<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly Period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Commission file no. 0-20863
CAPITAL FACTORS HOLDING, INC.
(Exact name of Registrant as Specified in its Charter)
FLORIDA 65-0500757
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
120 EAST PALMETTO PARK ROAD, SUITE 500, BOCA RATON, FLORIDA 33432
(Address of Principal Executive Offices) (Zip Code)
(561) 368-5011
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports). and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of August 10, 1998 there were 12,305,348 shares of the registrant's
Common Stock outstanding.
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<PAGE> 2
ITEM 1.
PART 1
FINANCIAL INFORMATION
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 39,803,773 $ 41,253,904
Restricted cash 9,375,000 10,134,375
Receivables 704,865,590 700,786,603
Unearned discounts (2,861,551) (2,926,865)
Allowance for credit losses (6,191,867) (6,125,359)
------------- -------------
Receivables, net 695,812,172 691,734,379
Property and equipment, net 4,321,311 4,471,397
Other assets 9,229,567 8,983,100
============= =============
TOTAL $ 758,541,823 $ 756,577,155
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to affiliates $ 715,488 $ 145,570
Capital Factors variable rate asset-backed certificates 253,740,158 275,000,000
Notes payable to affiliates 129,411,000 111,754,000
Other borrowings 83,800,000 53,600,000
Due to factoring clients 201,538,132 234,745,074
Other liabilities 8,708,141 7,150,825
------------- -------------
Total liabilities 677,912,919 682,395,469
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 25,000,000
shares authorized; 12,304,650
issued and outstanding at 6/30/98 and 12,303,950
issued and outstanding at 12/31/97 123,047 123,040
Additional paid-in capital 27,588,783 27,582,840
Retained earnings 52,917,074 46,475,806
------------- -------------
Total stockholders' equity 80,628,904 74,181,686
============= =============
TOTAL $ 758,541,823 $ 756,577,155
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Factoring fees $ 7,437,027 $ 7,053,027 $14,740,986 $13,877,404
Interest income 15,063,481 10,836,702 29,482,190 20,230,857
Letter of credit and other fees 1,260,116 1,118,953 2,329,571 2,071,389
Other 511,254 603,161 931,432 1,027,963
----------- ----------- ----------- -----------
Total revenues 24,271,878 19,611,843 47,484,179 37,207,613
EXPENSES
Interest expense 6,155,371 4,704,882 12,135,720 8,553,259
Interest expense to affiliates 2,616,053 1,337,795 5,163,336 2,803,520
Salaries and benefits 5,377,593 4,666,900 10,719,241 9,172,244
Provision for credit losses 1,300,000 800,000 2,850,000 2,200,000
Occupancy and other office expenses 1,220,386 1,154,809 2,449,889 2,108,762
Depreciation 276,918 215,594 552,366 391,357
Professional fees 435,664 378,365 752,663 680,254
Other 1,233,614 1,095,338 2,322,983 2,110,999
----------- ----------- ----------- -----------
Total expenses 18,615,599 14,353,683 36,946,198 28,020,395
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,656,279 5,258,160 10,537,981 9,187,218
PROVISION FOR INCOME TAXES 2,222,274 2,118,554 4,096,713 3,727,668
----------- ----------- ----------- -----------
NET INCOME $ 3,434,005 $ 3,139,606 $ 6,441,268 $ 5,459,550
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.28 $ 0.26 $ 0.52 $ 0.44
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.28 $ 0.25 $ 0.52 $ 0.44
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,441,268 $ 5,459,550
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 552,366 391,357
Amortization of deferred costs 578,520 464,590
Deferred income taxes (benefit) (234,203) (609,853)
Provision for credit losses 2,850,000 2,200,000
Decrease (increase) in restricted cash 759,375 (1,567,500)
Increase in due to affiliates 569,918 2,666,947
Increase in other assets (666,073) (445,447)
Increase in other liabilities 1,557,316 1,890,826
------------- -------------
Net cash provided by operating activities 12,408,487 10,450,470
------------- -------------
INVESTING ACTIVITIES:
Increase in loans to clients, net (7,188,882) (21,273,833)
Increase in asset-based loans (41,278,969) (17,342,625)
Net decrease (increase) in factoring accounts
receivable, net of due to factoring clients 3,135,106 (39,669,362)
Sales of participations 20,159,211 16,825,635
Payments on participations (14,961,202) (3,215,066)
Purchases of property and equipment (326,990) (1,442,983)
------------- -------------
Net cash used in investing activities (40,461,726) (66,118,234)
------------- -------------
FINANCING ACTIVITIES:
Issuance (repayment) of Senior Certificates (21,259,842) 43,884,515
Proceeds from exercise of stock options 5,950 --
Proceeds from borrowing 135,237,000 91,036,000
Payments on borrowing (87,380,000) (76,214,000)
Payments of deferred financing costs -- (703,343)
------------- -------------
Net cash provided by financing activities 26,603,108 58,003,172
------------- -------------
NET INCREASE (DECREASE) IN CASH (1,450,131) 2,335,408
CASH, BEGINNING OF PERIOD 41,253,904 28,101,237
------------- -------------
CASH, END OF PERIOD $ 39,803,773 $ 30,436,645
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest $ 16,099,513 $ 10,788,348
============= =============
Cash payments for income taxes $ 3,387,028 $ --
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements of Capital Factors
Holding, Inc. and Subsidiaries (the "Company") have been prepared on a
consistent basis in conformity with the instructions to Form 10-Q and Article 10
of Regulation S-X and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the financial statements
reflect all adjustments (principally consisting of normal, recurring accruals)
necessary to present fairly the financial condition of the Company as of June
30, 1998 and December 31, 1997, the results of its operations for the three and
six month periods ended June 30, 1998 and 1997 and its cash flows for the six
months ended June 30, 1998 and 1997. All significant inter-company transactions
and balances have been eliminated. The statements are unaudited except for the
Consolidated Balance Sheet as of December 31, 1997.
