U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR (15)d OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 0-12199
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SOURCE CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-0853890
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1825 N. Hutchinson Road, Spokane, Washington 99212
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(Address of principal executive office)
(509) 928-0908
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( Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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
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As of March 31, 1998, there were 1,355,818 shares of the
Registrant's common stock outstanding.
Transitional Small Business Disclosure Format (check One)
Yes No X
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SOURCE CAPITAL CORPORATION
Form 10-QSB
For the Quarter Ended March 31, 1998
INDEX
Part I - Financial Information
Item 1 - Financial Statements:
- Consolidated Balance Sheets March 31, 1998 and
December 31, 1997
- Consolidated Statements of Income, Comprehensive
Income and Retained Earnings Three Months Ended
March 31, 1998 and 1997
- Consolidated Statements of Cash Flows Three
Months Ended March 31, 1998 and 1997
- Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - Other Information
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
SOURCE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31,
1998 1997
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ASSETS
Loans receivable, net $37,048,952 $36,551,013
Leases receivable, net 4,207,954 2,917,145
Finance receivables, net 104,484 104,244
Accrued interest receivable 409,945 345,424
Cash and cash equivalents 473,479 473,551
Marketable securities (at market) 254,216 250,724
Other real estate owned 591,453 556,342
Other assets 940,448 391,614
Deferred income tax 1,429,239 1,456,239
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Total assets $45,460,170 $43,046,296
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LIABILITIES
Notes payable to bank $23,430,220 $26,990,096
Mortgage contracts payable 3,177,106 3,187,539
Accounts payable and accrued expenses 556,175 512,792
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Total liabilities 27,163,501 30,690,427
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Convertible subordinated debentures 6,000,000
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STOCKHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000
shares authorized, none outstanding
Common stock, no par value, authorized
10,000,000 shares; issued and out-
standing, 1,355,818 shares 7,038,802 7,038,802
Additional paid-in capital 2,049,047 2,049,047
Accumulated other comprehensive loss (10,646) (27,143)
Retained earnings 3,219,466 3,295,163
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Total stockholders' equity 12,296,669 12,355,869
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Total liabilities and stockholders'
equity $45,460,170 $43,046,296
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The accompanying notes are an integral part of the consolidated
financial statements.
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
RETAINED EARNINGS
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
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Financing income:
Interest and fee income $ 1,405,698 $ 1,044,499
Lease financing income 150,714
Interest expense (703,460) (394,922)
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Net financing income 852,952 649,577
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Provision for loan and lease losses 21,000
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Income before non-interest expenses 831,952 649,577
Non-interest expenses:
Employee compensation and benefits 342,829 243,429
Other operating expenses 234,273 157,973
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Total non-interest expenses 577,102 401,402
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Income before income taxes 254,850 248,175
Income tax provision:
Current 59,500 56,500
Deferred 27,000 28,000
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Total income tax provision 86,500 84,500
Net income 168,350 163,675
Retained earnings, beginning of period 3,295,163 2,811,302
Dividends paid (244,047) (255,099)
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Retained earnings, end of period $ 3,219,466 $ 2,719,878
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Net income per common share - basic $ .12 $ .12
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Net income per common share - diluted $ .11 $ .12
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Weighted average number of common shares
outstanding:
Basic 1,355,818 1,392,677
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Diluted 1,892,319 1,392,941
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Cash dividends per share $ .18 $ .18
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SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
RETAINED EARNINGS, CONTINUED
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
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Net income $ 168,350 $ 163,675
Other comprehensive income, net of tax:
Unrealized gain (loss) on marketable
securities 10,888 (10,014)
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Comprehensive income $ 179,238 $ 153,661
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The accompanying notes are an integral part of the consolidated
financial statements.
