U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
Amendment No. 1 to
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
to
------------------ -----------------.
Commission file number: 0-12199
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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 (Zip Code)
executive offices)
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
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. [ ]
The issuer's revenues for its most recent fiscal year: $5,129,610.
The aggregate market value of the voting common equity held by non-
affiliates as of March 5, 1998: $9,757,838.
The number of shares outstanding of each of the issuer's classes of
common equity, as of March 5, 1998: 1,355,818.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant's Proxy Statement to be filed with the
Securities and Exchange Commission prior to April 29, 1998, pursuant
to Regulation 14A of the Securities Exchange Act of 1934 in connection
with the 1998 annual meeting of registrant's shareholders are
incorporated herein by reference into Part III of this report.
Transitional Small Business Disclosure Format (check one):
Yes ; No X .
--- ---
<PAGE>
PART II
Item 7. Financial Statements.
-----------------------------
The report of independent certified public accountants appearing at
page 12 of the registrant's Form 10-KSB Annual Report for the year
ended December 31, 1997 is hereby deleted and replaced by the reports
of independent certified public accountants dated for the years ended
December 31, 1997 and December 31, 1996 attached as a part of the
Consolidated Financial Statements filed as a part of this report.
<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: July 29, 1998 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: July 29, 1998 By: /s/ D. Michael Jones
-------------- ---------------------------------------
D. Michael Jones, President
(Principal Executive Officer), Director
Date: July 29, 1998 By: /s/ Lester L. Clark
-------------- ---------------------------------------
Lester L. Clark, Vice President,
Treasurer and Secretary (Principal
Accounting and Financial Officer)
Date: July 29, 1998 By: /s/ Alvin J. Wolff, Jr.
-------------- ---------------------------------------
Alvin J. Wolff, Jr., Director,
Chairman of the Board
Date: July 29, 1998 By: /s/ Clarence H. Barnes
-------------- ---------------------------------------
Clarence H. Barnes, Director
Date: July 29, 1998 By: /s/ Robert E. Lee
-------------- ---------------------------------------
Robert E. Lee, Director
Date: July 29, 1998 By: /s/ Daniel R. Nelson
-------------- ---------------------------------------
Daniel R. Nelson, Director
Date: July 29, 1998 By: /s/ Charles G. Stocker
-------------- ---------------------------------------
Charles G. Stocker, Director
Date: July 29, 1998 By: /s/ John A. Frucci
-------------- ---------------------------------------
John A. Frucci, Director
<PAGE>
SOURCE CAPITAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Source Capital Corporation and Subsidiaries
Spokane, Washington
We have audited the accompanying consolidated balance sheet of Source
Capital Corporation and subsidiaries as of December 31, 1997 and the
related consolidated statements of income, changes in stockholders'
equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Source Capital Corporation and subsidiaries as of December 31,
1997, and the consolidated results of their operations and their cash
flows for the year then ended, in conformity with generally accepted
accounting principles.
/S/BDO SEIDMAN, LLP
Spokane, Washington
July 28, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Source Capital Corporation
Spokane, Washington
We have audited the accompanying balance sheet of Source Capital
Corporation as of December 31, 1996 and the related statements of
income, changes in stockholders' equity and cash flows for the year
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 audit.
