UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Quarterly Period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _______________________
Commission file no. 0-20863
CAPITAL FACTORS HOLDING , INC.
------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
FLORIDA 65-0500757
- -------------------------------- ----------------------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1799 West Oakland Park Boulevard, Fort Lauderdale, Florida 33311
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(954) 730-2900
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports). and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
- ------ -----
As of August 14, 1996 there were 12,300,000 shares of the registrant's Common
Stock outstanding.
Page 1 of 17 Pages
<PAGE>
ITEM 1.
PART I. FINANCIAL INFORMATION
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
(Unaudited) (Audited)
ASSETS
Cash $ 15,398,113 $ 20,326,814
Restricted Cash 6,562,500 16,187,500
Receivables 425,520,351 361,205,965
Unearned discounts (3,658,557) (3,404,016)
Allowance for credit losses (2,802,927) (2,980,778)
------------- -------------
Receivables, net 419,058,867 354,821,171
Property and equipment, net 3,215,798 3,285,049
Other Assets 4,562,405 4,850,831
------------- -------------
TOTAL $ 448,797,683 $ 399,471,365
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Due to affiliates $ 3,098,194 $ 6,452,964
Capital Factors variable rate asset
backed certificates 175,000,000 175,000,000
Notes payable to affiliates 61,155,000 52,260,000
Other borrowings 29,300,000 0
Due to factoring clients 139,576,870 128,577,577
Other liabilities 2,866,060 3,840,425
------------- -------------
Total liabilities 410,996,124 366,130,966
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $0.01 par value, 10,000,000
shares authorized, issued and outstanding 100,000 100,000
Additional paid-in capital 9,542,096 9,542,096
Retained earnings 28,159,463 23,698,303
------------- -------------
Total stockholder's equity 37,801,559 33,340,399
------------- -------------
TOTAL $ 448,797,683 $ 399,471,365
============= =============
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Factoring fees $ 6,118,784 $ 4,590,565 $ 11,643,233 $ 9,155,708
Interest income 8,359,757 6,612,680 16,015,455 12,616,629
Letter of Credit and other fees 852,595 566,273 1,524,805 916,966
Other 357,699 399,743 648 742 724,204
------------ ------------ ------------ ------------
Total revenues 15,688,835 12,169,261 29,832,235 23,413,507
------------ ------------ ------------ ------------
EXPENSES
Interest expense 3,920,749 2,557,650 7,061,860 5,058,446
Interest expense to affiliates 1,003,465 1,229,753 2,418,662 2,282,387
Salaries and benefits 3,411,341 2,730,605 6,662,178 5,351,433
Provision for credit losses 1,000,000 500,000 2,100,000 950,000
Occupancy and other office
expenses 863,260 608,244 1,744,136 1,152,787
Depreciation 154,194 155,342 307,834 318,384
Professional fees 269,465 251,679 448,504 493,841
Other 766,620 696,969 1,590,838 1,228,569
------------ ------------ ------------ ------------
Total expenses 11,389,094 8,730,242 22,334,012 16,835,847
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,299,741 3,439,019 7,498,223 6,577,660
PROVISION FOR INCOME TAXES 1,741,625 1,370,400 3,037,063 2,626,036
------------ ------------ ------------ ------------
NET INCOME $ 2,558,116 $ 2,068,619 $ 4,461,160 $ 3,951,624
============ ============ ============ ============
NET INCOME PER SHARE $ 0.26 $ 0.21 $ 0.45 $ 0.40
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
1996 1995
------------ ------------
OPERATING ACTIVITIES:
Net income $ 4,461,160 $ 3,951,624
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 307,834 318,384
Deferred income taxes (89,129) (238,466)
Provision for credit losses 2,100,000 950,000
Increase in restricted cash (375,000) 0
Loss on sale of assets 11,405 3,713
Decrease in due to affiliates (3,354,770) (1,864,180)
Other assets (759,079) (499,873)
Other liabilities 447,721 5,257,806
------------ -------------
Net cash provided by operating activities 2,750,142 7,879,008
------------ ------------
INVESTING ACTIVITIES:
Loan to clients, net 4,998,592 2,438,040
Increase in asset based loans (6,072,733) (7,684,644)
Net increase in factoring accounts receivable,
net of due to factoring clients (55,725,875) (12,770,183)
Sales of participations 3,312,828 843,459
Payments on participations (1,851,214) 0
Purchase of property and equipment (259,548) (350,561)
Disposal of property and equipment 9,560 13,753
------------ ------------
Net cash used in investing activities (55,588,390) (17,510,136)
------------ ------------
FINANCING ACTIVITIES:
Restricted proceeds from senior certificates 10,000,000 0
Proceeds from borrowing 72,543,000 30,990,000
Payments on borrowing (34,348,000) (23,061,033)
Payments of deferred financing costs (652,622) (58,904)
Amortization of deferred costs 367,169 275,468
------------ ------------
Net cash provided by financing activities 47,909,547 8,145,531
------------ ------------
NET INCREASE IN CASH (4,928,701) (1,485,597)
CASH, BEGINNING OF PERIOD 20,326,814 15,446,835
------------ ------------
CASH, END OF PERIOD 15,398,113 13,961,238
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest 8,728,962 6,854,193
============ ============
See accompanying notes to consolidated financial statements.