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997 (Unaudited)
1998 1997
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Cash flows from operating activities:
Net income $ 168,350 $ 163,675
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 9,914 5,715
Provision for loan losses 21,000
Deferred income taxes 27,000 28,000
Change in:
Accrued interest receivable (64,521) 40,750
Other assets (537,584) 144,037
Accounts payable and accrued
expenses 43,383 (273,291)
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Net cash provided by (used in)
operating activities (332,458) 108,886
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Cash flows from investing activities:
Sale of investment securities 13,005
Loan originations (3,962,666) (2,334,820)
Loan repayments 3,439,727 2,932,626
Additions to direct financing leases (1,665,786)
Collections on direct financing leases 345,977
Additions to financed receivables (193,153)
Collections on financed receivables 191,913
Capitalization of costs related to
other real estate owned (1,111) (406)
Proceeds from sale of other real estate 18,599
Purchase of office equipment and vehicle (21,164) (20,913)
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Net cash provided by (used in)
investing activities (1,853,258) 595,086
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Cash flows from financing activities:
Proceeds from line of credit 5,927,277 2,125,000
Payments on line of credit (9,487,153) (1,750,000)
Proceeds from sale of convertible
subordinated debentures 6,000,000
Payments of long-term debt (10,433) (2,171)
Payments for redemption of common stock (277,875)
Cash dividends paid (244,047) (255,099)
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Net cash provided by (used in)
financing activities 2,185,644 (160,145)
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SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 1998 and 1997 (Unaudited)
1998 1997
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Net increase (decrease) in cash and cash
equivalents $ (72) $ 543,827
Cash and cash equivalents, beginning of
period 473,551 21,506
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Cash and cash equivalents, end of period $ 473,479 $ 565,333
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Supplemental disclosure of cash flow
information:
Cash paid during the period for interest $ 672,622 $ 383,586
Cash paid during the period for income
taxes 211,825
Non-cash financing and investing
transactions:
Loan converted to repossessed assets (15,000)
Leases converted to repossessed
assets (19,000)
The accompanying notes are an integral part of the consolidated
financial statements.
SOURCE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
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The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Source Capital Leasing Co.
and Source Capital Finance Inc. All significant intercompany
transactions and balances have been eliminated in consolidation.
The unaudited consolidated financial statements reflect all
adjustments, which in the opinion of management, are necessary to a
fair statement for the periods reported. Certain 1997 amounts have
been reclassified to conform with the 1998 presentation. These
reclassifications had no effect on the net income or retained earnings
as previously reported. The results of operations for the three-month
period ended March 31, 1998, are not necessarily indicative of the
results to be expected for the full year. These unaudited financial
statements should be read in conjunction with the Company's most
recent audited financial statements for the year ended December 31,
1997.
NOTE 2.
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The Company's provision for federal income taxes for the three months
ended March 31, 1998 and 1997, is based on the statutory corporate
income tax rate of 34%. The actual current income tax liability to
the Company for the year ending December 31, 1998, is estimated to be
significantly less than the amount based on the statutory corporate
tax rate, because of the effect of net operating loss carryforwards
from prior years.
NOTE 3.
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In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosures about Segments for an Enterprise and Related Information
("SFAS 131"). This Statement requires public companies to report
selected segment information in their quarterly and annual reports
issued to shareholders, and entity-wide disclosures about products and
services, and major customers. The Statement was adopted by the
Company on January 1, 1998.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This Statement requires that comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined as the
change in equity of a business enterprise arising from non-owner
sources. This Statement was adopted by the Company on January 1,
1998. Unrealized gains and losses on investment securities are
reported as comprehensive income.
SOURCE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4.
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On February 11, 1998, the Company sold $6,000,000 of Subordinated
Convertible Debentures. The Debentures bear interest at 7.5%, mature
on March 1, 2008 and are convertible into common stock at the rate of
$8.01 per share. These debentures were sold through a private
placement to institutional investors. The Company intends to file a
registration statement prior to July 31, 1998 to register the shares
of common stock into which the debentures may be converted. The
debentures are convertible at any time after the earlier of September
30, 1998 or the date the registration statement becomes effective
until maturity. Interest on the debentures is payable semiannually in
arrears each March 1 and September 1, commencing September 1, 1998.