We conducted our audit 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 audit provides 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 the results of its
operations and its cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/S/PricewaterhouseCoopers LLP
Spokane, Washington
January 24, 1997
<PAGE>
SOURCE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
----------- -----------
ASSETS
Loans receivable, net $36,551,013 $26,059,031
Leases receivable, net 2,917,145
Finance receivables, net 104,244
Accrued interest receivable 345,424 295,047
Cash and cash equivalents 473,551 21,506
Marketable securities 250,724 740,004
Real estate owned 556,342 916,196
Other assets 391,614 360,839
Deferred income taxes 1,456,239 1,685,535
----------- -----------
Total assets $43,046,296 $30,078,158
=========== ===========
LIABILITIES
Note payable to bank $26,990,096 $14,000,000
Long-term debt 3,187,539 3,214,824
Accounts payable and accrued expenses 512,792 550,638
----------- -----------
Total liabilities 30,690,427 17,765,462
----------- -----------
Commitments (Notes 2, 8 and 10)
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000
shares authorized, none outstanding
Common stock, no par value, authorized
10,000,000 shares; issued and out-
standing, 1,355,818 and 1,417,200 shares 7,038,802 7,462,827
Additional paid-in capital 2,049,047 2,049,047
Net unrealized loss on marketable
securities (27,143) (10,480)
Retained earnings 3,295,163 2,811,302
----------- -----------
Total stockholders' equity 12,355,869 12,312,696
----------- -----------
Total liabilities and stockholders'
equity $43,046,296 $30,078,158
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997 and 1996
1997 1996
----------- -----------
Financing income:
Interest and fee income $ 4,866,935 $ 2,843,874
Lease financing income 188,158
Rental income, net 25,960 584,005
Interest expense (2,016,322) (1,069,372)
----------- -----------
Net financing income 3,064,731 2,358,507
Other income and provision for loan
losses:
Gains on investments and real estate
(net) 48,557 570,577
Provision for loan and lease losses (23,000) (95,000)
----------- -----------
Income before operating expense 3,090,288 2,834,084
----------- -----------
Operating expense:
Employee compensation and benefits 1,253,593 920,850
Other operating expenses 712,835 629,279
----------- -----------
Total non-interest expenses 1,966,428 1,550,129
----------- -----------
Income before income taxes 1,123,860 1,283,955
----------- -----------
Income tax provision:
Current (155,604) (397,235)
Deferred (229,296) (39,765)
----------- -----------
Total income tax provision (384,900) (437,000)
----------- -----------
Net income $ 738,960 $ 846,955
=========== ===========
Net income per common share - basic $ .54 $ .60
=========== ===========
Net income per common share - diluted $ .54 $ .59
=========== ===========
Weighted average number of basic common
shares outstanding 1,373,850 1,422,111
=========== ===========
Weighted average number of diluted
common shares outstanding 1,373,850 1,443,115
=========== ===========
Cash dividends per share $ .18 $ .15
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Additional Losses on
----------------------- Paid-in Marketable Retained
Shares Amount Capital Securities Earnings
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
capitalization of unclaimed distributions (4,925) 11,551
Net income 846,955
Net change in unrealized losses on marketable
securities (22,876)
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1996 1,417,220 7,462,827 2,049,047 (10,480) 2,811,302
Cash dividend ($.18 per share) paid February 28,
1997 (255,099)
Stock options granted 8,800
Redemption and cancellation of outstanding
common stock (62,588) (432,825)
Exercise of common stock options, net of reduction 1,186
Net income 738,960
Net change in unrealized losses on marketable
securities (16,663)
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1997 1,355,818 $7,038,802 $2,049,047 $ (27,143) $3,295,163
========== ========== ========== ========== ==========
</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 consolidated
financial statements.
