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 JUNE 30, 1997
[_] 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 3,310,133
(SHARES OUTSTANDING AS OF JUNE 30, 1997)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT YES [ ] NO [X]
<PAGE>
KBK CAPITAL CORPORATION
FORM 10-QSB -- Quarter Ended June 30, 1997
Page
Number
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at June 30, 1997
and December 31, 1996 1
Consolidated Statements of Income for the Three
Months Ended March 31, and June 30, 1997 and 1996 2
Consolidated Statements of Changes in Stockholders'
Equity for the Year Ended December 31, 3
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5 - 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 13
Part II. Other Information
Item 1 - Legal Proceedings 14
Item 4 - Submission of Matters To a Vote of Security Holders 14
Item 5 - Other Information 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
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, 1997 Dec. 31, 1996
------------- -------------
(unaudited)
<S> <C> <C>
Assets
Cash .................................................................. $ 2,134,221 $ 1,361,225
Accounts receivable ................................................... 9,336,327 55,584,786
Loans receivable ...................................................... 23,526,933 27,375,655
Residual receivables in securitization ................................ 15,059,805 --
Less allowance for credit losses ...................................... (1,801,375) (1,608,253)
------------ ------------
Total receivables, net ........................................... 46,121,690 81,352,188
Premises and equipment, net of accumulated depreciation of
$1,159,198 at June 30, 1997 and $878,646 at
December 31, 1996 ................................................ 2,239,127 1,952,568
Intangible assets, less accumulated amortization of $1,718,303 at
June 30, 1997 and $1,529,024 at December 31, 1996 ................ 3,521,118 3,710,397
Other assets .......................................................... 1,616,275 1,370,113
------------ ------------
$ 55,632,431 $ 89,746,491
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Bank line of credit ................................................... $ 22,000,000 $ 58,000,000
Due to factored clients ............................................... 9,588,985 8,245,544
Accounts payable and accrued liabilities .............................. 762,112 1,135,067
Income taxes payable .................................................. 125,040 --
Deferred revenue ...................................................... 166,548 225,965
------------ ------------
Total liabilities ................................. 32,642,685 67,606,576
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 3,310,133 shares at June 30, 1997
and December 31, 1996 ............................................ 35,472 35,472
Additional paid-in capital ............................................ 16,370,555 16,370,555
Retained earnings ..................................................... 8,086,352 7,236,521
------------ ------------
Treasury stock ........................................................ (1,502,633) (1,502,633)
------------ ------------
Total stockholders' equity ........................ 22,989,746 22,139,915
------------ ------------
$ 55,632,431 $ 89,746,491
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Three Months Three Months Six Months Six Months
Ended Ended Ended Ended Ended
June 30, 1997 Mar. 31, 1997 June 30, 1996 June 30, 1997 June 30, 1996
---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Earned discount income ..................................... $ 570,361 $2,356,989 $2,464,937 $2,927,350 $4,810,533
Interest income - Loans .................................... 724,623 838,968 275,892 1,563,591 475,178
Servicing fees ............................................. 1,802,634 -- -- 1,802,634 --
Other income - Fees ........................................ 550,379 403,078 197,170 953,457 254,690
---------- ---------- ---------- ---------- ----------
Total revenue ......................................... 3,647,997 3,599,035 2,937,999 7,247,032 5,540,401
Interest expense ........................................... 609,668 1,090,264 566,867 1,699,932 974,951
---------- ---------- ---------- ---------- ----------
Income after interest expense ......................... 3,038,329 2,508,771 2,371,132 5,547,100 4,565,450
Provision for credit losses ................................ 200,000 75,000 10,000 275,000 40,000
---------- ---------- ---------- ---------- ----------
Income after interest expense and
provision for credit losses ....................... 2,838,329 2,433,771 2,361,132 5,272,100 4,525,450
Operating expenses:
Salaries and employee benefits ........................ 1,067,665 1,052,917 862,034 2,120,582 1,599,587
Amortization of intangible assets ..................... 94,897 94,382 90,382 189,279 180,764
Occupancy and equipment ............................... 314,348 298,767 185,870 613,115 361,655
