500 commitment,
interest at the Bank of America Reference Rate (BARR)
plus 0.25%, expires October 15, 2001, collateralized by
real property and assignment of rents, guaranteed by Wayne
and David Guthrie 2,482,500 --
Sterling Savings Bank, line of credit, $2,137,500 commitment,
interest at the Bank of America Reference Rate (BARR)
plus 0.25%, expires October 15, 2001, collateralized by
real property and assignment of rents, guaranteed by Wayne
and David Guthrie 2,074,435 --
Sterling Savings Bank, line of credit, $2,812,500 commitment,
interest at the Bank of America Reference Rate (BARR)
plus 0.25%, expires June 1, 2001, guaranteed by Wayne
and David Guthrie 2,422,444 2,422,444
--------------- ----------------
$ 15,715,057 $ 13,925,405
=============== ================
</TABLE>
The prime rate and the BARR referenced on the above notes were 9.50% on
July 31, 2000 and 8.00% at July 31, 1999.
The above line-of-credit agreements contain restrictive covenants
requiring the maintenance of minimum tangible net worth, and certain debt
service coverage, debt to worth and fixed charge ratios. At July 31, 2000,
the Company was in compliance with the financial covenants in these
agreements.
29
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
7. Notes Payable to Banks (Lines-of-Credit), Continued:
The following assets were pledged as collateral on these notes payable at
July 31, 2000 and 1999:
2000 1999
Contracts receivable $ 1,583,985 $ 3,359,806
Loans receivable 8,034,040 5,116,209
Rental properties 8,547,730 7,231,398
--------------- ----------------
$ 18,165,755 $ 15,707,413
=============== ================
8. Installment Contracts, Mortgage Notes and Notes Payable:
Installment contracts, mortgage notes and notes payable consist of the
following at July 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Installment contracts and mortgage notes payable, interest at
7.0% to 10.75%, aggregate monthly payments of $44,264,
mature 2000 through 2021, collateralized by
various properties $ 5,519,439 $ 3,439,096
Other notes payable -- 56,884
------------ --------------
$ 5,519,439 $ 3,495,980
============== ==============
</TABLE>
Scheduled future maturities of contracts, mortgage notes and notes payable
are as follows:
Year Ending
July 31,
--------------
2001 $ 210,045
2002 1,961,627
2003 207,946
2004 190,224
2005 201,044
Thereafter 2,748,553
---------------
$ 5,519,439
===============
9. 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.
30
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
9. Debenture Bonds, Continued:
Outstanding bonds by interest rate categories were as follows at July 31,
2000 and 1999:
Bond Interest
Rate 2000 1999
------------
6.00 % -- 98,735
6.25 8,159 45,467
6.50 295,523 436,280
7.00 197,816 175,707
7.25 131,521 149,250
7.50 926,167 1,501,550
7.68 15,927 --
7.75 1,214,100 842,234
8.00 589,256 568,753
8.25 1,123,400 1,013,729
8.50 1,887,328 1,502,661
8.75 355,123 343,056
9.00 1,901,010 1,809,218
9.25 370,956 341,394
9.50 811,934 779,933
10.00 17,709 16,039
10.50 14,033 12,648
11.00 7,687 6,894
--------------- ---------------
$ 9,867,649 $ 9,643,548
=============== ===============
The weighted-average annual interest rate on outstanding debentures at
July 31, 2000 and 1999 was 8.37% and 8.26%, respectively.
Estimated future contractual maturities of outstanding debenture bonds are
as follows:
Year Ending
July 31,
-----------
2001 $ 1,194,800
2002 1,031,553
2003 1,130,738
2004 2,031,557
2005 1,925,564
Thereafter 2,553,437
--------------
$ 9,867,649
==============
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.
