U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to______
Commission file number: 0-12199
-------
SOURCE CAPITAL CORPORATION
--------------------------
(Name of small business issuer in its charter)
Washington 91-0853890
---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1825 N. Hutchinson Road
Spokane, Washington 99212
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 509 928-0908
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE NASDAQ SMALL CAP
Securities registered under Section 12(g) of the Act:
Common stock, no stated par value
(Title of Class)
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 [ ]
<PAGE>
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrants knowledge, in definitive
proxy of information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year $3,998,456.
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was
sold, on the average bid and asked prices of such stock, as of a
specified date within the past 60 days. $9,375,818 as of February 03,
1997.
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the
aggregate market value of the common equity held by non-affiliates on
the basis of reasonable assumptions, if the assumptions are stated.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, no
par value - 1,379,220 as of February 03, 1997.
Documents Incorporated By Reference.
Proxy statement dated March 14, 1997 for the annual meeting of
shareholders to be held on April 30, 1996 is incorporated by reference
in Part III.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
The number of pages in this document is 25.
<PAGE>
PART I
Item 1. Description of Business.
--------------------------------
GENERAL
-------
The discussions contain 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.
BACKGROUND AND INTRODUCTION
---------------------------
Source Capital Corporation (the "Company"), was incorporated in
Washington in October 1969. The Company is engaged in lending
activities, primarily making direct loans to individuals and
corporations. Generally, the loans are collateralized, or partially
collateralized, by real estate or personal property.
OPERATIONS - LENDING ACTIVITIES
-------------------------------
The Company presently serves the financial needs of individuals and
entities in the market between consumer finance companies and
commercial banks. The Company competes with many financing companies
and commercial lending institutions which have considerably more funds
available for lending. The Company's operations have not been
significantly affected by this competition thus far due to its market
niche. The Company, in the last five years has focused its lending
activities in the areas of commercial business lending. The majority
of loans made by the Company are primarily collateralized by first
mortgages on real estate.
Loans originated during 1996 and 1995, together with their terms and
range of interest rates are as follows:
Amount Term Interest Rates
----------- ---------- --------------
1996
----
Commercial $25,529,608 1-10 years 9.96-16.25%
1995
----
Commercial $10,636,783 1-10 years 7.13-16.50%
<PAGE>
Generally, the Company charges loan origination fees in connection
with its commercial lending activities which increase the effective
yields recognized on the loans. In some instances the Company
purchases contracts which may carry below market rates of interest;
however, the Company discounts the purchase price of these contracts
so that the yield on the discounted contract will approximate the
rates received on its originated loans. Lending decisions are made by
an officers' loan committee. Loans exceeding $2,500,000 also require
approval by the Board of Directors loan committee. The Company
originates commercial loans that are collateralized primarily by real
property. The primary factors In making lending decisions are the
amount of the loan in comparison to the value of the collateral, the
borrower's financial condition and the capacity to repay the loan. The
Company attempts to minimize lending risk by limiting total amounts
loaned to any one borrower. Additionally, the Company monitors and
restricts the credit exposure to any specific industry and
concentration of loans in any specific geographical area.
For additional information concerning loans, see Note 2 of Financial
Statements for the two years ended December 31, 1996 and 1995 (the
"Financial Statements").
DELINQUENT LOANS AND REAL ESTATE OWNED
--------------------------------------
To measure the quality of assets, the need for asset write downs to
the lower of cost or net realizable value and the adequacy of the
reserve for possible loan losses, the Company reviews the performance
of each loan, the valuation of all collateral (principally real
estate), the payment history of the borrower, current economic
conditions of the geographical area in which the loan was made and
market analysis of the type of the loan collateral. This information
is obtained primarily through on-site inspections, market analyses,
new appraisals, financial performance of the borrower and purchase
offers. A specific allowance for credit losses is established for any
non-performing loans where the underlying collateral value (less costs
of disposal) is below the recorded loan value. Upon repossession real
estate owned is recorded at the lower of the cost or fair value and is
reviewed at least monthly thereafter until disposition of the
property.
At December 31, 1996 and 1995, the allowance for credit losses was
approximately $176,000 and $87,000, respectively, which in the
opinion of management was adequate.
Delinquent and problem loans are a part of any lending business. If a
borrower fails to make a required payment when due, the Company
institutes collection procedures including the mailing of past due
notices, follow-up phone calls and/or personal contact. In many
cases, deficiencies are cured promptly. If the loan remains
delinquent, the Company generally initiates repossession or
foreclosure proceedings.
<PAGE>
Loans are considered delinquent when they are 30 days past due. The
following table sets forth the principal balances of delinquent loans
in the Company's loan portfolio at December 31, 1996 and 1995
Principal % of Total
1996 Balance Amount
---- ----------- ----------
Commercial $ 1,270,503 4.8%
=========== ===
1995
----
Commercial $ 523,268 4.4%
=========== ===
Of the total past due loans at December 31, 1996, $855,756 exceeded 90
days past due. For additional information concerning delinquencies and
real estate owned see Notes 2 and 5 of the Financial Statements.
OPERATIONS - REAL ESTATE OWNED
------------------------------
In May 1995 the Company acquired a retail shopping center located in
La Puente, California through foreclosure. At December 31, 1995 net
cash flows (net rent less interest carrying costs) received by the
Company since the date of foreclosure were approximately $200,000.
Cash flows received in 1996 were approximately $275,000. In late
December 1996 the Company sold the shopping center. For additional
information see Notes 2 and 5 of the Financial Statements.
OPERATIONS - INVESTING ACTIVITIES
---------------------------------
A covenant of the Company's line of credit requires the Company to
maintain $500,000 in liquid assets. To comply with this requirement,
the Company invests in short and intermediate term U.S. government
securities and corporate debt securities. All excess cash is applied
to reduce the Company's credit line.
For additional information concerning investing activities, see Note 4
of the Financial Statements.
OPERATIONS - SOURCES OF FUNDS
-----------------------------
The Company's funding for new loans is provided from repayments of
current loans plus interest, and from a $20,000,000 line of credit
from a bank which expires on April 30, 1997. Borrowings under the
line of credit agreement bear interest at .375% over the bank's prime
rate (8.625% at December 31, 1996). At December 31, 1996, there was
$14,000,000 outstanding under the line of credit agreement. Any
borrowings under the line of credit are collateralized by loans
receivable. The agreement contains certain restrictive covenants
including maximum percentages of loan categories allocated to land
loans, second mortgages, terms exceeding 24 months and maintenance of
<PAGE>
minimum levels of cash or marketable securities and tangible net worth
of at least $10,000,000. The line is annually renewable and the
Company expects the line will be renewed on its expiration date.
OPERATIONS - EMPLOYEES
----------------------
At December 31, 1996, the Company employed ten people, none of which
were represented by a collective bargaining unit. The Company
believes relations with its employees are good.
Item 2. Description of Properties.
----------------------------------
Since June 15, 1995, the Company's headquarters has been located in
leased offices at 1825 N. Hutchinson Rd., Spokane, Washington 99212.
The lease expires in May 2001. For more information concerning this
lease see Note 8 of the Financial Statements. The Company also
occupies leased office space at 200 First Ave. West, Suite 403, in
Seattle, Washington, and effective January 1, 1997 the Company opened
its third office in leased office space at 614 S. W. Eleventh Ave.
Suite D. Gallery Level Portland, Oregon.
Additionally, the Company has properties obtained through foreclosure
which are held for sale in the normal course of business. See Note 5
of the Financial Statements.
Item 3. Legal Proceedings.
--------------------------
The Company is from time to time a party to various legal actions
occurring in the normal course of business. Management believes that
there are no threatened or pending proceedings against the Company
that, if determined adversely, would have a material effect on the
business or financial position, results of operations or cash flows of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
------------------------------------------------------------
No matters were submitted to a vote of shareholders of the Company's
common stock during the fourth quarter of 1996.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
-----------------------------------------------------------------
Since 1991, the Company's common stock has traded on the over-the-
counter market. In July 1996 the Company applied for and was accepted
for listing on the "NASDAQ SMALLCAP Market tier of the NASDAQ Stock
market". At the annual meeting of stockholders held on May 9, 1996,
and pursuant to the vote of the shareholders, a resolution was adopted
to effect a one for five reverse split of the Company's Class A common
stock whereby one new Common share would be issued in exchange for
five Class A Common shares. Effective on May 31,1996 at 5:00 P.M.
P.D.T. the number of outstanding shares of common stock was reduced
from 7,115,244 to 1,422,144. The new shares of Source Capital
Corporation are designated as "Source Capital Corporation Common
Stock" having no stated par value.
As of February 3, 1997, there were approximately 1,000 holders of
record of the Company's common stock. Market prices for the first
half of 1996 and all of 1995 were obtained from NASDAQ's "Electronic
Bulletin Board" and prices for the last half of 1996 were obtained
directly from NASDAQ and reflect actual prices paid. The prices
reported in the over-the-counter market reflect inter-dealer prices,
without regard to retail markups, markdowns or commissions, and do not
necessarily represent actual transactions. The high and low prices
have been restated to reflect the one for five reverse split and are
scheduled as follows:
Common
---------------
1996 Quarter Ended High Low
------------------ ------ ------
March 31, $ 9.40 $ 6.15
June 30, 9.55 8.80
September 30, 10.00 7.75
December 31, 8.50 7.25
1995 Quarter Ended
------------------
March 31, $ 8.75 $ 5.65
June 30, 6.75 4.75
September 30, 7.50 4.75
December 31, 6.05 5.00
On February 03, 1997 the Bid was $7.25 and the ask was $8.50.