4
<PAGE>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
Note 1: GENERAL
- ---------------
The accompanying unaudited consolidated financial statements of Capital Factors
Holding, Inc. and Subsidiaries (the "Company") have been prepared on a
consistent basis in conformity with generally accepted accounting principles,
and in the opinion of management, reflect all adjustments (principally
consisting of normal, recurring accruals) necessary to present fairly the
financial condition of the Company as of June 30, 1996 and December 31, 1995,
the results of its operations for the three and six month periods ended June 30,
1996 and 1995 and its cash flows for the six months ended June 30, 1996 and
1995. All significant inter-company transactions and balances have been
eliminated. The December 31, 1995 amounts were derived from previously audited
statements. All interim information at June 30, 1996 and 1995 and for the three
and six months then ended was not audited.
The accounting policies followed for interim financial reporting are consistent
with the accounting policies set forth in Note 2 to the Consolidated Financial
Statements appearing in the Company's Form S-1 Registration Statement as filed
with the Securities and Exchange Commission on May 9, 1996 as thereafter
amended.
Note 2: RECEIVABLES
- -------------------
Receivables consist of the following:
JUNE 31, DECEMBER 31,
1996 1995
------------- -------------
Nonrecourse $ 291,618,697 $ 226,916,598
Recourse 68,469,143 69,558,913
------------- -------------
Factored accounts receivables 360,087,840 296,475,511
Loans to factoring clients 21,044,338 26,415,014
Asset based loans 44,388,173 38,315,440
------------- -------------
$ 425,520,351 $ 361,205,965
============= =============
The Company specifically considered $765,730 and $2,184,046 of its client
advances impaired at June 30, 1996 and December 31, 1995, respectively, and has
discontinued the accrual of interest income. The allowance for credit losses
related to these impaired loans for the same periods was $24,685 and $133,847,
respectively.
5
<PAGE>
Changes in the Company's allowance for credit losses were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
------------------------------------- ---------------------
% OF % OF % OF
JUNE 30, FACTORED JUNE 30, FACTORED DECEMBER 31, FACTORED
1996 SALES 1995 SALES 1995 SALES
---------- ------ ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $2,980,778 $1,774,101 $1,774,101
Provision for credit losses 2,100,000 .18 950,000 .11 2,234,721 .11
Charge-offs (2,547,855) .22 (907,416) .10 (1,625,148) .08
Recoveries 270,004 .03 369,940 .04 597,104 .03
---------- ------ ----------- ------- ---------- -------
Net charge-offs (2,277,851) .19 (537,476) .06 (1,028,044) .05
---------- ------ ----------- ------- ---------- -------
Ending balance $2,802,927 $2,186,625 $2,980,778
========== ========== ==========
</TABLE>
The adequacy of the provision for credit losses recorded by the Company is
assessed by management based in part on the level of net charge-offs relative to
accounts receivable purchased. These statistics are believed to be significant
indicators of inherent losses because the receivables portfolio turns over
approximately seven times each year. Accounts receivable which are past due will
not be written off if, in the opinion of management, collection is likely from
the customer, client or collateral realization, if any. In making this
determination, management considers the quality of the collateral, the
creditworthiness of the customer and client, economic conditions and other
factors which may be relevant. This statistical assessment is supplemented by a
review of the recorded allowance for credit losses at each month end relative to
total accounts receivable at month end, taking into consideration specific
potential problem accounts, accounts purchased with recourse where payment has
not been made by the Company to its client, and other factors which may be
relevant.