<PAGE>
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 738,960 $ 846,955
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 31,665 21,745
Provision for loan and lease losses 23,000 95,000
Impairment loss on real estate owned 120,000
Deferred income tax provision 229,296 39,765
(Gain) loss on sale of marketable securities (4,559) 15,860
Gain on sale of real estate owned (43,998) (700,841)
Gain on sale of office furniture and equipment (5,594)
Compensation expense associated with options
granted 8,800
Change in:
Accrued interest and other assets (781) (380,776)
Accounts payable and accrued expenses (30,291) 409,274
----------- ----------
Net cash provided by operating activities 952,092 461,388
----------- ----------
Cash flows from investing activities:
Purchases of marketable securities (299,877)
Proceeds from sale of marketable securities 477,176 94,122
Loan originations (21,143,542) (21,729,608)
Loan repayments 10,923,154 10,943,335
Additions to direct financing leases (3,717,495)
Collections on direct financing leases 782,350
Additions to financed receivables (162,496)
Collections on financed receivables 58,252
Capitalization of costs related to real estate owned (5,929) (139,719)
Proceeds from sale of real estate owned 139,198 1,247,651
Purchase of office furniture and equipment (118,786) (95,172)
Proceeds from sale of office furniture and equipment 739 52,897
----------- ----------
Net cash used in investing activities (12,767,379) (9,926,371)
----------- ----------
Cash flows from financing activities:
Proceeds from line of credit borrowings 23,513,527 18,170,500
Payments on line of credit borrowings (10,523,431) (12,070,500)
Proceeds from long-term debt 3,220,000
Payments of long-term debt (34,840) (5,176)
Payments for redemption of common stock (432,825) (8,252)
Cash dividends paid (255,099) (213,457)
----------- ----------
Net cash provided by financing activities 12,267,332 9,093,115
----------- ----------
Net change in cash and cash equivalents 452,045 (371,868)
Cash and cash equivalents, beginning of year 21,506 393,374
----------- -----------
Cash and cash equivalents, end of year $ 473,551 $ 21,506
=========== ===========
</TABLE>
<PAGE>
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $ 1,945,234 $1,035,456
Income taxes paid 494,825 199,309
Non-cash financing and investing transactions:
Financing of sales of real estate owned 377,194 3,800,000
Loans and interest converted to real estate owned
through repossession (106,611) (293,845)
Conversion of accounts payable to capital (11,551)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SOURCE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
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.
Approximately 85% of the Company's loan portfolio is
collateralized by real estate located in the Pacific Northwest.
In April 1997, the Company began equipment leasing operations
through its wholly owned subsidiary, Source Capital Leasing
Company, and in November 1997 began an accounts receivable
factoring operation through its other wholly owned subsidiary,
Source Capital Finance, Inc.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
LOANS RECEIVABLE
Loans receivable are reported at outstanding balance, including
principal and accrued interest, and adjusted for the allowance for
losses and any deferred fees or costs.
Loan origination fees, net of certain direct origination costs,
are deferred and amortized as an adjustment of yield over the term
of the related loan.
ALLOWANCE FOR LOSSES ON LOANS AND LEASES
The allowance for credit losses is based on a current evaluation
of the probable losses in the Company's loan and lease portfolios.
Provision for loss is recognized based on the estimated fair value
of the underlying collateral, net of selling costs.
LEASES RECEIVABLE
The Company accounts for its portfolio of leases receivable as
direct financing leases, and accordingly, records the minimum
lease payments, including any unguaranteed residual value.
The Company reports its net investment in direct financing leases
as an asset in its consolidated balance sheet. Unearned revenue
from finance income, after deducting initial direct costs, is
recognized as revenue over the term of the lease so as to produce
a constant periodic rate of return on the Company's investment in
the lease.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
FINANCE RECEIVABLES
The Company records the finance receivables under factoring
arrangements at the full balance of the factored receivable. The
Company expects that these amounts will be repaid through
collection of the receivable rather than by direct repayment from
the customer.
Fees related to factoring activities are recognized in income over
the period during which services are provided.
CASH EQUIVALENTS
The Company considers cash equivalents to be 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 federal depository insurance limits.
The Company places such deposits with high-credit quality
institutions and has not experienced any losses.
MARKETABLE SECURITIES
The Company invests 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 operations
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, which are recognized in
operations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
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.
INCOME RECOGNITION
Interest income from loans is recognized using the accrual method.
Accrual of income is suspended when a loan is contractually
delinquent for 90 days or more, unless the value of the underlying
collateral exceeds the sum of the loan and accrued interest
balances. The accrual is resumed when the loan becomes
contractually current, and past-due interest income is recognized
at that time, unless collection of the loan and interest is
doubtful.
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.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
income tax consequences of transactions that have been recognized
in the 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 5).
The Company files a consolidated income tax return with its
subsidiaries.
