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, 2004
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 COMPANIES, INC.
--------------------------------
(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 No.)
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)
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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
1,080,161 shares of common stock, par value $3.00 per share, were outstanding on
January 31, 2004.
PACIFIC SECURITY COMPANIES, 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 cash flows 4-6
Notes to unaudited financial statements 7-9
Item 2. Management's discussion and analysis of
financial condition and results of operations
Financial condition and liquidity 10-11
Results of operations 12-13
Item 3. Qualitative and Quantitative Disclosures about
Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 5. Other information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17-22
PACIFIC SECURITY COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
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ASSETS
JANUARY 31, July 31,
2004 2003
----------------------------
ASSETS
Cash and cash equivalents $ 865,793 $ 705,564
------------ ------------
Receivables
Contracts, mortgages, finance notes, and loans receivable 6,027,708 7,107,189
Less allowance for loan losses (379,552) (609,100)
------------ ------------
5,648,156 6,498,089
Accrued interest 39,935 42,790
Other 236,861 275,481
------------ ------------
5,924,952 6,816,360
------------ ------------
Investment in rental properties, net 8,788,808 11,344,735
Impairment on rental properties (643,680) (643,680)
------------ ------------
8,145,128 10,701,055
------------ ------------
Other investments
Property held for sale and development 4,700,740 4,367,608
------------ ------------
Other assets
Furniture and equipment, net 65,399 76,292
Prepaid and other, net 176,699 215,901
Deferred tax asset, net 550,625 284,834
Federal income tax refund receivable -- 54,204
------------ ------------
792,723 631,231
------------ ------------
TOTAL ASSETS $ 20,429,336 $ 23,221,818
------------ ------------
1
PACIFIC SECURITY COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
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LIABILITIES AND STOCKHOLDERS' EQUITY
JANUARY 31, July 31,
2004 2003
---------------------------
LIABILITIES
Notes payable to banks $ 3,592,500 $ 3,692,500
Installment contracts, mortgage notes, and notes payable 4,520,754 5,583,266
Debenture bonds 7,584,865 8,527,183
Accrued expenses and other liabilities
Related parties 95,597 100,933
Unrelated 725,766 873,546
------------ ------------
16,519,482 18,777,428
------------ ------------
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, 1,080,161 and
1,080,357 shares 3,240,482 3,241,070
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 (deficit) (1,461,569) (927,621)
------------ ------------
Total stockholders' equity 3,909,854 4,444,390
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,429,336 $ 23,221,818
------------ ------------
See accompanying notes. 2
PACIFIC SECURITY COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
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Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------
Income
Rental $ 275,381 $ 381,752 $ 622,517 $ 708,041
Interest, including loan fees of
$5,725 and $50,015
and $11,449 and $134,117 124,400 440,525 249,754 924,544
Gain (loss) on sale of real estate 417,320 (26,342) 415,896 (26,970)
Other, net 978 13,352 2,242 19,479
----------- ----------- ----------- -----------
818,079 809,287 1,290,409 1,625,094
----------- ----------- ----------- -----------
Expense
Rental operations
Depreciation and amortization 97,405 121,846 216,248 244,403
Interest 72,616 80,642 156,045 172,621
Other 230,813 169,625 396,298 332,109
----------- ----------- ----------- -----------
400,834 372,113 768,591 749,133
Interest, net of amount capitalized 239,148 425,529 479,796 888,734
Salaries and commissions 113,212 196,565 226,761 528,829
General and administrative 82,105 224,747 218,389 494,384
Depreciation and amortization 6,557 11,460 13,141 24,431
Provision for loan loss 40,000 423,819 365,470 558,872
----------- ----------- ----------- -----------
881,856 1,654,233 2,072,148 3,244,383
----------- ----------- ----------- -----------
Loss before income tax benefit (63,777) (844,946) (781,739) (1,619,289)
Income tax benefit (21,684) (287,281) (265,791) (550,558)
----------- ----------- ----------- -----------
NET LOSS (42,093) (557,665) (515,948) (1,068,731)
Less preferred stock dividends (18,000) -- (18,000) (18,000)
----------- ----------- ----------- -----------
Loss to common stockholders $ (60,093) $ (557,665) $ (533,948) $(1,086,731)
----------- ----------- ----------- -----------
Loss per common share basis
and diluted $ (0.06) $ (0.51) $ (0.49) $ (1.00)
----------- ----------- ----------- -----------
