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, 1999
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 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 1999 1998
----------- -----------
Cash and cash equivalents:
Unrestricted $ 427,056 $ 318,026
Restricted 10,889 11,289
----------- -----------
437,945 329,315
----------- -----------
Receivables:
Contracts, mortgages, notes and loans
receivable, net:
Related parties 221,488 427,183
Unrelated 17,957,127 10,819,572
----------- -----------
18,178,615 11,246,755
Accrued interest 225,161 391,076
Income taxes 133,057 154,857
Other (24,842) 2,415
----------- -----------
18,511,991 11,795,103
----------- -----------
Investment in rental properties, net 13,639,778 13,588,145
----------- -----------
Investment in golf center, net 1,933,070 2,070,994
----------- -----------
Other investments:
Property held for sale and development 2,233,608 2,775,542
Marketable securities 59,400 88,062
----------- -----------
2,293,008 2,863,604
----------- -----------
Other assets:
Vehicles and equipment, net 31,055 35,957
Prepaid expenses, including non-
competition agreement, net 264,078 296,590
Golf center inventories 15,873 58,331
----------- -----------
311,006 390,878
----------- -----------
Total assets $37,126,798 $31,038,039
=========== ===========
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 1999 1998
----------- -----------
Liabilities:
Notes payable to banks $10,131,969 $ 6,643,826
----------- -----------
Installment contracts, mortgage notes
and notes payable:
Related parties 170,534 1,028,758
Unrelated 7,763,269 4,582,594
----------- -----------
7,933,803 5,611,352
----------- -----------
Debenture bonds 9,819,230 9,839,936
----------- -----------
Accrued expenses and other liabilities:
Related parties 220,310 207,240
Unrelated 1,461,506 1,011,334
----------- -----------
1,681,816 1,218,574
----------- -----------
Deferred income taxes 591,147 586,872
----------- -----------
Total liabilities 30,157,965 23,900,560
----------- -----------
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 (137,500) (210,000)
----------- -----------
362,500 490,000
----------- -----------
Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets, Continued
LIABILITIES AND STOCKHOLDERS' January 31, July 31,
EQUITY, CONTINUED 1999 1998
----------- -----------
Stockholders' equity:
Common stock:
Original class, authorized 2,500,000
no par value shares, $3 stated value;
issued and outstanding, 1,156,849
and 1,172,488 shares $ 3,470,548 $ 3,517,464
Class B, authorized 30,000 no par
value shares; no shares issued and
outstanding -- --
Additional paid-in capital 1,798,336 1,776,951
Retained earnings 1,337,449 1,361,363
Unrealized loss on marketable securities,
net of deferred income taxes -- (8,299)
----------- -----------
Total stockholders' equity 6,606,333 6,647,479
----------- -----------
Total liabilities and stockholders'
equity $37,126,798 $31,038,039
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Income:
Rental $ 561,286 $ 553,742 $1,105,064 $1,119,811
Interest 425,334 197,444 799,554 419,177
Amortization of discounts on
real estate contracts 2,723 4,239 13,986 8,464
Gain on sales of real estate 624,349 354,255 624,349 327,240
Gain on sales of securities -- -- 29,962 --
Other, net 114,938 12,150 220,017 20,654
---------- ---------- ---------- ----------
1,728,630 1,121,830 2,792,932 1,895,346
---------- ---------- ---------- ----------
Expenses:
Rental operations:
Depreciation and amortization 163,854 155,943 325,067 309,776
Interest 90,972 96,277 183,214 179,827
Other 247,128 279,662 510,182 530,910
---------- ---------- ---------- ----------
501,954 531,882 1,018,463 1,020,513
Interest, net of amount capitalized 489,080 278,361 917,219 569,004
Salaries and commissions 203,937 137,447 394,540 318,583
General and administrative 114,557 367,286 178,842 442,885
Depreciation and amortization 9,603 4,661 19,325 7,182
Uncollectible accounts -- -- -- 2,199
---------- ---------- ---------- ----------
1,319,131 1,319,637 2,528,389 2,360,366
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before federal income tax provision
(benefit) 409,499 (197,807) 264,543 (465,020)
Federal income tax provision (benefit) 126,431 (20,614) 81,989 (114,776)
---------- ---------- ---------- ----------
Income (loss) from continuing operations 283,068 (177,193) 182,554 (350,244)
Discontinued operations (Note 2):
Loss from discontinued operations of
golf center (less federal income
tax benefit of $44,631, $7,986
$60,189 and $20,116) (99,339) (17,776) (133,969) (61,608)
---------- ---------- ---------- ----------
Net income (loss) 183,729 (194,969) 48,585 (411,852)
Less accretion of discount on
preferred stock (6,250) (90,250) (72,500) (101,500)
---------- ---------- ---------- ----------
Income (loss) applicable to common
stockholders $ 177,479 $ (285,219) $ (23,915) $ (513,352)
========== ========== ========== ==========
Pacific Security Companies and Subsidiaries
Consolidated Statements of Operations, Continued
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Income (loss) from continuing operations
applicable to common stockholders $ 276,818 $ (267,443) $ 110,054 $ (451,744)
========== ========== ========== ==========
Income (loss) per common share - basic
and diluted $ .15 $ (.16) $ (.02) $ (.28)
========== ========== ========== ==========
Income (loss) from continuing operations
per common share - basic and diluted $ .24 $ (.15) $ .09 $ (.25)
