UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 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.
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(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0500757
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(State or Other Jurisdiction of (I.R.S. Employee
Incorporation or Organization) Identification No.)
120 E. Palmetto Park Rd. Suite. 500,
Boca Raton, Florida 33432
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including are code (561) 368-5011
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
NONE NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
-----------------------------
(Title of class)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 17, 1998, the aggregate market value of the shares of the
registrant's Common Stock held by non-affiliates of the registrant was
$38,844,987.50. (This number is based on reported beneficial ownership by all
directors and executive officers of the registrant and holders of 5% or more of
the registrant's Common Stock. This determination, however, does not constitute
an admission of affiliate status for any of these individual shareholders.)
As of March 17, 1998 the registrant had outstanding 12,304,150 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file the Registrant's Definitive Proxy Statement for its
1998 Annual Meeting of Shareholders with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this Form
10-K pursuant to Rule G(3) of the General Instructions for Form 10-K.
Information from such Definitive Proxy Statement will be incorporated by
reference into Part III, Items 10,11, 12 and 13 hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Capital Factors Holding, Inc. and its subsidiaries (the "Company") are a
specialized financial services company principally engaged in providing
receivables-based commercial financing and related fee-based credit, collections
and management information services. The Company's clients are primarily small
to medium size companies in various industries, including textile and apparel
and furniture manufacturing. In 1994, the Company began to provide services to
clients involved in the healthcare industry. The Company operates through four
regional offices located in New York City, New York; Los Angeles, California;
Charlotte, North Carolina and its headquarters in South Florida, and an
asset-based lending office in Atlanta, Georgia that opened in 1997. The Company
currently has over 400 factoring clients who generate annual sales of $500,000
to $150 million, and services over 100,000 customers of those clients.
The Company generally provides financing to its clients through the purchase of
accounts receivable owed to the Company's clients by the clients' customers,
usually on a non-recourse basis, as well as by guaranteeing amounts due under
letters of credit issued to the Company's clients which are collateralized by
accounts receivable and other assets. The purchase of accounts receivable is
usually known as "factoring" and results in the payment by the client of a
factoring fee, generally equal to 0.5% to 2% of the factored sales volume. No
money is paid to the client at the time the Company purchases the client's
receivables. Instead, the Company records a liability to the client on its books
for the purchase price of the receivable. Generally, the Company and the client
notify the client's customers to make all payments on the receivable directly to
the Company. In most cases, a client's customers are other commercial entities,
not individuals. In healthcare financing, the client's customers are
individuals, but the client's receivables are mostly from third-party obligors
(usually insurance companies).
The Company guarantees the collection of each client's pre-approved receivables
or receivables from each client's customers with pre-approved credit lines.
Payment for receivables which are credit-approved by the Company is made to the
client after collection from the client's customer or, if the receivable is not
paid based solely on the customer's financial inability to pay, payment is made
to the client within 120 days after the due date of the receivable. Frequently,
the Company also advances funds to its clients prior to collection of
receivables, charges interest on such advances (in addition to any factoring
fees) and satisfies such advances from receivables collections. All payments to
clients are reduced by amounts outstanding to the Company, such as the factoring
fee charged to the client or any outstanding advances to the client. Interest
charged on such advances is generally equal to 1% to 4% over prime. Management
believes that the generally short-term and floating rate characteristics of its
advances and the floating rate of its financings result in minimal interest rate
exposure. Approximately 30% of the Company's clients use only the credit
protection and management information services offered by the Company in
connection with the purchase of their accounts receivable, and do not obtain
advances against the purchased receivables from the Company.
The Company began to expand its asset-based lending activities in late 1994. At
December 31, 1997 the Company's asset-based loans ranged from $100,000 to $20.0
million and are primarily secured by accounts receivable and, to some extent,
inventory. Such loans bear interest at annual rates ranging from 1% over prime
to 6% over prime. Most of such loans originate from the Company's California,
Florida, and beginning in 1997, Georgia, offices. The Company makes asset-based
loans to companies who may not need its other services and who have different
financial circumstances and needs than factored clients. In underwriting such
loans, the Company pays more attention to the borrower's financial stability and
creditworthiness, rather than that of the borrower's customers. In making such
loans the Company competes primarily with financial institutions and other
asset-based lenders, such as commercial finance companies.
The Company has grown in size and profitability. For 1997, the Company's
operating revenues, net income and factored sales volume increased by 23.3%,
4.9% and 22.7%, respectively, over 1996. The Company's operating strategy
includes (i) managing credit risk to ensure consistent and stable growth, (ii)
increasing market penetration through offices in key factoring centers, (iii)
recruiting and retaining experienced personnel who use a team approach to
provide quality service and (iv) diversifying by product and industry.
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BACKGROUND OF THE COMPANY
Capital Factors Holding, Inc. ("Holding") is a majority owned subsidiary of
Union Planters Bank of Florida, (the "Bank"), formerly known as Capital Bank, a
Florida commercial bank. The Bank is a wholly-owned subsidiary of Union Planters
Corporation, successor by merger with Capital Bancorp ("Bancorp"), effective
December 31, 1997. Holding has three wholly-owned subsidiaries, Capital Factors,
Inc. ("Factors"), CF One, Inc. ("CF One") 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".
Factors was acquired by Capital Bank in May 1985, at which time Factors had one
office in South Florida. Factors acquired a Los Angeles regional office in
August 1989 and opened a New York regional office in April 1990. The Company
established a healthcare division in September 1994 and, in late 1994, the
Company also began asset-based lending. The Charlotte regional office was opened
in May 1995 and the Atlanta asset-based lending office in January 1997.
Holding was formed in June 1994 in order to serve as the holding company for
Factors and to accommodate the issuance of asset-backed certificates in
connection with the securitization of factored advances (the "Securitized
Financings") which have been issued pursuant to several private placements.
Additionally in 1994, Holding formed another subsidiary, CF One, and Factors
formed a subsidiary, CF Funding Corp and in 1997 Holding formed the subsidiary
CF Investor Corp. CF One, CF Investor Corp and CF Funding Corp. were created to
accommodate the issuance of the asset-backed certificates. CF One and CF
Investor Corp hold subordinated certificates issued by the trust (the "Trust")
created in connection with the Securitized Financings, which it purchased with
funds contributed to it by Holding. Pursuant to the Securitized Financings,
advances made by Factors that were collateralized by third party accounts
receivable and, in certain cases, by cash, letters of credit, inventory or other
collateral provided to Factors were sold to CF Funding Corp., which subsequently
transferred the advances to the Trust. The Trust issued four series of
asset-backed certificates (the "Certificates"), which were sold to institutional
buyers through several private placements. The aggregate amount of Certificates
presently outstanding is $275 million, of which $100 million was issued in June
1994, $25 million was issued in December 1994, $50 million was issued in July
1995 and $100 million was issued in April 1997. Each Certificate evidences an
interest in the Trust's assets and the right to receive the payment of principal
on the face amount of the certificate and interest from the Trust. The Trust's
assets consist principally of the advances, as well as funds collected or to be
collected in respect of the advances and the collateral therefor. Factors is
responsible for servicing the advances owned by the Trust. Subordinated
certificates were also issued by the Trust to CF One and CF Investor Corp in
connection with each of the Securitized Financings ($15 million in June 1994,
$3.75 million in December 1994, $7.50 million in July 1995 and $5.40 million in
April 1997).
On July 16, 1996, Holding completed an initial public offering of 2,000,000
shares of its Common Stock at a public offering price of $8.50 per share. Prior
to this offering, all of the Common Stock was owned by the Bank. On August 2,
1996, the underwriting syndicate exercised its option to acquire an additional
300,000 shares of Common Stock. The net proceeds from the offering, which
totaled approximately $17.6 million, were used to reduce the Company's
indebtedness to the Bank under an outstanding line of credit. As a result of the
offering, the Bank's ownership of Holding was reduced to approximately 81% of
the outstanding Common Stock. The Common Stock is listed for trading on the
Nasdaq National Market under the symbol "CAPF."
On August 9, 1996, the Company closed on the acquisition of substantially all of
the assets of TempFunds America, Inc. and its affiliate, TempFunds America
Funding Corporation of South Carolina, Inc. (collectively "TempFunds").
TempFunds is a specialized financial service company principally engaged in
providing receivables-based commercial financing and related fee-based credit,
collection and management information services to temporary employment and home
health care agencies. The acquisition was completed through Capital TempFunds,
Inc., a newly formed subsidiary of Factors. Capital TempFunds provides certain
services, including billing, payroll processing, payroll tax, payroll reporting
and other payroll services and insurance reporting. The purchase price paid by
the Company was approximately $5.9 million (approximately $5.0 million equal to
the net book value of the assets plus an additional $900,000). An additional
amount up to $900,000 is payable over a three year period if certain
contingencies are met, of which $350,000 plus interest was paid in February
1998. In connection with the acquisition, all rights, title and interest to the
nationally registered service mark of "TempFunds America" were assigned to
Capital TempFunds, Inc., which intends to conduct
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business in said name. The purchase was funded under the Company's revolving
line of credit with Union Planters Bank of Florida.
MARKET FOR COMPANY SERVICES
Traditionally, the factoring client base has consisted of members of the textile
and apparel industries, furniture manufacturers, electronics and home
furnishings organizations, wholesalers, distributors and service organizations.
Approximately 73% of the Company's clients are in the textile and apparel
industry and 14% are manufacturers of furniture and home furnishings. Clients
who, for various reasons, have insufficient or less effective in-house staff,
equipment or procedures to monitor customers, manage accounts receivable or
protect against credit loss, also use factors to provide such services. These
include both mature and younger companies. For example, as the retail industry
becomes more fragmented due to an increased number of specialty stores
challenging department stores, mass merchants and discounters, suppliers are
faced with a larger universe of buyers and may experience higher costs to
maintain their credit and receivables department and increasing paper flow,
requiring more sophisticated systems. As clients experience these rising costs,
credit, collection and management information services such as those provided by
the Company become economically and operationally more attractive. In addition,
manufacturers benefit from factoring because it allows them to turn inventory
more quickly, particularly if they receive cash advances, which may be used to
produce more inventory that could not have been produced if the manufacturer had
waited to be paid by its customer.
The Company, as well as the factoring industry, has historically experienced and
expects to continue to experience seasonal fluctuations in its factored sales
volume and factoring fees, which generally have been highest during the period
from August through November. A principal reason for the fluctuation in the
Company's factored sales volume and factoring fees is the seasonality in the
sales of certain of the Company's clients, especially those in the textile and
apparel industry, who typically ship more goods during such 4-month period in
order to fill increased customer orders in anticipation of "back to school" and
the ensuing holiday season. The Company realized close to 40.0% of its annual
factored sales volume in each of 1997 (approximately $1.2 billion of $3.3
billion annual factored sales), 1996 (approximately $1.0 billion of $2.6 billion
annual factored sales), and 1995 (approximately $757 million of $2 billion
annual factored sales) during this 4-month period. Historical experience also
indicates that the Company's factored sales volume and factoring fees are at
their lowest during the period from December through February. Such seasonal
fluctuations can be seen by a review of the Company's quarterly factored sales
volume and net income for the three year period ended December 31, 1997, as set
forth below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
-------------- ------------ ---------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1997
Factored Sales Volume 730,177 746,249 873,364 902,896 3,252,686
Net Income 2,320 3,140 3,648 2,554 11,662
1996
Factored Sales Volume 563,989 614,614 708,930 763,909 2,651,442
Net Income 1,903 2,558 3,271 3,383 11,115
1995
Factored Sales Volume 441,211 460,407 561,222 538,523 2,001,364
Net Income 1,883 2,069 2,524 2,217 8,693
</TABLE>
The Company's net income for the fourth quarter of 1997 reflected a $3.5 million
provision for credit losses, a $2.5 million increase over the fourth quarter of
1996. A $1.0 million reserve, representing 40% of the increase, was established
specifically related to the bankruptcy of a national retail chain. The remainder
of the increase was principally the result of increasing general reserve levels
on loans originated by the asset-based lending and healthcare divisions.
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INDUSTRY OVERVIEW
Financial service companies which compete with the Company are widely known as
factors and typically service retail trade clients with a large number of
customers, requiring intensive customer credit and operational support.
Factoring companies service industries such as apparel, textiles, shoe,
carpeting and furniture, frozen foods, housewares, electronics, toys and other
service-related industries, including hospitals, medical companies and
employment services. Such industries benefit from the use of credit, collections
and management information services such as those provided by the Company
because factoring companies can (i) achieve economies of scale in evaluating the
credit quality of various customers and processing receivables and (ii) help
clients to achieve more stable cash flows and additional credit facilities.
Factoring has been a method of working capital financing in the United States
for over 200 years. Traditionally, the industry has focused on the purchase of
receivables in the apparel and furniture industries, but recently, new
industries, including healthcare providers, have begun factoring. The factoring
industry has undergone considerable consolidation over the past several years;
as a result, the industry is characterized by a small number of very large
factors operating nationally, with a multitude of small companies generally
operating on a local or regional basis.
In a recent survey, the largest thirteen factoring companies reported volume for
the year ended December 31, 1997 of $71.0 billion. The Company had a 4.6% share
of this reported volume for 1997.
STRATEGY
The Company provides fee-based services to its clients, including credit,
collection and management information services, and also makes advances to its
clients. Each of the Company's regional offices is staffed with a business
development manager, who has the primary responsibility for generating new
business. Potential new clients are often identified from (i) referrals by
previous and existing clients, accountants and lawyers, (ii) direct mail efforts
and (iii) direct telemarketing efforts. The Company also attempts to expand its
network through (i) mailings and magazine and trade journal advertisements to
increase its name recognition, (ii) cultivating its existing referral
relationships and (iii) soliciting additional referral relationships. Since the
Company opened its Charlotte office in 1995, management believes that it has a
network in place to meet the needs of its target client base in the key markets
for factoring services. Additional expansion and growth is contemplated through
product diversification, such as through healthcare financing, as well as
asset-based lending in all regional offices, including the Atlanta office opened
in 1997.
Management believes that the Company's growth has been primarily attributable to
the following operating strategies:
* Management of Credit Risks. The Company manages credit risks associated
with collection of accounts receivable and advances to clients primarily
by (i) conducting extensive financial and business due diligence on both
clients and their customers before entering into a factoring arrangement
with a client or establishing credit limits for customers, (ii) adhering
to the written guidelines set forth in a Loan and Credit Policy Manual
distributed to all credit and collection employees, and (iii) monitoring
outstanding accounts receivable and advances on a daily basis in order to
alert the Company to potential problems in a timely manner.
* Increased Market Penetration. The Company believes that it has been able
to increase market penetration by servicing a wide range of clients
nationally through its regional offices located in key factoring centers.
In addition, by providing its clients with personalized, flexible,
cost-efficient and effective service, the Company allows clients to be
more responsive to their customers and to devote more time to the
management of other aspects of their business.
