UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 STREET, SUITE 2200,
FORT WORTH, TEXAS 76102
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 258-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
AMERICAN STOCK EXCHANGE
COMMON STOCK, .01 PAR VALUE PACIFIC STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
Issuer's revenues for its most recent fiscal year: $12,201,331
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 13,
1997, as reported on the American Stock Exchange, was approximately $6,451,665.
Shares of Common Stock held by each officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 13, 1997, the Registrant had outstanding 3,310,133 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended December 31, 1996, are incorporated by reference into Parts I and II.
Portions of the definitive Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders to be held May 7, 1997, are incorporated by reference in
Part III.
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INDEX PAGE NUMBER
ITEM 1. DESCRIPTION OF BUSINESS 3
PRODUCTS AND MARKETS 3
SOURCES OF CAPITAL 4
CLIENTS 5
ACCOUNT DEBTORS 5
COMPETITION 6
GOVERNMENT REGULATION 6
EMPLOYEES 7
ITEM 2. DESCRIPTION OF PROPERTY 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
ITEM 7. FINANCIAL STATEMENTS 8
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 8
AND FINANCIAL DISCLOSURE
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL 9
PERSONS: COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION 9
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 9
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS 9
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 9
8-K
(a)(1) FINANCIAL STATEMENTS 9
(a)(2) FINANCIAL STATEMENT SCHEDULES 9
ITEM 13. (a)(3) EXHIBITS 10
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PART I
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 THAN 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,
COMPETITIONS, ABILITY OF THE COMPANY TO SUCCESSFULLY MANAGE ITS GROWTH, AND
OTHER FACTORS DISCUSSED OR INCLUDED BY REFERENCE IN THIS ANNUAL REPORT ON FORM
10-KSB. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE OR SHOULD
THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, THOSE ACTUAL RESULTS AND OUTCOMES
MAY DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS.
ITEM 1. DESCRIPTION OF BUSINESS
KBK Capital Corporation (the "Company") was incorporated in Delaware in
1992 to acquire its wholly owned subsidiary, KBK Financial, Inc. ("KBK"), a
commercial financial institution. KBK, in operation since 1962, is principally
engaged in providing working capital financing through the discounted purchase
of accounts receivable and asset-based lending to middle market businesses. KBK
or its predecessors have been engaged in the purchase of accounts receivable for
over thirty-four years.
Since 1992 KBK has expanded the existing Houston, Texas marketing
office; established corporate, regional and national marketing headquarters in
Fort Worth, Texas; moved the Houston operations center to Fort Worth; and opened
a regional marketing office in San Antonio, Texas. Additionally, through the
acquisition of Coastal Financial Resources, Inc. ("Coastal") in December of
1994, marketing offices were established in Lafayette and New Orleans, Louisiana
giving expanded market coverage across the Gulf Coast. The office in Lafayette,
Louisiana was consolidated into the New Orleans office at year end 1996. During
1996 the Company opened offices in Irvine, California (Los Angeles metropolitan
area) and Santa Clara, California (San Jose/San Francisco metropolitan area).
KBK is developing correspondent relationships with commercial banks
through its marketing offices and through the implementation of a service
delivery system formerly called "KBK in a Box". This product is currently being
marketed as "The Correspondent Banker." This service delivery system involves
the use of electronic and data transmission devices to generate purchased
receivables from independent commercial banks. The Company will either perform
the services as agent for the commercial bank, or will participate in some or
all of the funding of the purchased receivables. The Company expects to target
the Texas market initially, with additional markets targeted as appropriate. The
Company has also entered into a servicing arrangement with a commercial bank
holding company in Missouri to process and service their purchased receivables
portfolio. The Company will attempt to expand the sale of its services and
expertise to other financial institutions to broaden its sources of revenue. The
Company will continue to expand its traditional correspondent network where
business is generated through referrals. These correspondents refer prospective
clients to the Company for a fee and vary widely in background and lines of
business. Management currently plans to continue expanding the correspondent
relationship program into target cities and, as necessary, open support offices
in new geographical locations to facilitate the servicing of customers and
correspondents in these markets.
Unless otherwise noted, all references to the "Company" include KBK
Capital Corporation, KBK and its predecessors. The principal executive offices
of the Company are located at 301 Commerce Street, Suite 2200, Fort Worth, Texas
76102 and the telephone number is (817) 258-6000.
Products and Markets
The Company's business is providing asset based and working capital
financing to middle market businesses through the purchase of accounts
receivable, and lending collateralized by inventory, equipment, or other assets
of the borrower. During 1996 the Company continued to expand its product line
beyond the purchase of accounts receivable to further meet the needs of
customers already served through accounts receivable purchase facilities. It is
the Company's intent to provide a comprehensive product line of financing to
commercial businesses in the middle market in order to provide the sole source
of financing for these businesses. The Company may also generate fees and
revenues through the cross selling of third party products to existing
customers. These products include lease financing and structuring and brokering
asset securitizations.
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As of January, 1996, Dun & Bradstreet Market Place Information indicated
that, nationwide, there are approximately 325,000 businesses with annual
revenues in the $1 million to $25 million range whose industries the Company
feels are appropriate to target as potential clients. The Company would like to
deliver its product from marketing offices located in at least ten large
metropolitan markets throughout the United States. The opening of offices in the
San Francisco/Silicon Valley area, and the greater Los Angeles area, are
consistent with this strategy of growth.
The Company has traditionally marketed its services, in part, by
soliciting referrals from providers of financial services to small businesses,
such as commercial bankers, lawyers and accountants. Management believes these
sources refer quality clients who are more likely to have the financial
information and reporting systems required for the Company's purchase of
accounts receivable. In addition, the Company relies on referrals from current
and former clients and direct inquiries from potential clients resulting from
the Company's reputation established over its long tenure in the business. The
Company has developed a formal network of correspondents who bring prospective
client packages to KBK for consideration. Such correspondents receive a fee when
the Company actually advances funds to the client referred. The Company has
identified ten standard metropolitan statistical areas (SMSA's) as having the
highest concentrations of small commercial businesses in the United States. The
Company's goal is to develop correspondent networks in each of the five SMSA's
not currently served (New York City, Chicago, Boston, Philadelphia, and
Atlanta). At some point the Company expects to support such correspondent
services through the addition of marketing offices in these locations.
Sources of Capital
The Company's capital requirements generally increase proportionately to
the increase in outstanding earning assets (Loans and Working Capital
Facilities). The Company funds its earning assets through its equity (which was
$22.1 million at December 31, 1996 and $21.3 million at December 31, 1995), and
through borrowings from commercial banks under a revolving line of credit.
Since December 31, 1995, KBK has had a multi-bank revolving line of
credit ("Credit Facility"), maturing on April 30, 1999 and bearing interest at
the banks' prime rate or LIBOR plus 1.5%, at the election of KBK, and secured
primarily by KBK's accounts receivable. At December 31, 1995, the outstanding
indebtedness under this Credit Facility was $33 million ($14 million at an
interest rate of 8.5%, $5 million at 7.3%, and $14 million at 7.4%). In May of
1996, this Credit Facility was increased to $75 million to be comprised of a
Revolving Facility with $50 million secured by accounts receivable and an
Advancing Term Facility with $25 million secured by loans receivable. At
December 31, 1996, $45 million of the Revolving Facility and $20 million of the
Advancing Term Facility was committed with outstanding indebtedness of $38.5
million outstanding under the Revolving Facility and $19.5 million outstanding
under the Advancing Term Facility (with $14 million at an interest rate of
$8.25%, $21 million at 6.93%, $16.5 million at 7.04% and $6.5 million at 7.18%
under both facilities). The Credit Facility is secured by all accounts
receivable and inventory of KBK, (including all accounts receivable purchased by
KBK from its clients), all collateral securing term loans made by KBK and
certain other assets of KBK, and are subject to certain borrowing base
limitations based upon the nature of the underlying collateral. The terms of the
Credit Facility require the Company 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, an interest coverage ratio and
restrictions on payments of dividends. Primarily due to the concentrations in
several of its largest clients at year end, the Company's borrowings exceeded
its borrowing base limitation at year end and was in default. This default was
subsequently waived by the bank group and a modification to the Credit Facility
was entered into that allowed for such concentrations under defined terms and
conditions. Borrowings under this section of the Amended Credit Facility bear
interest at the banks' prime rate plus 1.5% (see note 5 to the Financial
Statements included in the Company's Annual Report to Stockholders for 1996).
The Company has also engaged in discussions regarding the
structure and documentation of a securitization program, pursuant to which it
would periodically sell or transfer earning assets to a special purpose finance
subsidiary, which would, in turn, transfer such earning assets to a trust for
the benefit of certain holders of securities of such subsidiary. The Company is
currently working toward closing such a securitization. The benefits to the
Company of such a transaction would include a cheaper source of funding as well
as greater efficiency in the use of capital. 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.
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Clients
The Company's client portfolio totaled 174 clients in eleven
different states during 1996 compared to 218 clients in eight states during
1995. During 1996, two clients made up more than 5% of total earning assets, or
13.9% and 8.4% of total receivables at year end 1996. The concentration in both
of these clients is being reduced through the participation of loans or accounts
receivable purchase facilities to other financial institutions. The Company
requires Board approval of any client facility (loan and/or working capital
facility) in excess of $3,000,000 of committed funds.
The Company's general policy has been to limit its exposure in a single
client to an amount which does not exceed the greater of the Company's allowance
for credit losses ($1.6 million at December 31, 1996 and $1.7 million at
December 31, 1995) or 20% of the Company's net worth ($4.4 million at December
31, 1996 and $4.3 million at December 31, 1995). The Company currently limits
its credit exposure to any one client, net of participations to other financial
institutions, to approximately 25% of capital, or $6 million after receiving
approval from its Board of Directors. Based on facts and circumstances,
exceptions are made to this policy, with Board approval, and there can be no
assurance that the Company's exposure to a particular client at any time will
not exceed such limits. At December 31, 1996 there were two clients who exceeded
this limitation. The largest client outstanding balance at December 31, 1996 was
$11.6 million or 52.2% of net worth, as compared to $2.9 million or 13.5% of
net worth at December 31, 1995. The second client had $7 million outstanding at
December 31, 1996 or 31.6% of net worth. The Company is in the process of
reducing the client concentration on these two accounts to conform to its
current concentration policy.
The following table indicates the composition of the Company's
total volume of purchased receivables by type of client business for the year
ended December 31, 1996, as well as outstanding receivables by type of client
business at December 31, 1996 and December 31, 1995 and the related percentages
thereon. The Company purchased $415 million of receivables in 1996, or $37
million increase over the $378 million purchased in 1995.