There were no cash dividends declared or paid in 1995. On April 19,
1996 the Company paid a cash dividend of $.15 per share to holders of
record on March 15, 1996. On January 15, 1997 the Board of directors
declared a cash dividend of $.18 per share payable on February 28,
1997 to holders of record on January 31, 1997.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
--------------------------------------------------------------------
Results of Operations - 1996 Compared to 1995
---------------------------------------------
The Company reported net income of approximately $847,000 or
$.59 per share for the year ended December 31, 1996 compared to net
income of approximately $644,000 or $.44 per share for the year ended
December 31, 1995.
The increase of $203,000 in 1996 net income compared to 1995 net
income is primarily due to an increase in net gains on investments and
real estate of approximately $491,000 and a $447,000 increase in net
interest and rent margin. The increase in gains on investments and
real estate is due primarily to the net gain realized on the sale of a
retail shopping center which was acquired through foreclosure in 1995.
The increase in interest and rent margin was the result of an increase
in interest and fees of approximately $264,000 and an increase in rent
of approximately $193,000 which were partially offset by an increase
in interest expense of approximately $32,000.
The increase in interest and fee income was due to the Company's
ability to grow its average earning asset portfolio by approximately
$2.3 million, to $20.6 million in 1996. The primary growth in the
Company's earning assets took place in the last half of 1996, thereby
keeping the average lower than would be expected considering the
increase in the Company's assets from $20.5 million at the end of
1995 to $30.9 million at December 31, 1996.
Non-interest operating expenses increased by approximately $536,000 in
1996 as compared to 1995. Salaries and benefits increased by
approximately $336,000 primarily due to the hiring of three additional
personnel, one of which is the Company's new Chief Executive Officer,
and an increase in profit sharing due to the increased profit of the
Company. Other operating expenses increased by approximately $200,000
primarily due to approximately $64,000 in taxes paid to the State of
California on the sale of its shopping center, approximately $65,000
increase in occupancy expense related to the Company's move to new
quarters in Spokane and a full years occupancy in the Company's
western Washington office and approximately $64,000 in acquisition
expenses related to the Company's search for an acquisition candidate.
The majority of the acquisition expenses related to a target bank
which the Company had been negotiating to purchase. Discussions were
terminated when a competitive offer exceeded the amount management
considered prudent. Management however, intends to continue its
search for an acquisition candidate which fits the Company's long-term
growth objectives.
<PAGE>
Net interest margin on earning assets increased from 10.4% in 1995 to
11.5% in 1996 in spite of lower average contractual interest rates,
due to increased competition from the banking industry. This apparent
anomaly is due to the relatively high loan turnover resulting from the
relative short maturity of the Company's loan portfolio and early
repayments by borrowers, which has the effect of accelerating the
recognition of income from deferred loan fees.
The income tax provision increased from approximately $333,000 in 1995
to approximately $437,000 in 1996. Although the Company has
significant net operating loss carryforwards available to reduce
income taxes payable, the utilization of these net operating losses
are limited each year due to the change in ownership of the Company
upon its reorganization in 1991. Although, for financial statement
purposes, the Company reported approximately $437,000 in income tax
expense for 1996 (in accordance with FASB Statement 109 "Accounting
for Income Taxes"), for income tax purposes, the actual tax liability
for 1996 was approximately $398,000. As discussed in Note 7 to the
Financial Statements, during 1995, the Company reduced the valuation
allowance for deferred tax assets to approximately $12,000 as Company
management determined that it is more likely than not that the Company
will realize the benefit of nearly all of the deferred tax assets in
the future. The deferred tax assets result primarily from pre-
reorganization net operating loss carryforwards. The benefits of
utilization of pre-reorganization net operating loss carryforwards are
recorded as an addition to paid-in-capital and are not reflected in
the statements of income.
Financial Condition and Liquidity
---------------------------------
At December 31, 1996, the Company had approximately $22,000 of cash
and cash equivalents and $740,000 of marketable securities. The
Company's primary sources of cash during 1996 were approximately
$18,171,000 from short-term borrowings, $10,943,000 of principal
repayments on outstanding loans, $3,220,000 long-term borrowings,
$1,248,000 from the sale of real estate and $461,000 from operations.
In 1996, the primary uses of cash were approximately $21,730,000 of
loan originations, $12,071,000 repayment of short-term borrowings,
$300,000 purchase of marketable securities, and $213,000 payment of
dividends.
The Company has a $20,000,000 revolving line of credit with a
financial institution which expires on April 30, 1997. The Company
anticipates that the line will be renewed for another year at that
time. Management believes that the line of credit coupled with the
cash and short-term investments held at December 31, 1996, normal loan
repayments and the sale of part or all of the real estate owned will
provide sufficient cash to fund operating needs during 1997. However,
the Company may seek additional funds dependent on the direct lending
demand and other projects the Company may endeavor to undertake during
the year.
<PAGE>
During 1996, the Company moved its western Washington office from
Renton to Seattle to better serve the market. On the first of January
1997, the Company opened an office in Portland, Oregon expanding its
coverage in the pacific northwest. Management is exploring other
areas of the western U. S. that will assist the Company in reaching
its long-term growth potential.
Effects of Inflation and Changes in Interest Rates.
--------------------------------------------------
Interest rates earned on the Company's loan portfolio are subject to
change as inflationary pressures, and other factors, affect prime
interest rates. At December 31, 1996, interest rates being charged on
approximately 90% of the Company's loan portfolio were based upon the
prime interest rate. The remaining loans have fixed interest rates.
The Company's line of credit agreement provides for variable interest
based upon the prime 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.
Item 7. Financial Statements.
-----------------------------
Information required by item 7 is incorporated herein by reference to
the financial statements filed as a part of this report. (see index
to financial statements at page 8 hereof.)
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
--------------------------------------------------------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act.
---------------------------------------------------------------------
Included in the proxy statement dated March 17, 1997 and incorporated
herein by reference.
Item 10. Executive Compensation.
--------------------------------
Included in the proxy statement dated March 17, 1997 and incorporated
herein by reference.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
-------------------------------------------------------------
Included in the proxy statement dated March 17, 1997 and incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions.
--------------------------------------------------------
Included in the proxy statement dated March 17, 1997 and incorporated
herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
------------------------------------------
Exhibit
(A) Exhibits No.
--------------------------------------------------- -------
Articles of Incorporation of Source Capital
Corporation, incorporated by reference to
Exhibit A to Form 8-K dated February 7, 1994. 3.1
Articles of Amendment to the restated Articles
of Incorporation of Source Capital Corporation,
incorporated by reverence to Exhibit C to
Form 8-K dated May 16, 1996. 3.2
Bylaws of Source Capital Corporation, incorporated
by reference to Exhibit A to Form 8-K dated
February 7, 1994. 3.3
Executive Compensation Plans Arrangements and
Other Management Contracts:
Employment Contract of Alvin J. Wolff, Jr.
effective January 1, 1995, incorporated by
reference to Exhibit A to Form 8-K dated
January 4, 1995. 10.1
Employment Agreement with D. Michael Jones
dated January 18, 1996. 10.2
Statement re: Computation of earnings per share.
The computation of earnings per share can be
determined from the Financial Statements filed
as a part of this report. Exhibit 11 is
therefore omitted. 11
(b) Report on Form 8-K
No Reports on Form 8-K were filed during the
last quarter of 1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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: March 14, 1997 By: /s/D. Michael Jones
-----------------------------------
D. Michael Jones, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: March 14, 1997 By: /s/ D. Michael Jones
-----------------------------------
D. Michael Jones, President
(Principal executive Officer)
Director
Date: March 14, 1997 By: /s/ Lester L. Clark
-----------------------------------
Lester L. Clark, Vice President,
Treasurer and Secretary (Principal
Accounting and Financial Officer)
Date: March 14, 1997 By: /s/ Alvin J. Wolff, Jr.
-----------------------------------
Alvin J. Wolff, Jr., Director,
Chairman of the Board
Date: March 14, 1997 By: /s/ Clarence H. Barnes
-----------------------------------
Clarence H. Barnes, Director
Date: March 14, 1997 By: /s/ Robert E. Lee
-----------------------------------
Robert E. Lee, Director
Date: March 14, 1997 By: /s/ Maynard Cary
-----------------------------------
Maynard Cary, Director
Date: March 14, 1997 By: /s/ Charles G. Stocker
-----------------------------------
Charles G. Stocker, Director
<PAGE>
Date: March 14, 1997 By: /s/ John A. Frucci
-----------------------------------
John A. Frucci, Director
Date: March 14, 1997 By: /s/ William H. Roberts
-----------------------------------
William H. Roberts, Director
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Balance Sheets
Statements of Income
Statement of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Source Capital Corporation
Spokane, Washington
We have audited the accompanying balance sheets of Source Capital
Corporation as of December 31, 1996 and 1995 and the related
statements of income, changes in stockholders' equity and cash flows
for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present
fairly, in all material respects, the financial position of Source
Capital Corporation as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Spokane, Washington
January 24, 1997
<PAGE>
SOURCE CAPITAL CORPORATION
BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
----------- -----------
ASSETS
Loans receivable, net $26,059,031 $11,861,603
Accrued interest receivable 295,047 127,206
Cash and cash equivalents 21,506 393,374
Deferred compensation trust 840,881 743,262
Marketable securities 740,004 572,985
Real estate owned 916,196 4,949,442
Other assets 360,839 121,780
Deferred income taxes 1,685,535 1,725,300
----------- -----------
Total assets $30,919,039 $20,494,952
=========== ===========
LIABILITIES
Note payable to bank $14,000,000 $ 7,900,000
Long-term debt 3,214,824
Accounts payable and accrued expenses 550,638 152,915
Deferred compensation payable 840,881 743,262
----------- -----------
Total liabilities 18,606,343 8,796,177
----------- -----------
Commitments (Notes 2, 8 and 11)
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, 1,417,220 and 1,423,079 shares 7,462,827 7,459,528
Additional paid-in capital 2,049,047 2,049,047
Unrealized gain (loss) on investment
securities (10,480) 12,396
Retained earnings 2,811,302 2,177,804
----------- -----------
Total stockholders' equity 12,312,696 11,698,775
----------- -----------
Total liabilities and stockholders'
equity $30,919,039 $20,494,952
=========== ===========
The accompanying notes are an integral part of the financial
statements.
