UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-6673
PACIFIC SECURITY FINANCIAL, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0669906
---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10 North Post Street
325 Peyton Building
Spokane, Washington 99201 (509) 444-7700
------------------------- --------------
(Address of principal executive offices) (Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
1,082,436 shares of common stock, par value $3.00 per share, were outstanding on
March 14, 2003.
PACIFIC SECURITY FINANCIAL, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
---------------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated balance sheet 1-2
Consolidated statement of operations 3
Consolidated statement of comprehensive income (loss) 4
Consolidated statement of cash flows 5-7
Notes to unaudited financial statements 8-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial condition and liquidity 10-11
Results of operations 12-13
Item 3. Qualitative and Quantitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
part ii. Other information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17-18
PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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ASSETS
JANUARY 31 JULY 31,
2003 2002
(UNAUDITED) (AUDITED)
------------ ------------
ASSETS
Cash and cash equivalents $ 598,312 $ 367,469
------------ ------------
Receivables
Contracts, mortgages, finance notes, and loans receivable, net
Related parties -- 166,182
Unrelated 18,790,789 25,871,569
Less allowance for loan losses (1,113,367) (585,855)
------------ ------------
17,677,422 25,451,896
Accrued interest 100,202 208,612
Other 159,329 251,639
------------ ------------
17,936,953 25,912,147
------------ ------------
Investment in rental properties, net 12,749,501 12,811,852
------------ ------------
Other investments
Property held for sale and development 3,654,248 4,399,921
------------ ------------
Other assets
Vehicles and equipment, net 87,679 78,553
Prepaid and other, net 189,116 234,410
Federal income tax refund receivable -- 647,273
------------ ------------
276,795 960,236
------------ ------------
TOTAL ASSETS $ 35,215,809 $ 44,451,625
============ ============
See accompanying notes. 1
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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LIABILITIES AND STOCKHOLDERS' EQUITY
JANUARY 31 JULY 31,
2003 2002
(UNAUDITED) (AUDITED)
----------- -----------
LIABILITIES
Notes payable to banks $11,045,473 $16,438,964
Installment contracts, mortgage notes, and notes payable
Related parties -- 28,158
Unrelated 7,768,530 8,636,785
Debenture bonds 8,914,022 9,996,954
Accrued expenses and other liabilities
Related parties 156,454 144,928
Unrelated 660,412 896,541
Deferred income taxes 530,372 1,096,699
----------- -----------
29,075,263 37,239,029
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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,
1,083,182 and 1,084,289 shares 3,249,547 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 760,058 1,828,789
----------- -----------
Total stockholders' equity 6,140,546 7,212,596
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,215,809 $44,451,625
=========== ===========
See accompanying notes. 2
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
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THREE MONTHS ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
------------------------------ ----------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Income
Rental $ 381,752 $ 334,941 $ 708,041 $ 927,406
Interest, including loan fees of
$50,015 and $244,777
and $134,117 and $521,051 440,525 814,993 924,544 1,751,188
Gain (loss) on sale of real estate (26,342) (155,769) (26,970) 1,989,818
Other, net 13,352 2,259 19,479 11,257
----------- ----------- ----------- -----------
809,287 996,424 1,625,094 4,679,669
----------- ----------- ----------- -----------
Expense
Rental operations
Depreciation and amortization 121,846 127,823 244,403 302,234
Interest 80,642 117,753 172,621 238,419
Other 169,625 168,127 332,109 403,620
----------- ----------- ----------- -----------
372,113 413,703 749,133 944,273
Interest, net of amount capitalized 425,529 496,809 888,734 1,039,166
Salaries and commissions 196,565 225,306 528,829 623,230
General and administrative 224,747 137,427 494,384 313,058
Depreciation and amortization 11,460 11,473 24,431 23,075
Provision for loan loss 423,819 82,207 558,872 379,207
----------- ----------- ----------- -----------
1,654,233 1,366,925 3,244,383 3,322,009
----------- ----------- ----------- -----------
Income (loss) before income
tax (benefit) provision (844,946) (370,501) (1,619,289) 1,357,660
Income tax (benefit) provision (287,281) (125,644) (550,558) 461,931
----------- ----------- ----------- -----------
NET INCOME (LOSS) (557,665) (244,857) (1,068,731) 895,729
Less preferred stock dividends -- -- (18,000) (18,000)
