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 October 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
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(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
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(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
October 31, July 31,
ASSETS 1998 1998
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Cash and cash equivalents:
Unrestricted $ 26,940 $ 318,026
Restricted 10,621 11,289
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37,561 329,315
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Receivables:
Contracts, mortgages, finance notes
and loans receivable, net:
Related parties 224,418 427,183
Unrelated 14,358,373 10,819,572
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14,582,791 11,246,755
Accrued interest 221,007 391,076
Income taxes 154,857 154,857
Other 3,517 2,415
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14,962,172 11,795,103
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Investment in rental properties, net 13,567,446 13,588,145
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Investment in golf center, net 2,053,620 2,070,994
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Other investments:
Property held for sale and development 2,794,864 2,775,542
Marketable securities 59,400 88,062
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2,854,264 2,863,604
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Other assets:
Vehicles and equipment, net 34,212 35,957
Prepaid and other, net 285,839 296,590
Golf center inventories 56,850 58,331
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376,901 390,878
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Total assets $33,851,964 $31,038,039
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Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets, Continued
October 31, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
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Liabilities:
Notes payable to banks $ 7,866,769 $ 6,643,826
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Installment contracts, mortgage notes
and notes payable:
Related parties 1,024,497 1,028,758
Unrelated 6,204,241 4,582,594
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7,228,738 5,611,352
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Debenture bonds 9,822,091 9,839,936
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Accrued expenses and other liabilities:
Related parties 224,344 207,240
Unrelated 1,375,173 1,011,334
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1,599,517 1,218,574
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Deferred income taxes 531,146 586,872
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Total liabilities 27,048,261 23,900,560
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Commitments and contingencies
Redeemable Class A preferred stock,
$100 par value; $100 redemption value;
authorized 20,000 shares; issued and
outstanding, 5,000 and 7,000 shares 500,000 700,000
Less: Net discount on issuance of pre-
ferred stock (143,750) (210,000)
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356,250 490,000
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Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets, Continued
LIABILITIES AND STOCKHOLDERS' October 31, July 31,
EQUITY, CONTINUED 1998 1998
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Stockholders' equity:
Common stock:
Original class, authorized 2,500,000
no par value shares, $3 stated value;
issued and outstanding, 1,168,849
and 1,172,488 shares $ 3,506,548 $ 3,517,464
Class B, authorized 30,000 no par
value shares; no shares issued and
outstanding
Additional paid-in capital 1,720,936 1,776,951
Retained earnings 1,219,969 1,361,363
Unrealized loss on marketable securities,
net of deferred income taxes 0 (8,299)
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Total stockholders' equity 6,447,453 6,647,479
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Total liabilities and stockholders'
equity $33,851,964 $31,038,039
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The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Operations
Three Months Ended
October 31,
----------------------
1998 1997
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Income:
Rental $ 543,778 $ 566,069
Interest 374,220 221,733
Amortization of discounts on
real estate contracts 11,263 4,225
Loss on sales of real estate (27,015)
Gain on sales of securities 29,962
Golf center sales (including
lessons of $6,025 and $574) 66,370 78,705
Other, net 105,079 8,504
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1,130,672 852,221
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Expenses:
Rental operations:
Depreciation and amortization 161,213 153,833
Interest 92,242 83,550
Other 263,054 251,248
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516,509 488,631
Interest, net of amount capitalized 428,139 290,643
Salaries and commissions 190,603 181,136
General and administrative 143,930 163,699
Depreciation and amortization 33,779 26,345
Cost of golf merchandise sales 12,856 22,743
Uncollectible accounts 0 2,199
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1,325,816 1,175,396
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Loss before income tax benefit (195,144) (323,175)
Income tax benefit (60,000) (106,292)
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Net loss (135,144) (216,883)
Less accretion of discount on
preferred stock (66,250) (11,250)
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Loss applicable to common stockholders $ (201,394) $ (228,133)
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Loss per common share -- basic and diluted $ (0.17) $ (0.12)
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Weighted average common shares
outstanding -- basic and diluted 1,170,925 1,872,082
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Comprehensive Loss
Three Months Ended
October 31,
----------------------
1998 1997
Net loss $ (135,144) $ (216,883)
Other comprehensive loss before
income taxes:
Changes in unrealized losses on
marketable securities 12,573 --
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Other comprehensive loss before income
taxes (122,571) (216,883)
Less deferred income taxes (4,274) --
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Comprehensive loss $ (126,845) $ (216,883)
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The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
October 31,
-----------------------
1998 1997
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Cash flows from operating activities:
Cash received from rentals and golf center sales $ 708,505 $ 635,871
Interest received 547,342 271,743
Cash paid to suppliers and employees (241,136) (665,401)
Interest paid, net of amounts capitalized (359,551) (258,990)
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Net cash provided by (used in) operating activities 655,160 (16,777)
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Cash flows from investing activities:
Proceeds from sales of real estate 101,024
Proceeds from sales of marketable securities 66,923
Collections on contracts, mortgages and finance
