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, 2000
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 O-6673
PACIFIC SECURITY FINANCIAL INC.
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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
incorporation or organization) Identification Number)
N. 10 Post Street
325 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
Pacific Security Financial Inc.
Consolidated Balance Sheets
October 31, July 31,
ASSETS 2000 2000
----------- -----------
Cash and cash equivalents:
Unrestricted $ 386,509 $ 442,208
Restricted 19,954 19,825
----------- -----------
406,463 462,033
----------- -----------
Receivables:
Contracts, mortgages, finance notes
and loans receivable, net:
Related parties 198,530 202,028
Unrelated 20,135,642 19,511,089
----------- -----------
20,334,172 19,713,117
Accrued interest 302,378 250,025
Other 175,339 60,549
----------- -----------
20,811,889 20,023,691
----------- -----------
Investment in rental properties, net 18,135,490 17,783,847
----------- -----------
Other investments:
Property held for sale and development 1,820,472 1,796,607
Marketable securities 41,724 41,724
----------- -----------
1,862,196 1,838,331
----------- -----------
Other assets:
Vehicles and equipment, net 69,520 63,340
Prepaid and other, net 213,112 245,153
----------- -----------
282,632 308,493
----------- -----------
Total assets $41,498,670 $40,416,395
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
2
Pacific Security Financial Inc.
Consolidated Balance Sheets, Continued
October 31, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 2000
----------- -----------
Liabilities:
Notes payable to banks $17,342,468 $15,715,057
----------- -----------
Installment contracts, mortgage notes
and notes payable:
Related parties 123,389 152,286
Unrelated 5,252,711 5,367,153
----------- -----------
5,376,100 5,519,439
----------- -----------
Debenture bonds 9,839,384 9,867,649
----------- -----------
Accrued expenses and other liabilities:
Related parties 134,424 106,097
Unrelated 721,972 819,287
----------- -----------
856,396 925,384
----------- -----------
Income taxes payable -- 241,511
Deferred income taxes 620,598 646,570
----------- -----------
Total liabilities 34,034,946 32,915,610
----------- -----------
Commitments and contingencies
The accompanying notes are an integral part of the consolidated
financial statements.
3
Pacific Security Financial Inc.
Consolidated Balance Sheets, Continued
LIABILITIES AND STOCKHOLDERS' October 31, July 31,
EQUITY, CONTINUED 2000 2000
----------- -----------
Stockholders' equity:
Preferred stock:
Class A preferred stock, $100 par
value; authorized 20,000 shares;
issued and outstanding, 3,000
shares $ 300,000 $ 300,000
Preferred stock, authorized
10,000,000 no par value shares;
no shares issued and outstanding -- --
Common stock:
Original class, authorized 2,500,000
no par value shares, $3 stated value;
issued and outstanding, 1,137,754
and 1,138,795 shares 3,413,261 3,416,386
Class B, authorized 30,000 no par
value shares; no shares issued and
outstanding -- --
Additional paid-in capital 1,822,203 1,822,203
Retained earnings 1,928,260 1,962,196
----------- -----------
Total stockholders' equity 7,463,724 7,500,785
----------- -----------
Total liabilities and stockholders'
equity $41,498,670 $40,416,395
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
Pacific Security Financial Inc.
Consolidated Statements of Operations
Three Months Ended
October 31,
---------------------------
2000 1999
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Income:
Rental $ 690,915 $ 552,788
Interest, including loan fees of $208,196
and $168,803 832,571 687,714
Amortization of discounts on real estate
contracts 3,692 4,596
Gain on sales of real estate -- 755,072
Gain on sales of securities -- 1,834
Other, net 9,412 6,003
----------- -----------
1,536,590 2,008,007
----------- -----------
Expenses:
Rental operations:
Depreciation and amortization 194,777 169,970
Interest 150,082 71,038
Other 259,057 252,113
----------- -----------
603,916 493,121
Interest, net of amount capitalized 577,273 511,751
Salaries and commissions 213,764 213,856
General and administrative 182,532 134,401
Depreciation and amortization 10,525 3,534
Provision for loan losses -- 50,025
----------- -----------
1,588,010 1,406,688
----------- -----------
Income (loss)
before federal income tax provision
(benefit) (51,420) 601,319
Federal income tax provision (benefit) (17,483) 201,779
----------- -----------
Net income (loss) (33,937) $ 399,540
=========== ===========
Loss per common share -- basic and diluted (.03) $ 0.35
=========== ===========
Weighted average common shares
outstanding -- basic and diluted 1,138,094 1,152,343
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
Pacific Security Financial Inc.
