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, 2003
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 0-6673
PACIFIC SECURITY FINANCIAL, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0669906
- ---------------------------------------- ------------------------------------
(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
- ---------------------------------------- ------------------------------------
(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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X ] No
1,080,615 shares of common stock, par value $3.00 per share, were outstanding on
June 6, 2003.
PACIFIC SECURITY FINANCIAL, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
-----------------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
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 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial condition and liquidity 12-13
Results of operations 14-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 17
part ii. Other information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20-24
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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ASSETS
April 30, July 31,
2003 2002
(Unaudited) (Audited)
------------ ------------
ASSETS
Cash and cash equivalents $ 944,793 $ 367,469
------------ ------------
Receivables
Contracts, mortgages, finance notes, and loans receivable, net
Related parties -- 166,182
Unrelated 12,168,927 25,871,569
Less allowance for loan losses (1,054,593) (585,855)
------------ ------------
11,114,334 25,451,896
Accrued interest 55,752 208,612
Other 233,295 251,639
------------ ------------
11,403,381 25,912,147
------------ ------------
Investment in rental properties, net 11,322,650 12,811,852
------------ ------------
Other investments
Property held for sale and development 3,046,066 4,399,921
------------ ------------
Other assets
Vehicles and equipment, net 81,842 78,553
Prepaid and other, net 178,285 234,410
Federal income tax refund receivable -- 647,273
------------ ------------
260,127 960,236
------------ ------------
TOTAL ASSETS $ 26,977,017 $ 44,451,625
============ ============
See accompanying notes. 1
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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LIABILITIES AND STOCKHOLDERS' EQUITY
April 30, July 31,
2003 2002
(Unaudited) (Audited)
----------- -----------
LIABILITIES
Notes payable to banks $ 5,550,226 $16,438,964
Installment contracts, mortgage notes, and notes payable
Related parties -- 28,158
Unrelated 6,410,914 8,636,785
Debenture bonds 8,633,962 9,996,954
Accrued expenses and other liabilities
Related parties 114,725 144,928
Unrelated 600,328 896,541
Deferred income taxes 191,191 1,096,699
----------- -----------
21,501,346 37,239,029
----------- -----------
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, 1,081,027 and
1,084,289 shares 3,243,081 3,252,866
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 101,649 1,828,789
----------- -----------
Total stockholders' equity 5,475,671 7,212,596
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,977,017 $44,451,625
=========== ===========
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 April 30, Nine Months Ended April 30,
---------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Income
Rental $ 354,119 $ 307,407 $ 1,062,160 $ 1,234,813
Interest, including loan fees of
$60,850 and $140,726
and $194,967 and $661,777 288,611 680,397 1,213,155 2,431,585
Gain (loss) on sale of real estate (179,156) (75,238) (206,126) 1,914,580
Other, net 2,905 4,871 22,384 16,128
----------- ----------- ----------- -----------
466,479 917,437 2,091,573 5,597,106
----------- ----------- ----------- -----------
Expense
Rental operations
Depreciation and amortization 115,650 116,273 360,053 418,507
Interest 64,377 93,507 236,998 331,926
Other 192,016 151,064 524,125 554,684
----------- ----------- ----------- -----------
372,043 360,844 1,121,176 1,305,117
Interest, net of amount capitalized 313,654 481,373 1,202,388 1,520,539
Salaries and commissions 366,656 215,475 895,485 838,705
General and administrative 86,634 167,236 581,017 480,294
Depreciation and amortization 7,017 11,998 31,448 35,073
Contract discount 318,066 -- 318,066 --
Provision for loan loss -- 351,152 558,872 730,359
----------- ----------- ----------- -----------
1,464,070 1,588,078 4,708,452 4,910,087
----------- ----------- ----------- -----------
Income (loss) before income
tax (benefit) provision (997,591) (670,641) (2,616,879) 687,019
Income tax (benefit) provision (339,181) (228,345) (889,739) 233,586
----------- ----------- ----------- -----------
NET INCOME (LOSS) (658,410) (442,296) (1,727,140) 453,433
Less preferred stock dividends -- -- (18,000) (18,000)
----------- ----------- ----------- -----------
Income (loss) available to