notes receivable 108,984 3,550,536
Investment in contracts, mortgages and finance notes
receivable (3,493,757) (200,923)
Additions to rental properties, property held for sale,
property under development, golf center, vehicles and
equipment (107,692) (348,462)
Change in restricted investments and cash equivalents 668 (8,381)
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Net cash provided by (used in) investing activities (3,424,874) 3,093,794
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Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit
agreements 1,222,943 (3,091,434)
Proceeds from issuance of installment contracts,
mortgage notes and notes payable 1,680,328
Payments on installment contracts, mortgage notes and
notes payable (62,942) (71,069)
Proceeds from sales of debenture bonds 39,113 129,587
Redemption of debenture bonds (193,883) (326,202)
Purchase and retirement of treasury stock (6,931) (132)
Purchase and retirement of preferred stock (200,000) (40,000)
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Net cash provided by (used in) financing activities 2,478,628 (3,399,250)
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Net decrease in cash and cash equivalents (291,086) (322,233)
Cash and cash equivalents, beginning of period 318,026 325,058
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Cash and cash equivalents, end of period $ 26,940 $ 2,825
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The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Cash Flows, Continued
Three Months Ended
October 31,
-----------------------
1998 1997
-----------------------
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Net loss $ (135,144) $ (216,883)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 188,188 180,178
Deferred income taxes (55,726)
Deferred financing income realized (11,263) (4,225)
Interest accrued on debenture bonds 136,925 140,968
Loss on sales of real estate 27,014
Gain on sales of marketable securities (29,962)
Uncollectible accounts 2,199
Change in assets and liabilities:
Accrued interest receivable 170,069 26,656
Prepaid expenses 10,751 17,532
Inventories 1,481 2,456
Accrued expenses 380,943 (95,638)
Income taxes payable (106,292)
Other, net (1,102) 9,258
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Net cash provided by (used in) operating
activities $ 655,160 $ (16,777)
=========== ===========
Supplemental schedule of noncash investing
and financing activities:
Accretion of discount on preferred stock $ 6,250 $ 11,250
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, 1998, filed with the Securities and Exchange
Commission.
The results of operations for the three months ended October 31, 1998
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 consists of a
driving range, lighted fairway with five target greens, a pro shop, a
putting green and teaching studies. The financial position and
results of operations of Birdies are included in the consolidated
financial statements.
Information about the Company's separate Birdies business segment as
of and for the quarter ended October 31, 1998 is as follows:
Birdies
Golf
Center
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Revenue $ 66,370
Loss from operations (50,188)
Identifiable assets, net 2,110,470
Depreciation and amortization 24,057
Capital expenditures 5,112
On December 1, 1998, management decided to close Birdies and commence
a liquidation of assets. It is estimated that no significant losses
from the disposition of Birdies assets will occur. Presently,
management intends to lease the Birdies building and will immediately
commence marketing the driving range land sold.
Note 3. Bank Covenants
Restrictive bank covenants regarding maintenance of certain amounts of
stockholders' equity and certain debt to equity ratios imposed by one
lender on its line of credit were violated by the Company during the
quarter. However, on December 16, 1998, the bank extended the
maturity date of the line of credit to February 15, 1999 with the same
terms and conditions. A $910,000 land sale was expected to close
during the quarter that would have generated a gain of approximately
$450,000, but was not finalized until after the quarter had ended.
The gain on this sale is expected to help the Company maintain
compliance with the covenants in the future. In addition, the Board
has proposed removal of the mandatory redemption provision for
$500,000 face amount (5,000) shares of the Company's preferred stock
which would increase total stockholders' equity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At October 31, 1998, the Company had a preferred stock net balance of
approximately $356,000 plus common stockholders' equity of
approximately $6,447,000 and a total liabilities to common equity
ratio of 4.20 to 1, which increased from 3.60 to 1 at July 31, 1998.
During the quarter, the Company's primary sources of funds were
approximately $1,680,000 from notes payable and approximately
$1,223,000 in borrowings under line-of-credit agreements, approximately
$67,000 from sales of marketable securities and $109,000 in real estate
contract collections. The primary uses of funds were approximately
$108,000 for property improvements, approximately $3,494,000 for
investments in loans receivable and approximately $63,000 for net debt
reduction. The Company anticipates that cash flows from operations,
and the availability of funds under its $19,000,000 line-of-credit
agreements, of which only $7,866,769 was outstanding at October 31,
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 rental properties and
to improve property held for sale and development.
Results of Operations
The Company's net loss for the quarter ended October 31, 1998 was
approximately $135,000 compared with a net loss of approximately
$217,000 for the quarter ended October 31, 1997. The improvement was
primarily attributable to an increase of $57,000 in gain on sale of
marketable securities and real estate in 1998 from 1997 and an
increase of $97,000 in other income, primarily loan fees.
Rental income decreased by approximately $22,000 (3.9%) to
approximately $544,000 in the quarter ended October 31, 1998 from
approximately $566,000 in 1997. This decrease primarily resulted from
lower occupancy levels in a multifamily apartment building currently
being renovated.
Rental property expenses were approximately $28,000 (5.7%) higher in
1998 than for the comparable three months in 1997. This increase was
due to increased interest expense of $8,692 (10.4%), operating expense
of $11,806 (4.7%) and depreciation of $7,380 (4.8%).
Interest income and amortized discount increased approximately
$160,000 (70.6%) for the three months ended October 31, 1998 compared
with the similar period in 1997 as the average outstanding balance in
contracts and notes 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
$137,000 (47.3%) in the first quarter of 1998 than in the comparable
1997 period 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 loss before
federal income tax was approximately 31% in 1998.
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 COMPANIES
/s/ Wayne E. Guthrie
---------------------------------
Wayne E. Guthrie
President/Chief Executive Officer
/s/ Donald J. Migliuri
---------------------------------
Donald J. Migliuri, Secretary/
Treasurer