* Experienced Personnel Who Use a Team Approach. Management believes that
the quality of service provided to its clients is a critical factor to the
Company's growth. In order to provide quality services, the Company
strives to recruit and retain management and other personnel with
significant industry experience, as well as a commitment to client
service. The Company's account executives, credit officers and operations
officers work together under the supervision of management to service the
Company's clients. As a result of this strategy, the Company's clients and
the customers of such clients interact with experienced personnel working
as a team.
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* Diversification by Product and Industry. As part of its operating and
growth strategy, the Company offers different variations and combinations
of its traditional products and services to clients and has recently
expanded into healthcare financing and asset-based lending. Asset-based
lending, in particular, provides the Company a vehicle to finance clients
who may not need its other services and who have different financial needs
than general factoring clients. Although the Company has a high
concentration of clients in the textile and apparel industry and furniture
manufacturing industry, the Company provides services to companies in
various industries. In addition to traditional factoring clients, the
Company now provides accounts-receivable financing to various clients in
the healthcare industry. Diversification provides the Company with a
potential client base that has significant growth potential, which may be
serviced from its existing offices.
FACTORING ARRANGEMENTS
Factoring Agreement
After the Company has completed a financial and business analysis on a potential
client and its customers, the Company will enter into a factoring agreement with
approved clients. Many of these factoring agreements provide for advances to be
made by the Company based on a client's receivables. The factoring agreement
typically appoints the Company as the client's sole factor for all accounts
receivable, generally for a term of one year. The Company can usually terminate
the agreement at any time upon 30 days' prior written notice to the client.
Once the factoring agreement has been executed, the Company will purchase the
client's accounts receivables for the face amount of the receivables, less
certain specified discounts, including the Company's factoring fee, and other
deductions. No money is paid to the client upon the purchase of the receivable.
Instead, the Company records a liability on its books for the purchase price of
the receivable. Generally, the Company and the client notify the customer to
make all payments for the receivable directly to the Company. In most areas, a
client's customers are other commercial entities and the client does not deal
directly with individuals. In healthcare financing, the client's customers are
individuals, but the client's receivables are mostly from third-party obligors
(usually insurance companies).
The Company guarantees the collection of each client's pre-approved receivables
or receivables from each client's customers with pre-approved credit lines.
Payment for the receivable is made to the client after collection from the
customer or, in the event the collection of the receivable was guaranteed by the
Company and the receivable was not paid based solely on the customer's financial
inability to pay, payment is made to the client within 120 days after the due
date of the receivable. If the customer fails to pay the receivable for any
reason other than financial inability to pay, such as a dispute regarding
defective merchandise, the Company has no obligation to pay the client for the
receivable, notwithstanding guarantee of the receivable by the Company. All
payments to clients are reduced by amounts outstanding to the Company, such as
the factoring fee charged to the client or any outstanding advances to the
client.
At the time the Company purchases the client's accounts receivable, the client
becomes obligated to pay the Company a fee, generally equal to 0.5% to 2.0% of
the gross amount of the receivable (not reduced by any discounts that may have
been provided to the customer for early payment). Typically, the fee is paid
from the proceeds of the accounts receivable collections. The factoring fee paid
by the client is not related to the collectibility or non-collectibility of the
purchased accounts receivable. Accordingly, even if the Company is not obligated
to pay for a guaranteed receivable because of a dispute between the client and
its customer, or if payment of the receivable was not guaranteed by the Company,
the factoring fee is due from the client on such receivable. The factoring fee
charged by the Company depends on various considerations, such as the length of
time the receivables are expected to be outstanding, the monthly volume of
receivables generated by the client, the anticipated administrative costs and
the perceived level of risk. Management believes that its factoring fees remain
competitive with other factoring companies, primarily because of the type of
clients serviced by the Company (generally, clients generating less than $50
million in sales) and the type and quality of services provided to its clients.
Services
The Company offers an interrelated package of financial services which meets a
variety of the business and financing needs of its clients. The Company's
services are designed to allow clients to be more responsive to their customers
and to
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devote more time to the management of other aspects of their business. The
Company's clients and the range of products and services offered distinguish it
from certain other commercial finance companies because the Company's main focus
is to provide fee-based services, as well as act as a lending source for many of
its clients. Management believes that it generally can provide these fee-based
services in a more cost-efficient manner than its clients because of economies
of scale.
Credit, Collection and Management Information Services. The Company provides its
clients with access to credit management, collection and information services,
including certain computerized accounting services, as well as the equivalent of
credit insurance. Each of the Company's regional offices is staffed with a
credit department of between 10 to 30 people. The credit department, at the
direction of the credit officer, conducts the credit checks on client's
customers, analyzes the information and makes a recommendation as to the amount
of credit to be extended, if any. If the Company approves the credit of the
customer, in accordance with written guidelines established by the Company, then
the Company will purchase the receivable for a fee and guarantee the collection
of the receivable based solely on the customer's financial ability to pay the
receivable. If the Company did not approve the credit of the customer, the
Company purchases the receivable for a fee, but will not guarantee collection of
the receivable.
Except with respect to much of the Company's healthcare financing, upon purchase
of the receivable by the Company, the client notifies the customer that all
payments on the receivable should be sent to the Company. The Company also
notifies the customer that it has purchased the receivable and provides payment
instructions to the customer. All payments are sent to the Company's operations
department in Florida. The regional collection departments monitor the
collection of the accounts receivable and make necessary follow-up calls if
payment is not received on a timely basis. Where necessary, the Company will
press for collections. Company staff is trained to seek collections in a
courteous and professional manner so as not to adversely affect a client's
relationship with its customers. In certain circumstances, the Company will use
the services of independent collection agencies. See "-Monitoring and Oversight
Policies - Receivables Portfolio."
In addition, the Company provides various management information services to its
clients, including (i) a monthly analysis that includes an aging schedule of all
open receivables by customer and (ii) information as to the creditworthiness of
its customers.
Advances.
The Company may also make advances to its clients, with interest charged on such
advances generally equal to 1% to 4% over prime. These fees are generally higher
than the fees charged by banks because a factor provides startup and expanding
businesses more financial flexibility, in addition to credit and other services.
This flexibility is primarily due to the fact that a bank, in making a
determination as to the amount that it would advance a borrower, will
customarily be more inclined to review the borrower's net worth, capital and
general financial condition, while a factor will place greater emphasis on the
borrower's collateral, particularly its receivables, and, correspondingly, the
creditworthiness of its customers. Interest accrues on the advance from the date
the advance is made until the date the Company would otherwise be obligated to
pay the client for purchased receivables. Advances are made on receivables
before they are due or collected by the Company based upon a stipulated
percentage of the net face value of aggregate outstanding receivables, usually
ranging from 75% to 90%. Advances to factoring clients are payable upon demand.
All advances must be approved in accordance with the written guidelines
established by the Company. Such guidelines provide that advances shall be (i)
under a duly authorized line approved at the time an arrangement is established,
taking into account the funding needs and financial strength of the client and
other credit factors and the anticipated performance of the collateral and (ii)
within an advance formula applied to eligible accounts receivable taking into
account anticipated dilution. Approximately 70% of the Company's clients obtain
advances from the Company. A number of these clients might not otherwise qualify
for financing of a comparable level from traditional sources. From time to time,
the Company makes advances in excess of a client's receivables to the extent
needed by such client because of the seasonality of its business or otherwise.
These overadvances may be secured by a client's inventory, other assets and/or
personal guarantees or may be unsecured.
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Other Financing Services.
The Company also provides other fee-based financial services to its clients,
including guarantees of commercial letters of credit and standby letters of
credits. Most, if not all of such letters of credit are issued by Union Planters
Bank of Florida. Union Planters Bank of Florida provided approximately $166.5
million, $135.5 million, and $130.1 million during 1997, 1996, and 1995,
respectively, of letters of credit for clients of the Company. For a fee, the
Company guarantees the payment by its clients under these letters of credit.
Fees charged for issuance of the letters of credit are paid directly to Union
Planters Bank of Florida and amounted to $605,429, $373,688, and $462,013 for
the years ended December 31, 1997, 1996, and 1995, respectively.
The Company may also provide financial guarantees for its clients. Commercial
letters of credit are issued to facilitate certain trade transactions for the
clients of the Company, principally the purchase of goods. Standby letters of
credit and financial guarantees are conditional commitments issued to guarantee
the performance of a client to a third party. The Company guarantees letters of
credit and issues financial guarantees only for clients with which the Company
has factoring or other financing arrangements. Generally, the Company requires
collateral to support these commitments and the collateral held varies, but may
include cash, inventory, real estate and the client's reserve balance.
ASSET BASED LENDING ARRANGEMENTS
In connection with its asset based lending, the Company completes a financial
and business analysis of a potential client focusing primarily on the financial
stability and creditworthiness of the borrower first, and, secondarily, on the
borrower's customers. Asset based loans are made by the Company based upon a
stipulated percentage of a client's eligible accounts receivable, inventory and
fixed assets. Eligibility may be determined based on the estimated recovery
value of collateral in the event of liquidation. The Company's typical asset
based lending agreements are generally for a term of one to three years.
Once an agreement is executed, the client submits borrowing base certificates to
the Company, generally on a daily or weekly basis. This certificate will list
the collateral and its eligible portion. After review by company personnel, the
account executive requests a loan to the client based on availability. Interest
on such loans generally ranges from 1% to 6% over prime.
All asset-based loans are made in accordance with a written credit memorandum
approved by the Company on each client. Such credit memoranda provide that
advances under each loan agreement shall be (i) within a credit limit approved
at the time a loan agreement is executed and (ii) within advance formulas
applied to eligible collateral taking into account anticipated recovery rates if
the collateral was liquidated. The Company performs audits on each client using
a predetermined schedule based on the perceived risk of the loan.
In most cases the Company has control of the cash collections of the client's
receivables through a pre-arranged bank account in the Company's name and
lockbox to which the clients' customer are directed to make receivable payments.
The client's loan is reduced by this cash collected and the client receives
lockbox documentation to update its receivable records.
In contrast to factoring, 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. In connection with asset based loans, instead of a factoring
fee, the Company may earn fees based on the level of monitoring required on
individual clients' collateral.
MONITORING AND OVERSIGHT POLICIES
Receivables Portfolio
The quality of purchased receivables is the Company's primary security against
credit losses. Accordingly, the Company conducts an extensive financial and
business analysis on a client prior to entering into a factoring arrangement
with the
8
<PAGE>
client, and on the client's customers, prior to the establishment of credit
lines for a customer. The Company focuses on such items as the age of
receivables, the quality of management and the ethical character of a
prospective client's owners, as well as the diversity of its customer base. The
Company generally seeks to avoid situations where a significant percentage of a
prospective client's receivables are from one customer. Pursuant to Company
policy, all factoring arrangements must conform to the guidelines set forth in
the Company's Loan and Credit Policy Manual, a written manual provided to all
credit and collection employees of the Company. The manual establishes
guidelines governing credit criteria, lending limits and required approvals, as
well as documentation requirements related to such matters as UCC filings,
guarantees, subordinations, shipping documents and financial reporting. There
can be no assurance, however, that adherence to the Company's written guidelines
will result in full collection of the purchased receivables or that such
guidelines will be complied with in every instance. See "Credit Loss Policy and
Experience."
Each of the Company's regional offices is staffed with one or more field
examiners who visit the office of each potential client for diligence purposes.
In certain situations, the Company will also use the services of independent
certified public accountants to assist the field examiners. In addition to
on-site visits, the Company's field examiners will review current financial
statements and business references of the client and personal financial
statements of the principals of the client and its major shareholders. The
Company's field examiners also conduct periodic field examinations of and visits
with clients to continue to learn about the client's operation. The Company
generally requires business plans for start-up ventures. Additionally, each of
the Company's regional credit departments makes routine random telephone calls
and mails written requests to customers to verify the existence and the terms of
receivables purchased from clients and obtains shipping evidence for all
invoices purchased, as well as remaining in communication with the client.
After the necessary financial and business information has been collected and
reviewed, if the Company intends to enter into a factoring arrangement with the
proposed client, a written proposal of the terms of the proposed factoring
arrangement is prepared. The proposal includes, among other things, (i) the
amount of the factoring fee to be charged, (ii) anticipated accounts receivable
purchases to be generated by the client and (iii) the interest rate to be
charged on advances, if applicable. All new factoring arrangements are approved
by the Company's President and the respective regional manager. If the factoring
arrangement provides for advances to the client against purchased receivables,
additional approvals are required. See "Client Advances."
Each of the Company's clients is serviced by a team of Company personnel.
Clients are assigned to an account executive and credit officer in one of the
Company's four regional offices, and an operations officer in the Florida
executive office. The account executive is the client's primary contact with the
Company. The account executive is responsible for managing the assigned client
relationship, including approval of client advances, and obtaining necessary
documentation prior to an advance to the client. Requests for customer credit
approvals or increases in customer credit lines are directed to the credit
officer. The operations officer is responsible for the processing of all
receivables, including application of payments and invoice handling. In
addition, the Company's senior management team will often meet with clients to
discuss problems, if any, and monitor client satisfaction.
Pursuant to the Company's Loan and Credit Policy Manual, the Company follows
certain credit guidelines. Prior to the establishment of a credit line for a
client's customer, the Company conducts a credit check on the customer and
obtains a credit rating for the customer. The Company takes into consideration
the amount of the requested credit line, the customer's credit rating and
satisfaction of internal written guidelines in determining whether to establish
a credit line for the customer. The Company's internal written guidelines
contain certain formulas used by the Company in determining whether to establish
a credit line, and which take into account ratings scales utilized by various
credit rating agencies, as well as the length of time a customer has been in
business. If these formulas are not satisfied, additional information is
obtained and reviewed by the Company, including bank references, trade surveys
and financial statements of the customer. The Company may also conduct on-site
visits of the customer's business and interview the customer's management team.
All credit lines over $250,000 require either executive officer or combined
executive officer and director approval, depending on the amount of the credit
line. The Company may also assume the credit risk of a single credit transaction
for a client's customer. Generally, the same credit check procedures are
followed in such transactions.
The Company assumes the credit risk only on receivables for which written
approval has been provided by the Company. The Company also reserves the right
to withdraw a credit approval if the Company believes a customer's credit
standing has become impaired before actual delivery of merchandise or rendering
of services by the Company's client. Credit
9
<PAGE>
approvals are limited to the specific terms provided by the client to the
Company and can be withdrawn if the terms of the sale are changed. If a dispute
relating to goods or services rendered by the client to its customer arises, the
credit approval on the receivable is negated. If sales are made by the client to
a customer without credit approval or in excess of any credit approval, any
payments made by such customer on outstanding receivables will be applied first
to outstanding credit-approved receivables on the books of the Company.
The Company monitors whether receivables are paid according to their terms.
Daily aging reports are generated by the Company and reviewed by the regional
credit department staff and the account executive responsible for the account.
