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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------ ------
Commission file number 0-6673
PACIFIC SECURITY COMPANIES
--------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0669906
------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
N. 10 Post Street
525 Peyton Building
Spokane, Washington 99201
------------------------------ -------------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (509) 624-0183
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange on which
Title of each class registered
------------------------------- ------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value shares
(Title of class)
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.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
---
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant: There is no regular, established
market for trading in the Company's common stock. Therefore, the
aggregate market value of the voting stock held by nonaffiliates of the
registrant is not determinable.
On July 31, 1996, the registrant had outstanding 1,918,085 shares of
common stock, no par value ($3 stated value) and 10,400 shares of Class
A preferred stock, $100 par value.
Documents incorporated by reference: none.
Number of pages in this document is 47.
PACIFIC SECURITY COMPANIES
FORM 10-K ANNUAL REPORT
Table of Contents
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
PART I
----------------------------------------------------------------------
Item 1. Business
(a) Pacific Security Companies was merged into Security Savesco, Inc.
as of May 31, 1985. The name of Security Savesco, Inc. the
surviving corporation, was changed to Pacific Security Companies
as of the date of the merger.
Prior to the merger, both corporations were engaged principally
in real estate contract financing and owning, leasing and selling
real properties. The merged corporation has continued these
activities. Total assets of the registrant at July 31, 1996 and
1995 were $33,060,107 and $35,351,486, respectively, and real
estate contracts represent approximately 32% and 38% of the
respective asset totals. The Company began curtailing its
contract acquisitions and presently primarily originates
contracts to facilitate the sale of real estate held for sale or
development. Many of the contracts have fixed contractual
interest rates from 5.25% to 14.25% and there is no provision for
changing these rates to current market rates. However, for real
estate contracts purchased by the Company, most contracts have
been purchased at a discount from the contract balance which
increases the effective yield. Newer contracts bear interest
rates based on current market conditions. At July 31, 1996,
approximately $2,626,000 of real estate contracts provide for
variable interest rates. The total amount invested in real estate
contracts and mortgages of $10,492,944 as of July 31, 1996 is
$2,964,952 less than at the end of the prior year. The percentage
of contracts which were delinquent over 90 days was 1.0% as of
July 31, 1996 and 0.8% as of July 31, 1995. Management continues
to emphasize enforcement of the Company's credit and collection
policies.
In fiscal 1996, the Company continued to emphasize the
development of its rental properties and commenced new projects
primarily to improve the occupancy of its commercial buildings.
Correspondingly, the acquisition of additional real estate
contracts was minimal, other than for Company financed sales of
its real estate.
In fiscal 1996, the Company completed construction of Birdies
Golf Center (Birdies). The golf center features a 56-tee driving
range, a fully-lighted, contoured fairway with 5 target greens, a
pro shop, teaching studios and an 8,000-square-foot putting
green. Birdies serves as a practice and teaching center for all
levels of golfers and additionally sells golf clubs and related
golfing supplies. Birdies has been constructed on land held for
development by the Company since 1990. Costs incurred to
construct the facility, including land costs, were approximately
$2,197,000. See further information on this business segment in
Note 6 to the consolidated financial statements.
Additionally, in fiscal 1996, the Company continued developing
certain land for residential development. The Company has made
street improvements and began underground and power line utility
construction. The project, known as Tanglewood Ranch Park Estates
(Tanglewood) offers 21 ten-acre parcels suitable for home
construction. The Company anticipates marketing these parcels
extensively in the spring of 1997.
Investments in rental properties totaled $15,150,040 and
$15,647,591 as of July 31, 1996 and 1995, respectively. The
decrease is primarily the net result of increased additional
costs offset by depreciation and sales. Other real property held
for sale totaled $3,797,395 and $3,205,951 as of July 31, 1996
and 1995, respectively. These properties will be liquidated
and/or developed at such time as market conditions warrant, and
in the judgment of management, when the Company can maximize its
return. The Company will continue to invest in and hold real
property on a long-term basis. These properties may ultimately be
sold on an installment basis for tax purposes in order to
minimize and defer related income taxes and to conserve funds for
additional investment purposes. These plans may be modified as
the result of future changes to the Internal Revenue Code.
With the Company's continued emphasis on the development and
leasing of commercial real estate and multi-family housing,
rental income has increased from $2,653,958 in fiscal 1994 to
$2,714,563 in fiscal 1996. During the same period, interest
income, including the amortization of discounts on real estate
contracts, has declined from 35% of total income in fiscal 1994
to 26% of total income in fiscal 1996. The Company expects to
continue its emphasis on the development and leasing of
commercial real estate in fiscal 1997 along with the continued
operation of Birdies and marketing of the Tanglewood parcels.
There are no contractual commitments other than the remaining
remodeling costs associated with improvements for commercial
buildings. The Company's fiscal 1996 capital expenditures may
increase if demand for the rental of Company properties continues
or if the Company decides to further develop any of its
properties held for sale. A description of the Company's
significant properties is included in Item 2 Properties.
The Company's business is concentrated in financing real estate
contracts, developing real estate for sale or lease and the
operation of Birdies. The Company is in competition with
financial institutions who invest in real estate collateralized
contracts and commercial property owners located primarily in or
near Spokane, Washington. As of July 31, 1996, the Company
employed approximately 36 people on a full-time equivalent basis,
11 of whom are in its office at N. 10 Post Street in Spokane,
Washington.
Item 2. Properties
As of July 31, 1996, the Company owns the following properties. Some
of the properties are subject to real estate contracts or mortgages
that are collateralized by the property.
Properties Located in Spokane County, Washington:
July 31, 1996
----------------------------------------
Rental Net Mortgage
Date Development Carrying or Contract
Aquired Description of Propety Status Value Obligation
------- ------------------------------ ------------- ---------- -----------
Commercial:
1979 The Peyton Building at N. 10 Substantially $3,628,632 $ 932,928
Post Street contains approxi- Leased
mately 85,000 square feet of
rentable space. Substantial
improvements have been made to
the building since its acqui-
sition. Remodeling of this
office building continues as
new occupancy warrants. The
Company's offices are located
in this building.
1979 The Hutton Building at S. 10 Substantially $3,512,927
Washington contains approxi- Leased
mately 56,000 square feet of
rentable space. Substantial
improvements have been made to
the building since its acqui-
sition. Remodeling of this
building continues as new
occupancy warrants. The Company
also acquired two other build-
ings and 25,000 square feet for
parking near this building.
1987 Retail office building located Leased $ 221,592 $ 143,357
at E. 11128 Sprague Avenue.
The property is occupied by
four tenants.
1984 Bank Branch Building at W. 102 Leased $ 449,606 $ 651,453
Indiana Avenue is under a long-
term lease.
Various The Valley Mini-Storage complex Substantially $1,081,891 $ 344,288
which includes 560 storage Rented
units.
Properties Located in Spokane County, Washington, Continued:
July 31, 1996
----------------------------------------
Rental Net Mortgage
Date Development Carrying or Contract
Acquired Description of Property Status Value Obligation
-------- ------------------------------ ------------- ---------- -----------
Commercial, Continued:
1992 The Pier One Building is a Leased $3,532,329 $1,595,136
commercial building. During
fiscal 1994, substantial
remodeling was completed. The
The building has two major
tenants, who occupy over 60%
of the space, and several other
smaller tenants for the remain-
ing space.
1992 The Cellular One Building is Leased $ 807,488
a commercial building con-
structed by the Company on the
north river bank in Spokane.
1990 The Nevada-Holland property Under $ 998,072
consists of approximately 20 development
remaining acres of raw land
in a location where there has
been substantial commercial
and development residential
development.
1995 Birdies Golf Center, con- Constructed $2,124,230
structed on 14 acres of the and operating
Nevada-Holland property,
features a 56-tee driving
range, a fully contoured fair-
way with 5 target greens, a
pro shop, teaching studios and
an 8,000-square-foot putting
green.
1991 Tanglewood Ranch Park Estates Under $1,600,550
in south Spokane County was development
acquired through a judicial
foreclosure. The area consisted
of approximately 330 acres of
undeveloped land. In fiscal
1996, the Company commenced the
development of this property
which, when completed, will
result in 21 fully developed
residential lots.
1990 The north river bank in Undeveloped $ 990,266 $ 122,643
Spokane consists of parcels
of undeveloped commercial real
estate.
Properties Located in Spokane County, Washington, Continued:
July 31, 1996
----------------------------------------
Rental Net Mortgage
Date Development Carrying or Contract
Acquired Description of Property Status Value Obligation
-------- ------------------------------ ------------- ---------- -----------
Commercial, Continued:
Multi-Family Housing:
1979 The East Valley Terrace Apart- Fully $ 462,562 $ 433,520
ments is a 48-unit apartment Occupied
complex. The apartment complex
is a Department of Housing
and Urban Development (HUD)
project.
1969 The Aqua View Apartments is Fully $ 639,342 $ 393,708
a 129-unit apartment complex. Occupied
The complex is an FHA 221(d)3
project, receives rent subsi-
dies from Spokane Housing
Authority and is subject to a
HUD-insured mortgage.
