-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CUjD+ytnQM3l1KMjrwrC3FaqW++DI6fccQ2BMFZjtbNX50/o4MaQjJWGd3sh/ytw q1wjRYwXaOOGJN/Z9V7YUQ== 0001116502-01-500069.txt : 20010320 0001116502-01-500069.hdr.sgml : 20010320 ACCESSION NUMBER: 0001116502-01-500069 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010131 FILED AS OF DATE: 20010319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC SECURITY COMPANIES CENTRAL INDEX KEY: 0000203159 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 910669906 STATE OF INCORPORATION: WA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-06673 FILM NUMBER: 1571311 BUSINESS ADDRESS: STREET 1: PEYTON BUILDING STREET 2: N 10 POST STREET CITY: SPOKANE STATE: WA ZIP: 99201 BUSINESS PHONE: 5096240183 MAIL ADDRESS: STREET 1: 10 N POST STREET 2: PEYTON BUILDING STE 525 CITY: SPOKANE STATE: WA ZIP: 99201 FORMER COMPANY: FORMER CONFORMED NAME: SECURITY SAVESCO INC DATE OF NAME CHANGE: 19851028 FORMER COMPANY: FORMER CONFORMED NAME: SECURITY SAVESCO INSTITUTION INC DATE OF NAME CHANGE: 19721114 10-Q 1 pacific10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 000-06673 PACIFIC SECURITY FINANCIAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Washington 91-0669906 - -------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) N. 10 Post Street 325 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 ] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
Pacific Security Financial, Inc. and Subsidiaries Consolidated Balance Sheets January 31, July 31, 2001 2000 ASSETS ----------- ----------- Cash and cash equivalents: Unrestricted $ 497,018 $ 442,208 Restricted 20,194 19,825 ----------- ----------- 517,212 462,033 ----------- ----------- Receivables: Contracts, mortgages, notes and loans receivable, net: Related parties 194,780 202,028 Unrelated 25,710,868 19,511,089 ----------- ----------- 25,905,648 19,713,117 Accrued interest 315,740 250,025 Other 96,375 60,549 ----------- ----------- 26,317,763 20,023,691 ----------- ----------- Investment in rental properties, net 18,038,968 17,783,847 ----------- ----------- Other investments: Property held for sale and development 3,067,441 1,796,607 Marketable securities 0 41,724 ----------- ----------- 3,067,441 1,838,331 ----------- ----------- Other assets: Vehicles and equipment, net 67,173 63,340 Prepaid and other, net 241,999 245,153 ----------- ----------- 309,172 308,493 ----------- ----------- Total assets $48,250,556 $40,416,395 =========== =========== The accompanying notes are an integral part of the consolidated financial statements Pacific Security Financial, Inc. and Subsidiaries Consolidated Balance Sheets, Continued January 31, July 31, 2001 2000 LIABILITIES AND STOCKHOLDERS' EQUITY ----------- ----------- Liabilities: Notes payable to banks $23,755,777 $15,715,057 ----------- ----------- Installment contracts, mortgage notes and notes payable: Related parties 111,109 152,286 Unrelated 5,407,920 5,367,153 ----------- ----------- 5,519,029 5,519,439 ----------- ----------- Debenture bonds 9,928,786 9,867,649 ----------- ----------- Accrued expenses and other liabilities: Related parties 195,667 106,097 Unrelated 746,755 819,287 ----------- ----------- 942,422 925,384 ----------- ----------- Income taxes 18,317 241,511 Deferred income taxes 604,870 646,570 ----------- ----------- Total liabilities 40,769,201 32,915,610 ----------- ----------- 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, 1,126,103 and 1,138,795 shares 3,378,308 3,416,386 Class B, authorized 30,000 no par value shares; no shares issued and outstanding -- -- Pacific Security Financial, Inc. and Subsidiaries Consolidated Balance Sheets, Continued January 31, July 31, 2001 2000 LIABILITIES AND STOCKHOLDERS' EQUITY, CONTINUED ----------- ----------- Stockholders' equity, Continued: Additional paid-in capital $ 1,830,941 $ 1,822,203 Retained earnings 1,972,106 1,962,196 ----------- ----------- Total stockholders' equity 7,481,355 7,500,785 ----------- ----------- Total liabilities and stockholders' equity $48,250,556 $40,416,395 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
Pacific Security Financial, Inc. and Subsidiaries Consolidated Statements of Operations Three Months Ended Six Months Ended January 31, January 31, ------------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Income: Rental $ 661,259 $ 552,466 $ 1,352,174 $ 1,105,254 Interest and loan fees 1,070,498 644,712 1,903,069 1,332,426 Amortization of discounts on real estate contracts 3,228 1,134 6,920 5,730 Gain (loss) on sales of real estate (6,793) -- (6,793) 755,071 Gain on sales of securities -- -- -- 1,834 Other, net 10,506 36,487 19,918 42,491 ----------- ----------- ----------- ----------- 1,738,698 1,234,799 3,275,288 3,242,806 ----------- ----------- ----------- ----------- Expenses: Rental operations: Depreciation and amortization 