UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR (15)d OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
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OR
[ ] TRANSITION REPORT UNDER 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)
As of May 5, 2001, there were 1,299,368 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, 2001
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Index
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Page
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Part I - Financial Information
Item 1 - Financial Statements:
- Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 1
- Consolidated Statements of Income, Comprehensive Income and
- Retained Earnings - Three Months Ended March 31, 2001 and 2000 2
- Consolidated Statements of Cash Flows - Three months
Ended March 31, 2001 and 2000 3
- Notes to Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II - Other Information 9
Part I - Financial Information
Item 1. Financial Statements
SOURCE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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March 31, December 31,
2001 2000
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(Unaudited)
ASSETS
Loans receivable, net $46,540,091 $46,063,294
Leases receivable, net 11,316,888 12,487,497
Accrued interest receivable 725,388 594,065
Cash and cash equivalents 344,735 644,476
Marketable securities 144,345 152,467
Real estate and equipment owned 886,867 679,027
Other assets 715,304 766,124
Deferred income tax 1,058,500 989,500
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Total assets $61,732,118 $62,376,450
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LIABILITIES
Notes payable to bank $31,150,000 $30,050,000
Notes payable to bank, long-term 11,304,503 12,807,457
Accounts payable and accrued expenses 688,659 874,551
Customer deposits 549,406 554,913
Convertible subordinated debentures 4,000,000 4,000,000
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Total liabilities 47,692,568 48,286,921
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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 outstanding, 1,302,368 and 1,302,715 shares 6,735,716 6,737,234
Additional paid in capital 2,049,047 2,049,047
Accumulated other comprehensive loss (24,429) (16,307)
Retained earnings 5,279,216 5,319,555
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Total stockholders' equity 14,039,550 14,089,529
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Total liabilities and stockholders' equity $61,732,118 $62,376,450
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See accompanying notes to consolidated financial statements.
1
SOURCE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
RETAINED EARNINGS
For the Three Months Ended March 31, 2001 and 2000
(Unaudited)
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Three Months ended March 31,
2001 2000
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Financing income:
Interest and fee income $1,899,352 $1,809,782
Lease financing income 526,492 573,360
Interest expense (1,083,193) (1,046,593)
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Net financing income 1,342,651 1,336,549
Gain on sale of marketable securities and equipment -- 93,818
Provision for loan and lease losses (154,052) (123,045)
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Income before operating expenses 1,188,599 1,307,322
Operating expenses:
Employee compensation and benefits 494,066 583,296
Other operating expenses 308,925 346,837
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Total operating expenses 802,991 930,133
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Income before income taxes 385,608 377,189
Income tax provision 139,350 86,500
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Net income 246,258 290,689
Retained earnings, beginning of period 5,319,555 4,608,460
Dividends paid (286,597) (299,122)
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Retained earnings, end of period $5,279,216 $4,600,027
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Net income per common share - basic $ .19 $ .21
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Net income per common share - diluted $ .17 $ .18
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Weighted average number of common shares outstanding:
Basic 1,302,599 1,359,111
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Diluted 1,803,253 2,108,765
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Cash dividends per share $.22 $.22
==== ====
Net income $ 246,258 $ 290,689
Other comprehensive income, net of tax:
Unrealized gain (loss) on marketable securities (12,306) 8,340
Tax (expense) benefit on unrealized gain (loss) 4,184 (2,836)
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Comprehensive income $238,136 $296,193
======== ========
See accompanying notes to consolidated financial statements.