Historically, the provision for credit losses as a percentage of factored sales
and net charge-offs as a percentage of factored sales ranged from 0.11% to 0.31%
and 0.06% to 0.30%, respectively. The provision for credit losses as a
percentage of factored sales increased from .11% for the six months ended June
30, 1995 to 0.18% for the six months ended June 30, 1996. Net charge-offs as a
percentage of factored sales also increased from 0.06% to 0.19% for the same six
month periods, respectively. The 1996 ratios listed above, although higher than
those experienced in 1995, reflect normal credit losses consistent with the
Company's historical experience and expectations. Based on these relationships,
and a review of the recorded allowance and accounts receivable at each period
end, management believes the provisions and allowance to be adequate to absorb
known and inherent losses in the accounts receivable portfolio. Because the
assessment of the adequacy of the allowance and provisions for credit losses
involves a significant degree of estimation and is subject to change, future
provisions for credit losses may be greater or less than actual charge-offs.
6
<PAGE>
Note 3: BORROWINGS
- ------------------
Borrowings are summarized as follows:
JUNE 31, DECEMBER 31,
1996 1995
------------- -------------
Variable rate asset backed certificates
due 1999 through 2001 $ 175,000,000 $ 175,000,000
Variable rate revolving credit line
due on demand 61,155,000 52,260,000
Variable rate revolver loan due 1999 19,300,000
7.95% subordinated notes due 2001 10,000,000
------------- -------------
Total borrowings $ 265,455,000 $ 227,260,000
============= =============
Note 4: SUBSEQUENT EVENTS
- -------------------------
On July 10, 1996, the Company completed an initial public offering of 2,000,000
shares of common stock and on August 5 sold an additional 300,000 shares
pursuant to the Underwriters' over-allotment option. Net proceeds from the sale
of common stock were approximately $17.7 million. Had the additional 2,300,000
shares from the stock sale been outstanding throughout the six months ended June
30, 1996, the proforma income statement data would have been as follows:
SIX MONTHS ENDED
June 30, 1996
-------------
Proforma interest income $ 15,880,511
Proforma interest expense 8,745,892
-------------
Proforma net interest income $ 7,134,619
-------------
Proforma net income $ 4,898,548
=============
Proforma net income per share $ 0.40
=========
On August 9, 1996 the Company closed on the acquisition of substantially all of
the assets of TempFunds America, Inc. and its affiliate, TempFunds America
Funding Corporation of South Carolina, Inc. (collectively "TempFunds"),
specialized financial services companies principally engaged in providing
receivables-based commercial financing and related fee-based credit, collection
and management information services to temporary employment and home health care
agencies. The acquisition was completed through Capital TempFunds, Inc., a newly
formed North Carolina Corporation and wholly owned subsidiary of Factors.
The TempFunds entities provide certain services not presently provided by the
Company, including billing, payroll processing, payroll tax, payroll reporting
and other payroll
7
<PAGE>
services and insurance reporting. The purchase price paid by the Company was
approximately $5.9 million (approximately $5.0 million equal to the net book
value of the assets plus an additional $900,000). An additional amount up to
$900,000 is payable over a three year period if certain contingencies are met.
In connection with the acquisition, all rights, title and interest, to the
nationally registered service mark of "TempFunds America" were assigned to
Capital TempFunds, Inc. who intends to conduct business in said name.
The purchase was funded under the Company's revolving line of credit with
Capital Bank.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
INTRODUCTION
- ------------
Capital Factors Holding, Inc. ("Holding") is a majority owned subsidiary
of Capital Bank (the "Bank"). The Bank is a wholly-owned subsidiary of Capital
Bancorp. Holding has two wholly-owned subsidiaries, Capital Factors, Inc.
("Factors") and CF One, Inc. Factors has one wholly-owned subsidiary, CF Funding
Corp. Throughout this discussion, Holding and its subsidiaries are collectively
referred to as the "Company."