The accounting policies followed for interim financial reporting are consistent
with the accounting policies set forth in Note 2 to the Consolidated Financial
Statements appearing in the Company's Form 10-K for the year ended December 31,
1997 as filed with the Securities and Exchange Commission.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. This statement establishes standards for the way that public
companies report selected information about operating segments. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations but may have an effect
on disclosure of such.
NOTE 2: RECEIVABLES
Receivables consist of the following:
June 30, December 31,
1998 1997
------------ ------------
Nonrecourse $361,626,323 $373,100,405
Recourse 122,835,367 154,863,870
------------ ------------
Factored accounts receivables 484,461,690 527,964,275
Loans to factoring clients 60,331,721 54,029,119
Asset-based loans 160,072,179 118,793,209
------------ ------------
Total Receivables $704,865,590 $700,786,603
============ ============
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. Average funds employed
(receivables less amounts due to factoring clients) were $483.1 million and
$391.0 million for the six months ended June 30, 1998 and the year ended
December 31, 1997, respectively.
5
<PAGE> 6
Changes in the Company's allowance for credit losses were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
------------------------------------------------------- ---------------------------
% OF % OF % OF
JUNE 30, FACTORED JUNE 30, FACTORED DECEMBER 31, FACTORED
1998 SALES 1997 SALES 1997 SALES
-------------- ------- ------------ -------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 6,125,359 $ 2,993,534 $ 2,993,534
Provision for credit losses 2,850,000 .17 2,200,000 .15 7,250,000 .22
Charge-offs (3,098,553) .19 (2,256,698) .15 (4,597,179) .14
Recoveries 315,061 .02 308,655 .02 479,004 .01
-------------- ------- ------------ ------ -------------- ------
Net charge-offs (2,783,492) .17 (1,948,043) .13 (4,118,175) .13
-------------- ------- ------------ ------ -------------- ------
Ending balance $ 6,191,867 $ 3,245,491 $ 6,125,359
============== ============= ==============
</TABLE>
The Company specifically considered approximately $1,464,000 and $430,000 of its
client advances impaired at June 30, 1997 and December 31, 1997, respectively,
and has discontinued the accrual of interest income. The allowance for credit
losses related to these impaired loans for the same periods were approximately
$350,000 and $309,000, respectively.
NOTE 3: BORROWINGS
Borrowings are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Variable rate asset-backed certificates due 1999 through 2001 $253,740,158 $275,000,000
Variable rate revolving credit line due on demand 129,411,000 111,754,000
Variable rate revolver loan due 1999 73,800,000 43,600,000
7.95% subordinated notes due 2001 10,000,000 10,000,000
------------ ------------
Total borrowings $466,951,158 $440,354,000
============ ============
</TABLE>
NOTE 4: EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
EARNINGS PER SHARE, which became effective for reporting periods ending after
December 15, 1997. Under the provisions of SFAS No. 128, primary and fully
diluted earnings per share were replaced with basic and diluted earnings per
share in an effort to simplify the computation of these measures and align them
more closely with the methodology used internationally. Basic earnings per share
is arrived at by dividing net earnings available to common shareholders by the
weighted-average number of common shares outstanding and does not include the
impact of any potentially dilutive common stock equivalents. The diluted
earnings per share calculation method is slightly different from the previously
required fully diluted earnings per share method and is arrived at by dividing
net earnings available to common shareholders by the weighted-average number of
shares outstanding, adjusted for the dilutive effect of outstanding stock
options and the conversion impact of convertible equity securities. The diluted
earnings per share calculation for 1998 equates to what would have been reported
in the fully diluted earnings per share calculation under the previous method.
For purposes of comparability, all prior-period earnings per share data have
been restated.
6
<PAGE> 7
The Company specifically considered approximately $1,464,000 and $430,000 of its
client advances impaired at June 30, 1997 and December 31, 1997, respectively,
and has discontinued the accrual of interest income. The allowance for credit
losses related to these impaired loans for the same periods were approximately
$350,000 and $309,000, respectively.
NOTE 3: BORROWINGS
Borrowings are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Variable rate asset-backed certificates due 1999 through 2001 $253,740,158 $275,000,000
Variable rate revolving credit line due on demand 129,411,000 111,754,000
Variable rate revolver loan due 1999 73,800,000 43,600,000
7.95% subordinated notes due 2001 10,000,000 10,000,000
------------ ------------
Total borrowings $466,951,158 $440,354,000
============ ============
</TABLE>
NOTE 4: EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
EARNINGS PER SHARE, which became effective for reporting periods ending after
December 15, 1997. Under the provisions of SFAS No. 128, primary and fully
diluted earnings per share were replaced with basic and diluted earnings per
share in an effort to simplify the computation of these measures and align them
more closely with the methodology used internationally. Basic earnings per share
is arrived at by dividing net earnings available to common shareholders by the
weighted-average number of common shares outstanding and does not include the
impact of any potentially dilutive common stock equivalents. The diluted
earnings per share calculation method is slightly different from the previously
required fully diluted earnings per share method and is arrived at by dividing
net earnings available to common shareholders by the weighted-average number of
shares outstanding, adjusted for the dilutive effect of outstanding stock
options and the conversion impact of convertible equity securities. The diluted
earnings per share calculation for 1998 equates to what would have been reported
in the fully diluted earnings per share calculation under the previous method.
