UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-24220
KBK CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2416103
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
301 COMMERCE, SUITE 2200, FORT WORTH, TEXAS 76102-4122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 258-6000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
COMMON STOCK, $0.01 PAR VALUE 3,278,009
(SHARES OUTSTANDING AS OF SEPTEMBER 30, 1996)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES [ ] NO [ X ]
<PAGE>
KBK CAPITAL CORPORATION
FORM 10-QSB -- Quarter Ended September 30, 1996
Page
Number
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 1
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 1996 and 1995 2
Consolidated Statements of Changes in Stockholders'
Equity for the Year Ended December 31, 1995 and Nine
Months Ended September 30, 1996 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 -13
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 15
<PAGE>
PART 1. - ITEM 1 - FINANCIAL STATEMENTS
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
SEPT. 30,
1996 DEC. 31,
(UNAUDITED) 1995
------------ -------------
ASSETS
Cash ........................................... $ 457,326 $ 11,520,969
Purchased receivables .......................... 51,939,917 40,874,377
Loans receivable ............................... 18,724,202 5,609,709
Participation sold in loans receivable ......... (3,928,136) --
------------ ------------
Total receivables .......... 66,735,983 46,484,086
Allowance for credit losses .................... (1,754,984) (1,729,171)
------------ ------------
Net receivables ............ 64,980,999 44,754,915
Premises and equipment, net of accumulated
depreciation of $764,783 at September 30,
1996 and $514,624 at December 31, 1995 ...... 1,852,295 1,238,625
Intangible assets, less accumulated
amortization of $1,438,642 at September 30,
1996 and $1,167,495 at December 31, 1995 .... 3,567,027 3,838,174
Prepaid federal income tax ..................... 93,219 --
Other assets ................................... 1,269,382 859,615
------------ ------------
$ 72,220,248 $ 62,212,298
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank line of credit ............................ $ 41,500,000 $ 33,000,000
Due to factored clients ........................ 7,999,871 7,217,162
Accounts payable and accrued liabilities ....... 1,007,320 478,701
Income taxes payable ........................... -- 228,879
------------ ------------
Total liabilities ................ 50,507,191 40,924,742
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value. Authorized
100,000 shares; no shares issued and
outstanding ................................. -- --
Common stock, $.01 par value. Authorized
10,000,000 shares; issued 3,547,200 shares
and outstanding 3,278,009 shares
at September 30, 1996 and issued 3,547,200
shares and outstanding 3,397,200 shares at
December 31, 1995 ........................... 35,472 35,472
Additional paid-in capital ..................... 16,500,555 16,500,555
Retained earnings ............................. 6,948,234 5,685,279
------------ ------------
23,484,261 22,221,306
Treasury stock ................................. (1,771,204) (933,750)
------------ ------------
Total Stockholders' equity ....... 21,713,057 21,287,556
------------ ------------
$ 72,220,248 $ 62,212,298
============ ============
See accompanying notes to consolidated financial statements.
1
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Three Three
Months Months Nine Months Nine Months
Ended Ended Ended Ended
September September September September
30, 1996 30, 1995 30, 1996 30, 1995
(unaudited) (unaudited) (unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earned discount income ................... $2,338,406 $2,842,045 $7,148,940 $7,702,093
Interest income - Loans .................. 363,011 24,172 841,479 43,143
Other income - Fees ...................... 369,060 23,373 623,748 55,988
---------- ---------- ---------- ----------
Total revenue ......................... 3,070,477 2,889,590 8,614,167 7,801,224
Interest expense ......................... 675,855 378,399 1,650,806 1,257,446
---------- ---------- ---------- ----------
Income after interest expense 2,394,622 2,511,191 6,963,361 6,543,778
Provision for credit losses .............. 105,000 370,000 145,000 495,000
---------- ---------- ---------- ----------
Income after interest
expense and provision
for credit losses .................. 2,289,622 2,141,191 6,818,361 6,048,778
Operating expenses:
Salaries and employee
benefits
Amortization of ....................... 985,674 731,063 2,587,310 2,080,759
intangible assets .................. 90,382 108,145 271,146 319,663
Occupancy and equipment ............... 210,966 143,724 572,621 431,428
Professional fees ..................... 105,742 158,753 255,034 432,059