2
SOURCE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2001 and 2000
(Unaudited)
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2001 2000
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Cash flows from operating activities:
Net income $ 246,258 $ 290,689
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 19,145 22,029
Provision for loan and lease losses 154,052 123,045
Deferred income taxes (69,000) 113,000
Gain on sale of equipment -- (3,600)
Gain on sale of marketable securities -- (90,218)
Change in:
Accrued interest receivable (131,323) (110,274)
Other assets 32,941 (154,903)
Accounts payable and accrued expenses (185,892) (303,653)
Customer deposits 6,100 (12,839)
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Net cash provided by (used in) operating activities 72,281 (126,724)
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Cash flows from investing activities:
Proceeds from sale of marketable securities -- 143,887
Loan originations (3,932,281) (7,301,763)
Loan repayments 3,237,933 4,607,792
Lease originations -- (2,497,819)
Collections on direct financing leases 900,762 1,101,028
Proceeds from sale of other real estate and equipment 113,899 41,593
Purchase of office equipment (1,266) (4,429)
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Net cash provided by (used in) investing activities 319,047 (3,909,711)
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Cash flows from financing activities:
Proceeds from notes payable to bank 4,375,000 10,272,484
Payments on notes payable to bank (3,275,000) (5,811,109)
Payments on notes payable, long-term (1,502,954) (10,145)
Payments for repurchase of common stock (1,518) (4,938)
Cash dividends paid (286,597) (299,122)
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Net cash provided by (used in) financing activities (691,069) 4,147,170
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Net increase (decrease) in cash and cash equivalents (299,741) 110,735
Cash and cash equivalents, beginning of period 644,476 590,630
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Cash and cash equivalents, end of period $ 344,735 $ 701,365
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,167,820 $ 1,095,700
Cash paid during the period for income taxes 115,711 --
Non-cash financing and investing transactions:
Loan converted to repossessed assets 150,000 --
Leases converted to repossessed and other assets 201,844 208,121
Unrealized loss (gain) on marketable securities 8,122 (5507)
See accompanying notes to consolidated financial statements
3
SOURCE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
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The unaudited consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Source Capital Leasing Co. All
significant intercompany transactions and balances have been eliminated in
consolidation.
The unaudited consolidated financial statements reflect all adjustments
(consisting only of normal recurring items), which in the opinion of management,
are necessary to fairly state the periods reported. Certain 2000 amounts have
been reclassified to conform with the 2001 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, 2001, 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, 2000.
NOTE 2.
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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 (after adjustment for the after-tax effect of
interest on convertible subordinated debentures) is computed by dividing net
income 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.
Earnings Per Share Computation:
For the Quarter Ended March 31, 2001
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Weighted- Per-Share
Net Income Average shares Amount
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Basic EPS
Income available to common
Stockholders $ 246,258 1,302,599 $ .19
========
Effect of Dilutive Securities
Interest on 7.5% convertible subordinated
debentures (net of 34% tax) 55,627 499,376
Common stock options -- 1,278
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Diluted EPS
Income available to common
stockholders + assumed conversions $ 301,885 1,803,253 $ .17
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4
NOTE 2 Continued:
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Earnings Per Share Computation, Continued:
For the Quarter Ended March 31, 2000
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Weighted- Per-Share
Net Income Average shares Amount
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Basic EPS
Income available to common
Stockholders $ 290,689 1,359,111 $ .21
=========
Effect of Dilutive Securities
Interest on convertible subordinated
debentures (net of 34% tax) 82,816 742,821
Common stock options -- 6,833
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Diluted EPS
Income available to common
stockholders + assumed conversions $ 373,505 2,108,765 $ .18
========== ========= =========
NOTE 3.
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The Company's consolidated financial statements include certain reportable
segment information. The segments include the parent company Source Capital
Corporation who's primary business is commercial real estate lending and its
wholly owned subsidiary Source Capital Leasing Co. who's primary business is
equipment lease financing. All accounting policies of the parent and subsidiary
are the same. The parent evaluates the performance of the subsidiary based upon
multiple variables including lease income, interest expense and profit or loss
after tax. The parent does not allocate any unusual items to the subsidiary.