31
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
10. Income Taxes:
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Federal:
Current $ 350,200 $ 43,657 $ 295,131
Deferred (65,900) 121,324 (534,967)
------------- ------------ ------------
284,300 164,981 (239,836)
Benefit allocated to discontinued operations -- 147,584 33,407
------------- ------------ ------------
$ 284,300 $ 312,565 $ (206,429)
============= ============ ============
</TABLE>
The components of the net deferred tax liability at July 31, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
Assets Liabilities Total
-------------- ------------- -------------
<S> <C> <C> <C>
2000:
Depreciation $ (551,620) $ (551,620)
Installment gains (234,018) (234,018)
Provision for loan loss $ 38,948 38,948
Accrued expenses 82,544 82,544
Other, net 17,576 17,576
------------- ------------ ------------
$ 139,068 $ (785,638) $ (646,570)
============= ============ ============
1999:
Depreciation $ (483,555) $ (483,555)
Installment gains (299,457) (299,457)
Unrealized gains on marketable securities (197) (197)
Accrued expenses $ 52,967 52,967
Other, net 17,969 17,969
------------- ------------ ------------
$ 70,936 $ (783,209) $ (712,273)
============= ============ ============
</TABLE>
The annual tax provision (benefit) from continuing operations is
different from the amount which would be provided by applying the
statutory federal income tax rate to the Company's income (loss) from
continuing operations. The reasons for the differences are:
<TABLE>
<CAPTION>
2000 % 1999 % 1998 %
----------- ----------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Computed statutory pro-
vision (benefit) $ 287,569 34.0 % $ 290,210 34.0 % $ (244,926) (34.0) %
Meals and entertainment 4,113 0.5 1,729 0.2 801 0.1
Nondeductible stockholder
legal expenses 51,000 7.1
Effect of graduated tax rate 5,941 0.8
Other (7,382) (0.9) 20,626 2.4 (19,245) (2.7)
---------- ------- ----------- ----- ----------- ------
$ 284,300 33.6 % $ 312,565 36.6 % $ (206,429) (28.7) %
========== ======= =========== ===== =========== ======
</TABLE>
32
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
11. Employee Benefit Plan:
In August 1998, the Company established a Retirement Savings Plan (the
Plan), authorized under Section 401(k) of the Tax Reform Act of 1986, as
amended. Under the terms of the Plan, the Company may contribute 25% of
pre-tax contributions of compensation up to a maximum of $500. Employees
are eligible to contribute up to 18% of their compensation, subject to
annual limitations, to the Plan. In August 1999, the Plan was revised to
provide for Company contributions of 3% of gross salary for all eligible
employees. Contributions are made directly to a qualified individual
retirement account or annuity in the employee's name. The Company is
required to make nondiscriminatory contributions for each employee who
(1) has reached the age of 21; (2) has performed services for the
Company during the last year of service in which he or she has completed
1,000 hours of service; (3) is not covered by a collective bargaining
agreement; and (4) is not a nonresident alien. The Company's
contribution to the Plan was approximately $28,000 and $4,400 during the
years ended July 31, 2000 and 1999, respectively.
12. Redeemable Preferred Stock/Preferred Stock:
In fiscal 1995, the Company issued 10,400 shares of $100 par value
redeemable Class A preferred stock. The Company had the right to redeem
any shares after three years from the date of issuance. During the years
ended July 31, 1999 and 1998, the Company redeemed 4,000 and 2,400
shares, respectively, of the preferred stock at par. However, all shares
were 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 was 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, which included accretion on
shares redeemed during the year, was $210,000 and $119,000 in the years
ended July 31, 1999 and 1998, respectively.
On February 18, 1999, at the Annual Meeting of the Stockholders, a
motion was passed to amend the Company's articles of incorporation to
eliminate the mandatory redemption provisions of the Class A Preferred
stock. Accordingly, the remaining 3,000 outstanding shares of preferred
stock, with a face amount of $300,000, were reclassified to
stockholders' equity. In addition, 10 million no par value shares of
preferred stock were authorized, but none were issued.
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 Class A preferred
stock was $318,000 at July 31, 2000 and July 31, 1999. The liquidation
preference of the redeemable Class A preferred stock was $742,000 at
July 31, 1998.
The 6% annual dividends on the Class A preferred stock are cumulative.
Dividends of $18,000, $18,000 and $42,000 were declared on the preferred
stock during the years ended July 31, 2000, 1999 and 1998, respectively,
and were paid subsequent to each respective year end.
13. Common Stock:
The Company has authorized a second class of common stock, Class B. 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.
33
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
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.
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 during the year ended
July 31, 1998.
Note Receivable
A certain former stockholder is indebted to the Company by a note
secured by real estate bearing interest at 12.5% (prime plus 4%
adjusted annually) in the outstanding amounts (including interest)
of $203,550 and $217,002 at July 31, 2000 and 1999, respectively.
