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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-6673
PACIFIC SECURITY FINANCIAL, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0669906
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
10 North Post Street
Suite 325
Spokane, Washington 99201
------------------- -----
(Address of principal executive offices) (Zip code)
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 share
--------------------------------
(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 (ss.229.405 of this chapter) 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 the Form 10-K or
any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and nonvoting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed fiscal year.
On July 31, 2003, the registrant had outstanding 1,080,357 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 FINANCIAL, INC.
FORM 10-K ANNUAL REPORT
Table of Contents
Part I
Item 1. Business 1
Item 2. Properties 4
Item 3. Legal proceedings 6
Item 4. Submission of matters to a vote of security holders 6
Part II
Item 5. Market for the registrant's common equity and related stockholder matters 7
Item 6. Selected financial data 8
Item 7. Management's discussion and analysis of financial condition and results of operations 9
Item 7A. Quantitative and qualitative disclosures about market risk 14
Item 8. Financial statements and supplemental data 16
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure 44
Item 9A. Controls and procedures 44
Part III
Item 10. Directors and executive officers of the registrant 45
Item 11. Executive compensation 48
Item 12. Security ownership of certain beneficial owners and management 49
Item 13. Certain relationships and related transactions 49
Item 14. Principle accounting fees and services 50
Part IV
Item 15. Exhibits, financial statement schedules, and reports on Form 8-K 51
PACIFIC SECURITY FINANCIAL, INC.
PART I
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ITEM 1. BUSINESS
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.
Pacific Security Companies changed its name to Pacific Security Financial, Inc.
in 1999.
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, 2003 and 2002, were $23,221,818 and $44,451,625, respectively, and real
estate contracts and loans represent approximately 28% and 57.1% of the
respective asset totals. The Company primarily originates commercial loans. The
Company also originates contracts to facilitate the sale of real estate held for
sale or development. Some of the Company's contracts have fixed contractual
interest rates while commercial (interim and construction) loans generally have
variable rates. The total amount invested in real estate contracts and loans of
$6,498,089 as of July 31, 2003, is $18,953,807 less than at the end of the prior
year. The percentage of contracts which were delinquent over 90 days was 17.7%
as of July 31, 2003, and 5.9% as of July 31, 2002. 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 construction and interim loans (generally
one to two years including extensions). Bank lines of credit were increased to
provide additional funds for this purpose. The permanent financing to payoff
these short-term loans is typically obtained from the secondary market and
includes such sources as banks, savings and loan institutions, life insurance
companies, credit unions, and conduits. Cornerstone Realty Advisors, Inc. was
administratively dissolved in 2002, and all aspects of the company's operation
were merged into the parent.
The Company has continued to emphasize the development of its rental properties
and commenced new projects primarily to improve the occupancy of its commercial
buildings. The Company has and continues to develop land for residential
development, where the land was acquired through foreclosure. 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 has no commitments for additional construction on these properties at
this time. The Company may continue to invest in and hold real property on a
long-term basis. These properties may ultimately be sold or exchanged for tax
purposes in order to minimize and defer the 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.
1
PACIFIC SECURITY FINANCIAL, INC.
PART I
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ITEM 1. BUSINESS (CONTINUED)
Investment in rental properties totaled $10,701,055 and $12,811,852 as of July
31, 2003 and 2002, respectively. Other real property held for sale and
development totaled $4,367,608 and $4,399,921 as of July 31, 2003 and 2002,
respectively. In fiscal 2001, the Company began construction of a commercial
building containing approximately 13,000 square feet of rentable space,
identified as Cornerstone Office Building #2. During fiscal year 2003, the
Company leased approximately 2,500 square feet.
With the Company's sale of certain commercial real estate, rental income has
decreased to $1,403,357 in fiscal 2003 from $1,533,476 in fiscal 2002 and
$2,689,799 in fiscal 2001. During the same period, interest income, including
loan fees has decreased to $1,337,848 in fiscal 2003 from $3,101,696 in fiscal
2002 and $3,981,137 in fiscal 2001. The Company expects to continue originating
some construction and interim commercial real estate loans as well as the
development, leasing, and sale of commercial real estate in fiscal 2004.
However, there are no contractual commitments other than the remaining
remodeling costs associated with improvement for commercial buildings. The
Company's fiscal 2004 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
As stated above, the Company's business is concentrated in originating loans
collateralized by real estate, financing real estate contracts, developing real
estate for sale or lease (where the properties generally have been acquired
through foreclosure), and the operation of rental properties. The Company is in
competition with financial institutions that originate or invest in real estate
collateralized contracts and commercial property owners located primarily in or
near Spokane, Washington.
The Company is not dependent upon a single borrower or tenant. However, at July
31, 2003, three individual borrowers represented approximately 42%, 19%, and 14%
of the gross outstanding contracts, mortgages, finance notes, and loans
receivable outstanding. For the year ended July 31, 2002, three individual
borrowers represented 15%, 11%, and 12% of the gross outstanding contracts,
mortgages, finance notes, and loans receivable outstanding.
As of July 31, 2003, the Company employed six people on a full-time equivalent
in its office at 10 North Post Street, Suite 325, Spokane, Washington 99201.
2
PACIFIC SECURITY FINANCIAL, INC.
PART I
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ITEM 1. BUSINESS (CONTINUED)
The management of Pacific Security Financial has commenced with a plan of
restructuring for the Company. The main elements of the restructuring include
paying off bank lines of credit, reducing other secured and unsecured debt,
securing a debenture bond permit allowing for the renewal of bonds to qualified
investors, selling Company assets including loans and properties, reducing
administrative costs primarily through reductions in personnel, pursuit of all
legal remedies available to protect and/or recover the Company's investments,
while simultaneously working to expand the Company's lending operations. The
Company intends to register as a mortgage broker/dealer in the state of
Washington. As such the Company will be engaged in originating and acquiring
loans secured by mortgages, deeds of trust, and real estate contracts to be sold
to investors meeting certain suitability requirements or retained by the Company
for investment. The Company will generally sell undivided fractional interests
in the same loan in incremental units to investors, and may also resell whole
loans to investors.
Because the Company cannot rely solely on revenues from operations to finance
its business and to meet it debt obligations, the Company has historically
raised a significant portion of its additional capital through the public sale
of debt securities. Any material interruption or decrease in the amount of debt
securities sold by the Company would make it necessary for the Company to reduce
or curtail its operations unless alternative sources of financing were
available. A similar impact would result if the Company were unable to spread
its debt repayment obligations by selling a mixture of long-term and short-term
securities. There can be no assurance that sufficient financing will continue to
be available from the public sale of debt securities or that holders of the
Company's maturing debt securities will continue to reinvest in the Company.
While the Company has historically financed its investments primarily through
collateralized lines of credit with local banks, management believes that it is
unlikely that these lines of credit will be available to the Company in the
foreseeable future. It may be necessary for the Company to sell a portion of its
loan portfolio or other assets at a discount to meet operating costs, including
principal and interest payments on outstanding obligations.
The Company currently does not maintain a website. The Company's periodic and
current reports are available on the Securities and Exchange Commission's (SEC)
website as soon as practicable after such material is electronically filed with
or furnished to the SEC. The SEC's website address is www.sec.com.
3
PACIFIC SECURITY FINANCIAL, INC.
PART I
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ITEM 2. PROPERTIES
As of July 31, 2003, 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, unless otherwise noted:
July 31, 2003
-------------------------------------------------
Rental/ Net Mortgage or
Date Development Carrying Contract
Acquired Description of Property Status Value Obligation
-------- ----------------------- ------ ----- ----------
COMMERCIAL:
1979 The Peyton Building at 10 North Post Street Substantially $5,086,835 $2,812,500
contains approximately 85,000 square feet of leased
rentable space. Substantial improvements
have been made to the building since its
acquisition. Remodeling of this office
building continues as new occupancy
warrants. The Company's offices are located
in this building.
1992 The Pier 1 Building is a commercial Leased 2,836,835 983,889(2)
building. The building has one major
tenant, who occupies over 35% of the space,
and several other smaller tenants for the
remaining space.
1995 Cornerstone Office Building #1 is the Leased 1,414,975 1,383,962(1)
remodeled Birdies Golf Center, constructed
on two acres of the Cornerstone Office Park
property. It has approximately 8,300 square
feet of rentable space occupied by two
tenants.
2003 Cornerstone Office Building #2 has Being leased 1,042,979 (1)
approximately 13,000 square feet of rentable
space with 2,500 square feet leased.
4
PACIFIC SECURITY FINANCIAL, INC.
PART I
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ITEM 2. PROPERTIES (CONTINUED)
July 31, 2003
-------------------------------------------------
Rental/ Net Mortgage or
Date Development Carrying Contract
Acquired Description of Property Status Value Obligation
----------------------- ------ ----- ----------
LAND:
1990 Cornerstone Office Park and property Being marketed $ 372,088
consists of approximately 4 remaining
acres of land in a location where there
has been substantial commercial and
residential development and construction
of office buildings.
