As filed with the Securities and Exchange Commission on February 25, 2003
File No. 333-100389
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
(POST-EFFECTIVE AMENDMENT NO. 1)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAPSOURCE FINANCIAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
COLORADO 7350 84-1334453
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(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
FRED BOETHLING STEVEN REICHERT
PRESIDENT VICE PRESIDENT AND
2305 CANYON BOULEVARD GENERAL COUNSEL
SUITE 103 1729 DONEGAL DRIVE
BOULDER, COLORADO 80302 WOODBURY, MINNESOTA 55125
(303) 245-0515 (651) 578-1757
(Address and telephone number of registrant's principal executive offices)
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COPIES OF COMMUNICATIONS TO:
DAVID B. DEAN
E. PATRICK SHRIVER
Rider, Bennett, Egan & Arundel LLP
2000 Metropolitan Centre
333 South Seventh Street
Minneapolis, MN 55402
(612) 340-8916, (612) 340-7943
APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) AGGREGATE OFFERING REGISTRATION FEE
PRICE(1)
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Common Stock, $.01 par value per 3,000,000 $1.75 $5,250,000 $483
share
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Total Registration Fee $483
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(1) The proposed maximum offering price is estimated solely for the purpose of
determining the registration fee calculated pursuant to Rule 457(o).
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THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
CAPSOURCE FINANCIAL, INC.
FORM SB-2
CROSS REFERENCE SHEET
FORM SB-2 ITEM NO. AND CAPTION
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1. Front of Registration Statement and Outside Front Cover
of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus Page 1 and Outside Back Cover Page of Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Determination of Offering Price
6. Dilution Dilution
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Promoters and Control
Persons Management
11. Security Ownership of Certain Beneficial Owners and
Management Principal Stockholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Interest of Named Experts and Counsel
14. Disclosure of Commission Position on Indemnification Commission Position on Indemnification for Securities
for Securities Act Liabilities Act Liabilities
15. Organization Within Last Five Years Organization Within Last Five Years
16. Description of Business Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation Condition and Results of Operations
18. Description of Property Description of Property
19. Certain Relationships and Related Transactions Certain Relationships and Related Transactions
20. Market for Common Equity and Related Stockholder Market for Common Equity and Related Stockholder
Matters Matters, Shares Eligible for Future Sale
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure None
2
PROSPECTUS
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CAPSOURCE FINANCIAL, INC.
3,000,000 SHARES OF COMMON STOCK
$1.75 PER SHARE
PROPOSED BULLETIN BOARD SYMBOL: CPSF
We are offering to the public up to 3,000,000 shares of common stock,
$.01 par value per share of CapSource Financial, Inc., a Colorado corporation.
We plan to continue the offering until all the shares are sold or for four (4)
months, whichever occurs first. Until a minimum of $525,000 has been received,
all proceeds will be held in an interest-bearing escrow account with the
independent escrow agent, Vectra Bank Colorado. If we don't sell a minimum of
$525,000, all amounts will be refunded with interest and without deductions, and
this offering will terminate. Officers, directors and promoters can purchase
shares for the purpose of meeting this requirement.
This is our initial public offering, and no public market currently
exists for our shares. The initial offering price of the shares of common stock
offered in this offering has been arbitrarily determined. The offering price
might not reflect the market price of our shares after the offering.
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AN INVESTMENT IN OUR SECURITIES IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. YOU SHOULD PURCHASE OUR SECURITIES ONLY IF YOU CAN AFFORD A
COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A
DISCUSSION OF CERTAIN MATTERS THAT YOU SHOULD CONSIDER CAREFULLY PRIOR TO
PURCHASING ANY OF OUR SECURITIES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS COMPLETE OR TRUTHFUL. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information contained in this prospectus is subject to completion
or amendment. We have filed a registration statement with the Securities and
Exchange Commission relating to the securities offered in this prospectus. We
can't sell or accept any offers to buy these securities before the registration
statement becomes effective. This prospectus is not an offer to sell or
solicitation of an offer to buy any securities. We can't sell these securities
in any state where an offer, solicitation or sale would be unlawful before we
register or qualify the securities for sale in that state.
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PRICE TO
PUBLIC COMMISSIONS PROCEEDS TO CAPSOURCE
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Per Share $1.75 $.175 $1.575
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Total $5,250,000 $525,000 $4,725,000
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We are offering the common stock on a "best efforts, minimum or
maximum" basis through our underwriter, Public Securities, Inc., who will be
paid a ten percent (10%) commission and receive warrants to purchase up to
300,000 shares. The table above calculates proceeds prior to deducting offering
expenses that we estimate to be $101,000 for filing fees, legal and accounting
fees and printing costs.
PUBLIC SECURITIES, INC.
The date of this Prospectus is February ____, 2003
PROSPECTUS SUMMARY
Since this is a summary, it doesn't contain all the information that
may be important to you. You should read the entire Prospectus before you decide
to invest. Unless we say otherwise, the information in this Prospectus does not
give effect to the exercise of options that have been reserved but not issued
under our 2001 Omnibus Stock Option and Incentive Plan, or warrants granted
officers, directors, consultants and our underwriter. Throughout this Prospectus
we will refer to CapSource Financial, Inc as CapSource, we or us.
CAPSOURCE
CapSource was incorporated on February 16, 1996 as a Colorado
corporation under the name Mexican-American-Canadian Trailer Rentals, Inc. Our
goal was to take advantage of NAFTA and the increased economic activity that
NAFTA triggered when the world's largest free trade area was created by linking
406 million people in Mexico, the U.S. and Canada producing more than $11
trillion worth of goods and services. (Source: Office of the United States Trade
Representative, NAFTA AT SEVEN).
Mexico is now the United States' second largest trading partner with an
average of $650 million in goods crossing the border each day. (Source: Fact
Sheet on NAFTA, The White House, President George W. Bush, April 22, 2001). The
Federal Reserve Bank of Dallas has reported that over the past fifteen years
U.S. trade with Mexico has increased 400 percent - from $48 billion to $239
billion. According to President George W. Bush, NAFTA has brought about a "truly
remarkable expansion of trade and investment among our countries" and "Mexico,
is an incredibly important part of the future of the United States."
The vast majority of this trade moves by truck. (Source: U.S. Bureau of
Transportation Statistics). U.S. Customs Service statistics show that border
crossings of trucks between the United States and Mexico have increased almost
200% since the passage of NAFTA in 1994. We have invested in equipment essential
to the Mexican trucking industry in the belief that NAFTA fosters an environment
of confidence and stability necessary to make long-term investments.
We are a holding company engaged in two principal lines of business. We
conduct each of those two lines of business through two, separate, wholly-owned
subsidiaries as follows: Rentas y Remolques de Mexico, S.A. de C.V. d/b/a REMEX
leases over-the-road truck trailers in Mexico; and Remolques y Sistemas Aliados
de Transportacion, S.A. de C.V. d/b/a RESALTA markets and distributes Hyundai
truck trailers in Mexico under an agreement granting us the exclusive right to
do so. See Risk Factors.
Through REMEX, we own and manage a lease/rental fleet of over-the-road
truck trailers and related equipment. Our lease/rental fleet consists primarily
of dry vans, flat beds and trailer dollies. As of September 30, 2002, REMEX
owned 182 units, of which 177 were under lease, resulting in a 97% utilization
rate. The 182 units cost approximately $3,200,000. The expected lease revenue
from these units is approximately $2,400,000 over the lease terms. All leases
are operating leases having an average term of 50 months. When the original
leases expire, we expect to re-lease or sell the equipment and to realize
substantial additional revenue as a result.
Through RESALTA, we have the exclusive right to sell Hyundai truck
trailers and related equipment in Mexico from Hyundai Translead, a subsidiary of
the Korean construction, engineering and manufacturing company. RESALTA
distributes Hyundai products through a number of locations across Mexico.
RESALTA was organized in April 2001 and began operations with its first sale of
a trailer in August 2001. As of September 30, 2002, RESALTA had sold 164 units,
representing sales of approximately $3.2 million. Fifteen of those units were
sold to REMEX for its lease fleet.
Since September 30, 2002, REMEX and RESALTA have continued to improve
their operating results. In October of 2002, RESALTA sold a total of 40 units
(including 21 units to REMEX) representing sales of approximately $760,000.
RESALTA has ordered an additional 145 trailers from Hyundai at a cost of
approximately $2.4 million for delivery in November and December 2002. These
trailers will be financed partially by customer advance payments, and by
short-term credit which we expect will be granted by Hyundai. Based upon its
sales to date and the additional trailers ordered, we believe that RESALTA
already is one of the largest, if not the largest, Hyundai trailer dealers.
As of November 18, 2002, REMEX had increased its lease/rental fleet to
203 units, of which 175 were under lease for a utilization rate of 86%. The 203
units cost approximately $3,600,000 and were financed by issuing unsecured
convertible and non-convertible notes and common stock in exchange for cash. The
temporary reduction in the utilization rate is the result of REMEX adding 21
units to the lease fleet in October, some of which still were in the process of
being delivered to customers and were not yet in service under lease contracts.
In addition, some previously leased units were being moved to new customers, and
were not yet under new leases.
2
On November 27, 2002, President George W. Bush announced his decision
to open U.S. highways to Mexican trucks beyond the 20-mile commercial border
zones, which is the current limitation for Mexican trucks entering the United
States. Motor carriers domiciled in Mexico operating in the United States will
be subject to the same Federal and State laws, regulations and procedures,
including safety regulations that apply to carriers domiciled in the United
States. President Bush's decision complies with a provision of NAFTA. Mexican
rigs currently transfer their cargo to U.S. trucks that carry the loads to
points within the United States. Barring a successful legal challenge to the
President's ruling, Mexican trucks could begin operating in the U.S. within one
month. We believe that allowing Mexican trucks into the United States will
further increase demand for our products and services.
As is the custom in Mexico, each of the primary operating subsidiaries
has an associated service company. The assets reside in the primary operating
subsidiary while employees are employed by the service company. The sole purpose
for the service company subsidiaries is to hire and retain the employees who
provide the services. The service companies have a service contract with the
operating companies and invoice them for the total personnel costs incurred on a
monthly basis. This operating structure, which is the common business practice
in Mexico, is done as part of a financial and tax planning tool to limit certain
personnel costs and related tax liabilities. The service company for REMEX is
Opciones Integrales de Arrendamiento, S.A. de C.V., and the service company for
RESALTA is Operador de Servicios Administratives Integrales, S.A. de C.V. All of
the operating subsidiaries and service companies are located in Mexico City and
are wholly-owned by CapSource. However, because Mexican law requires that all
Mexican companies have a Mexican shareholder, Lynch Grattan, our director of
Mexican operations, holds one share of each of REMEX, RESALTA and their
respective service companies to comply with Mexican law. Throughout this
document, the terms REMEX and RESALTA include their respective service
companies.
Our business was incorporated in 1996 but conducted only limited
operations until 1998. We took control of our predecessor in 1998 with the goal
of building a leasing company concentrating on transportation equipment for the
Mexican market. We have concentrated our efforts in and around Mexico City, the
primary business hub in Mexico. We intend to continue to expand our leasing
business in the future through the acquisition of additional equipment for our
lease fleet and the acquisition of other leasing companies in the truck trailer
market.
In 2001 we entered the transportation equipment sales business by
securing the right from Hyundai to sell and distribute its line of refrigerated
dry vans and dry van trailers in Mexico. We plan to expand our transportation
equipment sales business by establishing dealer arrangements with third parties
as well as direct sales by our sales force.
In addition to our operating offices in Mexico, we have corporate
offices in Boulder, Colorado and St. Paul, Minnesota.
AN INVESTMENT IN THESE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS."
THE OFFERING
The share totals in the table below do not include: approximately
750,775 shares of common stock that could be issued if all the convertible notes
are converted; 865,000 shares that could be issued if outstanding warrants
issued to officers, directors, our underwriter and others are exercised; and
550,000 shares reserved for issuance under our 2001 Stock Option Plan.
SECURITIES OFFERED 3,000,000 shares of common stock.
Common Stock Outstanding Before 7,877,038 shares of common stock.
Offering
Common Stock Outstanding if 100% 10,877,038 shares of common stock.
of Offering Sold
Common Stock outstanding if 50% 9,377,038 shares of common stock.
of Offering Sold
Use of Proceeds We expect to use the net proceeds
from the offering to expand REMEX's
lease/rental fleet, develop
facilities, acquire additional
inventory of Hyundai trailers for
distribution by RESALTA, and for
working capital.
3
SUMMARY CONSOLIDATED INFORMATION
The following is a summary, has not been audited and is subject to our
financial statements found elsewhere in this prospectus.
SUMMARY CONSOLIDATED INFORMATION
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
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2002 2001 2001 2000
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RESULTS OF OPERATIONS
Total revenue $ 3,394,217 481,026 1,037,444 402,521
Operating loss (553,453) (864,225) (1,405,475) (613,906)
Net loss (823,612) (922,783) (1,922,477) (641,130)
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BASIC AND DILUTED LOSS PER SHARE $ (0.10) (0.13) (0.28) (0.13)
SHARES USED IN COMPUTING PER SHARE AMOUNTS 7,845,237 6,952,838 6,957,881 5,064,125
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FINANCIAL POSITION
Equipment, net $ 2,324,205 2,319,856 2,210,908 1,620,897
Total assets 3,743,854 3,390,952 3,295,131 2,454,545
Long-term debt, net of discount 1,030,609 953,546 896,631 --
Stockholders' equity 1,468,517 1,668,283 1,932,379 2,343,786
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SELECTED DATA
Working capital $ 139,568 807,258 605,153 720,761
Capital expenditures 499,569 1,123,536 1,122,469 562,895
Depreciation and amortization 207,974 304,009 402,696 258,745
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Working capital is defined as total current assets less total current
liabilities.
Capital expenditures include the costs of acquiring trailer and semi-trailer
equipment for the REMEX lease/rental pool, computers, office equipment and
company vehicles.
4
RISK FACTORS
An investment in the common stock is speculative, involves a high
degree of risk and is suitable only for persons who have no need for liquidity
and who can afford the loss of their entire investment. A prospective investor
should carefully consider the following risk factors in addition to the other
information in this Prospectus:
WE HAVE EXPERIENCED LOSSES IN 2000 AND 2001, AND CAN OFFER NO ASSURANCE THAT WE
WILL ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
We recorded operating losses of $1,405,474 for the year ended December
31, 2001 and $613,906 for the year ended December 31, 2000. In 2000, our losses
were caused primarily by spending at the parent company level to restructure and
finance REMEX, our leasing operation in Mexico, and to staff the parent company
to develop and implement our strategic plan. Our operating loss in 2001 included
the start-up costs to establish RESALTA, our Mexican trailer sales and
distribution subsidiary. RESALTA incurred operating losses of approximately
$370,397 for the nine months ended September 30, 2002, and approximately
$689,000 for the year ended December 31, 2001.
We recorded net losses of $1,922,477 for the year ended December 31,
2001 and $641,130 for the year ended December 31, 2000. Our net loss in 2001
included increased interest expense on increased debt, and other expenses
related to our withdrawn initial public offering. We recorded net losses of
$823,612 for the nine months ended September 30, 2002 and $922,783 for the nine
months ended September 30, 2001. We have recorded $5,254,570 cumulative losses
since our inception.
WE WILL LIKELY NEED ADDITIONAL CAPITAL IN THE FUTURE.
We believe that the net proceeds of this offering and expected cash
flows from operations will be enough to meet our capital needs for the next 12
months. We believe that the existing indebtedness of approximately $1.2 million
that matures in the next 12 months will either convert to common stock or be
renewed, or we will have to seek additional replacement financing. In addition,
we expect to seek debt financing after the completion of this offering to pursue
our more rapid expansion strategy. We can offer no assurance that we will not
require additional financing before or after that time. Future financing may
result in dilution to holders of the common stock. Our cash needs may be
different from our estimates if we can't generate anticipated cash flows from
lease contracts and distributor earnings or if we spend more for acquisitions
than currently anticipated. No assurance can be given that our estimates of our
cash needs will prove accurate, that we will be able to obtain additional
financing when needed, or at all, or that if we obtain financing, it will be on
terms favorable or acceptable to us. If we are unable to obtain additional
financing when needed, we would significantly scale back expansion plans and,
depending upon cash flows from our existing business, reduce the scope of our
operations.
To fully implement our business plan, CapSource, REMEX and RESALTA will
require funding in addition to the sale of common stock in this offering. Our
history of operations may make it difficult for us to obtain that financing. If
we are unable to obtain additional funding from the sale of our shares or from
other sources, our business could be negatively effected. We cannot assure you
that our operations will be profitable. You may lose your entire investment.
WE OPERATE AS A HOLDING COMPANY AND WILL BE SUBJECT TO THE RISKS INHERENT IN
THAT STRUCTURE.
These risks include, among other things:
o the inability to collect enough service fees from our subsidiary companies
to cover our costs;
o the inability to make future acquisitions of profitable subsidiaries;
o the inability to provide enough funding for the growth of our subsidiaries;
o the inability to realize distributions from our subsidiaries;
o the inability to realize liquidity through the sale of our subsidiaries to
or merger with third parties; and
o the inability to recover Mexican withholding taxes on dividend and other
distributions.
Many of the risks associated with running our subsidiaries, currently
REMEX and RESALTA, and those of future acquisitions, become our risks.
5
Through REMEX we will be subject to all operating risks common to the
leasing and rental industries. These risks include, among other things:
o increases in operating costs due to inflation and other factors, which
increases may not be offset by increases in lease/rental rates;
o adverse effects of general, local and international economic conditions;
and
o our trailers are subject to accidents and theft, and while these
occurrences may be covered by insurance, the proceeds we may actually
recover could be less than the book value of the asset.
These factors could adversely affect the operations and the ability of
REMEX and us to generate revenue and therefore, our ability to make a profit.
RESALTA and we will be subject to all operating risks common to the
trailer sales and distribution business. These risks include, among other
things:
o adverse economic conditions could effect the demand for transportation
equipment;
o the lack of credit available to our customers could reduce the demand for
our products;
o we may not be able to maintain a price advantage over our competitors; and
o we may not be able to sell enough trailers to maintain our exclusive right
to distribute Hyundai trailers in Mexico.
WE ARE DEPENDENT ON THE CREDITWORTHINESS OF OUR CUSTOMERS.
REMEX depends on the creditworthiness of its lessees. It may incur
losses if its lessees fail to perform. REMEX provides lease financing to various
types of companies, including small companies, engaged in the Mexican
transportation industry. The ability to gauge the creditworthiness of a
potential lessee is more difficult in Mexico than the U.S. Therefore, leasing to
the Mexican transportation industry may present a greater risk of
non-performance than leasing to large U.S. companies. The failure of REMEX's
lessees to perform under their lease contracts could result in losses. If
defaults occur, these defaults would adversely affect REMEX's ability to realize
the anticipated return on its lease portfolio. Defaults would have a negative
effect on our financial condition and our ability to obtain additional funding.
We cannot assure you that our credit experience, criteria or procedures will
protect against these risks.
WE INTEND TO BORROW FUNDS TO EXPAND, AND CANNOT ASSURE YOU THAT WE WILL BE ABLE
TO MEET OUR DEBT SERVICE OBLIGATIONS.
REMEX intends to borrow funds to purchase equipment in order to expand
its lease/rental fleet and originate new leases. Increases in interest rates
will negatively affect its operating margins. If REMEX is unable to borrow funds
on a fixed rate basis and interest rates increase, these increases could have a
material adverse effect on REMEX's profitability. In the future, CapSource
and/or REMEX may enter into contracts to hedge against the risk of interest rate
increases when REMEX's equipment lease portfolio exceeds certain amounts. These
hedging activities may limit our ability to participate in the benefits of lower
interest rates for any hedged portfolio of leases. In addition, we cannot assure
you that our hedging activities, even if undertaken, will insulate us from
interest rate risks. See "Business."
CapSource and/or its operating subsidiaries, REMEX and RESALTA, may
borrow money from lenders and secure this debt with various assets of these
companies including the revenue stream from our leasing activities. These
borrowings may be secured by
o equipment;
o inventory; and/or
o the revenue stream from leased equipment.
If we cannot meet our obligations in the future, we and/or our
subsidiaries risk the loss of some or all of our assets and future revenue to
foreclosure.
WE CONDUCT ALL OF OUR OPERATIONS OUTSIDE OF THE UNITED STATES AND ARE SUBJECT TO
INTERNATIONAL AND POLITICAL RISKS.
We currently conduct all of our operations in Mexico, and in the
future, we may operate in other foreign countries. We are subject to foreign
laws, regulations and judicial procedures that may not be as protective of
lessor rights as those that apply in the United States. In addition, many
foreign countries have currency and exchange laws regulating the international
transfer of currencies. When possible, we seek to minimize our currency and
exchange risks by negotiating transactions in U.S. dollars and requiring
guarantees to support various lease agreements. Political instability abroad and
changes in international policy may also present risks
6
associated with the possible expropriation of some of REMEX's leased equipment.
Many countries, including Mexico, have no registration or other recording system
that allows REMEX to locally establish it's security interest in equipment,
potentially making it more difficult for REMEX to prove its interest in
collateral in the event that it needs to recover its property located in that
country.