----------- ----------- ----------- -----------
Income (loss) available to
common stockholders $ (557,665) $ (244,857) $(1,086,731) $ 877,729
=========== =========== =========== ===========
Net income (loss) per common share
basis and diluted $ (0.51) $ (0.22) $ (1.00) $ 0.79
=========== =========== =========== ===========
Weighted-average common shares
outstanding basic and diluted 1,083,222 1,104,096 1,083,421 1,105,336
=========== =========== =========== ===========
See accompanying notes. 3
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
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THREE MONTHS ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) $ (557,665) $ (244,857) $(1,068,731) $ 895,729
----------- ----------- ----------- -----------
Other comprehensive income
(loss) before income taxes (557,665) (244,857) (1,068,731) 895,729
----------- ----------- ----------- -----------
COMPREHENSIVE
INCOME (LOSS) $ (557,665) $ (244,857) $(1,068,731) $ 895,729
=========== =========== =========== ===========
See accompanying notes. 4
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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SIX MONTHS ENDED JANUARY 31,
----------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from rentals and other $ 854,708 $ 1,079,101
Interest received 1,032,955 1,788,796
Cash paid to suppliers and employees (1,479,572) (1,395,701)
Interest paid, net of amounts capitalized (847,990) (1,065,574)
Income taxes refunded (paid) 631,505 (40,000)
----------- -----------
Net cash provided by operating activities 191,606 366,622
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of real estate and fixed assets 2,179,204 520,216
Collections on contracts, mortgages, finance notes, and loans
receivable 8,014,292 8,784,851
Investment in contracts, mortgages, notes, and loans
receivable (1,617,330) (8,018,334)
Additions to rental properties, property held for sale, property
under development, vehicles, and equipment (844,890) (439,816)
Change in restricted investments and cash equivalents -- (19,480)
----------- -----------
Net cash provided by investing activities 7,731,276 827,437
----------- -----------
See accompanying notes. 5
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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SIX MONTHS ENDED JANUARY 31,
----------------------------
2003 2002
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreements $(5,393,492) $(1,043,870)
Proceeds from installment contracts, mortgage notes,
and notes payable -- 200,000
Payments on installment contracts, mortgage notes,
and notes payable (896,413) (176,239)
Proceeds from sales of debenture bonds -- 22,800
Redemption of debenture bonds (1,380,815) (543,081)
Purchase and retirement of common stock (3,319) (19,269)
Payment of dividends on preferred stock (18,000) (18,000)
----------- -----------
Net cash used by financing activities (7,692,039) (1,577,659)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 230,843 (383,600)
Cash and cash equivalents, beginning of year 367,469 639,122
----------- -----------
Cash and cash equivalents, end of year $ 598,312 $ 255,522
=========== ===========
See accompanying notes. 6
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PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JANUARY 31,
----------------------------
2003 2002
----------- -----------
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $(1,068,731) $ 895,729
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 268,834 325,309
Deferred income tax benefit (566,327) 416,931
Interest accrued on debenture bonds 297,883 301,363
(Gain) loss on sales of real estate 26,970 (1,989,817)
Provision for loan loss 558,872 379,207
Change in assets and liabilities:
Accrued interest receivable 108,410 37,608
Prepaid expenses 34,878 57,787
Accrued expense (177,407) (139,145)
Income taxes receivable 647,273 5,000
Other, net 60,951 76,650
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 191,606 $ 366,622
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Company financed sale of property $ 400,000 $ 6,679,280
=========== ===========
Property held for sale and development acquired in satisfaction
for defaulted loan receivable $ 1,250,000 $ --
=========== ===========
Impairment of real estate owned against provision for
loan loss $ -- $ 60,000
=========== ===========
See accompanying notes. 7
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PACIFIC SECURITY FINANCIAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pacific Security
Financial, Inc. and its subsidiaries (the Company). In the opinion of the
Company, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the Company's financial position, results of operations, and cash
flows for the periods presented.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and the related disclosures contained in the
Company's annual report on Form 10-K for the year ended July 31, 2002, filed
with the Securities and Exchange Commission.