Projects Located Outside Spokane County, Washington:
1991 The City View Apartments is Fully $ 441,903 $ 556,413
a 21-unit apartment complex. Occupied
1976 Retail store in Coeur d'Alene, Leased $ 98,947 $ 25,891
Idaho containing 17,000 square
feet. The building is currently
leased through 1996.
1993 Approximately six acres in Being $ 172,106
Auburn, Washington zoned for Marketed
multi-family housing were
acquired through a foreclosure.
Additionally, the Company has other less significant investments in
real estate located primarily in the state of Washington.
Item 3. Legal Proceedings
As of July 31, 1996, it is the opinion of management that there is no
pending litigation that would have a materially adverse effect on the
financial condition or operations of the registrant.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders during the
fourth quarter of fiscal 1996.
PART II
----------------------------------------------------------------------
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
(a) Principal Market.
There is no established market for trading in the Company's
common stock. Periodically, the Company will purchase and retire
its common stock, but does not solicit such transactions.
(b) Stock Price and Dividend Information.
There is no market information relative to the common stock price
of the Company's stock as it is not actively traded. A dividend
of $0.075 per common share totaling $150,786, declared as
payable to stockholders of record as of July 31, 1989, was paid
August 15, 1989. A dividend of $0.10 per common share or
$200,211, declared as payable to stockholders of record as of
July 31, 1990, was paid August 15, 1990. No dividends were
declared in any of the years since 1990.
(c) Approximate Number of Holders of Common Stock.
Common no par value -- 1,179 record holders.
(d) There is only one class of common stock outstanding. Any dividend
which may be declared would be payable at the same rate on each
share of common stock. At July 31, 1996, the Company also has
issued 10,400 shares of Class A preferred stock owned by five
holders. These shares receive cumulative dividends of 6% when
declared by the Board of Directors. During the fiscal years ended
July 31, 1996 and 1995, dividends totaling $62,400 were declared
and accrued on these shares. The dividends were paid on August 2,
1996 and August 2, 1995, respectively. These preferred shares
require redemption by the Company at par value ($1,040,000) in
2004.
Item 6. Selected Financial Data
The following selected financial data have been derived from the
Company's audited consolidated financial statements, and should be
read in conjunction with the consolidated financial statements and
notes thereto.
Years Ended July 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Statement of Operations Data:
-----------------------------
Rental income $ 2,714,563 $ 2,832,139 $ 2,653,958 $ 2,635,215 $ 2,477,709
Interest income 1,138,935 1,375,420 1,476,881 1,714,348 2,091,652
Gains on sales of real estate 486,469 584,657 186,109 233,766 271,313
Interest expense, net 1,650,559 1,681,213 1,682,355 1,894,691 2,142,103
Cumulative effect of change in
accounting principle -- -- (61,894) -- --
Net income (loss) 39,266 159,310 71,558 140,412 (255,072)
Income (loss) applicable to
common shareholders (75,134) 44,910 71,558 140,412 (255,072)
Income (loss) per common share:
Income (loss) before cumulative
effect of change in account-
ing principle (.04) .02 .07 .07 (.13)
Cumulative effect of change in
accounting principle -- -- (.03) -- --
----------- ----------- ----------- ----------- -----------
Income (loss) per common share (.04) .02 .04 .07 (.13)
----------- ----------- ----------- ----------- -----------
Cash dividends per common share -- -- -- -- --
Average number of common shares
outstanding 1,938,076 1,960,746 1,977,889 1,986,911 1,996,143
Years Ended July 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Balance Sheet Data (at year end):
Contracts, mortgages and finance
notes receivable, net $10,492,944 $13,457,896 $14,457,958 $14,930,791 $19,815,303
Total assets 33,060,107 35,351,486 34,842,679 35,898,448 37,601,731
Notes and contracts payable 11,055,919 13,107,725 13,679,068 14,951,242 16,100,784
Debentures 9,718,260 9,179,484 8,567,231 8,763,867 9,906,777
Stockholders' equity 9,397,005 9,544,017 9,563,355 9,521,032 9,389,970
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
-------
This discussion contains some forward-looking statements. A forward-
looking statement may contain words such as "will continue to be,"
"will be," "continue to," "expect to," "anticipates that," "to be," or
"can impact." Management cautions that forward-looking statements are
subject to risks and uncertainties that could cause the Company's
actual results to differ materially from those projected in forward-
looking statements.
The Company engages in financing real estate collateralized contracts,
acquiring real estate that is either held for sale or developed and
leased or sold and operating Birdies Golf Center as its primary
activities. During the past two years, the Company has been
emphasizing the development and lease of its commercial office
building projects as demand for the available space in these projects
has increased. Virtually all of the Company's development of these
commercial office building projects has involved extensive remodeling
efforts in connection with preparation of previously unoccupied space
for a new tenant and structural changes as required by current
building codes. As a result of the Company's emphasis, operating lease
income has become an increasingly larger portion of total Company
income.
The Company invests in real estate collateralized contracts and real
property primarily within the state of Washington, with a
concentration in Spokane County. The Company has concentrated its
efforts primarily on the development and sale of existing real estate
projects to maximize the return from those investments. The Company
has curtailed its contract acquisitions and now primarily originates
real estate contracts to facilitate the sale of its property held for
sale or development.
Birdies Golf Center opened to the pubic in fiscal 1996. The Company
has focused on a marketing campaign to increase public awareness and
attraction to the facility. In addition to its many unique amenities,
Birdies has on staff a golf pro and a general manager. In its second
year of operations, Birdies is expected to contribute an increasing
portion of the Company's income.
The Company finances its investments in real estate and contracts and
operates Birdies Golf Center primarily through the sale of fixed rate
debentures with terms ranging from one to ten years, real estate notes
or mortgages, and a collateralized line-of-credit arrangement with a
local bank. The Company intends to continue using these funding
sources in the future.
Results of Operations
---------------------
For the years ended July 31, 1996, 1995 and 1994, the Company's net
income was approximately $39,000, $159,000 and $72,000, respectively.
Due to dividends and the accretion of the discount on the issuance of
preferred stock, the loss applicable to common shareholders was
approximately $75,000 in fiscal 1996.
Rental real estate activities have increased as more available space
in existing projects has been let and rental rates have been
increased. Total rental income has increased from approximately
$2,654,000 in fiscal 1994 to $2,715,000 in fiscal 1996. The Company
anticipates this trend will continue as additional space is leased and
rental rates increase. However, reduced rental income could result
from sales of some rental properties.
The total interest income and amortization of discounts on acquired
real estate contracts has continued to decline from approximately
$1,610,000 and $1,458,000 in fiscal 1994 and 1995, respectively, to
approximately $1,265,000 in fiscal 1996. This decline corresponds
directly with the decline in the Company's investment in real estate
contracts. The Company has curtailed its real estate contract
acquisition activities to concentrate its efforts in renovating and
leasing commercial office buildings and developing real estate.
Collections on real estate contracts have significantly exceeded new
acquisitions in each of the last three fiscal years. These funds were
used to remodel and develop existing real estate projects and repay
outstanding obligations.
Gains on the sale of real estate were approximately $486,000, $585,000
and $186,000 in fiscal 1996, 1995 and 1994, respectively. The Company
anticipates that it will continue to recognize gains both on the sale
of real estate acquired through foreclosure and real estate acquired
for resale.
Sales of services and tangible products at Birdies were approximately
$294,000 in fiscal 1996, which is in line with the Company's
expectations for its first year of operations. Overall, the golf
center recorded a loss from operations of approximately $143,000,
primarily reflecting the initial start-up and staffing costs. The
Company anticipates that the margins from its golf center will improve
through increased sales in its second year of operations and the non-
recurrence of start-up costs.
The expenses associated with rental operations have increased to
approximately $2.5 million in fiscal 1996 from approximately $2.4
million in fiscal 1995 and $2.2 million in fiscal 1994. As new tenants
are added to the major office building projects, the Company
anticipates increased depreciation and interest expense and othercosts
associated with the major remodeling projects. However, the
resultant increase in rental income is anticipated to more than offset
the expected increases in related costs. The rental activities of the
Company are expected to continue to contribute significantly to its
profitability.
Interest expense, exclusive of interest on rental properties, net of
amounts capitalized, was approximately $1,216,000, $1,263,000 and
$1,363,000 in fiscal 1996, 1995 and 1994, respectively. The decline
in interest costs over the three-year period has been primarily as a
result of a decrease in outstanding borrowings.
Salaries and commissions and general and administrative costs have
increased modestly in absolute dollar amounts for each of the last
three fiscal years. The commencement of the Birdies operation in early
fiscal 1996 contributed to an increase in the number of employees and
related salaries and other administrative costs.
The Company's effective income tax rate as a percentage of income
before federal income tax was 31% in fiscal 1996; however, its current
income tax provision increased significantly due to the reversal of
deferred installments gains for tax purposes. Effective August 1,
1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The
cumulative effect of adopting this standard was a charge to operations
of $61,894 in fiscal 1994.