Professional fees ..................................... 55,474 46,983 54,742 102,457 149,292
Other ................................................. 450,098 359,887 385,841 809,985 710,058
---------- ---------- ---------- ---------- ----------
Total operating expenses ....... 1,982,482 1,852,936 1,578,869 3,835,418 3,001,356
---------- ---------- ---------- ---------- ----------
Income before income taxes ..... 855,847 580,835 782,263 1,436,682 1,524,094
Income tax expense (benefit):
Federal
Current ........................ 302,209 201,257 245,865 503,466 509,694
Deferred ....................... -- -- -- -- --
State ................................................. 51,918 31,467 21,571 83,385 37,341
---------- ---------- ---------- ---------- ----------
Total income taxes ............. 354,127 232,724 267,436 586,851 547,035
---------- ---------- ---------- ---------- ----------
Net income ..................... $ 501,720 $ 348,111 $ 514,827 $ 849,831 $ 977,059
========== ========== ========== ========== ==========
Net income per share ........... $ 0.15 $ 0.11 $ 0.15 $ 0.26 $ 0.28
========== ========== ========== ========== ==========
Weighted-average common
shares outstanding ......... 3,316,724 3,314,406 3,514,996 3,315,565 3,529,883
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
AND SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Total
Shares paid-in Retained Treasury stockholders'
Issued Amount capital earnings stock equity
--------- ------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ........... 3,497,200 $35,472 $ 16,500,555 $5,685,279 $ (933,750) $ 21,287,556
Purchase of stock for treasu ......... -- -- -- -- (886,383) (886,383)
Issuance of common stock ............. 50,000 -- (130,000) -- 317,500 187,500
Net Income ........................... -- -- -- 1,551,242 -- 1,551,242
--------- ------- ------------ ---------- ----------- ------------
Balance, December 31, 1996 ........... 3,547,200 $35,472 $ 16,370,555 $7,236,521 $(1,502,633) $ 22,139,915
Net Income ........................... -- -- -- 849,831 -- 849,831
--------- ------- ------------ ---------- ----------- ------------
Balance, June 30, 1997 ............... 3,547,200 $35,472 $ 16,370,555 $8,086,352 $(1,502,633) $ 22,989,746
========= ======= ============ ========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income ................................................................................... $ 849,831 $ 977,059
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization ...................................................... 469,830 353,042
Provision for credit losses ........................................................ 275,000 40,000
Proceeds from sale of receivables and loans ........................................ 50,800,365 --
Increase in receivables ............................................................ (15,913,129) (17,593,415)
Participation sold ................................................................. (124,819) 3,988,909
Increase in other assets ........................................................... (246,162) (385,694)
Increase in due to factored clients ................................................ 1,343,441 805,050
Increase (decrease) in accounts payable and accrued liabilities .................... (239,291) 368,934
Increase (decrease) in income taxes payable ........................................ 125,040 (295,637)
------------ ------------
Net cash provided by (used in) operating activities ............... 37,340,106 (11,741,752)
Cash flows used in investing activities
Purchase of premise and equipment .................................................. (567,110) (430,130)
Repurchase of common stock ......................................................... -- (384,348)
------------ ------------
Net cash used in investing activities ............................. (567,110) (814,478)
Cash flows from financing activities:
Net borrowings from (repayments to) bank ........................................... (36,000,000) 4,500,000
------------ ------------
Net cash provided by (used in) financing activities ............... (36,000,000) 4,500,000
------------ ------------
Net increase (decrease) in cash and cash equivalents .............. 772,996 (8,056,230)
Cash and cash equivalents at beginning of period ............................................. 1,361,225 11,520,969
------------ ------------
Cash and cash equivalents at end of period ................................................... $ 2,134,221 $ 3,464,739
============ ============
</TABLE>
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") and its wholly owned subsidiaries, KBK Financial, Inc. ("KBK")
and KBK Receivables Corporation ("SPC"), included herein, are unaudited for all
periods ended June 30, 1997 and 1996. The consolidated statements of income for
the quarter ended March 31, 1997 are also unaudited. However, such unaudited
statements 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 six months ended June 30, 1997 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, 1996 and 1995
which are included in the Company's annual report.
