<PAGE> 1
1,500,000 TRUST PREFERRED SECURITIES
KBK CAPITAL TRUST I
9.50% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER TRUST PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
KBK CAPITAL CORPORATION
The 9.50% Trust Preferred Securities (the "Trust Preferred Securities")
offered hereby represent preferred undivided beneficial ownership interests in
the assets of KBK Capital Trust I, a statutory business trust formed under the
laws of the State of Delaware (the "Trust"). KBK Capital Corporation, a Delaware
corporation (the "Company" or "KBK"), will own all of the common securities (the
"Trust Common Securities" and, together with the Trust Preferred Securities, the
"Trust Securities") representing subordinated undivided beneficial ownership
interests in the assets of the Trust. The Trust exists for the sole purpose of
issuing the Trust Securities, making distributions to the holders thereof and
investing the proceeds as described below and engaging in activities incidental
thereto. The proceeds from the sale of the Trust Preferred Securities (including
the proceeds, if any, from the exercise of the Underwriters' over-allotment
option) together with the proceeds from the issuance to KBK of the Trust Common
Securities will be used by the Trust to purchase 9.50% Subordinated Debentures
of KBK due 2028 (the "Debentures").
The Trust Preferred Securities have been approved for listing on the
American Stock Exchange, subject to official notice of issuance, under the
symbol "KBK.Pr".
(continued on next page)
------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE TRUST PREFERRED
SECURITIES.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC(1) COMMISSIONS(2) TO TRUST(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Trust Preferred Security.................... $10.00 (4) $10.00
- ------------------------------------------------------------------------------------------------------------
Total(5)........................................ $15,000,000 (4) $15,000,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accumulated distributions, if any, from November 20, 1998.
(2) The Trust and the Company have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses of the offering payable by the Company, estimated
at $537,500.
(4) In view of the fact that the proceeds of the sale of the Trust Preferred
Securities will be ultimately invested in investment instruments of the
Company, the Underwriting Agreement provides that the Company will pay to
the Underwriters, as compensation for their services, $0.375 per Trust
Preferred Security (or $562,500 in the aggregate) (the "Underwriters'
Compensation"). See "Underwriting."
(5) The Trust has granted the Underwriters an option for 30 days to purchase up
to an additional 225,000 Trust Preferred Securities at the price to public
solely to cover over-allotments. If such option is exercised in full, the
total price to public, aggregate Underwriters' Compensation and proceeds to
the Trust will be $17,250,000, $646,875 and $17,250,000, respectively. See
"Underwriting."
------------------------------------
The Trust Preferred Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that delivery of the Trust Preferred Securities will be made only in book-entry
form through the facilities of The Depository Trust Company ("DTC") on or about
November 20, 1998.
------------------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. J.J.B. HILLIARD, W.L. LYONS, INC.
NOVEMBER 17, 1998
<PAGE> 2
Holders of the Trust Preferred Securities will be entitled to receive
cumulative cash distributions accumulating from the closing of this offering and
payable quarterly in arrears on each February 28, May 31, August 31 and November
30, commencing February 28, 1999, at an annual rate of 9.50% of the liquidation
amount of $10 per Trust Preferred Security (equivalent to $0.95 per Trust
Preferred Security per annum), if, as and when the Trust has funds available for
payment. See "Description of the Trust Preferred Securities -- Distributions."
Distributions not paid on the scheduled payment date will accumulate and
compound quarterly at a rate per annum equal to 9.50% and, except to the extent
the context otherwise requires, when used herein the term "distributions"
includes any such additional amounts. The distribution rate and the distribution
payment dates and other payment dates for the Trust Preferred Securities will
correspond to the interest rate and interest payment dates and other payment
dates for the Debentures, which will be the principal assets of the Trust. The
Debentures will provide that payments of interest may be deferred at any time,
and from time to time, by KBK for a period not exceeding 20 consecutive quarters
(referred to herein as an "Extension Period"). During any extension period,
holders of Trust Preferred Securities will recognize original issue discount
("OID"). See "Certain Federal Income Tax Consequences -- Interest Income and
Original Issue Discount."
The payment of distributions by the Trust and payments on liquidation of
the Trust or the redemption of Trust Preferred Securities, as described below,
are guaranteed on a subordinated basis by the Company (the "Guarantee") to the
extent the Trust has funds available therefor as described under "Description of
the Guarantee." The Company's obligation under the Guarantee is subordinate and
junior in right of payment to all other liabilities of the Company (except for
the guarantee of the Trust Common Securities (as defined herein)) and ranks pari
passu with the most senior preferred stock, if any, issued from time to time by
the Company. The Company's obligations under the Debentures are subordinate and
junior in right of payment to all Senior Debt (as defined herein) of the
Company. As of November 16, 1998, after giving effect to this offering and the
application of the net proceeds therefrom (assuming the Underwriters'
over-allotment option is not exercised), the Company would have had
approximately $34.8 million of Senior Debt outstanding. See "Risk
Factors -- Ranking of Subordinate Obligations under the Guarantee and the
Debentures." The term "Senior Debt" means any indebtedness of the Company,
except for trade credit and any such indebtedness that is by its terms
subordinated to or pari passu with the Debentures, as the case may be. See
"Description of the Debentures -- Subordination."
The Company has covenanted in the Guarantee that, if (a) for any
distribution period, full distributions on a cumulative basis on any Trust
Preferred Securities have not been paid or declared and set apart for payment,
(b) an event of default has occurred and is continuing under the indenture under
which the Debentures are issued (the "Subordinated Indenture"), (c) the Company
is in default of its obligations under the Guarantee or the guarantee of the
Trust Common Securities, or (d) the Company has given notice of its selection of
an Extension Period, then during such period, subject to certain exceptions, the
Company shall not (i) declare or pay dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of its
capital stock or (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities of the Company that
rank pari passu with or junior to the Debentures. See "Description of the
Guarantee -- Certain Covenants of KBK."
Except as provided below, the Trust Preferred Securities may not be
redeemed by the Trust prior to November 30, 2001. The Trust Preferred Securities
are subject to mandatory redemption, in whole or in part, on or after such date,
at 100% of the liquidation amount thereof plus accrued and unpaid distributions,
if any, upon any permitted redemption by KBK of the Debentures. See "Description
of the Trust Preferred Securities -- Optional Redemption." In addition, the
Trust Preferred Securities are subject to mandatory redemption upon the
repayment at maturity or as a result of acceleration of the Debentures. See
"Description of the Trust Preferred Securities -- Mandatory Redemption."
Under certain circumstances following the occurrence of a Trust Special
Event (as defined herein), the Trust Preferred Securities are also subject to
exchange, at the option of the Trust in the manner described herein, for the
Debentures (see "Description of the Trust Preferred Securities -- Trust Special
Event Exchange"). At any time, KBK will have the right to terminate the Trust
and cause the Debentures to be
2
<PAGE> 3
distributed to the holders of the Trust Preferred Securities in liquidation of
the Trust. See "Description of the Trust Preferred Securities -- Mandatory
Redemption" and " -- Distribution of Debentures."
In the event of any liquidation, dissolution, winding up or termination of
the Trust, the holders of the Trust Preferred Securities will be entitled to
receive (after payment by the Trust of all of its liabilities to the extent
required by applicable law) for each Trust Preferred Security a liquidation
amount of $10 plus accumulated and unpaid distributions thereon, unless the
Debentures are distributed in connection with such liquidation, dissolution,
winding up or termination of the Trust. Upon a default by the Company on any of
its obligations under the Guarantee or the Debentures, the holders of the Trust
Preferred Securities will have a preference over the holders of the Trust Common
Securities with respect to payments upon liquidation of the Trust. See
"Description of the Trust Preferred Securities -- Liquidation Distribution Upon
Dissolution."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE TRUST PREFERRED
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF TRUST
PREFERRED SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
3
<PAGE> 4
AVAILABLE INFORMATION
KBK is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: 7 World Trade Center,
Suite 1300, New York, New York 10048; and Northwestern Atrium, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material also
may be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Such material also
may be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. KBK's common stock, par value $.01 per share
(the "Common Stock"), is listed for trading on the American Stock Exchange and
the Pacific Stock Exchange under the trading symbol "KBK," and reports, proxy
statements and other information concerning KBK may be inspected at the offices
of the American Stock Exchange, 86 Trinity Place, New York, New York 10005 and
at the offices of the Pacific Stock Exchange, 301 Pine Street, San Francisco,
California 94104.
The Trust and the Company have filed a registration statement on Form S-2
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Reference is made to such
Registration Statement for further information with respect to KBK and the Trust
Preferred Securities offered hereby. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents, and each
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission.
The Company will provide Quarterly Reports containing unaudited financial
statements to the holders of Trust Preferred Securities if such reports are
furnished to the holders of the Company's Common Stock, and Annual Reports
containing financial statements audited by the Company's independent auditors.
The Company will also furnish Annual Reports on Form 10-KSB and Quarterly
Reports on Form 10-QSB free of charge to holders of Trust Preferred Securities
who so request in writing addressed to the Secretary of the Company.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference the following documents filed
with the Commission pursuant to the Exchange Act:
1. The Company's Annual Reports on Form 10-KSB for the years ended
December 31, 1997 and 1996.
2. The Company's Quarterly Reports on Form 10-QSB for the quarters ended
March 31, 1998, June 30, 1998, and September 30, 1998.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon their written or oral request, a copy of any
or all of the documents incorporated herein by reference. Written requests for
such copies should be addressed to Jay K. Turner, KBK Capital Corporation, 301
Commerce Street, 2200 City Center II, Fort Worth, Texas 76102, telephone (817)
258-6000.
4
<PAGE> 5
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Where any
such forward-looking statement includes a statement of the assumptions or bases
underlying such forward-looking statement, KBK cautions that, while such
assumptions or bases are believed to be reasonable and are made in good faith,
assumed facts or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, KBK,
including its subsidiaries, or its management expresses an expectation or belief
as to future results, such expectation or belief is expressed in good faith and
is believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "may," "will," "expects," "anticipates," "intends," "plans,"
"estimates," "should" and words of similar import may identify forward-looking
statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include industry conditions,
general economic conditions, interest rates, competition and the ability of the
Company to successfully manage its growth.
5
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus and
incorporated by reference herein. When the context requires, the terms "Company"
and "KBK" shall be deemed to mean KBK Capital Corporation and its wholly-owned
subsidiaries, including KBK Financial, Inc. ("KBK Financial") and KBK
Receivables Corporation ("KBK Receivables") and their predecessors. In addition,
the information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised. See "Underwriting."
THE COMPANY
KBK Capital Corporation is the holding company for KBK Financial, an
independent financial services company that provides a broad line of financial
products and services to middle market commercial businesses with credit needs
of less than $10 million. The Company was founded in 1962 as a factoring company
for energy-related receivables in Texas. Factoring has served as the cornerstone
of KBK's growth. In 1994, the Company began introducing new products in an
effort to expand its client base and to meet the needs of its existing clients
as their credit quality improves. These products include purchase revolvers,
working capital loans, term loans and mezzanine loans. Factoring, purchase
revolvers, working capital loans, and term and mezzanine loans represented
approximately 36%, 17%, 15%, and 32%, respectively, of the Company's earning
assets at September 30, 1998. "Earning assets" means owned and managed factoring
facilities, purchase revolvers, commercial loans and mezzanine loans.
KBK's client base consists primarily of businesses with annual revenues
ranging from $1 million to $50 million. The Company's clients typically have
rapidly expanding operations which drive their need for capital. KBK strives to
provide fast, flexible and creative solutions that are tailored to meet these
needs. This approach has provided KBK with a strong reputation in the middle
market and a well-diversified client base. The Company's clients are located in
eleven states and are engaged in a range of businesses, including energy-
related, manufacturing, wholesale and retail distribution, and other businesses.
As of September 30, 1998, only one client had amounts outstanding under its
facilities in excess of 10% of the Company's earning assets, constituting 11.3%
of earning assets.
The Company's long-term goal is to be a leader in providing financial
products and services to middle market businesses in the largest United States
markets. KBK's growth strategies include increasing market penetration and
expanding its market presence, extending its product line and opportunistically
pursuing strategic acquisitions and partnerships which will complement or
leverage the Company's product portfolio or client relationships.
The Company has consistently employed a disciplined credit approach which
has enabled it to increase earning assets, minimize credit losses and generate
36 consecutive years of profitability. The Company's earning assets have grown
from $23.0 million as of December 31, 1993 to $149.3 million as of September 30,
1998. The ratio of net charge-offs to average earning assets over the same
period has declined from 2.1% in 1993 to 1.0% for the twelve months ended
September 30, 1998. The Company has also maintained prudent credit reserves. As
of September 30, 1998, KBK's allowance for credit losses was $1.9 million, or
1.3% of total earning assets.