WE ARE DEPENDENT ON THE RE-LEASING OR SALE OF EQUIPMENT AFTER THE INITIAL LEASE
TERMS EXPIRE.
REMEX originates operating leases according to the Statement of
Financial Accounting Standards No. 13, which governs accounting for leases.
REMEX's leases generally result in rents equal to the full cost of the leased
equipment during the initial term of the lease. However, to realize an
acceptable return on its investment, REMEX must re-lease or sell the equipment.
Accordingly, it retains an ownership interest in the equipment covered by its
leases and additional returns are expected from the later sale or re-lease of
the equipment. REMEX's and thus CapSource's results of operations will depend,
to some degree, on the ability to recover residual values via sale or re-lease
of the equipment. REMEX's ability to recover the residual value will depend on
many factors, several of which are outside its control, including:
o general market conditions at the time the lease expires;
o unusual wear and tear on, or use of, the equipment, the cost of which is
not recovered from the lessee;
o the cost of comparable new equipment;
o the extent, if any, to which the equipment has become technologically or
economically obsolete during the contract term; and
o the effects of any additional or amended government regulations.
To date, REMEX has not leased extremely specialized equipment,
concentrating instead on standard equipment. However, its leases and equipment
are still relatively illiquid. Its ability to vary its portfolio in response to
changes in economic and other conditions is limited. Profitability will be
negatively affected if the economic environment deteriorates and REMEX is unable
to vary its portfolio of leases accordingly.
WE HAVE BROAD DISCRETION IN PROCEEDS APPLICATION.
Even though we expect to use the proceeds of this offering as
illustrated in the Use of Proceeds section, we have broad discretion to apply
the proceeds of this offering in a different manner.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL.
Our success is highly dependent on the services of Fred Boethling, our
president, Steven Reichert, our vice president and general counsel, Steven J.
Kutcher, vice president and chief financial officer and Lynch Grattan, director
of Mexican operations. The loss of Mr. Boethling's, Mr. Reichert's, Mr.
Kutcher's or Mr. Grattan's services would have a material adverse effect on our
business. In December 2000, we entered into a two-year employment agreement with
Mr. Boethling, Mr. Reichert and Mr. Grattan.
Our operations are also dependent upon attracting and retaining highly
qualified people. To date, we have had success in attracting and retaining
qualified people. As our operations expand, we may experience difficulty
recruiting and maintaining adequate staff. Some of our competitors are larger
and have greater financial resources, which may provide them with an advantage
in attracting and retaining qualified employees. CapSource does not maintain key
person life insurance on its key personnel.
WE ARE CONTROLLED ALMOST EXCLUSIVELY BY EXISTING MANAGEMENT.
Assuming our officers and directors exercise all of their currently
exercisable outstanding warrants, our current officers and directors would
beneficially own 98.1% of our outstanding common stock. Assuming we sell all
shares of common stock being offered in this offering, our current officers and
directors will beneficially own 76% of our outstanding common stock. Our
officers and directors are in a position to exert significant influence in the
election of the members of our Board of Directors and otherwise in the control
of our affairs. In particular, Randolph Pentel beneficially owns 7,534,520
shares or 89.2% of our outstanding shares if he exercises all his warrants. If
we sell all the shares of common stock being offered in this offering, he will
still own 69% of our shares. Randolph Pentel does and will continue to exert
significant influence in the control of our affairs. Article 6 of our Articles
of Incorporation denies cumulative voting rights to holders of any class of
capital stock.
WE MAY BE UNABLE TO MANAGE OUR RAPID GROWTH.
Our growth strategy will require expanded services and support,
increased personnel throughout the organization, expanded operational and
financial systems and the implementation of new control procedures. We can give
no assurance that we will be able to
7
manage expanded operations effectively. Failure to implement these operational
and financial systems and to add these resources could have a material adverse
impact on our results of operations and financial condition. Rapidly growing
businesses frequently encounter unforeseen expenses and delays in completing
acquisitions, as well as difficulties and complications in integrating the
acquired operations without disturbing the profitability of the acquired
business in the short term. This depends on many factors, including capital
requirements, employee turnover and loss of referrals.
OUR OFFERING PRICE WAS ARBITRARILY DETERMINED.
The initial offering price of the shares of the common stock offered in
this offering has been arbitrarily determined and bears no relation to the book
value, net book value, earnings, per share price previously sold, or any other
standard indicator of share value.
THE ISSUANCE OF ADDITIONAL SHARES COULD CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION
OF THE COMMON STOCK.
We have authorized 100,000,000 shares of capital stock, of which an
undesignated number may be common stock or preferred stock. As of September 30,
2002, 7,877,038 shares of common stock were issued and outstanding. An
additional 865,000 shares of common stock could be issued if all outstanding
warrants, including up to 300,000 Underwriter's warrants are exercised,
approximately 750,755 additional shares of common stock could be issued if all
convertible notes are converted, and 550,000 additional shares are reserved for
issuance under our 2001 Stock Option Plan. Our Board of Directors has authority,
without action or vote of the stockholders, to issue all or part of the
authorized but unissued shares. Although we do not expect to issue additional
shares within the next 12 months, any issuance will dilute the percentage
ownership interest of stockholders and may further dilute the book value of the
common stock. If all of the securities in this offering are sold to investors,
the resulting dilution will be $1.19 per share or sixty-eight percent (68%)
dilution. If half of the securities in this offering are sold to investors, the
resulting dilution will be $1.35 per share or seventy-seven percent (77%)
dilution. If one-tenth of the securities in this offering are sold to investors,
the resulting dilution will be $1.52 per share or eighty-seven percent (87%)
dilution.
THERE HAS BEEN NO PRIOR PUBLIC MARKET, WE COULD EXPERIENCE POSSIBLE VOLATILITY
IN OUR STOCK PRICE, AND WE HAVEN'T DECLARED DIVIDENDS.
Prior to this public offering, there has been no public market for our
common stock. We cannot assure you that an active trading market will develop
or, if developed, that it will be sustained. Consequently, you may not be able
to liquidate your investment in the event of an emergency or for any other
reason. In recent years, the market for small capitalization, emerging growth
companies like us has been very volatile, subject to dramatic price fluctuations
for reasons that frequently are unrelated to the companies' performance.
We have never paid cash dividends on the common stock and we have no
present intention to declare or pay cash dividends on our common stock.
WE WILL NOT MEET THE NASDAQ LISTING REQUIREMENTS.
Our common stock will not meet the current Nasdaq listing requirements
for the Nasdaq SmallCap Market. For initial inclusion on Nasdaq:
o our stockholders' equity must equal $5,000,000, the market value of our
listed securities must equal $50,000,000, or our income from continuing
operations in our last fiscal year or two out of three of our last fiscal
years must equal $750,000,
o the minimum bid price of our common stock will have to be $4.00 per share,
and at least 1,000,000 shares must be in a public float valued at
$5,000,000 or more,
o our common stock will have to have at least three active market makers, and
o our common stock will have to be held by at least 300 holders.
If we ever meet the Nasdaq listing requirements, we will apply for
listing. Until then, we intend to seek sponsorship for quotation on the
Over-the-Counter Bulletin Board as soon as this offering is declared effective.
IT MAY BE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES IF OUR STOCK IS SUBJECT
TO PENNY STOCK RULES.
Since we do not expect that our securities will qualify for listing on
Nasdaq, trading, if any, in the common stock will have to be conducted in the
over-the-counter markets in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board". Consequently, the liquidity of our securities could
be impaired, not only in the number of securities which could be bought and
sold, but also through delays in the timing of the transactions, reductions in
security analysts' and the news media's coverage of us, and lower prices for our
securities than might otherwise be attained. The tradability in our stock may be
limited under the penny stock regulation. If the trading
8
price of our common stock is less than $5.00 per share, trading in the common
stock would also be subject to the requirements of Rule 15g-9 under the Exchange
Act. Under this rule, broker/dealers who recommend low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements. The broker/dealer must make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction. SEC regulations also
require additional disclosure in connection with any trades involving a "penny
stock", including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and its associated risks.
These requirements severely limit the liquidity of the common stock in the
secondary market because of the extra work required of the brokers or dealers to
comply with these rules. Generally, the term penny stock refers to a stock with
a market price of less than $5.00 per share.
WE HAVE RAISED ALL OF OUR CAPITAL FROM RECENT PRIVATE PLACEMENTS.
During 2002, we raised $419,000 through the sales of notes in private
placements to a limited number of investors. Of that amount, $150,000 (principal
amount) is convertible into our common stock at a 25% discount to the market
price at the time of conversion. Although we believe all these sales and
issuances were exempt from registration under applicable securities laws, if it
were determined that these sales were not exempt, we could be required to offer
to rescind these sales for the price originally paid for these securities,
together with interest from the date of the sales, and attorneys' fees. Under
those circumstances we may be required to obtain additional financing.
COLORADO LAW PERMITS LIMITATIONS ON DIRECTORS' LIABILITY.
Our Articles of Incorporation, as permitted by Colorado law, provide
that our directors are not liable for monetary damages for breach of fiduciary
duty as a director; except in connection with a breach of their duty of loyalty
to CapSource or its stockholders, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, for unlawful
distributions under Colorado law, or for any transaction in which a director has
derived an improper personal benefit. In addition, our bylaws authorize us to
indemnify our directors, officers, employees and agents to the fullest extent
permitted by Colorado law, for all expenses and liabilities arising by reason of
the fact that they were or are serving in such capacities. See "Management
Limitation on Officers' and Directors' Liabilities."
WE DO NOT HAVE INDEPENDENT DIRECTORS.
As a private company, we do not have and have not had any independent
directors. Upon registration, CapSource will endeavor to appoint two independent
directors within twelve months.
WE HAVE NOT SATISFIED MINIMUM PURCHASE REQUIREMENTS OF THE HYUNDAI AGREEMENT.
Under the terms of the Hyundai Agreement, we are obligated to meet
certain requirements to purchase a minimum number of Hyundai trailer products
for each of the first three years. As a consequence of the economic slowdown and
the tragic events of September 11, to date we have not met these requirements.
Hyundai has chosen not to enforce the requirements thus far. We believe that
Hyundai is satisfied with our performance under the circumstances, and that it
would not be in Hyundai's best interest to alter the current arrangements.
However, we can give no assurance that Hyundai will continue its current
position of not enforcing the minimum purchase requirements of our agreement. If
Hyundai chooses to enforce the minimum purchase requirements of its existing
agreement with us, we could be required to purchase Hyundai trailers for which
we have no immediate need or face the possible termination of the exclusivity of
the Hyundai Agreement.
WE COULD LOSE SIGNIFICANT CUSTOMERS.
We have six customers who each represent ten percent or more of REMEX's
rental income. The loss of any one of these significant customers would have a
material adverse effect on our business. We can offer no assurance that these
significant customers will continue to choose REMEX for their trailer rental
needs.
INFLATION COULD ADVERSELY AFFECT OUR BUSINESS.
Historically, the country of Mexico has been subject to volatile
inflation. The operating costs of our business, such as labor and supply costs,
are subject to the risk of inflation. High inflation could adversely impact the
results of our operations in the future.
9
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
We have included in this prospectus, and in the documents incorporated
by reference in this prospectus, statements containing "forward-looking
information," as defined by the Private Securities Litigation Reform Act of
1995. We have used the words "anticipate," "intend," "may," "expect," "believe,"
"plan," "will," "estimate," "should" and variations of those words and similar
expressions in this prospectus and in the documents incorporated by reference to
identify those forward-looking statements. Forward-looking information, by its
nature, involves estimates, projections, goals, forecasts, assumptions, risks
and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in a statement that contains forward-looking
information. Any statement containing forward-looking information speaks only as
of the date on which it is made; and, except to fulfill our obligations under
the U.S. securities laws, we undertake no obligation to update any such
statement to reflect events or circumstances after the date on which it is made.
Examples of factors that can affect our expectations, beliefs, plans, goals,
objectives and future financial or other performance are discussed under the
heading "Risk Factors." All such factors are difficult to predict, contain
uncertainties that may materially affect actual results, and may be beyond our
control. It is not possible for our management to predict all of such factors or
to assess the effect of each factor on our business. New factors emerge from
time to time, and may be found in the future SEC filings incorporated by
reference in this prospectus. All of our forward-looking statements should be
considered in light of these factors. For more information about such factors
and risks, see "Risk Factors" and the other documents incorporated by reference
in this prospectus.
USE OF PROCEEDS
If the maximum number of shares are sold, we will receive gross
proceeds of $5,250,000. Based on our present plans, which represent existing and
anticipated business conditions, we intend to apply the estimated net proceeds
of the offering over the next twelve months, assuming the sale of 100%, 50% and
10% of the offering, respectively, as follows:
USE OF PROCEEDS
Percent of Offering 100% 50% 10%
----------- ---------- ---------
Gross Proceeds $5,250,000 2,625,000 525,000
Less: Commissions 525,000 262,500 52,500
Less: Offering expenses 101,000 101,000 101,000
----------- ---------- ---------
Net Proceeds $4,624,000 2,261,500 371,500
=========== ========== =========
Projected Application and Corresponding
Percentage of Net Proceeds
REMEX:
Capital expenditures for development
and acquisition of facilities $ 200,000 4.3% 30,000 1.3% -- --
Expansion of lease / rental fleet $1,900,000 41.1% 525,000 23.2% -- --
RESALTA:
Capital expenditures for development
and acquisition of facilities $1,100,000 23.8% 940,000 41.6% 10,000 2.7%
Acquisition of additional inventory $ 850,000 18.4% 400,000 17.7% 120,000 32.3%
Working Capital
Salaries $ 370,000 8.0% 257,500 11.4% 168,500 45.4%
Rent 30,000 0.6% 39,000 1.7% 68,000 18.3%
Marketing and advertising costs 100,000 2.2% 40,000 1.8% -- --
Logistics and facility planning costs 35,000 0.8% 30,000 1.3% 5,000 1.3%
Acquisition research costs 39,000 0.8% -- -- --
----------- ----------- ----------
Totals $4,624,000 100% 2,261,500 100% 371,500 100%
=========== =========== ==========
10
Our first priority for the use of proceeds is to acquire additional
units for our lease/rental fleet and inventory for our trailer distribution
business. Our second priority is to develop and acquire additional facilities
for both businesses. The needs and costs for the RESALTA facilities component is
significantly greater than those for REMEX, because the distribution business
needs a service and parts facility as well as a storage yard. Our third priority
is to add personnel to service our expanding businesses. Salaries will remain
constant at CapSource, mildly increase at REMEX and substantially increase at
RESALTA, where we have the greatest need to increase personnel. Rent will remain
constant at CapSource, and may increase in the short term for both REMEX and
RESALTA, but may decrease if we receive enough proceeds to purchase a facilities
for both. RESALTA will incur greater rent expense and greater facility expense,
because of its needs for a service and parts facility already discussed. If we
don't sell the entire offering, we will proportionately scale back our plans in
each category along the lines presented in the table above.
DETERMINATION OF OFFERING PRICE
Prior to this public offering, there has been no public market for the
common stock. We cannot assure you that an active trading market will develop
or, if developed, that it will be sustained. We determined the offering price of
the common stock arbitrarily. The offering price bears no relationship to any
traditional or established criteria of value.
11
CAPITALIZATION
The following unaudited table sets forth our capitalization as of
September 30, 2002 and the adjusted capitalization assuming the sale of 100%,
50% and 10% of the offering:
As Adjusted
Actual (2)
September 30, 2002 100% 50% 10%
------------------ ---- --- ---
Short-term debt:
Convertible notes payable (net of discount) $ 173,106 173,106 173,106 173,106
Notes payable 254,251 254,251 254,251 254,251
----------- ----------- ----------- -----------
Short-term debt 427,357 427,357 427,357 427,357
Long-term debt:
Long-term portion of:
Convertible notes payable (net of discount) 292,004 292,004 292,004 292,004
Payable to stockholder (net of discount) 738,605 738,605 738,605 738,605
----------- ----------- ----------- -----------
Long-term debt 1,030,609 1,030,609 1,030,609 1,030,609
Stockholders' equity
100,000,000 shares of capital stock authorized:
Preferred stock, $.01 par value, indefinite shares
authorized; none issued or outstanding
Common stock, $.01 par value, 7,877,038 shares, 78,770 108,770 93,770 81,770
10,877,038 shares, 9,377,038 shares and 8,177,038
shares issued and outstanding, respectively (1)
Additional paid-in capital 6,644,317 11,763,317 9,153,317 7,065,317
Accumulated deficit (5,254,570) (5,254,570) (5,254,570) (5,254,570)
----------- ----------- ----------- -----------
Stockholders' equity 1,468,517 6,617,517 3,992,517 1,892,517
----------- ----------- ----------- -----------
Total capitalization $ 2,926,483 8,075,483 5,450,483 3,350,483
=========== =========== =========== ===========
(1) Does not include adjustment for 565,000 shares issuable upon exercise of
warrants outstanding at September 30, 2002, approximately 750,755 shares upon
conversion of all convertible notes at current amounts, and 550,000 shares
reserved for issuance under our 2001 Stock Option Plan.
(2) Adjusted to give effect to the receipt of the estimated net proceeds to us
from the sale of 3,000,000, 1,500,000 and 300,000 shares of common stock offered
in this offering, assuming an initial public offering price of $1.75 per share.
12
CAPSOURCE FINANCIAL, INC.
DILUTION
The following table illustrates the per common share dilution as of
September 30, 2002 which may be experienced by investors buying common stock in
this offering assuming the sale of 100%, 50% and 10% of the number of shares
offered:
100% 50% 10%
-------------- ------------ ------------
OFFERING PRICE $ 1.75 1.75 1.75
============== ============ ============
Quantity of shares outstanding before offering 7,877,038 7,877,038 7,877,038
Net tangible book value as of September 30, 2002 $ 1,468,517 1,468,517 1,468,517
-------------- ------------ ------------
NET TANGIBLE BOOK VALUE PER SHARE BEFORE OFFERING $ 0.19 0.19 0.19
============== ============ ============
-------------- ------------ ------------
INCREASE PER SHARE ATTRIBUTABLE TO INVESTORS IN THIS OFFERING $ 0.37 0.21 0.04
============== ============ ============
Quantity of shares outstanding after offering 10,877,038 9,377,038 8,177,038
Net tangible book value after offering $ 6,092,517 3,730,017 1,840,017
-------------- ------------ ------------
NET TANGIBLE BOOK VALUE PER SHARE AFTER OFFERING $ 0.56 0.40 0.23
============== ============ ============
-------------- ------------ ------------
DILUTION PER SHARE TO INVESTORS IN THIS OFFERING $ 1.19 1.35 1.52
============== ============ ============
We have not included any of the warrants that may be earned by
Public Securities under the underwriting agreement in any of the dilution
calculations or costs of the offering in the table above.
If we sell all of the shares offered, the percent dilution per share
to investors will be 68%. If we sell 50% of the shares offered, the percent
dilution per share to investors will be 77%. If we sell 10% of the shares
offered, the percent dilution per share will be 87%.
The following table illustrates the differences of the percentage of
equity to be purchased and the comparative amounts paid to us for shares of
common stock by investors in this offering before deducting estimated expenses
compared to the percentage of equity to be owned by our present stockholders and
the total consideration paid by them for their shares.
Assuming the sale of 100% of the offering, or 3,000,000 shares:
Shares Purchased Percentage of Total Total Paid % Total Paid Average
---------------- ------------------- ---------- ------------ -------
Present Investors 7,877,038 72% $6,723,087 56% $0.85
Investors in this Offering 3,000,000 28% $5,250,000 44% $1.75
Assuming the sale of 50% of the offering, or 1,500,000 shares:
Shares Purchased Percentage of Total Total Paid % Total Paid Average
---------------- ------------------- ---------- ------------ -------
Present Investors 7,877,038 84% $6,723,087 72% $0.85
Investors in this Offering 1,500,000 16% $2,625,000 28% $1.75
13
Assuming the sale of 10% of the offering, or 300,000 shares:
Shares Purchased Percentage of Total Total Paid % Total Paid Average
---------------- ------------------- ---------- ------------ -------
Present Investors 7,877,038 96% $6,723,087 93% $0.85
Investors in this Offering 300,000 4% $ 525,000 7% $1.75
FURTHER DILUTION. We may issue additional restricted common shares
pursuant to future private placements. Any sales under Rule 144 after the
applicable holding period may have a depressive effect upon the market price of
our common shares and investors in this offering. Dilution may also occur due to
the future exercise of outstanding warrants or conversion of convertible notes.