<PAGE>
SOURCE CAPITAL CORPORATION
STATEMENTS OF INCOME
For the Years Ended December 31, 1996 and 1995
1996 1995
----------- -----------
Revenues:
Interest and net rent income $ 3,427,879 $ 2,948,814
Interest expense (1,069,372) (1,037,624)
----------- -----------
Net interest and rent 2,358,507 1,911,190
Non-interest income and provision for
loan losses:
Gains on investments and real
estate (net) 70,577 79,418
Provision for loan losses (95,000)
----------- -----------
Income before non-interest expense 2,834,084 1,990,608
----------- -----------
Non-interest expense:
Employee compensation and benefits 920,850 585,003
Other operating expenses 629,279 429,101
----------- -----------
Total non-interest expenses 1,550,129 1,014,104
----------- -----------
Income before income taxes 1,283,955 976,504
----------- -----------
Income tax provision:
Current (397,235) (156,274)
Deferred (39,765) (176,485)
----------- -----------
Total income tax provision (437,000) (332,759)
----------- -----------
Net income $ 846,955 $ 643,745
=========== ===========
Net income per common share $ .59 $ .44
=========== ===========
Weighted average number of common share
equivalents outstanding 1,429,818 1,455,047
=========== ===========
Cash dividends per share $ .15 None
=========== ===========
The accompanying notes are an integral part of the financial
statements.
<PAGE>
SOURCE CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Additional Gains(Losses)
----------------------- Paid-in on Equity Retained
Shares Amount Capital Securities Earnings
---------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Balances, December 31,1994 *1,522,034 $8,034,238 $1,759,775 $ (63,604) $1,534,059
Redemption and cancellation
of Class A Common stock (98,955) (593,010)
Compensation expense associ-
ated with stock options 18,300
Income tax benefit from
utilization of net opera-
ting loss carryforwards 289,272
Net income 643,745
Net change in unrealized gain
on investment securities 76,000
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1995 *1,423,079 7,459,528 2,049,047 12,396 2,177,804
Cash dividend ($.15 per share)
paid April 19, 1996 (213,457)
Redemption and cancellation
of outstanding common stock (934) (8,252)
Cancellation of unclaimed
common stock and capital-
zation of unclaimed
distributions (4,925) 11,551
Net income 846,955
Net change in unrealized loss
on investment securities (22,876)
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1996 1,417,220 $7,462,827 $2,049,047 $ (10,480) $2,811,302
========== ========== ========== ========== ==========
</TABLE>
* Share amounts have been restated to reflect a 1 for 5 reverse stock
split completed on May 31, 1996.
The accompanying notes are an integral part of the financial
statements.
<PAGE>
SOURCE CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1995
1996 1995
----------- -----------
Cash flows from operating activities:
Net income $ 846,955 $ 643,745
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 21,745 14,045
Provision for loan losses 95,000
Impairment loss on real estate owned 120,000
Deferred income taxes 39,765 176,485
(Gain) loss on sale of marketable
securities 15,860 (22,229)
Gain on sale of real estate owned (700,841) (53,883)
Gain on sale of office furniture
and equipment (5,594) (3,306)
Compensation expense associated
with options granted 18,300
Deferred compensation payable 97,619 182,986
Change in:
Deferred compensation trust (97,619) (182,986)
Other assets (380,776) 49,270
Accounts payable and accrued
expenses 409,274 (271,575)
----------- -----------
Net cash provided by operating
activities 461,388 550,852
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities (299,877) (125,755)
Proceeds from sale of marketable
securities 94,122 273,635
Loan originations 21,729,608) (10,636,783)
Loan repayments 10,943,335 11,654,472
Purchase of loans for resale (500)
Capitalization of costs related to
real estate owned (139,719) (968,323)
Proceeds from sale of real estate owned 1,247,651 1,251,931
Purchase of office furniture and
equipment (95,172) 86,094)
Sale of office furniture and equipment 52,897 3,515
----------- -----------
Net cash provided by (used in)
investing activities (9,926,371) 1,366,098
----------- -----------
<PAGE>
SOURCE CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS (continued)
For the Years Ended December 31, 1996 and 1995
1996 1995
----------- -----------
Cash flows from financing activities:
Proceeds from line of credit borrowings 18,170,500 14,184,489
Payments on line of credit borrowings (12,070,500) (15,184,489)
Proceeds from long-term debt 3,220,000
Payments of long-term debt (5,176)
Payments for redemption of capital stock (8,252) (593,010)
Cash dividends paid (213,457)
----------- -----------
Net cash provided by (used in)
financing activities 9,093,115 (1,593,010)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (371,868) 323,940
Cash and cash equivalents, beginning
of year 393,374 69,434
----------- -----------
Cash and cash equivalents, end of year $ 21,506 $ 393,374
=========== ===========
Supplemental disclosure of cash flow
information:
Interest paid $ 1,035,456 $ 746,436
Income taxes paid 199,309 367,658
Non-cash financing and investing
transactions:
Financing of sales of real estate
owned 3,800,000
Loans converted to real estate
owned through repossession (293,845) (3,213,546)
Conversion of accounts payable
to capital (11,551)
The accompanying notes are an integral part of the financial
statements.
<PAGE>
SOURCE CAPITAL CORPORATIONNOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Company's Business
------------------
Source Capital Corporation was incorporated in Washington in
October, 1969. The Company is engaged in lending activities,
primarily making direct loans to individuals and corporations.
Income Recognition
------------------
Interest income from loans is recognized using the accrual
method. Accrual of income is suspended when a loan is
contractually delinquent for 150 days or more, unless the value
of the underlying collateral exceeds the sum of the loan and
accrued interest balances or when collection of the loan and
interest is doubtful. The accrual is resumed when the loan
becomes contractually current, and past-due interest income is
recognized at that time.
Loan origination fees net of direct loan costs are deferred and
amortized to interest income, using the interest method, over
the contractual term of the loan.
Allowance for Credit Losses
---------------------------
The allowance for credit losses is based on a current
evaluation of the potential losses in the Company's loan
portfolio. Provision for loss is recognized based on the
present value of expected future cash flows, discounted at the
loans effective rate or the fair value of the collateral.
Office Furniture and Equipment
------------------------------
Office furniture and equipment are stated at cost.
Depreciation is computed using the straight-line method over
the estimated useful lives of the assets (5-10 years). Major
renewals or betterments are capitalized and repairs and
maintenance are expensed to operations as incurred. When
furniture and equipment is sold or retired, the cost and
related accumulated depreciation are removed from the
respective accounts, and the resulting gains or losses are
reflected in operations.
Management Estimates
--------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Cash Equivalents
----------------
The Company considers cash equivalents to consist of short-
term, highly liquid investments with maturities of three months
or less at the date of purchase. The Company, on occasion, has
cash in institutions which may exceed depository insurance
limits. The Company places such deposits with high-creditquality
institutions and has not experienced any losses.
Marketable Securities
---------------------
The Company invests principally in corporate and U.S.
government bonds and minimizes its investment in any one
corporate bond or industry. Investments in debt securities are
classified as available-for-sale securities for which
unrealized gains and losses are recognized as a component of
stockholders' equity. Realized gains or losses on the sale of
securities are reflected in income based on specific
identification.
Real Estate Owned
-----------------
The Company records foreclosed assets as real estate owned
which is stated at the lower of (a) the fair value of the asset
minus the estimated selling costs, or (b) the cost of the
asset. Costs for the development and improvement of the real
estate are capitalized during the period in which the real
estate property is being readied for its intended use. Pending
the sale of certain repossessed properties, the Company incurs
certain expenses associated with the properties. These expenses
are offset against any rental revenues received on the
properties.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the
future income tax consequences of transactions that have been
recognized in a company's financial statements, using enacted
tax rates in effect in the years in which the temporary
differences between the carrying amount and the tax basis are
expected to reverse (see Note 7).
The Company accounts for the tax benefits associated with the
utilization of net operating loss carryforwards, which were
generated prior to the Company's reorganization in 1991, as
additional paid-in capital. A valuation allowance is
established when it is more likely than not that the deferred
tax assets will not be realized.
