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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGEACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-6673
PACIFIC SECURITY FINANCIAL, INC.
--------------------------------
(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 No.)
incorporation or organization)
10 North Post Street
325 Peyton Building
Spokane, Washington 99201 (509) 444-7700
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(Address of principal executive offices) (Registrant's telephone number,
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.
FORM 10-Q QUARTERLY REPORT
Table of Contents
_________________
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheet 1-2
Consolidated statement of operations 3
Consolidated statement of comprehensive income (loss) 4
Consolidated statement of cash flows 5-7
Notes to unaudited financial statements 8-9
Item 2. Management's discussion and analysis of financial
condition and results of operations
Financial condition and liquidity 10
Results of operations 11-12
Item 3. Qualitative and quantitative disclosures about
market risk 13
Item 5. Other information 13
Signatures 14
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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ASSETS
January 31, July 31,
2002 2001
---- ----
ASSETS
Cash and cash equivalents
Unrestricted $ 255,522 $ 619,642
Restricted -- 19,480
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255,522 639,122
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Receivables
Contracts, mortgages, finance notes, and loans receivable, net
Related parties 178,007 186,846
Unrelated 31,182,665 25,580,270
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31,360,672 25,767,116
Accrued interest 245,008 282,616
Other 43,602 121,319
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31,649,282 26,171,051
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Investment in rental properties, net 13,165,536 17,990,836
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Other investments
Property held for sale and development 3,305,656 3,635,184
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Other assets
Vehicles and equipment, net 75,437 62,732
Prepaid and other, net 186,766 251,053
Taxes -- 4,681
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262,203 318,466
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TOTAL ASSETS $48,638,199 $48,754,659
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1
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, July 31,
2002 2001
---- ----
LIABILITIES
Notes payable to banks $22,448,318 $23,487,255
Installment contracts, mortgage notes, and notes payable
Related parties 64,205 85,898
Unrelated 6,016,498 5,971,044
Debenture bonds 9,947,726 10,166,644
Accrued expenses and other liabilities
Related parties 131,124 153,078
Unrelated 646,674 782,798
Income taxes 319 --
Deferred income taxes 1,021,801 604,870
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40,276,665 41,251,587
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COMMITMENTS AND CONTINGENCIES (Note 2)
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, 1,104,116 and
1,110,385 shares 3,311,886 3,331,154
Class B, authorized 30,000 no par value shares; no shares
issued and outstanding -- --
Additional paid-in capital 1,830,941 1,830,941
Retained earnings 2,918,707 2,040,977
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Total stockholders' equity 8,361,534 7,503,072
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $48,638,199 $48,754,659
=========== ===========
See accompanying notes. 2
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
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Three Months Ended January 31, Six Months Ended January 31,
---------------------------- ---------------------------
2002 2001 2002 2001
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Income
Rental $ 334,941 $ 661,259 $ 927,406 $ 1,352,174
Interest, including loan fees of
$244,777 and $277,285
and $521,051 and $485,481 814,993 1,073,726 1,751,188 1,909,989
Gain (loss) on sale of real estate (155,769) (6,793) 1,989,818 (6,793)
Other, net 2,259 10,506 11,257 19,918
----------- ----------- ----------- -----------
996,424 1,738,698 4,679,669 3,275,288
----------- ----------- ----------- -----------
Expense
Rental operations
Depreciation and amortization 127,823 194,968 302,234 389,745
Interest 117,753 143,234 238,419 293,316
Other 168,127 259,696 403,620 518,753
----------- ----------- ----------- -----------
413,703 597,898 944,273 1,201,814
Interest, net of amount capitalized 496,809 695,141 1,039,166 1,272,414
Salaries and commissions 225,306 236,781 623,230 450,545
General and administrative 137,427 131,668 313,058 314,200
Depreciation and amortization 11,473 10,774 23,075 21,299
Provision for loan loss 82,207 -- 379,207 --
----------- ----------- ----------- -----------
1,366,925 1,672,262 3,322,009 3,260,272
----------- ----------- ----------- -----------
Income (loss) before income
tax (benefit) provision (370,501) 66,436 1,357,660 15,016
Income tax (benefit) provision (125,644) 22,589 461,931 5,106
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (244,857) $ 43,847 $ 895,729 $ 9,910
=========== =========== =========== ===========
Net income per common share
basis and diluted $ (0.22) $ 0.04 $ 0.81 $ 0.01
=========== =========== =========== ===========
Weighted-average common shares
outstanding basic and diluted 1,104,096 1,135,812 1,105,336 1,136,953
=========== =========== =========== ===========
3
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
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Three Months Ended January 31, Six Months Ended January 31,
---------------------------- ---------------------------
2002 2001 2002 2001
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Net income (loss) $ (244,857) $ 43,847 $ 895,729 $ 9,910
----------- ----------- ----------- -----------
Other comprehensive income
(loss) before income taxes (244,857) 43,847 895,729 9,910
----------- ----------- ----------- -----------
COMPREHENSIVE
INCOME (LOSS) $ (244,857) $ 43,847 $ 895,729 $ 9,910
