2,000,000 SHARES
CAPITAL FACTORS HOLDING, INC.
COMMON STOCK
------------
All of the 2,000,000 shares of Common Stock offered hereby are being sold
by Capital Factors Holding, Inc., a Florida corporation (the "Company"). All
of the Common Stock of the Company is presently owned by Capital Bank, a
Florida bank. Following this offering, Capital Bank will continue to
beneficially own approximately 83% of the outstanding Common Stock
(approximately 81% if the over-allotment option granted to the Underwriters
is exercised in full).
Prior to this offering, there has been no public trading market for the
Common Stock and there can be no assurance that any active trading market
will develop. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
The Company's Common Stock has been approved for quotation on The Nasdaq
National Market System ("Nasdaq") under the symbol "CAPF."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8 HEREOF FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES OF COMMON STOCK.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
=============================================================
PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNT(1) COMPANY(2)
- ------------ -------------- --------------- --------------
Per Share . $8.50 $0.595 $7.905
Total(3) .. $17,000,000 $1,190,000 $15,810,000
============ ============== =============== ==============
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering payable by the Company
estimated at $500,000.
(3) The Company has granted the Underwriters an option, exercisable from time
to time within 30 days from the date hereof, to purchase up to 300,000
additional shares of Common Stock at the Price to Public per share, less the
Underwriting Discount, solely for the purpose of covering over-allotments,
if any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $19,550,000,
$1,368,500 and $18,181,500, respectively. See "Underwriting."
------------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel
or reject orders in whole or in part and subject to certain other conditions.
It is expected that delivery of certificates representing the shares of
Common Stock will be made against payment on or about July 16, 1996 at the
offices of Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial
Center, New York, New York 10281.
- -----------------------------------------------------------------------------
Oppenheimer & Co., Inc.
The date of this Prospectus is July 10, 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Act"), with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to such Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies
of the Registration Statement may be obtained from the Commission's principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the
fees prescribed by the Commission, or may be examined without charge at the
offices of the Commission. In addition, copies of the Registration Statement
and related documents may be obtained through the Commission's Internet
address at http://www.sec.gov.
------------
The Company intends to furnish its shareholders with annual reports
containing audited financial statements which have been certified by its
independent public accountants, and quarterly reports containing unaudited
summary financial information for each of the first three quarters of each
fiscal year.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL INFORMATION SET FORTH HEREIN (I) ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, AND (II) GIVES
EFFECT TO A 10,000-FOR-1 STOCK SPLIT EFFECTED ON JULY 1, 1996. REFERENCES IN
THIS PROSPECTUS TO THE "COMPANY" INCLUDE CAPITAL FACTORS HOLDING, INC.
("HOLDING"), AND ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING CAPITAL
FACTORS, INC. ("FACTORS"), THE PRIMARY OPERATING COMPANY.
THE COMPANY
The Company is a specialized financial services company principally
engaged in providing receivables-based commercial financing and related
fee-based credit, collection and management information services. The
Company's clients are primarily small to medium size companies in various
industries, including textile and apparel and furniture manufacturing and,
recently, entities involved in the healthcare industry. The Company operates
through four offices located in New York City, Los Angeles, Charlotte and its
headquarters in South Florida.
The Company generally provides financing to its clients through the
purchase of accounts receivable owed to the Company's clients by the clients'
customers, usually on a non-recourse basis, as well as by guaranteeing
amounts due under letters of credit issued to the Company's clients which are
collateralized by such accounts receivable and other assets. The purchase of
accounts receivable is known as "factoring" and results in the payment by the
client of a factoring fee, generally equal to 0.5% to 2% of the factored
sales volume. No money is paid to the client at the time the Company
purchases the client's receivables. Payment for receivables which are
credit-approved by the Company is made to the client after collection from
the client's customer or, if the receivable was not paid based solely on the
customer's financial inability to pay, payment is made to the client within
120 days after the due date of the receivable. In some cases, the Company
does not guarantee payment of the receivable, in which case payment is made
to the client only upon collection of the receivable. Frequently, the Company
also advances funds to its clients prior to collection of receivables,
charges interest on such advances (in addition to any factoring fees) and
satisfies such advances from receivables collections. In late 1994, the
Company began to expand its asset-based lending business.
Factoring has been a method of working capital financing in the United
States for over 200 years. The factoring industry has undergone considerable
consolidation over the past several years; as a result the industry is
characterized by a small number of very large factors operating nationally,
with a multitude of small companies generally operating on a local or
regional basis. In a recent survey, the largest fourteen factoring companies
reported factoring volume in 1995 of $60.9 billion, an increase of 48% over
reported volume in 1988. The Company had a 3.3% share of this reported volume
for 1995.
The Company has grown significantly in size and profitability, with
compounded annual growth rates in operating revenues and net income of 23.6%
and 50.0%, respectively, during the period 1991 through 1995, and a
compounded annual growth rate in factored sales volume of 24.8% for the same
period. For 1995, the Company's operating revenues, net income and factored
sales volume increased by 28.5%, 42.7% and 30.2%, respectively, over 1994 and
increased by 24.7%, 1.1% and 27.8%, respectively, in the three month period
ended March 31, 1996 as compared to the same period in 1995. The Company's
operating strategy includes (i) managing credit risk to ensure consistent and
stable growth, (ii) increasing market penetration through offices in key
factoring centers, (iii) recruiting and retaining experienced personnel who
use a team approach to provide quality service, and (iv) diversifying by
product and industry, especially in healthcare financing, which management
believes has significant growth potential.
3
<PAGE>
In 1994, the Company became the first company to effect a securitization
of factored advances (the "Securitized Financings"). The advances
("Advances") are collateralized by accounts receivable from customers of the
Company's clients and, in certain cases, by cash, letters of credit,
inventory or other collateral. The Company has not employed gain-on-sale
accounting in its Securitized Financings. The Company has completed two
additional securitizations of factored advances since 1994. See "Business--
Background of the Company."
Holding is a wholly owned subsidiary of Capital Bank, a Florida commercial
bank ("Capital Bank"), which is a wholly owned subsidiary of Capital Bancorp
("Bancorp"). The Company's principal executive offices are located at 1799
West Oakland Park Boulevard, Fort Lauderdale, Florida 33311, and its
telephone number is (954) 730-2900.
RECENT DEVELOPMENTS
The Company's operating revenues and net income for the two months ended
May 31, 1996 were approximately $7.3 million and approximately $1.7 million,
respectively, as compared to approximately $5.5 million and approximately
$1.3 million, respectively, for the same two month period ended May 31, 1995,
a 32.2% and 30.8% increase, respectively.
The Company's operating revenues and net income for the five month period
ended May 31, 1996 were approximately $16.9 million and approximately $3.6
million, respectively, as compared to approximately $13.2 million and
approximately $3.2 million, respectively, for the same period ended May 31,
1995, a 27.8% and 13.4% increase, respectively. Factored sales increased from
approximately $745.3 million for the five months ended May 31, 1995 to
approximately $983.1 million for the five months ended May 31, 1996, an
increase of 31.9%, with factoring fees increasing 27.6% from approximately
$7.6 million to approximately $9.8 million, respectively, for the same five
month periods. The provision for credit losses increased from approximately
$800,000 for the 5 month period ended May 31, 1995 to approximately $1.8
million for the same period ended May 31, 1996. The provision as a percentage
of factored sales increased from 0.11% to 0.18%, respectively, for the same
five month periods, compared to 0.20% for the three months ended March 31,
1996.
In May 1996, the Company's direct wholly-owned subsidiary, CF One, Inc.
("CF One"), sold $10 million of subordinated notes (the "CF One Notes") which
are collateralized by subordinated certificates that were issued in
connection with the Company's Securitized Financings. The CF One Notes, which
are due and payable in July 2001, bear interest at an annual fixed rate of
7.95% and are rated "BBB" by both Duff & Phelps Credit Rating Company and
Fitch Investors Services, Inc. The principal purpose for the issuance of the
CF One Notes was to allow CF One to obtain additional financing by taking
advantage of the favorable financing terms resulting from an increase in the
value of the subordinated certificates held by CF One which are
collateralized by assets held by a trust established in connection with the
Securitized Financings.
The Company has executed a letter of intent in connection with a proposed
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 healthcare agencies. Pursuant to the letter of
intent, the purchase price would be $900,000 over the book value of the
assets acquired (estimated by the sellers to be between $7 and $10 million),
plus an additional amount up to $900,000 payable over 3 years if certain
contingencies are met. The Company expects that the purchase price will be
funded by the Company's revolving line of credit from its sole shareholder,
Capital Bank. The proposed sellers provide certain services not presently
provided by the Company, including billing, payroll processing, payroll tax,
payroll reporting and other payroll services and insurance reporting, some of
which may require regulatory approval prior to being engaged in by the
Company. No assurances can be given that the Company will consummate this
proposed acquisition.
4
<PAGE>
THE OFFERING
Common Stock Offered by the Company ...2,000,000 shares
Common Stock outstanding
after this offering ................... 12,000,000 shares(1)
Use of proceeds ........................ To reduce indebtedness(2)
Nasdaq symbol .......................... "CAPF"
- --------
(1) Does not include 800,000 shares of Common Stock reserved for issuance
upon exercise of stock options granted under the Company's stock option
plan. See "Management--Company Stock Option Plan."
(2) The proceeds from the offering will be used to reduce the Company's
indebtedness to its sole shareholder, Capital Bank.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------ ----------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ----------- ----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
FACTORING FEES ......................$ 9,870 $ 12,482 $ 15,376 $ 17,371 $ 19,519 $ 4,565 $ 5,524
INTEREST INCOME ..................... 11,482 11,450 13,511 17,628 28,211 6,004 7,574
INTEREST EXPENSE .................... (7,720) (7,005) (7,842) (10,329) (16,361) (3,553) (4,556)
NET INTEREST INCOME ................ 3,762 4,445 5,669 7,299 11,850 2,451 3,018
LETTER OF CREDIT AND OTHER FEES ..... 378 665 1,128 1,238 2,040 351 754
OTHER INCOME ........................ 1,092 905 1,303 1,541 1,849 324 291
-------- ----------- ----------- ----------- ----------- ----------- -----------
OPERATING REVENUES ................ 15,102 18,497 23,476 27,449 35,258 7,691 9,587
PROVISION FOR CREDIT LOSSES ......... 2,550 3,150 2,645 2,235 2,235 450 1,100
OPERATING EXPENSES .................. 9,594 11,316 13,072 14,137 18,457 4,102 5,289
-------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL EXPENSES .................... 12,144 14,466 15,717 16,372 20,692 4,552 6,389
INCOME BEFORE INCOME TAXES(1) ....... 2,958 4,031 7,759 11,077 14,566 3,139 3,198
NET INCOME .......................... 1,716 2,304 4,305 6,092 8,693 1,883 1,903
NET INCOME PER SHARE ................$ 0.17 $ 0.23 $ 0.43 $ 0.61 $ 0.87 $ 0.19 $ 0.19
PRO FORMA INCOME STATEMENT DATA(2):
PRO FORMA INTEREST INCOME ........... $ 28,211 $ 7,574
PRO FORMA INTEREST EXPENSE .......... (15,002) (4,235)
----------- -----------
PRO FORMA NET INTEREST INCOME ...... $ 13,209 $ 3,339
----------- -----------
PRO FORMA NET INCOME ................ 9,504 2,094
PRO FORMA NET INCOME PER SHARE ...... 0.79 0.17
OPERATING RATIOS AND OTHER DATA(3):
FACTORED SALES ......................$825,116 $ 1,057,846 $ 1,326,802 $ 1,536,960 $ 2,001,364 $ 441,211 $ 563,989
FACTORING FEES TO FACTORED SALES .... 1.20% 1.18% 1.16% 1.13% 0.98% 1.03% 0.98%
NET INTEREST INCOME TO FACTORED SALES 0.46% 0.42% 0.43% 0.47% 0.59% 0.56% 0.54%
LETTER OF CREDIT AND OTHER FEES TO
FACTORED SALES .................... 0.05% 0.06% 0.09% 0.08% 0.10% 0.08% 0.13%
OTHER INCOME TO FACTORED SALES ...... 0.13% 0.09% 0.09% 0.10% 0.09% 0.07% 0.05%
-------- ----------- ----------- ----------- ----------- ----------- -----------
1.84% 1.75% 1.77% 1.79% 1.76% 1.74% 1.70%
PROVISION FOR CREDIT LOSSES TO
FACTORED SALES .................... 0.31% 0.30% 0.20% 0.15% 0.11% 0.10% 0.20%
OPERATING EXPENSES TO FACTORED SALES 1.16% 1.07% 0.99% 0.92% 0.92% 0.93% 0.94%
-------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL EXPENSES TO FACTORED SALES .... 1.47% 1.37% 1.18% 1.07% 1.03% 1.03% 1.13%
INCOME BEFORE INCOME TAXES TO
FACTORED SALES .................... 0.36% 0.38% 0.58% 0.72% 0.73% 0.71% 0.57%
RETURN ON EQUITY(4) ................. 15.63% 17.78% 26.57% 28.80% 30.20% 29.58%(6) 22.27%(6)
RETURN ON ASSETS(4) ................. 1.23% 1.32% 1.99% 2.35% 2.51% 2.57%(6) 1.86%(6)
AVERAGE FUNDS EMPLOYED(5) ...........$ 89,700 $ 108,300 $ 131,800 $ 153,600 $ 210,900 $ 188,800 $ 243,000
NET INTEREST INCOME TO AVERAGE
FUNDS EMPLOYED .................... 4.19% 4.10% 4.30% 4.75% 5.62% 5.26%(6) 5.04%(6)
NET CHARGE-OFFS TO FACTORED
SALES VOLUME ...................... 0.16% 0.30% 0.20% 0.17% 0.05% 0.05% 0.25%
ACCOUNTS RECEIVABLE TURNOVER
IN DAYS(7) ........................ 53 54 52 53 53 50 51
AVERAGE NUMBER OF EMPLOYEES ......... 118 140 153 162 193 177 222
AVERAGE FACTORED SALES PER EMPLOYEE .$ 6,158 $ 7,246 $ 8,672 $ 9,487 $ 10,370 $ 9,971(6) $ 10,162(6)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
------------------ ----------------------------
ACTUAL ACTUAL AS ADJUSTED(8)
------------------ ----------- ---------------
BALANCE SHEET DATA: (UNAUDITED)
<S> <C> <C> <C>
Receivables, net ........................ $354,821 $394,780 $394,780
Total assets ............................ 399,471 425,160 425,160
Due to factoring clients ................ 128,578 141,578 141,578
Borrowings .............................. 227,260 244,754 229,444
Due to Affiliates and other liabilities 10,293 3,585 3,585
Shareholders' equity .................... 33,340 35,243 50,553
</TABLE>
- --------
(1) The results of operations of the Company are included in the consolidated
Federal income tax returns filed by Capital Bancorp, the parent of
Capital Bank. Capital Bank, the Company's sole shareholder, allocates
income taxes to the Company calculated on a separate return basis. See
"Certain Transactions."
(2) Pro forma income statement data reflects (i) the issuance of
2,000,000 shares of Common Stock offered hereby as if such issuance
had occurred on January 1, 1995 or January 1, 1996, net of issuance
costs, and the use of the net proceeds therefrom to repay
indebtedness as described in "Use of Proceeds," and (ii) reduction of
interest expense related to such indebtedness, net of income taxes,
as if the repayment occurred on January 1, 1995 or January 1, 1996.
(3) For purposes of the ratios and data below for 1994 and 1995, factored
sales include certain receivables which are pledged as collateral for
those asset-based loans for which the Company provides factoring-type
services.
(4) Computed using average monthly balances.
(5) Computed using average monthly balances of funds employed (receivables
less amounts due to factoring clients).
(6) Computed on an annualized basis.
(7) Computed by dividing 365 by the quotient of (i) factored sales volume for
the periods indicated and (ii) the average monthly accounts receivables
balance for the periods indicated.
(8) Adjusted to give effect to the sale of the Common Stock offered hereby and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
7
<PAGE>
RISK FACTORS
INVESTMENT IN THE COMPANY'S COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION INCLUDED IN THIS
PROSPECTUS, BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THE
CAUTIONARY STATEMENTS SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS SHOULD
BE READ AS ACCOMPANYING FORWARD-LOOKING STATEMENTS INCLUDED UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "BUSINESS" AND ELSEWHERE HEREIN. THE RISKS DESCRIBED IN SUCH
STATEMENTS COULD CAUSE THE COMPANY'S RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN OR INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
CREDIT LOSSES; RECESSIONARY ENVIRONMENT. The financial failure of clients
or their customers may adversely affect the Company's ability to fully
recover amounts due under either the accounts receivable purchased by the
Company or advances made to clients under the Company's factoring
arrangements. Accordingly, the Company makes provisions for credit losses.
The allowance for credit losses is determined after evaluating the
outstanding receivables and advances, current economic conditions, changes in
the nature and the volume of the outstanding receivables and advances, past
loss experience and other pertinent considerations. Many of these
considerations involve significant estimation and are subject to rapid
changes which may be unforeseen by management and could result in immediate
increased losses and material adjustments to the allowance. As a result,
ultimate losses could be significant and may vary from current estimates and
the amount of provisions for credit losses may be either greater or less than
actual future charge-offs of receivables or advances relating to these
provisions. Additionally, the Company's results of operations could be
materially and adversely affected if the Company were to experience a loss as
a result of the purchase of fraudulent receivables. The Company also
guarantees payment of letters of credit issued for the benefit of its
clients, which pose similar risks as discussed above. See "Business--Credit
Loss Policy and Experience." Moreover, the risks to which the Company's
business is subject become more acute in an economic slowdown or recession
because less accounts receivable may be generated by clients, resulting in
decreased factoring fees, and financial ability of customers to pay
outstanding accounts receivable and clients to pay outstanding advances may
be impaired, resulting in increased credit losses. Some of the Company's
clients are startup or less mature ventures that may be more susceptible to
economic slowdowns or recessions.
DEPENDENCE ON AVAILABILITY OF FUNDING SOURCES. The Company obtains
substantially all of its funds for its factoring activities from (i) the
Securitized Financings (presently $175 million) which expire between December
1999 and January 2001 and (ii) a $125 million revolving line of credit (the
"Capital Facility") funded by its sole shareholder, Capital Bank, a Florida
commercial bank, which facility is subject to annual review by Capital Bank
each June and is due on demand. The Company also has a $40 million revolving
line of credit with an unaffiliated commercial bank which was closed in April
1996, the initial term of which expires on March 4, 1999, subject to
automatic one-year renewals unless sooner terminated by either party thereto
(the "Other Bank Facility"). While the Company expects to have continued
access to credit after expiration of these facilities, there is no assurance
that such financing will be available, or if available, that it will be on
terms as favorable. In the event the Company is not able to renew the
Securitized Financings, the Capital Facility or the Other Bank Facility or
find alternative financing for its activities, the Company would be forced to
curtail or cease its factoring and financing business, which action would
have a material adverse effect on the Company's operations and financial
condition. Pursuant to the Securitized Financings, an event of default
causing an early amortization event would occur if Capital Bank were to enter
into a written agreement with the FDIC under the Financial Institutions
Supervisory Act which would have a material adverse effect on the Company's
ability to perform its obligations under the Securitized Financings. Capital
Bank could be required to enter into an agreement with the FDIC under the
Financial Institutions Supervisory Act if it was found that Capital Bank
engaged or was about to engage in unsafe or unsound business practices or had
violated or was about to violate any law, rule, or regulation or any
condition imposed in writing by the FDIC in connection with the granting of
any application or request by Capital Bank. Capital Bank has advised the
Company that it does not believe that it has engaged in or is engaging in any
unsafe or unsound business practices or has violated or is violating any
material rule, regulation or any condition
8
<PAGE>
and that it does not anticipate having to enter into an agreement with the
FDIC under the Financial Institutions Supervisory Act. In addition, as a
subsidiary of a regulated entity, bank regulatory actions taken against
Capital Bank, which cannot be predicted and are not anticipated, could affect
the Company. The Company would also be unable to access the Securitized
Financings for future funding in the event Capital Bank became a party to any
proceeding provided for by any debtor relief law, other than as creditor or
claimant.
DILUTION OF RECEIVABLES. Dilution of factored receivables occurs when such
receivables are not fully collectable for reasons other than the client's
customer's financial inability to pay (such as disagreements as to the
quality of goods shipped). The Company generally advances funds to borrowing
clients up to a specified percentage of factored sales purchased. Should
dilution occur in excess of the amount of the receivables not advanced upon,
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.
Significant dilution may be an indication of problems in a client's business
which could result in a decreased volume of new receivables available for
payment of outstanding obligations to the Company. Some dilution occurs with
respect to most, if not all, clients. Increased dilution with respect to any
client's receivables puts the Company's collection of the client's obligation
to the Company at risk. The Company monitors dilution on a daily basis.
Notwithstanding the foregoing, the Company may not be able to react quickly
enough to dilution to avoid losses and to ensure collection of receivables.
CONCENTRATION OF CLIENT BASE AND CLIENT CUSTOMER BASE. A large percentage
of the Company's clients are in the textile and apparel industry and the
furniture manufacturing industry, as well as certain other industries. At
March 31, 1996, textile and apparel factored receivables accounted for 78% of
the Company's total factored receivables, while furniture manufacturing and
healthcare factored receivables accounted for 6% and 4%, respectively. The
remaining factored receivables are represented by the home furnishing, floor
covering, service, food, toy and other miscellaneous industries. These
industries are segmented by product, price, style and other items. Many of
the customers of the Company's clients are in various retail or wholesale
industry segments. Adverse conditions in any of these industries or industry
segments could have a material adverse effect on the Company and on the
Company's ability to collect receivables from certain of its clients'
customers.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The Company's success depends
to a significant degree upon the continued contributions of members of its
senior management, particularly John W. Kiefer, the Company's President and
Chief Executive Officer, Stephen J. Donohue, the Company's Executive Vice
President--New York Regional Manager, and James L. Morrison, the Company's
Executive Vice President--California Regional Manager, as well as other
officers and key personnel, many of whom would be difficult to replace. The
future success of the Company also depends on its ability to identify,
attract and retain additional qualified technical and managerial personnel,
particularly in the healthcare financing industry. In light of the fact that
following this offering Capital Bank will continue to own 83% of the
Company's outstanding Common Stock (approximately 81% if the overallotment
option granted to the Underwriters is executed in full), Capital Bank will
have significant influence over decisions regarding the continued employment
of executive officers and key employees of the Company, including Mr. Kiefer.
Although the Company has employment agreements with Messrs. Kiefer, Donohue
and Morrison, and is negotiating new agreements with Messrs. Donohue and
Morrison, the loss of Messrs. Kiefer, Donohue and Morrison or other officers
and key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management."
SEASONALITY AND VARIABILITY OF QUARTERLY RESULTS. The Company, as well as
the factoring industry, has historically experienced and expects to continue
to experience seasonal fluctuations in its factored sales volume and
factoring fees, which generally have been highest during the period from
August through November. A principal reason for the fluctuation in the
Company's factored sales volume and factoring fees is the seasonality in the
sales of certain of the Company's clients, especially those in the apparel
industry, which typically ship more goods during such 4-month period in order
to fill increased customer orders in anticipation of "back to school" and the
ensuing holiday season. The Company realized approximately 40.0% of its
annual factored sales volume in each of 1994 (approximately $605
9
<PAGE>
million of $1.5 billion annual factored sales) and 1995 (approximately $757
million of $2 billion annual factored sales) during this 4-month period.
Historical experience indicates that the Company's factored sales volume is
at its lowest during the period from December through February. Although the
Company's healthcare financing services should help to mitigate the effect of
seasonal fluctuations in the Company's operating results, the Company does
expect to see fluctuations in its quarter-to-quarter results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
ABILITY OF THE COMPANY TO CONTINUE ITS GROWTH STRATEGY. The Company's
growth strategy is principally dependent upon its ability to increase its
factored sales volume by purchasing good quality accounts receivable meeting
its underwriting standards. In 1995, the Company's factored sales volume
increased approximately 30.2% to approximately $2 billion and operating
revenue increased by approximately 28.5% to $35.3 million, as compared to
that of 1994. During the first three months of 1996, the Company's factored
sales volume increased by approximately 27.8% to approximately $564.0 million
and operating revenues increased approximately 24.7% to approximately $9.6
million, as compared to the three month period ended March 31, 1995. The
Company experiences a certain amount of turnover in its client base annually
due primarily to credit issues. Therefore, the Company's ability to further
implement its strategy for continued growth of factored sales volume is
largely dependent upon the Company's ability to attract and retain quality
clients for the Company's services in a competitive market and on the
business growth of those clients, which may be affected by a number of
factors not within the Company's control. Historical growth rates are not
necessarily indicative of future results.
COMPETITION. The Company competes with numerous banks, financial
institutions, commercial finance companies and other factoring companies with
greater financial and other resources than the Company. The four largest
factors in the United States had approximately $37.9 billion of reported
volume in factored sales in 1995, compared to approximately $2 billion in
factored sales volume for the Company in 1995. The Company also competes with
other regional factoring companies. The Company's competitors target similar
clients to the Company and generally have operated in the markets serviced by
the Company for a longer period of time than the Company. See "Business--
Competition."
INABILITY TO DIRECTLY COLLECT HEALTHCARE RECEIVABLES FROM MEDICARE AND
MEDICAID; DILUTION OF HEALTHCARE RECEIVABLES. The Company's healthcare
division provides healthcare financing and factoring services to hospitals,
nursing homes, doctor groups, home treatment centers, home healthcare
provider services, temporary nursing or staffing services and providers of
durable medical equipment. A significant portion of the Company's healthcare
receivables are payable by Medicare and Medicaid, federal government
sponsored programs. Pursuant to Federal law, a healthcare provider is
prohibited from granting a third party a direct assignment of Medicare and/or
Medicaid proceeds. Accordingly, all Medicare and Medicaid proceeds are paid
directly to the provider of the medical services. As a result, the Company is
unable to perform certain traditional factoring services with respect to such
receivables, such as collection, and, instead, the Company must closely
monitor the client's collection of such receivables on a daily basis.
Although to date the Company has been successful in monitoring and collecting
its Medicare and Medicaid-based receivables directly from its clients, there
can be no assurance that the Company will continue to be successful in its
monitoring and collection activities in the future. In addition, healthcare
receivables have historically been subject to significant dilution. While the
Company has been successful in managing dilution and has not realized any
losses to date, there can be no assurance that the Company will continue to
be successful in managing dilution or that the Company will not realize
losses in the future as a result of dilution of its healthcare receivables.
See "Business--Healthcare Financing" and "Dilution of Receivables."
CONTROL BY MAJORITY SHAREHOLDER. Upon completion of this offering, the
Company's current sole shareholder, Capital Bank, which is a wholly-owned
subsidiary of Bancorp, will beneficially own approximately 83% of the
outstanding shares of Common Stock (approximately 81% if the Underwriters'
over-allotment option is exercised in full) and will therefore be able to
elect the entire Board of Directors and control all matters submitted to
shareholders for a vote, all fundamental
10
<PAGE>
corporate matters, including the selection of management and key personnel,
whether the Company engages in any mergers, acquisitions or other business
combinations or whether Capital Bank, at some time in the future, divests all
or any portion of its interest in Holding by means of a distribution to its
shareholders or otherwise. Four of the ten anticipated directors of Holding
also serve as officers or directors of Capital Bank or its affiliates.
The ownership interest of Capital Bank in Holding has been structured so
as not to violate one of the requirements necessary for the Company to
qualify for a subsequent tax free distribution of all or a portion of Capital
Bank's shares in Holding, should Capital Bank or Bancorp decide to make such
a distribution in the future. The Company has been advised by Capital Bank
and Bancorp that no decision has been made to make such a distribution and
that even if a decision is made to proceed with such a distribution, no
assurances can be given that all conditions precedent could be satisfied. As
a part of such corporate structure, no additional shares of Common Stock may
be issued that would reduce Capital Bank's interest below 80% without Capital
Bank's written approval, for the period that Capital Bank owns at least 80%
of the issued and outstanding Common Stock of the Company (the "Eighty
Percent Period"). Such restriction is reflected in the Amended and Restated
Articles of Incorporation of the Company (the "Articles") and in an agreement
being entered into among Capital Bank, the Company and the Company's
subsidiaries. In addition, although the Articles provide for the issuance by
the Company of one or more series of preferred stock from time to time,
during the Eighty Percent Period no shares of any other class of capital
stock may be issued without Capital Bank's written approval during such
period, nor may the Company invest in or form any corporation without such
approval. Amendments to its bylaws and changes to the Board are also subject
to such approval during the Eighty Percent Period. Similar restrictions apply
to the Company's direct and indirect subsidiaries, except that such
subsidiaries are restricted from issuing any shares without Capital Bank's
approval. Any decision as to whether any transactions of the type mentioned
above ultimately occur will be solely within the discretion of Bancorp and
Capital Bank. See "Management," "Certain Transactions," "Principal
Shareholders" and "Description of Capital Stock."
REGULATORY RESTRICTIONS RELATING TO POTENTIAL NEW ACTIVITIES. The
Company's immediate parent, Capital Bank, is a Florida-chartered,
FDIC-insured bank. Accordingly, the business activities of the Company are
generally limited under applicable FDIC regulations to those activities that
are permissible for national banks. Although factoring and the other
businesses in which the Company currently engages are authorized activities
for national banks, there can be no assurance that business opportunities the
Company might wish to pursue in the future will be authorized activities for
Capital Bank and therefore such activities might be unavailable to the
Company because of its regulated status as a subsidiary of Capital Bank. See
"Business--Regulation" and "Principal Shareholders."