Weighted-average common shares
outstanding basic and diluted 1,080,161 1,083,222 1,080,210 1,083,421
----------- ----------- ----------- -----------
See accompanying notes. 3
PACIFIC SECURITY COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
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Six Months Ended January 31,
--------------------------
2004 2003
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from rentals and other $ 702,580 $ 854,708
Interest received 252,609 1,032,955
Cash paid to suppliers and employees (965,328) (1,479,572)
Interest paid, net of amounts capitalized (419,920) (847,990)
Income taxes refunded 54,204 631,505
----------- -----------
Net cash provided (used) by operating activities (375,855) 191,606
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of real estate and fixed assets 3,252,421 2,179,204
Collections on contracts, mortgages, finance notes,
and loans receivable 274,288 8,014,292
Investment in contracts, mortgages, notes, and loans
receivable (117,936) (1,617,330)
Additions to rental properties, property held for sale,
property under development, vehicles, and equipment (503,845) (844,890)
----------- -----------
Net cash provided by investing activities 2,904,928 7,731,276
----------- -----------
See accompanying notes. 4
PACIFIC SECURITY COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Six Months Ended January 31,
--------------------------
2004 2003
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreements $ (100,000) $(5,393,492)
Proceeds from installment contracts, mortgage notes,
and notes payable 1,000,000 --
Payments on installment contracts, mortgage notes,
and notes payable (2,062,512) (896,413)
Redemption of debenture bonds (1,187,744) (1,380,815)
Purchase and retirement of common stock (588) (3,319)
Payment of dividends on preferred stock (18,000) (18,000)
----------- -----------
Net cash used by financing activities (2,368,844) (7,692,039)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 160,229 230,843
Cash and cash equivalents, beginning of year 705,564 367,469
----------- -----------
Cash and cash equivalents, end of period $ 865,793 $ 598,312
----------- -----------
See accompanying notes. 5
PACIFIC SECURITY COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Six Months Ended January 31,
--------------------------
2004 2003
--------------------------
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ (515,948) $(1,068,731)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 229,389 268,834
Deferred income tax benefit (265,791) (566,327)
Interest accrued on debenture bonds 245,427 297,883
(Gain) loss on sales of real estate (415,896) 26,970
Provision for loan loss 365,470 558,872
Change in assets and liabilities:
Accrued interest receivable 2,855 108,410
Prepaid expenses 39,202 34,878
Accrued expense (153,386) (177,407)
Income taxes receivable 54,204 647,273
Other, net 38,619 60,951
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ (375,855) $ 191,606
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Company financed sale of property $ 71,600 $ 400,000
----------- -----------
Property held for sale and development acquired in
satisfaction for defaulted loan receivable $ 400,000 $ 1,250,000
----------- -----------
See accompanying notes. 6
PACIFIC SECURITY COMPANIES, 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
Companies, Inc. (formerly 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, 2003, filed
with the Securities and Exchange Commission. Assets are presented at the lower
of cost or fair value and liabilities are recorded that are expected to be
incurred as part of the liquidation of a majority of the Company's assets to
meet its current and long-term obligations.
The results of operations for the six months ended January 31, 2004, 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 seller financed real estate sales contracts 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.
7
PACIFIC SECURITY COMPANIES, 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.
8
PACIFIC SECURITY COMPANIES, 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 six months ended January 31, 2004 and 2003, is as follows:
Real Estate,
Commercial Rental, and
Lending Receivables
Operations Operations Total
------------ ------------ ------------
2004
Revenue $ 100,346 $ 522,171 $ 622,517
Loss from operations (603,970) (177,769) (781,739)
Identifiable assets, net 5,608,877 14,820,459 20,429,336
Depreciation and amortization 2,023 227,366 229,389
Capital expenditures -- 503,845 503,845
2003
Revenue $ 498,530 $ 1,126,564 $ 1,625,094
Loss from operations (843,424) (775,865) (1,619,289)
Identifiable assets, net 12,046,360 23,169,449 35,215,809
Depreciation and amortization 2,485 266,349 268,834
Capital expenditures 2,382 842,508 844,890
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
originated 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.