Installment Contracts, Mortgage Notes and Notes Payable
At July 31, 2000 and 1999, the following related-party notes payable
were outstanding:
<TABLE>
<CAPTION>
Interest Monthly
2000 1999 Rate Payment
--------- ---------
<S> <C> <C> <C> <C>
Wayne E. Guthrie $ 135,457 $ 181,675 7.00 % $ 4,789
Wayne/Constance Guthrie 16,829 156,020 6.75 % 2,000
-------------- -------------
$ 152,286 $ 337,695
============== =============
</TABLE>
34
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
14. Related-Party Transactions, Continued:
Installment Contracts, Mortgage Notes and Notes Payable, Continued:
The scheduled future maturities of these notes are as follows:
Year Ending
July 31,
----------
2001 $ 64,420
2002 60,110
2003 27,756
--------------
$ 152,286
==============
Debenture Bonds
Included in debenture bonds at July 31, 2000 and 1999 is
approximately $163,000 and $193,000, respectively, that is payable
to related parties. These bonds bear interest at the prevailing
market rate on the date of issuance.
Accrued Expenses and Other Liabilities
At July 31, 2000 and 1999, the following demand notes were payable
to related parties:
<TABLE>
<CAPTION>
2000 1999
---------------------------- ---------------------------
Interest Interest
Amount Rate Amount Rate
-------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Wayne E. Guthrie $ 73,579 8.50 % $ 115,746 6.75 %
Constance Guthrie -- -- 91,692 6.75
Other stockholders 32,518 8.50 47,152 6.75
------------- ------------
$ 106,097 $ 254,590
============= ============
</TABLE>
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, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Interest income $ 27,000 $ 36,000 $ 53,000
Interest expense 32,000 53,000 64,000
</TABLE>
Participations
The President of Cornerstone Realty Advisors, Inc., a subsidiary of
the Company, has directly invested in certain loans through
participation agreements. The total amount of such participation was
$100,000 at July 31, 2000.
35
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
for the years ended July 31, 2000, 1999 and 1998
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, 2000 and 1999, 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 - Fair value approximates the carrying value
based on quoted market prices.
Off-Balance-Sheet Instruments - Fair value approximates the notional
amount of commitments to extend credit because advances bear
variable interest rates and are made contingent to the borrower's
compliance with the existing loan agreement.
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.
36
<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, 2000 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 80 1970 2003 Chairman of the Board (January 17, 1970);
Director
David L. Guthrie 36 1987 2001 President (February 18, 1999); Director
Kevin M. Guthrie 45 1980 2001 Vice President (May 2, 1985); Director
Donald J. Migliuri 53 1992 2002 Secretary/Treasurer (May 29, 1990); Director
Constance M. Guthrie 66 1981 2003 Director
Robert N. Codd 70 1994 2001 Director
Julian Guthrie 35 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.
Business Experience
Wayne E. Guthrie, Chairman of the Board of Pacific Security Financial, Inc.. Mr.
Guthrie is also Chairman of the Board of Cornerstone Properties and Development,
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.
David L. Guthrie, President of Pacific Security Financial, Inc. since 1999 and
Vice President since 1989. Mr. Guthrie was formerly a financial consultant with
Merrill Lynch in Spokane, Washington. Mr. Guthrie is also an officer and
director of Cornerstone Properties and Development, 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.
Kevin M. Guthrie, Vice President of Pacific Security Financial, Inc. since 1985.
Mr. Guthrie has served as property manager for the Company since 1976. Mr.
Guthrie is also an officer and director of Pacific Realty Management.
37
<PAGE>
Business Experience, Continued:
Donald J. Migliuri, Treasurer of Pacific Security Financial, Inc. 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 19 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 ten years.
Robert N. Codd. Mr. Codd is employed by Pacific Security Financial, Inc. 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 in 1998 was named education
reporter, responsible for covering all education issues in the Bay Area. Before
that, she was senior editor of a lifestyle magazine 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.
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, 2000, 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, 2000:
<TABLE>
<CAPTION>
Name of
Individual Capacities Annual
or Number of in Which Fiscal Compensation
Persons in Group Served Year Salary Bonus
-------------------------- ------------------------------------- ------- -------- ------------
<S> <C> <C> <C>
David L. Guthrie President and Director 2000 $ 105,086 $ 50,500
Vice President and Director 1999 101,045 7,500
Vice President and Director 1998 98,580 10,000
Kevin M. Guthrie Vice President and Director 2000 $ 105,515 $ 50,500
Vice President and Director 1999 101,396 7,500
Vice President and Director 1998 98,862 10,000
Officers and Directors 2000 $ 400,659 $ 121,600
as a group (5)
</TABLE>
The Company has no qualified or nonqualified stock option plans as of July 31,
2000.
38
<PAGE>
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, 2000: none.
