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, 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 SEPTEMBER 30, 1997)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES [ ] NO [X]
<PAGE>
KBK CAPITAL CORPORATION
FORM 10-QSB -- Quarter Ended September 30, 1997
PAGE
NUMBER
------
PART I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996 2
Consolidated Statements of Income for the Three Months
Ended September 30, 1997 and June 30, 1997 and Nine Months
Ended September 30, 1997 and 1996 3
Consolidated Statements of Changes in Stockholders' Equity
for the Year Ended December 31, 1996 and Nine Months Ended
September 30, 1997 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition
and results of Operations 8-14
PART II. Other Information
Item 1 - Legal Proceedings 15
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, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPT. 30, 1997 DEC. 31, 1996
(UNAUDITED)
------------ ------------
<S> <C> <C>
ASSETS
Cash ................................................................................. $ 4,795,726 $ 1,361,225
Accounts receivable .................................................................. 10,853,189 55,584,786
Loans receivable ..................................................................... 20,843,764 27,375,655
Residual receivables in securitization ............................................... 9,799,755 --
Less allowance for credit losses ..................................................... (1,842,888) (1,608,253)
------------ ------------
Total receivables, net .......................................................... 39,653,820 81,352,188
Premises and equipment, net of accumulated depreciation of
$1,314,864 at September 30, 1997 and $878,646 at
December 31, 1996 .................................................................. 2,247,771 1,952,568
Intangible assets, less accumulated amortization of $1,813,201 at
September 30, 1997 and $1,529,024 at December 31, 1996 ............................. 3,426,220 3,710,397
Other assets ......................................................................... 1,643,669 1,370,113
------------ ------------
$ 51,767,206 $ 89,746,491
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank line of credit .................................................................. $ 17,500,000 $ 58,000,000
Due to factored clients .............................................................. 9,677,929 8,245,544
Accounts payable and accrued liabilities ............................................. 786,388 1,135,067
Income taxes payable ................................................................. 67,442 --
Deferred revenue ..................................................................... 194,820 225,965
------------ ------------
Total liabilities ................................................................. 28,226,579 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 September 30, 1997 and
December 31, 1996 .................................................................. 35,472 35,472
Additional paid-in capital ........................................................... 16,370,555 16,370,555
Retained earnings .................................................................... 8,637,233 7,236,521
Treasury stock ....................................................................... (1,502,633) (1,502,633)
------------ ------------
Total stockholders' equity ....................................................... 23,540,627 22,139,915
------------ ------------
$ 51,767,206 $ 89,746,491
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPT 30, 1997 JUNE 30, 1997 SEPT 30, 1996 SEPT 30, 1997 SEPT 30, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Earned discount income ............................ $ 335,836 $ 570,361 $2,338,406 $ 3,263,185 $7,148,940
Interest income - Loans ........................... 795,340 724,623 363,011 2,368,987 841,479
Servicing fees .................................... 2,219,520 1,802,634 -- 4,022,154 --
Other income - Fees ............................... 485,276 550,379 369,060 1,428,680 623,748
---------- ---------- ---------- ----------- ----------
Total revenue ................................. 3,835,972 3,647,997 3,070,477 11,083,006 8,614,167
Interest expense .................................. 506,042 609,668 675,855 2,205,975 1,650,806
---------- ---------- ---------- ----------- ----------
Income after interest expense ................. 3,329,930 3,038,329 2,394,622 8,877,031 6,963,361
Provision for credit losses ....................... 300,000 200,000 105,000 575,000 145,000
---------- ---------- ---------- ----------- ----------
Income after interest expense and
provision for credit losses ............... 3,029,930 2,838,329 2,289,622 8,302,031 6,818,361
Operating expenses:
Salaries and employee benefits ................ 1,126,608 1,067,665 985,674 3,247,194 2,587,310
Amortization of intangible assets ............. 94,898 94,897 90,382 284,177 271,146