For purposes of comparability, all prior-period earnings per share data have
been restated.
6
<PAGE> 8
The calculation of net earnings per share follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
1998 1997
----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C>
Basic:
Net income applicable to common shares $ 3,434,005 $ 3,139,606
Average common shares outstanding 12,304,531 12,300,000
=========== ===========
Net income per common share -- basic $ 0.28 $ 0.26
=========== ===========
Diluted:
Net income applicable to common shares $ 3,434,005 $ 3,139,606
----------- -----------
Average common shares outstanding 12,304,531 12,300,000
Stock option adjustment 163,007 54,199
----------- -----------
Average common shares outstanding -- diluted 12,467,538 12,354,199
=========== ===========
Net income per common share -- diluted $ 0.28 $ 0.25
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1997
----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C>
Basic:
Net income applicable to common shares $ 6,441,268 $ 5,459,550
Average common shares outstanding 12,304,273 12,300,000
=========== ===========
Net income per common share -- basic $ 0.52 $ 0.44
=========== ===========
Diluted:
Net income applicable to common shares $ 6,441,268 $ 5,459,550
----------- -----------
Average common shares outstanding 12,304,273 12,300,000
Stock option adjustment 140,568 52,736
----------- -----------
Average common shares outstanding -- diluted 12,444,841 12,352,736
=========== ===========
Net income per common share -- diluted $ 0.52 $ 0.44
=========== ===========
</TABLE>
7
<PAGE> 9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
Introduction
Capital Factors Holding, Inc. ("Holding") is a majority owned subsidiary of
Union Planters Bank of Florida (the "Bank"), formerly know as Capital Bank, a
Florida commercial bank. The Bank, a wholly owned subsidiary of Union Planters
Corporation ("UPC") , successor by merger with Capital Bancorp effective
December 31, 1997, was merged into Union Planters Bank, National Association on
August 1, 1998. The Bank subsequently increased its ownership stake in Holding.
Holding has three wholly owned subsidiaries, Capital Factors, Inc. ("Factors"),
CF One, Inc. and CF Investor Corp. Factors has two wholly owned subsidiaries, CF
Funding Corp. and Capital TempFunds, Inc. Throughout this discussion, Holding,
Factors, and their subsidiaries are collectively referred to as the "Company".
The following discussion and analysis presents the significant changes in the
financial condition and results of operations for the periods indicated. In
addition, this Form 10-Q may contain certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning the Company's operations, performance, financial
condition, and growth. For this purpose, any statements contained in the Form
10-Q that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "estimate," or "continue," or the negative or other variation thereof
or comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
such as credit losses, dependence on availability of funding sources, dilution
of receivables, concentration of client base and client customer base,
dependence on management and key personnel, seasonality, and variability of
quarterly results, ability of the Company to continue its growth strategy,
competition, inability to directly collect healthcare receivables from Medicare
and Medicaid, dilution of healthcare receivables, control by majority
shareholder, and regulatory restrictions relating to potential new activities,
certain of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors which are noted herein.
The discussion should be read in conjunction with the consolidated financial
statements and notes included in this report.
The Company provides fee-based services to its clients, including credit
protection, collection and management information services, and also makes
advances to many of its clients. Clients are generally manufacturers of goods or
providers of services in various industries. At the time the Company purchases
the factored receivables, the Company records a receivable and an offsetting
liability "due to factoring client." Advances, which are interest earning and
secured by the client's factored receivables, are recorded by the Company as
reductions to the amounts due to the factoring client for factored receivables.
Cash collections from the client's customers are used to repay the client's
loans. If, as a result of financial inability to pay, a client's customer fails
to pay a receivable that was credit-approved by the Company, the Company will
ultimately bear any loss with respect to such receivable. In the event of
dilution in excess of the unfinanced portion of receivables, where factored
receivables are not fully collected for a reason other than the customer's
financial inability to pay, such as breach of warranty, the Company will in
practice typically need to look to newer receivables of the client for the
collection of the outstanding obligation to the Company and may not be repaid.
In contrast to the Company's purchase of factored receivables, when the Company
makes an asset-based loan, a client assigns its collateral (usually account
receivable and inventory) to the Company. Upon request of the client, the
Company may advance funds to the client as a loan in an amount based upon the
eligible collateral. When funds are advanced to the 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
8
<PAGE> 10
client's customers' inability to pay, although the Company may actually suffer a
loss if all sources of repayment fail, including other collateral and
guarantees, if any. In connection with asset-based loans, instead of a factoring
fee, the Company earns a facility fee. Both factored advances and asset-based
loans bear interest at a rate tied to the prime rate.
The Company operates through four regional offices (including the Florida
office) and an office in Atlanta which specializes in asset-based loans. The
Company currently has over 400 clients who generate annual sales from $500,000
to over $100 million, and services over 100,000 customers of those clients. The
majority of the Company's customers are large national or regional department
store chains or specialty retailers. At June 30, 1998, the largest amount due
from any one customer, a national department store chain, was approximately
$43.7 million.
