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, 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
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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 Identifi-
incorporation or organization) cation Number)
N. 10 Post Street
525 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 ] Yes [ ] No
Part I. Financial Information
Item I. Financial Statements
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, July 31,
1999 1998
----------- -----------
ASSETS
Cash:
Cash and cash equivalents:
Unrestricted $ 520,100 $ 318,026
Restricted 13,348 11,289
----------- -----------
533,448 329,315
----------- -----------
Receivables:
Contracts, mortgages and loans
receivable, net:
Related parties 217,857 427,183
Unrelated 14,702,406 10,819,572
----------- -----------
14,920,263 11,246,755
Accrued interest 96,625 391,076
Federal income taxes -- 154,857
Other 22,734 2,415
----------- -----------
15,039,622 11,795,103
----------- -----------
Investment in rental properties, net 13,612,412 13,588,145
----------- -----------
Investment in Birdie's Golf Center (Note 2) 2,016,918 2,070,994
----------- -----------
Other investments:
Property held for sale and development 2,257,394 2,775,542
Marketable securities 41,724 88,062
----------- -----------
2,299,118 2,863,604
----------- -----------
Other assets:
Vehicles and equipment, less
accumulated depreciation of
$210,427 and $198,073 35,460 35,957
Prepaid and other, net 236,739 296,590
Golf center inventories -- 58,331
----------- -----------
272,199 390,878
----------- -----------
Total assets $33,773,717 $31,038,039
=========== ===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
April 30, July 31,
1999 1998
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable to banks (lines of
credit) $ 6,411,873 $ 6,643,826
----------- -----------
Installment contracts, mortgage
notes payable and notes payable:
Related parties 355,084 1,028,758
Unrelated banks and other 8,697,003 4,582,594
----------- -----------
9,052,087 5,611,352
----------- -----------
Debenture bonds 9,662,343 9,839,936
----------- -----------
Accrued expenses and other
liabilities:
Related parties 262,609 207,240
Unrelated parties 1,016,416 1,011,334
----------- -----------
1,279,025 1,218,574
----------- -----------
Federal income taxes:
Current 15,000 --
Deferred 576,486 586,872
----------- -----------
591,486 586,872
----------- -----------
Total liabilities 26,996,814 23,900,560
----------- -----------
Commitments and contingencies
Redeemable stock, Class A preferred, $100
par value, $100 redeemable value;
authorized 20,000 shares; issued and
outstanding 0 and 7,000 shares -- 700,000
Less: Net discount on issuance of
preferred stock -- (210,000)
----------- -----------
-- 490,000
----------- -----------
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
April 30, July 31,
1999 1998
----------- ------------
Stockholders' equity:
Class A preferred stock, $100 par value;
authorized 20,000 shares; issued and
outstanding 3,000 shares $ 300,000 $ --
Preferred stock authorized 10,000,000
no par value shares, none issued
Class A common stock authorized
2,500,000 no par value shares, $3
stated value; issued and outstanding
1,153,660 and 1,172,448 shares 3,460,980 3,517,464
Class B common stock authorized
30,000 no par value shares,
none issued
Additional paid-in capital 1,802,374 1,776,951
Retained earnings 1,213,549 1,361,363
Accumulated comprehensive loss, net -- (8,299)
----------- -----------
Total stockholders' equity 6,776,903 6,647,479
----------- -----------
Total liabilities and stock-
holders' equity $33,773,717 $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 Nine Months Ended
April 30, April 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Income:
Rental $ 572,855 $ 562,686 $1,677,919 $1,682,497
Interest 464,417 197,004 1,263,971 616,181
Amortization of discounts on
real estate contracts 8,017 28,280 22,003 36,744
Gain (loss) on sales of real estate -- (262,807) 624,348 64,433
Gain on sale of securities 249,120 -- 279,082 --
Other, net 138,043 30,382 358,059 51,036
---------- ---------- ---------- ----------