Occupancy and equipment ....................... 324,120 314,348 210,966 937,238 572,621
Professional fees ............................. 92,914 55,474 105,742 188,535 255,034
Other ......................................... 473,353 450,098 435,546 1,290,168 1,143,555
---------- ---------- ---------- ----------- ----------
Total operating expenses ................... 2,111,893 1,982,482 1,828,310 5,947,312 4,829,666
---------- ---------- ---------- ----------- ----------
Income before income taxes ................. 918,037 855,847 461,312 2,354,719 1,988,695
Income tax expense:
Federal
Current .................................... 312,084 302,209 167,738 815,550 677,432
Deferred ................................... -- -- -- -- --
State ......................................... 55,072 51,918 10,967 138,457 48,308
---------- ---------- ---------- ----------- ----------
Total income taxes ......................... 367,156 354,127 178,705 954,007 725,740
---------- ---------- ---------- ----------- ----------
Net income ................................. $ 550,881 $ 501,720 $ 282,607 $ 1,400,712 $1,262,955
========== ========== ========== =========== ==========
Net income per share ....................... $ 0.16 $ 0.15 $ 0.08 $ 0.42 $ 0.36
========== ========== ========== =========== ==========
Weighted-average common shares
outstanding ............................ 3,386,002 3,316,724 3,404,806 3,339,306 3,488,704
========== ========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (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, 1995 ............... 3,397,200 $35,472 $ 16,500,555 $5,685,279 $ (933,750) $ 21,287,556
Purchase of stock for treasury ........... (137,067) -- -- -- (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 ............... 3,310,133 $35,472 $ 16,370,555 $7,236,521 $(1,502,633) $ 22,139,915
Net Income ............................... -- -- -- 1,400,712 -- 1,400,712
---------- ------- ------------ ---------- ----------- ------------
Balance, September 30, 1997 .............. 3,310,133 $35,472 $ 16,370,555 $8,637,758 $(1,502,633) $ 23,540,627
========== ======= ============ ========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT 30, 1997 SEPT 30, 1996
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income ............................................................................. $ 1,400,712 $ 1,262,955
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization .................................................... 720,395 535,656
Provision for credit losses ...................................................... 575,000 145,000
Proceeds from sale of receivables and loans ...................................... 62,324,755 --
Loss on disposition of assets .................................................... -- 16,120
Increase in receivables .......................................................... (23,698,903) (24,359,993)
Participation sold ............................................................... 2,262,022 3,988,909
Increase in other assets ......................................................... (273,556) (409,767)
Increase in due to factored clients .............................................. 1,432,385 782,709
Increase (decrease) in accounts payable and accrued liabilities .................. (144,330) 528,619
Increase (decrease) in income taxes payable ...................................... 67,442 (322,098)
------------ ------------
Net cash provided by (used in) operating activities ......................... 44,665,922 (17,831,890)
Cash flows used in investing activities
Purchase of premise and equipment ................................................ (731,421) (1,035,775)
Proceeds from sale of assets ..................................................... -- 141,476
Repurchase of common stock ....................................................... -- (837,454)
------------ ------------
Net cash used in investing activities ....................................... (731,421) (1,731,753)
Cash flows from financing activities:
Net borrowings from (repayments to) bank ......................................... (40,500,000) 8,500,000
------------ ------------
Net cash provided by (used in) financing activities ......................... (40,500,000) 8,500,000
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................ 3,434,501 (11,063,643)
Cash and cash equivalents at beginning of period ....................................... 1,361,225 11,520,969
------------ ------------
Cash and cash equivalents at end of period ............................................. $ 4,795,726 $ 457,326
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<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 September 30, 1997 and 1996. The consolidated statements of income
for the quarter ended June 30, 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 nine months ended September 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, 1997 and 1996
which are included in the Company's annual report.
