<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MarkOne)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly Period ended March 31, 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 May 12, 1997 there were 12,304,650 shares of the registrant's Common Stock
outstanding.
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<PAGE> 2
ITEM 1.
PART I. FINANCIAL INFORMATION
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 45,559,689 $ 41,253,904
Restricted cash 10,134,375 10,134,375
Receivables 711,582,248 700,786,603
Unearned discounts (3,657,121) (2,926,865)
Allowance for credit losses (5,924,129) (6,125,359)
------------- -------------
Receivables, net 702,000,998 691,734,379
Property and equipment, net 4,409,581 4,471,397
Other assets 9,253,321 8,983,100
------------- -------------
TOTAL $ 771,357,964 $ 756,577,155
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to affiliates $ 1,826,415 $ 145,570
Capital Factors variable rate asset-backed certificates 275,000,000 275,000,000
Notes payable to affiliate 124,832,000 111,754,000
Other borrowings 65,300,000 53,600,000
Due to factoring clients 220,554,775 234,745,074
Other liabilities 6,654,125 7,150,825
------------- -------------
Total liabilities 694,167,315 682,395,469
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 25,000,000
shares authorized; 12,304,150 issued and
outstanding at 3/31/98 and 12,303,950
issued and outstanding at 12/31/97 123,042 123,040
Additional paid-in capital 27,584,538 27,582,840
Retained earnings 49,483,069 46,475,806
------------- -------------
Total stockholders' equity 77,190,649 74,181,686
------------- -------------
TOTAL $ 771,357,964 $ 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
March 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
REVENUES
Factoring fees $ 7,303,959 $ 6,824,377
Interest income 14,418,709 9,394,155
Letter of credit and other fees 1,069,455 952,436
Other 420,178 424,802
------------- -------------
Total revenues 23,212,301 17,595,770
EXPENSES
Interest expense 5,980,349 3,848,377
Interest expense to affiliates 2,547,283 1,465,725
Salaries and benefits 5,341,648 4,505,344
Provision for credit losses 1,550,000 1,400,000
Occupancy and other office expenses 1,229,503 953,953
Depreciation 275,448 175,763
Professional fees 316,999 301,889
Other 1,089,369 1,015,661
------------- -------------
Total expenses 18,330,599 13,666,712
------------- -------------
INCOME BEFORE INCOME TAXES 4,881,702 3,929,058
PROVISION FOR INCOME TAXES 1,874,439 1,609,114
------------- -------------
NET INCOME $ 3,007,263 $ 2,319,944
============= =============
BASIC EARNINGS PER SHARE $ 0.24 $ 0.19
============= =============
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.19
============= =============
</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>
Three Months Ended March 31,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,007,263 $ 2,319,944
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 275,448 175,763
Amortization of deferred costs 289,260 217,456
Deferred income taxes (benefit) 151,265 (302,573)
Provision for credit losses 1,550,000 1,400,000
Increase in due to affiliates 1,680,845 610,770
Increase in other assets (748,204) (944,864)
Decrease in other liabilities (496,700) (117,596)
------------- -------------
Net cash provided by operating activities 5,709,177 3,358,900
------------- -------------
INVESTING ACTIVITIES
Increase in loans to clients, net (8,502,462) (3,733,955)
Increase in asset based loans (16,547,211) (4,322,946)
Net increase in factored accounts receivable,
net of due to factoring clients (6,286,425) (35,091,611)
Sales of participations 13,445,419 5,995,834
Payments on participations (8,116,239) (367,341)
Purchases of property and equipment (176,174) (58,603)
------------- -------------
Net cash used in investing activities (26,183,092) (37,578,622)
------------- -------------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 1,700 --
Proceeds from borrowings 75,308,000 57,764,000
Payments on borrowings (50,530,000) (21,425,000)
Payments of deferred financing costs -- (7,038)
------------- -------------
Net cash provided by financing activities 24,779,700 36,331,962
------------- -------------
NET INCREASE IN CASH 4,305,785 2,112,240
CASH, BEGINNING OF PERIOD 41,253,904 28,101,237
------------- -------------
CASH, END OF PERIOD $ 45,559,689 $ 30,213,477
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest $ 8,194,565 $ 5,355,831
============= =============
Cash payments for income taxes $ 15,000 --
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 March
31, 1998 and December 31, 1997, the results of its operations for the three
month periods ended March 31, 1998 and 1997 and its cash flows for the three
months ended March 31, 1998 and 1997. All significant intercompany 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:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Nonrecourse $ 336,767,608 $ 326,642,458
Recourse 177,419,900 201,321,817
------------- -------------
Factored accounts receivables 514,187,508 527,964,275
Loans to factoring clients 62,054,319 54,029,119
Asset-based loans 135,340,421 118,793,209
------------- -------------
Total Receivables $ 711,582,248 $ 700,786,603
============= =============
</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. Average funds employed
(receivables less amounts due to factoring clients) were $477.1 million and
$391.0 million for the quarter ended March 31, 1998 and the year ended December
31, 1997, respectively.