If payment is not received on its due date, follow-up contact is made with the
client's customer in accordance with written procedures established by the
Company. During this follow-up contact, the Company seeks to determine the cause
of the delay in order to take appropriate action at an early stage. The status
of overdue accounts and other relevant information is reported to each client
monthly, or sooner, if appropriate. The Company's average accounts receivables
turnover rate was 53 days for 1995, 52 days for 1996 and 55 days for 1997. The
Company may receive payments from time to time that it is unable to match
against specific outstanding invoices. The Company generally notifies the payor
when unidentifiable payments or portions thereof are received. If the payor does
not respond within 90 days, the Company generally records the unallocated
credits as income. The Company maintains an allowance for unallocated credits
recorded as income which may be subsequently repaid based upon its historical
experience. This allowance is also available for amounts that may be payable to
governmental authorities for property that is abandoned. There can be no
assurance that the allowance will be sufficient to meet all such future claims.
The Company periodically uses the services of independent collection agencies to
assist it in the collection of accounts receivable more than 90 days past due.
The Company's policy is to charge-off accounts receivable once they have been
placed with a collection agency. Collection agencies charge, on the average, a
20% fee of the delinquent account collected. On occasion, the Company initiates
litigation to recover payment of the receivable.
As security for the accounts receivable purchased, the Company obtains blanket
first liens on a client's receivables, and may also obtain personal guarantees
and liens (which may be subordinate to other liens) on other assets of the
client, including cash, tax refunds, inventory, real estate and equipment. In
addition, the Company arranges for periodic reviews of public records in order
to monitor the filing of any subsequent liens which could impair the value of
receivables in which the Company has an interest.
Client Advances
Prior to making any advances to a factoring or asset based lending client on
accounts receivable, the Company will conduct additional business and financial
analysis on the client. The typical written credit analysis sets forth (i) the
purpose for the advance, (ii) security to be provided for the advance, such as
personal guarantees from principals of the client and subordination
arrangements, (iii) the rate structure to be charged and projected income to be
earned by the Company, (iv) prior experience with the client if the client has
previously had a relationship with the Company or Union Planters Bank of
Florida, (v) the client's history, organization and operations, (vi) bank and
trade information on the client, (vii) financial information of the client and
(viii) future plans and projections of the client. In addition to the written
credit analysis, the account executive assigned to the account reviews a
factoring status report on the client, which sets forth the client's monthly
sales and accounts receivable volume, along with collection information on the
receivables.
Based upon a review of the credit analysis and factoring status report, the
account executive will make a recommendation as to whether or not the advance is
reasonable in relation to the value of the client's outstanding receivables. All
advances against purchased receivables must be approved by no less than four
officers of the Company, two of whom are generally the account executive and
head of client administration from the originating office and two in the
Company's executive offices in Florida, providing another level of control in
the advance process.
Outstanding advances to clients are reviewed on a daily basis and on a monthly
basis at monthly portfolio meetings attended by the President, or his designee,
and the regional managers (or their designees). At the monthly portfolio
meetings, senior management evaluates the Company's outstanding advances and
receivables in order to identify potential problems. The meetings also allow
senior management to evaluate the performance of their account executives, who
have the responsibility for managing their client's outstanding advances and
receivables.
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CREDIT LOSS POLICY AND EXPERIENCE
The Company regularly reviews its outstanding accounts receivable and other
extensions of credit, such as advances to clients, to determine the adequacy of
its allowance for credit losses. Factors such as the level of related credit
balances of clients and the impact of economic conditions on the
creditworthiness of the Company's clients and the client's customers are given
significant consideration in determining the adequacy of the Company's allowance
for credit losses. The Company's 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 its general
reserve on loans originated by the asset-based lending and healthcare divisions
to 1% of loans outstanding. 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 increased to
0.22% in 1997 from 0.14% in 1996. The 1997 provision includes a $1 million
specific reserve for possible loss due to the bankruptcy of a national retail
chain and a $1.2 million increase in general reserves for healthcare and asset
based loans. The provision for credit losses as a percentage of average
receivables and the provision for credit losses as a percentage of average funds
employed increased to 1.23% and 1.85%, respectively, in 1997 from 0.85% and
1.31%, respectively, in 1996.
Net charge-offs as a percentage of factored sales ranged from 0.05% to 0.30% in
the 1991-1997 period, reflecting normal credit losses consistent with historical
experience. Net charge-offs as a percentage of factored sales was 0.14% in 1996
and 0.13% in 1997. During the period 1992 to 1997, net charge-offs as a
percentage of average receivables and net charge-offs as a percentage of average
funds employed reflected normal credit losses consistent with historical
experience, ranging from 0.33% to 1.90% and 0.49% to 2.92%, respectively. Net
charge-offs as a percentage of average receivables and net charge-offs as a
percentage of average funds employed decreased to 0.33% and 0.49%, respectively,
in 1995, primarily as a result of higher receivable recoveries and fewer
bankruptcies affecting the Company in that year. Net charge-offs as a percentage
of average receivables and net charge-offs as a percentage of average funds
employed decreased to 0.70% and 1.05%, respectively, in 1997.
At the time a receivable is purchased an anticipated payment date is recorded
and is subsequently used to identify past due receivables. Receivables which
have been identified as past due will not be written-off if, in the opinion of
management, collection from the customer, client or realization on the
collateral held, if any, is likely. As of December 31, 1997 and 1996,
approximately $10.7 million and $2.3 million, respectively, of credit-approved
receivables, representing 3.3% and 0.9%, respectively, of outstanding
credit-approved receivables as of such date, were 90 days or more past the
payment date anticipated at the time of purchase and had not been written-off.
Three million dollars of the increase of $10 million represented the amounts due
from the retail chain referred to above, for which there was a $1 million
specific reserve.
Accrual of interest income is discontinued on advances to clients when the loan
balance, including interest, is considered impaired and exceeds the estimated
value of the collateral securing the advance. At December 31, 1997, 1996 and
1995, the Company had discontinued its accrual of interest income on
approximately $430,000, $660,000, and $2.2 million, respectively, of client
advances. In addition, at December 31, 1997, 1996 and 1995, approximately
$309,000, $30,000 and $134,000, respectively, of such client advances were
deemed to be uncollectible by the Company.
The credit and market risks associated with guaranteeing commercial letters of
credit and standby letters of credit and issuing financial guarantees are
generally managed in conjunction with the Company's accounts receivable
collection activities and are subject to normal credit policies, financial
controls and risk limiting and monitoring procedures. Commercial letters of
credit are generally for a short commitment period. The risk involved in
guaranteeing standby letters of credit and issuing financial guarantees is
similar to the risk involved in advancing funds to clients. At December 31, 1997
and 1996, the Company had approximately $48.7 million and $29.3 million,
respectively, of letters of credit and financial guarantees outstanding.
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HEALTHCARE FINANCING
The Company provides healthcare asset based lending, financing and factoring
services to hospitals, nursing homes, doctor groups, home treatment centers,
home healthcare provider services, temporary nursing or staffing services and
providers of durable medical equipment through its Capital Healthcare Financing
division. Healthcare businesses financed by the Company generally have annual
net sales of at least $1 million or are anticipated to grow to that size
shortly. Financing is provided as to bona fide and medically necessary goods or
services that have been provided to a patient for which a receivable is due with
no contingencies. For transactions to be financeable, fees claimed by the client
are to be reasonable and customary and the patient must be covered by a third
party obligor, although, in limited circumstances, the Company will consider
financing private pay receivables if they represent a small percentage of
overall receivables. The Company does not generally finance workers'
compensation claims or medical/legal (personal injury), dental and chiropractic
claims. At December 31, 1997 and 1996, the Company had approximately $18.3
million and $22.7 million, respectively, in healthcare factored receivables
outstanding, in addition to approximately $41.4 million and $9.9 million of
healthcare asset-based loans outstanding at December 31, 1997 and December 31,
1996, respectively. Approved third party payors include Medicare, Medicaid,
preferred provider organizations, private insurance carriers, Blue Cross/ Blue
Shield and corporate employee coverage for self-administered healthcare plans.
The minimum term for a healthcare financing contract is one year. Fees include
origination and due diligence fees of between 1% and 5% of the initial line and
a monthly monitoring fee 0% to 2%. The annual interest rate on advances ranges
from approximately 2% over prime to 4% over prime. Advances may be up to 85% of
the net receivable amount from the financed receivables. The client usually pays
for periodic audits and legal expenses to close the transaction.
In order to obtain healthcare financing from the Company, generally the same
steps must be followed as with the Company's factoring clients. A business plan,
current financial statements, receivables aging, resumes of the principals and
references are generally required. Once accepted, clients must file claims with
third party payors on the appropriate forms and assign such claims to the
Company. The Company posts the claim to its monitoring system and, thereafter,
closely monitors the collection by the client on a daily basis. In the case of
Medicare and Medicaid claims that must be paid directly to the provider of the
service, the Company, the client and the client's bank enter into an agreement
pursuant to which payments on account of such claims are made directly to a
lockbox account to which the Company and the client have access and thereafter,
are immediately swept out of such account into the Company's account. In either
case, the Company provides credit monitoring services as well as periodic
accountings to the client. Advances are based upon claims assigned to the
Company by the client.
The benefits of healthcare financing to the Company's clients are similar to the
benefits obtained by the Company's factoring clients. Healthcare clients
maximize their ability to monitor patient accounts. In addition, they receive
immediate cash for accounts receivable which can be injected into the business
to, among other things, increase purchasing power, improve and increase patient
services or reduce expenses and increase patient revenues.
MANAGEMENT INFORMATION SYSTEMS
Factoring is a systems intensive business because of the high volume of
transactions required to be entered and the matching with such transactions of
cash payments, chargebacks and other adjustments. The Company uses an IBM AS400
computer and developed software tailored to the requirements of the Company's
accounting, receivables collection, monitoring and oversight functions. The
system permits the Company to generate payment histories and analyses with
respect to its clients' customers, to generate daily aging of accounts
receivable reports, to accumulate accounting information and other data useful
for credit analysis, to produce information used in marketing and to respond to
account and management inquiries. The Company continues to add enhancement and
updates to its management information systems, including hardware. The Company
has the hardware capacity to handle the Company's anticipated transaction volume
increases.
In 1995, the Company acquired and installed a software package to administer and
process transactions of the clients of its healthcare division and in 1997 it
acquired and installed a software package to manage collateral and loan
transactions of its asset based loans.
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COMPETITION
The Company competes with numerous banks, financial institutions, commercial
finance companies and other factoring companies with greater financial and other
resources than the Company. According to a recent survey in 1997, the four
largest factors in the United States, BNY Financial Corp., CIT Group,
NationsBanc Commercial and Heller Financial, control approximately 63% of the
factored sales volume in the United States, as compared to 5% of United States
factored sales volume for the Company. The Company competes with the largest
national factors, as well as other national factors and also competes with other
regional factoring companies, all of whom target similar clients as the Company
and most of whom have operated in the markets serviced by the Company for a
longer period of time than the Company. Certain factors compete with the Company
for certain types of accounts. For example, one factor may provide services only
to textile mills, while another may provide services only to furniture
manufacturers. The Company competes primarily on the basis of service, not
price, even with respect to higher volume clients to whom the Company may
provide lower fee structures than to the Company's typical clients. The Company
generally does not seek to compete when price is the sole or primary criterion
for potential clients' selection of a factor. Future competition is expected to
be based primarily on the quality and level of service provided and the ability
to respond to the changing credit environment and demands of many factoring
clients. The Company believes that it is well-positioned to respond to these
needs.
REGULATION
As a result of the Company's ownership by Union Planters Bank of Florida
(formerly Capital Bank), which is owned by Union Planters Corporation,
(successor by merger with Capital Bancorp, parent of Capital Bank, effective
December 31, 1997) the Company is affected by certain regulations normally
applicable only to banking institutions. The Company is subject to periodic
examination by representatives of the Florida Department of Banking and Finance,
the Federal Deposit Insurance Corporation ("FDIC") and the Federal Reserve
Board. Additionally, because the Company's immediate parent, Union Planters Bank
of Florida, is a Florida-chartered, FDIC-insured bank, the business activities
of the Company are generally limited under applicable FDIC regulations to those
activities that are permissible for national banks. Although factoring and the
other businesses in which the Company currently engages are authorized
activities for national banks, there can be no assurance that business
opportunities the Company might wish to pursue in the future will be authorized
activities for Union Planters Bank of Florida and therefore might be unavailable
to the Company because of its regulated status as a subsidiary of Union Planters
Bank of Florida.
Federal bank regulations require the Company's parent, Union Planters Bank of
Florida, to meet two capital-to-assets ratios. The first such ratio, referred to
as the "risk-based" capital test, assigns a weight (or percentage) to assets by
categories of risk established by the federal regulators. Under this test, Union
Planters Bank of Florida's "tier one capital" (consisting essentially of their
common stockholders' equity and minority interests, if applicable) is required
to equal at least 4% of their risk-weighted assets. Also as part of the
"risk-based" capital test, all of Union Planters Bank of Florida capital (tier
one or otherwise) must equal or exceed 8% of aggregate risk-weighted assets.
The second ratio is referred to as the "leverage" test. Under this test, Union
Planters Bank of Florida must maintain tier one capital equal to or exceeding 3%
of total assets, or such higher level as may be imposed by federal regulators.
The regulators have publicly indicated that a bank should, in practice, maintain
a leveraged capital-to-assets ratio of at least 1% to 2% above the 3% minimum.
The following table sets forth Union Planters Bank of Florida's regulatory
capital ratios as of December 31, 1997 and 1996:
UNION PLANTERS BANK OF FLORIDA
12/31/97 12/31/96
------------ ---------
Tier One Capital Ratio 9.12% 10.84%
Total Capital Ratio 10.37% 11.75%
Leverage Ratio 7.48% 8.38%
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EMPLOYEES
At December 31, 1997, the Company had 307 full-time employees, including 73 in
its Boca Raton Headquarters, 82 in its Fort Lauderdale office, 64 in its
California office, 46 in its New York office, 34 in its North Carolina office
and 8 in its Georgia Office. None of the Company's employees are covered by a
collective bargaining agreement and the Company considers its employee relations
to be good.
EXECUTIVE OFFICERS
The executive officers of Holding and Factors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- --------------------------
<S> <C> <C>
John W. Kiefer.................... 51 President, Chief Executive Officer and Director
Stephen J. Donohue................ 53 Executive Vice President-New York Regional Manager
James L. Morrison................. 54 Executive Vice President-California Regional Manager
Dennis A. McDermott............... 47 Executive Vice President-Chief Financial Officer
Michael J. Sullivan............... 49 Senior Vice President-North Carolina Regional Manager
John B. Apgar..................... 44 Senior Vice President-Healthcare
Javier J. Holtz................... 37 Executive Vice President and Chairman of the Board
</TABLE>
Mr. Kiefer has served as the Company's President and Chief Executive Officer and
as a director since April 1987. Mr. Kiefer had also served as a Senior Vice
President of Bancorp since January 1987 until December 1997 and he has served
as director of the Bank since October 1992. From 1984 to 1986, Mr. Kiefer served
as Senior Vice President-Regional Manager of Barclays American/Commercial Inc.
and served as Vice President from 1981 to 1984.
Mr. Donohue has served as the Company's New York Regional Manager since April
1990, and was promoted from a Senior Vice President to an Executive Vice
President in January 1992. From 1970 to April 1990, Mr. Donohue was employed by
Bankers Trust Factors in various positions, including Manager of Client
Portfolio.