The results of operations for the six months ended January 31, 2003, are not
necessarily indicative of the results to be expected for the full year.
RECLASSIFICATIONS:
Certain reclassifications have been made in the prior period's financial
statements in order to conform with the current period financials. The
reclassifications had no effect on previously reported net income (loss) or
equity.
NOTE 2 - BUSINESS SEGMENT REPORTING
Information about the Company's separate continuing business segments as of and
for the six months ended January 31, 2003 and 2002, is as follows:
Real Estate
Commercial Rental and
Lending Receivables
Operations Operations Total
------------ ------------ ------------
2003
Revenue $ 498,530 $ 1,126,564 $ 1,625,094
Loss from operations, before tax (benefit) (843,424) (775,865) (1,619,289)
Identifiable assets, net 12,046,360 23,169,449 35,215,809
Depreciation and amortization 2,485 266,349 268,834
Capital expenditures 2,382 842,508 844,890
2002
Revenue $ 1,494,316 $ 3,185,353 $ 4,679,669
Income from operations, before tax (benefit) 306,390 1,051,270 1,357,660
Identifiable assets, net 22,113,353 26,524,846 48,638,199
Depreciation and amortization 2,485 322,824 325,309
Capital expenditures 40,414 399,402 439,816
8
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PACIFIC SECURITY FINANCIAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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NOTE 2 - BUSINESS SEGMENT REPORTING (CONTINUED)
The Company has determined that its reportable business segments are those that
are based on its method of disaggregated internal reporting. The Company's
reportable business segments are its commercial loan origination business and
its rental and receivable operations. Its commercial loan origination business,
operated as Cornerstone Realty Advisors, Inc., originates commercial
construction loans throughout the western United States. The rental and
receivable operations represent the selling and leasing of real properties and
the financing of contracts and loans collateralized by real estate. Some
unallocated general corporate expense items are part of the rental and
receivable segment reporting.
Management decided to dissolve its 100% owned subsidiary, Cornerstone Realty
Advisors, Inc., as of its corporation license expiration date of March 31, 2002.
Commercial lending activities are now being conducted through the parent
company.
9
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY:
At January 31, 2003, the Company had total stockholders' equity of approximately
$6,141,000 and a total liabilities to equity ratio of 4.7 to 1, which decreased
from 5.16 to 1 at July 31, 2002. During the quarter, the Company's primary
sources of funds were approximately $8,014,000 in real estate contract and loan
collections, $2,179,000 in net proceeds from the sales of real estate, and
approximately $192,000 from operating activities. The primary uses of funds were
approximately $1,617,000 for investments in contracts and loans receivable,
approximately $7,692,000 for net debt reduction, and $845,000 for property
improvements.
The Company's sources of liquidity traditionally have included the issuance of
debentures under the auspices of the Washington State Securities Division of the
Department of Financial Institutions and borrowings from various bank lenders.
These sources of liquidity are limited either by the Washington State Securities
Division who has capped the amount of debentures the Company may sell or by the
individual banks through covenants included in the lines of credit loan
agreements.
An additional source of liquidity is the issuance of participation interests in
certain loans originated by the Company. The total of these non-recourse
participations was approximately $1,996,000 at January 31, 2003, and $3,495,000
at July 31, 2002.