2. BANK LINE OF CREDIT. KBK maintains a $25 million multi-bank line of credit
("Credit Facility"), made up of a $10 million Revolving Credit Facility
("Revolving Facility") collateralized by purchased accounts receivable with $8.0
million outstanding at June 30, 1997 and a $15.0 million Advancing Term Facility
("Term Facility") collateralized by term loans, with $14.0 million outstanding
at June 30, 1997. The Credit Facility provides for maximum borrowings of the
lesser of (i) $25 million or (ii) the amount of a borrowing base (based upon a
percentage of eligible accounts receivable, as defined in the loan agreement
governing the Credit Facility, net of excluded amounts). There was $3.0 million
in available credit under this line as of June 30, 1997. Borrowings under the
Revolving Facility portion of the Credit Facility bear interest at the agent
banks' prime rate or applicable LIBOR plus 1.5% at KBK's discretion and expire
on April 30, 1999. Borrowings under the Term Facility portion of the Credit
Facility bear interest at the agent banks' prime rate or applicable LIBOR plus
1.75% at KBK's discretion and expire April 30, 1999.
3. STOCKHOLDERS' EQUITY. During the quarter ended June 30, 1997, the Company
acquired no additional shares of its common stock pursuant to the Stock
Repurchase Plan initiated in 1995.
4. SECURITIZATION. During the second quarter of 1997, KBK completed a
securitization of its purchased receivable portfolio, in which a substantial
portion of KBK's owned receivables were transferred into KBK Receivables
Corporation, a newly created and wholly-owned subsidiary, also known as a
Special Purpose corporation ("SPC").
Under this structure, the SPC sells eligible receivables to a conduit, which in
turn issues commercial paper to fund its ongoing purchase of assets. This
structure allows KBK to effectively fund its portfolio of earning assets on a
non-recourse basis, through the commercial paper conduit, potentially resulting
in a substantial reduction in its funding costs. The transfer of earning assets
into the SPC, and subsequent sale to the commercial paper conduit, is treated as
a sale pursuant to generally accepted accounting principles ("GAAP"). The assets
sold to the SPC and the commercial paper conduit continue to be serviced by KBK,
which receives on-going revenue in the form of a servicing fee which is derived
from the receipts generated from the transferred earning assets, less interest
and fees paid to the commercial paper holders and the conduit facility sponsors.
Although the sale is on a non-recourse basis, KBK may in certain circumstances
deem it necessary to repurchase or replace specific receivables.
5
<PAGE>
No gain or loss results from the sale of these receivables. However, individual
components of the income statement were impacted--particularly earned discount
income and interest expense, which have decreased. Additionally, this
transaction has impacted the Company's balance sheet. The proceeds of the
initial funding under the securitization, $40.4 million, were utilized to repay
$39.0 million of the bank credit line.
6
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
THE FOLLOWING COMMENTARY PRESENTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CERTAIN OF THE
STATEMENTS INCLUDED BELOW, INCLUDING THOSE REGARDING FUTURE FINANCIAL
PERFORMANCE OR RESULTS OR THAT ARE NOT HISTORICAL FACTS, ARE OR CONTAIN
"FORWARD-LOOKING" INFORMATION AS THAT TERM IS DEFINED IN THE SECURITIES ACT OF
1933, AS AMENDED. THE WORDS "EXPECT," "BELIEVE," "ANTICIPATE," "PROJECT,"
"ESTIMATE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THE COMPANY CAUTIONS READERS THAT ANY SUCH STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE OR EVENTS AND SUCH STATEMENTS INVOLVE RISKS,
UNCERTAINTIES AND ASSUMPTIONS, INCLUDING BUT NOT LIMITED TO INDUSTRY CONDITIONS,
GENERAL ECONOMIC CONDITIONS, INTEREST RATES, COMPETITION, ABILITY OF THE COMPANY
TO SUCCESSFULLY MANAGE ITS GROWTH, AND OTHER FACTORS DISCUSSED BELOW AND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, THE ACTUAL RESULTS AND OUTCOMES MAY
DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS. THIS
REVIEW SHOULD BE READ IN CONJUNCTION WITH INFORMATION PROVIDED IN THE FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES APPEARING IN THIS REPORT AND THE AUDITED
FINANCIAL STATEMENTS APPEARING IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR
THE YEAR ENDED DECEMBER 31, 1996.