(b) Security Ownership of Management
The following table sets forth as of July 31, 2000 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 of
Shares and
Nature of
Title Beneficial Percent
of Class Name of Beneficial Owner Ownership of Class
------------ ------------------------------------------- ----------- --------
<S> <C> <C> <C>
Common stock Wayne E. Guthrie 142,541.5 12.52
Common stock Constance Guthrie 142,541.5 12.52
Common stock Kevin Guthrie 222,718** 19.56
Common stock David Guthrie 222,718** 19.56
Common stock Julian Guthrie 196,838.4 17.28
------------- ----------
Common stock All directors and officers as a group 927,357.4 81.44
============= ==========
Preferred stock Wayne E. or Constance Guthrie 2,000 66.70%
Preferred stock Constance Guthrie 1,000 33.30
----------- ----------
Preferred stock All directors and officers as a group 3,000 100.00%
=========== ==========
</TABLE>
** Kevin and David Guthrie each exercise voting rights over an additional
18,706 (1.64%) shares 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.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
(a) 1. Financial Statements - See index under Item 8 11
(a) 2. Financial Statement Schedules:
Report of independent accountants 41
Schedule III - Real estate and accumulated depreciation 42
Schedule IV - Mortgage loans on real estate 44
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
</TABLE>
40
<PAGE>
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors and Stockholders
Pacific Security Financial, Inc. and Subsidiaries
Spokane, Washington
Our audits of the consolidated financial statements referred to in our report
dated September 19, 2000, of Pacific Security Financial, Inc. (formerly Pacific
Security Companies) and its subsidiaries, which report and consolidated
financial statements are included herein in this Annual Report on Form 10-K,
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/PricewaterhouseCoopers LLP
------------------------------
September 19, 2000
Spokane, Washington
41
<PAGE>
Pacific Security Financial, Inc. and Subsidiaries
Schedule III
Real Estate and Accumulated Depreciation
July 31, 2000
<TABLE>
<CAPTION>
Cost
Capitalized Amount at
Subsequent Which Carried
Description Encumbrance Initial Cost to Acquisition at Close of Period
------------------------------------ ----------- ------------ -------------- ------------------
<S> <C> <C> <C> <C> <C>
Residential and commercial properties:
Rental buildings and improvements:
Spokane, Washington
N. 10 Post Street (Peyton Bldg.) $ 2,422,444 $ 2,209,343 $ 4,045,608 $ 6,254,951
S. 10 Washington (Hutton Bldg.) 2,482,500 1,498,769 3,858,925 5,357,694
Broadmoor Apartments 2,074,435 1,385,074 598,923 1,983,997
Pier One Building 1,294,456 1,194,017 2,777,157 3,971,174
AT&T Wireless Building 796,016 950,373 (1,991) 948,382
Cornerstone Office Building 690,644 1,558,552 38,911 1,597,463
Apex Physical Therapy 529,028 561,594 -- 561,594
Boise, Idaho
Calderwood- Overland Building 1,742,250(1) 1,600,000 -- 1,600,000
Calderwood- Ardene Building (1) 1,200,000 -- 1,200,000
Furniture related to above -- 540,237 829,784 1,370,021
------------ ------------ ------------ -------------
$ 12,031,773 $ 12,697,959 $ 12,147,317 $ 24,845,276
============ ============ ============ =============
</TABLE>
[RESTUBBED]
<TABLE>
<CAPTION>
Life on Which
Depreciation
in Latest Income
Accumulated Date Statement
Description Depreciation Acquired is Computed
------------------------------------ -------------- -------- -------------------
<S> <C> <C> <C>
Residential and commercial properties:
Rental buildings and improvements:
Spokane, Washington
N. 10 Post Street (Peyton Bldg.) $ 1,918,722 1979 25-40 years
S. 10 Washington (Hutton Bldg.) 2,047,807 1979 25-40 years
Broadmoor Apartments 1,082,383 1969 40 years
Pier One Building 930,798 1992 25-40 years
AT&T Wireless Building 252,321 1992 25 years
Cornerstone Office Building 52,285 1999 25-40 years
Apex Physical Therapy 8,324 1999 25-40 years
Boise, Idaho
Calderwood- Overland Building 2,611 2000 25-40 years
Calderwood- Ardene Building 2,041 2000 25-40 years
Furniture related to above 764,137 Various Various
------------
$ 7,061,429
============
</TABLE>
(1) Total obligation of $1,742,250 is secured by two Calderwood properties as
noted above.