194,968 172,738 389,745 342,708 Interest 143,234 96,797 293,316 167,835 Other 259,696 228,255 518,753 480,368 ----------- ----------- ----------- ----------- 597,898 497,790 1,201,814 990,911 Interest, net of amount capitalized 695,141 450,508 1,272,414 962,259 Salaries and commissions 236,781 201,107 450,545 414,963 General and administrative 131,668 126,412 314,200 254,563 Depreciation and amortization 10,774 9,833 21,299 19,617 Provision for loan loss -- -- -- 50,025 ----------- ----------- ----------- ----------- 1,672,262 1,285,650 3,260,272 2,692,338 ----------- ----------- ----------- ----------- Income (loss) before federal income tax provision (benefit) 66,436 (50,851) 15,016 550,468 Federal income tax provision (benefit) 22,589 (20,362) 5,106 181,417 ----------- ----------- ----------- ----------- Net income (loss) 43,847 (30,489) 9,910 369,051 ----------- ----------- ----------- ----------- Income (loss) applicable to common stockholders $ 43,847 $ (30,489) $ 9,910 $ 369,051 =========== =========== =========== =========== Income (loss) per common share - basic and diluted $ .04 $ (.03) $ .01 $ .32 =========== =========== =========== =========== Weighted average common shares outstanding 1,135,812 1,149,985 1,136,953 1,151,164 =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
Pacific Security Financial Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) Three Months Ended Six Months Ended January 31, January 31, ------------------ ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income (loss) $ 43,847 $ (30,489) $ 9,910 $ 369,051 Other comprehensive income (loss) before income taxes: Changes in unrealized gains/losses on marketable securities -- -- -- (579) --------- --------- --------- --------- Other comprehensive income (loss) before income taxes 43,847 (30,489) 9,910 368,472 Less deferred income tax benefit -- -- -- (197) --------- --------- --------- --------- Comprehensive income (loss) $ 43,847 $ (30,489) $ 9,910 $ 368,669 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
Pacific Security Financial, Inc. and Subsidiaries Consolidated Statements of Cash Flows Six Months Ended ------------------------- January 31, January 31, 2001 2000 ------------ ------------- Cash flows from operating activities: Cash received from rentals $ 1,330,765 $ 1,392,498 Interest received 1,837,353 1,018,188 Cash paid to suppliers and employees (1,311,716) (1,271,962) Interest paid, net of amounts capitalized (1,224,029) (825,258) Income taxes paid (270,000) (117,820) ------------ ------------ Net cash provided by operating activities 362,373 195,646 ------------ ------------ Cash flows from investing activities: Proceeds from sales of securities 41,724 252,476 Proceeds from sales of real estate and fixed assets 61,437 662,468 Purchase of marketable securities 0 (50,000) Collections on contracts, mortgages, notes and loans receivable 4,792,010 8,246,454 Investment in contracts, mortgages, notes and loans receivable (11,979,423) (7,975,317) Additions to rental properties, property held for sale, property under development, vehicles and equipment (997,970) (838,582) Change in restricted investments and cash equivalents (369) (1,260) ------------ ------------ Net cash provided by (used in) investing activities (8,082,591) 296,239 ------------ ------------ Cash flows from financing activities: Net borrowings (repayments) under line- of-credit agreements 8,040,720 (794,524) Proceeds from installment contracts, mortgages and notes payable 910,013 700,000 Payments on installment contracts, mortgage notes and notes payable (910,422) (277,679) Proceeds from sales of debenture bonds 112,447 146,051 Redemption of debenture bonds (330,390) (249,282) Purchase and retirement of common stock (29,340) (19,449) Payment of dividend on preferred stock (18,000) (18,000) ------------ ------------ Net cash provided by (used in) financing activities 7,775,028 (512,883) ------------ ------------ Net increase (decrease) in cash and cash equivalents 54,810 (20,998) Cash and cash equivalents, beginning of period 442,208 512,472 ------------ ------------ Cash and cash equivalents, end of period $ 497,018 $ 491,474 ============ ============ Pacific Security Financial, Inc. and Subsidiaries Consolidated Statements of Cash Flows, Continued Six Months Ended ------------------------- January 31, January 31, 2001 2000 ------------ ------------- Reconciliation of net income to net cash provided by operating activities: Net income $ 9,910 $ 369,051 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 411,044 362,325 Deferred income tax benefit (41,700) -- Deferred financing income realized (6,920) (5,730) Interest accrued on debenture bonds 279,079 270,964 (Gain) loss on sales of real estate 6,793 (755,071) Gain on sales of securities -- (1,835) Provision for loan losses -- 50,025 Change in assets and liabilities: Accrued interest receivable (65,715) (6,637) Prepaid expenses (9,346) 49,197 Accrued expenses 35,038 (131,965) Income taxes payable (223,194) 63,597 Other, net (32,616) (68,275) ------------ ------------ Net cash provided by operating activities $ 362,373 $ 195,646 ============ ============ Supplemental schedule of noncash investing and financing activities: Company financed sale of property $ -- $ 129,750 Property held for sale and development acquired in satisfaction for defaulted loan receivable 1,065,804 --