<TABLE>
<CAPTION>
TOTAL
VOLUME GROSS
OF GROSS PURCHASED
PURCHASED PURCHASED RECEIVABLES
RECEIVABLES RECEIVABLES OUTSTANDING
FOR PERCENT OUTSTANDING AT PERCENT AT PERCENT
THE YEAR OF DECEMBER 31, OF DECEMBER OF
BUSINESS OF CLIENT 1996 TOTAL 1996 TOTAL 31, 1995 TOTAL
------------------ ---- ----- ---- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Energy
Related $ 101,688 24.5% $ 8,694 16.0% $13,353 33.1%
Engineering &
Construction 71,290 17.2 9,596 17.0 6,658 16.5
Transportation 17,053 4.1 1,079 1.9 1,582 3.9
Manufacturing 29,437 7.1 3,747 6.7 1,806 4.5
Wholesale, Retail
Sales 83,141 20.0 13,030 23.4 8,160 20.2
Agriculture 890 .2 788 1.4 -- --
Environmental
Services 1,976 .5 237 .4 262 .6
Communications 6,425 1.5 494 .9 442 1.1
Services 73,629 17.7 6,482 11.7 8,085 20.0
Unclassified 6,711 1.6 3,118 5.6 527 1.3
Pool Purchases* 23,223 5.6 8,320 15.0 -- --
Total $ 415,464 100.0% $55,585 100.0% $40,874 100.0%
</TABLE>
- - ---------------
* Pool purchases are not recorded as individual invoice purchases but as a
collection of invoices which have been purchased and recorded as the aggregate
sum of receivables purchased.
Account Debtors
During 1996 and 1995, the accounts receivable underlying the
Company's working capital facility portfolio represented 5,832 and 5,308
different debtor entities, respectively. The most significant concentration in
1996 was debtors in the oil and gas industry or directly related areas of the
oil and gas industry and the transportation industry. This category of debtors
made up 41% of the total balance of purchased receivables outstanding at
December 31, 1996 as compared to 29% at December 31, 1995. The trends in this
industry are monitored by the Company. Due to the Company's long
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established history in this industry, management does not feel this level of
industry concentration is a significant negative concentration.
<TABLE>
<CAPTION>
TOTAL VOLUME GROSS PURCHASED GROSS PURCHASED
OF RECEIVABLES RECEIVABLES RECEIVABLES
PURCHASED IN PERCENT OF OUTSTANDING AT PERCENT OF OUTSTANDING AT PERCENT OF
ACCOUNT DEBTORS 1996 TOTAL DECEMBER 31, 1996 TOTAL DECEMBER 31, 1995 TOTAL
- - --------------- -------------- --------------- ----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Engineering &
Construction $17,629 4.2% 1,773 3.2% 2,011 4.9%
Federal, State &
Local Govt. 19,864 4.8 1,687 3.3 1,288 3.2
Transportation 43,531 10.5 6,234 11.2 4,018 9.8
Manufacturing 55,519 13.4 7,513 13.5 4,027 9.6
Wholesale, Retail
Sales 58,408 14.1 8,717 15.7 6,201 15.2
Agriculture 1,930 .5 405 .7 113 .3
Environmental
Services 1,004 .2 79 .1 444 1.1
Communications 4,622 1.1 119 .2 359 .9
Services 55,208 13.3 4,273 7.7 7,401 18.1
Unclassified 8,633 2.1 6,810 12.3 597
Pool Purchases* 23,223 5.9 8,320 15.0 - -
Energy Related 125,892 30.3 9,655 17.4 14,414 35.3
Totals $415,464 100.0% $55,585 v 100.0% $40,874 100.0%
</TABLE>
*Pool purchases are not recorded as individual invoice purchases but as a
collection of invoices which have been purchased and recorded as the aggregate
sum of receivables purchased.
During 1996 and 1995, no individual account debtor's total receivables
purchased by the Company exceeded 5.0% of the total volume of receivables
purchased during such year. Due to the constantly changing nature of the
Company's clients and the changing volume and nature of receivables which
clients may offer the Company for purchase, the receivables purchased from the
Company's clients regularly result in the Company holding receivables from one
account debtor which constitute 5% to 10% of outstanding receivables then held
by the Company. There may also be times when a related group of debtors exceed
such levels of concentration. These concentrations are in excess of the
Company's allowance for credit losses and can be a significant percentage of the
Company's net worth. This account debtor concentration exposes the Company to
credit risk with respect to particular account debtors which could have a
material effect on the Company's operations. Although specific exposure limits
are set for each account, which at any time does not exceed 20% of the Company's
net worth, exceptions are regularly made to this policy, and there can be no
assurance that the Company's exposure to a particular account debtor (or group
of affiliated account debtors) will not at any time exceed such a percentage.
Competition
The Company encounters significant competition from factoring companies,
asset based lenders, commercial banks and other financial institutions engaged
in secured lending. Due to the size of facilities offered by the Company and the
size of target clients, the Company competes with a large number of local and
regional sources of financing, as well as large national competitors. Many of
these competitors have significantly greater financial and other resources than
the Company and have access to capital markets at a lower cost than the Company
is currently able to obtain.
The Company's larger competitors include Heller Financial, CIT,
and Associates Capital. Other competitors include Congress Financial, FINOVA,
the Foothill Group, a subsidiary of NORWEST, and Fremont Financial. Competitors
in the working capital product area include Riviera Finance, Creekwood
Financial, and Metro Factors. The competition for earning assets has had the
effect of reducing yields due to the competitive nature of the business and the
increasing strength of many clients in the current economic expansion.
Government Regulation
FEDERAL ASSIGNMENT OF CLAIMS ACT. In connection with certain of
its clients whose account debtors include the United States or departments or
agencies thereof (the "Federal Government"), certain receivables acquired by the
Company are subject to the Federal Assignment of Claims Act ("FACA"). FACA
provides that an assignment of a client's contractual claim for monies due from
the Federal Government will be enforceable against the Federal Government by a
third party assignee of such client only under limited circumstances. Certain
aspects of the Company's purchases of receivables make compliance with FACA
impractical or impossible, or make the protections afforded by FACA
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unavailable to the Company. As a result, the Company does not comply with FACA
when it purchases receivables where the Federal Government account debtors,
causing all assignments of receivables purchased by the Company to which the
Federal Government is the account debtor to be enforceable by the Company as
regards the Federal Government. Such failure to comply with FACA has no effect
on the validity of assignment among the Company, the client and third parties
other than the Federal Government. Non-compliance with FACA causes the Company
to lose any right it may have to receive payments directly from the Federal
Government or cause the Federal Government to acknowledge the Company's claim in
such receivables. FACA does not limit the Company's ability to require its
clients to direct payments made by the Federal Government to a lockbox
controlled by the Company. The Federal Government also has significant rights of
setoff in connection with its contractual payments. Typically, the Company can
protect itself from certain rights of setoff by account debtors, either by
pursuing its rights against clients for breach of representation regarding the
absence of setoffs with respect to purchased receivables, or sending the account
debtors a notice of assignment pursuant to the Uniform Commercial Code. In cases
where the Federal Government is the account debtor, an assignee must comply with
FACA in order to protect itself from such setoffs, thus the Company is unable to
avail itself of such protection (other than by pursuing its rights against
clients for breach of representations). The Federal Government has broad setoff
rights, including setoffs for unpaid taxes and setoffs arising from other
contracts between the client and the Federal Government. During 1996 and 1995,
respectively, the Federal Government comprised 4.02% and 2.4% of the account
debtors for the Company's total volume of purchased receivables. The Company has
not experienced a disproportionate dilution rate with respect to such
receivables compared to other of the Company's receivables.
STATE USURY LAWS. Usury laws generally limit the amount of interest that
a creditor may contract for, charge or receive in connection with the loan of
money. In the state of Texas (in which the Company's primary offices are
presently located), state law prohibits creditors from contracting for, charging
or receiving interest at a rate in excess of a varying index. For loans in which
the interest rate is fixed, the usury ceiling is equal to the index preceding
the week in which the contract is entered into. For varying rate loans, the
index floats. Under the provisions of Texas law, the index may never exceed 24%
per year (or, in the case of business purpose loans exceeding $250,000, 28% per
year). If the amount of the index is less than 18% per year, the creditor may,
nevertheless, charge interest at the rate of 18% per year. Because of the low
interest rate environment, the Texas usury ceiling has, since early in 1985,
prohibited a business creditor from contracting for, charging or receiving
interest at a rate in excess of 18% per year. On June 16, 1995 the Legislature
of the State of Texas passed House Bill 3101 effective August 28, 1995 resolving
several issues related to the purchase of accounts receivable. Under the bill as
enacted into law, an "account purchase transaction" is defined as an agreement
in which a commercial enterprise sells accounts receivable at a discount with or
without a related repurchase obligation. This bill amends chapter one of the
Consumer Credit Code to provide that the amount of any discount associated with
the purchase or any fees paid to an account service provider are not interest.
Also, the bill provides that the parties' characterization of an account
purchase transaction is conclusive that the account is not a loan.
Employees
The Company had 61 full-time and two part-time employees at December 31,
1996, of whom six were employed in executive and administrative positions and
thirteen (including one executive officer) were employed in marketing. None of
the Company's employees are a party to any collective bargaining agreement, and
the Company considers its relations with employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its offices at each of its locations in Fort Worth,
Houston and San Antonio, Texas, New Orleans, Louisiana, Irvine and Santa Clara,
California under lease agreements expiring at various dates through 2004. The
Company believes that its facilities are adequate to meet the Company's needs in
these markets; however, office space will be required at the location of each
new marketing office opened by the Company.
ITEM 3. 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
The information required by this item is set forth in the Company's
Annual Report to Stockholders for the year ended December 31, 1996, under the
caption, "Shareholder Information" and "Per Share Market Data" and is
incorporated herein by reference. Since January 18, 1996, the Company's common
stock has been traded on the American Stock Exchange and the Pacific Stock
Exchange. Prior to that time, it was traded on the NASDAQ National Market
System. At March 13, 1997, there were 47 holders of record of the Company's
common stock. The Company has not paid or declared dividends on its common stock
during the two most recent fiscal years and does not currently intend to pay
cash dividends on its common stock in the foreseeable future. The Credit
Facility of KBK effectively limits dividends to the Company. Under the terms of
the Credit Facility, the limitation on dividends by KBK to the Company at
December 31, 1996 was $313,000. There have been no additional unregistered
shares sold by the Company in the last three years.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information required by this item is set forth on pages 15 through
19 of the Company's Annual Report to Stockholders for the year ended December
31, 1996, under the caption, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is set forth on pages 20 through
30 of the Company's Annual Report to Stockholders for the year ended December
31, 1996, and is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16( A)OF THE EXCHANGE ACT
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1997 Annual Meeting of Stockholders, under the captions, "Election of
Directors," "Information Concerning Executive Officers" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," and is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included in the Proxy Statement
to be filed pursuant to Regulation 14A in connection with the Company's 1997
Annual Meeting of Stockholders, under the captions, "Compensation of Executive
Officers" and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Proxy Statement
to be filed pursuant to Regulation 14A in connection with the Company's 1997
Annual Meeting of Stockholders, under the captions, "Share Ownership of
Directors, Executive Officers and Certain Beneficial Owners" and is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Proxy Statement
to be filed pursuant to Regulation 14A in connection with the Company's 1997
Annual Meeting of Stockholders, under the captions, "Certain Relationships and
Related Party Transactions" and is incorporated herein by reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Consolidated Statements of Income for the years ended December
31, 1996 and December 31, 1995
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and December 31, 1995
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996 and December 31, 1995
(a)(2) Financial Statement Schedules - none
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(a)(3) Exhibits:
Exhibit Number
3.1 --Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on form SB-2, Registration No.