Net Income Per Share
--------------------
Net income per share is based on the weighted average number of
shares of common stock and common stock equivalents (stock
options) outstanding during the year.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Reclassifications
-----------------
Certain 1995 balances have been reclassified to conform with
the 1996 presentation with no effect on retained earnings or
net income.
2. LOANS RECEIVABLE:
Loans receivable consist of short-term and long-term loans made
to individuals and corporations. Virtually all loans are
collateralized by real property. At December 31, 1996,
approximately 90% of the loans have interest rates that fluctuate
based upon changes in the prime interest rate. Loans receivable,
the weighted-average interest rate and effective yield (including
amortized loan fees) by type of loan at December 31, 1996 and
1995 consist of the following:
<TABLE>
<CAPTION>
Weighted Average Effective Yield
Contractual on Average Loans
1996 Amount Interest rate Outstanding
------------------------ ----------- ---------------- ----------------
<S> <C> <C> <C>
Commercial Loans $26,493,090 12.33% 17.10%
Real estate loans 169,646 10.36 14.83
-----------
Gross loans receivable 26,662,736
Unearned discounts and
fees (427,659)
Allowance for loan losses (176,046)
-----------
Loans receivable, net $26,059,031
===========
1995
----
Commercial Loans $11,866,364 13.84% 17.30%
Real estate loans 321,945 10.66 14.02
-----------
Gross loans receivable 12,188,309
Unearned discounts and
fees (239,539)
Allowance for loan losses (87,167)
-----------
Loans receivable, net $11,861,603
===========
</TABLE>
Included in the 1996 totals above are five commercial loans
totaling approximately $856,000 which have been identified as
non-performing and are not accruing interest. Interest income of
$48,113 was recognized on these loans during the year ended
December 31, 1996. Had these loans performed in accordance with
their original terms, interest income of $63,982 would have been
recognized. There were no non-performing loans in the portfolio
at December 31, 1995.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. LOANS RECEIVABLE, CONTINUED:
The following is a summary of the changes in the allowance for
loan losses for the years ended December 31, 1996 and 1995:
1996 1995
----------- -----------
Beginning balance $ 87,167 $ 363,432
Provision 95,000
Write offs, net (6,121) (276,265)
----------- -----------
Ending balance $ 176,076 $ 87,167
=========== ===========
The following table sets forth the final scheduled maturity
dates of the principal balances of loans in the portfolio at
December 31, 1996:
Loans Maturing in
Year Ending
December 31, Commercial Real Estate Total
----------------- ----------- ----------- -----------
1997 $14,747,887 $ 996 $14,748,883
1998 6,359,563 22,854 6,382,417
1999 525,182 525,182
2000 452,075 12,911 464,986
2001 5,260 5,260
Thereafter 4,408,383 127,625 4,536,008
----------- ----------- -----------
$26,493,090 $ 169,646 $26,662,736
=========== =========== ===========
The preceding table includes the total principal amount
outstanding in the year of loan maturity. However, most loans
require periodic payments (generally monthly) of principal and or
interest. The Company applies collection and foreclosure
procedures to delinquent and non-performing loans which may
significantly affect the actual loan payment schedule. This
schedule does not purport to present actual anticipated principal
payments on loans receivable.
The Company has outstanding loans to six borrowers exceeding
$1,000,000 individually which aggregate approximately $9,260,000
at December 31, 1996. Included in the aforementioned total is a
loan of approximately $3,800,000 which the Company carried back
on the sale of its shopping center. The Company believes that the
value of the real estate that collateralizes these loans is
sufficient to reduce the Company's credit risk on these loans to
a reasonable level.
At December 31, 1996, the Company has outstanding loan
commitments aggregating approximately $3,936,000.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. DEFERRED COMPENSATION TRUST:
At December 31, 1996 and 1995, deferred compensation trust
represent assets held in trust under the deferred compensation
plan (see Note 6).
4. MARKETABLE SECURITIES:
The amortized cost and estimated market values of available for
sale debt and equity securities at December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996:
-----
Corporate debt securities $ 550,484 $ 26,718 $ 37,198 $ 540,004
Equity securities 200,000 200,000
---------- ---------- ---------- ----------
$ 750,484 $ 26,718 $ 37,198 $ 740,004
========== ========== ========== ==========
1995:
-----
Corporate debt securities $ 560,589 $ 40,927 $ 28,531 $ 572,985
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of debt securities
at December 31, 1996 by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------- ---------
<S> <C> <C>
Due after one year through five years $ 48,752 $ 55,125
Due after five years through ten years 501,732 484,879
---------- ----------
$ 550,484 $ 540,004
========== ==========
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. REAL ESTATE OWNED:
Real estate owned consists primarily of real estate obtained upon
loan foreclosures and development property as follows:
1996 1995
---------- ----------
Retail shopping center $3,817,057
Undeveloped real estate 605,764
Subdivision under sales contract $ 511,212 304,193
Partially developed subdivision 109,682
Other 404,984 12,746
---------- ----------
$ 916,916 $4,949,442
========== ==========
In May 1995 the Company acquired title to the retail shopping
center through foreclosure of a $3.2 million loan, incurring
costs of $600,000 resulting in a carrying value aggregating $3.8
million. In 1996 the Company recognized approximately $568,000
in net rent income from its retail shopping center, which was
partially offset by interest carrying cost of approximately
$280,000, as compared to approximately $379,000 in rent income
and $175,000 in interest carrying costs in 1995. In October 1996
the Company placed permanent financing on the shopping center in
the amount of $3,220,000 amortized over 24 years.
In December 1996 the Company sold the shopping center for
approximately $4,800,000 (less selling costs) and carried back a
wrapped contract in the amount of $3,800,000. This sale, combined
with other sales of real estate and a write down to market of the
remaining other real estate, resulted in a net gain for 1996 of
approximately $571,000.
6. BENEFIT PLANS:
The Company has a non-qualified retirement plan for its Chairman
of the Board and former President under which (at his annual
election), all or a portion of his salary and bonuses are placed
into a trust fund. The assets in the trust fund are subject to
the claims of the general creditors of the Company. Excluding
this claim, the assets of the trust funds are restricted solely
for the distribution to the Chairman upon his retirement,
termination or death. From the date of the plan, the Chairman
(former President) has elected to defer all salary and bonus.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. BENEFIT PLANS, CONTINUED:
During 1993, the Company implemented a 401(k) defined
contribution plan. All employees are eligible to participate in
the Plan. Employees may contribute from 1% to 15% of their
compensation to the Plan. The Company may at its discretion,
make contributions to the Plan in accordance with applicable
rules. The Company's contribution in 1996 and 1995 was $21,576
and $17,259 respectively.
7. INCOME TAXES:
The income tax provision in the statements of income repre-
sents 34.0% and 34.1% of pre-tax income for the years ended
December 31, 1996 and 1995, respectively, which approximate the
federal statutory rate.
The provision for income taxes for the years ended
December 31,1996 and 1995 includes an amount equal to the benefit
of the pre-1991 reorganization net operating loss carryforward
utilized during the years.
The tax effect of the temporary differences and carryforwards
giving rise to the Company's deferred tax assets at December 31,
1996 and 1995 is as follows:
1996 1995
---------- ----------
Net operating loss carryforwards $1,239,853 $1,392,226
Deductibility of deferred
compensation 285,900 252,708
Deductibility of allowances for
losses 103,241 29,637
Other 68,541 62,729
---------- ----------
1,697,535 1,737,300
Valuation allowance (12,000) (12,000)
---------- ----------
$1,685,535 $1,725,300
========== ==========
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
The change in the valuation allowance during the years ended
December 31, 1996 and 1995, is as follows:
1996 1995
---------- ----------
Balance, beginning of year $ 12,000 $ 326,000
Reduction because recognition of
deferred tax assets and utiliza-
tion of net operating loss
carryforwards is more likely than
not (314,000)
---------- ----------
Balance, end of year $ 12,000 $ 12,000
========== ==========
The valuation allowance at December 31, 1996 and 1995 represents
the future tax benefit of net operating loss carryforwards that
may expire before utilization. No valuation allowance has been
established for any other component of the Company's deferred tax
assets as it is more likely than not that these assets will be
realized. Realization is dependent on the generation of
sufficient taxable income in future years. The amount of
deferred tax asset considered realizable may be reduced in the
near term if estimates of future taxable income during the
carryforward period are reduced.
As discussed in Note 1, when the Company reorganized in 1991 and
adopted fresh-start reporting under the provisions of SOP 90-7,
the benefits realized from the utilization of existing net
operating loss carryforwards were reported as an addition to
paid-in capital. During the year ended December 31, 1995
approximately $289,000 of benefits from the utilization of net
operating loss carryforwards has been reported as additional
paid-in capital.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
At December 31, 1996, the Company has net operating loss
carryforwards available to offset future taxable income. For
alternative minimum tax purposes, the Company also has net
operating loss carryforwards. These carryforwards expire as
follows:
Year Ending Alternative
December 31, Regular Minimum
------------ ---------- -----------
2001 $ 465,000
2002 499,000
2003 2,045,000 $1,342,000
2004 612,000 612,000
2006 26,000 24,000
---------- ----------
$3,647,000 $1,978,000
========== ==========
Due to the Company's change in ownership as a result of its
reorganization and its election to limit the annual utilization
of net operating losses rather than reduce available net
operating losses, the amount of net operating losses that can be
utilized in any given year to reduce future taxable income will
be limited to approximately $448,000.