common stockholders $ (658,410) $ (442,296) $(1,745,140) $ 435,433
=========== =========== =========== ===========
Net income (loss) per common
share basic and diluted $ (0.61) $ (0.40) $ (1.61) $ 0.41
=========== =========== =========== ===========
Weighted-average common shares
outstanding basic and diluted 1,082,216 1,100,791 1,083,019 1,103,821
=========== =========== =========== ===========
See accompanying notes. 3
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
- --------------------------------------------------------------------------------
Three Months Ended April 30, Nine Months Ended April 30,
---------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) $ (658,410) $ (442,296) $(1,727,140) $ 453,433
Other comprehensive income
(loss) before income taxes -- -- -- --
----------- ----------- ----------- -----------
COMPREHENSIVE
INCOME (LOSS) $ (658,410) $ (442,296) $(1,727,140) $ 453,433
=========== =========== =========== ===========
See accompanying notes. 4
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Nine Months Ended April 30,
-----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from rentals and other $ 1,148,598 $ 1,396,636
Interest received 1,366,015 2,500,942
Cash paid to suppliers and employees (2,629,678) (1,799,681)
Interest paid, net of amounts capitalized (1,099,425) (1,533,176)
Income taxes refunded (paid) 631,505 (60,000)
------------ ------------
Net cash provided (used) by operating activities (582,985) 504,721
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of real estate and fixed assets 3,714,314 1,295,952
Collections on contracts, mortgages, finance notes, and loans
receivable 15,289,383 11,818,670
Investment in contracts, mortgages, notes, and loans
receivable (1,740,821) (10,652,280)
Additions to rental properties, property held for sale, property
under development, vehicles, and equipment (1,170,692) (724,751)
Change in restricted investments -- (19,480)
------------ ------------
Net cash provided by investing activities 16,092,184 1,718,111
------------ ------------
See accompanying notes. 5
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Nine Months Ended April 30,
-----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreements $(10,888,738) $ (1,271,410)
Proceeds from installment contracts, mortgage notes,
and notes payable -- 200,000
Payments on installment contracts, mortgage notes,
and notes payable (2,254,030) (947,475)
Proceeds from sales of debenture bonds -- 31,009
Redemption of debenture bonds (1,761,322) (594,970)
Purchase and retirement of common stock (9,785) (75,879)
Payment of dividends on preferred stock (18,000) (18,000)
------------ ------------
Net cash used by financing activities (14,931,875) (2,676,725)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 577,324 (453,893)
Cash and cash equivalents, beginning of year 367,469 639,122
------------ ------------
Cash and cash equivalents, end of period $ 944,793 $ 185,229
============ ============
See accompanying notes. 6
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PACIFIC SECURITY FINANCIAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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Nine Months Ended April 30,
---------------------------
2003 2002
----------- -----------
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $(1,727,140) $ 453,433
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 391,501 434,830
Deferred income tax (benefit) expense (905,508) 168,586
Interest accrued on debenture bonds 398,330 412,343
(Gain) loss on sales of real estate 206,126 (1,914,581)
Provision for loan loss 468,738 730,359
Change in assets and liabilities:
Accrued interest receivable 152,860 69,357
Prepaid expenses 56,125 87,443
Accrued expense (289,634) (19,051)
Income taxes receivable 647,273 5,000
Other, net 18,344 77,002
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES $ (582,985) $ 504,721
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Company financed sale of property $ 929,739 $ 6,679,280
=========== ===========
Property held for sale and development acquired in satisfaction
for defaulted loan receivable $ 1,250,000 $ 58,080
=========== ===========
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, 2002, filed
with the Securities and Exchange Commission.
The results of operations for the nine months ended April 30, 2003, are not
necessarily indicative of the results to be expected for the full year.
CONTRACTS, MORTGAGES, FINANCE NOTES, AND LOANS RECEIVABLE:
The Company's contracts, finance notes, and loans receivable consist primarily
of short-term construction and real estate development loans. Contracts,
mortgages, finance notes, and loans receivable are stated at the unpaid
principal balance, plus accrued interest, less acquisition discounts, unearned
loan fees, and an allowance for estimated uncollectible amounts, as necessary.