PLAN OF DISTRIBUTION
We have engaged Public Securities, Inc. as underwriter to sell our
common stock in this offering. Public Securities has agreed to sell a minimum of
300,000 shares and a maximum of 3,000,000 shares of our common stock, at a price
of $1.75 per share on a "best efforts, minimum or maximum" basis. This means
that unless 300,000 shares are sold and payment received by us within 120 days
from the date of this Prospectus, no shares will be sold, Public Securities
won't earn a commission or receive any warrants, and this offering will
terminate. Until a minimum of $525,000 has been received, all proceeds will be
held in an interest-bearing escrow account with the independent escrow agent,
Vectra Bank Colorado. If Public Securities does not sell a minimum of 300,000
shares, all amounts received will be refunded with interest and without
deductions, and this offering will terminate. In exchange for Public Securities
agreement to offer our shares of stock for sale to the public, Public Securities
will be paid a 10% commission on each share sold in this offering, subject to
the 300,000 share minimum. Additionally, Public Securities is entitled to
accountable out-of-pocket expenses not to exceed $52,500, unless we otherwise
agree, and to certain non-accountable expenses, not to exceed 2% of the public
offering price on all shares sold. Public Securities can use selected dealers,
who will be paid a commission of 7.5% on each share they sell. In addition,
Public Securities will be granted warrants to purchase up to 300,000 shares of
common stock for $100. The warrants will have an exercise price of $2.45 each,
140% of the offering price. The warrants will be granted at the rate of one
warrant for every ten shares sold in this offering, subject to the 300,000 share
minimum. The warrants are exercisable twelve (12) months after the effective
date of this Prospectus and have a term of four (4) years. We have not included
any warrants that may be earned by Public Securities under the underwriting
agreement in any of the dilution calculations or costs of the offering presented
herein. If any warrants are earned, their fair value will be determined at the
closing of the offering using the Black Scholes option pricing model and will
also then be reflected as a deduction from the offering proceeds, directly in
equity.
Our officers, directors, consultants and holders of more than 5% of
the outstanding common stock have agreed to not sell or otherwise transfer any
of their shares of common stock for a period commencing on the effective date of
this prospectus until after 180 days from the final closing date of this
offering, unless the price of the common stock trades at 175% of the public
offering price for twenty (20) consecutive days.
Public Securities is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of the common stock in this
offering. Public Securities does not have a material relationship with us.
Public Securities has been in business for seventeen (17) years and is a full
service broker-dealer specializing in market making and the filing of form
15c2-11 for new companies. It acts as a market maker in over 150 securities and
generally files Form 15c2-11s for between 50 and 100 companies each year. There
are no material relationships between our promoters and the Underwriter, other
than as identified in the Underwriting Agreement, filed herewith. We have agreed
to indemnify Public Securities against certain liabilities, including
liabilities under the Securities Act of 1933 and the Securities and Exchange Act
of 1934.
We will disseminate information regarding any broker-dealers that
make a market in our securities in the future, if any, to our stockholders as
part of ongoing communication.
LEGAL PROCEEDINGS
From time to time, we may become involved in various claims and
lawsuits incident to the operation of our business, including claims arising
from accidents or from the delay or inability to meet our contractual
obligations. We do not have any pending or threatened actions at this time.
14
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
We have listed below the names, ages and positions of our directors and
executive officers. We do not maintain key person life insurance on any or our
key personnel:
NAME AGE POSITION WITH CAPSOURCE
---- --- -----------------------
Fred C. Boethling 57 President, Chief Executive Officer and Director
Steven Reichert 55 Vice President, General Counsel and Director
Steven J. Kutcher 50 Vice President, Chief Financial Officer
Lynch Grattan 51 Director
Randolph M. Pentel 43 Director
FRED C. BOETHLING. President, Chief Executive Officer and Director -
CapSource Financial, Inc.; Director - Rentas y Remolques de Mexico, S.A. de C.
V; Director - Remolques y Sistemas Aliados de Transportes, S.A. de C. V.
Mr. Boethling is responsible for the overall direction and management
of CapSource and its subsidiaries. From 1994 to 1998, he was Co-Managing Partner
of Capstone Partners, a firm specializing in planning and finance. From 1989 to
1993, Mr. Boethling was President, CEO and Chairman of the Board of Directors of
KLH Engineering Group, Inc, a NASDAQ-listed engineering services holding
company. During this period, Mr. Boethling developed the in-house acquisition
management systems and procedures, developed and managed the deal flow,
evaluated over 400 acquisition candidates and completed seventeen acquisitions
and took the firm public. From 1983 to 1988, Mr. Boethling was Chairman of
Sandstone Capital Corporation, a private management consulting and investment
firm specializing in start-ups. From 1979 to 1982, he was a co-founder,
President and Director of Hart Exploration & Production Co., a NASDAQ-listed
independent oil and gas firm. Prior to that, for a period of eleven years, Mr.
Boethling was employed by Cities Service Oil Company, a Tulsa, Oklahoma-based,
NYSE-listed major oil company, first as an Engineer in Midland, Texas and then
as Exploration Manager for Canada-Cities Service, Ltd., the Canadian subsidiary
of Cities Service. Mr. Boethling graduated from the University of Minnesota with
a Bachelor's degree in engineering in 1968.
STEVEN E. REICHERT. Vice President, General Counsel, Secretary and
Director - CapSource Financial, Inc.; Director - Rentas y Remolques de Mexico,
S.A. de C. V.; Director - Remolques y Sistemas Aliados de Transportes, S.A. de
C. V.
Mr. Reichert serves as general counsel for CapSource and is responsible
for the negotiation of various agreements and general legal matters and is
involved in developing and implementing overall financial strategy for
CapSource. From 1994 to 1998, he was Co-Managing Partner of Capstone Partners.
From 1991 to 1994, Mr. Reichert was associated with the international law firm
of Popham, Haik, Schnobrich & Kaufman, Ltd. where he practiced in the area of
securities and complex commercial litigation. Prior to that, Mr. Reichert was a
founder and Senior Vice President and Director responsible for strategic
planning, acquisitions and capital development for Sequel Corporation, a
NASDAQ-listed, telecommunications company. From 1979 to 1982, Mr. Reichert was a
co-founder, Senior Vice President and Director of Hart Exploration & Production
Co., a NASDAQ-listed independent oil and gas firm. From 1966 to 1979, Mr.
Reichert was Vice President in charge of the Underwriting Department at Dain
Bosworth, Inc., a regional investment banking firm. He is a member of the Board
of Arbitrators for the National Association of Securities Dealers. Mr. Reichert
received his Juris Doctor degree (Cum Laude) from Hamline University School of
Law in 1991 and his undergraduate degree in economics from the University of
Minnesota in 1990.
STEVEN J. KUTCHER. Vice President and Chief Financial Officer -
CapSource Financial, Inc.
Mr. Kutcher is responsible for treasury management, accounting and
financial reporting for CapSource. Mr. Kutcher has substantial experience in
managing foreign operations. Prior to joining CapSource, from 1982 to 2000, he
was employed by International Multifoods Corporation, initially as Manager of
International Accounting & Analysis (Minneapolis, Minnesota) (1982 to 1985),
followed by Assistant Controller Venezuelan Operations (Caracas) (1985 to 1987),
Controller Mexican Operations (Mexico City) (1987 to 1990), Group Controller
International Operations (Minneapolis) (1990 to 1993), Director of Planning and
Procurement Venezuelan Operations (Caracas) (1993 to 1995), Vice President of
Finance Venezuelan Operations (Caracas) (1995 to 1999) and Chief Financial
Officer and Vice President of Finance Multifoods Distribution (Denver, Colorado)
(1999 to 2000). Before joining International Multifoods, he acquired public
accounting experience, first as a Staff Auditor with Mazanec, Carlson & Company,
CPA in St. Paul, Minnesota from 1977 to 1978 and later as a Senior Auditor at
Boyum & Barenscheer, CPA in Minneapolis from 1978 to
15
1981. From 1975 to 1977 he was Finance and Accounting Manager with Minnesota
Public Radio. From 1974 to 1975 he was an internal bank auditor with Bremer Bank
Group, a bank holding company located in St. Paul, Minnesota. Mr. Kutcher
received a BA in Accounting & Business Administration from St. John's University
in Collegeville, Minnesota in 1974 and a Certificate of Advanced Studies in
International Management from Thunderbird-The American Graduate School of
International Management in Phoenix, Arizona in 1981. Mr. Kutcher holds various
professional certifications and is a member of a number of professional
organizations.
LYNCH GRATTAN. Director - CapSource Financial, Inc.; Director General
and Director - Rentas y Remolques de Mexico, S.A. de C. V.; Director General and
Director - Remolques y Sistemas Aliados de Transportes, S.A. de C. V.
Mr. Grattan is responsible for the overall management of REMEX and
RESALTA. He has substantial experience with Mexican development banks and other
financial institutions. In addition, he has been involved with various
privatization efforts in Mexico. While he was born in the U.S., Mr. Grattan has
spent much of his life in Mexico. He has been a resident of Mexico City for the
past 18 years. He brings to us a thorough understanding of the Mexican business
culture, a broad base of contacts among Mexican and multi-national business
leaders domiciled in Mexico and a familiarity with Mexican government
departments and agencies. Prior to joining REMEX, from 1995 to 1997, Mr. Grattan
was a Partner with Palmer Associates, S.C., a risk management and consulting
firm based in Mexico City. Beginning in 1992, Mr. Grattan provided agribusiness
consulting services to a wide range of clients. Also, in 1992, Mr. Grattan
organized the agribusiness division of FINBEST, S.C., a small Mexican merchant
banking firm. While he is no longer active in the firm, he remains a Partner.
While he is employed full time at REMEX and RESALTA, he is widely respected in
the agribusiness sector and is called upon from time to time for public speaking
engagements. REMEX encourages this practice as it helps build relationships
which are essential to doing business in Mexico. From 1987 to 1992, he
represented ConAgra International, Inc. in Mexico. He opened and served as
Director of the Con-Agra Offices in Mexico City, where his primary
responsibility was the formation of export/import joint ventures. From 1982 to
1987, Mr. Grattan was Marketing and Sales Manager for the Protein Technologies
division of Ralston Purina Company. He organized, staffed, trained and directed
the national sales force for Isolated Soy Protein Products in Mexico. From 1975
to 1981, Mr. Grattan was employed by Purina S.A. de C.V., the Mexican subsidiary
of Ralston Purina Company, first as District Manager and later as National
Products Manager. Mr. Grattan is a member of numerous Mexican civic and business
organizations. He is active in the American Chamber of Commerce in Mexico City,
the largest Chamber of Commerce outside the U.S. He has won several awards from
the Chamber and is currently Vice Chairman of the Agribusiness Committee. He
holds a Bachelors Degree in Agricultural Engineering from Texas Tech University.
RANDOLPH M. PENTEL. Director - CapSource Financial, Inc.; Director -
Rentas y Remolques, S.A. de C. V.; Director - Remolques y Sistemas Aliados de
Transportes, S.A. de C. V.
Mr Pentel is also the Managing Member and principal owner of RTL Group,
LLC. In addition, he is the Executive Vice President and principal owner of
Notification Systems, Inc., the largest provider of large-dollar check return
notifications in the U.S. The electronic network, developed by Mr. Pentel, known
as EARNS, supplies banks with advanced data notification of checks in the
process of failing to clear, thereby allowing financial institutions nationwide
the ability to reduce operating losses. Since 1987, Notification Systems, Inc.
has grown steadily from 4,500 notifications per day, to over 30,000 in 2000.
Currently 99 of the largest 100 U.S. banks are customers of EARNS, as are
approximately 80% of the top 300 banks in the U.S. Mr. Pentel is involved in
various international charitable organizations.
In November 2002, RESALTA contracted with Mr. Carlos Legaspi for the
position of General Manager of RESALTA. Mr. Legaspi will assume that position on
January 1, 2003. Mr. Legaspi will be responsible for the overall management of
RESALTA, including coordinating sales efforts and establishing and managing the
parts and service operations. Mr. Legaspi has substantial experience in all
aspects of transportation and logistics management. Prior to joining RESALTA,
Mr. Legaspi was Manager of Operations for APIVER, a Mexican provider of seaport
management services. Mr. Legaspi has also served as Director of Operations for
Grupo TMM S.A., a major shipping, railroad and trucking company whose shares are
listed on the NYSE (TMM).
EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Beginning in 1999, each year we granted employee members of the Board
of Directors for their services on the Board, warrants to purchase 25,000 shares
of common stock at prices determined to be fair market value at the time of
grant. We also granted non-employee members of the Board of Directors for their
services on the Board, warrants to purchase 50,000 shares of common stock at
prices determined to be fair value at the time of grant, and a $500 fee per
meeting attended. All warrants vested immediately and expire five years from the
date of grant.
16
EXECUTIVE COMPENSATION
Executive compensation is determined by our Board of Directors. The
following table provides certain information regarding compensation earned by or
paid to our Chief Executive Officer and Vice President/General Counsel during
each of the past three years. No other executive officers received compensation
in excess of $100,000 during any of the last three years.
Summary Compensation Table
--------------------------
Long Term Compensation
Annual Compensation ------------------------------------
Name and -------------------------- Securities Underlying Dollar All Other
Principal Position Fiscal Year Salary Bonus Warrants(1) Value(2) Compensation
- ------------------ ----------- ------------ ----------- --------------------- ----------- ------------
Fred C. Boethling 1999 $48,000(3) 25,000 $27,500
CEO & 2000 $96,000 $8,000 25,000 $27,500 $1,267(4)
President 2001 $96,000 25,000(5) $27,500(5) $2,874(4)
Steven E. Reichert 1999 $48,000(3) 25,000 $27,500
Vice President & 2000 $96,000 $8,000 25,000 $27,500 $1,267(4)
General Counsel 2001 $96,000 25,000(5) $27,500(5) $2,874(4)
(1) Warrants granted to the executive in his capacity as a director.
(2) Assuming fair value of $1.10 per share.
(3) Represents six (6) months only. Employment commenced July 1, 1999.
(4) Represents executive's individual share of executive compensation pool,
which consists of 1.5% of REMEX's lease revenue for the fiscal year. (5)
Earned in 2001 but not granted until April, 2002.
EMPLOYMENT AGREEMENTS
On December 10, 2000 we entered into employment agreements with Mr.
Boethling, Mr. Reichert and Mr. Grattan. Those agreements provide that we will
employ Mr. Boethling, Mr. Reichert and Mr. Grattan for a period ending two years
after we give written notice of our intention to terminate either Mr. Boethling,
Mr. Reichert or Mr. Grattan or until they turn 65 years of age, whichever is
earlier. The contracts provide for an annual minimum base salary of $96,000
subject to adjustments at the discretion of the Board of Directors prior to
January 1, 2002, participation in any other insurance, pension, savings and
health and welfare plans offered by us, and the executive's option to receive up
to 25% of his base salary in common stock on the basis of one (1) share of
common stock for each $1.00 of base salary so designated. No executive has opted
to take any common stock in lieu of salary to date. The employment may be
terminated for cause or breach of the contract after opportunity to cure.
STOCK OPTIONS, WARRANTS
No options were granted to the named executive officers during 2001.
Except for warrants for participating on the Board in 2001, no warrants were
granted to the named executive officers, and no warrants were exercised by the
named executive officers during 2001.
The following table summarizes the aggregate value of the warrants to
which the named executive was entitled at December 31, 2001 by the executive
officers named in the Summary Compensation Table.
Year-End Values
Number of Securities Underlying Value of Unexercised
Unexercised Warrants at In-the-Money Warrants at
Year-End Year-End (2)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Fred C. Boethling 75,000(1) -- $87,500 --
Steven Reichert 75,000(1) -- $87,500 --
- -----------------------------
(1) These warrants vested 100% at the time of grant and were granted to the
executive in his capacity as a director.
(2) Based on an estimated market price of $1.75 per share
17
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table presents information provided to us as to the
beneficial ownership of Common Stock as of September 30, 2002, by all current
directors, certain executive officers and all directors and executive officers
as a group. All shares represent sole voting and investment power, unless
indicated to the contrary.
Number of Shares Percent of
Name and Address of Beneficial Owner (1) Beneficially Owned Shares
- ---------------------------------------- ------------------ ------
Fred C. Boethling(2).............................................. 325,259 3.9%
Steven Reichert(3)................................................ 325,259 3.9%
Randolph Pentel(4)................................................ 7,534,520 89.2%
Lynch Grattan(5).................................................. 75,000 .9%
Steven Kutcher(6)................................................. 20,000 .2%
------ ---
All directors and officers and as a group (5 persons)(7).......... 8,280,038 98.1%
========= =====
(1) The addresses of all the named individuals are c/o CapSource Financial,
Inc., 2305 Canyon Boulevard, Suite 103, Boulder, Colorado 80302.
(2) Includes 75,000 shares of common stock issuable upon the exercise of
warrants that are currently exercisable.
(3) Includes 75,000 shares of common stock issuable upon the exercise of
warrants that are currently exercisable.
(4) Includes 275,000 shares of common stock issuable upon the exercise of
warrants that are currently exercisable.
(5) Includes 75,000 shares of common stock issuable upon the exercise of
warrants that are currently exercisable.
(6) Includes 20,000 shares of common stock issuable upon the exercise of
warrants that are currently exercisable.
(7) Includes 520,000 shares of common stock issuable upon the exercise of
warrants that are currently exercisable.
The following table presents information about all share and warrant
acquisitions by current directors and officers.
Name # of Shares Purchase Price # of Warrants Exercise Price Type of Consideration Issue Date
- ---- ----------- -------------- ------------- -------------- --------------------- ----------
Fred C. Boethling 1,250 $ 6,250 Consulting services 08/19/1996
132,366 $ 6,169 Consulting services 12/01/1998
134,643 $ 6,169 Consulting services 06/11/1999
25,000 $1.10 1999 board participation 06/21/1999
25,000 $1.10 2000 board participation 12/31/2000
25,000 $1.30 2001 board participation 04/01/2002
Steven E. Reichert 1,250 $ 6,250 Consulting services 08/19/1996
132,366 $ 6,169 Consulting services 12/01/1998
134,643 $ 6,169 Consulting services 06/11/1999
25,000 $1.10 1999 board participation 06/21/1999
25,000 $1.10 2000 board participation 12/31/2000
25,000 $1.30 2001 board participation 04/01/2002
Randolph M. Pentel 89,995 $ 449,975 Initial cash investment 08/19/1996
4,266,684 $2,133,341 Conversion of debt 06/11/1999
22,000 $ 22,000 Cash contribution 11/03/1999
65,150 $ 65,150 Cash contribution 01/27/2000
40,978 $ 20,489 Travel services 01/27/2000
1,409,637 $1,409,637 Conversion of debt 12/31/2000
300,000 $ 300,000 Cash contribution 12/31/2000
168,280 $ 168,280 Cash contribution 01/09/2001
867,653 $ 867,653 Conversion of debt 06/03/2002
29,143 $ 51,000 Cash contribution 08/02/2002
50,000 $1.10 1999 board participation 06/21/1999
50,000 $1.10 2000 board participation 12/31/2000
125,000 $1.10 Compensation for services 07/01/2001
50,000 $1.30 2001 board participation 04/01/2002
Lynch Grattan 25,000 $1.10 1999 board participation 06/21/1999
25,000 $1.10 2000 board participation 12/31/2000
25,000 $1.30 2001 board participation 04/01/2002
Steven Kutcher 20,000 $1.10 Compensation for services 06/01/2001
18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table presents information provided to us about the
beneficial ownership of common stock as of September 30, 2002, by persons known
to us to hold 5% or more of our stock.
Number of Shares Percent of
Name and Address of Beneficial Owner(1) Beneficially Owned Shares
- ------------------------------------ ------------------ ------
Randolph Pentel(2).................. 7,534,520 89.2%
- ------------------------
(1) The address of the named individual is c/o CapSource Financial, Inc., 2305
Canyon Boulevard, Suite 103, Boulder, Colorado 80302.
(2) Includes 275,000 shares of common stock issuable upon the exercise of
warrants that are currently exercisable.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of
undesignated stock, 7,877,038 shares of which are common stock currently issued
and outstanding.
The Board of Directors, without further action by the stockholders, is
authorized to issue different classes of common stock and/or preferred stock in
one or more transactions. At September 30, 2002, no shares of preferred stock or
other classes of common stock have been issued.
COMMON STOCK
All shares of the common stock now outstanding are, and the shares
offered hereby will be, duly authorized, validly issued, fully paid and
nonassessable. The holders of the common stock: (i) have equal ratable rights to
dividends from funds legally available therefor, when, as and if declared by our
Board of Directors; (ii) are entitled to share ratably in all of the assets
available for distribution to holders of the common stock upon liquidation,
dissolution or winding up of our affairs; (iii) do not have preemptive,
subscription or conversion rights and there are no redemption or sinking fund
provisions applicable thereto; and (iv) are entitled to one vote per share on
all matters which stockholders may vote on at all meetings of stockholders.
The holders of the common stock do not have cumulative voting rights,
which means that the holders of more than 50% of such outstanding shares voting
for the election of directors can elect all of our directors to be elected, if
they so choose. In that event, the holders of the remaining shares will not be
able to elect any of our directors.
The payment by us of dividends, if any, in the future rests within the
discretion of the Board of Directors and will depend, among other things, upon
our earnings, our capital requirements and our financial condition, as well as
other relevant factors. Due to our anticipated financial needs and future plans,
we do not contemplate paying any dividends upon the common stock in the
foreseeable future.
While we have acted as our own transfer agent and registrar for our
common stock, we intend to retain a third party to do so.