Company segment profit and loss components and schedule of assets as of March
31, 2001 and 2000 is as follows:
2001 2000
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Leasing Lending Leasing Lending
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Revenue $526,492 $1,899,352 $573,360 $1,809,782
Interest expense 165,101 918,092 217,995 828,598
Depreciation 8,021 11,124 7,683 14,346
Income tax expense (benefit) 26,100 113,250 (15,000) 101,500
Net income (loss) 50,541 195,717 (29,029) 319,718
Significant non-cash items
other than depreciation 11,605 -- 33,743 --
Real estate lending assets -- 52,536,777 -- 53,152,283
Leasing assets 13,434,601 -- 16,265,471 --
Reconciliation of segment net income (loss), total assets, notes payable and
other significant items for the quarter ended March 31, 2001 and 2000 follows:
5
NOTE 3. Continued:
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2001 2000
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Profit or loss
Leasing net (loss) income $ 50,541 $ (29,029)
Adjustment for income taxes (113,250) (101,500)
Unallocated amounts:
Revenue of real estate lending 1,899,352 1,849,063
Expense of real estate lending (1,590,635) (1,427,845)
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Consolidated net income after tax $ 246,258 $ 290,689
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Total assets
Net lease investment $11,316,888 $15,398,002
Unallocated assets of leasing 2,117,713 867,469
Elimination of intercompany (4,239,260) (4,158,438)
Commercial loans receivable, net 46,540,091 45,527,815
Unallocated assets of real estate lending 5,996,686 7,624,468
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Consolidated assets $61,732,118 $65,259,316
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Debt
Leasing note payable, long-term $ 8,653,864 $11,337,642
Real estate lending note payable 31,150,000 29,905,000
Real estate lending mortgage contract payable 2,650,639 3,093,124
Real estate lending convertible subordinated
debentures 4,000,000 5,950,000
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Consolidated notes and mortgage payable $46,454,503 $50,285,766
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Real Estate
Leasing Lending
Other significant items Total Total Consolidated
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2001
Interest expense $165,101 $918,092 $1,083,193
Provision for losses 71,502 82,550 154,052
2000
Interest expense $217,995 $828,598 $1,046,593
Provision for losses 123,045 -- 123,045
SOURCE CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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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.
6
Three Months Ended March 31, 2001 Compared to Three Months ended March 31, 2000
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For the three months ended March 31, 2001, the Company reported net income of
$246,258 or $.17 per diluted common share. These results compare to net income
of $290,689 or $.18 per diluted share, for the comparable period in 2000. Net
financing income (interest and lease income less interest expense) increased
slightly from approximately $1,337,000 during the three months ended March 31,
2000 to approximately $1,343,000 in the comparable period of 2001. Finance
income of approximately $2,426,000 and $2,383,000 for the three months ended
March 31, 2001 and 2000 respectively, represents an approximate average interest
yield of 16.2% and 16.3%, respectively, on the Company's average earning assets.
The Company experienced a slight decline in interest yield on its average loan
portfolio (approximately 0.16%). However this decline was offset by an increase
of approximately 0.34% in yield on its lease portfolio, as compared to the first
quarter 2000. The decline in yield on the Company's loan portfolio is primarily
due to a drop in the prime interest rate charged by the majority of large money
center banks (the index) to which the majority of the Company's loans are tied.
The rates charged on the Company's lease portfolio were relatively unaffected by
market rates charged to loan customers.
The slight increase in financing income of approximately $6,000 is due to an
approximate $90,000 increase in interest income offset by an approximate $47,000
decrease in leasing revenue and a $37,000 increase in interest expense. The
Company's average earning assets increased by approximately $1,200,000 over the
first quarter 2000, growing from $58,400,000 for the quarter ended March 31,
2000 to $59,600,000 at March 31, 2001. The growth in the Company's average
earning assets is primarily related to better than expected loan production in
the fourth quarter 2000 which was somewhat offset by a decrease in the Company's
lease portfolio in the first quarter of 2001, as the Company discontinued
funding leases through lease brokers. Loan production in the quarter ended March
31, 2001 declined significantly from first quarter 2000 due to a management
decision to not make or fund new loan commitments from February 1, 2001 until
the Company obtains a replacement line of credit to fund its real estate lending
operations. On February 1, 2001 the Company was notified by one of its two
lenders that it was exiting the loan warehousing part of its business and that
the Company's current line-of-credit which expires April 30, 2001 would not be
renewed for an additional year, but would be extended to November 1, 2001, in
order to allow time for the Company to negotiate a new line-of-credit with
another lender. Management is currently in discussions with other lenders and
believes that a new line will be in place prior to the expiration of its current
line-of-credit on November 1, 2001.
The Company's cost of funds on average borrowings increased from approximately
8.95% at March 31, 2000 to approximately 9.13% in the comparable period in 2001.