Mr. Morrison has served as the Company's California Regional Manager since
August 1989, and was promoted from a Senior Vice President to an Executive Vice
President in January 1992. From 1984 to August 1989, Mr. Morrison served as Vice
President-Regional Manager of the Los Angeles office of NatWest Commercial
Services, Inc.
Mr. McDermott has served as the Company's Senior Vice President-Chief Financial
Officer since July 1991 and was promoted to Executive Vice President in December
1997. Prior to joining the Company, Mr. McDermott served as Chief Accounting
Officer from April 1990 to June 1991 at the request of the Resolution Trust
Company with several troubled financial institutions, including AmeriFirst Bank,
American Pioneer Savings Bank, and CenTrust Bank. Mr. McDermott served as Vice
President-Chief Financial Officer of Ambassador Financial Group, Inc., a savings
and loan holding company, from July 1988 to March 1990, and as Executive Vice
President-Chief Financial Officer of Crossland Savings from September 1983 to
June 1988.
Mr. Sullivan has served as the Company's Senior Vice President-North Carolina
Regional Manager since March 1995. From August 1994 to February 1995, Mr.
Sullivan served as the Head of Business Development for the CIT Group, the
successor to Barclays Commercial Corporation. From November 1981 to February
1994, Mr. Sullivan served as Senior Vice President-Regional Executive of
Barclays Commercial Corporation and, from March 1994 to August 1994, Mr.
Sullivan served in the same capacity with the CIT Group. Prior to that and from
June 1975 to December 1980, Mr. Sullivan was International Credit Director of
the B.F. Goodrich Company. Mr. Sullivan performed independent consulting
services from December 1980 to November 1981.
Mr. Apgar has served as the Company's Senior Vice President-Healthcare since
June 1994. From April 1992 to April 1993, Mr. Apgar was the head of the new
business segment of Tower Financial Corporation. In April 1993, Tower Financial
Corporation filed a petition seeking relief under the United States Bankruptcy
Code. In May 1993, Mr. Apgar was appointed Senior Vice President-Client
Relations-Healthcare Division of Tower Financial Corporation by the trustee
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<PAGE>
appointed to administer Tower Financial's bankruptcy estate and served in such
position until April 1994. From July 1990 to March 1992, Mr. Apgar was Vice
President-New Business of BancBoston Financial Company, a Trust of Bank of
Boston.
Mr. Javier Holtz has served as a director of the Company since August 1987 and
as Executive Vice President since November 1994. Mr. Holtz was appointed
Chairman of the Board of the Company in October 1994. In addition, Mr. Holtz has
been employed by the Bank since 1983, most recently as an Executive Vice
President. Mr. Holtz had been a director of the Bank since 1988. Mr. Holtz had
also served as Senior Vice President of Bancorp from January 1990 until December
1997. Mr. Holtz is Chairman of the Board of Capital Bank, N.A., Rockville,
Maryland. Mr. Holtz is the brother of Daniel Holtz, a director of the Company
who served as the Chairman of the Board, President and Chief Executive
Officer of each of Bancorp and Capital Bank until December 1997.
ITEM 2. PROPERTIES
The Company provides services to its clients through offices located in Boca
Raton and Fort Lauderdale, Florida; Los Angeles, California; New York City, New
York; Charlotte, North Carolina; and Atlanta, Georgia. The Company acquired the
office building located in Fort Lauderdale, Florida from an affiliate in
December 1990. In October 1996, the Company entered into a ten-year lease for
approximately 14,200 square feet of office space in Boca Raton. The lease
provides for annual base rent of approximately $312,000 for the first five years
and $341,000 for the remaining term. The Company's corporate headquarters and
the Florida regional office re-located to the Boca Raton office in May 1997 and
the Fort Lauderdale office now serves as the Company's operations center. The
Company leases approximately 14,000 square feet of office space in Los Angeles
pursuant to a ten-year lease that terminates in September 2005, and provides for
annual base rental payments of approximately $218,600 through August 2000 and
$257,500 during the remaining term of the lease. The Company leases
approximately 12,300 square feet of office space in New York pursuant to a
five-year sublease that terminates in December 1999 and provides for annual base
rental payments of approximately $368,400 during the remaining term of the
lease. The Company leases approximately 9,800 square feet of office space in
North Carolina pursuant to a five year lease that terminates in April 2000 and
provides for annual base rental payments of approximately $196,430. In March
1997, the Company signed a five-year lease for 3,000 square feet of office space
in Atlanta, Georgia. The annual base rental payment for the Atlanta office
equals $57,750.
TRADEMARKS, SERVICE MARKS AND LICENSES
In 1991, Capital Bancorp ("Bancorp"), which was merged into Union Planters
Corporation on December 31, 1997, registered the name "Capital Factors" with the
United States Patent and Trademark Office. Since the registration of such
service mark, Bancorp authorized the Company's uninterrupted and unrestricted
use of the name "Capital Factors." In 1996, Bancorp made application to register
the name "Capital Business Credit" with the United States Patent and Trademark
Office. UPC has authorized the Company's uninterrupted and unrestricted use of
the name "Capital Business Credit". UPC and the Company are parties to a license
agreement dated October 28, 1996. No agreement regarding the Company's use of
such service marks exists between UPC and the Company and no fee is paid by the
Company in connection with such uses. The "Capital Factors" service mark is
effective until December 2001, unless sooner terminated as provided by law. In
addition, the Company has recently applied for certain other service marks to be
used by it in connection with its business operations. The Company's management
does not believe that its business is dependent upon the use of any particular
service mark, trademark, license or similar property.
ITEM 3. 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.
BANCORP AND CAPITAL BANK
The matters entitled NATHAN J. ESFORMES, STANLEY I. WORTON, M.D., AND LEONARD
WEIN, AS INDIVIDUAL SHAREHOLDERS AND ON BEHALF OF ALL OTHER SHAREHOLDERS OF
CAPITAL BANCORP V. ABEL HOLTZ, FANA HOLTZ, DANIEL M. HOLTZ, JAVIER J. HOLTZ,
CAPITAL BANK AND CAPITAL BANCORP. Circuit Court for the 11th Judicial District
in and for Miami-Dade County, Florida (Case No. 95-02515) and STANLEY I. WORTON,
M.D., NATHAN J. ESFORMES V. ABEL HOLTZ, FANA HOLTZ, DANIEL HOLTZ AND CAPITAL
BANKCORP. Circuit Court for the 11th Judicial District in and for Miami-Dade
County, Florida (Case No. 95-02520) were dismissed in the fourth quarter of 1997
with no adverst effect to the Company or Capital Factors. In addition, the
regulatory matter involving the change-in-control of the Company's majority
shareholder, Union Planters Bank of Florida (f/k/a Capital Bank) was also
resolved in the fourth quarter of 1997 when Capital Bancorp, the former parent
company of Union Planters Bank of Florida, merged with and into a wholly owned
subsidiary of Union Planters Corporation. The Company and Capital Factors were
not parties to any of the above proceedings and no liability was incurred on
behalf of the Company or Capital Factors in the resolution thereof.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended December 31, 1997.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading Market
Effective July 11, 1996, Capital Factors Holding, Inc.'s Common Stock was listed
for trading on the Nasdaq National Market under the symbol "CAPF." Prior to that
date, there was no established trading market for the Common Stock. The high and
low sales prices of the Company's Common Stock since the commencement of public
trading are set forth below for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30,1997 DECEMBER 31, 1997
---------------- -------------- ------------------- --------------------
<S> <C> <C> <C> <C>
High $15.38 $17.75 $19.38 $19.25
Low $12.00 $13.25 $16.25 $16.00
Close $14.38 $17.50 $18.25 $19.00
</TABLE>
SEPTEMBER 30, 1996 DECEMBER 31, 1996
---------------------- -------------------
High $10.38 $13.25
Low $ 8.25 $ 9.88
Close $10.25 $12.50
As of March 17, 1998, there were approximately 500 holders of record, including
individual participants in security position listings of the Company's Common
Stock and the closing price as quoted on the Nadsaq National Market was $17.75.
Dividends
The Company has not paid any dividends on the Common Stock as of December 31,
1997. The Company presently intends to retain all future earnings for the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the payment
of cash dividends will depend on the Company's results of operations, financial
condition and capital requirements, and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other matters which the Company's Board
of Directors may consider.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Summary Consolidated Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Factoring fees $ 30,140 $ 26,066 $ 19,519 $ 17,371 $ 15,376
Interest income 48,192 35,835 28,211 17,628 13,511
Interest expense (27,587) (20,403) (16,361) (10,329) (7,842)
----------- ----------- ----------- ----------- -----------
Net interest income 20,605 15,432 11,850 7,299 5,669
Letter of credit and other fees 4,260 3,099 2,040 1,238 1,128
Other income 2,099 1,708 1,849 1,541 1,303
----------- ----------- ----------- ----------- -----------
Operating revenues 57,104 46,305 35,258 27,449 23,476
Provision for credit losses 7,250 3,750 2,235 2,235 2,645
Operating expenses 30,253 23,516 18,457 14,137 13,072
----------- ----------- ----------- ----------- -----------
Total expenses 37,503 27,266 20,692 16,372 15,717
Income before income taxes(1) 19,601 19,039 14,566 11,077 7,759
Net income 11,662 11,115 8,693 6,092 4,305
Basic earnings per share(2) $ 0.95 $ 1.01 $ 0.87 $ 0.61 $ 0.43
Diluted earnings per share(2) $ 0.93 $ 1.00 $ 0.87 $ 0.61 $ 0.43
Operating Ratios and Other
Data(3):
Factored sales $ 3,252,686 $ 2,651,442 $ 2,001,364 $ 1,536,960 $ 1,326,802
Factoring fees to factored sales 0.93% 0.98% 0.98% 1.13% 1.16%
Net interest income to factored
sales 0.63% 0.58% 0.59% 0.47% 0.43%
Letter of credit and other fees to
factored sales 0.14% 0.12% 0.10% 0.08% 0.09%
Other income to factored sales 0.06% 0.06% 0.09% 0.10% 0.09%
----------- ----------- ----------- ----------- -----------
Operating revenues to factored
sales 1.76% 1.74% 1.76% 1.79% 1.77%
Provision for credit losses to
factored sales 0.22% 0.14% 0.11% 0.15% 0.20%
Operating expenses to factored
sales 0.93% 0.89% 0.92% 0.92% 0.99%
----------- ----------- ----------- ----------- -----------
Total expenses to factored sales 1.15% 1.03% 1.03% 1.07% 1.18%
Income before income taxes to
factored sales 0.60% 0.72% 0.73% 0.72% 0.58%
Return on equity(4) 17.18% 24.01% 30.20% 28.80% 26.57%
Return on assets(4) 1.84% 2.36% 2.71% 2.35% 1.99%
Average funds employed(5) $ 391,000 $ 286,200 $ 210,900 $ 153,600 $ 131,800
Net interest income to average
funds 5.27% 5.39% 5.62% 4.75% 4.30%
employed
Net charge-offs to factored sales
volume 0.13% 0.14% 0.05% 0.17% 0.20%
Accounts receivable turnover in
days(6) 55 52 53 53 52
Average number of employees 295 242 193 162 153
Avg. factored sales per employee $ 11,026 $ 10,956 $ 10,370 $ 9,487 $ 8,672
</TABLE>
18
<PAGE>
DECEMBER 31,
Balance Sheet Data: 1997 1996
------------- --------------
Receivables, net $ 691,734 $ 485,548
Total assets 756,577 530,567
Due to factoring clients 234,745 191,489
Borrowings 440,354 271,031
Due to Affiliates and other
liabilities 7,296 5,959
Shareholders' equity 74,182 62,088
(1) The results of operations of the Company are included in the consolidated
Federal income tax returns filed by Union Planters Corporation, the parent of
Union Planters Bank of Florida. Union Planters Bank of Florida, the Company's
majority shareholder, allocates income taxes to the Company calculated on a
separate return basis.
(2) Per share amounts have been retroactively restated to reflect the change in
presentation of earnings per share as discussed in Note 13 to the consolidated
financial statements.
(3) For purposes of the ratios and data above for 1994 and 1995, factored sales
include certain receivables which are pledged as collateral for those
asset-based loans for which the Company provides factoring-type services.
(4) Computed using average monthly balance
(5) Computed using average monthly balances of funds employed (receivables less
amounts due to factoring clients).
(6) Computed by dividing 365 by the quotient of (i) factored sales volume for
the periods indicated and (ii) the average monthly accounts receivable balance
for the periods indicated.
19
<PAGE>
ITEM 7 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
Bank whose parent is 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. ("Funding")
and Capital TempFunds, Inc. ("TempFunds"). 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-K contains certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance and the Company's operations,
performance, financial condition, growth and strategies. For this purpose, any
statements contained in the Form 10-K 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, and the Bank, 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 accounts
receivable and inventory) to the Company. Upon request of the client, the
Company may advance funds to the client as a loan in an amount based upon the
eligible collateral. When funds are advanced to a client, a loan receivable
balance is created, and cash is disbursed. Although the Company loans funds to
the client based on eligible collateral, the Company provides no credit
protection and, accordingly, does not assume the risk of loss from a client's
customers' inability to pay, although the Company may actually suffer a loss if
all sources of repayment fail, including other collateral and guarantees, if
any. In connection with asset-based loans, instead of a factoring fee, the
Company earns a facility fee. Both factored advances and asset-based loans bear
interest at a rate tied to the prime rate.
The Company 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
20
<PAGE>
large national or regional department store chains or specialty retailers. At
December 31, 1997, the largest amount due from any one customer, a national
department store chain, was approximately $35.4 million.
The Company's factored sales volume can be affected in several ways, including
new clients, client retention or loss 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 close to 40% of its annual factored sales
volume during this 4-month period in 1995, 1996, and 1997.
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.
Set forth below are those ratios and statistics utilized by management in
monitoring asset quality for the fiscal years ended December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(dollars in 000's)
1997 1996 1995
-------------- ------------- -----------
<S> <C> <C> <C>
Provision for credit losses $7,250 $ 3,750 $2,235
Charge-offs net of recoveries 4,118 3,837 1,028
Allowance for credit losses-specific 2,052 531 1,203
Allowance for credit losses-general 4,073 2,462 1,778
-------------- -------------- ------------
Total allowance for credit losses $6,125 $ 2,993 $2,981
Accounts receivable turnover in days 55 52 53
Accounts receivable past due more than 60
days as a percentage of factored receivables 10.24% 7.96% 3.49%
Accounts receivable past due more than 90
days as a percentage of factored receivables 6.69% 4.09% 2.37%
Credit-approved accounts receivable past due
more than 60 days as a percentage of
credit approved receivables (1) 6.39% 2.36% 4.71%
Credit-approved accounts receivable past due
more than 90 days as a percentage of
credit approved receivables (1) 3.28% 0.86% 2.79%
Net charge-offs to factored sales 0.13% 0.14% 0.05%
21
<PAGE>
Average receivables $591,328 $438,815 $312,124
Provision for credit losses as a percentage
of factored sales 0.22% 0.14% 0.11%
Provision for credit losses as a percentage
of average receivables 1.23% 0.85% 0.72%
Net charge-offs as a percentage of average
receivables 0.70% 0.87% 0.33%
Non-accruing advances $430 $660 $2,184
Non-accruing advances as a percentage of
receivables 0.06% 0.13% 0.60%
Average funds employed (2) $391,000 $286,200 $210,900
Provision for credit losses as a percentage
of average funds employed (2)(3) 1.85% 1.31% 1.06%
Net charge-offs as a percentage of average
funds employed (2)(4) 1.05% 1.34% 0.49%
Non-accruing advances as a percentage of
funds employed (2)(5) 0.09% 0.22% 0.94%
<FN>
- -----------------------------
(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.