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<PAGE> 6
Changes in the Company's allowance for credit losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
----------------------------------------------------- -------------------------
% of % of % of
March 31, Factored March 31, 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 1,550,000 .19 1,400,000 .19 7,250,000 .22
Charge-offs (1,834,734) .23 (1,175,780) .16 (4,597,179) .14
Recoveries 83,504 .01 176,300 .02 479,004 .01
------------ ----------- ------------
Net charge-offs (1,751,230) .22 (999,480) .14 (4,118,175) .13
------------ ----------- ------------
Ending balance $ 5,924,129 $ 3,394,054 $ 6,125,359
============ =========== ============
</TABLE>
The Company specifically considered approximately $1,236,000 and $430,000 of its
client advances impaired at March 31, 1998 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 was approximately
$307,000 and $309,000, respectively.
Note 3: Borrowings
Borrowings are summarized as follows:
<TABLE>
<CAPTION>
March 31 December 31,
1998 1997
------------------- --------------------
<S> <C> <C>
Variable rate asset-backed certificates due 1999 through 2001 $ 275,000,000 $ 275,000,000
Variable rate revolving credit line due on demand 74,832,000 111,754,000
Variable rate revolving credit line due on demand 50,000,000 -
Variable rate revolver loan due 1999 55,300,000 43,600,000
7.95% subordinated notes due 2001 10,000,000 10,000,000
------------------- --------------------
Total borrowings $ 465,132,000 $ 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. For purposes of
comparability, all prior-period earnings per share data have been restated.
6
<PAGE> 7
The calculation of net earnings per share follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C>
Basic:
Net income applicable to common shares $ 3,007,263 $ 2,319,944
Average common shares outstanding 12,304,012 12,300,000
------------- -------------
Net income per common share -- basic $ 0.24 $ 0.19
============= =============
Diluted:
Net income applicable to common shares $ 3,007,263 $ 2,319,944
------------- -------------
Average common shares outstanding 12,304,012 12,300,000
Stock option adjustment 104,208 51,261
------------- -------------
Average common shares outstanding -- diluted 12,408,220 12,351,261
------------- -------------
Net income per common share -- diluted $ 0.24 $ 0.19
============= =============
</TABLE>
7
<PAGE> 8
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 is a wholly-owned subsidiary of Union Planters
Corporation, successor by merger with Capital Bancorp effective December 31,
1997. 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 client's
customers' inability to pay, although the Company may actually suffer a loss if
all sources of repayment fail,
8
<PAGE> 9
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 March 31, 1998, the largest amount due
from any one customer, a national department store chain, was approximately
$30.5 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> 10
Set forth below are those ratios and statistics utilized by management in
monitoring asset quality for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
As of March 31,
1998 1997
------------------ -----------------
(Unaudited, Dollars in Thousands)
<S> <C> <C>
Provision for credit losses $ 1,550 $ 1,400
Charge-offs net of recoveries 1,751 999
Allowance for credit losses-specific 1,700 662
Allowance for credit losses-general 4,224 2,732
------------------ -----------------
Total allowance for credit losses $ 5,924 $ 3,394
Accounts receivable turnover in days 57 54
Accounts receivable past due more
than 60 days as a percentage of factored receivables 6.99% 8.12%
Accounts receivable past due more
than 90 days as a percentage of factored receivables 4.33% 5.01%
Credit-approved accounts receivable past due more
than 60 days as a percentage of credit approved
receivables (1) 3.74% 1.94%
Credit-approved accounts receivable past due more
than 90 days as a percentage of credit approved
receivables (1) 2.47% 0.58%
Net charge-offs to factored sales 0.22% 0.14%
Average receivables $682,193 $498,168
Provision for credit losses as a
percentage of factored sales 0.19% 0.19%
Provision for credit losses as a
percentage of average receivables 0.23% 0.28%
Net charge-offs as a percentage of
average receivables 0.26% 0.20%
Non-accruing advances $ 1,236 $ 1,287
Non-accruing advances as a percentage
of receivables 0.17% 0.24%
Average funds employed (2) $477,100 $316,900
Provision for credit losses as a percentage of average
funds employed (2) (3) 1.30%(6) 1.77%(6)
Net charge-offs as a percentage of
average funds employed (2) (4) 1.47%(6) 1.26%(6)
Non-accruing advances as a percentage
of funds employed (2) (5) 0.25% 0.38%
</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> 11
(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 reserve for doubtful accounts 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
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. The Company increased it general
reserve on loans originated by the asset-based lending and healthcare divisions
to 1% of loans outstanding at December 31, 1997. This represents a more
conservative reserve position and is more in line with the Bank's reserve
levels.
The provision for credit losses as a percentage of factored sales equaled 0.19%
for the three months ended March 31, 1998 and March 31, 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 to 0.23% and
1.30%, respectively, for the three months ended March 31, 1998, from 0.28% and
1.77%, respectively, for the three months ended March 31, 1997.
Net charge-offs as a percentage of factored sales increased to 0.22% for the
period ended March 31, 1998 from 0.14% for the period ended March 31, 1997. For
the quarter ended March 31, 1998, the Company charged off $1.4 million in
customer bad debts, including approximately $547,000 related to the bankruptcies
of two large retail chains. Customer charge-offs for the period ended March 31,
1997 equaled $356,000. Client charge-offs for the period ended March 31, 1998
and March 31, 1997 equaled approximately $478,000 and $820,000, respectively. In
the first quarter of 1997, the Company charged off $750,000 due to a client
bankruptcy filing during that quarter. Net charge-offs as a percentage of
average receivables and net charge-offs as a percentage of average funds
employed increased 0.06% and 0.21%, respectively, for the three months ended
March 31, 1998 as compared to the same period in 1997.