2. BANK LINE OF CREDIT. KBK maintains a $45.0 million multi-bank line of credit
("Credit Facility"), collateralized by loans and purchased accounts receivable.
The Credit Facility is comprised of a $40.0 million Revolving Credit Facility
("Revolving Facility") and a $5.0 million "Over Advance" Facility which allows
for borrowing base availability to fund amounts in excess of client
concentration limits. As of September 30, 1997, there was $17.5 million
outstanding under the Revolving Facility and no balance outstanding under the
"Over Advance" Facility. The Credit Facility provides for maximum borrowings of
the lesser of (i) $45.0 million or (ii) the amount of a borrowing base (based
upon a percentage of eligible loans and accounts receivable, as defined in the
loan agreement governing the Credit Facility, net of excluded amounts). There
was $4.0 million in available credit under this line as of September 30, 1997.
Borrowings under the Revolving Facility portion of the Credit Facility bear
interest at the agent banks' prime rate or applicable LIBOR plus 1.75% at KBK's
discretion and expire on May 31, 2000. Borrowings under the "Over Advance"
Facility portion of the Credit Facility bear interest at the agent banks' prime
rate plus 1.25% and expire on August 19, 1998; however, the lenders may
terminate this portion of the facility at any time upon 120 days prior written
notice to KBK.
3. STOCKHOLDERS' EQUITY. During the quarter ended September 30, 1997, the
Company acquired no additional shares of its common stock pursuant to the Stock
Repurchase Plan initiated in 1995.
6
<PAGE>
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 or 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.
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.
7
<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 during the remainder of 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.
8
<PAGE>
RESULTS OF OPERATIONS
ANALYSIS OF THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
The following tables set forth the results of operations and certain other data
of the Company for the third quarter of 1997 and the third quarter of 1996.
QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
(UNAUDITED) (UNAUDITED)
----------------- -----------------
(dollars in thousands)
Average Net Earning Assets
Managed and Owned ........... $92,602 -- $51,043 --
Owned ....................... 35,906 -- 51,043 --
Total Revenue .................... 3,836 100.0% 3,070 100.0%
Interest Expense ................. 506 13.2% 676 22.0%
Provision for Credit Losses ...... 300 7.8% 105 3.4%
Operating Expense ................ 2,112 55.1% 1,828 59.6%
Income Taxes ..................... 367 9.5% 178 5.8%
Net Income ....................... 551 14.4% 283 9.2%
Average net earning assets (managed and owned) increased 81% to $92.6 million
for the quarter ended September 30, 1997 from $51.0 million for the quarter
ended September 30, 1996. Reflecting the increase in assets, total revenue
increased 25%, or $766,000 to $3.8 million for the quarter ended September 30,
1997 from quarter ended September 30, 1996 total revenue of $3.1 million. Due to
the assets sold into the securitization, although largely offset by $41.6
million growth in average assets owned and managed, average net earning assets
owned at quarter ended September 30, 1997 decreased $15.1 million from the
quarter ended September 30, 1996. The sale of assets resulted in a $3.2 million
adjustment to interest income and a $978,000 adjustment to interest expense,
which netted to $2.2 million in servicing spread income during the quarter ended
September 30, 1997.
Interest expense decreased 25% to $506,000 for the third quarter of 1997
compared with $676,000 for the third quarter of 1996. The securitization
resulted in a decrease in average funded debt of $14.2 million from $35.2
million for the quarter ended September 30, 1996 to $21.0 million for the
quarter ended September 30, 1997.
A provision for credit losses of $300,000 was recorded for the third quarter of
1997, compared to $105,000 for the third quarter of 1996. During the third
quarter of 1997 the Company had net chargeoffs of $258,000 compared to $83,000
of net charge-offs for the third quarter of 1996. The allowance for credit
losses at September 30, 1997 of $1.8 million represents 4.4% of total
outstanding loans and accounts receivables and 5.1% of average net earning
assets owned for the quarter then ended. The allowance for credit losses at
September 30, 1996 of $1.6 million represents 1.9% of total outstanding loans
and accounts receivables and 3.2% 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 September 30, 1997.