The debentures are redeemable, in whole or in part, at any time on or
after March 1, 2001, at the option of the Company. The debentures are
unsecured general obligations of the Company subordinate in right of
payment to all existing and future senior indebtedness of the Company.
Senior indebtedness includes, but is not limited to, all current bank
lines-of-credit and any future increases to these lines as well as any
new borrowings from financial institutions.
NOTE 5.
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Net income per share - basic is computed by dividing net income by the
weighted-average number of common shares outstanding during the
period. Net income per share - diluted is computed by dividing net
income (after adjustment for the after-tax effect of interest on
convertible debentures) 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.
Net income per share disclosures have been made in accordance with
SFAS No. 128, "Earnings per Share," which was applied by the Company
in 1997. In accordance with SFAS No. 128, all prior net income per
share data has been restated to conform to this presentation. See
Exhibit 11.1.
SOURCE CAPITAL CORPORATION
Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
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These discussions contain forward-looking statements containing words
such as "will continue to be," "will be," "continue 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.
Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997
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For the three months ended March 31, 1998, the Company reported a net
income of $168,350 or $.11 per diluted common share. These results
compare to a net income of $163,675 or $.12 per diluted share, for the
comparable period in 1997. Net financing income (interest and lease
income less interest expense) increased from approximately $650,000
during the three months ended March 31, 1997 to approximately $853,000
in the comparable period of 1998 (a 31% increase). Finance income of
approximately $1,556,000 and $1,045,000 in the three months ended
March 31, 1998 and 1997 respectively, represents an approximate
average interest yield of 15.2% and 15.6%, respectively, on the
Company's average earning assets. The decrease in average interest
yield in 1998 is primarily due to a lower average contractual interest
rate charged to the Company's borrowers on its real estate lending
portfolio, due to increased competition. The decrease in interest
rate on the real estate portfolio is somewhat mitigated by a slightly
higher interest rate received on the Company's lease portfolio.
The increase in financing income of approximately $511,000 is directly
attributable to the increase of approximately $14,200,000 in the
Company's average earning assets over the first quarter of 1997. The
Company's average earning asset portfolio grew from $26,800,000 for
the three months ended March 31, 1997 to approximately $41,000,000 at
March 31, 1998. The growth in the portfolio is directly attributable
to the increase in production personnel and to the steady growth in
the Company's lease portfolio. The increase in financing income was
partially offset by an approximate $309,000 increase in interest
expense. The Company's cost of funds on average borrowings decreased
from approximately 9.1% at March 31, 1997 to approximately 8.9% in the
comparable period in 1998. The Company was able to reduce its
borrowing costs by funding a portion of its loan portfolio using a
"LIBOR" based rate, which is currently more attractive than a prime
based rate. The Company funds its lease portfolio using a "LIBOR"
based rate which currently approximates prime less 0.5%. At March 31,
1998, the Company had approximately $1,268,000 of loans and leases
which were delinquent as to principal or interest more than 60 days,
as compared to approximately $755,000 at March 31, 1997. Subsequent
to March 31, 1998, a delinquent loan of approximately $326,000
included in the over 60 day category was paid. These loans are well
collateralized and the Company's allowance for loan and lease losses
of approximately $229,000 is considered adequate as of March 31, 1998.
Total non-interest expenses increased approximately 43.8% over the
first three months of 1997 primarily due to a 40.8% increase in
salaries and benefits resulting from a near doubling of personnel over
the comparable period in 1997. Additionally, other operating expenses
increased by approximately $76,000 or 48.3% over the prior year. Of
the increase in other expense, the most significant was an approximate
$33,000 increase in general and administrative expense and an
approximate $25,000 increase in occupancy expense. These increases
and the increases in salaries and benefits are primarily related to
the start up phase of the Company's leasing and factoring subsidiaries
which had a negative impact on earnings of approximately $16,500 for
the quarter. There were other increases and decreases in the
Company's other operating expenses none of which is material when
considered individually.