NET INCOME PER SHARE
Net income per share - basic is computed by dividing net income by
the weighted-average number of common shares outstanding during
the period. Net income per share diluted is computed by
dividing net income by the weighted-average number of common
shares outstanding increased by the additional common shares that
would have been outstanding if the dilutive potential common
shares had been issued.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
NET INCOME PER SHARE, CONTINUED
The net income per share disclosures have been made in accordance
with SFAS No. 128, "Earnings per Share," which was applied by the
Company in 1997. In accordance with SFAS No. 128, all prior net
income per share data has been restated to conform to this
presentation. During the year ended December 31, 1997,
outstanding stock options were not included in the computation of
earnings per share because the effect was antidilutive. During the
year ended December 31, 1996, stock options outstanding resulted
in the addition of 21,004 weighted-average shares to the diluted
net income per share computation.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 131, Disclosures about Segments for an Enterprise and
Related Information ("SFAS No. 131"). This Statement will require
public companies to report selected information about segments in
their annual financial statements and requires public companies to
report selected segment information in their reports to
shareholders. It also requires entity-wide disclosures about the
products and services an entity provides, and its major customers.
The Statement is effective for fiscal years beginning after
December 15, 1997. The Company has not yet determined the effect,
if any, of SFAS No. 131 on its consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. This Statement requires that comprehensive
income be reported in a financial statement and displayed with the
same prominence as other financial statements. This Statement
will require the Company to report unrealized gains and losses on
investment securities as components of comprehensive income.
Management has not yet determined which format it will choose to
display comprehensive income. This Statement is effective for
fiscal years beginning after December 15, 1997.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
RECLASSIFICATIONS
Certain 1996 balances have been reclassified to conform with the
1997 presentation with no effect on retained earnings or net
income as previously reported.
2. LOANS AND LEASES 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, 1997,
approximately 94% 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, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
Effective
Weighted- Yield
Average on Average
Contractual Loans
1997 Amount Interest Rate Outstanding
----------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Commercial real estate loans $ 36,553,916 12.58% 16.17%
Residential real estate loans 526,581 14.13 14.07
------------
Gross loans receivable 37,080,497
Unearned discounts and fees (324,518)
Allowance for loan losses (204,966)
------------
Loans receivable, net $ 36,551,013
============
1996
-----------------------------
Commercial real estate loans $26,493,090 12.33% 17.10%
Residential 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
============
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. LOANS AND LEASES RECEIVABLE, CONTINUED:
Included in the 1997 totals above are two commercial loans
totaling approximately $455,000 which have been identified as non-
performing and are not accruing interest. Interest income of
$28,483 was recognized on these loans during the year ended
December 31, 1997. Had these loans performed in accordance with
their original terms, interest income of $61,856 would have been
recognized. There were five commercial real estate loans totaling
approximately $856,000, which were non-performing at December 31,
1996. 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. The average recorded
investment in impaired loans during the years ended December 31,
1997 and 1996 was $555,000 and $521,500, respectively.
The following table sets forth the final scheduled maturity dates
of the principal balances of loans in the portfolio at
December 31, 1997:
Loans Maturing in
Year Ending
December 31, Commercial Residential Total
----------------- ----------- ----------- -----------
1998 $25,900,981 $ 9,653 $25,910,634
1999 4,628,198 4,628,198
2000 1,441,594 4,139 1,445,733
2001 4,246 4,246
2002 384,055 19,691 403,746
Thereafter 4,199,088 488,852 4,687,940
----------- ----------- -----------
$36,553,916 $ 526,581 $37,080,497
=========== =========== ===========
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 eleven borrowers exceeding
$1,000,000 individually, which aggregate approximately
$17,550,000 at December 31, 1997. Included in the aforementioned
total is a loan of approximately $3,800,000 which the Company
originated on the sale of its shopping center (see note 4). 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. Actual results
could vary from estimates in the near term.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. LOANS AND LEASES RECEIVABLE, CONTINUED:
At December 31, 1997, the Company has outstanding loan
commitments aggregating approximately $1,800,000.