Other ................................. 435,546 267,173 1,143,555 789,765
---------- ---------- ---------- ----------
Total operating expenses ........... 1,828,310 1,408,858 4,829,666 4,053,674
---------- ---------- ---------- ----------
Income before income
taxes .............................. 461,312 732,333 1,988,695 1,995,104
Income tax expense:
Federal
Current ............................ 167,738 263,399 677,432 717,555
Deferred ........................... -- 6,044 -- 9,920
State ................................. 10,967 17,906 48,308 58,388
---------- ---------- ---------- ----------
Total income taxes ................. 178,705 287,349 725,740 785,863
---------- ---------- ---------- ----------
Net income ............................ $ 282,607 $ 444,984 $1,262,955 $1,209,241
========== ========== ========== ==========
Net income per share .................. $ .08 $ .12 $ .36 $ .33
Weighted-average common
shares outstanding ................. 3,404,806 3,667,646 3,488,704 3,613,433
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------------------
Additional Total
Shares paid-in Retained Treasury stockholders'
Outstanding Amount capital earnings stock equity
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .. 3,547,200 $35,472 $ 16,501,754 $3,836,786 $ -- $ 20,374,012
Purchase of stock for treasury (150,000) -- -- -- (933,750) (933,750)
Offering expenses ............ -- -- (1,199) -- -- (1,199)
Net Income ................... -- -- -- 1,848,493 -- 1,848,493
---------------------------------------------------------------------------------
Balance, December 31, 1995 ... $ 3,397,200 $35,472 $ 16,500,555 $5,685,279 $ (933,750) $ 21,287,556
Net Income ................... -- -- -- 1,262,955 -- 1,262,955
Purchase of stock for treasury (146,435) -- -- -- (837,454) (837,454)
---------------------------------------------------------------------------------
Balance, September 30, 1996 .. $ 3,250,765 $35,472 $ 16,500,555 $6,948,234 $(1,771,204) $ 21,713,057
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER
1996 30, 1995
(UNAUDITED) (UNAUDITED)
-----------------------------
Cash flows from operating activities:
Net income ..................................... $ 1,262,955 $ 1,209,241
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............. 535,656 480,397
Provision for credit losses ............... 145,000 (17,408)
Loss on disposition of assets ............. 16,120 --
Decrease (increase) in receivables ........ (24,359,993) 5,227,330
Participation sold ........................ 3,988,909 --
Decrease (increase) in other assets ....... (409,767) 46,935
Increase (decrease) in due to factored
clients ................................ 782,709 (2,204,909)
Increase in accounts payable and accrued
liabilities ............................ 528,619 510,414
Increase (decrease) in income taxes ....... (322,098) --
------------ -----------
Net cash provided by (used in) operating
activities ............................ (17,831,890) 5,252,000
Cash flows used in investing activities
Purchase of premise and equipment ......... (1,035,775) (462,296)
Additional acquisition expense ............ -- (170,034)
Proceeds from sale of assets .............. 141,476
Repurchase of common stock ................ (837,454) --
------------ -----------
Net cash used in investing activities .... (1,731,753) (632,330)
Cash flows from financing activities:
Repayments of payable to former stockholder -- (375,000)
Net borrowings from (repayments to) bank .. 8,500,000 (4,926,125)
Net decrease in commercial certificates ... -- (132,405)
Offering expenses ......................... -- (1,198)
------------ -----------
Net cash provided by financing activities 8,500,000 (5,434,728)
------------ -----------
Net decrease in cash and cash equivalents (11,063,643) (815,058)
Cash at beginning of period .................... 11,520,969 4,447,304
============ ===========
Cash at end of period .......................... $ 457,326 $ 3,632,246
============ ===========
See accompanying notes to consolidated financial statements.
4
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of KBK Capital Corporation (the
"Company"), included herein, are unaudited for all periods ended September 30,
1996 and 1995. However, they reflect all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary to
fairly depict the results for the periods presented. Certain information and
note disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures made herein are adequate
to make the information presented not misleading.
The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results of operations to be expected for the
remainder of the year. It is suggested that these consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and notes thereto for the years ended December 31, 1995 and 1994
which are included in the Company's annual report.