The increase in borrowing costs is primarily related to the increases in the
prime rate over the past year. These increases were partially mitigated by rate
reductions in the first quarter of 2001, however a large portion of the
Company's outstanding notes payable were funded under LIBOR contracts issued in
the fourth quarter 2000, which are currently carrying higher interest rates than
the current prime based portion of the outstanding loan. These higher rate LIBOR
contracts expire by the end of April, 2001. The Company funded its lease
portfolio using a "LIBOR" based rate which currently averages approximately
7.28% as compared to an average 7.89% at March 31, 2000.
At March 31, 2001, the Company had approximately $1,521,000 of loans and leases
which were delinquent as to principal or interest more than 90 days, as compared
to approximately $781,000 at March 31, 2000. Management believes that these
loans and leases are adequately collateralized and that the Company's allowance
for loan and lease losses of approximately $721,000 is adequate as of March 31,
2001.
Operating expenses decreased approximately 13.7% from the first three months of
2000 primarily due to a 15.3% decrease in salaries and benefits resulting from
staff reductions in the Company's leasing operations and a reduced salary level
and profit sharing accrual related to a new employment agreement with the
Company's Chief Executive Officer. Additionally, other operating expenses
decreased by approximately 10.9% from the prior year quarter.
7
The Company was able to reduce its operating expenses in nearly all expense
categories.
The provision for income taxes was approximately $139,000 and $86,500 for the
three months ended March 31, 2001 and 2000, respectively. The Company expects to
pay current income taxes less than the amounts calculated at the statutory rates
for the year ended December 31, 2001, due to the utilization of net operating
loss carryovers and the differences between book and tax accounting for leases.
Financial Condition and Liquidity
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At March 31, 2001, the Company had approximately $345,000 of cash and cash
equivalents and $144,000 of marketable securities. Cash and cash equivalents
decreased approximately $300,000 from December 31, 2000. The Company's primary
sources of cash during the first three months of 2001 were approximately
$4,375,000 from short-term borrowings, $3,238,000 loan repayments, $901,000
lease repayments and $114,000 from the sale of repossessed equipment. The
primary uses of cash during the first three months of 2001 were approximately
$3,932,000 of loan originations, $3,275,000 repayment of short term borrowings,
$1,503,000 payments on long-term debt and $287,000 payment of dividends.
The Company's $45,000,000 line of credit, which matures annually, was extended
until November 1, 2001 in order to provide time for the Company to negotiate a
line of credit with a new lender. The Company has been advised by one of the two
banks participating in this line-of-credit that their $17,500,000 portion of the
line-of-credit will be renewed. At March 31, 2001, the Company had $31,150,000
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 fully
amortizing loan which amortization coincides with amortization of its lease
portfolio. The leasing company had approximately $8,654,000 outstanding under
this amortizing loan at March 31, 2001. The cash flows from the Company's line
of credit, loan and lease repayments, and the existing cash, cash equivalents
and marketable securities are expected to be sufficient for the operating needs
of the Company.
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, 2001,
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,
2001 are considered variable. The Company's line of credit agreement provides
for variable interest based on the prime rate or at the Company's option, a
"LIBOR" based rate.
Management believes that any negative effects of an increase in the prime
interest rate would be largely offset by the Company's relatively short-term
loan portfolio, balloon payments and the large percentage of variable rate
loans.
Rates earned on the Company's lease portfolio are fixed for the term of the
lease, as are the rates on the various components of the amortizing loan used to
fund the lease portfolio.
8
SOURCE CAPITAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
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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
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(a) Exhibits - The following exhibit is filed as a Exhibit No.
part of this report:
Executive Retention and Employment Agreement 10.4
dated effective January 19, 2001 between
D. Michael Jones and the Company.
(b) Reports on Form 8-K
A Form 8-K Report dated February 8, 2001 reporting other events under
Item 5 was filed by the registrant during the quarter ended March 31,
2001.
(The balance of this page has been intentionally left blank.)
9
SOURCE CAPITAL CORPORATION AND SUBSIDIARIES
SIGNATURES
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In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOURCE CAPITAL CORPORATION
(Registrant)
Date: May 10, 2001 By: /s/ D. Michael Jones
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D. Michael Jones
President and Chief Executive Officer
Date: May 10, 2001 By: /s/ Lester L. Clark
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Lester L. Clark
Vice President-Secretary/Treasurer
Principal accounting and finance officer
10