(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.
</FN>
</TABLE>
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 its general
reserve on loans originated by the asset-based lending and healthcare divisions
to 1% of loans outstanding. 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 increased to
0.22% for the fiscal year ended December 31, 1997 from 0.14% for the fiscal year
ended December 31, 1996. The 1997 provision includes a $1 million specific
reserve for possible loss due to the bankruptcy of a national retail chain and a
$1.2 million increase in general reserves for healthcare and asset based loans.
The provision for credit losses as a percentage of average receivables and the
provision for credit losses as a percentage of average funds employed increased
to 1.23% and 1.85%, respectively, for the fiscal year ended December 31, 1997,
from 0.85% and 1.31%, respectively, for the fiscal year ended December 31, 1996.
Net charge-offs as a percentage of factored sales decreased from 0.14% for the
fiscal year ended December 31, 1996 to 0.13% for the fiscal year ended December
31, 1997. Charge offs included $1,826,000 in client related bad debts and
$2,771,000 in customer bad debts. In 1996, the Company charged off $1.1 million
in customer bad debts, including a charge-off of $600,000 related to the
bankruptcy of a large Northeastern regional chain store customer. Net
charge-offs
22
<PAGE>
as a percentage of average receivables and net charge-offs as a percentage of
average funds employed decreased 0.17% and 0.29%, respectively, for the fiscal
year ended December 31, 1997 as compared to the same period in 1996. Net
charge-offs as a percentage of factored sales ranged from 0.05% to 0.30% in the
1992-1997 period.
Non-accruing advances as a percentage of funds employed have historically
remained below 1.00% and at December 31, 1997 and December 31, 1996 were 0.09%
and 0.22%, respectively. Non-accruing advances as a percentage of receivables
was 0.06% at December 31, 1997 and 0.13% at December 31, 1996. 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 6.39% and 3.28%, respectively, at December 31, 1997 as
compared to 2.36% and 0.86%, respectively, at December 31, 1996. The increase in
the 60 and 90 day delinquency ratios is primarily related to certain clients who
have experienced operational problems with EDI transmissions with some major
retail chain stores which has led to an extended payment cycle on such
receivables. The delinquency ratios were also adversely affected by the
bankruptcy of a large Midwestern chain store, for which the Company has provided
reserves to cover potential losses after certain first loss deductible
arrangements with its clients. 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 10.24% and
6.69%, respectively, for the fiscal year ended December 31, 1997 as compared to
7.96% and 4.09%, respectively, for the fiscal year ended December 31, 1997.
FINANCIAL CONDITION - FISCAL YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO
DECEMBER 31, 1996
Total assets increased to $756.6 million at December 31, 1997 from $530.6
million at December 31, 1996. The $226 million increase was due primarily to a
$206.2 million increase in net receivables. Factored accounts receivables
increased $101.0 million primarily as a result of increased factored sales. The
Company's factored accounts receivable are due from clients' customers
geographically located throughout the United States, principally retailers,
manufacturers and distributors. Asset based loans, which represent loans
provided to clients principally collateralized by accounts receivable, increased
$82.8 million from $36.0 million at December 31, 1996 to $118.8 million at
December 31, 1997.
The increase in assets was principally funded by variable rate asset backed
certificates, the "Securitized Financings" and a $50 million revolving credit
facility with an unaffiliated bank. Outstanding debt under the Securitized
Financings increased to $275.0 million at December 31, 1997 from $175.0 million
at December 31, 1996 due to the Company's issuance and full funding of a fourth
series of variable rate asset-backed certificates (the "Variable Funding
Certificates"). 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 senior Variable Funding Certificates ($95.25 million) bear interest at LIBOR
plus 0.75% and the senior subordinated Variable Funding Certificates ($4.75
million) bear interest at LIBOR plus 1.50%, (6.73% and 7.48%, respectively), at
December 31, 1997. (See Liquidity and Capital Resources). At December 31, 1997
and December 31, 1996, the Company had $43.6 million and $15.9 million,
respectively, outstanding under its $50 million facility with an unaffiliated
bank, which bears interest at LIBOR plus 2.15%. This increase in this debt was
collateralized by increased asset-based loans and healthcare receivables.
Stockholders' equity increased approximately $12.1 million during 1997 primarily
as a result of net income earned by the Company.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1996.
Net income increased 4.9% to approximately $11.7 million for the fiscal year
ended December 31, 1997 from approximately $11.1 million for 1996. Operating
revenues (total revenues less interest expense) increased from approximately
$46.3 million for the fiscal year ended December 31, 1996 to approximately $57.1
million for 1997, a
23
<PAGE>
23.3% increase. These increases were primarily a result of a 22.7% increase in
the Company's factored sales volume from $2.7 billion in 1996 to $3.3 billion in
1997 and the resulting increase in interest income and factoring fees. The
factored sales volume increases were attributable to continued growth of the
Company's client base, in all four regional offices and asset-based lending.
Factoring fee income increased 15.6% to approximately $30.1 million for 1997
as compared to approximately $26.1 million for 1996 as a result of a 22.7%
increase in factored sales. Factoring fee income as a percentage of factored
sales for the fiscal years decreased from .98% in 1996 to 0.93% in 1997. 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
Net interest income (interest income less interest expense) increased to
approximately $20.6 million for 1997 from approximately $15.4 million for the
comparable period in 1996, a 33.5% increase. The increase was principally as a
result of the $17.6 million of net proceeds raised by the Company's issuance of
common stock in July 1996 and the issuance of a fourth series of variable rate
asset-backed certificates on April 30, 1997 of which $95.25 million of the
senior Variable Funding Certificates and $4.75 million of the senior
subordinated Variable Funding Certificates were fully funded and outstanding at
December 31, 1997 bearing interest at LIBOR plus 0.75% and LIBOR plus 1.50%
respectively, (6.73% and 7.84%, respectively, at December 31, 1997). The
proceeds from both transactions were used to reduce the debt outstanding under a
debt facility with Union Planters Bank of Florida. The interest rate on the
Union Planters Bank of Florida facility was 8.5% at December 31, 1997.
Additionally, the Company entered into a $50.0 million revolving loan agreement
bearing interest at LIBOR plus 2.15% in April 1996 with an unaffiliated bank.
Average borrowings from the revolving loan during 1997 equaled approximately
$29.0 million and had an effective interest rate of 8.1% for the twelve month
period. Interest income also increased due to an increase of $104.8 million in
average outstanding funds employed for 1997 as compared to the prior year.
Letter of credit and other fee income increased to approximately $4.3 million
for 1997 from $3.1 million for 1996, a 37.5% increase. Letter of credit fees
increased approximately 44.4% or $498,000 and overadvance fees increased 104.4%
or $445,000 during the year. Overadvances represent loans to clients in excess
of the factored accounts receivable, substantially all of which are
collateralized by assets other than receivables. Other fee income, such as wire
and audit fees, increased by approximately $218,000 due to the increased
factoring volume and asset-based lending activities.
The provision for credit losses equaled $7.3 million for 1997 and $3.8 million
for 1996. The provision included $1.8 million related to client losses. In 1997
a $1.0 million charge-off was recorded for a single client bankruptcy filing
during 1997. The remainder of the 1997 provision relates to customer accounts
receivable, with net charge-offs of $4.1 million compared to $3.8 million in
1996 and the increase in the general reserves on loans originated by asset-based
lending and healthcare divisions. Provisions for credit losses as a percentage
of factored sales increased to 0.22% for 1997 as compared to 0.14% for the
comparable period in 1996, reflecting a slightly higher net charge-off rate for
the year (see "Monitoring Asset Quality and Credit Losses").
Operating expenses increased from $23.5 million for 1997 to $30.3 million for
1996. This $6.7 million or 28.7% increase is primarily the result of the move of
the Company's corporate headquarters to Boca Raton, expansion in the regional
offices and the healthcare division, start-up costs in the Atlanta office,
expenses related to Capital TempFunds, Inc. which was acquired in August 1996
and compensation expense related to the compensatory nature of the Company's
stock option plan. The compensation expense, which is tied to increases in the
market value of the Company's stock, was $1,040,000, ($0.05 per share) for 1997
as compared to $149,000 in 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net income increased 27.9% to approximately $11.1 million for 1996 as compared
to $8.7 million for 1995, due primarily to an increase in operating revenues
offset by an increase in the provision for credit losses and operating expenses.
Operating revenues (total revenues less interest expense) increased 31.3% to
approximately $46.3 million in 1996 from $35.3 million in 1995. These increases
were primarily a result of a 32.5% increase in the Company's factored sales
24
<PAGE>
volume from $2.0 billion for 1995 to $2.7 billion for 1996. This increase in
factored sales was attributable to the opening of the Charlotte office which
increased factored sales volume by $159.6 million year, combined with continued
growth of the Company's New York and California offices. The Company's
healthcare division, which commenced operations in September 1994, contributed
$124.5 million in factored sales, a 41.0% increase over its contribution in the
prior year. The New York office accounted for 43.1% of the Company's factored
sales volume in 1996, compared to 48.0% in 1995.
The Company experienced a 33.5% increase in factoring fee income for 1996 as
compared to 1995 as a result of a 32.5% increase in factored sales. Factoring
fee income as a percentage of factored sales remained flat at 0.98% in 1995 and
1996.
Net interest income (interest income less interest expense) increased to
approximately $15.4 million for 1996 from approximately $11.8 million for 1995,
a 30.2% increase, principally as a result of an increase of $75.3 million, or a
35.7% increase, in average outstanding funds employed for 1996 as compared to
1995. Additionally, the $17.6 million of net proceeds raised by the Company's
issuance of common stock in July 1996 which were used to reduce the debt
outstanding under the debt facility with Union Planters Bank of Florida
favorably impacted net interest income. Net interest income for 1996 also
benefited from interest expense reductions achieved through the issuance of
$50.0 million of additional Certificates under the Securitized Financings
agreement in July 1995, entering into a $40.0 million revolving loan agreement
with an unaffiliated bank in April 1996, and the issuance of $10.0 million in
subordinated notes in May 1996. Average borrowings from the revolving loan
during the year ended December 31, 1996 equaled approximately $17.1 million and
had an effective interest rate of 8.2% for the twelve month period. The $10.0
million notes bear interest at a fixed annual rate of 7.95%.
Letter of credit and other fee income increased to approximately $3.1 million
for 1996 from $2.0 million for 1995, a 51.9% increase. Letter of credit fees
increased approximately 32.7% or $277,000 during the year. Other fee income
includes fees charged for wires and client audits.
The provision for credit losses increased to $3.8 million for 1996 from $2.2
million for 1995. This increase is primarily attributable to an increase in
outstanding accounts receivable. The provisions for credit losses as a
percentage of factored sales for the year ended December 31, 1996 increased to
.14% as compared to .11% for the comparable period in 1995, reflecting a higher
net charge-off rate (see "Monitoring Asset Quality and Credit Losses").
Operating expenses (total expenses less interest expense) increased from $18.5
million for 1995 to $23.5 million for 1996. This $5.1 million or 27.4% increase
is primarily the result of opening the North Carolina regional office and
expansion of the existing regional offices and the healthcare division.
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 line
of credit with Union Planters Bank of Florida and a revolving credit facility
with an unaffiliated bank. Additionally, on January 2, 1998, the Company entered
into a $150 million unsecured line of credit with Union Planters Corporation.
The trust created in connection with the Securitized Financings (the "Trust")
issued three series of asset-backed certificates (each, a "Certificate"),
prior to 1997, 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% (7.23% at December 31, 1997, excluding annualized
transaction costs of 0.41%). Interest is payable monthly. 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
25
<PAGE>
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 material compliance with these and all other covenants contained
in the Securitized Financing agreements. The Company may continue to use the
Securitized Financings for funding, provided eligible advances are available for
transfer to the Trust.
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. 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 December 31, 1997, $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% (6.73% and 7.48%, respectively, at December 31, 1997, 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 December 31, 1997, the Company had transferred to the Trust
client advances aggregating nearly $323.8 million.
The Company utilizes a $50.0 million revolving credit facility with an
unaffiliated bank which closed in April 1996 for $40.0 million and subsequently
increased to $50.0 million in August 1997. 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 $55.6 million in 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 December 31,
1997, the Company had outstanding borrowings of $43.6 million. The indebtedness
under this revolving facility bears interest at a rate of LIBOR plus 2.15%
(8.09% at December 31, 1997), payable monthly. In February 1998, the revolving
credit facility 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%. 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 expects to utilize the full line and pledge
approximately $83.3 million in advances upon completion of the amendment to the
agreement.
The Company also has a $150.0 million unsecured revolving line of credit with
Union Planters Bank of Florida, pursuant to which the Company had outstanding
borrowings of approximately $111.8 million at December 31, 1997. Amounts
borrowed under this facility are subject to the Bank's overall statutory
limitation on investments in and advances to
26
<PAGE>
subsidiaries of 10% of assets. Based on the statutory limitation, the maximum
amount which could be outstanding under this line was approximately $151.4
million at December 31, 1997. Indebtedness under this facility bears interest at
the prime rate, as published in The Wall Street Journal ("WSJ") (8.5% at
December 31, 1997), is subject to annual review by the Bank each June and is due
on demand. The Facility has been in place since 1985 and historically has been
renewed for one-year periods in June of each year. Interest is payable monthly.
The Company generally has used the Facility with the Bank to make advances to
its clients. Effective January 15, 1998, the Bank decreased the interest rate on
the line of credit to 0.75% below WSJ prime, or 7.75%.
In May 1996, CF One sold $10 million of subordinated notes (the "CF One Notes"),
which are collateralized by subordinated certificates that were issued in
connection with the Company's Securitized Financings. The CF One Notes, which
are due and payable in July 2001, bear interest at an annual fixed rate of 7.95%
and are rated "BBB" by both Duff & Phelps Credit Rating Company and Fitch
Investors Services, Inc. The principal purpose for the issuance of the CF One
Notes was to allow CF One to obtain additional financing by taking advantage of
the favorable financing terms resulting from an increase in the value of the
subordinated certificates held by CF One which are collateralized by assets held
by the Trust. The increase in the value of the subordinated certificates held by
CF One was the result of the favorable performance of the receivables and other
assets held in the Trust's portfolio.