Liquidity and Capital Resources
-------------------------------
At July 31, 1996, the Company had total stockholders' equity of
approximately $9,397,000 and a total liabilities to equity ratio of
2.45 to 1, which decreased slightly from 2.64 to 1 a year before. In
fiscal 1996, the Company's primary sources of funds were approximately
$259,000 from the sale of real estate, $4.2 million in real estate
contract collections, $863,000 from the sale of debentures and $1.3
million from the issuance of mortgage and notes payable. The primary
uses of funds were approximately $2.5 million used for the acquisition
and improvements of real estate projects, $2.2 million in net
repayments on the line of credit borrowings and approximately $1.1
million in repayment of outstanding long-term debt. As a holder of
monetary assets and liabilities, the Company's performance may be
significantly affected by changes in interest rates. These changes are
somewhat mitigated or delayed to the extent that much of the Company's
investment in real estate contracts, and established real estate
leases have fixed returns, as do the Company's debentures.
Additionally, the Company will be affected by changes in the real
estate market in Washington.
The Company anticipates that sales of debentures and the availability
of funds under its $8,000,000 line-of-credit arrangement, of which
only approximately $4,448,000 was outstanding at July 31, 1996, will
be sufficient to fund its short- and intermediate-term needs to retire
maturing debentures and mortgage obligations and continue development
of its real estate projects as demand warrants.
Impact of Recently Issued Accounting Standards
----------------------------------------------
The Company is required to adopt the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" on August 1, 1996. SFAS No. 121 requires that an
impairment loss be recognized when the estimated future cash flows
(undiscounted and without interest) expected to result from the use of
an asset are less than the carrying amount of the asset. Measurement
of an impairment loss is based on the fair value of the asset if the
asset is expected to be held and used. The Company does not anticipate
that the adoption of this standard will have a material effect on the
consolidated financial statements.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of independent accountants
Financial statements:
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There were no disagreements on accounting issues or financial
statement disclosure during the fiscal year ended July 31, 1996 or any
interim period after July 31, 1996.
Report of Independent Accountants
Board of Directors and Stockholders
Pacific Security Companies
Spokane, Washington
We have audited the accompanying consolidated balance sheets of
Pacific Security Companies and subsidiaries as of July 31, 1996 and
1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended July 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Pacific Security Companies and subsidiaries as of July 31, 1996 and
1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended July 31, 1996,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for impaired loans in fiscal
1996 and for income taxes in fiscal 1994.
/s/Coopers & Lybrand L.L.P.
Spokane, Washington
September 27, 1996
Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets
July 31, 1996 and 1995
ASSETS 1996 1995
----------- -----------
Cash and cash equivalents:
Unrestricted $ 464,471 $ 575,351
Restricted 152,346 188,510
----------- -----------
616,817 763,861
----------- -----------
Receivables:
Contracts, mortgages and finance notes
receivable, net:
Related parties 845,672 1,092,875
Unrelated 9,647,272 12,365,021
----------- -----------
10,492,944 13,457,896
Accrued interest 90,111 108,796
Other 72,542 48,232
----------- -----------
10,655,597 13,614,924
----------- -----------
Investment in rental properties, net 15,150,040 15,647,591
----------- -----------
Investment in golf center, net 2,124,230
-----------
Other investments:
Property held for sale and development 3,797,395 3,205,951
Golf center under development 1,341,798
Marketable securities 75,880 96,379
Restricted investments 221,840 270,650
Other 20,931 49,768
----------- -----------
4,116,046 4,964,546
----------- -----------
Other assets:
Vehicles and equipment, net 30,983 25,497
Prepaid expenses 283,042 335,067
Golf center inventories 83,352
----------- -----------
397,377 360,564
----------- -----------
Total assets $33,060,107 $35,351,486
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets, Continued
July 31, 1996 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----------- -----------
Liabilities:
Note payable to bank $ 4,448,010 $ 6,679,398
----------- -----------
Installment contracts, mortgage notes
and notespayable:
Related parties 204,136 215,795
Unrelated 6,403,773 6,212,532
----------- -----------
6,607,909 6,428,327
----------- -----------
Debenture bonds 9,718,260 9,179,484
----------- -----------
Accrued expenses and other liabilities:
Related parties 165,438 264,864
Unrelated 786,166 1,269,985
----------- -----------
951,604 1,534,849
----------- -----------
Federal income taxes:
Currently payable 244,944 16,849
Deferred 1,068,375 1,396,562
----------- -----------
1,313,319 1,413,411
----------- -----------
Total liabilities 23,039,102 25,235,469
----------- -----------
Commitments and contingencies (Note 10)
Redeemable Class A preferred stock,
$100 par value; $100 redemption value;
authorized 20,000 shares; issued and
outstanding, 10,400 shares 1,040,000 1,040,000
Less: Net discount on issuance of pre-
ferred stock (416,000) (468,000)
----------- -----------
624,000 572,000
----------- -----------
Pacific Security Companies and Subsidiaries
Consolidated Balance Sheets, Continued
July 31, 1996 and 1995
LIABILITIES AND STOCKHOLDERS'
EQUITY, CONTINUED 1996 1995
----------- -----------
Stockholders' equity:
Common stock:
Original class, authorized 2,500,000
no par value shares, $3 stated value;
issued and outstanding, 1,918,085
and 1,958,067 shares $ 5,754,256 $ 5,874,202
Class B, authorized 30,000 no par
value shares; no shares issued and
outstanding
Additional paid-in capital 1,805,000 1,747,027
Retained earnings 1,853,275 1,928,409
Unrealized loss on marketable securities (15,526) (5,621)
----------- -----------
Total stockholders' equity 9,397,005 9,544,017
----------- -----------
Total liabilities and stockholders'
equity $33,060,107 $35,351,486
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Operations
for the years ended July 31, 1996, 1995 and 1994
1996 1995 1994
---------- ---------- ----------
Income:
Rental $2,714,563 $2,832,139 $2,653,958
Interest 1,138,935 1,375,420 1,476,881
Gain on sale of securities 30,959 4,445 25,119
Service fees and options 3,600 980
Amortization of discounts on
real estate contracts 126,044 82,783 132,662
Gain on sales of real estate 486,469 584,657 186,109
Golf center sales (including
lessons of $31,936) 294,276
Other, net 153,376 (30,010) 93,378
---------- ---------- ----------
4,944,622 4,853,034 4,569,087
---------- ---------- ----------
Expenses:
Rental operations:
Depreciation and amortization 714,474 699,264 677,687
Interest 434,397 418,688 319,011
Other 1,311,200 1,332,205 1,197,641
---------- ---------- ----------
2,460,071 2,450,157 2,194,339
Interest, net of amount
capitalized 1,216,162 1,262,525 1,363,344
Salaries and commissions 651,416 565,245 504,627
General and administrative 422,455 311,557 294,242
Depreciation 82,797 18,190 19,843
Cost of golf merchandise sales 53,503
Uncollectible accounts 1,412 117 821
---------- ---------- ----------
4,887,816 4,607,791 4,377,216
Income before federal income tax
provision and accumulative
effect of change in accounting
principle 56,806 245,243 191,871
Federal income tax provision 17,540 85,933 58,419
---------- ---------- ----------
Income before cumulative effect
of change in accounting
principle 39,266 159,310 133,452
Cumulative effect of change in
accounting principle (61,894)
---------- ---------- ----------
Net income 39,266 159,310 71,558
---------- ---------- ----------
Pacific Security Companies and Subsidiaries
Consolidated Statements of Operations, Continued
for the years ended July 31, 1996, 1995 and 1994
1996 1995 1994
---------- ---------- ----------
Net income 39,266 159,310 71,558
Less: Preferred stock dividends (62,400) (62,400)
Accretion of discount on
preferred stock (52,000) (52,000)
---------- ---------- ----------
Income (loss) applicable to
common stockholders $ (75,134) $ 44,910 $ 71,558
========== ========== ==========
Income (loss) per common share:
Income (loss) before cumulative
effect of change in account-
ing principle $ (.04) $ .02 $ .07
Cumulative effect of change in
accounting principle (.03)
---------- ---------- ----------
Income (loss) per common share $ (.04) $ .02 $ .04
========== ========== ==========
Weighted average common shares
outstanding 1,938,076 1,960,746 1,977,889
========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended July 31, 1996, 1995 and 1994
Unrealized
Additional Gain (Loss)
Common Paid-In Retained on Marketable
Stock Capital Earnings Securities Total
---------- ---------- ---------- ------------- ----------
Balances, July 31, 1993 $5,943,303 $1,760,529 $1,811,941 $ 5,259 $9,521,032
Net income 71,558 71,558
Unrealized gain on
marketable securi-
ties 17,550 17,550
Purchase and retire-
ment of common stock
(15,506 shares) (46,517) (268) (46,785)
---------- ---------- ---------- ----------- ----------
Balances, July 31, 1994 5,896,786 1,760,261 1,883,499 22,809 9,563,355
Net income 159,310 159,310
Unrealized loss on
marketable securi-
ties (28,430) (28,430)
Purchase and retire-
ment of common stock
(7,528 shares) (22,584) (13,234) (35,818)
Cash dividend declared
on preferred stock (62,400) (62,400)
Accretion of discount
on preferred stock (52,000) (52,000)
---------- ---------- ---------- ----------- ----------
Balances, July 31, 1995 5,874,202 1,747,027 1,928,409 (5,621) 9,544,017
Net income 39,266 39,266
Unrealized loss on
marketable securi-
ties (9,905) (9,905)
Purchase and retire-
ment of common stock
(39,982 shares) (119,946) 57,973 (61,973)
Cash dividend declared
on preferred stock (62,400) (62,400)
Accretion of discount on
preferred stock (52,000) (52,000)
---------- ---------- ---------- ----------- ----------
Balances, July 31, 1996 $5,754,256 $1,805,000 $1,853,275 $ (15,526) $9,397,005
========== ========== ========== =========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended July 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Cash received from rentals and golf
center sales $ 3,119,937 $ 2,861,797 $ 2,741,139