1991 Tanglewood Ranch Park Estates (The Crest) Lot sold in 75,104
in south Spokane County was acquired September 2003
through a judicial foreclosure. The area
consisted of approximately 300 acres of
undeveloped land. In fiscal 2003, two
lots were sold, leaving one lot available
for sale.
2002 Bear Hollow, Summit County, Utah, acquired Sale pending 1,250,046
through foreclosure in December 2002; approval of
approximately 27 acres. entitlements
2003 Trolley Square, Eagle, Idaho; acquired Sale pending 2,493,277
through foreclosure in June 2003; approval of
approximately 25 acres. entitlements
1993 Approximately six acres in Auburn, Being marketed 177,092
Washington, zoned for single-family housing were acquired
through a foreclosure.
- ---------------
(1) Total obligation of $1,383,962 is secured by two commercial buildings
and land as noted above.
(2) Additional obligation of $3,038,272 is secured by contract sale of
Broadmoor Apartments and Pier 1 Building.
5
PACIFIC SECURITY FINANCIAL, INC.
PART I
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ITEM 3. LEGAL PROCEEDINGS
As of July 31, 2003, 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
A director, Constance Guthrie, was re-elected and John F. (Jack) Bury, a
replacement for Wayne E. Guthrie, was elected to the Board of Directors at the
annual meeting of shareholders on April 29, 2003. The following directors
continued to serve after the annual meeting: David L. Guthrie, Kevin M. Guthrie,
Donald J. Migliuri, Robert N. Codd, and Julian Guthrie. Moss Adams LLP was
approved as the Company's outside independent auditor by a vote of the
stockholders during the fourth quarter of fiscal 2003.
6
PACIFIC SECURITY FINANCIAL, INC.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Principle 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 common stock
dividends have been declared since 1990.
(c) Approximate number of holders of common stock.
Common no par value - 983 record holders as of July 31, 2003.
(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, 2003, 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. No dividends were declared in the fiscal year ended July 31,
2003. During the fiscal year ended July 31, 2002, dividends totaling
$18,000 were declared and accrued on these shares and paid August 2,
2002. Dividends of $18,000 were paid August 3, 2001, 2000, and 1999.
7
PACIFIC SECURITY FINANCIAL, INC.
PART II
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
audited consolidated financial statements, and should be read in conjunction
with the consolidated financial statements and notes thereto.
Year Ended July 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Rental income $ 1,403,357 $ 1,533,476 $ 2,689,799 $ 2,285,947 $ 2,268,810
Interest income, including loan
fees 1,337,848 3,101,696 3,981,137 2,885,338 2,183,276
Gain (loss) on sale of real estate (457,582) 2,022,192 (24,525) 1,038,694 1,128,628
Interest expense, net 1,739,985 2,429,258 3,148,162 2,364,846 2,208,858
Income (loss) from continuing
operations before income taxes (4,176,377) (266,951) 100,888 845,791 853,559
Net income (loss) (2,756,410) (176,188) 78,780 561,491 285,342
Income (loss) applicable to
common stockholders (2,756,410) (212,188) 78,780 543,491 57,342
Income (loss) per common share -
basic and diluted (2.55) (0.19) 0.07 0.48 0.05
------------ ------------ ------------ ------------ ------------
Cash dividends per common share -- -- -- -- --
Weighted-average number of
common shares outstanding 1,082,409 1,099,105 1,128,469 1,139,232 1,161,677
Balance Sheet Data (at year end):
Contracts, mortgages, finance
notes, and loans receivable, net $ 6,498,089 $ 25,451,896 $ 25,767,116 $ 19,713,117 $ 17,923,329
Total assets 23,221,818 44,451,625 48,754,659 40,416,395 35,946,222
Notes and contracts payable 9,275,766 25,103,907 29,544,197 21,234,496 17,421,385
Debentures 8,527,183 9,996,954 10,166,644 9,867,649 9,643,548
Stockholders' equity 4,444,390 7,212,596 7,503,072 7,500,785 6,980,693
Book value per common share 4.11 6.38 6.49 6.32 5.80
------------ ------------ ------------ ------------ ------------
Shares used to calculate book
value per common share 1,080,357 1,084,289 1,110,385 1,138,796 1,152,533
8
PACIFIC SECURITY FINANCIAL, INC.
PART II
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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 leasing 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 new tenants and structural changes as required
by current building codes. The Company also constructed a new building in the
Cornerstone Office Park.
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 originates real estate contracts to facilitate the sale of its property
held for sale or development and, in fiscal year 1998, began originating loans
secured by real estate, including construction and interim loans. These loans
have involved properties located in the western United States.
The Company has historically financed 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 may not be able to continue
using these funding sources in the future.
9
PACIFIC SECURITY FINANCIAL, INC.
PART II
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS:
For the years ended July 31, 2003, 2002, and 2001, the Company's net income
(loss) was approximately $(2,756,000), $(176,000), and $79,000, respectively.
Due to dividends on the preferred stock, the income (loss) applicable to common
stockholders was approximately $(2,756,000), $(212,000), and $79,000, in fiscal
2003, 2002, and 2001, respectively.
Rental revenues have decreased primarily because of sales of rental properties.
Total rental income has decreased from approximately $2,690,000 in fiscal 2001
to $1,403,000 in fiscal 2003.
Interest income, including loan fees and amortization of discounts on acquired
real estate contracts and loans, has decreased from approximately $3,102,000 and
$3,993,000 in fiscal 2002 and 2001, respectively, to approximately $1,338,000 in
fiscal 2003. This decrease corresponds directly with the decrease in the
Company's origination of construction and interim commercial loans. In the last
half of fiscal 2002, the Company discontinued originating new commercial real
property construction and interim loans through its subsidiary, Cornerstone
Realty Advisors, Inc. Loan fees of $201,000 have declined as the new loan
portfolio has declined in fiscal 2003. Loan fees were $741,000 and $1,053,000 in
fiscal 2002 and 2001, respectively. Net interest income without loan fees was
approximately $(305,000) in fiscal year 2003 compared with $356,000 and $352,000
in fiscal 2002 and 2001, respectively.
The Company had a loss of approximately $458,000 from real estate sales in
fiscal 2003 compared with a gain of approximately $2,022,000 in fiscal 2001 and
a loss of $25,000 in fiscal 2001.
The Company anticipates that it will continue to recognize gains and losses on
the sale of real estate acquired through foreclosure and real estate acquired
for resale as well as on the sales of rental properties and other assets.
The expenses associated with rental operations have decreased to approximately
$1,472,000 in fiscal 2003 from approximately $1,703,000 in fiscal 2002 and
$2,396,000 in fiscal 2001. The rental activities of the Company are expected to
continue to contribute to its operations, but reduced revenues due to the sales
of rental properties have more than offset rental increases from renovated or
newly-constructed properties.
Interest expense, exclusive of interest on rental properties, net of amounts
capitalized, was approximately $1,442,000, $2,005,000, and $2,588,000, in fiscal
2003, 2002, and 2001, respectively. In fiscal 2000 and through the first half of
fiscal 2002, outstanding borrowings increased significantly due to advances
drawn under the Company's lines of credit to fund the origination of
construction and interim loans. Decreased borrowings and lower interest rates
resulted in the decrease in interest expense in fiscal 2003 and 2002.
10
PACIFIC SECURITY FINANCIAL, INC.
PART II
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
Salaries and commissions have decreased to approximately $1,020,000 in fiscal
2003 from $1,121,000 in fiscal 2002, and $901,000 in fiscal 2001. One-time
restructuring charges exceeding $300,000 for severance payments and employee
contracts were incurred in fiscal 2003 as the Company reduced personnel.
General and administrative expenses in fiscal 2003 were approximately $742,000
compared with $667,000 in fiscal 2002 and $589,000 in fiscal 2001 primarily due
to increases in legal fees and real estate taxes from foreclosed properties.
The Company made a provision for an impaired asset of approximately $644,000 for
a rental property after obtaining an appraisal in fiscal 2003.
The Company incurred a $318,000 contract discount expense to induce a borrower
to pay off a $3,181,000 contract receivable in fiscal 2003.
The provision for loan losses decreased to approximately $807,000 in fiscal 2003
compared with approximately $1,408,000 in fiscal 2002 and $70,000 in fiscal 2001
as the slow economy resulted in some loan defaults and foreclosures. Write offs
decreased to approximately $784,000 in fiscal 2003 compared with approximately
$941,000 in fiscal 2002 and approximately $70,000 in fiscal 2001.