In January 1998, the Company entered into a $150.0 million unsecured revolving
line of credit with Union Planters Corporation. Indebtedness under this facility
will bear interest at 0.75% below the WSJ prime rate. 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 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
$700.8 million of accounts receivable outstanding at December 31, 1997,
approximately $294.3 million have balances exceeding $1 million. These customers
are primarily large national or regional department store chains or specialty
retailers. At December 31, 1997, the largest amount due from any one customer, a
national chain store, was approximately $35.4 million. In addition, the
Company's accounts receivable turned over in an average of 55 days during 1997
and 52 days during 1996.
The Company had no material commitments for capital expenditures as of December
31, 1997. 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.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material impact on its results
of operations.
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
27
<PAGE>
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.
Not withstanding 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 .
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
28
<TABLE>
<CAPTION>
ITEM 8. FINANCIAL STATEMENTS
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1997 1996
------------------ ------------------
<S> <C> <C>
ASSETS
Cash $41,253,904 $ 28,101,237
Restricted cash 10,134,375 6,562,500
Receivables 700,786,603 490,977,592
Unearned discounts (2,926,865) (2,436,301)
Allowance for credit losses (6,125,359) (2,993,534)
------------------ ------------------
Receivables, net 691,734,379 485,547,757
Property and equipment, net 4,471,397 3,095,157
Other assets 8,983,100 7,260,672
------------------ ------------------
TOTAL $756,577,155 $ 530,567,323
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to affiliates $ 145,570 $ 1,310,304
Capital Factors variable rate asset backed
certificates 275,000,000 175,000,000
Note payable to affiliate 111,754,000 70,131,000
Other borrowings 53,600,000 25,900,000
Due to factoring clients 234,745,074 191,488,668
Other liabilities 7,150,825 4,648,892
------------------ ------------------
Total liabilities 682,395,469 468,478,864
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 25,000,000
shares authorized; issued and outstanding
12,303,950 in 1997, 12,300,000 in 1996 123,040 123,000
Additional paid-in capital 27,582,840 27,151,932
Retained earnings 46,475,806 34,813,527
------------------ ------------------
Total stockholders' equity 74,181,686 62,088,459
------------------ ------------------
TOTAL $756,577,155 $ 530,567,323
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Factoring fees $30,139,585 $26,066,382 $19,518,541
Interest income 48,192,429 35,835,351 28,210,599
Letter of credit and other fees 4,260,039 3,098,596 2,040,383
Other 2,098,944 1,707,995 1,849,466
----------------- -------------- --------------
Total revenues 84,690,997 66,708,324 51,618,989
----------------- -------------- --------------
EXPENSES
Interest expense 20,196,669 15,137,924 11,629,391
Interest expense to affiliates 7,390,855 5,265,025 4,731,668
Salaries and benefits 19,141,804 14,674,483 11,240,046
Provision for credit losses 7,250,000 3,750,000 2,234,721
Occupancy and other office expenses 4,718,825 3,628,446 2,588,459
Depreciation and amortization 898,044 656,384 632,739
Professional fees 1,274,043 1,006,441 991,535
Other 4,219,966 3,550,441 3,004,570
----------------- -------------- --------------
Total expenses 65,090,206 47,669,144 37,053,129
----------------- -------------- --------------
INCOME BEFORE INCOME TAXES 19,600,791 19,039,180 14,565,860
PROVISION FOR INCOME TAXES 7,938,512 7,923,956 5,872,763
----------------- -------------- --------------
NET INCOME $11,662,279 $11,115,224 $ 8,693,097
================= ============== ==============
Basic earnings per share $ 0.95 $ 1.01 $ 0.87
================= ============== ==============
Diluted earnings per share $ 0.93 $ 1.00 $ 0.87
================= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
1995, 1996 and 1997
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
-------------- ------------- ---------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $100,000 $ 9,542,096 $15,005,206
Net Income 8,693,097
-------------- ------------- ---------------
BALANCE, DECEMBER 31, 1995 100,000 9,542,096 23,698,303
Net proceeds from the sale of common stock 23,000 17,609,836
Net Income 11,115,224
-------------- ------------- ---------------
BALANCE, DECEMBER 31, 1996 123,000 27,151,932 34,813,527
Net proceeds from the sale of common stock 40 33,535
Allocation of tax benefits from exercise of
Bancorp stock options by company personnel 397,373
Net Income 11,662,279
-------------- ------------- ---------------
BALANCE, DECEMBER 31, 1997 $123,040 $27,582,840 $46,475,806
============== ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements
31
<PAGE>
<TABLE>
<CAPTION>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------ ---------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $11,662,279 $11,115,224 $ 8,693,097
Adjustments to reconcile net income
to net cash provided by operating
activities: Depreciation and amortization 898,044 656,384 632,739
Deferred income taxes (1,755,379) (76,610) (399,986)
Provision for credit losses 7,250,000 3,750,000 2,234,721
Increase in restricted cash (3,571,875) (375,000) (1,500,000)
Loss on sale of assets 14,495 3,873
Due (from) to affiliates (1,164,734) (5,142,660) 1,617,266
Other assets (122,912) (2,103,811) (430,465)
Other liabilities 2,899,306 808,467 690,179
------------------ ---------------- ------------------
Net cash provided by operating activities 16,094,729 8,646,489 11,541,424
------------------ ---------------- ------------------
INVESTING ACTIVITIES:
Loan to clients, net (27,860,326) (1,913,535) (3,053,589)
(Increase) decrease in asset based loans (82,773,666) 2,295,896 (27,841,907)
Net increase in factoring accounts
receivable, (79,319,123) (79,560,531) (32,940,825)
net of due to factoring clients
Sales of participations 26,291,256 11,432,386 1,238,287
Payments on participations (6,518,356) (3,919,712) (751,947)
Purchases of property and equipment (2,219,148) (456,749) (914,342)
Disposals of property and equipment 50,931 25,033 18,836
------------------ ---------------- ------------------
Net cash used in investing activities (172,348,432) (72,097,212) (64,245,487)
------------------ ---------------- ------------------
FINANCING ACTIVITIES:
Issuance of senior certificates 100,000,000 50,000,000
Restricted proceeds from senior
certificates 10,000,000 (10,000,000)
Net proceeds from sale of common stock 33,575 17,632,836
Proceeds from borrowings 163,167,000 127,528,000 53,522,033
Payments on borrowings (93,844,000) (83,757,000) (35,802,033)
Payments of deferred financing costs (972,230) (980,825) (744,802)
Amortization of deferred costs 1,022,025 802,135 608,844
------------------ ---------------- ------------------
Net cash provided by financing activities 169,406,370 71,225,146 57,584,042
------------------ ---------------- ------------------
NET INCREASE IN CASH 13,152,667 7,774,423 4,879,979
CASH, BEGINNING OF PERIOD 28,101,237 20,326,814 15,446,835
------------------ ---------------- ------------------
CASH, END OF PERIOD $41,253,904 $28,101,237 $20,326,814
================== ================ ==================
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash payments for interest $25,554,308 $18,338,991 $14,784,541
================== ================ ==================
Cash payments for income taxes $ 9,669,839 $13,648,128 $ 4,929,303
================== ================ ==================
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF OPERATIONS
Capital Factors Holding, Inc. ("the Parent Company") is a majority-owned
subsidiary of Union Planters Bank of Florida (the "Bank") which was formerly
known as Capital Bank. The Bank is a wholly-owned subsidiary of Union Planters
Corporation ("UPC"), the surviving company of a merger with Capital Bancorp
("Bancorp") effective December 31, 1997 and was accounted for as a pooling of
interests. The Parent Company was incorporated in June 1994, in order to
accommodate the issuance of Variable Rate Asset Backed Certificates (as further
discussed in Note 5 to the financial statements), and issued 1000 shares (100%)
of its stock to Capital Bank in exchange for 60 shares (100%) of the outstanding
shares of Capital Factors, Inc. ("Factors"). On July 1, 1996, the Parent Company
effected a 10,000-for-1 stock split resulting in 10,000,000 common shares
issued. The stock split was retroactively reflected in the consolidated
financial statements. On July 16, 1996, the Parent Company completed an initial
public offering of 2,000,000 shares of common stock at a public offering price
of $8.50 per share. On August 2, 1996, the underwriting syndicate exercised its
option to acquire an additional 300,000 shares of common stock. As a result of
the public offering, the Bank's ownership of the Parent Company was reduced to
approximately 81% of the outstanding 12,300,000 shares of common stock.
The Parent Company has three wholly-owned subsidiaries, Factors, CF One, Inc.
("CF One"), and CF Investor Corp. Factors has two wholly-owned subsidiaries, CF
Funding Corp. ("Funding") and Capital TempFunds, Inc. ("TempFunds"), a North
Carolina corporation formed in 1996. On August 9, 1996, Factors acquired
substantially all of the assets of TempFunds America, Inc. and its affiliate,
TempFunds America Funding Corporation of South Carolina, Inc. The purchase price
paid by Factors was approximately $5.9 million (approximately $5.0 million equal
to the net book value of the assets plus an additional $900,000.) An additional
amount up to $900,000 is payable over a three year period if certain
contingencies are met. Goodwill resulting from the acquisition is being
amortized using the straight-line method over a 10 year period. TempFunds is a
specialized financial services company principally engaged in providing
receivables-based commercial financing and related fee-based credit, collection
and management information services to temporary employment and home health care
agencies.
Factors provides factoring and other services primarily to commercial businesses
and generally purchases trade accounts receivables from clients and assumes all
risks of collectibility for credit approved receivables, except as such risks
result from fraud or invalid receivables, and dilution. Factors generally enters
into advance factoring arrangements which allow clients to obtain cash advances
against a stipulated percentage of the receivables before they are due or
collected.
The Company provides services to its clients through four regional offices
located in Boca Raton, Florida; Los Angeles, California; New York, New York and
Charlotte, North Carolina and an asset based lending office in Atlanta, Georgia.
The Company's clients primarily include manufacturers, importers, wholesalers
and distributors in apparel and textile related industries and, to a lesser
extent, clients in consumer goods related industries and healthcare services.
The Company's factored accounts receivable are due from clients' customers
geographically located throughout the United States, principally retailers,
manufacturers and distributors. As of December 31, 1997 and 1996, the Company
had factored accounts receivable aggregating approximately $294.3 million and
$192.9 million, respectively, due from 54 and 38 customers, respectively, each
with balances exceeding $1 million. These customers are primarily large national
or regional department store chains or specialty retailers. The largest amount
due from any one customer, a national department store chain, at December 31,
1997 was approximately $35.4 million.
The Company's asset-based loans represent loans provided to clients principally
collateralized by accounts receivables. The Company does not service the
accounts receivable nor does it provide credit protection of the receivables.
33
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements of Capital
Factors Holding, Inc. and Subsidiaries (the "Company") include the accounts of
the Parent Company, Factors, TempFunds, Funding, CF One, and CF Investor Corp.
All significant intercompany transactions and balances have been eliminated in
consolidation.
Unearned and Earned Discounts - The Company deducts trade and cash discounts on
all factoring invoices purchased. Discounts not taken by customers are
recognized as income principally at the time of payment of the invoice.
Allowance for Credit Losses - The allowance for credit losses is maintained at a
level deemed adequate by management to absorb losses in the portfolio after
evaluating the portfolio, current economic conditions, changes in the nature and
the volume of the portfolio, past loss experience and other pertinent factors.
Many of these factors involve a significant degree of estimation and are subject
to rapid change which may be unforeseen by management. It is reasonably possible
that changes in these factors could result in material adjustments to the
allowance in the near term.
Property and Equipment - Property and equipment are carried at cost less
accumulated depreciation. Depreciation is provided over the estimated useful
lives, primarily on the straight-line method. Estimated depreciable lives range
from 3 - 8 years for furniture, equipment, software and leasehold improvements
and 39 years for buildings.
Income Recognition - Interest income on all loans and advances is calculated
using the simple interest method on the daily balances of principal outstanding
and is recorded as earned in accordance with the terms of the related factoring
agreements with clients. Accrual of interest income is discontinued on troubled
loans and advances to factoring clients when the loan balance and interest
receivable exceeds the estimated value of the collateral securing the loan or
advance. Factoring fees are recognized generally at the time of purchase of
factored receivables due to the nature of the relationship with the factoring
client and the relatively short term nature of the factored receivables. The
difference between the Company's income recognition policy and amortization of
such fee over the service period is immaterial. Commitment/closing fees related
to asset based loans are amortized over the life of the loan as an adjustment of
yield.
Unallocated Credits - The Company generally notifies the payor when
unidentifiable payments or portions thereof are received. If the payor does not
respond within 90 days, the Company records the unallocated credits as income.
The Company maintains an allowance for unallocated credits recorded as income
which may be subsequently repaid based upon its historical experience.
Income Taxes - There are two components of the income tax provision, current and
deferred. Current income tax provisions approximate taxes to be paid or refunded
for the applicable period. Balance sheet amounts of deferred taxes are
recognized on the temporary differences between the bases of assets and
liabilities as measured by tax laws and their bases as reported in the financial
statements. Deferred tax expense or benefit is then recognized for the change in
deferred tax liabilities or assets between periods. Recognition of deferred tax
balance sheet amounts is based on management's belief that it is more likely
than not that the tax benefit associated with certain temporary differences, tax
operating loss carryforwards, and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is more likely
than not that realization will not occur. The results of operations of the
Company are included in the consolidated Federal income tax return filed by UPC.
UPC allocates income taxes to the Company principally calculated on a separate
return basis.
Accounting for Stock Options - In October 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" which is effective
for awards granted in fiscal years beginning after December 15, 1995. This
standard defines a fair value-based method of measuring employee stock options
or similar equity instruments. In lieu of recording the value of such options as
compensation expense, companies may provide pro forma disclosures quantifying
the difference between net income as
34
<PAGE>
prescribed by current accounting standards and the related cost measured by such
fair value-based method. The Company will measure cost for stock-based
compensation as prescribed by the Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees."
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. Management has not evaluated the impact
this statement will have on the Company's consolidated financial position and
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 but may have an effect
on disclosure of such.
<TABLE>
<CAPTION>
3. RECEIVABLES
Receivables consist of the following:
DECEMBER 31,
1997 1996
------------------- --------------
<S> <C> <C>
Nonrecourse $326,642,458 $269,812,980
Recourse 201,321,817 157,178,312
------------------- --------------
Factored accounts receivables 527,964,275 426,991,292
Loans to factoring clients 54,029,119 27,966,757
Asset based loans 118,793,209 36,019,543
------------------- --------------
$700,786,603 $490,977,592
=================== ==============
</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 $391.0 million and
$286.2 million at December 31, 1997 and December 31, 1996, respectively.
Changes in the Company's allowance for credit losses were as follows:
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------- ------------- -------------
Beginning balance $2,993,534 $2,980,778 $1,774,101
Allowance related to
acquisition of TempFunds 100,000
America, Inc.
Provision for credit losses 7,250,000 3,750,000 2,234,721
Charge-offs (4,597,179) (4,402,745) (1,625,148)
Recoveries 479,004 565,501 597,104
-------------- ------------ ----------
Net charge-offs (4,118,175) (3,837,244) (1,028,044)
-------------- ------------- -------------
Ending balance $6,125,359 $2,993,534 $2,980,778
============== ============= =============
The Company specifically considered approximately $430,000 and $660,000 of its
client advances impaired at December 31, 1997 and December 31, 1996,
respectively, and has discontinued the accrual of interest income. The allowance
for credit losses related to these impaired loans for the same periods was
approximately $309,000 and $30,000, respectively.