The Company's factoring facilities generally involve an on-going or
revolving agreement to purchase eligible new receivables. Factoring involves the
Company's purchase and the client's true sale of accounts receivable which
usually are individually ledgered, invoice-by-invoice, on the Company's books.
The Company offers a full range of factoring products and services, including
notification, non-notification, verification, non-verification and non-recourse
factoring as well as several other hybrid variations. See "The
Company -- Products." The obligors or "debtors" of the factored receivables
typically represent large, financially strong businesses, many of which are
ranked in Fortune Magazine's Fortune 1000 list. As of September 30, 1998, KBK's
portfolio of owned and managed receivables purchased under factoring facilities
6
<PAGE> 7
totaled $52.2 million. The Company's yield on its factoring portfolio was 20.2%
in 1997 and 21.8% for the nine months ended September 30, 1998.
In addition to factoring or purchasing accounts receivable on a specific
"invoice-by-invoice" ledgered basis, the Company also purchases accounts
receivable as a revolving "pool." Under this arrangement, the client sells all
receivables as and when they are generated by the business and KBK makes
periodic advances upon a request by the client, in aggregate amounts up to the
client's maximum availability limit. The Company's yield on purchase revolvers
was 14.2% in 1997 and 13.1% for the nine months ended September 30, 1998.
KBK's commercial loan portfolio includes working capital and term loan
facilities that are typically secured by a first lien on accounts receivable,
inventory, equipment, owner-occupied real estate or other assets. The working
capital lines of credit have maturities of up to two years, while term loans are
structured with monthly payments and maturities which typically range from one
to five years. Most of the Company's commercial loan products are priced on a
floating rate basis over the Company's announced base rate. During 1997 and the
nine months ended September 30, 1998, the Company's yield on its commercial loan
portfolio was 12.1% and 12.8%, respectively.
The Company's mezzanine loan product, which was introduced in 1998, offers
an attractive financing alternative for customers whose growth has outpaced
their borrowing capacity from senior debt sources. The Company's strategy with
respect to mezzanine loans is to extend the duration of its current
relationships and offer the Company's traditional products to new customers. It
is anticipated that KBK's mezzanine financings will typically have fixed
interest rates as well as warrants to acquire equity in the borrower. Since
introducing the product in the first quarter of 1998, the Company has reviewed
approximately 145 transactions. To date, the Company has funded two loans for an
aggregate investment of $5.0 million.
In 1997, the Company established a secured credit facility through a
conduit commercial paper issuer to diversify its funding sources and reduce its
cost of capital. Under this arrangement, KBK sells certain receivables and
certain inventory loans to the conduit on a non-recourse basis; such assets are
pooled with similar types of assets acquired by the conduit from other
unaffiliated companies and serve as collateral for revolving commercial paper
issuances. KBK continues to manage and service the assets sold by KBK to the
conduit in exchange for a fee based on the balance of such assets. As of
December 31, 1997 and September 30, 1998, KBK had $67.0 million and $74.2
million, respectively, of receivables and inventory loans outstanding in the
conduit facility and during 1997 and the first nine months of 1998 the Company
had received approximately $6.3 million and $5.9 million, respectively, in fees
related to managing and servicing such assets. Currently, the Company has the
ability to fund up to $75.0 million through the conduit facility and expects
this limit to be increased to $100.0 million as the result of continued growth
in earning assets. The financing provided by this facility is off-balance sheet
and the Company realizes no gain on transfer of the assets to the conduit.
Servicing income is credited as received. The Company believes that the conduit
facility will enable it to significantly expand its owned and managed portfolio
while simultaneously minimizing its balance sheet leverage.
Over the past five years, the Company has posted strong growth in revenue
and consistent profitability within reasonable leverage levels. Revenues have
increased from $6.3 million for 1993 to $15.2 million for 1997 and $13.2 million
for the nine months ended September 30, 1998. This growth was largely attributed
to an increase in KBK's total earning assets, which rose from $23.0 million as
of December 31, 1993 to $149.3 million as of September 30, 1998. Net income
increased from $1.4 million in 1993 to $2.1 million in 1997 and $2.1 million for
the nine months ended September 30, 1998. The Company's ratio of earnings to
fixed charges was 3.9x at December 31, 1993 and 2.6x at September 30, 1998.
The Company is incorporated in the state of Delaware and its headquarters
are located at 301 Commerce Street, 2200 City Center II, Fort Worth, Texas
76102. The Company's general telephone number is (817) 258-6000. KBK maintains
six offices: three in Texas, and one in each of Louisiana, California and
Missouri.
7
<PAGE> 8
THE OFFERING
The Trust.................. KBK Capital Trust I, a Delaware statutory business
trust. The principal assets of the Trust will be
the 9.50% Subordinated Debentures of KBK due 2028.
Securities Offered......... 1,500,000 9.50% Trust Preferred Securities
(1,725,000 if the Underwriters' over-allotment
option is exercised in full).
Liquidation Amount......... $10 per Trust Preferred Security. See "Description
of the Trust Preferred Securities -- Liquidation
Distribution Upon Dissolution."
Distributions.............. Distributions on the Trust Preferred Securities
will accumulate from the closing of this offering
and will be payable at the annual rate of 9.50% of
the liquidation amount of $10 per Trust Preferred
Security (equivalent to $0.95 per Trust Preferred
Security per annum) if, as and when the Trust has
funds available for payment. Distributions will be
payable quarterly in arrears on each February 28,
May 31, August 31 and November 30, commencing
February 28, 1999. Distributions not made on the
scheduled payment date will accumulate and compound
quarterly at a rate per annum equal to 9.50%.
The ability of the Trust to pay distributions on
the Trust Preferred Securities is entirely
dependent on its receipt of payments with respect
to the Debentures held by the Trust. The Debentures
will provide that payments of interest may be
deferred at any time, and from time to time, by KBK
for a period not exceeding 20 consecutive quarters.
See "-- The Offering -- Debentures," "Risk
Factors -- Option to Extend Interest Payment
Period; Tax Consequences; Trading Price" and
"Description of the Trust Preferred
Securities -- Distributions."
Rights Upon Non-Payment of
Distributions and Certain
Defaults; Covenants of
the Company............. If, at any time, KBK or any successor is in default
on any of its obligations under the Guarantee, then
the Trust Guarantee Trustee (as defined herein), as
the holder of the Guarantee, shall have the right
to enforce such Guarantee, including the right to
enforce the covenant restricting certain payments
by KBK described below.
In the Guarantee, the Company has agreed that if
(a) for any distribution period, full distributions
on a cumulative basis on any Trust Preferred
Securities have not been paid, (b) an event of
default has occurred and is continuing under the
Subordinated Indenture (a "Debenture Event of
Default"), (c) the Company is in default of its
obligations under the Guarantee or the guarantee of
the Trust Common Securities (together with the
Guarantee, the "Guarantees") or (d) notice of an
Extension Period has been given and shall not have
been rescinded or such Extension Period is
continuing, then, during such period the Company
shall not (i) declare or pay dividends on, make
distributions with respect to, or redeem, purchase
or acquire, or make a liquidation payment with
respect to any of its capital stock (except for
dividends or distributions in shares of, or
options, warrants or rights to subscribe for or
purchase shares of, its capital stock and
conversions or exchanges of common stock of one
class into common stock of another class) or (ii)
make any payments of principal, interest or
premium, if
8
<PAGE> 9
any, on or repay, repurchase or redeem any debt
securities (including guarantees of indebtedness
for money borrowed) of the Company that rank pari
passu with or junior to the Debentures (other than
(v) any redemption, liquidation, interest,
principal or guarantee payment by the Company where
the payment is made by way of securities (including
capital stock) that rank pari passu with or junior
to the securities on which such redemption,
liquidation, interest, principal or guarantee
payment is being made, (w) payments under the
Guarantees, (x) purchases of Common Stock related
to the issuance of Common Stock under any of the
Company's benefit plans for its directors, officers
or employees, (y) as a result of a reclassification
of the Company's capital stock or the exchange or
conversion of one series or class of the Company's
capital stock for another series or class of the
Company's capital stock, and (z) the purchase of
fractional interests in shares of the Company's
capital stock pursuant to the conversion or
exchange provisions of such capital stock or the
security being converted or exchanged). See
"Description of the Guarantee -- Certain Covenants
of KBK."
Redemption................. The Trust Preferred Securities will be redeemable
for cash, at the option of the Trust, in whole or
in part, from time to time on or after November 30,
2001 at a redemption price of $10 per Trust
Preferred Security together with accumulated and
unpaid distributions to the date of redemption. See
"Description of the Trust Preferred Securities --
Optional Redemption." The Trust Preferred
Securities will also be redeemable upon the
repayment either at maturity of the Debentures or
as a result of the acceleration of the Debentures
upon an event of default, at a redemption price of
$10 per Trust Preferred Security together with
accumulated and unpaid distributions thereon to the
date of redemption. See "Description of the Trust
Preferred Securities -- Mandatory Redemption."
Trust Special Event
Exchange................... Upon the occurrence of a Trust Tax Event (as
defined herein) or a Trust Investment Company Event
(as defined herein), the Administrative Trustees
(as defined herein) shall direct the Property
Trustee (as defined herein) to exchange all
outstanding Trust Preferred Securities for
Debentures and to dissolve the Trust, provided
that, in the case of a Trust Tax Event, KBK shall
have the right to direct that less than all, or
none, of the Trust Preferred Securities be so
exchanged if and for so long as KBK shall have
elected to pay Additional Sums (as defined herein)
such that the net amounts received by the holders
of Trust Preferred Securities that remain
outstanding are not reduced as a result of such
Trust Tax Event, and shall not have revoked any
such election or failed to make such payments. See
"Description of the Trust Preferred
Securities -- Trust Special Event Exchange."
Distribution of
Debentures................. At any time, KBK will have the right to dissolve
the Trust and, after satisfaction of the
liabilities of creditors of the Trust as provided
by applicable law, cause the Debentures to be
distributed to the holders of the Trust Preferred
Securities in liquidation of the Trust. See
"Description of the Trust Preferred
Securities -- Distribution of Debentures."
Guarantee.................. Pursuant to the Guarantee, the Company will
irrevocably guarantee, on a subordinated basis, the
payment in full of (i) any accumulated and unpaid
distributions on the Trust Preferred Securities to
the extent of funds of the Trust available
therefor, (ii) the amount payable upon
9
<PAGE> 10
redemption of the Trust Preferred Securities to the
extent of funds of the Trust available therefor and
(iii) generally, the liquidation amount of the
Trust Preferred Securities to the extent of the
assets of the Trust available for distribution to
holders of Trust Preferred Securities. See
"Description of the Guarantee."
The Company's obligation under the Guarantee is
subordinate and junior in right of payment to all
other liabilities of the Company and ranks pari
passu with the most senior preferred stock, if any,
issued from time to time by the Company.
Voting Rights.............. Holders of Trust Preferred Securities will
generally have limited voting rights relating only
to the modification of the Trust Preferred
Securities. Holders of Trust Preferred Securities
will not be entitled to vote to appoint, remove or
replace the Regular Trustees (as defined herein) or
the Delaware Trustee (as defined herein), which
voting rights are vested exclusively in KBK as
holder of the Trust Common Securities. The holders
of a majority in aggregate liquidation amount of
the Trust Preferred Securities will, however, have
the right to direct the time, method and place of
conducting any proceeding for any remedy available
to the Property Trustee, or direct the exercise of
any power conferred upon the Property Trustee under
the Declaration, including the right to direct the
Property Trustee as holder of the Debentures (i) to
exercise the remedies available to it under the
Subordinated Indenture as holder of the Debentures
and (ii) to consent to any amendment, modification
or termination of the Subordinated Indenture or the
Debentures, where such consent shall be required.
See "Description of the Trust Preferred
Securities -- Voting Rights; Amendment of the
Declaration."
Debentures................. The Debentures will have a maturity of 30 years
from the date of original issuance and will bear
interest at the rate of 9.50% per annum payable
quarterly in arrears. KBK has the right from time
to time to select an interest payment period or
periods longer than one quarter (during which
period or periods interest will compound
quarterly), provided that no such Extension Period
will exceed 20 consecutive quarters and provided
further that no such deferral of interest payments
may extend beyond the stated maturity of the
Debentures or any redemption date of the
Debentures.
Accordingly, distribution payments on the Trust
Preferred Securities may not be deferred beyond the
stated maturity of the Debentures or any redemption
date of the Debentures. If KBK defers interest
payments longer than one quarter, subject to
certain exceptions, it will be prohibited from
paying dividends on any of its capital stock and
making certain other restricted payments until
quarterly interest payments are resumed and all
accumulated and unpaid interest on the Debentures
is brought current. SHOULD AN EXTENSION PERIOD
OCCUR, THE HOLDERS OF TRUST PREFERRED SECURITIES
WILL BE REQUIRED TO ACCRUE INTEREST INCOME IN THEIR
GROSS INCOME FOR UNITED STATES FEDERAL INCOME TAX
PURPOSES IN ADVANCE OF RECEIPT OF THE CASH
DISTRIBUTIONS WITH RESPECT TO SUCH DEFERRED
INTEREST PAYMENTS. See "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue
Discount."