Following are the components of the Company's investment in
leases receivable at December 31, 1997:
Minimum lease payments receivable $ 3,671,404
Contingent rentals for interim rent receivable 13,498
Unguaranteed residual value 224,640
-----------
Gross leases receivable 3,909,542
Less unearned finance income (974,397)
Less allowance for uncollectible leases (18,000)
-----------
Net investment in leases receivable $ 2,917,145
===========
Future minimum lease payments receivable at December 31, 1997 are
as follows:
Year Ending
December 31,
------------
1998 $ 999,446
1999 992,907
2000 919,437
2001 508,075
2002 251,539
-----------
$ 3,671,404
===========
The following is a summary of the changes in the allowance for
loan and lease losses for the years ended December 31, 1997 and
1996:
1997 1996
----------- -----------
Beginning balance $ 176,076 $ 87,167
Recoveries 23,920
Provision 23,000 95,000
Write offs (6,121)
----------- -----------
Ending balance $ 222,996 $ 176,076
=========== ===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. MARKETABLE SECURITIES:
The amortized cost and estimated market values of available-for-
sale debt and equity securities at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
Carrying/
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1997:
Equity securities $ 277,867 $ 8,347 $ 35,490 $ 250,724
========= ========== ========== =========
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
========= ========== ========== =========
</TABLE>
4. REAL ESTATE OWNED:
Real estate owned consists primarily of real estate obtained upon
loan foreclosures and development property as follows:
1997 1996
-------- --------
Undeveloped real estate $556,342 $511,212
Other 404,984
-------- --------
$556,342 $916,196
======== ========
In 1996, the Company recognized approximately $568,000 in net
rental income from a retail shopping center, which was acquired
through foreclosure in 1995. The income was partially offset by
interest carrying cost of approximately $280,000. In October
1996, the Company placed permanent financing on the shopping
center in the amount of $3,220,000. See Note 7.
In December 1996, the Company sold the shopping center for
approximately $4,800,000 (less selling costs) and financed a
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 on real
estate in 1996 of approximately $571,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES:
The income tax provision in the statements of income represents
34.0% of pre-tax income for the years ended December 31, 1997 and
1996, which approximates the federal statutory rate.
The tax effect of the temporary differences and carryforwards
giving rise to the Company's deferred tax assets at December 31,
1997 and 1996 is as follows:
1997 1996
---------- ----------
Net operating loss carryforwards $1,075,479 $1,227,853
Deferred compensation 319,215 285,900
Allowances for loan and lease losses 120,361 103,241
Other (58,816) 68,541
---------- ----------
$1,456,239 $1,685,535
========== ==========
Net operating loss carryforwards that will expire before
utilization have been excluded from the deferred tax asset. No
valuation allowance has been established for any 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.
At December 31, 1997, the Company has regular and alternative
minimum tax net operating loss carryforwards available to offset
future taxable income. These carryforwards expire as follows:
Year Ending Alternative
December 31, Regular Minimum
------------ ---------- -----------
2001 $ 16,000
2002 499,000
2003 2,045,000 $ 446,000
2004 612,000 612,000
2006 26,000 26,000
---------- -----------
$3,198,000 $ 1,084,000
========== ===========
Due to the Company's change in ownership 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 are limited to approximately $448,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LINE-OF-CREDIT AGREEMENT:
The Company has a $30,000,000 revolving line-of-credit agreement
with Seafirst Bank which expires on April 30, 1998. Borrowings
under the line-of-credit agreement bear interest at .375% over
the bank's prime rate (8.875% at December 31, 1997). At
December 31, 1997, there was $24,635,000 outstanding under the
line-of-credit agreement. All 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 plus
subordinated debt (see note 12) of at least $11,500,000. The
Company was in compliance with all terms and covenants of the
line of credit agreement at December 31, 1997. The line is
annually renewable and the Company expects the line will be
renewed on its expiration date.
