SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K --------- ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended December 31, 2002 [_] TRANSITION REPORT PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from ___________________. Commission File Number: 000-30062 CAPITAL BANK 401(k) RETIREMENT PLAN (Full title of the plan) CAPITAL BANK CORPORATION 4901 Glenwood Avenue Raleigh, NC 27612-3820 (Name of issuer of the securities held pursuant to the plan and address of its principal executive office) CONTENTS Page ---- Signatures 3 Report of Independent Registered Public Accounting Firm F-1 Financial Statements: Statements of Net Assets Available for Benefits December 31, 2002 and 2001 F-2 Statement of Changes in Net Assets Available for Benefits Year Ended December 31, 2002 F-3 Notes to Financial Statements F-4 Supplemental Schedules: Schedule H, Line 4i: Schedule of Assets (Held at End of Year) December 31, 2002 F-9 Schedule G: Schedule of Non-Exempt Transactions Year Ended December 31, 2002 F-10 Exhibit 23 Consent of Independent Registered Public Accounting Firm B-1 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. Capital Bank 401(k) Retirement Plan Date: October 1, 2004 /s/ B. Grant Yarber --------------- ------------------- B. Grant Yarber President and Chief Executive Officer Capital Bank Corporation 3 Report of Independent Registered Public Accounting Firm To the Participants and Administrator of Capital Bank 401(k) Retirement Plan In our opinion, the accompanying statements of net assets available for benefits and the related statement of changes in net assets available for benefits present fairly, in all material respects, the net assets available for benefits of the Capital Bank 401(k) Retirement Plan (the "Plan") at December 31, 2002 and 2001 and the changes in net assets available for benefits for the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Schedule H, Line 4i - Assets (Held at End of Year) and Schedule G - Non-Exempt Transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan's management. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ PricewaterhouseCoopers LLP Raleigh, North Carolina September 13, 2004 F-1 Capital Bank 401(k) Retirement Plan Statements of Net Assets Available for Benefits December 31, 2002 and 2001 2002 2001 ---------- ---------- Assets Participant-directed investments, at fair value $4,455,037 $1,581,213 ---------- ---------- Contributions receivable Employer 114,382 22,454 Employee 40,494 25,900 ---------- ---------- 154,876 48,354 ---------- ---------- Net assets available for benefits $4,609,913 $1,629,567 ========== ========== The accompanying notes are an integral part of these financial statements. F-2 Capital Bank 401(k) Retirement Plan Statement of Changes in Net Assets Available for Benefits Year Ended December 31, 2002 Additions to net assets attributed to Investment income (loss) Interest and dividends $ 48,379 Net depreciation in fair value of investments (431,787) ----------- (383,408) ----------- Contributions Employer 347,431 Employee 437,445 Rollover 99,227 ----------- 884,103 ----------- Total additions 500,695 ----------- Deductions from net assets attributed to Benefits paid to participants 235,929 Administrative expenses 30,525 ----------- 266,454 ----------- Net increase prior to transfer from other plans 234,241 Transfers from other plans: Community Savings Bank Employees' Savings and Profit Sharing Plan 2,317,190 High Street Banking Company Retirement Savings Plan 428,915 ----------- 2,746,105 ----------- Net increase 2,980,346 Net assets available for benefits Beginning of year 1,629,567 ----------- End of year $ 4,609,913 =========== The accompanying notes are an integral part of these financial statements. F-3 Capital Bank 401(k) Retirement Plan Notes to Financial Statements December 31, 2002 and 2001 1. Description of Plan The following description of the Capital Bank 401(k) Retirement Plan (the "Plan") provides only general information. Participants should refer to the Plan Agreement for a more complete description of the Plan's provisions. General The Plan is a defined contribution plan, which covers substantially all salaried employees of Capital Bank Corporation (the "Company"). The Plan was established effective September 1, 1997 and is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). Plan Administration Wells Fargo Retirement Plan Services ("Wells Fargo") is the appointed trustee and record keeper for the Plan. In addition at December 31, 2002, there were balances from the former High Street 