2. BANK LINE OF CREDIT
The Company maintains a $75 million multi-bank line of credit ("Credit
Facility"), made up of a $50 million Revolving Credit Facility ("Revolving
Facility") collateralized by purchased accounts receivable with $40 million
committed at September 30, 1996 and a $25 million Advancing Term Facility ("Term
Facility") collateralized by term loans, with $15 million committed at September
30, 1996. The Credit Facility, as amended on May 28, 1996 to include the Term
Facility, provides for maximum borrowings under the Revolving Facility of the
lesser of (i) $50 million, or (ii) the amount of a borrowing base (based on a
percentage of eligible accounts receivable as defined in the letter agreement to
the Credit Facility net of related amounts due to clients and exclusions based
on client or debtor considerations). Borrowings under the Revolving Facility
bear interest at the agent bank's prime rate or at applicable LIBOR plus 1.5% or
1.25% depending on the Company's interest coverage ratio (as defined in the
letter agreement to the Credit Facility) with interest payable quarterly. The
Credit Facility also provides for maximum borrowings under the Term Facility of
the lesser of (i) $25 million, or (ii) the amount of a borrowing base (based on
a percentage of eligible term loans as defined in the letter agreement to the
Credit Facility). Borrowings under the Term Facility bear interest at the agent
bank's prime rate or at applicable LIBOR plus 1.75% or 1.50% depending on the
Company's interest coverage ratio (as defined in the letter agreement to the
Credit Facility) with interest payable quarterly. Commitment fees are paid
quarterly at the rate of .25% on the unused current commitment amounts under the
Revolving Facility and the Term Facility. The Credit Facility expires on April
30, 1999, at which time all outstanding amounts are due thereunder.
3. STOCKHOLDERS' EQUITY
Pursuant to the Stock Repurchase Plan initiated in 1995, the Company
acquired 146,435 shares of its common stock at a cost of $837,454 during the
nine months ended September 30, 1996. This stock is currently held as treasury
stock and has not been canceled.
5
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a commercial financial institution providing working capital and
asset-based financing to middle-market businesses through the discounted
purchase of their accounts receivable and through lending collateralized by
inventory, equipment, accounts receivable or other assets of the borrower. The
Company's clients are typically businesses with annual revenues up to $30
million which are experiencing growth. By providing asset-based and working
capital financing, the Company relies principally on the quality of the client's
underlying assets and financial condition of the client's customers ("account
debtors") rather than the financial condition of the client itself.
In working capital financings, the Company purchases accounts receivable for a
negotiated price (the "Initial Payment"), usually less than their face amount,
based upon size, age and type of accounts being purchased, the quality of client
documentation and the Company's judgment as to payment history and credit
worthiness of the account debtors. This price is negotiated on a
client-by-client basis and generally does not vary on a receivable-by-receivable
basis when purchased from the client. Revenue generated from the Initial Payment
in the form of a fixed discount is recognized for financial accounting purposes
in the month the related receivable is purchased.
The Company also deducts a variable discount from the purchase price of the
accounts receivable based on the Initial Payment amount and the number of days
between the Initial Payment date and the date the underlying account receivable
is collected. Upon collection of an account receivable, the difference between
the amount collected and the Initial Payment, with respect to that receivable,
less the Company's fixed and variable discounts, (the "residual payment") is
paid to the client. Variable discount income is recorded on an accrual basis
over the period between the date the underlying receivable is purchased and the
date the receivable is collected.
During 1995, the Company expanded its product lines to offer various other types
of financing to customers already served through accounts receivable purchase
facilities. These revolving loan facilities were extended in an effort to
maintain and extend the financial relationship with new or existing customers.
Such working capital revolvers are generally secured by inventory and accounts
receivable. These expanded product lines also include term loans secured by
equipment, real estate, and other assets at floating rates over a base rate. In
its asset-based lending activities, the Company typically obtains an auction or
liquidation value appraisal of the collateral and extends credit at a negotiated
percentage of the appraised value. The term of these facilities generally does
not exceed five years. Interest income on these loans is accrued ratably over
the life of the loan at a variable rate. The rates are negotiated on a
client-by-client basis.
The Company's portfolio of assets continues to grow in all three portfolio
components; however, the Company expects an increasing proportion of the
portfolio to consist of Term Facilities and Working Capital Revolvers. These two
components of the portfolio typically have lower yields than account receivable
purchase facilities but give the portfolio diversification and depth by
extending the term of client relationships.
The Company expects that it will continue to experience lower than historical
yields during the fourth quarter of 1996, which is expected to have a negative
impact on the level of expected growth in its revenues and results for
operations for 1996. Broad-based and sustained economic growth has resulted in
improved financial strength for many middle market companies currently and
prospectively served by KBK. The Company's customary practice of adjusting
pricing for its customers commensurate with improvement or deterioration in
their financial strength, continues to be reflected in lower yields on the
6
<PAGE>
Company's earning asset portfolio. In addition, the Company continues to extend
lower pricing on new business generated as it competes aggressively for earning
asset growth.