8. OPERATING LEASE:
The Company leases office space in a building owned by a
partnership in which the partners are adult children of the
Chairman of the Board of the Company. The lease requires minimum
monthly payments through May 6, 2001 of $6,570 which is subject
to adjustment on March 1, 1998 according to the increase in the
consumer price index over the prior year. The Company leases the
entire first floor of the building, which contains occupied and
unoccupied space, for which the monthly rent is $4,927 and
$1,643, respectively. The Company may, at its option, sublease
the unoccupied portion of its space. Future minimum lease
payments under this noncancelable lease agreement at December 31,
1996 are $78,840 for each year in the four year period ending in
the year 2000 and $27,955 in 2001.
Total rent expense for the years ended December 31, 1996 and 1995
was approximately $76,000 and $36,000, respectively. Rent
expense during the years ended December 31, 1996 and 1995
includes approximately $10,500 and $7,065, respectively, rent on
the Company's western Washington office.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK:
The Company is authorized to issue 10,000,000 shares of Preferred
Stock having no par value, and 10,000,000 (post reverse split)
shares of Common Stock having no par value. In May 1996, the
Company's shareholders approved the five for one reverse stock
split of its Common Stock. All share amounts included herein
reflect this reverse stock split.
Preferred Stock
---------------
The Preferred Stock may be issued upon resolution adopted by the
board of directors providing for the issuance and establishing
the terms of each preferred stock share. Terms established by
the board are to include voting rights, dividend rates,
conversion rights and any other rights granted to Preferred
stockholders. At December 31, 1996 and 1995, no Preferred Stock
is outstanding
Common Stock Options
--------------------
In February 1995, the Company purchased and retired 64,000 shares
of Class A Common stock from the President at $6.25 per share.
The Company has three stock option plans (the Plans) for non-
employee directors, key employees and non-director, non-officer
employees. The Plans allow for the granting of options to
purchase up to 264,000 shares of Common Stock for terms up to ten
years. Non-employee directors receive an annual grant of options
to purchase 1,000 shares of the Company's Common Stock (as
adjusted) at fair market value not to exceed $10.00 per share.
Non-employee directors will be granted an additional 1,000
options if the Company's pre-tax income for the fiscal year
exceeds 110% of the immediate prior fiscal year's pre-tax income,
and an additional 1,000 options if the pre-tax income for the
fiscal year exceeds 115% of the immediate prior fiscal year's
pre-tax income. The exercise price for the additional incentive
stock options shall be 85% of fair market value of the Common
Stock as defined in the Plan. The maximum annual grant to an
eligible participant in any one fiscal year of the Company shall
not exceed 3,000 shares. Key employee and non-director, non-
officer employee options are administered by the compensation
committee of the board of directors and options are granted at
their sole discretion.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED:
In 1996 the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123). As On January 1, permitted by SFAS 123, the Company
has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations in
accounting for its Plans. Had compensation cost for the
Company's Plans been determined based on the fair value at the
grant dates for awards under the Plans consistent with SFAS 123,
the Company's net income and net income per share as reported
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
As Pro As Pro
Reported Forma Reported Forma
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $846,955 $755,116 $643,745 $569,286
======== ======== ======== ========
Net Income Per Share $ 0.59 $ 0.53 $ 0.44 $ 0.39
======== ======== ======== ========
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grant in 1996 and
1995, respectively: dividend yield of 0% in each year, as there
has been no regular dividend payment history, expected volatility
of 60% and 58%; risk-free interest rates of 5.81% to 5.91%; and
expected lives of 5.02 and 5.38.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED:
A summary of the status of the Company's Plan as of December 31,
1996 and 1995 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 62,400 $6.39 32,000 $8.13
Granted 64,500 7.09 30,400 4.55
Expired (4,000) 5.33
Canceled (6,000) 4.85
------- ------
Outstanding at end of year 116,000 6.72 62,400 6.39
======= ======
Options exercisable at year end 101,810 6.66 62,400 6.34
Weighted-average fair value of
options granted during the
year $4.50 $2.60
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED:
The following table summarizes information about the Plan's stock
options at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisableat Weighted-Average
Exercise Prices December 31, 1996 Contractual Life Exercise Price December 31, 1996 Exercise Price
--------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$4.00-$4.99 27,400 8.6 years $4.47 25,360 $4.44
$5.00-$5.99 10,000 9.1 5.00 10,000 5.00
$6.00-$6.99 10,000 9.1 6.65 10,000 6.65
$7.00-$7.99 29,500 9.9 7.25 16,450 7.25
$8.00-$8.99 38,000 8.1 8.17 38,000 8.17
$9.00-$9.99 2,000 7.4 9.40 2,000 7.40
------- -------
116,900 101,810
======= =======
</TABLE>
The Company recognized $18,300 of compensation expense in 1995
under the Plans.
10. COMMON STOCK DIVIDENDS:
On January 15, 1997 the Board of Directors declared a cash
dividend of $.18 per share on Common Stock, payable on
February 28, 1997 to shareholders of record on January 31, 1997.
A dividend of $.15 per share was paid by the Company on its
common stock April 19, 1996.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. LINE OF CREDIT AGREEMENT:
The Company has a $20,000,000 revolving line of credit agreement
with a financial institution which expires on April 30, 1997.
Borrowings under the line of credit agreement bear interest at
.375% over the bank's prime rate (8.625% at December 31, 1996).
At December 31, 1996, there was $14,000,000 outstanding under the
line of credit agreement. Any borrowings under the line of
credit agreement are collateralized by loans receivable. The
agreement requires the Company to maintain minimum levels of cash
or marketable securities and a tangible net worth of at least
$10,000,000. The Company was in compliance with all terms and
covenants of the line of credit agreement at December 31, 1996.
The line is annually renewable and the Company expects the line
will be renewed on its expiration date.
12. LONG-TERM DEBT:
On October 16, 1996 the Company placed a mortgage on its shopping
center in California in the amount of $3,220,000. The mortgage
is amortized over 24 years with the entire balance due in 10
years. The interest rate is variable determined by adding 3.75%
to the six months London Interbank Offered Rate (LIBOR), as
published in the Wall Street Journal and is subject to change
each three month period throughout the term of the loan.
Additionally there is a prepayment penalty of 1% during the first
36 months of the loan. On December 20, 1996 the Company sold the
shopping center and took back a wrapped mortgage in the amount of
$3,800,000 for which the Company remains liable.
Aggregate amounts of principal due on this long-term debt are as
follows:
Year Ending
December 31,
------------
1997 $ 42,111
1998 47,451
1999 53,470
2000 60,251
2001 67,892
Thereafter 2,943,649
----------
$3,214,824
==========
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market
information and appropriate valuation methodologies.
Considerable judgment is necessary to interpret market data and
to develop the estimates of fair value.
The following methods and assumptions were used to estimate the
value of each class of financial instrument for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
CASH, CASH EQUIVALENTS - Carrying value approximates fair
value.
DEFERRED COMPENSATION TRUST AND DEFERRED COMPENSATION PAYABLE -
Fair value is determined by quoted market prices and cash
surrender value of life insurance.
MARKETABLE SECURITIES - Fair value is determined by quoted
market prices.
LOANS RECEIVABLE - Fair values are determined using the
discounted value of future cash flows at a rate currently
offered for loans of similar characteristics.
NOTE PAYABLE TO BANK - Fair value approximates the carrying
value because the note bears current interest rates.
LONG-TERM DEBT - Fair value approximates the carrying value
because the note bears a current interest rate.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
The estimated fair values of the following financial instruments
as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 21,506 $ 21,506 $ 393,374 $ 393,374
Deferred compensation
trust 840,881 921,076 743,262 785,798
Marketable securities 740,004 740,004 572,985 72,985
Loans receivable (face):
Commercial 26,493,090 27,888,306 11,866,364 12,306,598
Real estate 169,646 189,930 321,945 369,752
Financial liabilities:
Note Payable to bank 14,000,000 14,000,000 7,900,000 7,900,000
Long-term debt 3,214,824 3,222,379
Deferred compensation
payable 840,881 921,076 743,262 785,798
</TABLE>
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 a portion of these financial instruments,
fair value estimates are based onjudgments regarding current
economic conditions and other factors. These estimates are
subjective in nature and involve uncertainties and
matters ofsignificant 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.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 21506
<SECURITIES> 740004
<RECEIVABLES> 26059031
<ALLOWANCES> 176076
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 30919039
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 7462827
<OTHER-SE> 2049047
<TOTAL-LIABILITY-AND-EQUITY> 30919039
<SALES> 0
<TOTAL-REVENUES> 3427879
<CGS> 0
<TOTAL-COSTS> 1550129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 95000
<INTEREST-EXPENSE> 1069372
<INCOME-PRETAX> 1283955
<INCOME-TAX> 437000
<INCOME-CONTINUING> 846955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 846955
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Agreement is entered into as of the 18th day of January, 1996, by
and between SOURCE CAPITAL CORPORATION, a Washington corporation (the
"Company" or "Employer") and D. MICHAEL JONES ("Employee" or "Jones").
WHEREAS, the Employer desires to employ Jones and Jones desires to be
employed by and to serve the Employer in the capacities and for the
term and compensation and upon and subject to the terms and conditions
hereinafter set forth,
NOW, THEREFORE, in consideration of the promises and covenants herein,
Employer and Jones mutually undertake and agree as follows:
1. EMPLOYMENT. Employer hereby employs Jones, and Jones hereby
accepts employment from Employer, on the terms and conditions
herein specified.