33-77378-D).
3.2 --Bylaws of the Company and amendment thereto (incorporated by
reference to Exhibit 4.5 to the Registrant's Registration
Statement on Form S-8, Registration No. 33-89377).
4.1 --Specimen Stock Certificate for Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on form SB-2, Registration No.
33-77378-D).
4.2 --Form of Registration Rights Agreement between the Company
and the parties named therein, as amended (incorporated by
reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-77378-D).
+10.1 --1992 Key Employee Stock Option Plan of the Company
(terminated), and forms of stock option agreements and
amendments thereto (incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-77378-D).
+10.2 --1993 Non-Employee Director Stock Option Plan of the Company
(terminated), and form of stock option agreement (incorporated
by reference to Exhibit 10.2 to the Registrant's Registration
Statement on form SB-2, Registration No. 33-77378-D).
+10.3 --1994 Stock Option Plan of the Company, and forms of stock
option agreements (incorporated by reference to Exhibit 10.3
to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-77378-D).
10.4 --Form of Indemnification Agreement between the Company and
each of its directors (incorporated by reference to Exhibit
10.4 to the Registrant's Registration Statement on form SB-2,
Registration No. 33-77378-D).
10.5 --Stock Purchase Agreement dated as of April 2, 1992 among the
Company, KBK, Inc. and R. Doyle Kelley (incorporated by
reference to Exhibit 105 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-77378-D).
10.6 --Employment and Non-Competition Agreement dated Aril 7, 1992
between the Company and R. Doyle Kelley (incorporated by
reference to Exhibit 10.6 to the Registrant's Registration
statement on form SB-2, Registration No. 33-77378-D).
10.7 --Amended and Restated Letter Loan Agreement dated as of April
4, 1994 among KBK Financial, Inc., the Banks listed on the
signature pages thereof and First Interstate Bank of Texas,
N.A. as Agent, and related documents (incorporated by
reference to Exhibit 10.7 to the Registrant's registration
Statement on form SB-2, Registration No. 33-77378-D).
10.8 --Form of Warrants of the Company (incorporated by reference
to Exhibit 10.8 to the Registrant's Registration Statement on
Form SB-2, Registration No. 33-77378-D).
10.9 --Stock Exchange Agreement among KBK Capital Corporation and
Coastal, Inc. and the Owners of the outstanding capital stock
of Coastal Financial Resources, Inc. dated as of December 30,
1994.
13.1 --Annual Report to Shareholders for the Fiscal Year ended
December 31, 1995.
21.1 --Subsidiary of the Company (incorporated by reference to
Exhibit 21.1 to the Registrant's Registration Statement on
Form SB-2, Registration No. 33-77378-D).
+*23.2 --Change of Control Employment Agreement.
*23.3 --Annual Report to Shareholders for the Fiscal Year ended
December 31, 1996. *Filed herewith
- - ------------
+ Management contract or compensatory plan or
arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form
10-KSB.
(b) Report on form 8-K
The company did not file any reports on Form 8-K during the fourth quarter of
the year ended December 31, 1996.
Page 10
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
KBK CAPITAL CORPORATION
Registrant
Date: March 28, 1997 By /S/ MICHAEL D. MAGILL
Michael D. Magill, Executive
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated below and on the dates indicated.
By /S/ ROBERT J. MCGEE Chairman and Chief Executive
(Robert J. McGee) Officer March 28, 1997
By /S/ MICHAEL D. MAGILL Director, Executive Vice President
(Michael D. Magill) and Chief Financial Officer March 28, 1997
(Principal Financial Officer)
By /S/ DEBORAH B. WILKINSON Vice President and Controller
(Deborah B. Wilkinson) (Principal Accounting Officer) March 28, 1997
By /S/ KENNETH H.JONES, JR.) Vice Chairman and Director March 28, 1997
(Kenneth H. Jones, Jr.)
By /S/ THOMAS SIMMONS Director March 28, 1997
(Thomas Simmons)
By /S/ DANIEL R. FEEHAN Director March 28, 1997
(Daniel R. Feehan)
By /S/
(Thomas L. Healey) Director March 28, 1997
By /S/ MARTHA V. LEONARD Director March 28, 1997
(Martha V. Leonard)
By /S/ R. EARL COX Director March 28, 1997
(R. Earl Cox)
By /S/ HARRIS A. KAFFIE Director March 28, 1997
(Harris A. Kaffie)
EXHIBIT 23.2
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
AGREEMENT between KBK Capital Corporation, a Delaware corporation (the
"Company"), AND J. DUGAN SMITH, residing at the address set forth under his
signature on the last page of this Agreement (the "Executive"), dated as of the
15th day of May, 1996.
WITNESSETH:
WHEREAS, the Executive is a principal officer of the Company and an
integral part of its management; and
WHEREAS, the Company recognizes that even the possibility of a change of
control and the uncertainty and questions which it may raise may result in the
departure or distraction of management personnel to the detriment of the Company
and its shareholders during a critical time; and
WHEREAS, the Company considers it in the best interest of the Company
and its shareholders that the Executive be encouraged to remain with the Company
in the event of any actual or threatened change of control of the Company; and
WHEREAS, the Company's Board of Directors (the "Board") has determined
that appropriate steps should be taken now to reinforce and encourage members of
the Company's management;
NOW, THEREFORE, in consideration of the above premises and mutual
agreements herein set forth and the services performed and to be performed by
the Executive for the Company, the parties agree as follows:
1. OPERATION OF AGREEMENT.
This Agreement shall be effective without any action by any party upon
the first date on which a Change of Control ( as defined in Article 2) has
occurred; PROVIDED, HOWEVER, that at the option of the Company this Agreement
may be terminated on the first anniversary of written notice of termination
given to the Executive by the Board prior to the Agreement's Effective Date.
2. DEFINITIONS.
CAUSE. For purposes of this Agreement "Cause" shall mean termination
resulting from (i) acts of dishonesty by the Executive constituting a felony and
resulting or intended to result directly or indirectly in gain or personal
enrichment to the Executive at the expense of the Company or (ii) willful and
continued failure by Executive to substantially perform his duties with the
Company (other than any such failure resulting from Disability (as defined
herein) after a demand in writing for substantial performance is delivered to
the Executive by the Board, which demand specifically identifies the manner in
which the Board believes that the Executive has not substantially performed his
duties, and such failure to perform the Executive's duties results in
demonstrably material injury to the Company.
CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of
Control" shall occur if (i) the Company shall not be the surviving entity in any
merger or consolidation (or survives only as a subsidiary of an entity other
than a previously wholly-owned subsidiary of the Company), (ii) the Company
sells, leases or exchanges or agrees to sell, lease or exchange all or
substantially all of its assets to any other person or entity (other than a
wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved
and liquidated, (iv) any person or entity, including a "group" as
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contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or
control (including, without limitation, power to vote) of more than 50% of the
outstanding shares of capital stock of the Company, or (v) as a result of or in
connection with any cash tender or exchange offer, merger or other business
combination, sales of assets or a contested election for the board of directors,
or any combination of the foregoing transactions (a "Transaction"), the persons
who were directors of the Company before such Transaction shall cease to
constitute a majority of the Board.
EFFECTIVE DATE. For purposes of this Agreement "Effective Date" shall
mean the first date on which a Change of Control has occurred.
DISABILITY. For purposes of this Agreement, "Disability" shall mean that
the Executive is unable to perform the essential functions of the job for which
the Executive is being employed hereunder, with or without reasonable
accommodation, by reason of his illness, accident or other cause, including
mental disability, for a period of six consecutive calendar months, or an
aggregate of nine months during any continuous twelve-month period.
GOOD REASON. For purposes of this Agreement, "Good Reason" shall mean:
(i) A determination by the Executive made in good faith that his primary
management functions, duties or responsibilities have been diminished in any
material respect and the situation is not remedied within 30 days after receipt
by the Company of written notice from the Executive of such determination;
(ii) Any requirement that the Executive relocate his principal office
outside of Tarrant County, Texas;
(iii) Any modification to the rights to indemnification or director and
officer liability insurance under which the Executive is covered immediately
prior to the Effective Date which reduces the benefits available to the
Executive under such indemnification or insurance; or
(iv) A breach by the Company of any provision of this Agreement not
embraced within the foregoing clause (i), (ii) or (iii) which is not remedied
within 30 days after receipt by the Company of written notice from the
Executive.
3. EMPLOYMENT PERIOD. Unless terminated pursuant to Section 6, the
Company hereby agrees to continue the Executive in its employ for the period
commencing on the Effective Date and ending on the second anniversary of such
date (the "Employment Period"). Unless terminated pursuant to Section 6, the
Executive agrees to remain in the employ of the Company until such time as the
Executive gives the Company at least 30 days written notice of the Executive's
intent to voluntarily terminate employment.
4. POSITION AND DUTIES.
(a) During the Employment Period, the Executive shall continue to serve
as a principal officer of the Company with office, title and primary management
functions, duties, and responsibilities, substantially similar to those held and
performed during the 90-day period immediately preceding the Effective Date
provided that any change in such functions, duties and responsibilities which
results solely from the Company no longer being a reporting company under the
Federal securities laws or the Company being a subsidiary of another company
shall not be considered a change in functions, duties or responsibilities for
any purpose under this Agreement.
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<PAGE>
(b) During the Employment Period, the Executive shall devote the
Executive's full time and efforts during normal business hours to the business
and affairs of the Company except for reasonable vacations and except for
illness or incapacity, but nothing in this Agreement shall preclude the
Executive from (i) devoting reasonable periods required for serving as a
director or member of a committee of any organization involving no conflict of
interest with the interests of the Company, and (ii) engaging in charitable and
community activities and professional organizations, provided that such
activities do not materially interfere with the regular performance of his
duties and responsibilities under this Agreement.
(c) Executive shall have as his principal office and shall perform his
duties hereunder primarily at the Company's headquarters at 301 Commerce, Suite
2200, Fort Worth, Texas 76102-4140 or at such other location as the Board shall
direct within Tarrant County, Texas.
5. COMPENSATION.
(a) BASE SALARY. During the Employment Period, the Executive shall
receive a base salary ("Base Salary") equal to the average of the Executive's
monthly salary during the three full months immediately preceding the Effective
Date multiplied by twelve. The Base Salary shall not be reduced after the
Effective Date. The Base Salary will be paid in equal bi-monthly installments.
(b) OTHER NON-SALARY BENEFITS. During the Employment Period, the
Executive shall be entitled to participate in all bonus, incentive, savings and
retirement plans, policies and programs applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, policies and programs provide the Executive with incentive
opportunities, savings opportunities and retirement benefit opportunities, in
each case, less favorable, in the aggregate, than those provided by the Company
and its affiliated companies for the Executive under such plans, policies and
programs as in effect at any time during the 90-day period immediately preceding
the Effective Date or if more favorable to the Executive, those provided
generally at any time after the Executive Date to other peer executives of the
Company and its affiliated companies. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
policies and programs provided by the Company and its affiliated companies
(including to the extent they exist and without limitation, medical,
prescription, dental, disability, salary continuance, employee life, group life,
accidental death and travel accident insurance plans and programs) to the extent
applicable generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, policies and programs provide the
Executive with benefits which are less favorable, in the aggregate, than such
plans, practices, policies and programs in effect for the Executive at any time
during the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies. During the Employment Period, the Executive shall be entitled to
perquisites, including, without limitation, an office, secretarial and clerical
staff, and to fringe benefits, including, without limitation, the payment of
allowances for, and reimbursement of, automobile expenses, and cellular
telephone charges, in each case at least equal to those attached to his office
immediately prior to the Effective Date.