The provision for income taxes of approximately $86,500 and $84,500
for the three months ended March 31, 1998 and 1997, respectively, is
based on the statutory income tax rate of 34%. The Company expects to
pay current income taxes significantly less than the estimated tax
provision for the year ended December 31, 1998, due to the utilization
of net operating loss carryovers and the differences between book and
tax accounting for leases. The Company's effective tax rate for taxes
paid in 1997 was approximately 23%.
Financial Condition and Liquidity
---------------------------------
At March 31, 1998, the Company had approximately $473,000 of cash and
cash equivalents and $254,000 of investment securities. Cash and cash
equivalents are approximately the same as December 31, 1997. The
Company's primary sources of cash during the first three months of
1998 were approximately $6,000,000 from the sale of subordinated
convertible debentures, (See Note 4 of Notes to Consolidated Financial
Statements), $5,927,000 from short-term borrowings, $3,440,000 loan
repayments, and $538,000 lease and finance receivables repayments.
The primary uses of cash during the first three months of 1998 were
approximately $9,487,000 repayment of short term borrowings,
$3,963,000 of loan originations, $1,859,000 additions to direct
financing leases and finance receivables, $332,000 from operations and
$244,000 payment of dividends.
The Company's line of credit, which matures annually, was renewed and
increased to $40,000,000 on April 30, 1998. The line matures April 30,
1999. At March 31, 1998, the Company had $20,360,000 outstanding
under the line of credit. In addition to the Company's line of
credit, its wholly owned subsidiary, Source Capital Leasing Co., has a
$4,000,000 line of credit to fund its lease portfolio. The leasing
company's line which matured on April 30, 1998, has been extended 90
days to provide time for the renewal process. The Company expects the
leasing line will be renewed prior to the expiration of the 90 day
extension. The leasing company had approximately $3,070,000
outstanding under its line at March 31, 1998. The cash flows from the
Company's lines of credit, loan and lease repayments, and the existing
cash, cash equivalents and investment securities are expected to be
sufficient for the operating needs of the Company.
New Accounting Pronouncements
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In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosures about Segments for an Enterprise and Related Information
("SFAS 131"). This Statement requires public companies to report
selected segment information in their quarterly and annual reports
issued to shareholders, and entity wide disclosures about products and
services and major customers. The statement was adopted by the
Company on January 1, 1998.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This Statement requires that comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined as the
change in equity of a business enterprise arising from non-owner
sources. This Statement was adopted by the Company on January 1, 1998.
Unrealized gains and losses on investment securities are reported as
comprehensive income.
Effect of Inflation and Changing Prices
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Interest rates on the Company's loan portfolio are subject to
inflation as inflationary pressures affect the prime interest rate.
At March 31, 1998, interest rates on approximately 98% of the
Company's loan portfolio were variable based on various indexes. The
remaining loans have fixed interest rates. Loans with fixed rates and
maturities of less than one year at March 31, 1998 are considered
variable. At March 31, 1998 all leases in the Company's lease
portfolio carry fixed interest rates, however, the Company's line-of-
credit with Seafirst Bank provides for match funding of leases. Each
lease is funded separately and the interest rate charged by the bank
is fixed for the term of the advance which is matched to the term of
the lease.
SOURCE CAPITAL CORPORATION
Part II - Other Information
Items 1,2,3,4 and 5 of Part II are omitted from this report as they
are either inapplicable or the answer is negative.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement regarding Computation of Per Share
Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed for the three months
ended March 31, 1998:
Form 8-K Report dated February 11, 1998 Item 5 Other Events
SOURCE CAPITAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
SOURCE CAPITAL CORPORATION
(Registrant)
Date: May 5, 1998 By: /s/ D. Michael Jones
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D. Michael Jones, President and
Chief Executive Officer
Date: May 5, 1998 By: /s/ Lester L. Clark
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Lester L. Clark, Vice President-
Secretary/Treasurer, Principal
accounting and finance officer