The following discussion and analysis presents the significant changes in the
financial condition and results of operations for the periods indicated. The
discussion should be read in conjunction with the consolidated financial
statements and notes included in Part I, Item 1 of this report.
The Company provides fee-based services to its clients, including credit
protection, collection and management information services, and also makes
advances to many of its clients. Clients are generally manufacturers of goods or
providers of services in various industries. At the time the Company purchases
the factored receivables, the Company records a receivable and an offsetting
liability "due to factoring client." Advances, which are interest earning and
secured by the client's factored receivables, are recorded by the Company as
reductions to the amounts due to the factoring client for factored receivables.
Cash collections from the client's customers are used to repay the client's
loans. If, as a result of financial inability to pay, a client's customer fails
to pay a receivable that was credit-approved by the Company, the Company will
ultimately bear any loss with respect to such receivable. In the event of
dilution in excess of the unfinanced portion of receivables, where factored
receivables are not fully collected for a reason other than the customer's
financial inability to pay, such as breach of warranty, the Company will in
practice typically need to look to newer receivables of the client for the
collection of the outstanding obligation to the Company and may not be repaid.
In contrast to the Company's purchase of factored receivables, when the Company
makes an asset-based loan, a client assigns its collateral (usually account
receivable and inventory) to the Company. Upon request of the client, the
Company may advance funds to the client as a loan in an amount based upon the
eligible collateral. When funds are advanced to a client, a loan receivable
balance is created, and cash is disbursed. Although the Company loans funds to
the client based on eligible collateral, the Company provides no credit
protection and, accordingly, does not assume the risk of loss from a client's
customers' inability to pay, although the Company may actually suffer a loss if
all sources of repayment fail, including other collateral and guarantees, if
any. In connection with asset-based loans, instead of a factoring fee, the
Company earns a facility fee. Both factored advances and asset-based loans bear
interest at a rate tied to the prime rate.
The Company operates through four regional offices (including the Florida
office) and currently has over 400 clients who generate annual sales from
$500,000 to over $100 million, and services over 100,000 customers of those
clients. The majority of the Company's customers are large national or regional
department store chains or specialty retailers. At June 30, 1996, the largest
amount due from any one customer, a national
9
<PAGE>
department store chain, was approximately $19.2 million.
The Company's factored sales volume can be affected in several ways, including
new clients, client retention or losses, inflation and other economic
conditions. Additionally, fluctuations in the sales dollar volume of the
Company's clients, both positive and negative, have a direct impact on the
Company's factored sales volume and factoring fees. In this regard, the Company
has historically experienced seasonal fluctuations in its factored sales volume
and factoring fees as a result of the seasonality of the sales of certain of the
Company's clients, especially those in the apparel industry, who typically ship
more goods during the four-month period of August through November in order to
fill increased customer orders in anticipation of "back to school" and the
ensuing holiday season. The Company realized approximately 40% of its annual
factored sales volume during this 4-month period in 1994 and 1995.
MONITORING ASSET QUALITY AND CREDIT LOSSES
- ------------------------------------------
The monitoring of asset quality is a routine function performed by management to
control credit losses. The Company's allowance for credit losses is determined
after evaluating the receivables portfolio, current market conditions, changes
in the nature and volume of the portfolio, past loss experience and other
pertinent factors.
Set forth below are those ratios and statistics utilized by management in
monitoring asset quality for the six months ended June 30, 1996 and June 30,
1995:
AS OF JUNE 30,
----------------------
1996 1995
--------- ---------
(Unaudited, Dollars in Thousands)
Provision for credit losses $ 2,100 $ 950
Charge-offs net of recoveries $ 2,278 $ 537
Allowance for credit losses-specific $ 646 $ 214
Allowance for credit losses-general $ 2,157 $ 1,973
----------- ---------
Total allowance for credit losses $ 2,803 $ 2,187
Accounts receivable turnover in days 51 51
Accounts receivable past due more
than 60 days as a percentage of
factored receivables 3.93% 4.67%
Accounts receivable past due more
than 90 days as a percentage of
factored receivables 2.04% 2.61%
Provision for credit losses as a
percentage of factored sales 0.18% 0.11%
Net charge-offs to factored sales 0.19% 0.06%
Average receivables $385,911 $277,971
Provision for credit losses as a
percentage of average receivables 1.08% (1) 0.68% (1)
Net charge-offs as a percentage of
average receivables 1.18% (1) 0.38% (1)
Non-accruing advances $ 766 $ 930
10
<PAGE>
Non-accruing advances as a percentage
of receivables 0.18% 0.33%
Provision for credit losses as a percentage
of average funds employed 1.63% (1) 0.99% (1)
Net charge-offs as a percentage of
average funds employed 1.76% (1) 0.56% (1)
Non-accruing advances as a percentage
of funds employed 0.27% 0.49%
(1) Computed on an annualized basis.