The accompanying notes are an integral part of the consolidated financial statements. PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 1. Basis of Presentation The consolidated financial statements include the accounts of Pacific Security Financial, Inc. (formerly Pacific Security Companies) and its subsidiaries (the "Company"). Wholly owned subsidiaries of the Company include Pacific Realty Management and Cornerstone Realty Advisors, Inc. 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, 2000, filed with the Securities and Exchange Commission. The results of operations for the six months ended January 31, 2001 are not necessarily indicative of the results to be expected for the full year. In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999 and 2000 Statement of Financial Accounting Standards No. 137, ""Accounting for Derivative Instruments and Hedging Activities - --Deferral of effective date of SFAS 133" ("SFAS No. 137") and Statement of Financial Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS 133" ("SFAS No. 138") were issued. SFAS No. 137 amends SFAS No. 133 to become effective for all quarters of fiscal years beginning after June 15, 2000. The implementation of SFAS No. 133, as amended on August 1, 2000 had no effect on the Company's financial statements. Note 2. Business Segment Reporting: Information about the Company's separate business segments as of and for the six months ended January 31, 2001 and 2000 is as follows:
Real Estate Commercial Rental and Lending Receivable Operations Operations Total ----------- ----------- ------------ 2001: Revenue $ 1,712,934 $ 1,562,354 $ 3,275,288 Income before income tax 544,495 (529,479) 15,016 Identifiable assets, net 23,308,591 24,941,965 48,250,556 Depreciation and amortization 1,376 409,668 411,044 Capital expenditures 10,655 987,315 997,970
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED Note 2. Business Segment Reporting, Continued:
Real Estate Commercial Rental and Lending Receivable Operations Operations Total ----------- ----------- ----------- 2000: Revenue $ 1,073,833 $ 2,168,973 $ 3,242,806 Income before income tax 305,280 245,188 550,468 Identifiable assets, net 13,171,661 22,462,021 35,633,682 Depreciation and amortization 738 361,587 362,325 Capital expenditures -- 838,582 838,582
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. Note 3. Bank Lines of Credit: During the quarter ended January 31, 2001, the Company violated a bank covenant with one of its three bank lines of credit. Negotiations with the bank resulted in an extension of the Company's existing $8 million line as of March 15, 2001 with the same terms and conditions, resulting in a technical violation of a debt-to-equity covenant by exceeding a 5:1 ratio. The Company is working with the bank to have the covenant modified. A second bank adjusted its new loan agreement with the Company to reflect an increase in the allowable debt-to-equity ratio to 6:1 and to increase the Company's line of credit by $2.5 million to $13.5 million. A third bank kept the same terms and conditions resulting in continued compliance and increased the line capacity by $1 million to $8,432,500. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition and Liquidity At January 31, 2001, the Company had total stockholders' equity of approximately $7,481,000 and a total liabilities to equity ratio of 5.45 to 1, which increased from 4.56 to 1 at October 31, 2000, and 4.39 to 1 at July 31, 2000. In order to fund additional loans receivable, the Company increased the debt outstanding resulting in a ratio at January 31, 2001 in excess of the 5 to 1 maximum ratio allowed under the covenants of one of the Company's lines of credit. The bank has not called any amounts outstanding under the line and the Company is working with the bank to modify the covenant. The Company's liquidity could possibly be affected until a modification is completed. During the quarter, the Company's primary sources of funds were approximately $8,041,000 from the issuance of notes payable to banks and others, approximately $112,000 from issuance of debentures, $61,000 from sales of real estate, $4,792,000 in real estate contract and loan collections and $362,000 for operations. The primary uses of funds were approximately $998,000 for property improvements, approximately $11,979,000 