UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-06673
PACIFIC SECURITY FINANCIAL, INC.
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0669906
-------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identifi-
incorporation or organization) cation Number)
N. 10 Post Street
525 Peyton Building
Spokane, Washington 99201 (509) 444-7700
-------------------------------- ------------------------------
(Address of principal (Registrant's telephone number,
executive offices) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
<PAGE>
Part I. Financial Information
Item I. Financial Statements
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Cash:
Cash and cash equivalents:
Unrestricted $ 564,629 $ 512,472
Restricted 22,063 16,321
----------- -----------
586,692 528,793
----------- -----------
Receivables:
Contracts, mortgages and loans receivable, net:
Related parties 204,369 214,795
Unrelated parties 20,609,276 17,710,543
----------- -----------
20,813,645 17,925,338
Accrued interest 167,328 98,319
Other 313,161 31,475
----------- -----------
21,294,134 18,055,132
----------- -----------
Investment in rental properties, net 15,062,947 14,807,679
----------- -----------
Other investments:
Property held for sale and development 1,829,841 2,031,448
Marketable securities 41,724 242,168
----------- -----------
1,871,565 2,273,616
----------- -----------
Other assets:
Vehicles and equipment, less
accumulated depreciation of
$252,604 and $213,850 29,160 33,590
Prepaid and other, net 202,342 247,412
----------- -----------
231,502 281,002
----------- -----------
Total assets $39,046,840 $35,946,222
=========== ===========
2
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
April 30, July 31,
2000 1999
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Liabilities:
Notes payable to banks (lines of
credit) $16,458,533 $13,925,405
----------- -----------
Installment contracts, mortgage notes payable and notes payable:
Related parties 199,595 337,695
Unrelated banks and other parties 3,093,785 3,158,285
----------- -----------
3,293,380 3,495,980
----------- -----------
Debenture bonds 9,763,355 9,643,548
----------- -----------
Accrued expenses and other liabilities:
Related parties 120,682 254,590
Unrelated parties 1,122,067 874,602
----------- -----------
1,242,749 1,129,192
----------- -----------
Federal income taxes:
Current 147,785 59,131
Deferred 712,470 712,273
----------- -----------
Total liabilities 31,618,272 28,965,529
----------- -----------
Commitments and contingencies
3
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
April 30, July 31,
2000 1999
----------- ------------
(Unaudited)
Stockholders' equity:
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 -- --
Class A common stock, authorized
2,500,000 no par value shares, $3
stated value; issued and outstanding
1,139,551 and 1,152,532 shares 3,418,651 3,457,597
Class B common stock, authorized
30,000 no par value shares; no shares
issued and outstanding -- --
Additional paid-in capital 1,822,203 1,804,009
Retained earnings 1,887,714 1,418,705
Accumulated comprehensive income, net -- 382
----------- -----------
Total stockholders' equity 7,428,568 6,980,693
----------- -----------
Total liabilities and stock-
holders' equity $39,046,840 $35,964,222
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Income:
Rental $ 575,666 $ 572,855 $ 1,680,920 $ 1,677,919
Interest and loan fees 687,429 570,225 2,019,855 1,575,268
Amortization of discounts on
real estate contracts 60,957 8,017 66,687 22,003
Gain on sales of real estate 144,294 -- 899,365 624,348
Gain on sale of securities -- 249,120 1,834 279,082
Other, net 6,140 32,235 48,631 46,762
----------- ----------- ----------- -----------
1,474,486 1,432,452 4,717,292 4,225,382
----------- ----------- ----------- -----------
Expenses:
Rental operations:
Depreciation and amortization 174,861 165,237 517,569 490,304
Interest 92,277 88,724 260,112 271,938
Other 236,346 255,368 716,714 765,550
----------- ----------- ----------- -----------
503,484 509,329 1,494,395 1,527,792
Interest, net of amount capitalized 498,052 468,647 1,460,311 1,385,866
Salaries and commissions 237,559 177,743 652,522 572,283
General and administrative 85,248 135,277 339,811 314,119
Depreciation and amortization 9,834 9,903 29,451 29,228
Provision for loan loss -- -- 50,025 --
----------- ----------- ----------- -----------
1,334,177 1,300,899 4,026,515 3,829,288
----------- ----------- ----------- -----------
Income from continuing operations
before federal income tax provision 140,309 131,553 690,777 396,094
Federal income tax provision 50,057 41,081 231,474 123,069
----------- ----------- ----------- -----------
Income from continuing operations 90,252 90,472 459,303 273,025
Discontinued operations (Note 2):
Loss from discontinued operations of
golf center (less federal income
tax benefit of $48,015 and $108,203) -- (106,872) -- (240,840)
----------- ----------- ----------- -----------
Net income (loss) 90,252 (16,400) 459,303 32,185
Less accretion of discount on
preferred stock -- (137,500) -- (210,000)
----------- ----------- ----------- -----------
Income (loss) applicable to common
stockholders $ 90,252 $ (153,900) $ 459,303 $ (177,815)
=========== =========== =========== ===========
</TABLE>
5