In addition, on and after November 30, 2001, the
Debentures are redeemable at the option of KBK at
any time, in whole or in part, at a
10
<PAGE> 11
redemption price equal to 100% of the principal
amount of Debentures being redeemed together with
accrued and unpaid interest thereon to the date
fixed for redemption. See "Description of the
Debentures -- Optional Redemption."
The payment of the principal of and interest on the
Debentures will be subordinated in right of payment
to all Senior Debt of KBK. As of November 16, 1998,
after giving effect to this offering of Trust
Preferred Securities and the application of the net
proceeds therefrom (assuming the Underwriters'
over-allotment option is not exercised), KBK would
have had outstanding approximately $34.8 million of
Senior Debt. See "Risk Factors -- Ranking of
Subordinate Obligations under the Guarantee and the
Debentures." While the Trust Preferred Securities
are outstanding, the Property Trustee will not have
the right to amend the Subordinated Indenture or
the terms of the Debentures in a way that adversely
affects the holders of the Trust Preferred
Securities or to waive a Debenture Event of Default
without the consent of holders of at least a
majority in aggregate liquidation amount of the
Trust Preferred Securities and, in certain cases,
the Trust Common Securities then outstanding. See
"Description of the Debentures -- Modification of
the Subordinated Indenture."
Use of Proceeds............ All of the proceeds from the sale of the Trust
Preferred Securities will be used by the Trust to
purchase the Debentures. The Company intends to use
the net proceeds from the sale of the Debentures to
repay approximately $13.9 million of short-term
indebtedness and for general corporate purposes.
See "Use of Proceeds."
Form of Trust Preferred
Securities............... The Trust Preferred Securities will be represented
by a global certificate or certificates registered
in the name of Cede & Co., as nominee for DTC.
Beneficial interests in the Trust Preferred
Securities will be evidenced by, and transfers
thereof will be effected only through, records
maintained by the participants in DTC. Except as
described herein, Trust Preferred Securities in
certificated form will not be issued in exchange
for the global certificate or certificates. See
"Description of the Trust Preferred
Securities -- Book-Entry Only Issuance -- The
Depository Trust Company."
Listing.................... The Trust Preferred Securities have been approved
for listing on the American Stock Exchange, subject
to official notice of issuance.
Proposed Trading Symbol.... "KBK.Pr"
Risk Factors............... Prospective purchasers of Trust Preferred
Securities should carefully consider the specific
risk factors set forth under "Risk Factors."
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<PAGE> 12
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary historical consolidated financial
data of the Company and its subsidiaries as of the dates and for the periods
indicated. The summary historical consolidated financial data as of and for each
of the nine month periods ended September 30, 1998 and 1997 were derived from
the unaudited interim financial statements of the Company and in the opinion of
management include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. The
information presented below should be read in conjunction with the Company's
historical consolidated financial statements and notes thereto incorporated by
reference herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ---------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Earned discount income................. $ 1,378 $ 3,263 $ 3,777 $ 9,778 $10,634 $ 6,625 $ 6,204
Interest income -- loans............... 3,371 2,369 3,119 1,369 144 70 115
Servicing fees......................... 5,897 4,022 6,314 -- -- -- --
Other income -- fees................... 2,586 1,429 1,981 1,054 166 201 --
------- ------- ------- ------- ------- ------- -------
Total revenue........................ 13,232 11,083 15,191 12,201 10,944 6,896 6,319
Interest expense......................... 2,004 2,206 2,666 2,590 1,652 806 762
------- ------- ------- ------- ------- ------- -------
Income after interest expense............ 11,228 8,877 12,525 9,611 9,292 6,090 5,557
Provision for credit losses.............. 1,100 575 875 245 600 65 588
------- ------- ------- ------- ------- ------- -------
Income after interest expense and
provision for credit losses............ 10,128 8,302 11,650 9,366 8,692 6,025 4,969
Operating expenses:
Salaries and employee benefits......... 3,722 3,247 4,431 3,545 2,997 1,960 1,569
Amortization of intangible assets...... 295 284 379 361 410 276 275
Occupancy and equipment................ 1,108 937 1,285 847 587 423 241
Professional fees...................... 285 189 251 344 584 181 159
Other.................................. 1,463 1,290 1,852 1,812 1,089 691 507
------- ------- ------- ------- ------- ------- -------
Total operating expenses............. 6,873 5,947 8,198 6,909 5,667 3,531 2,751
------- ------- ------- ------- ------- ------- -------
Income before income taxes............... 3,255 2,355 3,452 2,457 3,025 2,494 2,218
Income tax expense....................... 1,111 954 1,388 906 1,177 863 783
------- ------- ------- ------- ------- ------- -------
Net income............................... $ 2,144 $ 1,401 $ 2,064 $ 1,551 $ 1,848 $ 1,631 $ 1,435
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets........................... $82,580 $51,767 $56,401 $89,747 $62,212 $61,080 $26,494
Long term debt......................... -- -- -- -- -- -- --
Short term debt........................ 41,080 17,500 21,000 58,000 33,000 29,926 11,993
Stockholders' equity................... 25,505 23,541 24,569 22,140 21,288 20,374 8,797
PROFITABILITY RATIOS:
Yield on average net earning assets.... 19.8% 20.8% 20.9% 24.0% 31.7% 29.2% 35.4%
Return on average assets under
management........................... 2.1(1) 1.9(1) 2.0 2.4 4.0 5.3 6.4
Return on average equity............... 11.6(1) 8.2(1) 8.9 7.1 8.9 11.2 17.8
ASSET QUALITY RATIOS:
Ratio of allowance for credit losses to
net charge-offs...................... 1.5x(2) 3.1x(2) 3.5x 4.4x 3.3x 3.9x 2.7x
Net charge-offs as a percentage of
average earning assets............... 1.0%(2) 0.7%(2) 0.6% 0.6% 1.3% 1.5% 2.1%
Ratio of earnings to fixed
charges(3)........................... 2.6x 2.1x 2.3x 1.9x 2.8x 4.1x 3.9x
</TABLE>
- ---------------
(1) Percentage shown has been annualized.
(2) For the twelve months ended September 30, 1998 and 1997.
(3) For purposes of calculating these ratios: (i) "fixed charges" represent
interest expense and (ii) "earnings" represent the aggregate of income
before income taxes and interest expense.
12
<PAGE> 13
RISK FACTORS
Before investing in the Trust Preferred Securities offered hereby,
prospective investors should give special consideration, in addition to the
information set forth elsewhere in this Prospectus, to the information set forth
below. The Company cautions the reader, however, that this list of factors may
not be exhaustive.
The risk factors set forth below and elsewhere in this Prospectus should be
read as accompanying all forward-looking statements made in this Prospectus.
These forward-looking statements can be identified by the use of forward-looking
terminology such as "may," "will," "expects," "anticipates," "intends," "plans,"
"estimates," "should" and words of similar import. The Company's actual results
could differ materially from those anticipated in such forward-looking
statements for the reasons set forth below and for other reasons.
RISK FACTORS RELATING TO THE TRUST PREFERRED SECURITIES
RANKING OF SUBORDINATE OBLIGATIONS UNDER THE GUARANTEE AND THE DEBENTURES
The obligations of KBK under the Guarantee issued by KBK for the benefit of
the holders of the Trust Preferred Securities are unsecured and rank subordinate
and junior in right of payment to all other liabilities of KBK and pari passu
with the most senior preferred stock, if any, issued from time to time by KBK.
The obligations of KBK under the Debentures are subordinate and junior in right
of payment to all present and future Senior Debt. As of November 16, 1998, after
giving effect to this offering and the application of the net proceeds therefrom
(assuming the Underwriters' over-allotment option is not exercised), KBK would
have had approximately $34.8 million of Senior Debt outstanding. The ability of
the Trust to pay amounts due on the Trust Preferred Securities is solely
dependent upon KBK making payments on the Debentures as and when required.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary, including KBK
Financial, upon such subsidiary's liquidation or reorganization or otherwise
(and thus the ability of holders of the Trust Preferred Securities to benefit
indirectly from such distribution), is subject to the prior claims of creditors
of that subsidiary, except to the extent that the Company may itself be
recognized as a creditor of that subsidiary. Accordingly, the Debentures and the
Guarantee will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries, and holders of the Debentures should
look only to the assets of the Company for payments on the Debentures. None of
the Subordinated Indenture, the Guarantee or the Declaration places any
limitation on the amount of secured or unsecured debt, including Senior Debt,
that may be incurred by KBK. See "Description of the Guarantee -- Status of the
Guarantee" and "Description of the Debentures -- Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; TRADING PRICE
So long as there is no continuing event of default under the Debentures,
KBK has the right under the Subordinated Indenture to defer the payment of
interest on the Debentures beyond the regular quarterly period (the "Interest
Payment Period") at any time or from time to time for a period not exceeding 20
consecutive quarters, provided that no such Extension Period may extend beyond
the stated maturity of the Debentures or any redemption date of the Debentures.
Upon the termination of any Extension Period and the payment on the Interest
Payment Date (as defined herein) coinciding with or next following the end of
such Extension Period (whichever is earlier) of all amounts then due to the
persons in whose names the Debentures are registered at the close of business on
the regular record date next preceding such Interest Payment Date, KBK may
select a new Extension Period and terminate the payments of all amounts then due
subject to the requirements described herein. As a consequence of any such
deferral, quarterly distributions on the Trust Preferred Securities by the Trust
will be deferred (and the amount of distributions to which holders of the Trust
Preferred Securities are entitled will accumulate additional distributions)
during any such Extension Period.
Should an Extension Period occur, a holder of Trust Preferred Securities
will continue to accrue income (in the form of OID) in respect of its pro rata
share of the deferred interest allowable to the Debentures held by the Trust for
United States federal income tax purposes. As a result, a holder of Trust
Preferred Securities will include such income in gross income for United States
federal income tax purposes in advance of the receipt of cash, and will not
receive the cash related to such income from the Trust if the holder disposes of
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<PAGE> 14
the Trust Preferred Securities prior to the record date for the payment of
distributions. See "Certain Federal Income Tax Consequences -- Interest Income
and Original Issue Discount."
KBK has no current intention of invoking an Extension Period. Should KBK
elect to exercise such right in the future, however, the market price of the
Trust Preferred Securities is likely to be adversely affected. A holder that
disposes of its Trust Preferred Securities during an Extension Period,
therefore, might not receive the same return on its investment as a holder that
continues to hold its Trust Preferred Securities. In addition, as a result of
the existence of KBK's right to invoke an Extension Period, the market price of
the Trust Preferred Securities (which represent preferred undivided beneficial
interests in the Debentures) may be more volatile than the market prices of
other securities that are not subject to such deferrals.
TRUST SPECIAL EVENT EXCHANGE
Under certain circumstances following the occurrence and continuation of a
Trust Special Event (as defined herein), the Trust Preferred Securities are also
subject to exchange, in whole or in part, in the manner described herein, for
the Debentures, which exchange will result in termination of the Trust. See
"Description of the Trust Preferred Securities -- Trust Special Event Exchange."
There can be no assurance as to the market prices for Trust Preferred
Securities or Debentures that may be distributed in exchange for Trust Preferred
Securities if a liquidation of the Trust occurs or if the Trust Preferred
Securities are exchanged for Debentures in connection with a Trust Special
Event. Accordingly, the Trust Preferred Securities that an investor may
purchase, whether pursuant to the offer made hereby or in the secondary market,
or the Debentures that a holder of Trust Preferred Securities may receive on
liquidation of the Trust, may trade at a discount to the price that the investor
paid to purchase the Trust Preferred Securities offered hereby. Because holders
of Trust Preferred Securities may receive Debentures on dissolution of the Trust
or if the Trust Preferred Securities are exchanged for Debentures in connection
with a Trust Special Event, prospective purchasers of Trust Preferred Securities
are also making an investment decision with regard to the Debentures and should
carefully consider all of the information contained herein regarding the
Debentures. See "Description of the Trust Preferred Securities -- Trust Special
Event Exchange" and "Description of the Debentures -- General."
