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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
For the fiscal year ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6673
PACIFIC SECURITY COMPANIES
--------------------------
(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) 444-7700
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 and non-voting common
equity held by nonaffiliates computed by reference to the price at
which the common equity was sold, or the average bid and asked price
of such common equity, as of a specified date within the past 60 days.
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, 1999, the registrant had outstanding 1,152,532 shares of
common stock, no par value ($3 stated value) and 3,000 shares of Class
A preferred stock, $100 par value.
Documents incorporated by reference: none.
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 7A. Quantitative and Qualitative Disclosures About Market Risk
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
(the "Company") 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 Company at July 31, 1999 and 1998
were $35,946,222 and $30,940,293, respectively, and real estate
contracts and loans represent approximately 50% and 36% of the
respective asset totals. The Company presently primarily
originates commercial loans. The Company also originates
contracts to facilitate the sale of real estate held for sale or
development. Some of the contracts have fixed contractual
interest rates while commercial (interim and construction) loans
generally have variable rates. 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. The total amount invested in real estate contracts and
loans of $17,925,338 as of July 31, 1999 is $6,776,329 more than
at the end of the prior year. The percentage of contracts which
were delinquent over 90 days was 1.9% as of July 31, 1999 and
2.2% as of July 31, 1998. Management continues to emphasize
enforcement of the Company's credit and collection policies.
In fiscal 1998, the Company's newly formed subsidiary,
Cornerstone Realty Advisors, Inc., began making short-term
(generally one to two years including extensions) construction
and interim loans. Bank lines of credit were increased to provide
additional funds for this purpose. The permanent financing for
these short-term loans is obtained from the secondary market and
includes such sources as banks, savings and loan institutions,
life insurance companies, credit unions and conduits.
In fiscal 1997, 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. Additionally, in fiscal 1997, the Company
continued developing certain land for residential development.
The project, known as Tanglewood Ranch Park Estates (The Crest)
offered approximately 21 ten-acre parcels suitable for home
construction. The Company began marketing these parcels in fiscal
1998 and has approximately 13 ten-acre parcels remaining for sale
at July 31, 1999.
In fiscal 1996, the Company completed construction of Birdies
Golf Center (Birdies) and discontinued this operation in fiscal
1999. See further information on this discontinued business
segment in Note 4 to the consolidated financial statements.
Investments in rental properties totaled $14,807,679 and
$13,588,145 as of July 31, 1999 and 1998, respectively. The
increase is primarily the net result of the conversion of the
Birdies Golf Center building into a leased office building and
additional capitalized costs that more than offset depreciation
expense and the cost of real estate that was sold. Other real
property held for sale and development totaled $2,031,448 and
$2,775,542 as of July 31, 1999 and 1998, 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 sale of certain commercial real estate and
multi-family housing, rental income has decreased from $2,398,369
in fiscal 1997 to $2,268,810 in fiscal 1999. During the same
period, interest income, including the amortization of discounts
on real estate contracts, has increased from 21% of total income
in fiscal 1997 to 37% of total income in fiscal 1999. The Company
expects to continue its emphasis on the development, leasing and
sale of commercial real estate in fiscal 2000, marketing of the
Tanglewood (The Crest) parcels and originating construction and
interim commercial real estate loans. There are no contractual
commitments other than the remaining remodeling costs associated
with improvements for commercial buildings and the construction
of a new building pre-leased to a tenant at the Cornerstone
Office Park. The Company's fiscal 2000 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, originating loans collateralized by real estate,
developing real estate for sale or lease and the operation of
rental properties. The Company is in competition with financial
institutions who originate or invest in real estate
collateralized contracts and commercial property owners located
primarily in or near Spokane, Washington.
As of July 31, 1999, the Company employed approximately 21 people
on a full-time equivalent basis, 18 of whom are in its office at
N. 10 Post Street in Spokane, Washington.
Item 2. Properties
As of July 31, 1999, 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, 1999
---------------------------------------
Rental/ Net Mortgage
Date Development Carrying or Contract
Acquired Description of Property Status Value Obligation
-------- ---------------------------------------- ------------- ---------- -----------
Commercial:
1979 The Peyton Building at N. 10 Post Street Substantially $4,175,899 $2,422,444
contains approximately 85,000 square leased
feet of rentable space. Substantial
improvements have been made to the
building since its acquisition. Remodel-
ing of this ffice building continues as
new occupancy warrants. The Company's
offices are located in this building.
1979 The Hutton Building at S. 10 Washington Substantially $3,599,368 $ --
contains approximately 56,000 square leased
feet of rentable space. Substantial
improvements have been made to the
building since its acquisition. The
Company also acquired 25,000 square
feet for parking near this building.
1984 Bank Branch Building at W. 102 Indiana Sold $ 396,250 $ 569,858
Avenue was under a long-term lease. subsequent
to year end
1992 The Pier One Building is a commercial Leased $3,176,219 $1,380,312
building. The building has two major
tenants, who occupy over 60% of the
space, and several other smaller
tenants for the remaining space.
1992 The AT&T Wireless Building is a Leased $ 723,304 $ 815,793
commercial building constructed by the
Company on the north river bank in
Spokane.
1995 Cornerstone Office Building is the Leased $1,581,087 $ --
remodeled Birdies Golf Center, con-
structed on 2 acres of the Cornerstone
Office Park property. It has approxi-
mately 8,300 square feet of rental
space occupied by two tenants.
Multi-Family Housing:
1969 The Broadmoor Apartments, formerly the Occupied $1,155,561 $ --
Aqua View Apartments, is a 128-unit
apartment complex.
July 31, 1999
---------------------------------------
Rental/ Net Mortgage
Date Development Carrying or Contract
Acquired Description of Property Status Value Obligation
-------- ---------------------------------------- ------------- ---------- -----------
Land:
1990 Cornerstone Office Park and property Under $ 752,929 $ --
consists of approximately 12 remaining development
acres of raw land in a location where
there has been substantial commercial
and residential development.
1991 Tanglewood Ranch Park Estates (The Crest) Being $1,106,134 $ --
in south Spokane County was acquired marketed
through a judicial foreclosure. The
area consisted of approximately 300
acres of undeveloped land. In fiscal
1999, one lot was sold, leaving approxi-
mately 13 lots available for sale.
1993 Approximately six acres in Auburn, Being $ 172,386 $ --
Washington zoned for multi-family housing marketed
were acquired through a foreclosure.
Item 3. Legal Proceedings
As of July 31, 1999, it is the opinion of management that there is no
pending litigation that would have a material 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 1999.
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. No dividends
have been declared since 1990.
(c) Approximate Number of Holders of Common Stock.
Common no par value -- 1,126 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, 1999, the Company also has
issued 3,000 shares of Class A preferred stock owned by two
holders. These shares receive cumulative dividends of 6% when
declared by the Board of Directors. During the fiscal years ended
July 31, 1999 and 1998, dividends totaling $18,000 and $42,000
were declared and accrued on these shares, respectively. During
the fiscal years ended July 31, 1997 and 1996, dividends totaling
$62,400 were declared and accrued on these shares. The dividends
were paid on August 3, 1999, August 3, 1998, August 1, 1997 and
August 2, 1996, respectively.
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,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Rental income $ 2,268,810 $ 2,220,979 $ 2,398,369 $ 2,714,563 $ 2,832,139
Interest income, including loan fees 2,183,276 963,297 1,032,847 1,138,935 1,375,420
Gains on sales of real estate 1,128,628 514,141 1,611,195 486,469 584,657
Interest expense, net 2,208,858 1,580,820 1,548,173 1,650,559 1,681,213
Income (loss) from continuing operations,
before income taxes 853,559 (720,371) 879,238 182,114 --
Net income (loss) 285,342 (596,936) 472,000 39,266 159,310
Income (loss) applicable to common
stockholders 57,342 (757,936) 357,600 (75,134) 44,910
Income (loss) per common share - basic
and diluted .05 (.48) .19 (.04) .02
=========== =========== =========== =========== ===========
Income (loss) from continuing operations
per common share - basic and diluted .27 (.42) .26 (.03) --
=========== =========== =========== =========== ===========
Cash dividends per common share -- -- -- -- --
Weighted-average number of common
shares outstanding 1,161,677 1,591,484 1,895,105 1,938,076 1,960,746
BALANCE SHEET DATA (AT YEAR END):
Contracts, mortgages, finance notes and
loans receivable, net $17,925,338 $11,149,009 $10,971,700 $10,492,944 $13,457,896
Total assets 35,946,222 30,940,293 32,294,907 32,840,107 35,351,486
Notes and contracts payable 17,421,385 12,255,178 10,028,531 11,055,919 13,107,725
Debentures 9,643,548 9,839,936 9,898,351 9,718,260 9,179,484
Stockholders' equity 6,980,693 6,647,479 9,689,896 9,397,005 9,544,017
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
and loans, originating construction and interim loans, acquiring real
estate that is either held for sale or developed and leased or sold
and operating rental properties as its primary activities. In fiscal
1999, the Company expanded its lending activities associated with
interim construction loans. During the past two years, the Company has
also focused on the development and lease of its rental properties as
demand for the available space in these projects has increased. Much
of the Company's development of the 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.