(c) VACATION. The Executive shall be entitled to receive such paid
vacation time each year during the term of this Agreement as is consistent with
the vacation policy of the Company for Executive's position. Such vacation shall
be taken at a time convenient to the Company. Any vacation time to which the
Executive is entitled in accordance with the foregoing that is not taken by the
Executive in any year during the Employment Period shall not be cumulative, and
the Executive shall not receive any cash or noncash benefit in lieu of vacation
time not taken by the Executive except that Executive shall be entitled to
receive cash in lieu of any unused vacation time applicable for the year in
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which any termination of employment occurs.
(d) EXPENSES. Upon submission of proper vouchers, the Company will pay
or reimburse the Executive for reasonable transportation, hotel, travel and
related expenses incurred by the Executive on business trips away from the
Executive's principal office, and for other business and entertainment expenses
reasonably incurred by the Executive in connection with the business of the
Company and its subsidiaries during the Employment Period, all subject to such
limitations as may from time to time be prescribed by the Board.
(e) INDEMNITY. The Executive shall be entitled to and shall be provided
the benefits of indemnification and director and officer liability insurance on
the same basis as in effect immediately preceding the Effective Date, or if more
favorable to the Executive, as in effect at anytime thereafter with respect to
other officers of similar position and responsibility.
6. TERMINATION.
(a) DEATH OR DISABILITY. Executive's employment shall terminate
automatically upon the Executive's death. The Company may terminate Executive's
employment upon Executive's Disability, by giving to the Executive written
notice of its intention to terminate the Executive's employment. The Company
shall have the right to terminate the Executive's employment effective as of the
applicable date of his Disability.
(b) CAUSE. The Company may terminate the Executive's employment for
"Cause" upon written notice as required herein. Executive's employment shall in
no event be considered to have been terminated by the Company for Cause if such
termination took place as the result of (i) bad judgment or negligence, or (ii)
any act or omission without intent of gaining therefrom directly or indirectly a
profit to which the Executive was not legally entitled, or (iii) any act or
omission believed by the Executive in good faith to have been in or not opposed
to the interest of the Company, or (iv) any act or omission in respect of which
a determination is made that the Executive met the applicable standard of
conduct prescribed for indemnification or reimbursement or payment of expenses
under the by-laws of the Company or the laws of the State of Delaware or the
directors and officers liability insurance of the Company, in each case as in
effect at the time of such act or omission. The Executive shall not be deemed to
have been terminated for Cause unless and until there shall have been delivered
to him a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the entire membership of the Board at a meeting of the Board
called and held for the purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with his counsel, to be heard before the
Board), finding that in the good faith opinion of the Board, the Executive was
guilty of conduct contained in the definition of Cause and specifying the
particulars thereof in detail.
(c) GOOD REASON. The Executive's employment may be terminated by the
Executive at any time for Good Reason. Executive's employment shall in no event
be considered to have been terminated by Executive for Good Reason if such
termination by the Executive took place as a result of changes in the
Executive's functions, duties and responsibilities resulting solely from the
Company no longer being a reporting company under the Federal securities laws or
the Company being a subsidiary of another company.
(d) VOLUNTARY TERMINATION AFTER ONE YEAR. The Executive's employment may
be terminated by the Executive at any time after the first anniversary of the
Effective Date.
(e) NOTICE OF TERMINATION. Any termination of the Executive's employment
by the Company for Cause or due to Disability or by the Executive for Good
Reason or otherwise shall be
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communicated by Notice of Termination to the other party. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i) indicates
the specific termination provision in this Agreement relied upon, (ii) sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated, if applicable, and (iii) if the termination date is other than the
date of receipt of such notice, specifies the termination date (which date shall
be not more than 15 days after the giving of such notice).
(f) DATE OF TERMINATION. If the Executive's employment is terminated for
any reason, whether pursuant to the terms of this Agreement or otherwise, the
date set forth in the notice of termination as the termination date of the
Executive's employment shall be deemed the "Date of Termination."
7. COMPENSATION UPON TERMINATION OR DURING DISABILITY.
(a) DURING DISABILITY. During any period that Executive is unable to
perform his duties hereunder during the Employment Period as a result of
incapacity due to physical or mental illness or injury, the Company shall
continue to pay to the Executive his full Base Salary and other benefits as in
effect immediately prior to such physical or mental illness or injury until
Executive's employment is terminated.
(b) DEATH; DISABILITY. If during the Employment Period the Executive's
employment is terminated by reason of death or Disability, the Company shall (x)
pay to the Executive or his estate a lump sum payment (made within 10 days after
the Date of Termination) equal to the Executive's Base Salary divided by twelve
multiplied by the number of full or partial months remaining in the Employment
Period, (y) provide the medical insurance benefits contemplated by Section 5(b)
for one year from the Date of Termination or through the end of the Employment
Period whichever is longer and (z) make available medical benefits equivalent to
those required to be provided under "COBRA" for a period of eighteen months
after the expiration of the Company's obligations under clause (y) above.
(c) CAUSE; VOLUNTARY TERMINATION PRIOR TO ONE YEAR. If the Executive's
employment shall be terminated either (i) for Cause by the Company or (ii) by
the Executive voluntarily prior to the first anniversary of the Effective Date
other than for Good Reason, the Company shall pay the Executive's full Base
Salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given and shall have no further obligations to the Executive
under this Agreement.
(d) GOOD REASON; VOLUNTARY TERMINATION AFTER ONE YEAR; OTHER THAN FOR
CAUSE. If, during the Employment Period, (i) the Company shall terminate the
Executive's employment other than for Cause, death or Disability, (ii) the
employment of the Executive shall be terminated by the Executive for Good Reason
or (iii) after the first anniversary date of the Effective Date for any reason
or no reason, the Company shall (x) pay to the Executive as severance pay
hereunder and in lieu of any other amounts due hereunder a lump sum payment
(made within 10 days after the Date of Termination) equal to two times the
Executive's then current Base Salary, (y) provide the medical insurance benefits
contemplated by Section 5(b) for one year from the Date of Termination or
through the end of the Employment Period whichever is longer and (z) make
available to the Executive medical benefits equivalent to those required to be
provided under "COBRA" for a period of eighteen months after the expiration of
the Company's obligations under clause (y) above.
(e) PAYMENT LIMITATION. Notwithstanding anything to the contrary in this
Agreement, the payments and benefits otherwise provided by this Agreement shall
be reduced if and to the extent that such payments and benefits, when added to
any payments and benefits provided by the Company other than under this
Agreement, would result in any such payments being nondeductible to the Company
or
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would subject Executive to an excise tax pursuant to the golden parachute
payment provisions of Section 280G or Section 4999 of the Internal Revenue Code
of 1986, as amended. Any reduction of payments and benefits under this Agreement
resulting from the foregoing limitations shall be applied to the payments and
benefits due to be otherwise provided to Executive latest in time.
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
other agreements with the Company or any of its affiliated companies. Amounts
which are vested benefits or which the Executive is otherwise entitled to
receive under any plan or program of the Company or any or program of the
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan or program.
9. EXECUTIVE OBLIGATIONS.
(a) For the Employment Period the Executive will not do or say anything
that reasonably may be expected to have the effect of diminishing or impairing
the goodwill and good reputation of the Company and its officers, directors and
products nor will the Executive intentionally disparage or injure the reputation
of the Company by making any material negative statements about the Company's
methods of doing business, the effectiveness of its business policies and the
quality of its products or personnel.
(b) The Executive agrees to keep the terms of this Agreement in strict
confidence, except that the Executive may disclose the terms of this Agreement
to family members and professional advisors who understand the confidentiality
of such terms.
(c) The Executive hereby agrees that during the Executive's employment
by the Company and for a period of twenty-four months following termination of
the Executive's employment during the Employment Period either (i) by the
Company other than for Cause, death or Disability or (ii) by the Executive for
Good Reason or after the first anniversary date of the Effective Date for any
reason or no reason, the Executive shall not act in any manner or capacity,
directly or indirectly, in any individual or representative capacity, whether as
principal, agent, partner, officer, director, employee, joint venturer, member
of any business entity, consultant, advisor or investor (except that the
Executive shall have the right hereunder to own up to 2% of one or more public
companies having a class of equity securities registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended) or
otherwise, in or for any business entity or enterprise which competes with the
Company in any geographic area served by the Company at the time of the
Executive's termination and engages as its primary line of business in factoring
or other asset-based lending (the "Business");
(d) The Executive hereby agrees that during the Executive's employment
by the Company and for a period of twenty-four months following the termination
of the Executive's employment, the Executive shall not:
(i) without the prior written consent of the Company, divulge,
disclose or make accessible to any other person, firm, partnership or
company or other entity any Confidential Information which shall not
include information known generally or available to the public or of
information not considered confidential by persons engaged in the
business conducted by the Company or from disclosure required by law or
court order pertaining to the Business except (x) while employed by the
Company in the Business and for the benefit of the Company or (y) when
required to do so by a court of competent jurisdiction, by any
governmental agency, or by any
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administrative body or legislative body (including a committee thereof)
with purported or apparent jurisdiction to order the Executive to
divulge, disclose or make accessible such information.
(ii) without the prior written consent of the Company solicit or
hire away any person who is then an employee of the Company and was an
employee of the Company at any time after the Effective Date and prior
to termination of the Executive's employment.
(e) The Executive also agrees that upon leaving the Company's employ he
will not take with him, without the prior written consent of an officer
authorized to act in the matter by the Board, any drawing, blueprint, business
strategies, budgets, projections, nonpublic financial information, manuals,
policies or other document of the Company, its subsidiaries, affiliates and
divisions.
(f) If the scope of any restriction contained in Section 9(c) or (d)
hereof is too broad to permit enforcement of such restriction to its full
extent, then such restriction shall be enforced to the maximum extent permitted
by law, and the Executive hereby consents and agrees that such scope may be
judicially modified accordingly in any proceedings brought to enforce such
restrictions.
(g) The Executive acknowledges and agrees that the Company's remedy at
law for any breach of the Executive's obligations under this Section 9 (other
than Section 9(c)) may be inadequate, and agrees and consents that temporary
and/'or permanent injunctive relief may be granted in any proceeding which may
be brought to enforce any provision hereof (other than Section 9(c)), without
the necessity of proof of actual damage. In the event of any breach of the
provisions of Section 9(c) hereof, as liquidated damages and in lieu of any
other damages, payments to or actions by the Company, the Executive shall pay to
the Company an amount equal to the product of (i) any lump sum payment made to
Executive under this Agreement divided by twenty-four multiplied by (ii)
twenty-four minus the number of months (including as a whole month any portion
thereof) since the Executive's Date of Termination.