LIMITATIONS OF THE GUARANTEE
Pursuant to the Guarantee, KBK guarantees on a subordinated basis to the
holders of the Trust Preferred Securities the following payments, to the extent
not paid by the Trust: (i) any accumulated and unpaid distributions required to
be paid on the Trust Preferred Securities, to the extent that the Trust has
funds on hand available therefor at such time; (ii) the redemption price with
respect to any Trust Preferred Securities called for redemption, to the extent
that the Trust has funds on hand available therefor at such time; and (iii) upon
a voluntary or involuntary termination, dissolution, winding-up or liquidation
of the Trust (unless the Debentures are distributed to holders of the Trust
Preferred Securities or in connection with the redemption of all of the Trust
Preferred Securities), the lesser of (a) the aggregate of the liquidation amount
of the Trust Preferred Securities and all accumulated and unpaid distributions
thereon to the date of payment to the extent that the Trust has funds on hand
available therefor at such time and (b) the amount of assets of the Trust
remaining available for distribution to holders of the Trust Preferred
Securities in liquidation of the Trust.
Pursuant to the Guarantee, KBK agrees that it will honor all obligations
described therein relating to the exchange of the Trust Preferred Securities for
Debentures.
The holders of a majority in aggregate liquidation amount of the Trust
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trust Guarantee
Trustee (as defined herein) in respect of the Guarantee or to direct the
exercise of any trust power conferred upon the Trust Guarantee Trustee under the
Guarantee. If the Trust Guarantee Trustee fails to enforce the Guarantee, any
holder of Trust Preferred Securities may institute a proceeding directly against
KBK to enforce its rights under the Guarantee without first instituting a
proceeding against the Trust, the Trust Guarantee Trustee or any other person or
entity. If KBK were to default on its obligation to pay amounts payable under
the Debentures, the Trust would lack funds for the payment of distributions or
amounts payable
14
<PAGE> 15
on redemption of the Trust Preferred Securities or otherwise, and, in such
event, holders of the Trust Preferred Securities would not be able to rely upon
the Guarantee for payment of such amount. Instead, in the event a Debenture
Event of Default shall have occurred and be continuing, a holder of Trust
Preferred Securities would be required to rely on enforcement by the Property
Trustee of its rights as registered holder of Debentures against KBK pursuant to
the terms of the Subordinated Indenture and the Debentures. If, however, such
event is attributable to the failure of KBK to pay interest on or principal of
the Debentures on the payment date on which such payment is due and payable,
then a holder of Trust Preferred Securities may directly institute a proceeding
against KBK for enforcement of payment to such holder of the interest on or
principal of such Debentures having a principal amount equal to the aggregate
liquidation amount of the Trust Preferred Securities of such holder (a "Legal
Action"). In connection with such Legal Action, KBK will be subrogated to the
rights of such holder of Trust Preferred Securities under the Declaration to the
extent of any payment made by KBK to such holder of Trust Preferred Securities
in such Legal Action. Except as set forth herein, holders of Trust Preferred
Securities will not be able to exercise directly any other remedy available to
the holders of Debentures or assert directly any other rights in respect of the
Debentures. See "Description of the Trust Preferred Securities -- Trust
Enforcement Events; Notice" and "-- Enforcement of Certain Rights by Holders of
Trust Preferred Securities" and "Description of the Guarantee" and "Description
of the Debentures -- Events of Default." The Declaration provides that each
holder of Trust Preferred Securities by acceptance thereof agrees to the
provisions of the Guarantee and the Subordinated Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Debenture Event of Default occurs and is continuing, then the holders
of Trust Preferred Securities would rely on the enforcement by the Property
Trustee of its rights as the holder of the Debentures against KBK. In addition,
the holders of a majority in aggregate liquidation preference of the Trust
Preferred Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Property Trustee or to
direct the exercise of any trust or power conferred upon the Property Trustee
under the Declaration, including the right to direct the Property Trustee to
exercise the remedies available to it as holder of the Debentures. If the
Property Trustee fails to enforce its rights as holder of the Debentures after a
request therefor by a holder of Trust Preferred Securities, such holder may
proceed to enforce such rights directly against KBK. Notwithstanding the
foregoing, if a Debenture Event of Default occurs that results from the failure
of KBK to pay principal of or interest on the Debentures when due (or in the
case of a redemption, on the redemption date), during the continuance of such an
event of default a holder of Trust Preferred Securities may institute a Legal
Action against KBK to obtain payment to such holder of such principal or
interest on Debentures having a principal amount equal to the aggregate
liquidation amount of the Trust Preferred Securities owned of record by such
holder. See "Description of the Trust Preferred Securities -- Trust Enforcement
Events; Notice," "-- Enforcement of Certain Rights by Holders of Trust Preferred
Securities" and "-- Voting Rights; Amendment of the Declaration."
LIMITED VOTING RIGHTS
Holders of the Trust Preferred Securities will generally have limited
voting rights, primarily in connection with directing the activities of the
Property Trustee as the holder of the Debentures. Holders of the Trust Preferred
Securities will not be entitled to vote to appoint, remove or replace the
Property Trustee, which voting rights are vested exclusively in KBK as holder of
the Trust Common Securities, provided that, upon the occurrence and during the
continuance of a Trust Enforcement Event (as defined herein), the Property
Trustee may be removed and a successor appointed only by the holders of a
majority in liquidation amount of the Trust Preferred Securities. The holders of
a majority in liquidation amount of the Trust Preferred Securities will,
however, have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or direct the
exercise of any power conferred upon the Property Trustee including the right to
direct the Property Trustee as holder of the Debentures, (i) to exercise the
remedies available to it under the Subordinated Indenture as holder of the
Debentures and (ii) to consent to any amendment, modification or termination of
the Subordinated Indenture or the Debentures, where such consent shall be
required. See "Description of the Trust Preferred Securities -- Voting Rights;
Amendment of the Declaration."
15
<PAGE> 16
PROPOSED TAX LEGISLATION
As a part of President Clinton's Fiscal 1999 and 1998 Budget Proposals, the
Treasury Department proposed legislation (the "Proposed Legislation") that,
among other things, would have treated as equity for United States federal
income tax purposes certain debt instruments that are not shown as indebtedness
on the consolidated balance sheet of KBK, which Proposed Legislation has not
been enacted to date. No assurance can be given that the Proposed Legislation
will not ultimately be enacted in the future, that such future legislation would
not have a retroactive effective date and that such future legislation would not
prevent KBK from deducting interest on the Debentures. Such an event would
constitute a Trust Tax Event and would permit the Trust to exchange the Trust
Preferred Securities, in whole or in part, for the Debentures.
TRADING PRICE OF TRUST PREFERRED SECURITIES
The Trust Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Debentures. A holder disposing of Trust Preferred Securities between record
dates for payments of distributions thereon will be required for United States
federal income tax purposes to include accrued but unpaid interest on the
Debentures through the date of disposition in income as ordinary income (i.e.,
original issue discount), and to add such amount to the adjusted tax basis in
the holder's Trust Preferred Securities. To the extent the selling price is less
than the holder's adjusted tax basis (which will include, in the form of
original issue discount, all accrued but unpaid interest), a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Sales of Trust
Preferred Securities."
NO PRIOR MARKET FOR THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities constitute a new issue of securities with no
established trading market. Although the Trust Preferred Securities have been
approved for listing on the American Stock Exchange, subject to official notice
of issuance, there can be no assurance that an active market for the Trust
Preferred Securities will develop or be sustained in the future on the American
Stock Exchange. No assurance can be given as to the liquidity of, or trading
markets for, the Trust Preferred Securities.
RISK FACTORS RELATING TO THE COMPANY
CREDIT RISK
A primary risk facing the Company, and financial institutions in general,
is credit risk, that is the risk of losing principal, discount income and
interest due to a client's failure to perform according to the terms of such
client's loan or factoring agreement. The Company is exposed to the risk that
customers to whom it has made loans will be unable to repay those loans
according to their terms and that collateral securing such loans may not be
sufficient in value to assure repayment. The Company is also exposed to risk
from client fraud. The Company is exposed to similar credit risks with respect
to the account debtors on the accounts receivable purchased by the Company.
Credit losses could have a material adverse effect on the Company's operating
results. While management has taken measures intended to limit exposure to any
one client or account debtor, there can be no assurance that such measures will
be effective in avoiding undue credit risk. In addition, there can be no
assurance that the Company's allowance for credit losses is adequate to absorb
all future charge-offs arising from the Company's accounts and loans receivable.
At September 30, 1998, the Company's earning assets in each of the
energy-related, wholesale and retail sales, and transportation sectors
represented over 10% of the Company's total earning assets. A downturn in any of
these sectors could have a material adverse effect on the Company's operating
results.
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
16
<PAGE> 17
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 at a
lower cost than the Company. See "The Company -- Competition."
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent upon the
general economic conditions of the geographic markets it serves. Unlike larger
financial institutions which are more geographically diversified, the Company
provides financial services to clients located primarily in Texas, California
and the Gulf Coast. No assurance can be given concerning the economic conditions
which will exist in such markets.
CONCENTRATION OF OWNERSHIP
As of September 30, 1998, the Company's senior management and directors
beneficially owned approximately 39% of the outstanding shares of Common Stock.
Accordingly, these stockholders, if they vote together, will have significant
influence over matters requiring stockholder approval, including election of the
Company's directors and certain extraordinary transactions. The Company's
charter does not permit cumulative voting, which may adversely affect
stockholders' ability to elect a particular nominee to the board of directors of
the Company. Additionally, the Company's charter and bylaws contain provisions
which may make changes in management and control of the Company more difficult
than would be the case absent such provisions.
VOLATILITY OF RECEIVABLES PORTFOLIO AND OPERATING RESULTS
The size of the Company's receivables portfolio and the Company's aggregate
volume of receivables purchased can vary significantly during a year due to
differences in timing of collections and purchases of receivables and the volume
of receivables available to be purchased from clients. The Company's results of
operations can also vary significantly, and unpredictably, from quarter to
quarter.
REGULATORY RISKS
The financial industry is subject to compliance with state usury laws,
which generally limit the amount of interest that a creditor may contract for,
charge or receive in connection with the loan of money. Compliance with state
usury laws affects the operational profitability of the Company. In addition,
certain receivables purchased by or pledged to the Company in connection with
certain of its clients whose account debtors include the United States or
departments or agencies thereof (the "Federal Government") are subject to the
Federal Assignment of Claims Act ("FACA"). FACA is primarily intended to protect
the Federal Government, not shareholders or other creditors. Non-compliance with
FACA causes the Company to lose any right it may have to receive payments
directly from the Federal Government. Regulations affecting the financial
industry are undergoing continuous change, and the ultimate effect of such
changes cannot be predicted. Regulations and laws affecting the Company may be
modified at any time, and new legislation affecting financial institutions may
be proposed and enacted. There is no assurance that such modifications or new
laws will not materially and adversely affect the business, conditions, or
operations of the Company. See "The Company -- Government Regulation."
IMPACT OF INTEREST RATE CHANGES
The Company's results of operations are principally dependent on net
interest and discount income, calculated as the difference between interest
earned on loans and investments and discounts earned on accounts receivable
purchased and the interest expense paid on borrowings. Like other financial
institutions, the Company's interest and discount income and interest expense
are affected by general economic and financial conditions. While management has
taken measures intended to manage the risks of operating in a changing interest
rate environment, there can be no assurance that such measures will be effective
in avoiding undue interest rate risk.
17
<PAGE> 18
DEPENDENCE ON KEY OFFICER
The success of the Company's business is dependent in significant part on
the efforts and abilities of its Chief Executive Officer, Robert J. McGee. The
loss of the services of Mr. McGee could have a material adverse effect on the
Company.
YEAR 2000
KBK is subject to risks associated with the year 2000 problem, a term which
refers to uncertainties about the ability of various data processing hardware
and software systems to interpret dates correctly after the beginning of the
year 2000. Although the Company has initiated a company-wide program to prepare
the Company's computer systems and applications for the year 2000 and believes
that its year 2000 conversion project will be completed by July 1, 1999, there
can be no guarantee that year 2000 compliance issues that may be created by
clients, debtors and financial institutions with whom the Company does business
will be resolved. Disruptions caused by system failure or miscalculation as a
result of year 2000 noncompliance could have a significant impact on the
Company's operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Impact of the Year 2000 Issue."
USE OF PROCEEDS
The proceeds to be received by the Trust from the sale of the Trust
Securities will be used by the Trust to purchase the Debentures. The Company
intends to use the net proceeds from the sale of such Debentures to repay
approximately $13.9 million of short-term indebtedness and for general corporate
purposes.
THE COMPANY
OVERVIEW
KBK Capital Corporation is the holding company for KBK Financial, Inc., an
independent financial services company that provides a broad line of financial
products and services to middle market commercial businesses with credit needs
of less than $10 million. The Company was founded in 1962 as a factoring company
for energy-related receivables in Texas. Factoring has served as the cornerstone
of KBK's growth. In 1994, the Company began introducing new products in an
effort to expand its client base and to meet the needs of its existing clients
as their credit quality improves. These products include purchase revolvers,
working capital loans, term loans and mezzanine loans. Factoring, purchase
revolvers, working capital loans, and term and mezzanine loans represented
approximately 36%, 17%, 15%, and 32%, respectively, of the Company's earning
assets at September 30, 1998. "Earning assets" means owned and managed factoring
facilities, purchase revolvers, commercial loans and mezzanine loans.
