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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number Q-6673
PACIFIC SECURITY COMPANIES
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(Exact name of registrant as specified in its charter)
Washington 91-0669906
-------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
N. 10 Post Street
525 Peyton Building
Spokane, Washington 99201 (509) 624-0183
-------------------------------- ---------------------------------
(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
Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets
January 31, July 31,
ASSETS 1998 1997
----------- -----------
Cash and cash equivalents:
Unrestricted $ 5,140 $ 325,058
Restricted 370,479 84,684
----------- -----------
375,619 409,742
----------- -----------
Receivables:
Contracts, mortgages and finance notes
receivable, net:
Related parties 445,233 728,436
Unrelated 6,749,071 10,243,264
----------- -----------
7,194,304 10,971,700
Accrued interest 70,439 91,919
Federal income taxes 0 454,621
Other 61,032 30,541
----------- -----------
7,325,775 11,548,781
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Investment in rental properties, net 13,585,154 13,487,085
----------- -----------
Investment in golf center, net 2,200,306 2,142,247
----------- -----------
Other investments:
Property held for sale and development 3,677,673 4,039,208
Marketable securities 89,739 87,004
Restricted investments 0 278,154
----------- -----------
3,767,412 4,404,366
----------- -----------
Other assets:
Vehicles and equipment, net 31,496 25,760
Prepaid expenses, including non-
competition agreement, net 328,192 221,425
Golf center inventories 54,295 55,501
----------- -----------
413,983 302,686
----------- -----------
Total assets $27,668,249 $32,294,907
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets, Continued
January 31, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- -----------
Liabilities:
Note payable to bank $ 2,305,671 $ 5,404,999
----------- -----------
Installment contracts, mortgage notes
and notes payable:
Related parties 1,039,355 191,462
Unrelated 5,009,912 4,432,070
----------- -----------
6,049,267 4,623,532
----------- -----------
Debenture bonds 9,841,874 9,898,351
----------- -----------
Accrued expenses and other liabilities:
Related parties 169,872 246,994
Unrelated 830,948 733,657
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1,000,820 980,651
----------- -----------
Federal income taxes:
Deferred 613,625 1,121,478
----------- -----------
613,625 1,121,478
----------- -----------
Total liabilities 19,811,257 22,029,011
----------- -----------
Commitments and contingencies
Redeemable Class A preferred stock,
$100 par value; $100 redemption value;
authorized 20,000 shares; issued and
outstanding, 7,000 and 9,400 shares 700,000 940,000
Less: Net discount on issuance of pre-
ferred stock (227,500) (364,000)
----------- -----------
472,500 576,000
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Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets, Continued
LIABILITIES AND STOCKHOLDERS' January 31, July 31,
EQUITY, CONTINUED 1998 1997
----------- -----------
Stockholders' equity:
Common stock:
Original class, authorized 2,500,000
no par value shares, $3 stated value;
issued and outstanding, 1,415,983
and 1,872,125 shares $ 4,247,948 $ 5,616,375
Class B, authorized 30,000 no par
value shares; no shares issued and
outstanding
Additional paid-in capital 1,581,955 1,906,642
Retained earnings 1,561,781 2,175,875
Unrealized loss on marketable securities,
net of deferred income taxes (7,192) (8,996)
----------- -----------
Total stockholders' equity 7,384,492 9,689,896
----------- -----------
Total liabilities and stockholders'
equity $27,668,249 $32,294,907
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Operations
Three Months Ended
January 31,
----------------------
1998 1997
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Income:
Rental $ 553,742 $ 601,573
Interest 197,444 252,065
Amortization of discounts on
real estate contracts 4,239 5,871
Gain on sales of real estate 354,255 49,638
Golf center sales (including
lessons of $-0- and $2,805) 31,746 28,837
Other, net 12,150 20,372
---------- ----------
1,153,576 958,356
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Expenses:
Rental operations:
Depreciation and amortization 155,943 160,539
Interest 96,277 91,825
Other 279,662 269,928
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531,882 522,292
Interest, net of amount capitalized 278,361 300,484
Salaries and commissions 137,447 157,516
General and administrative 395,118 157,345
Depreciation and amortization 28,353 24,310
Cost of golf merchandise sales 5,984 14,580
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1,377,145 1,176,527
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Income (loss) before federal income tax
provision (benefit) (223,569) (218,171)
Federal income tax provision (benefit) (28,600) (71,593)
---------- ----------
Net income (loss) (194,969) (146,578)
Less accretion of discount on
preferred stock (90,250) (13,000)
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Income (loss) applicable to common
stockholders $ (285,219) $ (159,578)
========== ==========
Income (loss) per common share - basic $ (.16) $ (.08)
========== ==========