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 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 and, in fiscal 1998, began originating loans secured by
real estate, including construction and interim loans through its
subsidiary, Cornerstone Realty Advisors, Inc. These loans have
involved properties located in the western United States.
The Company finances its investments in real estate and loans
primarily through collateralized line-of-credit arrangements with
local banks, real estate notes or mortgages, and the sale of fixed
rate debentures with terms ranging from one to ten years. The Company
intends to continue using these funding sources in the future.
RESULTS OF OPERATIONS
For the years ended July 31, 1999, 1998 and 1997, the Company's net
income (loss) was approximately $285,000, $(597,000) and $472,000,
respectively. Due to dividends and the accretion of the discount on
the issuance of preferred stock, the income (loss) applicable to
common stockholders was approximately $57,000, $(758,000) and $358,000
in fiscal 1999, 1998 and 1997, respectively.
Rental real estate activities have decreased due to sales of rental
properties. Total rental income has decreased from $2,398,369 in
fiscal 1997 to $2,268,810 in fiscal 1999. Reduced rental income could
continue as a result of sales of some rental properties.
The total interest income, including loan fees and amortization of
discounts on acquired real estate contracts and loans, has increased
from approximately $1,059,000 and $1,005,000 in fiscal 1997 and 1998,
respectively, to approximately $2,211,000 in fiscal 1999. This
increase corresponds directly with the increase in the Company's
origination of constrution and interim commercial loans. In the last
half of fiscal 1998, the Company began originating new commercial real
property construction and interim loans through its subsidiary,
Cornerstone Realty Advisors, Inc. Loan fees of $450,000 and net
interest income of $251,000 have significantly increased as the loan
portfolio has grown in fiscal 1999.
Gains on the sale of real estate were approximately $1,129,000,
$514,000 and $1,611,000 in fiscal 1999, 1998 and 1997, 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.
The expenses associated with rental operations have remained
relatively flat at approximately $2.1 million in fiscal 1999 from
approximately $2.1 million in fiscal 1997. The rental activities of
the Company are expected to continue to contribute to its
profitability, but may be affected by sales of rental properties.
Interest expense, exclusive of interest on rental properties, net of
amounts capitalized, was approximately $1,842,000, $1,212,000 and
$1,188,000 in fiscal 1999, 1998 and 1997, respectively. In the last
half of fiscal 1998 and through fiscal 1999, outstanding borrowings
increased significantly due to advances drawn under the Company's
lines of credit to fund the origination of construction and interim
loans. These increased borrowings resulted in the increase in interest
expense in fiscal 1999.
Salaries and commissions have increased in absolute dollar amounts for
each of the last three fiscal years. In fiscal 1999, salaries and
commissions only increased $24,000. In fiscal 1998, additional
staffing for Cornerstone Realty Advisors, Inc. resulted in increased
salaries and commissions.
General and administrative expenses in fiscal 1999 were significantly
lower by approximately $155,000 than in fiscal 1998 due to
nonrecurring legal fees incurred in fiscal 1998 of approximately
$300,000 related to a minority stockholder lawsuit.
The Company's effective income tax rate as a percentage of income
(loss) from continuing operations before income taxes was 37% in
fiscal 1999, compared to a benefit of 29% and a provision of 32% in
fiscal 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, the Company had total stockholders' equity of
approximately $6,981,000 and a total liabilities to equity ratio of
4.15 to 1, which increased from 3.58 to 1 the year before. The
increase in this ratio was primarily due to the increase in bank
borrowings to fund new interim and construction loans in fiscal 1999.
In fiscal 1999, the Company's primary sources of funds were
approximately $1.1 million from the sale of real estate, $13.5 million
in real estate contract collections, $.9 million from operating
activities and $7.3 million from net line-of-credit and note
borrowings. The primary uses of funds were approximately $.8 million
used for the acquisition and improvements of real estate projects,
$18.5 million used to originate new loans and acquire new contracts
and mortgage notes, $.8 in repayment of maturing debentures, $.2
million for purchase and retirement of common stock and preferred
stock, and approximately $2.6 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. The interim and construction loans originated by
the Company have variable interest rates and are primarily funded by
variable interest rate loans so that the spread between the loans
receivable interest rate and debt interest rate is maintained
regardless of whether rates are increasing or decreasing. The Company
will be affected by changes in the real estate market in Washington
and other western states where it originates loans.
The Company anticipates that the availability of funds and sales of
debentures under its $21,812,500 line-of-credit and loan arrangements,
of which approximately $13,925,000 was outstanding at July 31, 1999,
will be sufficient to fund its short- and intermediate-term needs to
retire maturing debentures and mortgage obligations, to continue
development of its real estate projects as demand warrants, and to
originate commercial real estate loans. The Company does not
anticipate any significant capital expenditures during fiscal 2000,
other than the completion of the remodeling of rental properties and
the construction of a pre-leased building and other improvements to
the Cornerstone Office Park.
YEAR 2000 ISSUES
Throughout the information technology industry, the use of two-digit
fields was common practice in the design of hardware, systems
software, proprietary applications and system interfaces. The Year
2000 problem is pervasive and complex. The issue is whether computer
systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures and has assessed
Year 2000 risks. This assessment includes the identification of
necessary changes to computer hardware and software applications that
will attempt to ensure availability and integrity of the Company's
information systems and the reliability of its financial and
operational systems.
The Company has reviewed its financial, information and operational
systems in order to identify those products, services or systems that
are not Year 2000 compliant. As a result of this review, the Company
has determined that it will be required to modify or replace certain
information and operational systems so they will be Year 2000
compliant. These modifications and replacements are being, and will
continue to be, made in conjunction with the Company's overall systems
initiatives. The total cost of these Year 2000 compliance activities
is not anticipated to be material to the Company's financial position
or its results of operations.
Based on available information, the Company does not believe any
material exposure to significant business interruption exists as a
result of Year 2000 compliance issues. These costs and the timing in
which the Company plans to complete its Year 2000 modifications are
based on management's best estimates. However, there can be no
assurance that the Company will timely identify and remediate all
significant Year 2000 problems, that remedial efforts will not involve
significant time and expense, or that such problems will not have a
material adverse effect on the Company's business, results of
operations or financial position.
The Company also faces risk to the extent that its borrowers, vendors,
service providers and others with whom the Company transacts business
may not comply with Year 2000 requirements. The Company has initiated
formal communications with significant borrowers, vendors and service
providers to determine the extent to which the Company is vulnerable
to these third parties failure to remediate their own Year 2000
issues. In the event any such third parties are not Year 2000
compliant, the Company's results of operations could be materially
adversely affected.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises principally from interest
rate risk in its lending and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the
Company manages other risks, as in credit quality and liquidity risk,
in the normal course of business, management considers interest rate
risk to be a significant market risk and could potentially have a
material effect on the Company's financial condition and results of
operations. Other types of market risks, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the
normal course of the Company's business activity.
The Company's profitability is affected by fluctuations in the
interest rates. Management's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings. A sudden
and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-
earning assets and interest-bearing liabilities do not change at the
same speed, to the same extent or on the same basis. In addition, real
estate lending may slow in a rising interest rate environment.
The Company mitigates interest rate risk on the interim and
construction loans it originates by having variable interest rates on
these loans tied to the variable interest rates on its borrowings to
fund the loans. These loans are short-term loans (generally one to two
years, including extensions). Permanent financing for these loans is
obtained from the secondary market and includes such sources as banks,
savings and loan institutions, life insurance companies, credit unions
and conduits.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected
maturity, and the instruments' estimated fair values at July 31, 1999.
2000 2001 2002 2003 2004 Thereafter Balance Fair Value
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest-sensitive
assets:
Contracts, mortgages,
finance notes
and loans
receivable $ 9,238,794 $ 449,193 $ 2,173,037 $ 526,853 $ 570,582 $ 5,279,847 $18,238,306 $18,238,306
Interest-sensitive
liabilities:
Notes payable to
banks 11,502,961 2,422,444 13,925,405 13,925,405
Installment con-
tracts, mortgage
notes and notes
payable 137,543 241,788 255,781 248,238 224,924 2,387,706 3,495,980 3,495,980
Debenture bonds 1,435,825 932,645 820,309 883,000 1,582,411 3,989,358 9,643,548 9,643,548
Off-balance sheet
items:
Undisbursed loans
receivable 4,828,082 4,828,042 4,828,042
Expected maturities are contractual maturities adjusted for prepayments
of principal. The Company uses certain assumptions to estimate fair
values and expected maturities. For assets, expected maturities are based
upon contractual maturity, projected repayments and prepayment of
principal.