Additionally, the Company's wholly owned subsidiary, Source
Capital Leasing Co. has a separate $4,000,000 line of credit with
Seafirst Bank. Each advance under this line is evidenced by a
separate note, and shall be no greater than 100% of equipment
cost less security deposits and advance payments. Advances under
the line of credit bear interest at a London Interbank Offered
Rate (LIBOR) based rate, which approximates prime less .50%.
Maturities shall not exceed 60 months and are matched to the
specific lease to which it applies. At December 31, 1997,
$2,355,096 was outstanding under the line-of-credit agreement.
The commitment under this line expires May 1, 1998 and is
renewable annually. The Company expects the line will be renewed
at that time.
7. 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 3.75% added to the six months
LIBOR 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. The Company
remains liable on the first mortgage.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT, CONTINUED:
Aggregate amounts of principal due on this long-term debt are as
follows:
Year Ending
December 31,
------------
1998 $ 36,350
1999 40,009
2000 44,036
2001 48,468
2002 53,347
Thereafter 2,965,329
----------
$3,187,539
==========
8. 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, 1997 and 1996, no Preferred Stock
is outstanding.
COMMON STOCK OPTIONS
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. CAPITAL STOCK, CONTINUED:
COMMON STOCK OPTIONS, CONTINUED
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.
In 1996 the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123). As 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>
1997 1996
-------------------- --------------------
As Pro As Pro
Reported Forma Reported Forma
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income $738,960 $682,516 $846,955 $755,116
======== ======== ======== ========
Net income per share - basic $ 0.54 $ 0.50 $ 0.60 $ 0.53
======== ======== ======== ========
Net income per share - diluted $ 0.54 $ 0.50 $ 0.59 $ 0.52
======== ======== ======== ========
</TABLE>
The fair value of each option grant is estimated on the date of
grant using an option-pricing model with the following weighted-
average assumptions used for grants in 1997 and 1996,
respectively: dividend yield of 0% in each year, as there has
been no regular dividend payment history, expected volatility of
27% and 60%; risk-free interest rates of 6.69% to 6.89% and 5.81%
to 5.91%; and expected lives of 7.03 and 5.02 years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. CAPITAL STOCK, CONTINUED:
COMMON STOCK OPTIONS, CONTINUED
A summary of the status of the Company's Plans as of December 31,
1997 and 1996 and changes during the years ended on those dates
is presented below:
1997 1996
----------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
Outstanding at begin-
ning of year 116,900 $6.72 62,400 $6.39
Granted 25,000 5.73 64,500 7.09
Expired (4,000) 5.33
Canceled (6,000) 4.85
Exercised (3,000) 4.38
------- ----- ------- -----
Outstanding at end of
year 138,900 $6.54 116,900 $6.72
======= ===== ======= =====
Options exercisable at
end of year 111,180 $6.73 101,810 $6.66
======= ===== ======= =====
Weighted-average fair
value of options
granted during the
year $6.08 $4.50
===== =====
During 1997, option holders exercised 3,000 options through a non-
cash transaction which resulted in 1,186 common shares being
issued.
The following table summarizes information about the Plan's stock
options at December 31, 1997:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. CAPITAL STOCK, CONTINUED:
COMMON STOCK OPTIONS, CONTINUED
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices December 31, 1997 Contractual Life Exercise Price December 31, 1997 Exercise Price
--------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$4.00-$4.99 24,400 7.0 years $4.60 21,580 $4.62
$5.00-$5.99 25,000 7.0 5.18 10,000 5.00
$6.00-$6.99 20,000 6.1 6.51 20,000 6.51
$7.00-$7.99 29,500 9.0 7.25 22,000 7.25
$8.00-$8.99 38,000 5.6 8.19 35,600 8.15
$9.00-$9.99 2,000 6.4 9.40 2,000 9.40
------- -------
138,900 111,180
======= =======
</TABLE>
The Company recognized $8,800 of compensation expense in 1997
under the Plans.
9. BENEFIT PLANS:
The Company has a non-qualified retirement plan for its Chairman
of the Board and former President (the Chairman) under which (at
his annual election), all or a portion of his salary and bonuses
are placed into an off-balance sheet 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
fund are restricted solely for the distribution to the Chairman
upon his retirement, termination or death. From the date of the
plan, the Chairman has elected to defer all salary and bonus.