Non-accruing advances as a percentage of funds employed have historically
remained below 1.00% and at March 31, 1998 and March 31, 1997 were 0.25% and
0.38%, respectively. Non-accruing advances as a percentage of receivables was
0.17% at March 31, 1998 and 0.24% at March 31, 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 3.74% and 2.47%, respectively, at March 31, 1998 as compared
to 1.94% and 0.58%, respectively, at March 31, 1997. The increase in the 60 and
90 day delinquency ratios is primarily related to certain clients which have
experienced operational problems with EDI transmissions with some major retail
chain stores which has led to an extended payment cycle on such receivables.
Accounts receivable past due more than 60 days as a percentage of factored
receivables and accounts receivable past due more than 90 days as a percentage
of factored receivables equaled 6.99% and 4.33%, respectively, as of March 31,
1998 as compared to 8.12% and 5.01%, respectively, as of March 31, 1997.
11
<PAGE> 12
Financial Condition - March 31, 1998 as compared to December 31, 1997
Total assets increased to $771.4 million at March 31, 1998 from $756.6 million
at December 31, 1997. The $14.8 million increase was due primarily to a $10.3
million dollar increase in net receivables. Total liabilities decreased $11.8
million to $694.2 million from $682.4 million due primarily to a $14.2 million
decrease in due to factoring clients.
Asset-based loans, which represent loans provided to clients principally
collateralized by accounts receivable increased by $16.5 million. Asset-based
loans totaled $118.8 million at December 31, 1997 and $135.3 million at March
31, 1998. This increase was offset by a decrease of $13.8 million in factored
accounts receivable and a corresponding decrease in due to factoring clients of
$14.2 million. These decreases are primarily a result of a large volume of
receivable collections during the 1st quarter of 1998. Loans to factoring
clients also increased $8.0 million.
The increase in assets and decrease in due to factoring clients was principally
funded by an $11.7 million increase in the Company's debt outstanding under its
$75.0 million revolving credit facility with an unaffiliated bank and a $50.0
million increase in the debt outstanding under the Company's new $150.0 million
unsecured revolving line of credit with Union Planters Corporation, offset by a
$36.9 decrease of in its $150.0 million line with the Bank. At March 31, 1998
and December 31, 1997, the Company had $55.3 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 and healthcare receivables. On January 2, 1998, the Company
entered into a $150.0 million unsecured line of credit with Union Planters
Corporation, which bears interest at 0.75% below Wall Street Journal ("WSJ")
prime, 7.75% at March 31, 1998. Outstanding debt under this line equaled $50.0
million at March 31, 1998. The Company's debt outstanding under its $150.0
million unsecured revolving line of credit with the Bank equaled $74.8 million
at March 31, 1998 and $111.8 million at December 31, 1997, respectively. This
line was amended on January 15, 1998 to also bear interest at 0.75% below WSJ
prime or 7.75% at March 31, 1998 from WSJ prime or 8.25% at March 31, 1997. (See
Liquidity and Capital Resources).
Stockholders' equity increased approximately $3.0 million during the first three
months of 1998 as a result of net income earned by the Company and the exercise
of 200 employee stock options.
Results of Operations - Three Months Ended March 31, 1998 Compared to Three
Months Ended March 31, 1997.
Net income increased 29.6% to approximately $3.0 million for the three month
period ended March 31, 1998 from approximately $2.3 million for the comparable
period in 1997 due to an increase in operating revenues which were partially
offset by a $150,000 increase in the quarterly provision for credit losses, and
increases in operating expenses. Operating revenues increased from approximately
$12.3 million for the three month period ended March 31, 1997 to approximately
$14.7 million for the comparable period in 1998, a 19.6% increase. These
increases were the result of a 9.7% increase in the Company's factored sales
volume from $730.2 million to $800.8 million for the three month period ended
March 31, 1997 and March 31, 1998, respectively, and a 13.9% increase in
asset-based loans. Both increases resulted in an increase in interest and fee
income. The factored sales volume increases were attributable to increased
customer orders in anticipation of the ensuing Spring season and continued
growth of the Company's four 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.
Factoring fee income increased to approximately $7.3 million for the three month
period ended March 31, 1998 as compared to approximately $6.8 million for the
three month period ended March 31, 1997. Factoring fee income as a percentage of
factored sales for the three month periods decreased from 0.93% in 1997 to 0.91%
in 1998. This decrease was due to lower factoring commission rates charged on
larger clients and overall lower rate structures resulting from competitive
market pressures. 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.
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<PAGE> 13
Net interest income (interest income less interest expense) increased to
approximately $5.9 million for the three months ended March 31, 1998 from
approximately $4.1 million for the comparable period in 1997, a 44.4% increase,
principally as a result of an increase of $160.2 million in average outstanding
funds employed for the three months ended March 31, 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 Trust issued a fourth
series of variable rate asset-backed certificates (the "Variable Funding
Certificates") in connection with the Securitized Financings 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 fully funded at $95.25 million and $4.75 million,
respectively, at March 31, 1998 bearing interest at LIBOR plus 0.75% and 1.50%,
respectively, (6.44% and 7.19%, respectively, at March 31, 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 March 31, 1998 equaled approximately $51.1 million and had an
effective interest rate of 7.5% for the three month period.