Item 8. Financial Statements and Supplementary Data
Report of independent accountants
Financial statements:
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of comprehensive income (loss)
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, 1999 or any
interim period after July 31, 1999.
[PricewaterhouseCoopers LLP Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Pacific Security Companies and Subsidiaries
Spokane, Washington
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, comprehensive income
(loss), stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Pacific Security
Companies and its subsidiaries (the Company) at July 31, 1999 and
1998, and the results of their operations and their cash flows for
each of the three years in the period ended July 31, 1999, in
conformity with generally accepted accounting principles. 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 of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
September 29, 1999
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 1999 and 1998
1999 1998
----------- -----------
Assets:
Cash and cash equivalents:
Unrestricted $ 512,472 $ 318,026
Restricted 16,321 11,289
----------- -----------
528,793 329,315
----------- -----------
Receivables:
Contracts, mortgages, finance notes and
loans receivable, net:
Related parties 214,795 427,183
Unrelated 17,710,543 10,721,826
----------- -----------
17,925,338 11,149,009
Accrued interest 98,319 391,076
Income taxes -- 154,857
Other 31,475 2,415
----------- -----------
18,055,132 11,697,357
----------- -----------
Investment in rental properties, net 14,807,679 13,588,145
----------- -----------
Investment in golf center, net -- 2,070,994
----------- -----------
Other investments:
Property held for sale and development 2,031,448 2,775,542
Marketable securities 242,168 88,062
----------- -----------
2,273,616 2,863,604
----------- -----------
Other assets:
Vehicles and equipment, net 33,590 35,957
Prepaid and other, net 247,412 296,590
Golf center inventories -- 58,331
----------- -----------
281,002 390,878
----------- -----------
Total assets $35,946,222 $30,940,293
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
July 31, 1999 and 1998
1999 1998
----------- -----------
Liabilities:
Notes payable to banks $13,925,405 $ 6,643,826
----------- -----------
Installment contracts, mortgage notes and
notes payable:
Related parties 337,695 1,028,758
Unrelated 3,158,285 4,582,594
----------- -----------
3,495,980 5,611,352
----------- -----------
Debenture bonds 9,643,548 9,839,936
----------- -----------
Accrued expenses and other liabilities:
Related parties 254,590 207,240
Unrelated 874,602 913,588
----------- -----------
1,129,192 1,120,828
----------- -----------
Income taxes 59,131 --
Deferred income taxes 712,273 586,872
----------- -----------
Total liabilities 28,965,529 23,802,814
----------- -----------
Commitments and contingencies (Notes 2, 3,
7, 8, 9, and 14)
Redeemable Class A preferred stock, $100 par
value; $100 redemption value; authorized
20,000 shares; issued and outstanding
0 and 7,000 shares -- 700,000
Less: Net discount on issuance of preferred
stock -- (210,000)
----------- -----------
-- 490,000
----------- -----------
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
July 31, 1999 and 1998
1999 1998
----------- -----------
Stockholders' equity:
Preferred stock:
Class A preferred stock, $100 par value;
authorized 20,000 shares; issued and
outstanding, 3,000 shares $ 300,000 $ --
Preferred stock, authorized 10,000,000
no par value shares; no shares issued
and outstanding -- --
Common stock:
Original class, authorized 2,500,000 no
par value shares, $3 stated value;
issued and outstanding, 1,152,532 and
1,172,488 shares 3,457,597 3,517,464
Class B, authorized 30,000 no par value
shares; no shares issued and out-
standing
Additional paid-in capital 1,804,009 1,776,951
Retained earnings 1,418,705 1,361,363
Accumulated comprehensive income (loss), net 382 (8,299)
----------- -----------
Total stockholders' equity 6,980,693 6,647,479
----------- -----------
Total liabilities and stockholders' equity $35,946,222 $30,940,293
=========== ===========
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, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Income:
Rental $ 2,268,810 $ 2,220,979 $ 2,398,369
Interest, including loan fees of $450,285,
$59,979 and $27,775 2,183,276 963,297 1,032,847
Amortization of discounts on real estate
contracts 27,633 41,992 25,856
Gain on sales of real estate 1,128,628 514,141 1,611,195
Gain on sale of marketable securities 279,082 -- --
Other, net 45,897 49,412 (32,757)
----------- ----------- -----------
5,933,326 3,789,821 5,035,510
----------- ----------- -----------
Expenses:
Rental operations:
Depreciation and amortization 663,272 628,149 640,105
Interest 366,817 369,276 360,632
Other 1,064,448 1,038,890 1,097,046
----------- ----------- -----------
2,094,537 2,036,315 2,097,783
Interest, net of amount capitalized 1,842,041 1,211,544 1,187,541
Salaries and commissions 735,120 710,660 608,550
General and administrative 368,848 523,443 250,532
Depreciation and amortization 39,014 26,031 9,078
Uncollectible accounts 207 2,199 2,788
----------- ----------- -----------
5,079,767 4,510,192 4,156,272
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 853,559 (720,371) 879,238
Income tax provision (benefit) 312,565 (206,429) 277,668
----------- ----------- -----------
Income (loss) from continuing operations 540,994 (513,942) 601,570
Discontinued operations:
Loss from discontinued operations of golf
center (less federal income tax benefit
of $147,584, $33,407 and $59,860) (255,652) (82,994) (129,570)
----------- ----------- -----------
Net income (loss) 285,342 (596,936) 472,000
Less: Preferred stock dividends (18,000) (42,000) (62,400)
Accretion of discount on preferred stock (210,000) (119,000) (52,000)
----------- ----------- -----------
Income (loss) applicable to common stockholders $ 57,342 $ (757,936) $ 357,600
=========== =========== ===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Income (loss) from continuing operations
applicable to common stockholders $ 312,994 $ (674,942) $ 487,170
=========== =========== ===========
Income (loss) per common share - basic and
diluted $ .05 $ (.48) $ .19
=========== =========== ===========
Income (loss) from continuing operations per
common share - basic and diluted $ .27 $ (.42) $ .26
=========== =========== ===========
Loss from discontinued operations per common
share - basic and diluted $ (.22) $ (.05) $ (.07)
=========== =========== ===========
Weighted average common shares outstanding -
basic and diluted 1,161,677 1,591,484 1,895,105
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
for the years ended July 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Net income (loss) $ 285,342 $ (596,936) $ 472,000
Other comprehensive income before income taxes:
Changes in unrealized losses on marketable
securities 13,152 1,058 19,470
----------- ----------- -----------
Other comprehensive income (loss) before
income taxes 298,494 (595,878) 491,470
Less deferred income taxes (4,471) (361) (12,940)
----------- ----------- -----------
Comprehensive income (loss) $ 294,023 $ (596,239) $ 478,530
=========== =========== ===========
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, 1999, 1998 and 1997
Additional Accumulated
Preferred Common Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income (Loss) Total
----------- ----------- ----------- ----------- ------------- -----------
Balances, July 31, 1996 $ 5,754,255 $ 1,805,001 $ 1,853,275 $ (15,526) $ 9,397,005
Net income 472,000 472,000
Unrealized gain on marketable
securities 6,530 6,530
Purchase and retirement
of common stock
(45,960 shares) (137,880) 66,641 (71,239)
Cash dividend declared on
preferred stock (62,400) (62,400)
Accretion of discount on
preferred stock, including
redemption of 1,000 shares 35,000 (87,000) (52,000)
----------- ----------- ----------- ----------- ----------- -----------
Balances, July 31, 1997 5,616,375 1,906,642 2,175,875 (8,996) 9,689,896
Net loss (596,936) (596,936)
Unrealized gain on marketable
securities 697 697
Purchase and retirement
of common stock
(699,637 shares) (2,098,911) (94,691) (56,576) (2,250,178)
Cash dividend declared on
preferred stock (42,000) (42,000)
Accretion of discount on
preferred stock, including
redemption of 2,400 shares (35,000) (119,000) (154,000)
----------- ----------- ----------- ----------- ----------- -----------
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
Additional Accumulated
Preferred Common Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income (Loss) Total
----------- ----------- ----------- ----------- ------------- -----------
Balances, July 31, 1998 $ 3,517,464 $ 1,776,951 $ 1,361,363 $ (8,299) $ 6,647,479
Net income 285,342 285,342
Unrealized gain on marketable
securities 8,681 8,681
Purchase and retirement
of common stock
(19,956 shares) (59,867) 27,058 (32,809)
Cash dividend declared on
preferred stock (18,000) (18,000)
Accretion of discount on
preferred stock, including
redemption of 4,000 shares
and conversion of 3,000
shares (210,000) (210,000)
Conversion of redeemable
preferred stock $ 300,000 300,000
----------- ----------- ----------- ----------- ----------- -----------
Balances, July 31, 1999 $ 300,000 $ 3,457,597 $ 1,804,009 $ 1,418,705 $ 382 $ 6,980,693
=========== =========== =========== =========== =========== ===========
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, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Cash received from contracts, rentals and