35
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
1997 1996
----------------- ----------------
Land $ 479,581 $ 479,581
Building 1,518,538 1,518,538
Building improvements 922,157 749,568
Furniture and equipment 4,369,292 2,752,850
Computer software 397,215 288,930
Leasehold improvements 230,201 76,874
----------------- ----------------
$7,916,984 $5,866,341
Less accumulated depreciation (3,445,587) (2,771,184)
----------------- ----------------
$4,471,397 $ 3,095,157
================= ================
5. VARIABLE RATE ASSET-BACKED CERTIFICATES
On June 29, 1994, December 15, 1994 and July 28, 1995 Capital Factors, Inc.,
through its wholly owned subsidiary CF Funding Corp., issued $100,000,000,
$25,000,000 and $50,000,000, respectively, of Variable Rate Asset Backed
Certificates ("senior certificates") with maturity dates of December 1999, June
2000 and January 2001. The senior certificates bear an interest rate of LIBOR
plus 1.25%. The interest rates on December 31, 1997 and 1996 were 7.23% and
6.86%, respectively. The senior certificates may not be redeemed prior to their
stated maturity. On April 30, 1997, CF Funding Corp., issued a fourth series of
variable rate asset-backed certificates ("the Variable Funding Certificates")
that mature at June 2004. 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 which bear interest rates of LIBOR plus 0.75% and LIBOR
plus 1.50%, respectively. The interest rates at December 31, 1997 were 6.73% and
7.48%, respectively, excluding annualized transaction costs of 0.17%. Interest
on all certificates is payable monthly. The certificates are collateralized by
interest-earning advances to factoring clients which totaled approximately
$323,760,000 at December 31, 1997. Such advances are made on receivables before
they are due or collected by the Company. Capital Factors, Inc., services and
administers these advances and related receivables under an agreement entered
into by Bankers Trust Company, as Trustee, CF Funding Corp. and Capital Factors,
Inc. The senior certificates are subject to acceleration if certain collateral
and net worth requirements are not maintained. Remaining deferred issuance costs
of $2.1 million are being amortized over the terms of the related series. Such
costs are included in other assets on the balance sheets.
Restricted Cash - CF Funding Corporation is required to maintain a cash
collateral account at Bankers Trust Company, pursuant to the terms of the
aforementioned agreement. Such restricted cash collateral amounted to
$10,134,375 and $6,562,500 at December 31, 1997 and 1996, respectively.
36
<PAGE>
6. OTHER BORROWINGS
Notes payable are summarized as follows:
DECEMBER 31,
1997 1996
-------------- -----------
Affiliate:
A $150 million revolving line-of-credit
payable to the Bank at prime ( 8.50% and
8.25% at December 31, 1997 and 1996,
respectively) with interest payable
monthly. The loan matures on demand. $ 111,754,000 $ 70,131,000
Non-Affiliate:
A $50,000,000 revolving loan payable
to an unaffiliated bank at LIBOR plus
2.15% (8.09% at December 31, 1997) with
interest payable monthly. The loan
matures in March 1999, with automatic
1 year renewal periods. 43,600,000 15,900,000
7.95% subordinated note issued in
connection with the Company's Securitized
Financings. Interest is payable monthly.
The loan is due in July 2001. 10,000,000 10,000,000
------------ ------------
Total Other Borrowings $165,354,000 $ 96,031,000
============ ============
Amounts borrowed under the affiliate Bank facility are subject to the Bank's
overall statutory limitation on investments in and advances to subsidiaries of
10% of consolidated Bank assets. In addition to the line with the Bank, the
Company entered into a $150 million unsecured line of credit with Union Planters
Corporation on January 2, 1998. Indebtedness under this facility will bear
interest at 0.75% below the WSJ prime rate.
Under the revolving loan payable to an unaffiliated bank, the Company has
certain financial covenants and ratios, including those relating to the
Company's debt to net worth, profitability and net cash flows. In February 1998,
this revolving credit facility was increased to $75.0 million and the interest
rate was reduced to LIBOR plus 1.25%, a decrease of 0.90%.
Supplemental information for the Company's borrowings, including the Variable
Rate Asset Backed Certificates (Note 5), follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
Maximum amount outstanding at any month-end $448,464,000 $ 295,566,000 $221,871,000
Average borrowings $346,411,000 $ 258,342,000 $191,264,000
Interest expense for the period $ 25,708,058 $ 18,843,230 $ 15,140,324
Average interest rate 7.42% 7.29% 7.92%
Average interest rate, end of period 7.54% 7.31% 7.57%
</TABLE>
37
<PAGE>
The aggregate maturities of total borrowings at December 31, 1997 are as
follows:
Year Ending:
1998 $111,754,000
1999 143,600,000
2000 25,000,000
2001 60,000,000
Thereafter 100,000,000
------------
Total $440,354,000
============
7. INCOME TAXES
The results of operations of the Company are included in the consolidated
Federal income tax return filed by the Bank. UPC allocates income taxes to the
Company principally calculated on a separate return basis. The Company pays to
the Bank the amount of its estimated annual current tax provisions. The Company
paid approximately $9,609,000, $13,620,000, and $4,929,000, for income taxes in
the years ended December 31, 1997, 1996 and 1995, respectively, for income taxes
related to its fiscal years ended December 31, 1997 through 1995.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The tax effects of significant items comprising the Company's net deferred tax
asset, which is included in other assets in the balance sheet, as of December
31, 1997 and 1996 are as follows:
1997 1996
---------------- ----------------
Deferred tax assets:
Bad debts $ 2,362,551 $ 1,154,756
Difference between book and tax basis
of property 211,343 214,115
Deferred stock option compensation 458,519
Deferred compensation 136,466 89,347
---------------- ----------------
Deferred asset 3,168,879 1,458,218
---------------- ----------------
Deferred tax liability:
Pension costs 27,524 (29,750)
Other (31,456) (18,900)
---------------- ----------------
Deferred liability (3,932) (48,650)
---------------- ----------------
Net deferred asset $ 3,164,947 $ 1,409,568
================ ================
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---------------- ------------------ ------------------
<S> <C> <C> <C>
Current taxes:
Federal $8,185,557 $ 6,996,887 $ 4,898,648
State 1,508,334 1,003,679 1,374,101
---------------- ------------------ ------------------
9,693,891 8,000,566 6,272,749
Deferred taxes (benefit):
Federal and State (1,755,379) (76,610)
(399,986)
---------------- ------------------ ------------------
$ 7,938,512 $ 7,923,956 $ 5,872,763
================ ================== ==================
</TABLE>
38
<PAGE>
The following is a reconciliation between the provision for income taxes
included in the accompanying statements of income and the provision computed
using the statutory federal tax rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------------- --------------------- ------------ ----------
% OF % OF % OF
PRE-TAX PRE-TAX PRE -TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
----------- -------- ------------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Computed provision at
statutory rate $6,860,276 35.0% $6,663,713 35.0% $5,098,051 35.0%
State taxes, net of
Federal benefit 802,882 4.1% 678,883 3.6% 774,712 5.3%
Other 275,354 1.4% 581,360 3.0%
=========== ======== ============= ======= ============ ==========
$7,938,512 40.5% $7,923,956 41.6% $5,872,763 40.3%
=========== ======== ============= ======= ============ ==========
</TABLE>
8. COMMITMENTS AND OFF-BALANCE SHEET RISK
The Company is a lessee under operating leases for real estate and equipment.
The real estate leases contain clauses which require additional rent for
increases in operating expenses or a proportionate share of taxes and operating
expenses. There are no options to renew the leases of the leased regional
offices. The approximate future minimum rental payments under noncancellable
leases (exclusive of additional amounts for taxes and operating expenses) as of
December 31, 1997, are as follows:
Years Ending December 31,
1998 $1,242,761
1999 1,242,761
2000 661,595
2001 635,540
2002 718,048
Thereafter 2,465,507
=====================
$6,966,212
=====================
Rental expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $1,092,000, $745,000 and $624,000, respectively.
In the normal course of business, the Company utilizes certain financial
instruments with off-balance sheet risk to meet the financing needs of its
clients. These off-balance sheet activities include amounts available under the
unused portion of approved customer and client credit limits, commercial letters
of credit and standby letters of credit and financial guarantees. Letters of
credit are issued by the Bank for the Company's clients and the Company
guarantees the payment by its clients under these letters of credit. The credit
and market risks associated with these financial instruments are generally
managed in conjunction with the Company's balance sheet activities and are
subject to normal credit policies, financial controls and risk limiting and
monitoring procedures.
Credit losses may be incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Company's exposure to credit loss
is represented by the contractual amount of the commitments to extend credit,
commercial letters of credit and standby letters of credit and financial
guarantees. This is the maximum potential loss of principal in the event the
commitment is drawn upon and the counterparty defaults. In addition, the
measurements of the risks associated with these financial instruments is
meaningful only when all related and offsetting transactions are considered.
Amounts available under the unused portion of approved customer and client
credit limits do not necessarily represent legally binding arrangements to
factored sales or otherwise advance funds to clients. Generally, credit
approvals and
39
<PAGE>
limits are modified or withdrawn based upon the Company's evaluation of the
customer or client's credit or if the client violates the terms of the factoring
agreement. Credit limits for clients and customers continually vary and do not
necessarily represent future cash requirements to fund the factored sales or
otherwise advance funds to clients.
Commercial letters of credit are issued to facilitate certain trade
transactions, principally the purchase of goods. The risks associated with these
transactions are somewhat reduced since the contracts are generally for a short
commitment period. Standby letters of credit and financial guarantees are
conditional commitments issued to guarantee the performance of a customer to a
third party. The Company issues standby letters of credit and financial
guarantees to ensure contract performance or assure payment by its clients. The
risk involved in issuing standby letters of credit to clients and financial
guarantees is similar to the risk involved in extending credit to clients and
they are subject to the same credit approvals and monitoring procedures. At
December 31, 1997 and 1996, the Company had approximately $48,684,000 and
$29,294,000, respectively, of letters of credit and financial guarantees
outstanding. The Company usually guarantees letters of credit and financial
guarantees only for clients with which the Company has factoring arrangements.
Generally, the Company requires collateral to support these commitments and the
collateral held varies but may include cash, merchandise, inventory, real estate
and the client's reserve balance.
9. RELATED PARTY TRANSACTIONS
The Company expensed interest payments to the Bank of $7,391,000, $5,265,000,
and $4,732,000 on its $150 million revolving line of credit facility with the
Bank during the periods ended December 31, 1997, 1996 and 1995, respectively.
The Bank obtained group medical, dental and life insurance coverage on behalf of
the Company. Premiums are charged to the Company at the same amount as they are
assessed by the insurance companies to the Bank with respect to the Company.
During 1997, 1996 and 1995, the Company paid insurance premiums of $662,075,
$605,277 and $527,669, respectively, for its actual portion of such insurance
premiums.
The Bank provided approximately $166.5 million, $135.5 million and $130.1
million during 1997, 1996 and 1995, respectively, of letters of credit for
clients of the Company. For a fee, the Company guarantees the payment by its
clients under these letters of credit. Fees charged for issuance of the letters
of credit are paid directly to the Bank and amounted to $605,429, $373,688, and
$462,013 during 1997, 1996 and 1995, respectively.
The Company reimburses the Bank for its portion of commercial insurance
expenses. Payments to the Bank for insurance expenses during 1997, 1996 and 1995
equaled $85,426, $465,513, and $149,302, respectively. In addition, the Company
paid the Bank $315,635, $224,332, and $148,900, during the periods ended
December 31, 1997, 1996 and 1995, respectively, for bank service charges. In
addition, the Company paid the Bank $75,000 for internal audit services during
1997. The Company did not pay the Bank for internal audit services in 1996 or
1995.
Due to affiliate represents balances owed to the Bank, principally for income
taxes and unpaid interest on the line of credit with the Bank.
10. CONTINGENCIES
From time to time, the Company has been a party to lawsuits and claims,
including lender liability claims, which management considers incidental to
normal operations. The Company believes that these matters will not materially
affect its financial position or results of its operations.
11. RETIREMENT PLAN
Bancorp sponsored a noncontributory defined benefit pension plan (the "Plan")
covering employees meeting certain eligibility requirements. The Company's
employees are included in the Plan. The benefits are based on years of service
and the employee's compensation for the five consecutive years during the last
ten years of service that produce the highest average salary. The Plan provides
for accumulation of full benefits equal to 1.2% of eligible compensation over a
25-year period. Full vesting will occur after completion of seven years of
service. Bancorp's funding policy is to contribute
40
<PAGE>
annually the maximum amount that can be deducted for Federal income tax
purposes. The Bank charged the Company pension costs of approximately $300,000,
$283,000, and $172,090 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Bancorp and the Company ceased the accrual of benefits under this plan effective
December 31, 1997 and is in the process of terminating the plan. At December 31,
1997 and 1996 the fair value of plan assets was $10,858,220 and $8,613,511, and
consisted primarily of corporate obligations, mutual funds, U.S. Government
securities and other cash equivalents. The effect of this termination by Bancorp
is not expected to have a material effect on the Company's financial position or
results of operations.
12. STOCK OPTION PLAN
In July 1996, the Company adopted, and later amended, a stock option plan under
which 1.3 million shares of Common Stock were reserved for issuance upon
exercise of stock options. The stock option plan provides for the granting of
both incentive stock options and nonqualified stock options. Options granted
vest 20% a year over five years and expire at the end of the tenth year. The
plan also provides for the granting of stock appreciation rights.
Stock option activity in the plan is summarized as follows:
<TABLE>
<CAPTION>
AVAILABLE OPTION PRICE WEIGHTED
FOR GRANT OUTSTANDING PER SHARE AVERAGE PRICE
----------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 0 0
Adoption of Plan 800,000
Granted (572,500) 572,500 $8.50
Exercised
Canceled 0 0
----------------- -------------- ---------------- ---------------
Balance, December 31, 1996 227,500 572,500 $8.50 $8.50
Amendment of Plan 500,000
Granted (133,850) 133,850 $13.50-$14.875 $13.66
Exercised (3,950) $8.50 $8.50
Canceled 3,500 (3,500)
----------------- -------------- ---------------- ---------------
Balance, December 31, 1997 597,150 698,900 $8.50-$14.875 $9.48
================= ============== ================ ===============
</TABLE>
The weighted-average exercise price and the weighted-average remaining
contractual life for options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
----------------------------------------
NUMBER OF
RANGE OF EXERCISE OPTIONS REMAINING
PRICE OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE
- -------------------- ----------------- ---------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
$8.50 565,850 $8.50 8.6 years 110,450
$13.50 117,050 $13.50 9.3 years
$14.875 16,000 $14.875 9.3 years
----------------- -----------------
$8.50 - $14.875 698,900 $9.48 110,450
================= =================
</TABLE>
The Company measures compensation cost for stock based compensation as
prescribed by APB 25, "Accounting for Stock Issued to Employees." All options
granted in 1997 and 372,500 options granted in 1996 were granted with
restrictions as to their exercise as long as the Bank owns 80% or more of the
Company's outstanding shares. These options are accompanied by stock
appreciation rights. In accordance with APB 25, the Company has recorded
compensation expense of $1,040,000 and $149,000 for 1997 and 1996, respectively,
based on the market value of the Company's stock and the vesting schedule of
such options. However, SFAS No. 123, "Accounting for Stock Based Compensation"
requires pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. The fair value of the options
granted in 1997 and 1996 is estimated on the date of grant
41
<PAGE>
using the binomial option-pricing model with the following weighted average
assumptions in 1997 and 1996, respectively: dividend yield of 00.0%, expected
volatility of 45.4499% and 30.00%, risk-free interest rate of 6.798% and 6.66%
and expected option life of 5.0 years. The weighted average fair value of
options granted in 1997 was $6.665 and $7.2822 per share, respectively,
and $3.34 per share in 1996.