BANCORP AND CAPITAL BANK LITIGATION. At times over the past several years,
Bancorp, Capital Bank and certain of their former and existing officers and
directors, including Daniel M. Holtz, the Chairman of the Board, Chief
Executive Officer and President of Bancorp and Capital Bank and a director of
the Company, Fana Holtz, Vice-Chairman of the Bancorp Board, Javier J. Holtz,
Chairman of the Board and Executive Vice President of the Company, a Senior
Vice President of Bancorp and an Executive Vice President and a director of
Capital Bank, and Abel Holtz, the former Chairman of the Board, Chief
Executive Officer and President of Bancorp and Capital Bank and the former
Chairman of the Board of the Company, and presently a shareholder of Bancorp,
have been parties to litigation brought either by certain shareholders of
Bancorp or its Audit Committee. Although an initial action brought in 1992 by
the Audit Committee was voluntarily dismissed by the plaintiffs, a derivative
action and an individual action were brought by certain shareholders of
Bancorp in February 1995. See "Business--Legal and Administrative
Proceedings" for a description of the action brought by the Audit Committee.
Pursuant to the derivative action, the plaintiffs have alleged, among
other things, that certain defendants engaged in a series of illegal
activities causing harm to Bancorp and Capital Bank. In addition, the
plaintiffs have alleged that certain of such officers and directors engaged
in a series of activities designed to improperly increase or maintain their
interest in, and control of, Bancorp. In the individual action, the
plaintiffs have alleged, among other things, that the defendants breached
fiduciary
11
<PAGE>
duties by, among other things, improperly using proxies to vote shares of
Bancorp owned by one plaintiff, that certain of the defendants unlawfully
solicited proxies for a shareholders' meeting and that actions taken at this
meeting were invalid. The plaintiffs are seeking, on behalf of Bancorp in the
derivative action, and on behalf of themselves in the individual action,
unspecified monetary damages, including treble damages, reasonable costs and
attorneys' fees, and certain injunctive and declaratory relief. The
plaintiffs have not indicated that they are seeking any monetary relief from
Bancorp and Capital Bank other than costs in the individual action. The
defendants have denied the allegations and are defending against both
actions. The Company is not a party to these proceedings and no relief is
sought from the Company, although Daniel Holtz, a director of the Company,
and Javier Holtz, Chairman of the Board and an Executive Vice President of
the Company, are defendants in the litigation. Although the Company does not
believe that the outcome of the foregoing litigations will have a material
adverse effect on its financial condition, results of operations or
liquidity, the Company cannot predict what effect, if any, such litigation
will have on the Company. For more information regarding these matters, see
"Business--Legal and Administrative Proceedings" and "Principal
Shareholders."
PENDING BANCORP AND CAPITAL BANK CHANGE IN CONTROL APPLICATIONS. Daniel
Holtz, Fana Holtz and Javier Holtz have advised Bancorp that they had
discussions with the Florida Department of Banking and Finance ("FDBF") as to
whether one or more of them was required under Florida law to file an
application to acquire and/or maintain a controlling interest in Capital Bank
through their ownership and control of Bancorp. As a result of those
discussions, Daniel Holtz, Fana Holtz and Javier Holtz have advised Bancorp
that they, both individually and as a group, have voluntarily filed an
application to acquire and/or maintain a controlling interest in Bancorp,
although they do not believe such an application is legally required. Daniel
Holtz, Fana Holtz and Javier Holtz are also having discussions with the Board
of Governors of the Federal Reserve System ("FRB") as to whether a change of
control notice is required under federal law. It presently cannot be
determined what effect, if any, the discussions with the FRB or the FDBF's
action on the application will have on Bancorp, Capital Bank and the Company,
although if the control applications are denied, regulatory authorities could
take various actions, including requiring that one or more members of the
Holtz family divest sufficient shares of Bancorp so as not to have legal
control of Bancorp as defined by regulatory authorities. As Bancorp and
Capital Bank will continue to control the Company after this offering, any
such actions could have an effect on the Company which cannot presently be
predicted, although the Company does not believe that the outcome of the
foregoing will have a material adverse effect on its financial condition,
results of operations or liquidity. For more information regarding the change
in control application, see "Business--Legal and Administrative Proceedings"
and "Principal Shareholders."
INVESTIGATIONS BY FEDERAL BANKING AUTHORITIES. Pursuant to Section 19 of
the Federal Deposit Insurance Act, without the consent of the FDIC, no person
who has been convicted of a crime involving dishonesty or breach of trust,
may own, control, or otherwise participate in the affairs of a banking
institution. As a result of entering a guilty plea to one count of giving
misleading testimony in 1991 to a Federal Grand Jury in violation of a
federal statute, with respect to the purpose of certain payments made by
Capital Bank, the Company and certain related parties to a public official,
Abel Holtz is subject to the restrictions of Section 19 of the Federal
Deposit Insurance Act. Accordingly, Abel Holtz is precluded from owning or
controlling, or otherwise participating in, the affairs of Bancorp and
Capital Bank without regulatory approval. Abel Holtz has advised Bancorp that
he has orally agreed with the FDIC not to vote his shares in Bancorp at the
present time. Federal bank regulatory authorities are also examining and
investigating whether Abel Holtz and some or all of the persons discussed in
this section, including Bancorp and its subsidiaries, as well as possibly
other persons, are in compliance with applicable change in control laws and
Section 19. The Company cannot presently determine when these investigations
by the federal bank regulatory authorities will be completed or what the
results of such investigations will be. The resolution of certain of these
examinations and investigations could have an effect on Bancorp and Capital
Bank, and as a result of their control of the Company, the Company, which
effect cannot presently be determined. However, the Company does not believe
that the outcome of the foregoing will have a material adverse effect on its
financial condition, results of operations or liquidity.
12
<PAGE>
NO DIVIDENDS. The Company has not paid any cash dividends to date and does
not intend to pay cash dividends in the foreseeable future. The Company
intends to retain earnings to finance the development and expansion of its
business. Under the Securitized Financings, the Company is prohibited from
paying dividends if immediately after giving effect to such dividend payment
the consolidated net worth of the Company will be less than that of the
Company as of December 31, 1993. In addition, the Other Bank Facility
prohibits the Company from paying dividends if immediately after giving
effect to such dividend payments the Company fails to meet certain financial
covenants and ratios, such as those relating to debt to net worth (no less
than 1 to 1), profitability ($5.2 million consolidated net income per year)
and positive net cash flows (more than $1 for each quarter). In addition,
because Holding conducts substantially all of its business through
subsidiaries, its ability to pay dividends in the future is dependent upon
its receipt of dividends paid to it by its subsidiaries. See "Dividend
Policy."
ABSENCE OF PUBLIC MARKET; POSSIBLE FLUCTUATIONS OF STOCK PRICE. Prior to
this offering, there has been no public market for the Company's Common
Stock. There can be no assurance that an active trading market for the Common
Stock will develop or that, if developed, it will be sustained after this
offering or that it will be possible to resell the shares of Common Stock at
or above the initial public offering price. The market price of the Common
Stock could be subject to significant fluctuations in response to the
Company's operating results and other factors. In addition, the stock market
in recent years has experienced extreme price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance of
companies. Such fluctuations, and general economic and market conditions, may
adversely affect the market price of the Common Stock. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of this offering, the
Company will have 12,000,000 shares of Common Stock outstanding. Of these
shares, 2,000,000 shares (2,300,000 if the over-allotment option granted to
the Underwriters is exercised in full) will be freely tradeable without
restriction or registration under the Securities Act of 1933, as amended (the
"Act"). All of the remaining 10,000,000 shares of Common Stock held by
Capital Bank, the current sole shareholder of the Company, will be
"restricted securities" as that term is defined in Rule 144 promulgated under
the Act. The current sole shareholder has agreed not to sell any such shares
of Common Stock for 180 days from the date of this Prospectus without the
prior written consent of Oppenheimer & Co., Inc., as representative of the
Underwriters. See "Underwriting." Additionally, upon consummation of this
offering, 800,000 shares of Common Stock will be reserved for issuance under
the Company's Stock Option Plan. The Company intends to register under the
Act all shares reserved for issuance under its Stock Option Plan. Shares
covered by such registration will be eligible for resale in the public
market, subject to Rule 144 limitations applicable to affiliates. See
"Management--Stock Option Plan." Future sales of substantial amounts of
Common Stock in the public market, or the availability of such shares for
future sale, could impair the Company's ability to raise capital through an
offering of securities and may adversely affect the then-prevailing market
prices. See "Shares Eligible for Future Sale."
FACTORS INHIBITING TAKEOVER. As the Company's sole shareholder, Capital
Bank, will continue to own in excess of 80% of the Company's Common Stock
after this offering, no takeover would be successful without its consent.
Changes in the management or ownership of Capital Bank or Bancorp or a
reduction in the number of shares owned by Capital Bank, however, could have
an effect on the likelihood of a takeover. See "Business--Regulation."
However, the Articles provide that no additional shares of Common Stock may
be issued that would reduce Capital Bank's interest below 80% without Capital
Bank's written approval during the Eighty Percent Period. In addition,
although the Articles provide for the issuance of one or more series of
Preferred Stock from time to time, during the Eighty Percent Period no shares
of any other class of capital stock or other equity security may be issued
without Capital Bank's written approval. Even in the event that at some later
date Capital Bank's percentage ownership in the Company is significantly
reduced, certain provisions of the Company's Articles and Amended and
Restated Bylaws (the "Bylaws") may be deemed to have anti-takeover effects
and may delay, defer or prevent a takeover attempt that a shareholder might
consider in its best interest. The Company's Articles authorize the Board to
determine the rights, preferences, privileges
13
<PAGE>
and restrictions of unissued series of Preferred Stock and to fix the number
of shares of any series of Preferred Stock and the designation of any such
series, without any vote or action by the Company's shareholders. Thus, the
Board can authorize and issue shares of Preferred Stock with voting or
conversion rights that could adversely affect the voting or other rights of
holders of the Company's Common Stock. In addition, the issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change of
control of the Company, since the terms of the Preferred Stock that might be
issued could potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of
the outstanding shares of the Common Stock. Other provisions of the Company's
Articles and Bylaws provide that special meetings of the shareholders may be
called only by the Board of Directors or upon the written demand of the
holders of not less than 30% of the votes entitled to be cast at a special
meeting. Capital Bank could also vote to amend the Articles or Bylaws without
the vote of any other shareholders. Such amendments could include other
anti-takeover provisions. In addition, certain provisions of the Florida
Business Corporation Act may have the effect of delaying, deferring or
preventing a change in control of the Company. See "Description of Capital
Stock--Anti-takeover Effects of Certain Provisions of Florida Law and the
Company's Articles of Incorporation and Bylaws."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of shares of
Common Stock offered hereby, after deducting the underwriting discount and
estimated offering expenses, are estimated to be approximately $15.3 million
($17.7 million if the over-allotment option granted to the Underwriters is
exercised in full).
The Company intends to use all of the net proceeds to reduce the Company's
indebtedness to its sole shareholder, Capital Bank, under the Capital
Facility, which bears interest at the prime rate, as published in THE WALL
STREET JOURNAL (8.25% at March 31, 1996), is subject to annual review each
June by Capital Bank and is due on demand. The outstanding borrowings under
the Capital Facility were approximately $69.8 million at March 31, 1996. See
Note 6 of Notes to the Company's Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company intends to retain all future earnings for the operation and
expansion of its business, and does not anticipate paying cash dividends in
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon the Company's results of operations, financial
condition and capital requirements and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other matters which the Company's
Board of Directors may consider. See "Risk Factors."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, giving effect to the 10,000-for-1 stock split effected July
1, 1996, and as adjusted for the sale of the 2,000,000 shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
BORROWINGS:
Notes Payable ........................................... $ 69,754 $ 54,444
Variable Rate Asset-Backed Certificates ................. 175,000 175,000
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; no shares outstanding ..................... 0 0
Common Stock, $.01 par value; 25,000,000 shares
authorized; 10,000,000 shares issued and outstanding;
12,000,000 shares issued and outstanding, as
adjusted(1) ........................................... 100 120
Additional paid-in capital ............................... 9,542 24,832
Retained earnings ....................................... 25,601 25,601
----------- --------------
Total shareholders' equity ............................ 35,243 50,553
----------- --------------
TOTAL CAPITALIZATION .................................. $279,997 $279,997
=========== ==============
</TABLE>
- --------
(1) Does not include shares of Common Stock reserved for issuance upon
exercise of stock options to be granted under the Company's Stock Option
Plan effective upon the consummation of this offering or shares issuable
pursuant to the Underwriters' over-allotment option. See
"Management--Company Stock Option Plan" and "Underwriting."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The consolidated selected financial data set forth below for income
statement and balance sheet data has been derived from the consolidated
financial statements of the Company contained elsewhere herein. The
consolidated financial statements as of and for the years ended December 31,
1991, 1992, 1993, 1994 and 1995 have been audited by Deloitte & Touche LLP,
independent auditors. The income statement data for the three months ended
March 31, 1995 and 1996, and the balance sheet data as of March 31, 1996,
have been derived from unaudited interim consolidated financial statements
contained elsewhere herein, which, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The data set forth
below should be read in conjunction with the financial statements and related
notes, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------ ----------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ----------- ----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
FACTORING FEES .......................$ 9,870 $ 12,482 $ 15,376 $ 17,371 $ 19,519 $ 4,565 $ 5,524
INTEREST INCOME ...................... 11,482 11,450 13,511 17,628 28,211 6,004 7,574
INTEREST EXPENSE ..................... (7,720) (7,005) (7,842) (10,329) (16,361) (3,553) (4,556)
NET INTEREST INCOME ................. 3,762 4,445 5,669 7,299 11,850 2,451 3,018
LETTER OF CREDIT AND OTHER FEES ...... 378 665 1,128 1,238 2,040 351 754
OTHER INCOME ......................... 1,092 905 1,303 1,541 1,849 324 291
-------- ---------- ---------- ---------- ---------- -------- --------
OPERATING REVENUES ................. 15,102 18,497 23,476 27,449 35,258 7,691 9,587
PROVISION FOR CREDIT LOSSES .......... 2,550 3,150 2,645 2,235 2,235 450 1,100
OPERATING EXPENSES ................... 9,594 11,316 13,072 14,137 18,457 4,102 5,289
-------- ---------- ---------- ---------- ---------- -------- --------
TOTAL EXPENSES ..................... 12,144 14,466 15,717 16,372 20,692 4,552 6,389
INCOME BEFORE INCOME TAXES(1) ........ 2,958 4,031 7,759 11,077 14,566 3,139 3,198
NET INCOME ........................... 1,716 2,304 4,305 6,092 8,693 1,883 1,903
NET INCOME PER SHARE .................$ 0.17 $ 0.23 $ 0.43 $ 0.61 $ 0.87 $ 0.19 $ 0.19
PRO FORMA INCOME STATEMENT DATA(2):
PRO FORMA INTEREST INCOME ............ $ 28,211 $ 7,574
PRO FORMA INTEREST EXPENSE ........... (15,002) (4,235)
------------ -----------
PRO FORMA NET INTEREST INCOME ........ $ 13,209 $ 3,339
------------ ------------
PRO FORMA NET INCOME ................. 9,504 2,094
PRO FORMA NET INCOME PER SHARE ....... 0.79 0.17
OPERATING RATIOS AND OTHER DATA(3):
FACTORED SALES .......................$825,116 $1,057,846 $1,326,802 $1,536,960 $2,001,364 $441,211 $563,989
FACTORING FEES TO FACTORED SALES ..... 1.20% 1.18% 1.16% 1.13% 0.98% 1.03% 0.98%
NET INTEREST INCOME TO FACTORED SALES 0.46% 0.42% 0.43% 0.47% 0.59% 0.56% 0.54%
LETTER OF CREDIT AND OTHER FEES TO
FACTORED SALES ..................... 0.05% 0.06% 0.09% 0.08% 0.10% 0.08% 0.13%
OTHER INCOME TO FACTORED SALES ....... 0.13% 0.09% 0.09% 0.10% 0.09% 0.07% 0.05%
-------- ---------- ---------- ---------- ---------- -------- --------
1.84% 1.75% 1.77% 1.79% 1.76% 1.74% 1.70%
PROVISION FOR CREDIT LOSSES TO
FACTORED SALES 0.31% 0.30% 0.20% 0.15% 0.11% 0.10% 0.20%
OPERATING EXPENSES TO FACTORED SALES 1.16% 1.07% 0.99% 0.92% 0.92% 0.93% 0.94%
-------- ---------- ---------- ---------- ---------- -------- --------
TOTAL EXPENSES TO FACTORED SALES ..... 1.47% 1.37% 1.18% 1.07% 1.03% 1.03% 1.13%
INCOME BEFORE INCOME TAXES TO
FACTORED SALES ..................... 0.36% 0.38% 0.58% 0.72% 0.73% 0.71% 0.57%
RETURN ON EQUITY(4) .................. 15.63% 17.78% 26.57% 28.80% 30.20% 29.58%(6) 22.27%(6)
RETURN ON ASSETS(4) .................. 1.23% 1.32% 1.99% 2.35% 2.51% 2.57%(6) 1.86%(6)
AVERAGE FUNDS EMPLOYED(5) ............$ 89,700 $ 108,300 $ 131,800 $ 153,600 $ 210,900 $188,800 $243,000
NET INTEREST INCOME TO AVERAGE
FUNDS EMPLOYED ..................... 4.19% 4.10% 4.30% 4.75% 5.62% 5.26%(6) 5.04%(6)
NET CHARGE-OFFS TO FACTORED
SALES VOLUME ...................... 0.16% 0.30% 0.20% 0.17% 0.05% 0.05% 0.25%
ACCOUNTS RECEIVABLE TURNOVER IN
DAYS(7)............................. 53 54 52 53 53 50 51
AVERAGE NUMBER OF EMPLOYEES .......... 118 140 153 162 193 177 222
AVERAGE FACTORED SALES PER EMPLOYEE ..$ 6,158 $ 7,246 $ 8,672 $ 9,487 $ 10,370 $ 9,971(6) $ 10,162(6)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
------------------ ----------------------------
ACTUAL ACTUAL AS ADJUSTED(8)
------------------ ----------- ---------------
BALANCE SHEET DATA: (UNAUDITED)
<S> <C> <C> <C>
Receivables, net ........................ $354,821 $394,780 $394,780
Total assets ............................ 399,471 425,160 425,160
Due to factoring clients ................ 128,578 141,578 141,578
Borrowings .............................. 227,260 244,754 229,444
Due to Affiliates and other liabilities 10,293 3,585 3,585
Shareholders' equity .................... 33,340 35,243 50,553
</TABLE>
- --------
(1) The results of operations of the Company are included in the consolidated
Federal income tax returns filed by Capital Bancorp, the parent of
Capital Bank. Capital Bank, the Company's sole shareholder, allocates
income taxes to the Company calculated on a separate return basis. See
"Certain Transactions."
(2) Pro forma income statement data reflects (i) the issuance of
2,000,000 shares of Common Stock offered hereby as if such issuance had
occurred on January 1, 1995 or January 1, 1996, net of issuance costs, and
the use of the net proceeds therefrom to repay indebtedness as described in
"Use of Proceeds," and (ii) reduction of interest expense related to such
indebtedness, net of income taxes, as if the repayment occurred on January
1, 1995 or January 1, 1996.
(3) For purposes of the ratios and data below for 1994 and 1995, factored
sales include certain receivables which are pledged as collateral for those
asset-based loans for which the Company provides factoring-type services.
(4) Computed using average monthly balances.
(5) Computed using average monthly balances of funds employed (receivables
less amounts due to factoring clients).
(6) Computed on an annualized basis.
(7) Computed by dividing 365 by the quotient of (i) factored sales volume for
the periods indicated and (ii) the average monthly accounts receivable
balance for the periods indicated.
(8) Adjusted to give effect to the sale of the Common Stock offered hereby and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
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
accounts 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 was acquired by Capital Bank in May 1985, at which time the
Company had one office in South Florida. The Company acquired its Los Angeles
regional office in August 1989, opened its New York regional office in April
1990 and the North Carolina regional office in May 1995. In September, 1994
the Company also established a healthcare division which provides financing
to various types of healthcare providers and companies involved in the
healthcare industry. The Company has experienced a compounded annual growth
rate in factored sales volume and operating revenues of 24.8% and 23.6%,
respectively, during the period 1991 through 1995, primarily as a result of
the growth in the California and New York regional offices and the opening of
the North Carolina regional office. In addition, the Company's factored sales
volume and operating revenues increased by 27.8% and 24.7%, respectively, in
the three month period ended March 31, 1996 as compared to the same period in
1995.
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 March 31, 1996,
the largest amount due from any one customer, a national department store
chain, was approximately $18.8 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
18
<PAGE>
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 each of 1994 (approximately $605 million
of $1.5 billion annual factored sales) and 1995 (approximately $757 million
of $2 billion annual factored sales).
Management believes that one of the essential tools in maintaining and
managing growth of the Company is the monitoring of certain key financial
ratios. The Company monitors the key components of its income statement data,
such as factoring fees, net interest income, other income, provision for
credit losses and operating expenses, as a percentage of its factored sales
volume. These key ratios allow the Company to monitor its performance in
achieving its goals of (i) obtaining higher gross margins on factoring fee
income, (ii) increasing fee income as a percentage of cash employed, (iii)
reducing credit losses, (iv) controlling costs, and (v) maximizing return to
its investors. Management also monitors both accounts receivable turnover and
the aging of customers' accounts receivable, with particular emphasis on
amounts greater than 60 days past due.
MONITORING ASSET QUALITY AND CREDIT LOSSES
The monitoring of asset quality is a routine function performed by
management to control credit losses. Monitoring asset quality involves the
periodic review, sometimes daily, of such pertinent financial statistics as
the aging of the accounts receivable portfolio, accounts receivable turnover,
dilution and charge-offs. 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.
19
<PAGE>
Set forth below are those ratios and statistics utilized by management in
monitoring asset quality for the five years ended December 31, 1995 and the
three month periods ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Provision for credit losses ........... $ 2,550 $ 3,150 $ 2,645 $ 2,235 $ 2,235
Charge-offs net of recoveries ......... $ 1,348 $ 3,164 $ 2,663 $ 2,618 $ 1,028
Allowance for credit losses--specific $ 1,398 $ 967 $ 600 $ 160 $ 1,203
Allowance for credit losses--general . $ 791 $ 1,208 $ 1,557 $ 1,614 $ 1,778
----------- ----------- ----------- ----------- -----------
Total allowance for credit losses ... $ 2,189 $ 2,175 $ 2,157 $ 1,774 $ 2,981
Accounts receivable turnover in days . 53 54 52 53 53
Accounts receivable past due more
than 60 days as a percentage of
factored receivables .................. 6.72% 6.08% 4.85% 5.17% 3.49%
Accounts receivable past due more
than 90 days as a percentage of
factored receivables .................. 4.31% 2.66% 1.95% 2.35% 2.37%
Provision for credit losses as a
percentage of factored sales .......... 0.31% 0.30% 0.20% 0.15% 0.11%
Net charge-offs to factored sales .... 0.16% 0.30% 0.20% 0.17% 0.05%
Average receivables ................... $126,487 $166,506 $204,664 $241,815 $312,124
Provision for credit losses as a
percentage of average receivables ... 2.02% 1.89% 1.29% 0.92% 0.72%
Net charge-offs as a percentage of
average receivables ................... 1.07% 1.90% 1.30% 1.08% 0.33%
Non-accruing advances ................. $ 965 $ 1,083 $ 385 $ 739 $ 2,184
Non-accruing advances as a percentage
of receivables ...................... 0.66% 0.60% 0.17% 0.28% 0.60%
Provision for credit losses as a
percentage of average funds
employed(1)(2) ...................... 2.84% 2.91% 2.01% 1.46% 1.06%
Net charge-offs as a percentage of
average funds employed(1)(3) ........ 1.50% 2.92% 2.02% 1.70% 0.49%
Non-accruing advances as a
percentage of funds employed(1)(4) .. 0.98% 1.01% 0.28% 0.44% 0.94%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Provision for credit losses ........... $ 450 $ 1,100
Charge-offs net of recoveries ......... $ 206 $ 1,397
Allowance for credit losses--specific $ 244 $ 736
Allowance for credit losses--general . $ 1,774 $ 1,948
----------- -----------
Total allowance for credit losses ... $ 2,018 $ 2,684
Accounts receivable turnover in days . 50 51
Accounts receivable past due more
than 60 days as a percentage of
factored receivables .................. 4.40% 4.86%
Accounts receivable past due more
than 90 days as a percentage of
factored receivables .................. 2.81% 3.04%
Provision for credit losses as a
percentage of factored sales .......... 0.10% 0.20%
Net charge-offs to factored sales .... 0.05% 0.25%
Average receivables ................... $269,675 $365,918
Provision for credit losses as a
percentage of average receivables ... 0.68%(5) 1.20%(5)
Net charge-offs as a percentage of
average receivables ................... 0.32%(5) 1.52%(5)
Non-accruing advances ................. $ 293 $ 2,436
Non-accruing advances as a percentage
of receivables ...................... 0.10% 0.61%
Provision for credit losses as a
percentage of average funds
employed(1)(2) ...................... 0.96%(5) 1.80%(5)
Net charge-offs as a percentage of
average funds employed(1)(3) ........ 0.44%(5) 2.28%(5)
Non-accruing advances as a
percentage of funds employed(1)(4) .. 0.14% 0.94%
</TABLE>
<PAGE>
- --------
(1) Funds employed are receivables less amounts due to factoring clients.
(2) Computed by dividing provision for credit losses by average funds
employed for each period presented. The provision for credit losses as a
percentage of average advances for each of the periods presented was
lower than the provision for credit losses as a percentage of average
funds employed.
(3) Computed by dividing net charge-offs by average funds employed for each
period presented. Net charge-offs as a percentage of average advances for
each of the periods presented was lower than net charge-offs as a
percentage of average funds employed.
(4) Computed by dividing non-accruing advances by funds employed at the end
of each respective period indicated. Non-accruing advances as a
percentage of advances during each period presented was lower than
non-accruing advances as a percentage of funds employed.
(5) Computed on an annualized basis.
20
<PAGE>
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
decreased from 0.31% in 1991 to 0.11% in 1995, reflecting the Company's
improved loss experience over that period and positive economic trends that
benefited the Company's clients and their customers. The provision as a
percentage of factored sales increased to 0.20% in the first quarter of 1996,
reflecting a higher net charge-off rate. The provision for credit losses as a
percentage of average receivables decreased from 2.02% in 1991 to 0.72% in
1995, and the provision for credit losses as a percentage of average funds
employed decreased from 2.84% in 1991 to 1.06% in 1995, also reflecting the
Company's improved loss experience over that period. 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 1.20% and
1.80%, respectively, in the first quarter of 1996 from 0.68% and 0.96%,
respectively, in the first quarter of 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 0.16% to
0.30% in the 1991-1994 period, reflecting normal credit losses consistent
with historical experience. Net charge-offs as a percentage of factored sales
declined to 0.05% in 1995 as a result of higher recoveries and fewer
bankruptcies that affected the Company. The net charge-off percentage
increased to 0.25% in the first quarter of 1996 as a result of the charge-off
of several large items, including $600,000 related to the bankruptcy of a
large Northeastern regional chain store and $200,000 related to a single
client loan, $74,000 of which was recovered subsequent to March 31, 1996.
Consistent with net charge-offs as a percentage of factored sales, during the
period 1991 to 1994, net charge-offs as a percentage of average receivables
and net charge-offs as a percentage of average funds employed reflected
normal credit losses consistent with historical experience, ranging from
1.07% to 1.90% and 1.50% to 2.92%, respectively. Net charge-offs as a
percentage of average receivables and net charge-offs as a percentage of
average funds employed decreased to 0.33% and 0.49%, respectively, in 1995,
primarily as a result of higher receivable recoveries and fewer bankruptcies
affecting the Company in that year. Net charge-offs as a percentage of
average receivables and net charge-offs as a percentage of average funds
employed increased to 1.52% and 2.28%, respectively, in the first quarter of
1996, as a result of the charge-off of several large items as described
above. Management anticipates that net charge-offs during the remainder of
1996 will be higher than during 1995 and more consistent with the Company's
historical experience.
Non-accruing advances as a percentage of funds employed have remained
below 1.00% from January 1, 1993 to March 31, 1996, ranging from 0.14% to
0.94% during such period. Non-accruing advances as a percentage of
receivables ranged from 0.10% to 0.66% during the same period. Management
believes that fluctuations in non-accruing advances within this range are a
normal part of the Company's ongoing business and are not significant.
Non-accruing advances increased by $200,000 from December 31, 1995 to March
31, 1996, as a result of the Company's placement of a single loan of
approximately $1.5 million on non-accrual during such period, which was
subsequently paid-off with no loss of principal, partially offset by the
repayment of the largest non-accrual advance at December 31, 1995. This
advance was approximately $1.4 million at December 31, 1995, and the
subsequent repayments resulted in a net charge-off of approximately $126,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Net income increased from approximately $1.88 million for the three month
period ended March 31, 1995 to approximately $1.90 million for the comparable
period in 1996, a 1.1% increase,
21
<PAGE>
primarily as a result of an increase in the Company's provision for credit
losses which offset the increase in revenues. Operating revenues increased
from approximately $7.7 million for the three month period ended March 31,
1995 to approximately $9.6 million for the comparable period in 1996, a 24.7%
increase, primarily attributable to the increase in the Company's factored
sales volume, and the resulting increase in interest income and factoring
fees. Factored sales increased from approximately $441.2 million for the
three month period ended March 31, 1995 to approximately $564.0 million for
the three month period ended March 31, 1996, an increase of 27.8%, with
factoring fees increasing by 21.0% from approximately $4.6 million for the
three month period ended March 31, 1995 to approximately $5.5 million for the
comparable period in 1996. These 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.