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited), Continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- -------------------------------
2000 1999 2000 1999
---------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations
applicable to common stockholders $ 90,252 $ (47,028) $ 459,303 $ 63,025
=========== =============== =============== =============
Income (loss) per common share - basic
and diluted $ .08 $ (0.13) $ .40 $ (0.15)
=========== =============== =============== =============
Income (loss) from continuing operations
per common share - basic and diluted $ .08 $ (0.04) $ .40 $ 0.05
=========== =============== =============== =============
Loss from discontinued operations per
common share - basic and diluted $ -- $ (0.09) $ -- $ (0.20)
=========== =============== =============== =============
Weighted average common shares
outstanding 1,139,912 1,155,593 1,147,413 1,164,456
=========== =============== =============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 90,252 $ (16,400) $ 459,303 $ 32,185
Other comprehensive income (loss)
before income taxes:
Changes in unrealized gains/losses
on marketable securities -- -- (579) 12,573
--------- --------- --------- ---------
Other comprehensive income (loss)
before income taxes 90,252 (16,400) 458,724 44,758
Less deferred income tax provision
(benefit) -- -- (197) 4,274
--------- --------- --------- ---------
Comprehensive income (loss) $ 90,252 $ (16,400) $ 458,921 $ 40,484
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For Nine Months
Ended April 30,
-----------------------------
2000 1999
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from rentals $ 1,655,856 $ 1,799,709
Interest received 1,950,846 1,619,499
Cash paid to suppliers and employees (1,838,273) (1,775,454)
Interest paid, net of amounts capitalized (1,252,607) (1,203,886)
Income tax (paid) refund, net (142,820) 170,330
------------ ------------
Net cash provided by (used in)
operating activities 373,002 610,198
------------ ------------
Cash flows from investing activities:
Proceeds from sale of securities 252,476 337,993
Purchase of marketable securities (50,000)
Proceeds from sales of real estate 735,737 268,517
Collections on contracts, mortgages
and finance notes receivable 6,975,555 11,054,117
Investment in contracts, mortgages
and finance notes receivable (9,469,946) (13,645,044)
Additions to rental properties, property
held for sale, property under develop-
ment, vehicles and equipment (1,371,103) (620,362)
------------ ------------
Net cash provided by (used in)
investing activities (2,927,281) (2,604,779)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under line-
of-credit agreements 2,533,128 1,206,374
Net proceeds from installment contracts,
mortgage notes and notes payable 750,000 2,936,063
Payments on installment contracts,
mortgage notes and notes payable (382,741) (1,133,655)
Proceeds from sales of debenture bonds 240,620 76,912
Redemption of debenture bonds (513,820) (657,978)
Purchase and retirement of common stock (20,751) (31,061)
Purchase and retirement of preferred stock -- (200,000)
------------ ------------
Net cash provided by (used in)
financing activities 2,606,436 2,196,655
------------ ------------
Net increase in cash and cash equivalents $ 52,157 $ 202,074
Cash and cash equivalents, beginning of
period 512,472 318,026
------------ ------------
Cash and cash equivalents, end of period $ 564,629 $ 520,100
============ ============
</TABLE>
8
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, (Unaudited) Continued
<TABLE>
<CAPTION>
For Nine Months
Ended April 30,
---------------------------
2000 1999
---------- -----------
<S> <C> <C>
Reconciliation of net income to net cash provided by (used in) operating
activities:
Net income $ 459,303 $ 32,185
Adjustment to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 547,020 562,382
Deferred financing income realized (66,687) (22,003)
Interest accrued on debenture
bonds 393,008 403,473
Gain on sales of securities (1,834) (279,082)
Gain on sales of real estate and
rental properties (899,365) (472,439)
Provision for loan losses 50,025 --
Change in assets and liabilities:
Accrued interest receivable (69,009) 44,231
Prepaid expenses 45,070 (50,566)
Inventories -- 58,331
Accrued expenses (87,810) 168,809
Income taxes 88,654 154,857
Other, net (85,373) 10,020
----------- -----------
Net cash provided by (used in)
operating activities $ 373,002 $ 610,198
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Company financed sale of property $ 129,750 $ 1,035,358
Accretion of discount on preferred stock -- 150,000
Related-party note for preferred stock -- 200,000
Proceeds from land sale held for tax-free
exchange by intermediary 265,089 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
9
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Pacific Security
Financial, Inc. and its subsidiaries (the "Company"). In the opinion of the
Company, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the Company's financial position, results of operations and cash
flows for the periods presented.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and the related disclosures contained in the
Company's annual report on Form 10-K for the year ended July 31, 1999, filed
with the Securities and Exchange Commission.