The Company's factored sales volume can be affected in several ways, including
new clients, client retention or losses, inflation and other economic
conditions. Additionally, fluctuations in the sales dollar volume of the
Company's clients, both positive and negative, have a direct impact on the
Company's factored sales volume and factoring fees. In this regard, the Company
has historically experienced seasonal fluctuations in its factored sales volume
and factoring fees as a result of the seasonality of the sales of certain of the
Company's clients, especially those in the apparel industry, who typically ship
more goods during the four-month period of August through November in order to
fill increased customer orders in anticipation of "back to school" and the
ensuing holiday season. The Company realized approximately 40% of its annual
factored sales volume during this 4-month period in 1997 and 1996.
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.
9
<PAGE> 11
Set forth below are those ratios and statistics utilized by management in
monitoring asset quality for the six months ended June 30, 1998 and June 30,
1997:
<TABLE>
<CAPTION>
As of June 30,
-----------------------------
1998 1997
----------- -----------
(Unaudited, Dollars in Thousands)
<S> <C> <C>
Provision for credit losses $ 2,850 $ 2,200
Charge-offs net of recoveries 2,783 1,948
Allowance for credit losses-specific 1,714 672
Allowance for credit losses-general 4,478 2,573
----------- -----------
Total allowance for credit losses $ 6,192 $ 3,245
Accounts receivable turnover in days 55 54
Accounts receivable past due more than 60 days as a
percentage of factored receivables 7.49% 8.88%
Accounts receivable past due more than 90 days as a
percentage of factored receivables 4.77% 5.45%
Credit-approved accounts receivable past due more
than 60 days as a percentage of credit-approved
receivables (1) 3.43% 3.31%
Credit-approved accounts receivable past due more
than 90 days as a percentage of credit-approved
receivables (1) 2.12% 1.38%
Net charge-offs to factored sales 0.17% 0.13%
Average receivables $ 692,367 $ 513,811
Provision for credit losses as a percentage of
factored sales 0.17% 0.15%
Provision for credit losses as a percentage of
average receivables (6) 0.82% 0.86%
Net charge-offs as a percentage of
average receivables (6) 0.80% 0.76%
Non-accruing advances $ 1,464 $ 973
Non-accruing advances as a percentage
of receivables 0.21% 0.18%
Average funds employed (2) $ 483,100 $ 332,600
Provision for credit losses as a percentage of average funds
employed (2) (3) (6) 1.18% 1.32%
Net charge-offs as a percentage of average
funds employed (2) (4) (6) 1.15% 1.17%
Non-accruing advances as a percentage
of funds employed (2) (5) 0.29% 0.27%
</TABLE>
(1) Management considers the aging of credit-approved receivables a more
meaningful measure of exposure to credit risk than the aging of total
receivables. The Company guarantees payment of receivables which it credit
approves if the receivable was not paid based solely on the customers'
financial inability to pay.
(2) Funds employed are receivables less amounts due to factoring clients.
(3) 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 funds advanced for each of the periods presented was lower than
the provision for credit losses as a percentage of average funds employed.
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<PAGE> 12
(4) 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.
(5) 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.
(6) Computed on an annualized basis.
The Company regularly reviews its outstanding accounts receivable and other
extensions of credit, such as advances to clients, to determine the adequacy of
its allowance for credit losses. Factors such as the level of related credit
balances of clients and the impact of economic conditions on the
creditworthiness of the Company's clients and the client's customers are given
significant consideration in determining the adequacy of the Company's allowance
for credit losses. The Company's allowance for credit losses 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
uncollectable. The general reserve represents 0.75% of factored receivables that
are not specifically reserved for but for which the Company has provided credit
guarantees and a reserve for loans originated by the asset-based lending and
healthcare divisions. Since December 31, 1997, the Company's general reserve on
loans originated by the asset-based lending and healthcare divisions has been 1%
of loans outstanding.
The provision for credit losses as a percentage of factored sales increased to
0.17% for the six months ended June 30, 1998 from 0.15% for the six months ended
June 30, 1997. The provision for credit losses as a percentage of average
receivables and the provision for credit losses as a percentage of average funds
employed decreased from 0.86% and 1.32%, respectively, for the six months ended
June 30, 1997, to 0.82% and 1.18%, respectively, for the six months ended June
30, 1998.
Net charge-offs as a percentage of factored sales increased to 0.17% for the six
month period ended June 30, 1998 from 0.13% for the period ended June 30, 1997.
In the period ended June 30, 1998, the Company charged-off $1.8 million net in
customer bad debts, including approximately $547,000 related to the bankruptcies
of two large retail chains. Customer charge-offs for the period ended June 30,
1997 equaled $1.0 million and contained no single material customer. Client
charge-offs for the periods ended June 30, 1998 and 1997 equaled approximately,
$941,000 and $1.2 million, respectively. There were five separate client
charge-offs in the six months ended June 30, 1998, the largest of which was
$258,000, and in the same period of 1997, the Company charged off $1.2 million
due to a single client bankruptcy filing. Net charge-offs as a percentage of
average receivables and net charge-offs as a percentage of average funds
employed were 0.80% and 1.15%, respectively, for the six months ended June 30,
1998 as compared to 0.76% and 1.17% for the same period in 1997.