The Company, through its wholly owned subsidiaries, KBK Financial, Inc.
("KBK") and KBK Receivables Corporation ("SPC"), is a commercial financial
institution providing asset-based and working capital financing to middle market
businesses through the discounted purchase of their accounts receivable and
through loans secured by inventory, equipment, accounts receivable or other
assets of the client. The Company's clients are typically businesses that are
experiencing rapid growth or financial stress. Thus, the Company relies
primarily on the quality of the assets and account debtors of the client, rather
than the financial condition of the client itself.
In a majority of its working capital financings, the Company purchases
accounts receivable for a negotiated price usually less than their face amount,
based upon the size, age and type of accounts being purchased, the quality of
client documentation and the Company's judgment as to the payment history and
creditworthiness of the account debtors. The Company generates revenue through a
combination of fixed and variable discounts which are negotiated on a
client-by-client basis. Fixed discount income is recognized for financial
accounting purposes in the month the related receivable is purchased. 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.
The Company, in some cases, purchases accounts receivable as a "pool" from
some of its clients. These working capital financings generally involve clients
with greater financial strength, and have larger volumes of invoices to
purchase. The Company deducts a discount from the face amount of invoices
purchased based upon the number of days between the purchase date and the date
the underlying receivables are collected.
The Company also provides other types of financing to middle market
businesses, including, among other things, inventory, equipment and working
capital loans at floating rates over its reference rate. The Company expects to
continue to expand its product line to include other types of financing
consistent with its goal of being the sole source of financing for its middle
market clients. Interest income and amounts outstanding under such facilities
are expected to increase in 1997 due to the continued emphasis on retaining
existing customers and attracting new customers who need asset-based loans, as
well as working capital financing.
In its asset-based lending activities, the Company typically obtains an
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. The interest income on these loans is accrued ratably over the life of
the loan at a floating rate. The rate is negotiated on a client-by-client basis.
7
<PAGE>
RESULTS OF OPERATIONS
ANALYSIS OF SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
The following tables set forth the results of operations and certain other data
of the Company for the second quarter of 1997 and the second quarter of 1996.
Quarter Ended Quarter Ended
June 30, 1997 June 30, 1996
(unaudited) (unaudited)
----------------- -------------------
(dollars in thousands)
Average Net Earning Assets
Managed and Owned ........... $81,368 $48,169
Owned ....................... 43,070 48,169
Total Revenue .................... 3,648 100.0% 2,938 100.0%
Interest Expense ................. 610 16.7% 567 19.3%
Provision for Credit Losses ...... 200 5.5% 10 0.3%
Operating Expense ................ 1,982 54.3% 1,579 53.8%
Income Taxes ..................... 354 9.7% 267 9.1%
Net Income ....................... 502 13.8% 515 17.5%
Average net earning assets (managed and owned) increased 69% to $81.4 million
for the quarter ended June 30, 1997 from $48.2 million for the quarter ended
June 30, 1996. Reflecting the increase in assets, total revenue increased 24%,
or $710,000, to $3.6 million for the quarter ended June 30, 1997 from quarter
ended June 30, 1996 total revenue of $2.9 million. Due to the assets sold into
the securitization, although largely offset by $33.2 million growth in average
assets owned and managed, average net earning assets owned at quarter ended June
30, 1997 decreased $5.1 million from the quarter ended June 30, 1996. The sale
of assets resulted in a $2.7 million adjustment to interest income and a
$648,000 adjustment to interest expense, which netted to $1.8 million in
servicing spread income during the quarter ended June 30, 1997.
Interest expense increased 7.8% to $610,000 for the second quarter of 1997
compared with $567,000 for the second quarter of 1996. Although the
securitization resulted in a decrease in average funded debt of $2.8 million
from $29.2 million for the quarter ended June 30, 1996 to $26.4 million for the
quarter ended June 30, 1997, interest expense increased slightly reflecting
rising market rates between the two periods.