Although the Company experienced increased factoring fee income as a
result of increased factored sales, factoring fee income as a percentage of
factored sales declined from 1.03% for the three months ended March 31, 1995
to 0.98% for the three months ended March 31, 1996. This decline was
primarily the result of lower factoring fees charged to high volume clients
in the New York market 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 because, among other reasons, high
volume clients do not have the same servicing needs as smaller clients,
requiring less labor intensive services to be performed by the Company, and
because there is increased competition for such clients' business. The New
York office accounted for 53.0% of the Company's factored sales volume for
the quarters ended March 31, 1995 and March 31, 1996.
Net interest income increased from approximately $2.5 million for the
three months ended March 31, 1995 to approximately $3.0 million for the
comparable period in 1996, a 23.1% increase, principally as a result of an
increase of $54.2 million in average outstanding client advances for the
three months ended March 31, 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 issuance of additional Certificates
under the Securitized Financings initiated by the Company in June 1994. In
particular, as a result of the Company's issuance of an additional $50
million in Certificates in July 1995, the proceeds of which were used to pay
down the Capital Facility, the Company was able to reduce the higher interest
debt (approximately 8.25% at March 31, 1996) outstanding under the Capital
Facility. At March 31, 1996, there were $175 million of Certificates
outstanding bearing interest at LIBOR plus 1.25% (approximately 6.63% at
March 31, 1996, excluding annualized transaction costs of 0.37%). The Company
intends to continue to use the Securitized Financings as a principal funding
source for its traditional factoring activities, to the extent available.
Letter of credit and other fee income increased from approximately
$350,700 for the three months ended March 31, 1995 to $753,800 for the three
months ended March 31, 1996, an 115.0% increase, primarily due to an increase
in letter of credit fees of approximately $101,200 or 67.8% for the three
month period ended March 31, 1996 as compared to the comparable period in
1995. In addition, other fee income increased by $301,933 for the quarter
ended March 31, 1996 as compared to the quarter ended March 31, 1995.
Operating expenses as a percentage of operating revenues increased from
53.3% to 55.2% for the three month period ended March 31, 1996 as compared to
the three month period ended March 31, 1995. This increase was primarily the
result of the increase in salaries and office expenses related to the opening
of the Company's North Carolina office in May 1995.
The provision for credit losses increased from $450,000 for the three
months ended March 31, 1996 to approximately $1.1 million for the three
months ended March 31, 1996. This increase is primarily attributable to an
increase in outstanding accounts receivable, and a $200,000 charge-off on a
single client, $74,000 of which was recovered subsequent to March 31, 1996.
In addition, recoveries during the three month period ended March 31, 1995
were approximately $110,000 greater than recoveries during the comparable
period in 1996. Provisions for credit losses as a percentage of factored
sales increased to 0.20% at March 31, 1996 as compared to 0.10% for the
comparable period in 1995.
22
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net income increased from approximately $6.1 million during 1994 to
approximately $8.7 million for 1995, a 42.6% increase, primarily as a result
of increased operating revenues generated from increased factored sales.
Operating revenues increased from approximately $27.4 million for 1994 to
approximately $35.3 million for 1995, a 28.5% increase, primarily
attributable to the increase in the Company's factored sales volume, and the
resulting increase in interest income and factoring fees. Factored sales
increased from approximately $1.5 billion for 1994 to approximately $2
billion for 1995, an increase of 30.2%, with factoring fees increasing by
12.4% from approximately $17.4 million for 1994 to approximately $19.5
million for 1995. A significant portion of these increases were attributable
to continued growth of the Company's New York and California offices and the
opening of the Charlotte, North Carolina office, as well as the business
generated by the Company's healthcare division.
Although the Company experienced increased factoring fee income as a
result of increased factored sales, factoring fee income as a percentage of
factored sales has declined from 1.13% for 1994 to 0.98% (1.03% excluding
asset-based lending activities) for 1995. This decline was primarily the
result of lower factoring fees charged to high volume clients in the New York
market 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 because, among other reasons, high volume clients do
not have the same servicing needs as smaller clients, requiring less labor
intensive services to be performed by the Company, and because there is
increased competition for such clients' business. The New York office
accounted for 48.0% of the Company's factored sales volume for 1995, compared
to 53.0% for 1994.
Net interest income increased from approximately $7.3 million for 1994 to
approximately $11.8 million for 1995, a 62.3% increase, principally as a
result of a $57.3 million increase in average outstanding client advances for
1995 compared to 1994. Net interest income was also favorably impacted by
continued interest expense reductions achieved through the issuance of
additional Certificates under the Securitized Financing initiated by the
Company in June 1994. The Company issued an additional $25 million of such
certificates in December 1994, and an additional $50 million in July 1995.
This allowed the Company to reduce the higher interest debt outstanding under
the Capital Facility (approximately 8.75% at December 31, 1995). At December
31, 1995, there were $175 million of Certificates outstanding bearing
interest at LIBOR plus 1.25% (approximately 7.19% at December 31, 1995,
excluding annualized transaction costs of 0.37%).
Letter of credit and other fee income increased from approximately $1.2
million in 1994 to approximately $2.0 million in 1995, a 66.7% increase,
primarily as a result of an increase in letter of credit fees of
approximately $305,000 in 1995 as compared to 1994, and an increase in
overadvance fees of approximately $332,000 in 1995 as compared to 1994. In
addition, fees related to field examinations increased by approximately
$91,000 in 1995 as compared to 1994. Overadvances represent loans to clients
in excess of the factored accounts receivable, substantially all of which are
collateralized by assets other than receivables. All of the foregoing
increases were principally the result of increased factoring volume in 1995.
Operating expenses increased as a percentage of operating revenues,
increasing from approximately 51.5% in 1994 to approximately 52.3% in 1995.
The increase was the result of the opening of the North Carolina office in
May 1995, and increases in salaries and benefits related principally to
increased staff levels in the healthcare division and the hiring of personnel
for the North Carolina office.
The provision for credit losses was approximately $2.2 million in both
1994 and 1995. The provision for credit losses as a percentage of factored
sales declined from 0.15% in 1994 to 0.11% in 1995. The Company's allowance
for credit losses is determined after evaluating the receivables portfolio,
current market conditions, changes in the nature and the volume of the
receivables portfolio and past loss experience. Management believes that the
decline in net charge-offs over such period reflects the Company's policies
and practices of (i) generally refraining from providing factoring services
to certain
23
<PAGE>
industries, (ii) carefully screening and selecting new clients, (iii)
maintaining stringent underwriting criteria and using good credit judgment,
(iv) using diligent monitoring procedures and (v) avoiding a significant
concentration in any one client or clients. Although management attributes
this positive trend primarily to the procedures it employs in monitoring
asset quality, which procedures have kept losses on client advances at
negligible levels and customer credit losses at their lowest level in the
past three years, there can be no assurances that such levels will be
sustained by the Company in the future. Non-accruing advances at December 31,
1995 were approximately $2.2 million compared to approximately $739,000 at
December 31, 1994. This increase was primarily attributable to advances to a
single client, most of which were collected in 1996.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net income increased from approximately $4.3 million in 1993 to
approximately $6.1 million in 1994, a 41.5% increase, primarily as a result
of increased operating revenues generated from increased factored sales.
Operating revenues increased from approximately $23.5 million in 1993 to
approximately $27.4 million in 1994, a 16.9% increase, and was primarily
attributable to a significant increase in the Company's factored sales, and
the resulting increase in factoring fees. Factored sales increased from
approximately $1.3 billion in 1993 to approximately $1.5 billion in 1994, an
increase of 15.8%, with factoring fees increasing by 13% from approximately
$15.4 million in 1993 to approximately $17.4 million in 1994. A significant
portion of these increases was attributable to continued growth of the
Company's New York office.
Although the Company experienced increased factoring fee income as a
result of increased factored sales, factoring fee income as a percentage of
factored sales declined slightly, from 1.16% in 1993 to 1.13% in 1994. This
decline was primarily the result of lower rates for factoring fees
experienced on several large client relationships where expenses as a
percentage of factored sales are also lower.
Net interest income increased from approximately $5.7 million in 1993 to
approximately $7.3 million in 1994, a 28.8% increase, primarily as a result
of a $21.8 million increase in average client advances outstanding in 1994
compared to 1993, and interest expense reductions achieved as a result of the
issuance in June 1994 of $100 million in certificates under the Securitized
Financings. These certificates bear interest at LIBOR plus 1.25% and were
used to (i) repay in full the outstanding balance under a $15 million loan
from an unaffiliated bank, where the Company paid LIBOR plus 1.75%, and (ii)
reduce the amount outstanding under the Capital Facility which bears interest
at the prime rate.
Letter of credit and other fee income increased from approximately $1.1
million in 1993 to approximately $1.2 million in 1994 representing a 10%
increase.
The Company's total expenses increased from approximately $15.7 million in
1993 to approximately $16.4 million in 1994, a 4.2% increase, primarily as a
result of increases in salaries and benefits associated with the growth in
New York and California, as well as operations in the Florida office.
The provision for credit losses decreased from approximately $2.6 million
in 1993 to approximately $2.2 million in 1994, a 15.5% decrease. As a
percentage of factored sales, the provision for credit losses declined from
.20% in 1993 to .15% in 1994. 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 receivables portfolio and
past loss experience.
LIQUIDITY AND CAPITAL RESOURCES
Since June 1994, the Company has relied upon an asset securitization
program, the Securitized Financings, as its principal source of funding. This
funding is supplemented by the Capital Facility and, more recently, the Other
Bank Facility.
Through March 31, 1996, the trust created in connection with the
Securitized Financings had issued three series of asset-backed certificates
(each, a "Certificate") aggregating $175 million under the
24
<PAGE>
Securitized Financings, including $100 million in June 1994, $25 million in
December 1994 and $50 million in July 1995. All of the Certificates were
issued to life insurance companies. Initially, the Certificates were rated
"AA" by Duff & Phelps Credit Rating Company and "A" by Fitch Investors
Services, Inc. Approximately one year after its initial rating, Fitch
Investors Services, Inc. upgraded its rating of the Certificates to "AA". The
scheduled maturity date of the Certificates corresponding to each series is
December 1999 ($100 million), June 2000 ($25 million), and January 2001 ($50
million), respectively. The Certificates issued under each series bear
interest at LIBOR plus 1.25% before transaction costs (approximately 7.19% at
December 31, 1995 and 6.63% at March 31, 1996, excluding annualized
transaction costs of 0.37% during such periods). Interest is payable monthly.
However, an early amortization event will occur if the Company fails to
satisfy certain financial covenants. The principal financial covenants
contained in the Securitized Financing agreements that the Company must
satisfy include, (i) consolidated net worth in excess of $18.5 million, (ii)
tangible equity ratio of at least 6%, (iii) accounts receivable non-payment
percentage of no more than 18%, (iv) 60-day accounts receivable percentage of
no more than 10% of total accounts receivable, (v) 90-day accounts receivable
percentage of no more than 4.5% of total accounts receivable, (vi) weighted
average factoring fee of at least 0.75%, (vii) weighted average accounts
receivable turnover of less than 70 days, (viii) accounts receivable dilution
of no more than 11%, (ix) accounts receivable payment ratio for three
consecutive periods of more than 40%, (x) aggregate amount of subordinated
certificates of no more than 25% of senior certificates, (xi) subordinated
certificates equal to or greater than 7% of total certificates and (xii)
value of accounts receivable transferred to the Trust (as defined below) of
no less than 135% of aggregate certificates. In addition, there are other
covenants relating to the collateral, including required capital levels,
maximum dilution and delinquency ratios and minimum subordination levels. The
Company is in material compliance with these and all other covenants
contained in the Securitized Financing agreements. The Company may continue
to use the Securitized Financings for funding, provided eligible 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 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 March 31, 1996, the Company had transferred
to the Trust Advances aggregating nearly $224 million. Additionally, in
connection with any additional secured indebtedness to be incurred by the
Company, the Securitized Financings require that all additional secured
lenders enter into an intercreditor agreement with the holders of the
Certificates and the trustee of the Trust. The Securitized Financings permit
future purchases to the extent that the Company generates eligible Advances.
The Company used all of the funding it has obtained through the Securitized
Financings to (i) repay in full the outstanding balance under a $15 million
loan from an unaffiliated bank, where the Company paid interest of LIBOR plus
1.75%, and (ii) pay down the indebtedness under the Capital Facility.
In May 1996, CF One sold the CF One Notes which notes are collateralized
by subordinated certificates that were issued in connection with the
Company's Securitized Financings. The CF One Notes, which are due and payable
in July 2001, bear interest at an annual fixed rate of 7.95% and are rated
"BBB" by both Duff & Phelps Credit Rating Company and Fitch Investors
Services, Inc. The principal purpose for the issuance of the CF One Notes was
to allow CF One to obtain additional financing by taking advantage of the
favorable financing terms resulting from an increase in the value of the
subordinated certificates held by CF One which are collateralized by assets
held by the Trust. The increase in the value of the subordinated certificates
held by CF One was the result of the favorable performance of the receivables
and other assets held in the Trust's portfolio.
Under the Capital Facility, the Company also has a $125 million unsecured
revolving line of credit with Capital Bank, the Company's sole shareholder,
pursuant to which the Company had outstanding borrowings of approximately
$69.8 million at March 31, 1996. The indebtedness under the Capital Facility
bears interest at the prime rate, as published in The Wall Street Journal
(8.25% at March 31, 1996), is subject to annual review by Capital Bank each
June and is due on demand. The Facility has been in place since 1985 and
historically has been renewed for one-year periods in June of each year.
Interest under the Capital Facility is payable monthly. The Company generally
has used the Capital
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Facility to make Advances to its clients. The net proceeds of this offering
will be used to reduce the Company's indebtedness under the Capital Facility.
In March 1996, the Company entered into the Other Bank Facility, a
revolving credit facility with an unaffiliated bank in the amount of $40
million which was closed in April 1996. Indebtedness under the Other Bank
Facility will be secured by Advances not transferred to the Trust or eligible
for transfer to the Trust, most of which were made by the Company's
healthcare division or were asset-based loans, as well as all of the
equipment used by the Company in its operations. In order for the Other Bank
Facility to be fully funded, the Company would have to pledge an amount in
excess of $57 million in Advances. The indebtedness under the Other Bank
Facility may not exceed 70% of the value of the Advances pledged by the
Company as collateral for such indebtedness. The Company currently has
borrowings of approximately $22 million outstanding under the Other Bank
Facility. The indebtedness under the Other Bank Facility bears interest at a
rate of LIBOR plus 2.15%, payable monthly. The indebtedness under the Other
Bank 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 Other Bank Facility contains certain financial
covenants and ratios, including those relating to the Company's debt to net
worth (no less than 1 to 1), profitability ($5.2 million of annual
consolidated net income) and positive net cash flows (more than $1 per
quarter). Funds borrowed under the Other Bank Facility were used by the
Company to pay down indebtedness under the Capital Facility, and to fund
certain of the Company's healthcare financing activities and asset-based
lending activities.
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 receivables purchased from its clients. Of the Company's
approximately $401.5 million of accounts receivable outstanding at March 31,
1996, approximately $169.5 million have balances exceeding $1 million. These
customers are primarily large national or regional department store chains or
specialty retailers. At March 31, 1996, the largest amount due from any one
customer, a national chain store, was approximately $18.8 million. In
addition, the Company's accounts receivable turned over in an average of 53
days during 1995 and 51 days during the three months ended March 31, 1996.
The Company had no material commitments for capital expenditures as of
March 31, 1996. The Company has signed a letter of intent to purchase
substantially all of the assets of Tempfunds, specialized financial services
companies, subject to negotiation of a definitive agreement containing, among
other things, representations and warranties that there have been no material
adverse changes in the sellers' operations, financial condition or business
prospects, and several other conditions, including the Company's satisfactory
completion of due diligence and the receipt of all required regulatory and
other approvals, if any. Pursuant to the letter of intent, the purchase price
would be $900,000 over the book value of the assets acquired (estimated by
the sellers to be between $7 million and $10 million), plus an additional
amount up to $900,000 payable over 3 years if certain contingencies are met.
If the acquisition is consummated, the Company would use the Capital Facility
to fund the acquisition. 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.
Management believes that it has the corporate infrastructure in place to
support its earnings growth for the foreseeable future. Management also
believes that funds available under the Company's current credit facilities
(assuming such facilities are renewed or replaced with similar facilities)
and cash flow from operations will be sufficient to satisfy the Company's
working capital requirements for at least 12 months after this offering.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material impact on its
results of operations.
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BUSINESS
GENERAL
The Company is a specialized financial services company principally
engaged in providing receivables-based commercial financing and related
fee-based credit, collection and management information services. The
Company's clients are primarily small to medium size companies in various
industries, including textile and apparel and furniture manufacturing, and,
recently, entities involved in the healthcare industry. The Company operates
through four offices located in New York City, Los Angeles, Charlotte and its
headquarters in South Florida. In late 1994, the Company began to expand its
asset-based lending business. Management expects healthcare financing and
asset-based lending to contribute significantly to the growth of the Company,
although there can be no assurance that this will be the case. The Company
currently has over 400 clients who generate annual sales of $500,000 to over
$100 million, and services over 100,000 customers of those clients.
The Company generally provides financing to its clients through the
purchase of accounts receivable owed to the Company's clients by the clients'
customers, usually on a non-recourse basis, as well as by guaranteeing
amounts due under letters of credit issued to the Company's clients which are
collateralized by accounts receivable and other assets. The purchase of
accounts receivable is usually known as "factoring" and results in the
payment by the client of a factoring fee, generally equal to 0.5% to 2% of
the factored sales volume. No money is paid to the client at the time the
Company purchases the client's receivables. Instead, the Company records a
liability to the client on its books for the purchase price of the
receivable. Generally, the Company and the client notify the client's
customer to make all payments on the receivable directly to the Company. In
most cases, a client's customers are other commercial entities and the client
does not deal directly with individuals. In healthcare financing, the
client's customers are individuals, but the client's receivables are mostly
from third-party obligors. See "--Healthcare Financing."
The Company guarantees the collection of each client's pre-approved
receivables or receivables from each client's customers with pre-approved
credit lines. Payment for receivables which are credit-approved by the
Company is made to the client after collection from the client's customer or,
if the receivable is not paid based solely on the customer's financial
inability to pay, payment is made to the client within 120 days after the due
date of the receivable. Frequently, the Company also advances funds to its
clients prior to collection of receivables, charges interest on such advances
(in addition to any factoring fees) and satisfies such advances from
receivables collections. All payments to clients are reduced by amounts
outstanding to the Company, such as the factoring fee charged to the client
or any outstanding advances to the client. Interest charged on such advances
is generally equal to 1% to 4% over prime. Management believes that the
generally short-term and floating rate characteristics of its advances and
the floating rate of its financings result in minimal interest rate exposure.
Approximately 30% of the Company's clients use only the credit protection and
management information services offered by the Company in connection with the
purchase of their accounts receivable, and do not obtain advances against the
purchased receivables from the Company.
The Company has grown significantly in size and profitability, with a
compounded annual growth rates in operating revenues and net income of 23.6%
and 50.0%, respectively, during the period 1991 through 1995, and a
compounded annual growth rate in factored sales volume of 24.8% for the same
period. For 1995, the Company's operating revenues, net income and factored
sales volume increased by 28.5%, 42.7% and 30.2%, respectively, over 1994 and
increased by 24.7%, 1.1% and 27.8%, respectively, in the three month period
ended March 31, 1996 as compared to the same period in 1995. The Company's
operating strategy includes (i) managing credit risk to ensure consistent and
stable growth, (ii) increasing market penetration through offices in key
factoring centers, (iii) recruiting and retaining experienced personnel who
use a team approach to provide quality service and (iv) diversifying by
product and industry, especially in healthcare financing, which management
believes has significant growth potential.
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BACKGROUND OF THE COMPANY
Factors was acquired by Capital Bank in May 1985, at which time Factors
had one office in South Florida and total assets of less than $6 million,
compared to total assets of $399.5 million as of December 31, 1995. Factors
grew rapidly during 1985 and the first six months of 1986, but sustained
losses during these periods. In 1986, Factors hired a new management team,
including the current President and Chief Executive Officer of Holding and
Factors and two members of the current senior management team located in
Florida. Factors, under this management, acquired the Los Angeles regional
office in August 1989, which was initially staffed with former officers of
NatWest Commercial Services, Inc., and opened the New York regional office in
April 1990, which was initially staffed with former officers of Bankers Trust
Factors. Factors experienced substantial growth in the early 1990s, and added
several key executive officers. In September 1994, the Company established a
healthcare division and, in late 1994, the Company also began asset-based
lending. The Company opened its Charlotte regional office in May 1995,
initially staffed with former executives of Barclays Commercial Corporation.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of increases in factored sales volume in the
newer offices.
Holding is a wholly-owned subsidiary of Capital Bank, a Florida commercial
bank, which is a wholly-owned subsidiary of Bancorp. Holding was formed in
June 1994 in order to serve as the holding company for Factors and to
accommodate the issuance of asset-backed certificates in connection with the
Securitized Financings which have been issued pursuant to several private
placements . Additionally, in 1994, Holding formed another subsidiary, CF
One, and Factors formed a subsidiary, CF Funding Corp. Both CF One and CF
Funding Corp. were created to accommodate the issuance of the asset-backed
certificates. CF One holds subordinated certificates issued by the Trust,
created in connection with the Securitized Financings, which it purchased
with funds contributed to it by Holding. Pursuant to the Securitized
Financings, Advances made by Factors that were collateralized by third party
accounts receivable and, in certain cases, by cash, letters of credit,
inventory or other collateral provided to Factors were sold to CF Funding
Corp., which subsequently transferred the Advances to the Trust. The Trust
issued Certificates, which were sold to institutional buyers through several
private placements. The aggregate amount of Certificates presently
outstanding is $175 million, of which $100 million was issued in June 1994,
$25 million was issued in December 1994 and $50 million was issued in July
1995. Each Certificate evidences an interest in the Trust's assets and the
right to receive the payment of principal in the face amount of the
certificate and interest from the Trust. The Trust's assets consist
principally of the Advances, as well as funds collected or to be collected in
respect of the Advances and the collateral therefor. Factors is responsible
for servicing the Advances owned by the Trust. Subordinated certificates were
also issued by the Trust to CF One in connection with each of the Securitized
Financings ($15 million in June 1994, $3.75 million in December 1994 and
$7.50 million in July 1995). The Company utilized the Securitized Financings
because, among other reasons, it offered the Company a less costly financing
alternative and, under applicable regulatory restrictions, the Company was
unable to increase its borrowings under the Capital Facility. Although the
Company has no present plans to complete any additional Securitized
Financings during the next 12 months, if an opportunity arises which would
allow for any additional Securitized Financings, the Company would likely
seek to issue additional Certificates thereunder.
MARKET FOR COMPANY SERVICES
Traditionally, the factoring client base has consisted of members of the
textile and apparel industries, furniture manufacturers, electronics and home
furnishings organizations, wholesalers, distributors and service
organizations. Approximately 76.0% of the Company's clients are in the
textile and apparel industry and 10.8% are manufacturers of furniture and
home furnishings. Clients who, for various reasons, have insufficient or less
effective in-house staff, equipment or procedures to monitor customers,
manage accounts receivable or protect against credit loss, also use factors
to provide such services. These include both mature and younger companies.
For example, as the retail industry becomes more fragmented due to an
increased number of specialty stores challenging department stores, mass
merchants and discounters, suppliers are faced with a larger universe of
buyers and may
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experience higher costs to maintain their credit and receivables department
and increasing paper flow, requiring more sophisticated systems. As clients
experience these rising costs, credit, collection and management information
services such as those provided by the Company become economically and
operationally more attractive. In addition, manufacturers benefit from
factoring because it allows them to turn inventory more quickly, particularly
if they receive cash advances, which may be used to produce more inventory
that could not have been produced if the manufacturer had waited to be paid
by its customer.
The Company, as well as the factoring industry, has historically
experienced and expects to continue to experience seasonal fluctuations in
its factored sales volume and factoring fees, which generally have been
highest during the period from August through November. A principal reason
for the fluctuation in the Company's factored sales volume and factoring fees
is the seasonality in the sales of certain of the Company's clients,
especially those in the textile and apparel industry, who typically ship more
goods during such 4-month period in order to fill increased customer orders
in anticipation of "back to school" and the ensuing holiday season. The
Company realized approximately 40.0% of its annual factored sales volume in
each of 1994 (approximately $605 million of $1.5 billion annual factored
sales) and 1995 (approximately $757 million of $2 billion annual factored
sales) during this 4-month period. Historical experience also indicates that
the Company's factored sales volume and factoring fees are at their lowest
during the period from December through February. Such seasonal fluctuations
can be seen by a review of the Company's quarterly factored sales volume and
net income for the 3-year period ended December 31, 1995, as set forth below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1993 Factored Sales Volume $296,710 $319,767 $341,953 $368,372 $1,326,802
Net Income ............ $824 $991 $1,154 $1,336 $4,305
1994 Factored Sales Volume $328,855 $365,176 $423,884 $419,045 $1,536,960
Net Income ............ $1,128 $1,110 $1,769 $2,085 $6,092
1995 Factored Sales Volume $441,211 $460,407 $561,222 $538,523 $2,001,364
Net Income ............ $1,883 $2,069 $2,524 $2,217 $8,693
</TABLE>
One fast-growing market is healthcare financing, which the Company has
recently entered. Typical clients include hospitals, nursing homes, doctor
groups, home treatment centers, home healthcare service providers, temporary
nursing or staffing services and providers of durable medical equipment.
These entities often have long waits for receivables to be paid, but steady
needs for cash, and, accordingly, are less subject to seasonal changes. See
"--Healthcare Financing."
INDUSTRY OVERVIEW
Financial service companies which compete with the Company are widely
known as factors and typically service retail trade clients with a large
number of customers, requiring intensive customer credit and operational
support. Factoring companies service industries such as apparel, textiles,
shoe, carpeting and furniture, frozen foods, housewares, electronics, toys
and other service-related industries, including hospitals, medical companies
and employment services. Such industries benefit from the use of credit,
collection and management information services such as those provided by the
Company because factoring companies can (i) achieve economies of scale in
evaluating the credit quality of various customers and processing receivables
and (ii) help clients to achieve more stable cash flows and additional credit
facilities.
Factoring has been a method of working capital financing in the United
States for over 200 years. Traditionally, the industry has focused on the
purchase of receivables in the apparel and furniture
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industries, but recently, new industries, including healthcare providers,
have begun factoring. The factoring industry has undergone considerable
consolidation over the past several years; as a result, the industry is
characterized by a small number of very large factors operating nationally,
with a multitude of small companies generally operating on a local or
regional basis.
In a recent survey, the largest fourteen factoring companies reported
volume in 1995 of $60.9 billion, an increase of 48% over reported volume in
1988. The Company had a 3.3% share of this reported volume for 1995.
STRATEGY
The Company provides fee-based services to its clients, including credit,
collection and management information services, and also makes advances to
its clients. Each of the Company's regional offices is staffed with a
business development manager, who has the primary responsibility for
generating new business. Potential new clients are often identified from (i)
referrals by previous and existing clients, accountants and lawyers, (ii)
direct mail efforts and (iii) direct telemarketing efforts. The Company also
attempts to expand its network through (i) mailings and magazine and trade
journal advertisements to increase its name recognition, (ii) cultivating its
existing referral relationships and (iii) soliciting additional referral
relationships. Since the Company opened its Charlotte office in 1995,
management believes that it has a network in place to meet the needs of its
target client base in the key markets for factoring services. Additional
expansion and growth is contemplated through product diversification, such as
through healthcare financing, as well as asset-based lending.
Management believes that the Company's growth has been primarily
attributable to the following operating strategies:
/bullet/ MANAGEMENT OF CREDIT RISKS. The Company manages credit risks
associated with collection of accounts receivable and advances to
clients primarily by (i) conducting extensive financial and business
due diligence on both clients and their customers before entering
into a factoring arrangement with a client or establishing credit
limits for customers, (ii) adhering to written guidelines set forth
in a Loan and Credit Policy Manual distributed to all credit and
collection employees, and (iii) monitoring outstanding accounts
receivable and advances on a daily basis in order to alert the
Company to potential problems in a timely manner.
/bullet/ INCREASED MARKET PENETRATION. The Company believes that it has
been able to increase market penetration by servicing a wide range
of clients nationally through its regional offices located in key
factoring centers. In addition, by providing its clients with
personalized, flexible cost-efficient and effective service, the
Company allows clients to be more responsive to their customers and
to devote more time to the management of other aspects of their
business.
/bullet/ EXPERIENCED PERSONNEL WHO USE A TEAM APPROACH. Management
believes that the quality of service provided to its clients is a
critical factor to the Company's growth. In order to provide quality
services, the Company strives to recruit and retain management and
other personnel with significant industry experience, as well as a
commitment to client service. The Company's account executives,
credit officers and operations officers work together under the
supervision of management to service the Company's clients. As a
result of this strategy, the Company's clients and the customers of
such clients interact with experienced personnel working as a team.