Interest received 1,168,493 1,390,814 1,480,230
Cash paid to suppliers and employees (3,029,296) (1,832,994) (2,295,699)
Interest paid, net of amounts capitalized (1,141,198) (1,184,699) (1,263,433)
Income taxes paid (112,500) (97,500) (30,000)
----------- ----------- -----------
Net cash provided by operating activities 5,436 1,137,418 632,237
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of real estate 259,435 293,138 707,730
Proceeds from sales of marketable securities
and other investments 41,553 2,300 51,236
Collections on contracts, mortgages and
finance notes receivable 4,166,338 2,543,914 3,572,465
Investment in contracts, mortgages and
finance notes receivable (51,106) (242,399) (90,550)
Additions to rental properties, property
held for sale, property under develop-
ment, golf center, vehicles and equipment (2,477,696) (3,146,582) (3,348,611)
Change in restricted investments and
cash equivalents 84,974 (46,473) (19,634)
Other 28,837 (2,121)
----------- ----------- -----------
Net cash provided by (used in) investing
activities 2,052,335 (598,223) 872,636
----------- ----------- -----------
Cash flows from financing activities:
Net (repayments) borrowings under
line-of-credit agreement (2,231,388) (344,143) 929,681
Proceeds from installment contracts,
mortgage notes and notes payable 1,270,858 1,911,000
Payments on installment contracts,
mortgage notes and notes payable (1,091,276) (2,138,200) (2,067,091)
Proceeds from sales of debenture bonds 863,142 1,107,171 1,140,201
Redemption of debenture bonds (855,614) (975,715) (1,823,291)
Proceeds from sale of preferred stock 520,000
Payment of dividends on preferred stock (62,400)
Purchase and retirement of common stock (61,973) (35,818) (46,785)
----------- ----------- -----------
Net cash used in financing activities (2,168,651) (475,705) (1,347,285)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (110,880) 63,490 157,588
Cash and cash equivalents, beginning of year 575,351 511,861 354,273
----------- ----------- -----------
Cash and cash equivalents, end of year $ 464,471 $ 575,351 $ 511,861
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Pacific Security Companies and Subsidiaries
Consolidated Statements of Cash Flows, Continued
for the years ended July 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 39,266 $ 159,310 $ 71,558
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 797,271 717,454 697,530
Deferred income tax benefit (328,187) (28,424) (63,340)
Cumulative effect of change in
accounting for income taxes 61,894
Deferred financing income realized (126,044) (82,783) (132,662)
Interest accrued on debenture bonds 531,248 480,797 486,454
Gain on sales of marketable
securities (30,959) (4,445)
Gain on sales of real estate (486,469) (584,657) (186,109)
Loss on other investment 24,865
Uncollectible accounts 1,412 117 821
Change in assets and liabilities:
Accrued interest receivable 18,685 16,251 1,364
Prepaid expenses 52,025 15,604 (216,548)
Inventories (83,352)
Accrued expenses (583,245) 412,613 (176,039)
Income taxes payable 228,095 (11,354) 91,759
Other, net (24,310) 17,625
----------- ----------- -----------
Net cash provided by operating
activities $ 5,436 $ 1,137,418 $ 632,237
=========== =========== ===========
Supplemental schedule of noncash investing
and financing activities:
Additions to investment in rental
properties and properties held for
sale through contract foreclosures $ 6,060 $ 23,225
Mortgages and contracts payable financing
related to investments in properties 134,764
Company financed sale of property $ 1,025,648 1,160,400 2,899,647
Accretion of discount on preferred stock 52,000 52,000
Stock dividend declared and unpaid 62,400 62,400
The accompanying notes are an integral part of the consolidated
financial statements.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Pacific Security Companies and subsidiaries (the Company) is
incorporated under the laws of the state of Washington. The
Company is engaged in the business of owning, selling and leasing
real properties and in contract and loan financing, collater-
alized by real estate. Most of the Company's real estate
activities are concentrated within the state of Washington. The
Company completed construction and commenced operations of a golf
center during the year ended July 31, 1996. The golf center,
located in Spokane, Washington, serves as a practice and teaching
center and sells golf clubs and related golf supplies.
A summary of significant accounting policies followed by the
Company is presented below:
Consolidation
-------------
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Aqua View
Apartments, Inc. All significant intercompany accounts and
transactions have been eliminated.
The Company's wholly owned subsidiary, Henry George & Sons Co.,
Inc. (and its wholly owned subsidiary, Cooper George Company)
(Cooper George) was dissolved during the year ended July 31,
1996. Upon dissolution, all assets of Cooper George were
transferred to the Company for the redemption of the
outstanding common stock. Cooper George was included in the
accounts of the Company during the years ended July 31, 1995
and 1994.
The Company sold the assets of a wholly owned subsidiary, Park
Manor, Inc., in August 1993. The operating results of Park
Manor, Inc., were included in the accounts of the Company
during the year ended July 31, 1994.
Cash and Cash Equivalents
-------------------------
The Company deposits all cash and cash equivalents with high
quality financial institutions. The Company considers highly
liquid debt instruments, if any, purchased with a remaining
maturity of three months or less to be cash equivalents.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Contracts, Mortgages and Finance Notes Receivable
-------------------------------------------------
Contracts, mortgages and finance notes receivable are stated at
unpaid principal balance, plus accrued interest, less
acquisition discounts 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.
Interest continues to be accrued on non-performing receivables
until such amount is not expected to be recovered.
In May 1993, Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan" was
issued. SFAS No. 114 requires that certain impaired loans be
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or the
fair value of the collateral less selling costs. The Company
adopted this new standard August 1, 1995, which did not have a
material effect on the consolidated financial statements.
Discounts on Contracts
----------------------
The Company amortizes discounts on purchased contracts using
the level-yield method over the expected term of the contracts.
Investment in Rental Properties
-------------------------------
Rental properties, including land, buildings and improvements
and furniture and equipment are recorded at cost. Expenditures
for maintenance and repairs are charged to operations as
incurred. Renewals and betterments are capitalized.
Depreciation is provided on the straight-line method over
estimated useful lives as summarized below:
Years
-----
Buildings and improvements 15-40
Furniture and equipment 5-10
Upon sale or retirement of depreciable properties, the related
cost and accumulated depreciation are removed from the accounts
and any resultant gain or loss is reflected inoperations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Investment in Golf Center
-------------------------
The golf center, including land, building and improvements and
furniture and equipment are recorded at cost. Depreciation is
provided on the straight-line method over the estimated useful
lives as summarized below:
Years
-----
Buildings and improvements 15-40
Furniture and equipment 3-10
Interest Capitalization
-----------------------
All costs associated with self-constructed assets
(including interest and real estate taxes) incurred during
the construction period are capitalized. Interest costs of
approximately $205,000, $204,000, and $152,000 were
capitalized in fiscal 1996, 1995 and 1994, respectively.
Property Held for Sale or Development
-------------------------------------
The Company acquires real estate through direct acquisition
and foreclosures and records these assets at the lower of
fair value less estimated costs to sell or cost. Losses on
properties held for sale or development are recognized if
the anticipated cash flows from disposition, less estimated
selling costs, are estimated to be less than the carrying
value of the related asset.
In March 1995, Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of,"
was issued. SFAS No. 121 requires certain long-lived
assets, such as the Company's real estate assets, to be
reviewed for impairment in value whenever events or
circumstances indicate that the carrying value of an asset
may not be recoverable. In performing the review, if
expected future undiscounted cash flows from the use of the
asset or the fair value, less selling costs, from the
disposition of the asset is less than its carrying value,
an impairment loss is to be recognized. The Company is
required to adopt this new standard by August 1, 1996. The
Company does not anticipate that the adoption of SFAS No.
121 will have a material effect on the consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Marketable Securities
---------------------
The Company's investments, consisting of debt and equity
securities, are considered to be "available for sale" and,
therefore, are carried at market value. Realized gains and
losses on the sale of these securities are recognized on a
specific identification basis in the consolidated statement of
operations in the period the securities are sold. Unrealized
gains and losses are excluded from operations and reported as a
separate component of stockholders' equity, net of related
income taxes, until realized.
Restricted Investments
----------------------
Restricted investments in U.S. Treasury bonds are carried at
amortized cost. Premiums or discounts at acquisition are
amortized using the interest method over the term of the
investment.
Vehicles and Equipment
----------------------
Vehicles and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful
lives of 4 to 5 and 5 to 10 years, respectively. Accumulated
depreciation associated with vehicles and equipment was
$207,505 and $197,217 at July 31, 1996 and 1995, respectively.
Upon sale or retirement, the cost and related accumulated
depreciation are removed from the accounts and any resultant
gain or loss is reflected in operations.
Golf Center Inventories
-----------------------
Golf center inventories are stated at the lower of cost or
estimated net realizable value using the first-in, first-out
method.