NOTE 3 - SUBSEQUENT EVENTS
Subsequent to the quarter ended January 31, 2004, the Company received a
$100,000 non-refundable deposit on the $1,370,000 sale of Cornerstone Office
Building #2 with an expected closing date of June 1, 2004.
The Company has also received an offer of approximately $6 million for the sale
of the Peyton Building which is subject to due diligence reviews.
9
PACIFIC SECURITY COMPANIES, 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, 2004, the Company had total stockholders' equity of approximately
$3,910,000 and a total liabilities to equity ratio of 4.22 to 1, which was the
same as July 31, 2003. During the six months ended January 31, 2004, the
Company's primary sources of funds were approximately $3,252,000 from the sales
of real estate, and $274,000 in real estate contract and loan collections. The
primary uses of funds were approximately $2,350,000 for net debt reduction, and
$504,000 for property improvements.
The Company's sources of liquidity historically 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, which has capped the amount of debentures the Company may sell or by
the individual banks through restrictive covenants included in the loan
agreements. The state of Washington has mandated as a condition for issuance of
a permit that the Company reduce total debentures outstanding by $500,000 to
$7,965,000 by August 29, 2004. The requirement to do so has materially impacted
the Company's liquidity.
An additional source of liquidity is the issuance of participation interests in
certain loans and contracts originated by the Company. The total of these
nonrecourse repurchasable participations was approximately $475,000 at January
31, 2004, and July 31, 2003.
At January 31, 2004, the Company's outstanding banking agreements totaled
approximately $3,592,000 with an additional $4,520,754 due for installment
contracts, mortgage notes, and notes payable. A bank continues to work with the
Company on a loan that was paid down to $780,000 on October 15, 2003, and that
is collateralized by a property in Eagle, Idaho, that was acquired through
foreclosure in June 2003. Subsequent to the fiscal year end on July 31, 2003,
the loan was evaluated based on market and other business conditions and the
maturity date was extended to June 1, 2004. The Company also obtained a six
month extension to July 31, 2004, on a $1,650,000 loan with undisbursed funds at
January 31, 2004, of $205,000 to be used to complete the construction of
Cornerstone Office Building #2. Management does not believe that a line of
credit can be quickly obtained from 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.
The Company anticipates, but there can be no assurance, 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.
10
PACIFIC SECURITY COMPANIES, 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 (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED):
The Company continues to implement strategies for reorganizing, which include
liquidating a majority of the Company's assets over the course of the next year.
The Company reduced personnel during the prior 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.
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,
approximately 27 acres of land, that was acquired through a trustee's sale after
the bankruptcy stay was lifted in December 2002. The Company has a sale pending
for approximately half of the property expected to close in May 2004 and the
remaining balance in 2005.
The Company completed foreclosure proceedings on three Eagle, Idaho, loans
totaling approximately $2,460,000 and obtained title to approximately 25 acres
of land in June 2003. The Company has negotiated a sale of approximately 75% of
this property pending and expects to close in March 2004.
The Company has provided an allowance for loan loss of $140,000 on a Kirkland,
Washington, loan of approximately $140,000. 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 assessed its potential for
recovery and provided $40,000 to the allowance for loan loss in the quarter
ended January 31, 2004.
The borrower on two loans totaling approximately $995,000 filed for bankruptcy
in March 2003. The loans were collateralized by eight lots, including one
partially finished house and eleven acres of land in Oakland Hills, California.
The Company acquired one lot valued at $400,000 at a Trustees sale on January
28, 2004, and wrote off the remaining $595,000 balance during the quarter ending
January 31, 2004.
11
PACIFIC SECURITY COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (THREE MONTHS):
The Company's net loss for the quarter ended January 31, 2004, was approximately
$42,000 compared with a net loss of approximately $558,000 for the quarter ended
January 31, 2003. The change was primarily attributable to a $444,000 increase
in gain on sales of real estate, a decrease of $186,000 in interest expense, a
decrease of $83,000 in salaries and commissions, and a decrease of $143,000 in
general and administrative expense and a decrease of $384,000 in the provision
for loan loss offset by a $316,000 reduction in interest income in the quarter
ended January 31, 2004, compared with the similar period in 2003.