Non-accruing advances as a percentage of funds employed have historically
remained below 1.00% and at June 30, 1998 and June 30, 1997, were 0.29% and
0.27%, respectively. Non-accruing advances as a percentage of receivables was
0.21% at June 30, 1998 and 0.18% at June 30, 1997. Management believes that
non-accruing advance fluctuations below 1.0% are a normal part of the Company's
ongoing business and are not significant.
Credit-approved accounts receivable past due more than 60 days as a percentage
of credit-approved factored receivables and credit-approved accounts receivable
past due more than 90 days as a percentage of credit-approved factored
receivables equaled 3.43% and 2.12%, respectively, at June 30, 1998 as compared
to 3.31% and 1.38%, respectively, at June 30, 1997. Accounts receivable past due
more than 60 days as a percentage of total factored receivables and accounts
receivable past due more than 90 days as a percentage of total factored
receivables equaled 7.49% and 4.77%, respectively, for the six-month period
ended June 30, 1998 as compared to 8.88% and 5.45%, respectively, for the
six-month period ended June 30, 1997.
11
<PAGE> 13
Financial Condition - June 30, 1998 as compared to December 31, 1997.
Total assets increased to $758.5 million at June 30, 1998 from $756.6 million at
December 31, 1997. The $1.9 million increase was due primarily to a $4.1 million
dollar increase in net receivables offset by a decrease in cash. Total
liabilities decreased $4.5 million to $677.9 million from $682.4 million due
primarily to a $33.2 million decrease in due to factoring clients offset by a
$26.6 million increase in debt.
Asset-based loans, which represent loans provided to clients principally
collateralized by accounts receivable increased by $41.3 million. Asset-based
loans totaled $118.8 million at December 31, 1997 and $160.1 million at June 30,
1998. This increase was offset by a decrease of $43.5 million in factored
accounts receivable.
The Company increased its debt outstanding under its $75.0 million revolving
credit facility with an unaffiliated bank by $30.2 million and borrowed $50.0
million under its new $150.0 million unsecured revolving line of credit with
Union Planters Corporation, offset by a $32.3 decrease in its $150.0 million
line with the Bank. At June 30, 1998 and December 31, 1997, the Company had
$73.8 million and $43.6 million, respectively, outstanding under its $75.0
million facility, which bears interest at LIBOR plus 1.25%. This increase in
debt was collateralized by increased asset-based loans. On January 2, 1998, the
Company entered into a $150.0 million unsecured line of credit with UPC, which
bears interest at 0.75% below Wall Street Journal ("WSJ") prime, 7.75% at June
30, 1998. The Company's debt outstanding under its $150.0 million unsecured
revolving line of credit with the Bank equaled $79.4 million at June 30, 1998
and $111.8 million at December 31, 1997, respectively, a decrease of $32.4
million. This line was amended on January 15, 1998 to also bear interest at
0.75% below WSJ prime or 7.75% at June 30, 1998 from WSJ prime or 8.5% at June
30, 1997. Debt under the Company's fourth series of variable rate asset-backed
certificates decreased by $21.3 million. Under this series, the senior Variable
Funding Certificates bear interest at LIBOR plus 0.75% and the senior
subordinated Variable Funding Certificates bear interest at LIBOR plus 1.50% .
(See "Liquidity and Capital Resources").
Stockholders' equity increased approximately $6.4 million during the first six
months of 1998 as a result of net income earned by the Company and the exercise
of 700 employee stock options.
Results of Operations - Three Months Ended June 30, 1998 Compared to Three
Months Ended June 30, 1997.
Net income increased 9.4% to approximately $3.4 million for the three month
period ended June 30, 1998 from approximately $3.1 million for the comparable
period in 1997, due to an increase in operating revenues which was partially
offset by a $500,000 increase in the quarterly provision for credit losses, and
increases in operating expenses. Operating revenues (total revenues less
interest expense) increased from approximately $13.6 million for the three month
period ended June 30, 1997 to approximately $15.5 million for the comparable
period in 1998, a 14.2% increase. This increase was the result of a 13% increase
in the Company's factored sales volume from $746.2 million to $843.3 million for
the three month periods ended June 30, 1997 and June 30, 1998, respectively, and
a $41.3 million increase in asset-based loans. Both increases resulted in an
increase in interest and fee income. The factored sales volume increase was
attributable to continued growth of the Company's regional factoring offices.
Additionally, the effective interest rate on debt decreased as a result of the
issuance of a fourth series of variable rate asset-backed certificates in April
1997.
Factoring fee income increased to approximately $7.4 million for the three month
period ended June 30, 1998 as compared to approximately $7.1 million for the
three-month period ended June 30, 1997. Factoring fee income as a percentage of
factored sales for the three-month periods decreased from .95% in 1997 to .88%
in 1998. This decrease was due to overall lower rate structures resulting from
competitive market pressures.
Net interest income (interest income less interest expense) increased to
approximately $6.3 million for the three months ended June 30, 1998 from
approximately $4.8 million for the comparable period in 1997, a 31.3% increase,
principally as a result of an increase of $140.8 million in average outstanding
funds employed for the three months ended June 30, 1998 as compared to the same
period in the prior year. Net interest income was also favorably impacted by
continued interest expense reductions achieved through the use of financing
programs with lower interest rates. On April 30, 1997, the
12
<PAGE> 14
Company issued the Variable Funding Certificates which provide for a monthly
settlement of principal, which may increase or decrease the outstanding amount.