Results for the third quarter of 1996 reflect a 6% increase in revenues and a
38% increase in average earning assets, in each case compared to the same period
in the prior year. The Company expects that additions made to its marketing
staff during the second quarter of 1996 will continue to generate earning asset
growth during the fourth quarter of 1996 as yields remain under pressure from
strong economic growth and the Company's aggressive competition for earning
asset growth. Management expects that the rate of growth in earning assets will
out-pace revenue growth through the remainder of the year. There can be no
assurance, however, that earning asset growth will be sufficient to offset lower
yields continuing to be experienced by the Company.
The information in the preceding two paragraphs contains forward-looking
information based on current information and expectations of the Company that
involve a number of risks, uncertainties and assumptions, including the overall
state of the economy, competition among financial institutions, and the
Company's ability to generate growth in earning assets through the generation of
new business. Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual outcomes could vary
materially from those expected.
The following discussion of the Company's results of operations and financial
condition should be read in conjunction with the Company's unaudited
consolidated financial statements included elsewhere in this report. This
discussion contains forward looking statements that are, as such, estimates.
These estimates could be affected by changes in assumptions that make the
estimates not correct.
RESULTS OF OPERATIONS
ANALYSIS OF THIRD QUARTER 1996 COMPARED TO THIRD QUARTER 1995
The following tables set forth the results of operations and certain other data
of the Company for the third quarter of 1996 and the third quarter of 1995.
Quarter Ended Quarter Ended
September 30, 1996 September 30, 1995
(UNAUDITED) (UNAUDITED)
(dollars in thousands)
Average Earning Assets $58,870 $42,713
Total Revenues $3,070 100.0% $2,890 100.0%
Interest Expense 676 22% 379 13%
Provision for Credit Losses 105 3% 370 13%
Operating Expenses 1,828 60% 1,409 49%
Income Taxes 178 6% 287 10%
Net Income 283 9% 445 15%
Total revenue increased 6%, or $180,000 to $3.1 million for the third quarter of
1996 compared to third quarter 1995 total revenues of $2.9 million. This was due
in part to an increase of $339,000 in the interest income component of revenue
to $363,000 for the third quarter 1996 from $24,000 for the same period in 1995.
The increase in interest income was primarily due to the increase of $15.3
million in average outstanding loans for the third quarter 1996 to $16.1 million
from $868,000 for the same period of 1995 resulting from extending the life of
client relationships by offering secured loans to clients already served by the
accounts receivable purchase facilities. Other fee income also increased
$345,000 to $369,000 for the third quarter of 1996, from $24,000 in the same
quarter of 1995 resulting from fees
7
<PAGE>
charged on new loans and receivable purchase facilities, increases in funds
transfer fees and the addition of fees for services performed such as audits and
document preparation. These increases were offset by the drop in discount fees
of $504,000 to $2.3 million for the third quarter of 1996 from $2.8 million in
the same quarter of 1995. The decrease resulted from a $534,000 drop in fixed
discounts for the third quarter of 1996 from the same quarter in 1995 partially
offset by an increase of $31,000 in variable discounts to $1.0 million in the
third quarter of 1996 from $984,000 in the same quarter of 1995. The drop in
fixed fees resulted from the participation by certain correspondents in the
fixed fee revenue of some clients in lieu of a commission and the overall
decline in fixed fee structures connected with variable performance-based
pricing. Increases in variable discounts resulted from the increase in average
purchased accounts receivable outstanding to $45.8 million for the third quarter
of 1996 from $41.5 million for the third quarter of 1995.
Total earning assets generated from purchased receivables financing and loan
financing resulted in a 38% growth in average earning assets to $59.0 million
for the quarter ended September 30, 1996 from $43.0 million for the quarter
ended September 30, 1995. Of this increase, $15.3 million resulted from the
growth in the average outstanding loan portfolio and $4.3 million resulted from
growth in the average outstanding receivables purchased portfolio. The growth in
the third quarter was primarily due to the receivables purchased by the
California division. This division was opened with two offices, one in Santa
Clara, California to serve the San Francisco/Silicon Valley area and the second
in Irvine, California to service the Los Angeles and San Diego areas. The growth
in loans receivable is due to cross selling of asset-based financing products to
new and existing clients.
Interest expense increased $297,000 to $676,000 for the third quarter of 1996
from $379,000 for the same quarter in 1995. This increase is due to a $15.6
million increase in the average outstanding balance under the Company's line of
credit to $35.6 million for the third quarter of 1996 from $20.0 million for the
same quarter in 1995. The increase in the average amounts outstanding was
partially offset by the lower effective prime rate in the third quarter of 1996
of 8.25% compared to 8.75% in the third quarter of 1995.