The Company regularly reviews its outstanding accounts receivable and other
extensions of credit, such as advances to clients, to determine the adequacy of
its allowance for credit losses. Factors such as the level of related credit
balances of clients and the impact of economic conditions on the
creditworthiness of the Company's clients and the client's customers are given
significant consideration in determining the adequacy of the Company's allowance
for credit losses. The Company's methodology for calculating its reserve for
doubtful accounts has remained consistent for the periods shown above, and
includes a specific and general component. Specific reserves are established for
receivables and client advances which the Company's management deems to be
wholly or partially uncollectible. The general reserve represents 0.75% of those
receivables (other than healthcare receivables, which have a lower general
reserve) that are not specifically reserved for but for which the Company has
provided credit guarantees.
The provision for credit losses as a percentage of factored sales increased from
0.11% for the six months ended June 30, 1995 to 0.18%. The provision for credit
losses as a percentage of average receivables and the provision for credit
losses as a percentage of average funds employed increased to 1.08% and 1.63%,
respectively, for the six months ended June 30, 1996, from 0.68% and 0.99%,
respectively in the six months ended June 30, 1995, reflecting a higher net
charge-off rate. Management anticipates that the provision for credit losses
during the remainder of 1996 will be higher than during 1995 and more consistent
with the Company's historical experience.
Net charge-offs as a percentage of factored sales ranged from 0.06% to 0.30% in
the 1991-1995 period. Net charge-offs as a percentage of factored sales
increased from 0.06% for the period ended June 30, 1995 to 0.19% for the period
ended June 30, 1996. The net charge-offs percentage increased in 1996 due to the
charge-off of $600,000 related to the bankruptcy of a large Northeastern
regional chain store, but net charge-offs remained well within the Company's
historical experience. Net charge-offs as a percentage of average receivables
and net charge-offs as a percentage of average funds employed increased 0.80%
and 1.20%, respectively, for the six months ended June 30, 1996 as compared to
the same period in 1995 due primarily to the $600,000 charge off described
above.
Non-accruing advances as a percentage of funds employed have historically
remained below 1.00% and during the six months ended June 30, 1996 and 1995,
were at 0.27% and 0.49%, respectively. Non-accruing advances as a percentage of
receivables decreased from 0.33% to 0.18%, for the same six month periods ended
June 30, 1995 and 1996, respectively. Management believes that non-accruing
advance fluctuations below 1.0% are a normal part of the Company's ongoing
business and are not significant.
Accounts receivable past due more than 60 days as a percentage of factored
receivables decreased from 4.67% at June 30, 1995 to 3.93% at June 30, 1996.
Accounts receivable
11
<PAGE>
past due more than 90 days as a percentage of factored receivables decreased
from 2.61% at June 30, 1995 to 2.04% at June 30, 1996.
FINANCIAL CONDITION - JUNE 30, 1996 AS COMPARED TO DECEMBER 31, 1995
- --------------------------------------------------------------------
Total assets increased to $448.8 million at June 30, 1996 from $399.5 million at
December 31, 1995. The $49.3 million increase was due to a $64.2 million dollar
increase in net receivables offset by a $14.6 million decrease in cash and
restricted cash.
Factored accounts receivables increased $63.6 million primarily as a result of
increased factored sales. The Company's factored accounts receivable are due
from clients' customers geographically located throughout the United States,
principally retailers, manufacturers and distributors. Asset based loans, which
represent loans provided to clients principally collateralized by accounts
receivable, increased $6.1 million from December 31, 1995 to June 30, 1996. Cash
and Restricted Cash decreased primarily as a result of the final draw down of
$10.0 million of cash maintained in a Pre-Funding account related to the third
series of variable rate asset-backed certificates collateralized by factored
advances ("Securitized Financings").