Management evaluates receivables which may not be fully collectible to determine
if a provision for loss is necessary based on the present value of expected
future cash flows from the receivables in the ordinary course of business or
from amounts recoverable through foreclosures and the subsequent resale of the
collateral.
Contracts, mortgages, finance notes, and loans receivable are placed on
nonaccrual status when collection of principal or interest is considered
doubtful. Interest income previously accrued on these loans, but not yet
received, is reversed in the current period to the extent that it is considered
uncollectible. Interest subsequently recovered is credited to income in the
period collected.
8
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PACIFIC SECURITY FINANCIAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is based on management's evaluation of each
specific loan. A loan is considered impaired when, based on current information
such as adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, current economic conditions, and
independent appraisals, it is probable that the Company will be unable to
collect, on a timely basis, all principal and interest according to the
contractual terms of the loan's original agreement. The amount of the impairment
is measured using cash flows discounted at the loan's effective interest rate,
except when it is determined that the sole source of repayment for the loan is
the operation or liquidation of the underlying collateral. In such cases, the
current value of the collateral, reduced by anticipated selling costs, is used
in place of discounted cash flows. Generally, when a loan is deemed impaired,
current period interest previously accrued but not collected is reversed against
current period interest income. Income on such impaired loans is then recognized
only to the extent that cash in excess of any amounts charged off to the
allowance for loan losses is received and where the future collection of
principal is probable. Interest accruals are resumed on such loans only when
they are brought fully current with respect to interest and principal and when,
in the judgment of management, the loans are estimated to be fully collectible
as to both principal and interest.
Contracts, mortgages, finance notes, and loans receivable are charged off when
management believes there has been permanent impairment of their carrying
values.
SALES OF REAL ESTATE:
Profit on sale of real estate is recognized when the buyers' initial and
continuing investment is adequate to demonstrate (1) a commitment to fulfill the
terms of the transaction, (2) that collectibility of the remaining sales price
due is reasonably assured, and (3) the Company maintains no continuing
involvement or obligation in relation to the property sold and has transferred
all the risk and rewards of ownership to the buyer.
Receipts on sales of real estate investments are accounted for as customer
deposits until the principal payments received on the sales contracts exceed the
minimum guidelines for gain recognition. Losses arising from sales of real
estate are recognized immediately upon sale.
RECLASSIFICATIONS:
Certain reclassifications have been made in the prior period's financial
statements in order to conform with the current period financials. The
reclassifications had no effect on previously reported net income (loss) or
equity.
9
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PACIFIC SECURITY FINANCIAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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NOTE 2 - BUSINESS SEGMENT REPORTING
Information about the Company's separate continuing business segments as of and
for the nine months ended April 30, 2003 and 2002, is as follows:
Real Estate,
Commercial Rental, and
Lending Receivables
Operations Operations Total
------------ ------------ ------------
2003
Revenue $ 598,701 $ 1,492,872 $ 2,091,573
Loss from operations, before tax (benefit) (1,095,552) (1,521,327) (2,616,879)
Identifiable assets, net 8,348,880 18,628,137 26,977,017
Depreciation and amortization 3,664 387,837 391,501
Capital expenditures 2,382 1,168,310 1,170,692
2002
Revenue $ 2,007,034 $ 3,590,072 $ 5,597,106
Income from operations, before tax 44,114 642,905 687,019
Identifiable assets, net 22,433,863 24,645,702 47,079,565
Depreciation and amortization 3,727 449,853 453,580
Capital expenditures 40,414 684,337 724,751
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.
Management decided to dissolve its 100% owned subsidiary, Cornerstone Realty
Advisors, Inc., as of its corporation license expiration date of March 31, 2002.
Commercial lending activities are now being conducted through the parent
company.
10
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PACIFIC SECURITY FINANCIAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not expect SFAS No. 150 to have a material effect on its
financial position or results of operations.
NOTE 4 - SUBSEQUENT EVENT
Subsequent to April 30, 2003, the Company sold a rental property located in
Boise, Idaho, for approximately $1,024,000, resulting in a loss of approximately
$218,000. The net book value of this commercial building was approximately
$1,204,000.