Yields (annualized revenue divided by average earning assets), however,
decreased to 20.9% for the third quarter of 1996 from 27.1% for the same quarter
of 1995, due to the increase in the loan portion of earning assets as discussed
above and the results of performance-based variable pricing in place in 1996.
The Company's customary practice of adjusting pricing for its customers,
commensurate with improvement or deterioration in their financial strength,
continues to be reflected in lower yields on the Company's earning assets
portfolio. Also, the term loan component of earning assets generally has a lower
yield than the yield generated in working capital financing through purchased
receivables. As the Company extends the life of client relationships through the
addition of lower yield products and rewards good performance with lower rate
purchase facilities, yields are expected to continue to decline. Additionally,
the Company continues to extend lower pricing on new business generated as it
competes aggressively for earning asset growth. A broad-based and sustained
economic growth has resulted in improved financial strength for many middle
market companies currently and prospectively served by the Company. This allows
such companies alternative financing sources such as commercial banks and
asset-based lenders.
A provision for credit losses of $105,000 was recorded for the third quarter of
1996, as compared to $370,000 for the third quarter of 1995. During the third
quarter of 1996, the Company had net charge-offs of $119,000 compared to
$278,000 of net charge-offs for the third quarter of 1995. The allowance for
credit losses at September 30, 1996 of $1.8 million represents 3.0% of average
earning assets for the quarter then ended. The allowance for credit losses at
September 30, 1995 of $1.6 million was 3.8% of average earning assets for the
quarter then ended. Management believes the current allowance is adequate to
cover potential losses which might result from the purchased accounts receivable
and loan portfolios at September 30, 1996.
8
<PAGE>
Operating expenses of $1.8 million for the quarter ended September 30, 1996 were
up $419,000, or 30%, compared with the $1.4 million for the quarter ended at
September 30, 1995. Salaries and employee benefits increased $255,000 to
$986,000 for the third quarter of 1996 compared to $731,000 for the same quarter
of 1995. Most of this increase relates to the expansion of the marketing staff
to 24 full-time personnel from 11 full-time personnel in the same quarter of
1995. Occupancy expenses increased $67,000 to $211,000 for the third quarter of
1996, from $144,000 for the same quarter of 1995 resulting from the increased
rent and depreciation for office space and equipment required in New Orleans,
the opening of two new offices in California in the second quarter of 1996 and
the expansion of operations, finance and executive areas in the Fort Worth
Corporate headquarters. Marketing related expenses such as advertising,
automobile, travel, entertainment, postage and telephone increased $106,000 or
70% to $262,000 in the third quarter of 1996 from $156,000 in the same quarter
of 1995 due to increases in the direct cost to support more geographically
diverse marketing offices. Administrative expenses such as directors fees,
office supplies, credit services, insurance, dues and subscription,
contributions and miscellaneous expenses increased $62,000 or 55% to $174,000
for the third quarter of 1996 from $112,000 for the same quarter of 1995. These
increased expenses for the third quarter of 1996 were partially offset by a
$51,000 decrease in legal and professional fees to $106,000 from $159,000 in the
third quarter of 1995 and a decrease of $18,000 in amortization of intangibles
to $90,000 in the third quarter of 1996 from $108,000 in the third quarter of
1995. The decrease in legal fees relates to high cost in 1995 of the Company's
defense in a client bankruptcy suit which was substantially concluded before the
third quarter of 1996. The decrease in amortization is due to the lengthening of
the noncompetition agreement with the prior owner in the fourth quarter of 1995.
Income taxes of $179,000 for the third quarter of 1996 were $108,000 or 37% less
than the $287,000 of income taxes for the third quarter of 1995, proportionately
equal to the 37% decrease in income before taxes of $271,000 to $461,000 for the
third quarter of 1996 from $732,000 for the same period of 1995.
As a result of the foregoing, net income of the Company for the third quarter of
1996 decreased $162,000, or 36%, to $283,000 from $445,000 for the third quarter
of 1995.
ANALYSIS OF NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1995
The following table sets forth the results of operations and certain other
data of the Company for the nine months ended September 30, 1996 and 1995.