The Company's effective income tax rate as a percentage of income (loss) from
continuing operations before income taxes was 34% in fiscal 2003, compared to a
provision of 34% and 22% in 2002 and 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
At July 31, 2003, the Company had total stockholders' equity of approximately
$4,444,000 and a total liabilities to equity ratio of 4.22 to 1, which decreased
from 5.16 to 1 the year before. The decrease in this ratio was primarily due to
the repayment of bank borrowings in fiscal 2003. In fiscal 2003, the Company's
primary sources of funds were approximately $15,198,000 in real estate contract
collections and $4,822,000 from real estate sales. The primary uses of funds
were approximately $1,490,000 used for acquisition and improvement of real
estate projects, $156,000 used to originate new loans and acquire new contracts,
$1,983,000 in net repayment of maturing debentures, approximately $15,828,000 in
net repayment of bank line and other borrowings, and approximately $195,000 for
net operating activities. As a shareholder of monetary assets and liabilities,
the Company's performance may be significantly affected by changes in interest
rates. These changes are somewhat delayed to the extent that a portion 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.
11
PACIFIC SECURITY FINANCIAL, INC.
PART II
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
The Company's sources of liquidity traditionally have included the issuance of
debentures under the auspices of the Washington State Securities Division of the
Department of Financial Institutions and borrowings from various bank lenders.
These sources of liquidity are limited either by the Washington State Securities
Division, which has capped the amount of debentures the Company may sell or by
the individual banks through covenants included in the loan agreements.
An additional source of liquidity is the issuance of participation interests in
certain loans originated by the Company. The total of these non-recourse
participations was $475,000 at July 31, 2003, and $3,495,000 at July 31, 2002.
At July 31, 2003, the Company's outstanding banking agreements totaled
approximately $3,692,000 with an additional $5,583,000 due for installment
contracts, mortgage notes, and notes payable. During the year ended July 31,
2003, the Company induced a borrower with a discount of $318,000 (10%) on a
contract of approximately $3,181,000 to pay off and provide funds to pay off the
Company's bank line on March 3, 2003. The bank continues to work with the
Company on a loan that was paid down to $880,000 on March 3, 2003, and that is
collateralized by a property in Eagle, Idaho, that was acquired through
foreclosure in June 2003. The bank agreed to extend the loan for a period of six
months to September 3, 2003, with interest only paid monthly. Subsequent to the
fiscal year end on July 31, 2003, the loan was evaluated based on market and
other business conditions and the maturity date was extended to June 1, 2004.
Another financial institution the Company relied upon as a source of funding for
its commercial real estate loans indicated they are terminating (nationally) all
or nearly all, commercial warehouse lines of credit. This financial institution
agreed to work with the Company to allow a current loan totaling approximately
$1,858,000 to pay off as it matured. The final payoff occurred in May 2003.
Management does not believe that this line of credit can be quickly replaced by
another lender. This will materially impact the Company's liquidity and
profitability. Due to the restrictive banking agreements, the Company has
essentially stopped making new loans and has concentrated on collection efforts
to pay down outstanding debt. These collection efforts include foreclosure
proceedings on several loans.
12
PACIFIC SECURITY FINANCIAL, INC.
PART II
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED):
The Company anticipates that cash flows from operations along with real estate
and receivable sales will be sufficient to provide for the retirement of
maturing debentures and mortgage obligations.
The Company has begun to implement strategies for restructuring, which include
liquidating a majority of the Company's assets over the course of the next year.
The Company has reduced personnel during the year, incurring restructuring
charges exceeding $300,000 for severance payments and employment contracts for
seven employees. Six employees have continued to work for the Company after the
April 30, 2003, employment contract ending date. It is management's intention
that the Company will continue to own and invest in commercial real estate upon
completion of the restructuring, at which time management intends to evaluate
the opportunities to continue financing commercial real estate in light of
market conditions and available capital.
The Company's management is continuously evaluating loans for collectibility.
Additional provisions for loan losses may be required as the Company analyzes
each loan during its efforts to reduce outstanding loans receivable. Litigation
may be required in the course of collection. In addition, the Company's position
relative to bankruptcy filings by borrowers must be assessed.
The borrower on a Park City, Utah, loan filed for bankruptcy protection on May
1, 2002. The Company's principal portion of this loan totaled $1,250,000 and is
expected to be recovered through the sale of the foreclosed property
(approximately 27 acres of land) that was acquired through a trustee's sale in
December 2002.
The Company completed foreclosure proceedings on three Eagle, Idaho loans
totaling approximately $2,460,000 and obtained title to approximately 25 acres
of land in June 2003. The Company has negotiated a sale of approximately 75% of
this property pending approval of entitlements.
The Company has provided an allowance for loan loss of $100,000 on a Kirkland,
Washington, loan of approximately $140,000. The borrower was forced into
involuntary bankruptcy by unsecured creditors. A trustee's sale of the property
scheduled for May 9, 2003, was postponed. The Company is currently assessing its
potential for recovery.
The borrower on two loans totaling approximately $995,000 filed for bankruptcy
in March 2003. The loans are collateralized by eight lots, including one
partially finished house and eleven acres of land in Oakland Hills, California.
The Company is currently assessing its potential for recovery and has made a
$269,000 provision for loan loss on these loans.
13
PACIFIC SECURITY FINANCIAL, INC.
PART II
- --------------------------------------------------------------------------------
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 can be affected by fluctuations in 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.
14
PACIFIC SECURITY FINANCIAL, INC.
PART II
- -------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
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, 2003.
2004 2005 2006 2007 2008 Thereafter Balance Fair Value
--------- --------- --------- ------- ------- ---------- --------- ---------
Interest-sensitive assets:
Contracts, mortgages, finance
notes, and loans receivable $3,142,504 $ 340,604 $ 55,516 $ 55,516 $ 170,377 $3,363,025 $7,127,542 $7,127,542
Interest-sensitive liabilities:
Notes payable to banks 3,692,500 -- -- -- -- 3,692,500 3,692,500
Installment contracts, mortgage
notes, and notes payable 1,604,766 218,802 219,915 3,020,583 184,622 334,578 5,583,266 5,583,266
Debenture bonds 2,808,723 2,626,034 1,727,803 892,318 472,305 -- 8,527,183 8,527,183
Off-balance sheet items:
Undisbursed loans receivable 91,985 -- -- -- -- -- --
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.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Pacific Security Financial, Inc. and Subsidiaries
Spokane, Washington
We have audited the accompanying consolidated balance sheets of Pacific Security
Financial, Inc. and subsidiaries as of July 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended July 31, 2003, 2002, and 2001. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Security
Financial, Inc. and subsidiaries as of July 31, 2003 and 2002, and the results
of their operations and cash flows for the years ended July 31, 2003, 2002, and
2001, in conformity with accounting principles generally accepted in the United
States of America.
Spokane, Washington
August 29, 2003
16
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
ASSETS
July 31,
----------------------------
2003 2002
----------------------------
ASSETS
Cash and cash equivalents $ 705,564 $ 367,469
------------ ------------
Receivables
Contracts, mortgages, finance notes, and loans receivable, net
Related parties -- 166,182
Unrelated 7,107,189 25,871,569
Less allowance for loan losses (609,100) (585,855)
------------ ------------
6,498,089 25,451,896
Accrued interest 42,790 208,612
Other 275,481 251,639
------------ ------------
6,816,360 25,912,147
------------ ------------
Investment in rental properties, net 11,344,735 12,811,852
Impairment on rental properties (643,680) --
------------ ------------
10,701,055 12,811,852
------------ ------------
Other investments
Property held for sale and development 4,367,608 4,399,921
------------ ------------
Other assets
Furniture and equipment, net 76,292 78,553
Prepaid expenses and other, net 215,901 234,410
Deferred tax asset, net 284,834 --
Federal income tax refund receivable 54,204 647,273
------------ ------------
631,231 960,236
------------ ------------
TOTAL ASSETS $ 23,221,818 $ 44,451,625
============ ============
See accompanying notes.