Letter of credit and other fee income increased to approximately $1.1 million
for the three months ended March 31, 1998 from $952,000 for the three months
ended March 31, 1997, a 12.3% increase. Overadvance fees increased approximately
34.9% or $56,000 during the three month period while other fee income increased
by approximately $61,000 due to the increased factoring volume and growth in the
Company's asset-based lending activities.
The provision for credit losses increased to $1.6 million for the three months
ended March 31, 1997 from $1.4 million for the three months ended March 31,
1998. Provisions for credit losses as a percentage of factored sales was 0.19%
for the three months ended March 31, 1998 and March 31, 1997. (see "Monitoring
Asset Quality and Credit Losses").
Operating expenses less provision for credit losses increased from $7.0 million
to $8.3 million for the three month period ended March 31, 1998 as compared to
the three months ended March 31, 1997. This $1.3 million or 18.7% increase is
primarily the result of the move of the 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, Union Planters Corporation 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% (6.94%
at March 31, 1998, excluding annualized transaction costs of 0.39%). 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)
13
<PAGE> 14
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
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 March 31, 1998 $95.25 million and $4.75 million, respectively, of such
certificates were outstanding. 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%
(6.44% and 7.19%, respectively, at March 31, 1998, excluding annualized
transaction costs of 0.17%). 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, as well as asset-based loans, are eligible for transfer to
the Trust. As of March 31, 1998, the Company had transferred to the Trust client
advances aggregating nearly $320.1 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 were asset-based loans, 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
March 31, 1998, the Company had outstanding borrowings of $55.3 million. In
February 1998, the interest rate on this revolving credit facility was amended
to LIBOR plus 1.25%, a decrease of 0.90%. At March 31, 1998 and March 31, 1997,
the interest rates were 6.94% and 7.59%, respectively, reflecting a decrease due
to the amendment 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
$74.8 million at March 31, 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. Based on
14
<PAGE> 15
the statutory limitation, the maximum amount which could be outstanding under
this line was approximately $201.9 million at March 31, 1998. 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 March 31, 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 Union Planters Corporation. Indebtedness under this facility
bears interest at 0.75% below the WSJ prime rate (7.75% at March 31, 1998). The
Company had outstanding borrowings of $50.0 million at March 31, 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.
In May 1996, CF One, Inc. sold $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. 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
$712 million of customer accounts receivable outstanding at March 31, 1998,
approximately $277.4 million of customer receivables balances exceeded $1
million. These customers are primarily large national or regional department
store chains or specialty retailers. At March 31, 1998, the largest amount due
from any one customer, a national chain store, was approximately $30.5 million.
In addition, the Company's accounts receivable turned over in an average of 57
days and 54 days during the three months ended March 31, 1998 and 1997,
respectively.
The Company had no material commitments for capital expenditures as of March 31,
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.
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<PAGE> 16
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.
16
<PAGE> 17
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.
None.
Item 5. Other Information.
None.
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<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 - Second Consolidated Amendment to Loan and Security
Agreement, by and between Capital Factors, Inc. and Fleet Capital
Corporation, dated as of February, 1998.
Exhibit 10.2 - Unsecured revolving line of credit with Union Planters
Corporation, dated as of January 2, 1998.
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 (for SEC use only).
(b) On March 31, 1998, the Company filed a Report on Form 8-K to disclose a
change in its Certified Public Accountants.
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<PAGE> 19
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: May 14, 1998 By: /s/ Dennis A. McDermott
------------------------
DENNIS A. MCDERMOTT
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment")
is made and entered into this 26th day of February, 1998, by and between CAPITAL
FACTORS, INC., a Florida corporation (hereinafter referred to as "Borrower")
with its chief executive office and principal place of business at 120 East
Palmetto Park Road, 5th Floor, Boca Raton, Florida 33432, and FLEET CAPITAL
CORPORATION, a Rhode Island corporation (hereinafter referred to as "Fleet"),
successor-by-merger to Fleet Capital Corporation, a Connecticut corporation
("Old Fleet") with an office at 300 Galleria Parkway, N.W., Suite 800, Atlanta,
Georgia 30339.
RECITALS:
Old Fleet and Borrower entered into a certain Loan and Security
Agreement dated as of March 4, 1996 (the "Original Loan Agreement"), pursuant to
which Old Fleet made certain revolving credit loans to Borrower.
Effective May 1, 1996, Old Fleet merged into Fleet Credit Corporation,
a Rhode Island corporation ("Fleet Credit"), with Fleet Credit being the
surviving corporation and having changed its name to "Fleet Capital
Corporation."
Fleet and Borrower amended the Original Loan Agreement pursuant to a
certain First Amendment to Loan and Security Agreement dated July 15, 1996,
between Borrower and Fleet (the "First Amendment").
The parties further amended the Original Loan Agreement as set forth in
a certain First Consolidated Amendment to Loan and Security Agreement dated
August 29, 1997, between Borrower and Fleet (the "Consolidated Amendment"), and
the Consolidated Amendment superseded and replaced the First Amendment in its
entirety (the Original Loan Agreement, as amended by the Consolidated Amendment,
is hereinafter referred to as the "Loan Agreement").
The parties desire to further amend the Loan Agreement as hereinafter
set forth.
NOW, THEREFORE, for TEN DOLLARS ($10.00) in hand paid and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
<PAGE> 2
1. DEFINITIONS. All capitalized terms used in this Amendment, unless
otherwise defined herein, shall have the meaning ascribed to such terms in the
Loan Agreement.