401(k) plan which were being held by two other institutions, Annuity Investors and Capital Investment Company, but were transferred to Wells Fargo subsequent to year end. Eligibility of Participation All full-time, salaried employees over the age of 21 and employed by the Company for at least 3 months are eligible to participant in the Plan. Contributions Participant contributions are voluntary, and the Company imposes no limitations on participant contributions other than certain Internal Revenue Code limitations. The Company may make a discretionary match on participant contributions. During the year ended December 31, 2002, the Company matched individual participant contributions up to 6 percent of the employee's eligible salary. Participants may make changes in their contribution percentage monthly. Investments Upon enrollment in the Plan, participants may direct the investment of contributions to any of the investment options offered by the Plan, including Company stock (limited to 25 percent of total allocation) and nine funds managed by Wells Fargo Retirement Plan Services. Contributions are allocated to investment options in whole percentages with a minimum of 5 percent per elected investment option. The Plan permits participants to redistribute asset balances and to change investment allocations on a daily basis during business days. Vesting Employee contributions are always 100 percent vested. Employer matching contributions are subject to the following vesting schedule: Years 1 2 3 4 5 Vested % 0% 20% 40% 60% 100% F-4 Capital Bank 401(k) Retirement Plan Notes to Financial Statements December 31, 2002 and 2001 Participant Accounts Each participant's separate account is credited with the participant's contribution, the Company's matching contribution and earnings on the account. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. Participant Loans Participants may borrow from their account balances subject to Internal Revenue Service regulation. Participants must have a financial hardship and may not borrow less than $1,000. Interest charged on participant loans by the Plan administrator ranged from 5.14 percent to 9.50 percent and 6 percent to 7.75 percent, respectively, during 2002 and 2001. Principal and interest is paid through payroll deductions. Payment of Benefits On termination of service due to separation from the Company, retirement, permanent disability or death, a participant will receive either a lump sum amount or installment payments equal to the value of the participant's vested account. Forfeited Accounts Forfeitures of non-vested account balances are utilized by the Company to reduce employer contributions. At December 31, 2002 and 2001, forfeited non-vested accounts totaled $74,656 and $18,980, respectively, and no forfeitures were used during the year ended December 31, 2002. Party-in-Interest The Plan invests in Company stock and certain mutual funds managed by Wells Fargo Retirement Plan Services. The income of the Plan is derived from these investments; therefore, these transactions qualify as party-in-interest transactions, which are allowable under ERISA. During the year ended December 31, 2002, the Plan purchased and sold 47,273 shares and 3,543 shares, respectively, of Capital Bank Corporation stock. 2. Summary of Significant Accounting Policies Basis of Accounting The Plan's financial statements are prepared using the accrual basis of accounting. Administrative Expenses The Plan and the Company pay administrative expenses of the Plan. During the year ended December 31, 2002, administrative expenses of $30,525 and $20,209 were paid by the Plan and the Company, respectively. Investment Valuation and Income Recognition The Plan's investments consist primarily of the Company's common stock and mutual funds held with Wells Fargo Retirement Services. All investments are recorded at fair value. Quoted market prices are used to value common stock. Shares of mutual funds are valued at the net asset value of shares held by the plan at year end. The value of the common/collective trust is based on the Plan's interest in the net assets of the common/collective trust. The common/collective trust unit values equals the total value of assets held by the fund less any liabilities (including fees payable F-5 Capital Bank 401(k) Retirement Plan Notes to Financial Statements December 31, 2002 and 2001 to the manager) divided by the total number of units outstanding on the valuation date. Participant loans are valued at their outstanding balances, which approximates fair value. Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date. The Plan presents in the statement of changes in net assets available for benefits the net appreciation (depreciation) in the fair value of its investments, which consists of the realized gains or losses and the unrealized appreciation (depreciation) on these investments. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits at the dates of the financial statements and the reported changes in net assets available for benefits, and disclosure of contingent assets and liabilities during the reported periods. Actual results could differ from those estimates. Risks and Uncertainties The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants' account balances and the amounts reported in the statement of net assets available for benefits. Payment of Benefits Benefits are recorded when paid. 3. Investments The following presents investments that represent five percent or more of the Plan's net assets in one or both years: 2002 2001 ------------------------ ------------------------ Shares Value Shares Value ---------- ---------- ---------- ---------- Capital Bank Corporation Stock 63,339 $ 782,027 19,609 $ 205,132 Wells Fargo Stable Return Fund 32,176 1,098,056 3,845 123,932 American Century Ultra Fund 24,300 514,665 11,321 312,907 Washington Mutual Investors Fund 13,904 326,894 8,469 239,240 Franklin Small Cap Growth II Fund 29,578 212,372 21,704 214,219 PIMCO Total Return Fund 23,325 248,878 3,074 32,153 Vanguard Index 500 Fund 5,542 449,729 1,372 145,283 EuroPacific Growth Fund 8,211 188,604 5,367 144,202 Invesco Dynamics Fund 17,805 189,805 9,492 151,220 F-6 Capital Bank 401(k) Retirement Plan Notes to Financial Statements December 31, 2002 and 2001 During 2002, the Plan's investments (including gains and losses on investments bought and sold, as well as held during the year) depreciated in value by $431,787 as follows: Common/collective trust $ 43,883 Mutual funds (433,261) Common stock (42,409) --------- $(431,787) ========= 4. Tax Status The Company adopted a Prototype Non-Standardized Profit Sharing arrangement which received a favorable opinion letter from the Internal Revenue Service ("IRS") on August 30, 2001 which stated that the form of the prototype plan is designed in accordance with applicable sections of the Internal Revenue Code ("IRC"). The Plan has since been amended. However, the Plan administrator believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. Therefore, no provision for income taxes has been included in the Plan's financial statements. 5. Plan Termination Although it has not expressed any intent to do so, the Company has the right under the Plan to amend or terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, distribution of assets would continue in accordance with existing Plan provisions and would be distributed to participants with a deduction for expenses. 6. Plan Amendment Effective January 1, 2002, the Plan was amended and restated to incorporate operational provisions required in the Uruguay Round Agreements Act, the Uniformed Services Employment and Re-employment Rights Act of 1994, the Small Business Job Protection Act of 1996 and the Tax Reform Act of 1997, collectively referred to as GUST. 7. Acquisitions In 2002, the Company acquired two financial institutions. During the first quarter, the Company acquired First Community Financial Corporation and merged its subsidiary, Community Savings Bank, into Capital Bank. In the fourth quarter of 2002, the Company acquired High Street Corporation and merged its subsidiary, High Street Banking Company, into Capital Bank. As a result of these acquisitions, 401(k) participant balances in the amount of $2,317,190 and $428,915 were transferred into the Capital Bank 401(k) Plan from the Community Savings Bank Employees' Savings and Profit Sharing Plan and the High Street Banking Company Retirement Savings Plan, respectively. F-7 Capital Bank 401(k) Retirement Plan Notes to Financial Statements December 31, 2002 and 2001 8. Nonexempt Transactions Title I of ERISA requires that all employee contributions be submitted to the Plan as soon as administratively possible but no later than the 15th business day of the month following the month of being withheld from compensation. Failure to remit employee contributions into the Plan on a timely basis is considered a non-exempt transaction with a party-in-interest. Management has determined that non-exempt transactions occurred in 2002. These transactions involved the untimely remittance of employee contributions and loan repayments for the pay period ended in May 2002. The past due contributions and loan repayments, totalling $37,256, were remitted to the Plan twenty-two business days following the month in which the deferral was withheld from compensation. 