/bullet/ DIVERSIFICATION BY PRODUCT AND INDUSTRY. As part of its operating
and growth strategy, the Company offers different variations and
combinations of its traditional products and services to clients
and has recently expanded into healthcare financing and
asset-based lending. Asset-based lending, in particular, provides
the Company a vehicle to finance clients who may not need its
other services and who have different financial needs than
general factoring clients. Although the Company has a high
concentration of clients in the textile and apparel industry and
furniture manufacturing industry, the Company provides services
to companies in various industries. In
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addition to traditional factoring clients, the Company now
provides accounts-receivable financing to various clients in the
healthcare industry. Diversification provides the Company with a
potential client base that has significant growth potential,
which may be serviced from its existing offices.
FACTORING ARRANGEMENTS
FACTORING AGREEMENT
After the Company has completed a financial and business analysis on a
potential client and its customers, the Company will enter into a factoring
agreement with approved clients. Many of these factoring agreements provide
for advances to be made by the Company based on a client's receivables. The
factoring agreement typically appoints the Company as the client's sole
factor for all accounts receivable, generally for a term of one year. The
Company can usually terminate the agreement at any time upon 30 days' prior
written notice to the client.
Once the factoring agreement has been executed, the Company will purchase
the client's accounts receivables for the face amount of the receivables,
less certain specified discounts, including the Company's factoring fee, and
other deductions. No money is paid to the client upon the purchase of the
receivables. Instead, the Company records a liability on its books for the
purchase price of the receivable. Generally, the Company and the client
notify the customer to make all payments for the receivable directly to the
Company. In most areas, a client's customers are other commercial entities
and the client does not deal directly with individuals. In healthcare
financing, the client's customers are individuals, but the client's
receivables are mostly from third-party obligors.
The Company guarantees the collection of each client's pre-approved
receivables or receivables from each client's customers with pre-approved
credit lines. Payment for the receivable is made to the client after
collection from the customer or, in the event the collection of the
receivable was guaranteed by the Company and the receivable was not paid
based solely on the customer's financial inability to pay, payment is made to
the client within 120 days after the due date of the receivable. If the
customer fails to pay the receivable for any reason other than financial
inability to pay, such as a dispute regarding defective merchandise, the
Company has no obligation to pay the client for the receivable,
notwithstanding guarantee of the receivable by the Company. All payments to
clients are reduced by amounts outstanding to the Company, such as the
factoring fee charged to the client or any outstanding advances to the
client.
At the time the Company purchases the client's accounts receivable, the
client becomes obligated to pay the Company a fee, generally equal to 0.5% to
2.0% of the gross amount of the receivable (not reduced by any discounts that
may have been provided to the customer for early payment). Typically, the fee
is paid from the proceeds of the accounts receivable collections. The
factoring fee paid by the client is not related to the collectibility or
non-collectibility of the purchased accounts receivable. Accordingly, even if
the Company is not obligated to pay for a guaranteed receivable because of a
dispute between the client and its customer, or if payment of the receivable
was not guaranteed by the Company, the factoring fee is due from the client
on such receivable. The factoring fee charged by the Company depends on
various considerations, such as the length of time the receivables are
expected to be outstanding, the monthly volume of receivables generated by
the client, the anticipated administrative costs and the perceived level of
risk. Management believes that its factoring fees remain competitive with
other factoring companies, primarily because of the type of client serviced
by the Company (generally, clients generating less than $50 million in sales)
and the type and quality of services provided to its clients.
SERVICES
The Company offers an interrelated package of financial services which
meets a variety of the business and financing needs of its clients. The
Company's services are designed to allow clients to be
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more responsive to their customers and to devote more time to the management
of other aspects of their business. The Company's clients and the range of
products and services offered distinguish it from certain other commercial
finance companies and asset-based lenders because the Company's main focus is
to provide fee-based services, as well as act as a lending source for many of
its clients. Management believes that it generally can provide these
fee-based services in a more cost-efficient manner than its clients because
of economies of scale.
CREDIT, COLLECTION AND MANAGEMENT INFORMATION SERVICES. The Company
provides its clients with access to credit management, collection and
information services, including certain computerized accounting services, as
well as the equivalent of credit insurance. Each of the Company's regional
offices is staffed with a credit department of between 10 to 30 people. The
credit department, at the direction of the credit officer, conducts the
credit checks on client's customers, analyzes the information and makes a
recommendation as to the amount of credit to be extended, if any. If the
Company approves the credit of the customer, in accordance with written
guidelines established by the Company, then the Company will purchase the
receivable for a fee and guarantee the collection of the receivable based
solely on the customer's financial ability to pay the receivable. If the
Company did not approve the credit of the customer, the Company purchases the
receivable for a fee, but will not guarantee collection of the receivable.
Except with respect to much of the Company's healthcare financing, upon
purchase of the receivable by the Company, the client notifies the customer
that all payments on the receivable should be sent to the Company. The
Company also notifies the customer that it has purchased the receivable and
provides payment instructions to the customer. All payments are sent to the
Company's operations department in Florida. The regional collection
departments monitor the collection of the accounts receivable and make
necessary follow-up calls if payment is not received on a timely basis. Where
necessary, the Company will press for collections. Company staff is trained
to seek collections in a courteous and professional manner so as not to
adversely affect a client's relationship with its customers. In certain
circumstances, the Company will use the services of independent collection
agencies. See "--Monitoring and Oversight Policies--Receivables Portfolio."
In addition, the Company provides various management information services
to its clients, including (i) a monthly analysis that includes an aging
schedule of all open receivables by customer and (ii) information as to the
creditworthiness of its customers.
ADVANCES. The Company may also make advances to its clients, with interest
charged on such advances, generally equal to 1% to 4% over prime. These fees
are generally higher than the fees charged by banks because a factor provides
startup and expanding businesses more financial flexibility, in addition to
credit and other services. This flexibility is primarily due to the fact that
a bank, in making a determination as to the amount that it would advance a
borrower, will customarily be more inclined to review the borrower's net
worth, capital and general financial condition, while a factor will place
greater emphasis on the borrower's collateral, particularly its receivables,
and, correspondingly, the credit-worthiness of its customers. Interest
accrues on the advance from the date the advance is made until the date the
Company would otherwise be obligated to pay the client for purchased
receivables. Advances are made on receivables before they are due or
collected by the Company based upon a stipulated percentage of the net face
value of aggregate outstanding receivables, usually ranging from 75% to 90%.
Advances are payable upon demand. All advances must be approved in accordance
with the written guidelines established by the Company. Such guidelines
provide that advances shall be under a duly authorized line approved at the
time an arrangement is established, taking into account the funding needs and
financial strength of the client and other credit factors, the anticipated
performance of the collateral and within an advance formula applied to
eligible accounts receivable taking into account anticipated dilution.
Approximately 70% of the Company's clients obtain advances from the Company.
A number of these clients might not otherwise qualify for financing of a
comparable level from traditional sources. From time to time, the Company
makes advances in excess of a client's receivables to the extent needed by
such client because of the seasonality of its business or otherwise. These
overadvances may be secured by one or more of a client's inventory, other
assets or personal guarantees or may be unsecured.
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OTHER FINANCING SERVICES. The Company also provides other fee-based
financial services to its clients, including guarantees of commercial letters
of credit and standby letters of credits. Most, if not all of such letters of
credit are issued by Capital Bank. See "Certain Transactions." The Company
may also provide financial guarantees for its clients. Commercial letters of
credit are issued to facilitate certain trade transactions for the clients of
the Company, principally the purchase of goods. Standby letters of credit and
financial guarantees are conditional commitments issued to guarantee the
performance of a client to a third party. The Company guarantees letters of
credit and issues financial guarantees only for clients with which the
Company has factoring or other financing arrangements. Generally, the Company
requires collateral to support these commitments and the collateral held
varies, but may include cash, inventory, real estate and the client's reserve
balance.
MONITORING AND OVERSIGHT POLICIES
RECEIVABLES PORTFOLIO
The quality of purchased receivables is the Company's primary security
against credit losses. Accordingly, the Company conducts an extensive
financial and business analysis on a client prior to entering into a
factoring arrangement with the client, and on the client's customers, prior
to the establishment of credit lines for a customer. The Company focuses on
such items as the age of receivables, the quality of management and the
ethical character of a prospective client's owners, as well as the diversity
of its customer base. The Company generally seeks to avoid situations where a
significant percentage of a prospective client's receivables are from one
customer. Pursuant to Company policy, all factoring arrangements must conform
to the guidelines set forth in the Company's Loan and Credit Policy Manual, a
written manual provided to all credit and collection employees of the
Company. The manual establishes guidelines governing credit criteria, lending
limits and required approvals, as well as documentation requirements related
to such matters as UCC filings, guarantees, subordinations, shipping
documents and financial reporting. There can be no assurance, however, that
adherence to the Company's written guidelines will result in full collection
of the purchased receivables or that such guidelines will be complied with in
every instance. See "--Credit Loss Policy and Experience."
Each of the Company's regional offices is staffed with one or more field
examiners who visit the office of each potential client for diligence
purposes. In certain situations, the Company will also use the services of
independent certified public accountants to assist the field examiners. In
addition to on-site visits, the Company's field examiners will review current
financial statements and business references of the client and personal
financial statements of the principals of the client and its major
shareholders. The Company's field examiners also conduct periodic field
examinations of and visits with clients to continue to learn about the
client's operation. The Company generally requires business plans for
start-up ventures. Additionally, each of the Company's regional credit
departments makes routine random telephone calls and mails written requests
to customers to verify the existence and the terms of receivables purchased
from clients and obtains shipping evidence for all invoices purchased, as
well as remaining in communication with the client.
After the necessary financial and business information has been collected
and reviewed, if the Company intends to enter into a factoring arrangement
with the proposed client, a written proposal of the terms of the proposed
factoring arrangement is prepared. The proposal includes, among other things,
(i) the amount of the factoring fee to be charged, (ii) anticipated accounts
receivable purchases to be generated by the client and (iii) the interest
rate to be charged on advances, if applicable. All new factoring arrangements
are approved by the Company's President and the respective regional manager.
If the factoring arrangement provides for advances to the client against
purchased receivables, additional approvals are required. See "--Client
Advances" below.
Each of the Company's clients is serviced by a team of Company personnel.
Clients are assigned to an account executive and credit officer in one of the
Company's four regional offices, and an operations officer in the Florida
executive office. The account executive is the client's primary contact with
the Company. The account executive is responsible for managing the assigned
client relationship, including
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approval of client advances, and obtaining necessary documentation prior to
any advances to the client. Requests for customer credit approvals or
increases in customer credit lines are directed to the credit officer. The
operations officer is responsible for the processing of all receivables,
including application of payments and invoice handling. In addition, the
Company's senior management team will often meet with clients to discuss
problems, if any, and monitor client satisfaction.
Pursuant to the Company's Loan and Credit Policy Manual, the Company
follows certain credit guidelines. Prior to the establishment of a credit
line for a client's customer, the Company conducts a credit check on the
customer and obtains a credit rating for the customer. The Company takes into
consideration the amount of the requested credit line, the customer's credit
rating and satisfaction of internal written guidelines in determining whether
to establish a credit line for the customer. The Company's internal written
guidelines contain certain formulas used by the Company in determining
whether to establish a credit line and which take into account ratings scales
utilized by various credit rating agencies, as well as the length of time a
customer has been in business. If these formulas are not satisfied,
additional information is obtained and reviewed by the Company, including
bank references, trade surveys and financial statements of the customer. The
Company may also conduct on-site visits of the customer's business and
interview the customer's management team. All credit lines over $250,000
require either executive officer or combined executive officer and director
approval, depending on the amount of the credit line. The Company may also
assume the credit risk of a single credit transaction for a client's
customer. Generally, the same credit check procedures are followed in such
transactions.
The Company assumes the credit risk only on receivables for which written
approval has been provided by the Company. The Company also reserves the
right to withdraw a credit approval if the Company believes a customer's
credit standing has become impaired before actual delivery of merchandise or
rendering of services by the Company's client. Credit approvals are limited
to the specific terms provided by the client to the Company and can be
withdrawn if the terms of the sale are changed. If a dispute relating to
goods or services rendered by the client to its customer arises, the credit
approval on the receivable is negated. If sales are made by the client to a
customer without credit approval or in excess of any credit approval, any
payments made by such customer on outstanding receivables will be applied
first to outstanding credit-approved receivables on the books of the Company.
The Company monitors whether receivables are paid according to their
terms. Daily aging reports are generated by the Company and reviewed by the
regional credit department staff and the account executive responsible for
the account. If payment is not received on its due date, follow-up contact is
made with the client's customer in accordance with written procedures
established by the Company. During this follow-up contact, the Company seeks
to determine the cause of the delay in order to take appropriate action at an
early stage. The status of overdue accounts and other relevant information is
reported to each client monthly, or sooner, if appropriate. The Company's
average accounts receivables turnover rate was 53 days for 1994 and 1995 and
51 days during the three months ended March 31, 1996. The Company may receive
payments, from time to time, that it is unable to match against specific
outstanding invoices. The Company generally notifies the payor when
unidentifiable payments or portions thereof are received. If the payor does
not respond within 90 days, the Company generally records the unallocated
credits as income. The Company maintains an allowance for unallocated credits
recorded as income which may be subsequently repaid based upon its historical
experience. This allowance is also available for amounts that may be payable
to governmental authorities for property that is abandoned. There can be no
assurance that the allowance will be sufficient to meet all such future
claims.
The Company periodically uses the services of independent collection
agencies to assist it in the collection of accounts receivable more than 90
days past due. The Company's policy is to charge-off accounts receivable once
they have been placed with a collection agency. Collection agencies charge,
on the average, a 20% fee of the delinquent account collected. On occasion,
the Company initiates litigation to recover payment of the receivable.
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As security for the accounts receivable purchased, the Company obtains
blanket first liens on a client's receivables, and may also obtain personal
guarantees and liens (which may be subordinate to other liens) on other
assets of the client, including cash, tax refunds, inventory, real estate and
equipment. In addition, the Company arranges for periodic reviews of public
records in order to monitor the filing of any subsequent liens which could
impair the value of receivables in which the Company has an interest.
CLIENT ADVANCES
Prior to making any advances to a client on accounts receivable, the
Company will conduct additional business and financial analysis on the
client. The typical written credit analysis sets forth (i) the purpose for
the advance, (ii) security to be provided for the advance, such as personal
guarantees from principals of the client and subordination arrangements,
(iii) the rate structure to be charged and projected income to be earned by
the Company, (iv) prior experience with the client if the client has
previously had a relationship with the Company or Capital Bank, (v) the
client's history, organization and operations, (vi) bank and trade
information on the client, (vi) financial information of the client and
(viii) future plans and projections of the client. In addition to the written
credit analysis, the account executive assigned to the account reviews a
factoring status report on the client, which sets forth the client's monthly
sales and accounts receivable volume, along with collection information on
the receivables.
Based upon a review of the credit analysis and factoring status report,
the account executive will make a recommendation as to whether or not the
advance is reasonable in relation to the value of the client's outstanding
receivables. All advances against purchased receivables must be approved by
no less than four officers of the Company, two of whom are generally the
account executive and head of client administration from the originating
office and two in the Company's executive offices in Florida, providing
another level of control in the advance process.
Outstanding advances to clients are reviewed on a daily basis and on a
monthly basis at monthly portfolio meetings attended by the President, or his
designee, and the regional managers (or their designees). At the monthly
portfolio meetings, senior management evaluates the Company's outstanding
advances and receivables in order to identify potential problems. The
meetings also allow senior management to evaluate the performance of their
account executives, who have the responsibility of managing their client's
outstanding advances and receivables.
CREDIT LOSS POLICY AND EXPERIENCE
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 period
commencing in 1991 and continuing through March 1996, 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
decreased from 0.31% in 1991 to 0.11% in 1995, reflecting the Company's
improved loss experience over that period and positive economic trends that
benefited the Company's clients and their customers. The provision as a
percentage of factored sales increased to 0.20% in the first quarter of 1996,
reflecting a higher net charge-off rate. The provision for credit losses as a
percentage of average receivables decreased from 2.02% in 1991 to 0.72% in
1995, and the provision for credit losses as a percentage of average funds
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<PAGE>
employed decreased from 2.84% in 1991 to 1.06% in 1995, also reflecting the
Company's improved loss experience over that period. 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 1.20% and
1.80%, respectively, in the first quarter of 1996 from 0.68% and 0.96%,
respectively, in the first quarter of 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 0.16% to
0.30% in the 1991-1994 period, reflecting normal credit losses consistent
with historical experience. Net charge-offs as a percentage of factored sales
declined to 0.05% in 1995 as a result of higher recoveries and fewer
bankruptcies that affected the Company. The net charge-off percentage
increased to 0.25% in the first quarter of 1996 as a result of the charge-off
of several large items, including $600,000 related to the bankruptcy of a
large Northeastern regional chain store and $200,000 related to a single
client loan, $74,000 of which was recovered subsequent to March 31, 1996.
Consistent with net charge-offs as a percentage of factored sales, during the
period 1991 to 1994, net charge-offs as a percentage of average receivables
and net charge-offs as a percentage of average funds employed reflected
normal credit losses consistent with historical experience, ranging from
1.07% to 1.90% and 1.50% to 2.92%, respectively. Net charge-offs as a
percentage of average receivables and net charge-offs as a percentage of
average funds employed decreased to 0.33% and 0.49%, respectively, in 1995,
primarily as a result of higher receivable recoveries and fewer bankruptcies
affecting the Company in that year. Net charge-offs as a percentage of
average receivables and net charge-offs as a percentage of average funds
employed increased to 1.52% and 2.28%, respectively, in the first quarter of
1996, as a result of the charge-off of several large items as described
above. Management anticipates that net charge-offs during the remainder of
1996 will be higher than during 1995 and more consistent with the Company's
historical experience.
At the time a receivable is purchased an anticipated payment date is
recorded and is subsequently used to identify past due receivables.
Receivables which have been identified as past due will not be written-off
if, in the opinion of management, collection from the customer, client or
realization on the collateral held, if any, is likely. As of December 31,
1995 and March 31, 1996, approximately $7.0 million and $10.7 million,
respectively, of receivables, representing 2.2% and 2.9%, respectively, of
outstanding receivables as of such date, were 90 days or more past the
payment date anticipated at the time of purchase and had not been
written-off.
Accrual of interest income is discontinued on advances to clients when the
loan balance, including interest, is considered impaired and exceeds the
estimated value of the collateral securing the advance. At December 31, 1994
and 1995 and March 31, 1996, the Company had discontinued its accrual of
interest income on approximately $739,000, $2.2 million and $2.4 million,
respectively, of client advances. In addition, at December 31, 1994 and 1995
and March 31, 1996, approximately $48,000, $134,000 and $105,000,
respectively, of such client advances were deemed to be uncollectible by the
Company.
The credit and market risks associated with guaranteeing commercial
letters of credit and standby letters of credit and issuing financial
guarantees are generally managed in conjunction with the Company's accounts
receivable collection activities and are subject to normal credit policies,
financial controls and risk limiting and monitoring procedures. Commercial
letters of credit are generally for a short commitment period. The risk
involved in guaranteeing standby letters of credit and issuing financial
guarantees is similar to the risk involved in advancing funds to clients. At
December 31, 1995 and March 31, 1996, the Company had approximately $22.6
million and $30.2 million, respectively, of letters of credit and financial
guarantees outstanding.
HEALTHCARE FINANCING
The Company provides healthcare financing and factoring services to
hospitals, nursing homes, doctor groups, home treatment centers, home
healthcare provider services, temporary nursing or
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staffing services and providers of durable medical equipment through its
Capital Healthcare Financing division. Healthcare businesses financed by the
Company generally have annual net sales of at least $1 million or are
anticipated to grow to that size shortly. Financing is provided as to bona
fide and medically necessary goods or services that have been provided to a
patient for which a receivable is due with no contingencies. For transactions
to be financeable, fees claimed by the client are to be reasonable and
customary and the patient must be covered by a third party obligor, although,
in limited circumstances, the Company will consider financing private pay
receivables if they represent a small percentage of overall receivables. The
Company does not generally finance workers' compensation claims or,
medical/legal (personal injury), dental and chiropractic claims. At December
31, 1995 and March 31, 1996, the Company had approximately $16.3 million and
$25.6 million, respectively, in healthcare factored receivables outstanding,
in addition to approximately $11.0 million and $17.4 million of healthcare
asset-based loans outstanding at December 31, 1995 and March 31, 1996,
respectively. Approved third party payors include Medicare, Medicaid,
preferred provider organizations, private insurance carriers, Blue Cross/
Blue Shield and corporate employee coverage for self-administered healthcare
plans.
The minimum term for a healthcare financing contract is one year. Fees
include origination and due diligence fees of between 1% and 5% of the
initial line and a monthly monitoring fee of .35% to 2%, with the possibility
of a guaranteed minimum monitoring fee. The annual interest rate on advances
ranges from 2% over prime to 4% over prime. Advances may be up to 85% of the
net receivable amount from the financed receivables. The client usually pays
for periodic audits and legal expenses to close the transaction.
In order to obtain healthcare financing from the Company, generally the
same steps must be followed as with the Company's factoring clients. A
business plan, current financial statements, receivables aging, resumes of
the principals and references are generally required. Once accepted, clients
must file claims with third party payors on the appropriate forms and assign
such claims to the Company. The Company posts the claim to its monitoring
system and, thereafter, closely monitors the collection by the client on a
daily basis. In the case of Medicare and Medicaid claims that must be paid
directly to the provider of the service, the Company, the client and the
client's bank enter into an agreement pursuant to which payments on account
of such claims are made directly to a lockbox account to which the Company
and the client have access and thereafter, are immediately swept out of such
account into the Company's account. In either case, the Company provides
credit monitoring services as well as periodic accountings to the client.
Advances are based upon claims assigned to the Company by the client.
The benefits of healthcare financing to the Company's clients are similar
to the benefits obtained by the Company's factoring clients. Healthcare
clients maximize their ability to monitor patient accounts. In addition, they
receive immediate cash for accounts receivable which can be injected into the
business to, among other things, increase purchasing power, improve and
increase patient services or reduce expenses and increase patient revenues.
ASSET-BASED LENDING
The Company began to expand its asset-based lending activities in late
1994. The Company's asset-based loans range from $300,000 to $6 million and
are primarily secured by accounts receivable and, to some extent, inventory.
Such loans bear interest at annual rates ranging from 1% over prime to 6%
over prime. Most of such loans originate from the Company's California and
Florida offices. At December 31, 1995 and March 31, 1996, the Company had
asset-based loans outstanding aggregating approximately $38 million and $33.3
million, respectively, including loans to healthcare clients of approximately
$11.0 million and $17.4 million at the end of such periods.
The Company makes asset-based loans to companies who may not need its
other services and who have different financial circumstances than factored
clients. In underwriting such loans, the Company pays more attention to the
borrower's financial stability and creditworthiness, rather than that of the
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borrower's customers. In making such loans the Company competes primarily
with financial institutions and other asset-based lenders, such as commercial
finance companies. See "--Competition."
MANAGEMENT INFORMATION SYSTEMS
Factoring is a systems intensive business because of the high volume of
transactions required to be entered and the matching with such transactions
of cash payments, chargebacks and other adjustments. In 1990, the Company
purchased an IBM AS400 computer and developed software tailored to the
requirements of the Company's accounting, receivables collection, monitoring
and oversight functions. The system permits the Company to generate payment
histories and analyses with respect to its clients' customers, to generate
daily aging of accounts receivable reports, to accumulate accounting
information and other data useful for credit analysis, to produce information
used in marketing and to respond to account and management inquires. The
Company continues to add enhancements and updates to its management
information systems. In 1995, the Company acquired and installed a software
package to administer and process transactions of the clients of its
healthcare division. In March 1996, the Company installed the latest IBM
AS400 model. The Company expects that this new hardware will provide the
Company with additional capacity to handle the Company's increased
transaction volume.
COMPETITION
The Company competes with numerous banks, financial institutions,
commercial finance companies and other factoring companies with greater
financial and other resources than the Company. The four largest factors in
the United States, CIT Group, BNY Financial Corp., NationsBanc Commercial and
Heller Financial, control approximately 62% of the factored sales volume in
the United States, as compared to 3.3% of United States factored sales volume
for the Company in 1995, according to a recent survey. The Company competes
with the largest national factors, as well as other national factors and also
competes with other regional factoring companies, all of whom target similar
clients as the Company and most of whom have operated in the markets serviced
by the Company for a longer period of time than the Company. Certain factors
compete with the Company for certain types of accounts. For example, one
factor may provide services only to textile mills, while another may provide
services only to furniture manufacturers. The Company competes primarily on
the basis of service, not price, even with respect to higher volume clients
to whom the Company may provide lower fee structures than to the Company's
typical clients. The Company generally does not seek to compete when price is
the sole or primary criterion for potential clients' selection of a factor.
Future competition is expected to be based primarily on the quality and level
of service provided and the ability to respond to the changing credit
environment and demands of many factoring clients. The Company believes that
it is well-positioned to respond to these needs.
REGULATION
As a result of the Company's ownership by Capital Bank, a Florida
commercial bank, which in turn is owned by Bancorp, a bank holding company,
the Company is affected by certain regulations normally applicable only to
banking institutions. The Company is subject to periodic examination by
representatives of the Florida Department of Banking and Finance, the FDIC
and the FRB. Additionally, because the Company's immediate parent, Capital
Bank, is a Florida-chartered, FDIC-insured bank, the business activities of
the Company are generally limited under applicable FDIC regulations to those
activities that are permissible for national banks. Although factoring and
the other businesses in which the Company currently engages are authorized
activities for national banks, there can be no assurance that business
opportunities the Company might wish to pursue in the future will be
authorized activities for Capital Bank and therefore might be unavailable to
the Company because of its regulated status as a subsidiary of Capital Bank.
Federal bank regulations require the Company's parent, Capital Bank, and
its parent, Bancorp, to meet two capital-to-assets ratios. The first such
ratio, referred to as the "risk-based" capital test, assigns a weight (or
percentage) to assets by categories of risk established by the federal
regulators. Under this
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<PAGE>
test, Capital Bank's and Bancorp's "tier one capital" (consisting essentially
of their common stockholders' equity and minority interests, if applicable)
is required to equal at least 4% of their risk-weighted assets. Also as part
of the "risk-based" capital test, all of Capital Bank's and Bancorp's capital
(tier one or otherwise) must equal or exceed 8% of aggregate risk-weighted
assets.
The second ratio is referred to as the "leverage" test. Under this test,
each of Capital Bank and Bancorp must maintain tier one capital equal to or
exceeding 3% of total assets, or such higher level as may be imposed by
federal regulators. The regulators have publicly indicated that a bank
should, in practice, maintain a leveraged capital-to-assets ratio of at least
1% to 2% above the 3% minimum. In 1993, in order to address comments made by
the State of Florida banking examiners, Capital Bank adopted a resolution to
maintain a leveraged capital-to-assets ratio of not less than 6% and not to
pay dividends in excess of 75% of earnings on a quarterly basis.
The following table sets forth Capital Bank's and Bancorp's regulatory
capital ratios as of December 31, 1995 and March 31, 1996 and after giving
effect to the sale of the 2,000,000 shares of Common Stock offered hereby and
the use of the net proceeds therefrom as set forth in "Use of Proceeds"
(using March 31, 1996 information).
<TABLE>
<CAPTION>
BANCORP CAPITAL BANK
-------------------------------------- --------------------------------------
3/31/96 3/31/96
-------------------------------------- -------------------------------------
12/31/95 ACTUAL AS ADJUSTED 12/31/95 ACTUAL AS ADJUSTED
----------- --------- -------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Tier One Capital Ratio 9.99% 10.13% 11.07% 9.58% 9.65% 10.59%
Total Capital Ratio .. 11.24% 11.36% 12.29% 10.83% 10.88% 11.81%
Leverage Ratio ........ 7.25% 7.64% 8.37% 6.97% 7.29% 8.03%
</TABLE>
PROPERTIES
The Company provides services to its clients through offices located in
Fort Lauderdale, Florida; Los Angeles, California; New York City, New York;
and Charlotte, North Carolina. The Company acquired the office building
located in Fort Lauderdale, Florida from an affiliate in December 1990. The
Company leases approximately 14,000 square feet of office space in Los
Angeles pursuant to a ten-year lease that terminates in September, 2005, and
provides for annual base rental payments of approximately $218,600 through
August 2000 and $257,500 during the remaining term of the lease. The Company
leases approximately 12,300 square feet of office space in New York pursuant
to a five-year sublease that terminates in December 1999 and provides for
annual base rental payments of approximately $337,700 through December 1996
and $368,400 during the remaining term of the lease. The Company leases
approximately 9,800 square feet of office space in North Carolina pursuant to
a five year lease that terminates in April 2000 and provides for annual base
rental payments of approximately $196,430.
TRADEMARKS, SERVICE MARKS AND LICENSES
In 1991, Bancorp registered the name "Capital Factors" with the United
States Patent and Trademark Office. Since the registration of such service
mark, Bancorp has authorized the Company's uninterrupted and unrestricted use
of the name "Capital Factors." No agreement regarding the Company's use of
such service mark exists between Bancorp and the Company and no fee is paid
by the Company in connection with such use. The service mark is effective
until December 2001, unless sooner terminated as provided by law. In
addition, the Company has recently applied for certain other service marks to
be used by it in connection with its business operations. The Company's
management does not believe that its business is dependent upon the use of
any particular service mark, trademark, license or similar property.
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LEGAL AND ADMINISTRATIVE PROCEEDINGS
THE COMPANY
From time to time, the Company has been a party to lawsuits and claims,
including lender liability claims, which management considers incidental to
normal operations. The Company is currently a party to one lawsuit that was
dismissed after trial. The plaintiff is currently appealing the dismissal.