The results of operations for the nine months ended April 30, 2000 are not
necessarily indicative of the results to be expected for the full year.
Note 2. Birdies Business Segment
In September 1995, the Company completed construction of and began operating
Birdies Golf Center (Birdies). The facility consisted of a driving range,
lighted fairway with five target greens, a pro shop, a putting green and
teaching studios.
On December 1, 1998, management decided to close Birdies and commence a
liquidation of assets. Management has leased the Birdies building, has sold a
portion of the driving range land, and intends to develop or sell the remaining
land. The consolidated financial statements of the Company have been
reclassified to reflect the disposition of Birdies Golf Center as discontinued
operations for all periods presented herein.
Information about the discontinued operations of the Birdie's business segment
is as follows:
10
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
Note 2. Birdies Business Segment, Continued
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30, April 30,
------------ -----------
1999 1999
------------ -----------
<S> <C> <C>
Operating revenues $ (78,810) $ (48,061)
Loss before federal income taxes 154,887 349,043
Loss from discontinued operations,
net of federal income taxes 106,872 240,840
</TABLE>
Total assets from discontinued operations were $2,016,918 at April 30, 1999.
Note 3. Business Segment Reporting:
Information about the Company's separate continuing business segments as of and
for the nine months ended April, 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Real Estate
Commercial Rental and
Lending Receivable
Operations Operations Total
----------- ----------- -----------
<S> <C> <C> <C>
2000:
Revenue $ 1,644,819 $ 3,072,473 $ 4,717,292
Income from continuing
operations before tax 492,263 198,514 690,777
Identifiable assets, net 16,046,353 23,000,487 39,046,840
Depreciation and
amortization 1,107 545,913 547,020
Capital expenditures -- 1,371,103 1,371,103
</TABLE>
11
<PAGE>
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
Note 3. Business Segment Reporting, Continued:
<TABLE>
<CAPTION>
Real Estate
Commercial Rental and
Lending Receivable
Operations Operations Total
----------- ----------- -----------
<S> <C> <C> <C>
1999:
Revenue $1,061,731 $ 3,163,651 $ 4,225,382
Income from continuing
operations before tax 339,115 56,979 396,094
Identifiable assets, net 8,999,097 26,947,125 33,773,717
Depreciation and
amortization 706 518,826 519,532
Capital expenditures 3,440 616,958 620,362
</TABLE>
The Company has determined that its reportable business segments are those that
are based on its method of disaggregated internal reporting. The Company's
reportable business segments are its commercial loan origination business and
its rental and receivable operations. Its commercial loan origination business,
operated as Cornerstone Realty Advisors, Inc., originates commercial
construction loans throughout the western United States. The rental and
receivable operations represent the selling and leasing of real properties and
the financing of contracts and loans collateralized by real estate.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At April 30, 2000, the Company had total stockholders' equity of approximately
$7,429,000 and a total liabilities to equity ratio of 4.26 to 1, which increased
from 4.15 to 1 at July 31, 1999. During the nine months of the fiscal year, the
Company's primary sources of funds were approximately $750,000 from the issuance
of notes payable to banks and others, approximately $2,533,000 in borrowings
under line-of-credit agreements, $252,000 from sales of marketable securities,
$736,000 from sales of real estate, $373,000 from operating activities and
$6,976,000 in real estate contract and loan collections. The primary uses of
funds were approximately $1,371,000 for property improvements, $9,470,000 for
investments in contracts and loans receivable, and $656,000 for net debt
reduction.
The Company anticipates that cash flows from operations, and the availability of
funds under its lines-of-credit and other banking agreements totalling
$23,432,500, of which $16,459,000 was outstanding at April 30, 2000, will be
sufficient to provide for the retirement of maturing debentures and mortgage
obligations. The Company plans to continue using funds to make improvements to
its existing rental properties, to improve property held for sale and
development and to originate interim and construction loans.