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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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY:
At April 30, 2003, the Company had total stockholders' equity of approximately
$5,476,000 and a total liabilities to equity ratio of 3.93 to 1, which decreased
from 5.16 to 1 at July 31, 2002. During the fiscal year-to-date, the Company's
primary sources of funds were approximately $15,289,000 in real estate contract
and loan collections and $3,714,000 in net proceeds from the sales of real
estate. The primary uses of funds were approximately $14,904,000 for net debt
reduction, approximately $1,741,000 for investments in contracts and loans
receivable, $1,171,000 for property improvements, and $583,000 for operating
activities.
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 covenants included in the lines of credit loan
agreements.
An additional source of liquidity is the issuance of participation interests in
certain loans originated by the Company. The total of these non-recourse
participations was approximately $2,145,000 at April 30, 2003, and $3,495,000 at
July 31, 2002.
At April 30, 2003, the Company's outstanding banking agreements totaled
approximately $5,550,000 with an additional $6,411,000 due for installment
contracts, mortgage notes, and notes payable. During the quarter ended April 30,
2003, the Company induced a borrower with a discount of $318,000 (10%) on a
contract of approximately $3,181,000 to pay off and provide funds to pay off the
Company's bank line on March 3, 2003. The bank continues to work with the
Company on a loan that was paid down to $880,000 on March 3, 2003, and that is
collateralized by a Company loan to a borrower who filed for bankruptcy. The
bank has agreed to extend the loan for a period of six months to September 3,
2003, with interest only paid monthly. After six months the loan will be
evaluated based on market and other business conditions. Another financial
institution the Company has relied upon as a source of funding for its
commercial real estate loans has indicated they are terminating (nationally) all
or nearly all, commercial warehouse lines of credit. This financial institution
agreed to work with the Company to allow a current loan totaling approximately
$1,858,000 to pay off as it matured. The final payoff occurred in May 2003
subsequent to the quarter ended April 30, 2003. Management does not believe that
this line of credit can be quickly replaced by another lender. This will
materially impact the Company's liquidity and profitability. Due to the
restrictive banking agreements, the Company has essentially stopped making new
loans and has concentrated on collection efforts to pay down outstanding debt.
These collection efforts include foreclosure proceedings on several loans.
12
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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FINANCIAL CONDITION AND LIQUIDITY (CONTINUED):
The Company anticipates that cash flows from operations along with real estate
and receivable sales will be sufficient to provide for the retirement of
maturing debentures and mortgage obligations.
The Company has begun to implement strategies for restructuring, which include
liquidating a majority of the Company's assets over the course of the next year.
The Company has reduced personnel during the year, incurring restructuring
charges exceeding $300,000 for severance payments and employment contracts for
seven employees. Six employees have continued to work for the Company after the
April 30, 2003, employment contract ending date. It is management's intention
that the Company will continue to own and invest in commercial real estate upon
completion of the restructuring, at which time management intends to evaluate
the opportunities to continue financing commercial real estate in light of
market conditions and available capital.
The Company's management is continuously evaluating loans for collectibility.
Additional provisions for loan losses may be required as the Company analyzes
each loan during its efforts to reduce outstanding loans receivable. Litigation
may be required in the course of collection. In addition, the Company's position
relative to bankruptcy filings by borrowers must be assessed.
No additional provision for loan loss was made during the quarter ending April
30, 2003. The allowance for loan loss includes a 100% allowance on a Bellevue,
Washington, loan of approximately $669,000. The Bellevue loan borrower filed for
bankruptcy protection on June 6, 2002. A judgment has been sought for the
balance owed.
The borrower on a Park City, Utah, loan filed for bankruptcy protection on May
1, 2002. The Company's principal portion of this loan totaled $1,250,000 and is
expected to be recovered through the sale of the foreclosed property that was
acquired through a trustee's sale after the bankruptcy stay was lifted in
December 2002.