This fourth series of variable rate asset-backed certificates includes the
issuance of $95.25 million of senior Variable Funding Certificates and $4.75
million of senior subordinated Variable Funding Certificates. The Variable
Funding Certificates were funded at $75.0 million and $3.74 million,
respectively, at June 30, 1998 compared to $41.8 million and $2.1 million,
respectively, at June 30, 1997. The senior and senior subordinated Variable
Funding Certificates bear interest at LIBOR plus 0.75% and 1.50%, respectively,
(6.41% and 7.16%, respectively, at June 30, 1998). In February 1998, the
Company's $40.0 million revolving loan agreement with an unaffiliated bank,
bearing interest at LIBOR plus 2.15 was amended to increase the line to $75.0
million and the interest rate was reduced to LIBOR plus 1.25%, a decrease of
0.90%. Average borrowings from the revolving loan during the three-month period
ended June 30, 1998, equaled approximately $63.9 million and had an effective
interest rate of 6.99% for the three-month period.
Letter of credit and other fee income increased to approximately $1.3 million
for the three months ended June 30, 1998 from $1.1 million for the three months
ended June 30, 1997, a 12.6% increase. Overadvance fees increased approximately
30.7% or $76,000 during the three month period while other fee income increased
by approximately $65,000 due to the increased factoring volume and growth in the
Company's asset-based lending activities.
The provision for credit losses increased to $1.3 million for the three months
ended June 30, 1998 from $800,000 for the three months ended June 30, 1997. The
provision for credit losses as a percentage of factored sales increased to 0.15%
for the three months ended June 30, 1998 as compared to 0.11% for the comparable
period in 1997, reflecting a higher net customer charge-off rate.
Operating expenses, excluding the provision for credit losses, increased from
$7.5 million to $8.5 million for the three-month period ended June 30, 1998 as
compared to the three months ended June 30, 1997. This $1.0 million or 13.8%
increase is primarily the result of the move of the corporate headquarters to
Boca Raton in May 1997 and expansion of personnel.
Results of Operations - Six Months Ended June 30, 1998 Compared to Six Months
Ended June 30, 1997.
Net income increased 18.0% to approximately $6.4 million for the six months
ended June 30, 1998 from approximately $5.5 million for the comparable period in
1997 due to an increase in operating revenues which was partially offset by a
$650,000 increase in the provision for credit losses and increases in operating
expenses. Operating revenues increased from approximately $25.9 million for the
six months ended June 30, 1997 to approximately $30.2 million for the comparable
period in 1998, a 16.8% increase. This increase was primarily a result of an
11.4% increase in the Company's factored sales volume from $1,476.4 million to
$1,644.1 million for the six months ended June 30, 1997 and June 30, 1998,
respectively, and a $106.7 million increase in asset-based loans. Both increases
resulted in an increase in interest and fee income. The factored sales volume
increase and asset-based loan increases were attributable to growth of the
Company's regional factoring offices and asset-based lending divisions.
Additionally, the effective interest rate on debt decreased as a result of the
issuance of a fourth series of variable rate asset-backed certificates and
additional usage of the Company's $75.0 million loan agreement with an
unaffiliated bank.
Factoring fee income increased to approximately $14.7 million for the six-month
period ended June 30, 1998 as compared to approximately $13.9 million for the
six-month period ended June 30, 1997 as a result of an 11.4% increase in
factored sales. Factoring fee income as a percentage of factored sales for the
six-month periods decreased from 0.94% in 1997 to 0.90% in 1998. This decrease
was due to overall lower rate structures resulting from competitive market
pressures.
Net interest income (interest income less interest expense) increased to
approximately $12.2 million for the six months ended June 30, 1998 from
approximately $8.9 million for the comparable period in 1997, a 37.3% increase,
principally as a result of an increase of $150.5 million in average outstanding
funds employed for the six months ended June 30, 1998 as compared to the same
period in the prior year. Funds raised through the Company's utilization of
certain lower interest financing programs were used to reduce its debt under the
Bank line of credit which bears interest at prime less 0.75% or
13
<PAGE> 15
7.75%. On April 30, 1997, the Company issued the Variable Funding Certificates
which provide for a monthly settlement of principal, which may increase or
decrease the outstanding amount. This fourth series of variable rate asset
backed certificates includes the issuance of $95.25 million of senior Variable
Funding Certificates and $4.75 million of senior subordinated Variable Funding
Certificates. The Variable Funding Certificates were funded at $75.0 million and
$3.74 million, respectively, at June 30, 1998, bearing interest at LIBOR plus
0.75% and 1.50%, respectively, (6.41% and 7.16%, respectively, at June 30,
1998). In February 1998, the Company's $40.0 million revolving loan agreement
with an unaffiliated bank, bearing interest at LIBOR plus 2.15 was amended to
increase the line to $75.0 million and the interest rate was reduced to LIBOR
plus 1.25%, a decrease of 0.90%. Average borrowings from the revolving loan
during the six months ended June 30, 1998 equaled approximately $57.3 million
and had an effective interest rate of 7.23% for the six-month period.
Letter of credit and other fee income increased to approximately $2.3 million
for the six months ended June 30, 1998 from $2.1 million for the six months
ended June 30, 1997, a 12.5% increase. Overadvance fees increased approximately
32.4% or $132,000 during the six month period while other fee income increased
by approximately $127,000 due to the increased factoring volume and growth in
the Company's asset-based lending activities.