Sales of Real Estate
--------------------
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 as established by Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate" (see
Note 4). Losses arising from sales of real estate are
recognized immediately upon sale.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Income Taxes
------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109), effective August 1, 1993. The cumulative effect
of adopting SFAS No. 109 in fiscal 1994 was a charge to
operations of $61,894. SFAS No. 109 requires a company to
recognize deferred tax assets and liabilities for the expected
future income tax consequences of events that have been
recognized in a company's financial statements. Under this
method, deferred tax liabilities and assets are determined
based on the temporary differences between the financial
statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in
which the temporary differences are expected to reverse.
Income or Loss Per Share
------------------------
Income or loss per common share is based on net income or loss
after deducting preferred stock dividends and the accretion of
the discount on preferred stock divided by the weighted average
number of shares of common stock outstanding during each year.
Credit Risk
-----------
Financial instruments which expose the Company to
concentrations of credit risk consist primarily of cash and
cash equivalents, contracts, mortgages and finance notes
receivable.
As of July 31, 1996 and 1995, the Company has various cash and
investment accounts totaling approximately $446,000 and
$564,000, respectively, with one financial institution. These
accounts are insured by the Federal Deposit Insurance
Corporation up to $100,000.
The Company's contracts, mortgages and finance notes receivable
are primarily from borrowers in the state of Washington and are
collateralized principally by real estate located in
Washington. Additionally, the outstanding balance of five
individual loans totaled approximately $6,740,000 and
$8,130,000 at July 31, 1996 and 1995, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
Reclassifications
-----------------
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform with the current
year's presentation. These reclassifications had no effect on
retained earnings or net income as previously reported.
2. RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENTS:
At July 31, 1996 and 1995, the Company holds cash and cash
equivalents and investments which are restricted for the
following purposes:
1996 1995
---------------------- ----------------------
Cash and U.S. Cash and U.S.
Cash Treasury Cash Treasury
Equivalents Notes Equivalents Notes
----------- -------- ----------- --------
Tenant security deposits $ 25,948 $ 31,126
Mortgage reserves 33,728 31,337
Apartment complex re-
placement reserve
required by the Depart-
ment of Housing and
Urban Development
(HUD) 88,702 $128,588 117,377 $127,847
Apartment complex residual
receipts as required by
HUD 4,161 93,252 8,670 142,803
-------- -------- -------- --------
$154,346 $221,840 $188,510 $270,650
======== ======== ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENTS, CONTINUED:
The U.S. Treasury notes held in the replacement and residual
receipt reserves at July 31, 1996 bear interest at 6% and mature
October 15, 1999.
3. CONTRACTS, MORTGAGES AND FINANCE NOTES RECEIVABLE:
At July 31, 1996 and 1995, the aging of amounts due on contracts,
mortgages and finance notes receivable was as follows:
1996 1995
----------- -----------
Current $10,474,252 $13,578,288
31 to 60 days 46,448 133,575
60 to 90 days 85,767 21,345
Over 90 days 102,771 108,998
----------- -----------
10,709,238 13,842,206
Less unearned acquisition discounts (216,294) (384,310)
----------- -----------
$10,492,944 $13,457,896
=========== ===========
Substantially all of these receivables are collateralized by
land, commercial buildings and single and multi-family
residences. Interest rates on most loans are fixed and range from
5.25% to 14.25% at July 31, 1996 and 1995. Approximately
$2,626,000 and $2,484,000 of loans outstanding at July 31, 1996
and 1995, respectively, have variable interest rates.
Management of the Company provides an allowance for losses based
upon estimates of the cash flows to be collected on the
receivable or the fair value of the underlying collateral, net of
selling costs. At July 31, 1996 and 1995, the fair value of the
underlying collateral, net of selling costs, is estimated to be
greater than the carrying value of the related contracts and
notes, and thus, no allowance for loss has been provided. These
estimates can be affected by changes in the economic environment
in the state of Washington and the resultant effect on real
estate values. As a result of changing economic conditions, it is
reasonably possible that the amount of the allowance for loan
losses could change in the near term.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS IN RENTAL PROPERTIES:
Following is a summary of investments in rental properties at
July 31, 1996 and 1995:
1996 1995
----------- -----------
Land $ 2,929,981 $ 3,063,976
Buildings and improvements 17,652,278 17,984,196
Furniture and equipment 1,082,374 902,665
----------- -----------
21,664,633 21,950,837
Less accumulated depreciation (6,514,593) (6,303,246)
----------- -----------
$15,150,040 $15,647,591
=========== ===========
The Company leases office space in certain of the above buildings
under operating leases. Most of the lease agreements contain
renewal options and escalation provisions associated with
inflation over the term of the lease. The following is a schedule
by years of minimum future rentals on noncancellable operating
leases as of July 31, 1996:
Year Ending
July 31,
-----------
1997 $1,347,865
1998 1,127,188
1999 911,404
2000 530,203
2001 407,115
Thereafter 412,212
----------
Total minimum future
rentals $4,735,987
==========
These properties are primarily located in the greater Spokane,
Washington geographical area. Losses on investments in rental
properties are recognized if the anticipated cash flows from
operations or the sale of the rental property, net of selling
costs, are estimated to be less than the carrying value of the
related asset. These estimates can be affected by changes in the
economic environment of the Spokane, Washington area and the
resultant effect on the real estate rental and property values.
As a result of changing economic conditions, it is reasonably
possible that these estimates could change in the near term.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS IN RENTAL PROPERTIES, CONTINUED:
At July 31, 1996 and 1995, the sales of certain rental property
and land were subject to sales contracts, but had not met the
criterion to be recorded as a sale. Therefore, the deposit method
of accounting for these sales was applied, resulting in
approximately $185,000 and $303,000 being classified as
investments in rental properties at July 31, 1996 and 1995,
respectively. At July 31, 1996 and 1995, the Company had deferred
gains of approximately $42,000 and $74,000, respectively,
associated with these sales which will be recognized when the
criterion for a sale is ultimately met.
5. INVESTMENT IN GOLF CENTER:
The Company completed construction of Birdies Golf Center
(Birdies), which features a 56-tee driving range, a fully
lighted, contoured fairway with 5 target greens, a pro shop,
teaching studios and an 8,000-square-foot putting green.
The following is a summary of the investment in the golf center
at July 31, 1996:
Land $ 350,000
Building and improvements 1,622,751
Furniture and equipment 223,985
----------
2,196,736
Less accumulated depreciation (72,506)
----------
$2,124,230
==========
This property was under development during the year ended
July 31, 1995. Upon completion, the costs previously recorded as
golf center under development were transferred to the investment
in the golf center and depreciation commenced.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. BUSINESS SEGMENT REPORTING:
Information about the Company's separate business segments and
in total as of and for the year ended July 31, 1996 is as
follows:
Birdies Rental and
Golf Receivable
Center Operations Total
----------- ----------- -----------
Revenue $ 294,276 $ 4,650,346 $ 4,944,622
Earnings (loss) from
operations (142,848) 199,654 56,806
Identifiable assets,
net 2,207,582 30,852,525 33,060,107
Depreciation and
amortization 72,506 724,765 797,271
Capital expenditures 854,937 1,622,759 2,477,696
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. MARKETABLE SECURITIES:
A summary of investments in marketable securities at July 31,
1996 and 1995 is as follows:
1996 1995
---------------------------------- ----------------------------------
Unrealized Market/ Unrealized Market/
Appreciation Carrying Appreciation Carrying
Cost (Depreciation) Value Cost (Depreciation) Value
-------- -------------- -------- -------- -------------- --------
Marketable equity
securities $ 40,004 $(23,524) $ 16,480 $ 45,495 $ (8,516) $ 36,979
Debt securities 59,400 59,400 59,400 59,400
-------- -------- -------- -------- -------- --------
$ 99,404 $(23,524) $ 75,880 $104,895 $ (8,516) $ 96,379
======== ======== ======== ======== ======== ========
The debt securities are contractually due in 1997; however,
actual maturities may differ from the stated contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. NOTE PAYABLE TO BANK:
Note payable to bank represents borrowings outstanding under the
Company's $8,000,000 short-term, line-of-credit agreement with
U.S. Bank of Washington. Amounts drawn under the line bear
interest at the bank's prime rate plus seven-eighths of one
percent. The interest rate was 9.125% (based on a prime rate of
8.25%) at July 31, 1996. The agreement is subject to renewal on
December 5, 1996. The Company's majority stockholder provides a
guarantee of up to $1.2 million on outstanding borrowings under
the line-of-credit agreement. The following assets were pledgedas
collateral for the note at July 31, 1996 and 1995:
1996 1995
---------- ----------
Finance notes and real estate
contracts receivable $3,267,367 $5,425,401
Assignment of future rents 2,029,184 2,447,550
Equity in contracts with underlying
obligations 104,191 172,343
---------- ----------
$5,400,742 $8,045,294
========== ==========
9. INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE:
Installment contracts, mortgage notes and notes payable bear
interest at rates ranging from 6.0% to 10.5% per annum. Monthly
debt service payments, including interest, were approximately
$126,422 at July 31, 1996.