PREFERRED STOCK
Our Articles of Incorporation authorize the issuance of 100,000,000
shares of undesignated stock, 7,877,038 shares of which are common stock
currently issued and outstanding. There are no shares of preferred stock
outstanding. The Board of Directors, without further action by the stockholders,
is authorized to establish and issue different classes or series of preferred
stock, fix rights and preferences of those classes or series, fix the number or
change the number of shares constituting any class or series and fix or change
any special rights, qualifications, limitations or restrictions relative to any
class or series. One of the effects of having undesignated preferred stock may
be to enable the Board of Directors to render more difficult or to discourage an
attempt to obtain control of us by means of a tender offer, proxy contest,
merger or otherwise, and thereby protect the continuity of our management. The
issuance of preferred stock may adversely affect the rights of holders of common
stock. For example, preferred stock may rank prior to common stock as to
dividends, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of common stock. Consequently, the
issuance of preferred stock may discourage bids for the common stock at a
premium or otherwise adversely affect the price of the common stock. We will not
offer preferred stock to any officer, director or 5% shareholder, except on the
same terms that are offered to all other existing or new stockholders.
19
INTEREST OF NAMED EXPERTS AND COUNSEL
The consolidated financial statements of CapSource Financial, Inc. as
of December 31, 2001 and 2000, and for the years then ended, have been included
in this prospectus and in the registration statement in reliance upon the report
of KPMG LLP, independent accountants, appearing elsewhere in this prospectus,
and upon the authority of KPMG LLP as experts in accounting and auditing.
The validity of the shares of Common Stock offered in this prospectus
was passed upon for us by Rider, Bennett, Egan & Arundel, LLP Minneapolis,
Minnesota.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, our Bylaws and the provisions of the
Colorado Business Corporation Act, which govern our actions, provide that our
present and former officers and directors shall be indemnified against certain
liabilities and expenses which any of them may incur as a result of being, or
having been, our officer or director. Indemnification is contingent upon certain
conditions being met, including, that the person: conducted himself or herself
in good faith; reasonably believed (i) in the case of conduct in an official
capacity with us, that his or her conduct was in our best interest; and (ii) in
all other cases, that his or her conduct was at least not opposed to our best
interests; and in the case of any criminal proceeding, had no reasonable cause
to believe that his or her conduct was unlawful. We may not indemnify a director
in connection with a proceeding by us or in our right in which the director was
adjudged liable to us; or in connection with any proceeding charging that the
director derived an improper personal benefit, whether or not involving action
in an official capacity, in which proceeding the director was adjudged liable on
the basis that he or she derived an improper personal benefit.
In addition, our Articles of Incorporation provide that a director
shall not be liable for monetary damages for a breach of the director's
fiduciary duty, except for a breach of the duty of loyalty, acts not in good
faith or involving intentional misconduct or a knowing violation of law,
violations involving unlawful distributions, or for actions from which the
director derived an improper personal benefit.
Insofar as the indemnification of liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons by the provisions of our Articles of Incorporation, Bylaws and the
provisions of the Colorado Business Corporation Act, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission, that
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable.
ORGANIZATION WITHIN LAST FIVE YEARS
Trailers Modernos International, Inc. ("TMI") was established June 19,
1992, as a United States company incorporated in the State of Virginia. TMI
formed a wholly owned Mexican operating subsidiary, named Trailers Modernos S.A.
de C.V. ("TMSA"), located in Mexico City. TMI and TMSA spent several years
attempting to establish a truck trailer manufacturing, truck stops and truck
trailer leasing business in Mexico.
As part of its efforts to obtain private financing, TMI, on February
16, 1996, formed a wholly-owned subsidiary, named Mexican-American-Canadian
Trailers Leasing, Inc. ("MAC"), a United States corporation incorporated in
Colorado. MAC also formed a wholly-owned Mexican subsidiary, named Trailers
Modernos Arrendamiento S.A. de C.V. ("TMA"). Upon incorporation, MAC exchanged
1,000,000 of its shares of common stock with TMI for title to equipment (19
truck van trailers).
As part of its efforts to obtain private financing, Randolph Pentel
invested approximately $400,000 for 399,950 shares of MAC common stock. TMI then
requested Mr. Pentel to loan MAC $500,000 as a bridge loan to be used to
purchase additional equipment and for working capital. The bridge loan was
secured by a pledge of 500,000 of the 1,000,000 shares of MAC common stock owned
by TMI and all rights to any lease payments generated by the equipment purchased
with the proceeds from the bridge loan in the event of a default. MAC defaulted
on the bridge loan in August of 1997, and Mr. Pentel foreclosed on the 500,000
shares of MAC common stock that served as collateral for the bridge loan. At a
meeting of MAC and TMI stockholders on January 8, 1998, the current management
group took control of MAC by electing new directors of MAC and resolving all
issues regarding title to certain MAC rolling stock and management agreements
between MAC and its subsidiary and TMI and its subsidiary. MAC then changed its
name to CapSource Financial, Inc. CapSource has operated independently from TMI
and its subsidiary since that time.
20
BUSINESS
GENERAL
CapSource is a holding company with two Mexican subsidiaries through
which we engage in two principal lines of business: (1) through our subsidiary,
REMEX, we own and manage a lease/rental fleet of over-the-road truck trailers
and related equipment; and (2) through our subsidiary, RESALTA, we have an
agreement with Hyundai Translead granting RESALTA the exclusive right to sell
Hyundai truck trailers in Mexico. As is custom in Mexico, each operating company
has an associated service company that employs all of the personnel who perform
services for the primary operating company. The service companies invoice the
operating companies for the total personnel costs incurred on a monthly basis.
This operating structure, which is common business practice in Mexico, is done
as part of a financial and tax planning tool to limit certain personnel costs
and related tax liabilities.
In 1998, we determined that the North American Free Trade Agreement and
the resulting substantial increase in trade among the signatory countries
presented a significant business opportunity. To capitalize on this opportunity,
we gained control of Mexican-American-Canadian Trailer Rentals, Inc., the
predecessor to CapSource. Mexican-American-Canadian Trailer Rentals and its
Mexican operations were restructured with the following objectives:
o participate in the anticipated growth of the Mexican transportation
industry;
o develop a significant presence in the fledgling Mexican leasing industry;
and
o exploit our ability to do business in Mexico.
A holding company structure was adopted and the business's name was
changed to CapSource Financial, Inc. to reflect our business strategy more
accurately.
Today, REMEX, CapSource's wholly owned subsidiary, the successor to
Mexican-American-Canadian Trailer Rentals' Mexican operations, operates as an
equipment leasing company with headquarters in Mexico City. REMEX currently
leases truck trailers and related equipment to contract carriers and private
fleets in Mexico. As of September 30, 2002, REMEX had 182 units of which 177
were on lease in its lease/rental pool with an approximate cost of $3,200,000.
Fleet utilization was 97%. All leases are operating leases, that is we retain
title to and ownership of the equipment. CapSource formed RESALTA in April 2001
as a majority owned subsidiary to take advantage of an agreement negotiated
between CapSource and Hyundai which provides CapSource with the exclusive right
to market and sell Hyundai truck trailers and related equipment in Mexico.
Hyundai markets its products directly through and through a network of dealers
in the U.S. The signed agreement with CapSource represents Hyundai's initial
entry into the Mexican market.
INDUSTRY BACKGROUND
Mexico is strategically situated between Atlantic Europe and the
nations of the Pacific Rim, as well as culturally and geographically located
between the world's largest economy, the United States to the north, and the
developing economies of Central and South America.
In terms of land area, Mexico is the 13th largest country in the world
with an area of 1,967,183 square km or 759,530 square miles, about three times
the size of Texas. (Source: 2001 CIA World Factbook). Mexico has an estimated
population of 98.5 million, 72% of whom live in urban areas and more than 50% of
whom are less than twenty years of age. Mexico has three major inland industrial
centers: Monterrey, Guadalajara and Mexico City. In addition, Mexico has major
ports on both the Atlantic and Pacific coasts.
On January 1, 1994, Mexico entered the North American Free Trade
Agreement with the U.S. and Canada, further reducing barriers to trade with
Mexico for U.S. and Canadian companies and removing many restrictions on foreign
investment. (Source: WHAT IS NAFTA, Wall Street Journal, September 15, 1993, p.
A18, providing a summary of the contents of the five volume North American Free
Trade Agreement). NAFTA has created a powerful economic bloc of 406 million
consumers in the U.S., Mexico and Canada. The combined gross national products
of the three NAFTA participants are over $11 trillion U.S. (Source: Fact Sheet
on NAFTA, The White House, President George W. Bush, April 22, 2001). The U.S.
Trade office states that NAFTA has and will continue to provide numerous
opportunities to business, industry and workers throughout the trade area. NAFTA
was designed to lead to a more efficient use of North American resources -
capital, land, labor and technology - while heightening competitive market
forces. NAFTA has been a great success. (Source: Joint Statement of United
States Trade Representative Robert B. Zoellick, Canadian Minster for
International Trade Pierre S. Pettigrew, and Mexican Secretary of Economy Luis
Ernesto Derbez, following the July 31, 2001 meeting of the NAFTA Free Trade
Commission). Mexico exported $139 billion to its NAFTA partners in 2001, 225
percent more than in 1993, the year prior to the start of NAFTA implementation.
U.S.-Mexico bilateral trade surpassed U.S.-Japan bilateral trade which
21
placed Mexico as the United States' second largest trading partner. (Source:
U.S. Mexico Chamber of Commerce; U.S. Bureau of the Census). Trucks carry 90% of
the trade between Mexico and the United States. (Source: Closing the Border
under NAFTA: The Strength of the Teamsters or Weakness of Leadership?, James
Giermanski, Capital Research Center, February 2000). Data provided by the U.S.
Customs Service shows that since the passage of NAFTA, truck crossings at the
various U.S./Mexican border checkpoints have increased approximately 198%.
On November 27, 2002, President George W. Bush announced his decision
to open U.S. highways to Mexican trucks beyond the 20-mile commercial border
zones, which is the current limitation for Mexican trucks entering the United
States. Motor carriers domiciled in Mexico operating in the United States will
be subject to the same Federal and State laws, regulations and procedures,
including safety regulations that apply to carriers domiciled in the United
States. President Bush's decision complies with a provision of NAFTA. Mexican
rigs currently transfer their cargo to U.S. trucks that carry the loads to
points within the United States. Barring a successful legal challenge to the
President's ruling, Mexican trucks could begin operating in the U.S. within one
month. We believe that allowing Mexican trucks into the United States will
further increase demand for our products and services.
BUSINESS AND EXPANSION STRATEGY
CapSource management works with the operating company executives at
REMEX and RESALTA to formulate business plans and strategies consistent with our
overall corporate goals. Our subsidiaries are party to inter-company service
agreements whereby the parent company provides management services in exchange
for a fee. Operating company executives manage the operating companies based on
established goals. Investment and capital allocation decisions are made by the
executive management and board of directors of CapSource.
We intend to expand our business operations through the acquisition of
existing businesses and the integration of acquired businesses with existing
operations.
In evaluating potential acquisitions, we consider the following
factors:
o The geographic location of the candidate. Our first priority is to acquire
candidates located in areas where we believe the market for services is
strong and growing and the candidate represents a strong contributor in
that market. We also consider the ease with which such businesses can be
integrated into our existing operations. Once we have entered a region, we
may seek to increase our presence in the region through expansion of our
existing operations, additional acquisitions and/or new business
opportunities;
o The candidate's profitability. We seek to acquire businesses that are
profitable at the time of acquisition. We also review other financial
factors such as historic levels of revenue and earnings and the opportunity
to increase profitability through operational improvements;
o The candidate's existing and potential customer base. We seek to acquire
businesses with a strong customer base and a reputation for high quality
service. We attempt to retain key personnel through the use of employment
agreements containing noncompetitive provisions and incentive programs. In
addition, we assess the probability of being able to expand the existing
lease base; and
o Each candidate is evaluated for potential synergy with our existing
businesses.
We are engaged in discussions with prospective acquisition candidates
and are in the process of exchanging information with certain of these
candidates. Although we would like to make one or more acquisitions in the next
twelve months and to pursue our acquisition program immediately following the
public offering, as of the date of this prospectus we have not agreed to make
any acquisitions and no assurance can be given as to whether, when, or on what
terms any such possible acquisitions may be completed. We expect that any
acquisition would require seller financing, debt or equity financing or a
combination of some or all these financing techniques that will be decided on a
case by case basis.
RENTAS Y REMOLQUES DE MEXICO, S.A. DE C. V. (D/B/A REMEX)
REMEX is engaged in equipment leasing with headquarters in Mexico City.
REMEX currently focuses on leasing transportation equipment, primarily truck
transportation equipment, to contract carriers and private fleets. REMEX will
consider leasing other types of capital equipment where market conditions are
favorable.
REMEX BUSINESS STRATEGY. Mexico has replaced Japan as the U.S.'s second
largest trading partner. The net effect has been an explosion in cross-border
shipments. (Source: U.S. Customs Service, Inspection and Control Division and
Texas A&M International University). The growth in shipping has resulted in a
substantial increase in demand for truck trailers. Moreover, there is
22
a need to generally upgrade Mexican transportation infrastructure. Further,
CapSource anticipates that Mexican companies, like their U.S. counterparts, will
attempt to out-source their transportation fleets and fleet management in order
to utilize a variable cost approach to operating their businesses. We believe
REMEX is well positioned to capitalize on these economic and regulatory changes.
Mexico suffers from a chronic shortage of investment capital and a
relatively high cost of borrowing. These factors argue against the direct
ownership of capital equipment. REMEX's leasing services offer an alternative to
direct equipment ownership. REMEX offers triple-net operating leases. REMEX
arranges for the license, insurance and taxes relating to the leased equipment.
REMEX leases are typically mid-term - from one to five years. The customer pays
all costs and returns the equipment to REMEX at the end of the lease term. REMEX
does not offer financial or full payout leases.
Mid-term operating lease rates are usually higher than finance lease
rates but lower than short-term rental rates. REMEX leases generally result in
the recovery of the full cost of the leased equipment during the initial term of
the lease, however, to realize an acceptable return on our instrument, we must
re-lease or sell the equipment. Accordingly, at the beginning of each lease,
REMEX estimates the value of the used equipment or residual value at the end of
the term of the lease. To achieve its full return on investment, the equipment
is either sold or re-leased at the termination of the lease. To the extent that
the sale or release of the equipment results in more or less proceeds to REMEX
than the residual value that is carried on REMEX's book, the actual profit and
rate of return on the invested capital will vary. REMEX focuses on mid-term
operating leases because it believes that such leases provide the optimal
balance between risk and return - a high rate of return on invested capital and
an acceptable level of risk.
REMEX occasionally offers short-term leases at rates that are higher
than mid-term leases in order to keep overall fleet utilization at maximum
levels and maximize cash flow.
REMEX TARGET MARKETS. REMEX has targeted small to mid-size companies
which are financially stable, adequately capitalized, well managed with strong
growth potential and good credit. Management is focused on opportunities to
lease equipment which is non-specialized including dry vans, flat beds and
trailer dollies. However, REMEX occasionally leases more specialized equipment
if the term of the lease and the rate of return justify the added risks of these
leases. Of particular interest are business sectors which have recently been or
are in the process of being privatized, such as railroads, port facilities and
grain collection, warehousing and distribution, where REMEX can become the
predominant lessor. Management has been aggressively pursuing this business
strategy.
REMEX COMPETITION. Competition for REMEX comes from three main areas:
o other firms offering operating leases;
o financial leases; and
o other financing arrangements.
In Mexico, as compared to the United States, the leasing business is in
its infancy and, accordingly, competition for the leasing of truck trailers is
somewhat limited.
With respect to operating leases, REMEX has two primary competitors,
XTRA Mexicana, S.A. de C.V. and TIP de Mexico, S.A. de C.V. They are the Mexican
subsidiaries of the two largest U.S. firms offering operating leases to the
transportation industry, XTRA Corporation located in Boston, MA and the TIP
division of GE Capital Services, a unit of General Electric Company located in
Fairfield, CT. Nevertheless, they too are relatively new to the Mexican market,
both since the passage of NAFTA in 1994.
Financial leases are an alternative to operating leases. Captive truck
leasing firms, including PACCAR Leasing, Volvo Credit and Mercedes Benz Leasing,
occasionally offer to put trailers on lease along with their trucks to enhance
truck sales. In addition, there are a number of firms, major financial
institutions including banks and asset based lenders, which offer financial
leases and/or other financing arrangements.
REMEX OPERATIONS. Doing business in Mexico is relationship oriented.
The Director General of REMEX is responsible for new business generation which
is accomplished by developing relationships with and soliciting business
directly from potential lessees or through relationships with manufacturers of
transportation equipment and/or their distributors. In order to achieve its
growth objectives, management anticipates it will expand its sales and marketing
activities through the addition of one or more senior employees whose time would
be devoted to such activities. By assisting these manufacturers and/or their
distributors in providing timely, convenient and competitive financing for their
equipment sales and offering a variety of value-added services, REMEX
simultaneously promotes their equipment sales and the utilization of REMEX as
the equipment finance provider. Leases are originated as a result of REMEX's
sales and marketing activities. REMEX employs underwriting policies and
procedures that are intended to
23
minimize the risk of delinquencies and credit losses. CapSource in conjunction
with REMEX management has established and regularly reviews overall corporate
credit guidelines. Since 1998, when current management took control and
instituted new lease contracts and credit guidelines, we have not suffered any
credit losses.
REMEX's servicing responsibilities generally include billing,
processing payments, paying taxes and insurance and performing collection and
liquidation functions. Currently, REMEX performs all of the servicing functions
for its leases. REMEX acquires trailers and related equipment from a wide range
of suppliers, both in the U.S. and Mexico. Equipment purchasing is generally
driven by the lessee's requirements. The lessee usually specifies the equipment,
including, in many cases, the manufacturer. Specifications typically include:
o the trailer type,
o structural elements,
o length,
o suspension - mechanical or air ride, and
o tires, brakes and other features.
These specifications are usually driven by a combination of the
lessee's customer's need, current fleet composition and operating experience,
equipment cost and availability, the lessee's requirements and other factors.
Generally REMEX does not acquire equipment without a commitment to lease.
We have six customers who each represent ten percent or more of REMEX's
rental income. The loss of any one of these significant customers would have a
material adverse effect on our business. We believe that our relationship with
these customers is good, but we can offer no assurance that these significant
customers will continue to choose REMEX for their trailer rental needs.
REMEX SERVICE SUBISIDARY. As is the custom in Mexico, REMEX, the
primary operating subsidiary, has an associated service company. The assets
reside in the primary operating subsidiary while employees are employed by the
service company. The sole purpose for the service company is to hire and retain
the employees who provide the services. The service company has a service
contract with the operating company and invoices it for the total personnel
costs incurred on a monthly basis. This operating structure, which is the common
business practice in Mexico, is done as part of a financial and tax planning
tool to limit certain personnel costs and related tax liabilities. The service
company for REMEX is Opciones Integrales de Arrendamiento, S.A. de C.V. Both
REMEX and its service company are located in Mexico City and are wholly-owned by
CapSource. However, because Mexican law requires that all Mexican companies have
a Mexican shareholder, Lynch Grattan, our director of Mexican operations, holds
one share of each of REMEX, its service company, to comply with Mexican law.
REMEX ASSET POOL. As of September 30, 2002, REMEX had 182 units in its
lease/rental asset pool with an original cost of $3.2 million. All of REMEX's
equipment is less than five years old.
The following table indicates the mix of trailers and related
equipment:
Type of Equipment Number of Units % of Lease/Rental Fleet
- ----------------- --------------- -----------------------
Dry Van - 53' 13 7.0%
48' 71 41.5%
40' 16 7.0%
38' 12 7.0%
35' 2 1.2%
22' 5 2.9%
Flat Bed Trailers 26 15.2%
Bulk Hoppers - 42' 1 0.6%
34' 2 1.2%
Trailer Dollies 34 16.4%
-- -----
Total 182 100%
24
Since September 30, 2002, REMEX has increased its lease/rental fleet to
203 units.
Utilization is a key measure of a leasing company's operating
performance. Based on in-house research, leasing company utilization in the U.S.
generally falls in the range of 65-85%. REMEX's utilization historically has
exceeded 90%. As of September 30, 2002, our utilization was 97%.
REMEX FINANCIAL PERFORMANCE. The following unaudited table is a summary
of REMEX's operating performance:
---------------------------------------------------------------
Years Ended December 31 Three Months Ended Nine Months Ended
----------------------- ------------------------------------- -----------------------
March 31, June 30, Sept 30, Sept 30, Sept 30,
2001 2000 2002 2002 2002 2002 2001
--------- --------- --------- --------- --------- ---------- ---------
Revenue $ 649,184 402,521 178,318 215,881 221,456 615,655 465,567
Depreciation & direct cost of
trailers under operating leases 536,698 330,794 103,530 114,474 86,609 304,613 410,611
Selling, general and administrative
expenses 486,221 429,242 92,840 109,253 99,323 301,416 198,992
Operating income (loss) $(373,735) (357,515) (18,052) (7,846) 35,524 9,626 (144,036)
Number of Lease/Rental units 159 107 157 171 182 182 153
The above table shows lease/rental asset pool units at period end. The
revenue does not necessarily reflect having owned and leased the assets for the
entire period.