KBK's client base consists primarily of businesses with annual revenues
ranging from $1 million to $50 million. The Company's clients typically have
rapidly expanding operations which drive their need for capital. KBK strives to
provide fast, flexible and creative solutions that are tailored to meet these
needs. This approach has provided KBK with a strong reputation in the middle
market and a well-diversified client base. The Company's clients are located in
eleven states and are engaged in a range of businesses, including energy-
related, manufacturing, wholesale and retail distribution, and other businesses.
As of September 30, 1998, only one client had amounts outstanding under its
facilities in excess of 10% of the Company's earning assets, constituting 11.3%
of earning assets.
The Company has consistently employed a disciplined credit approach which
has enabled it to increase earning assets, minimize credit losses and generate
36 consecutive years of profitability. The Company's earning assets have grown
from $23.0 million as of December 31, 1993 to $149.3 million as of September 30,
1998. The ratio of net charge-offs to average earning assets over the same
period has declined from 2.1% in 1993 to 1.0% for the twelve months ended
September 30, 1998. The Company has also maintained prudent credit reserves. As
of September 30, 1998, KBK's allowance for credit losses was $1.9 million, or
1.3% of total earning assets.
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<PAGE> 19
The Company's factoring facilities generally involve an on-going or
revolving agreement to purchase eligible new receivables. Factoring involves the
Company's purchase and the client's true sale of accounts receivable which
usually are individually ledgered, invoice-by-invoice on the Company's books.
The Company offers a full range of factoring products and services, including
notification, non-notification, verification, non-verification and non-recourse
factoring as well as several other hybrid variations. See "The Company --
Products." The obligors or "debtors" of the factored receivables typically
represent large, financially strong businesses, many of which are ranked in
Fortune Magazine's Fortune 1000 list. As of September 30, 1998, KBK's portfolio
of owned and managed receivables purchased under factoring facilities totaled
$52.2 million. The Company's yield on its factoring portfolio was 20.2% in 1997
and 21.8% for the nine months ended September 30, 1998.
In addition to factoring or purchasing accounts receivable on a specific
"invoice-by-invoice" ledgered basis, the Company also purchases accounts
receivable as a revolving "pool." Under this arrangement, the client sells all
receivables as and when they are generated by the business and KBK makes
periodic advances upon a request by the client, in aggregate amounts up to the
client's maximum availability limit. The Company's yield on purchase revolvers
was 14.2% in 1997 and 13.1% for the nine months ended September 30, 1998.
KBK's commercial loan portfolio includes working capital and term loan
facilities that are typically secured by a first lien on accounts receivable,
inventory, equipment, owner-occupied real estate or other assets. The working
capital lines of credit have maturities of up to two years, while term loans are
structured with monthly payments and maturities which typically range from one
to five years. Most of the Company's commercial loan products are priced on a
floating rate basis over the Company's announced base rate. During 1997 and the
nine months ended September 30, 1998, the Company's yield on its commercial loan
portfolio was 12.1% and 12.8%, respectively.
The Company's mezzanine loan product, which was introduced in 1998, offers
an attractive financing alternative for customers whose growth has outpaced
their borrowing capacity from senior debt sources. The Company's strategy with
respect to mezzanine loans is to extend the duration of its current
relationships and offer the Company's traditional products to new customers. It
is anticipated that KBK's mezzanine financings will typically have fixed
interest rates as well as warrants to acquire equity in the borrower. Since
introducing the product in the first quarter of 1998, the Company has reviewed
approximately 145 transactions. To date, the Company has funded two loans for an
aggregate investment of $5.0 million.
In 1997, the Company established a secured credit facility through a
conduit commercial paper issuer to diversify its funding sources and reduce its
cost of capital. Under this arrangement, KBK sells certain receivables and
certain inventory loans to the conduit on a non-recourse basis; such assets are
pooled with similar types of assets acquired by the conduit from other
unaffiliated companies and serve as collateral for revolving commercial paper
issuances. KBK continues to manage and service the assets sold by KBK to the
conduit in exchange for a fee based on the balance of such assets. As of
December 31, 1997 and September 30, 1998, KBK had $67.0 and $74.2 million,
respectively, of receivables and inventory loans outstanding in the conduit
facility and during 1997 and the first nine months of 1998 the Company had
received approximately $6.3 million and $5.9 million, respectively, in fees
related to managing and servicing such assets. Currently, the Company has the
ability to fund up to $75.0 million through the conduit facility and expects
this limit to be increased to $100.0 million as the result of continued growth
in earning assets. The financing provided by this facility is off-balance sheet
and the Company realizes no gain on transfer of the assets to the conduit.
Servicing income is credited as received. The Company believes that the conduit
facility will enable it to significantly expand its owned and managed portfolio
while simultaneously minimizing its balance sheet leverage.
Over the past five years, the Company has posted strong growth in revenue
and consistent profitability within reasonable leverage levels. Revenues have
increased from $6.3 million for 1993 to $15.2 million for 1997 and $13.2 million
for the nine months ended September 30, 1998. This growth was largely attributed
to an increase in KBK's total earning assets, which rose from $23.0 million as
of December 31, 1993 to $149.3 million as of September 30, 1998. Net income
increased from $1.4 million in 1993 to $2.1 million in
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<PAGE> 20
1997 and $2.1 million for the nine months ended September 30, 1998. The
Company's ratio of earnings to fixed charges was 3.9x at December 31, 1993 and
2.6x at September 30, 1998.
The Company is incorporated in the state of Delaware and its headquarters
are located at 301 Commerce Street, 2200 City Center II, Fort Worth, Texas
76102. The Company's general telephone number is (817) 258-6000. KBK maintains
six offices: three in Texas, and one in each of Louisiana, California and
Missouri.
STRATEGY
The Company's long-term goal is to be a leader in providing financial
products and services to middle market businesses in the United States. By
serving the financial and capital needs of this growing segment, the Company
believes that it can achieve strong growth and generate a return on assets above
other financial institutions. The Company believes that it has been very
successful in achieving an appropriate balance between asset growth, asset
quality and profitability through strict adherence to proven systems for
origination, underwriting and monitoring. During the course of the past five
years, the Company has leveraged its existing market presence into new product
lines to enable its clients to transition into lower-priced financial products
and services as their business expanded and credit quality improved.
Additionally, the Company expanded its geographic presence in key metropolitan
markets through both new office openings and the development of relationships
with regional correspondent banks. The Company remains committed to focusing on
its core middle market commercial finance business. Going forward, KBK's growth
strategies include increasing market penetration, introducing additional
products and services, expanding market presence and pursuing strategic
acquisitions and partnerships.
Increase Market Penetration. A critical aspect of KBK's long-term growth
objective is to increase its earning asset base from existing markets. The
Company's strategy is to (i) continue improving the productivity of its
marketing force through extensive market planning and a compensation program
tied directly to targeted objectives, (ii) add additional marketing
professionals and (iii) train its marketing force to cross-sell existing and new
products. Each year, KBK's account officers are required to develop a marketing
plan with respect to existing customer business and new business prospects. This
active business development program is designed to enable KBK account officers
to identify an ample number of new high-quality business opportunities, thereby
improving selectivity and increasing market penetration. In order to meet their
objectives, account officers are provided with on-going training in the areas of
credit analysis, product application and relationship development and retention.
Expand Product Line. Another element of KBK's growth plan is the continued
introduction of new products and services. Since 1995, the Company has
introduced a variety of commercial finance products and services designed to
meet the needs of its core middle market client, broaden its client base and
diversify its portfolio mix. Many of these products enable KBK's former
factoring clients to transition to other financial products and services as
their credit quality improves and, accordingly, have allowed the Company to
lengthen the duration of its relationships. In addition, a growing component of
KBK's portfolio is comprised of conventional commercial loans extended to
clients with more than two years of tenure with the Company. The mezzanine
market has also generated a number of high quality conventional commercial loan
prospects. See " -- Products."
Expand Market Presence. Today, KBK maintains a significant presence in six
large metropolitan areas (Dallas/Fort Worth, Houston, Los Angeles, New Orleans,
San Antonio and St. Louis). KBK's goal is to have a physical presence in a
substantial number of the nation's largest markets. The Company has a two-step
approach that enables KBK to establish wholesale client relationships and an
asset base prior to committing to the overhead expenses associated with opening
a new office. Through its Correspondent Banker(TM) Program, KBK has established
a network of local or regional commercial banks to source deals in exchange for
a participation in the deal or an origination fee. Once an adequate portfolio
has been established to justify incremental costs, the Company may establish a
new marketing office.
The foundation of the Correspondent Banker(TM) Program is a computer-based
scanning and imaging system for factoring across the Internet. This system was
originally developed for use in the Company's own
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<PAGE> 21
marketing offices. However, in late 1996, the Company began prototyping the
system and filed a patent application covering the process in 1998. Under this
method, the bank identifies prospective factoring clients. Both KBK and the bank
underwrite each new client, and KBK also reviews and underwrites each individual
invoice. After the credit analysis and underwriting are performed, the bank
funds the invoice. KBK administers the collection process and the bank and KBK
split revenue and any losses. The Company's St. Louis area office, opened in
early 1998, is primarily focused on marketing this system to community banks
across the country. Currently, KBK has four banks operating under contracts for
the system.
Pursue Strategic Acquisitions and Partnerships. Also important to the
Company's strategy is the pursuit of opportunistic acquisitions and formation of
key partnerships. The Company focuses on acquisition candidates who can expand
KBK's origination capabilities, product line, cross-selling potential and market
penetration, as well as those which add to its asset base. Given current
conditions in the specialty finance market, the Company's management continually
evaluates potential acquisition opportunities. Accordingly, at any particular
time, the Company may be involved in negotiations (at various stages) to acquire
other companies.
In addition to acquisitions, KBK will continue to explore partnerships
which complement or leverage the Company's product portfolio or client
relationships. During the past several years, KBK has formed a number of
important partnerships. For example, KBK currently offers equipment lease
financing through third party equipment leasing companies. KBK also originates
real estate loans to its clients and may participate or sell such loans to an
unaffiliated real estate lender. KBK collects an origination or placement fee
from its client or the third party.
PRODUCTS
The Company currently offers factoring facilities; purchase revolver
facilities; commercial loans secured by accounts receivable, inventory,
equipment, owner-occupied real estate or other assets of the borrower; and
mezzanine loans. The Company intends to offer a broad line of financing products
to commercial businesses in the middle market in order to provide a single
source of financing for these businesses. The Company also sells third party
products to existing customers on a fee basis. KBK believes that this breadth of
financing services for middle market clients differentiates the Company from its
competitors and enables its clients to transition between products as their
businesses expand and credit quality improves. Factoring, purchase revolvers,
working capital loans, and term and mezzanine loans represented approximately
36%, 17%, 15% and 32%, respectively, of the Company's earning assets at
September 30, 1998. The Company's four main product categories are described
below.
Factoring
Management believes KBK operates the largest and oldest independent
commercial factoring portfolio in the southwestern region of the United States.
KBK offers a full range of factoring products and services from traditional
"old-line" notification factoring to non-recourse, non-notification and
non-verification factoring. The Company's factoring facilities generally involve
an on-going or revolving agreement to purchase eligible new receivables. These
agreements generally are cancelable by KBK upon 30 days notice and range between
$500,000 and $2 million in facility size. The facilities involve the purchase of
receivables and therefore qualify for off-balance sheet treatment on the
client's books and provide KBK with some insulation from consolidation and other
risks in the event of client bankruptcy.
Factored receivables are individually ledgered on an "invoice-by-invoice"
basis in the Company's proprietary data processing system and all collections
are matched and posted against the original invoice. This proprietary system
includes a management information system which tracks performance and risk
trends by customer or "client", by obligor or "debtor", as well as measures the
performance of the aggregate portfolio. The factoring system also allows KBK
account executives and senior management to select from a broad menu of reports
and analytical tools. Many of these system reports are also provided to the
Company's clients via the Internet. The Company's electronic client files track
purchase volume, customer concentrations, account agings, dilution and other key
data for each of the Company's clients and provides a trendline
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<PAGE> 22
perspective over the span of the client relationship. The Company's debtor files
include a data base with active files covering more than 20,000 U.S. businesses.
These files are regularly updated and include (a) financial information gathered
directly from the debtor, rating agencies, credit services and other public and
private data sources, (b) payment habits and patterns developed by profiling
KBK's historical experience with the particular debtor spanning across all
clients and time periods, which helps the Company identify when a particular
debtor begins stretching trade payables' and may be experiencing a deterioration
in financial capacity, and (c) reference checks with trade, industry sources as
well as other factoring companies. Perpetual maintenance of these debtor files
allows the Company to establish maximum debtor exposure limits prior to
receiving a specific purchase request from any particular client. Each debtor
exposure limit is refreshed periodically on a pre-determined schedule, allowing
spontaneous response to individual client requests.