Scheduled future maturities of contracts, mortgage notes and
notes payable are as follows:
Year Ending
July 31,
-----------
1997 $1,031,576
1998 552,305
1999 499,231
2000 537,707
2001 580,081
Thereafter 3,407,009
----------
$6,607,909
==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE,
CONTINUED:
The following assets were pledged as collateral for contracts,
mortgage notes and notes payable at July 31, 1996 and 1995:
1996 1995
----------- -----------
Contracts receivable $ 3,828,054 $ 4,265,720
Rental properties 8,428,533 7,185,140
----------- -----------
$12,256,587 $11,450,860
=========== ===========
10. DEBENTURE BONDS:
The Company has issued unsecured investment bonds to residents of
the state of Washington under the Securities Act of Washington.
The proceeds have been used in making funds available for loans
and the development, improvement and acquisition of commercial
real property.
The outstanding bonds have original maturities ranging from one
to ten years and the interest rates vary depending upon the
maturity.
Estimated future contractual maturities of outstanding debenture
bonds are as follows:
Year Ending
July 31,
-----------
1997 $2,012,826
1998 1,621,359
1999 691,305
2000 920,110
2001 433,333
Thereafter 4,039,327
----------
$9,718,260
==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. DEBENTURE BONDS, CONTINUED:
Outstanding bonds by interest rate categories were as follows at
July 31, 1996 and 1995:
Bond Interest Rate 1996 1995
------------------ ---------- ----------
5.50% $ 5,780
5.75 $ 42,086
6.00 447,664 687,390
6.25 114,129 5,500
6.50 484,690 630,495
6.75 20,231 86,699
7.00 927,631 913,242
7.25 274,235 207,041
7.50 1,748,361 1,445,477
7.75 246,690 127,750
8.00 742,900 665,625
8.25 258,745 216,767
8.50 1,300,283 1,229,508
8.75 544,285 397,467
9.00 1,566,314 1,019,189
9.25 312,638 226,478
9.50 661,206 1,291,456
10.00 11,926 10,802
10.50 9,268 8,353
11.00 4,978 4,465
---------- ----------
$9,718,260 $9,179,484
========== ==========
The weighted average interest rate for outstanding debentures at
July 31, 1996 and 1995 was 8.01% and 7.99%, respectively.
The Securities Act of Washington contains specific statutory and
regulatory requirements concerning companies selling debentures
in the state of Washington. These regulations require maintenance
of minimum net worth and liquidity levels, define debenture terms
and maturity limitations, describe financial reporting
requirements and prohibit certain activities by controlling
persons of the issuer of debentures. Failure to comply with these
requirements may jeopardize a company's ability to issue
debentures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. DEBENTURE BONDS, CONTINUED:
In November 1995, the Company renewed its permit to offer
debentures for sale under the Securities Act of Washington. The
permit is subject to the following conditions:
(a) Outstanding debentures, including accrued interest, may not
exceed $10,488,910 at any time during the period.
(b) Normal quarterly reports will be supplemented with the
following information:
- Copies of the Company's Form 10-Q.
- Calculations of the ratio of earnings to fixed charges.
- Schedules showing the real estate sold, proceeds received
and use of the proceeds during the quarter.
- Schedules showing the amounts of debentures sold to new
investors, old debentures retired and renewals.
- A discussion of the efforts which have been made during
the quarter to transfer a receivable from Washington
Capital, Inc. (WCI), a related party (see Note 14), to an
unaffiliated entity.
The permit expires in November 1996. However, the Company's
continued ability to sell additional debentures is dependent upon
its compliance with the preceding conditions.
11. INCOME TAXES:
The components of the income tax provision (benefit) are as
follows:
1996 1995 1994
----------- ----------- -----------
Current $ 345,727 $ 114,357 $ 121,759
Deferred (328,187) (28,424) (63,340)
----------- ----------- -----------
$ 17,540 $ 85,933 $ 58,419
=========== =========== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
The components of the net deferred tax liability at July 31, 1996
and 1995 were as follows:
Assets Liabilities Total
----------- ----------- -----------
1996:
Depreciation $ (182,538) $ (182,538)
Installment gains (937,642) (937,642)
Unrealized gains or
losses on market-
able securities $ 17,575 17,575
Accrued liabilities 46,982 46,982
Other (12,752) (12,752)
----------- ----------- -----------
$ 64,557 $(1,132,932) $(1,068,375)
=========== =========== ===========
1995:
Depreciation $ (260,218) $ (260,218)
Installment gains (1,225,788) (1,225,788)
Unrealized gains or
losses on market-
able securities $ 71,474 71,474
Accrued liabilities 39,735 39,735
Other (21,765) (21,765)
----------- ----------- -----------
$ 111,209 $(1,507,771) $(1,396,562)
=========== =========== ===========
The annual tax provision is different from the amount which would
be provided by applying the statutory federal income tax rate to
the Company's pretax income. The reasons for the differences are:
1996 % 1995 % 1994 %
------- ----- ------- ----- ------- -----
Computed statutory
provision $19,314 34.0% $83,383 34.0% $65,236 34.0%
Meals and entertainment 1,280 1.3 950 0.4 618 0.3
Other (3,054) (5.4) 1,600 0.6 (5,024) (2.6)
Utilization of carry-
forward of charitable
contribution deduction (2,411) (1.3)
------- ---- ------- ---- ------- ----
$17,540 30.9% $85,933 35.0% $58,419 30.4%
======= ==== ======= ==== ======= ====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. REDEEMABLE PREFERRED STOCK:
The 6% annual dividends on the Class A preferred stock are
cumulative. Dividends of $62,400 were declared on the preferred
stock during the years ended July 31, 1996 and 1995 and were paid
subsequent to each respective year end.
The Company has the right to redeem any shares after three years
from the date of issuance. However, all shares are required to be
redeemed by the Company ten years after issuance at the par value
plus accrued dividends to date of redemption. Due to the mandatory
ten-year redemption, the discount on the issuance of the preferred
stock is being accreted using the interest method over the
redemption period. This accretion is recorded as an increase in
the carrying value of the preferred stock and as a charge against
retained earnings. The accretion of this discount was $52,000 in
each of the years ended July 31, 1996 and 1995.
Each share of Class A Preferred Stock is entitled to one vote on
each matter voted on at a stockholders' meeting. The preferred
stockholders have liquidation rights equal to the par value plus
accumulated and unpaid dividends. The liquidation preference of
the preferred stock was $1,102,400 at July 31, 1996 and 1995.
At July 31, 1996, $800,000 face value of preferred stock has been
pledged as collateral for a contract receivable from WCI (see
Note 14).
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market
information and appropriate valuation methodologies. Considerable
judgment is necessary to interpret market data and to develop the
estimates of fair value.
The following methods and assumptions were used to estimate the
value of each class of financial instrument for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
CASH AND CASH EQUIVALENTS - Due to the nature of these financial
instruments, carrying value approximates fair value.
DEBENTURE BONDS, CONTRACTS RECEIVABLE AND INSTALLMENT CONTRACTS
PAYABLE - Fair values are determined using future cash flows
discounted at a rate of interest currently offered for debt or
receivables with similar remaining maturities and credit risks.
At July 31, 1996, the carrying values of these financial
instruments approximated their fair values.
NOTE PAYABLE TO BANK - Fair value approximates the carrying
value because the loan bears a variable interest rate.
MARKETABLE SECURITIES AND RESTRICTED INVESTMENTS - Fair value
approximates the carrying value based on quoted market prices.
LIMITATIONS - The fair value estimates are made at a discrete
point in time based on relevant market information and
information about the financial instruments. Because no market
exists for many of these financial instruments, fair value
estimates are based on judgments regarding current economic
conditions and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Accordingly, the estimates presented herein are not necessarily
indicative of what the Company could realize in a current market
exchange.
14. RELATED-PARTY TRANSACTIONS:
Contracts and Notes Receivable
------------------------------
Certain stockholders are indebted to the Company on contracts or
notes with the following terms:
1996 1995
-------- --------
Note secured by common stock, bearing
interest at 12.25% (prime plus 4%);
due in full by October 2001 $278,206 $278,206
Notes secured by real estate and common
stock; interest at 8.5% to 13.75% 27,985 160,585
-------- --------
$306,191 $438,791
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
Heritage Village Apartment Complex
----------------------------------
On February 1, 1974, Wayne E. Guthrie and his wife, Constance
Guthrie, purchased the Heritage Village apartment complex
located in King County, Washington for $2,100,000 from Pacific
National Capital Company (which subsequently merged into Pacific
Security Companies). The purchase was partially seller-financed
by a real estate contract bearing interest at 8% in an original
amount of $2,060,000. This contract was assigned to WCI in 1990
(see below). The balance owed on this contract was $539,481 and
$654,084 on July 31, 1996 and 1995, respectively. The taxable
gain on this sale was $932,348.
On August 1, 1976, Wayne E. Guthrie and Constance Guthrie sold
the Heritage Village apartment complex for $2,650,000 to
Security Savesco, Inc., which subsequently merged with Pacific
Security Companies in 1985 and had its name changed to Pacific
Security Companies.
On November 29, 1979, Security Savesco, Inc. sold the Heritage
Village apartment complex for $6,000,000 to a non-related party.
The sale was partially seller-financed by a real estate contract
bearing interest at 9% in an original amount of $5,200,000. The
balance owed on this contract was $3,388,641 and $3,669,771 on
July 31, 1996 and 1995, respectively. The taxable gain on this
sale was $2,732,811.