REMOLQUES Y SISTEMAS ALIADOS DE TRANSPORTATION, S.A. DE C.V. (D/B/A RESALTA)
Organized in April 2001, as of April 1, 2002 RESALTA became a wholly
owned subsidiary of CapSource. Prior to that date RESALTA was an 80% owned
subsidiary of CapSource. The remaining 20% was owned by Marlo Conzuelo
Bettancourt. Mr. Conzuelo is Director General and principal owner of TractoBaja
Volvo, S.A. de C.V., a Volvo truck dealership located in Tijuana, and Soluciones
Logisticas y de Transportes, S.A. de C.V., a customer of CapSource's leasing
subsidiary, REMEX. On April 1, 2002, CapSource purchased Mr. Conzuelo's interest
in RESALTA by issuing him 15,000 shares of CapSource common stock.
On November 17, 2000, CapSource executed an agreement with Hyundai,
which provides CapSource and/or its subsidiary RESALTA with exclusive
distribution rights for Hyundai truck trailers and related equipment in Mexico.
HYUNDAI AGREEMENT. The Hyundai Agreement is for a period of four years
and is renewable. Among other things, the Agreement requires RESALTA to fulfill
certain minimum annual purchase requirements as well as develop certain
facilities to sell and service Hyundai products covered by the Agreement. To
date, we have not met these requirements and Hyundai has chosen not to enforce
them. As part of the Agreement, Hyundai agrees that it will not designate any
other dealers to compete with RESALTA in Mexico as well as pay RESALTA a per
trailer fee should Hyundai sell directly in Mexico, except for a certain limited
number of house accounts serviced directly by Hyundai.
HYUNDAI. Hyundai, the largest company in Korea, is engaged in
insurance, shipbuilding, engineering and construction, electronics and
automotive as well as other businesses.
In 1990, Hyundai, built a maquiladora plant across the border from San
Diego, California, in Tijuana, Baja California, Mexico. The facility produces
van trailers, refrigerated trailers known as reefers, container chassis and
domestic and refrigerated containers for the U.S. market. For the past two
decades, Hyundai has been the largest manufacturer of sea going containers in
the world. Hyundai is believed to be the largest container chassis supplier in
the U.S. market, producing up to 1,500 chassis monthly.
Hyundai's manufacturing process and quality assurance system have been
internationally recognized by achieving ISO 9002 certification. Hyundai is the
first North American trailer and container manufacturer to receive ISO 9002
designation. Made with American components, Hyundai trailers feature many
standard features that are optional on competitive trailers. Hyundai markets its
products both directly and through dealers in the U.S. Hyundai's agreement with
RESALTA represents its initial entry into the Mexican market.
25
RESALTA BUSINESS STRATEGY. The Mexican economy saw significant growth
in 2000 when gross domestic product increased approximately 6.9% (Source:
Banamex). The recent global economic slowdown has also affected the Mexican
economy where the GDP growth in 2001 was a negative 0.3% (Source: Banamex). For
the first quarter of 2002, overall GDP declined 2.0%. Nevertheless, the
transportation sector of the Mexican economy is investing to replace and grow
infrastructure based upon increased traffic due to NAFTA. Hyundai currently
produces a product at a price that allows RESALTA to offer a price advantage
over its competitors.
Management expects the majority of sales will be dry vans and
refrigerated trailers sold pursuant to the Hyundai Agreement. However, RESALTA
intends to supplement its dry van business by adding other types of trailers as
follows:
o flat beds;
o bulk hoppers;
o livestock trailers;
o trailer dollies; and
o after-market equipment, etc.
RESALTA COMPETITION. Since the passage of NAFTA, the Mexican van
trailer market has been dominated by one U.S. manufacturer, Utility, and its
independent distributor, Utility de Mexico, and four Mexican manufacturers,
Fruehauf de Mexico, Ramirez, Caytrasa and Altamirano. While no reliable market
statistics are available, we believe that Utility de Mexico has been gaining
market share and is now the dominant distributor in the market. A number of U.S.
manufacturers have sold trailers in Mexico but have not developed a significant
presence in the market.
More recently, current economic conditions, corresponding market forces
and new business strategies have begun to cause a shift in the competitive
environment. U.S. manufacturers Great Dane and Lufkin have been increasing sales
largely at the expense of Utility de Mexico and the Mexican manufacturers.
Ramirez has dropped out of the market while Caytrasa and Altamirano seem to be
holding steady. The owner of Fruehauf de Mexico has acquired the U.S. operations
of Dorsey and plans to restructure the distribution of their products. We
believe RESALTA has experienced the strongest growth of all of the market
participants.
As the market continues to shift, it is clear that companies with the
most efficient manufacturing operations, the lowest cost of manufacturing, the
lowest transportation costs and the most efficient distributions systems will
dominate the market. We believe that RESALTA and Hyundai are well positioned in
this regard.
RESALTA OPERATIONS. RESALTA was incorporated in April 2001. During the
initial months of operations, we focused on establishing brand recognition of
the Hyundai name, specifically emphasizing the quality and reliability of
Hyundai trailers. We established sales offices in Mexico City and Monterrey and
developed a network of independent sales personnel, in order to cover the major
transportation centers in Mexico. We introduced Hyundai products at a major
Mexican transportation trade show, ExpoTransporte in Guadalajara. In addition,
RESALTA is working jointly with REMEX, the equipment-leasing subsidiary of
CapSource, whereby RESALTA supplies equipment to REMEX, which REMEX then leases
directly to its customers.
RESALTA completed its first sale in August 2001. The overall economic
downturn, exacerbated by the tragic events of September 11th, negatively
impacted our entry into the Mexican market. Beginning in the second quarter of
2002, our sales, revenue and earnings are coming into line with our original
expectations.
RESALTA SERVICE SUBSIDIARY. As is the custom in Mexico, RESALTA, the
primary operating subsidiary has an associated service company. The assets
reside in the primary operating subsidiary while employees are employed by the
service company. The sole purpose for the service company is to hire and retain
the employees who provide the services. The service company has a service
contract with the operating company and invoices it for the total personnel
costs incurred on a monthly basis. This operating structure, which is the common
business practice in Mexico, is done as part of a financial and tax planning
tool to limit certain personnel costs and related tax liabilities. The service
company for RESALTA is Operador de Servicios Administratives Integrales, S.A. de
C.V. Both RESALTA and its service company are located in Mexico City and are
wholly-owned by CapSource. However, because Mexican law requires that all
Mexican companies have a Mexican shareholder, Lynch Grattan, our director of
Mexican operations, holds one share of RESALTA and its service company to comply
with Mexican law.
26
RESALTA FINANCIAL PERFORMANCE. The following unaudited table is a
summary of RESALTA's operating performance:
----------------------------------------------------------------------
Three Months Ended Nine Months Ended
Year Ended ---------------------------------------- -------------------------
December 31 March 31, June 30, Sept 30, Sept 30, Sept 30,
2001 2002 2002 2002 2002 2001
---------- ---------- ---------- ---------- ---------- ----------
Equipment sales $ 388,260 548,909 854,891 1,374,762 2,778,562 15,459
Direct cost of sales 369,586 504,934 787,849 1,281,378 2,574,161 15,130
Selling, general and administrative
expenses 708,114 180,587 186,354 207,855 574,796 323,323
Net operating loss $ (689,440) (136,612) (119,312) (114,471) (370,395) (322,994)
Number of trailer units sold 21 26 40 62 128 1
GOVERNMENT REGULATION
Our truck trailer leasing and distributor businesses are subject to
extensive and changing governmental regulation governing licensure, conduct of
operations, payment of referral fees, purchase or lease of facilities, and
employment of personnel by business corporations. We believe that our operations
are structured to comply with all such laws and regulations currently in effect
as well as laws and regulations enacted or adopted but not yet effective. We can
offer no assurance, however, that enforcement authorities will not take a
contrary position. We also believe that, if it is subsequently determined that
our operations do not comply with such laws or regulations, we can restructure
our operations to comply with such laws and regulations. We can offer no
assurance, however, that we would be able to so restructure our operations. In
addition, we can offer no assurance that jurisdictions in which we operate or
will operate will not enact similar or more restrictive laws and that we will be
able to operate or restructure our operations to comply with such new
legislation or regulations or interpretations of existing or new legislation and
regulations.
FUTURE ACQUISITIONS
As part of our strategy to expand our business, we intend to pursue the
acquisition of other businesses. While we have developed criteria that we will
use to evaluate such acquisition opportunities, we can offer no assurance that
we will be successful in acquiring other businesses and, if we do acquire
another business, that the acquisition will be on terms that are favorable to us
or that the acquired business will be successfully integrated into ours.
Currently we have no agreement to acquire any business.
RISK OF LIABILITY
Although we have no history of material legal claims, we may be subject
to claims and lawsuits from time to time arising from the operation of our
business, including claims arising from accidents. Damages resulting from and
the costs of defending any such actions could be substantial. In the opinion of
management, we are adequately insured against personal injury claims and other
business-related claims. Nevertheless, there can be no assurance we will be able
to maintain such coverage, or that it will be adequate.
OUR REPORTS TO SECURITY HOLDERS
After this offering is completed, we will become subject to the
informational requirements of the Securities Exchange Act of 1934, so we will
file reports and other information with the Securities and Exchange Commission.
We have not yet filed any periodic reports with the Securities and Exchange
Commission. The reports and other information filed by us can be inspected and
copied at the public reference facilities maintained by the Commission in
Washington, D.C. and at the Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
We will furnish to stockholders:
o an annual report containing financial information audited by our certified
public accountants;
o unaudited financial statements for each quarter of the current fiscal year;
and
o additional information concerning the business and operations of CapSource
as deemed appropriate by the Board of Directors.
We will continue to furnish stockholders an annual report, even if we
are no longer required to file reports with the SEC.
27
EMPLOYEES
At September 30, 2002, we had 11 full-time and no part-time employees.
None of our employees are subject to any collective bargaining agreements and we
believe that our relations with our employees are good. In addition, effective
in November of 2002, we contracted with two independent sales representatives to
sell RESALTA products exclusively covering east, southeast and central Mexico.
One of these representatives was previously a top salesperson for our major
competitor.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of CapSource's financial condition and
results of operation are based upon consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. Our significant accounting policies
are described in Note 1 to our Consolidated Financial Statements as set forth
elsewhere in this Prospectus. In response to SEC release No. 33-8040,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we
have identified certain of these policies as being of particular importance to
the portrayal of our financial position and results of operations and which
require the application of significant judgment by our management. We analyze
our estimates, including those related to lease revenue, depreciation rates,
impairment equipment, residual values, allowance for doubtful accounts, income
tax valuation allowance, the fair value of beneficial conversion features and
contingencies and litigation, and base our estimates on historical experience
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
affect our most significant judgments and estimates used in the preparation of
CapSource's consolidated financial statements:
LEASE ACCOUNTING. Statement of Financial Accounting Standards No. 13,
Accounting for Leases, requires that a lessor account for each lease by either
the direct financing, sales-type (collectively capital leases) method, or
operating lease method. Direct financing and sales-type leases are defined as
those leases that transfer substantially all of the benefits and risks of
ownership of the equipment to the lessee. Our leases are classified as operating
leases for all of our leases and for all lease activity as the lease contracts
do not satisfy the criteria to be recognized as capital leases. For all types of
leases, the determination of return on investment considers the estimated value
of the equipment at lease termination, referred to as the residual value.
The cost of equipment is recorded as equipment and is depreciated on a
straight-line basis over the estimated useful life of the equipment. Leasing
revenue consists principally of monthly rentals and related charges due from
lessees. Leasing revenue is recognized when due from lessees. Deposits and
advance rental payments are recorded as a liability until repaid or earned by
us. Operating lease terms range from month-to-month rentals to five years.
Initial direct costs (IDC) are capitalized and amortized over the lease term in
proportion to the recognition of rental income. Depreciation expense and
amortization of IDC are recorded as leasing costs in the accompanying
consolidated statements of operations. Our assets are depreciated over a period
that we believe best represents the useful lives of the assets. We establish
residual values at lease inception equal to the estimated value to be received
from the equipment following termination of the initial lease (which in certain
circumstances includes anticipated re-lease proceeds). In estimating such
values, we consider all relevant information and circumstances regarding the
equipment and the lessee.
USE OF ESTIMATES. The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires us 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 revenue and expenses during the reporting period. Actual results could differ
significantly from those estimates.
ALLOWANCE FOR LOSSES. We maintain an allowance for losses at levels
that we determine to adequately provide for any other than temporary declines in
asset values. In determining possible losses, we consider economic conditions,
the activity in used equipment markets, the effect of actions by equipment
manufacturers, the financial condition of lessees, the expected courses of
action by lessees with regard to leased equipment at termination of the initial
lease term, and other factors which we believe are relevant. Recoverability of
an asset's value is measured by a comparison of the carrying amount of the
asset, to the future net cash flows that we expect to be generated by the asset.
If a loss is indicated, the loss to be recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Asset dispositions are recorded upon the termination or remarketing of the
underlying assets. Assets are reviewed annually to determine the adequacy of the
allowance for losses.
28
BENEFICIAL CONVERSION OPTION. In connection with the issuance of debt
instruments, we granted the holders the option to convert the debt into our
common stock at a beneficial conversion rate. In calculating the fair value of
these beneficial conversions, we estimated the fair value of our stock based on
current results, budgeted performance, and recent transactions involving our
common stock.
STOCK-BASED COMPENSATION. We have adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No.
123). As permitted under this standard, we have elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), in accounting for our stock options and other stock-based employee awards.
GENERAL
CapSource is engaged in two principal lines of business (segments): (1)
the lease of truck trailers and (2) the distribution of Hyundai trailers.
In early 1998, present management took control and restructured
CapSource as a holding company. Results for 2000 reflect expenses incurred at
the parent company level to restructure and finance REMEX, its leasing operation
in Mexico, and the expense of providing staffing at the parent company level
sufficient to develop and implement the strategic plan. Results for 2001 reflect
the start-up costs incurred to establish RESALTA, the Mexican trailer sales and
distribution subsidiary, as well as increased interest expense on increased debt
level and other expense related to CapSource's withdrawn initial public
offering.
According to the plan, CapSource obtained the exclusive right to sell
and distribute Hyundai truck trailers in Mexico. In April 2001, CapSource
organized RESALTA to take advantage of this opportunity. CapSource does not
anticipate significant increases in parent company general and administrative in
the future. Given its business strategy, CapSource anticipates parent company
expenses will be offset by increases in revenue from REMEX, the leasing
subsidiary, and RESALTA, the trailer sales and distribution subsidiary, as well
as additions to revenue from future acquisitions.
All of the REMEX lease contracts are denominated in U.S. dollars; in
other words, the lessee makes its payment to us in pesos based upon the exchange
rate on the date the payment is made. This transfers the exchange rate risk from
us to the lessee. All of the equipment purchases also are denominated in U.S.
dollars.
Utilization, the percentage of the fleet leased, is an important
measure of operating performance. United States lease/rental firms have
utilization rates in the range of 65% to 85%. REMEX utilization was 96% in 2001
and 94% in 2000. We attribute the high utilization rates to three factors:
o the strong demand for equipment;
o our focus on mid-term leases (5 years); and
o CapSource generally does not purchase equipment for the lease/rental pool
without a lease commitment from a customer.
29
RESULTS OF OPERATIONS
HISTORICAL RESULTS OF OPERATIONS
The following unaudited table is a summary of our historical results of
operations for the periods noted.
Nine Months Ended September 30
---------------------------------------------------
2002 2001
----------- ------ ----------- -------
Rental income from operating leases $ 537,696 18.58% 430,488 89.49%
Equipment sales - gross 2,278,562 78.73% 15,459 3.21%
Other income 77,959 2.69% 35,079 7.29%
----------- ------ ----------- ------
Total revenue 2,894,217 100.00% 481,026 100.00%
Costs and expenses:
Depreciation and direct costs of trailers under
operating leases 304,613 10.52% 410,611 85.36%
Direct costs of sales 2,574,161 88.94% 15,130 3.15%
Selling, general and administrative expenses 1,068,986 36.94% 919,510 191.16%
----------- ------ ----------- ------
Total expenses 3,947,760 136.40% 1,345,251 279.66%
----------- ------ ----------- ------
Operating loss (553,543) (19.13%) (864,225) (179.66%)
------ ------
Other income (expense);
Interest income (expense) (189,579) (6.55%) (49,060) (10.20%)
Foreign exchange gains (losses), net (56,444) (1.95%) (16,610) (3.45%)
Other income (expense) (24,046) (0.83%) 7,112 1.48%
----------- ------ ----------- ------
Total other income (expense), net (270,069) (9.33%) (58,558) (12.17%)
----------- ------ ----------- ------
Net loss $ (823,612) (28.46%) (922,783) (191.84%)
=========== ------ =========== ------
[WIDE TABLE CONTINUED FROM ABOVE]
YEAR ENDED DECEMBER 31
--------------------------------------------------
2001 2000
----------- ------ ----------- ------
Rental income from operating leases 618,069 59.58% 402,521 100.00%
Equipment sales - gross 388,260 37.42% -- 0.00%
Other income 31,115 3.00% -- 0.00%
----------- ------ ----------- ------
Total revenue 1,037,444 100.00% 402,521 100.00%
Costs and expenses:
Depreciation and direct costs of trailers under
operating leases 536,698 51.73% 330,794 82.18%
Direct costs of sales 369,586 35.62% -- 0.00%
Selling, general and administrative expenses 1,536,635 148.12% 685,633 170.33%
----------- ------ ----------- ------
Total expenses 2,442,919 235.47% 1 1,016,427 252.52%
----------- ------ ----------- ------
Operating loss (1,405,475) (135.47%) (613,906) (152.52%)
------ ------
Other income (expense);
Interest income (expense) (381,186) (36.74%) (55,929) (13.89%)
Foreign exchange gains (losses), net 11,559 1.11% (12,761) (3.17%)
Other income (expense) (147,375) (14.21%) 41,466 10.30%
----------- ------ ----------- ------
Total other income (expense), net (517,002) (49.83%) (27,224) (6.76%)
----------- ------ ----------- ------
Net loss (1,922,477) (185.31%) (641,130) (159.28%)
=========== ------ =========== ------
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
REVENUE. During the nine months ended September 30, 2002, the lease
revenue generated by the lease/rental subsidiary, REMEX continued to increase.
In addition, capitalizing on the agreement with Hyundai giving the exclusive
right to sell/distribute Hyundai trailers in Mexico, CapSource continued to
expand the operations of RESALTA, its new trailer sales/distribution company.
RESALTA made significant progress in establishing its presence in Mexico by
opening sales offices in Mexico City and Monterrey, and by establishing a
relationship with an independent sales agent in Guadalajara.
For the nine months ended September 30, 2002, REMEX had lease/rental
income of $615,655, compared to $465,567 for the nine months ended September 30,
2001. This represents an approximate 32% increase. The increase is attributable
to the increase in the size of the lease/rental pool while maintaining high
fleet utilization.
RESALTA had equipment sales of $2,278,562 for the nine months ended
September 30, 2002 compared to $15,459 for the nine months ended September 30,
2001. This increase is due to the launching of the RESALTA trailer sales
operation that generated its first sales and costs of sales in August 2001.
OPERATING COSTS AND EXPENSES. Operating costs and expenses consist of
depreciation and direct costs of trailers under operating leases, direct costs
of trailer and equipment sales, and salaries and selling, general, and
administrative costs that are not directly attributable to the generation of
revenue and interest expense. Depreciation and direct costs of trailers under
operating leases were $304,613 and $410,611 for the nine months ended September
30, 2002 and 2001, respectively. The decrease can be attributed to the change in
the estimated depreciable life of the trailer lease fleet from seven to ten
years. Our management has determined that the lease fleet has a longer useful
life than we previously used for calculating depreciation. If the estimated
useful life of trailer and semi-trailer equipment was changed from seven to ten
years in 2001, the net loss for 2001 would have been reduced by approximately
$109,000. RESALTA had direct costs of sales of $2,574,161 for the nine months
ended September 30, 2002, compared to $15,130 for the nine months ended
September 30, 2001. This increase is due to the launching of the RESALTA trailer
sales operation that generated its first sales and costs of sales in August
2001. Selling, general and administrative expenses during the first nine months
of 2002 were $1,068,986, of which approximately $301,416 was attributable to
REMEX, $574,796 to RESALTA and $192,774 to the parent company. During the first
nine months of 2001, selling, general and administrative expenses were $919,510,
with $198,992 attributable to REMEX, $323,323 to RESALTA (initial start-up
costs) and $397,195 to the parent company.
30
OPERATING LOSS. Operating loss consists of revenue less operating
expenses. For the nine months ended September 30, 2002, we recognized an
operating loss of $553,543, compared to $864,225 for the nine months ended
September 30, 2001. This reduction in operating loss is a result of the
increased lease/rental income from REMEX during the first nine months of 2002,
as well as the revenue generated by RESALTA from equipment sales.