========== ========== ========== ==========
Weighted average common shares
outstanding 1,166,849 1,764,736 1,168,887 1,818,423
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended Six Months Ended
January 31, January 31,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net income (loss) $ 183,729 $(194,969) $ 48,585 $(411,852)
Other comprehensive income (loss)
before income taxes:
Changes in unrealized losses on
marketable securities -- 2,734 12,573 --
--------- --------- --------- ---------
Other comprehensive income (loss)
before income taxes 183,729 (192,235) 61,158 (411,852)
Less deferred income taxes -- 930 (4,274) --
--------- --------- --------- ---------
Comprehensive income (loss) $ 183,729 $(193,165) $ 56,884 $(411,852)
========= ========= ========= =========
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,
------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Cash received from rentals and golf center sales $ 1,441,191 $ 1,245,748
Interest received 715,249 465,012
Cash paid to suppliers and employees (786,736) (1,398,965)
Interest paid, net of amounts capitalized (769,761) (489,940)
----------- -----------
Net cash provided by (used in) operating activities 599,943 (178,145)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities 71,198 --
Proceeds from sales of real estate and fixed assets 223,521 101,024
Collections on contracts, mortgages, notes and loans
receivable 3,141,006 4,060,001
Investment in contracts, mortgages, notes and loans
receivable (8,923,302) (202,621)
Additions to rental properties, property held for sale,
property under development, golf center, vehicles and
equipment (293,767) (768,800)
Change in restricted investments and cash equivalents -- (8,338)
----------- -----------
Net cash provided by (used in) investing activities (5,781,344) 3,181,266
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements 4,923,471 (3,099,328)
Proceeds from installment contracts, mortgages and notes
payable 1,914,773 850,000
Payments on installment contracts, mortgage notes and
notes payable (1,027,650) (161,070)
Proceeds from sales of debenture bonds 76,912 267,942
Redemption of debenture bonds (371,544) (606,069)
Purchase and retirement of common stock (25,531) (1,063,614)
Purchase and retirement of preferred stock (200,000) (240,000)
Related party notes -- 729,100
----------- -----------
Net cash provided by (used in) financing activities 5,290,431 (3,323,039)
----------- -----------
Net increase (decrease) in cash and cash equivalents 109,030 (319,918)
Cash and cash equivalents, beginning of period 318,026 325,058
----------- -----------
Cash and cash equivalents, end of period $ 427,056 $ 5,140
=========== ===========
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,
------------------------
1999 1998
----------- -----------
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ 48,585 $ (411,852)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 377,447 364,474
Deferred financing income realized (13,986) (8,464)
Interest accrued on debenture bonds 273,926 281,649
Gain on sales of real estate (559,430) (327,240)
Gain on sales of securities (29,962) --
Uncollectible accounts -- 2,199
Change in assets and liabilities:
Accrued interest receivable (84,305) 21,480
Prepaid expenses (77,905) 16,149
Inventories 42,457 1,206
Accrued expenses 574,059 17,609
Income taxes payable 21,800 (134,892)
Other, net 27,257 (463)
----------- -----------
Net cash provided by (used in) operating
activities $ 599,943 $ (178,145)
=========== ===========
Supplemental schedule of noncash investing
and financing activities:
Company financed sale of property $ 1,035,358 $ --
Accretion of discount on preferred stock 12,500 20,000
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, 1998, filed with the Securities and Exchange
Commission.
The results of operations for the six months ended January 31, 1999
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 studios. The financial position and
operating results of Birdies are included in the consolidated
financial statements.
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. Management intends
to lease the Birdies building and sell the driving range 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:
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
Note 2. Birdies Business Segment, Continued
Three Months Six Months Ended
January 31, January 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues $ 29,297 $ 31,746 $ 95,667 $110,451
Loss before federal income taxes 143,970 25,762 194,158 81,724
Loss from discontinued operations,
net of federal income taxes 99,339 17,776 133,969 61,608
Total assets from discontinued operations were $1,944,963 and
$2,193,291 at January 31, 1999 and 1998, respectively.
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
year. However, the bank extended the maturity date of the line of
credit to April 23, 1999 with the same terms and conditions. To help
the Company maintain compliance with the covenants in the future, the
Board proposed and stockholders approved at the February 18, 1999
annual meeting, a resolution removing 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 January 31, 1999, the Company had a preferred stock net balance of
approximately $362,000 plus common stockholders' equity of
approximately $6,606,000 and a total liabilities to common equity
ratio of 4.56 to 1, which increased from 3.60 to 1 at July 31, 1998.