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended
October 31,
------------------------
2000 1999
--------- ---------
Net income (loss) $ (33,937) $ 399,540
Other comprehensive income (loss) before
income tax provision (benefit):
Changes in unrealized income (losses)
on marketable securities -- (579)
--------- ---------
Other comprehensive income (loss) before
income tax provision (benefit) (33,937) 398,961
Less deferred income tax provision(benefit) -- (197)
--------- ---------
Comprehensive income (loss) $ (33,937) $ 399,158
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
6
Pacific Security Financial Inc.
Consolidated Statements of Cash Flows
Three Months Ended
October 31,
--------------------------
2000 1999
----------- -----------
Cash flows from operating activities:
Cash received from rentals $ 611,329 $ 680,527
Interest received 780,218 523,914
Cash paid to suppliers and employees (735,681) (816,670)
Interest paid, net of amounts capitalized (569,009) (409,893)
Income taxes paid (250,000) (62,820)
----------- -----------
Net cash used in operating activities (163,143) (84,942)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of real estate -- 662,468
Proceeds from sales of marketable securities -- 252,476
Purchase of marketable securities -- (50,000)
Collections on contracts, mortgages, finance notes
and loans receivable 4,614,664 6,098,974
Origination of loans receivable and investment in
contracts, mortgages and finance notes receivable (5,232,028) (5,594,005)
Additions to rental properties, property held for sale,
property under development, vehicles and equipment (582,904) (187,429)
Change in restricted investments and cash equivalents (129) (1,260)
----------- -----------
Net cash provided by (used in) investing activities (1,200,397) 1,181,224
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit
agreements 1,627,411 (206,582)
Proceeds from issuance of installment contracts,
mortgage notes and notes payable 20,000 956,422
Payments on installment contracts, mortgage notes and
notes payable (163,339) (1,558,665)
Proceeds from sales of debenture bonds 51,467 87,077
Redemption of debenture bonds (206,573) (213,722)
Purchase and retirement of treasury stock (3,125) (849)
Payment of dividends on preferred stock (18,000) (18,000)
----------- -----------
Net cash provided by (used in) financing activities 1,307,841 (954,319)
----------- -----------
Net increase (decrease) in cash and cash equivalents (55,699) 141,963
Cash and cash equivalents, beginning of period 442,208 512,472
----------- -----------
Cash and cash equivalents, end of period $ 386,509 $ 654,435
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
7
Pacific Security Financial Inc.
Consolidated Statements of Cash Flows, Continued
Three Months Ended
October 31,
----------------------
2000 1999
--------- ---------
Reconciliation of net income (loss) to net cash provided
by (used in) operating activities:
Net income (loss) $ (33,937) $ 399,540
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 205,302 173,504
Deferred financing income realized (3,692) (4,596)
Interest accrued on debenture bonds 126,841 132,102
Gain on sales of real estate -- (755,071)
Gain on sales of marketable securities -- (1,834)
Provision for loan losses -- 50,025
Change in assets and liabilities:
Accrued interest receivable (52,353) 5,004
Prepaid expenses 25,792 30,208
Accrued expenses (50,988) (213,972)
Income taxes payable (267,483) 138,959
Other, net (112,625) (38,811)
--------- ---------
Net cash used in operating
activities (163,143) $ (84,942)
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
8
PACIFIC SECURITY FINANCIAL INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Pacific Security
Financial Inc. 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, 2000, filed
with the Securities and Exchange Commission.
The results of operations for the three months ended October 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999 and 2000 Statement of Financial Accounting Standards
No. 137, ""Accounting for Derivative Instruments and Hedging Activities
- --Deferral of effective Date of AFAS 133" ("SFAS No. 137") and Statement of
Financial Accounting Standards No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of AFAS 133" ("SFAS
No. 138") were issued. SFAS No. 137 amends SFAS No. 133 to become effective for
all quarters of fiscal years beginning after June 15, 2000. The implementation
of AFAS No. 133, as amended on August 1, 2000 had no effect on the Company's
financial statements.
