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, 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
---------------------------------------------------------------------
(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) 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
Part I. Financial Information
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, July 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Cash:
Cash and cash equivalents:
Unrestricted $ 78,685 $ 325,058
Restricted 11,883 84,684
----------- -----------
90,568 409,742
----------- -----------
Receivables:
Contracts, mortgages and finance
notes receivable, net:
Related parties 429,788 728,436
Unrelated 8,159,395 10,243,264
----------- -----------
8,589,183 10,971,700
Accrued interest 59,955 91,919
Federal income taxes 454,621
Other 167,031 30,541
----------- -----------
8,816,169 11,548,781
----------- -----------
Investment in rental properties, net 13,717,292 13,487,085
----------- -----------
Investment in Birdie's Golf Center (Note 2) 2,095,723 2,142,247
----------- -----------
Other investments:
Property held for sale and development 2,955,451 4,039,208
Marketable securities 95,018 87,004
Restricted investments 278,154
----------- -----------
3,050,469 4,404,366
----------- -----------
Other assets:
Vehicles and equipment, less
accumulated depreciation of
$194,901 and $189,288 35,071 25,760
Prepaid expenses 303,744 221,425
Golf center inventories 63,509 55,501
----------- -----------
402,324 302,686
----------- -----------
Total assets $28,172,545 $32,294,907
=========== ===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
April 30, July 31,
1998 1997
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Note payable to bank $ 3,536,717 $ 5,404,999
----------- -----------
Installment contracts, mortgage
notes payable and notes payable:
Related parties 1,033,478 191,462
Unrelated 4,639,953 4,432,070
----------- -----------
5,673,431 4,623,532
----------- -----------
Debenture bonds 9,879,018 9,898,351
----------- -----------
Accrued expenses and other
liabilities:
Related parties 215,812 246,994
Unrelated parties 911,223 733,657
----------- -----------
1,127,035 980,651
----------- -----------
Federal income taxes:
Deferred 456,935 1,121,478
----------- -----------
456,935 1,121,478
----------- -----------
Total liabilities 20,673,136 22,029,011
----------- -----------
Commitments and contingencies
Redeemable Class A preferred stock,
$100 par value; $100 redeemable value;
authorized 20,000 shares; issued and
outstanding 7,000 and 9,400 shares 700,000 940,000
Less: Net discount on issuance of
preferred stock (218,750) (364,000)
----------- -----------
481,250 576,000
----------- -----------
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
April 30, July 31,
1998 1997
----------- ------------
(Unaudited)
Stockholders' equity:
Class A common stock authorized
2,500,000 no par value shares,
$3 stated value; issued and
outstanding 1,381,521 and
1,872,125 shares $ 4,144,563 $ 5,616,375
Class B common stock authorized
30,000 no par value shares,
none issued
Additional paid-in capital 1,582,924 1,906,642
Retained earnings 1,294,380 2,175,875
Unrealized loss on marketable
securities, net of deferred
income taxes (3,708) (8,996)
----------- -----------
Total stockholders' equity 7,018,159 9,689,896
----------- -----------
Total liabilities and
stockholders' equity $28,172,545 $32,294,907
=========== ===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
For Three Months
Ended April 30,
----------------------
1998 1997
---------- ----------
Income:
Rental $ 562,686 $ 544,389
Interest (related parties, $9,063
and $21,422, respectively) 197,004 262,761
Amortization of discounts on
real estate contracts 28,280 13,437
Gain on sale of real estate (262,807) 25,639
Golf center sales (including lessons
of $13,245 and $1,040) 109,050 106,631
Other 30,382 16,107
---------- ----------
664,595 968,964
---------- ----------
Expenses:
Rental operations:
Depreciation and amortization 158,002 151,118
Interest 95,948 85,791
Other 258,018 261,587
---------- ----------
511,968 498,496
Interest (related parties, $23,361
and $6,840, respectively),
net of amount capitalized 291,081 290,468
Salaries and commissions 176,438 147,681
General and administrative 105,467 160,016
Depreciation and amortization 33,471 25,366
Cost of golf merchandise sales 12,306 25,127
---------- ----------
1,130,731 1,142,154
---------- ----------
Loss before federal income tax (466,136) (178,190)
Federal income tax benefit (158,486) (56,042)
---------- ----------
Net loss (307,650) (122,148)
Less accretion of discount on
preferred stock (8,750) 13,000
---------- ----------
Net loss applicable to common shareholders $ (316,400) $ (135,148)
========== ==========
Net loss per common share $ (.23) $ (.07)
========== ==========
Weighted average common shares
outstanding 1,387,890 1,892,398