OTHER INCOME (EXPENSE). Other (expense) increased from ($58,558) for
the nine months ended September 30, 2001 to ($270,069) for the nine months ended
September 30, 2002. This increase is primarily due to an increase in interest
expense associated with an increased debt level and an increase in foreign
exchange losses due to the strengthening of the Mexican peso in relation to the
U.S. dollar.
NET LOSS. CapSource recognized a net loss for the nine months ended
September 30, 2002 of $823,612. This compares to a net loss of $922,783 for the
nine months ended September 30, 2001. The decrease in the net loss was due to
the increase in rental income from REMEX and the revenue generated by RESALTA
from equipment sales, which was partially offset by the increase in interest
expense incurred on our additional debt.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUE. During 2001, CapSource's principal source of revenue was its
lease/rental subsidiary, REMEX. For the year ended December 31, 2001, REMEX had
lease/rental income of $649,184, compared to $402,521for the year ended December
31, 2000. This represents an approximate 61% increase. The increase is
attributable to the increase in the size of the lease/rental pool while
maintaining high fleet utilization.
OPERATING COSTS AND EXPENSES. Depreciation was $402,696 and $258,745
for 2001 and 2000, respectively. The increase in depreciation can be attributed
to the increase in fleet size. RESALTA had direct costs of sales of $369,586 for
the year ended June 30, 2002, compared to $0 for year ended June 30, 2001. This
increase is due to the launching of the RESALTA trailer sales operation that
generated its first sales and costs of sales in August 2001. Selling, general
and administrative expenses during 2001, were $1,536,635, of which approximately
$486,221 was attributable to REMEX, $708,114 to RESALTA (initial start-up costs)
and $342,300 to the parent company. During 2000, selling, general and
administrative expenses were $685,633, with $429,242 attributable to REMEX and
$256,391 to the parent company.
OPERATING LOSS. Operating loss consists of revenue less operating
expenses. For the year ended December 31, 2001, we experienced an operating loss
of ($1,405,475), compared to ($613,906) for the year ended December 31, 2000.
This increase of operating loss is attributable principally to the initial
start-up and marketing costs of $718,114 incurred by RESALTA in 2001.
OTHER INCOME (EXPENSE). Other income (expense) increased from ($27,224)
for the year ended December 31, 2000 to ($517,002) for the year ended December
31, 2001. This increase is due to increased interest expense in 2001 associated
with the increase in debt incurred to finance RESALTA's start-up costs as well
as a charge of $228,584 to interest expense, which represents the unaccreted
discount on the convertible stockholder note that was converted to common stock
prior to its maturity. In addition, $145,250 of costs were charged to other
expense in 2001 which were incurred partially in 2000 and partially in 2001 by
CapSource's withdrawn initial public offering.
NET LOSS. CapSource posted a net loss of ($1,922,477) and ($641,130)
for the years ended December 31, 2001 and 2000, respectively. This increase in
net loss resulted from the initial start-up costs for RESALTA, as well as the
$228,584 charged to interest and the $145,250 charged to other expense incurred
in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of capital have been obtained through advances
and subsequent conversion to our common stock by the majority stockholder. Our
principal uses of capital have been to continue and expand our operations
pursuant to our strategic business plan including: adding to our lease/rental
fleet, and increasing sales by adding to equipment inventory on display.
Net cash used in operating activities was $540,850 for the nine months
ended September 30, 2002, compared to $1,120,766 for the nine months ended
September 30, 2001. Net operating cash used in the nine month period decreased
compared to the prior period due to the reduction in inventory and rents and
accounts receivable, which were partially offset by an increase in advance
payments to suppliers of trailer and semi-trailer equipment.
Net cash used in operating activities was $1,475,605 for the year ended
December 31, 2001, compared to $461,151 for the year ended December 31, 2000.
Net operating cash used in the year increased compared to the prior year due to
increased rents and
31
accounts receivable, inventory, and increased operating expenses resulting from
the start-up expenses of RESALTA. These uses were partially offset by increased
accounts payable.
For the nine months ended September 30, 2002, CapSource acquired
trailer and semi-trailer equipment for its lease/rental pool of $478,407 offset
by disposals of $178,297, and purchased vehicles, furniture and computer
equipment of $21,162. This compares to $1,006,980, $120,568 and $116,556,
respectively, for the nine months ended September 30, 2001. As a result, net
cash used in investing activities was $321,272 and $1,002,968 for the nine
months ended September 30, 2002 and 2001, respectively.
For the year ended December 31, 2001, CapSource acquired trailer and
semi-trailer equipment for its lease/rental pool of $992,379 offset by disposals
of $129,762, and purchased vehicles, furniture and computer equipment of
$130,090. This compares to $560,122, $0 and $2,773 respectively, for the year
ended December 31, 2000. As a result, net cash used in investing activities was
$992,707 and $562,895 for the years ended December 31, 2001 and 2000,
respectively.
During the nine months ended September 30, 2002, CapSource received
proceeds from payable to stockholder and other notes payable of $768,698, of
which $362,246 was from the issuance of unsecured convertible notes to a
stockholder, $152,201 from the issuance of unsecured convertible notes to others
and $254,251 from the issuance of unsecured notes payable to others. In
addition, CapSource received proceeds of $51,000 from the issuance of common
stock for cash. As a result, net cash flow from financing activities for the
nine months ended September 30, 2002 was $819,698.
During the nine months ended September 30, 2001, CapSource received
proceeds from payable to stockholder of $1,466,885 from the issuance of
unsecured convertible notes. In addition, CapSource received proceeds from the
issuance of common stock of $218,280. As a result, net cash flow from financing
activities for the nine months ended September 30, 2001 was $1,685,165.
For the year ended December 31, 2001, CapSource received proceeds from
payable to stockholder and other notes payable of $1,874,079, of which $867,653
was from the issuance of unsecured convertible notes to a stockholder, $590,740
from the issuance of unsecured notes to stockholder and $415,686 from the
issuance of unsecured convertible notes to others. In addition, CapSource
received proceeds from the issuance of common stock of $218,280. As a result,
the net cash flow from financing activities for the year ended December 31, 2001
was $2,092,359. For the year ended December 31, 2000, CapSource received
proceeds of $1,027,363 from the issuance of unsecured convertible notes to
stockholder. In addition, CapSource received proceeds from the issuance of
common stock of $385,640. As a result, the net cash flow from financing
activities for the year ended December 31, 2000 was $1,413,003.
On a long-term basis, liquidity is dependent on continuation and
expansion of operations, the re-leasing and sale of equipment and the receipt of
revenue as well as additional infusions of equity and debt capital. We believe
that additional equity and debt financing in the short term will allow us to
increase the REMEX lease/rental asset pool, implement the Hyundai-RESALTA
business opportunity and pursue other business opportunities pursuant to our
strategic plan. We believe this will result in substantially increased revenue
and liquidity in the long term. However, there can be no assurance that we will
be able to obtain the additional equity or debt financing in the future.
CAPSOURCE FINANCIAL STRATEGY. Funding and financial strategy are
significant factors in our business plan. The cost, reliability and flexibility
of the actual and potential funding sources will dictate, to a large extent, our
ability to acquire additional businesses pursuant to our strategic plan.
Additionally, each operating subsidiary's ability to grow and improve its
competitive position within its respective business sector is similarly
dependent upon its ability to secure adequate funding, either directly or
through the parent company.
To date, REMEX, the leasing subsidiary, has been financed largely with
equity from CapSource. In order to achieve its future growth objectives,
management of CapSource believes that REMEX's financial structure needs to
include various forms of borrowings including both a short-term credit facility,
commonly termed a warehouse credit facility, and long-term debt. We believe that
the optimum debt/ratio for REMEX is approximately 80% debt and 20% equity.
RESALTA, the new trailer sales/distribution subsidiary, requires two forms of
financing - equity and a short-term credit facility commonly referred to as
"floor plan" financing. Floor plan financing is similar to the warehouse credit
facility being sought by REMEX, in that it is used to finance the purchase of
inventory on an ongoing basis. However, in the case of floor plan financing, the
facility is repaid through the sale of equipment rather than being replaced with
long-term debt. The parent company has already provided for the initial equity
funding. We are currently seeking floor plan financing.
There is no assurance that any financing can be obtained for REMEX or
RESALTA.
We expect that the proceeds of the public offering will be adequate to
provide for our cash requirements for the next twelve months.
32
Our strategy is to continue to expand its operations through
acquisitions and to improve profitability by reducing operating expenses. Future
financing may result in dilution to holders of common stock. It is anticipated
that funds required for future acquisitions and the integration of acquired
businesses with us will be provided from the proceeds of the public offering and
proceeds from future borrowings. However, there can be no assurance that
suitable acquisition candidates will be identified by us in the future, that
suitable financing for any such acquisitions can be obtained by us or that any
such acquisitions will occur. Following the Public Offering, we will incur
additional expenses due to being a public company. Our growth strategy will
require expanded support, increased personnel throughout our business, expanded
operational and financial systems and implementation of new control procedures.
These factors will affect future results and liquidity.
In order to conserve capital resources, our policy is to lease our
physical facilities. As of September 30, 2002, we have no material commitments
to purchase capital assets.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
which requires the use of the purchase method and eliminates the option of using
the pooling-of-interests method of accounting for all business combinations. The
provisions in this statement apply to all business combinations initiated after
June 30, 2001, and all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later. We do not
believe the adoption of this statement will have a material impact on our
financial position, results of operations or cash flows.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142) which
requires that all intangible assets acquired, other that those acquired in a
business combination, be initially recognized and measured based on the asset's
fair value. We adopted the provisions of FAS 142 effective January 1, 2002.
Goodwill and certain identifiable intangible assets are not amortized under SFAS
142, but instead are reviewed for impairment at least annually in accordance
with the provisions of this statement. Other identifiable intangibles continue
to be amortized over their useful lives. We do not believe the adoption of this
statement will have a material impact on our financial position, results of
operations or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal use of the asset. SFAS 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability, we will recognize a gain or
loss on settlement. We does not expect the impact of SFAS 143 to be significant.
On October 3, 2001, the FASB issued FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While FASB Statement No. 144 supersedes FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
it retains many of the fundamental provisions of that Statement. SFAS Statement
144 also supersedes the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. We do not
expect the impact of adopting SFAS 144 to be significant.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement provides guidance on the classification of gains
and losses from the extinguishment of debt and on the accounting for certain
specified lease transactions. SFAS No. 145 is not expected to have a material
impact on us.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). Generally, SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized as incurred, whereas EITF Issue No. 94-3 required such a
liability to be recognized at the time that an entity committed to an exit play.
We are currently evaluating the provisions of the new rule, which is effective
for exit or disposal activities that are initiated after December 31, 2002.
33
INFLATION
Inflation in Mexico has abated in the last few years. Nevertheless,
increased operating costs that are subject to inflation, such as labor and
supply costs, without a compensating increase in lease rates or equipment sales
revenue, could adversely impact results of operations in the future.
INSURANCE
We maintain liability coverage in the amount of $1,000,000 per
occurrence and $3,000,000 in the aggregate, as well as $2,000,000 of general
premises liability insurance for each of our facilities and our executive
offices. While we believe our insurance policies to be sufficient in amount and
coverage for current operations, there can be no assurance that coverage will
continue to be available in adequate amounts or at a reasonable cost, and there
can be no assurance that the insurance proceeds, if any, will cover the full
extent of loss resulting from any claims.
QUANTITATIVE AND QUALITATIVE MARKET RISKS
Our operations are conducted in Mexico. All leases are denominated in
United States dollars, but administrative activities are generally denominated
in the Mexican peso. We do not enter into foreign currency exchange contracts
either to hedge our exposure to currency fluctuations or for trading purposes.
All of our indebtedness is at fixed interest rates and we do not enter
into interest rate swaps or any other type of derivative instruments.
DESCRIPTION OF PROPERTY
We sublease by reimbursing our president, Fred Boethling, at
approximately 86% of the lease cost to him for 872 square feet of commercial
office space at 2305 Canyon Boulevard, Suite 103, Boulder, Colorado 80302, under
a lease expiring on May 31, 2003. Mr. Boethling is reimbursed in the approximate
amount of $1,200 per month for the use of this space. We also reimburse our vice
president and general counsel, Steve Reichert, in the amount of $300 per month
for the use of his house as our Minnesota office. As a result our monthly base
rental expense for these U.S. offices is approximately $1,500. REMEX leases
1,432 square feet of commercial office space in Mexico City from an unrelated
third party under a lease expiring February 28, 2003 at a rental rate of
approximately $1,700 per month. RESALTA leases 689 square feet of commercial
office space in Monterrey from an unrelated third party under a lease expiring
May 15, 2003 at a rental rate of approximately $650 per month. We believe that
our facilities are adequate for our foreseeable needs in the United States. In
Mexico, REMEX needs a storage yard for the leasing company within the next six
months. RESALTA needs additional sales offices in selected locations throughout
Mexico, including a service and parts facility and storage yard.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASES OF OUR COMMON STOCK
Effective December 31, 2001, Randolph Pentel, a director, converted
$867,653 payable to him on a convertible note into 867,653 shares of our common
stock at a conversion price of $1.00 per share. On August 2, 2002, Randolph
Pentel purchased 29,143 shares of our common stock at $1.75 per share.
A company in which Randolph Pentel has a substantial interest has on
occasion provided the use of an aircraft for travel for certain executive
officers. We have paid no more than the price of a first class ticket charged by
commercial airlines flying to the same destination on those dates. While there
is no arrangement or assurance that the use of this aircraft will be made
available in the future, if the occasion arises it is expected that the same
payment terms will be followed.
PAST AFFILIATED TRANSACTIONS
Randolph Pentel has provided the majority of financing to us at
interest rates more favorable than those available to unaffiliated third
parties. We lacked disinterested directors that could ratify these transactions
at the time these transactions were initiated. There is no assurance that such
favorable financing will be available to us in the future.
34
APPOINTMENT OF INDEPENDENT DIRECTORS AND AMENDMENT OF BYLAWS
Within a reasonable time after SEC effectiveness, we undertake to
appoint two independent directors. An independent director shall be a member of
our board of directors who: (1) is not an officer or employee of us or our
subsidiaries and has not been an officer or employee within the last two years;
(2) is not a promoter who organized or founded us or holds five percent or more
of any class of our equity securities; and (3) does not have a material business
or professional relationship with us. Within a reasonable time after SEC
effectiveness, we undertake to amend our Bylaws to require the appointment of at
least two independent directors and the approval by those independent directors
of any future material transactions, loans or forgiveness of loans.
FUTURE MATERIAL TRANSACTIONS AND LOANS
All future material transactions and loans will be made or entered into
on terms that are not less favorable to us than those that can be obtained from
unaffiliated third parties. All future material transactions and loans, and any
forgiveness of loans, must be approved by majority of our independent directors
who do not have an interest in the transactions and who had access, at our
expense, to us or independent legal counsel. We do not have any independent
directors now. We will use our best efforts to recruit at least two independent
directors within the next 12 months.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We intend to file for inclusion of our common stock on the
over-the-counter Bulletin Board; however we can offer no assurance that the NASD
will approve the inclusion of our common stock. Prior to the effective date of
this offering, no public market existed for our shares, and our common stock was
not traded.
As of September 30, 2002, we had 12 stockholders of our common stock.
We have never paid cash dividends on the common stock and have no
present intention to declare or pay cash dividends on the common stock in the
foreseeable future. Although there is no external restriction on paying
dividends, we intend to retain earnings, if any, to finance potential
acquisitions and operations.
Equity Compensation Plan Information
------------------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance
outstanding options, warrants and rights
warrants and rights
(a) (b) (c)
Equity compensation plans approved by 0 N/A 550,000
security holders 2001 Stock Option Plan
Equity compensation plans not approved 565,000 $1.37 --
by security holders Discretionary
Warrants
Total 565,000 $1.37 550,000
WARRANTS
At September 30, 2002, we had outstanding warrants to purchase a total
of 565,000 shares of common stock exercisable at prices ranging from $1.10 per
share to $5.00 per share and expiring at varying times through April 1, 2007.
Such warrants were issued in a number of financing transactions, in connection
with consulting arrangements and as compensation to members of the Board of
Directors. See "Director Compensation". The warrant holders, as such, are not
entitled to vote, receive dividends, or exercise any of the rights of holders
for shares of common stock for any purpose until such warrants have been duly
exercised and payment of the purchase price has been made. No warrants have been
issued or will be issued with an exercise price of less than eighty-five percent
(85%) of the fair market value on the date of grant. No warrants have been
issued or will be issued with a term of no longer than five years.
35
Under the terms of our Underwriting Agreement with Public Securities,
we have agreed to grant Public Securities warrants to purchase up to 300,000
shares of our common stock for $100, having an exercise price of $2.45 per
warrant, a price which is 140% of the per share offering price. The warrants
will be granted at a rate of one underwriter's warrant for every ten shares sold
in this offering, subject to the 300,000 share minimum. The warrants are
exercisable twelve (12) months after the effective date of this Prospectus and
have a term of four (4) years.
OPTIONS AND 2001 STOCK OPTION PLAN
Effective February 16, 2001, our Board of Directors and Stockholders
adopted the 2001 Omnibus Stock Option and Incentive Plan. This plan provides for
the grant of options to purchase shares of common stock to our key employees and
advisors. The aggregate number of shares of common stock that can be awarded
under the plan was 550,000. The plan permits the Board to grant qualified
options with an exercise price of not less than the fair market value on the
date of grant, and non-qualified options at an exercise price of not less than
eighty-five percent (85%) of the fair market value of CapSource's underlying
shares of common stock on the date of the grant. The plan permits the Board to
grant options with a term of up to ten years for certain qualified options and
not more than five years for options granted to a granted to a person holding
10% or more of our stock. However, no options will be issued with a term longer
than five years. Options will be used by us to attract and retain certain key
individuals and to give such individuals a direct financial interest in our
future success and profitability. There are currently no options to purchase
shares outstanding under the 2001 Stock Option Plan.
SHARES ELIGIBLE FOR FUTURE SALE
We have outstanding 7,877,038 shares of common stock. The 3,000,000
shares of common stock being registered in this offering will be freely tradable
without restriction under the Securities Act of 1933.
Of the 7,877,038 shares of common stock outstanding as of September 30,
2002, none have been registered under the Securities Act, and are "restricted
securities" under Rule 144 of the Securities Act and may not be sold in the
absence of a registration under the Securities Act unless an exemption from
registration is available, including an exemption contained in Rule 144. Of the
restricted shares, 5,064,325 shares have been held for more than two years and
may be transferred, subject to Rule 144.
In general, under Rule 144 as currently in effect, a holder of
restricted shares who has beneficially owned such shares for at least one year
(including the holding period of any prior owner other than an affiliate) is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) one percent of the then outstanding shares of common
stock (approximately 114,129 shares not including: (a) 550,000 shares reserved
for issuance under our 2001 Stock Option Plan; (b) 865,000 shares issuable upon
exercise of warrants (including underwriter warrants); or (ii) the average
weekly trading volume of the common stock in the public market during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about us. A person who is not deemed an affiliate of
ours at any time during the 90 days preceding a sale and who beneficially owns
shares that were not acquired from us or an affiliate of ours within the past
three years is entitled to sell such shares under Rule 144(k) without regard to
volume limitations, manner of sale provisions, notice requirements or the
availability of current public information concerning CapSource. Under Rule 701,
shares privately issued under certain compensatory stock-based plans, may be
resold under Rule 144 by non-affiliates subject only to the manner of sale
requirements, and by affiliates without regard to the two-year holding period
requirement, commencing 90 days after the date hereof.
Prior to this public offering, there was no market for our common stock
and there is no assurance that an active public market for our common stock will
develop or be sustained. Sales of substantial amounts of common stock in the
public market could adversely affect the market price of the common stock and
could impair our future ability to raise capital through the sale of our equity
securities.
We have in the past and may in the future grant warrants to consultants
and non-employee directors at prices and on terms determined by the board of
directors in its discretion. The grant of warrants is not done pursuant to any
written plan considered by the stockholders, rather each warrant is a separate
written agreement. See "EXECUTIVE COMPENSATION-Stock Options, Warrants."