Had compensation cost for the Company's stock option plans been consistently
determined based upon the fair value at the grant date for awards under the
methodology prescribed under SFAS No. 123, the Company's net income and earnings
per share would have been different as shown in the table below.
1997 1996
-------------- --------------
Net earnings - as reported 11,662,279 11,115,224
Net earnings - pro forma 11,979,609 11,098,317
Earnings per share - as reported
Basic $0.95 $1.01
Diluted $0.93 $1.00
Earnings per share - pro forma
Basic $0.97 $1.00
Diluted $0.95 $1.00
13. 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 1997 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.
The calculation of net earnings per share follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
------------ ----------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Basic:
Net income applicable to common shares 11,662,279 11,115,224 8,693,097
Average common shares outstanding 12,301,315 11,044,809 10,000,000
------------ ----------- -------------
Net earnings per common share -- basic $0.95 $1.01 $0.87
============ =========== =============
Diluted:
Net earnings applicable to common shares 11,662,279 11,115,224 8,693,097
------------ ----------- -------------
Average common shares outstanding 12,301,315 11,044,809 10,000,000
Stock option adjustment 294,955 106,034 -
------------ ----------- -------------
Average common shares outstanding --
diluted 12,596,270 11,150,843 10,000,000
------------ ----------- -------------
Net earnings per common share -- diluted $0.93 $1.00 $0.87
============ =========== =============
</TABLE>
42
<PAGE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
In cases where quoted market prices are not available, fair value estimates are
based on the quoted market price of a financial instrument with similar
characteristics, the present value of expected future cash flows or other
valuation techniques. Fair value estimates determined using other valuation
techniques are significantly affected by the assumptions used and consequently
may not reflect the proceeds that may be realizable from the sale of such
financial instruments.
The estimated fair value disclosures related to the Company's financial
instruments are as follows:
Cash: Since the Company's cash is maintained in demand deposit accounts, the
carrying amount is equal to the fair value.
Accounts Receivable, Asset Based Loans, Due to/from Factoring Clients: The
Company's receivables turn over quickly and interest earning advances made to
clients against such receivables and loans to factoring clients carry variable
interest rates based upon the prime rate and reprice as the prime rate changes.
Therefore, the Company believes the carrying amounts are reasonable estimates of
fair value.
Notes and Certificates Payable: The Company's notes payable are short-term in
nature. All but one of the notes payable carry variable interest rates which
reprice at least every 30 days. The Company holds one $10,000,000 note payable
at a fixed interest rate of 7.95%. The Company believes the interest rates on
the notes and certificates payable approximate rates currently available to the
Company and consequently the carrying amount is a reasonable estimate of fair
value.
Letters of Credit: As indicated in Note 8, the Company utilizes certain
financial instruments with off-balance sheet risk to meet the financing needs of
its clients. At December 31, 1997 and 1996, the Company had approximately
$48,684,000 and $29,294,000, respectively, of letters of credit and financial
guarantees for clients outstanding. The estimated fair value of these
off-balance sheet instruments, based on discounting the fees to be charged on
the unused portion of such facilities until their respective expiration dates is
considered insignificant.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Capital Factors Holding, Inc.
We have audited the accompanying consolidated balance sheets of Capital Factors
Holding, Inc. (a majority owned subsidiary of Union Planters Bank of Florida)
and subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Capital Factors Holding, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 6, 1998
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
45
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the caption "Election of Directors" to appear in
the Company's definitive proxy statement relating to the Company's 1998 Annual
Meeting of Shareholders, which definitive proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Company's fiscal year covered by this Report on Form 10-K (hereinafter referred
to as the "Annual Meeting Proxy Statement"), is incorporated herein by
reference. Information concerning the executive officers of the Company is
included in Part 1 of this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "Executive Compensation" to appear
in the Annual Meeting Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" to appear in the Annual Meeting Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the caption "Certain Relationships and Related
Transactions" to appear in the Annual Meeting Proxy Statement is incorporated
herein by reference
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements.
The following financial statements of the Company and its subsidiaries and the
independent certified public accountant's report thereon appear in Item 8
hereof.
Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1997
and 1996 Consolidated Statements of Income for the years ended December 31,1997,
1996, and 1995 Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995 Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1997, 1996, and 1995 Notes to
Consolidated Financial Statements
(2) Financial Statement Schedules.
Schedules are omitted because the conditions requiring their filing are not
applicable or because the required information is provided in the Consolidated
Financial Statements, including the Notes thereto.
(3) Exhibits.*
(3.1) Amended and Restated Articles of Incorporation (Exhibit 3.1 to the
Company's Registration Statement [Registration No. 333-3419] on Form S-1 as
filed with the Securities and Exchange Commission on May 9, 1996 [the
"Registration Statement"]).
(3.2) Amended and Restated Bylaws (Exhibit 3.2 to the Company's Registration
Statement).
(4.1) Form of Common Stock Certificate (Exhibit 4.1 to the Company's
Registration Statement).
(10.1) Form of Stock Option Plan (Exhibit 10.1 to the Company's Registration
Statement).**
(10.2) Capital Bancorp Employees Pension Plan (Exhibit 10.2 to the Company's
Registration Statement).**
(10.3) Form of Indemnification Agreement between the Company and each of its
directors and certain executive officers (Exhibit 10.3 to the Company's
Registration Statement).
(10.4) Capital Factors Financing Trust Pooling and Servicing Agreement dated
June 1, 1994, among CF Funding Corp., the Company and Bankers Trust Company
(Exhibit 10.4 to the Company's Registration Statement).
(10.5) Contribution and Sale Agreement related to the Capital Factors Financing
Trust Pooling and Servicing Agreement (Exhibit 10.5 to the Company's
Registration Statement).
(10.6) Series 1994-1 Supplement dated as of June 1, 1994 to Capital Factors
Financing Trust Pooling and Servicing Agreement (Exhibit 10.6 to the Company's
Registration Statement).
(10.7) Series 1994-2 Supplement, dated as of December 1, 1994, to Capital
Factors Financing Trust Pooling and Servicing Agreement (Exhibit 10.7 to the
Company's Registration Statement).
(10.8) Series 1995-1 Supplement, dated as of July 1, 1995, to Capital Factors
Financing Trust Pooling and Servicing Agreement (Exhibit 10.8 to the Company's
Registration Statement).
47
<PAGE>
(10.9) Promissory Note evidencing Credit Facility with Capital Bank (Exhibit
10.9 to the Company's Registration Statement).
(10.10) Credit Facility with Fleet Capital Corporation (Exhibit 10.10 to the
Company's Registration Statement).
(10.11) Lease Agreement dated as of April 30, 1990, between Hachette Filipacchi
Magazines, Inc. (Formerly Diamandis Communications, Inc.) and Factors, as
amended (Exhibit 10.11 to the Company's Registration Statement).
(10.12) Lease Agreement dated April 19, 1995, between Factors and H-C REIT,
Inc.(Exhibit 10.12 to the Company's Registration Statement).
(10.13) Lease Agreement dated as of March 1, 1995, between Hope & Flowers B.P.
Partnership and Factors (Exhibit 10.13 to the Company's Registration Statement).
(10.14) Tax Sharing and Indemnity Agreement (Exhibit 10.14 to the Company's
Registration Statement).
(10.15) Employment Agreement dated January 1, 1996 among John W. Kiefer, the
Registrant and Capital Factors, Inc. (Exhibit 10.15 to the Company's
Registration Statement).**
(10.16) Employment Agreement between Stephen J. Donohue and Capital Factors,
Inc. (Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 [the "September 1996 10-Q"]).**
(10.17) Employment Agreement between James L. Morrison and Capital Factors, Inc.
(Exhibit 10.1 to the September 1996 10-Q).**
(10.18) Note Purchase Agreement, dated as of May 15, 1996, between CF One, Inc.
And Connecticut General Life Insurance Company (Exhibit 10.18 to the Company's
Registration Statement).
(10.19) Collateral Pledge and Account Agreement, dated as of May 15, 1996, among
CF One, Inc., Bankers Trust Company and Connecticut General Life Insurance
Company (Exhibit 10.19 to the Company's Registration Statement).
(10.20) Form of Agreement among Capital Bank, the Registrant and Capital
Factors, Inc.(Exhibit 10.20 to the Company's Registration Statement).
(10.21) Intercreditor Agreement by and among Capital Factors, Inc., Fleet
Capital Corporation, CF Funding Corp. and Bankers Trust Company (Exhibit 10.21
to Amendment No. 2 to the Company's Registration Statement).
(10.22) Form of Amendment No. 1 to Employment Agreement among John W. Kiefer,
the Registrant, and Capital Factors, Inc. (Exhibit 10.22 to Amendment No.2 to
the Company's Registration Statement).**
(10.23) Lease Agreement dated as of October 30, 1996 between Parkwood Properties
Corp. and Capital Factors Holding, Inc. (Exhibit 10.23 to the Form 10-K for the
year ended December 31, 1996 (the "1996 10-K))
(10.24) Purchase Agreement dated July 31, 1996 by and among Capital Factors,
Inc. and TempFunds America, Inc. and TempFunds America Funding Corporation of
South Carolina, Inc. (1996 10-K)
(10.25) Amendment dated September 9, 1996 to the Purchase Agreement by and among
Capital Factors, Inc. and TempFunds America, Inc. and TempFunds America Funding
Corporation of South Carolina, Inc. (1996 10-K)
(10.26) Second Amendment dated September 30, 1996 to the Purchase Agreement by
and among Capital Factors, Inc. and TempFunds America, Inc. and TempFunds
America Funding Corporation of South Carolina, Inc. (1996 10-K)
(10.27) Third Amendment dated February 28, 1997 to the Purchase Agreement by and
among Capital Factors, Inc. and TempFunds America, Inc. and TempFunds America
Funding Corporation of South Carolina, Inc. (1996 10-K)
48
<PAGE>
(10.28) Second Amendment to Employment Agreement among John W. Kiefer, the
Registrant, and Capital Factors, Inc.
(10.29) Series 1997-1 Supplement, dated as of April 1, 1997, to Capital Factors
Financing Trust Pooling and Servicing Agreement dated as of June 1, 1994.
(10.30) First Consolidated Amendment to Loan and Security Agreement, by and
between Capital Factors, Inc. and Fleet Capital Corporation, dated as of August
29, 1997.
(11.1) Statement re:computation of per share earnings
(21.1) Subsidiaries of the Registrant
(23.1) Independent Auditors Consent
(27.1) Financial Data Schedule. ***
- --------------------
* Exhibits followed by a parenthetical reference are incorporated herein by
reference from the document described therein.
** These Exhibits are management contracts or compensatory plans or
arrangements.
*** Filed electronically only.
(b) Reports on Form 8-K The Company did not file any reports on Form 8-K during
the fourth quarter of 1997.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 27, 1998 By: /s/ DENNIS A. MCDERMOTT
------------------------------------
DENNIS A. MCDERMOTT
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
50
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ JOHN W. KIEFER
- -----------------------
John W. Kiefer Director,
President and Principal
Executive Officer
March 27, 1998
/s/ JAVIER J. HOLTZ
- -----------------------
Javier J. Holtz Chairman of the Board
March 27, 1998
/s/ STEPHEN N. ASHMAN
- ------------------------
Stephen N. Ashman Director
March 27, 1998
/s/ RONALD S. CHASE
- ------------------------
Ronald S. Chase Director
March 27, 1998
/s/ CYNTHIA COHEN
- ------------------------
Cynthia Cohen Director
March 27, 1998
/s/ NORMAN G. EINSPRUCH
- -------------------------
Norman G. Einspruch Director
March 27, 1998
/s/ DANIEL M. HOLTZ
- ------------------------
Daniel M. Holtz Director
March 27, 1998
/s/ JACK LISTANOWSKY
- ------------------------
Jack Listanowsky Director
March 27, 1998
51
<PAGE>
/s/ HAROLD L. OSHRY
- ------------------------
Harold L. Oshry Director
March 27, 1998
/s/ BRUCE RAIFFE
- ------------------------
Bruce Raiffe Director
March 27, 1998
52
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
(11.1) Statement re:computation of per share earnings
(23.1) Independent Auditors Consent
(27.1) Financial Data Schedule. ***
- ----------------
EXHIBIT 11.1
<TABLE>
<CAPTION>
CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
YEARS ENDED DECEMBER 31,
1997 1996 1995
------------ ----------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Basic:
Net income applicable to common shares 11,662,279 11,115,224 8,693,097
Average common shares outstanding 12,301,315 11,044,809 10,000,000
------------ ----------- -------------
Net earnings per common share -- basic $0.95 $1.01 $0.87
============ =========== =============
Diluted:
Net earnings applicable to common shares 11,662,279 11,115,224 8,693,097
------------ ----------- -------------
Average common shares outstanding 12,301,315 11,044,809 10,000,000
Stock option adjustment 294,955 106,034 -
------------ ----------- -------------
Average common shares outstanding --
diluted 12,596,270 11,150,843 10,000,000
------------ ----------- -------------
Net earnings per common share -- diluted $0.93 $1.00 $0.87
============ =========== =============
</TABLE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-30369 of Capital Factors Holding, Inc. on Form S-8 of our report dated March
6, 1998, appearing in reference in the Annual Report on Form 10-K of Capital
Factors Holding, Inc. for the year ended December 31, 1997.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 27, 1998
53
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 51,388,279
<SECURITIES> 0
<RECEIVABLES> 697,859,738
<ALLOWANCES> (6,125,359)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,471,397
<DEPRECIATION> 791,976
<TOTAL-ASSETS> 756,577,155
<CURRENT-LIABILITIES> 0
<BONDS> 440,354,000
0
0
<COMMON> 123,040
<OTHER-SE> 74,058,646
<TOTAL-LIABILITY-AND-EQUITY> 756,577,155
<SALES> 0
<TOTAL-REVENUES> 84,690,997
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,252,682
<LOSS-PROVISION> 7,250,000
<INTEREST-EXPENSE> 27,587,524
<INCOME-PRETAX> 19,600,791
<INCOME-TAX> 7,938,512
<INCOME-CONTINUING> 11,662,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,662,279
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.93
</TABLE>