Weighted average common shares
outstanding 1,764,736 1,894,017
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Operations, Continued
Six Months Ended
January 31,
----------------------
1998 1997
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Income:
Rental $1,119,811 $1,308,814
Interest 419,177 493,462
Amortization of discounts on
real estate contracts 8,464 16,016
Gain on sales of real estate 327,240 858,222
Golf center sales (including
lessons of $574 and $11,470) 110,451 109,879
Other, net 20,654 20,428
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2,005,797 2,806,821
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Expenses:
Rental operations:
Depreciation and amortization 309,776 335,640
Interest 179,827 193,905
Other 530,910 584,287
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1,020,513 1,113,832
Interest, net of amount capitalized 569,004 566,204
Salaries and commissions 318,583 326,323
General and administrative 558,817 270,965
Depreciation and amortization 54,698 48,459
Cost of golf merchandise sales 28,727 43,946
Uncollectible accounts 2,199 2,788
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2,552,541 2,372,517
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Income (loss) before federal income tax
provision (benefit) (546,744) 434,304
Federal income tax provision (benefit) (134,892) 157,675
---------- ----------
Net income (loss) (411,852) 276,629
Less accretion of discount on
preferred stock (101,500) (26,000)
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Income (loss) applicable to common
stockholders $ (513,352) $ 250,629
========== ==========
Income (loss) per common share - basic $ (.28) $ .13
========== ==========
Weighted average common shares
outstanding 1,818,423 1,905,261
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
January 31,
------------------------
1998 1997
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Cash flows from operating activities:
Cash received from rentals and golf center sales $ 1,245,748 $ 1,476,411
Interest received 465,012 494,463
Cash paid to suppliers and employees (1,398,965) (1,165,359)
Interest paid, net of amounts capitalized (489,940) (495,572)
Income taxes paid 0 (455,000)
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Net cash used in operating activities (178,145) (145,057)
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Cash flows from investing activities:
Proceeds from sales of real estate 101,024 2,032,053
Collections on contracts, mortgages and finance
notes receivable 4,060,001 1,525,669
Investment in contracts, mortgages and finance notes
receivable (202,621) (279,942)
Additions to rental properties, property held for sale,
property under development, golf center, vehicles and
equipment (768,800) (601,510)
Change in restricted investments and cash equivalents (8,338) (66,338)
----------- -----------
Net cash provided by investing activities 3,181,266 2,609,932
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Cash flows from financing activities:
Net repayments under line-of-credit agreement (3,099,328) (1,617,303)
Net proceeds from installment contracts, mortgages
and notes payable 850,000 0
Payments on installment contracts, mortgage notes and
notes payable (161,070) (1,033,792)
Proceeds from sales of debenture bonds 267,942 206,627
Redemption of debenture bonds (606,069) (425,780)
Purchase and retirement of common stock (1,063,614) (39,256)
Purchase and retirement of preferred stock (240,000) 0
Related party notes 729,100 0
----------- -----------
Net cash used in financing activities (3,323,039) (2,910,004)
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Net decrease in cash and cash equivalents (319,918) (445,129)
Cash and cash equivalents, beginning of period 325,058 462,471
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Cash and cash equivalents, end of period $ 5,140 $ 17,342
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Cash Flows, Continued
Six Months Ended
January 31,
------------------------
1998 1997
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Reconciliation of net income (loss) to net cash
provided by operating activities:
Net income (loss) $ (411,852) $ 276,629
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 364,474 384,099
Deferred financing income realized (8,464) (16,016)
Interest accrued on debenture bonds 281,649 274,342
(Gain) loss on sales of real estate (327,240) (858,222)
Uncollectible accounts 2,199 2,788
Change in assets and liabilities:
Accrued interest receivable 21,480 1,002
Prepaid expenses 16,149 55,381
Inventories 1,206 33,866
Accrued expenses 17,609 (43,764)
Income taxes payable (134,892) (297,325)
Other, net (463) 42,163
----------- -----------
Net cash used in operating activities $ (178,145) $ (145,057)
=========== ===========
Supplemental schedule of noncash investing
and financing activities:
Company financed sale of property $ 0 $ 1,348,495
Accretion of discount on preferred stock 20,000 26,000
Exchange of land for common shares 643,500
Related party note for non-competition agreement 125,000
The accompanying notes are an integral part of the consolidated
financial statements.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Pacific
Security Companies 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, 1997, filed with the Securities and Exchange
Commission.