Rental property revenue decreased by approximately $106,000 (28%) to
approximately $275,000 in the quarter ended January 31, 2004, from approximately
$381,000 in 2003. This decrease primarily resulted from decreased rents from
properties sold during the year.
Rental property expenses were approximately $29,000 (8%) higher in 2004 than for
the comparable three months in 2003. This increase was due to increased
operating expense of $61,000 (36%), offset by decreased interest expense of
$8,000 (10%) and decreased depreciation expense of $24,000 (20%).
Salaries and commissions were approximately $83,000 (42%) lower for the quarter
ended January 31, 2004, than the comparable three months in 2003 due to lower
commissions, severances, and bonuses paid or accrued in 2004.
Interest income, including loan fees, decreased approximately $316,000 (72%) for
the three months ended January 31, 2004, compared with the similar period in
2003 as the total amount of receivables declined. Loan fees declined
approximately $44,000 (89%) to $6,000 from $50,000 because of a lack of new loan
originations.
General and administrative expense decreased approximately $143,000 (64%) for
the three months ended January 31, 2004, compared with the same period in 2003,
primarily because of legal and foreclosure expense decreases of approximately
$17,000 for various matters and no restructuring expenses in 2004 compared with
approximately $91,000 in 2003.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, decreased approximately $186,000 (44%)
in the quarter ended January 31, 2004, compared with the same period in 2003
primarily due to the reduction in interest-bearing debt.
The Company's effective income tax rate as a percentage of loss before federal
income tax was approximately 34% in 2004 and 2003.
12
PACIFIC SECURITY COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (SIX MONTHS):
The Company's net loss for the six months ended January 31, 2004, was
approximately $516,000 compared with a net loss of approximately $1,069,000 for
the six months ended January 31, 2003. The decrease was primarily attributable
to approximately $443,000 in pre-tax increase in gain on sales of real estate in
2004 compared to 2003, a decrease of $266,000 in net interest income, a decrease
of $193,000 in the provision for loan losses, decrease of $276,000 in general
and administrative expenses and a decrease of $302,000 in salaries and
commissions offset by a $285,000 decrease in income tax benefit.
Rental revenue decreased approximately $86,000 (12%) in the six months ended
January 31, 2004, compared to the six months ended January 31, 2003. This
primarily resulted from decreased rents due to sales of rental properties,
including an office building in December 2003.
Rental property expense was approximately $19,000 (3%) higher in 2004 than for
the comparable six months in 2003. This resulted from increased operating
expense of approximately $64,000 (19%), decreased interest expense of $17,000
(10%), and a decrease in depreciation of $28,000 (12%).
Interest income, including loan fees, was approximately $675,000 (73%) less for
the six months ended January 31, 2004, compared with the similar period in 2003
as interest earned on the average outstanding balance in contracts and notes
receivable decreased during the period, primarily due to a lack of new loans
originated by the Company.
Salaries and commissions were approximately $302,000 (57%) lower in the six
months ended January 31, 2004, than for the comparable six months in 2003,
primarily because of a reduction in personnel. No restructuring expenses for
severance payments were incurred in 2004 compared with 2003 and were primarily
responsible for a decrease of approximately $276,000 in general and
administrative expenses.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was approximately $409,000 (46%) less in
2004 than in 2003 primarily due to a decrease in interest bearing debt.
The Company's effective income tax rate as a percentage of income before federal
income tax was approximately 34.0% in 2004 and 2003.
13
PACIFIC SECURITY COMPANIES, INC.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
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.
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
January 31, 2004. 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
Not applicable.
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ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 CEO Certification required under Section 302 of
Sarbanes-Oxley Act of 2002
Exhibit 31.2 CFO Certification required under Section 302 of
Sarbanes-Oxley Act of 2002
Exhibit 32.1 CEO Certifications required under Section 906 of
Sarbanes-Oxley Act of 2002
Exhibit 32.2 CFO Certifications required under Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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PACIFIC SECURITY COMPANIES, INC.
SIGNATURES
- --------------------------------------------------------------------------------
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, Inc.
/s/ David L. Guthrie
- ------------------------- President/Chief March 15, 2004
David L. Guthrie Executive Officer
/s/ Donald J. Migliuri
- ------------------------- Secretary-Treasurer/ March 15, 2004
Donald J. Migliuri Chief Financial Officer
16