golf center sales $ 2,836,790 $ 2,690,419 $ 2,759,659
Interest received 1,775,529 879,135 1,003,265
Cash paid to suppliers and employees (2,297,644) (2,590,272) (2,269,308)
Interest paid, net of amounts capitalized (1,610,269) (1,040,047) (995,036)
Income taxes refunded (paid) 170,330 -- (643,000)
----------- ----------- -----------
Net cash from operating activities 874,736 (60,765) (144,420)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of real estate 1,140,122 566,628 2,032,279
Proceeds from sales and maturities of
marketable securities 337,796 -- --
Purchase of marketable securities (200,062) -- --
Collections on contracts, mortgages, finance
notes and loans receivable 13,461,784 7,208,934 2,462,229
Origination of loans receivable and investment
in contracts, mortgages and finance notes (18,521,619) (6,471,596) (1,535,634)
Additions to rental properties, property
held for sale, property under develop-
ment, golf center, vehicles and equipment (847,658) (1,673,150) (1,353,211)
Change in restricted investments (5,032) 351,549 11,348
Other -- -- 16,335
----------- ----------- -----------
Net cash from investing activities (4,634,669) (17,635) 1,633,346
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 7,281,579 1,238,827 956,989
Proceeds from installment contracts,
mortgage notes and notes payable 283,333 434,688 --
Payments on installment contracts,
mortgage notes and notes payable (2,598,705) (300,868) (1,984,377)
Proceeds from sales of debenture bonds 76,912 340,657 447,223
Redemption of debenture bonds (813,931) (954,296) (814,535)
Redemption of preferred stock (200,000) (240,000) (100,000)
Payment of dividends on preferred stock (42,000) (62,400) (62,400)
Purchase and retirement of common stock (32,809) (385,240) (71,239)
----------- ----------- -----------
Net cash from financing activities 3,954,379 71,368 (1,628,339)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 194,446 (7,032) (139,413)
Cash and cash equivalents, beginning of year 318,026 325,058 464,471
----------- ----------- -----------
Cash and cash equivalents, end of year $ 512,472 $ 318,026 $ 325,058
=========== =========== ===========
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, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Reconciliation of net income (loss) to net
cash from operating activities:
Net income (loss) $ 285,342 $ (596,936) $ 472,000
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 743,802 750,370 740,980
Deferred income tax provision (benefit) 121,324 (534,967) 274,374
Deferred financing income realized (27,633) (41,992) (25,856)
Interest accrued on debenture bonds 540,631 555,224 547,403
Gain on sales of marketable securities (279,082) -- --
Gain on sales of real estate (1,128,628) (514,141) (1,611,195)
Uncollectible accounts -- 2,199 2,788
Change in assets and liabilities:
Accrued interest receivable 42,537 (299,157) (1,808)
Income taxes 213,988 299,764 (699,565)
Prepaid expenses 49,178 35,252 61,617
Golf center inventories 58,331 (2,830) 27,851
Accrued expenses and other liabilities 282,584 258,323 29,047
Other, net (27,638) 28,126 37,944
----------- ----------- -----------
Net cash from operating activities $ 874,736 $ (60,765) $ (144,420)
=========== =========== ===========
Supplemental schedule of noncash investing
and financing activities:
Company financed sale of property $ 1,775,358 $ 486,300 $ 1,379,495
Accretion of discount on preferred stock 150,000 119,000 52,000
Stock dividend declared and unpaid 18,000 42,000 62,400
Transfer of investment in golf center to
investment in rental properties 1,366,683 -- --
Transfer of investment in golf center to
property held for sale or development 460,182 -- --
Note payable issued for purchase and
redemption of preferred shares 200,000 -- --
Deferred gain recognized on sale of property -- 41,516 507,703
Related party note issued in exchange for
non-competition agreement -- 125,000 --
Exchange of real estate for purchase and
redemption of common shares -- 1,143,500 --
Notes payable issued for purchase and
redemption of common shares -- 729,000 --
The accompanying notes are an integral part of the consolidated
financial statements.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended July 31, 1999, 1998 and 1997
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 financing contracts and loans,
collateralized by real estate. Most of the Company's real estate
activities are concentrated within the state of Washington.
During the year ended July 31, 1998, the Company began
originating commercial real estate loans on properties located in
the western United States.
A summary of the 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 subsidiaries, Cornerstone
Properties and Development, Inc. (formerly the Aqua View
Apartments, Inc.) operating as the Broadmoor Apartments, and
Cornerstone Realty Advisors, Inc. which was formed in March
1998. All significant intercompany accounts and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
The Company deposits all cash and cash equivalents with high
quality financial institutions. At times, the deposits may
exceed the federal insured limit.
The Company considers highly liquid debt instruments, if any,
purchased with a remaining maturity of three months or less to
be cash equivalents.
CONTRACTS, MORTGAGES, FINANCE NOTES AND LOANS RECEIVABLE
Contracts, mortgages, finance notes and loans receivable are
stated at unpaid principal balance, plus accrued interest, less
acquisition discounts, unearned loan fees and an allowance for
estimated uncollectible amounts, as necessary. Management
evaluates receivables which may not be fully collectible to
determine if a provision for loss is necessary based on the
present value of expected future cash flows from the
receivables in the ordinary course of business or from amounts
recoverable through foreclosures and the subsequent resale of
the collateral.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
CONTRACTS, MORTGAGES, FINANCE NOTES AND LOANS RECEIVABLE
Interest continues to be accrued on non-performing receivables
until such amount is not expected to be recovered.
DISCOUNTS ON CONTRACTS
The Company amortizes discounts on purchased contracts using
the level-yield method over the expected term of the contracts.
LOAN ORIGINATION FEES
Loan origination fees, net of direct origination costs, are
deferred and recognized as interest income using the level
interest yield method over the contractual term of each loan.
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 in operations.
INVESTMENT IN GOLF CENTER
The discontinued golf center assets, 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
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
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 $98,000 were capitalized during the year ended
July 31, 1997.
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.
The Company evaluates its real estate assets 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 recognized.
MARKETABLE SECURITIES
The Company's investments, consisting of debt and equity
securities, are classified as "available for sale" and,
therefore, are carried at market value. Realized gains and
losses on the sale of these marketable 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
accumulated comprehensive income (loss), net of related income
taxes.
INTANGIBLE ASSETS
The amount paid under a covenant not-to-compete is being
amortized on a straight-line basis over the five-year term of
the related agreement. Accumulated amortization associated with
this agreement was $36,441 and $11,441 at July 31, 1999 and
1998, respectively.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
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
$213,850 and $198,073 at July 31, 1999 and 1998, 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 were stated at the lower of cost or
estimated net realizable value using the first-in, first-out
method.
SALES OF REAL ESTATE
Profit on sale of real estate is recognized when the buyers'
initial and continuing investment is adequate to demonstrate
(1) a commitment to fulfill the terms of the transaction, (2)
that collectibility of the remaining sales price due is
reasonably assured, and (3) the Company maintains no continuing
involvement or obligation in relation to the property sold and
has transferred all the risk and rewards of ownership to the
buyer.
Receipts on sales of real estate investments are accounted for
as customer deposits until the principal payments received on
the sales contracts exceed the minimum guidelines for gain
recognition. Losses arising from sales of real estate are
recognized immediately upon sale.
RECOGNITION OF RENTAL INCOME
Rental income on cancelable operating leases is recognized as
it becomes receivable in accordance with the provisions of the
lease. Rental income on noncancelable operating leases which
contain fixed escalation clauses is recognized on the straight-
line method over the term of the lease. The difference between
income earned and lease payments received from the tenants is
included in the other assets on the consolidated balance sheet.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for
the expected future income tax consequences of events that have
been recognized in the 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.
The Company allocates income taxes between continuing and
discontinued operations in proportion to their individual
effects on the consolidated income tax provision (benefit) at
the Company's effective tax rate for the respective period.