Washington Capital, Inc. (WCI)
------------------------------
In July 1990, certain contracts receivable from Company
officers, directors and stockholders were assigned by the
Company to WCI, a corporation whose sole stockholder was Wayne
E. Guthrie. In December 1991, Mr. Guthrie transferred his
ownership interest in WCI to his brother, who is now the sole
stockholder in WCI. Generally accepted accounting principles
include members of the immediate families of principal owners or
management as related parties.
The assignment of the contracts receivable from officers/
directors/stockholders of the Company was made at no gain or
loss as WCI executed installment notes payable to the Company
for the same principal amounts and interest rates as the
contracts assigned to WCI. In 1993, one of the contracts was
paid in full. At July 31, 1996 and 1995, the only significant
assets and liabilities of WCI were the contract receivable from
the officer/stockholder of the Company and the installment
contract payable to the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
Washington Capital, Inc. (WCI), Continued
-----------------------------------------
In July 1994, Wayne E. Guthrie and/or WCI pledged $800,000 face
value of the Company's Class A Preferred Stock (see Note 12) to
guarantee performance and full payment of any account that he or
WCI may owe to the Company.
In the event the Company elects to redeem this preferred stock
at any time prior to 2002, the proceeds shall be applied to the
debt. Also, any dividends included therewith shall be applied to
accrued interest paid on the debt.
If the debt is not paid in full prior to July 5, 2002, the
Company shall become the owner of the preferred stock, and the
liquidation shall be at the Company's sole discretion with the
proceeds being applied to the debt along with accrued dividends
that may be declared.
The contract receivable by the Company from WCI had balances
outstanding of $539,481 and $654,084 at July 31, 1996 and 1995,
respectively. This contract is repayable in $15,000 monthly
installments and bears interest at 8% per annum.
The Securities Act of Washington prohibits a debenture company's
officers, directors or controlling persons from directly or
indirectly borrowing funds from a debenture company or from
indirectly or directly owning real property upon which the
debenture company holds a mortgage, deed of trust or property
contract. The Securities Division takes the position that the
holding of these receivables, whether by the Company or WCI,
violates this provision of the Securities Act. The Company has
agreed to work with WCI to move these receivables to a party
which may legally hold them subject to such restrictions (see
Notes 10 and 12).
Installment Contacts, Mortgage Notes and Notes Payable
------------------------------------------------------
At July 31, 1996 and 1995, the following related-party notes
payable were outstanding:
Interest Monthly
1996 1995 Rate Payment
-------- -------- -------- --------
Wayne E. Guthrie $199,190 $209,369 6.75% $ 2,000
John Guthrie 4,946 6,426 9.00% 219
-------- --------
$204,136 $215,795
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
Debenture Bonds
---------------
Included in debenture bonds at July 31, 1996 and 1995 is
approximately $101,000 and $83,000, respectively, that is
payable to related parties. These bonds bear interest at the
prevailing market rate on the date of purchase.
Accrued Expenses and Other Liabilities
--------------------------------------
Included in accrued expenses and other liabilities at July 31,
1996 and 1995 are $57,283 and $175,919, respectively, payable to
Wayne E. Guthrie. Additionally, $98,885 and $69,735 was payable
to Constance Guthrie at July 31, 1996 and 1995, respectively.
Interest at 9.0% accrues on these advances. Advances to other
stockholders, who are children of Wayne E. Guthrie, included in
other liabilities amounted to $9,269 and $19,210 at July 31,
1996 and 1995, respectively. These advances bear interest at
9.0%.
Interest Income and Expense
---------------------------
The approximate amount of related-party interest income and
expense included in the accompanying consolidated statements of
operations for each of the three years ended July 31, 1996, 1995
and 1994 is as follows:
1996 1995 1994
-------- -------- --------
Interest income $ 90,000 $100,000 $111,000
Interest expense 35,000 34,000 70,000
Deferred Compensation Agreement
-------------------------------
During October 1991, the Company entered into a deferred
compensation agreement with its former president, Robert W.
Guthrie. In accordance with the terms of the agreement, Mr.
Guthrie was paid monthly compensation of $7,124 through
March 31, 1993.
The agreement also called for Robert W. Guthrie to be paid a
commission of $150,000 upon the sale or lease of certain real
estate for personal services he rendered on behalf of the
Company related to the acquisition and development of the
property. As of July 31, 1996, a commission of $147,876 had
been paid pursuant to the agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
Deferred Compensation Agreement, Continued
------------------------------------------
Additionally, the agreement provides that the Company will
provide Robert W. Guthrie with a line-of-credit loan of up to
$278,206 collateralized by Mr. Guthrie's pledge of his 158,975
shares of the Company's common stock. The line of credit
requires monthly interest payments only for the first five-year
period at a rate of prime plus 4.0% (or 12.25% at July 31,
1996), then monthly interest and principal payments of an
amount necessary to amortize the loan over the next five-year
period. As of July 31, 1996, $278,206 had been loaned to Robert
W. Guthrie pursuant to the agreement.
15. COMMON STOCK:
On October 31, 1995, the Board of Directors of the Company
proposed the creation of a second class of common stock, Class B
common stock. This proposed action was ratified by the
stockholders of the Company on December 12, 1995, at which time
amendment to the Articles of Incorporation was approved. This
class has authorized 30,000, no par value shares and entitles the
holder to 50 votes on each matter in all proceedings in which
actions are taken by the stockholders, including the election of
directors. Otherwise, the common stock is identical to the
original class in all respects and for all purposes.
PART III
---------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Identification of Directors and Executive Officers
The following information as of July 31, 1996 is provided with respect
to each director and executive officer of the Company:
Year Fist Term as
Elected as Director
Name Age Director Expires in Position (date elected to position)
----------------------- --- ---------- ---------- ---------------------------------------
Wayne E. Guthrie 76 1970 1996 Chairman of the Board and Chief
Executive Officer (January 17,
1970); Director
Kevin M. Guthrie 41 1980 1997 Vice President (May 2, 1985);
Director
David L. Guthrie 32 1987 1997 Vice President (September 1, 1989);
Director
Donald J. Migliuri 49 1992 1995 Secretary/Treasurer (May 29, 1990);
Director
Raymond J. Fisher 73 1970 1996 Director
Constance M. Guthrie 62 1981 1996 Director
Robert N. Codd 66 1994 1997 Director
Family Relationships
--------------------
Kevin M. Guthrie and David L. Guthrie are the sons of Wayne E.
Guthrie. Constance M. Guthrie is the wife of Wayne E. Guthrie.
Business Experience
-------------------
Wayne E. Guthrie, Chairman of the Board of Pacific Security Companies.
Mr. Guthrie is also Chairman of the Board of Aqua View Apartments,
Inc. a Washington corporation and subsidiary of the registrant. Mr.
Guthrie has over 40 years of experience in areas of construction,
financing of real estate and personal property, and real estate
investments.
Kevin M. Guthrie, Vice President of Pacific Security Companies since
1985. Mr. Guthrie has served as property manager for the Company since
1976. Mr. Guthrie is also an officer and director of Aqua View
Apartments, Inc.
Business Experience, Continued
------------------------------
David L. Guthrie, Vice President of Pacific Security Companies since
1989. Mr. Guthrie was formerly a stockbroker with Merrill Lynch in
Spokane, Washington. Mr. Guthrie is also an officer and director of
Aqua View Apartments, Inc.
Donald J. Migliuri, Treasurer of Pacific Security Companies since
1990. Mr. Migliuri was a Certified Public Accountant and has served
as an accounting officer with various diversified financial services
companies for over 10 years.
Constance M. Guthrie. Mrs. Guthrie is a housewife and has not been
employed outside the home during the past nine years.
Raymond J. Fisher. Mr. Fisher, now retired, was Secretary of Pacific
Security Companies. He was a Certified Public Accountant and was
employed by the Company and its predecessor companies for 41 years.
Robert N. Codd. Mr. Codd is employed by Pacific Security Companies in
its leasing and real estate activities. He was employed by the
Company from 1970 to 1979 and was rehired in November 1992. Prior to
being rehired, he was a commercial realtor and property manager.
Item 11. Executive Compensation
Remuneration of Directors and Officers
--------------------------------------
The following table lists, on an accrual basis, for each of the three
years ended July 31, 1996, the remuneration paid by the Company to any
officers or directors in excess of $100,000 and to all officers and
directors as a group who were officers or directors of the Company at
any time during the year ended July 31, 1996:
Annual
Name of Individual Compensation
or Number of Fiscal -------------------
Persons in Group Capacities in Which Served Year Salary Bonus
------------------ -------------------------- ------ --------- --------
Wayne E. Guthrie Chairman of the Board and 1996 $ *
Chief Executive Officer 1995 113,000
1994 100,000
Officers and
Directors
as a group (five) 1996 316,470
The Company has no qualified or nonqualified stock option plans as of
July 31, 1996.