2. AMENDMENT TO LOAN AGREEMENT. The Loan Agreement is hereby amended as
follows:
(a) By deleting the reference to "$40,000,000.00" on the cover
page thereof and by substituting therefor a reference to
"$75,000,000.00."
(b) By deleting the reference to "$40,000,000" in the
introductory paragraph to Section 1 thereof and by substituting
therefor a reference to "$75,000,000."
(c) By deleting the first sentence of Section 2.1.1 thereof
and by substituting therefor the following:
Interest shall accrue on the principal amount of the
Revolver Loans outstanding at the end of each day at a
variable rate per annum equal to 1.25% plus the LIBOR Rate in
effect from time to time.
(d) By deleting Section 2.1.2 thereof in its entirety and by
substituting therefor the following:
2.1.2 Default Rate of Interest. Upon and after the
occurrence of an Event of Default, and during the continuation
thereof, the principal amount of all Revolver Loans (and, to
the extent permitted by Applicable Law, all accrued interest
that is past due) shall, at the election of Lender at any time
without notice, bear interest at a variable rate per annum
equal to 3.25% plus the LIBOR Rate in effect from time to time
(the "Default Rate").
(e) By deleting Section 2.5 thereof in its entirety and by
substituting therefor the following:
2.5. Unused Line Fee. Borrower agrees that, effective
February 26, 1998, if the Average Monthly Loan Balance for any
month is less than $75,000,000, then, to the extent of the
difference (the "Deficiency"), Borrower shall pay to Lender a
fee equal to .25% per annum of the Deficiency. The Unused Line
Fee shall be payable monthly, in arrears, on the first day of
each calendar month.
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<PAGE> 3
(f) By deleting Section 8.1.3 thereof in its entirety and by
substituting therefor the following:
8.1.13. Liquidity.
(i) Maintain in full force and effect with
Capital Holding, Union Planters or any other bank or
financial institution on terms similar to the terms
of the Lines of Credit, an unsecured line of credit
which, when aggregated with the amounts realized in
connection with any initial public offering of the
stock of Capital Holding or Borrower after March 4,
1996, is in an amount not less than $50,000,000.
(ii) Maintain Liquidity of at least
$25,000,000.
(g) By deleting clauses (iii) and (iv) of Section 8.2.3
thereof in their entirety and by substituting therefor the following:
(iii) Debt outstanding from time to time
under the Lines of Credit;
(iv) Debt that is unsecured and outstanding
from time to time under any unsecured line of credit,
whether in replacement of or in addition to either of
the Lines of Credit;
(h) The parties acknowledge and agree that any and all
references to "Capital Bank" in the last paragraph of Section 8.2.3 of
the Loan Agreement shall be deemed to be references to "Union
Planters."
(i) By deleting clause (i) of Section 8.2.17 thereof and by
substituting therefor the following:
(i) no Default or Event of Default exists at the time of or
would result from the conveyance, assignment, transfer or sale
of a participation in such Borrower Advance;
(j) By adding the following new clause (v) and additional text
at the end of Section 8.2.17 thereof
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<PAGE> 4
immediately after the phrase "the Borrower Advance" and
immediately preceding the period at the end of Section 8.2.17:
(v) if an Event of Default exists and Lender nonetheless
consents to the conveyance, assignment, transfer or sale by
Borrower of a participation in any Borrower Advance or the
Transaction Documents or other Collateral relating thereto,
the purchaser, assignee or transferee of such participation or
other interest acknowledges the existence of Lender's security
interest in and Lien upon such Borrower Advance, and
Transaction Documents and other Collateral relating thereto,
and agrees that Lender's security interest in and Lien upon
the Borrower Advance, and the Transaction Documents and other
Collateral relating thereto, shall continue therein despite
such conveyance, assignment, transfer or sale, and to such
other matters as Lender shall reasonably require, all pursuant
to a written agreement that is in form and substance
reasonably acceptable to Lender. At any time that an Event of
Default exists, Borrower agrees to use its reasonable efforts
to cause the holder of a participation or other interest in
any Borrower Advance, or the Transaction Documents or other
Collateral relating thereto, which has not yet done so to
enter into a written agreement with Lender and Borrower
pursuant to which such holder of such participation or other
interest acknowledges the existence of Lender's security
interest in and Lien upon the applicable Borrower Advance, and
Transaction Documents and other Collateral relating thereto,
agrees that Lender's security in and Lien upon the Borrower
Advance, and the Transaction Documents and other Collateral
relating thereto, shall continue therein despite such
conveyance, assignment, transfer or sale, and agrees to such
other matters as Lender shall reasonably require. In the event
that the holder of such participation or other interest does
not enter into such an agreement with Borrower and Lender in
the circumstances described in the preceding sentence,
Borrower agrees that Lender may, at its election, choose not
to treat the Borrower Advances in which such holder has a
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<PAGE> 5
participation or other interest as Qualified Borrower
Advances.
(k) By deleting the definition of "Borrowing Base" in Appendix
A thereto and by substituting therefor the following:
Borrowing Base - on any date of determination
thereof, an amount equal to the lesser of:
(i) $75,000,000; or
(ii) an amount equal to:
(a) 90% of the Net Amount of Qualified
Borrower Advances outstanding at such date;
MINUS
(b) the Availability Reserve.
(l) By deleting the definition of "Capital Bank" in Appendix A
thereto.