INCOME OR LOSS PER SHARE
Income (loss) per share - basic is computed by dividing income
(loss) applicable to common stockholders by the weighted-
average number of common shares outstanding during the period.
Income (loss) per share - diluted is computed by dividing
income (loss) applicable to common stockholders by the
weighted-average number of common shares outstanding increased
by the additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued. The Company did not have any potentially dilutive
common shares outstanding during the years ended July 31,
1999, 1998 and 1997; therefore, diluted earnings per share
amounts are identical to basic earnings per share. The Company
also presents income (loss) per share for continuing and
discontinued operations.
INTEREST RATE RISK
The results of operations of the Company may be materially and
adversely affected by changes in prevailing economic
conditions, including rapid changes in interest rates. The
Company's financial assets (primarily contracts, mortgages,
finance notes and loans receivable) and liabilities (primarily
notes payable to banks, installment contracts, mortgage notes
and notes payable and debenture bonds) are subject to interest
rate risk. Management is aware of the sources of interest rate
risk and endeavors to actively monitor and manage its interest
rate risk, although there can be no assurance regarding the
management of interest rate risk in future periods.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
OFF-BALANCE-SHEET INSTRUMENTS
The Company has outstanding commitments to extend credit to
commercial borrowers. Such financial instruments are recorded
in the financial statements when they are funded or related
fees are incurred or received.
The Company has also entered into participation agreements with
other lenders to reduce its credit risk on certain commercial
loans. The use of participations enables the Company to
diversify its portfolio among its borrowers and lenders and
mitigate significant geographical and credit concentration.
COMPREHENSIVE INCOME
During the year ended July 31, 1999, the Company adopted
Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income". SFAS 130 establishes
standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. This Statement
required the Company to classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the
equity section of the consolidated balance sheet. Prior
periods' financial statements have been presented and
reclassified to conform to this Statement.
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 1998 and 1997 consolidated financial
statements have been reclassified to conform with the current
year's presentation. These reclassifications had no effect on
net income (loss) or retained earnings as previously reported.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
2. CONTRACTS, MORTGAGES, FINANCE NOTES AND LOANS RECEIVABLE:
The components of contracts, mortgages, finance notes and loans
receivable at July 31, 1999 and 1998 are as follows:
1999 1998
----------- -----------
Contracts, mortgages and finance notes
receivable $ 6,607,188 $ 7,298,708
Originated loans receivable 16,459,200 4,931,340
Undisbursed portion of loans receivable (4,828,082) (837,272)
----------- -----------
18,238,306 11,392,776
Unamortized discounts, net (113,479) (141,113)
Unearned loan fees, net (194,581) (97,746)
Allowance for loan losses (4,908) (4,908)
----------- -----------
Contracts, mortgages, finance notes and
loans receivable, net $17,925,338 $11,149,009
=========== ===========
At July 31, 1999 and 1998, three individual contract, mortgage,
finance note and loan receivable balances represented
approximately 13%, 9% and 8% and 15%, 13% and 13% of the gross
outstanding receivable, respectively. Additionally, aggregate
amounts receivable from two separate borrowers represented 14%
and 13% of the gross outstanding receivable at July 31, 1999.
At July 31, 1999 and 1998, the aging of the gross amounts due on
contracts, mortgages, finance notes and loans receivable was as
follows:
1999 1998
----------- -----------
Current $17,892,985 $11,086,501
31 to 60 days 6,785 53,552
60 to 90 days -- --
Over 90 days 338,536 252,723
----------- -----------
$18,238,306 $11,392,776
=========== ===========
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, 1999 and 1998, the fair value of the
underlying collateral, net of selling costs, is estimated to be
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
2. CONTRACTS, MORTGAGES, FINANCE NOTES AND LOANS RECEIVABLE,
CONTINUED:
greater than the carrying value of the related receivables, and
thus, no allowance for loss has been provided. The receivables
are collateralized primarily by residential and commercial real
estate located in the western United States. These estimates can
be affected by changes in the economic environment in the western
United States and the resultant effect on real estate values. As
a result of changing economic conditions, the amount of the
allowance for loan losses could change in the near term.
3. INVESTMENTS IN RENTAL PROPERTIES:
Following is a summary of investments in rental properties at
July 31, 1999 and 1998:
1999 1998
----------- -----------
Land $ 2,389,128 $ 2,417,729
Buildings and improvements 17,842,108 16,130,418
Furniture and equipment 1,267,220 1,166,014
----------- -----------
21,498,456 19,714,161
Less accumulated depreciation (6,690,777) (6,126,016)
----------- -----------
$14,807,679 $13,588,145
=========== ===========
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, 1999:
Year Ending
July 31,
-----------
2000 $ 1,294,324
2001 1,068,944
2002 842,406
2003 670,786
2004 293,259
Thereafter 10,228
-----------
Total minimum future rentals $ 4,179,947
===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
3. INVESTMENTS IN RENTAL PROPERTIES, CONTINUED:
These properties are primarily located in the greater Spokane,
Washington geographical area. Losses on investments in rental
properties are recognized if the anticipated undiscounted 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, these
estimates could change in the near term.
Historically, 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 the classification of
approximately $159,000 as investments in rental properties and
deferred gains of approximately $41,000 at July 31, 1997. These
gains were recognized during the year ended July 31, 1998 when
the criterion for a sale was met.
4. DISCONTINUED OPERATION:
In September 1995, the Company completed construction of and
began operating Birdies Golf Center (Birdies). The facility
consisted of a driving range, lighted fairways with five target
greens, a pro shop, a putting green and teaching studios.
On December 1, 1998, the Company decided to close Birdies and
commenced a liquidation of assets. The Company has leased the
Birdies building and plans to sell the driving range land. The
consolidated financial statements of the Company for the years
ended July 31, 1998 and 1997 have been reclassified to present
the operations of Birdies Golf Center as a discontinued
operation.
The following is a summary of the investment in the golf center
at July 31, 1998:
Land $ 350,000
Building and improvements 1,696,175
Furniture and equipment 271,896
-----------
2,318,071
Less accumulated depreciation (247,077)
-----------
$ 2,070,994
===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
4. DISCONTINUED OPERATION, CONTINUED:
Information about the discontinued operations of the Birdie's
business segment is as follows:
Years Ended July 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Operating revenues $ 103,848 $ 332,815 $ 343,528
Loss from discontinued operations
before federal income tax benefit (403,236) (116,401) (189,430)
Loss from discontinued operations,
net of federal income tax benefit (255,652) (82,994) (129,570)
Total assets associated with the discontinued operation were
$2,211,911 at July 31, 1998. Proceeds from the sale of these
assets during the year ended July 31, 1999 were $188,592. At July
31, 1999, the Birdies building has been included in investment in
rental properties, and the excess land associated with Birdies
has been included in property held for sale and development.
5. BUSINESS SEGMENT REPORTING:
Information about the Company's separate continuing business
segments and in total as of and for the years ended July 31,
1999, 1998 and 1997 is as follows:
Real Estate
Commercial Rental and
Lending Receivable
Operations Operations Total
----------- ----------- -----------
1999:
Revenue $ 1,524,139 $ 4,409,187 $ 5,933,326
Income from continuing
operations 476,088 377,471 853,559
Identifiable assets, net 11,683,670 24,262,552 35,946,222
Depreciation and amortization 1,075 742,727 743,802
Capital expenditures 3,440 844,218 847,658
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
5. BUSINESS SEGMENT REPORTING, CONTINUED:
Real Estate
Commercial Rental and
Lending Receivable
Operations Operations Total
----------- ----------- -----------
1998:
Revenue $ 183,272 $ 3,606,549 $ 3,789,821
Income (loss) from continuing
operations 3,245 (723,616) (720,371)
Identifiable assets, net 4,473,573 26,466,720 30,940,293
Depreciation and amortization 277 750,093 750,370
Capital expenditures 4,524 1,668,626 1,673,150
1997:
Revenue $ -- $ 5,035,510 $ 5,035,510
Income from continuing
operations -- 879,238 879,238
Identifiable assets, net -- 32,294,907 32,294,907
Depreciation and amortization -- 740,980 740,980
Capital expenditures -- 1,353,211 1,353,211
The Company has determined that its reportable business segments
are those that are based on its method of disaggregated internal
reporting. The Company's reportable business segments are its
commercial loan origination business and its rental and
receivable operations. Its commercial loan origination business,
operated as Cornerstone Realty Advisors, Inc., originates
commercial construction loans throughout the western United
States. The rental and receivable operations represent the
selling and leasing of real properties and the financing of
contracts and loans collateralized by real estate.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
6. MARKETABLE SECURITIES:
A summary of investments in marketable securities at July 31,
1999 and 1998 is as follows:
1999 1998
-------------------------------- --------------------------------
Market/ Market/
Unrealized Carrying Unrealized Carrying
Cost Gain Value Cost Loss Value
-------- ---------- -------- -------- ---------- --------
Equity securities $199,865 $ 579 $200,444 $ 41,235 $(12,573) $ 28,662
Debt securities 41,724 -- 41,724 59,400 -- 59,400
-------- -------- -------- -------- -------- --------
$241,589 $ 579 $242,168 $100,635 $(12,573) $ 88,062
======== ======== ======== ======== ======== ========
The debt securities matured during the year ended July 31, 1998.