2. DUTIES OF JONES.
2.1 PRINCIPAL DUTIES. Employer hereby employs Jones as President
and Chief Executive Officer of Employer, to perform such
duties for Employer as may reasonably be requested of Jones
by the Board of Directors of Employer. Jones shall report
directly to the Board of Directors of Employer.
2.1.1 The business of the Employer includes lending
activities, primarily making loans to individuals,
corporations, and other entities for commercial
business and mortgage lending.
2.1.2 The business of the Employer also includes identifying
other companies for acquisition by, or merger with,
Employer, as approved by Employer s Board of
Directors.
3. COMPENSATION.
3.1 SALARY. Employer shall pay Jones a yearly salary of One
Hundred forty Thousand Dollars ($140,000.00). Jones may
direct Employer as to the method and manner of payment of
compensation so as to minimize taxation to Jones.
<PAGE>
3.2 COST OF LIVING INCREASE ADJUSTMENT.
(a) The payment described in Section 3.1 of this Agreement
shall be adjusted to reflect cost-of-living increases
in order to ensure that the real value of the payments
provided under this Agreement are not impaired by
changing economic conditions.
(b) On January 1, 1997, and each January 1st thereafter,
Employer shall compute a cost-of-living increase
adjustment factor by which payments during the
following year are to be multiplied. The payments to
be multiplied are those determined under Section 3.1
without regard to any prior cost-of-living increase
adjustment. The factor shall consist of a fraction,
the numerator of which shall be the most recently
determined cost-of-living index when the calculation
is made, and the denominator of which shall be the
most recently determined cost-of-living index
determined prior to January 1, 1996.
(c) That all items, for the Standard Metropolitan
Statistical Area of Seattle, Washington cost-of-living
index required for this calculation shall be obtained
from the Consumer Price Index published by the Bureau
of Labor Statistics of the United States Department of
Labor. In any year in which this index is not
available Employer shall ascertain and utilize some
similar criterion and establish retroactively an
initial index figure for the denominator of the
fraction consistent with the intent of this Agreement.
(d) Nothing in this Agreement shall be construed to
diminish the fixed amount payable under this Agreement
as established above, or to diminish the amount of any
particular payment.
3.3 BONUS. By January 15 of each year, beginning January 15,
1997, Jones shall receive a cash bonus based upon Employer s
net earnings for the prior year. Such bonus shall be
determined in the following manner: Jones shall receive a
bonus of ten percent (10%) of Employer s net earnings. For
purposes of this paragraph, net earnings shall be defined as
before tax earnings computed by the Employer s Certified
Public Accountant using generally accepted accounting
principles consistently applied with the following
adjustments;
(i) No deductions shall be taken for stock options given
to or exercised by Jones, the Directors, or Key
Employees or under any stock option plan.
<PAGE>
(ii) No deductions shall be taken for bonuses given to
Jones.
(iii) No federal, state, and local income taxes shall be
deductible.
Any Bonuses earned herein will be advanced as follows: July
15 based on a computation for the first quarter of Employer s
operations; October 15 based on a computation for the second
quarter of Employer s operations; and on December 31 based on
a computation for the remainder of the year of Employer s
operations. Notwithstanding the above, if net earnings for
the complete year at December 31 indicate Jones has been
bonused in excess of ten (10% percent of net earnings, Jones
agrees to reimburse Employer such excess amount by February
15 of the year following. Each complete year shall be
considered separately and not cumulatively for purposes of
this calculation.
3.4 DISABILITY PAY. In the event Jones becomes unable to perform
his duties hereunder by reason of illness or accident, he
shall receive full salary during the first six (6) months of
such incapacity in any elapsed period of twelve (12) months.
The number of days during which Jones is entitled to
disability pay hereunder shall be proportionately reduced if
such incapacity occurs before the initial twelve months of
the term of employment have elapsed. Pay under this
provision shall be noncumulative. Employer may, in its sole
discretion, maintain a disability insurance policy for the
purpose of funding benefits for Jones while so incapacitated.
This provision, however, shall not in any way limit the
rights of Employer under Paragraph 4.
3.5 EXPENSES. Jones shall be entitled to receive reimbursement
for all reasonable expenses incurred by him in connection
with the performance of his duties, provided he submits an
itemized statement for such expenses to Employer and, if
required by Employer, actual receipts of the expenses so
incurred.
3.6 REIMBURSEMENT OF DISALLOWED EXPENSES. If any salary,
payment, reimbursement, employee fringe benefit, expense
allowance payment, or other expense incurred by the Employer
for the benefit of Jones is disallowed in whole or in part as
a deductible expense of Employer for federal income tax
purposes, shall reimburse the Employer, upon notice and
demand, to the full extent of the disallowance. This legally
enforceable obligation is in accordance with the provisions
of Revenue Ruling 69-115 and it is for the purpose of
entitling Jones to a business expense deduction for the
taxable year in which the repayment is made to the Employer.
In this manner the Employer will be protected from having to
bear the entire burden of a disallowed items.
<PAGE>
3.7 FRINGE BENEFITS. While he is in the employ of the Employer,
Jones shall be entitled to the following benefits:
(a) AUTOMOBILE USE. Jones shall receive Five Hundred
dollars ($500.00) per month automobile reimbursement
expense. Employee shall arrange for an "umbrella"
policy in the name of Employer or naming Employer as
an additional insured in the minimum amount of Three
Million Dollars ($3,000,000).
(b) HEALTH BENEFITS. Employer shall purchase and maintain
for the benefit of employee and his family medical
insurance providing such coverage as may from time to
time be determined by the Board of Directors.
(c) VACATION. Beginning January 18, 1996, Jones shall be
entitled each year to a vacation of four (4) weeks
during which time his compensation shall be paid in
full; provided however, Jones shall not take more than
two (2) consecutive weeks of vacation.
(d) LIFE INSURANCE. Employer and Jones agree to enter
into a Buy-Sale Agreement which will provide: Employer
shall purchase and maintain term life insurance on
Jones in an amount equal to the fair market value of
Employer s stock held by Jones. Such insurance shall
be in force for the duration of Jones employment and
proceeds of which shall be used to buy from Jones
estate Employer s stock. In the event of death of
Jones, Employer agrees to redeem and repurchase Jones
stock as soon as practicable upon receive of proceeds
of said insurance. Jones agrees his estate shall sell
his stock pursuant to a Buy-Sell Agreement.
(e) OTHER BENEFITS. Jones shall be entitled to
participate in any pension plans, or any other health
insurance plans, or other fringe benefit plan which
the Employer may adopt from time to time for the
benefit of its officers or executive employees.
(f) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. In
addition to the compensation provided for herein,
Jones shall be granted, at the Exercise Price per
share, the right during the term of this Agreement to
purchase from Employer Class A Common Stock ("Option
Shares") at the following price (the "Exercise Price")
and in the following amounts: (i) 50,000 shares at
$1.00 per share; (ii) 50,000 shares at $1.33 per
share; and (iii) 50,000 shares at $1.67 per share.
<PAGE>
(1) Payment of the option exercise price may be made
in cash, cashier s, or personal check, or to the
extent permitted by the Company, in its sole
discretion: (i) transfer to the Company of shares
of Class A Common Stock having a Fair Market
Value equal to the option exercise price at the
time of such exercise; (ii) delivery of
instructions to the Employer to withhold from the
option, shares that would otherwise be issued on
the exercise that number of option shares having
a Fair Market Value equal to the option exercise
price at the time of such exercise. If the Fair
Market Value of the whole number of shares
transferred or the number of whole option shares
surrendered is less than the total exercise price
of the option, the shortfall must be made up in
cash. As used in this subparagraph the "Fair
Market Value" shall mean the average of the
lowest bid and asked price for the thirty (30)
day period prior to the date of exercise of the
option by Jones.
(2) Delivery of a certificate representing the shares
purchased will be made within thirty (30) days of
receipt by Employer of such notice, and payment
will be due on delivery.
(3) Employee shall only sell any shares acquired by
him as permitted by SEC Rule 144(e); provided,
further, if requested by the Company s Board of
Directors, Jones shall execute a Shareholder Buy-
Sell Agreement further restricting the sale,
transfer or other disposition of the option
shares.
(4) STOCK APPRECIATION RIGHTS. Provided, however, at
Employer s sole option and in its sole
discretion, of the total 150,000 shares of
Employer s Class A Common Stock granted to
Employee in Section 3.7(f) herein, 70,000 may be
in the form of Stock Appreciation Rights (SAR).
The granting of each SAR shall reduce the
remaining number of Option Shares ratably.
(i) Payment for each SAR shall be in an amount
equal to _______ percent (____%) of the
difference between the average bid price,
for employer s Class A Common Stock, for
the five (5) business days prior to Jones
exercise of his option to purchase the
shares, and the Exercise Price.
<PAGE>
(ii) Payment for each SAR shall be made within
thirty (30) days of Jones notice to
Employer of his intent to exercise his
option to purchase the shares.
(iii) If Jones exercises his option to purchase
the shares, as provided herein, Employer
shall notify him within five (5) days of
its intent to allow the exercise of the
options or to issue the SAR.