for investments in contracts and loans receivable, and approximately $330,000 for redemption of debenture bonds. The Company anticipates that cash flows from operations, and the availability of funds under its lines-of-credit and other banking agreements totaling $29,932,500 of which $23,755,777 was outstanding at January 31, 2001, 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 January 31, 2001 was approximately $44,000 compared with a net loss of approximately $30,000 for the quarter ended January 31, 2000. Excluding the $7,000 loss on sale of real estate in 2001, income improved by $81,000 in 2001. Rental income increased by approximately $109,000 (19.7%) to approximately $661,000 in the quarter ended January 31, 2001 from approximately $552,000 in 2000. This increase primarily resulted from the rents received from two newly-constructed commercial buildings in Boise, Idaho and from a newly-constructed physical therapy building in Spokane. Rental property expenses were approximately $100,000 (20.1%) higher in 2001 than for the comparable three months in 2000. This increase was due to increased operating expense of $31,441 (13.8%), increased depreciation of 22,230 (12.9%) and increased interest expense of $46,437 (48.0%). Salaries and commissions were $35,674 (17.7%) higher in the quarter ended January 31, 2001 than for the comparable three months in 2000, primarily because of additional personnel expense for Cornerstone Realty Advisors. Interest income and amortized discount increased approximately $428,000 (66.2%) for the three months ended January 31, 2001 compared with the similar period in 2000 as amortized loan fees and interest earned on the average outstanding balance in contracts and loans receivable increased during the period primarily due to the new loans originated by Cornerstone Realty Advisors. Interest expense, exclusive of interest on debt associated with rental properties, net of amounts capitalized, increased approximately $245,000 (54.3%) in the second quarter of 2001 compared with the comparable 2000 period primarily due to increased borrowings in 2001. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued The Company's effective income tax rate as a percentage of income (loss) before federal income tax was approximately 34% in 2001 compared to 40% in 2000. Results of Operations (Six Months) The Company's net income for the six months ended January 31, 2001 was approximately $10,000 compared with net income of approximately $369,000 for the six months ended January 31, 2000. The decrease was primarily attributable to a decrease of approximately $762,000 in gain on sales of real estate in 2001 compared to 2000, which was partially offset by an increase in net interest and loan fee income. Rental income increased approximately $247,000 (22.3%) in the six months ended January 31, 2001 from 2000. This primarily resulted from increased rents due to rents received from two newly-constructed commercial buildings in Boise, Idaho and one in Spokane. Rental property expenses were $210,903 (21.3%) higher in 2001 than for the comparable six months in 2000. This resulted from increased operating expense of $38,385 (8.0%), interest expense of $125,481 (74.8%) and an increase in depreciation of $47,037 (13.7%). Interest income and amortized discount was $571,833 (42.7%) more for the six months ended January 31, 2001 compared with the similar period in 2000 as amortized loan fees and interest earned on the average outstanding balance in contracts and notes receivable increased during the period, primarily due to new loans originated by Cornerstone Realty Advisors. Salaries and commissions were $35,582 (8.6%) higher in the six months ended January 31, 2001 than for the comparable six months in 2000, primarily because of additional personnel expense for Cornerstone Realty Advisors. Interest expense, exclusive of interest on debt associated with rental properties, net of amounts capitalized, was $310,155 (32.2%) more in 2001 than in 2000 primarily due to an increase in borrowings to fund the loans originated by Cornerstone Realty Advisors. The Company's effective income tax rate as a percentage of income (loss) before federal income tax was approximately 34% in the current fiscal year compared to 33% in the prior fiscal year. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not believe that there has been a material change in its market risk since the end of its last fiscal year. Part II. Other Information Items 1, 2, 3, 4, 5 and 6 -- Not applicable. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACIFIC SECURITY FINANCIAL, INC. /s/ David L. Guthrie - --------------------------------- David L. Guthrie President/Chief Executive Officer /s/ Donald J. Migliuri - --------------------------------- Donald J. Migliuri, Secretary/ Treasurer -----END PRIVACY-ENHANCED MESSAGE-----