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
Average Earning Assets $54,473 $40,048
Total Revenues $8,614 100.0% $ 7,801 100.0%
Interest Expense 1,651 19% 1,257 16%
Provision for Credit Losses 145 2% 495 6%
Operating Expenses 4,830 56% 4,054 52%
Income Taxes 725 9% 786 10%
Net Income 1,263 15% 1,209 15%
Total revenue increased 10%, or $813,000, to $8.6 million for the nine months
ended September 30, 1996 compared to the same period for 1995 total revenues of
$7.8 million. This was due primarily to the increase of $798,000 in the interest
income component of revenue to $841,000 for the nine months ended September 30,
1996 from $43,000 for the same period 1995. The increase in interest income was
primarily due to the increase of $11.1 million in average outstanding loans for
the nine months ended
9
<PAGE>
September 30, 1996 to $11.5 million from $397,000 for the same period of 1995
resulting from the Company's extending the life of client relationships by
offering secured loans to clients already served by the accounts receivable
purchase facilities. Other fee income also increased $568,000 to $624,000 for
the first nine months of 1996, from $56,000 in the same period of 1995 resulting
from fees charged on new loans and receivable purchase facilities, increases in
funds transfer fees and the addition of fees for services performed such as
audits and document preparation. These increases were partially offset by the
drop in discount fees of $553,000 to $7.1 million for the nine months ended June
30,1996. The decrease resulted from a $750,000 drop in fixed discounts for the
nine months ended September 30, 1996 from the same period in 1995 partially
offset by an increase of $197,000 in variable discounts to $2.9 million for the
nine months ended September 30, 1996 from $2.7 million in the same period of
1995. The drop in fixed fees resulted from the participation by certain
correspondents in the fixed fee revenue of some clients in lieu of a commission
and the overall decline in fixed fee structures connected with variable pricing.
Increases in variable discounts resulted from the increase in average purchased
accounts receivable outstanding of $44.7 million for the nine months ended
September 30, 1996 from $39.3 for the same period of 1995.
Total average earning assets generated from purchased receivables and loan
financing resulted in a 36% growth in earning assets, to $54.5 million for the
nine months ended September 30, 1996 up $14.5 million from $40 million for the
nine months ended September 30, 1995. The growth of $5.4 million in the average
outstanding purchased receivables is primarily due to the portfolio growth
generated by the California offices in the third quarter of 1996. The growth in
average loans outstanding of $11.1 million is due to cross selling of
asset-based working capital and term financing products to new and existing
clients geographically across the portfolio.
Interest expense increased $394,000 to $1.7 million for the nine months ended
September 30, 1996 from $1.3 million for the same quarter in 1995. This increase
is due to a $12 million increase in the average outstanding balance under the
line of credit to $30 million for the nine months ended September 30, 1996 from
$18 million for the same period in 1995 but was partially offset by the prime
borrowing rate declining 25 basis points from 8.5% to 8.25% in the third month
of 1996 compared to increasing 50 basis points from 8.5% to 9% in the third
month of 1995.
Yields (revenue divided by average earning assets, annualized), however,
decreased to 21.1% for the nine months ended June 30,1996 from 26.0% for the
same period of 1995, due to the increase in the loan portion of earning assets
as discussed in the preceding paragraph and the results of performance based
variable pricing in place in 1996. This component of earning assets generally
has a lower yield than the yield generated in working capital financing through
purchased receivables. As the Company extends the life of client relationships
through the addition of lower yield products and rewards good performance with
lower rate purchase facilities, yields are expected to continue to decline.
A provision for credit losses of $145,000 was recorded for the nine months ended
September 30, 1996, as compared to $495,000 for the same period of 1995. During
the nine month period ended September 30, 1996, the Company had net charge-offs
of $119,000 compared to $235,000 of net charge-offs for the same period of 1995.
The allowance for credit losses at September 30, 1996 of $1.8 million represents
3.0% of average earning assets for the nine months then ended. The allowance for
credit losses at September 30, 1995 of $1.6 million was 3.8% of average earning
assets for the nine months then ended. Management believes the current allowance
is adequate to cover potential losses which might result from the purchased
accounts receivable and loan portfolio at September 30, 1996.
Operating expenses of $4.8 million for the nine months September 30, 1996 were
up $776,000, or 19%, compared with the $4.1 million for the same period of 1995.