The provision for credit losses equaled $2.85 million for the six-month period
ended June 30, 1998 and $2.2 million for the six-month period ended June 30,
1997. Provisions for credit losses as a percentage of factored sales increased
to 0.17% for the six months ended June 30, 1998 as compared to 0.15% for the
comparable period in 1997, reflecting a higher net charge-off rate.
(See "Monitoring Asset Quality and Credit Losses").
Operating expenses increased from $14.5 million to $16.8 million for the
six-month period ended June 30, 1998 as compared to the six-month period ended
June 30, 1997. This $2.3 million or 16.1% increase is primarily the result of
the move of the Company's corporate headquarters to Boca Raton in May 1997 and
expansion of personnel in the asset-based lending and regional offices.
Liquidity and Capital Resources
The Company's principal source of funding is its asset securitization program,
the Securitized Financings. This funding is supplemented by the Company's lines
of credit with the Bank, UPC and a revolving credit facility with an
unaffiliated bank.
The trust created in connection with the Securitized Financings (the "Trust")
had issued three series of asset-backed certificates (each, a "Certificate")
aggregating $175 million, 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 Investor 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% (6.91%
at June 30, 1998, excluding annualized transaction costs of 0.41%). 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, 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 compliance with these and all other covenants contained in the
Securitized Financing agreements. The
14
<PAGE> 16
Company may continue to use the Securitized Financings for funding, provided
eligible advances are available for transfer to the Trust.
On April 30, 1997 the Trust issued a fourth series of variable rate asset-backed
certificates in connection with the Securitized Financings. Unlike the
previously issued Certificates which were fixed as to principal amount, the
Variable Funding Certificates provide for a monthly settlement of principal,
which may increase or decrease the outstanding amount. The fourth series
includes the issuance of $95.25 million of senior Variable Funding Certificates
and $4.75 million of senior subordinated Variable Funding Certificates. The
Certificates were rated "AAA" and "A", respectively by Duff & Phelps Credit
Rating Company and "AA" and "BBB", respectively by Fitch Investors Services Inc.
At June 30, 1998, $75 million and $3.74 million, respectively, of such
certificates were outstanding as compared to $41.8 million and $2.1 million,
respectively, at June 30, 1997. Management believes that this type of
Certificate will provide a more efficient means of funding the seasonal
fluctuations in the Company's overall funding requirements. Under this series,
the senior Variable Funding Certificates bear interest at LIBOR plus 0.75% and
the senior subordinated Variable Funding Certificates bear interest at LIBOR
plus 1.50% (6.41% and 7.16%, respectively, at June 30, 1998, and 6.44% and
7.19%, respectively, at June 30, 1997, excluding annualized transaction costs of
0.23%). In connection with the fourth series, the Company formed a new wholly
owned subsidiary, CF Investor Corp. CF Investor Corp., through a limited
liability corporation, CF Two, LLC., acquired the junior subordinated
certificate issued by the Trust. 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, for all four series, permit future purchases to the
extent that the Company generates eligible advances. Generally, all of the
client advances made by the Company, with the exception of those made by its
healthcare division and asset-based loan divisions are eligible for transfer to
the Trust. As of June 30, 1998, the Company had transferred to the Trust client
advances aggregating nearly $309 million.
The Company utilizes a $75.0 million revolving credit facility with an
unaffiliated bank which closed in April 1996 for $40.0 million and subsequently
increased to $75.0 million in February 1998. The indebtedness under this
facility is 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 asset-based loan divisions, as well as all of the equipment used by
the Company in its operations. In order for this facility to be fully funded,
the Company would have to pledge an amount in excess of $83.3 million in
eligible advances. The indebtedness under this facility may not exceed 90% of
the value of the advances pledged by the Company as collateral for such
indebtedness. At June 30, 1998 and 1997, the Company had outstanding borrowings
of $73.8 million and $27.2 million, respectively. In February 1998, the interest
rate on this revolving credit facility was amended to LIBOR plus 1.25%, a
decrease of 0.90%. At June 30, 1998 and 1997, the interest rates were 6.94% and
7.84%, respectively, reflecting a decrease due to the amended rate offset by an
increase of 0.25% in LIBOR. The indebtedness under this facility matures upon
termination in March 1999, although it will be automatically renewed for
additional one-year periods unless the Company or the lender terminates it. This
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 this facility were used by the
Company to pay down indebtedness under the Company's line of credit with the
Bank, and to fund certain of the Company's healthcare financing activities and
asset-based lending activities.
The Company has a $150.0 million unsecured revolving line of credit with the
Bank, pursuant to which the Company had outstanding borrowings of approximately
$79.4 million at June 30, 1998. Amounts borrowed under this facility are subject
to the Bank's overall statutory limitation on investments in and advances to
subsidiaries of 10% of assets. Effective January 15, 1998, the Bank decreased
the interest rate on the line of credit from prime to 0.75% below prime, or
7.75% at June 30, 1998. This line is subject to annual review by the Bank each
June and is due on demand. This facility has been in place since 1985 and
historically has been renewed for one-year periods in June of each year.
Interest is payable monthly.
In January 1998, the Company entered into a $150.0 million unsecured revolving
line of credit with UPC. Indebtedness under this facility bears interest at
0.75% below the WSJ prime rate (7.75% at June 30, 1998). The Company had
15
<PAGE> 17
outstanding borrowings of $50 million at June 30, 1998. This facility requires
that the total debt cannot exceed 95% of the Company's receivables, and the
borrowings and payments must be made in increments of $10.0 million. The
indebtedness under this facility matures on demand, or if no demand on April 1,
1999.