17
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31,
----------------------------
2003 2002
----------------------------
LIABILITIES
Notes payable to banks $ 3,692,500 $ 16,438,964
Installment contracts, mortgage notes, and notes payable
Related parties -- 28,158
Unrelated 5,583,266 8,636,785
Debenture bonds 8,527,183 9,996,954
Accrued expenses and other liabilities
Related parties 100,933 144,928
Unrelated 873,546 896,541
Deferred income taxes -- 1,096,699
------------ ------------
18,777,428 37,239,029
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY
Preferred stock
Class A preferred stock, $100 par value, authorized 20,000
shares; issued and outstanding 3,000 shares 300,000 300,000
Preferred stock, authorized 10,000,000 no par value shares;
no shares issued and outstanding -- --
Common stock
Original class, authorized 2,500,000 no par value shares; $3
stated value; issued and outstanding, 1,080,357 and
1,084,289 shares 3,241,070 3,252,866
Class B, authorized 30,000 no par value shares; no shares
issued and outstanding -- --
Additional paid-in capital 1,830,941 1,830,941
Retained earnings (deficit) (927,621) 1,828,789
------------ ------------
Total stockholders' equity 4,444,390 7,212,596
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,221,818 $ 44,451,625
============ ============
See accompanying notes
18
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended July, 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Income
Rental $ 1,403,357 $ 1,533,476 $ 2,689,799
Interest, including loan fees of $200,691,
$740,556, and $1,052,937 1,337,848 3,101,696 3,981,137
Amortization of discounts on real estate
contracts -- -- 11,971
Gain (loss) on sale of real estate (457,582) 2,022,192 (24,525)
Other, net 22,464 27,097 31,126
----------- ----------- -----------
2,306,087 6,684,461 6,689,508
----------- ----------- -----------
Expense
Rental operations
Depreciation and amortization 471,440 538,096 783,704
Interest 297,931 424,116 559,701
Other 702,181 741,109 1,053,072
----------- ----------- -----------
1,471,552 1,703,321 2,396,477
Interest, net of amount capitalized 1,442,054 2,005,142 2,588,461
Salaries and commissions 1,020,015 1,120,787 901,220
General and administrative 741,867 666,555 589,184
Depreciation and amortization 38,072 47,895 43,278
Provision for loan loss 807,159 1,407,712 70,000
Impairment on rental properties 643,680 -- --
Contract discount 318,066 -- --
----------- ----------- -----------
6,482,465 6,951,412 6,588,620
----------- ----------- -----------
Income (loss) from operations
before income taxes (4,176,378) (266,951) 100,888
Income tax provision (benefit) (1,419,968) (90,763) 22,108
----------- ----------- -----------
Net income (loss) (2,756,410) (176,188) 78,780
----------- ----------- -----------
See accompanying notes.
19
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended July, 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
Net income (loss) $(2,756,410) $ (176,188) $ 78,780
Less preferred stock dividends -- (36,000) --
----------- ----------- -----------
INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS $(2,756,410) $ (212,188) $ 78,780
=========== =========== ===========
Income (loss) per common share - basic and
diluted $ (2.55) $ (0.19) $ 0.07
=========== =========== ===========
Weighted-average common shares
outstanding basic and diluted 1,082,409 1,099,105 1,128,469
=========== =========== ===========
See accompanying notes.
20
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Number of Additional
Common Preferred Common Paid-In Retained
Shares Stock Stock Capital Earnings Total
----------- ----------- ----------- ----------- ----------- -----------
Balance, July 31, 2000 1,138,796 $ 300,000 $ 3,416,386 $ 1,822,203 $ 1,962,197 $ 7,500,786
Net income -- -- -- -- 78,780 78,780
Purchase and retirement
of common stock (28,411) -- (85,232) 8,738 -- (76,494)
----------- ----------- ----------- ----------- ----------- -----------
Balance, July 31, 2001 1,110,385 300,000 3,331,154 1,830,941 2,040,977 7,503,072
Net loss -- -- -- -- (176,188) (176,188)
Purchase and retirement
of common stock (26,096) -- (78,288) -- -- (78,288)
Cash dividend declared
on preferred stock
(3,000 shares) -- -- -- -- (36,000) (36,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance, July 31, 2002 1,084,289 300,000 3,252,866 1,830,941 1,828,789 7,212,596
Net loss -- -- -- -- (2,756,410) (2,756,410)
Purchase and retirement
of common stock (3,932) -- (11,796) -- -- (11,796)
----------- ----------- ----------- ----------- ----------- -----------
Balance, July 31, 2003 1,080,357 $ 300,000 $ 3,241,070 $ 1,830,941 $ (927,621) $ 4,444,390
=========== =========== =========== =========== =========== ===========
See accompanying notes.
21
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------------
Year Ended July 31,
--------------------------------------------
2003 2002 2001
--------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Cash received from rentals and other $ 1,410,072 $ 1,333,773 $ 2,658,100
Interest received 1,503,669 3,175,700 3,948,546
Cash paid to suppliers and employees (2,429,503) (2,273,802) (2,585,089)
Interest paid, net of amounts capitalized (1,310,306) (1,964,830) (2,572,067)
Income taxes refunded (paid) 631,505 (60,000) (310,000)
------------ ------------ ------------
Net cash provided (used) by operating
activities (194,563) 210,841 1,139,490
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sales of real estate 4,821,716 1,762,137 75,530
Proceeds from sales and maturities of
marketable securities -- -- 41,724
Collections on contracts, mortgages,
finance notes, and loans receivable 15,198,100 15,893,636 16,020,406
Origination of loans receivable and
investment in contracts, mortgages, and
finance notes (156,238) (11,669,791) (23,014,235)
Additions to rental properties, property
held for sale and development, and equipment (1,489,984) (1,195,241) (2,068,405)
Change in restricted investments -- -- 345
------------ ------------ ------------
Net cash provided (used) by investing
activities 18,373,594 4,790,741 (8,944,635)
------------ ------------ ------------
See accompanying notes.
22
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Year Ended July 31,
--------------------------------------------
2003 2002 2001
--------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net borrowings under line of credit
agreements $(12,746,464) $ (4,647,717) $ 7,772,198
Proceeds from installment contracts,
mortgage notes, and notes payable -- 2,143,925 1,544,301
Payments on installment contracts,
mortgage notes, and notes payable (3,081,677) (1,941,432) (1,006,798)
Proceeds from sales of debenture bonds -- 31,009 237,319
Redemption of debenture bonds (1,982,999) (743,252) (469,947)
Payment of dividends on preferred stock (18,000) (18,000) (18,000)
Purchase and retirements of common
stock (11,796) (78,288) (76,494)
------------ ------------ ------------
Net cash provided (used) by financing
activities (17,840,936) (5,253,755) 7,982,579
------------ ------------ ------------
NET CHANGE IN CASH
AND CASH EQUIVALENTS 338,095 (252,173) 177,434
Cash and cash equivalents, beginning of year 367,469 619,642 442,208
------------ ------------ ------------
Cash and cash equivalents, end of year $ 705,564 $ 367,469 $ 619,642
============ ============ ============
See accompanying notes.
23
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Year Ended July 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
RECONCILIATION OF NET INCOME
TO NET CASH FROM OPERATING
ACTIVITIES
Net income (loss) $(2,756,410) $ (176,188) $ 78,780
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 509,512 585,991 826,982
Deferred income tax provision (benefit) (1,381,533) 491,829 (41,700)
Deferred financing income realized -- -- (11,971)
Interest accrued on debenture bonds 513,228 542,552 531,623
(Gain) loss on sales of real estate 457,582 (2,022,192) 24,525
Contract discount 318,066 -- --
Provision for loan loss 807,159 1,477,712 70,000
Provision for impaired asset 643,680 -- --
Change in assets and liabilities:
Accrued interest receivable 165,822 74,004 (32,591)
Income taxes -- -- (246,192)
Prepaid expenses 8,094 (8,358) (30,900)
Income tax refund receivable 593,069 (642,592) --
Accrued expense and other liabilities (48,990) 106,526 28,493
Other, net (23,842) (218,443) (57,559)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ (194,563) $ 210,841 $ 1,139,490
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Company financed sale of property $ 929,739 $ 6,742,480 $ 50,000
=========== =========== ===========
Stock dividend declared and unpaid $ -- $ 18,000 $ --
=========== =========== ===========
Property held for sale and development acquired
in satisfaction for defaulted loan receivable $ 3,743,248 $ 1,509,200 $ 1,065,804
=========== =========== ===========
Impairment of real estate owned against
provision for loan loss $ 58,774 $ 60,000 $ 70,000
=========== =========== ===========
See accompanying notes.
24
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pacific Security Financial, Inc. (formerly 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. The Company's commercial real estate loans are
originated on properties located in the western United States.
FINANCIAL CONDITION OF LIQUIDITY:
As a result of the weakening national economy, the Company experienced
increasing levels of delinquent loans arising from its lending to borrowers
primarily engaged in construction and real estate development around the western
United States. This has resulted in a reduction in the Company's earning assets,
which may materially impact the Company's profitability. This has also resulted
in one of the Company's lenders limiting borrowing capacity to $880,000 from
$4.75 million.
Another financial institution the Company relied upon as a source of funding for
its commercial real estate loans has terminated (nationally) all or nearly all,
commercial warehouse lines of credit similar to the borrowing relationship they
had entered into with us in the past. This financial institution agreed to work
with the Company to allow all loan commitments to pay off as they mature, which
occurred by May 31, 2003. Therefore, the Company does not have access to an
$11.0 million line of credit provided by this institution going forward.
Management does not currently believe that this line of credit can be quickly
replaced by another lender. This event has materially impacted the Company's
liquidity and profitability. The Washington State Securities Division has
approved the Company's application to issue debentures under the Washington
State Debenture Act. Approval required significant conditions, which may
adversely impact the Company's liquidity and profitability. The state of
Washington has mandated as a condition for issuance of the permit that the
Company reduce total debentures outstanding by $500,000 by August 29, 2004. The
requirement to do so will materially impact the Company's liquidity.