*Annual compensation did not exceed $100,000.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain Beneficial Owners
Set forth below is certain information concerning parties,
excluding management, who are known by the Company to directly
own more than 5% of any class of the Company's voting shares on
July 31, 1996:
Amount and
Nature of
Name and Address Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
-------------- --------------------- ---------- --------
Common stock Linda Guthrie Welden
Bothell, WA 158,975 8.29%
Common stock Julie Guthrie Hable
San Francisco, CA 190,387 9.92
Common stock Robert Guthrie
Spokane, WA 158,975 8.29
Common stock John W. Guthrie
Olympia, WA 137,348 7.16
------- -----
Totals 645,685 33.66%
======= =====
(b) Security Ownership of Management
The following table sets forth as of July 31, 1996 information
concerning the direct ownership of each class of equity
securities by all directors and all directors and officers of the
Company as a group:
Amount and
Nature of
Name and Address Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
--------------- --------------------- ---------- --------
Common stock Wayne E. Guthrie 495,027 25.81%
Common stock Constance Guthrie 105,043 5.47
Common stock Kevin Guthrie 216,267 11.28*
Common stock David Guthrie 216,267 11.28*
--------- -----
Common stock All directors and
officers as a group 1,032,604 53.84%
========= =====
Amount and
Nature of
Name and Address Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
--------------- --------------------- ---------- --------
Preferred stock Wayne E. Guthrie 8,000 76.9%
Preferred stock Wayne E. or Constance
Guthrie 2,000 19.1
Preferred stock Kevin Guthrie 100 1.0
Preferred stock David Guthrie 100 1.0
Preferred stock Don Migliuri 200 2.0
--------- ----
Preferred stock All directors and
officers as a group 10,400 100.0%
========= =====
* Additionally, these parties exercise voting rights over an
additional 1.35% of this class through the holdings of their minor
children.
Item 13. Certain Relationships and Related Transactions
Transactions with Company officers, directors and stockholders and
other related parties are summarized in Notes 12 and 14 to the
consolidated financial statements included herein.
PART IV
---------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) 1. Financial Statements - See index under Item 8
(a) 2. Financial Statement Schedules:
Report of independent accountants
Schedule III - Real estate and accumulated depreciation
Schedule IV - Mortgage loans on real estate
All other schedules are omitted because they are not
applicable, or not required, or because the required
information is included in the financial statements or notes
thereto.
(a) 3. Exhibits:
There are no exhibits included in this filing.
(b) Reports on Form 8-K during the last quarter:
None
Report of Independent Accountants on
Financial Statement Schedules
Board of Directors and Stockholders
Pacific Security Companies
Spokane, Washington
Our report on the consolidated financial statements of Pacific
Security Companies and subsidiaries is included on page 10 of this
Form 10-K. In connection with our audits of such consolidated
financial statements, we have also audited the related financial
statement schedules listed under Item 14 of this Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as
a whole, present fairly, in all material respects, the information
required to be included therein.
/s/Coopers & Lybrand L.L.P.
Spokane, Washington
September 27, 1996
Pacific Security Companies and Subsidiaries
Schedule III
Real Estate and Accumulated DepreciationJuly 31, 1996
Life on
Which
Cost Amount at Depreciation
Capitalized Which in Latest
Subseqent Carried at Income
Initial to Revaluation Close of Accumulated Date Statement is
Description Encumbrance Cost Acquisition Reserve Period Depreciation Acquired Computed
------------------- ----------- ----------- ----------- ----------- ----------- ------------ ----------- ------------
Residential and
commercial
properties:
Rental buildings
and improvements:
Spokane, WA
N. 10 Post
Street (Peyton
Bldg.) $ 932,928 $ 2,209,343 $ 2,609,029 $ 4,818,372 $ 1,309,480 1979 25-40 years
S. 10 Washing-
ton (Hutton
Bldg.) -- 1,498,769 3,282,034 4,780,803 1,413,231 1979 25-40 years
E. 11128 Sprague
Avenue 143,357 216,000 41,718 257,718 37,569 1987 25 years
East Valley
Terrace Apart-
ments 433,520 896,953 88,193 985,146 599,450 1979 25 years
Mini-warehouse
complex 344,288 1,640,004 514,974 $ (507,703) 1,647,275 565,384 Various Various
Aqua View Apart-
ments 393,708 1,385,074 350,581 1,735,655 1,097,137 1969 40 years
W. 102 Indiana 651,453 663,031 -- 663,031 213,425 1984 30 years
City View Apart-
ments 556,413 440,028 58,742 498,770 85,007 1991 25 years
Pier One Build-
ing 1,595,136 1,194,017 2,744,755 3,938,772 416,016 1992 25-40 years
Cellular One
Building -- 950,373 (2,811) 947,562 140,074 1992 25 years
Birdies Golf
Center -- -- 1,972,752 1,972,752 45,139 1995 15-40 years
805 E. 33rd -- 87,967 87,967 1,682 1995 25 years
Life on
Which
Cost Amount at Depreciation
Capitalized Which in Latest
Subseqent Carried at Income
Initial to Revaluation Close of Accumulated Date Statement is
Description Encumbrance Cost Acquisition Reserve Period Depreciation Acquired Computed
------------------- ----------- ----------- ----------- ----------- ----------- ------------ ----------- ------------
Coeur d'Alene,
ID
Yellowfront
Building $ 25,891 $ 281,723 $ -- $ 281,723 $ 182,776 1976 25 years
Furniture
related to
above 540,237 494,771 1,035,029 480,729 Various Various
Held for
resale:*
Alberta
Apartments 167,193 167,193 -- 1988
E. 44th Street
Condominium 43,622 43,622 1981
----------- ----------- ----------- ----------- ----------- -----------
$5,076,694 $12,126,367 $12,242,705 $ (507,703) $23,861,390 $ 6,587,099
=========== =========== =========== =========== =========== ===========
*Buildings sold, but not meeting criteria for recognition of gain for
financial statement reporting purposes.
SCHEDULE III, Continued
Real Estate and Accumulated Depreciation
July 31, 1996
Real estate:
Balance at beginning of period $21,950,837
Additions during period:Purchases and
capitalized costs 3,006,930
Deductions during period:
Cost of real estate sold (1,096,377)
-----------
Balance at close of period $23,861,390
===========
Accumulated depreciation:
Balance at beginning of period $ 6,303,246
Depreciation for the year 767,207
Charges to accumulated depreciation related to
real estate investments sold, net of other
adjustments (483,354)
-----------
Balance at close of period $ 6,587,099
===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
SCHEDULE IV
Mortgage Loans on Real Estate
July 31, 1996
Principal
Amount of
Loans
Subject to
Face Carrying Delinquent
Interest Maturity Periodic Amount Amount Principal
Description Rate Date Payment Terms Prior Liens of Mortgages of Mortgages or Interest
------------------------ -------- -------- ------------------ ----------- ------------ ------------ -----------
Real estate contract on 9% 2004 $50,000 per month, $ 3,388,641 $ 3,388,641
apartment building including interest
(HeritageVillage)
Real estate contract on 9% 2023 $16,973 per month, 1,777,573 1,777,573
apartment complex including interest
(Evergreen Town House)
Real estate contract on 9.25% Repaid $6,412 per month
Hastings Building 8/96 including interest 587,351 587,351
Real estate contract on Prime 1998 Interest only 447,448 447,448
Regency Care Center +1%
Real estate contract on 8.50% 2016 3,600 per month,
Walker-McGough Building including interest 407,898 407,898
Other mortgage contracts Various Various Various 4,100,328 3,884,033
and notes receivable,
none of which individu-
ally exceed 3% of the
total carrying value of
mortgages ----------- -----------
$10,709,239 $10,492,944
=========== ===========
Principal
Amount of
Loans
Subject to
Face Carrying Delinquent
Interest Maturity Periodic Amount Amount Principal
Description Rate Date Payment Terms Prior Liens of Mortgages of Mortgages or Interest
------------------------ -------- -------- ------------------ ----------- ------------ ------------ ------------
Balance at beginning of
period $13,457,896
Additions during period:
Mortgage loans origi-
nated and purchased $ 1,076,754
Contract discounts
realized 126,044
-----------
1,202,798
Deductions during period:
Collections of principal
and contract payoffs (4,166,338)
Amounts written off (1,412)
-----------
(4,167,750)
-----------
Balance at end of period $10,492,944
===========
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, Pacific Security Companies has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PACIFIC SECURITY COMPANIES
(Registrant)
Dated: October 25, 1996 By: /s/ Wayne E. Guthrie
------------------------ -------------------------------
Wayne E. Guthrie
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, which
include the Chief Executive Officer, the Chief Financial Officer, and
the Board of Directors, on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature Capacity Date
------------------------ ----------------------- ----------------
/s/ Wayne E. Guthrie Chief Executive Officer October 23, 1996
------------------------ and Director ----------------
Wayne E. Guthrie
/s/ Donald J. Migliuri Secretary-Treasurer October 24, 1996
------------------------ Chief Financial Officer ----------------
Donald J. Migliuri
/s/ Kevin M. Guthrie Vice-President and October 24, 1996
------------------------ Director ----------------
Kevin M. Guthrie
/s/ David L. Guthrie Vice-President and October 24, 1996
------------------------ Director ----------------
David L. Guthrie
/s/ Constance M. Guthrie Director October 23, 1996
------------------------ ----------------
Constance M. Guthrie
/s/ Raymond J. Fisher Director October 24, 1996
------------------------ ----------------
Raymond J. Fisher
/s/ Robert N. Codd Director October 24, 1994
------------------------ ----------------
Robert N. Codd