A provision for credit losses of $200,000 was recorded for the second quarter of
1997, compared to $10,000 for the second quarter of 1996. During the second
quarter of 1997 the Company had net recoveries of $40,000 compared to $21,000 of
net charge-offs for the second quarter of 1996. The allowance for credit losses
at June 30, 1997 of $1.8 million represents 3.8% of total outstanding loans and
accounts receivables and 4.2% of average net earning assets owned for the
quarter then ended. The allowance for credit losses at June 30, 1996 of $1.7
million represents 2.9% of total outstanding loans and accounts receivables and
3.6% of average net earning assets owned 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 portfolio at June 30,
1997.
Operating expense of $2.0 million for the three months ended June 30, 1997
increased $404,000, or 26%, compared with $1.6 million for the three months
ended June 30, 1996. Employment related expense constituted $206,000 of the
increase, due to increased staffing in the underwriting, operations and
8
<PAGE>
marketing departments of the Company. Occupancy expense increased $128,000 to
$314,000 for the quarter ended June 30, 1997 compared to $186,000 for the
quarter ended June 30, 1996, primarily related to the expansion of marketing
efforts into California and additional occupancy and systems costs in the
corporate offices.
Income taxes of $354,000 for the second quarter of 1997 were 32% greater than
the $267,000 of income taxes for the second quarter of 1996, due to the 9%
increase in income before taxes and the increased franchise tax expense in
California and Louisiana.
As a result of the foregoing, net income of the Company for the second quarter
of 1997, decreased slightly to $502,000 from $515,000 for the second quarter of
1996.
ANALYSIS OF SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1996
The following table sets forth the results of operations and certain
other data of the Company for the six months ended June 30, 1997 and 1996.
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
(unaudited) (unaudited)
---------------- ------------------
(DOLLARS IN THOUSANDS)
Average Net Earning Assets
Managed and Owned ............... $76,831 -- $43,868 --
Owned ........................... 57,703 -- 43,868 --
Total Revenue ........................ 7,247 100.0% 5,540 100.0%
Interest Expense ..................... 1,700 23.5% 975 17.6%
Provision for Credit Losses .......... 275 3.8% 40 .7%
Operating Expense .................... 3,835 52.9% 3,001 54.2%
Income Taxes ......................... 587 8.1% 547 9.9%
Net Income ........................... 850 11.7% 977 17.6%
Average net earning assets (managed and owned) increased 75% to $76.8 million
for the six months ended June 30, 1997 from $43.9 million for the six months
ended June 30, 1996. Reflecting this increase in earning assets, total revenue
increased 31%, or $1.7 million to $7.2 million for the six months ended June 30,
1997 compared to $5.5 for the same period in 1996. Although average net earning
assets owned for the six months ended June 30, 1997 increased by $13.8 million
compared to the same period in 1996, the growth in average net earning assets
owned and managed was $32.9 million, which was partially offset by the assets
sold into the securitization during the six months ended June 30, 1997.
Interest expense increased 74% to $1.7 million for the six months ended June 30,
1997 from $975,000 for the same period of 1996. This increase is primarily due
to a $14.7 million increase in the average outstanding balance under the line of
credit to $41.9 million for the six months ended June 30, 1997 from $27.2
million for the same period in 1996 and also to the increase in prime rate
during March, 1997.
A provision for credit losses of $275,000 was recorded for the six months ended
June 30, 1997, as compared to $40,000 for the same period of 1996. During the
six months ended June 30, 1997, the Company had net charge-offs of $82,000
compared to $36,000 of net charge-offs for the same period of 1996. The
allowance for credit losses at June 30, 1997 of $1.8 million represents 3.8% of
total outstanding loans and accounts receivables and 3.1% of average net earning
assets owned for the six
10
<PAGE>
months then ended. The allowance for credit losses at June 30, 1996 of $1.7
million was 3.7% of average earning assets owned for the six 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
June 30, 1997.