Management, after review, including consultation with counsel, believes that
any ultimate liability which could arise from this current lawsuit would not
materially affect the financial position of the Company.
BANCORP AND CAPITAL BANK LEGAL PROCEEDINGS
Beginning in approximately August 1992, the Audit Committee of Capital
Bank began to investigate certain allegations made by a then-officer and
director of Capital Bank (who is currently the beneficial owner of
approximately 10% of Bancorp common stock) against Abel Holtz, Capital Bank
and possibly other family members of Abel Holtz. At the time, Abel Holtz was
the Chairman of the Board, Chief Executive Officer and President of Bancorp
and Capital Bank and the Chairman of the Board of the Company, as well as a
principal shareholder of Bancorp. He currently owns slightly less than 10% of
Bancorp's outstanding shares. See "Principal Shareholders." The allegations
related primarily to alleged wrongful conduct by Abel Holtz with respect to
(i) the settlement of two sexual harassment claims brought against Capital
Bank and Abel Holtz, (ii) the reimbursement of certain travel and
entertainment expenses by Capital Bank and (iii) certain charitable donations
made by Capital Bank.
In connection with this investigation, the Audit Committee filed a Report
of Apparent Crime with certain governmental authorities. Thereafter, members
of the Audit Committee, together with three other directors of Capital Bank,
attempted to call a special meeting of the Board of Capital Bank to, among
other things, remove Abel Holtz as the Chief Executive Officer and as
Chairman of the Board of Capital Bank. Prior to such meeting, the holders of
a majority of Bancorp stock, either in person or by proxy, took certain
action by written consent in lieu of a meeting pursuant to which Bancorp's
Board of Directors was expanded from seven to ten directors, three new
directors were elected and certain sections of Bancorp's bylaws were amended.
Holders of a majority of Bancorp stock voted in favor of the foregoing,
including the outstanding shares of Bancorp that were subject to irrevocable
proxies in favor of Abel Holtz. Holders of certain of the shares covered by
these proxies notified Abel Holtz that, in their view, the irrevocable
proxies previously given to Abel Holtz were invalid and purported to revoke
them. Abel Holtz advised the Company that he believed that the irrevocable
proxies continued to be valid. Subsequent to the Bancorp meeting, Bancorp, as
the sole shareholder of Capital Bank, by written consent removed four
directors of Capital Bank, including a member of the Audit Committee. This
corporate action occurred prior to the special meeting called by certain
directors of Capital Bank, including those directors removed by such action.
Thereafter, the Audit Committee (including the removed director) instituted
Case No. 92-2520-Civ-Graham in the United States District Court, Southern
District of Florida against Abel Holtz, Capital Bank, Bancorp and certain
directors of Bancorp (the "Audit Committee Action"). The Audit Committee
Action sought, among other things, to (i) obtain declaratory and injunctive
relief to prevent alleged interference with the Audit Committee and to
invalidate the corporate actions undertaken by the shareholders of the
Company and Capital Bank on October 19, 1992, (ii) declare that Abel Holtz
and Daniel Holtz unlawfully interfered with the investigative work of the
Audit Committee and that Abel Holtz was unlawfully in de facto control of
Capital Bank, its assets and its business, and (iii) declare invalid the
actions allegedly taken in the self interest of Abel Holtz.
Certain of the governmental authorities having regulatory oversight for
Capital Bank and Bancorp, as well as a Federal Grand Jury, investigated these
matters among others. Bancorp was advised that neither it nor Capital Bank
were targets of the Federal Grand Jury investigation, although Bancorp
ultimately learned that Abel Holtz was a target. The independent accounting
firm of Arthur Andersen & Co. was engaged to conduct an independent
investigation of the matters investigated by the Audit Committee.
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The Audit Committee Action was voluntarily dismissed by the Audit
Committee on November 24, 1992. On January 28, 1993, after conducting an
investigation and reviewing the report from Arthur Anderson & Co., both the
Audit Committee and Capital Bank's Board of Directors adopted resolutions
which ratified the settlement of the sexual harassment claims, determined
that there was no basis for requiring Abel Holtz to contribute to such
settlement and concluded that certain travel and entertainment expenses and
charitable contributions reviewed by the Audit Committee were ordinary
business expenses of Capital Bank.
On October 25, 1994, Bancorp was advised that the above-described Federal
Grand Jury investigation terminated when Mr. Holtz entered a guilty plea to
one count of giving misleading testimony in 1991 to a Federal Grand Jury in
violation of 18 United States Code Section 1503, with respect to the purpose
of certain payments made by Capital Bank, the Company and certain related
parties to a public official. Bancorp was advised that this plea resolved all
pending criminal investigations against Mr. Holtz being conducted or
supervised by the United States Attorney's Office for the Southern District
of Florida and that no charges would be filed against either Bancorp or
Capital Bank with respect to the matters that were the subject of the Grand
Jury investigation. On January 20, 1995, Abel Holtz was sentenced to a term
of confinement of 45 days, to be followed by two years of supervised release,
including 4 1/2 months of house confinement, to be followed by community
service during the supervised release. Abel Holtz was also fined $20,000 and
assessed certain costs.
In approximately April 1994, Abel Holtz, pursuant to the terms of the
irrevocable proxies, designated Fana Holtz, his wife, as successor
proxyholder with respect to most of the irrevocable proxies within his
control and transferred the remainder of such proxies in January 1995. Fana
Holtz has designated her son, the current Chairman of the Board, President
and Chief Executive Officer of Bancorp and Capital Bank, Daniel Holtz, as her
successor proxyholder in the event of her death. On October 7, 1994, Abel
Holtz resigned from all positions with Bancorp and it subsidiaries.
On February 8, 1995, certain shareholders, including the removed member of
the Audit Committee, commenced a derivative action against Bancorp, Daniel M.
Holtz, the Chairman of the Board, President and Chief Executive Officer of
Bancorp, Fana Holtz, the Vice Chairman of the Board, Javier Holtz, a director
of Capital Bank, and Abel Holtz (the "Derivative Action"). The Derivative
Action is entitled NATHAN J. ESFORMES, STANLEY I. WORTON, M.D., AND LEONARD
WIEN, AS INDIVIDUAL SHAREHOLDERS AND ON BEHALF OF ALL OTHER SHAREHOLDERS OF
CAPITAL BANCORP V. ABEL HOLTZ, FANA HOLTZ, DANIEL M. HOLTZ, JAVIER J. HOLTZ,
CAPITAL BANK AND CAPITAL BANCORP., Circuit Court for the 11th Judicial
District in and for Dade County, Florida, Case No. 95-02515. The Derivative
Action was subsequently amended to add, among other things, the remaining
members of the Board of Directors as defendants. Through the Derivative
Action, the plaintiffs have alleged that certain defendants engaged in a
series of illegal activities causing harm to Bancorp and Capital Bank,
including (i) the settlement of the sexual harassment claims, (ii) the
payment of excessive compensation and separation payments, (iii) the
appointment of unqualified family members as officers, (iv) the withholding
of information and (v) the misappropriation of Capital Bank funds for
personal uses. The plaintiffs also alleged that such individuals engaged in a
series of activities designed to improperly increase or maintain their
interest in, and control of, Bancorp, including (i) the unlawful use of
proxies, (ii) the prevention of investigations and shareholder meetings,
(iii) the unlawful alteration of the composition of Bancorp's Board of
Directors and (iv) the failure to obtain approval for a change in control.
The Board of Directors of Bancorp established an independent committee
(the "Committee") to investigate the allegations contained in the Derivative
Action and to retain independent legal counsel. The members of the Committee
are Russell Galbut, who serves as Chairman of the Committee, and Hugh
Culverhouse, Jr., both of whom are outside directors of Bancorp. Thereafter,
the plaintiffs challenged the independence of the committee. Upon motion of
the defendants, the complaint was dismissed without prejudice in November
1995 for containing legal argument, which the court ruled to be improper. The
Court allowed for the filing of an amended complaint, but stayed the
proceedings and any required response to an amended complaint until the
Committee has a reasonable period of time to complete its review. The
plaintiffs appeal of the Court's decision to stay the proceedings was denied.
In May 1996, the plaintiffs moved for a rehearing or, alternatively, for
clarification of the Court's denial of such appeal. In June 1996, the
plaintiff's motion for rehearing was denied.
41
<PAGE>
An amended complaint was filed in December 1995 containing substantially
the same allegations. A new director and former director of Bancorp were
added as defendants, while another former director of Bancorp was removed as
a defendant. The plaintiffs are seeking, on behalf of Bancorp, unspecified
monetary damages, including treble damages, reasonable costs and attorneys'
fees, and injunctive relief (i) precluding Fana Holtz from voting shares for
which she has proxies, (ii) setting aside the February 27, 1995 annual
shareholders' meeting, (iii) reinstating two former directors, (iv)
precluding the current Board from taking any action and (v) returning certain
shares to Bancorp. No monetary relief is sought from Bancorp and no count
specifically seeks relief from Bancorp.
The Committee recently issued a report dated May 29, 1996, concluding,
based on its investigation and the investigation of its counsel and
accounting firm, that no legal basis for pursuing the Derivative Action
exists and that the Derivative Action is not in the best interests of Bancorp
or Capital Bank and, as such, should be dismissed. Bancorp is filing a motion
to lift the stay entered by the court with respect to the Derivative Action
and intends to move to dismiss the Derivative Action. Bancorp has advised the
Company that it expects the plaintiffs in the Derivative Action to strongly
oppose this motion.
The Chairman of the Committee, who is also a director of Capital Bank, and
two companies in which he is a principal (neither of which are affiliates of
Bancorp, Capital Bank or the Company) were recently named as defandants in a
complaint filed in the United States District Court for the Southern District
of Florida by a former female employee of such companies, alleging sex
discrimination, sexual harassment and exposure to a sexually hostile work
environment through the actions of such director as the managing director of
the defendant companies. The complaint also alleges intentional infliction of
emotional distress and violation of the Florida Whistleblower Statute. In
connection with the latter claim, the employee alleges, among other things,
that in 1995, the director requested that she provide perjured testimony in
connection with "private civil litigation and an investigation by the Federal
Deposit Insurance Corporation involving Capital Bancorp," which testimony
would have included, but not been limited to, "the fact that certain shares
of stock of Bancorp were being fraudulently held in trust for [the director]
under the names of certain other third parties." The employee also alleges
that the director requested that she assist the law firm hired by Bancorp to
conduct a purportedly "independent investigation." The plaintiff alleges that
the director made this request even though he was named as a defendant in the
lawsuit and that he promised her a large bonus if she became involved and
provided him with details of any findings of wrongdoing before officially
reported. Although no answer is yet due or has been filed, the director has
advised the Company that in his judgment, there is no substance to any of the
allegations. No other allegations in this complaint relate to Bancorp, the
Bank or the Company.
The director has also filed an action against the former employee in the
Circuit Court for the Eleventh Judicial Circuit in and for Dade County,
Florida, seeking permanent injunctive relief and damages for conspiracy and
extortion, as well as defamation and intentional infliction of emotional
distress. The director alleges that the former employee schemed to extort
$1.2 million from the director by the use of defamation and blackmail.
Also on February 8, 1995, a shareholder of Bancorp, who was one of the
members of the 1992 Audit Committee who was removed from Capital Bank's Board
of Directors, commenced an individual action against Bancorp, Daniel Holtz,
Fana Holtz, Javier Holtz and Abel Holtz (the "Individual Action"). Such
action alleged that the defendants, other than Bancorp, breached fiduciary
duties owed to the plaintiff by, among other things, improperly using proxies
to vote shares of Bancorp owned by the plaintiff and another shareholder to
engage in improper activity and to promote their personal interest to the
detriment of the plaintiff. The Individual Action is entitled STANLEY I.
WORTON, M.D. AND NATHAN ESFORMES V. ABEL HOLTZ, FANA HOLTZ, DANIEL HOLTZ,
ALEX HALBERSTEIN AND CAPITAL BANCORP, Circuit Court for the 11th Judicial
District in and for Dade County, Florida, Case No. 95-02520-CA-09. In support
of the complaint, the plaintiff asserted many of the same allegations
contained in the Derivative Action. Thereafter, the plaintiff filed an
amended complaint pursuant to which an additional plaintiff was added (both
plaintiffs are named plaintiffs in the Derivative Action) and all the
existing and certain former directors of Bancorp were added as defendants.
The amended complaint alleged that certain of the defendants unlawfully
solicited proxies for the February 27, 1995 annual shareholders' meeting and
that the actions taken at this meeting, including the reduction in the size
of the Board,
42
<PAGE>
were invalid. The amended complaint also sought a court order directing
Bancorp to hold a shareholders' meeting on or before May 28, 1995 to elect a
board of directors (although the required papers to have a hearing on the
matter have not been filed).
Upon motion of the defendants in the Individual Action, the amended
complaint was dismissed without prejudice for containing legal argument,
which the court ruled to be improper. The Court dismissed with prejudice the
plaintiff's request to terminate the proxies granted by the non-plaintiff
shareholder. The Court allowed for the filing of an amended complaint, but
stayed the proceedings as to certain claims until the independent committee
has a reasonable period of time to complete its review. The Court also
indicated that certain counts of the complaint did not properly plead the
elements for injunctive relief. An amended complaint was filed in December
1995 containing substantially the same allegations. The plaintiffs seek
unspecified monetary damages and costs and, in addition to the injunctive
relief requested in the Derivative Action, plaintiffs seek relief regarding,
among other things, the voting and/or termination of certain proxies, the
establishment of a constructive trust for certain shares and options, the
holding of a shareholders meeting, the return to one of the plaintiffs of his
percentage of any shares obtained by members of the Holtz family because of
the control group created by the proxies and the reinstatement of one of the
plaintiffs to the Board of Directors and invalidation of the actions of the
current Board. Plaintiffs also seek declaratory relief invalidating the
proxies and former actions with respect to which the proxies were voted. The
plaintiffs have not indicated that they are seeking any monetary relief from
Bancorp other than costs. Bancorp has filed a motion to dismiss the two
counts of the complaint in the individual action in which it is named and has
moved to stay certain other counts of the complaint on the grounds that those
claims are derivative.
Bancorp has advised the Company that it has not determined whether, if
asked, it would indemnify directors and former directors named in these
actions if the plaintiffs are successful, although it is currently advancing
the legal expenses of the outside directors who were named as defendants.
Such defendants have agreed to repay Bancorp for all or any portion of such
advances which they are ultimately found not to be entitled to pursuant to
applicable law.
The Company is not a party to either of the current actions and management
does not believe that the outcome of such actions will have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
ADMINISTRATIVE PROCEEDINGS
As of February 14, 1996, Daniel Holtz, Chairman of the Board, President
and Chief Executive Officer of Bancorp, Fana Holtz, the Vice-Chairman of the
Board, and Javier Holtz, a director of Capital Bank, owned and/or had the
power to vote, approximately 7%, 40% and 4% (51% in the aggregate),
respectively, of Bancorp's Common Stock (including shares of Common Stock
subject to options exercisable by such individuals within 60 days). Fana
Holtz, Daniel Holtz, and Javier Holtz have advised Bancorp that they had
discussions with the Florida Department of Banking and Finance (the "FDBF")
as to whether one or more of them was required under Florida law to file an
application to acquire and/or maintain a controlling interest in Capital Bank
through their ownership and control of Bancorp. Fana Holtz, Daniel Holtz and
Javier Holtz have advised Bancorp that, as a result of those discussions,
they both individually and as a group, have voluntarily filed an application
to acquire and/or maintain a controlling interest in Bancorp, although they
do not believe such an application is legally required. Fana Holtz, Daniel
Holtz and Javier Holtz are also having discussions with the FRB as to whether
a change of control notice is required under federal law. The plaintiffs and
another shareholder in the pending litigations described in "Legal and
Administrative Proceedings--Bancorp and Capital Bank Legal Proceedings" have
filed a Notice of Intent to Appear and Petition for a Formal Administrative
Hearing with the FDBF in connection with the disposition of the Florida
application opposing the change in control notice and application and raising
many of the same issues raised in the court proceedings. A hearing date has
been set for August 1996. It cannot presently be determined what effect, if
any, the FDBF's action on the application and the discussions with the FRB
will have on the Company although if the control applications are denied,
regulatory authorities could take various actions, including requiring that
one or more members of the Holtz family divest sufficient shares of Bancorp
so as not to have legal control of Bancorp as defined by regulatory
authorities.
43
<PAGE>
Abel Holtz is subject to the restrictions of Section 19 of the Federal
Deposit Insurance Act as a result of entering a guilty plea to one count of
giving misleading testimony in 1991 to a Federal Grand Jury in violation of a
federal statute, with respect to the purpose of certain payments made by
Capital Bank, the Company and certain related parties to a public official.
As a result, he is precluded from owning or controlling, or otherwise
participating in, the affairs of Bancorp and Capital Bank without regulatory
approval. Abel Holtz has advised Bancorp that he has orally agreed with the
FDIC not to vote his shares in Bancorp at the present time. Federal bank
regulatory authorities are also examining and investigating whether Abel
Holtz and some or all of the persons discussed in this section, including
Bancorp and its subsidiaries, as well as possibly other persons, are in
compliance with applicable change in control laws and Section 19. To date,
the Company is unaware of any conclusions which may have resulted from these
inquiries.
EMPLOYEES
At March 31, 1996, the Company had 228 employees, of which 111 were
employed in the Florida office, including 29 professional staff and 82
clerical staff, 45 were employed in the California office, including 22
professional staff and 23 clerical staff, 44 were employed in the New York
office, including 23 professional staff and 21 clerical staff, and 28 were
employed in the North Carolina Office, including 10 professional staff and 18
clerical staff. None of the Company's employees are covered by a collective
bargaining agreement and the Company considers its employee relations to be
good.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and nominees for director of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -----------------------------------------------------------------------------------
<S> <C> <C>
John W. Kiefer ...... 49 President, Chief Executive Officer and Director
Stephen J. Donohue . 51 Executive Vice President--New York Regional Manager
James L. Morrison .. 52 Executive Vice President--California Regional Manager
Michael J. Sullivan 47 Senior Vice President--North Carolina Regional Manager
Dennis A. McDermott 45 Senior Vice President--Chief Financial Officer
John B. Apgar ....... 42 Senior Vice President--Healthcare
Javier J. Holtz .... 35 Executive Vice President and Chairman of the Board
Daniel M. Holtz .... 36 Director
Stephen N. Ashman .. 47 Director
Ronald S. Chase .... 51 Director
Harold L. Oshry .... 73 Director
Bruce Raiffe ........ 38 Director
Jack Listanowsky ... 48 Director
Cynthia Cohen Turk . 43 Director Nominee
Norman G. Einspruch 63 Director Nominee
</TABLE>
Mr. Kiefer has served as the Company's President and Chief Executive
Officer and as a director since April 1987. Mr. Kiefer has also served as a
Senior Vice President of Bancorp since January 1987 and as a director of
Capital Bank since October 1992. From 1984 to 1986, Mr. Kiefer served as
Senior Vice President--Regional Manager of Barclays American/Commercial Inc.
and served as Vice President from 1981 to 1984.
Mr. Donohue has served as the Company's New York Regional Manager since
April 1990, and was promoted from a Senior Vice President to an Executive
Vice President in January 1992. From 1970 to April 1990, Mr. Donohue was
employed by Bankers Trust Factors in various positions, including Manager of
Client Portfolio.
Mr. Morrison has served as the Company's California Regional Manager since
August 1989, and was promoted from a Senior Vice President to an Executive
Vice President in January 1992. From 1984 to August 1989, Mr. Morrison served
as Vice President--Regional Manager of the Los Angeles office of NatWest
Commercial Services, Inc.
Mr. McDermott has served as the Company's Senior Vice President--Chief
Financial Officer since July 1991. Prior to joining the Company, Mr.
McDermott served as Chief Accounting Officer from April 1990 to June 1991 at
the request of the Resolution Trust Company with several troubled financial
institutions, including AmeriFirst Bank, American Pioneer Savings Bank, and
Centrust Bank. Mr. McDermott served as Vice President--Chief Financial
Officer of Ambassador Financial Group, Inc., a savings and loan holding
company, from July 1988 to March 1990, and as Executive Vice President--Chief
Financial Officer of Crossland Savings from September 1983 to June 1988.
Mr. Sullivan has served as the Company's Senior Vice President--North
Carolina Regional Manager since March 1995. From August 1994 to February
1995, Mr. Sullivan served as the Head of Business Development for the CIT
Group, the successor to Barclays Commercial Corporation. From November 1981
to February 1994, Mr. Sullivan served as Senior Vice President--Regional
Executive of Barclays Commercial Corporation and, from March 1994 to August
1994, Mr. Sullivan served in the same capacity with the CIT Group. Prior to
that and from June 1975 to December 1980, Mr. Sullivan was International
Credit Director of the B.F. Goodrich Company. Mr. Sullivan performed
independent consulting services from December 1980 to November 1981.
45
<PAGE>
Mr. Apgar has served as the Company's Senior Vice President--Healthcare
since June 1994. From April 1992 to April 1993, Mr. Apgar was the head of the
new business segment of Tower Financial Corporation. In April 1993, Tower
Financial Corporation filed a petition seeking relief under the United States
Bankruptcy Code. In May 1993, Mr. Apgar was appointed Senior Vice
President--Client Relations--Healthcare Division of Tower Financial
Corporation by the trustee appointed to administer Tower Financial's
bankruptcy estate and served in such position until April 1994. From July
1990 to March 1992, Mr. Apgar was Vice President--New Business of BancBoston
Financial Company, a Trust of Bank of Boston.
Mr. Javier Holtz has served as a director of the Company since August 1987
and as Executive Vice President since November 1994. Mr. Holtz was appointed
Chairman of the Board of the Company in October 1994. In addition, Mr. Holtz
has been employed by Capital Bank since 1983, most recently as an Executive
Vice President. Mr. Holtz has been a director of Capital Bank since 1988. Mr.
Holtz has also served as Senior Vice President of Bancorp since January 1990.
Mr. Holtz is Chairman of the Board of Capital Bank, N.A., Rockville,
Maryland. Mr. Holtz is the brother of Daniel Holtz, a director of the Company
and the Chairman of the Board, President and Chief Executive Officer of each
of Bancorp and Capital Bank, and the son of Fana Holtz, the Vice Chairman of
Bancorp's Board of Directors and the beneficial owner of approximately 40% of
Bancorp common stock, and Abel Holtz, the beneficial owner of approximately
9.1% of Bancorp common stock. See "Principal Shareholders."
Mr. Daniel Holtz has served as a director of the Company from 1985 to 1987
and from 1993 to the present. Mr. Holtz has been a director of Bancorp since
June 1988 and also served as President of Bancorp since February 1994 and as
Chairman of the Board and Chief Executive Officer since October 1994. In
addition, Mr. Holtz has served as President of Capital Bank since October
1991 and as Chairman of the Board and Chief Executive Officer since October
1994. Mr. Holtz was President and Chief Executive Officer of Capital Bank of
California from September 1987 to November 1991 and director from July 1985
until June 1993, when the bank was declared insolvent and closed by the
California Superintendent of Banks. Mr. Holtz is the brother of Javier Holtz
and the son of Fana Holtz and Abel Holtz. See "Principal Shareholders."
Mr. Ashman has been a director of the Company since May 1985. Mr. Ashman
has served as President and Chief Executive Officer of Capital Bank, N.A.,
Rockville, Maryland since November 1991. Mr. Ashman served as Treasurer and
Chief Financial Officer of Bancorp from February 1985 to November 1991, and
as Executive Vice President and Chief Financial Officer of Capital Bank from
February 1985 to November 1991.
Mr. Chase has served as a director of the Company since September 1992.
Mr. Chase has also served as a director of Capital Bank since July 1993. Mr.
Chase has been the President and owner of Chase Holdings & Advisory Services,
Inc., which provides financial advisory services to corporations and
litigation attorneys, since June 1991. In addition, Mr. Chase is the owner
and has served as President of each of RSC Development, Inc., a residential
developer, and CFAT H20, Inc., a water treatment facility, both of which are
located in Ocala, Florida, since approximately November 1993. Mr. Chase is a
certified public accountant who served as Managing Partner for several
offices of Deloitte & Touche, LLP for 14 of his 25 years with the firm. Mr.
Chase also serves as a director of the Greater Miami Neighborhood, Inc., a
not-for-profit affordable housing developer.
Mr. Oshry has served as a director of the Company since September 1992.
Mr. Oshry served as Chairman, President and Chief Executive Officer of
Sandgate Corp., a New York real estate developer, from 1955 until his
retirement in 1985.
Mr. Raiffe has served as a director of the Company since 1993. Mr. Raiffe
has served as the President of Gund, Inc., a toy manufacturer, since March
1993. From 1980 to 1993, Mr. Raiffe served as an Executive Vice President of
Gund, Inc. Mr. Raiffe also serves as a director of the United Cerebral Palsy
Association.
Mr. Listanowsky has served as a director of the Company since 1993. Mr.
Listanowsky has served as the Vice President--Sourcing and Production of The
Limited, Inc. since April 1995. From December
46
<PAGE>
1989 to May 1995, Mr. Listanowsky served as the Executive Vice President of
Manufacturing and Operations of Liz Claiborne, Inc. Prior to joining Liz
Claiborne, Inc. in 1981, Mr. Listanowsky was the Vice President of
Manufacturing and Operations of SKYR Sportswear from 1974 to 1981.
Ms. Cohen Turk, the President of MARKETPLACE 2000, a marketing and
strategy consulting firm, has been nominated to become a director of the
Company immediately upon the consummation of this offering. Prior to founding
MARKETPLACE 2000 in 1990, Ms. Turk was a partner with the public accounting
firm of Deloitte & Touche LLP. Ms. Turk is currently a director of Loehmann's
Holdings, Inc., One Price Clothing, Inc., and Spec's Music Stores, Inc., all
publicly-traded companies.
Norman G. Einspruch, Ph.D., Professor and Chairman of the Department of
Industrial Engineering at the University of Miami, has been nominated to
become a director of the Company immediately upon the consummation of this
offering. From 1977 to 1990, Dr. Einspruch served as Dean of the College of
Engineering at the University of Miami and beginning in 1990, has served as
Senior Fellow in Science and Technology at that university. From 1959 to
1977, Dr. Einspruch served in various capacities with Texas Instruments
Incorporated, including Assistant Vice President, Corporate Development
Manager and Strategic Planning Manager from 1975 to 1977. Dr. Einspruch is
currently a director of Ogden Corporation and Penril DataComm Networks, Inc.,
publicly traded corporations. Dr. Einspruch has published various articles in
technical journals and is a Fellow of the Institute of Electrical and
Electronics Engineers.
All directors hold office until the next annual meeting of shareholders of
the Company and until their successors have been duly elected and qualified.
Each officer serves at the discretion of the Board of Directors (and in the
case of Messrs. Kiefer, Donohue and Morrison pursuant to employment
agreements).
DIRECTORS' COMPENSATION
The Company pays all directors a monthly retainer of $1,000 and $250 for
each meeting attended by the director. The Company also reimburses all
directors for all travel-related expenses incurred in connection with their
activities as directors. The Company also paid $94,000 in salary and bonus to
Javier Holtz for his services as Executive Vice President of the Company
during 1995.
In addition, non-officer directors of the Company also have in the past
received options to acquire Bancorp Common Stock for their service on the
Company's Board of Directors. For the 1995 fiscal year, each outside director
of the Company received options to acquire 5,000 shares of Bancorp common
stock. Certain directors who are also officers and/or directors of Bancorp,
Capital Bank and/or the Company received options to purchase shares of
Bancorp common stock. John Kiefer, Javier Holtz and Daniel Holtz received
options to purchase a total of 12,500, 6,000 and 18,000 shares of Bancorp
common stock, respectively, in 1996 for 1995. The grants of such options,
however, reflect compensation for such persons' service with Bancorp and
Capital Bank, as well as with the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
Messrs. Chase, Oshry, Listanowsky and Raiffe serve on the Company's Audit
Committee. The Audit Committee's functions include recommending to the Board
of Directors the engagement of the Company's independent certified public
accountants, reviewing with such accountants the plan and results of their
audit of the financial statements and determining the independence of such
accountants. In addition, Messrs. Chase, Oshry, Listanowsky and Raiffe serve
on the Company's Compensation and Benefits Committee, which reviews and makes
recommendations with respect to compensation of officers and key employees,
including the grant of options under the Company's Stock Option Plan, and the
Company's Conflict of Interest Committee, which, among other things, reviews
and makes recommendations with respect to transactions between the Company
and any of its affiliates, including those with Bancorp and Capital Bank.
47
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company, for
services rendered during the past year to the five most highly compensated
officers (the "Named Officers") of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------ ---------------
NUMBER OF
SECURITIES
FISCAL SALARY BONUS OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION($) OPTIONS(1) COMPENSATION($)
- ------------------------------ --------- ---------- ------------- ---------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
John W. Kiefer 1995 275,000 600,000(2) --(3) 12,500 25,084(4)
Chief Executive Officer
Stephen J. Donohue 1995 210,000 262,171 --(3) 3,500 28,142(4)(5)
Executive Vice President,
New York--Regional Manager
James L. Morrison 1995 171,000 162,490 --(3) 3,475 26,294(4)
Executive Vice President,
California--Regional Manager
Michael J. Sullivan 1995 125,577 70,000 --(3) 700 --
Senior Vice President,
North Carolina --
Regional Manager(6)
Dennis A. McDermott 1995 100,000 60,000 --(3) 2,500 1,000(5)
Senior Vice President and
Chief Financial Officer
</TABLE>
- --------
(1) Represents options to purchase shares of Bancorp common stock granted
under the Bancorp 1992 Stock Option Plan which options were granted in
1996. No options were granted to the Named Officers to purchase Common
Stock of the Company during the year ended December 31, 1995.