The result of these actions has impacted the Company's ability to meet long-term
debt retirement projections. Without additional sources of liquidity with which
to originate further loans, the liquidity needed to retire the debentures is a
significant problem. Therefore, the Company will continue strategies for
reorganizing or liquidating the Company over the next year. In either case,
implementation of the different alternatives will result in the orderly sale of
some or all of the Company's assets.
25
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, Pacific Realty Management and Cornerstone Realty
Advisors, Inc., which were formed in fiscal years 2000 and 1998, respectively.
All significant intercompany accounts and transactions have been eliminated.
Cornerstone Realty Advisors, Inc. was dissolved as of March 31, 2002, with
commercial lending activities folded back into the parent company. Pacific
Realty Management was an inactive corporation that was dissolved on December 23,
2002.
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:
The Company's contracts, finance notes, and loans receivable consist primarily
of short-term construction and real estate development loans. Contracts,
mortgages, finance notes, and loans receivable are stated at the unpaid
principal balance, plus accrued interest, less acquisition discounts, unearned
loan fees, and an allowance for estimated uncollectible amounts, as necessary.
Management evaluates receivables which may not be fully collectible to determine
if a provision for loss is necessary based on the present value of expected
future cash flows from the receivables in the ordinary course of business or
from amounts recoverable through foreclosures and the subsequent resale of the
collateral.
Contracts, mortgages, finance notes, and loans receivable are determined to be
delinquent when the contractual payments are 30 days past due. Contracts,
mortgages, finance notes, and loans receivable are placed on nonaccrual status
when collection of principal or interest is considered doubtful. Interest income
previously accrued on these loans that are 90 days past due, but not yet
received, is reversed in the current period to the extent that it is considered
uncollectible. Interest subsequently recovered is credited to income in the
period collected.
26
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is based on management's evaluation of each
specific loan. A loan is considered impaired when, based on current information
such as adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, current economic conditions, and
independent appraisals, it is probable that the Company will be unable to
collect, on a timely basis, all principal and interest according to the
contractual terms of the loan's original agreement. The amount of the impairment
is measured using cash flows discounted at the loan's effective interest rate,
except when it is determined that the sole source of repayment for the loan is
the operation or liquidation of the underlying collateral. In such cases, the
current value of the collateral, reduced by anticipated selling costs, is used
in place of discounted cash flows. Generally, when a loan is deemed impaired,
current period interest previously accrued but not collected is reversed against
current period interest income. Income on such impaired loans is then recognized
only to the extent that cash in excess of any amounts charged off to the
allowance for loan losses is received and where the future collection of
principal is probable. Interest accruals are resumed on such loans only when
they are brought fully current with respect to interest and principal and when,
in the judgment of management, the loans are estimated to be fully collectible
as to both principal and interest.
Contracts, mortgages, finance notes, and loans receivable are charged off when
management believes there has been permanent impairment of their carrying
values.
DISCOUNTS ON CONTRACTS:
The Company amortizes discounts on purchased contracts using the effective 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 effective 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.
Depreciation is provided on the straight-line method over estimated useful lives
as summarized below:
Building and improvements 15-40 years
Furniture and equipment 5-10 years
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.
27
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST CAPITALIZATION:
All costs associated with self-constructed assets, including interest, incurred
during the construction period, are capitalized. Interest costs of approximately
$66,000 and $46,000 were capitalized during the years ended July 31, 2003 and
2002, respectively.
PROPERTY HELD FOR SALE OR DEVELOPMENT:
The Company acquires real estate through direct acquisition and foreclosures and
records these assets at the lower of fair value, less estimated costs to sell,
or cost. Losses on properties held for sale or development are recognized if the
anticipated cash flows from disposition, less estimated selling costs, are
estimated to be less than the carrying value of the related asset.
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.
INTANGIBLE ASSETS:
A covenant not to compete of $125,000 was amortized on a straight-line basis
over a five-year term of the related agreement. At July 31, 2002, this asset was
recorded as other assets on the consolidated balance sheet with a balance of
$13,559. The covenant not to compete was fully amortized as of July 31, 2003.
FURNITURE AND EQUIPMENT:
Furniture 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 furniture and
equipment was $281,590 and $259,714 at July 31, 2003 and 2002, 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.
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.
28
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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, 2003, 2002, and 2001; therefore,
diluted earnings per share amounts are identical to basic earnings per share.
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, 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.
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 nonrecourse 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.
29
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company has elected to
early adopt SFAS No. 146. The effect of adoption of this Statement is included
in these statements.
In October 2002, FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions - an amendment of FASB Nos. 72 and 144 and FASB Interpretation No.
9. SFAS No. 147 concluded that for a transaction that is a business combination,
the unidentified intangible asset that is required to be recognized under
paragraph 5 of SFAS No. 72 represents goodwill that should be accounted for
under SFAS No. 147. The statement also concluded that SFAS No. 141 provides
sufficient guidance for assigning amounts to assets acquired and liabilities
assumed; therefore, the specialized industry guidance in Interpretation No. 9
and paragraph 4 of SFAS No. 72 is no longer necessary. Finally, SFAS No. 147
clarifies that a branch acquisition that meets the definition of a business
should be accounted for as a business combination, otherwise the transaction
should be accounted for as an acquisition of net assets that does not result in
the recognition of goodwill. This statement was effective on October 1, 2002.
The Company's adoption of SFAS No. 147 did not have a material impact on the
Company's financial position or results of operations.
In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure - an amendment to FASB Statement No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures about the method of
accounting for stock-based employee compensation and the effect of the method
used on reporting results. As the Company has no stock-based compensation plans,
this statement had no impact on the Company's financial position or results of
operations.
The FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative
Instruments and Hedging Activities. This statement, which was issued in April
2003, amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement is effective
for contracts entered into or modified after June 30, 2003. The Company's
adoption of SFAS No. 149 did not have a material impact on the Company's
financial position or results of operations.
30
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This statement, which was issued
in May 2003, establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company's adoption of SFAS No. 150 did not
have a material impact on the Company's financial position or results of
operations.
ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 expense during
the reporting periods. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures, or in
satisfaction of loans as well as the impairment of investments in rental
properties.
Management believes that the allowance for loan losses and impairment of rental
properties is adequate. While management uses currently available information to
recognize losses on loans and real estate held for sale and development or
investment in rental properties, future additions to the allowance or impairment
valuation may be necessary based on changes in economic conditions.
RECLASSIFICATIONS:
Certain amounts in the 2002 and 2001 financial statements have been reclassified
to conform with the current year's presentation. These reclassifications had no
effect on retained earnings or net income (loss) as previously reported.
31
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - CONTRACTS, MORTGAGES, FINANCE NOTES, AND LOANS RECEIVABLE
The components of contracts, mortgages, finance notes, and loans receivable at
July 31, 2003 and 2002, are as follows:
2003 2002
------------ ------------
Contracts, mortgages, and finance notes receivable $ 4,644,946 $ 9,121,087
Originated loans receivable 2,574,581 18,823,391
Undisbursed portion of loans receivable (91,985) (1,825,566)
------------ ------------
7,127,542 26,118,912
Unearned loan fees, net (20,353) (81,161)
Allowance for loan losses (609,100) (585,855)
------------ ------------
CONTRACTS, MORTGAGES, FINANCE NOTES,
AND LOANS RECEIVABLE, NET $ 6,498,089 $ 25,451,896
============ ============
At July 31, 2003, three individual borrowers represented approximately 42%, 19%,
and 14% of the gross outstanding receivable. For the year ended July 31, 2002,
three individual borrowers represented 15%, 11%, and 12% of the gross
outstanding receivable.
Outstanding commitments to extend credit to borrowers is $91,985 at July 31,
2003. The Company does not have any other commitments to extend credit.
At July 31, 2003 and 2002, the aging of the gross amounts due on contracts,
mortgages, finance notes, and loans receivable was as follows:
2003 2002
----------- -----------
Current $ 5,869,714 $20,429,239
31 to 60 days -- 2,864,281
61 to 90 days -- 1,290,000
Over 90 days 1,257,828 1,535,392
----------- -----------
$ 7,127,542 $26,118,912
=========== ===========
The Company had no loans past due 90 days or more and still accruing interest.
32
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - CONTRACTS, MORTGAGES, FINANCE NOTES, AND LOANS RECEIVABLE (CONTINUED)
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 on an individual loan basis. An
allowance of $609,100 and $585,855 was provided at July 31, 2003 and 2002,
respectively. 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.
ALLOWANCE FOR LOAN LOSSES:
Write offs include $58,774, $60,000, and $70,000 in 2003, 2002, and 2001,
respectively, for impairment of real estate owned against the provision for loan
loss.