Operating expense of $3.8 million for the six months ended June 30, 1997
increased $834,000, or 28%, compared with the $3.0 million for the same period
of 1996. Employment related expense increased $521,000 to $2.1 million for the
six months ended June 30, 1997 compared to $1.6 million for the same period of
1996. Most of this increase relates to the expansion of the marketing and credit
department staff subsequent to the second quarter of 1996. Occupancy expense
increased $251,000 to $613,000 for the six months ended June 30, 1997, from
$362,000 for the same period of 1996 resulting from the increased rent and
depreciation for office space and equipment required in the California and Fort
Worth offices. Other operating expenses increased $100,000 or 14% to $810,000
for the six months ended June 30, 1997 from $710,000 in the same period of 1996
due to the costs of temporary employees and recruiting fees necessitated by the
Company's growth. These increases were partially offset by a decrease in
professional fees from $149,000 during the six months ended June 30, 1996 to
$102,000 for the same period in 1997.
Income taxes of $587,000 for the six months ended June 30, 1997 were 7% more
than the $547,000 of income taxes for the same period of 1996, due to the
$46,000 increase in franchise tax expense for the six months ended June 30, 1997
compared to the six months ended June 30, 1996.
As a result of the foregoing, net income of the Company for the six months ended
June 30, 1997 decreased $127,000, or 13%, to $850,000 from $977,000 for the same
period in 1996.
ANALYSIS OF SECOND QUARTER 1997 COMPARED TO FIRST QUARTER 1997
The following tables set forth the results of operations and certain other data
of the Company for the second quarter of 1997 and the first quarter of 1997.
Quarter Ended Quarter Ended
June 30, 1997 March 31, 1997
(unaudited) (unaudited)
---------------- ---------------
(dollars in thousands)
Average Net Earning Assets
Managed and Owned ............... $81,368 $72,335
Owned ........................... 43,070 72,335
Total Revenue ........................ 3,648 100.0% 3,599 100.0%
Interest Expense ..................... 610 16.7% 1,090 30.3%
Provision for Credit Losses .......... 200 5.5% 75 2.1%
Operating Expense .................... 1,982 54.3% 1,853 51.5%
Income Taxes ......................... 354 9.7% 233 6.4%
Net Income ........................... 502 13.8% 348 9.7%
Average net earning assets (managed and owned) increased 13% to $81.4 million
for the quarter ended June 30, 1997 from $72.3 million for the quarter ended
March 31, 1997. Reflecting the increase in assets and the effects of the
securitization during the second quarter of 1997, total revenue increased
slightly, $49,000, from the quarter ended March
11
<PAGE>
31, 1997. Due to the assets sold into the securitization, which was partially
offset by $9.0 million growth in average assets managed and owned, average net
earning assets owned for the quarter ended June 30, 1997 decreased $29.3 million
from the quarter ended March 31, 1997. The sale of assets resulted in a $2.7
million adjustment to interest income and a $648,000 adjustment to interest
expense, which netted to $1.8 million in servicing spread income during the
quarter ended June 30, 1997.
Interest expense decreased 44% to $610,000 for the second quarter of 1997
compared with $1.1 million for the first quarter of 1997. The securitization
resulted in a $31.0 million decrease in average funded debt from $57.4 million
for the quarter ended March 31, 1997 to $26.4 million for the quarter ended June
30, 1997. Net income after interest expense increased 21% from $2.5 million for
the quarter ended March 31, 1997 to $3.0 million for the quarter ended June 30,
1997, reflecting the reduction in funding costs associated with the
securitization.
A provision for credit losses of $200,000 was recorded for the second quarter of
1997, compared to $75,000 for the first quarter of 1997. During the second
quarter of 1997 the Company had net recoveries of $40,000 compared to $122,000
of net charge-offs for the first quarter of 1997. The allowance for credit
losses at June 30, 1997 of $1.8 million represents 3.8% of total outstanding
loans and accounts receivables and 4.2% of average earning assets owned for the
quarter then ended. The allowance for credit losses at March 31, 1997 of $1.6
million represents 1.9% of total outstanding loans and accounts receivables and
2.2% of average earning assets owned 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 portfolio at June 30,
1997.
Operating expense of $2.0 million for the three months ended June 30, 1997
increased $130,000, or 7%, compared with $1.9 million for the three months ended
March 31, 1997. This increase is primarily comprised of marketing related
expenses such as referral commission, travel, entertainment, advertising,
postage, and office supplies, which increased $90,000, or 25% to $450,000 for
the quarter ended June 30, 1997 compared to $360,000 for the quarter ended March
31, 1997.