The Company purchases individual accounts receivable for a negotiated price
which is less than the face amount, based upon the size, age and type of
accounts being purchased, the quality of client documentation and the Company's
knowledge of the payment history and judgment of the creditworthiness of the
account debtors. KBK generates revenue through a combination of discounts and
fees that are negotiated on a client-by-client basis.
The following describes the factoring products offered by the Company in
the course of its factoring business. These products are blended in various
combinations, on a case by case basis, to formulate the particular structure
most appropriate for a particular client's needs and risk profile.
Notification Factoring is most appropriate for small businesses that lack
the capacity to provide a lender with the financial information required to
evaluate their capacity to repay debt through cash flow. In this style of
factoring, the Company typically notifies or instructs the debtor to remit
payments directly to KBK. Notification can be accomplished by stamping a notice
of the assignment and remittance instructions on the face of the original
invoice transmitted to the debtor or by sending a separate letter, usually by
certified mail, to the debtor. Irrespective of the method of notification, once
properly notified of the assignment, the debtor is obligated to remit payment
for assigned receivables directly to KBK or risk liability for double payment.
The operational burden and expense incurred in this notification process is
greatly reduced by KBK's automated systems.
Non-notification Factoring is when the debtor of the accounts receivable is
not notified of the purchase. Instead, KBK purchases the receivables, relying
principally on documentation and representations provided by the client.
Although this reliance on client documentation and representations exposes the
Company to the possibility of conversion fraud by dishonest clients,
non-notification factoring is intended for higher quality clients. Such clients
view notification as potentially disruptive to sensitive customer relationships,
who may perceive such notification from a factor as an indicator of weakness in
their vendor. Consequently, clients seek to avoid this intrusion whenever
possible. Non-notification transactions have historically comprised the majority
of KBK's factoring portfolio and management believes this form of factoring
differentiates KBK's facilities from its competitors, allowing the Company to
build and retain a portfolio of higher quality clients. However, even in
non-notification transactions, KBK always reserves the right to place the debtor
on notice of the assignment. KBK's due diligence, reference checking, automated
risk management systems and frequent audits have allowed the Company to limit
its losses during the past 36 years.
Verification Factoring typically entails contacting the debtor prior to
purchase, and confirming that the individual invoices underlying the receivables
offered for sale are valid, due and payable at par without offset. Verification
is a labor intensive exercise, normally accomplished by phone conversation
directly with the debtor. However, written verification is occasionally
required. Most verification factoring accounts also require debtor notification
as a precedent to purchase. Verification factoring represents a small proportion
of KBK's portfolio, limited primarily to troubled higher risk clients. Even in
such accounts, KBK normally limits the verification process to a sampling of
large or unusual receivables.
Non-verification Factoring, like non-notification factoring, may subject
the Company to greater reliance on client documentation and representations and
consequently exposes the Company to the possibility of fraud by dishonest
clients. However, clients view the verification process at least as disruptive
to sensitive customer relationships as the notification process. Consequently,
KBK's willingness to forgo intrusive debtor verification
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<PAGE> 23
in exchange for upfront due diligence, reference checking and frequent audits
differentiates KBK's facilities from its competitors. Management believes this
form of factoring has allowed the Company to build and retain a portfolio of
higher quality clients. Just as non-notification transactions can be converted
to notification accounts at KBK's discretion, non-verification accounts can
become verification accounts as circumstances warrant. KBK typically engages in
non-verification factoring.
Recourse Factoring, which is commonly practiced across the factoring
industry, is not a prevalent aspect of KBK's factoring business. In recourse
transactions, the client is fully liable for repayment of all factoring advances
in the event of non-collection of an account. This style of factoring is
virtually indistinguishable from specific receivable lending. It is KBK's view
that full recourse to the client may substantially weaken defendability of the
transaction as a true sale, exposing the factor to the risk of consolidation,
and other risks, in the event of a client bankruptcy.
Non-recourse Factoring entails the purchase of receivables without recourse
to the seller for some or all elements of risk in the event of non-payment. This
transference of some element(s) of risk is generally the primary determinant in
distinguishing between a sale and a loan transaction. KBK's factoring
transactions are typically structured as non-recourse transactions, in which the
Company assumes the burden of credit risk for the debtor's inability to pay,
subject to the Company's right to offset any credit loss against any
pre-established client reserves. However, the risk of non-payment resulting from
the delivery of faulty merchandise or deficient services remains the
responsibility of the client, as well as any debtor offsets or reductions the
debtor may have from the original invoice amount. While KBK bears the full
burden of the debtor credit risk in such transactions, it is the Company's view
that assumption of this risk is controllable because KBK has the right to refuse
to purchase receivables payable by low quality, high risk debtors.
During 1997 and the first nine months of 1998, KBK purchased receivables
with a face-amount totaling approximately $426.4 million and $360.6 million,
respectively, from clients spanning a broad range of industries. In 1997 and for
the first nine months of 1998, KBK's yield on these factoring facilities was
20.2% and 21.8%, respectively.
Purchase Revolver Facilities
In addition to factoring or purchasing accounts receivable on a specific
invoice-by-invoice ledgered basis, the Company also purchases accounts
receivable as a revolving "pool." These purchases are sometimes referred to as
revolving purchase facilities, pooled purchase facilities or batch purchase
facilities and closely resemble a conduit financing structure in which the
client transfers ownership of all of its receivables to KBK and receives
off-balance sheet treatment for the transaction. Under this arrangement, the
client sells all receivables as and when they are generated by their business
and KBK makes periodic advances upon request by the client, in aggregate amounts
up to the client's maximum availability limit. The maximum availability limit
under these facilities is similar to a borrowing base availability limit and is
typically calculated at approximately 80% of eligible receivables, less the
current balance of prior advances. Generally these transactions are entered into
with clients who have greater financial stability, larger volumes of invoices,
and more sophisticated management information and reporting systems. When such
purchases are transacted, KBK does not perform an individual review of each
purchased invoice and associated documentation. Rather, the documentation is
held in trust by the client and the Company earns discounts on the amount paid
for purchased receivables. KBK's yield for revolving purchase facilities during
1997 and the first nine months of 1998 was 14.2% and 13.1%, respectively.
Commercial Finance
The Company offers a variety of financings that are similar to those
offered by commercial banking institutions and asset-based lenders. The
following describes these in further detail.
Working Capital Lines of Credit. KBK provides working capital for rapidly
growing companies through borrowing base lines of credit. The amount of the
financing is predicated on the current value of the underlying receivable and
inventory collateral. Generally, the Company advances up to 80% against its
clients' eligible accounts receivable and up to 50% on eligible inventory.
Typically, aggregate inventory advances cannot
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<PAGE> 24
exceed aggregate advances against receivables. The monitoring frequency on lines
of credit varies from daily to monthly, depending upon the underlying financial
condition of each particular borrower. The term of these facilities generally
does not exceed two years for accounts receivable and one year for inventory,
and the interest rate is typically floating based upon a spread over the KBK
base rate and is payable monthly. The Company's average yield on this product
was approximately 13.0% in 1997 and 12.3% for the first nine months of 1998.
Term Loans. KBK provides term loans with variable rates and terms to
finance the purchase of equipment, machinery and other general corporate
purposes. These term loans generally have maturities of up to five years. KBK
provides capital expenditure lines, which are pre-approved commitments for new
equipment purchases, refinancing of existing equipment and other capital
expansion needs. Loan amounts and repayment terms are based on the type and
appraised value of the underlying collateral. All term loans are supported by
independent collateral appraisals and require monthly payments which are
direct-debited (through automatic clearinghouse debits) from each client's bank
account. The Company's yield on this product was 11.2% in 1997 and 13.0% for the
first nine months of 1998.
Letters of Credit. KBK provides stand-by and documentary letters of credit
("L/Cs") on behalf of its clients. These L/Cs generally support the client's
import or export activity and are fully secured by collateral acceptable to KBK.
Typically, KBK arranges the issuance of the letters of credit through one of
KBK's lenders. On occasion, however, KBK may issue the letter of credit directly
and have it confirmed, if required, by one of its lenders. Typically, KBK
charges a flat fee of between 2.0% and 3.0% for each L/C and pays 1.0% per annum
to the issuing or confirming bank.
Equipment Leasing. KBK offers equipment leases on negotiated terms based
on those available from the Company's leasing company correspondents. Currently,
KBK refers these opportunities to the equipment leasing companies in exchange
for an origination or referral fee.
Mezzanine Loans
KBK's new mezzanine product offers financing alternative for customers
whose growth has outpaced their borrowing capacity from traditional senior debt
sources. The Company's strategy for mezzanine loans is to extend the length and
depth of current relationships and provide the Company's traditional products to
new customers. KBK's mezzanine financings will generally not exceed $5.0 million
and will have fixed interest rates and bullet maturities. In addition to upfront
closing fees and a current coupon, KBK seeks to receive warrants to acquire
equity in the borrowers. KBK will consider participating as a lead or
co-investor in larger transactions, which tend to be expansion financings,
recapitalizations and divestitures, or leveraged and/or management buyouts.
Since introducing the product in the first quarter of 1998, the Company has
reviewed approximately 145 transactions. To date, the Company has funded two
mezzanine loans, representing an aggregate principal investment amount of $5.0
million.
EARNING ASSETS ANALYSIS
KBK has significantly expanded its portfolio over the past five years. As
of September 30, 1998, the Company's owned and managed portfolio was $149.3
million, comprised of $75.1 million of receivables owned and $74.2 million of
receivables under management.
From an asset management perspective, the Company does not differentiate
between its owned and managed portfolio. Although all receivables sold to the
conduit facility are non-recourse to KBK, the Company monitors concentration
limits and credit quality and determines credit losses on the combined amount of
owned and managed assets. This conservative approach enables the Company to
track the performance of its portfolio on a consistent basis year over year.
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<PAGE> 25
The following chart summarizes the Company's owned and managed portfolio
over the past five years:
OWNED AND MANAGED ASSETS PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Accounts Receivable(1)......... $ 76,679 $ 75,383 $53,926 $40,378 $51,739 $22,240
Loans Receivable and
Other(2)..................... 68,132 35,204 27,376 5,610 241 431
Non-Performing Assets.......... 4,486 2,176 1,658 496 460 377
-------- -------- ------- ------- ------- -------
Gross Owned and Managed
Assets....................... $149,297 $112,763 $82,960 $46,484 $52,440 $23,048
======== ======== ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes factoring and purchase revolvers; includes $66,991 and $72,250 of
managed assets sold to the conduit facility outstanding as of December 31,
1997 and September 30, 1998, respectively.
(2) Includes $12,130 and $14,921 of managed assets sold to the conduit facility
outstanding as of December 31, 1997 and September 30, 1998, respectively.
Diversification
The Company seeks to diversify its portfolio of earning assets so as to
limit exposure to any one specific industry. On the purchased accounts
receivable portfolio, the Company tracks concentration by the industry of the
account debtor as shown in the following table.
GROSS ACCOUNTS RECEIVABLE(1)
(MANAGED AND OWNED) BY INDUSTRY OF ACCOUNT DEBTORS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OUTSTANDING AS OF PERCENTAGE OF OUTSTANDING AS OF PERCENTAGE OF
INDUSTRY OF ACCOUNT DEBTORS SEPTEMBER 30, 1998 TOTAL DECEMBER 31, 1997 TOTAL
--------------------------- ------------------ ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Wholesale, Retail Sales........... $21,473 28.0% $17,860 23.7%
Energy Related.................... 9,131 11.9 10,365 13.8
Transportation.................... 7,971 10.4 5,298 7.0
Services.......................... 4,717 6.2 4,507 6.0
Manufacturing..................... 3,817 5.0 3,509 4.7
Engineering & Construction........ 2,076 2.7 3,286 4.3
Federal, State & Local Govt....... 1,027 1.3 1,332 1.8
Other............................. 829 1.1 3,304 4.4
Communications.................... 478 0.6 611 0.8
Environmental Services............ 411 0.5 805 1.0
Agriculture....................... 221 0.3 7 0.0
Pool Purchases.................... 24,528 32.0 24,499 32.5
------- ------ ------- -------
Total........................ $76,679 100.0% $75,383 100.0%
======= ====== ======= =======
</TABLE>
- ---------------
(1) Includes factoring and purchase revolvers, which represented 51.3% and
66.8%, respectively, of the Company's earning assets as of September 30,
1998 and December 31, 1997.
As of September 30, 1998, the Company's ten largest account debtors
represented 21.5% of total receivables purchases and 31.5% of the receivables
balance. No single debtor accounted for more than 8.9% of receivables under
management as of September 30, 1998.