From its inception in January 1992, $938,868 of salary and
bonuses has been placed into the trust.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. 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 1997 and 1996 was $29,572
and $21,576, respectively.
10. 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 $8,213 which is subject
to adjustment on March 1, 1998 based on the increase in the
consumer price index over the prior year. The Company leases the
entire first floor of the building. The Company may, at its
option, sublease any unoccupied portion of its space. The
Company additionally assumed an existing lease on its Seattle
office.
Future minimum lease payments under these non-cancelable lease
agreements are as follows:
Year Ending
December 31,
------------
1998 $ 128,508
1999 128,508
2000 128,508
2001 59,865
----------
$ 445,389
==========
Total rent expense for the years ended December 31, 1997 and 1996
was approximately $113,000 and $76,000, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
CASH AND CASH EQUIVALENTS - Carrying value approximates fair
value.
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.
LEASES RECEIVABLE - Fair values are determined using the
discounted value of future cash flows at a rate currently
offered for leases of similar characteristics.
NOTE PAYABLE TO BANK AND LONG-TERM DEBT - Fair value
approximates the carrying value because the notes bear current
interest rates.
The estimated fair values of the following financial
instruments as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 473,551 $ 473,551 $ 21,506 $ 21,506
Marketable securities 250,724 250,724 740,004 740,004
Loans receivable
(face):
Commercial 36,553,916 37,484,613 26,493,090 27,888,306
Real estate 526,581 659,119 169,646 189,930
Leases receivable 3,909,542 3,973,398
Financial liabilities:
Note payable to bank 26,990,096 26,990,096 14,000,000 14,000,000
Long-term debt 3,187,539 3,187,539 3,214,824 3,214,824
</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 on judgments regarding current economic
conditions and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
Accordingly, the estimates presented herein are not necessarily
indicative of what the Company could realize in a current market
exchange.
12. SUBORDINATED DEBENTURES:
On February 11, 1998, the Company sold $6,000,000 of Subordinated
Convertible Debentures. The debentures carry an interest rate of
7.50%, mature on March 1, 2008 and are convertible into common
stock at the rate of $8.01 per share. These debentures were sold
through a private placement to institutional investors. The
Company intends to file a registration statement prior to
July 31, 1998 to register the shares of common stock into which
the debentures may be converted. The debentures are convertible
at any time after the earlier of September 30, 1998, or the date
the registration statement becomes effective, until maturity.
Interest on the debentures is payable semiannually in arrears
each March 1 and September 1, commencing September 1, 1998. The
debentures are redeemable, in whole or in part, at any time on or
after March 1, 2001, at the option of the Company. The
debentures are unsecured general obligations of the Company
subordinate in right of payment to all existing and future Senior
indebtedness of the Company. Senior indebtedness includes, but
is not limited to, all current bank lines-of-credit and any
future increases to these lines as well as any new borrowings
from financial institutions.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 21506 473551
<SECURITIES> 740004 250724
<RECEIVABLES> 26059031 39572402
<ALLOWANCES> 176046 222966
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 30078158 43046296
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 7462827 7038802
<OTHER-SE> 2049047 2049047
<TOTAL-LIABILITY-AND-EQUITY> 30078158 43046296
<SALES> 342879 5081053
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1550129 1966428
<LOSS-PROVISION> 95000 41000
<INTEREST-EXPENSE> 1069372 2016322
<INCOME-PRETAX> 1283955 1123860
<INCOME-TAX> 437000 384900
<INCOME-CONTINUING> 846955 738960
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 846955 738960
<EPS-PRIMARY> .60<F1> .54
<EPS-DILUTED> .59<F1> .54
<FN>
<F1>Reflects the adoption in fourth quarter 1997 of FAS 128, a new standard
of computing and presenting both basic and diluted net income per share.
</FN>
</TABLE>