36
NOTE FINANCING
From time to time we have offered both convertible and non-convertible
notes to investors. The following table summarizes outstanding notes issued by
us and the principal amounts due as of December 9, 2002:
Principal
Amount Date Rate Convertible Conversion Rate Maturity
--------- -------- -------- ----------- ---------------------- --------
Patricia and Gary Dolphus $ 53,000 08/14/01 12% Yes 25% discount to market 08/14/03
Patricia and Gary Dolphus $ 87,000 10/03/01 14% Yes 25% discount to market 10/03/03
Patricia and Gary Dolphus $ 50,000 02/20/02 12% Yes 25% discount to market 02/20/04
Frederick J. and Jean D. Huppert $ 50,000 04/16/02 11% Yes 25% discount to market 02/01/05
Steven J. Kutcher,
(Custodian for Anthony J. Kutcher, UTMA) $ 40,000 11/06/01 12% Yes 25% discount to market 11/06/03
Steven J. Kutcher,
(Custodian for Nicole E. Kutcher, UTMA) $ 40,000 11/06/01 12% Yes 25% discount to market 11/06/03
Irwin Pentel $ 192,280 05/07/01 12% Yes 25% discount to market 05/07/03
Irwin Pentel $ 50,000 06/17/01 11% Yes 25% discount to market 06/17/05
Randy Pentel (Loan #1)
(Various draws - interest accrued) $ 554,880 06/04/01 12% No Not Applicable 12/31/03
Randy Pentel (Loan #2)
(Various draws - interest accrued) $ 269,000 12/31/01 9.25% Yes $1.00 per share 12/31/04
Church of the Risen Messiah (Credit line
up to $250,000 - interest accrued) $ 250,000 07/22/02 12% No Not Applicable 12/31/02
Joyce L. Birch $ 504,303 10/17/02 10% No Not Applicable demand
TERMS OF THE NOTES. The notes bear interest at various rates ranging
from 9.25% to 14%. Interest on the notes is paid monthly. The principal amount
of each note is payable at maturity. The notes mature at various times between
December 31, 2002 and June 17, 2005. No commissions were paid in connection with
the sale of the notes. The proceeds from the sale of the notes were used to
acquire inventory for RESALTA, increase the size of REMEX's lease/rental fleet
and for general corporate purposes. The notes were not issued pursuant to an
indenture and no trustee was retained to enforce any of the obligations
represented by the notes.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act of 1933, as
amended, with respect to the common stock being offered in this prospectus. This
prospectus does not contain all of the information contained in the registration
statement and the exhibits and schedules to the registration statement. Some
items are omitted in accordance with the rules and regulations of the SEC. For
further information about us and the Common Stock offered in this prospectus,
you should review the registration statement and the exhibits and schedules
filed as part of the registration statement. The Registration Statement and the
exhibits and schedules forming a part thereof may be inspected without charge at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material may also be obtained from
the public reference facilities of the Commission, upon payment of prescribed
fees. The SEC also maintains a website at www.sec.gov that contains reports and
other information regarding registrants, including us, that file electronically
with the SEC. You can also call the SEC at 800-732-0330.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We have had no disagreements with our auditors on accounting or
financial disclosures.
37
INDEX TO FINANCIAL STATEMENTS
CAPSOURCE FINANCIAL, INC.
Independent Auditor's Report............................................F-2
Consolidated balance sheets as of September 30, 2002 (unaudited)
and December 31, 2001 and 2000 ......................................F-3
Consolidated statements of operations for the years ended
December 31, 2001 and 2000 and the nine months ended
September 30, 2002 and 2001 (unaudited)..............................F-4
Consolidated statements of stockholders' equity (deficiency) for
the years ended December 31, 2001 and 2000 and nine months
ended September 30, 2002 and 2001 (unaudited) .......................F-5
Consolidated statements of cash flows for the years ended
December 31, 2001 and 2000 and the nine months ended
September 30, 2002 and 2001 (audited) ...............................F-6
Notes to consolidated financial statements..............................F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapSource Financial, Inc.:
We have audited the accompanying consolidated balance sheets of CapSource
Financial, Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CapSource Financial,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Boulder, Colorado
August 21, 2002
F-2
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
DECEMBER 31,
SEPTEMBER 30, ---------------------------
2002 2001 2000
----------- ----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 64,192 106,616 482,569
Rents and receivables, net of allowance for doubtful
accounts of $79,095, $79,095 and $78,000 in 2002,
2001 and 2000, respectively 186,932 239,746 124,905
Mexican value added taxes receivable 94,808 331,738 155,000
Inventory 78,671 354,938 --
Advance payments and other current assets 959,693 38,236 69,046
----------- ----------- -----------
Total current assets 1,384,296 1,071,274 831,520
Trailer and semi-trailer equipment, net 2,239,906 2,085,795 1,610,262
Vehicles, net 28,270 65,500 --
Furniture and computer equipment, net 56,029 59,613 10,635
----------- ----------- -----------
Net property, plant and equipment 2,324,205 2,210,908 1,620,897
Other assets 35,353 12,949 2,128
----------- ----------- -----------
Total assets $ 3,743,854 3,295,131 2,454,545
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 610,903 398,028 72,409
Deposits and advance payments 206,468 68,093 38,350
Notes payable 254,251 -- --
Convertible notes payable, net of discount 173,106 -- --
----------- ----------- -----------
Total current liabilities 1,244,728 466,121 110,759
Long term liabilities:
Convertible notes payable, net of discount 292,004 305,891 --
Payable to stockholder, net of discount 738,605 590,740 --
----------- ----------- -----------
Total long term liabilities 1,030,609 896,631 --
Stockholders' equity (deficit):
Common Stock, $.01 par value. Authorized 100,000,000 shares;
issued and outstanding 7,877,038 (unaudited), 7,832,895
and 6,776,962 shares in 2002, 2001 and 2000, respectively 78,989 78,329 67,770
Additional paid-in capital 6,644,098 6,285,008 4,784,497
Accumulated deficit (5,254,570) (4,430,958) (2,508,481)
----------- ----------- -----------
Total stockholders' equity 1,468,517 1,932,379 2,343,786
----------- ----------- -----------
Total liabilities and stockholders' equity $ 3,743,854 3,295,131 2,454,545
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------
2002 2001 2001 2000
----------- ----------- ----------- -----------
(Unaudited)
Rental income from operating leases $ 537,696 430,488 618,069 402,521
Sales 2,778,562 15,459 388,260 0
Other income 77,959 35,079 31,115 0
----------- ----------- ----------- -----------
Total revenue 3,394,217 481,026 1,037,444 402,521
Costs and expenses:
Depreciation and direct costs of trailers under
operating leases 304,613 410,611 536,698 330,794
Direct costs of sales 2,574,161 15,130 369,586 0
Selling, general and administrative expenses 1,068,986 919,510 1,536,635 685,633
----------- ----------- ----------- -----------
Total expenses 3,947,760 1,345,251 2,442,919 1,016,427
----------- ----------- ----------- -----------
Operating loss (553,543) (864,225) (1,405,475) (613,906)
Other income (expense);
Interest expense (189,579) (49,060) (381,186) (55,929)
Foreign exchange gains (losses), net (56,444) (16,610) 11,559 (12,761)
Other (24,046) 7,112 (147,375) 41,466
----------- ----------- ----------- -----------
Total other income (expense), net (270,069) (58,558) (517,002) (27,224)
----------- ----------- ----------- -----------
Net loss $ (823,612) (922,783) (1,922,477) (641,130)
=========== =========== =========== ===========
Net loss per basic and diluted share $ (0.10) (0.13) (0.28) (0.13)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
and Comprehensive Loss
Years Ended December 31, 2001 and 2000
and nine months ended September 30, 2002 (unaudited)
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------ PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 4,956,643 49,566 3,007,424 (1,867,351) 1,189,639
Conversion of payable to stockholder
to common stock 1,409,637 14,096 1,395,541 1,409,637
Common stock issued for cash 410,682 4,108 381,532 385,640
Net loss (641,130) (641,130)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 6,776,962 $ 67,770 4,784,497 (2,508,481) 2,343,786
=========== =============================================================
Conversion of payable to stockholder
to common stock 867,653 8,677 858,976 867,653
Common stock issued for cash 188,280 1,882 216,398 218,280
Warrants issued for services 29,000 29,000
Discount on convertible notes
payable and payable to stockholder 396,137 396,137
Net loss (1,922,477) (1,922,477)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 7,832,895 78,329 6,285,008 (4,430,958) 1,932,379
=========== =========== =========== =========== ===========
Discount on convertible notes payable and
payable to stockholder from beneficial
conversion option 282,500 282,500
Common stock issued for cash 29,143 291 50,709 51,000
Common stock issued for acquisition of
remaining 20% minority interest
in RESALTA 15,000 150 26,100 26,250
Net loss (823,612) (823,612)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2002 (unaudited) 7,877,038 $ 78,770 6,644,317 (5,254,570) 1,468,517
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements Cash Flows
NINE MONTHS YEARS
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
------------------------ ------------------------
2002 2001 2001 2000
---------- ---------- ---------- ----------
Cash flows from operating activities:
Net loss $ (823,612) (922,783) (1,922,477) (641,130)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts -- -- 1,095 6,000
Depreciation and amortization 207,974 304,009 402,696 258,745
Warrants for common stock issued for services -- 29,000 29,000 --
Accretion of discount on convertible notes payable
and payable to stockholder 75,138 -- 57,758 --
Accretion of discount on payable to stockholder
converted to equity prior to maturity -- -- 228,584 --
Issuance of common stock to acquire minority interest 26,250 -- -- --
Changes in operating assets and liabilities:
Rents and other receivables 289,744 (151,224) (292,674) 37,164
Inventory 276,267 (477,423) (354,938) 0
Other current assets (921,457) (41,444) 30,810 (69,046)
Accounts payable and accrued expenses 212,875 113,461 325,619 (74,455)
Deposits and advance payments 138,375 31,564 29,743 17,795
Other assets (22,404) (5,926) (10,821) 3,776
---------- ---------- ---------- ----------
Net cash used in operating activities (540,850) (1,120,766) (1,475,605) (461,151)
---------- ---------- ---------- ----------
Cash flows from investing activities
Purchase of trailer and semi-trailer equipment (478,407) (1,006,980) (992,379) (560,122)
Purchase of vehicles and equipment (21,162) (116,556) (130,090) (2,773)
Disposal of property, plant and equipment 178,297 120,568 129,762 0
---------- ---------- ---------- ----------
Net cash used in investing activities (321,272) (1,002,968) (992,707) (562,895)
---------- ---------- ---------- ----------
Cash flows from financing activities
Proceeds from payable to stockholder 362,246 1,466,885 1,458,393 1,027,363
Proceeds from convertible notes payable 152,201 -- 415,686 --
Proceeds from notes payable 254,251 -- -- --
Proceeds from sales of common stock 51,000 218,280 218,280 385,640
---------- ---------- ---------- ----------
Net cash provided by financing activities 819,698 1,685,165 2,092,359 1,413,003
---------- ---------- ---------- ----------
Net increase in cash and cash equivalents (42,424) (438,569) (375,953) 388,957
Cash and cash equivalents at the beginning of the period 106,616 482,569 482,569 93,612
---------- ----------
Cash and cash equivalents at the end of the period $ 64,192 44,000 106,616 482,569
========== ========== ========== ==========
Supplemental disclosure of non-cash investing and financing activities:
Cash paid for interest $ 18,626 8,316 20,151 --
========== ========== ========== ==========
Conversion of payable to stockholder to common stock $ -- -- 867,655 1,409,637
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002 (Unaudited), December 31, 2001 and 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
CapSource Financial, Inc. (CapSource or the Company) is a
Colorado corporation with its principal place of business in
Boulder, Colorado. CapSource is a holding company that leases
and rents a fleet of dry van and stainless steel tank truck
trailers through operating leases in Mexico through its
wholly-owned Mexican subsidiaries, Rentas y Remolques de
Mexico, S.A. de C.V. (REMEX), and Opciones Integrales de
Arrendamiento S.A. de C.V. In addition, CapSource sells and
distributes dry vans and truck-trailers through its wholly
owned subsidiaries Remolques y Sistemes Aliados de
Transportacion, S.A. de C.V. and Operador de Servicios
Administrativos Integrales, S.A. de C.V. (RESALTA). The
Company operates in one segment, the leasing and selling of
trailers, and all operations are in Mexico.
(b) USE OF ESTIMATES
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in
the United States of America 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 revenue and expenses during the reporting
period. Significant estimates include depreciation rates,
impairment equipment, residual values, allowance for doubtful
accounts, income tax valuation allowance and the fair value of
beneficial conversion features. Actual results could differ
significantly from those estimates.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of CapSource and its wholly-owned subsidiaries. For
the years ended December 31, 2001 and 2000, RESALTA was an 80%
owned subsidiary of the Company. For those periods all
significant intercompany balances and transactions have been
eliminated in consolidation. Minority interest is recorded for
other stockholders' ownership interests in majority owned
subsidiaries of CapSource.
(d) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits and highly
liquid investments with original maturities of three months or
less.
(e) ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is maintained at levels
determined by management to be adequate based upon specific
identification of certain past-due accounts, which are in the
legal collection process, and deemed to be improbable as to
their collection. In addition, a general percentage allowance
is provided for all other past-due accounts, based on account
aging. Past-due accounts are charged-off against the allowance
when management considers that all practical efforts to
collect the accounts have been exhausted. Accounts receivable
are reviewed quarterly to determine the adequacy of the
allowance for doubtful accounts.
(f) MEXICAN VALUE ADDED TAX RECEIVABLE
Mexican value added tax receivable is the excess of the value
added tax paid versus the value added tax collected which the
Company is in the process of collecting as a normal value
added tax refund from the Mexican government.
(g) INVENTORY
Inventory represents trailers purchased for resale and are
recorded at the lower of cost or market on a first-in
first-out basis.
F-7
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002 (Unaudited), December 31, 2001 and 2000
(h) RECOGNITION OF REVENUE FROM EQUIPMENT SALES
Revenue generated by the sale of trailer and semi-trailer
equipment is recorded at the time the title to the equipment
legally transfers to the buyer. This policy applies to sale of
equipment by both the REMEX trailer leasing subsidiary, and
the RESALTA trailer sales subsidiary.
(i) EQUIPMENT
Equipment is recorded at cost. Trailer and semi-trailer
equipment is depreciated on a straight-line basis over the
estimated useful life of ten years. Prior to January 1, 2002,
the Company depreciated its trailer and semi-trailer equipment
over an estimated useful life of seven years. If the estimated
useful life of trailer and semi-trailer equipment was changed
from seven to ten years in 2001, the net loss for 2001 would
have been reduced by approximately $109,000. Vehicles are
depreciated on a straight-line basis over the estimated useful
life of three years. Furniture and computer equipment is
depreciated on a straight-line basis over the estimated useful
life ranging from three to ten years.
(j) INCOME TAXES
The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date.
(k) EARNINGS PER SHARE
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------
2002 2001 2001 2000
----------- ----------- ----------- -----------
(Unaudited)
Net loss $ (823,612) (922,783) (1,922,477) (641,130)
Common and common
equivalent shares
outstanding:
Historical common
equivalent shares
outstanding 7,832,895 6,776,962 6,776,962 4,956,643
Weighted average common
shares issued during
period 12,342 175,876 180,919 107,482
----------- ----------- ----------- -----------
Weighted average common
shares issued -
basic and diluted 7,845,237 6,952,838 6,957,881 5,064,125
=========== =========== =========== ===========
Loss per basic and
diluted share $ (.10) (.13) (0.28) (0.13)
=========== =========== =========== ===========
Basic loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted
loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding increased
for potentially dilutive common shares outstanding during the
period. The dilutive effect of equity instruments is
calculated using the treasury stock method.
F-8
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002 (Unaudited), December 31, 2001 and 2000
Warrants to purchase 525,000, 525,000 and 255,000 common
shares as of September 30, 2002, December 31, 2001 and 2000,
respectively, were excluded from the treasury stock
calculation because they were anti-dilutive.
(l) EQUIPMENT LEASING
Statement of Financial Accounting Standards No. 13, ACCOUNTING
FOR LEASES, requires that a lessor account for each lease by
either the direct financing, sales-type (collectively capital
leases), or operating lease method. Direct financing and
sales-type leases are defined as those leases that transfer
substantially all of the benefits and risks of ownership of
the equipment to the lessee. For all types of leases, the
determination of classification considers the estimated value
of the equipment at lease termination, referred to as the
residual value. The Company's leases are classified as
operating leases for all of the Company's leases as its lease
contracts do not satisfy the criteria to be recognized as
capital leases.
Leasing revenue consists principally of monthly rentals and
related charges due from lessees. Leasing revenue is
recognized ratably over the lease term. Deposits and advance
rental payments are recorded as a liability until repaid or
earned by the Company. Operating lease terms range from
month-to-month rentals to five years. Initial direct costs
(IDC) are capitalized and amortized over the lease term in
proportion to the recognition of rental income. Depreciation
expense and amortization of IDC are recorded as leasing costs
in the accompanying consolidated statements of operations on a
straight-like basis over the estimated useful life of the
equipment. Residual values are established at lease inception
equal to the estimated value to be received from the equipment
following termination of the initial lease (which in certain
circumstances includes anticipated re-lease proceeds) as
determined by the Company. In estimating such values, the
Company considers all relevant information and circumstances
regarding the equipment and the lessee.
(m) ALLOWANCE FOR IMPAIRMENT
An allowance for impairment is maintained at levels determined
by management to adequately provide for any other than
temporary declines in asset values. In determining impairment,
economic conditions, the activity in used equipment markets,
the effect of actions by equipment manufacturers, the
financial condition of lessees, the expected courses of action
by lessees with regard to leased equipment at termination of
the initial lease term, and other factors which management
believes are relevant, are considered. Recoverability of an
asset's value is measured by a comparison of the carrying
amount of the asset to future net cash flows expected to be
generated by the asset. If a loss is indicated, the loss to be
recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Asset
dispositions are recorded upon the termination or remarketing
of the underlying assets. Assets are reviewed annually to
determine the adequacy of the allowance for impairment.
(n) FOREIGN EXCHANGE TRANSLATION
The financial statements of the Company's Mexican subsidiaries
where the U.S. dollar is the functional currency and which
have certain transactions denominated in the local currency
are remeasured into the U.S. dollar. The remeasurement of the
local currency into U.S. dollars creates translation
adjustments which are included in other income (expense).
F-9
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002 (Unaudited), December 31, 2001 and 2000
The accounts of the Company's Mexican subsidiaries are
reported in the Mexican peso; however, as all leases and
generally all other activities are denominated in U.S.
dollars, the functional currency is the U.S. dollar. For those
operations, certain assets and liabilities are remeasured into
U.S. dollars at historical exchange rates and certain assets
and liabilities are translated into U.S. dollars at period-end
exchange rates. Income and expense accounts are translated at
average monthly exchange rates in accordance with Statement of
Financial Accounting Standards No. 52, FOREIGN CURRENCY
TRANSLATION (SFAS No. 52). Net exchange gains or losses
resulting from translation of those assets and liabilities
which have been translated into U.S. dollars at the period-end
exchange rates were recognized in the results of operations in
the period incurred.
(o) BENEFICIAL CONVERSION OPTION
In connection with the issuance of debt instruments, the
Company granted the holders the option to convert the debt
into equity of the Company at amounts less than the current
fair value of its common stock. In calculating the fair value
of these beneficial conversions, the Company estimated the
fair value of the Company's stock based on current results,
budgeted performance, and recent transactions involving the
Company's common stock.
(p) STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
(SFAS No. 123). As permitted under this standard, the Company
has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), in
accounting for its stock options and other stock-based
employee awards.
(2) LIQUIDITY
The Company plans to raise capital through the sale of its common stock
through a public offering scheduled to take place during the fourth
quarter of 2002. If the public offering does not take place or if it is
under subscribed, management of the Company may seek additional funding
from existing stockholders. These stockholders have expressed the
willingness and ability to contribute additional capital, if necessary.
However, no financing agreements have been formalized.
Management believes that the cash to be received from the future sale
of the Company's common stock to existing stockholders plus cash
expected to be generated from operations to be sufficient to fund
operations through December 31, 2002 and to satisfy obligations as they
become due.