(m) By adding the following new definitions to Appendix A
thereto in the proper alphabetical sequence:
Line of Credit Documents - the Capital Holding Line
of Credit Documents and the UPC Line of Credit Documents.
Line of Credit Notes - the Capital Holding Line of
Credit Note and the UPC Line of Credit Note.
Lines of Credit - the Capital Holding Line of Credit
and the UPC Line of Credit.
Union Planters - Union Planters Bank of Florida
(formerly known as Capital Bank).
UPC Line of Credit - the unsecured line of credit
from UPC in favor of Borrower under the UPC Line of Credit
Documents.
UPC Line of Credit Documents - the UPC Line of Credit
Note and any and all other documents, agreements and
instruments heretofore, now or hereafter executed by Borrower
in respect to the UPC Line of
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<PAGE> 6
Credit.
UPC Line of Credit Note - the promissory note dated
January 2, 1998, made by Borrower to the order of UPC in the
original principal amount of $150,000,000.
UPC - Union Planters Corporation, a Tennessee
corporation.
(n) By deleting the definition of "Liquidity" in Appendix A
thereto and by substituting therefor the following:
Liquidity - at any date of determination, the sum of
Availability plus the unutilized amount under the Lines of
Credit (or any line or lines of credits substituted therefor
in accordance with the Agreement).
(o) Lender acknowledges that, effective December 31, 1997,
Parent was merged with and into Union Planters Corporation, a Tennessee
corporation ("UPC"), with UPC being the surviving corporation of such
merger, and that the same shall not be deemed to constitute a Default
or an Event of Default under the Loan Agreement. The parties
acknowledge and agree that from and after January 19, 1998, any and all
references in the Loan Agreement to the term "Parent" shall be deemed
to be references to UPC. The parties further acknowledge that,
effective January 19, 1998, Capital Bank changed its name to Union
Planters Bank of Florida ("Union Planters"), and that from and after
December 31, 1997, any and all references in the Loan Agreement to
"Capital Bank" that are not otherwise dealt with specifically in this
Amendment shall be deemed to be references to Union Planters.
3. RATIFICATION AND REAFFIRMATION. Borrower hereby ratifies and
reaffirms each of the Loan Documents and all of Borrower's covenants, duties and
liabilities thereunder.
4. ACKNOWLEDGMENTS AND STIPULATIONS. Borrower acknowledges and
stipulates that the Loan Agreement and the other Loan Documents executed by
Borrower are legal, valid and binding obligations of Borrower that are
enforceable against Borrower in accordance with the terms thereof; and the Liens
granted by Borrower in the Collateral in favor of Fleet are duly perfected,
first priority Liens.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Fleet, to induce Fleet to enter into this
-6-
<PAGE> 7
Amendment, that, after giving effect to the amendments set forth in Section 2
hereof, no Default or Event of Default exists on the date hereof; the execution,
delivery and performance of this Amendment have been duly authorized by all
requisite corporate action on the part of Borrower and this Amendment has been
duly executed and delivered by Borrower; and all of the representations and
warranties made by Borrower in the Loan Agreement are true and correct on and as
of the date hereof.
6. EFFECTIVENESS; GOVERNING LAW. This Amendment shall be effective upon
acceptance by Fleet in Atlanta, Georgia, whereupon the same shall be governed by
and construed in accordance with the internal laws of the State of Georgia.
7. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
8. NO NOVATION, ETC.. Except as otherwise expressly provided in this
Amendment, nothing herein shall be deemed to amend or modify any provision of
the Loan Agreement, any of the Other Agreements or any of the Security
Documents, each of which shall remain in full force and effect. This Amendment
is not intended to be, nor shall it be construed to create, a novation or accord
and satisfaction, and the Loan Agreement as herein modified shall continue in
full force and effect.
9. COUNTERPARTS; TELECOPIED SIGNATURES. This Amendment may be executed
in any number of counterparts and by different parties to this Agreement on
separate counterparts, each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute one and the same agreement.
Any signature delivered by a party by facsimile transmission shall be deemed to
be an original signature hereto.
10. FURTHER ASSURANCES. Borrower agrees to take such further actions as
Fleet shall reasonably request from time to time in connection herewith to
evidence the amendments set forth herein to the Loan Agreement.
11. SECTION TITLES. Section titles and references used in this
Amendment shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreements among the parties hereto.
12. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, THE PARTIES HERETO EACH HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY
ACTION, SUIT, COUNTERCLAIM OR PROCEEDING ARISING OUT OF OR RELATED TO THIS
AMENDMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed under seal in Atlanta, Georgia, and delivered by their respective
duly authorized officers on the
-7-
<PAGE> 8
date first written above.
CAPITAL FACTORS, INC.
("Borrower")
By: /s/ Donald Wisdom
------------------------
DONALD WISDOM,
Senior Vice President
Accepted and agreed to in Atlanta, Georgia, this _____ day of February,
1998.
FLEET CAPITAL CORPORATION
("Fleet")
By:
------------------------
Title:
----------------------
-8-
<PAGE> 9
CONSENT AND REAFFIRMATION
The undersigned guarantor of the Obligations of Borrower at any time
owing to Fleet hereby: (i) acknowledges receipt of a copy of the foregoing
Second Amendment to Loan and Security Agreement; (ii) consents to Borrower's
execution and delivery thereof; (iii) agrees to be bound thereby; and (iv)
affirms that nothing contained therein shall modify in any respect whatsoever
its guaranty of the Obligations and reaffirms that such guaranty is and shall
remain in full force and effect.