Operating expense of $2.1 million for the three months ended September 30, 1997
increased $284,000, or 16%, compared with $1.8 million for the three months
ended September 30, 1996. Employment related expense constituted $141,000 of the
increase, due to increased staffing in the underwriting, operations and
marketing departments of the Company. Occupancy expense increased $113,000 to
$324,000 for the quarter ended September 30, 1997 compared to $211,000 for the
quarter ended September 30, 1996, primarily related to the expansion of
marketing efforts into California and additional occupancy and systems costs in
the corporate offices.
9
<PAGE>
Income taxes of $367,000 for the third quarter of 1997 were 106% greater than
the $178,000 of income taxes for the third quarter of 1996, due to the 99%
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 third quarter of
1997, increased to $551,000 from $283,000 for the third quarter of 1996.
ANALYSIS OF NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1996
The following table sets forth the results of operations and certain other
data of the Company for the nine months ended September 30, 1997 and 1996.
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
(UNAUDITED) (UNAUDITED)
-------------------------------------------
(DOLLARS IN THOUSANDS)
Average Net Earning Assets
Managed and Owned ........... $82,088 -- $46,260 --
Owned ....................... 50,437 -- 46,260 --
Total Revenue .................... 11,083 100.0% 8,614 100.0%
Interest Expense ................. 2,206 19.9% 1,651 19.1%
Provision for Credit Losses ...... 575 5.2% 145 1.7%
Operating Expense ................ 5,947 53.7% 4,830 56.1%
Income Taxes ..................... 954 8.6% 725 8.4%
Net Income ....................... 1,401 12.6% 1,263 14.7%
Average net earning assets (managed and owned) increased 77% to $82.1 million
for the nine months ended September 30, 1997 from $46.3 million for the nine
months ended September 30, 1996. Reflecting this increase in earning assets,
total revenue increased 29%, or $2.5 million to $11.1 million for the nine
months ended September 30, 1997 compared to $8.6 million for the same period in
1996. Although average net earning assets owned for the nine months ended
September 30, 1997 increased by $4.2 million compared to the same period in
1996, the growth in average net earning assets owned and managed was $35.8
million, which was largely offset by the assets sold into the securitization
during the nine months ended September 30, 1997.
Interest expense increased 34% to $2.2 million for the nine months ended
September 30, 1997 from $1.7 million for the same period of 1996. This increase
is primarily due to a $5.1 million increase in the average outstanding balance
under the line of credit to $35.0 million for the nine months ended September
30, 1997 from $29.9 million for the same period in 1996 and also to the increase
in prime rate during March, 1997.
10
<PAGE>
A provision for credit losses of $575,000 was recorded for the nine months ended
September 30, 1997, as compared to $145,000 for the same period of 1996. During
the nine months ended September 30, 1997, the Company had net charge-offs of
$340,000 compared to $119,000 of net charge-offs for the same period of 1996.
The allowance for credit losses at September 30, 1997 of $1.8 million represents
4.4% of total outstanding loans and accounts receivables and 3.7% of average net
earning assets owned for the nine months then ended. The allowance for credit
losses at September 30, 1996 of $1.8 million was 3.5% of average earning assets
owned 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, 1997.
Operating expense of $5.9 million for the nine months ended September 30, 1997
increased $1.1 million, or 23%, compared with the $4.8 million for the same
period of 1996. Employment related expense increased $660,000 to $3.2 million
for the nine months ended September 30, 1997 compared to $2.6 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 $364,000 to $937,000 for the nine months ended
September 30, 1997, from $573,000 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 $146,000
or 13% to $1.2 million for the nine months ended September 30, 1997 from $1.1
million 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 $255,000 during the
nine months ended June 30, 1996 to $189,000 for the same period in 1997.