During the six months of the fiscal year, the Company's primary
sources of funds were approximately $1,915,000 from the issuance of
installment contracts and notes payable, approximately $4,923,000 in
borrowings under line-of-credit agreements, approximately $295,000
from sales of marketable securities and real estate and $3,141,000 in
real estate contract collections. The primary uses of funds were
approximately $294,000 for property improvements, approximately
$8,923,000 for investments in contracts and loans receivable,
approximately $1,322,000 for net debt reduction and approximatley
$226,000 in purchase and redemption of common and preferred stock.
The Company anticipates that cash flows from operations, and the
availability of funds under its $19,000,000 line-of-credit agreements,
of which $10,131,969 was outstanding at January 31, 1999, 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 income for the quarter ended January 31, 1999 was
approximately $184,000 compared with a net loss of approximately
$195,000 for the quarter ended January 31, 1998. Income from
continuing operations before tax was approximately $409,000 in 1999
compared with a loss of $198,000 in 1998, an improvement of
approximately $607,000. The improvement was primarily attributable to
an increase of approximately $15,000 in net interest income, an
increase of $270,000 in gain on sale of real estate in 1999 from 1998
and an increase of $103,000 in other income, primarily loan fees.
General and administrative expense was reduced by $253,000, primarily
due to a reduction in legal fees.
Rental income increased by approximately $7,500 (1.4%) to
approximately $561,000 in the quarter ended January 31, 1999 from
approximately $554,000 in 1998. This increase primarily resulted from
higher occupancy levels in office buildings.
Rental property expenses were approximately $30,000 (5.7%) lower in
1999 than for the comparable three months in 1998. This decrease was
due to decreased interest expense of $5,305 (5.6%) and operating
expense of $32,534 (11.7%), which more than offset increased
depreciation of $7,911 (5.1%).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations, Continued
Salaries and commissions were $66,490 (48.4%) higher in the quarter
ended January 31, 1999 than for the comparable three months in 1998,
primarily because of additional personnel expense for Cornerstone
Realty Advisors, which began operations in March 1998.
Interest income and amortized discount increased approximately
$226,000 (112.3%) for the three months ended January 31, 1999 compared
with the similar period in 1998 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
$211,000 (75.7%) in the first quarter of 1999 compared with the
comparable 1998 period primarily due to an increase in borrowings to
fund the loans originated by Cornerstone Realty Advisors.
Results of Operations (Six Months)
The Company's net income for the six months ended January 31, 1999 was
approximately $49,000 compared with a net loss of approximately
$412,000 for the six months ended January 31, 1998. Income from
continuing operations before tax was approximately $265,000 in 1999
compared with a loss of $465,000 in 1998, an improvement of
approximately $730,000. The increase was primarily attributable to an
increase of approximately $32,000 in net interest income, an increase
of approximately $297,000 in gain on sales of real estate in 1999
compared to 1998 and an increase of approximately $199,000 in other
income, primarily loan fees. G&A expense was also reduced by
approximately $264,000, primarily due to a reduction in legal fees.
Rental income decreased by $14,747 (1.4%) to approximately $1,105,000
in the six months ended January 31, 1999 from approximately $1,120,000
in 1998. This primarily resulted from reduced rents due to lower
occupancy levels in a multifamily apartment building being renovated.
Rental property expenses were $2,050 (.2%) lower in 1999 than for the
comparable six months in 1998. This resulted from decreased operating
expense of $20,728 (3.9%) which more than offset an increase in
depreciation of $15,291 (5.0%) and interest expense of $3,387 (1.9%).
Interest income and amortized discount was $385,899 (90.3%) more for
the six months ended January 31, 1999 compared with the similar period
in 1998 as the average outstanding balance in contracts and notes
receivable increased during the period, primarily due to new loans
originated by Cornerstone Realty Advisors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations (Six Months), Continued
Salaries and commissions were $75,957 (23.8%) higher in the six months
ended January 31, 1999 than for the comparable six months in 1998,
primarily because of additional personnel expense for Cornerstone
Realty Advisors, which began operations in March 1998.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was $348,215 (43.7%) more in
1999 than in 1998 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 31% in fiscal 1999
compared to 25% in fiscal 1998 due to certain nondeductible expenses
occurring in fiscal 1998.
Part II. Other Information
Items 1, 2 and 3 -- Not applicable.
Item 4 -- Submission of Matters to a Vote of Security Holders
On February 18, 1999, at the Annual Meeting of the Stockholders, a
motion was passed to amend the Company's articles of incorporation
to eliminate the mandatory redemption provisions of the Class A
Preferred Stock and authorize an additional 10,000,0000 shares of
Preferred Stock. The stockholders further passed a motion to
increase the size of the Board of Directors from seven to eight
members and authorized the amendment of the articles of incorporation
accordingly.
Item 5 -- Other Information
On February 18, 1999, the Board of Directors elected the following
officers of the Company:
David Guthrie President
Kevin Guthrie Vice President
Donald Migliuri Secretary/Treasurer
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/ David L. Guthrie
---------------------------------
David L. Guthrie
President/Chief Executive Officer
/s/ Donald J. Migliuri
---------------------------------
Donald J. Migliuri, Secretary/
Treasurer