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TEN LARGEST ACCOUNT DEBTORS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE OF RECEIVABLE
TOTAL 1998 TOTAL BALANCE PERCENTAGE OF
RECEIVABLE RECEIVABLE SEPTEMBER 30, SEPTEMBER 30,
DEBTOR PURCHASES PURCHASES 1998 1998 BALANCE
------ ---------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Ocean Marine Navigation Company......... $14,429 4.0% $ 4,630 8.9%
Otto Candies............................ 14,420 4.0 2,575 4.9
Home Depot Inc.......................... 8,107 2.3 1,050 2.0
Keystone Shipping Co.................... 7,470 2.0 1,793 3.4
Gulfmark Offshore....................... 6,570 1.8 2,190 4.2
RMIC/Republic Mortgage.................. 6,531 1.8 818 1.6
American Overseas Marine Corp........... 6,493 1.8 1,487 2.9
Lucent Technologies, Inc................ 5,740 1.6 770 1.5
PGS Exploration......................... 3,871 1.1 0 0.0
Petrozuata C.A.......................... 3,755 1.1 1,112 2.1
------- ---- ------- -----
Total.............................. $77,386 21.5% $16,425 31.5%
======= ==== ======= =====
</TABLE>
In the loans receivable portfolio, the Company tracks the concentration of
the borrowers, as shown in the following table.
GROSS LOANS RECEIVABLE(1)
(MANAGED AND OWNED) BY INDUSTRY OF CLIENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OUTSTANDING AS OF PERCENTAGE OF OUTSTANDING AS OF PERCENTAGE OF
INDUSTRY OF CLIENTS SEPTEMBER 30, 1998 TOTAL DECEMBER 31, 1997 TOTAL
------------------- ------------------ ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Manufacturing..................... $24,643 36.2% $11,734 33.3%
Energy Related.................... 17,886 26.3 12,793 36.3
Services.......................... 8,165 12.0 0 0.0
Engineering and Construction...... 6,716 9.9 7,111 20.2
Transportation.................... 5,000 7.3 0 0.0
Agriculture....................... 3,100 4.5 1,000 2.9
Wholesale and Retail Sales........ 2,050 3.0 1,006 2.9
Other............................. 572 0.8 1,560 4.4
------- ----- ------- -----
Total........................ $68,132 100.0% $35,204 100.0%
======= ===== ======= =====
</TABLE>
- ---------------
(1) Includes working capital, term and mezzanine loans, which represented 45.6%
and 31.2%, respectively, of the Company's earning assets as of September 30,
1998 and December 31, 1997.
Credit Quality
KBK's history of strong credit quality is a function of its stringent
underwriting standards and diligent administrative processes after funding. The
Company's underwriting procedures consist of a detailed credit analysis of the
client, the receivables and debtor bases (for a factoring facility) and the
collateral (for a loan), as well as extensive reference checks. Generally, the
proposed transactions with new clients must be reviewed by the Company's
centralized underwriting department and receive a majority vote by the
underwriting committee prior to approval. The multi-step approval process is
designed to ensure that all proposed transactions conform with KBK's credit and
collateral standards. See "-- Underwriting and Operations and Controls."
26
<PAGE> 27
After funding, the credit quality of the Company's portfolio is closely
monitored by KBK's asset quality committee. The committee regularly re-evaluates
the initial risk grade assigned to each client transaction. These ratings are
either reaffirmed or changed based upon the client's financial condition,
previous history or experience with the client, the quality of the underlying
collateral, as well as any other relevant factors.
Delinquencies and Charge-off Policies
The asset quality committee reviews all delinquent accounts on a weekly
basis. Any purchased account that is owned for more than 45 days requires the
appropriate credit officer to submit a full explanation of the circumstances
surrounding the delinquency and specific steps implemented to rectify the
problem. When the asset quality committee determines that an account is doubtful
as to its collection, including discount or interest income, the entire amount
of the account is placed on non-performing status. After an account is placed on
non-performing status, no income is accrued until circumstances indicate that
such income is collectible. Upon an asset becoming non-performing, the Company
commences aggressive collection efforts, including negotiated resolutions with
its clients and prompt liquidation of collateral or purchased accounts
receivable.
Accounts are charged off when the Company believes that it can reasonably
expect to incur a loss or if it expects to incur substantial collection or other
expenses to collect the amount due. Accounts are written down to the net
realizable value or charged-off completely when the Company believes that such
treatment is warranted. As a matter of policy, all accounts that are more than
120 days past-due are charged off, unless the Chief Credit Officer determines
that collection is in process and the balance has a reasonable probability of
collection. Historically, KBK has not experienced large concentrations of past
due accounts. As of September 30, 1998, past dues in excess of 90 days were 1.1%
of total receivables.
Allowance for Credit Losses
The allowance for credit losses is an amount which, in the judgment of
senior management, is adequate to absorb the estimated losses from KBK's
portfolio of earning assets. The amount of the provision for possible credit
loss charged to earnings is determined each quarter based on the adequacy of the
reserve relative to the quality and size of the portfolio.
The adequacy of KBK's allowance for credit losses is reviewed on a
quarterly basis by the Board of Directors' asset quality committee utilizing a
matrix approach. The matrix measures the Company's actual loss experience over
the past three, five and seven year periods and calculates an optimum required
reserve for each asset class based upon the greater of (i) the Company's actual
loss experience over any of the three time periods or (ii) the Board of
Directors' approved minimum reserve. In determining this minimum reserve the
Board of Directors considers the size of the portfolio, the level of
non-performing assets and any known portfolio loss exposures. The matrix also
performs stress test analyses on the allowance to discern the impact of various
growth scenarios. In addition to this matrix, the committee also takes into
account subjective factors, such as known and inherent risks in the portfolio,
adverse situations that may affect repayment, the potential for additional costs
to perfect title to collateral and current and prospective economic situations,
as well as such other factors as the Board of Directors may from time to time
deem appropriate. Management's goal is to maintain an allowance for credit
losses within the range of the calculated minimum and maximum optimum reserve;
however, from time to time, the reserve may be below or above the optimum band.
27
<PAGE> 28
ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------------------------
SEPTEMBER 30, 1998 1997 1996 1995 1994 1993
------------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period..... $ 1,929 $1,608 $1,729 $1,658 $1,161 $1,000
Provision for credit losses........ 1,100 875 245 600 65 588
Charge-offs........................ (1,088) (764) (404) (541) (470) (569)
Recoveries......................... 2 210 38 12 41 142
Reserve from acquisition........... -- -- -- -- 861 --
------- ------ ------ ------ ------ ------
Balance at end of period........... $ 1,943 $1,929 $1,608 $1,729 $1,658 $1,161
======= ====== ====== ====== ====== ======
Allowance for credit losses as a
percentage of owned receivables
at end of period................. 2.6%(1) 4.2%(1) 1.9% 3.7% 3.2% 5.0%
</TABLE>
- ---------------
(1) The allowance for credit losses as a percentage of owned and managed
accounts and loans receivable was 1.3% as of September 30, 1998 and 1.7% as
of December 31, 1997.
SALES AND MARKETING
KBK's sales and marketing efforts are conducted through six offices located
in Houston, Fort Worth, New Orleans, San Antonio, the Los Angeles area and the
St. Louis area. These offices allow the Company to establish and maintain close
personal relationships with each client and the network of referral sources.
The Company markets its services through direct solicitation of prospective
new clients, as well as the solicitation of referrals from providers of various
services to middle-market businesses, such as commercial bankers, lawyers and
accountants. Management believes these sources refer quality clients who are
likely to have the financial information and reporting systems necessary for the
Company to make a sound credit evaluation. In addition, due to the Company's
long-standing reputation in the business, the Company also receives referrals
from current and former clients and direct inquiries from potential clients. The
Company has also begun to develop a formal network of correspondent community
and regional banks throughout the United States that generate prospective client
opportunities for KBK. Such correspondent banks receive a fee, or participate in
the transaction.
UNDERWRITING AND OPERATIONS AND CONTROLS
Underwriting
In addition to marketing responsibilities, each account officer is
responsible for performing initial credit evaluations and submitting the
required documentation for underwriting committee approval. Generally, the
account officers are most familiar with an individual customer's business, the
accounts receivable/collateral to be used in the financing as well as local
economic conditions. The Company maintains control over the quality of its
portfolio by utilizing a uniform set of evaluation steps and standards in the
underwriting process and well-established control mechanisms and audits to
monitor the financings after funding.
The account officers rely on their own due diligence and in-depth credit
investigations, supplemented by the use of outside credit reporting firms which
provide credit reports on potential clients and their principals. Once such
preliminary information is gathered, the account officers then submit this
information to the Company's central underwriting department for independent
evaluation. Typically, the underwriting department focuses its evaluation on the
following items: (a) the client's financial condition; (b) the quality of the
client's debtor base; (c) the nature and enforceability of the client's sales
transactions; and (d) reference checks with major customers, vendors, attorneys,
accountants and other service providers.
For loan facilities, KBK's credit analysis focuses on (i) the prospective
client's past and anticipated ability to generate sufficient cash flow to
adequately service its debt in the ordinary course of business and (ii)
28
<PAGE> 29
the value of collateral pledged as a secondary source of repayment. For
factoring facilities, the credit evaluation focuses on an analysis of the (a)
debtor's capacity to pay, (b) the debtor's obligation to pay and (c) the
client's level of financial stress which might provide a motive for
misrepresentation of, or the unauthorized conversion of, factored receivables.
The debtor evaluation process principally consists of reference checks, review
of debtor debt ratings and a close analysis of the debtor's financial
statements, if available. In addition, the Company maintains online proprietary
information systems and active credit files covering the payment patterns of
more than 20,000 domestic and foreign debtors. The underwriting department
relies on these independent sources and typically does not contact or notify the
debtor during this process. Once the underwriting department feels comfortable
with the credit of the debtor, the focus is shifted to the client in order to
analyze the client's cash flows and financial statements. The client's accounts
receivable payment trends are also reviewed to determine the historical dilution
ratio of the client's receivable base. The final step in the credit evaluation
process is determining whether the client/debtor relationship is a good fit with
KBK's business focus. This subjective decision is based upon past customer
experience as well as the business and industry fit.
Once the review of the underwriting department's component evaluations are
satisfactorily completed, then an audit of the prospect is completed by KBK's
internal auditors. Upon review of the audit, the account officer prepares a
written presentation, summarizing the component evaluations and submits the
presentation to the underwriting committee for approval.
The voting members of the underwriting committee are comprised of senior
executive officers, and approval is based upon a majority vote of the committee
members. Client relationships in which KBK's aggregate commitment amount exceeds
$3.0 million require the approval of the designated members of the Board of
Directors in addition to the approval of the underwriting committee.
Operations and Controls
The operations and controls of the Company are centralized in Fort Worth,
Texas at the corporate headquarters. The responsibilities of the operational
area include reviewing all requests for advances under working capital lines of
credit and factoring facilities and supporting documents (invoices, purchase
orders, delivery evidence, sales journal, collection reports, etc.) and
monitoring the collateral and financial covenants. This unit of the Company is
segmented into two divisions, the funding division and the item processing
division.
For factoring facilities, extensive operational and control mechanisms are
required. In conjunction with the credit evaluation process, KBK's funding
division closely reviews all the potential receivables documentation, including
purchase orders, invoices, shipment notification and proof of sales and receipt
of goods. In addition, the funding division and the credit division must approve
all invoices prior to purchase. The funding division is responsible for
authenticating all documentation, and the credit division evaluates each
debtor's capacity to pay the invoice. Once advance approvals are granted by the
funding division and the credit division, an account executive from the credit
department must also approve each request prior to funding, and depending on the
client grade, management approval may also be required.
Once the funding occurs, the item processing division monitors and collects
the receivables through an established lock box system. The Company has a
proprietary sophisticated computer system to assist in this process. This system
tracks the incoming payment flows and generates daily reports such as agings,
collection, concentration, turnover, dilution and exception reporting.
When funding and monitoring a loan, the control process principally
involves evaluation and monitoring of the collateral pledged. When a client
desires funding on a working capital line of credit, an availability certificate
is completed by the client to verify accuracy. Based upon these results the
purchasing desk then calculates availability under the loan. Depending upon
availability, the client requests an advance, which must be approved by the
account executive prior to funding. Financial covenants are set for these
facilities and reviewed on a daily, weekly or monthly basis. All working capital
facilities are regularly audited for compliance.
29
<PAGE> 30
Prior to funding a term loan, an independent appraisal is received. Based
upon the valuation of the appraisal, the type of collateral financed and the
current and anticipated market for the collateral, an advance rate is
determined. The account officer and/or the audit department typically inspects
the equipment prior to funding. The client must show adequate current, past and
projected cash flow to service the debt. The maximum term for any term loan is
typically five years. Once approved by the underwriting committee, the term loan
is funded. All payments are collected through an automatic clearinghouse
transfer. The asset quality committee reviews all delinquent payments.