At January 31, 2003, the Company's outstanding lines of credit and other banking
agreements totaled approximately $11,045,473. The remaining unused portions of
the lines of credit may not be fully available to the Company to meet
operational needs because of violation of covenants at the Company's banks. One
bank negotiated a reduction in total line availability from $4.75 million to $4
million effective November 27, 2002. Subsequent to the quarter ended January 31,
2003, the Company induced a borrower with a 10% discount of $318,000 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 of $1,050,000 that was paid down to $880,000 on March 3, 2003,
and that is collateralized by a Company loan to a borrower who filed for
bankruptcy. The bank has verbally agreed to extend the loan for a period of six
months with interest only paid monthly. After six months the loan will be
evaluated based on market and other business conditions. Another financial
institution the Company has relied upon as a source of funding for its
commercial real estate loans has, subsequent to fiscal year end, indicated they
are terminating (nationally) from all or nearly all, commercial warehouse lines
of credit. This financial institution has agreed to work with the Company to
allow all current loans totaling approximately $4,952,000 to pay off as they
mature, which is anticipated to occur by June 30, 2003. Management does not
currently believe that this line of credit can be replaced by another lender.
This event 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.
10
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 for severance payments and employment contracts for seven employees. 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.
An additional provision for loan loss of approximately $319,000 was made during
the quarter ending January 31, 2003, bringing the total allowance for loan loss
to 100% on a Bellevue, Washington, loan of approximately $669,000. The Bellevue
loan borrower filed for bankruptcy protection on June 6, 2002. A judgment has
been sought for the balance owed. The Company is currently assessing its
potential for recovery.
The borrower on a Park City, Utah, loan filed for bankruptcy protection on May
1, 2002. The Company's principal portion of this loan totaled $1,250,000 and is
expected to be recovered through the sale of the foreclosed property that was
acquired through a trustee's sale after the bankruptcy stay was lifted in
December 2002.
The Company was stayed in foreclosure proceedings on three Eagle, Idaho loans
when the borrower filed for bankruptcy protection on December 19, 2002. A total
allowance for loan loss of $269,548 has been provided against loans receivable
totaling approximately $2,466,000.
An additional provision for loan loss of $30,000 was made during the quarter
ending January 31, 2003, bringing the total allowance for loan loss to $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 is scheduled for May 9, 2003.
11
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (THREE MONTHS):
The Company's net loss for the quarter ended January 31, 2003, was approximately
$558,000 compared with net loss of approximately $245,000 for the quarter ended
January 31, 2002. The change was primarily attributable to a reduction of
$303,000 in net interest income, and an increase of $342,000 in the provision
for loan losses, offset by an increase of $88,000 in net rental income, and a
$129,000 decrease in pre-tax loss on sales of real estate in the quarter ended
January 31, 2003.
Rental revenue increased by approximately $47,000 (14%) to approximately
$382,000 in the quarter ended January 31, 2003, from approximately $335,000 in
2002. This increase primarily resulted from increased rents from new tenants in
the Peyton and Pier 1 Buildings offsetting reduced rents from properties sold
during the prior year.
Rental property expenses were approximately $42,000 (10%) lower in 2003 than for
the comparable three months in 2002. This decrease was due to decreased interest
expense of $37,000 (32%), and decreased depreciation of $6,000 (5%), offsetting
increased operating expense of $1,000 (1%).
Salaries and commissions were approximately $29,000 (13%) lower for the quarter
ended January 31, 2003, than the comparable three months in 2002 due to lower
commissions paid in 2003 and a reduction in personnel.
Interest income, including loan fees, decreased approximately $374,000 (46%) for
the three months ended January 31, 2003, compared with the similar period in
2002 as the variable interest rate on contracts and loans receivable decreased
during the period, interest on some past due loans went to nonaccrual status,
and the total amount of receivables declined. Loan fees declined approximately
$195,000 (80%) to $50,000 from $245,000 because of a lack of new loan
originations.
General and administrative expense increased approximately $87,000 (64%) for the
three months ended January 31, 2003, compared with the same period in 2002,
primarily because of net restructuring expenses of approximately $92,000 in 2003
for employment contracts with certain employees.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, decreased approximately $71,000 (14%) in
the second quarter of 2003 compared with the same 2002 period primarily due to a
reduction in interest-bearing debt.