The Company was stayed in foreclosure proceedings on three Eagle, Idaho loans
when the borrower filed for bankruptcy protection on December 19, 2002. A total
allowance for loan loss of $269,000 has been provided against loans receivable
totaling approximately $2,460,000. A trustee's sale has been scheduled for June
12, 2003, and the Company is negotiating with the borrower and other interested
parties.
On a Kirkland, Washington, loan of approximately $140,000, the allowance for
loan loss is $100,000. The borrower was forced into involuntary bankruptcy by
unsecured creditors. A trustee's sale of the property scheduled for May 9, 2003,
was postponed. The Company is currently assessing its potential for recovery.
The borrower on two loans totaling approximately $995,000 filed for bankruptcy
in March 2003. The loans are collateralized by eight lots, including one
partially finished house and eleven acres of land in Oakland Hills, California.
The Company is currently assessing its potential for recovery and has made no
provision for loan loss on these loans.
13
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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 April 30, 2003, was approximately
$658,000 compared with a net loss of approximately $442,000 for the quarter
ended April 30, 2002. The change was primarily attributable to a reduction of
$224,000 in net interest income, an increase of $318,000 in contract discount
expense, an increase of $151,000 in salaries and commission, and a $104,000
increase in pre-tax loss on sales of real estate offset by a decrease of
$351,000 in the provision for loan losses, a decrease of $81,000 in general and
administrative expense, an increase of $36,000 in net rental income, and an
increase of $111,000 in income tax benefit in the quarter ended April 30, 2003,
compared with the similar period in 2002.
Rental revenue increased by approximately $47,000 (15%) to approximately
$354,000 in the quarter ended April 30, 2003, from approximately $307,000 in
2002. This increase primarily resulted from increased rents from new tenants in
the Peyton and Pier 1 Buildings offsetting reduced rents from properties sold
during the prior year.
Rental property expenses were approximately $11,000 (3%) higher in 2003 than for
the comparable three months in 2002. This increase was due to increased
operating expense of $41,000 (27%) primarily due to new parking garage charges
that more than offset decreased interest expense of $29,000 (31%) and decreased
depreciation of $1,000 (1%).
Salaries and commissions were approximately $151,000 (70%) higher for the
quarter ended April 30, 2003, than the comparable three months in 2002 due to
one-time payments of approximately $231,000, made under employment contracts to
employees as part of restructuring charges. These one-time charges, a portion of
which was previously accrued as restructuring charges in general and
administrative expense, more than offset the costs saved by reducing personnel
during the quarter.
Interest income, including loan fees, decreased approximately $392,000 (58%) for
the three months ended April 30, 2003, compared with the similar period in 2002
as the variable interest rate on contracts and loans receivable decreased during
the period and the total amount of receivables declined. Loan fees declined
approximately $80,000 (57%) to $61,000 from $141,000 because of a lack of new
loan originations.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, decreased approximately $168,000 (35%)
in the third quarter of 2003 compared with the same 2002 period primarily due to
a reduction in interest-bearing debt.
General and administrative expense decreased approximately $81,000 (48%) for the
three months ended April 30, 2003, compared with the same period in 2002,
primarily because some previously accrued restructuring charges were reversed
and paid as salaries and commissions.
The contract discount of $318,000 was provided to a borrower to induce the
payoff of a $3,181,000 contract receivable.
14
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (THREE MONTHS) (CONTINUED):
No provision for loan loss was made in the quarter ended April 30, 2003,
compared with $351,000 provided in the same period in 2002 as management
determined the existing allowance was adequate.
The Company's effective income tax rate as a percentage of income (loss) before
federal income tax was approximately 34.0% in 2003 and 2002.
RESULTS OF OPERATIONS (NINE MONTHS):
The Company's net loss for the nine months ended April 30, 2003, was
approximately $1,727,000 compared with net income of approximately $453,000 for
the nine months ended April 30, 2002. The decrease was primarily attributable to
approximately $2,121,000 in pre-tax reduction in gain on sales of real estate in
2003 compared to 2002, a decrease of $900,000 in net interest income, an
increase of $318,000 in contract discount expense, an increase of $101,000 in
general and administrative expenses offset by a decrease of $171,000 in the
provision for loan losses.