42
<PAGE>
SCHEDULE III, Continued:
Real Estate and Accumulated Depreciation
July 31, 2000
Real estate:
Balance at beginning of period $ 21,498,496
Additions during period:
Purchases and capitalized costs, net 4,065,205
Deductions during period:
Cost of real estate sold (718,425)
------------
Balance at close of period $ 24,845,276
============
Accumulated depreciation:
Balance at beginning of period $ 6,690,777
Depreciation for the year 700,254
Charges to accumulated depreciation related to
real estate investments sold, net of other
adjustments (329,602)
------------
Balance at close of period $ 7,061,429
============
43
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
SCHEDULE IV
Mortgage Loans on Real Estate
July 31, 2000
<TABLE>
<CAPTION>
Interest Maturity
Description Rate Date Periodic Payment Terms Prior Liens
--------------------------------- ------------- -------- ---------------------- -----------
<S> <C> <C> <C> <C>
Loan (PP Two LLC) Prime + 3% 2000 Interest only monthly
Loan (Bauer) Prime + 3.25% 2000 Interest only monthly
Loan (Washington House) Prime + 3.5% 2001 Interest only monthly
Loan (Toscana) Prime + 4.0% 2001 Interest only monthly
Loan (McArthur) Prime + 3.25% 2000 Interest only monthly
Loan (L.B. Industries #2002) Prime + 3% 2001 Interest only monthly
Loan (Coulter #2027) Prime + 4.0% 2001 Interest only monthly
Loan (Parkview) Prime + 3% 2000 Interest only monthly
Loan (Clegg Investments) Prime + 3.25% 2000 Interest only monthly
Real estate contract on apartment
building (East Valley Terrace) Prime + 2% 2006 $9,014 per month,
including interest
Loan (Rock Ridge) Prime + 4.25% 2000 Interest only monthly
Loan (L.B. Industries #2010) Prime + 3% 2000 Interest only monthly
Other mortgage contracts and notes
receivable, none of which individually
exceed 3% of the total carrying
value of mortgages Various Various Various
</TABLE>
[RESTUBBED]
<TABLE>
<CAPTION>
Principal Amount
of Loans Subject
to Delinquent
Face Amount Carrying Amount Principal
Description of Mortgages of Mortgages or Interest
--------------------------------- ------------- -------------- ---------------
<S> <C> <C> <C>
Loan (PP Two LLC) $ 2,953,369 $ 2,953,369
Loan (Bauer) 1,780,202 1,780,202
Loan (Washington House) 1,646,420 1,646,420
Loan (Toscana) 1,400,000 1,400,000
Loan (McArthur) 1,164,990 1,164,990
Loan (L.B. Industries #2002) 1,150,000 1,150,000
Loan (Coulter #2027) 1,055,000 1,055,000
Loan (Parkview) 1,001,800 1,001,800
Loan (Clegg Investments) 966,611 966,611
Real estate contract on apartment
building (East Valley Terrace) 939,030 939,030
Loan (Rock Ridge) 900,000 900,000
Loan (L.B. Industries #2010) 700,000 700,000
Other mortgage contracts and notes
receivable, none of which individually
exceed 3% of the total carrying
value of mortgages 4,578,001 4,055,695
------------ ------------
$ 20,235,423 $ 19,713,117
============= ============
Balance at beginning of period $ 17,923,329
Additions during period:
Mortgage loans originated and
purchased $ 19,415,924
Contract discounts realized 72,777
------------
19,488,701
Deductions during period:
Collections of principal and contract
payoffs 17,546,549
Other 152,364 17,698,913
------------ ------------
Balance at end of period $ 19,713,117
=============
</TABLE>
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, Pacific Security Financial, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC SECURITY FINANCIAL, INC.
(Registrant)
Dated: October 26, 2000 By: /s/ David L. Guthrie
------------------ -------------------------
David L. Guthrie
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, which include the Chief
Executive Officer, the Chief Financial Officer, and the Board of Directors, on
behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ David L. Guthrie Chief Executive Officer and October 26, 2000
------------------------------ Director ---------------------
David L. Guthrie
/s/ Donald J. Migliuri Secretary-Treasurer October 26, 2000
------------------------------ Chief Financial Officer and Director ----------------------
Donald J. Migliuri
/s/ Wayne E. Guthrie Chairman of the Board of October 26, 2000
------------------------------ Directors and Director ----------------------
Wayne E. Guthrie
/s/ Kevin M. Guthrie Vice-President and October 26, 2000
------------------------------ Director ----------------------
Kevin M. Guthrie
/s/ Constance M. Guthrie Director October 29, 2000
------------------------------ ----------------------
Constance M. Guthrie
/s/ Robert N. Codd Director October 26, 2000
------------------------------ ----------------------
Robert N. Codd
/s/ Julian Guthrie Director October 29, 2000
------------------------------ -----------------------
Julian Guthrie
</TABLE>
45