The increase in assets was principally funded by two new credit facilities
closed by the Company during the six months ended June 30, 1996. In April 1996,
the Company closed a revolving credit facility in the amount of $40 million with
an unaffiliated bank. At June 30, 1996 the Company had $19.3 million outstanding
under this facility, which bears interest at LIBOR plus 2.15%. In May 1996, the
Company, through its wholly-owned subsidiary, CF One, Inc., raised an additional
$10 million through the issuance of 5 year notes, due and payable in July 2001,
which bear a fixed rate of interest of 7.95%.
Stockholder's equity increased approximately $4,461,000 during the first six
months of 1996 as a result of net income earned by the Company.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1995
- --------------------------------------------------------------------------------
Net income increased 23.6% to approximately $2.6 million for the three month
period ended June 30, 1996 from approximately $2.1 million for the comparable
period in 1995 due to an increase in operating revenues offset by an increase in
the provision for credit losses. Operating revenues increased from approximately
$8.4 million for the three month period ended June 30, 1995 to approximately
$10.8 million for the comparable period in 1996, a 28.4% increase. These
increases were primarily a result of a 33.5% increase in the Company's factored
sales volume from $460.4 million to $614.6 million for the three month period
ended June 30, 1995 and June 30, 1996, respectively, and the resulting increase
in interest income and factoring fees. The factored sales volume increases were
attributable to continued growth of the Company's New York and California
offices and the opening of the Charlotte, North Carolina office in May 1995, as
well as the business generated by the Company's healthcare division.
Factoring fee income increased to approximately $6.1 million for the three month
period ended June 30, 1996 as compared to approximately $4.6 million for the
three month period ended June 30, 1995. Factoring fee income as a percentage of
factored sales for
12
<PAGE>
the three month periods decreased from 1.0% in 1995 to .99% in 1996. This slight
decline was the result of lower factoring fees charged to high volume clients in
the Charlotte market. For the three months ended June 30, 1995 Charlotte office
clients represented 0.4% of the Company's factored sales and for the three
months ended June 30, 1996, the Charlotte office clients represented 10.5% of
the Company's factored sales.
Net interest income (interest income less interest expense) increased to
approximately $3.4 million for the three months ended June 30, 1996 from
approximately $2.8 million for the comparable period in 1995, a 21.6% increase,
principally as a result of an increase of $80.5 million in average outstanding
funds employed for the three months ended June 30, 1996 as compared to the same
period in the prior year. Net interest income was also favorably impacted by
continued interest expense reductions achieved through the use of financing
programs with lower interest rates. The Company increased its Securitized
Financings, with the issuance of $50,000,000 additional Certificates in July
1995, bearing interest at LIBOR plus 1.25% (6.74609% at June 30, 1996). The
Company entered into a $40,000,000 revolving loan agreement bearing interest at
LIBOR plus 2.15% in April 1995 with an unaffiliated bank. Average borrowings
from the revolving loan during the three month period ended June 30, 1996
equaled approximately $17.8 million and had an effective interest rate of 7.74%
for the three month period. Additionally, the Company, through its wholly-owned
subsidiary, CF One, issued $10,000,000 in subordinated notes in May 1996,
bearing a fixed annual interest rate of 7.95%. The funds raised through the
above transactions were used to reduce higher interest debt (8.25% at June 30,
1996) outstanding under the debt facility with Capital Bank.
Letter of credit and other fee income increased to approximately $853,000 for
the three months ended June 30, 1996 from $566,000 for the three months ended
June 30, 1995, a 50.6% increase. Letter of credit fees increased approximately
31.1% or $76,000 during the three month period while other fee income increased
by approximately $210,000 due to the increased factoring volume and asset based
lending activities, and growth in the Company's healthcare division.