(2) Represents a one-time cash bonus of $300,000 which was paid to Mr. Kiefer
at the conclusion of his employment agreement, which agreement terminated on
December 31, 1995, for continuing to be employed until such termination, as
well as a $300,000 bonus based upon the Company's earnings for the year
ended December 31, 1995.
(3) The aggregate amount of perquisites and other personal benefits
provided to such Named Officer is less than 10% of the total annual salary
and bonus of such officer.
(4) Represents the cost of life insurance coverage for Mr. Kiefer
and Morrison and includes the cost of life insurance coverage for Mr.
Donohue pursuant to a split-dollar life insurance policy on the life of the
executive. The Company will be reimbursed for its premium payments at such
time as benefits are paid under the policies or the policies are terminated
and the cash proceeds distributed.
(5) Includes matching contributions to Bancorp's 401(k) plan of $1,500 for
Mr. Donohue and $1,000 for Mr. McDermott.
(6) Mr. Sullivan was not employed by the Company for the full fiscal year.
Represents the period commencing on February 28, 1995 and continuing through
December 31, 1995.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with John W. Kiefer,
the President and Chief Executive Officer of the Company. The employment
agreement with Mr. Kiefer expires in December 2000. Upon execution of the
agreement, Mr. Kiefer received a signing bonus of $250,000 and a $100,000
loan payable in five equal installments of principal plus all accrued
interest through the date of payment during the term, but due in full upon
earlier termination of the employment agreement. The agreement provides for
an annual base salary to Mr. Kiefer of $300,000 in the first year, subject to
adjustment in the discretion of the Company's Board of Directors or
Compensation and Benefits Committee. Mr. Kiefer will receive a bonus on
December 31 of each year during the term of the agreement if he is then still
employed thereunder, in an amount equal to the amount of principal and
interest then due under his loan from the Company. The employment agreement
also provides for an annual bonus based on the Company's success in reaching
certain targets for net revenues and income before income taxes. In the event
the targets are reached, the portion of the bonus relating to net
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<PAGE>
revenues would equal 20% of Mr. Kiefer's salary and the portion of the bonus
relating to income before income taxes would equal 80% of his salary. Each
portion of the bonus could be a smaller or larger percentage of his salary
depending upon whether the targets are either not met or exceeded, with the
aggregate maximum in any year being 185% of salary if both targets are
doubled. Mr. Kiefer shall also receive deferred compensation equal to 67% of
his salary for each year that (i) net revenues and income before income taxes
exceed projected net revenues and income before income taxes as set forth in
the Company's 5-year plan, (ii) net revenues increase by 13.5% over net
revenues for the prior year and (iii) income before income taxes increases by
22.5% over income before income taxes for the prior year. The deferred
compensation shall vest 50% after three years and 25% after each of the
fourth and fifth years, provided that Mr. Kiefer is still employed by the
Company, although the employment condition for vesting will lapse after the
5-year term of the employment agreement if Mr. Kiefer is employed at that
time. If at the end of the 5-year term, Mr. Kiefer agrees to be employed by
the Company for another five years, then all deferred compensation that has
not yet vested shall immediately vest. In addition, on the effective date of
this offering, Mr. Kiefer will receive options to purchase one (1%) percent
of the Company's Common Stock outstanding after giving effect to such
offering at the initial public offering price, subject to the terms and
conditions of the Company's Stock Option Plan then in effect. Upon the
Company's termination of Mr. Kiefer's employment agreement without cause, Mr.
Kiefer shall be entitled to receive, among other things, (i) base salary
through the date of such termination and (ii) all previous bonuses and a
pro-rata portion of the bonus payable, if any, for the year in which
termination occurs, (iii) an acceleration of the vesting of all deferred
compensation and (iv) subject to mitigation if he obtains subsequent
employment, his base salary through the expiration date of his employment
agreement. In the event of a change in control, Mr. Kiefer shall receive the
same compensation as if terminated without cause except that in lieu of the
compensation payable in (iv) above, Mr. Kiefer shall be entitled to receive a
lump sum payment equal to two times his salary and prior year's bonus if he
terminates his employment because of changes in his employment situation and
an additional amount equal to two times his prior year's deferred
compensation, if any, if he is terminated by the Company without cause within
one year after a change in control. Upon termination for "cause" or upon
voluntary resignation, Mr. Kiefer shall be entitled to receive his base
salary through the date of such termination. Payment of the bonus and
deferred compensation in certain years during the term that would not
otherwise be deductible by reason of Section 162(m) of the Internal Revenue
Code of 1986, as amended, is subject to certain approvals, including
shareholder approval. The Company's Compensation and Benefits Committee may,
at its option, defer payment of amounts that would not otherwise be
deductible under Section 162(m) until a time when it would be deductible. The
stock option grant will also be conditioned upon approval of the Compensation
and Benefits Committee and approval of the Company's Stock Option Plan by the
Company's shareholder. The agreement also contains certain non-competition
covenants and covenants against solicitation of clients and employees for a
competitive business.
Factors is a party to an employment agreement with Stephen J. Donohue, the
Company's Executive Vice President and Regional Manager of the Company's New
York office. The Company is negotiating a new agreement with Mr. Donohue,
subject to approval of the Compensation and Benefits Committee. The terms of
the new agreement proposed by Mr. Donohue and being negotiated with the
Company are set forth below. Final terms may differ. The new agreement would
expire on December 31, 2000. The existing agreement, which expires in
December 1997, provides for an annual base salary to Mr. Donohue of $170,000,
subject to a 6% increase from the base salary paid in the previous year as
well as an annual bonus based upon the Company's earnings before income taxes
("EBT") attributable to the Company's New York office. The new agreement
would provide for a base salary of $232,000 in 1996 and $255,000 in 1997,
with minimum annual increases thereafter of 8%. Mr. Donohue would receive a
bonus on December 31 of each year during the term of the agreement if he is
then still employed thereunder in an amount equal to the amount of principal
and interest then due under his loan from the Company described below.
Pursuant to the Board's discretion, during the previous two years, Mr.
Donohue received 3.0% of EBT attributable to the New York office. The new
agreement would provide for an annual bonus equal to 3.0% of EBT attributable
to the New York office, but not to exceed twice his base salary. Mr. Donohue
was to receive an additional cash bonus of
49
<PAGE>
$250,000 if he was employed by the Company through the expiration date of the
existing employment agreement. Pursuant to the new agreement he would receive
$150,000 of this compensation upon the execution of the new agreements for
his three years of service under the existing agreement. He would also
receive a signing bonus of $125,000 and a $75,000 loan payable in five equal
installments of principal plus all accrued interest at the date of payment
during the term, but due in full upon earlier termination of the employment
agreement. Under the new agreement, Mr. Donohue would also receive deferred
compensation equal to 50% of his salary for each year that (i) net revenues
for the region increases by 13.5% over net revenues for the prior year and
(ii) income before income taxes for the New York region increases by 22.5%
over income before income taxes for the prior year. The deferred compensation
shall vest 50% after three years and 25% after each of the fourth and fifth
year, provided that Mr. Donohue is still employed by the Company, although
the employment condition for vesting will lapse after the 5-year term of the
employment agreement if Mr. Donohue is employed at that time. If at the end
of the five-year term, Mr. Donohue agrees to be employed by the Company for
another five years, then all deferred compensation that has not yet vested
shall immediately vest. In addition, upon consummation of this offering, Mr.
Donohue will receive options to purchase 0.5% of the Company's Common Stock
outstanding after giving effect to such offering at the initial public
offering price. Upon the Company's termination of Mr. Donohue's employment
agreement without cause, Mr. Donohue is entitled to receive (i) his base
salary through the date of such termination, (ii) all previous unpaid bonuses
and a pro-rata portion of the bonus payable, if any, for the year in which
termination occurs and (iii) subject to the obligation to seek subsequent
employment, his base salary for one year following termination, but in no
event beyond the expiration date of his employment agreement. Under the new
agreement, Mr. Donohue would receive the compensation set forth in (i) and
(ii) above, but his base salary would be paid through the expiration date of
the agreement, subject to mitigation if he obtains subsequent employment. In
the event of a change in control, Mr. Donohue shall be entitled to terminate
his employment agreement in the event of certain changes in his employment
situation. Under the existing agreement, upon Mr. Donohue's termination of
the existing employment agreement as a result of a change in control, Mr.
Donohue is entitled to receive (i) his base salary through the date of such
termination, (ii) all previous unpaid bonuses and a pro-rata portion of the
bonus payable, if any, for the year in which termination occurs, (iii) his
base salary for one year following termination but in no event beyond the
expiration date of his employment agreement and (iv) a portion of his
additional cash bonus. Under the new agreement, Mr. Donohue would be entitled
to the same compensation as in (i) and (ii) above, an acceleration of the
vesting of all deferred compensation, and a lump sum payment equal to two
times his base salary and prior year bonus if he terminates his employment
because of changes in his employment situation and an additional amount equal
to two times his prior year's deferred compensation, if any, if he is
terminated by the Company without cause, within one year of a change in
control. Upon termination for "cause" or upon voluntary resignation, Mr.
Donohue shall be entitled to receive his base salary through the date of such
termination. Payment of the bonus and deferred compensation in certain years
during the term that would not otherwise be deductible by reason of Section
162(m) of the Internal Revenue Code of 1986, as amended, is subject to
certain approvals, including shareholder approval. The Company's Compensation
and Benefits Committee may, at its option, defer payment of amounts that
would not otherwise be deductible under Section 162(m) until a time when it
would be deductible. The stock option grant will also be conditioned upon
approval of the Compensation and Benefits Committee and approval of the
Company's Stock Option Plan by the Company's shareholder. The agreement would
also contain certain non-competition covenants and covenants against
solicitation of clients and employees for a competitive business.
In addition, Factors is a party to an employment agreement with James L.
Morrison, the Company's Executive Vice President and Regional Manager of the
Company's California office. The Company is negotiating a new agreement with
Mr. Morrison, subject to final approval of the Compensation and Benefits
Committee. The terms of the new agreement proposed by Mr. Morrison and being
negotiated with the Company are set forth below. Final terms may differ.The
new agreement would expire on December 31, 2000. The existing agreement,
which expires in December 1997, provides for an annual base salary to Mr.
Morrison of $140,000, subject to a 6% increase from the base salary paid in
the previous year as well as an annual bonus based upon the Company's EBT
attributable to the
50
<PAGE>
Company's California office. The new agreement would provide for a base
salary of $189,000 in 1996 and $210,000 in 1997, with minimum annual
increases of 8% thereafter. Mr. Morrison would receive a bonus on December 31
of each year during the term of the agreement if he is then still employed
thereunder in an amount equal to the amount of principal and interest then
due under his loan from the Company described below. Pursuant to the Board's
discretion, during the previous two years, Mr. Morrison received 3.0% of EBT
attributable to the California office. The new agreement would provide for an
annual bonus equal to 3.0% of EBT attributable to the California office, but
not to exceed twice his base salary. Under the existing agreement, Mr.
Morrison was to receive an additional cash bonus of $150,000 if he is
employed by the Company through the expiration date of the employment
agreement. Pursuant to the new agreement, he would receive $90,000 of this
compensation upon the execution of the new agreement for his three years of
service under the existing agreement. He would also receive a signing bonus
of $125,000 and a $75,000 loan payable in five equal installments of
principal plus all accrued interest through the date of payment during the
term, but due in full upon earlier termination of the employment agreement.
Under the new agreement, Mr. Morrison would also receive deferred
compensation equal to 50% of his salary for each year that (i) net revenues
for the California region increases by 13.5% over net revenues for the prior
year and (ii) income before income taxes for the California region increases
by 22.5% over income before income taxes for the prior year. The deferred
compensation shall vest 50% after three years and 25% after each of the
fourth and fifth years, provided that Mr. Morrison is still employed by the
Company although the employment condition for vesting will lapse after the
5-year term of the employment agreement if Mr. Morrison is employed at that
time. If at the end of the five-year term, Mr. Morrison agrees to be employed
by the Company for another five years, then all deferred compensation that
has not yet vested shall immediately vest. In addition, upon consummation of
this offering, Mr. Morrison will receive options to purchase 0.5% of the
Common Stock outstanding after giving effect to such offering at the initial
public offering price. Upon the Company's termination of Mr. Morrison's
existing employment agreement without cause, Mr. Morrison is entitled to
receive (i) base salary through the date of such termination, (ii) all
previous unpaid bonuses and a pro-rata portion of the bonus payable, if any,
for the year in which termination occurs and (iii) subject to the obligation
to seek subsequent employment, his base salary for one year following
termination, but in no event beyond the expiration date of his employment
agreement. Under the new agreement, Mr. Morrison would receive the
compensation set forth in (i) and (ii) above, but his base salary would be
paid through the expiration date of the agreement, subject to mitigation if
he obtains subsequent employment. In the event of a change in control, Mr.
Morrison shall be entitled to terminate his employment agreement in the event
of certain changes in his employment situation. Under the existing agreement,
upon Mr. Morrison's termination of the existing employment agreement as a
result of a change in control, Mr. Morrison is entitled to receive (i) base
salary through the date of such termination, (ii) all previous unpaid bonuses
and a pro-rata portion of the bonus payable, if any, for the year in which
termination occurs, (iii) his base salary for one year following termination
but in no event beyond the expiration date of his employment agreement and
(iv) a portion of his additional cash bonus. Under the new agreement, Mr.
Morrison would be entitled to the same compensation as in (i) and (ii) above,
an acceleration of the vesting of all deferred compensation, and a lump sum
payment equal to two times his salary and prior year bonus if he terminates
his employment because of changes in his employment situation and an
additional amount equal to two times his prior year's deferred compensation,
if any, if he is terminated by the Company without cause, within one year
after a change in control. Upon termination for "cause" or upon voluntary
resignation, Mr. Morrison shall be entitled to receive his base salary
through the date of such termination. Payment of the bonus and deferred
compensation in certain years during the term that would not otherwise be
deductible by reason of Section 162(m) of the Internal Revenue Code of 1986,
as amended, is subject to certain approvals, including shareholder approval.
The Company's Compensation and Benefits Committee may, at its option, defer
payment of amounts that would not otherwise be deductible under Section
162(m) until a time when it would be deductible. The stock option grant will
also be conditioned upon approval of the Compensation and Benefits Committee
and approval of the Company's Stock Option Plan by the Company's shareholder.
The agreement would also contain certain non-competition covenants and
covenants against solicitation of clients and employees for a competitive
business.
51
<PAGE>
The Company may enter into employment agreements with other executive
officers in the future.
COMPANY STOCK OPTION PLAN
Under the Company's Stock Option Plan (the "Plan"), which will be
effective upon the consummation of this offering, 800,000 shares of Common
Stock will be reserved for issuance upon exercise of stock options. During
the Eighty Percent Period, no more than 200,000 of such options may be
granted without the restrictions set forth below. See "Description of Capital
Stock--Anti-takeover Effects of Certain Provisions of Florida Law and the
Company's Articles of Incorporation and Bylaws." The remaining options, even
if vested, may not be exercised without the written approval of Capital Bank
during the Eighty Percent Period. Such shares will be accompanied by stock
appreciation rights which will become exercisable as determined by the
Committee, but in no event prior to April 15, 2001, and only if Capital Bank
does not give approval to the exercise of the option. The Plan is designed as
a means to retain and motivate key employees and directors. The Compensation
and Benefits Committee of the Board of Directors will administer and
interpret the Plan and be authorized to grant options thereunder to all
eligible employees and directors of the Company, except that no incentive
stock options (as defined in Section 422 of the Internal Revenue Code) may be
granted to a director who is not also an employee of the Company or a
subsidiary.
The Plan will provide for the granting of both incentive stock options and
nonqualified stock options. Options will be granted under the Plan on such
terms and at such prices as determined by the Compensation and Benefits
Committee, except that the per share exercise price of incentive stock
options cannot be less than the fair market value of the Common Stock on the
date of grant. The aggregate number of options granted to any one director,
officer or employee may not exceed 35% of the total options available under
the Plan. Each option is exercisable after the period or periods specified in
the option agreement, but no option may be exercisable after the expiration
of ten years from the date of grant. Options granted to an individual who
owns (or is deemed to own) at least 10% of the total combined voting power of
all classes of stock of the Company or its subsidiary must have an exercise
price of at least 110% of the fair market value of the Common Stock on the
date of grant and a term of no more than five years. Options granted under
the Plan are not transferable other than by will or by the laws of descent
and distribution. The Plan also authorizes the Company to make or guarantee
loans to optionees to enable them to exercise their options. Such loans must
(i) provide for recourse to the optionee, (ii) bear interest at a rate no
less than the prime rate of interest, and (iii) be secured by the shares of
Common Stock purchased. The Board of Directors has the authority to amend or
terminate the Plan, provided that no such action may impair the rights of the
holder of any outstanding option without the written consent of such holder,
and provided further that certain amendments of the Plan are subject to
shareholder approval. Unless terminated sooner, the Plan will continue in
effect until all options granted thereunder have expired or been exercised,
provided that no options may be granted ten years after commencement of the
Plan.
The Plan will provide that (i) each director who is not an employee of the
Company and who may be required to meet certain other criteria (a
"Non-Employee Director") will receive, on the date of his or her appointment
as a director or the date of this offering, whichever is earlier (but in no
event earlier than the date of this offering), options to purchase 10,000
shares of Common Stock and, at the annual meeting each year commencing in
1997 (if such person continues to serve as a director of the Company on such
date), an option to purchase an additional 2,000 shares of Common Stock, (ii)
each option granted to Non-Employee Directors will become exercisable as to
be provided in the Plan, although such options granted on the date of this
offering shall be restricted as provided above on a pro-rata basis with all
other options granted on such date, and, thereafter, during the Eighty
Percent Period, all options shall be restricted as provided above, (iii) the
unexercised portion of any option granted to Non-Employee Directors shall
terminate a specified period of time after such director no longer serves on
the Company's Board (or one year in the event of physical or mental
disability or death), except that such period shall not begin until the
restrictions listed above cease, or if the stock appreciation right
accompanying such option becomes exercisable, until such exercisability, and
(iv) the per share exercise price of all options granted to Non-Employee
Directors will be equal to the fair market value of the Common Stock on the
date of grant.
52
<PAGE>
The following table sets forth information with respect to options to be
granted under the Plan upon consummation of this offering to (i) each Named
Officer, (ii) each director and nominee for director, (iii) all executive
officers as a group, and (iv) all other employees of the Company as a group.
All of the options are nonstatutory, are being granted with an exercise price
equal to the offering price, are subject to the consummation of this offering
and are being granted in 1996.
<TABLE>
<CAPTION>
NAME OF GRANTEE OR GROUP NUMBER OF SHARES
- ---------------------------------------------- -----------------
<S> <C>
John W. Kiefer ............................... 120,000
Stephen J. Donohue ........................... 60,000
James L. Morrison ............................ 60,000
Michael J. Sullivan .......................... 20,000
Dennis A. McDermott .......................... 40,000
John B. Apgar ................................ 25,000
Javier J. Holtz .............................. 25,000
Daniel M. Holtz .............................. 10,000
Stephen N. Ashman ............................ 10,000
Ronald S. Chase .............................. 10,000
Harold L. Oshry .............................. 10,000
Bruce Raiffe ................................. 10,000
Jack Listanowsky ............................. 10,000
Cynthia Cohen Turk ........................... 10,000
Norman G. Einspruch .......................... 10,000
All executive officers as a group (7 persons) 350,000
All other employees as a group (80 persons) . 142,500
</TABLE>
BANCORP PENSION PLAN
Currently, all eligible officers of the Company participate in the Bancorp
Employees Pension Plan which was established in 1983 (the "Bancorp Pension
Plan"). The normal retirement age under the Bancorp Pension Plan is the later
of age 65 or the age of the participant on the 5th anniversary of plan
participation. The monthly pension benefit for normal retirement in 1.2% of
average monthly compensation for the 5 consecutive years during the last 10
years of service that produce the highest average salary, plus an additional
0.6% of the portion of the average monthly compensation during these same 5
years in excess of the monthly social security integration level. The entire
monthly pension benefit for normal retirement will be multiplied by each year
of service at normal retirement age, not to exceed 25 years. The Bancorp
Pension Plan provides for early retirement at age 55 with 10 years continuous
employment as well as full vesting of benefits upon termination of employment
before retirement age and after completion of 7 years continuous employment.
In the event of the death of an active participant, the total value of the
decedent's accrued pension benefit will be paid to the designated beneficiary
by the method selected by the beneficiary and approved by the Bancorp Pension
Plan administrator. The benefit will be based upon the years of service and
number of years before normal retirement age. The Bancorp Pension Plan does
not provide for disability benefits. The Company funds the Bancorp Pension
Plan for its proportionate share of the costs of such plan, based on the
number of its employee participants. During 1995, the Company paid $172,090
for its share of the Bancorp Pension Plan's costs. See "Certain
Transactions."
53
<PAGE>
Annual amounts of normal retirement pension payable under the Bancorp
Pension Plan are illustrated in the following table. The illustration assumes
retirement as of December 31, 1995 at the normal retirement age of 65.
<TABLE>
<CAPTION>
FIVE YEAR YEARS TO SERVICE
AVERAGE ---------------------------------------------
COMPENSATION 10 15 20 25
- --------------- --------- --------- --------- --------
<S> <C> <C> <C> <C>
$125,000 $21,060 $31,590 $42,120 $52,650
150,000 25,560 38,340 51,120 63,900
175,000 25,560 38,340 51,120 63,900
200,000 25,560 38,340 51,120 63,900
225,000 25,560 38,340 51,120 63,900
250,000 25,560 38,340 51,120 63,900
275,000 25,560 38,340 51,120 63,900
300,000 25,560 38,340 51,120 63,900
</TABLE>
As of December 31, 1995, each of the Named Officers and certain directors
of the Company had credited service (to the nearest whole year) under the
Bancorp Pension Plan as follows:
<TABLE>
<CAPTION>
CREDITED SERVICE
NAME IN YEARS
- ------------------------- ---------------------
<S> <C>
John W. Kiefer .......... 9
Stephen J. Donohue ...... 6
James L. Morrison ....... 6
Michael J. Sullivan .... 0
Dennis A. McDermott .... 4
Javier J. Holtz ......... 13
Daniel M. Holtz ......... 13
</TABLE>
In the event that Capital Bank's percentage ownership of the Common Stock
of the Company drops below 80%, it is anticipated that the Company would
adopt its own pension plan. At such time, the officers of the Company with
years of credited service in the Bancorp Pension Plan would transfer such
credit to the Company's pension plan.
BANCORP STOCK OPTION PLANS
Certain of the Company's executive officers and all of the directors also
participate in the Bancorp 1982 Employee Stock Option Plan and/or 1992
Employee Stock Option Plan (collectively, the "Bancorp Plans"). All of the
directors and executive officers of the Company have participated in one or
both of the Bancorp Plans. Messrs. John W. Kiefer, Daniel M. Holtz, Javier J.
Holtz and Ronald S. Chase participate in the Bancorp Plans as a result of
their relationship with Bancorp and Capital Bank and will continue to
participate in such plans after the consummation of this offering. Mr.
Kiefer's participation also relates to his employment by the Company. The
participation of the officers of the Company in the 1992 Employee Stock
Option Plan may continue after the consummation of this offering so long as
the Company remains a subsidiary of Bancorp or Capital Bank.
54
<PAGE>
The following table sets forth certain information with respect to options
to purchase shares of common stock of Bancorp granted under the Bancorp Plans
to the Named Officers for the 1995 fiscal year and represents all options
granted by Bancorp to such Named Officers for the period. In accordance with
rules of the Securities and Exchange Commission, the table also describes the
hypothetical gains that would exist for the respective options based on
assumed rates of annual compounded stock appreciation of 5% and 10% from the
date of grant to the end of the option term. These hypothetical gains are
based on assumed rates of appreciation and, therefore, the actual gains, if
any, on stock option exercises are dependent on the future performance of
Bancorp common stock, overall stock market conditions, and the Named
Officer's continued employment with the Company. As a result, the amounts
reflected in this table may not necessarily be achieved.
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(4)
---------------------------------------------------------------- ---------------------------
% OF TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SARS IN FISCAL BASE PRICE
NAME GRANTED(#) YEAR(2) ($/SH)(3) EXPIRATION DATE 5% 10%
- ---- --------------- ---------------- -------------- ---------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
John W. Kiefer ...... 12,500 16.9% $31.00 February 2001 $107,000 $236,625
Stephen J. Donohue . 3,500 4.7% $31.00 February 2001 $ 29,960 $ 66,255
James L. Morrison .. 3,475 4.7% $31.00 February 2001 $ 29,746 $ 65,782
Michael J. Sullivan 700 0.9% $31.00 February 2001 $ 5,992 $ 13,251
Dennis A. McDermott 2,500 3.4% $31.00 February 2001 $ 21,400 $ 47,325
</TABLE>
- --------
(1) Bancorp did not grant any SARs during the 1995 fiscal year. All options
were granted in February 1996 for services rendered during the 1995
fiscal year. In addition, all of such options are exercisable immediately
and are granted for a term of five years.
(2) This information is as a percentage of total Company employees only.
(3) Exercise price is based on the Nasdaq National Market closing price of
Bancorp's common stock on the day immediately prior to the date of grant.
(4) Potential realizable value assumes that any shares that are acquired by
the exercise of options are held until the end of the five-year option
term.
OPTIONS EXERCISES UNDER BANCORP PLANS. The following table sets forth
stock options exercised during 1995 by the Named Officers, including the
value realized upon such exercises. In addition, this table describes the
number of unexercised options and the value of unexercised in-the-money
options at the end of the 1995 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND DECEMBER 31, 1995 OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, DECEMBER 31,
1995(#) 1995($)(2)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(2) UNEXERCISABLE(3) UNEXERCISABLE(3)
- ---- ---------------- ----------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
John W. Kiefer ...... 4,500 $124,125 59,001 / 0 $1,010,597 / 0
Stephen J. Donohue . 1,500 $ 41,375 15,500 / 0 $ 272,651 / 0
James L. Morrison .. 1,500 $ 41,375 15,100 / 0 $ 265,119 / 0
Michael J. Sullivan 0 $ 0 700 / 0 $ 0 / 0
Dennis A. McDermott 0 $ 0 11,500 / 0 $ 196,250 / 0
</TABLE>
55
<PAGE>
- --------
(1) Bancorp has not granted any SARs under the Bancorp Plans.
(2) These values are based on the Nasdaq National Market closing price of
Bancorp's common stock on December 29, 1995.
(3) Includes options acquired pursuant to a 3-for-2 stock split effected in
the form of a 50% stock dividend in 1995. Also includes options which
were granted in February 1996 for services rendered during the 1995
fiscal year, which as of June 13, 1996 were out of the money options.
CERTAIN TRANSACTIONS
LOANS FROM AFFILIATES
The Company has a $125 million revolving line of credit facility with
Capital Bank, the Company's sole shareholder prior to the Offering, pursuant
to which the Company had outstanding borrowings of approximately $52 million
as of December 31, 1995. The Capital Facility bears interest at the prime
rate as published in the Wall Street Journal (8.75% at December 31, 1995).
The Facility is subject to annual review by Capital Bank and is due on
demand. The net proceeds from this offering will be used to reduce
indebtedness under the Capital Facility. The following table sets forth
certain information with respect to amounts owed by the Company to Capital
Bank since December 31, 1993:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount outstanding at any month-end $122,200 $118,000 $ 64,840
Average borrowings .......................... $103,929 $ 84,095 $ 52,701
Interest expense for the period ............. $ 6,845 $ 6,090 $ 4,732
Average interest rate ....................... 6.6% 7.2% 9.0%
</TABLE>
PENSION PLAN
Eligible employees of the Company participate in the Bancorp Pension Plan.
The Company's share of the required contributions to the Bancorp Pension Plan
are based on a fixed percentage of the Company's payroll and is remitted
monthly to Capital Bank. Capital Bank is responsible for the actual
contributions to the Bancorp Pension Plan. The Company remitted $113,420,
$134,390 and $172,090 for the years ending 1993, 1994 and 1995, respectively,
for its share of the Bancorp Pension Plan's costs.
GROUP MEDICAL AND LIFE PLANS
Capital Bank obtains group medical, dental and life insurance coverage on
behalf of the Company. Premiums are charged to the Company at the same amount
as they are assessed by the insurance companies to Capital Bank with respect
to the Company. During the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1996, the Company paid insurance premiums of
$114,846, $533,843, $527,669 and $139,099, respectively, for its actual
portion of such insurance premiums.
ALLOCATED EXPENSES WITH AFFILIATES
Capital Bank charges the Company for services rendered by Capital Bank's
legal department. Charges are based upon internal time estimates prepared by
Capital Bank for personnel costs and related overhead costs associated with
such services. Legal costs paid by the Company to Capital Bank for 1993, 1994
and 1995 were $190,662, $102,543 and $80,048 respectively. The Company also
reimburses Capital Bank for its portion of insurance expenses. Payments to
Capital Bank for insurance expenses during the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1996, aggregated
approximately $126,219, $97,384, $149,302 and $25,548, respectively.