Income taxes of $954,000 for the nine months ended September 30, 1997 were 31%
more than the $725,000 of income taxes for the same period of 1996, due to the
$366,000 increase in earnings before taxes and the $90,000 increase in franchise
tax expense for the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996.
As a result of the foregoing, net income of the Company for the nine months
ended September 30, 1997 increased $138,000, or 11%, to $1.4 million from $1.3
million for the same period in 1996.
11
<PAGE>
ANALYSIS OF THIRD QUARTER 1997 COMPARED TO SECOND QUARTER 1997
The following tables set forth the results of operations and certain other data
of the Company for the third quarter of 1997 and the second quarter of 1997.
QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 1997 JUNE 30, 1997
(UNAUDITED) (UNAUDITED)
----------------------------------------
(dollars in thousands)
Average Net Earning Assets
Managed and Owned ........... $92,602 -- $81,368 --
Owned ....................... 35,906 -- 43,070 --
Total Revenue .................... 3,836 100.0% 3,648 100.0%
Interest Expense ................. 506 13.2% 610 16.7%
Provision for Credit Losses ...... 300 7.8% 200 5.5%
Operating Expense ................ 2,112 55.1% 1,982 54.3%
Income Taxes ..................... 367 9.5% 354 9.7%
Net Income ....................... 551 14.4% 502 13.8%
Average net earning assets (managed and owned) increased 14% to $92.6 million
for the quarter ended September 30, 1997 from $81.4 million for the quarter
ended June 30, 1997. Reflecting the increase in assets and the effects of the
securitization during the third quarter of 1997, total revenue increased
slightly, $188,000 from the quarter ended June 30, 1997. Due to the assets sold
into the securitization, which was partially offset by $11.2 million growth in
average assets managed and owned, average net earning assets owned for the
quarter ended September 30, 1997 decreased $7.2 million from the quarter ended
June 30, 1997. The sale of assets resulted in a $3.2 million adjustment to
interest income and a $978,000 adjustment to interest expense, which netted to
$2.2 million in servicing spread income during the quarter ended September 30,
1997, compared to $1.8 million in servicing spread income during the quarter
ended June 30, 1997.
Interest expense decreased 17% to $506,000 for the third quarter of 1997
compared with $610,000 for the second quarter of 1997. The securitization
resulted in a $5.4 million decrease in average funded debt from $26.4 million
for the quarter ended June 30, 1997 to $21.0 million for the quarter ended
September 30, 1997. Net income after interest expense increased 10% from $3.0
million for the quarter ended June 30, 1997 to $3.3 million for the quarter
ended September 30, 1997, reflecting the reduction in funding costs associated
with the securitization.
A provision for credit losses of $300,000 was recorded for the third quarter of
1997, compared to $200,000 for the second quarter of 1997. During the third
quarter of 1997 the Company had net chargeoffs of $258,000 compared to net
recoveries of $40,000 for the second quarter of 1997. The allowance for credit
losses at September 30, 1997 of $1.8 million represents 4.4% of total
outstanding loans and accounts receivables and 5.1% of net average earning
assets owned for the quarter then ended. 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 net 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 September 30, 1997.
Operating expense of $2.1 million for the three months ended September 30, 1997
increased $130,000, or 6.6%, compared with $2.0 million for the three months
ended June 30, 1997. This increase is primarily comprised of increased salaries
and professional fees during the third quarter of 1997.
12
<PAGE>
Income taxes of $367,000 for the third quarter of 1997 were 4% greater than the
$354,000 of income taxes for the second quarter of 1997, due to the $62,000
increase in income before taxes.
As a result of the foregoing, net income of the Company for the third quarter of
1997, increased 10% to $551,000 from $502,000 for the second 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 September 30, 1997. Total
assets decreased 42% from $89.7 million at December 31, 1996 to $51.8 million at
September 30, 1997. This decrease is primarily related to the net change in
accounts receivable and loans receivable during the nine months from $83.0
million at December 31, 1996 to $41.5 million at September 30, 1997, including
the sale of $62.3 million of assets into the securitization, along with accounts
receivable and loans receivable growth of $23.7 million.