The results of operations for the six months ended January 31, 1998
are not necessarily indicative of the results to be expected for the
full year.
The income (loss) per common share disclosures have been made in
accordance with SFAS No. 128, "Earnings per Share," which was applied
by the Company in the three months ended January 31, 1998. In
accordance with SFAS No. 128, all prior income (loss) per common share
data has been restated to conform to this presentation. Basic earnings
per share amounts for the prior periods are identical in amount to the
earnings per share amounts that were previously presented.
Note 2. Business Segment Reporting
In September 1995, the Company completed construction of and began
operating Birdies Golf Center (Birdies). The facility consists of a
driving range, lighted fairway with five target greens, a pro shop, a
putting green and teaching studies. The financial position and
operating results of Birdies are included in the consolidated
financial statements.
Information about the Company's separate business segments and in
total as of and for the six months ended January 31, 1998 is as
follows:
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
Note 2. Business Segment Reporting, Continued
Birdies Rental and
Golf Receivable
Center Operations Total
----------- ----------- -----------
Revenue $ 110,451 $ 1,895,346 $ 2,005,797
Earnings (loss) from
operations (81,724) (465,020) (546,744)
Identifiable assets, net 2,193,291 25,494,958 27,688,249
Depreciation and amortization 47,516 316,958 364,474
Capital expenditures 18,505 470,723 489,228
Note 3. Related-Party Transactions
On January 5, 1998, in connection with pending litigation between the
Company and all of the Company's officers and directors ("the
Company") and certain minority shareholders of the Company, who are
children of Wayne E. Guthrie, the Company's Chief Executive Officer
and largest individual Company common shareholder ("the Minority
Shareholders"), the Company agreed to settle all claims of the
Minority Shareholders and redeem all Company common shares held by the
Minority Shareholders by paying approximately $317,000 in cash,
distributing Company real property with an agreed-upon 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 Shareholders 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
Shareholders. In connection with the settlement, the Company also
agreed to reimburse the Minority Shareholders for legal costs
aggregating $150,000.
As a result of the settlement, the Minority Shareholders and the
Company agreed to mutually release all parties from any and all claims
whatsoever past, present and future, and the Minority Shareholders
terminated all outstanding claims against the Company.
In January 1998, Mr. Wayne E. Guthrie repaid approximately $200,000
owing to the Company, which had been collateralized by Company
preferred stock held by Mr. Guthrie. Concurrently, the Company
redeemed and retired 2,000 shares of its preferred stock held by Mr.