LETTERS OF CREDIT
Capital Bank provided approximately $66.6 million, $79.5 million, $130.1
million and $30.7 million during 1993, 1994, 1995 and the three months ended
March 31, 1996, respectively, of letters of credit for
56
<PAGE>
clients of the Company. For a fee, the Company guarantees the payment by its
clients under these letters of credit. Fees charged for issuance of the
letters of credit are paid directly to Capital Bank and amounted to $445,090,
$389,571, $462,013 and $94,353, for the years ended December 31, 1993, 1994
and 1995 and the three months ended March 31, 1996, respectively.
INCOME TAX PAYMENTS TO AFFILIATES
The results of operations of the Company are included in the consolidated
federal income tax returns filed by Bancorp. Capital Bank allocates income
taxes to the Company calculated on a separate return basis, except that tax
benefits are allocated to the Company to the extent such benefits are useable
by the consolidated group. The Company pays to (or receives from) Capital
Bank the amount of its estimated annual current tax provisions (benefits).
The Company paid approximately $3.0 million and $4.9 million for income taxes
related to its fiscal years ended December 31, 1993 and December 31, 1994,
respectively. As of December 31, 1995, the Company had not paid Capital Bank
the amounts due for taxes for the 1995 fiscal year.
TAX SHARING AND INDEMNITY AGREEMENT
After this offering, the results of operations of the Company will
continue to be included in the tax returns filed by Bancorp's affiliated,
combined or unitary groups for federal, state and local income and franchise
tax purposes. The members of those groups, including the Company, currently
are parties to a tax allocation agreement that allocates the liability for
those taxes among them. Effective on consummation of this offering, the
Company, Bancorp and the other members of those tax reporting groups will
enter into a new tax allocation and indemnity agreement. Under the new
agreement, for periods ending after the offering, the tax liabilities of the
group will be allocated between, on the one hand, the Parent Group (the
"Parent Group"), consisting of Bancorp and its direct and indirect
wholly-owned subsidiaries other than the Company and its direct and indirect
wholly-owned subsidiaries ("the Factors Group") and, on the other hand, the
Factors Group, pursuant to a method specified in regulations of the Treasury
Department that would impose on Parent Group and Factors Group liability for
an amount that corresponds (with various modifications) to the liability that
Parent Group and Factors Group each would incur if Parent Group and Factors
Group filed tax returns as separate affiliated, combined or unitary groups.
In addition, the new agreement provides that Factors Group will indemnify
Parent Group for any increase in the tax liability of the group that is
attributable (under the prior agreement or the new agreement, as applicable)
to Factors Group, and Factors Group will be entitled to receive any tax
refund that is attributable to Factors Group. The new agreement similarly
provides that Parent Group will indemnify Factors Group for any increase in
the tax liability of the group that is attributable to Parent Group.
TRANSACTIONS WITH OPPENHEIMER & CO., INC.
Craig L. Platt, a director of Bancorp since May 1993 and of Capital Bank
since April 1993, has been a Senior Vice President with Oppenheimer & Co.,
Inc., the managing underwriter of this offering, since December 1994. In
addition to Oppenheimer & Co., Inc.'s involvement with this offering, in July
1995, Oppenheimer & Co., was engaged by Capital Bank to provide advisory
services, for which Oppenheimer & Co., Inc. received a fee of $30,000. In
addition, Oppenheimer & Co., Inc. provided certain brokerage services to
Capital Bank in connection with its sale of 120,000 shares of Bancorp common
stock, for which it received its customary brokerage commission.
LOANS TO OFFICERS OF THE COMPANY
From time to time, Capital Bank makes loans and extends credit to certain
of the Company's officers and directors, including John W. Kiefer, the
President, Chief Executive Officer and a director of the Company. In the
opinion of Capital Bank, all of such loans and extensions of credit were made
in ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other third parties.
57
<PAGE>
AGREEMENT BETWEEN CAPITAL BANK, HOLDING AND FACTORS
Holding has agreed with Capital Bank not to issue any shares of Common
Stock that would reduce Capital Bank's interest below 80% or any shares of
any other class of capital stock without Capital Bank's written approval,
during the Eighty Percent Period. Holding may also not acquire certain
assets, amend its bylaws, change the size of its Board or fill vacancies in
the Board without such approval during the Eighty Percent Period. Similar
restrictions apply to Factors pursuant to this Agreement, except that Factors
is restricted from issuing any shares of capital stock without approval by
Capital Bank.
APPROVAL OF RELATED PARTY TRANSACTIONS
The Company has adopted a policy whereby all transactions between the
Company and one or more of its affiliates must be approved in advance by a
majority of the Company's Conflict of Interest Committee.
58
<PAGE>
PRINCIPAL SHAREHOLDERS
Capital Bank, whose principal address is 1221 Brickell Avenue, Miami,
Florida 33131, currently owns 10,000,000 shares of Common Stock (after giving
effect to the 10,000-for-1 stock split), representing 100% of all the issued
and outstanding Common Stock of the Company. After giving effect to issuance
of the Common Stock pursuant to this offering, Capital Bank will own
approximately 83% of the issued and outstanding Common Stock of the Company
(approximately 81% if the Underwriters' over-allotment option is exercised in
full).
Bancorp is the sole shareholder of Capital Bank. The following table sets
forth information, as of June 1, 1996, with respect to the beneficial
ownership of the common stock of Bancorp by (i) each director and nominee for
director of the Company, (ii) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding common stock of Bancorp,
and (iii) all directors, nominees for director and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
ATTRIBUTABLE TO THE
COMPANY
--------------------------
NAME OF INDIVIDUAL OR AMOUNT AND NATURE BEFORE AFTER
IDENTITY OF GROUP OF BENEFICIAL OWNERSHIP OFFERING OFFERING
- --------------------- ----------------------- ----------- -----------
<S> <C> <C> <C>
Fana Holtz ............................ 2,935,680(1) 39.2% 32.5%
Daniel M. Holtz ....................... 546,166(2) 7.2% 6.0%
Javier J. Holtz ....................... 285,778(3) 3.8% 3.2%
John W. Kiefer ........................ 68,001(4) * *
Stephen N. Ashman ..................... 60,866(5) * *
Harold L. Oshry ....................... 42,500(6) * *
Ronald S. Chase ....................... 23,750(7) * *
Bruce Raiffe .......................... 107,834(8) 1.4% 1.2%
Jack Listanowsky ...................... 12,500(9) * *
Leon Simkins .......................... 712,399(10) 9.5% 7.9%
Cynthia Cohen Turk .................... -- -- --
Norman G. Einspruch ................... -- -- --
Abel Holtz ............................ 677,077(11) 9.1% 7.6%
Alex Halberstein ...................... 734,692(12) 10.0% 8.3%
All directors and executive officers
of the Company as a group, including
those listed above (15 persons) ..... 1,195,295 15.1% 12.5%
</TABLE>
- --------
* Less than 1%
(1) Includes 1,527,565 shares held individually, 1,385,115 shares over
which Mrs. Holtz claims voting power pursuant to various shareholder
agreements and irrevocable proxies and 23,000 shares that Mrs. Holtz has the
right to acquire upon exercise of presently exercisable options. Does not
include an aggregate of 325,838 shares, nor presently exercisable options to
purchase a total of 264,002 shares, owned by the adult sons of Mrs. Holtz,
as to which shares Mrs. Holtz disclaims beneficial ownership and voting
power. Also does not include 665,893 shares, nor presently exercisable
options to purchase a total of 11,184 shares, owned by Mr. Abel Holtz, Mrs.
Holtz's husband, as to which shares Mrs. Holtz disclaims beneficial
ownership and voting power. Mrs. Holtz, individually, and together with her
sons Daniel Holtz and Javier Holtz, filed an application with the FDBF to
acquire and/or maintain control of Bancorp, although they do not believe
that such an application is required. See "Business--Legal and
Administrative Proceedings--Administrative Proceedings" and "Business--
Regulation."
(2) Includes 211,500 shares held individually, 166,665 shares held by DH
Associates, Ltd., a partnership of which Daniel Holtz is general partner,
and 168,001 shares that Mr. Holtz has the right to acquire upon exercise of
currently exercisable options. Mr. Holtz, individually and together with
Fana Holtz and Javier Holtz, filed an application with the FDBF to acquire
and/or maintain control of Bancorp, although they do not believe such an
application is required. See "Business--Legal and Administrative
Proceedings--Administrative Proceedings" and "Business--Regulation."
(3) Includes 162,919 shares held individually, 3,937 shares held jointly by
Javier Holtz and his wife, 22,500 shares held by his wife individually and
421 shares over which Mr. Holtz claims voting power pursuant to various
shareholder agreements and irrevocable proxies. Also includes 96,001 shares
that Mr. Holtz has the right to acquire upon exercise of currently
exercisable options. Mr. Holtz, individually and together with Fana Holtz
and Daniel Holtz, filed an application with the FDBF to acquire and/or
maintain control of Bancorp, although they do not believe such an
application is required. See "Business--Legal and Administrative
Proceedings--Administrative Proceedings" and "Business--Regulation."
59
<PAGE>
(4) Includes 9,000 shares held individually and 59,001 shares that Mr. Kiefer
has the right to acquire upon exercise of currently exercisable options.
(5) Includes 24,466 shares held jointly by Stephen Ashman and his wife, 7,000
shares held by his wife individually, 5,400 shares held by a trust of which
Mr. Ashman is a co-trustee and presently exercisable options held by Mr.
Ashman to purchase an aggregate of 20,000 shares.
(6) Includes 20,000 shares that Mr. Oshry has the right to acquire upon
exercise of currently exercisable options.
(7) Represents presently exercisable options held by Mr. Chase to purchase
23,750 shares.
(8) Includes 20,000 shares that Mr. Raiffe has the right to acquire upon
exercise of presently exercisable options.
(9) Represents 12,500 shares that Mr. Listanowsky has the right to acquire upon
exercise of presently exercisable options.
(10) Includes 516,277 shares held by Mr. Simkins individually, 13 shares held
as custodian for Mr. Simkins' son under the Florida Gifts to Minors Act,
170,109 shares held by a trust for the benefit of Mr. Simkins and 26,000
shares that Mr. Simkins has the right to acquire upon exercise of presently
exercisable options.
(11) Based upon the Schedule 13G filed by Mr. Holtz on February 14, 1996
pursuant to Rule 13d-1 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), includes presently exercisable options held by Abel
Holtz to purchase an aggregate of 11,184 shares. Abel Holtz has advised
Bancorp that he has orally agreed with the FDIC not to vote his shares in
Bancorp at the present time.
(12) Based upon the Schedule 13G filed by Mr. Halberstein on February 14,
1996 pursuant to Rule 13d-1 of the Exchange Act, includes 527,814 shares
held individually by Mr. Halberstein and 90,000 shares held jointly with
his wife. Also includes 116,878 shares held by Mr. Halberstein as trustee
for various trusts established for the benefit of Mr. Halberstein's family
members.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Holding's authorized capital stock consists of 25,000,000 shares of Common
Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, par value
$.01 per share. After giving effect to 10,000 for-1 stock split to be
effected by Holding prior to the effective date of this offering, an
aggregate of 10,000,000 shares of Common Stock will be outstanding. See
"Principal Shareholders." No shares of Preferred Stock have been issued to
date. The following brief description of Holding's capital stock does not
purport to be complete and is subject in all respects to applicable Florida
law and the provisions of Holding's Articles of Incorporation (the
"Articles") and Bylaws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of shareholders, including the election of directors. The
Common Stock does not have cumulative voting rights, which means that the
holders of a majority of the shares voting for election of directors can
elect all members of the Board of Directors. A majority vote is also
sufficient for other actions that require the vote of shareholders. Dividends
may be paid to holders of Common Stock when and if declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy."
Upon liquidation or dissolution of Holding, holders of Common Stock will be
entitled to share ratably in the assets of Holding legally available for
distribution to shareholders.
Upon completion of this offering, Holding's existing shareholder will
beneficially own approximately 83% of the outstanding shares of Common Stock
(approximately 81% if the Underwriters' over-allotment option is exercised in
full) and will therefore be able to elect the entire Board of Directors and
control all matters submitted to shareholders for a vote.
The holders of Common Stock have no preemptive or conversion rights and
are not subject to further calls or assessments by Holding, although Capital
Bank will have preemptive rights (the "Preemptive Rights") with respect to
the issuance of any shares of Holding's capital stock or other equity
securities, including shares issuable pursuant to outstanding options, other
than options issued pursuant to the Plan which are exercisable without
Capital Bank's approval, pursuant to an agreement entered into among Capital
Bank, Holding and Holding's direct and indirect subsidiaries. The Preemptive
Rights shall be exercisable at the same price per share as the shares
proposed to be issued. Such rights shall remain in effect during the Eighty
Percent Period. During this period, pursuant to the Articles, no additional
shares of Common Stock may be issued that would reduce Capital Bank's
ownership interest in the Common Stock below 80% of the issued and
outstanding shares of Common Stock without Capital Bank's written approval,
and no shares of any other class of capital stock or other equity security
may be issued without Capital Bank's written approval. The shares of Common
Stock offered hereby will be, when issued and paid for, fully paid and
non-assessable.
PREFERRED STOCK
Although Holding has no present plans to issue shares of Preferred Stock,
Preferred Stock may be issued from time to time in one or more classes or
series with such designations, powers, preferences, rights, qualifications,
limitations and restrictions as may be fixed by the Company's Board of
Directors. The Board of Directors, without obtaining shareholder approval
other than written approval from Capital Bank during the Eighty Percent
Period, could issue the Preferred Stock with voting and/or conversion rights
and thereby dilute the voting power and equity of the holders of Common Stock
and adversely effect the market price of such stock. The issuance of
Preferred Stock could also be used as an antitakeover measure by Holding
without any further action by the shareholders.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF FLORIDA LAW AND THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS
Holding is subject to (i) the Florida Control Share Act, which generally
provides that shares acquired in excess of certain specified thresholds will
not possess any voting rights unless such voting
61
<PAGE>
rights are approved by a majority vote of the corporation's disinterested
shareholders and (ii) the Florida Fair Price Act, which generally requires
supermajority approval by disinterested directors or shareholders of certain
specified transactions between a corporation and holders of more than 10% of
the outstanding shares of the corporation (or their affiliates).
In addition, certain provisions of Holding's Articles summarized in the
following paragraphs may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a shareholder
might consider in its best interest, including those attempts that might
result in a premium over the market price for the shares held by
shareholders.
BOARD OF DIRECTORS. The Articles authorize the Board of Directors to fill
vacant directorships or increase the size of the Board, subject to the
approval of Capital Bank or its designee during the Eighty Percent Period.
This provision will prevent a shareholder from removing incumbent directors
and simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees and will deter the
Board from changing the Board without Capital Bank's approval.
BYLAWS. The Articles authorize the Board of Directors to amend the bylaws,
subject to the approval of Capital Bank or its designee during the Eighty
Percent Period. This provision will prevent a shareholder or the Board from
amending the bylaws without Capital Bank's approval during the Eighty Percent
Period.
SPECIAL MEETING OF SHAREHOLDERS. The Articles provide that special
meetings of shareholders of Holding be called only by the Board of Directors
or holders of not less than 30% of the votes entitled to be cast at the
special meeting.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
Common Stock and Preferred Stock are available for future issuance without
shareholder approval, except that during the Eighty Percent Period, written
approval of Capital Bank is required for the issuance of shares of Common
Stock that would reduce Capital Bank's ownership of Common Stock below 80% of
the issued and outstanding shares of Common Stock or for the issuance of
shares of any other class of capital stock. If issued, these additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued and
unreserved Common Stock and Preferred Stock may enable the Board of
Directors, with Capital Bank's approval during the Eighty Percent Period and
without such approval thereafter, to issue shares to persons friendly to
current management or Capital Bank which could render more difficult or
discourage an attempt to obtain control of Holding by means of a proxy
contest, tender offer, merger or otherwise, and thereby protect the
continuity of Holding's management.
The articles of incorporation of Factors prohibit the issuance of
additional shares of capital stock during the Eighty Percent Period, without
the prior approval of Capital Bank. In addition, such articles require
Capital Bank's approval during the Eighty Percent Period for the Board to
change the size of the Board, fill vacancies in the Board or amend the
bylaws. The articles of incorporation of Holding and Factors also require
approval of Capital Bank during the Eighty Percent Period for certain
acquisitions of assets and for Holding or Factors to take any action that
would cause their subsidiaries to issue additional shares of capital stock or
to make certain acquisitions or to alter the Board of Directors of Factors or
any subsidiary. The foregoing provisions applicable to Factors and the
provisions applicable to Holding are also contained in an agreement among
Capital Bank, Holding and Factors. This agreement also gives Capital Bank
preemptive rights during the Eighty Percent Period.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock will be American
Stock Transfer and Trust Company.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have 12,000,000
shares of Common Stock outstanding (12,300,000 shares if the Over-Allotment
Option is exercised in full). Of those shares, the 2,000,000 shares sold in
this offering (2,300,000 shares if the Over-Allotment Option is exercised in
full) will be freely transferable without restriction or registration under
the Act, unless purchased by persons deemed to be "affiliates" of the Company
(as that term is defined under the Act). The remaining 10,000,000 shares of
Common Stock to be outstanding immediately following the offering
("restricted shares") may only be sold in the public market if such shares
are registered under the Act or sold in accordance with Rule 144 promulgated
under the Act.
In general, under Rule 144 a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned his shares for
two years, may sell in the open market within any three-month period a number
of shares that does not exceed the greater of (i) 1% of the then outstanding
shares of the Company's Common Stock (approximately 120,000 shares
immediately after this offering, 123,000 if the over-allotment option is
exercised in full) or (ii) the average weekly trading volume in the Common
Stock in the over-the-counter market during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain limitations on
the manner of sale, notice requirements and availability of current public
information about the Company. A person (or persons whose shares are
aggregated) who is deemed not to have been an "affiliate" of the Company at
any time during the 90 days preceding a sale by such person and who has
beneficially owned his shares for at least three years, may sell such shares
in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, notice requirements or availability
of current information referred to above. Restricted shares properly sold in
reliance upon Rule 144 are thereafter freely tradeable without restrictions
or registration under the Act, unless thereafter held by an "affiliate" of
the Company.
The Commission has recently proposed reducing the initial Rule 144 holding
period to one year and the Rule 144(k) holding period to two years. There can
be no assurance as to when or whether such rule changes will be enacted. If
enacted, such modifications will have a material effect on the times when
shares of the Company's Common Stock become eligible for resale.
The Company has reserved an aggregate of 800,000 shares of Common Stock
for issuance pursuant to the Plan and the Company intends to register such
shares on Form S-8 following this offering. Subject to restrictions imposed
pursuant to the Plans, shares of Common Stock issued pursuant to the Plans
after the effective date of any Registration Statement on Form S-8 will be
available for sale in the public market without restriction to the extent
they are held by persons who are not affiliates of the Company, and by
affiliates pursuant to Rule 144. See "Management--Stock Option Plan."
Prior to this offering, there has been no trading market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales
of shares pursuant to Rule 144 or otherwise will have on the market price
prevailing from time to time. Sales of substantial amounts of the Common
Stock in the public market following this offering could adversely affect the
then prevailing market price. The Company's existing sole shareholder,
Capital Bank, has agreed that it will not sell or otherwise transfer any
shares of Common Stock to the public for 180 days after this offering. See
"Underwriting."
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriters named below (the "Underwriting Agreement"),
for whom Oppenheimer & Co., Inc. is acting as representative (the
"Representative"), the Underwriters have severally agreed to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the
number of shares of Common Stock set forth opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------- ------------
<S> <C>
Oppenheimer & Co., Inc. ............. 880,000
A.G. Edwards & Sons, Inc. ........... 90,000
PaineWebber Incorporated ............ 90,000
Salomon Brothers Inc ................ 90,000
Advest, Inc. ........................ 50,000
Robert W. Baird & Co. Incorporated . 50,000
J.C. Bradford & Co. ................. 50,000
Dain Bosworth Incorporated .......... 50,000
Allen C. Ewing & Co. ................ 50,000
Fahnestock & Co. Inc. ............... 50,000
First Equity Corporation of Florida 50,000
Gruntal & Co., Incorporated ......... 50,000
JW Charles Securities, Inc. ......... 50,000
Legg Mason Wood Walker, Incorporated 50,000
McDonald & Company Securities, Inc. 50,000
Piper Jaffray Inc. .................. 50,000
Principal Financial Securities, Inc. 50,000
Raymond James & Associates, Inc. ... 50,000
The Robinson-Humphrey Company, Inc. 50,000
Rodman & Renshaw, Inc. .............. 50,000
Wheat First Butcher Singer .......... 50,000
------------
Total ............................ 2,000,000
============
</TABLE>
The Underwriters will be obligated to purchase all of the shares of Common
Stock offered (other than the shares covered by the over-allotment option
described below) if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $0.30 per
share. The Underwriters may allow, and such dealers may reallow, concessions
not in excess of $0.10 per share on sales to other brokers or dealers. After
the initial public offering, the public offering price, concession and
reallowance to brokers or dealers may be changed by the Representative.
The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to an aggregate of 300,000 additional shares of
Common Stock exercisable from time to time at the public offering price less
the underwriting discount. If the Underwriters exercise such over-allotment
option, then each of the Underwriters will be obligated, subject to certain
conditions, to purchase the same proportion thereof as the number of shares
of Common Stock to be purchased by it as shown in the above table bears to
the shares of Common Stock offered hereby. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby.
The Company, Capital Bank and Bancorp have agreed to indemnify the
Underwriters against certain liabilities, losses and expenses, including
liabilities under the Act, and to contribute to payments that the
Underwriters may be required to make in respect thereof.
64
<PAGE>
The Company, Capital Bank, the sole shareholder of the Company prior to
the offering, and their respective officers and directors have agreed that
they will not sell, offer to sell, contract to sell, distribute, transfer,
grant any option for the sale of or otherwise dispose of, directly or
indirectly, any shares of Common Stock, any securities convertible into,
exercisable for or exchangeable for Common Stock or any rights to purchase or
acquire Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of the Representative, except
for the shares offered hereby and the issuance of shares upon exercise of
options granted under the Company's stock option plans. See "Shares Eligible
for Future Sale."
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock offered hereby
has been determined by negotiation between the Company and the
Representative. The matters considered in determining the initial public
offering price include the history of and prospects for the industry in which
the Company competes, the ability of the Company's management, the past and
present operations of the Company, the historical results of operations of
the Company, the prospects for further earnings of the Company, the general
condition of the securities markets at the time of the offering and the
prices of similar securities of generally comparable companies. There can be
no assurance that an active or orderly trading market will develop for Common
Stock or that the Common Stock will trade in the public market subsequent to
the offering at or above the initial public trading price. The Company's
Common Stock has been approved for quotation on the Nasdaq National Market
System under the symbol "CAPF."
Craig L. Platt, a director of Bancorp since May 1993 and Capital Bank
since April 1993, has been a Senior Vice President with Oppenheimer & Co.,
Inc., the managing underwriter of this offering, since December 1994. Mr.
Platt is a 40% limited partner in a partnership which owns 166,665 shares of
Bancorp common stock (representing less than 2.5% of the outstanding shares);
however, he has no voting or investment control of such shares. In addition,
Mr. Platt has presently exercisable options to acquire 23,750 shares of
Bancorp common stock, which he received in his capacity as a director of
Bancorp and Capital Bank. Additionally, Oppenheimer & Co., Inc. has from time
to time provided investment banking and brokerage services to affiliates of
the Company. See "Certain Transactions."
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A., Miami, Florida. Certain legal matters for the Underwriters will be
passed upon by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports thereon appearing herein and elsewhere
in the Registration Statement, and have been so included in reliance upon
such reports given upon the authority of that firm as experts in accounting
and auditing.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
THE COMPANY'S FINANCIAL STATEMENTS
Report of Independent Auditors ........................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
March 31, 1996 (unaudited) ............................................................. F-3
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995
and for the three month periods ended March 31, 1995 and 1996 (unaudited) .............. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993,
1994 and 1995 and for the three month periods ended March 31, and 1996 (unaudited) ..... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995 and for the three month periods ended March 31, 1995 and 1996 (unaudited) ......... F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Capital Factors Holding, Inc.:
We have audited the accompanying consolidated balance sheets of Capital
Factors Holding, Inc. (a wholly owned subsidiary of Capital Bank) and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1995. 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 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, such financial statements present fairly, in all material
respects, the financial position of Capital Factors Holding, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Miami, Florida
February 28, 1996 (March 4, 1996 as to the second paragraph of Note 13, May 16,
1996 as to the third paragraph of Note 13 and July 1, 1996 as to the first
paragraph of Note 13)
F-2
<PAGE>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1994 1995 1996
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash (Note 12) ........................................ $ 15,446,835 $ 20,326,814 $ 16,718,006
Restricted Cash (Notes 5,12) .......................... 4,687,500 16,187,500 6,562,500
Receivables (Notes 3,5,12) ............................ 260,390,337 361,205,965 401,515,700
Unearned discounts ................................... (2,781,219) (3,404,016) (4,051,473)
Allowance for credit losses .......................... (1,774,101) (2,980,778) (2,683,733)
--------------- --------------- ---------------
Receivables, net ...................................... 255,835,017 354,821,171 394,780,494
Property and equipment, net (Note 4) .................. 3,026,155 3,285,049 3,282,592
Other Assets (Notes 5,7) .............................. 3,884,422 4,850,831 5,042,554
--------------- --------------- ---------------
TOTAL .................................................. $282,879,929 $399,471,365 $426,386,146
=============== =============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Due to affiliates (Note 9) ............................ $ 4,835,698 $ 6,452,964 $ 1,250,458
Capital Factors variable rate asset backed
certificates (Notes 5,12) ........................... 125,000,000 175,000,000 175,000,000
Notes payable to affiliates (Notes 6,12) .............. 34,540,000 52,260,000 69,754,000
Due to factoring clients (Note 12) .................... 90,706,683 128,577,577 141,578,108
Other liabilities ..................................... 3,150,246 3,840,425 3,560,137
--------------- --------------- ---------------
Total liabilities .................................... 258,232,627 366,130,966 391,142,703
--------------- --------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 8,10,11,12)
STOCKHOLDER'S EQUITY (Note 1,13):
Common stock, $0.01 par value, 10,000,000 shares
authorized, issued and outstanding ................ 100,000 100,000 100,000
Additional paid-in capital ............................ 9,542,096 9,542,096 9,542,096
Retained earnings ..................................... 15,005,206 23,698,303 25,601,347
--------------- --------------- ---------------
Total stockholder's equity ........................... 24,647,302 33,340,399 35,243,443
--------------- --------------- ---------------
TOTAL .................................................. $282,879,929 $399,471,365 $426,386,146
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Factoring fees ............................ $15,375,900 $17,370,626 $19,518,541 $ 4,565,143 $ 5,524,449
Interest income ........................... 13,511,324 17,628,230 28,210,599 6,003,949 7,574,087
Letter of Credit and other fees ........... 1,127,513 1,237,611 2,040,383 350,693 753,821
Other ..................................... 1,302,685 1,540,712 1,849,466 324,461 291,043
-------------- -------------- -------------- -------------- --------------
Total revenues ........................... 31,317,422 37,777,179 51,618,989 11,244,246 14,143,400
-------------- -------------- -------------- -------------- --------------
EXPENSES (Note 9) ..........................