Year Ended July 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
Beginning balance $ 585,855 $ 119,460 $ 119,460
Provision for loan loss 807,159 1,407,712 70,000
Write offs (783,914) (941,317) (70,000)
----------- ----------- -----------
ENDING BALANCE $ 609,100 $ 585,855 $ 119,460
=========== =========== ===========
NOTE 3 - INVESTMENTS IN RENTAL PROPERTIES
Following is a summary of investments in rental properties at July 31, 2003 and
2002:
2003 2002
------------ ------------
Land $ 1,412,585 $ 2,071,033
Buildings and improvements 13,605,327 14,234,991
Furniture and equipment 743,997 641,457
------------ ------------
15,761,909 16,947,481
Impairment on rental properties (643,680) --
Less accumulated depreciation (4,417,174) (4,135,629)
------------ ------------
$ 10,701,055 $ 12,811,852
------------ ------------
Depreciation expense was $471,440, $538,096, and $783,704 for the years ended
July 31, 2003, 2002, and 2001, respectively.
33
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENTS IN RENTAL PROPERTIES (CONTINUED)
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 noncancelable
operating leases as of July 31, 2003:
Year Ending July 31,
2004 $ 850,800
2005 689,429
2006 603,773
2007 535,458
2008 240,170
Thereafter 386,007
----------
$3,305,637
==========
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.
Management determined that an impairment of value had occurred on a rental
property office building after obtaining an appraisal and updating it with
additional information. An impairment expense of $643,680 was recorded in the
fiscal year ended July 31, 2003, to reduce the carrying value of this office
building.
34
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - BUSINESS SEGMENT REPORTING
Information about the Company's separate continuing business segments as of and
for the years ended July 31, 2003, 2002, and 2001, is as follows:
Real Estate
Commercial Rental, and
Lending Receivales
Operations Operations Total
---------- ---------- -----
2003
Revenue $ 632,434 $ 1,673,653 $ 2,306,087
Income (loss) before income tax (1,533,701) (2,642,677) (4,176,378)
Identifiable assets, net 5,881,571 17,340,247 23,221,818
Depreciation and amortization 4,739 504,773 509,512
Capital expenditures 2,382 1,487,602 1,489,984
2002
Revenue $ 2,507,279 $ 4,177,182 $ 6,684,461
Income (loss) before income tax (485,102) 218,151 (266,951)
Identifiable assets, net 19,052,050 25,399,575 44,451,625
Depreciation and amortization 4,969 581,022 585,991
Capital expenditures 40,414 1,154,827 1,195,241
2001
Revenue 3,582,771 3,106,737 6,689,508
Income (loss) before income tax 1,088,890 (988,002) 100,888
Identifiable assets, net 22,792,656 25,962,003 48,754,659
Depreciation and amortization 3,709 823,273 826,982
Capital expenditures 20,449 2,047,956 2,068,405
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. The commercial loan origination business,
operated as Cornerstone Realty Advisors, Inc. from 1998 to March 31, 2002,
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.
35
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - MARKETABLE SECURITIES
The Company had no investments in marketable securities at July 31, 2003 and
2002. Investments in marketable securities at July 31, 2000, consisted of debt
securities of $41,724, which matured in 1998, but were not fully paid by the
issuer until 2001 due to the issuer's reorganization. No gain or loss was
recognized on this security.
NOTE 6 - NOTES PAYABLE TO BANKS (LINES OF CREDIT)
Notes payable to banks consisted of the following at July 31, 2003 and 2002:
2003 2002
----------- -----------
U.S. Bank of Washington, short-term line of credit, $11,000,000
commitment, interest at the prime rate plus 0.25%, expired
December 15, 2002, guaranteed by Wayne Guthrie, collateralized
by loans receivable $ -- $ 8,899,046
Washington Mutual Bank, $880,000 commitment, interest at
prime rate plus 0.25%, expires September 3, 2003,
collateralized by Eagle, Idaho, property and guaranteed by
David Guthrie 880,000 4,727,418
Sterling Savings Bank, line of credit, $2,812,500 commitment,
interest at BARR plus 0.5%, expires December 1, 2003,
collateralized by real property and assignment of rents,
guaranteed by Wayne and David Guthrie 2,812,500 2,812,500
----------- -----------
$ 3,692,500 $16,438,964
=========== ===========
The prime rate and the BARR referenced on the above notes were 4.00% and 4.75%
on July 31, 2003 and 2002, respectively
The following assets were pledged as collateral on these notes payable at July
31, 2003 and 2002:
2003 2002
----------- -----------
Contracts receivable $ -- $ 5,122,703
Loans receivable/real estate held 1,150,000 11,143,440
Rental properties 5,086,835 4,814,258
----------- -----------
$ 6,236,835 $21,080,401
=========== ===========
36
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - INSTALLMENT CONTRACTS, MORTGAGE NOTES, AND NOTES PAYABLE
Installment contracts, mortgage notes, and notes payable consist of the
following at July 31, 2003 and 2002:
2003 2002
-------- --------
Installment contracts, mortgage notes, and notes payable, interest
at 4.00% to 9.25%, aggregate monthly payment of $42,767,
mature 2005 through 2020, collateralized by various properties. $5,583,266 $8,664,943
========== ==========
Scheduled future maturities of installment contracts, mortgage notes, and notes
payable are as follows:
Year Ending July 31,
2004 $1,604,766
2005 218,802
2006 219,915
2007 3,020,583
2008 184,622
Thereafter 334,578
----------
$5,583,266
==========
NOTE 8 - DEBENTURE BONDS
The Company has issued unsecured investment bonds (debentures) 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 debentures have original maturities ranging from one to ten
years, and the interest rates vary depending upon the maturity.
37
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - DEBENTURE BONDS (CONTINUED)
Outstanding debentures by interest rate categories were as follows at July 31,
2003 and 2002:
Debenture Interest Rate 2003 2002
---------- -----------
5.00% $ -- $ 136,008
5.25% -- 34,561
5.75% -- 49,736
6.00% 263,661 257,566
6.50% 140,838 138,652
6.75% 78,276 84,153
7.00% 113,846 128,938
7.25% 210,602 209,598
7.50% 10,561 176,822
7.75% 791,594 1,176,651
8.00% 293,416 287,808
8.25% 1,259,783 1,380,740
8.50% 1,696,554 2,134,065
8.75% 369,016 364,362
9.00% 1,908,723 2,045,523
9.25% 474,400 438,738
9.50% 896,110 923,363
10.00% 10,826 21,577
10.50% 8,977 8,093
---------- ----------
$8,527,183 $9,996,954
========== ==========
The weighted-average annual interest rate on outstanding debentures at July 31,
2003 and 2002, was 8.47% and 8.36%, respectively.
Estimated future contractual maturities of outstanding debentures are as
follows:
Year Ending July 31,
2004 $2,808,723
2005 2,626,034
2006 1,727,803
2007 892,318
2008 472,305
----------
$8,527,183
38
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - DEBENTURE BONDS (CONTINUED)
The Company's permit for the sale of debenture securities is effective from
August 29, 2003, to August 29, 2004. This permit is conditional upon maintaining
compliance with the Washington Securities Act, including special permit
conditions, such as the maintenance of minimum net worth and liquidity levels.
In addition, the Company is required to reduce outstanding debentures by
$500,000 by August 29, 2004. Failure to comply with these requirements may
jeopardize the Company's ability to issue debentures.
NOTE 9 - INCOME TAXES
The components of income tax expense consists of the following for the years
ended July 31:
2003 2002 2001
----------- ----------- -----------
Current tax (benefit) expense $ (38,435) $ (582,592) $ 63,808
Deferred tax (benefit) expense (1,381,533) 491,829 (41,700)
----------- ----------- -----------
INCOME TAX (BENEFIT) EXPENSE $(1,419,968) $ (90,763) $ 22,108
=========== =========== ===========
39
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (CONTINUED)
The net deferred tax liabilities consist of the following components at July 31:
2003 2002 2001
----------- ----------- -----------
Deferred tax assets
Provision for loan loss $ 207,094 $ 197,522 $ 38,948
Accrued expenses -- 24,714 71,586
Prepaid rents 7,433 35,208 46,573
Net operating loss carryforward 1,088,488 -- --
Other 40,329 25,972 32,778
----------- ----------- -----------
Total deferred tax assets 1,343,344 283,416 189,885
----------- ----------- -----------
Deferred tax liabilities
Depreciation (427,717) (617,986) (604,562)
Installment gains (623,690) (755,026) (190,193)
Other (7,103) (7,103) --
----------- ----------- -----------
Total deferred tax liabilities (1,058,510) (1,380,115) (794,755)
----------- ----------- -----------
NET DEFERRED TAX ASSETS
(LIABILITIES) $ 284,834 $(1,096,699) $ (604,870)
=========== =========== ===========
The effective tax rate differs from the statutory federal rate for the years
presented as follows:
2003 2002 2001
----------- ----------- -----------
Federal income tax expense at statutory rates $(1,419,968) $ (90,763) $ 34,302
Effect of permanent differences 1,960 7,403 11,763
Effect of graduated tax rate -- 3,403 (4,673)
Other (1,960) (10,806) (19,284)
----------- ----------- -----------
INCOME TAX (BENEFIT) EXPENSE $(1,419,968) $ (90,763) $ 22,108
=========== =========== ===========
Operating loss carryforward as of July 31, 2003, for income tax purposes were as
follows:
Expiration Date
2023 $3,227,239
----------
40
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - EMPLOYEE BENEFIT PLAN
The Company provides 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, employees are eligible to contribute up to 18% of their compensation,
subject to annual limitations, to the Plan. The Company may contribute 3% of
gross salary for all eligible employees. 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 Plan contribution was approximately $30,000,
$34,000, and $25,000 during the years ended July 31, 2003, 2002, and 2001,
respectively.