(3) EQUIPMENT
At September 30, 2002, December 31, 2001 and 2000, equipment consists
of the following:
DECEMBER 31,
SEPTEMBER 30, ---------------------------
2002 2001 2000
----------- ----------- -----------
(Unaudited)
Trailer and semi-trailer equipment $ 3,172,447 2,877,503 2,208,816
Vehicles 38,635 72,564 --
Furniture and computer equipment 83,548 75,518 17,831
----------- ----------- -----------
3,294,630 3,025,585 2,226,647
Less accumulated depreciation (970,425) (814,677) (605,750)
----------- ----------- -----------
$ 2,324,205 2,210,908 1,620,897
=========== =========== ===========
F-10
CAPSOURCE FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002 (Unaudited), December 31, 2001 and 2000
(4) FUTURE MINIMUM RENTAL INCOME
Future minimum lease payments receivable from noncancelable operating
leases on equipment as of September 30, 2002 and December 31, 2001 are
as follows:
2002 2001
---------- ----------
(Unaudited)
Year ending December 31:
2002 $ 168,274 622,553
2003 570,544 568,428
2004 570,144 460,524
2005 570,144 415,336
2006 439,764 239,420
Thereafter 105,868 --
---------- ----------
$2,424,738 2,306,261
========== ==========
(5) SIGNIFICANT CUSTOMERS
All of the Company's lessees are located in Mexico but the lease
payments are denominated in U.S. dollars. During the nine months ended
September 30, 2002 and the fiscal years 2001 and 2000, rental income
from customers who represent 10% or greater of rental income are as
follows:
SEPTEMBER 30,
CUSTOMER 2002 2001 2000
--------------------------- -------- -------- --------
(Unaudited)
Customer A $ 59,683 117,934 128,100
Customer B 52,751 82,787 106,770
Customer C -- -- 42,325
Customer D 68,774 134,429 --
Customer E 51,525 69,677 36,450
Customer F 164,112 115,621 --
(6) NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
Notes payable and convertible notes payable at September 30, 2002,
December 31, 2001 and 2000 consist of the following:
Short term notes payable with unpaid principal and accrued interest
payable on the following due dates at the following rates:
2002 2001 2000
--------- --------- ---------
(Unaudited)
Due December 31, 2002 at 12% per annum $ 254,251
--------- --------- ---------
$ 254,251
========= ========= =========
Short-term convertible notes payable with unpaid principal and accrued
interest payable on the following due dates at the following rates:
2002 2001 2000
--------- --------- ---------
(Unaudited)
Due May 7, 2003 at 12% per annum $ 194,176 -- --
--------- --------- ---------
194,176 -- --
Discount on convertible notes payable (21,070) -- --
--------- --------- ---------
$ 173,106 -- --
========= ========= =========
F-11
Long-term convertible notes payable with unpaid principal and accrued
interest payable on the following due dates at the following rates:
2002 2001 2000
--------- --------- ---------
(Unaudited)
Due May 7, 2003 at 12% per annum $ -- 93,798 --
Due August 14, 2003 at 12% per annum 53,523 53,296 --
Due October 3, 2003 at 14% per annum 88,001 87,934 --
Due November 6, 2003 at 12% per annum 40,395 40,329 --
Due November 6, 2003 at 12% per annum 40,395 40,329 --
Due February 20, 2004 at 12% per annum 50,493 -- --
Due February 1, 2005 at 11% per annum 50,452 -- --
Due June 17, 2005 at 11% per annum 50,452 -- --
--------- --------- ---------
373,711 415,686 --
Discount on convertible notes payable (81,707) (109,795) --
--------- --------- ---------
$ 292,004 305,891 --
========= ========= =========
The convertible notes payable are immediately convertible into common
stock at 75% of the market price (as defined in the agreement) of
common stock on the date of conversion. This beneficial conversion
feature has been valued in accordance with EITF 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios (EITF 98-5) and EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments (EITF
00-27) at the intrinsic value at the commitment date. The beneficial
conversion feature is recorded as an increase to additional paid-in
capital and a discount on the related debt which is accreted to
interest expense from the commitment date to the stated maturity date
of the debt using the effective interest method.
During the nine months ended September 30, 2002 and the year ended
December 31, 2001, the Company recorded discounts of $50,000 and
$135,760, respectively, in connection with the beneficial conversion
features on the convertible notes payable.
(7) PAYABLE TO STOCKHOLDER
Payable to stockholder at September 30, 2002, December 31, 2001 and
2000 consists of the following:
2002 2001 2000
--------- --------- ---------
(Unaudited)
Unsecured notes payable to stockholder
with interest at 12.0% per annum with
unpaid principal and accrued interest
due on December 31, 2003. $ 634,887 590,740 --
Convertible notes payable to stockholder
with interest at 9.25% per annum with
unpaid principal and accrued interest
due December 31, 2004. 318,099 --
--------- --------- ---------
952,986 590,740 --
Discount on convertible notes payable (214,281) -- --
--------- --------- ---------
$ 738,605 590,740 --
========= ========= =========
F-12
The convertible note payable is convertible to common stock of the
Company at a conversion price of $1.00 per common share. In 2001, debt
of $826,805 plus accrued interest of $40,848 was converted into common
stock. In 2000, debt of $1,344,174 plus accrued interest of $65,463 was
converted to common stock.
During the nine months ended September 30, 2002 and the year ended
December 31, 2001, the Company recorded discounts of $232,500 and
$260,377, respectively, in connection with the beneficial conversion
features on the payable to stockholder.
(8) CONVERSION OF STOCKHOLDER NOTE
The December 31, 2001 consolidated statement of operations includes a
charge of $228,584 to interest expense which represents the unaccreted
discount on the convertible stockholder note that was converted to
common stock prior to its maturity.
(9) INCOME TAXES
Income tax benefit for the years ended December 31, 2001 and 2000
differed from the amounts computed by applying an income tax rate of
34% to pretax loss as a result of the following:
2001 2000
---------- ----------
Computed expected tax benefit $ 653,642 217,984
Reduction (increase) in income taxes
resulting from:
State and local taxes, net of
federal benefit and other 36,594 76,617
Increase in valuation allowance (690,236) (294,601)
---------- ----------
$ -- --
========== ==========
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2001 and 2000 are
presented below:
2001 2000
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 26,893 26,447
Accrued expenses 46,948 8,476
Net operating loss carryforwards 1,808,085 1,036,088
----------- -----------
Total gross deferred tax assets 1,881,926 1,071,011
Deferred tax liabilities:
Inventories 120,679 --
----------- -----------
Total gross deferred tax 120,679 --
liabilities
Less valuation allowance (1,761,247) (1,071,011)
----------- -----------
Net deferred tax assets $ -- --
=========== ===========
F-13
Deferred tax assets are fully offset by a valuation allowance. As of
December 31, 2001, the Company has net operating loss carryforwards for
U.S. or Mexico federal income tax purposes of approximately $4,550,000
which are available to offset future federal taxable income and expire
starting in 2002 through 2020.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during periods in which those temporary differences become
deductible. Due to historical losses, realization of tax assets is not
assured and, accordingly, management has recognized a valuation allowance
for all deferred income tax assets.
The Company has included $94,808, $331,738 and $155,000 of value-added
tax credit receivables in their receivable balance as of September 30,
2002, December 31, 2001 and 2000, respectively. This credit is the excess
of the value-added tax paid versus the value-added tax collected, which
the Company is in the process of collecting as a normal value-added tax
refund from the Mexican government.
(10) COMMON AND PREFERRED STOCK
The Company has authority to issue different classes of common stock and
preferred stock up to a total of 100,000,000 shares. At December 31,
2001, no shares of preferred stock or other classes of common stock have
been issued.
In December 2001 and 2000, the Company issued warrants to directors to
purchase 125,000 shares of common stock at $1.30 and $1.10 per share,
respectively. The warrants are immediately exercisable and have a
five-year life. The Company applied APB 25 in accounting for stock
options and awards and, accordingly, no compensation expense has been
recorded as the exercise price of the warrants was at or above the then
estimated fair value at the issue date.
Had the Company determined compensation cost for the warrants pursuant to
the fair value based accounting method consistent with the provisions of
SFAS No. 123; pro forma net loss would have been $1,960,000 and $659,000
for the years ended December 31, 2001 and 2000, respectively. The fair
values of each warrant of $0.18 and $0.14, respectively, are estimated on
the grant date using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, expected volatility of 0%
weighted average risk-free rate of 5.13% and 6.00%, respectively, and
weighted average expected lives of five years.
In April 2001, in conjunction with a private placement offering to sell
its common stock, the Company issued 20,000 A Warrants and 20,000 B
Warrants to purchase one share of common stock for each Warrant. Each A
Warrant is exercisable immediately and for a period of two years from the
date of issue, at $2.50. Each B Warrant is exercisable immediately and
for a period of five years from the date of issue, at $5.00. The Warrants
are callable by the Company at $0.05 each. The A Warrants are callable
after one year and the B Warrants are callable after two years.
Also during 2001, the Company issued 20,000 warrants to a consultant and
125,000 warrants to a member of the board of directors for services
rendered. These warrants are to purchase common stock at $1.10 per share.
Compensation expense of $29,000 has been recorded for these warrants
equal to the estimated fair value of the services provided to the
Company.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancelable operating leases. The
leases, which all expire in 2002, contain renewal options and provide for
annual escalation for utilities, taxes and service costs. Rent expense
was $39,604, $50,464 and $16,837 for the nine months ended September 30,
2002 and for the years ended December 31, 2001 and 2000, respectively.
Effective July 1, 2000 the Company adopted an Employee Compensation Plan.
Under this plan, up to 1.5% of lease revenue is paid to those employees
responsible for lease origination and lease financing.
F-14
On February 16, 2001, the Company adopted the 2001 Omnibus Stock Option
and Incentive Plan (the "Plan"). The Plan provides that options to
purchase shares of the Company's common stock may be granted to key
employees, directors, consultants and others who are expected to provide
significant services to the Company. The exercise price of the options
ranges between 85% to 110% of the fair value of the Company's common
stock at the date of grant depending on the type of option and optionee.
The aggregate number of shares that can be under the Plan is 550,000. As
of June 30, 2002, no options have been issued under the Plan.
The RESALTA subsidiary was formed to sell tractor-trailers and related
equipment, initially under an agreement negotiated between CapSource and
Hyundai Precision America, Inc. Under the terms of the Hyundai Agreement,
the Company is obligated to meet certain requirements to purchase a
minimum number of Hyundai trailer products for each of the first three
years. To date the Company has not met these requirements. Hyundai has
chosen not to enforce the requirements thus far. There is no assurance
that Hyundai will continue its current position of not enforcing the
minimum purchase requirements of the agreement. If Hyundai chooses to
enforce the minimum purchase requirements of the existing agreement, the
Company could be required to purchase Hyundai trailers for which it has
no immediate need or face the possible termination of the exclusivity of
the Hyundai Agreement.
As of September 30, 2002, the Company had committed to purchase an
additional 210 trailers from Hyundai for sale or lease. The total
purchase price was approximtely $3,500,000, towards which the Company had
made a down-payment to Hyundai of approximately $900,000 as of September
30, 2002.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, rents receivable, other receivables,
inventory, other current assets, accounts payable and accrued expenses
and deposits and advance payments approximate fair value because of the
short maturity of these instruments.
The carrying amounts of the payable to stockholder and convertible notes
payable approximate fair value (before discount) because the interest
rates are based on currently offered rates by lending institutions for
similar debt instruments of comparable maturities.
(13) FORMATION OF RESALTA
CapSource formed RESALTA, an 80% owned subsidiary in April 2001. The
minority interest stockholder of RESALTA converted his ownership interest
in RESALTA into common stock of the Company in June 2002. Consequently,
at September 30, 2002, RESALTA is a wholly owned subsidiary of the
Company. The minority interest stockholder made no financial investment.
Due to losses in all periods and an excess of liabilities over assets for
RESALTA, no minority interest was recognized, as the minority interest
stockholder was not responsible for liabilities or losses of RESALTA. The
fair value of the shares of CapSource granted in exchange for the 20%
minority interest was deemed to be the same as the expected per share
price of CapSource's planned sale of common stock in late 2002.
F-15
================================================================================
NO DEALER OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER
MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY US. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO PURCHASE BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
--------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary.......................................................... 2
The Offering................................................................ 3
Risk Factors................................................................ 5
Safe Harbor for Forward-Looking Statement................................... 10
Use of Proceeds............................................................. 10
Determination of Offering Price ............................................ 11
Capitalization.............................................................. 12
Dilution ................................................................... 13
Plan of Distribution ....................................................... 14
Legal Proceedings .......................................................... 14
Management.................................................................. 15
Executive Compensation...................................................... 16
Principal Stockholders...................................................... 18
Description of Securities................................................... 19
Interest of Named Experts and Counsel....................................... 20
Commission Position on Indemnification...................................... 20
Organization Within Last Five Years......................................... 20
Business.................................................................... 21
Our Reports to Security Holders............................................. 27
Employees................................................................... 28
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 28
Description of Property..................................................... 34
Certain Relationships and Related Transactions.............................. 34
Market for Common Equity and Related
Stockholder Matters...................................................... 35
Note Financing.............................................................. 37
Available Information....................................................... 37
Changes In and Disagreements with Accountants............................... 37
Index to Financial Statements............................................... F-1
--------------------------------
Until ______________, 2003 (90 days from the date of this Prospectus) all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters an with respect to their unsold allotments or subscriptions.
================================================================================
3,000,000 SHARES OF
COMMON STOCK
CAPSOURCE FINANCIAL, INC.
-------------
PROSPECTUS
-------------
____________________________, 2003
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 7-109-103 of the Colorado Business Corporation Act provides
that, unless limited by a corporation's articles of incorporation, a corporation
shall indemnify a person who was wholly successful, on the merits or otherwise,
in the defense of any proceeding to which the person was a party because the
person is or was a director or officer of the corporation, against reasonable
expenses incurred by him or her in connection with the proceeding. Section
7-109-108 of the Colorado Business Corporation Act permits a corporation to
purchase and maintain insurance on behalf of its officers, directors, employees
and agents against any liability which may be asserted against, or incurred by,
such persons in their capacities as officers, directors, employees and agents of
the corporation, whether or not the corporation would have been required to
indemnify the person against the liability under Colorado law.
Article IX of our Bylaws provides that we are authorized to indemnify
its directors, officers, employees or agents to the fullest extent permitted by
Colorado law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be borne by
us, other than underwriting discounts and commissions, in connection with the
issuance and distribution of the shares of Common Stock offered hereby:
SEC registration fee $ 483
Legal fees and expenses 45,000
Accounting fees and expenses 25,000
Blue Sky fees and expenses 21,000
Printing expenses. 2,500
Transfer agent fees and expenses 350
Miscellaneous 6,667
-----
TOTAL $101,000
Each amount set forth above is estimated, except for SEC registration
fee.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, we have sold the following securities
pursuant to exemptions from registration under the Securities Act of 1933, as
amended (the "Securities Act"):
1. In November 1999, CapSource issued 22,000 shares of common stock to
Randolph M. Pentel in exchange for a cash contribution of $22,000.
2. In January 2000, CapSource issued 65,150 shares of common stock to
Randolph M. Pentel in exchange for a cash contribution of $65,150.
3. In January 2000, CapSource issued 40,978 shares of common stock to
Randolph M. Pentel in exchange for travel services valued at $20,489.
4. In December 2000, CapSource issued 1,409,637 shares of common stock to
Randolph M. Pentel in exchange for the conversion notes to CapSource in
the amount of $1,409,637 made by RTL, LLC, a company controlled by
Randolph M. Pentel.
5. In December 2000, CapSource issued 300,000 shares of common stock to
Randolph M. Pentel in exchange for a cash contribution of $300,000.
6. In January 2001, CapSource issued 168,280 shares of common stock to
Randolph M. Pentel in exchange for a cash contribution of $168,280.
II-1
7. In April 2001, CapSource issued 20,000 shares of common stock to Gary
and Patricia Dolphus in exchange for a cash contribution of $50,000.
8. In May 2001, CapSource issued a 12% $192,280 convertible promissory
note to Irwin Pentel in exchange for $192,280. The note is convertible
to common stock at a 25% discount to market price, and matures May
2003.
9. In June 2001, CapSource issued a 12% $554,880 (interest accrued)
promissory note to Randolph M. Pentel in exchange for $544,880. The
note matures December 31, 2003.
10. In June 2001, CapSource issued an 11% $50,000 convertible promissory
note to Irwin Pentel in exchange for $50,000. The note is convertible
to common stock at a 25% discount to market price and matures June
2005.
11. In August 2001, CapSource issued a 12% $53,000 convertible promissory
note to Patricia and Gary Dolphus, in exchange for $53,000. The note is
convertible to common stock at a 25% discount to market price and
matures August 2003.
12. In October 2001, CapSource issued a 14% $87,000 convertible promissory
note to Patricia and Gary Dolphus, in exchange for $87,000. The note is
convertible to common stock at a 25% discount to market price and
matures October 2003.
13. In November 2001, CapSource issued a 12% $40,000 convertible promissory
note to Steven J. Kutcher, Custodian for Anthony J. Kutcher, UTMA, in
exchange for $40,000. The note is convertible to common stock at a 25%
discount to market price and matures November 2003.
14. In November 2001, CapSource issued a 12% $40,000 convertible promissory
note to Steven J. Kutcher, Custodian for Nicole J. Kutcher, UTMA, in
exchange for $40,000. The note is convertible to common stock at a 25%
discount to market price and matures November 2003.
15. In December 2001, CapSource issued a 9.25% $269,000 (interest accrued)
convertible promissory note to Randolph M. Pentel, in exchange for
$269,000. The note is convertible to common stock at $1.00 per share
and matures December 2004.
16. In February 2002, CapSource issued a 12% $50,000 convertible promissory
note to Patricia and Gary Dolphus, in exchange for $50,000. The note is
convertible to common stock at a 25% discount to market price and
matures February 2004.
17. In April 2002, CapSource issued an 11% $50,000 convertible promissory
note to Fredrick J. and Jean D. Huppert in exchange for $50,000. The
note is convertible to common stock at a 25% discount to market price
and matures February 2005.
18. In July 2002, CapSource issued a 12% $250,000 promissory note to the
Church of the Risen Messiah in exchange for $250,000. The note matures
December 2002.
19. On August 2, 2002 CapSource issued 29,143 shares of common stock to
Randolph M. Pentel in exchange for a cash contribution of $51,000.
20. We have issued warrants to officers, directors and others from time to
time, aggregating 565,000 shares, at exercise prices between $1.10 and
$5.00. Some of the warrants were issued for board participation, some
as compensation for services, and some as companion to convertible note
offerings.
The above transactions were made in reliance upon the exemptions from
registration provided under Section 4(2) and 4(6) of the Securities Act, and
Rules 504, 505 and 506 of Regulation D. The purchasers of such securities
acquired the securities for his or her own account and not with a view to any
distribution thereof to the public. The certificates evidencing the securities
bear (or will bear upon issuance, in the case of convertible securities) a
legend stating that the securities may not be offered, sold or transferred other
than pursuant to an effective Registration Statement under the Securities Act,
or an exemption from such registration requirements.
II-2
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
--- -----------
1.1 Underwriting Agreement
1.2 Form of Underwriter Warrant
1.3 Selected Dealer Agreement
*3.1 Articles of Incorporation
*3.1.1 Articles of Amendment to the Articles of Incorporation (Name Change)
*3.1.2 Articles of Amendment to the Articles of Incorporation (Authorized
Capital)
*3.2 By-laws
*4.1 Specimen of Common Stock Certificate
***5.1 Opinion of Rider Bennett Egan and Arundel LLP
*10.1 Employment Agreement dated December 10, 2000 Between Company and
Fred C. Boethling
*10.2 Employment Agreement dated December 10, 2000 Between Company and
Steven E. Reichert
*10.3 Employment Agreement dated December 10, 2000 Between Company and
Lynch Grattan
*10.4 CapSource Financial, Inc. 2001 Omnibus Stock Option and Incentive
Plan
*10.5 Form of Warrant Agreement
*10.6 Form of Certificate for Common Stock Purchase Warrants
+10.7 Hyundai Distribution Agreement
*10.8 12% Promissory Note dated June 4, 2001 in Favor of Randolph M.
Pentel
*10.9 9.25% Convertible Promissory Note dated December 31, 2001 in Favor
of Randolph M. Pentel
*10.10 12% Convertible Promissory Note dated November 6, 2001 in Favor of
Steven J. Kutcher as custodian for Anthony J. Kutcher, UTMA
*10.11 12% Convertible Promissory Note dated November 6, 2001 in Favor of
Steven J. Kutcher as custodian for
Nicole E. Kutcher, UTMA
*10.12 Conzuelo Shareholder Agreement with Amendment
*11.1 Statement Regarding Computation of Per Share Earnings
*21.1 List of Subsidiaries
23.1 Consent of KPMG LLP
+ Portions omitted pursuant to a Confidential Treatment Request
("CTR"), which CTR was granted pursuant to a Commission Order
as of the effective date of this Registration Statement. The
omitted portions have been filed separately with the
Commission.
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 filed October 7, 2002.
** Incorporated by reference to the Company's Registration Statement on
Form SB-2 filed October 7, 2002 by the Company's Amendment No. 1 to
Form SB-2 filed December 9, 2002.
*** Incorporated by reference to the Company's Registration Statement on
Form SB-2 filed October 7, 2002 by the Company's Amendment No. 2 to
Form SB-2 filed December 27, 2002.
ITEM 28. UNDERTAKINGS.
II. The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and
(iii) To include any additional or changed material information on
the plan of distribution.
(2) That, for determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
III. The undersigned small business issuer hereby undertakes to
provide certificates in such denominations and registered in such names as
required to permit prompt delivery to each purchaser.
IV. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, (the "Act") may be permitted to directors,
officers, and controlling persons of the small business issuer pursuant to the
provisions summarized in Item 24
II-3
above, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Post-effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Boulder, State of Denver, on February 25, 2003.
CAPSOURCE FINANCIAL, INC.
By: /s/ Fred C. Boethling
------------------------------------
Fred C. Boethling,
President, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act of 1933, this
Post-effective Amendment No. 1 to the Registration Statement was signed on
February 25, 2003 by the following persons in the capacities stated.
Signature Title
--------- -----
/s/ Fred C. Boethling President, Chief Executive Officer
--------------------- and Director
Fred C. Boethling
/s/ Steven E. Reichert Vice President, General Counsel
---------------------- and Director
Steven E. Reichert
/s/ Steven J. Kutcher Vice President, Chief Financial Officer
---------------------
Steven J. Kutcher
/s/ Randolph M. Pentel Director
----------------------
Randolph M. Pentel
/s/ Lynch Grattan Director
-----------------
Lynch Grattan
II-5