Salaries and employee benefits increased $506,000 to $2.6 million for the nine
months ended September 30, 1996 compared to $2.1 million for the same period of
1995. Most of this increase relates to the expansion of the marketing staff in
the first nine months of 1996 through the addition of eleven full-time
personnel. Occupancy expenses increased
10
<PAGE>
$141,000 to $573,000 for the third quarter of 1996, from $432,000 for the same
period of 1995 resulting from the increased rent and depreciation for office
space and equipment required in New Orleans and the opening of two new offices
in California in the second quarter of 1996 and the expansion of operations,
finance and executive areas at the Fort Worth corporate headquarters. Marketing
related expenses such as advertising, referral commissions, automobile, travel,
entertainment, postage and telephone increased $228,000 or 52% to $668,000 in
the nine months ended September 30, 1996 from $440,000 in the same period of
1995 due to increases in the direct cost to support more geographically diverse
marketing offices. Administrative expenses such as directors fees, office
supplies, credit services, dues and subscriptions insurance, contributions and
miscellaneous expenses increased $126,000 or 36% to $475,000 for the nine months
ended September 30, 1996 from $349,000 for the same period of 1995. These
increased expenses for the third quarter of 1996 were offset by a $177,000
decrease in legal and professional fees to $255,000 for the nine months ended
September 30, 1996 from $432,000 in the third quarter of 1995 and a decrease of
$49,000 in amortization of intangibles to $271,000 for the nine months ended
September 30, 1996 from $320,000 in the third quarter of 1995. The decrease in
legal fees relates to high cost in 1995 of the Company's defense in a client
bankruptcy suit which was substantially concluded before the first quarter of
1996. The decrease in amortization is due to the lengthening of the
noncompetition agreement with the prior owner in the fourth quarter of 1995.
Income taxes of $725,000 for the nine months ended September 30, 1996 were 8%
less than the $785,000 of income taxes for the same period of 1995.
As a result of the foregoing, net income of the Company for the nine months
ended September 30, 1996 increased $54,000, or 4%, to $1.3 million from $1.2 for
the same period of 1995.
CHANGES IN FINANCIAL CONDITION
All asset components of the Company's balance sheet increased from December 31,
1995, to September 30, 1996, except cash and intangible assets. Total assets
increased 16% from $62.2 million at December 31, 1995 to $72.2 million at
September 30, 1996. This increase was primarily due to the increase in earning
assets of $19 million, from $44 million at December 31, 1995 to $63 million at
September 30, 1996 resulting from increased borrowings of $8.5 million. Net
intangible assets declined $90,400 during the third quarter 1996 due to
amortization. The decrease in cash of $11 million was used primarily in
operating activities.
Stockholders' equity increased $426,000, from $21.3 million at December 31, 1995
to $21.7 million at September 30, 1996 due to net income for the nine months
ended September 30, 1996 of $1.3 million net of treasury stock purchased during
the quarter at a cost of $837,000. The Company paid no dividends on its common
stock for the nine months ended September 30, 1996.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements generally increase proportionately to the
change in earning assets. Average earning assets of $47.3 million was 18.6%
above the comparable average earning assets of $38.5 million for the quarter
ended September 30, 1995. The average balance on loans, however, grew from
$676,000 for the quarter ended September 30, 1995 to $12.8 million for the
quarter ended September 30, 1996. This increase in loan growth caused average
earning assets to grow 45.9% from $39.2 million for the quarter ended September
30, 1995, to $57.2 million for the quarter ended September 30, 1996. The Company
continues to search for ways to employ its capital base and to expand its
portfolio through the expansion of its current product line, the addition of new
product lines such as collateralized loan facilities, the acquisition or
development of new products or lines and the addition of services related to the
purchase or servicing of accounts receivable.
The Company maintains a $75 million multi-bank line of credit ("Credit
Facility"), made up of a $50 million Revolving Credit Facility ("Revolving
Facility") collateralized by purchased accounts receivable with $32.5 million
outstanding and $40 million committed at September 30, 1996 and a $25 million
Advancing Term Facility ("Term Facility") collateralized by term loans with $5
million outstanding and $5 million committed at September 30, 1996. The Credit
Facility as amended on May 28, 1996 to include the Term Facility provided for
maximum borrowings under the Revolving Facility of the lesser of (i) $50
million, or (ii) the amount of a borrowing base (based on a percentage of
eligible accounts receivable as defined in the letter agreement to the Credit
Facility net of related amounts due to clients and exclusions based on client or
debtor considerations). Borrowings under the Revolving Facility bear interest at
the agent bank's prime rate or at applicable LIBOR plus 1.5% or 1.25% depending
on the Company's interest coverage ratio (as defined in the letter agreement to
the credit facility) with interest payable quarterly. The Credit Facility also
provided for maximum borrowings under the Term Facility of the lesser of (i) $25
million, or (ii) the amount of a borrowing base (based on a percentage of
eligible term loans as defined in the letter agreement to the Credit Facility.