NOTE 11 - PREFERRED STOCK
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 on July 31,
2003, 2002, and 2001.
There were no changes to the 3,000 outstanding shares of preferred stock during
the years ending July 31, 2003, 2002, and 2001.
The 6% annual dividends on the Class A preferred stock are cumulative. No
dividends were declared or recorded during the year ended July 31, 2003.
Dividends of $18,000 were declared on the preferred stock during July 2002,
which were accrued as of July 31, 2002, and reflected in the consolidated
statement of stockholders' equity for the year ending July 31, 2002, and paid
August 2, 2002. No dividends were declared during the year ended July 31, 2001;
however, dividends of $18,000 were declared and paid during August 2001 and are
reflected in the consolidated statement of stockholders' equity for the year
ending July 31, 2002.
NOTE 12 - 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.
41
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE:
A certain former stockholder was indebted to the Company by a note secured by
real estate bearing interest at 8.75% (prime plus 4.00% adjusted annually) in
the outstanding amounts (including interest) of $-0- and $167,098 at July 31,
2003 and 2002, respectively.
INSTALLMENT CONTRACTS, MORTGAGE NOTES, AND NOTES PAYABLE:
At July 31, 2003 and 2002, the Company had a related party payable of $-0- and
$28,158, respectively. The payable had a monthly payment of $4,789, bearing
interest at 7.00%, and matured in 2003.
DEBENTURE BONDS:
Included in debenture bonds at July 31, 2003 and 2002, is approximately $80,000
and $142,000, respectively, that is payable to related parties. These debentures
bear interest at the prevailing market rate on the date of issuance.
ACCRUED EXPENSES AND OTHER LIABILITIES:
At July 31, 2003 and 2002, the following demand notes were payable to related
parties:
2003 2002
-------------------- --------------------
Interest Interest
Amount Rate Amount Rate
-------- ------- -------- -------
Wayne E. Guthrie $ 52,814 7.50% $ 80,093 7.50%
Constance Guthrie 47,604 7.50% 62,860 7.50%
Other stockholders and employees 515 7.50% 1,975 7.50%
-------- --------
$100,933 0.00 $144,928 0.00
======== ========
INTEREST INCOME AND EXPENSE:
The approximate amount of related party interest income and expense included in
the accompanying consolidated statement of operations during the years ended
July 31, 2003, 2002, and 2001, is as follows:
2003 2002 2001
---- ---- ----
Interest income $ 7,000 $18,000 $24,000
Interest expense 12,000 14,000 22,000
42
PACIFIC SECURITY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)
PARTICIPATIONS:
The former president of Cornerstone Realty Advisors, Inc., a wholly-owned
subsidiary of the Company that was folded into the parent company in 2002, had
directly invested in certain loans through participation agreements during 2002.
The former president had no direct investments in loan participating agreements
at July 31, 2003. The total of such participations was $150,000 at July 31,
2002.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the value of each
class of financial instruments 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 sales 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, 2003 and 2002, the carrying values of
these financial instruments approximated their fair values.
NOTES PAYABLE TO BANKS:
Fair value approximates the carrying value because the notes bear variable
interest rates.
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.
43
PACIFIC SECURITY FINANCIAL, INC.
PART II
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES:
Based on an evaluation of the Company's disclosure controls and procedures as of
the end of the period covered by this annual report, the Company's president and
treasurer have determined that the Company's current disclosure controls and
procedures are effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act)
during the fourth quarter of fiscal year ended July 31, 2003, that have
materially affected, or are reasonably likely to materially affect the Company's
internal control over financial reporting.
44
PACIFIC SECURITY FINANCIAL, INC.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
The following information as of July 31, 2003, is provided with respect to each
director and executive officer of the Company:
Year First
Elected as Expiration
Name Age Director of Term Position and Date Elected
---- --- -------- ------- -------------------------
Wayne E. Guthrie 83 1970 2003 Chairman of the Board (Emeritus, March 7, 2002)
David L. Guthrie 39 1987 2004 Chairman of the Board (March 7, 2002)
President (February 18, 1999); Director
Kevin M. Guthrie 48 1980 2004 Director
Donald J. Migliuri 56 1992 2005 Secretary/Treasurer (May 29, 1990); Director
Constance M. Guthrie 68 1981 2006 Director
Robert N. Codd 73 1994 2004 Director
Julian Guthrie 38 1998 2004 Director
John F. (Jack) Bury 54 2003 2006 Director
William L. Jenkins 41 -- -- Vice President (August 19, 2003)
FAMILY RELATIONSHIP:
Kevin M. Guthrie, David L. Guthrie, and Julian Guthrie are the children of Wayne
E. Guthrie and Constance Guthrie. Constance M. Guthrie is the wife of Wayne E.
Guthrie.
BUSINESS EXPERIENCE:
Wayne E. Guthrie was Chairman of the Board Emeritus of Pacific Security
Financial, Inc., a Washington corporation. Mr. Guthrie had over 50 years
experience in areas of construction, financing of real estate and personal
property, and real estate investments. He died August 4, 2003.
David L. Guthrie became Chairman of the Board in 2002 and has been president of
Pacific Security Financial, Inc. since 1999 and vice president since 1989. Mr.
Guthrie was formerly a financial consultant with Merrill Lynch in Spokane,
Washington. 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.
45
PACIFIC SECURITY FINANCIAL, INC.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
BUSINESS EXPERIENCE (CONTINUED):
Kevin M. Guthrie was vice president of Pacific Security Financial, Inc. from
1985 to 2002. Mr. Guthrie has served as property manager for the Company since
1976. Mr. Guthrie resigned as an officer and terminated employment with the
Company on October 15, 2002, to work for a Spokane property management firm that
manages the Company's rental properties located in Spokane.
Donald J. Migliuri has been treasurer of Pacific Security Financial, Inc. since
1990 and secretary since 1991. Mr. Migliuri was a Certified Public Accountant
and has served as an accounting officer with various diversified financial
services companies for over 20 years. He also is a Certified Management
Accountant (CMA) and has a Masters Degree in Business Administration.
Constance M. Guthrie has not been employed outside the home during the past ten
years.
Robert N. Codd retired August 1, 2002, after being employed by Pacific Security
Financial, Inc. 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 is a reporter for the San Francisco Chronicle. 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 magazine in San Francisco and also
worked as a freelance writer for the Chronicle, covering breaking business,
political, and lifestyle stories. She currently lives in San Francisco.
Jack Bury is a practicing attorney in Spokane, Washington. Mr. Bury graduated
from the Gonzaga University School of Law. Since 1974 he has been employed by
the law firm of Murphy, Bantz & Bury, P.S. where he is currently the sole
shareholder and president of that professional service corporation. Mr. Bury's
law firm represents the Company in corporate and certain other legal matters.
Mr. Bury owns no shares in the Company's common or preferred stock.
William L. Jenkins became vice president in August 2003. He is a Certified
Public Accountant and has a Masters Degree in Business Administration. He joined
the Company on October 9, 2000, after working as an accountant and senior
treasury analyst since 1986 at two financial institutions.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934:
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent (10%) of a registered class of the Company's equity securities
(Reporting Persons), to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Officers, directors, and greater than
ten percent (10%) beneficial owners are required by Securities and Exchange
Commission regulation to furnish the Company with copies of all Section 16(a)
forms filed by them.
46
PACIFIC SECURITY FINANCIAL, INC.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(CONTINUED):
Based solely on its review of copies of such forms furnished to the Company, the
Company believes that during the fiscal years ended July 31, 2003 and 2002, all
Section 16(a) filing requirements applicable to Reporting Persons were complied
with, except that David L. Guthrie has one delinquent Form 4 filing and Kevin M.
Guthrie had two delinquent Form 4 filings.
47
PACIFIC SECURITY FINANCIAL, INC.
PART III
- --------------------------------------------------------------------------------
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, 2003, 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, 2003:
Name of Individual or Number of Annual
Person in Capacities in Fiscal Compensation
Group Which Served Year Salary Bonus*
- ------------------------------- ------------ ---- ------ ------
David L. Guthrie President and Director 2003 $130,200 $105,000
President and Director 2002 130,850 93,000
President and Director 2001 110,340 --
Kevin M. Guthrie Vice President and Director 2003 24,030 97,377
Vice President and Director 2002 114,707 82,000
Vice President and Director 2001 110,863 --
Donald J. Migliuri Secretary/Treasurer, Director 2003 97,583 50,000
Secretary/Treasurer, Director 2002 83,700 22,050
Officers and Directors as a group (5) 2003 552,191 --
The Company has no qualified or nonqualified stock option plan as of July 31,
2003.