10. REVIEW BY COUNSEL. The Executive has had sufficient time and the
opportunity, whether or not exercised, to have this Agreement reviewed by
counsel of the Executive's choosing and to be advised as to the Executive's
rights and obligations hereunder.
11. SUCCESSORS.
(a) This Agreement shall not be assignable by either party without the
consent of the other party.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors.
(c) In the event of a Change of Control of the Company, any successor
shall, by an agreement in form and substance satisfactory to the Executive,
expressly assume and agree to perform this Agreement.
12. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas, without reference to principles of conflict of
laws. The captions of this Agreement are not part of the provisions hereof and
shall have no force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
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(b) Executive shall not be required to mitigate the amount of any
payment or benefit provided for herein by seeking other employment or otherwise,
nor shall the amount of any payment or benefit provided for herein be reduced by
any compensation earned by you as a result of employment by another employer
after the Date of Termination, or otherwise.
(c) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by overnight courier
or by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
IF TO THE EXECUTIVE: At the address set forth on the signature page hereto
IF TO THE COMPANY: KBK Capital Corporation
301 Commerce Street, Suite 2200
Forth Worth, Texas 76102-4122
Attention: Robert J. McGee
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amounts payable under this
Agreement such federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(f) This Agreement contains the entire understanding of the Company and
the Executive with respect to the subject matter hereof.
(g) Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Houston, Texas in
accordance with the rules of the American Arbitration Association then in
effect; provided that all arbitration expenses shall be borne by the Company.
Notwithstanding the pendency of any dispute or controversy concerning
termination or the effects thereof, the Company will continue to pay Executive
bi-monthly the full compensation in effect immediately before any Notice of
Termination giving rise to the dispute was given (including, but not limited to,
Base Salary and bonus or incentive pay) and continue Executive as a participant
in all compensation, benefit and insurance plans in which the Executive was then
participating, until the dispute is finally resolved. Amounts paid under this
paragraph are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this Agreement
except as otherwise determined by the arbitrator based upon the facts and
circumstances giving rise to the arbitration. Judgment may be entered on the
arbitrators' award in any court having jurisdiction; PROVIDED, HOWEVER, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
(h) The Executive and the Company acknowledge that this Agreement shall
have no force and effect, and is no intended to alter in any way the current
relationship of the Executive and the Company, prior to the Effective Date. This
Agreement shall terminate and there shall be no further rights or liabilities
hereunder upon a termination of the Executive's employment prior to the
Effective Date.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
KBK CAPITAL CORPORATION
BY: /S/MICHAEL D. MAGILL
Name: Michael D. Magill
Title: Executive Vice President and
Chief Financial Officer
/S/ J. DUGAN SMITH
J. Dugan Smith
ADDRESS: J. DUGAN SMITH
5116 Partridge
Fort Worth, Texas 76132
EXHIBIT 23.3
KBK CAPITAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, THOSE 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, ACCOMPANYING NOTES AND SELECTED FINANCIAL DATA
APPEARING ELSEWHERE IN THIS REPORT.
OVERVIEW
The Company, through its wholly-owned subsidiary KBK Financial, Inc.
("KBK"), is a commercial financial institution providing 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 borrower. 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 and, during
1996, such Fixed Discount rates applied against purchased receivables averaged
1.3%.
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 and, during 1996, averaged 9.5% per annum.
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. During 1996, the Company's loans increased $21.8 million,
to approximately $27.0 million. The Company's yield on outstanding loans during
1996 averaged 19.0%. Interest income from these loans accounted for 11.2% of
total revenue for 1996 compared to 1.3% for 1995. Interest income and amounts
outstanding under such facilities are expected to increase in 1997 due to
continuing pent-up demand for capital goods and plant financing.
<PAGE>
In its asset-based lending activities, the Company typically obtains an
appraisal of the underlying collateral and extends credit based upon a
negotiated percentage of the appraised collateral value. The maturity of these
facilities generally does not exceed five years. The interest income on these
loans is recognized on the accrual method. The interest rate charged on loans is
based upon a negotiated spread over KBK's floating base rate and is payable
monthly.
In December 1994, the Company acquired Coastal Financial Resources, Inc.
("Coastal"), based in Abbeville, Louisiana, pursuant to a Purchase Agreement
(the "Agreement") for 400,000 shares of Company stock valued at $1.3 million and
up to 200,000 shares of the Company's common stock to be issued ratably in
increments of 66,667 shares for 1995, 1996 and 1997. The additional shares would
be issued if certain attributable earnings goals with respect to the acquired
business were met in each of the three years. No shares were issued under the
Agreement for 1995. During 1996 the Agreement was modified to include broader
definitions of earning assets and revenue eligible for attributable earnings.
Pursuant to the Agreement, 50,000 common shares were issued from treasury stock
for 1996.
The Company's plan for continued growth in 1997 is based upon growth in
earning assets from the markets currently served. The Company continues to
develop a network of correspondents who refer prospective clients to the
Company. Such correspondents vary in background and are primarily located in
Texas, California and Louisiana. It is the Company's intent to expand this
network nationwide.
Continuing growth depends heavily on the Company's ability to evaluate,
underwrite and process the financing requests from middle-market businesses.
This may require the addition of experienced marketing, operations, support and
executive staff, as well as additional funding resources to support new business
and growth in earning assets.
RESULTS OF OPERATIONS ANALYSIS
1996 COMPARED TO 1995
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
(dollars in thousands)
Total revenue .................... $12,201 100% $10,945 100%
Interest expense ................. 2,590 21% 1,653 15%
Provision for credit losses ...... 245 2% 600 5%
Operating expenses ............... 6,909 57% 5,667 52%
Income taxes ..................... 906 7% 1,177 11%
------------------ ------------------
Net income ....................... $ 1,551 13% $ 1,848 17%
================== ==================
Receivables purchased in 1996 averaged $46.7 million, approximately $6.6
million, or 16.5%, over 1995 average purchased receivables balance of $40.1
million. This growth in average receivables purchased in 1996 was primarily
attributable to growth in the Louisiana, California and Fort Worth receivables
portfolios. Revenue derived from earned discount income was $9.8 million in 1996
compared to $10.6 million in 1995, a 7% decrease. This percentage decreased
notwithstanding the increase in average receivables purchased because of lower
pricing on purchases from existing and new clients. These reduced yields were
due in part to the strengthening of the credit quality of the existing
portfolio, as well as competitive pressures. In future periods, this level of
pricing may continue to trend downward, depending upon the strength of the
economy and the quality of the newer clients.
In an effort to meet the financing needs of its clients and lengthen the
duration of the relationship, the Company continues to broaden the range of its
product line. Loans receivable increased $21.8 million to $27.4 million
outstanding at December 31, 1996 from $5.6 million outstanding at December 31,
1995. Revenue derived from these loans increased from $144,000 for 1995 to $1.4
million for 1996. The Company plans to continue its efforts to attract
receivables purchase facilities, although term loans are expected to represent
an increasing portion of the Company's outstanding earning assets.
Interest expense increased $938,000, or 56.8%, to $2.6 million for 1996
compared with $1.7 million for
<PAGE>
1995. Interest expense was 21.0% of total revenue for 1996 and 15.0% of
total revenue for 1995. The increase was due mainly to the borrowings used to
finance the higher levels of earning assets funded during 1996. During 1996, the
Company had an average outstanding balance of bank debt of $34.7 million at a
weighted average interest rate of 7.5%. During 1995, the Company had average
outstanding balance of bank debt of $19.8 million at a weighted average interest
rate of 7.8%.
During 1996, the Company provided $245,000 for credit losses compared to
$600,000 for 1995, representing a 59.0% decrease. During 1996, the Company
recorded charge-offs of $404,000 while recovering $38,000. Net charge-offs for
1996 of $366,000 and a provision of $245,000 for 1996 resulted in an allowance
for credit losses of $1.6 million or 1.9% of gross receivables outstanding as of
December 31, 1996 (2.7% of average receivables). During 1995, the Company
recorded charge-offs of $542,000 while recovering $12,000 resulting in net
charge-offs of $530,000. The Company's 1995 provision for credit losses of
$600,000 brought the allowance for credit losses to $ 1.7 million, or 3.7% of
gross receivables outstanding (4.1% of average receivables outstanding at
December 31, 1995). The Company believes that the allowance for credit losses is
adequate in light of the historical loss experience and the risk inherent in the
earning asset portfolio at year-end 1996.
Operating expenses increased $1.2 million, or 21.0%, to $6.9 million, or
57.0% of total revenue for 1996 compared with $5.7 million or 52.0% of total
revenue for 1995. This increase was primarily a result of increased salaries and
benefits and other employment expenses of $783,000, of which $281,000 related to
the opening of offices in Irvine and Santa Clara, California and $502,000
related to support staff and management added in 1996 to support increased
business activity. Occupancy expenses increased $109,000, resulting from the
addition of the California offices and increased rental expense associated with
the corporate offices. Amortization and depreciation expense for 1996 increased
$102,000 due to the addition of fixed assets in Fort Worth and California. The
remaining increase in operating expenses of $206,000 is comprised of a $54,000
increase in direct marketing and marketing support expenses such as travel,
entertainment, telephone, and postage, a $65,000 increase in advertising, and an
$87,000 increase in general overhead such as insurance, office expenses and
directors fees.
Income taxes of $906,000 for 1996 were 24.5% lower than the income taxes
of $1.2 million for 1995 due to lower pre-tax operating profits.
As a result of the above, net income of the Company for 1996 decreased
$300,000, or 16.0%, to $1.6 million or 13.0% of total revenue, from $1.9 million
or 17.0% of total revenue in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements generally increase proportionately to
the change in earning assets. During 1996, total average receivables purchased
increased by $6.6 million, from $40.1 million in 1995 to $46.7 million in 1996,
and loans receivable increased from $5.6 million at year-end 1995 to $27.4
million at year-end 1996. The Company continues to expand its portfolio of
earning assets through the expansion of its product line, such as collateralized
loan facilities and the addition of services related to the purchase or
servicing of accounts receivable.
KBK maintained a $75 million, multi-bank line of credit ("Credit
Facility") which had $58 million outstanding and $65 million committed at
December 31, 1996, $25 million more than the $33 million outstanding at December
31, 1995.