1,432,452 555,545 4,225,382 2,450,891
---------- ---------- ---------- ----------
Expenses:
Rental operations:
Depreciation and amortization 165,237 158,002 490,304 467,778
Interest 88,724 95,948 271,938 275,775
Other 255,368 258,018 765,550 788,928
---------- ---------- ---------- ----------
509,329 511,968 1,527,792 1,532,481
Interest, net of amount capitalized 468,647 291,081 1,385,866 860,085
Depreciation and amortization 9,903 9,230 29,228 16,412
Salaries and commissions 177,743 165,988 572,283 484,571
General and administrative 135,277 42,626 314,119 487,483
Uncollectible accounts -- -- -- 2,199
---------- ---------- ---------- ----------
1,300,899 1,020,893 3,829,288 3,383,231
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before federal income tax provision
(benefit) 131,553 (465,348) 396,094 (932,340)
Federal income tax provision (benefit) 41,081 (158,257) 123,069 (270,022)
---------- ---------- ---------- ----------
Income (loss) from continuing operations 90,472 (307,091) 273,025 (622,318)
Discontinued operations (Note 2):
Loss from discontinued operations of
golf center (less federal income
tax benefit of $48,015, $299,
$108,203 and $23,356) (106,872) (559) (240,840) (57,184)
---------- ---------- ---------- ----------
Net income (loss) (16,400) (307,650) 32,185 (719,502)
Less accretion of discount on
preferred stock (137,500) (8,750) (210,000) (110,250)
---------- ---------- ---------- ----------
Income (loss) applicable to common
stockholders $ (153,900) $ (316,400) $ (177,815) $ (829,752)
========== ========== ========== ==========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Income (loss) from continuing operations
applicable to common stockholders $ (47,028) $ (315,841) $ 63,025 $ (732,568)
========== ========== ========== ==========
Income (loss) per common share - basic
and diluted $ (0.13) $ (0.23) $ (0.15) $ (0.50)
========== ========== ========== ==========
Income (loss) from continuing operations
per common share - basic and diluted $ (0.04) $ (0.23) $ 0.05 $ (0.46)
========== ========== ========== ==========
Weighted average common shares
outstanding 1,155,593 1,387,890 1,164,456 1,674,912
========== ========== ========== ==========
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 Nine Months Ended
April 30, April 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net income (loss) $ (16,400) $(307,650) $ 32,185 $(719,502)
Other comprehensive income (loss)
before income taxes:
Changes in unrealized losses on
marketable securities -- 5,279 12,573 8,014
--------- --------- --------- ---------
Other comprehensive income (loss)
before income taxes (16,400) (302,371) 44,758 (711,488)
Less deferred income taxes -- (1,795) (4,274) (2,725)
--------- --------- --------- ---------
Comprehensive income (loss) $ (16,400) $(304,166) $ 40,484 $(714,213)
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Nine Months
Ended April 30,
----------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Cash received from rentals and golf
center sales $2,111,006 $1,945,029
Interest received 1,308,202 672,500
Cash paid to suppliers and employees (1,775,454) (1,940,324)
Interest paid, net of amounts capitalized (1,203,886) (739,471)
Income tax refund, net 170,330 --
---------- ----------
Net cash provided by (used in)
operating activities 610,198 (62,266)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of securities 337,993 --
Proceeds from sales of real estate 268,517 316,575
Collections on contracts, mortgages
and finance notes receivable 11,054,117 6,806,537
Investment in contracts, mortgages
and finance notes receivable (13,645,044) (3,987,649)
Additions to rental properties,
property held for sale, property
under development, vehicles and
equipment (620,362) (1,046,901)
Increase in restricted investments
and cash equivalents -- 51,463
---------- ----------
Net cash provided by (used in)
investing activities (2,604,779) 2,140,025
---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) under line-
of-credit agreements 1,206,374 (1,868,282)
Net proceeds from installment contracts,
mortgage notes and notes payable 2,936,063 850,000
Payments on installment contracts,