=========== =========== =========== ===========
See accompanying notes. 4
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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Six Months Ended January 31,
------------------------------
2002 2001
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from rentals and other $ 1,079,101 $ 1,330,765
Interest received 1,788,796 1,837,353
Cash paid to suppliers and employees (1,395,701) (1,311,716)
Interest paid, net of amounts capitalized (1,065,574) (1,224,029)
Income taxes paid (40,000) (270,000)
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Net cash provided (used) by operating activities 366,622 362,373
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities -- 41,724
Proceeds from sales of real estate and fixed assets 520,216 61,437
Collections on contracts, mortgages, finance notes, and loans
receivable 8,784,851 4,792,010
Investment in contracts, mortgages, notes, and loans
receivable (8,018,334) (11,979,423)
Additions to rental properties, property held for sale, property
under development, vehicles, and equipment (439,816) (997,970)
Change in restricted investments and cash equivalents (19,480) (369)
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Net cash provided (used) by investing activities 827,437 (8,082,591)
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5
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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Six Months Ended January 31,
----------------------------
2002 2001
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreements $(1,043,870) $ 8,040,720
Proceeds from installment contracts, mortgage notes,
and notes payable 200,000 910,013
Payments on installment contracts, mortgage notes,
and notes payable (176,239) (910,422)
Proceeds from sales of debenture bonds 22,800 112,447
Redemption of debenture bonds (543,081) (330,390)
Purchase and retirement of common stock (19,269) (29,340)
Payment of dividends on preferred stock (18,000) (18,000)
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Net cash provided (used) by financing activities (1,577,659) 7,775,028
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NET CHANGE IN CASH AND CASH EQUIVALENTS (383,600) 54,810
Cash and cash equivalents, beginning of year 639,122 442,208
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Cash and cash equivalents, end of year $ 255,522 $ 497,018
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6
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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Six Months Ended January 31,
----------------------------
2002 2001
----------------------------
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 895,730 $ 9,910
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 325,309 411,044
Deferred income tax benefit 416,931 (41,700)
Deferred financing income realized -- (6,920)
Interest accrued on debenture bonds 301,363 279,079
(Gain) loss on sales of real estate (1,989,818) 6,793
Provision for loan loss 379,207 --
Change in assets and liabilities:
Accrued interest receivable 37,608 (65,715)
Prepaid expenses 57,787 (9,346)
Accrued expense (139,145) 35,038
Income taxes (receivable) payable 5,000 (223,194)
Other, net 82,651 (32,616)
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 372,623 $ 362,373
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Company financed sale of property $ 6,679,280 $ --
=========== ===========
Property held for sale and development acquired in satisfaction
for defaulted loan receivable $ -- $ 1,065,804
=========== ===========
Impairment of real estate owned against provision for
loan loss $ 60,000 $ --
=========== ===========
See accompanying notes. 7
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PACIFIC SECURITY FINANCIAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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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, 2001, filed
with the Securities and Exchange Commission.
The results of operations for the six months ended January 31, 2002, are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - BUSINESS SEGMENT REPORTING
Information about the Company's separate continuing business segments as of and
for the six months ended January 31, 2002 and 2001, is as follows:
Real Estate,
Commercial Rental, and
Lending Receivables
Operations Operations Total
------------------------------------------------------------
2002
Revenue $ 1,494,316 $ 3,185,353 $ 4,679,669
Income from operations 306,390 1,051,270 1,357,660
Identifiable assets, net 22,113,353 26,524,846 48,638,199
Depreciation and amortization 2,485 322,824 325,309
Capital expenditures 40,414 399,402 439,816
2001
Revenue $ 1,712,934 $ 1,562,354 $ 3,275,288
Income from operations 544,495 (529,479) 15,016
Identifiable assets, net 23,308,591 24,941,965 48,250,556
Depreciation and amortization 1,376 409,668 411,044
Capital expenditures 10,655 987,315 997,970
8
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PACIFIC SECURITY FINANCIAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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NOTE 2 - BUSINESS SEGMENT REPORTING (CONTINUED)
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.
9
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY:
At January 31, 2002, the Company had total stockholders' equity of approximately
$8,362,000 and a total liabilities to equity ratio of 4.8 to 1, which decreased
from 5.5 to 1 at July 31, 2001. During the quarter, the Company's primary
sources of funds were approximately $8,785,000 in real estate contract and loan
collections, $520,000 in net proceeds from the sales of real estate, and
approximately $366,000 from operating activities. The primary uses of funds were
approximately $8,018,000 for investments in contracts and loans receivable,
approximately $1,540,000 for net debt reduction, and $440,000 for property
improvements.
The Company's sources of liquidity traditionally have included the issuance of
debentures under the auspices of the Washington State Securities Division of the
Department of Financial Institutions and borrowings from various bank lenders.