The Credit Facility contains two subfacilities with separate borrowing
base limits for each subfacility. Fifty million dollars of the Credit Facility
is available to support KBK's purchased accounts receivables, and the remaining
$25 million is available to fund term loans. The Credit
<PAGE>
Facility at year-end 1996 provided for maximum borrowings of the lesser of (i)
$65 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 accounts
receivable 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 portion of the Credit Facility supported by term
loans to KBK's clients 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 effectively secured by all
tangible assets of KBK including all purchased accounts receivable and all term
loans owned by KBK and are subject to certain borrowing base limitations based
upon the nature of the underlying collateral. 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, and an interest coverage ratio which requires
that KBK's ratio of 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 in any fiscal year by KBK to the
lesser of (i) KBK's after tax income for such fiscal year or (ii) the sum of
50.0% of the amount by which KBK's after tax income and the cumulative amount of
dividends permitted to be paid under such tests, but not so paid. Thus, KBK is
effectively restricted in its ability to pay cash dividends to the Company for
the repurchase of stock by the Company. Under the terms of the Credit Facility,
the limitation on dividends by KBK to the Company at December 31, 1996 was
$313,000. At year-end 1996, KBK was not in compliance with its borrowing base
limitations under the Credit Facility. Concentrations in several of KBK's
largest clients resulted in borrowings in excess of the eligible borrowing base
by approximately $4 million. The Company has received waivers for the technical
default from the bank group and an amendment to the Credit Facility ("Over
Advance Facility") to allow for greater client concentration limits under the
borrowing base. The Over Advance Facility allows up to $5 million in additional
borrowing base availability to fund amounts in excess of concentration limits,
but does not increase the total committed amount of the Credit Facility
outstanding at year-end. Borrowings under the amended Credit Facility, to the
extent of the expanded concentration limits in the borrowing base, bear interest
at the banks' prime rate plus 1.5%. Until the Credit Facility was amended, KBK
possessed sufficient cash resources to fund new and existing receivables due to
the collection of the increased receivable balances outstanding at year-end.
Future sources of liquidity to fund growth in earning assets are expected to
come primarily from securitization of earning assets, as well as from
traditional bank financing.
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 year-end 1996) of the Company's common
stock at the current market price. At December 31, 1996, 237,067 shares (net of
50,000 shares issued to the former Coastal shareholders) of common stock had
been placed in the treasury at a cost of $1.5 million. All of such purchases
have been funded out of earnings and general funds of the Company. Had the
Company not repurchased shares during the year, the cost of repurchasing shares
may have been available to reduce debt; consequently, the stock repurchase
program may have had the result of increasing the outstanding balance under the
Credit Facility.
<PAGE>
The increase in outstanding loans and accounts receivable purchased for
the year ended December 31, 1996 resulted in $16 million and $21 million of net
cash being utilized by the Company's business operations. The Company
anticipates that, at certain times during 1997, it may use the entire committed
portion under the Credit Facility. If the borrowing base is adequate, the
Company believes that it could increase the committed portion of the Credit
Facility. However, such increase is subject to approval of each of the Credit
Facility banks. The Company has also engaged in continuing discussions with
respect to the structure and execution of a securitization program, pursuant to
which KBK would, from time to time, transfer or sell purchased accounts
receivable 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 purchased accounts
receivable would provide it with access to capital at attractive rates and in
amounts which would support substantial growth in the level of accounts
receivable purchased.
The Company expended $1.2 million and $799,000 on premises and equipment
in 1996 and 1995, respectively, principally in connection with upgrades to its
management information systems, computer equipment, office furniture and
equipment, and leasehold improvements. The Company funded such expenditures from
internally generated funds or borrowings under the Credit Facility. The Company
plans to continue to enhance systems for providing, tracking and supporting new
products.
CHANGES IN FINANCIAL CONDITION
Total assets increased 44% to $89.7 million at December 31, 1996. This
growth was the result of the $14.7 million increase in purchased receivables and
the $21.8 million increase in loans receivable outstanding at December 31, 1996
due to increased borrowings. The Company's allowance for credit losses stood at
$1.6 million on December 31, 1996, 1.9% of gross outstanding receivables or 2.7%
of average receivables. At year-end 1995, the reserve for credit losses was $1.7
million, 3.7% of gross outstanding receivables or 4.1% of average receivables.
Management believes that the Company's allowance for credit losses is adequate
at December 31, 1996 and 1995. Although average assets increased 40% in 1996
over 1995, fluctuation of outstanding purchased receivable balances decreased in
1996 due to the addition of loans receivable which enhance the stability of the
balance sheet and subject the Company to less of the seasonality inherent in
purchased accounts receivable. Such stability in the balance sheet provides more
earnings certainty and also improves the long-term relationship with the
Company's client base.
The balance of the deferred tax asset (included in other assets) of
$427,000 at year-end 1996 decreased by 21.0% from the 1995 balance of $540,000
largely due to the decrease in the deferred tax asset related to the temporary
differences for book and tax purposes in the deductibility of provisions for
credit losses.
KBK Capital Corporation and Subsidiary
Consolidated Statements of Income
Years Ended December 31
-----------------------
_______________________________________________________________________________
1996 1995
Earned discount income $ 9,777,834 $ 10,634,283
Interest income - Loans 1,368,828 143,834
Other Income - Fees 1,054,669 166,515
---------------------------
Total revenue 12,201,331 10,944,632
Interest expense 2,590,257 1,652,401
---------------------------
Income after interest expense 9,611,074 9,292,231
Provision for credit losses (note 3) 245,000 600,000
---------------------------
Income after interest expense and
provision for credit losses 9,366,074 8,692,231
Operating expenses:
Salaries and employee benefits 3,545,033 2,996,482
Amortization of intangible assets 361,529 410,045
Occupancy and equipment 846,542 587,441
Professional fees 343,920 583,665
Other 1,811,713 1,089,433
---------------------------
Total operating expenses 6,908,737 5,667,066
---------------------------
Income before income taxes 2,457,337 3,025,165
Income tax expense (benefit):
Federal (note 7):
Current 882,261 1,078,941
Deferred (45,524) 14,042
State 69,358 83,689
---------------------------
Total income taxes 906,095 1,176,672
Net income $ 1,551,242 $ 1,848,493
---------------------------
Net income per share $ .45 $ .51
_______________________________________________________________________________
Weighted-average common shares 3,435,838 3,659,137
_______________________________________________________________________________
See accompanying notes to consolidated financial statements.
<PAGE>
December 31 December 31
------------------------------
1996 1995
____________________________________________________________________________
ASSETS
Cash $ 1,361,225 $ 11,520,969
Accounts receivable (notes 3 and 5) 55,584,786 40,874,377
Loans receivable, net (notes 3 and 5) 27,375,655 5,609,709
Less allowance for credit losses (1,608,253) (1,729,171)
-----------------------------
Total receivables, net 81,352,188 44,754,915
Premises and equipment, net of accumulated
depreciation of $878,646 and
$514,624 at December 31, 1996
and 1995, respectively (note 4) 1,952,568 1,238,625
Intangible assets less accumulated
amortization of $1,529,024 and
$1,167,495 at December 31, 1996
and 1995, respectively (note 2) 3,710,397 3,838,174
Other assets (note 7) 1,370,113 859,615
-----------------------------
$ 89,746,491 $ 62,212,298
_____________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank line of credit (note 5) $ 58,000,000 $ 33,000,000
Due to factored clients (note 6) 8,245,544 7,217,162
Accounts payable and other liabilities 1,135,067 478,701
Income taxes payable -- 228,879
Deferred revenue 225,965 --
------------------------------
Total liabilities 67,606,576 40,924,742
Stockholders' equity (notes 8 and 9):
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 and
3,397,200 shares at December
31, 1996 and 1995 35,472 35,472
Additional paid-in capital 16,370,555 16,500,555
Retained earnings 7,236,521 5,685,279
Treasury stock (1,502,633) (933,750)
------------------------------
Total stockholders' equity 22,139,915 21,287,556
Commitments and contingencies
(notes 2, 5, 8, 9, 10, 11) -- --
------------------------------
$ 89,746,491 $ 62,212,298
____________________________________________________________________________
See accompanying notes to consolidated financial statements.
<PAGE>
KBK Capital Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the Years ended December 31, 1996 and 1995
<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 at December 31, 1994 3,547,200 $ 35,472 $ 16,501,754 $ 3,836,786 $ -- $ 20,374,012
Purchase of stock for treasury
(note 8) (150,000) -- -- -- (933,750) (933,750)
Offering expenses -- -- (1,199) -- -- (1, 199)
Net income for 1995 -- -- -- 1,848,493 -- 1,848,493
---------- --------- -------------- ----------- ------------- ---------------
Balance at December 31, 1995 3,397,200 $ 35,472 $ 16,500,555 $ 5,685,279 $ ( 933,750) $ 21,287,556
Purchase of stock for treasury
(note 8) (137,067) -- -- -- (886,383) (886,383)
Issuance of common stock
(note 2) 50,000 -- (130,000) -- 317,500 187,500
Net income for 1996 -- -- -- 1,551,242 -- 1,551,242
---------- --------- -------------- ----------- ------------- ---------------
Balance at December 31, 1996 3,310,133 $ 35,472 $ 16,370,555 $ 7,236,521 $(1,502,633) $ 22,139,915
</TABLE>
________________________________________________________________________________
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,551,242 $ 1,848,493
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation and amortization 739,901 638,284
Provision for credit losses 245,000 600,000
Decrease (increase) in accounts receivable (15,612,727) 10,795,409
Decrease (increase) in other assets (556,751) 74,479
Increase (decrease) in due to factored clients 1,028,382 (2,967,715)
Increase in accounts payable and other liabilities 656,366 391,432
Increase (decrease) in income taxes payable (228,878) 228,879
Increase in deferred revenue 225,965 --
-------------- --------------
Net cash provided by (used in) operating activities $ (11,951,500) $ 11,609,261
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable and
employee advances, net $ (21,229,546) $ (5,368,468)
Purchases of premise and equipment (1,246,091) (798,649)
Proceed from sale of assets 160,410 --
Gain on sale of assets (6,634) --
Repurchase of common stock (886,383) (933,750)
-------------- --------------
Net cash used in investing activities $ (23,208,244) $ (7,100,867)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from the bank $ 25,000,000 $ 3,073,875
Repayments of payable to former stockholder -- (375,000)
Net decrease in commercial paper -- (132,405)
Offering expenses -- (1, 199)
-------------- --------------
Net cash provided by financing activities $ 25,000,000 $ 2,565,271
-------------- --------------
Net increase (decrease) in cash (10,159,744) 7,073,665
Cash at beginning of period 11,520,969 4,447,304
-------------- --------------
Cash at end of period $ 1,361,225 $ 11,520,969
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,703,861 $ 1,652,868
Income taxes paid $ 1,165,000 $ 625,000
</TABLE>
See accompanying notes to consolidated financial statements.
KBK Capital Corporation and Subsidiary
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements presented herein reflect consolidated statements
for KBK Capital Corporation (the "Company") and its wholly owned subsidiary, KBK
Financial, Inc., ("KBK"). In June of 1994, the Company sold 949,500 shares of
common stock in an initial public offering at a price to the public of $10.50
per share. Net proceeds from such sale were $8,626,033. On December 30, 1994,
the Company acquired the stock of Coastal Financial Resources, Inc. ("Coastal"),
for 400,000 shares of the Company's common stock in a transaction accounted for
using the purchase method of accounting. Coastal was merged into KBK
simultaneously with its acquisition. All material intercompany balances and
transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles ("GAAP") and to practices within the finance
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the statement of financial condition
and revenues and expenses for the period. The Company provides financial
services primarily through the discounted purchase of accounts receivable and
the extension of credit secured by assets ("asset-based lending").