========== ==========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For Nine Months
Ended April 30,
----------------------
1998 1997
---------- ----------
Income:
Rental $1,682,497 $1,853,203
Interest (related parties, $36,542
and $60,623, respectively) 616,181 756,223
Amortization of discounts on
real estate contracts 36,744 29,453
Gain on sale of real estate 64,433 883,861
Golf center sales (including lessons
of $13,819 and $12,510) 219,501 216,510
Other 51,036 36,535
---------- ----------
2,670,392 3,775,785
---------- ----------
Expenses:
Rental operations:
Depreciation and amortization 467,778 486,758
Interest 275,775 279,696
Other 788,928 845,874
---------- ----------
1,532,481 1,612,328
Interest (related parties, $40,952
and $25,747, respectively),
net of amount capitalized 860,085 856,672
Salaries and commissions 495,021 474,004
General and administrative 664,284 430,981
Depreciation and amortization 88,169 73,825
Cost of golf merchandise sales 41,033 69,073
Uncollectible accounts 2,199 2,788
---------- ----------
3,683,272 3,519,671
---------- ----------
Income (loss) before federal income tax (1,012,880) 256,114
Federal income tax provision (benefit) (293,378) 101,633
---------- ----------
Net income (loss) (719,502) 154,481
Less accretion of discount on
preferred stock (110,250) (39,000)
---------- ----------
Net income (loss) applicable to common
shareholders $ (829,752) $ 115,481
========== ==========
Net income (loss) per common share $ (.50) $ .06
========== ==========
Weighted average common shares
outstanding 1,674,912 1,905,222
========== ==========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For Nine Months
Ended April 30,
----------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Cash received from rentals and golf
center sales $1,945,029 $2,155,317
Interest received 672,500 759,313
Cash paid to suppliers and employees (1,940,324) (1,771,092)
Interest paid, net of amounts capitalized (739,471) (727,559)
Income taxes paid (549,000)
---------- ----------
Net cash used in operating activities (62,266) (133,021)
---------- ----------
Cash flows from investing activities:
Proceeds of sales of real estate 316,575 2,032,648
Collections on contracts, mortgages
and finance notes receivable 6,806,537 1,810,853
Investment in contracts, mortgages
and finance notes receivable (3,987,649) (1,279,291)
Additions to rental properties,
property held for sale, property
under development, vehicles and
equipment (1,046,901) (938,152)
Increase in restricted investments
and cash equivalents 51,463 24,740
Other 5,416
---------- ----------
Net cash provided by investing
activities 2,140,025 1,656,214
---------- ----------
Cash flows from financing activities:
Net repayments under line-of-credit
agreement (1,868,282) 98,231
Net proceeds from installment contracts,
mortgage notes and notes payable 850,000
Payments on installment contracts,
mortgage notes and notes payable (238,781) (1,691,597)
Proceeds from sales of debenture bonds 294,631 377,813
Redemption of debenture bonds (733,771) (722,025)
Purchase and retirement of common stock (1,117,030) (39,875)
Purchase and retirement of preferred
stock (240,000)
Related-party notes issued to redeem stock 729,100
---------- ----------
Net cash used in financing activities (2,324,133) (1,977,453)
---------- ----------
Net decrease in cash and cash
equivalents (246,374) (454,260)
Cash and cash equivalents, beginning
of period 325,058 462,471
---------- ----------
Cash and cash equivalents, end of period $ 78,684 $ 8,211
========== ==========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited), Continued
For Nine Months
Ended April 30,
----------------------
1998 1997
---------- ----------
Reconciliation of net income to net
cash used in operating activities:
Net income $ (719,502) $ 154,481
Adjustment to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 555,947 560,583
Deferred financing income realized (36,744) (29,454)
Interest accrued on debenture
bonds 419,807 406,279
Gain on sales of real estate (64,433) (883,861)
Uncollectible accounts 2,199 2,788
Change in assets and liabilities:
Accrued interest receivable 31,964 4,002
Prepaid expenses (34,348) 74,215
Inventories (8,008) 36,203
Accrued expenses 121,997 (66,116)
Deferred taxes payable (224,681) (447,367)
Other, net (106,464) 55,226
---------- ----------
Net cash used in operating
activities $ (62,266) $ (133,021)
========== ==========
Supplemental schedule of noncash investing
and financing activities:
Company financed sale of property $ 327,250 $1,378,495
Accretion of discount on preferred stock 28,750 26,000
Exchange of land for common shares 643,500
Related-party note for non-competition
agreement 125,000
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 (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 nine months ended April 30, 1998 are
not necessarily indicative of the results to be expected for the full
year.