Income taxes of $354,000 for the second quarter of 1997 were 52% greater than
the $233,000 of income taxes for the first quarter of 1997, due to the 47%
increase in income before taxes.
As a result of the foregoing, net income of the Company for the second quarter
of 1997, increased 44% to $502,000 from $348,000 for the first quarter of 1997.
CHANGES IN FINANCIAL CONDITION
Due to the effects of the securitization, the components of the balance sheet
changed significantly from December 31, 1996, to June 30, 1997. Total assets
decreased 38% from $89.7 million at December 31, 1996 to $55.6 million at June
30, 1997. This decrease includes the sale of $50.1 million of assets into the
securitization as of June 30, 1997, along with accounts receivable and loans
receivable growth of $15.0 million from $83.0 million at December 31, 1996 to
$98.0 million at June 30, 1997. During the six months ended June 30, 1997, cash
increased $773,000, premises and equipment increased $287,000, other assets
increased $246,000 and intangible assets decreased $189,000.
The proceeds of the securitization were utilized to pay down the bank line,
resulting in a $36.0 million decrease in bank borrowing during the six months
ended June 30, 1997. Due to the growth in receivables, the balance due to
factored clients increased $1.3 million from December 31, 1996 to June 30, 1997.
Stockholders' equity increased $850,000, from $22.1 million at December 31, 1996
to $23.0 million at June 30, 1997 due to net income for the six months ended
June 30, 1997. The Company paid no dividends on its common stock for the six
months ended June 30, 1997.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements generally increase proportionately to the
change in earning assets. Average net earning assets owned for the quarter ended
June 30, 1997 of $43.1 million were 11% less than the comparable average net
earning assets owned for the quarter ended June 30, 1996 of $48.2 million. The
average balance on earning assets included $33.2 million growth during the
second quarter of 1997, which was offset by average sales of assets into the
securitization. The Company continues to explore methods of employing its
capital base and expanding its portfolio through the expansion of its current
product line, 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 anticipates that if the portfolio experiences growth in
future periods, funding will be available through the securitization program.
For assets not financed through the securitization program, the Company expects
to continue use of its Credit Facility, although there can be no assurance that
such facility will remain available.
KBK maintains a $25 million multi-bank line of credit ("Credit Facility"), made
up of a $10.0 million Revolving Credit Facility ("Revolving Facility")
collateralized by purchased accounts receivable with $8.0 million outstanding at
June 30, 1997 and a $15.0 million Advancing Term Facility ("Term Facility")
collateralized by term loans, with $14.0 million outstanding at June 30, 1997.
The Credit Facility provides for maximum borrowings of the lesser of (i) $25
million or (ii) the amount of a borrowing base (based upon a percentage of
eligible accounts receivable, as defined in the loan agreement governing the
Credit Facility, net of excluded amounts). Borrowings under the Revolving
Facility portion of the Credit Facility bear interest at the agent banks' prime
rate or applicable LIBOR plus 1.5% at KBK's discretion and expire on April 30,
1999. Borrowings under the Term Facility portion of the Credit Facility bear
interest at the agent banks' prime rate or applicable LIBOR plus 1.75% at KBK's
discretion and expire April 30, 1999.
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 Credit
Facility provides that KBK is permitted to contribute and sell, free of liens,
and grant security interests in, accounts, chattel paper, instruments and
general intangibles to the Special Purpose corporation ("SPC") pursuant to the
securitization purchase and sale agreement. 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. 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. 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 (15% of the
outstanding shares at June 30, 1997) at current market prices. During the second
quarter of 1997, the Company purchased no shares. At June 30, 1997, an aggregate
of 237,067 shares (net of 50,000 shares issued to the former Coastal
shareholders under the earnout provision) of common stock had been placed in the
treasury at a cost of $1.5 million, as a result of the Company's stock
repurchase plan.
13
<PAGE>
During the second quarter of 1997, KBK completed a securitization of its
purchased receivable portfolio, in which a substantial portion of KBK's owned
receivables were transferred into KBK Receivables Corporation, a newly created
and wholly-owned subsidiary, also known as a Special Purpose corporation
("SPC").