IN WITNESS WHEREOF, the undersigned has executed this Consent and
Reaffirmation on and as of the date of such Second Amendment to Loan and
Security Agreement.
CAPITAL FACTORS HOLDING, INC.
By: /s/ John W. Kiefer
--------------------------------
JOHN W. KIEFER, President
-9-
<PAGE> 10
CAPITAL FACTORS, INC.
ASSISTANT SECRETARY'S CERTIFICATE
OF
BOARD OF DIRECTORS RESOLUTIONS
I, Michael G. Levine, DO HEREBY CERTIFY, that I am the Assistant
Secretary of Capital Factors, Inc. (the "Corporation"), a corporation duly
organized and existing under and by virtue of the laws of the State of Florida
and am keeper of the records and seal thereof; that the following is a true,
correct and compared copy of the resolutions duly adopted by the unanimous
consent of all members of the Board of Directors of said Corporation effective
as of February 27, 1998; and that said resolutions are still in full force and
effect:
RESOLVED, that the (i) making, execution and delivery to Fleet Capital
Corporation ("Lender") of (1) a Second Amendment to Loan and Security Agreement
(the "Amendment") providing for the amendment of certain terms of that certain
Loan and Security Agreement dated as of March 4, 1996, between the Corporation
and Lender, as amended (the "Loan Agreement"), in the form annexed hereto as
Annex 1, and (2) all other agreements, documents and instruments contemplated by
or referred to in the Amendment or executed by the Corporation in connection
therewith; and (ii) the carrying out, modification, amendment or termination of
any arrangements or agreements at any time existing between the Corporation and
Lender, are hereby ratified and approved.
RESOLVED, that the Loan Agreement and each amendment to the Loan
Agreement heretofore executed by any officer or director of the Corporation and
any actions taken under the Loan Agreement as thereby amended are hereby
ratified and approved.
I DO FURTHER CERTIFY that John W. Kiefer is the President of the
Corporation, Donald Wisdom is the Senior Vice President of Corporation and
Michael G. Levine is the Assistant Secretary of the Corporation and each is duly
elected, qualified and acting as such, respectively.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of
the Corporation, as of February 27, 1998.
/s/Michael G. Levine
------------------------------------
MICHAEL G. LEVINE,
Assistant Secretary
[CORPORATE SEAL]
I, John W. Kiefer, President of said Corporation, do hereby certify
that the foregoing is a correct copy of the resolutions passed by the Board of
Directors of the Corporation and that Michael G. Levine is Assistant Secretary
of the Corporation and is duly authorized to attest to the passage of said
resolutions.
/s/John W. Kiefer
------------------------------------
JOHN W. KIEFER, President
<PAGE> 1
Exhibit 10.2
COMBINATION PROMISSORY NOTE (Commercial System)
$150,000,000.00 Memphis, Tennessee January 2, 1998
FOR VALUE RECEIVED the undersigned, jointly and severally, promise to pay to the
order of UNION PLANTERS CORPORATION (hereinafter UPC) at the Headquarters of UPC
- - 7130 Goodlett Farms Parkway in the City of Cordova, Tennessee, In current
funds the principal sum of One hundred fifty million and no/100
($150,000,000.00) Dollars, together with interest on the principal debt
evidenced hereby from date to maturity and payable as hereinafter set forth.
Said principal debt and interest thereon shall be due and payable as provided in
the subparagraph(s) checked |X| below:
AS TO PRINCIPAL ONLY:
|X| On demand, or if no demand, on April 1, 1999:
AS TO INTEREST ONLY:
|X| Commencing on the 1st day of February, 1998, and on the same day of each
and every |X| month, | | quarter, | | six months or | | year thereafter at
the per annum rate of WSJ Prime - 75 percent (7.75%) percentage points in
excess of UPC's "prime rate."
AS TO METHOD OF PAYMENT:
|X| On due date of payment, charge Bank Account No. ______________________ for
payment due.
- -------------------------------------------------------------------------------
If used herein "Prime Rate" means Wall Street Journal published reference
rate in effect from time to time for commercial loans. Effective on the day on
which any change in Bank's prime rate shall occur, the rate of interest shall be
adjusted upward or downward by a number of percentage points (and fractional
parts thereof) equal to the adjustment upward or downward in Bank's prime rate,
provided, however, that the rate, as adjusted, shall not exceed the maximum rate
of 24%.
It is agreed that the interest may be calculated on the basis of a 360-day
year unless calculation on that basis would result in UPC receiving interest at
a rate in excess of the maximum rate of 24%, in which case the principal debt
evidenced hereby shall bear interest at such maximum rate.
Any renewal of the rate evidenced hereby shall bear interest at the rate of
interest set at the time, not to exceed the maximum rate, which is permitted by
law to contract for and charge on the date hereof or such maximum rate so
permitted on the date of such renewal, whichever is greater.
The undersigned hereby agree to pay all expenses directly related to the
loan evidenced hereby, incurred or to be incurred in its making, servicing or
collection, including reasonable attorney's fees. The undersigned further agree
to pay a late charge equal to one-half of one percent (.5%) of any payment that
is more than 15 days past due. The undersigned further agree to pay UPC upon
demand, all charges for services rendered or to be rendered by its officers and
employees directly for inspecting, verifying and servicing the collateral
securing the obligations set forth herein and for the collection of said loan.