Proceeds from the partial redemption of these securities of
$17,676 were received during the year ended July 31, 1999. In
connection with the reorganization of the issuer, the outstanding
balance of these securities is expected to be paid in the year
ending July 31, 2000 at the full principal amount.
Proceeds from the sale of marketable securities during the year
ended July 31, 1999 were $320,120, resulting in gross realized
gains of $279,082. Included in these sales were securities which
had no carrying value as they had been previously written down in
connection with the issuer's bankruptcy proceedings.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
7. NOTES PAYABLE TO BANKS:
Notes payable to banks consisted of the following at July 31,
1999 and 1998:
1999 1998
----------- -----------
U.S. Bank of Washington, short-term line of
credit, $11,000,000 commitment, interest
at the prime rate plus 0.375%, expires
October 1, 1999, guaranteed by Wayne Guthrie:
Collateralized by contracts, mortgages and
finance notes receivable $ 3,075,149 $ 4,163,189
Collateralized by loans receivable 5,116,210 1,435,327
Western Bank, line of credit, $8,000,000
commitment, interest at the prime rate plus
0.25%, expires December 1, 1999, collateral-
ized by contracts and loans receivable and
guaranteed by Wayne and David Guthrie
(stockholder of the Company) 3,311,602 1,045,310
Sterling Savings Bank, line of credit,
$2,812,500 commitment, interest at the Bank
of America Reference Rate (BARR) plus 0.25%,
expires June 1, 2001, guaranteed by Wayne
and David Guthrie 2,422,444 --
----------- -----------
$13,925,405 $ 6,643,826
=========== ===========
The prime rate and the BARR referenced on the above notes were
8.00% at July 31, 1999. $8,000,000 of the U.S. Bank of Washington
line of credit was extended to December 15, 1999.
The above line-of-credit agreements contain restrictive covenants
requiring the maintenance of minimum tangible net worth, and
certain debt service coverage, debt to worth and fixed charge
ratios. At July 31, 1999, the Company was in compliance with the
financial covenants in these agreements.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
7. NOTES PAYABLE TO BANKS, CONTINUED:
The following assets were pledged as collateral on these notes
payable at July 31, 1999 and 1998:
1999 1998
----------- -----------
Contracts receivable $ 3,359,806 $ 3,003,208
Loans receivable 5,116,209 1,435,238
Rental properties 7,231,398 4,905,085
----------- -----------
$15,707,413 $ 9,343,531
=========== ===========
8. INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE:
Installment contracts, mortgage notes and notes payable consist
of the following at July 31, 1999 and 1998:
1999 1998
------------- -----------
Installment contracts and mortgage notes
payable, interest at 7.0% to 9.0%,
aggregate monthly payments, including
interest of $54,269, mature 1999 through
2021, collateralized by various properties $ 3,439,096 $ 4,643,887
Notes payable to former stockholders,
interest at 7.0%, aggregate monthly
payments, including interest of $5,317,
mature 2003, collateralized by property -- 850,416
Other notes payable 56,884 117,049
----------- -----------
$ 3,495,980 $ 5,611,352
=========== ===========
Scheduled future maturities of contracts, mortgage notes and
notes payable are as follows:
Year Ending
July 31,
-----------
2000 $ 137,543
2001 241,788
2002 255,781
2003 248,238
2004 224,924
Thereafter 2,387,706
-----------
$ 3,495,980
===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
9. 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 primarily used in making funds available
for contracts and 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.
Outstanding bonds by interest rate categories were as follows at
July 31, 1999 and 1998:
Bond Interest Rate 1999 1998
------------------ ----------- -----------
5.75% $ -- $ 141,530
6.00 98,735 132,803
6.25 45,467 29,490
6.50 436,280 535,561
7.00 175,707 65,618
7.25 149,250 176,345
7.50 1,501,550 1,669,324
7.75 842,234 756,709
8.00 568,753 788,032
8.25 1,013,729 964,264
8.50 1,502,661 1,416,790
8.75 343,056 341,911
9.00 1,809,218 1,721,023
9.25 341,394 314,511
9.50 779,933 753,906
10.00 16,039 14,531
10.50 12,648 11,403
11.00 6,894 6,185
----------- -----------
$ 9,643,548 $ 9,839,936
=========== ===========
The weighted-average annual interest rate on outstanding
debentures at July 31, 1999 and 1998 was 8.26% and 8.19%,
respectively.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
9. DEBENTURE BONDS, CONTINUED:
Estimated future contractual maturities of outstanding debenture
bonds are as follows:
Year Ending
July 31,
2000 $ 1,435,825
2001 932,645
2002 820,309
2003 883,000
2004 1,582,411
Thereafter 3,989,358
-----------
$ 9,643,548
===========
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.
The Company's permit to offer debentures for sale under the
Securities Act of Washington expired in November 1998, and while
a registration statement has been filed, it is not currently
effective. Thus, the Company did not sell any new debentures from
the expiration of its permit to July 31, 1999.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
10. INCOME TAXES:
The components of the income tax provision (benefit) are as
follows:
1999 1998 1997
----------- ----------- -----------
Federal:
Current $ 43,657 $ 295,131 $ (56,566)
Deferred 121,324 (534,967) 274,374
----------- ----------- -----------
164,981 (239,836) 217,808
Benefit allocated to discontinued
operations 147,584 33,407 59,860
----------- ----------- -----------
Income tax provision (benefit) from
continuing operations $ 312,565 $ (206,429) $ 277,668
=========== =========== ===========
The components of the net deferred tax liability at July 31, 1999
and 1998 are as follows:
Assets Liabilities Total
----------- ----------- -----------
1999:
Depreciation $ (483,555) $ (483,555)
Installment gains (299,457) (299,457)
Unrealized gains on marketable
securities (197) (197)
Accrued expenses $ 52,967 52,967
Other, net 17,969 17,969
----------- ----------- -----------
$ 70,936 $ (783,209) $ (712,273)
=========== =========== ===========
1998:
Depreciation $ (324,403) $ (324,403)
Installment gains (330,106) (330,106)
Unrealized losses on marketable
securities $ 4,274 4,274
Accrued expenses 46,297 46,297
Other, net 17,066 17,066
----------- ----------- -----------
$ 67,637 $ (654,509) $ (586,872)
=========== =========== ===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
10. INCOME TAXES, CONTINUED:
The annual tax provision (benefit) from continuing operations is
different from the amount which would be provided by applying the
statutory federal income tax rate to the Company's income (loss)
from continuing operations. The reasons for the differences are:
1999 % 1998 % 1997 %
--------- ----- --------- ----- --------- -----
Computed statutory
provision
(benefit) $ 290,210 34.0% $(244,926) (34.0)% $ 298,941 34.0%
Meals and
entertainment 1,729 0.2 801 0.1 861 0.1
Change in tax
estimates -- -- -- -- (17,588) (2.0)
Nondeductible stock-
holder legal
expenses -- -- 51,000 7.1 -- --
Effect of graduated
tax rate -- -- 5,941 0.8 -- --
Other 20,626 2.4 (19,245) (2.7) (4,546) (0.5)
--------- ---- --------- ----- --------- ----
$ 312,565 36.6% $(206,429) (28.7)% $ 277,668 31.6%
========= ==== ========= ===== ========= ====
11. EMPLOYEE BENEFIT PLAN:
In August 1998, the Company established a Retirement Savings
Plan (the Plan), authorized under Section 401(k) of the Tax
Reform Act of 1986, as amended. Under the terms of the Plan, the
Company may contribute 25% of pre-tax contributions of
compensation up to a maximum of $500. Employees are eligible to
contribute up to 18% of their compensation, subject to annual
limitations, to the Plan. Contributions are made directly to a
qualified individual retirement account or annuity in the
employee's name.