The provision for credit losses increased to $1,000,000 for the three months
ended June 30, 1996 from $500,000 for the three months ended June 30, 1995. This
increase is primarily attributable to an increase in outstanding accounts
receivable. Provisions for credit losses as a percentage of factored sales
increased to 0.16% for the three months ended June 30, 1996 as compared to 0.11%
for the comparable period in 1995, reflecting a higher net charge-off rate (see
"Monitoring Asset Quality and Credit Losses")
Operating expenses increased from $4,443,000 to $5,465,000 for the three month
period ended June 30, 1995 as compared to the three months ended June 30, 1996.
This $1.0 million or 23% increase is primarily the result of opening the North
Carolina regional office and the expansion of the Healthcare division.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1995
- -------------------------------------------------------------------------------
Net income increased $510,000 to approximately $4.5 million for the six month
period ended June 30, 1996 from approximately $4.0 million for the comparable
period in 1995, a 12.9% increase due to an increase in operating revenues offset
by an increase in the provision for credit losses. Operating revenues increased
26.6% from approximately $16.1 million to $20.4 million, respectively, for the
six month periods ended June 30,
13
<PAGE>
1995 and June 30, 1996. These increases were primarily a result of a 30.7%
increase in the Company's factored sales volume from $901.6 million to $1,178.6
million for the six month period ended June 30, 1995 and June 30, 1996,
respectively. This increase in factored sales was attributable to the opening of
the Charlotte office which increased factored sales volume by $115.7 million in
the six month period, combined with continued growth of the Company's New York
and California offices. The Company's healthcare division, which commenced
operations in September 1994, contributed $55.2 million in factored sales, an
81% increase over its contribution over the prior comparable period.
The Company experienced a 27.2% increase in factoring fee income for the six
months ended June 30, 1996 as compared to the six months ended June 30, 1995 as
a result of increased factored sales. In contrast, factoring fee income as a
percentage of factored sales declined from 1.02% to .99% due primarily to lower
factoring fees charged to high volume clients and a lower fee structure, partly
because of high volume clients, in the Charlotte market. The Company typically
receives lower factoring fees from high volume clients due to less labor
intensive servicing needs required of the Company by the client and because
there is increased competition for such clients' business.
Net interest income increased to approximately $6.4 million for the six months
ended June 30, 1996 from approximately $5.3 million for the comparable period in
1995, a 21.3% increase, principally as a result of an increase of $67.3 million,
a 35.2% increase, in average outstanding funds employed for the six months ended
June 30, 1996 as compared to the same period in the prior year. Net interest
income for the six months ended June 30, 1996 was also favorably impacted by
continued interest expense reductions achieved through the issuance of
$50,000,000 of additional Certificates under the Securitized Financings
agreement in July 1995, entering into a $40,000,000 revolving loan agreement
with an unaffiliated bank in April 1996, and the issuance of $10,000,000 in
subordinated notes in May 1996. Average borrowings from the revolving loan
during the six month period ended June 30, 1996 equaled approximately $8.9
million and had an effective interest rate of 7.74% for the six month period.
The $10,000,000 notes bearing interest at a fixed annual rate of 7.95%.
Letter of credit and other fee income increased to approximately $1.5 million
for the six months ended June 30, 1996 from $917,000 for the six months ended
June 30, 1995, a 66.3% increase. Letter of credit fees increased approximately
45.0% or $177,500 during the six month period while other fee income increased
by approximately $430,000 due to the increased factoring volume and asset based
lending activities, and growth in the Company's healthcare division.
The provision for credit losses increased to $2,100,000 for the six months ended
June 30, 1996 from $950,000 for the six months ended June 30, 1995. This
increase is primarily attributable to an increase in outstanding accounts
receivable. The provisions for credit losses as a percentage of factored sales
for the six months ended June 30, 1996 increased to .18% as compared to .11% for
the comparable period in 1995, reflecting a higher net charge-off rate (see
"Monitoring Asset Quality and Credit Losses")
Operating expenses increased from $8,545,000 to $10,753,000 for the six month
period ended June 30, 1995 as compared to the six months ended June 30, 1996.