Guthrie at face value of $200,000 for cash.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At January 31, 1998, the Company had total stockholder's equity of
approximately $7,384,000 and a total liabilities to equity ratio of
2.68 to 1, which increased from 2.27 to 1 at July 31, 1997. During
the first six months of the fiscal year, the Company's primary sources
of funds were approximately $101,000 from sales of real estate and
$4,060,000 in real estate contract collections. The primary uses of
funds were approximately $769,000 for property improvements and
approximately $3,323,000 for net debt reduction and retirement of
common and preferred stock. The Company anticipates that cash flows
from operations, sales of debentures under its present offering and
the availability of funds under its $8,000,000 line-of-credit
agreement, of which only $2,305,671 was outstanding at January 31,
1998, will be sufficient to provide for the retirement of maturing
debentures and mortgage obligations and ongoing operations. The
Company plans to continue using funds to make improvements to its
existing office buildings and to improve property held for sale and
development, including Birdies Golf Center.
Results of Operations (Three Months)
The Company's net loss for the quarter ended January 31, 1998 was
approximately $195,000 compared with a net loss of approximately
$147,000 for the quarter ended January 31, 1997. The decrease was
primarily attributable to an increase of $238,000 in general and
administrative expense, primarily legal fees associated with
litigation (see Note 3 to consolidated financial statements), in 1998
compared to 1997.
Rental income decreased by $47,831 (8.0%) to approximately $554,000 in
the quarter ended January 31, 1998 from approximately $602,000 in
1997. This reduction primarily resulted from the sales of rental
properties in 1997.
Rental property expenses were $9,590 (1.8%) higher in 1998 than for
the comparable three months in 1997. This increase was a result of
increased interest expense of $4,452 (4.8%) and operating expense of
$9,734 (3.6%) offset by a reduction in depreciation of $4,596 (2.9%).
Interest income and amortized discount was $56,253 (21.8%) less for
the three months ended January 31, 1998 compared with the similar
period in 1997 as the average outstanding balance in contracts and
notes receivable declined during the period primarily due to the
payoff of a $3.1 million contract receivable in the first quarter of
the current fiscal year.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was $22,123 (7.4%) less in
1998 than in 1997 primarily due to a decrease in the average amount of
outstanding debt obligations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations (Six Months)
The Company s net loss for the six months ended January 31, 1998 was
approximately $412,000 compared with net income of approximately
$277,000 for the six months ended January 31, 1997. The decrease was
primarily attributable to a decrease of approximately $531,000 in gain
on sales of real estate in 1998 compared to 1997 and an increase of
approximately $288,000 in general and administrative expense
(primarily legal fees).
Rental income decreased by $189,003 (14.4%) to approximately
$1,120,000 in the six months ended January 31, 1998 from approximately
$1,309,000 in 1997. This primarily resulted from reduced rents due to
the sale of rental properties which more than offset rental rate
increases.
Rental property expenses were $93,319 (8.4%) lower in 1998 than for
the comparable six months in 1997. This resulted from decreased
interest expense of $14,078 (7.3%), operating expense of $53,377
(9.2%) and a reduction in depreciation of $25,864 (7.7%).
Interest income and amortized discount was $81,837 (16.1%) less for
the six months ended January 31, 1998 compared with the similar period
in 1997 as the average outstanding balance in contracts and notes
receivable declined during the period.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was $2,800 (.5%) more in 1998
than in 1997 primarily due to a decrease in the amount of capitalized
interest.
The federal income taxes which were deferred due to the installment
sale of real estate became currently payable when the $3.1 million
contract balance was paid off in the first quarter of fiscal 1998.
The income tax due was primarily offset by the income tax receivable
(refund) of $454,621 at July 31, 1997.
The Company s effective income tax rate as a percentage of income
(loss) before federal income tax was approximately 25% in 1998
compared to 36% in fiscal 1997 due to certain nondeductible expenses
occurring in fiscal 1998.
Part II. Other Information
Items 1, 2, 3, 4 and 5 -- Not applicable.
Item 6(a) -- Exhibit 27 - Financial Data Schedule
6(b) -- Form 8-K filed January 20, 1998 - Related-Party
Transactions.
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 COMPANIES
/s/ Wayne E. Guthrie
---------------------------------
Wayne E. Guthrie
President/Chief Executive Officer
/s/ Donald J. Migliuri
---------------------------------
Donald J. Migliuri, Secretary/
Treasurer