Rental revenue decreased approximately $173,000 (14%) in the nine months ended
April 30, 2003, compared to the nine months ended April 30, 2002. 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 $184,000 (14%) lower in 2003 than for
the comparable nine months in 2002. This resulted from decreased operating
expense of approximately $31,000 (6%), decreased interest expense of $95,000
(29%), and a decrease in depreciation of $58,000 (14%).
Interest income, including loan fees, was approximately $1,218,000 (50%) less
for the nine months ended April 30, 2003, compared with the similar period in
2002 as interest earned on the average outstanding balance in contracts and
notes receivable decreased during the period. Loan fees declined approximately
$467,000 (70%) primarily due to a lack of new loans originated by the Company.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was approximately $318,000 (21%) less in
2003 than in 2002 primarily due to a reduction in outstanding debt and a
decrease in interest rates on borrowings tied to bank prime rates.
Salaries and commissions were approximately $57,000 (7%) higher in the nine
months ended April 30, 2003, than for the comparable nine months in 2002,
primarily because one-time restructuring expenses for severance payments and
employment contracts for certain employees were incurred in 2003 and more than
offset the costs saved by reducing personnel.
15
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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 (NINE MONTHS) (CONTINUED):
General and administrative expense increased approximately $101,000 (21%) in the
nine months ended April 30, 2003, compared with the similar period in 2002
primarily because of increases in legal fees and real estate taxes.
The contract discount of $318,000 was provided to a borrower to induce the
payoff of a $3,181,000 contract receivable.
The provision for loan loss was approximately $171,000 (23%) less in 2003 than
2002 as the Company continued to aggressively pursue legal remedies (including
foreclosure actions) to collect outstanding receivables.
The Company's effective income tax rate as a percentage of income before federal
income tax was approximately 34.0% in 2003 and 2002 resulting in a tax benefit
of approximately $890,000 in 2003 compared with an expense of approximately
$234,000 in 2002.
16
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PACIFIC SECURITY FINANCIAL, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 3. QUANTITATIVE AND QUALITATIVE 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and principal financial officer have
evaluated the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days
of the filing date of this quarterly report on Form 10-Q. Based on that
evaluation, these officers concluded that the design and operation of the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not engaged in any legal proceeding of a material nature at
April 30, 2003. From time to time, the Company is a party to legal proceedings
in the ordinary course of business wherein it enforces its security interest in
loans.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Two Directors, Constance Guthrie and Jack Bury (replacing Wayne Guthrie), were
elected to the Board of Directors and Moss Adams LLP was approved as the
Company's outside independent auditor by a vote of the stockholders at the
annual meeting of stockholders on April 29, 2003.
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PACIFIC SECURITY FINANCIAL, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 -- Certification Pursuant to 18 U.S. C. ss. 1350
(b) Reports on Form 8-K
None
18
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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
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David L. Guthrie
President/Chief Executive Officer
June 11, 2003
/s/ Donald J. Migliuri
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Donald J. Migliuri
Secretary-Treasurer
June 11, 2003
19
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PACIFIC SECURITY FINANCIAL, INC.
CERTIFICATIONS
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I, David L. Guthrie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Security
Financial, Inc. (the Company);
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this report (the Evaluation Date); and
(c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's Board of Directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
20
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PACIFIC SECURITY FINANCIAL, INC.
CERTIFICATIONS
- --------------------------------------------------------------------------------
6. The registrant's other certifying officer and I have indicated in this
quarter report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: June 11, 2003
/s/ David L. Guthrie
- ---------------------------
David L. Guthrie, President
21
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PACIFIC SECURITY FINANCIAL, INC.
CERTIFICATIONS
- --------------------------------------------------------------------------------
I, Donald J. Migliuri, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Security
Financial, Inc. (the Company);
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this report (the Evaluation Date); and
(c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's Board of Directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
22
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PACIFIC SECURITY FINANCIAL, INC.
CERTIFICATIONS
- --------------------------------------------------------------------------------
6. The registrant's other certifying officer and I have indicated in this
quarter report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: June 11, 2003
/s/ Donald J. Migliuri
- -----------------------------
Donald J. Migliuri, Treasurer
23
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