* Includes severance payments
48
PACIFIC SECURITY FINANCIAL, INC.
PART III
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 five percent of any class
of the Company's voting shares on July 31, 2003: none.
SECURITY OWNERSHIP OF MANAGEMENT:
The following table sets forth as of July 31, 2003, 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 of
Shares and
Nature of
Beneficial Percent of
Title of Class Name of Beneficial Owner Ownership Class
- ---------------- ----------------------------- --------- ---------
Common stock Wayne E. Guthrie 142,521.5 13.19%
Common stock Constance Guthrie 142,521.5 13.19%
Common stock Kevin Guthrie 222,718.0 20.62%
Common stock David Guthrie 222,718.0 20.62%
Common stock Julian Guthrie 196,838.4 18.22%
--------- -------
Common stock All directors and officers as a group 927,317.4 85.84%
--------- -------
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%
--------- -------
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Transactions with Company officers, directors, and stockholders and other
related parties are summarized in Note 13 to the consolidated financial
statements included herein.
49
PACIFIC SECURITY FINANCIAL, INC.
PART III
- --------------------------------------------------------------------------------
ITEM 14. PRINCIPLE ACCOUNTING FEES AND SERVICES
AUDIT FEES:
Audit fees billed or expected to be billed to the Company by Moss Adams for the
audit of the Company's financial statements for the year ended July 31, 2003,
and for reviews of the Company's financial statements included in the Company's
quarterly reports on Form 10-Q totaled $41,908.
Audit fees billed or expected to be billed to the Company by Moss Adams for the
audit of the Company's financial statements for the year ended July 31, 2002,
and for reviews of the Company's financial statements included in the Company's
quarterly reports on Form 10-Q totaled $43,317.
TAX FEES:
Fees billed or expected to be billed to the Company by Moss Adams for
tax-related services provided during 2003 totaled $4,895.
Fees billed or expected to be billed to the Company by Moss Adams for
tax-related services provided during 2002 totaled $5,345.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES:
No fees were billed or are expected to be billed to the Company by Moss Adams
for services provided during 2003 or 2002 for the design and implementation of
financial information systems.
ALL OTHER FEES:
No fees were billed or are expected to be billed to the Company by Moss Adams
for other services during 2003 or 2002.
The Company's Board of Directors has considered whether the provisions of the
services performed by Moss Adams LLP are compatible with maintaining their
independence. All services are approved by the Chairman of the Board prior to
the commencement of the engagement.
50
PACIFIC SECURITY FINANCIAL, INC.
PART IV
- --------------------------------------------------------------------------------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The consolidated financial statements of Pacific Security
Financial, Inc. are included in Part II, Item 8 of this annual
report.
(2) Financial Statement Schedules
Schedule III - Real estate and accumulated depreciation.
Schedule IV - Mortgage loans on real estate.
(3) Exhibits
31.1 Certification of President pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Treasurer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of President pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Treasurer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed during the quarter None
(c) See Item 15(a)(3) above.
(d) See Item 15(a)(2) above.
51
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (CONTINUED)
INDEPENDENT ACCOUNTANT'S REPORT ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
Pacific Security Financial, Inc. and Subsidiaries
Spokane, Washington
Our audits of the consolidated financial statements referred to in our report
dated August 29, 2003, of Pacific Security Financial, Inc. (formerly Pacific
Security Companies) and its 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 15 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.
Spokane, Washington
August 29, 2003
52
PACIFIC SECURITY FINANCIAL, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
- --------------------------------------------------------------------------------
Life on
Which
Amount at Depreciation
Cost Which in Latest
Capitalize Carried at Income
Initial Subsequent to Close of Accumulated Date Statement is
Description Encumbrance Cost Acquisition Period Depreciation Acquired Computed
----------- ----------- ----------- ----------- ----------- -------- -----------
Residential and commercial properties:
Rental buildings and improvements:
Spokane, Washington
10 North Post Street (Peyton Bldg.) $ 2,812,500 $ 2,209,343 $ 5,358,792 $ 7,568,135 $ 2,481,300 1979 25-40 years
Pier 1 Building/Contract Sale
Broadmoor Apartments (2) 3,038,272 -- -- -- --
Pier 1 Building (2) 983,889 1,194,017 2,965,409 4,159,426 1,322,591 1992 25-40 years
Cornerstone Office Building #1 (1) 1,383,962 1,558,552 45,140 1,603,692 188,717 1999 25-40 years
Cornerstone Office Building #2 (1) -- 1,019,163 23,816 1,042,979 -- 2003 25-40 years
Furniture and equipment related to above -- 549,276 194,720 743,996 424,566 Various Various
----------- ----------- ----------- ----------- -----------
$ 8,218,623 $ 6,530,351 $ 8,587,877 $15,118,228 $ 4,417,174
=========== =========== =========== =========== ===========
(1) Total obligation of $1,383,962 is secured by two commercial buildings and
land as noted above.
(2) Total obligation of $3,038,272 is secured by contract sale of Broadmoor
Apartments and Pier 1 Building.
53
PACIFIC SECURITY FINANCIAL, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
- --------------------------------------------------------------------------------
Real estate:
Balance at beginning of period $ 16,947,480
Additions during period:
Purchases and capitalized costs, net 2,417,403
Deductions during period:
Cost of real estate sold (3,602,975)
Impairment of rental properties (643,680)
------------
BALANCE AT CLOSE OF PERIOD $ 15,118,228
------------
Accumulated depreciation:
Balance at beginning of period $ 4,135,629
Depreciation for the year 477,956
Charges to accumulated depreciation related to real estate investments
sold, net of other adjustments (196,411)
------------
BALANCE AT CLOSE OF PERIOD $ 4,417,174
============
54
PACIFIC SECURITY FINANCIAL, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
- --------------------------------------------------------------------------------
Principal
Amount of
Loans
Subject
to
Carrying Delinquent
Interest Maturity Periodic Prior Face Amount Amount of Principal
Description Rate Date Payment Terms Liens of Mortgages Mortgages Interst
- ------------------------------------------ ------------ ------ ------------- ----- ------------ --------- -------
Prime + 1.00%
Real estate contract (Butler) floor of 6.5% 2011 $20,566.64 monthly $ 2,961,960 $ 2,961,960 $ --
Loan (#1990 Rock Ridge Properties) 13.00% 2004 Interest only monthly 1,257,998 1,257,998 --
Loan (#2020 Skyline Estates) Prime + 3.50% 2002 Past due 500,000 500,000 500,000
Loan (#2048 Skyline Estates) Prime + 3.50% 2002 Past due 495,018 495,018 495,000
Contract-Nall Prime + 1.00% 2032 $2,628.16 montly 345,549 345,549 --
8.25% until 1/1/05
Contract-Ducommun 13.00% 2004 $3,800.00 monthy 285,088 285,088 --
Contract-Christen 12.50% 2004 $2,664.00 monthly 249,245 249,245 --
Other mortgage contracts and notes receivable,
none of which individually exceed 3% of the
total carrying value of mortgages Various Various Various 1,012,331 262,828
----------- ----------- ----------
$ 6,094,858 $ 7,107,189 $1,257,828
=========== =========== ==========
Balance at beginning of period
Additions during period: $ 25,451,896
Mortgage loans originated and purchased $ --
Deductions during period:
Collections of principal and
contract payoffs 15,198,100
Other 3,146,607
-----------
18,344,707
-----------
BALANCE AT END OF PERIOD $ 7,107,189
===========
55
PACIFIC SECURITY FINANCIAL, INC.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Pacific Security Financial, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC SECURITY FINANCIAL, INC.
(Registrant)
Dated: October 27, 2003 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
--------- -------- ----
Chief Executive Officer and
/s/ David L. Guthrie Director, Chairman of the Board of Directors
- --------------------------------------- October 27, 2003
David L. Guthrie
/s/ Donald J. Migliuri Secretary-Treasurer
- --------------------------------------- Chief Financial Officer and Director October 27, 2003
Donald J. Migliuri
/s/ Kevin M. Guthrie Director
- --------------------------------------- October 27, 2003
Kevin M. Guthrie
/s/ Constance M. Guthrie Director
- --------------------------------------- October 27, 2003
Constance M. Guthrie
/s/ Robert N. Codd Director
- --------------------------------------- October 27, 2003
Robert N. Codd
/s/ Julian Guthrie Director
- --------------------------------------- October 27, 2003
Julian Guthrie
/s/ John F. Bury Director
- --------------------------------------- October 27, 2003
John F. Bury
56