The Company's effective income tax rate as a percentage of income (loss) before
federal income tax was approximately 34.0% in 2003 and 2002.
12
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PACIFIC SECURITY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (SIX MONTHS):
The Company's net loss for the six months ended January 31, 2003, was
approximately $1,068,000 compared with net income of approximately $896,000 for
the six months ended January 31, 2002. The decrease was primarily attributable
to approximately $2,017,000 in pre-tax reduction in gain on sales of real estate
in 2003 compared to 2002, a decrease of $676,000 in net interest income, an
increase of $180,000 in the provision for loan losses, and increase of $181,000
in general and administrative expenses.
Rental revenue decreased approximately $219,000 (24%) in the six months ended
January 31, 2003, compared to the six months ended January 31, 2002. This
primarily resulted from decreased rents due to sales of rental properties,
including an apartment complex and an office building in October 2001.
Rental property expense was approximately $195,000 (21%) lower in 2003 than for
the comparable six months in 2002. This resulted from decreased operating
expense of approximately $72,000 (18%), decreased interest expense of $66,000
(28%), and a decrease in depreciation of $58,000 (19%).
Interest income, including loan fees, was approximately $827,000 (47%) less for
the six months ended January 31, 2003, compared with the similar period in 2002
as interest earned on the average outstanding balance in contracts and notes
receivable decreased during the period, primarily due to a lack of new loans
originated by the Company.
Salaries and commissions were approximately $94,000 (15%) lower in the six
months ended January 31, 2003, than for the comparable six months in 2002,
primarily because of a reduction in personnel. However, restructuring expenses
for severance payments and employment contracts for certain employees were
incurred in 2003 and were primarily responsible for an increase of approximately
$181,000 in general and administrative expenses.
Interest expense, exclusive of interest on debt associated with rental
properties, net of amounts capitalized, was approximately $150,000 (14%) less in
2003 than in 2002 primarily due to a decrease in interest rates on borrowings
tied to bank prime rates.
The Company's effective income tax rate as a percentage of income before federal
income tax was approximately 34.0% in 2003 and 2002.
13
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PACIFIC SECURITY FINANCIAL, INC.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
- --------------------------------------------------------------------------------
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there has been a material change in its market
risk since the end of its last fiscal year.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and principal financial officer have
evaluated the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days
of the filing date of this quarterly report on Form 10-Q. Based on that
evaluation, these officers concluded that the design and operation of the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not engaged in any legal proceeding of a material nature at
January 31, 2003. From time to time, the Company is a party to legal proceedings
in the ordinary course of business wherein it enforces its security interest in
loans.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
14
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PACIFIC SECURITY FINANCIAL, INC.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 -- Certification Pursuant to 18 U.S. C. ss. 1350
(b) Reports on Form 8-K
None
15
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PACIFIC SECURITY FINANCIAL, INC.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Pacific Security Financial, Inc.
/s/ David L. Guthrie
- ---------------------------------------
David L. Guthrie
President/Chief Executive Officer
March 14, 2003
/s/ Donald J. Migliuri
- ---------------------------------------
Donald J. Migliuri
Secretary-Treasurer
March 14, 2003
16
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PACIFIC SECURITY FINANCIAL, INC.
CERTIFICATIONS
- --------------------------------------------------------------------------------
I, David L. Guthrie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Security
Financial, Inc. (the Company);
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the Evaluation Date); and
(c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's Board of Directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 14, 2003
/s/ David L. Guthrie
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David L. Guthrie, President
17
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PACIFIC SECURITY FINANCIAL, INC.
CERTIFICATIONS
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I, Donald J. Migliuri, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Security
Financial, Inc. (the Company);
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the Evaluation Date); and
(c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's Board of Directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 14, 2003
/s/ Donald J. Migliuri
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Donald J. Migliuri, Treasurer
18
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