Earned Discount Income and Interest Income
Variable discount income from accounts receivable and interest income
from loans receivable are recorded on an accrual basis in accordance with the
terms of the agreements. Fixed discounts from accounts receivable are earned in
the month in which the receivables are purchased. The financial result of this
method of recognizing such fixed discounts does not differ materially from the
accrual method utilized in recognizing variable discounts.
Loans Receivable
Loans receivable are recorded at cost, less the related allowance for
impaired notes receivable. Management, considering current information and
events regarding the borrowers ability to repay their obligations, considers a
note to be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the note
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based upon the present value of expected future cash
flows discounted at the note's effective interest rate. Impairment losses are
included in the allowance for credit losses through a charge to provision for
credit loss expense. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been recovered
and are recognized as interest income, thereafter. Prior periods have not been
restated.
Allowance for Credit Losses
The allowance for credit losses represents the provision charged to
operations, less accounts receivable or loans receivable charged off, net of
recoveries. The allowance for credit losses is an amount which, in the judgment
of management, is adequate to absorb the estimated losses from accounts
receivable or loans receivable on the Company's books. The amount of credit loss
provision is set with reference to the adequacy of the allowance. Management's
periodic evaluation of the adequacy of the allowance is based upon the Company's
past credit loss experience, known and inherent risks in the receivables,
adverse situations that may affect the account debtors' ability to pay or the
potential for additional costs to perfect title to collateral, ability to
repurchase receivables in breach of warranty circumstances, and current and
prospective economic situations.
Management continually reviews the receivables portfolio to identify
account debtors or client relationships which, with respect to the accounts
receivable, discounts, or loans receivable have or may become collection
problems. When any credit relationship involving an account debtor or a client
becomes doubtful as to collection of discount or interest income, the account is
placed on non-accrual status. Any discount or interest income accrued during the
current year, but not received at the time its collectability becomes doubtful,
is reversed in that year to the extent deemed uncollectable. Additional
discounts and interest accrued in prior years which are subsequently determined
to have doubtful collectability are charged to the allowance for credit losses.
Payments of discount and interest income subsequently received on credit
relationships classified as non-accrual are recognized as received. After a
credit relationship is placed on non-accrual status, no income is accrued until
circumstances indicate that such income is collectable.
Premises and Equipment
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed primarily using the straight-line method
over the useful lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation is removed from the
accounts and any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to expense as incurred.
Intangible Assets
Goodwill, which represents the excess of purchase price over the fair
value of net assets acquired, is amortized on a straight-line basis over fifteen
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through the operating cash flows of the acquired business.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
The noncompetition agreement is amortized on a straight-line basis over
the life of the agreement. The agreement was extended an additional thirty-six
months in the fourth quarter of 1995, its term now ending March 31, 2005.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company files a consolidated Federal income tax return and reflects a
consolidated tax provision.
Net Income Per Share
Net income per share is calculated by dividing net income by the
weighted-average number of common shares and common stock equivalents
outstanding during each year. Stock options and the warrants to purchase stock
have been determined to be common stock equivalents and are, therefore,
considered in net income per share calculations. The dilutive effect of common
stock equivalents is computed using the treasury stock method.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, due to factored
clients and accounts payable and accrued liabilities approximates fair value
because of the short maturity of these instruments. The carrying value of loans
receivable approximates fair value because the loans are earning interest at
floating rates which approximate rates currently offered by local lending
institutions for loans of similar terms to companies with comparable credit
risk. The carrying value of the Company's bank debt approximates fair value
because it bears interest at floating rates that are similar to current
borrowing rates for loans of comparable maturity and credit risk and because of
the short maturities of the LIBOR tranches of the line of credit.
(2) ACQUISITIONS AND SUPPLEMENTAL CASH FLOW INFORMATION
On December 30, 1994, the Company purchased 100% of the outstanding common
stock of Coastal ("Acquisition") from its prior owners, pursuant to a stock
exchange agreement. The Acquisition was accounted for using the purchase method
of accounting and, accordingly, the purchase price was allocated to assets and
liabilities based upon their estimated fair value as of the date of acquisition.
At December 31, 1994, goodwill of $2,181,283 was recorded as a result of the
Acquisition. During 1996, the purchase agreement (the "Agreement") related to
the Coastal acquisition was amended to expand the definition of attributable
earnings pursuant to the Agreement for purposes of determining the issuance of
additional shares to former Coastal shareholders under an earnout provision of
the Agreement. For the year ended December 31, 1996, the criteria for the
earnout provision were met, and 50,000 shares of common stock of the Company
were issued from treasury shares to the former Coastal shareholders at an
average cost of $6.35 per share. This had the effect of increasing goodwill by
$187,500. During 1995, the Company recorded a deferred tax asset of
approximately $293,000 related to the Acquisition. In addition, the Company
recorded costs of approximately $170,000 directly related to the Acquisition.
These transactions resulted in a net decrease in goodwill of approximately
$123,000 at December 31, 1995. In 1992, the Company entered into a
noncompetition agreement with the previous owners of KBK. The noncompetition
agreement, originally effective for ten years subsequent to April 1, 1992, was
amended to be effective through March 31, 2005. The consideration for the
noncompetition agreement was $2,250,000 and was paid in twelve quarterly
installments of $187,500 each. The final two of these installments were paid in
the first quarter of 1995.
(3) RECEIVABLES
Receivables at December 31, 1996 and 1995 are summarized as follows:
1996 1995
---- ----
Accounts receivable $55,584,786 $ 40,874,377
Loans receivable 30,839,703 5,375,467
Less participation (3,868,117) --
Employee advances 404,069 234,242
82,960,441 46,484,086
---------- ----------
Less allowance for credit losses 1,608,253 1,729,171
---------- ----------
$81,352,188 $ 44,754,915
========== ==========
Accounts receivable are purchased from clients engaged in a variety of
industries including, but not limited to, engineering and construction, energy,
manufacturing, transportation, marketing and personnel-related companies. The
two largest clients represent 13.9% and 8.4%, respectively, of total receivables
or 52.2% and 31.6%, respectively, of equity at December 31, 1996. The Company's
clients are primarily located in Texas, California, and Louisiana but have
debtors nationwide. At December 31, 1996, approximately 23.4% and 17.3% of the
outstanding accounts receivable were purchased from clients in manufacturing,
engineering and construction-related industries, respectively.
The two largest debtors at December 31, 1996, had outstanding accounts
receivable of $1,987,000 and $1,384,000 which represented approximately 3.6% and
2.5%, respectively, of the total outstanding accounts receivables at that date.
Accounts receivable generally have terms of 30 days and are normally
collected within 30 to 60 days from the date of purchase. Loans receivable are
collateralized by equipment, inventory, and accounts receivable, and generally
guaranteed by the individual or corporate owners of the business.
The following is an analysis of the activity in the allowance for credit
losses:
Years Ended December 31
-----------------------
1996 1995
---- ----
Balance at beginning of period $1,729,171 $ 1,658,429
Provision for credit losses 245,000 600,000
Charge-offs (404,166) (541,531)
Recoveries 38,248 12,273
---------- -----------
Balance at end of period $1,608,253 $ 1,729,171
____________________________________________________________
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 are summarized as
follows:
Estimated
useful lives
1996 1995 in years
_____________________________________________________________
Office equipment $2,705,084 $1,618,083 3-7
Automotive 75,833 90,960 5
Leasehold improvements 50,297 44,206 2-10
---------- ---------- ------
$2,831,214 $1,753,249
Less accumulated
depreciation 878,646 514,624
---------- ---------- ------
$1,952,568 $1,238,625
_____________________________________________________________
(5) BANK LINE OF CREDIT
At December 31, 1996, KBK had a multi-bank revolving line of credit
("Credit Facility"), maturing on April 30, 1999 and bearing interest at the
banks' prime rate or LIBOR plus 1.5%, at the election of KBK, and secured
primarily by KBK's accounts receivable. At December 31, 1995, the outstanding
indebtedness under this Credit Facility was $33,000,000 ($14,000,000 at an
interest rate of 8.5%, $5,000,000 at 7.3%, and $14,000,000 at 7.4%). In May of
1996, this Credit Facility was increased to $75 million with up to $50 million
available to fund accounts receivable and up to $25 million available to fund
loans receivable. At December 31, 1996, $65,000,000 was committed with
outstanding indebtedness of $58,000,000 ($14,000,000 at an interest rate of
$8.25%, $21,000,000 at 6.93%, $16,500,000 at 7.04% and $6,500,000 at 7.18%). 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, an interest coverage
ratio and restrictions on payments of dividends. The Credit Facility also
provides for a borrowing base against eligible receivables and eligible loans
pursuant to the terms of the Credit Facility. Primarily due to the
concentrations in several of its largest clients at year-end, KBK exceeded its
borrowing base by approximately $4,000,000 and was in default. This default was
subsequently waived by the bank group and an amendment to the Credit Facility
("Over Advance Facility") allowing greater concentration limits under the
borrowing base was executed. The Over Advance Facility amendment allows up to
$5,000,000 in additional borrowing base limits, but does not increase the
overall committed amount of the Facilities outstanding at year-end. Borrowings
under this section of the Amended Credit Facility would bear interest at the
banks' prime rate plus 1.5%. Due to subsequent collections in purchased
receivables through repayments occurring after year-end 1996, KBK possessed
sufficient cash resources to fund new and existing facilities until the Credit
Facility was amended.
The following is an analysis of the activity under the line of credit for
the periods indicated:
Years Ended December 31
-------------------------
1996 1995
____________________________________________________________
Average amount outstanding $ 34,713,000 $ 19,792,000
____________________________________________________________
Maximum outstanding as of
any month-end $ 58,000,000 $ 33,000,000
____________________________________________________________
Weighted-average interest rate 7.5% 7.8%
____________________________________________________________
(6) DUE TO FACTORED CLIENTS
The Company typically pays less than the face value of the invoice at the
time a receivable is purchased from a client. Upon collection of the purchased
invoices, amounts collected in excess of discount income and the initial payment
are remitted to clients. Such amounts may, in some instances, be applied to
offset uncollected account balances due to clients' breach of representations or
warranties.
(7) INCOME TAXES
The tax effects of temporary differences that give rise to the deferred
tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995
____________________________________________________________
Deferred tax assets:
Allowance for credit losses $ 546,806 $ 587,918
Deferred tax liabilities:
Premises and Equipment,
due to differences
in depreciation (119,561) (47,710)
____________________________________________________________
Net deferred tax asset $ 427,245 $ 540,208
____________________________________________________________
No valuation allowance has been established for the deferred tax assets
at December 31, 1996 or 1995 as management believes that realizability of such
assets is more likely than not. The income tax expense was different than the
amount computed by using the U.S. Federal income tax rate of 34.0% as a result
of the following:
Years Ended December 31
-------------------------
1996 1995
____________________________________________________________
Computed "expected" tax expense $835,495 $1,028,556
Nondeductible amortization 44,401 60,897
State Income Tax, net 45,776 55,234
Other, net (19,577) 31,98
____________________________________________________________
$906,095 $1,176,672
____________________________________________________________
(8) STOCKHOLDERS' EQUITY
In connection with the Company's initial public offering in June 1994,
the Company sold 949,500 shares of common stock in an initial public offering at
a price to the public of $10.50 per share. Net proceeds to the Company after
underwriting, legal, accounting and other offering expenses were $8,626,000. As
discussed in note 2, on December 30, 1994, the Company issued 400,000 shares of
common stock in connection with the acquisition of Coastal. Pursuant to the
Stock Repurchase Plan initiated in 1995, the Company has acquired 237,067 shares
of Treasury Stock at a cost of $1,503,000, net of 50,000 shares of stock issued
to Coastal (note 2) through December 31, 1996.