3.8 REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(a) PIGGYBACK REGISTRATION. In the event that the
Employer files a registration statement under the
Securities Act of 1933, as amended ("Act") at any time
which relates to a current offering of securities of
the Employer (except in connection with an exchange
offer, an offer to acquire assets or a registration on
Form S-4) such registration statement and the
prospectus included therein shall also, at the written
request to the Employer by Jones, include the Shares
issued upon exercise of the Option granted herein or
options at any time previously granted and exercised
(collectively, the "Share"). The Employer shall give
written notice to Jones of its intention to file a
registration statement under the Act relating to a
current offering at least thirty (30) days prior to
the filing of such registration statement. Jones
shall thereafter have twenty (20) days in which to
request that the Shares owned by Jones be included as
part of the registration (the "Registration Notice").
Notwithstanding the foregoing or the actual filing of
the registration statement, the Employer may determine
at any time not to offer the securities to which such
registration statement relates, without liability to
Jones, except that the Employer under Paragraph 3.8(e)
below. Provided, Jones may only exercise the rights
granted under this Paragraph 3.8(a) only once a year,
but no more than three (3) times during the term of
this Agreement.
(b) EXERCISE OF REGISTRATION RIGHT. In the event that the
Registration Notice shall have been so mailed or
delivered, Jones, may mail or deliver to the Company a
written notice (the "Supplemental Notice") (i)
specifying the number of Option Shares (the
"Supplemental Registration Shares") proposed to be
sold or otherwise transferred by such holder, (ii)
<PAGE>
describing the proposed manner of sale or other
transfer thereof and (iii) requesting the registration
thereof under the Securities Act; provided, however,
that the Supplemental Notice shall be so mailed or
delivered by Jones not more than 15 days after the
date of delivery to Jones of Registration Notice.
Jones shall have no further right to cause the
Employer to register the Option Shares; provided,
however, to the extent that any Supplemental
Registration Shares specified in the Supplemental
Notice shall not have been registered (as contemplated
herein other than clause (ii) thereof), the provisions
of this paragraph 3.8 shall apply in the case of the
next registration (and, if necessary, succeeding
registrations until all the Supplemental Registration
Shares specified in the Supplemental Notice shall have
been registered.
(c) DUTIES OF EMPLOYER. In each instance, after receipt
of Supplemental Notice as provided in Section 3.8(a),
the Employer shall take action to permit a public
offering of the Shares. The Employer agrees to the
following:
(1) Employer shall supply to Jones two (2) executed
copies of the registration statement, final and
other prospectus which conform with the
requirements of the Act and Rules and Regulations
promulgated thereunder and such documents which
Jones may reasonably request.
(2) The Employer shall cooperate in taking such
action as may be reasonably necessary to register
or qualify the Shares under such other securities
acts or blue sky laws of such jurisdictions as
Jones shall reasonably request and to do any and
all other acts and things which may be necessary
or advisable to enable Jones to consummate such
proposed sales in any such jurisdiction;
provided, however, the Employer shall not be
required to qualify or register in any state or
jurisdiction which would obligate any shareholder
of the Employer to escrow their shares, (provided
that the Employer shall not be required in
connection therewith to qualify as a foreign
corporation or to execute general consent to
service of process in any state); provided,
however, that if (i) in the case of an
underwritten public offering of securities
proposed to be made by the Employer, the managing
underwriter shall advise the Employer in writing
that inclusion of some or all of such
<PAGE>
supplemental Registration Shares would, in such
managing underwriter s opinion, interfere with
the proposed distribution of the securities to be
issued by the Employer in respect of which
registration was originally to be effected, then
the Employer may, upon written notice to Jones
and to all other holders of securities which
otherwise were to be included in such
registration (other than the Employer which shall
have first priority or, in the case of a
registration for the purpose of sale or other
transfer by a holder of common shares, other than
such holder which shall have first priority),
allocate (if and to the extent such allocation is
certified by such managing underwriter as
necessary to eliminate such interference) the
Supplemental Registration Shares and such other
securities pro rata among the Supplemental
Registration Shares and such other securities,
(ii) any firm of counsel representing the
Employer in connection with such registration
shall advise the Employer in writing that in
their opinion one or more of the steps
contemplated hereby is not necessary to permit
the sale of the Supplemental Registration Shares
in a transaction constituting a public offering
within the meaning of the Securities Act, then
the Employer shall not be required to take any
action with respect to such step or steps, and
(iii) in the case of an underwritten public
offering, if the managing underwriter requires
that the Employer and all other selling security
holders agree not to sell or otherwise dispose of
securities of the Employer following the closing
of such public offering, Jones shall so agree,
provided that the period of such agreement shall
not exceed 120 days.
(3) The Employer shall keep any such registration
statement effective for a period of nine (9)
months after the initial effectiveness and
cooperate in taking such reasonable action as may
be necessary to keep effective such other
registrations and qualifications, and do any and
all other acts and things for such period as may
be necessary to permit the public sale of the
Shares by Jones.
<PAGE>
(4) If an underwriter is involved in the offering,
the Employer and Jones shall execute such
documents are as necessary.
(e) EXPENSES. Employer shall pay all expenses necessary
to effect under the Securities Act any registration
statements, amendments or supplements filed pursuant
to this paragraph 3.8 (other than underwriters
discounts and commissions and brokerage commissions,
expenses and fees, if any, payable with respect to
Option Shares sold by Jones, transfer taxes, and other
than legal fees incurred by Jones), including, without
limitation, printing expenses, fees of the Securities
and Exchange commission and the National Association
of Securities Dealers, Inc., expenses of compliance
with Blue Sky and other state, securities laws, and
accounting and legal fees and expenses, except to the
extent that such expenses are required to be paid by
Jones under applicable law or regulations.
(f) CONDITIONS. The Employer s obligation hereunder shall
be conditioned, as to each public offering, upon a
timely receipt by the Employer in writing of:
(1) Information as to the terms of such public
offering furnished by Jones.
(2) Such other information as the Employer and any
underwriter may reasonably require from Jones.
(g) TRANSFER. The Agreement and the options evidenced
hereby may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except by will,
the Laws of Descent and Distribution, or other
testamentary transfer. Each taker and holder of this
Agreement, the Options evidenced hereby and any shares
of capital stock of the Employer issued upon exercise
of any such options, by taking or holding the same,
consents to and agrees to be bound by the provisions
of this Agreement; provided, further, if requested by
the Company s Board of Directors, Jones shall execute
a Shareholder Buy-Sell Agreement further restricting
the sale, transfer or other disposition of the option
shares.
4. TERM AND TERMINATION OF AGREEMENT. The term and termination of
this Agreement shall be as follows:
4.1 TERM. The term of this Agreement shall be the period
beginning on January 20, 1996 (the "Commencement Date") and
terminate on January 19, 2001 (the "Termination Date"),
<PAGE>
(a) unless Jones shall sooner die, whereupon this
Agreement shall terminate, or
(b) unless this Agreement shall be sooner terminated by
Jones as herein provided for, or
(c) unless the Employer shall terminate this Agreement as
provided for in the next succeeding paragraph hereof,
4.2 EFFECT OF TERMINATION:
(a) RESIGNATION. In the event Employee resigns as an
employee, Employee shall have the right to
compensation as set forth in Paragraph 4.4.
(b) Termination "for cause". In the event Employee is
terminated for "for cause", Employee shall have the
right to compensation as set forth in Paragraph 3 to
the end of the month of such termination, however,
Employee waives any rights to any compensation from
and following the end of the month of termination
including but not limited to compensation, benefits or
securities payable to Employee under sections 3.1,
3.2, 3.3, 3.4, 3.5, 3.7 (a,b,c,d,e,). Employee s
salary under paragraph 3.1 shall be prorated up to the
month of such termination and Employee shall have no
right to direct Employer as to the method and manner
of payment of compensation. In the event Employee is
terminated "for cause" as defined in paragraph 4.3,
Employee shall forfeit any rights in and to any
Options.
(c) If Jones shall become ill or be injured or otherwise
become so incapacitated that he cannot, in the
judgment of the Board of Directors of Employer, fully
carry out and perform his duties hereunder, and such
incapacity shall continue for a period of six (6)
months, he shall be considered disabled. In the event
of such disability, Employer may, give to Jones
written Notice of such termination, and this agreement
shall be terminated fifteen (15) days thereafter, and
Employee shall have the right to compensation as
provided in paragraph 4.2(b).
(d) If at any time after the Commencement Date the
Employer commits a material breach of the terms an
provisions of this Agreement and fails to cure such
breach prior to the expiration of thirty (30) days
after the delivery by Jones to the Employer by written
notice setting forth the nature and extent of such
breach, Jones may terminate this Agreement thereafter
<PAGE>
by prompt written notice of such termination delivered
to the Employer, subject to Jones rights for payment
of all compensation outlined within Paragraph 3 and
Paragraph 4.3 through the term of this Agreement. The
failure by Jones to exercise his right to matters
referred to in this Paragraph 4.1 shall not be taken
or held to be a waiver by Jones of his right to
terminate this Agreement in respect of that breach and
his right to enumerated payments. The foregoing
sentence shall not limit Jones rights or remedy,
other than in regard to termination, for damages
occasioned by breach of this Agreement by Employer.