The undersigned have granted to UPC a lien or security interest in, have
deposited with UPC or have pledged as collateral security for the payment of
this and any other present or future indebtedness or liability of undersigned to
UPC, whether now due or hereafter to become due, directly or indirectly (as
principal, endorser, surety, guarantor or otherwise), the property descried in
Agreements as follows:
Security Agreements:
|X| Unsecured.
Every maker, surety, endorser, and guarantor of the Note agrees, at any
time, and from time to time, upon request of the UPC to make, execute, and
deliver, or cause to be made, executed, and delivered to UPC any and all
instruments, certificates and documents (including but not limited to financial
statements and security documents) as may, in the opinion of UPC or its counsel,
be necessary or desirable in order for UPC to effectuate, complete or perfect or
to continue and preserve the obligations of the undersigned under this Note and
loan evidenced hereby.
Upon the happening of any of the following events, all of the aforesaid
liabilities shall, without notice, at the option of UPC, become immediately due
without demand for payment thereof: (a) The failure of any Obligor (which term
shall include the undersigned makers, together with all endorsers, sureties and
guarantors of this Note) to perform any agreement hereunder or related to the
loan evidenced hereby; (b) The death of an Obligor; (c) The filing of any
petition under any Bankruptcy Act, Federal or State, by or against Obligor; (d)
The filing of any application for appointment of a receiver for, the making of a
general assignment for the benefit or creditors by, or any other act of
insolvency of any Obligor, however expressed or indicated; (e) The entry of any
judgement against any Obligor; (f) the issuing of any attachment or garnishment
or the filing of any lien against any property of any Obligor; (g) The
determination by UPC that a material adverse change has occurred in the
financial condition of any Obligor; (h) The dissolution, merger, consolidation
or reorganization of any Obligor; (i) The assignment by any Obligor of any
equity or other right in any of the collateral without the written consent of
UPC; (j) The taking of possession of any substantial part of the property of any
Obligor at the instance of any governmental authority; (k) The failure to pay
when due the premium on any life insurance policy assigned as collateral to UPC;
or (l) UPC deeming itself to be insecure.
The undersigned shall have the privilege, at any time and from time to
time, of prepaying, in whole or in part, the then outstanding balance hereunder
together with accrued interest thereon. Any prepayment shall not have the effect
of suspending or deferring the payments herein provided for, but the same shall
continue to be due and payable on each due date subsequent to such prepayment
and shall operate to effect full payment of this Note at an earlier date.
No delay or omission on the part of UPC or the holder in exercising any
right hereunder or related to the obligations evidenced hereby shall operate as
a waiver of such right or of any other right. A waiver on any one occasion shall
not be construed as a bar to or waiver of any such right and/or remedy on any
future occasion.
Every maker, surety, endorser, guarantor or other party, whether primarily
or secondarily liable on this Note or the indebtedness evidenced hereby, agrees
that any moneys or other property at any time in the possession of UPC belonging
to any of said parties and any deposits, balance of deposits or other sums at
any time credited by or due from UPC to any said parties, may at all times, at
the option of UPC, be held and treated as collateral security for the payment of
any liability of undersigned to UPC, whether due or not due, and UPC may, at its
sole option and at any time before or after default, set off the amount due or
to become due hereon against any claim of any of said parties against UPC.
Every maker, surety, endorser and guarantor of this Note or the obligations
set forth herein waives presentment, demand, notice, protest and all other
demands in connection with the delivery, acceptance, performance, default or
endorsement of this Note or their respective obligations hereon; consents to any
extensions or postponements of the due date or time of payment hereof, or of any
other indebtedness (with or without concurrence of the undersigned) in whole or
in part without notice to the undersigned and without limitation as to the
number of such extensions or the period or periods thereof; and consents to any
substitution, exchange or release of any other party or person whether primarily
or secondarily liable. Each extension granted shall be noted by the holder on
the reverse side of this instrument with a new date of maturity clearly
indicated.
All rights and powers of UPC hereunder shall inure to the benefit of any
subsequent holder or assignee of this Note and the owner of any part of the debt
evidenced hereby.
This instrument shall be governed by and construed in accordance with the
laws of the State of Tennessee, except with respect to interest which shall be
governed by and construed in accordance with federal laws.
Capital Factors, Inc.
(signature of makers)
/s/ John W. Kiefer
-----------------------------------
This note shall not be deemed consummated until accepted by UPC in Memphis,
Tennessee.
Accepted in Memphis, Tennessee - Union Planters Corporation: By /s/ Robert
L. Booth, Jr.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CAPITAL FACTORS HOLDING, INC. FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 55,694,064
<SECURITIES> 0
<RECEIVABLES> 707,925,127
<ALLOWANCES> (5,924,129)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,409,581
<DEPRECIATION> 237,880
<TOTAL-ASSETS> 771,357,964
<CURRENT-LIABILITIES> 0
<BONDS> 465,132,000
0
0
<COMMON> 123,042
<OTHER-SE> 77,067,607
<TOTAL-LIABILITY-AND-EQUITY> 771,357,964
<SALES> 0
<TOTAL-REVENUES> 23,212,301
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,252,967
<LOSS-PROVISION> 1,550,000
<INTEREST-EXPENSE> 8,527,632
<INCOME-PRETAX> 4,881,702
<INCOME-TAX> 1,874,439
<INCOME-CONTINUING> 4,881,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,007,263
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