The proceeds of the securitization were utilized to pay down the bank line,
resulting in a $40.5 million decrease in bank borrowing during the nine months
ended September 30, 1997. Due to the growth in receivables, the balance due to
factored clients increased $1.4 million from December 31, 1996 to September 30,
1997. Stockholders' equity increased $1.4 million, from $22.1 million at
December 31, 1996 to $23.5 million at September 30, 1997 due to net income for
the nine months ended September 30, 1997. The Company paid no dividends on its
common stock for the nine months ended September 30, 1997.
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
September 30, 1997 of $35.9 million were 30% less than the comparable average
net earning assets owned for the quarter ended September 30, 1996 of $51.0
million. The average balance on net earning assets included $11.2 million growth
during the third quarter of 1997, which was offset by 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.
KBK maintains a $45.0 million multi-bank line of credit ("Credit Facility"),
collateralized by loans and purchased accounts receivable. The Credit Facility
is comprised of a $40.0 million Revolving Credit Facility ("Revolving Facility")
and a $5.0 million "Over Advance" Facility which allows for borrowing base
availability to fund amounts in excess of client concentration limits. As of
September 30, 1997, there was $17.5 million outstanding under the Revolving
Facility and no balance outstanding under the "Over Advance" Facility. The
Credit Facility provides for maximum borrowings of the lesser of (i) $45.0
million or (ii) the amount of a borrowing base (based upon a percentage of
eligible loans and accounts receivable, as defined in the loan agreement
governing the Credit Facility, net of excluded amounts). There was $4.0 million
in available credit under this line as of September 30, 1997. Borrowings under
the Revolving Facility portion of the Credit Facility bear interest at the agent
banks' prime rate or applicable LIBOR plus 1.75% at KBK's discretion and expire
on May 31, 2000. Borrowings under the "Over Advance" Facility portion of the
Credit Facility bear interest at the agent banks' prime rate plus 1.25% and
expire on August 19, 1998; however, the lenders may terminate this portion of
the facility at any time upon 120 days prior written notice to KBK.
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),
13
<PAGE>
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 500,850 shares (15% of the
outstanding shares at September 30, 1997) at current market prices. During the
third quarter of 1997, the Company purchased no shares. At September 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.
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 September 30, 1997 was $75.0 million, with
remaining availability of $12.7 million.
The Company anticipates that portfolio growth in future periods will be funded
primarily through the securitization. For asset growth not financed through the
securitization, the Company anticipates the continued or increased use of the
Credit Facility, although there can be no assurance that the Credit Facility
banks will allow such increase in committed bank lines.
14
<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 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, 1997 /s/ DEBORAH B. WILKINSON
Deborah B. Wilkinson,
Vice President and Controller
(on behalf of the registrant and as chief
accounting officer)
15
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,795,726
<SECURITIES> 0
<RECEIVABLES> 41,496,708
<ALLOWANCES> (1,842,888)
<INVENTORY> 0
<CURRENT-ASSETS> 5,069,889
<PP&E> 3,562,635
<DEPRECIATION> (1,314,864)
<TOTAL-ASSETS> 51,767,206
<CURRENT-LIABILITIES> 28,226,579
<BONDS> 0
0
0
<COMMON> 35,472
<OTHER-SE> 23,505,155
<TOTAL-LIABILITY-AND-EQUITY> 51,767,206
<SALES> 0
<TOTAL-REVENUES> 3,835,972
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,111,893
<LOSS-PROVISION> (300,000)
<INTEREST-EXPENSE> 505,042
<INCOME-PRETAX> 918,037
<INCOME-TAX> 367,156
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 550,881
<EPS-PRIMARY> 0.17
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