The Company is required to make nondiscriminatory contributions
for each employee who (1) has reached the age of 21; (2) has
performed services for the Company during the last year of
service in which he or she has completed 1,000 hours of service;
(3) is not covered by a collective bargaining agreement; and (4)
is not a nonresident alien. The Company's contribution to the
Plan was approximately $4,400 during the year ended July 31,
1999.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
12. REDEEMABLE PREFERRED STOCK/PREFERRED STOCK:
In fiscal 1995, the Company issued 10,400 shares of $100 par
value redeemable Class A preferred stock. The Company had the
right to redeem any shares after three years from the date of
issuance. During the years ended July 31, 1999, 1998 and 1997,
the Company redeemed 4,000, 2,400 and 1,000 shares,
respectively, of the preferred stock at par. However, all shares
were 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 was 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, which included
accretion on shares redeemed during the year, was $210,000,
$119,000 and $52,000 in the years ended July 31, 1999, 1998 and
1997, respectively.
On February 18, 1999, at the Annual Meeting of the Stockholders,
a motion was passed to amend the Company's articles of
incorporation to eliminate the mandatory redemption provisions
of the Class A Preferred stock. Accordingly, the remaining 3,000
outstanding shares of preferred stock, with a face amount of
$300,000, were reclassified to stockholders' equity. In
addition, 10 million no par value shares of preferred stock were
authorized, but none were issued.
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 Class A preferred stock was $318,000 at July 31, 1999. The
liquidation preference of the redeemable Class A preferred stock
was $742,000 at July 31, 1998.
The 6% annual dividends on the Class A preferred stock are
cumulative. Dividends of $18,000, $42,000 and $62,400 were
declared on the preferred stock during the years ended July 31,
1999, 1998 and 1997, respectively, and were paid subsequent to
each respective year end.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
13. COMMON STOCK:
The Company has authorized a second class of common stock, Class
B. 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.
14. RELATED-PARTY TRANSACTIONS:
LITIGATION SETTLEMENT
On January 5, 1998, in connection with pending litigation
between the Company and all of the Company's officers and
directors and certain minority stockholders of the Company
("the Minority Stockholders"), who are children of Wayne E.
Guthrie, the Company's Chief Executive Officer and largest
individual Company common stockholder, the Company agreed to
settle all claims of the Minority Stockholders and redeem all
Company common shares held by the Minority Stockholders by
paying approximately $317,000 in cash, distributing Company
real property with an estimated fair value of $643,500 and the
issuance of notes payable, bearing interest at 7% per annum,
aggregating approximately $729,000. The Company acquired
408,419 of its common shares pursuant to this agreement, which
were retired. In addition, the Company obtained a covenant
not-to-compete for five years from one of the Minority
Stockholders in return for the issuance of a $125,000 note
payable bearing interest at 7% per annum. Concurrently,
certain Company officers and directors issued notes payable
aggregating approximately $236,000 to one of the Minority
Stockholders. In connection with the settlement, the Company
also agreed to reimburse the Minority Stockholders for legal
costs aggregating $150,000. Total expenses incurred by the
Company during the year ended July 31, 1998 related to this
settlement were approximately $300,000.
YELLOWFRONT BUILDING
On July 31, 1998, the Company transferred its ownership of the
Yellowfront Building, a commercial property located in Coeur
d'Alene, Idaho, to a family trust formed by Wayne E. Guthrie
in exchange for 200,000 shares of Class A common stock. The
transfer was recorded at the fair value of the property and
resulted in a net gain to the Company of approximately
$420,000 during the year ended July 31, 1998.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
NOTE RECEIVABLE
A certain former stockholder is indebted to the Company by a
note secured by real estate bearing interest at 12.5% (prime
plus 4% adjusted annually) in the outstanding amounts of
$217,002 and $227,183 at July 31, 1999 and 1998, respectively.
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 of WCI. The contract receivable from WCI had a
balance outstanding of $200,000 at July 31, 1998. The contract
was satisfied in full in August 1998 in connection with the
redemption of preferred stock.
INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE
At July 31, 1999 and 1998, the following related-party notes
payable were outstanding:
Interest Monthly
1999 1998 Rate Payment
---------- ---------- -------- ----------
Wayne E. Guthrie $ 181,675 $ -- 7.00% $ 4,789
Wayne E. Guthrie 156,020 176,658 6.75% 2,000
John Guthrie -- 496,618 7.00% --
Linda Welden -- 176,899 7.00% --
Robert Guthrie -- 176,899 7.00% --
John Guthrie -- 1,684 9.00% --
---------- ----------
$ 337,695 $1,028,758
========== ==========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE,
CONTINUED
The scheduled future maturities of these notes are as follows:
Year Ending
July 31,
-----------
2000 $60,111
2001 64,420
2002 74,037
2003 44,758
2004 18,186
Thereafter 76,183
--------
$337,695
========
DEBENTURE BONDS
Included in debenture bonds at July 31, 1999 and 1998 is
approximately $193,000 and $135,000, respectively, that is
payable to related parties. These bonds bear interest at the
prevailing market rate on the date of issuance.
ACCRUED EXPENSES AND OTHER LIABILITIES
At July 31, 1999 and 1998, the following demand notes were
payable to related parties:
1999 1998
------------------- -------------------
Interest Interest
Amount Rate Amount Rate
-------- -------- -------- --------
Wayne E. Guthrie $115,746 6.75% $ 82,990 7.50%
Constance Guthrie 91,692 6.75 99,996 7.50
Other stockholders 47,152 6.75 24,254 7.50
-------- --------
$254,590 $207,240
======== ========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
14. RELATED-PARTY TRANSACTIONS, CONTINUED:
INTEREST INCOME AND EXPENSE
The approximate amount of related-party interest income and
expense included in the accompanying consolidated statements
of operations during the years ended July 31, 1999, 1998 and
1997 is as follows:
1999 1998 1997
------- ------- -------
Interest income $36,000 $53,000 $68,000
Interest expense 53,000 64,000 36,000
SALE OF REAL ESTATE
On December 1, 1979, Pacific Security Companies sold land and a
mini-warehouse business to Security Savesco, Inc., an equity
method investee. Security Savesco, Inc. merged with Pacific
Security Companies in 1985 and had its name changed to Pacific
Security Companies. The gain on the sale of the property was
$727,703. The gain, net of $220,000 of income taxes, was
deferred for financial statement purposes until the property
was sold to an unrelated entity. During the year ended July 31,
1997, the property was sold and the net deferred gain of
$507,703 was recognized in the statement of operations.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
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.
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, 1999 and 1998, the carrying values of these
financial instruments approximated their fair values.
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the years ended July 31, 1999, 1998 and 1997
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
NOTES PAYABLE TO BANKS - Fair value approximates the carrying
value because the notes bear variable interest rates.
MARKETABLE SECURITIES - Fair value approximates the carrying
value based on quoted market prices.
OFF-BALANCE-SHEET INSTRUMENTS - Fair value approximates the
notional amount of commitments to extend credit because
advances bear variable interest rates and are made contingent
to the borrower's compliance with the existing loan agreement.
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.
PART III
Item 10. Directors and Executive Officers of the Registrant
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following information as of July 31, 1999 is provided with respect
to each director and executive officer of the Company:
Year First Term as
Elected as Director
Name Age Director Expires in Position (date elected to position)
--------------------- --- ---------- ---------- --------------------------------------------
Wayne E. Guthrie 79 1970 1999 Chairman of the Board (January 17, 1970);
Director
David L. Guthrie 35 1987 2001 President (February 18, 1999); Director
Kevin M. Guthrie 44 1980 2001 Vice President (May 2, 1985); Director
Donald J. Migliuri 52 1992 2002 Secretary/Treasurer (May 29, 1990); Director
Raymond J. Fisher 76 1970 1999 Director
Constance M. Guthrie 65 1981 1999 Director
Robert N. Codd 69 1994 2001 Director
Julian Guthrie 34 1998 2001 Director
FAMILY RELATIONSHIPS
Kevin M. Guthrie, David L. Guthrie and Julian Guthrie are the children
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 Cornerstone Properties
and Development, Inc., a Washington corporation and subsidiary of the
registrant. Mr. Guthrie has over 50 years of experience in areas of
construction, financing of real estate and personal property, and real
estate investments.
David L. Guthrie, President of Pacific Security Companies since 1999
and Vice Presdient since 1989. Mr. Guthrie was formerly a financial
consultant with Merrill Lynch in Spokane, Washington. Mr. Guthrie is
also an officer and director of Cornerstone Properties and
Development, Inc. Mr. Guthrie is a NASD licensed securities sales
person (registered representative) and broker-dealer (general
securities principal). He is a licensed real estate broker in the
state of Washington and has obtained the CCIM designation (certified
commercial investment member) awarded by the commercial real estate
investment institute.
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 Cornerstone
Properties and Development, Inc.