Interest expense (Note 5, 6) .............. 997,446 4,238,942 11,629,391 2,500,796 3,141,111
Interest expense to affiliates (Note 6, 9) 6,844,512 6,090,174 4,731,668 1,052,634 1,415,197
Salaries and benefits ..................... 7,773,626 8,698,858 11,240,046 2,620,828 3,250,837
Provision for credit losses (Note 3) ..... 2,645,000 2,235,000 2,234,721 450,000 1,100,000
Occupancy and other office expenses ...... 1,861,862 2,135,319 2,588,459 544,543 880,876
Depreciation .............................. 565,311 591,554 632,739 163,042 153,640
Professional fees ......................... 1,286,929 1,180,861 991,535 242,162 179,039
Other ..................................... 1,584,017 1,529,925 3,004,570 531,600 824,218
-------------- -------------- -------------- -------------- --------------
Total expenses ........................... 23,558,703 26,700,633 37,053,129 8,105,605 10,944,918
-------------- -------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES ................. 7,758,719 11,076,546 14,565,860 3,138,641 3,198,482
-------------- -------------- -------------- -------------- --------------
PROVISION FOR INCOME TAXES (Note 7) ....... 3,453,428 4,984,450 5,872,763 1,255,636 1,295,438
-------------- -------------- -------------- -------------- --------------
NET INCOME ................................. $ 4,305,291 $ 6,092,096 $ 8,693,097 $ 1,883,005 $ 1,903,044
============== ============== ============== ============== ==============
NET INCOME PER SHARE (Note 2) .............. $ 0.43 $ 0.61 $ 0.87 $ 0.19 $ 0.19
============== ============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THREE MONTHS ENDED MARCH 31, 1996
-----------------------------------------------
ADDITIONAL
PAID-IN RETAINED
COMMON STOCK CAPITAL EARNINGS
--------------- -------------- --------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 ......... $100,000 $ 9,542,096 $ 4,607,819
Net Income ........................ 0 0 4,305,291
--------------- -------------- --------------
BALANCE, DECEMBER 31, 1993 ......... 100,000 9,542,096 8,913,110
Net Income ........................ 0 0 6,092,096
--------------- -------------- --------------
BALANCE, DECEMBER 31, 1994 ......... 100,000 9,542,096 15,005,206
Net Income ........................ 0 0 8,693,097
--------------- -------------- --------------
BALANCE, DECEMBER 31, 1995 ......... 100,000 9,542,096 23,698,303
Net Income (unaudited) ............ 0 0 1,903,044
--------------- -------------- --------------
BALANCE, MARCH 31, 1996 (unaudited) $100,000 $9,542,096 $25,601,347
=============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
--------------- ---------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................ $ 4,305,291 $ 6,092,096 $ 8,693,097 $ 1,883,005 $ 1,903,044
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation .................. 565,311 591,554 632,739 163,042 153,640
Deferred income taxes ............ (259,664) 209,383 (399,986) (125,982) 106,869
Provision for credit losses ..... 2,645,000 2,235,000 2,234,721 450,000 1,100,000
Increase in restricted cash ..... 0 (4,687,500) (1,500,000) -- (375,000)
Loss on sale of assets ........... 0 12,399 3,873 -- 884
Due to affiliates ................ 456,869 3,936,578 1,617,266 (2,808,222) (5,202,506)
Other assets ..................... (104,338) 343,208 (430,465) (275,655) (403,554)
Other liabilities ................ 688,899 1,052,788 690,179 4,484,197 (280,288)
------------- -------------- ------------- ------------- -------------
Net cash provided by operating
activities ................... 8,297,368 9,785,506 11,541,424 3,770,385 (2,996,911)
--------------- ---------------- --------------- --------------- ---------------
INVESTING ACTIVITIES:
Loan to clients, net .............. (6,202,118) (7,448,868) (3,053,589) 7,271,274 10,882,604
Increase in asset backed loans ... 0 (10,473,533) (27,841,907) (4,384,703) 4,980,164
Net increase in factoring accounts
receivable, net of due to
factoring clients ............... (34,761,943) (5,230,704) (32,940,825) (35,551,618) (44,588,233)
Sales of participations ........... 11,545,936 334,570 1,238,287 -- 1,228,458
Payments on participations ....... (2,000,000) (12,180,506) (751,947) (409,421) (561,784)
Purchase of property and equipment (313,839) (621,391) (914,342) (153,023) (152,068)
Disposal of property and equipment 0 2,821 18,836 17,466 0
--------------- ---------------- --------------- --------------- ---------------
Net cash used in investing
activities ................... (31,731,964) (35,617,611) (64,245,487) (33,210,025) (28,210,859)
--------------- ---------------- --------------- --------------- ---------------
FINANCING ACTIVITIES:
Issuance of senior certificates .. 0 125,000,000 50,000,000 -- --
Restricted proceeds from senior
certificates .................... 0 0 (10,000,000) -- 10,000,000
Proceeds from borrowings .......... 50,700,000 51,900,000 53,522,033 30,990,000 24,042,000
Payments on borrowings ............ (27,200,000) (140,360,000) (35,802,033) (690,000) (6,548,000)
Payments of deferred financing
costs ........................... 0 (2,700,761) (744,802) 0 (66,523)
Amortization of deferred costs ... 0 228,189 608,844 137,592 171,485
--------------- ---------------- --------------- --------------- ---------------
Net cash provided by financing
activities ................... 23,500,000 34,067,428 57,584,042 30,437,592 27,598,962
--------------- ---------------- --------------- --------------- ---------------
NET INCREASE IN CASH ............... 65,404 8,235,323 4,879,979 997,952 (3,608,808)
CASH, BEGINNING OF PERIOD .......... 7,146,108 7,211,512 15,446,835 15,446,835 20,326,814
--------------- ---------------- --------------- --------------- ---------------
CASH, END OF PERIOD ................ $ 7,211,512 $ 15,446,835 $ 20,326,814 $ 16,444,787 $ 16,718,006
============ ============= ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest ...... $ 8,064,714 $ 9,375,978 $ 14,784,541 $ 3,331,280 $ 4,381,897
============ ============= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF OPERATIONS
Capital Factors Holding, Inc. ("the Parent Company") is a wholly-owned
subsidiary of Capital Bank (the "Bank"). The Bank is a wholly-owned
subsidiary of Capital Bancorp ("Bancorp"). The Parent Company was
incorporated in June 1994, in order to accommodate the issuance of Variable
Rate Asset Backed Certificates (as further discussed in Note 5 to the
financial statements), and issued 1,000 shares (100%) of its stock to Capital
Bank in exchange for 60 shares (100%) of the outstanding shares of Capital
Factors, Inc. ("Factors"). Since the stock transaction has been between
related parties, the results of operations have been presented as though the
companies had been combined as of the earliest year presented. The Parent
Company has two wholly-owned subsidiaries, Factors and CF One, Inc. ("CF
One"). Factors has one wholly-owned subsidiary, CF Funding Corp. ("Funding").
Factors provides factoring and other services primarily to commercial
businesses and generally purchases trade accounts receivables from clients
and assumes all risks of collectibility for credit approved receivables,
except as such risks result from fraud or invalid receivables, and dilution.
Factors generally enters into advance factoring arrangements which allow
clients to obtain cash advances against a stipulated percentage of the
receivables before they are due or collected.
The Company provides services to its clients through four offices located
in Fort Lauderdale, Florida; Los Angeles, California; New York, New York and
Charlotte, North Carolina. The Company's clients primarily include
manufacturers, importers, wholesalers and distributors in apparel and textile
related industries and, to a lesser extent, clients in consumer goods related
industries such as plastics, video game cartridges, paper and healthcare
services.
The Company's factored accounts receivable are due from clients' customers
geographically located throughout the United States, principally retailers,
manufacturers and distributors. The majority of the Company's customers are
large national or regional department store chains or specialty retailers. As
of December 31, 1994, 1995 and March 31, 1996, the Company had factored
accounts receivable aggregating approximately $114.1 million, $130.0 million
and $169.5 million, respectively, due from 34, 37 and 44 customers,
respectively, each with balances exceeding $1 million. These customers are
primarily large national or regional department store chains or specialty
retailers. The largest amount due from any one customer, a national
department store chain, at March 31, 1996 was approximately $18.8 million.
The Company's asset backed loans represent loans provided to clients
principally collateralized by accounts receivables. The Company does not
service the accounts receivables nor does it provide credit protection of the
receivables.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION--The unaudited financial statements as of
March 31, 1996 and for the three months ended March 31, 1996 and 1995 have
been prepared on the same basis as the audited financial statements included
herein. In the opinion of management, such unaudited financial statements
F-7
<PAGE>
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results for such periods. The operating
results for the three months ended March 31, 1996 are not necessarily
indicative of the operating results to be expected for the full fiscal year
or for any future period.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements of
Capital Factors Holding, Inc. and Subsidiaries (the "Company") include the
accounts of the Parent Company, Factors and Funding, and CF One. All
significant intercompany transactions and balances have been eliminated in
consolidation.
INCOME RECOGNITION--Interest income on all loans and advances is
calculated using the simple interest method on the daily balances of
principal outstanding and is recorded as earned in accordance with the terms
of the related factoring agreements with clients. Accrual of interest income
is discontinued on troubled loans and advances to factoring clients when the
loan balance and interest receivable exceeds the estimated value of the
collateral securing the loan or advance. Factoring fees are recognized
generally at the time of purchase of factored receivables due to the nature
of the relationship with the factoring client and the relatively short term
nature of the factored receivables. Commitment/closing fees related to asset
based loans are amortized over the life of the loan as an adjustment of
yield. The difference between the Company's income recognition policy and
amortization of such fee over the service period is immaterial.
ALLOWANCE FOR CREDIT LOSSES--The allowance for credit losses is maintained
at a level deemed adequate by management to absorb losses in the portfolio
after evaluating the portfolio, current economic conditions, changes in the
nature and the volume of the portfolio, past loss experience and other
pertinent factors. Many of these factors involve a significant degree of
estimation and are subject to rapid change which may be unforeseen by
management. It is reasonably possible that changes in these factors could
result in material adjustments to the allowance in the near term. The charge
off of a past due receivable takes place when management determines that the
receivable is uncollectible and, in most cases, when the receivable becomes
120 days past due.
PROPERTY AND EQUIPMENT--Property and equipment are carried at cost less
accumulated depreciation. Depreciation is provided over the estimated useful
lives, primarily on the straight-line method. Estimated depreciable lives
range from 3--8 years for furniture, equipment, software and leasehold
improvements and 39 years for buildings.
UNEARNED AND EARNED DISCOUNTS--The Company deducts trade and cash
discounts on all factoring invoices purchased. Discounts not taken by
customers are recognized as income principally at the time of payment of the
invoice.
UNALLOCATED CREDITS--The Company generally notifies the payor when
unidentifiable payments or portions thereof are received. If the payor does
not respond within 90 days, the Company generally records the unallocated
credits as income. The Company maintains an allowance for unallocated credits
recorded as income which may be subsequently repaid based upon its historical
experience.
NET INCOME PER SHARE--Net income per share amounts are based on the
average number of common shares outstanding for each period, after giving
effect to the stock split discussed in Note 13.
F-8
<PAGE>
3. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- MARCH 31,
1994 1995 1996
---------------- ---------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Nonrecourse ................... $ 188,698,818 $ 226,916,598 $ 243,422,912
Recourse ...................... 37,786,588 69,558,913 109,554,707
---------------- ---------------- ----------------
Factored accounts receivables 226,485,406 296,475,511 352,977,619
Loans to factoring client .... 23,431,398 26,415,014 15,202,805
Asset based loans ............. 10,473,533 38,315,440 33,335,276
---------------- ---------------- ----------------
$260,390,337 $361,205,965 $401,515,700
================ ================ ================
</TABLE>
The Company also makes advances to factoring clients. Such advance
payments, which are interest earning, are recorded as reductions to the
amounts due to the factoring clients for the purchase of receivables.
Changes in the Company's allowance for credit losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- MARCH 31,
1993 1994 1995 1996
-------------- -------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Beginning balance ........... $ 2,174,844 $ 2,157,333 $ 1,774,101 $ 2,980,778
Provision for credit losses 2,645,000 2,235,000 2,234,721 1,100,000
Charge-offs ................. (3,384,956) (3,148,281) (1,625,148) (1,487,831)
Recoveries .................. 722,445 530,049 597,104 90,786
-------------- -------------- -------------- ---------------
Ending balance .............. $ 2,157,333 $ 1,774,101 $ 2,980,778 $ 2,683,733
============== ============== ============== ==============
</TABLE>
The Company specifically considered $739,332, $2,184,046 and $2,436,486 of
its client advances impaired at December 31, 1994 and 1995 and March 31,
1996, respectively and has discontinued the accrual of interest income. The
allowance for credit losses related to these impaired loans for the same
periods was $48,051, $133,847 and $105,422, respectively.
F-9
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Land .......................... $ 479,581 $ 479,581 $ 479,581
Building ...................... 1,518,538 1,518,538 1,518,538
Building improvements ......... 744,909 744,909 749,568
Furniture and equipment ...... 2,311,602 3,007,122 3,141,843
Computer software ............. 191,486 267,666 279,175
Leasehold improvements ........ 53,447 59,140 59,140
-------------- -------------- --------------
5,299,563 6,076,956 6,227,845
Less accumulated depreciation (2,273,408) (2,791,907) (2,945,253)
-------------- -------------- --------------
$ 3,026,155 $ 3,285,049 $ 3,282,592
============== ============== ==============
</TABLE>
5. VARIABLE RATE ASSET-BACKED CERTIFICATES
On June 29, 1994, December 15, 1994 and July 28, 1995. Capital Factors,
Inc., through its wholly owned subsidiary CF Funding Corp., issued
$100,000,000, $25,000,000 and $50,000,000, respectively, of Variable Rate
Asset Backed Certificates ("senior certificates") with maturity dates of
December 1999, June 2000 and January 2001. The senior certificates bear an
interest rate of LIBOR plus 1.25%. The interest rate on December 31, 1995 and
March 31, 1996 was 7.1875% and 6.625%, respectively. Interest is payable
monthly. The senior certificates are collateralized by interest-earning
advances to factoring clients which totaled $198,992,000 and $224,086,000 at
December 31, 1995 and March 31, 1996, respectively. Such advances are made on
receivables before they are due or collected by the Company. Capital Factors,
Inc., services and administers these advances and related receivables under
an agreement entered into by Bankers Trust Company as Trustee, CF Funding
Corp. and Capital Factors, Inc. The senior certificates may not be redeemed
prior to their stated maturity and are subject to acceleration if certain
collateral requirements are not maintained. Deferred issuance costs of $2.6
million are being amortized over the terms of the related series. Such costs
are included in other assets on the balance sheets.
Restricted Cash--CF Funding Corporation is required to maintain a cash
collateral account at Bankers Trust Company, pursuant to the terms of the
aforementioned agreement. Such restricted cash collateral amounted to
$6,187,500 and $6,562,500 at December 31, 1995 and March 31, 1996,
respectively.
Of the $50,000,000 of senior certificates issued on July 28, 1995, CF
Funding Corp. initially utilized $15,000,000, and a Pre-Funding account was
created at Bankers Trust Company for the remaining $35,000,000. During 1995
CF Funding Corp. drewdown these funds as supported by interest earning
advances to clients. At December 31, 1995, $10,000,000 remained in the
Pre-Funding account. This remaining amount is also included in restricted
cash. No cash remained in the Pre-Funding account at March 31, 1996.
F-10
<PAGE>
6. BORROWINGS
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1994 1995 1996
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Affiliates
A $125 million revolving line-of-credit payable to
the Bank at prime (8.25%, 8.75% and 8.25% at
December 31, 1994, December 31, 1995 and March
31, 1996 with interest payable monthly. The loan
matures on demand ............................... $34,540,000 $52,260,000 $69,754,000
============== ============== =============
</TABLE>
Supplemental information for the Company's borrowings including the
Variable Rate Asset Backed Certificates (Note 5), follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Maximum amount outstanding
at any month-end ........ $137,200,000 $171,000,000 $221,871,000 $189,840,000 $284,754,000
Average borrowings ........ $118,929,000 $142,959,000 $191,264,000 $172,887,000 $223,984,000
Interest expense for
the period .............. $ 7,662,569 $ 9,990,305 $ 15,140,324 $ 3,323,055 $ 4,183,079
Average interest rate .... 6.44% 6.99% 7.92% 7.69% 7.47%
Average interest rate, end
of period ............... 6.35% 7.67% 7.57% 7.93% 7.11%
</TABLE>
7. INCOME TAXES
The results of operations of the Company are included in the consolidated
Federal income tax return filed by Bancorp. Bancorp allocates income taxes to
the Company principally calculated on a separate return basis. The Company
pays to (or receives from) the Bank the amount of its estimated annual
current tax provisions (benefits). The Company paid approximately $3,042,000,
$0, and $4,929,000, for income taxes in the years ended December 31, 1993,
1994 and 1995, respectively, and $0 and $6,000,000 in the three month periods
ended March 31, 1995 and 1996, respectively, for income taxes related to its
fiscal years ended December 31, 1993 and 1994 respectively. As of December
31, 1995, the Company had not paid the Bank the amounts due for taxes for the
1995 fiscal year. The amounts are included in the balance sheet as due to
affiliates.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
F-11
<PAGE>
The tax effects of significant items comprising the Company's net deferred
tax asset, which is included in other assets in the balance sheet, as of
December 31, 1994, 1995 and March 31, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
------------ -------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Bad debts ........................................ $684,359 $ 1,149,834 $ 1,035,250
Difference between book and tax basis of property 145,592 126,393 126,393
Deferred compensation ............................. 138,870 92,580 100,295
------------ -------------- --------------
Deferred asset .................................... 968,821 1,368,807 1,261,938
------------ -------------- --------------
Deferred tax liability:
Pension costs .................................... (29,750) (29,750) (29,750)
Difference between book and tax basis of assets .. (6,099) (6,099) (6,099)
------------ -------------- --------------
Deferred liability ................................ (35,849) (35,849) (35,849)
------------ -------------- --------------
Net deferred asset ............................... $ 932,972 $ 1,332,958 $ 1,226,089
============ ============== ==============
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current taxes:
Federal ................. $2,728,004 $ 3,436,645 $ 4,898,648 $ 864,082 $ 947,607
State ................... 985,088 1,338,422 1,374,101 517,536 240,962
-------------- -------------- -------------- -------------- ----------------
3,713,092 4,775,067 6,272,749 1,381,618 1,188,569
-------------- -------------- -------------- -------------- ----------------
Deferred taxes (benefit):
Federal and State ....... (259,664) 209,383 (399,986) (125,982) 106,869
-------------- -------------- -------------- -------------- ----------------
$ 3,453,428 $ 4,984,450 $ 5,872,763 $ 1,255,636 $ 1,295,438
============== ============== ============== ============== =============
</TABLE>
F-12
<PAGE>
The following is a reconciliation between the provision for income taxes
included in the accompanying statements of income and the provision computed
using the statutory federal tax rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------- -------------------------------------
1993 1994 1995 1995 1996
------------------ ------------------ ----------------- ---------------- ------------------
% OF % OF % OF % OF % OF
PRETAX PRETAX PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
---------- ---- ---------- ---- ---------- ---- --------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMPUTED PROVISION AT
STATUTORY RATE ..... $2,715,552 35.0% $3,876,791 35.0% $5,098,051 35.0% $1,098,524 35.0% $1,119,469 35.0%
BENEFIT OF GRADUATED
TAX RATE ........... (77,587) (1.0%) (110,765) (1.0%)
STATE TAXES, NET OF
FEDERAL BENEFIT .... 640,307 8.3% 889,379 8.0% 774,712 5.3% 157,112 5.0% 175,969 5.5%
OTHER ................ 175,156 2.3% 329,045 3.0%
---------- ---- ---------- ---- ---------- ---- --------- ---- ---------- ----
$3,453,428 44.6% $4,984,450 45.0% $5,872,763 40.3% 1,255,636 40.0% $1,295,438 40.5%
========== ==== ========== ==== ========== ==== ========= ==== ========== ====
</TABLE>
8. COMMITMENTS AND OFF-BALANCE SHEET RISK
The Company is a lessee under operating leases for real estate and
equipment. The real estate leases contain clauses which require additional
rent for increases in operating expenses or a proportionate share of taxes
and operating expenses. There are no options to renew the leases of the
leased regional offices. The approximate future minimum rental payments under
noncancellable leases (exclusive of additional amounts for taxes and
operating expenses) as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
1996 ................... $ 702,277
1997 ................... 817,049
1998 ................... 817,049
1999 ................... 817,049
2000 and thereafter ... $1,534,424
-------------
$4,687,848
=============
</TABLE>
Rental expense for the years ended December 31, 1993, 1994 and 1995 and
for the three months ended March 31, 1995 and 1996 was approximately
$428,000, $487,000, $624,000, $122,000 and $185,000, respectively.
In the normal course of business, the Company utilizes certain financial
instruments with off-balance sheet risk to meet the financing needs of its
clients. These off-balance sheet activities include amounts available under
the unused portion of approved customer and client credit limits, commercial
letters of credit and standby letters of credit and financial guarantees.
Letters of credit are issued by the Bank for the Company's clients and the
Company guarantees the payment by its clients under these letters of credit.
The credit and market risks associated with these financial instruments are
generally managed in conjunction with the Company's balance sheet activities
and are subject to normal credit policies, financial controls and risk
limiting and monitoring procedures.
F-13
<PAGE>
Credit losses may be incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Company's exposure to credit
loss is represented by the contractual amount of the commitments to extend
credit, commercial letters of credit and standby letters of credit and
financial guarantees. This is the maximum potential loss of principal in the
event the commitment is drawn upon and the counterpart defaults. In addition,
the measurements of the risks associated with these financial instruments is
meaningful only when all related and offsetting transactions are considered.
Amounts available under the unused portion of approved customer and client
credit limits do not necessarily represent legally binding arrangements to
factored sales or otherwise advance funds to clients. Generally, credit
approvals and limits are modified or withdrawn based upon the Company's
evaluation of the customer or client's credit or if the client violates the
terms of the factoring agreement. Credit limits for clients and customers
continually vary and do not necessarily represent future cash requirements to
fund the factored sales or otherwise advance funds to clients.
Commercial letters of credit are issued to facilitate certain trade
transactions, principally the purchase of goods. The risks associated with
these transactions are somewhat reduced since the contracts are generally for
a short commitment period. Standby letters of credit and financial guarantees
are conditional commitments issued to guarantee the performance of a customer
to a third party. The Company issues standby letters of credit and financial
guarantees to ensure contract performance or assure payment by its clients.
The risk involved in issuing standby letters of credit to clients and
financial guarantees is similar to the risk involved in extending credit to
clients and they are subject to the same credit approvals and monitoring
procedures. At December 31, 1994, 1995 and March 31, 1996, the Company had
approximately $19,677,000, $22,645,000 and $30,203,000, respectively, of
letters of credit and financial guarantees outstanding. The Company usually
guarantees letters of credit and financial guarantees only for clients with
which the Company has factoring arrangements. Generally, the Company requires
collateral to support these commitments and the collateral held varies but
may include cash, merchandise, inventory, real estate and the client's
reserve balance.
9. RELATED PARTY TRANSACTIONS
The Company expensed interest payments to the Bank of $6,845,000,
$6,090,000, $4,732,000, $1,053,000 and $1,415,000 on its $125 million
revolving line of credit facility with the Bank during the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995
and March 31, 1996, respectively.
The Bank obtained group medical, dental and life insurance coverage on
behalf of the Company. Premiums are charged to the Company at the same amount
as they are assessed by the insurance companies to the Bank with respect to
the Company. During 1993, 1994 and 1995, the Company paid insurance premiums
of $114,846, $533,843 and $527,669, respectively, and $122,350 and $139,099
for the three months ended March 31, 1995 and March 31, 1996, for its actual
portion of such insurance premiums.
Capital Bank provided approximately $66.6 million, $79.5 million, $130.1
million and $30.7 million during 1993, 1994, 1995 and the three months ended
March 31, 1996, respectively, of letters of credit for clients of the
Company. For a fee, the Company guarantees the payment by its clients under
these letters of credit. Fees charged for issuance of the letters of credit
are paid directly to Capital Bank and
F-14
<PAGE>
amounted to $445,090, $389,571 and $462,013, during 1993, 1994 and 1995, and
$94,353 for the three months ended March 31, 1996, respectively.
The Bank charged the Company for services rendered by the Bank's legal
department. Charges are based upon estimates prepared by the Bank. Payments
to the Bank for these items during the periods ended December 31, 1993, 1994
and 1995 and the three months ended March 31, 1995 and 1996 aggregated
approximately, $190,663, $102,543, $80,048, $36,804 and $0, respectively. The
Company also reimburses the Bank for its portion of commercial insurance
expenses. Payments to the Bank for insurance expenses during 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 equaled $126,219,
$97,384, $149,302, $0 and $25,548, respectively. In addition, the Company
paid the Bank $136,100, $17,700, $148,900, $27,952 and $16,128 during the
periods ended December 31, 1993, 1994 and 1995 and the three months ended
March 31, 1995 and 1996, respectively, for bank service charges.
Due to affiliate represents balances owed to the Bank at the end of the
fiscal year, principally the unremitted portion of the Company's current tax
liability.
10. CONTINGENCIES
From time to time, the Company has been a party to lawsuits and claims,
including lender liability claims, which management considers incidental to
normal operations. The Company is currently a party to one lawsuit that was
dismissed after trial. The Plaintiff is currently appealing the dismissal.
Management, after review, including consultation with counsel, believes that
any ultimate liability which could arise from this current lawsuit would not
materially affect the financial position or results of operations of the
Company.
11. RETIREMENT PLAN
Bancorp sponsors a noncontributory defined benefit pension plan (the
"Plan") covering employees meeting certain eligibility requirements. The
Company's employees are included in the Plan. The benefits are based on years
of service and the employee's compensation for the five consecutive years
during the last ten years of service that produce the highest average salary.
The Plan provides for accumulation of full benefits equal to 30% of eligible
compensation over a 25-year period. Full vesting will occur after completion
of seven years of service. Bancorp's funding policy is to contribute annually
the maximum amount that can be deducted for Federal income tax purposes. The
Bank charged the Company pension costs of approximately $113,420, $134,390,
$172,090, $48,644 and $56,489 for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996, respectively.
F-15
<PAGE>
The following items are components of the net periodic pension cost of the
Plan:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1993 1994 1995
------------ ------------ --------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 554,156 $ 704,851 $ 700,348
Interest cost-projected benefits obligation 307,955 370,261 525,785
Actual return on plan assets ................ (390,959) (102,875) (1,403,127)
Net amortization and deferral ............... 91 (300,215) 1,384,221
------------ ------------ --------------
Net periodic pension cost ................... $ 471,243 $ 672,022 $ 1,207,227
============ ============ ==============
</TABLE>
The funded status of the Plan is shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Plan assets at fair value .......................... $ 5,464,072 $ 7,176,298
Projected benefit obligation for services rendered (6,271,120) (8,635,263)
-------------- --------------
Plan assets less than projected benefit obligation (807,048) (1,458,965)
Unrecognized prior service cost .................... 112,193 407,424
Unrecognized net loss .............................. 642,231 336,923
Adjustment to recognize minimum required liability (522,530)
-------------- --------------
Accrued pension cost (Bancorp) ..................... $ (575,154) $ (714,618)
============== ==============
</TABLE>
At December 31, 1994 and 1995, the Plan's assets consisted of
approximately 55% and 60%, respectively, of corporate equities. The remainder
of such assets include U.S. government securities, corporate bonds, cash and
cash equivalents and accrued interest and dividends.
The accumulated benefits obligation at December 31, 1994 and 1995 was
approximately $6,039,000 and $7,097,000, respectively. Included in these
amounts were vested benefits of approximately $5,422,000 and $6,454,000 at
December 31, 1994 and 1995, respectively.
The assumed weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.00% in 1994
and 1995. The assumed expected long-term rate of return on assets was 8.50%
in 1994 and 1995. The assumed rate of salary progression was 5.50% in 1994
and 1995.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
In cases where quoted market prices are not available, fair value
estimates are based on the quoted market price of a financial instrument with
similar characteristics, the present value of expected future cash flows or
other valuation techniques. Fair value estimates determined using other
valuation techniques are significantly affected by the assumptions used and
consequently may not reflect the proceeds that may be realizable from the
sale of such financial instruments.
The estimated fair value disclosures related to the Company's financial
instruments are as follows:
Cash: Since the Company's cash is maintained in demand deposit accounts,
the carrying amount is equal to the fair value.
F-16
<PAGE>
Accounts Receivable, Due to/from Factoring Clients: The Company's
receivables turn over quickly and interest earning advances made to clients
against such receivables and loans to factoring clients carry variable
interest rates based upon the prime rate and reprice as the prime rate
changes. Therefore, the Company believes the carrying amounts are reasonable
estimates of fair value.
Notes and Certificates Payable: The Company's notes payable are short-term
in nature and carry variable interest rates which reprice at least every 30
days. The Company believes the interest rates on the notes and certificates
payable approximate rates currently available to the Company and consequently
the carrying amount is a reasonable estimate of fair value.
Letters of Credit: As indicated in Note 8, the Company utilizes certain
financial instruments with off-balance sheet risk to meet the financing needs
of its clients. At December 31, 1994 and 1995 and March 31, 1996, the Company
had approximately $19,677,000, $22,645,000 and $30,203,000, respectively, of
letters of credit and financial guarantees for clients outstanding. The
estimated fair value of these off-balance sheet instruments, based on
discounting the fees to be charged on the unused portion of such facilities
until their respective expiration dates is considered insignificant.
13. SUBSEQUENT EVENTS
Effective July 1, 1996, the Parent Company executed a 10,000-for-1 stock
split resulting in 10,000,000 common shares issued and outstanding. The stock
split is retroactively reflected in the consolidated financial statements.
On March 4, 1996, Factors entered into a loan and security agreement with
Fleet Capital Corporation ("Fleet"), under which Fleet agrees to make a total
credit facility of up to $40,000,000, available upon Factors' request. The
revolver loans bear an interest rate of LIBOR plus 2.15% (7.525% at March 31,
1996). Interest is payable monthly. The revolver loans are collateralized by
interest-bearing advances to borrowers. Factors services and administers
these advances under the agreement with Fleet. This agreement shall be in
effect for a period of 3 years through March 4, 1999 and shall automatically
renew itself for 1-year periods thereafter unless terminated by lender or
borrower upon at least 90 days prior written notice. The revolver loans are
subject to termination if certain events of default occur.
In May 1996, the Company, through its direct wholly-owned subsidiary, CF
One, Inc. raised $10,000,000 in financing through the issuance of $10,000,000
in subordinated notes. The notes bear interest at a fixed annual rate of
7.95% and mature in July 2001.
F-17
<PAGE>
=============================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ............................... 3
Risk Factors ..................................... 8
Use of Proceeds .................................. 14
Dividend Policy .................................. 14
Capitalization ................................... 15
Selected Consolidated Financial Data ............. 16
Management's Discussion and Analysis of
Financial Condition and Results of Operations ... 18
Business ......................................... 27
Management ....................................... 45
Certain Transactions ............................. 56
Principal Shareholders ........................... 59
Description of Capital Stock ..................... 61
Shares Eligible for Future Sale .................. 63
Underwriting ..................................... 64
Legal Matters .................................... 65
Experts .......................................... 65
Index to Financial Statements .................... F-1
</TABLE>
- -----------------------------------------------------------------------------
UNTIL AUGUST 5, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
=============================================================================
=============================================================================
2,000,000 SHARES
CAPITAL FACTORS HOLDING, INC.
Common Stock
----------
PROSPECTUS
----------
OPPENHEIMER & CO., INC.
JULY 10, 1996
=============================================================================