mortgage notes and notes payable (1,133,655) (238,781)
Proceeds from sales of debenture bonds 76,912 294,631
Redemption of debenture bonds (657,978) (733,771)
Purchase and retirement of common stock (31,061) (1,117,030)
Purchase and retirement of preferred
stock (200,000) (240,000)
Related-party notes issued to redeem stock -- 729,100
---------- ----------
Net cash provided by (used in)
financing activities 2,196,655 (2,324,133)
---------- ----------
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For Nine Months
Ended April 30,
----------------------
1999 1998
---------- ----------
Net increase (decrease) in cash and cash
equivalents $ 202,074 $ (246,374)
Cash and cash equivalents, beginning
of period 318,026 325,058
---------- ----------
Cash and cash equivalents, end of period $ 520,100 $ 78,684
========== ==========
Reconciliation of net income (loss) to net
cash provided by (used in) operating
activities:
Net income (loss) $ 32,185 $ (719,502)
Adjustment to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 562,382 555,947
Deferred financing income realized (22,003) (36,744)
Interest accrued on debenture
bonds 403,473 419,807
Gain on sales of securities (279,082) --
Gain on sales of real estate and
rental properties (472,439) (64,433)
Uncollectible accounts -- 2,199
Change in assets and liabilities:
Accrued interest receivable 44,231 31,964
Prepaid expenses (50,566) (34,348)
Inventories 58,331 (8,008)
Accrued expenses 168,809 121,997
Income taxes 154,857 (224,681)
Other, net 10,020 (106,464)
---------- ----------
Net cash provided by (used in)
operating activities $ 610,198 $ (62,266)
========== ==========
Supplemental schedule of noncash investing
and financing activities:
Company financed sale of property $1,035,358 $ 327,250
Accretion of discount on preferred stock 150,000 28,750
Exchange of land for common shares -- 643,500
Related-party note for non-competition
agreement -- 125,000
Related-party note for preferred stock 200,000 --
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 nine months ended April 30, 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 consisted of a
driving range, lighted fairway with five target greens, a pro shop, a
putting green and teaching studios.
On December 1, 1998, management decided to close Birdies and commence
a liquidation of assets. 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 Nine Months Ended
April 30, April 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues $(78,810) $109,050 $(48,061) $219,501
Loss before federal income taxes 154,887 788 349,043 80,540
Loss from discontinued operations,
net of federal income taxes 106,872 559 240,840 57,184
Total assets from discontinued operations were $2,016,918 and
$2,211,911 at April 30, 1999 and July 31, 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 July 1, 1999 and the Company was in compliance with revised
covenants at April 30, 1999.
Note 4. Preferred Stock
During the quarter ended April 30, 1999, the Company redeemed 2,000
shares of preferred stock at par by issuing a $200,000 note payable.
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. Accordingly, 3,000 outstanding shares of preferred stock, with
a face amount of $300,000, were reclassified to stockholders' equity.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At April 30, 1999, the Company had total stockholders' equity of
approximately $6,777,000 and a total liabilities to equity ratio of
3.98 to 1, which increased from 3.60 to 1 at July 31, 1998. During
the nine months of the fiscal year, the Company's primary sources of
funds were approximately $2,936,000 from the issuance of notes payable
to banks and others, approximately $1,206,000 in borrowings under
line-of-credit agreements, approximately $338,000 from sales of
marketable securities, $269,000 from sales of real estate and
$11,054,000 in real estate contract collections. The primary uses of
funds were approximately $620,000 for property improvements,
approximately $13,645,000 for investments in contracts and loans
receivable, approximately $1,715,000 for net debt reduction and
approximately $231,000 in purchase and redemption of common and
preferred stock.