Under this structure, the SPC sells eligible receivables to a conduit, which in
turn issues commercial paper to fund its ongoing purchase of assets. This
structure allows KBK to effectively fund its portfolio of earning assets on a
non-recourse basis, through the commercial paper conduit, potentially resulting
in a substantial reduction in its funding costs. The transfer of earning assets
into the SPC, and subsequent sale to the commercial paper conduit, is treated as
a sale pursuant to generally accepted accounting principles ("GAAP"). The assets
sold to the SPC and the commercial paper conduit continue to be serviced by KBK,
which receives on-going revenue in the form of a servicing fee which is derived
from the receipts generated from the transferred earning assets, less interest
and fees paid to the commercial paper holders and the conduit facility sponsors.
The commercial paper conduit facility terminates on March 31, 2002. The
committed level of the facility as of June 30, 1997 was $71.4 million.
The increase in cash from $1.4 million at December 31, 1996 to $2.1 million at
June 30, 1997 is primarily due to the $16.0 million increase in purchased
accounts receivable and loans outstanding and the associated $1.3 million
increase in due to factored clients, net of $50.8 million proceeds from the
securitization and payments on bank lines of $36.0 million during the quarter
ended June 30, 1997.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following items were submitted to the stockholders of the Company at the
Annual Meeting of Stockholders held on May 7, 1997. Of the total 3,310,133
outstanding and authorized voting shares, there were present by proxy or in
person, 3,029,744 shares or 92% of the voting shares outstanding. The following
issues were presented to the stockholders for approval.
1. To elect three directors to serve for a term of three years;
2. To ratify the selection by the Board of Directors of KPMG Peat
Marwick LLP as independent auditors for the fiscal year ending
December 31, 1997.
For Item 1, the following votes were cast for each of the nominees proposed by
the Board of the Company.
<TABLE>
<CAPTION>
Shares Shares Shares
NOMINEE Voted For Voted Against Withheld Broker Non-Votes
------- --------- ------------- -------- ----------------
<S> <C> <C> <C> <C>
Kenneth H. Jones, Jr. 3,020,319 -0- 9,425 -0-
R. Earl Cox, III 3,020,319 -0- 9,425 -0-
Martha V. Leonard 3,019,344 -0- 10,400 -0-
</TABLE>
In addition, the terms of Michael D. Magill, Thomas M. Simmons, Harris A.
Kaffie, Robert J. McGee, Daniel R. Feehan, and Thomas L. Healey as directors
continued following the Annual Meeting.
For Item 2, shares voted FOR were 3,029,169 shares, 400 shares voted AGAINST,
and 175 shares ABSTAINED. There were no broker non-votes. Both items were
approved pursuant to the Company's Articles of Incorporation and By-Laws.
ITEM 5 - OTHER INFORMATION
On July 16, 1997, Michael D. Magill resigned as a Director and as Executive Vice
President and Chief Financial Officer of the Company to pursue other
opportunities. The Company is currently conducting a search for a new chief
financial officer, and until a new chief financial officer is appointed, Deborah
B. Wilkinson, Vice President and Controller of the Company, will act as the
Company's principal financial and accounting officer.
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 AUGUST 13, 1997 /s/ DEBORAH B. WILKINSON
Deborah B. Wilkinson,
Vice President and Controller
(on behalf of the registrant
and as chief accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,134,221
<SECURITIES> 0
<RECEIVABLES> 47,923,065
<ALLOWANCES> (1,801,375)
<INVENTORY> 0
<CURRENT-ASSETS> 5,137,393
<PP&E> 3,398,325
<DEPRECIATION> (1,159,198)
<TOTAL-ASSETS> 55,632,431
<CURRENT-LIABILITIES> 32,642,685
<BONDS> 0
0
0
<COMMON> 35,472
<OTHER-SE> 22,954,274
<TOTAL-LIABILITY-AND-EQUITY> 55,632,431
<SALES> 0
<TOTAL-REVENUES> 3,647,997
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,982,482
<LOSS-PROVISION> (200,000)
<INTEREST-EXPENSE> 609,668
<INCOME-PRETAX> 855,847
<INCOME-TAX> 354,127
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 501,720
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