9
NOTE 2. Business Segment Reporting:
Information about the Company's separate continuing business segments as of and
for the three months ended October 31, 2000 and 1999 is as follows:
Real Estate
Commercial Rental and
Lending Receivable
Operations Operations Total
---------- ---------- -----
2000:
Revenue $ 743,051 $ 793,539 $ 1,536,590
Income (loss) from operations
before tax 231,921 (283,341) (51,420)
Identifiable assets, net 17,516,295 23,982,375 41,498,670
Depreciation and
amortization 603 204,699 205,302
Capital expenditures 9,346 573,558 582,904
1999:
Revenue $ 527,848 $ 1,480,159 $ 2,008,007
Income (loss) from operations
before tax 124,964 476,355 601,319
Identifiable assets, net 12,873,272 27,543,123 40,416,395
Depreciation and
amortization 369 173,135 173,504
Capital expenditures -- 187,429 187,429
The Company has determined that its reportable business segments are those that
are based on its method of disaggregated internal reporting. The Company's
reportable business segments are its commercial loan origination business and
its rental and receivable operations. Its commercial loan origination business,
operated as Cornerstone Realty Advisors, Inc., originates commercial
construction loans throughout the western United States. The rental and
receivable operations represent the selling and leasing of real properties and
the financing of contracts and loans collateralized by real estate. Some
unallocated general corporate expense items are part of the rental and
receivable segment reporting.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At October 31, 2000, the Company had total stockholders' equity of approximately
$7,464,000 and a total liabilities to equity ratio of 4.56 to 1, which increased
from 4.39 to 1 at July 31, 2000. During the quarter, the Company's primary
sources of funds were approximately $1,647,000 from the issuance of notes
payable to banks and others, and $4,615,000 in real estate contract and loan
collections. The primary uses of funds were approximately $583,000 for property
improvements and additions, approximately $5,232,000 for investments in
contracts and loans receivable, approximately $318,000 for net debt reduction,
and $250,000 for income taxes paid.
The Company anticipates that cash flows from operations, and the availability of
funds under its lines-of-credit and other banking agreements totaling
$23,432,500 of which $17,342,468 was outstanding at October 31, 2000, 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.
10
Results of Operations
The Company's net loss for the quarter ended October 31, 2000 was approximately
$34,000 compared with net income of approximately $400,000 for the quarter ended
October 31, 1999. The change was primarily attributable to a $755,000 reduction
in gain on sale of real estate, which was partially offset by an increase of
approximately $79,000 in net interest income. The loss from operations before
tax without regard to real estate sales was approximately $51,000 in 2000
compared with approximately $154,000 in 1999, an improvement of approximately
$103,000.
Rental income increased by approximately $138,000 (25.0%) to approximately
$691,000 in the quarter ended October 31, 2000 from approximately $553,000 in
1999. This increase primarily resulted from rents received from two
newly-constructed commercial buildings in Boise, Idaho and from a
newly-constructed physical therapy building in Spokane.
Rental property expenses were approximately $111,000 (22.5%) higher in 2000 than
for the comparable three months in 1999. This increase was due to increased
interest expense of $79,044 (111.3%), operating expense of $6,944 (2.8%), and
depreciation of $24,807 (14.6%).
Salaries and commissions were approximately $214,000 for both the quarter ended
October 31, 2000 and the comparable three months in 1999. Interest income and
amortized discount increased approximately $144,000 (20.8%) for the three months
ended October 31, 2000 compared with the similar period in 1999 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.
General and administrative expense increased approximately $48,000 (35.8%) for
the three months ended October 31, 2000 compared with the comparable period in
1999 primarily because of expenses associated with the Company's move to new
offices and the expansion of lending activity through Cornerstone Realty
Advisors.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, increased approximately $66,000 (12.8%)
in the first quarter of 2000 compared with the comparable 1999 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 income (loss) before
federal income tax was approximately 34% in 2000 and 1999.
Part II. Other Information
Items 1, 2, 3, 4 and 5 -- Not applicable.
Item 5. Other Information
Item 6. EXHIBIT 27 - Financial Data Schedule
11
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 FINANCIAL INC.
/s/ David L. Guthrie
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David L. Guthrie
President/Chief Executive Officer
/s/ Donald J. Migliuri
- ---------------------------------
Donald J. Migliuri, Secretary/
Treasurer