The Company anticipates that cash flows from operations, and the
availability of funds under its lines-of-credit and other banking
agreements totalling $19,245,000, of which $12,100,930 was outstanding
at April 30, 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, to improve property held for sale and development and to
originate interim and construction loans.
Results of Operations
The Company's net loss for the quarter ended April 30, 1999 was
approximately $16,000 compared with a net loss of approximately
$308,000 for the quarter ended April 30, 1998. Income from continuing
operations before tax was approximately $132,000 in 1999 compared with
a loss of $465,000 in 1998, an improvement of approximately $597,000.
The improvement was primarily attributable to a $249,000 gain on sale
of marketable securities which had previously been written off due to
the investee's bankruptcy proceedings in 1992, an increase of
approximately $70,000 in net interest income, non-recurrence of a
$263,000 loss on sale of real estate in 1998 and an increase of
$108,000 in other income, primarily loan fees. General and
administrative expense increased by $93,000, partially offsetting the
improvement.
Rental income increased by approximately $10,000 (1.8%) to
approximately $573,000 in the quarter ended April 30, 1999 from
approximately $563,000 in 1998. This increase primarily resulted from
higher occupancy levels in office buildings.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations, Continued
Rental property expenses were approximately $3,000 (0.5%) lower in
1999 than for the comparable three months in 1998. This decrease was
due to decreased interest expense of $7,224 (7.5%) and operating
expense of $2,650 (1.0%), which more than offset increased
depreciation of $7,235 (4.5%).
Salaries and commissions were $11,755 (7.0%) higher in the quarter
ended April 30, 1999 than for the comparable three months in 1998,
primarily because of additional personnel expense for Cornerstone
Realty Advisors, the Company's subsidiary, which originates commercial
real estate loans and began operations in March 1998.
Interest income and amortized discount increased approximately
$247,000 (71.6%) for the three months ended April 30, 1999 compared
with the similar period in 1998 as 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
$178,000 (61.0%) in the third 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 (Nine Months)
The Company's net income for the nine months ended April 30, 1999 was
approximately $32,000 compared with a net loss of approximately
$720,000 for the nine months ended April 30, 1998. Income from
continuing operations before tax was approximately $396,000 in 1999
compared with a loss of $932,000 in 1998, an improvement of
approximately $1,328,000. The increase was primarily attributable to
a $279,000 gain on sale of marketable securities, an increase of
approximately $102,000 in net interest income, an increase of
approximately $560,000 in gain on sales of real estate and an increase
of approximately $307,000 in other income, primarily loan fees.
General and administrative expense was also reduced by approximately
$173,000, primarily due to a reduction in legal fees.
Rental income decreased by $4,578 (0.2%) to approximately $1,678,000
in the nine months ended April 30, 1999 from approximately $1,682,000
in 1998. This primarily resulted from reduced rents due to lower
occupancy levels in a multifamily apartment building being renovated.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations (Nine Months), Continued
Rental property expenses were $4,689 (0.3%) lower in 1999 than for the
comparable nine months in 1998. This resulted from decreased
operating expense of $23,378 (2.9%) and interest expense of $3,837
(1.3%), which more than offset an increase in depreciation of $22,526
(4.8%).
Interest income and amortized discount was $633,049 (97.9%) more for
the nine months ended April 30, 1999 compared with the similar period
in 1998 as the average outstanding balance in contracts and loans
receivable increased during the period, primarily due to new loans
originated by Cornerstone Realty Advisors.
Salaries and commissions were $87,712 (18.1%) higher in the nine
months ended April 30, 1999 than for the comparable nine 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 $525,781 (61.1%) 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 29% in fiscal 1998.
New Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information," was issued. SFAS 131 establishes standards for the way
that public business enterprises report information about operating
segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas
and major customers. This Statement is effective for financial
statements for fiscal year reporting beginning after December 15,
1997. The Company has not yet determined the effect that the
application of this Statement will have on its consolidated financial
statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK --
INAPPLICABLE.
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