These sources of liquidity are limited either by the Washington State Securities
Division who has capped the amount of debentures the Company may sell or by the
individual banks through debt equity ratio covenants included in the lines of
credit loan agreements.
An additional source of liquidity is the sale of participation interests in
certain loans originated by the Company. The total of these non-recourse
participations was $4,720,000 at January 31, 2002, and $6,686,000 at July 31,
2001.
At January 31, 2002, available funds under its lines of credit and other banking
agreements totaled $25,052,000 of which $22,448,318 was outstanding. The
remaining unused portions of the lines of credit are fully available to the
Company to meet operational needs. Additionally, the Company anticipates that
cash flows from operations will be sufficient to provide for the retirement of
maturing debentures and mortgage obligations.
10
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS (THREE MONTHS):
The Company's net loss for the quarter ended January 31, 2002, was approximately
$245,000 compared with net income of approximately $44,000 for the quarter ended
January 31, 2001. The change was primarily attributable to a $156,000 pre-tax
loss on sales of real estate in the quarter ended January 31, 2002, an increase
of $82,000 in the provision for loan losses, and a reduction of $142,000 in net
rental income.
Rental income decreased by approximately $326,000 (49.3%) to approximately
$335,000 in the quarter ended January 31, 2002, from approximately $661,000 in
2001. This decrease primarily resulted from reduced rents from properties sold
during the year and increased vacancies.
Rental property expenses were approximately $184,000 (30.8%) lower in 2002 than
for the comparable six months in 2001. This decrease was due to decreased
interest expense of $25,481 (17.7%), decreased operating expense of $91,569
(35.2%), and decreased depreciation of $67,145 (34.4%).
Salaries and commissions were approximately $11,000 (4.6%) lower for the quarter
ended January 31, 2002, than the comparable three months in 2001 due to lower
commissions paid in 2002.
Interest income and amortized discount decreased approximately $259,000 (24.0%)
for the three months ended January 31, 2002, compared with the similar period in
2001 as the variable interest rate on contracts and loans receivable decreased
during the period and interest on some past due loans went to nonaccrual status.
General and administrative expense increased approximately $6,000 (4.6%) for the
three months ended January 31, 2002, compared with the same period in 2001.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, decreased approximately $198,000 (28.5%)
in the first quarter of 2002 compared with the same 2001 period primarily due to
the decrease in the rate of interest charged on bank borrowings tied to prime.
The Company's effective income tax rate as a percentage of income (loss) before
federal income tax was approximately 34.0% in 2002 and 2001.
RESULTS OF OPERATIONS (SIX MONTHS):
The Company's net income for the six months ended January 31, 2002, was
approximately $896,000 compared with net income of approximately $10,000 for the
six months ended January 31, 2001. The increase was primarily attributable to
approximately $1,990,000 in gain on sales of real estate in 2002 compared to a
loss of $7,000 in 2001, which was partially offset by a decrease of $167,000 in
net rental income and increase of $379,000 in the provision for loan losses.
11
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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Rental income decreased approximately $425,000 (31.4%) in the six months ended
January 31, 2002, from 2001. This primarily resulted from decreased rents due to
sales of rental properties, including an apartment complex and an office
building in October 2001.
Rental property expense was approximately $258,000 (21.4%) lower in 2002 than
for the comparable six months in 2001. This resulted from decreased operating
expense of $115,133 (22.1%), decreased interest expense of $54,897 (18.7%), and
a decrease in depreciation of $87,511 (22.4%).
Interest income and amortized discount was approximately $159,000 (8.3%) less
for the six months ended January 31, 2002, compared with the similar period in
2001 as interest earned on the average outstanding balance in contracts and
notes receivable decreased during the period, primarily due to lower interest
rates and fewer new loans originated by Cornerstone Realty Advisors.
Salaries and commissions were approximately $173,000 (38.4%) higher in the six
months ended January 31, 2002, than for the comparable six months in 2001,
primarily because of bonuses paid to Company officers in the current fiscal
year.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was approximately $233,000 (18.3%) less
in 2002 than in 2001 primarily due to a decrease in interest rates on borrowings
tied to bank prime rates.
The Company's effective income tax rate as a percentage of income before federal
income tax was approximately 34.0% in 2002 and 2001.
12
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PACIFIC SECURITY FINANCIAL, INC.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there has been a material change in its market
risk since the end of its last fiscal year.
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4, AND 6 - NOT APPLICABLE
ITEM 5. OTHER INFORMATION
At a special meeting of the Board of Directors on March 7, 2002, David L.
Guthrie was elected Chairman of the Board, replacing Wayne E. Guthrie who
retained the title Chairman of the Board Emeritus.
13
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PACIFIC SECURITY FINANCIAL, INC.
SIGNATURES
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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
- ---------------------------------
David L. Guthrie
President/Chief Executive Officer
March 15, 2002
/s/ Donald J. Migliuri
- ---------------------------------
Donald J. Migliuri
Secretary-Treasurer
March 15, 2002
14
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