This $2.2 million or 26% increase is primarily the result of opening the North
Carolina regional office and the expansion of the Healthcare division.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal source of funding is from its asset securitization
program, the Securitized Financings which include three series of asset-backed
certificates aggregating $175.0 million. The certificates issued under each
series bear interest at LIBOR plus 1.25% (6.75% at June 30, 1996, excluding
annualized transaction costs of 0.37%) and interest is payable monthly. The
Company may continue to use the Securitized Financings for funding, provided
eligible client advances are available for transfer to the trust created to
accommodate the Securitized Financings (the "Trust") for future funding through
new series. Generally, all of the client advances made by the Company, with the
exception of those made by its healthcare division, as well as certain
asset-based loans, are eligible for transfer to the Trust. As of June 30, 1996,
the Company had transferred to the Trust, client advances aggregating
approximately $228 million. The scheduled maturity dates of the certificates
corresponding to each series is December 1999 ($100 million), June 2000 ($25
million), and January 2001 ($50 million), respectively.
In April 1996, the Company entered into a $40.0 million revolving credit
facility with an unaffiliated bank. The indebtedness under this facility is
secured by advances not collateralizing the Securitized Financings (primarily
advances made by the Company's healthcare division or asset-based loans). The
indebtedness under this revolving facility bears interest at a rate of LIBOR
plus 2.15%, payable monthly. The indebtedness under this facility matures upon
termination in March 1999, although it will be automatically renewed for
additional one year periods unless the Company or the lender terminate it. The
Company also has a $125.0 million unsecured revolving line of credit with
Capital Bank, pursuant to which the Company had outstanding borrowings of
approximately $61.2 million at June 30, 1996. Indebtedness under this facility
bears interest at the prime rate, as published in The Wall Street Journal (8.25%
at June 30, 1996), is subject to annual review by Capital Bank each June and is
due on demand. In May 1996, $10.0 million subordinated notes were issued through
CF One, Inc. These notes are due and payable in July 2001 and bear interest at
an annual fixed rate of 7.95%.
In addition to the continued availability of the above financing, the Company's
future liquidity will continue to be dependent upon its ability to collect the
accounts receivable purchased from its clients. Of the Company's approximately
$425.5 million of accounts receivable outstanding at June 30, 1996,
approximately $203.8 million have balances exceeding $1 million. These customers
are primarily large national or regional department store chains or specialty
retailers. At June 30, 1996, the largest amount due from any one customer, a
national chain store, was approximately $19.2 million. In addition, the
Company's accounts receivable turned over in an average of 53 days during 1995
and 51 days during the six months ended June 30, 1996.
The Company had no material commitments for capital expenditures as of June 30,
1996. As discussed in Note 7 to the consolidated financial statements, the
Company consummated its purchase of substantially all of the assets of
TempFunds, specialized financial services companies for a purchase price of
approximately $5.9 million. Although the Company has no present plans for other
acquisitions, the Company would consider appropriate potential acquisitions as
and if they arise. The Company would need to utilize the above financings and
potentially other financings to fund any such acquisitions.
15
<PAGE>
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
- --------------------------
On August 9, 1996 the Company closed on the acquisition of substantially all of
the assets of TempFunds America, Inc. and its affiliate, TempFunds America
Funding Corporation of South Carolina, Inc. (collectively "TempFunds"),
specialized financial services companies principally engaged in providing
receivables-based commercial financing and related fee-based credit, collection
and management information services to temporary employment and home health care
agencies. The acquisition was completed through Capital TempFunds, Inc., a newly
formed North Carolina Corporation and wholly owned subsidiary of Factors.
The TempFunds entities provide certain services not presently provided by the
Company, including billing, payroll processing, payroll tax, payroll reporting
and other payroll services and insurance reporting. The purchase price paid by
the Company was approximately $5.9 million (approximately $5.0 million equal to
the net book value of the assets plus an additional $900,000). An additional
amount up to $900,000 is payable over a three year period if certain
contingencies are met. In connection with the acquisition, all rights, title and
interest, to the nationally registered service mark of "TempFunds America" were
assigned to Capital TempFunds, Inc. who intends to conduct business in said
name.
The purchase was funded under the Company's revolving line of credit with
Capital Bank.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibit 27.1 - Financial Data Schedule
(b) No Current Reports on Form 8-K were filed by the Company during the quarter
and six months ended June 30, 1996.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: By: /s/ Dennis A. McDermott
---------------------------
DENNIS A. MCDERMOTT
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
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<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,960,613
<SECURITIES> 0
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