Donald J. Migliuri, Treasurer of Pacific Security Companies since 1990
and Secretary since 1991. Mr. Migliuri is a Certified Public
Accountant and has served as an accounting officer with various
diversified financial services companies for over 19 years. He also is
a certified management accountant (CMA) and has a Masters degree in
Business Administration.
Constance M. Guthrie. Mrs. Guthrie is a housewife and has not been
employed outside the home during the past ten 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.
Julian Guthrie. Ms. Guthrie is a reporter for the San Francisco
Examiner. She covered general news for the paper for two years and in
1998 was named education reporter, responsible for covering all
education issues in the Bay Area. Before that, she was senior editor
of a lifestyle managzine in San Francisco and also worked as a
freelance writer for the Examiner, covering breaking business,
political and lifestyle stories. She currently lives in San Francisco.
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, 1999, 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, 1999:
Annual Compensation*
Name of Individual --------------------
or Number of Fiscal
Persons in Group Capacities in Which Served Year Salary Bonus
------------------ ---------------------------- ------ -------- --------
David L. Guthrie President and Director 1999 $101,045 $ 7,500
Vice President and Director 1998 98,580 10,000
Kevin M. Guthrie Vice President and Director 1999 $101,396 $ 7,500
Vice President and Director 1998 98,862 10,000
Officers and Directors 1999 $375,212 $ 22,500
as a group (5)
The Company has no qualified or nonqualified stock option plans as of
July 31, 1999.
*Annual compensation did not exceed $100,000 in 1997.
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, 1999: none.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of July 31, 1999
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
Title Beneficial Percent
of Class Name of Beneficial Owner Ownership of Class
-------------- ------------------------------------- ---------- --------
Common stock Wayne E. Guthrie 180,000* 15.62%
Common stock Constance Guthrie 105,043 9.11
Common stock Kevin Guthrie 222,718** 19.32
Common stock David Guthrie 222,718** 19.32
Common stock Julian Guthrie 196,838 17.10
------- ------
Common stock All directors and officers as a group 927,319 80.47%
======= ======
Preferred stock Wayne E. or Constance Guthrie 2,000 66.70%
Preferred stock Constance Guthrie 1,000 33.30
------- ------
Preferred stock All directors and officers as a group 3,000 100.00%
======= ======
* Includes shares held in trust.
** Kevin and David Guthrie each exercise voting rights over an
additional 24,706 (2.14%) shares 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:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K during the last quarter:
None
[PricewaterhouseCoopers LLP Letterhead}
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
Pacific Security Companies and Subsidiaries
Spokane, Washington
Our audits of the consolidated financial statements referred to in our
report dated September 29, 1999, of Pacific Security Companies and
Subsidiaries, which report and consolidated financial statements are
included herein in this Annual Report on Form 10-K, also included an
audit of the financial statement schedules listed in Item 14(a)(2) of
this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements.
/s/PricewaterhouseCoopers LLP
September 29, 1999
Pacific Security Companies and Subsidiaries
Schedule III
Real Estate and Accumulated Depreciation
July 31, 1999
Life on Which
Depreciation
Cost in Latest
Capitalized Amount at Income
Subsequent Which Carried Accumulated Date Statement
Description Encumbrance Initial Cost to Acquisition at Close of Period Depreciation Acquired is Computed
-------------------- ----------- ------------ -------------- ------------------ ------------ -------- -------------
Residential and
commercial properties:
Rental buildings and
improvements:
Spokane, Washington
N. 10 Post Street
(Peyton Bldg.) $ 2,422,444 $ 2,209,343 $ 3,581,973 $ 5,791,316 $ 1,754,329 1979 25-40 years
S. 10 Washington
(Hutton Bldg.) -- 1,498,769 3,849,774 5,348,543 1,884,873 1979 25-40 years
Broadmoor
Apartments -- 1,385,074 990,422 2,375,496 1,219,935 1969 40 years
W. 102 Indiana 569,858 663,031 -- 663,031 266,781 1984 30 years
Pier One Building 1,380,312 1,194,017 2,771,167 3,965,184 801,981 1992 25-40 years
AT&T Wireless
Building 815,793 950,373 (2,811) 947,562 224,258 1992 25 years
Cornerstone
Office Building -- 1,558,552 25,533 1,584,085 7,369 1999 25-40 years
Furniture related
to above 540,237 283,002 823,239 531,251 Various Various
----------- ----------- ----------- ----------- -----------
$ 5,188,407 $ 9,999,396 $11,499,060 $21,498,456 $ 6,690,777
=========== =========== =========== =========== ===========
SCHEDULE III, Continued
Real Estate and Accumulated Depreciation
July 31, 1999
Real estate:
Balance at beginning of period$ $22,032,232
Additions during period:
Purchases and capitalized costs, net 395,602
Deductions during period:
Cost of real estate sold (929,378)
-----------
Balance at close of period $21,498,456
===========
Accumulated depreciation:
Balance at beginning of period $ 6,373,093
Depreciation for the year 728,649
Charges to accumulated depreciation related to
real estate investments sold, net of other
adjustments (411,965)
-----------
Balance at close of period $ 6,690,777
===========
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
SCHEDULE IV
Mortgage Loans on Real Estate
July 31, 1999
Principal
Amount of
Loans Subject
Face Carrying to Delinquent
Interest Maturity Periodic Amount of Amount of Principal
Description Rate Date Payment Terms Prior Liens Mortgages Mortgages or Interest
-------------------------- ---------- -------- --------------------- ----------- ----------- ----------- -------------
Loan (PP Two LLC) Prime + 3% 2000 Interest only monthly $ 2,296,515 $2,296,515
Real estate contract on
apartment complex
(Evergreen Town House) 10.50% 2023 $18,498 per month,
including interest 1,632,894 1,632,894
Loan (WAM #1963) Prime + 3% 1999 Interest only monthly 1,435,328 1,435,328
Loan (WAM #1993) Prime + 3% 1999 Interest only monthly 1,089,536 1,089,536
Loan (GLMD) Prime +
3.50% 2000 Interest only monthly 1,060,279 1,060,279
Loan (Calderwood #1988) Prime + 3% 2000 Interest only monthly 900,000 900,000
Loan (Calderwood #1987) Prime + 3% 2000 Interest only monthly 587,000 587,000
Loan (Rock Ridge) Prime +
4.25% 2000 Interest only monthly 804,815 804,815
Loan (U-City) Prime + 3% 2000 Interest only monthly 650,000 650,000
Real estate contract on
apartment building
(East Valley Terrace) 9.50% 2002 $8,492 per month, including interest 946,561 946,561
Real estate contract on
North Riverbank land 8% 2000 Interest only monthly 740,000 740,000
PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
SCHEDULE IV
Mortgage Loans on Real Estate
July 31, 1999
Principal
Amount of
Loans Subject
Face Carrying to Delinquent
Interest Maturity Periodic Amount of Amount of Principal
Description Rate Date Payment Terms Prior Liens Mortgages Mortgages or Interest
-------------------------- ---------- -------- --------------------- ----------- ----------- ----------- -------------
Other mortgage contracts
and notes receivable,
none of which individually
exceed 3% of the total
carrying value of
mortgages Various Various Various 6,095,378 5,782,410
----------- -----------
$18,238,306 $17,925,338
=========== ===========
Balance at beginning of
period $11,149,009
Additions during period:
Mortgage loans origi-
nated and purchased $20,296,977
Contract discounts
realized 27,633
-----------
20,324,610
Deductions during period:
Collections of principal
and contract payoffs 13,461,784
Other 86,497 13,548,281
----------- -----------
Balance at end of period $17,925,338
===========
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 29, 1999 By: /s/ David L. Guthrie
-----------------------------------
David L. 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/David L. Guthrie Chief Executive Officer October 29, 1999
----------------------- Director ----------------
David L. Guthrie
/s/Donald J. Migliuri Secretary-Treasurer October 29, 1999
----------------------- Chief Financial Officer ----------------
Donald J. Migliuri and Director
/s/Wayne E. Guthrie Chairman of the Board October 29, 1999
----------------------- of Directors and ----------------
Wayne E. Guthrie Director
/s/Kevin M. Guthrie Vice-President and October 29, 1999
----------------------- Director ----------------
Kevin M. Guthrie
/s/Constance M. Guthrie Director October 29, 1999
----------------------- ----------------
Constance M. Guthrie
/s/Raymond J. Fisher Director October 29, 1999
----------------------- ----------------
Raymond J. Fisher
/s/Robert N. Codd Director October 29, 1999
----------------------- ----------------
Robert N. Codd
/s/Julian Guthrie Director October 29, 1999
----------------------- ----------------
Julian Guthrie