4.3 For purposes of this Agreement termination "for cause" shall
mean:
(a) disloyalty, including conflicts of interest and other
circumstances amounting to a breach of fiduciary duty,
or dishonesty toward or involving Employer;
(b) repeated failure or refusal to carry out the
directions of the board of Directors of the Employer,
which directions are consistent with the duties herein
required of the Employee;
(c) violation of the state or federal criminal laws
involving the conviction of a felony;
(d) medical certification that the Employee is unable to
carry out his duties by reason of insanity or physical
disability;
(e) any material breach of the terms of this Agreement;
and
(f) breach of fiduciary duty by Employee.
Notice by Employer under Paragraph 4.2(b) above shall state
generally the reason or reasons for termination; and such
notice under Paragraph 4.2(c) shall identify the period of
incapacity; provided, however, that the reasons stated in the
notice pursuant to Paragraph 4.2(b) shall in no event be
considered a waiver by the Employer of the reasons for such
termination.
<PAGE>
4.4 SEVERANCE PAY. In the event the Board of Directors of
Employer terminates the employment of Jones for any reason
other than the provisions of Paragraph 4.2(b), Jones shall be
entitled to his salary under 3.1 for a period of three (3)
months, and his bonus prorated for such year of termination
computed as described herein. Said sums shall be paid to
Jones in a manner that minimizes tax liability for Jones, all
at the request of Jones. Jones retains the right to all
compensation (other than salary as specified above) earned to
the date of termination [specifically all compensation,
benefits or securities earned under sections 3.2, 3.4, 3.5,
3.7 (a,b,c,d,e,f); provided, however, in the event Jones
still has options upon the date of termination, such Options
must be exercised within three (3) months of termination. If
such termination occurs other than on December 31, the bonus
provided for under paragraph 3.3 in the year of termination
shall be prorated to each of the following dates, as
appropriate, and computed based upon the Company s
performance as follows: July 15 based on a computation for
the first quarter of Employer s operations; October 15 based
on a computation for the second quarter of Employer s
operations; and on December 31 based on a computation for the
remainder of the year of Employer s operations; provided,
however, nothing herein shall be construed to entitle Jones
to a Bonus attributable to a period of time after
termination.
4.5 NO WAIVER. The failure by Employer to exercise its right to
terminate Jones employment under this Agreement with respect
to any one or more of the matters referred to in Paragraph
4.2 above, or with respect to any incapacity of Jones which
would give rise to the Employer having a right to terminate
this Agreement, as provided for above, shall not be taken or
held to be a waiver by the Employer of its right of
termination of this Agreement in respect of that breach or
incapacity (provided it shall be continuing) or of any
subsequent breach or incapacity, Paragraph 4.2 shall not
limit the Employer s rights or remedies, other than in regard
to termination, for a breach of this Agreement by Jones.
4.6 RIGHTS PRESERVED. In the event that at any time during the
term of this Agreement, the Employer shall be liquidated or
dissolved or merged into or consolidated with another
corporation, all rights of Jones under this Agreement shall
be preserved unimpaired, and all liabilities and obligations
of Employer hereunder shall thenceforth flow to the entity
receiving the properties and assets of Employer in such
liquidation and dissolution, or the surviving corporation in
such merger or consolidation, and may be enforced against
corporation in such merger or consolidation, and may be
<PAGE>
enforced against it to the same extent as if this Agreement
had been entered into by it; provided, however, that in the
event Employer is merged into another corporation and is not
the surviving entity, Jones shall exercise his Options prior
to the effective date of such merger and, if such Options are
not so exercised, then they shall automatically expire and
terminate.
5. DISCLOSURE OF INFORMATION. Jones will not, during or any time
after termination of employment hereunder, without written
authorization of Employer, disclose to, or make use of, for
himself or for any person or corporation or other entity, any
files or trade secrets or other confidential or proprietary
information concerning the business, clients, methods, operations,
financing, or services of Employer. Trade secrets and
confidential information shall mean the information disclosed to
Jones or known by him as a consequence of his employment by
Employer, whether or not pursuant to this Agreement and not
generally known in the industry.
6. SURRENDER OF BOOKS AND RECORDS. Jones acknowledges that all
files, lists, books, records, products, and other materials owned
by Employer or used by it in connection with the conduct of its
business shall at all times remain the property of Employer and
that upon termination of employment hereunder, irrespective of the
time, manner, or cause of such termination, Jones will surrender
to the Employer all such files, lists, books, records, products,
and other materials.
7. SEVERABILITY. If any provisions of this Agreement shall be held
invalid or unenforceable, the remainder of this Agreement shall,
nevertheless, remain in full force and effect. If any provisions
are held invalid or unenforceable with respect to particular
circumstances, it shall nevertheless, remain in full force and
effect in all other circumstances.
8. NOTICE. All notices required to be given under the terms of this
Agreement shall be in writing, shall be effective, upon receipt,
and shall be delivered to the addressee in person or mailed by
certified mail, return receipt requested:
If to Employer: Source Capital Corporation
c/o Chairman of the Board
1825 N. Hutchinson Road
Spokane, WA 99212
If to Jones: D. Michael Jones
2804 E. 30th, MSC 212
Spokane, WA 99223
<PAGE>
9. BENEFIT. This Agreement shall inure to and shall be binding upon
the parties hereto, the successors and assigns of Employer and the
heirs and personal representatives of Jones. This Agreement
cannot be assigned by Jones because of the personal services
required of Jones.
10. WAIVER. The waiver by either party of any breach or violation of
any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach or violation hereof.
11. GOVERNING LAW. This Agreement has been negotiated and executed in
the State of Washington, and the law of that state shall govern
its construction and validity.
12. ARBITRATION. Any controversy arising out of, connected to, or
relating to any matters herein of the transactions between
Employee and Employer (including for purposes of arbitration,
officers, directors, employees, controlling persons, affiliates,
professional advisors, accountants, attorneys, agents, or
promoters of the Employer), on behalf of the undersigned, or this
Agreement, or the breach thereof, including, but not limited to
any claims of violations of Federal and/or State Securities Acts,
Banking Statutes, Consumer Protection Statutes, Federal and/or
State anti-Racketeering (e.g. RICO) claims as well as any common
law claims and any State Law claims of breach of contract, fraud,
negligence, negligent misrepresentations, unlawful discharge,
and/or conversion shall be settled by arbitration; and in
accordance with this paragraph and judgment on the arbitrator s
award may be entered in any court having jurisdiction thereof in
accordance with the provisions of RCW 7.04. In the event of such
a dispute, each party to the conflict shall select an arbitrator,
both of whom shall select a third artbitrator, which shall
constitute the three person arbitration board. The decision of a
majority of the board of arbitrators, who shall render their
decision within thirty (30) days of appointment of the final
arbitrator, shall be binding upon the parties. Venue for
arbitration and any action herein shall lie in Spokane County,
State of Washington. The laws of the State of Washington shall
apply herein.
13. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto with respect to the employment of Jones
by Employer. No change, addition, or amendment shall be made
except by written agreement signed by the parties hereto.
14. REPRESENTATIONS AND WARRANTIES OF JONES. Jones hereby represents
and warrants to the Employer:
(a) Jones understands that this Agreement and the Common Stock to
be issued herein, HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, THE STATE
OF WASHINGTON, OR ANY OTHER STATE SECURITIES AGENCIES.
<PAGE>
(b) Jones is not an underwriter and would be acquiring this
Agreement and the Common Stock to be issued, solely for
investment for his own account and not with a view to, or
for, resale in connection with any distribution of stock
within the meaning of the Federal Securities Acts, the
Washington State Securities Act, or any other applicable
State Securities Acts.
(c) Jones understands the speculative nature and risks of
investments associated with the Employer, and confirms that
this Agreement and the Common Stock to be issued would be
suitable and consistent with his investment program and that
his financial position enables it bear the risks of this
investment; and that there may not be any public market for
this Agreement and the Common Stock to be issued herein.
(d) This Agreement and the Common Stock to be issued herein may
not be transferred, encumbered, sold, hypothecated, or
otherwise disposed of to any person, without the express
prior written consent of the Employer, and the prior opinion
of counsel for the Employer, that such disposition will not
violate Federal and/or State Securities Acts. Disposition
shall include, but is not limited to acts of selling,
assigning, transferring, pledging, encumbering,
hypothecating, giving, and any form of conveying, whether
voluntary or not.
(e) To the extent that any Federal and/or State Securities law
shall require, Jones hereby agrees that: (1) any shares
acquired pursuant to this Agreement shall be without
preference as to dividends, assets, or voting rights and
shall have no greater or lesser rights per share than the
securities issued for cash or its equivalent; (2) any shares
acquired pursuant to this Agreement shall be subordinated in
favor of the securities to be sold to the public with respect
to dividend rights or preferences and liquidation or other
distribution rights or preferences in the event of a
dissolution, liquidation, bankruptcy, receivership, or sale
of all or substantially all of such issuer s assets until
such time as the purchasers of the public stock offering
shall have received back their initial investment at which
time all Jones shall share pro rata in any further
distribution.
(f) Jones has fully reviewed or had the opportunity to review the
economic consequences of this Agreement and the Common Stock
to be issued, with his attorney and/or other financial
advisor, has been afforded access to the books and records of
the Corporation (including tax returns) and is or has had the
opportunity to become fully familiar with the financial
affairs of the Corporation.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date set forth above.
EMPLOYER:
SOURCE CAPITAL CORPORATION
By
--------------------------------------------
Title
-----------------------------------------
EMPLOYEE:
-----------------------------------------------
D. MICHAEL JONES
<PAGE>