Results of Operations (Three Months)
The Company's net income for the quarter ended April 30, 2000 was approximately
$90,000 compared with a net loss of approximately $16,000 for the quarter ended
April 30, 1999. Income from continuing operations before tax was approximately
$140,000 in 2000 compared with $132,000 in 1999, an improvement of approximately
$8,000. The improvement was primarily attributable to a $144,000 gain on sale of
real estate and an increase of approximately $141,000 in net interest and loan
fee income offset by a $249,000 reduction in gain on sale of securities. General
and administrative expense decreased by $50,000, partially offsetting the
increase in salaries and commissions of $60,000.
Rental income increased by approximately $3,000 (0.5%) to approximately $576,000
in the quarter ended April 30, 2000 from approximately $573,000. This increase
primarily resulted from higher occupancy levels in apartment and office
buildings, including the remodeled office building that was formerly the Birdies
Golf Center and a newly-constructed building, which more than offset the
reduction in rental income due to the sales of two properties in prior periods.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations (Three Months), Continued
Rental property expenses were approximately $6,000 (1.1%) lower in 2000 than for
the comparable three months in 1999. This decrease was due to decreased
operating expense of $19,022 (7.4%), which more than offset increased
depreciation of $9,624 (5.8%) and interest expense of $3,553 (4.0%).
Salaries and commissions were $59,816 (33.7%) higher in the quarter ended April
30, 2000 than for the comparable three months in 1999, primarily because of
additional personnel expense for Cornerstone Realty Advisors, the Company's
subsidiary, which originates commercial real estate loans and bonuses paid to
two Company officers.
Interest and loan fee income and amortized discount increased approximately
$170,000 (29.4%) for the three months ended April 30, 2000 compared with the
similar period in 1999 as the average outstanding balance in contracts and loans
receivable increased during the period primarily due to the new loans originated
by Cornerstone Realty Advisors.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, increased approximately $29,000 (6.3%)
in the three months ended April 30, 2000 compared with the comparable 1999
period primarily due to an increase in borrowings to fund the loans originated
by Cornerstone Realty Advisors.
The Company's effective tax rate as a percentage of income from continuing
operations before federal income tax was approximately 36% in 2000 compared to
31% in 1999.
Results of Operations (Nine Months)
The Company's net income for the nine months ended April 30, 2000 was
approximately $459,000 compared with $32,000 for the nine months ended April 30,
1999. Income from continuing operations before tax was approximately $691,000 in
2000 compared with $396,000 in 1999, an improvement of approximately $295,000.
The increase was primarily attributable to an increase of approximately $415,000
in net interest and loan fee income, and an increase of approximately $275,000
in gain on sales of real estate which was offset by $277,000 reduction in gain
on sale of securities, an $80,000 increase in salaries and commissions, and a
$50,000 provision for loan losses.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations (Nine Months), Continued
Rental income increased by $3,000 (0.2%) to approximately $1,681,000 in the nine
months ended April 30, 2000 from approximately $1,678,000 in 1999. This
primarily resulted from increased rents due to higher occupancy levels in a
multifamily apartment building and the renovated office building that was
formerly Birdies Golf Center offset by the reduction in rental income from two
rental properties that were sold.
Rental property expenses were $33,397 (2.2%) lower in 2000 than for the
comparable nine months in 1999. This resulted from decreased operating expense
of $48,836 (6.4%) and interest expense of $11,826 (4.3%), which more than offset
an increase in depreciation of $27,265 (5.6%).
Interest and loan fee income and amortized discount was $489,271 (30.6%) more
for the nine months ended April 30, 2000 compared with the similar period in
1999 as the average outstanding balance in contracts and loans receivable
increased during the period, primarily due to new loans originated by
Cornerstone Realty Advisors.
Salaries and commissions were $80,239 (14.0%) higher in the nine months ended
April 30, 2000 than for the comparable nine months in 1999, primarily because of
additional personnel expense for Cornerstone Realty Advisors and bonuses paid to
Company officers.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was $74,445 (5.4%) more in 2000 than in
1999 primarily due to an increase in borrowings to fund the loans originated by
Cornerstone Realty Advisors.
The Company's effective income tax rate as a percentage of income before federal
income tax was approximately 34% in fiscal 2000
compared to 31% in fiscal 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that there has been a material change in its market
risk since the end of its last fiscal year.
15
<PAGE>
Part II. Other Information
Items 1, 2, 3, 4 and 5 -- Not applicable.
Item 6. Exhibit 27 -- Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC SECURITY FINANCIAL, INC.
/s/ David L. Guthrie June 5, 2000
--------------------------------- -----------------------
David L. Guthrie Date
President/Chief Executive Officer
/s/ Donald J. Migliuri June 5, 2000
--------------------------------- -----------------------
Donald J. Migliuri, Secretary/ Date
Treasurer
16