Borrowings under the Term Facility bear interest at the agent bank's prime rate
or at applicable LIBOR plus 1.75% or 1.50% depending on the Company's interest
coverage ratio (as defined in the letter agreement to the credit facility) with
interest payable quarterly. Commitment fees are paid quarterly at the rate of
.25% on the unused current commitment amounts under the Revolving Facility and
the Term Facility. The Credit Facility expires on April 30, 1999, at which time
all outstanding amounts are due thereunder.
Borrowings under the Credit Facility are secured by all accounts receivable of
KBK now existing or hereafter to come into existence (including all accounts
receivable purchased by KBK from its clients), all inventory of KBK now owned or
acquired, all instruments, chattel paper, documents and general intangibles of
KBK now owned or acquired, an assignment of all security interest, mortgages and
liens securing the foregoing and all proceeds of the foregoing. The terms of the
Credit Facility require KBK to comply with certain financial covenants and
include the maintenance of a certain current ratio and tangible net worth,
limitations on its debt to tangible net worth ratio and an interest coverage
ratio which requires that the ratio of the Company's income before interest and
taxes to interest expense, over the last four quarters, be no less than 1.5 to
1. Additionally, the Credit Facility restricts the payment of dividends or the
repurchase of stock in any fiscal year to the lesser of (i) KBK's after tax
income for such fiscal year, or (ii) the sum of 50% of the amount by which KBK's
after tax income exceeds the cumulative amount of dividends permitted to be paid
under such tests, but not so paid.
Thus, the Company is restricted in its ability to pay cash dividends or
repurchase its common stock. Under the terms of the Credit Facility, the
limitation on dividends and repurchases at September 30, 1996 was $819,000, and
$435,000 was available for such payments. The Company has not paid dividends on
its common stock and currently does not intend to pay cash dividends, rather it
intends to retain its cash for the continued expansion of its business and the
continuation of the stock repurchase program initiated in November, 1995.
Pursuant to action by the Company's Board of Directors in July of 1996, the
stock
12
<PAGE>
repurchase program was increased by 200,000 shares from its initial 300,000
shares. Under the Company's stock repurchase program, the Company may buy back
in open market transactions, block trades or private transactions up to 500,000
shares (14% of the outstanding shares at the time of the program's initiation)
at current market prices. During the third quarter of 1996, the Company
repurchased 90,000 shares at a cost of $453,106. As a result, at the end of the
third quarter of 1996, the Company has purchased 296,435 shares of its common
stock since the inception of its repurchase program in November 1995.
Because of the recent growth in earning assets, the Company's net cash used in
operating activities was $18 million for the nine months ended September 30,
1996 as compared to net cash provided from operating activities of $5 million
for the same period in 1995. The Company anticipates operating activities will
continue to utilize more cash than generated as earning assets continue to grow.
The Company anticipates that, on occasion, it may reach the limits of its
capital and borrowing capabilities under the Credit Facility. The Company has
also engaged in continuing discussions with respect to the structure and
documentation of a securitization program, pursuant to which the Company would,
from time to time, transfer or sell purchased accounts receivable, inventory
revolving lines, and term loans to a special purpose finance subsidiary, which
would in turn transfer such receivables to a trust for the benefit of certain
holders of securities of such subsidiary. Although there can be no assurance
that the Company will be successful in structuring, consummating, or maintaining
a securitization program, the Company believes that a securitization of its
earning assets would provide it with access to capital at attractive rates and
in amounts which would support substantial growth in earning assets for the
Company.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any litigation other than routine proceedings
incidental to its business and the Company does not expect that these
proceedings will have a material adverse effect on the Company.
14
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KBK CAPITAL CORPORATION
Date NOVEMBER 13, 1996 /s/ MICHAEL D. MAGILL
Michael D. Magill,
Executive Vice President
and Chief Financial Officer
15
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 457,326
<SECURITIES> 0
<RECEIVABLES> 66,735,983
<ALLOWANCES> (1,754,984)
<INVENTORY> 0
<CURRENT-ASSETS> 65,438,325
<PP&E> 1,852,295
<DEPRECIATION> 0
<TOTAL-ASSETS> 72,220,248
<CURRENT-LIABILITIES> 50,507,191
<BONDS> 0
0
0
<COMMON> 35,472
<OTHER-SE> 21,677,585
<TOTAL-LIABILITY-AND-EQUITY> 72,220,248
<SALES> 0
<TOTAL-REVENUES> 8,614,167
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 145,000
<INTEREST-EXPENSE> 1,650,806
<INCOME-PRETAX> 1,988,695
<INCOME-TAX> 725,740
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 1,262,955
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