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 studios. The financial position and
results of operations 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 nine months ended April 30, 1998 is as
follows:
Birdies Rental and
Golf Receivable
Center Operations Total
----------- ----------- ----------
Revenue $ 219,501 $ 2,450,891 $ 2,670,392
Earnings (loss) from
operations (80,540) (932,340) (1,012,880)
Identifiable assets, net 2,211,911 25,960,634 28,172,545
Depreciation and amorti-
zation 71,757 484,190 555,947
Capital expenditures 26,195 1,020,706 1,046,901
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
---------------------------------
At April 30, 1998, the Company had total stockholders' equity of
approximately $7,018,000 and a total liabilities to equity ratio of
2.95 to 1, which increased from 2.27 to 1 at July 31, 1997. During
the first nine months of the fiscal year, the Company's primary
sources of funds were approximately $317,000 from sales of real estate
and $6,807,000 in real estate contract collections. The primary uses
of funds were approximately $1,047,000 for property improvements,
approximately $3,988,000 in loans and contract receivable investments,
and approximately $967,000 in net repayment of interest-bearing debt.
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
$3,536,717 was outstanding at April 30, 1998, 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 office buildings and to make construction
and interim loans. Additional bank lines of credit are expected to
provide funding for the increased lending activity.
Results of Operations (Three Months)
------------------------------------
The Company's net loss for the quarter ended April 30, 1998 was
approximately $308,000 compared with a net loss of approximately
$122,000 for the quarter ended April 30, 1997. The loss was primarily
attributable to a decrease in gain on sales of real estate due to
losses incurred in the sales of developed properties.
Rental income increased by $18,297 (3.4%) to approximately $563,000 in
the quarter ended April 30, 1998 from approximately $544,000 in 1997.
Rental income increased due to improved occupancy in office buildings
during the current year.
Rental property expenses were $13,472 (2.7%) higher in fiscal 1998
than for the comparable three months in 1997. This primarily resulted
from increased interest expense of $10,157 (11.8%) and depreciation of
$6,884 (4.6%), which more than offset the decrease in other operating
expenses of $3,569 (1.4%).
Interest income and amortized discount was $50,914 (22.6%) less for
the three months ended April 30, 1998 compared with the similar period
in 1997, due to the decrease in contracts receivable, primarily from
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, increased by $613 (.2%) in fiscal 1998 compared with
fiscal 1997. This was primarily caused by slightly higher interest
rates more than offsetting a decrease in outstanding debt obligations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations (Nine Months)
----------------------------------
The Company's net loss for the nine months ended April 30, 1998 was
approximately $720,000 compared with net income of approximately
$154,000 for the nine months ended April 30, 1997. The decrease was
primarily attributable to a decrease of approximately $819,000 in gain
on sale of real estate in 1998 from 1997, along with decreases in
rental income and interest income and an increase of approximately
$233,000 in general and administrative expense (primarily legal fees).
Rental income decreased by $170,706 (9.2%) to approximately $1,682,000
in the nine months ended April 30, 1998 from approximately $1,853,000
in 1997. This primarily resulted from reduced rents due to the sale
of rental properties which more than offset rental rate increases and
improved occupancy in commercial buildings.
Rental property expenses were $79,847 (5.0%) lower in 1998 than for
the comparable nine months in 1997. This resulted from decreased
interest expense of $3,921 (1.4%), operating expense of $56,946 (6.7%)
and a reduction in depreciation of $18,980 (3.9%).
Interest income and amortized discount was $132,751 (16.9%) less for
the nine months ended April 30, 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 $3,413 (.4%) higher in
1998 than in 1997 primarily due to slightly higher interest rates and
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 29% in 1998
compared to 40% in fiscal 1997 due to certain nondeductible expenses
occurring in fiscal 1998.
Part II. Other Information
Items 1, 2, 3, 4 and 5 -- Inapplicable.
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 COMPANIES
/s/ Wayne E. Guthrie
---------------------------------
Wayne E. Guthrie
President/Chief Executive Officer
/s/ Donald J. Migliuri
---------------------------------
Donald J. Migliuri, Secretary/
Treasurer