(9) STOCK OPTION PLANS
In 1994, the stockholders approved the 1994 Stock Option Plan for the
benefit of the employees and non-employee directors. Such plan replaced both
plans previously adopted by the Board and the stockholders. This plan authorizes
the Company to grant incentive options or options which do not constitute
incentive options and an automatic grant of options which do not constitute
incentive options to non-employee directors. This plan is administered by a
committee appointed by the Board of Directors. The aggregate number of shares
which may be issued under this plan shall not exceed 400,000 shares of common
stock of the Company. Such options become exercisable ratably over five years
from the date of grant and expire ten years from the grant date if not
exercised.
At December 31,1996, there were 70,500 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1996 and 1995 was $4.00 and $3.41 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1996 expected dividend yield 0%, expected volatility of 45%,
risk-free interest rate of 6%, and an expected life of 8 years; 1995 - expected
dividend yield 0%, expected volatility of 45%, risk-free interest rate of 6%,
and an expected life of 9 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
upon the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
1996 1995
________________________________________________________________________________
Net Income As reported $ 1,551,000 $ 1,848,000
Pro Forma $ 1,497,000 $ 1,838,000
Net Income Per Share As Reported $ .45 $ .51
Pro forma $ .44 $ .50
________________________________________________________________________________
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of 10 years and compensation cost for options granted prior to January 1,
1995 is not considered.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
___________________________________________________________
Balance at December 31, 1994 184,500 $ 6.87
Granted 40,000 5.38
Exercised -- --
Forfeited (26,000) 7.91
___________________________________________________________
Balance at December 31, 1995 198,500 6.43
Granted 188,000 6.31
Exercised -- --
Forfeited (57,000) 6.89
___________________________________________________________
Balance at December 31, 1996 329,500 6.28
The following tables summarize information about stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING
__________________________________________________________________
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price
__________________________________________________________________
$4.06 to $5.50 130,000 7.89 years $5.05
$6.00 to $7.25 171,000 8.57 6.77
$9.00 28,500 6.53 9.00
__________________________________________________________________
$4.06 to $9.00 329,500 8.12 6.28
__________________________________________________________________
OPTIONS EXERCISABLE
__________________________________________________________________
Number
Range of Exercisable Weighted-Average
Exercise Prices at 12/31/96 Exercise Price
$4.06 to $5.50 54,800 $5.27
$6.00 to $7.25 49,000 6.54
$9.00 19,800 9.00
__________________________________________________________________
$4.06 to $9.00 123,600 6.37
__________________________________________________________________
At December 31, 1996 and 1995, the number of options exercisable was
123,600 and 89,100, respectively, and the weighted-average exercise price of
those options was $6.37 and $6.67, respectively.
(10) COMMITMENTS
The Company has several noncancelable operating leases for office space.
Total rent expense incurred was $468,000 and $359,000, during 1996 and 1995. At
December 31, 1996, future minimum payments on noncancelable operating leases are
as follows:
Year Ended Year Ended
December 31 December 31
- - -------------------------- -----------------------
1997 $ 507,415 2000 $465,024
1998 471,828 2001 465,024
1999 465,024 Thereafter 647,845
(11) FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK The Company may have
limited off-balance sheet risk due to agreements
with clients. In certain circumstances, the Company may have a commitment to
continue purchasing accounts receivable from a client during a 30-day notice
period. A notice of termination of the agreement is required, under some
conditions, before the agreement may be terminated.
The Company's exposure to credit loss with respect to future purchases of
accounts receivable, in the event of nonperformance by the other party, does not
exceed the amounts to be considered for purchase. The Company uses its
established credit policies to consider committing to purchase accounts
receivable, and all future purchases of receivables are contingent on the
individual clients maintaining specific credit and other standards at the time
of the purchase funding. The Company has $1,352,000 of outstanding letters of
credit at December 31, 1996.
The Company's average receivable purchases in a 30-day period (considered
to be the maximum future purchase commitment, although not a contractual
obligation) pursuant to its normal business practice were approximately
$34,600,000 and $31,493,000 for 1996 and 1995, respectively.
(12) INVESTMENT PLAN
In January of 1996, the Company adopted a defined contribution plan ("the
"Plan") that is a qualified plan under Section 401(k) of the Internal Revenue
Code for the benefit of KBK employees. The Plan is available to substantially
all employees with at least six months of employment. Employee contributions are
voluntary. The Company may, at the discretion of the Board, annually elect to
match some portion of employee contributions to this Plan. The Company currently
matches 25% of every employee contribution subject to a 4% salary limit. The
Company's contributions to the Plan totalled $20,000 for the year ended December
31, 1996.
KBK CAPITAL CORPORATION AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KBK CAPITAL CORPORATION:
We have audited the accompanying consolidated balance sheets of KBK Capital
Corporation and subsidiary (the Company) as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based upon our audits. We
conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KBK Capital
Corporation and subsidiary at December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Fort Worth, Texas
January 24, 1997, except as to note 5
which is March 6, 1997
KBK CAPITAL CORPORATION AND SUBSIDIARY
QUARTERLY SUMMARY RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YTD 1996 YTD 1995
---- ----
1996 4TH QTR 3RD QTR 2ND QTR 1ST QTR 1995 4TH QTR 3RD QTR 2ND QTR 1ST QTR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE EARNING ASSETS ......... $56,480 $71,066 $56,486 $54,793 $44,490 $39,550 $44,162 $41,195 $37,913 $39,453
-------------------------------------------------------------------------------------------------
Revenue ........................ $12,201 $ 3,590 $ 3,070 $ 2,938 $ 2,603 $10,945 $ 3,143 $ 2,890 $ 2,541 $ 2,371
Interest Expense ............... 2,590 939 676 567 408 1,653 396 378 402 477
Operating Expenses ............. 6,909 2,080 1,828 1,579 1,422 5,667 1,614 1,409 1,296 1,348
-------------------------------------------------------------------------------------------------
Operating profit ............... 2,702 571 566 792 773 3,625 1,133 1,103 843 546
Provision for credit losses . 245 100 105 10 30 600 105 370 100 25
-------------------------------------------------------------------------------------------------
Pretax Income .................. 2,457 471 461 782 743 3,025 1,028 733 743 521
Taxes ....................... 906 181 179 267 279 1,177 389 288 300 200
-------------------------------------------------------------------------------------------------
Net Consolidated Income ........ $ 1,551 $ 290 $ 282 $ 515 $ 464 $ 1,848 $ 639 $ 445 $ 443 $ 321
-------------------------------------------------------------------------------------------------
PRIMARY EPS .................... $ 0.45 $ 0.09 $ 0.08 $ 0.15 $ 0.13 $ 0.51 $ 0.18 $ 0.12 $ 0.12 $ 0.09
-------------------------------------------------------------------------------------------------
</TABLE>
KBK CAPITAL CORPORATION AND SUBSIDIARY
CORPORATE INFORMATION
EXECUTIVE COMMITTEE
The membership of the Executive Committee is comprised of the Chairman of each
of the Director's Committees and meets monthly. The Committee may exercise all
of the powers of the Board of Directors of the Company in between scheduled
Board meetings.
CHAIRMAN: ROBERT J. MCGEE
MEMBERS: DANIEL R. FEEHAN THOMAS M.SIMMONS
THOMAS L. HEALEY HARRIS A. KAFFIE
COMPENSATION COMMITTEE
The Committee consists solely of non-employee directors and is responsible for
the establishment of policies and administration of compensation and employee
benefit matters, including compensation of the Chief Executive Officer and other
executive officers.
CHAIRMAN: THOMAS M. SIMMONS
MEMBERS: DANIEL R. FEEHAN
NOMINATING COMMITTEE
The Committee is comprised of one non-employee director and the Chief Executive
Officer and provides recommendations to the full Board of Directors for nominees
to serve as Directors of the Company.
CHAIRMAN: ROBERT J. MCGEE
MEMBERS: THOMAS M. SIMMONS
For a copy of the Company's Annual Report, Form 10-KSB or additional
information, please write:
Kathy S. Snook
Investor Relations Coordinator
KBK Capital Corporation
2200 City Center II
301 Commerce Street
Fort Worth, Texas 76102
(817) 258-6000
PER SHARE MARKET DATA*
QUARTER 1996 1995
- - ------- ---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First $ 7.50 $ 6.50 $ 9.50 $ 6.25
Second 7.63 6.38 8.00 4.50
Third 7.38 4.88 7.00 4.88
Fourth 5.25 3.94 6.75 5.75
KBK CAPITAL CORPORATION AND SUBSIDIARY
AUDIT COMMITTEE
The Committee is comprised solely of non-employee directors and meets separately
with the Company's independent auditors and senior management on matters related
to the Company's internal control systems, accounting policies and the selection
and approval of the Company's independent auditors.
CHAIRMAN: DANIEL R. FEEHAN
MEMBERS: THOMAS L. HEALEY THOMAS M. SIMMONS
MARKETS COMMITTEE
The Committee approves new products, geographic markets, pricing and strategy
relating to the market and competitive focus of the Company.
CHAIRMAN: HARRIS A. KAFFIE
MEMBERS: MARTHA V. LEONARD R. EARL COX, III
ASSET QUALITY COMMITTEE
The Committee is responsible for oversight and review of the Company's portfolio
quality and adequacy of the allowance for possible credit losses and approval of
any commitments that may exceed management's "House Limits."
CHAIRMAN: THOMAS L. HEALEY
MEMBERS: R. EARL COX, III DANIEL R. FEEHAN
KBK CAPITAL CORPORATION
CORPORATE OFFICES:
2200 City Center II
301 Commerce Street
Fort Worth, Texas 76102
Telephone: (817) 258-6000
Fax: (817) 258-6100
INTERNET ADDRESS:
http://www.kbkcapital.com
http://www.kbkfinancial.com
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,361,225
<SECURITIES> 0
<RECEIVABLES> 82,960,441
<ALLOWANCES> (1,608,253)
<INVENTORY> 0
<CURRENT-ASSETS> 5,080,510
<PP&E> 2,831,214
<DEPRECIATION> 878,646
<TOTAL-ASSETS> 89,746,491
<CURRENT-LIABILITIES> 67,606,576
<BONDS> 0
0
0
<COMMON> 35,472
<OTHER-SE> 22,104,443
<TOTAL-LIABILITY-AND-EQUITY> 89,746,491
<SALES> 0
<TOTAL-REVENUES> 12,201,331
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,908,737
<LOSS-PROVISION> (245,000)
<INTEREST-EXPENSE> 2,590,257
<INCOME-PRETAX> 2,457,337
<INCOME-TAX> 906,095
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,551,242
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