CF One, Inc. holds $10.0 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 in May 1996. 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, Inc. 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, Inc. which are
collateralized by assets held by the Trust. The increase in the value of the
subordinated certificates held by CF One, Inc. was the result of the favorable
performance of the receivables and other assets held in the Trust's portfolio.
In addition to the continued availability of the above financing, the Company's
future liquidity will continue to be dependent upon its ability to collect the
accounts receivable purchased from its clients. Of the Company's approximately
$705 million of customer accounts receivable outstanding at June 30, 1998,
approximately $271.9 million of customer receivables balances exceeded $1
million. These customers are primarily large national or regional department
store chains or specialty retailers. At June 30, 1998, the largest amount due
from any one customer, a national chain store, was approximately $43.7 million.
In addition, the Company's accounts receivable turned over in an average of 55
days and 54 days during the six months ended June 30, 1998 and 1997,
respectively.
The Company had no material commitments for capital expenditures as of June 30,
1998. 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 the next 12 months.
New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. This statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. This statement establishes standards for the way that public
companies report selected information about operating segments. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
Effects of Inflation
The Company believes that inflation has not had a material impact on its results
of operations.
16
<PAGE> 18
Impact of Year 2000
The Company relies heavily on computer technologies to operate its business.
During 1997, the Company implemented its "Year 2000 Project" to address a
potential problem with which substantially all users of automated data
processing and information systems are faced. This problem arises from the use
by older systems of only two digits to represent the year applicable to a
transaction, e.g., "97" to represent "1997" rather than the full four digits.
Computer systems so programmed may not operate properly when the last two digits
of the year become "00" as will occur on January 1, 2000. In some cases
inputting a date later than December 31, 1999, would cause a computer to stop
operating while in other cases incorrect output may result. This potential
problem could affect a wide variety of automated systems such as mainframe
applications, personal computers, communications systems, and other information
systems routinely used in all industries. The Company has conducted an
assessment of its computer systems and has begun to make the programming changes
necessary to make its computer systems Year 2000 compliant. The Company believes
that with these modifications to its existing computer-based systems, it will be
Year 2000 compliant by December 31, 1998 although the Company cannot provide any
assurance in this regard. The Company's systems rely in part on the
computer-based systems of other companies. As part of the Company's assessment,
an overview of certain other companies' Year 2000 compliance strategies is being
performed. Nevertheless, if any such company failed to become Year 2000
compliant, the Company could be adversely affected. Although the amount expensed
by the Company for its Year 2000 project has not been significant, nor does the
Company anticipate that such cost will be significant to its results of
operations in any year, these costs are difficult to estimate accurately and the
projected cost could change due to unanticipated technological difficulties.
In summary, the Company's Year 2000 Project goal and management's expectation is
to have all software reviewed and modified or replaced as necessary to achieve
Year 2000 compliance and to be fully tested with satisfactory results prior to
year-end 1998. Based upon currently available information, management has no
reason to believe that its goal and expectation will not be met and does not
anticipate that the cost of identifying problems and effecting Year 2000
compliance will have a material impact on the Company's financial condition,
results of operations, or liquidity.
Notwithstanding the foregoing, the Company continues to bear some risk arising
from the advent of the Year 2000 and could be adversely affected should
significant clients or customers of the Company fail to address the issues
appropriately. Presently management has no reason to believe that any clients
with which it has significant relationships are failing to take appropriate
action to effect Year 2000 compliance. There can be no assurance until 2000,
however, that all of the Company's systems, and the systems of its clients,
customers, vendors, and other external business partners will function
adequately. If these systems are not Year 2000 compliant, it could have a
material adverse effect on the Company.
17
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal 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 believes that these matters will not materially
affect its financial position or results of its operations.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its 1998 Annual Meeting of Shareholders on May 22, 1998 (the
"Annual Meeting"), at which twelve persons were elected to the Company's Board
of Directors. The following sets forth the voting results with respect to each
nominee for director, including votes cast for the nominee and the votes
withheld:
Nominee VOTES FOR VOTES AGAINST VOTES WITHHELD
--------- ------------- --------------
Stephen N. Ashman 12,187,034 2,200 0
Ronald S. Chase 12,187,034 2,200 0
Cynthia R. Cohen 12,187,034 2,200 0
Norman G. Einspruch 12,187,034 2,200 0
Daniel M. Holtz 12,187,034 2,200 0
Javier J. Holtz 12,187,034 2,200 0
John W. Kiefer 12,187,034 2,200 0
Jack D. Listanowsky 12,187,034 2,200 0
Harold L. Oshry 12,187,034 2,200 0
Bruce S. Raiffe 12,187,034 2,200 0
Jackson W. Moore 12,187,034 2,200 0
Benjamin W. Rawlins, Jr. 12,187,034 2,200 0
Item 5. Other Information.
None.
18
<PAGE> 20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11.1 - Computation of Earnings Per Share incorporated by
reference to Note 4 to the Company's unaudited financial statements
included herein.
Exhibit 27.1 - Financial Data Schedule
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1998 By: /s/ Dennis A. McDermott
------------------------
DENNIS A. MCDERMOTT
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
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<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 49,178,773
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