9. Subsequent Event Effective January 1, 2003, the Plan was amended and restated to incorporate provisions required by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). 10. SEC Filings The Plan has commenced filing Form 11-K's with the Securities and Exchange Commission for each of the two years ended December 31, 2002 and 2003. A Form 11-K is required for any period in which the Plan participants can elect to invest their individual contributions in the securities of the Plan sponsor, which became an available election in July, 2000. In the event that additional filings are required, the Plan sponsor would be responsible for paying any associated costs not permitted to be paid by the Plan under Department of Labor Rules and Regulations. F-8 Capital Bank 401(k) Retirement Plan Schedule H, Line 4i - Schedule of Assets (Held at End of Year) December 31, 2002 Description of Investment Including Maturity Date, Identity of Issuer, Borrower, Rate of Interest, Collateral, Number of Current Lessor or Similar Party Par or Maturity Value Shares/Units Cost Value - ----------------------------------------------- ------------------------------ -------------- ------ ------------- Capital Bank Corporation Stock* Common Stock 63,339 ** $ 782,027 Wells Fargo Stable Return Fund Common/Collective Trust 32,176 ** 1,098,056 American Century Ultra Fund Mutual Fund 24,300 ** 514,665 Washington Mutual Investors Fund Mutual Fund 13,904 ** 326,894 Franklin Small Cap Growth II Fund Mutual Fund 29,578 ** 212,372 PIMCO Total Return Fund Mutual Fund 23,325 ** 248,878 Vanguard Index 500 Fund Mutual Fund 5,542 ** 449,729 EuroPacific Growth Fund Mutual Fund 8,211 ** 188,604 Invesco Dynamics Fund Mutual Fund 17,805 ** 189,805 Neuberger & Berman Genesis Mutual Fund 1,592 ** 44,786 Cash Trust Prime Money Market * Money Market 141,672 ** 141,672 Annuity Investors - Fixed * Mutual Fund 1,722 ** 1,722 Aim Government Securities Fund Mutual Fund 19 ** 182 Dreyfus Developing Leaders Fund Mutual Fund 593 ** 20,718 Dreyfus Growth Income Fund Mutual Fund 54 ** 622 Dreyfus Stock Index Fund Mutual Fund 1,907 ** 34,904 Dreyfus Social Responsible Growth Fund Mutual Fund 340 ** 2,143 Dreyfus Appreciation Fund Mutual Fund 295 ** 9,220 Aim Premier Equity Fund Mutual Fund 906 ** 906 Janus Balanced Fund Mutual Fund 1,070 ** 22,032 Janus Capital Appreciation Fund Mutual Fund 954 ** 27,679 Janus Mid Cap Fund Mutual Fund 1,330 ** 30,517 Janus World Wide Growth Fund Mutual Fund 757 ** 24,311 Merrill Lynch Basic Value Fund Mutual Fund 98 ** 2,297 Merrill Lynch Money Market Fund Money Market 278 ** 278 Merrill Lynch Hi Current Income Fund Mutual Fund 38 ** 159 Pilgrim Baxter Growth 2 Fund Mutual Fund 689 ** 9,776 Pilgrim Baxter Technology & Mutual Fund Communications Fund Mutual Fund 883 ** 6,590 Pilgrim Baxter Mid Cap Fund Mutual Fund 646 ** 8,253 Pilgrim Baxter Select Value Fund Mutual Fund 3 ** 38 Strong Opportunity Fund 2 Mutual Fund 115 ** 3,301 Scudder Ease Equity Index Fund Mutual Fund 890 ** 6,912 Scudder Ease Equity 500 Index Fund Mutual Fund 374 ** 2,909 Scudder Small Cap Index Fund Mutual Fund 112 ** 1,981 Van Campen Fixed Income Fund Mutual Fund 257 ** 2,961 Van Campen Real Estate Fund Mutual Fund 24 ** 327 Participant Loans 5.14% to 9.50% due thru September, 2007 36,811 ------------- $ 4,455,037 ============= * Party-in-interest ** Cost information has been omitted because all investments are participant-directed. F-9 Capital Bank 401(k) Retirement Plan Schedule G - Schedule of Non-Exempt Transactions Year Ended December 31, 2002 Identity of Party Relationship Description Purchase Selling Lease Expenses Involved to Plan of Transaction Price Price Rental Incurred - --------------------------- --------------- ---------------------------- ----------- --------- ---------- ---------- Capital Bank Plan Sponsor Failure to remit employee $ - $ - $ - $ - contributions and loan repayments on a timely basis for May 2002. Identity Current Net gain or of Party Relationship Description Cost of Value of (loss) on each Involved to Plan of Transaction Asset Asset transaction - --------------------------- --------------- ---------------------------- ------------ ------------ --------------- Capital Bank Plan Sponsor Failure to remit employee $ 37,256 $ 37,286 $ 30 contributions and loan repayments on a timely basis for May 2002. F-10