The Company also performs periodic on-site audits of all clients. The
auditing process is a diligent and detailed analysis similar to the credit
analysis performed prior to approval of the facility. The frequency of the audit
is dependent upon the risk rating of the client.
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 at a lower cost than the Company.
The Company's larger competitors include Comerica Bank, Heller Financial,
CIT, Congress Financial, FINOVA, the Foothill Group, a subsidiary of Norwest,
and Fremont Financial. Smaller regional competitors vary broadly from market to
market. 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, certain receivables sold or pledged to the Company are subject
to 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 very limited
circumstances. Certain aspects of the Company's purchased or pledged receivables
make compliance with FACA impractical or impossible, or make the protections
afforded by FACA unavailable to the Company. As a result, the Company does not
always comply with FACA when it purchases or receives a pledge of receivables
where the Federal Government is the account debtor, causing all assignments of
receivables purchased by the Company to which the Federal Government is the
account debtor to be unenforceable by the Company against the Federal
Government. Such failure to comply with FACA has no effect on the validity of
the assignment or pledge 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. However, 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, and 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 1997 and the
nine months ended September 30, 1998, respectively, the Federal Government
comprised 1.7% and 2.8% of the account debtors for the Company's total volume of
purchased
30
<PAGE> 31
receivables under management. 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, reserving, taking 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 index is less than 18% per year, the
creditor may, nevertheless, charge interest pursuant to a written agreement 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, reserving, taking or receiving interest at a
rate in excess of 18% per year. Section 339.004 of the Texas Finance Code
defines an "account purchase transaction" as an agreement in which a commercial
enterprise sells accounts receivable at a discount with or without a related
repurchase obligation. This law provides that the amount of any discount
associated with the purchase is not interest. Also, the law provides that the
parties' characterization of an account purchase transaction as a purchase is
conclusive that the transaction is not a loan.
EMPLOYEES
The Company had 72 full-time and two part-time employees at September 30,
1998, of whom six were employed in executive and administrative positions and 17
(including one executive officer) were employed in marketing. None of the
Company's employees is a party to any collective bargaining agreement, and the
Company considers its relations with employees to be satisfactory.
PROPERTIES
The Company leases its offices at each of its locations in Fort Worth,
Houston and San Antonio, Texas, New Orleans, Louisiana, the Los Angeles area and
the St. Louis area 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 may be expanded in the
Fort Worth office, and space will be required at the location of any new
marketing office opened by the Company.
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.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------
1998(1) 1997 1996 1995 1994 1993
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges(2)..... 2.6x 2.3x 1.9x 2.8x 4.1x 3.9x
</TABLE>
- ---------------
(1) The ratio for the nine month period may not necessarily be indicative of
the ratio that will result for the full year 1998.
(2) The ratio of earnings to combined fixed charges and preferred stock
dividend requirements for the periods presented is the same as the ratio
of earnings to fixed charges since KBK has no outstanding preferred stock
and, therefore, no dividend requirements.
For purposes of calculating these ratios: (i) "fixed charges" represent
interest expense and (ii) "earnings" represent the aggregate of income before
income taxes and interest expense.
31
<PAGE> 32
CAPITALIZATION
The following table sets forth the consolidated capitalization of KBK as of
September 30, 1998 and as adjusted to reflect the issuance and sale of the
1,500,000 Trust Preferred Securities offered hereby and the application by KBK
of the estimated net proceeds from the sale of the Debentures as described in
"Use of Proceeds." The table is unaudited and should be read in conjunction with
the financial statements and notes thereto incorporated by reference herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
AS
ACTUAL ADJUSTED(A)
------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt(b).......................................... $41,080 $27,180
Long-term debt.............................................. -- --
Company-obligated mandatorily redeemable preferred
securities of subsidiary.................................. -- 13,900(c)
------- -------
Stockholders' equity:
Common Stock, par value $.01 per share; authorized
10,000,000 shares; issued 3,548,600 shares (d)......... 35 35
Additional paid-in capital................................ 16,594 16,594
Retained earnings......................................... 11,445 11,445
Treasury stock............................................ (2,569) (2,569)
------- -------
Total stockholders' equity............................. 25,505 25,505
------- -------
Total capitalization................................... $66,585 $66,585
======= =======
</TABLE>
- ---------------
(a) Adjusted to reflect the application of $13.9 million of the estimated net
proceeds from the sale by KBK of the Debentures to the Trust.
(b) Does not give effect to an additional $11.1 million of short-term debt
incurred since September 30, 1998.
(c) Gives effect to the issuance of 1,500,000 Trust Preferred Securities. The
principal assets of the Trust will be the Debentures having an outstanding
principal amount of $15,450,000 and, upon redemption or maturity of the
Debentures, the Trust Preferred Securities will be mandatorily redeemable.
(d) Does not include 622,150 shares of Common Stock issuable upon the exercise
of outstanding stock options granted to certain directors and employees of
the Company pursuant to the Company's stock option plans. Does not include
500,000 shares of Common Stock issuable upon the exercise of outstanding
warrants sold in connection with the formation of KBK to two former
directors and one current director.
32
<PAGE> 33
SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company and its subsidiaries. The historical financial data as of
December 31, 1997 and 1996 and for each of the three fiscal years in the period
ended December 31, 1997 are derived from the Company's audited financial
statements incorporated by reference herein. The financial data as of and for
each of the nine month periods ended September 30, 1998 and 1997 were derived
from the Company's unaudited interim financial statements and in the opinion of
management include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The information presented below should be read in conjunction with the
Company's historical financial statements and notes thereto incorporated by
reference herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Earned discount income............ $ 1,378 $ 3,263 $ 3,777 $ 9,778 $ 10,634 $ 6,625 $ 6,204
Interest income -- loans.......... 3,371 2,369 3,119 1,369 144 70 115
Servicing fees.................... 5,897 4,022 6,314 -- -- -- --
Other income -- fees.............. 2,586 1,429 1,981 1,054 166 201 --
--------- --------- --------- --------- --------- --------- -------
Total revenue................... 13,232 11,083 15,191 12,201 10,944 6,896 6,319
Interest expense.................... 2,004 2,206 2,666 2,590 1,652 806 762
--------- --------- --------- --------- --------- --------- -------
Income after interest expense....... 11,228 8,877 12,525 9,611 9,292 6,090 5,557
Provision for credit losses......... 1,100 575 875 245 600 65 588
--------- --------- --------- --------- --------- --------- -------
Income after interest expense and
provision for credit losses....... 10,128 8,302 11,650 9,366 8,692 6,025 4,969
Operating expenses:
Salaries and employee benefits.... 3,722 3,247 4,431 3,545 2,997 1,960 1,569
Amortization of intangible
assets.......................... 295 284 379 361 410 276 275
Occupancy and equipment........... 1,108 937 1,285 847 587 423 241
Professional fees................. 285 189 251 344 584 181 159
Other............................. 1,463 1,290 1,852 1,812 1,089 691 507
--------- --------- --------- --------- --------- --------- -------
Total operating expenses........ 6,873 5,947 8,198 6,909 5,667 3,531 2,751
--------- --------- --------- --------- --------- --------- -------
Income before income taxes.......... 3,255 2,355 3,452 2,457 3,025 2,494 2,218
Income tax expense.................. 1,111 954 1,388 906 1,177 863 783
--------- --------- --------- --------- --------- --------- -------
Net income...................... $ 2,144 $ 1,401 $ 2,064 $ 1,551 $ 1,848 $ 1,631 $ 1,435
========= ========= ========= ========= ========= ========= =======
PER SHARE DATA:
Earnings per share -- basic....... $ 0.65 $ 0.42 $ 0.62 $ 0.47 $ 0.52 $ 0.61 N/A
Weighted-average common shares --
outstanding -- basic............ 3,286,000 3,310,000 3,309,000 3,334,000 3,526,000 2,672,000 N/A
Earnings per share -- diluted..... $ 0.57 $ 0.42 $ 0.60 $ 0.45 $ 0.51 $ 0.56 N/A
Weighted-average common shares --
outstanding -- diluted.......... 3,785,000 3,339,000 3,428,000 3,436,000 3,659,000 2,929,000 N/A
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets...................... $ 82,580 $ 51,767 $ 56,401 $ 89,747 $ 62,212 $ 61,080 $26,494
Long term debt.................... -- -- -- -- -- -- --
Short term debt................... 41,080 17,500 21,000 58,000 33,000 29,926 11,993
Stockholders' equity.............. 25,505 23,541 24,569 22,140 21,288 20,374 8,797
Book value per share.............. 7.86 7.11 7.35 6.69 6.27 5.74 N/A
PROFITABILITY RATIOS:
Yield on average net earning
assets............................ 19.8% 20.8% 20.9% 24.0% 31.7% 29.2% 35.4%
Return on average assets under
management........................ 2.1(1) 1.9(1) 2.0 2.4 4.0 5.3 6.4
Return on average equity............ 11.6(1) 8.2(1) 8.9 7.1 8.9 11.2 17.8
ASSET QUALITY RATIOS:
Ratio of allowance for credit losses
to net charge-offs................ 1.5x(2) 3.1x(2) 3.5x 4.4x 3.3x 3.9x 2.7x
Net charge-offs as a percentage of
average earning assets............ 1.0%(2) 0.7%(2) 0.6% 0.6% 1.3% 1.5% 2.1%
Ratio of earnings to fixed
charges(3)........................ 2.6x 2.1x 2.3x 1.9x 2.8x 4.1x 3.9x
</TABLE>
- ---------------
(1) Percentage shown has been annualized.
(2) For the twelve months ended September 30, 1998 and 1997.
(3) For purposes of calculating these ratios: (i) "fixed charges" represent
interest expense and (ii) "earnings" represent the aggregate of income
before income taxes and interest expense.
33
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
The following table sets forth the results of operations and certain other
data of the Company for the nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
(UNAUDITED) (UNAUDITED)
------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned.................................. $112,142 $82,088
Owned.............................................. 44,753 50,437
Total revenue........................................ $ 13,232 100.0% $11,083 100.0%
Interest expense..................................... 2,004 15.1 2,206 19.9
Provision for credit losses.......................... 1,100 8.3 575 5.2
Operating expenses................................... 6,873 52.0 5,947 53.7
Income taxes......................................... 1,111 8.4 954 8.6
-------- ----- ------- -----
Net income........................................... $ 2,144 16.2% $ 1,401 12.6%
======== ===== ======= =====
</TABLE>
Average net earning assets (managed and owned) increased 36.6% to $112.1
million for the nine months ended September 30, 1998 from $82.1 million for the
nine months ended September 30, 1997. Reflecting this increase in earning
assets, total revenue increased 19.4%, or $2.1 million, to $13.2 million for the
nine months ended September 30, 1998 compared to $11.1 million for the same
period in 1997. Although the growth in average net earning assets owned and
managed was $30.1 million, average net earning assets owned for the nine months
ended September 30, 1998 decreased by $5.7 million compared to the same period
in 1997, due to the assets sold into the conduit facility during the nine months
ended September 30, 1998.
Interest expense decreased 9.2% to $2.0 million for the nine months ended
September 30, 1998 from $2.2 million for the same period of 1997. This decrease
is primarily due to a $6.9 million decrease in the average outstanding balance
under the Credit Facility (as defined herein) to $28.1 million for the nine
months ended September 30, 1998 from $35.0 million for the same period in 1997
resulting from the sale of assets into the conduit facility beginning in April
1997.
A provision for credit losses of $1.1 million was recorded for the nine
months ended September 30, 1998, as compared to $575,000 for the same period of
1997. The increased provision resulted from the final resolution of several
nonperforming relationships which were charged off during 1998. During the nine
months ended September 30, 1998, the Company had net charge-offs of $1.1 million
compared to $340,000 of net charge-offs for the same period of 1997. The
allowance for credit losses at September 30, 1998 of $1.9 million represents
2.6% of total outstanding loans and accounts receivable and 4.3% of average net
earning assets owned for the nine months then ended. The allowance for credit
losses at September 30, 1997 of $1.8 million was 4.4% of total outstanding loans
and accounts receivable and 3.7% of average net earning assets owned for the
nine months then ended. Management believes the current allowance is adequate to
cover potential losses which might result from the purchased accounts receivable
and loan portfolio at September 30, 1998.
Operating expenses of $6.9 million for the nine months ended September 30,
1998 increased $926,000, or 15.6%, compared with $5.9 million for the same
period of 1997. Employment related expense increased $475,000 to $3.7 million
for the nine months ended September 30, 1998 compared to $3.2 million for the
same period of 1997. This increase is primarily attributable to the addition of
executive management and marketing staff during 1998. Occupancy expense
increased $171,000 to $1.1 million for the nine months ended September 30, 1998,
from $937,000 for the same period of 1997 resulting primarily from the increased
34
<PAGE> 35
depreciation for equipment and systems required in the Fort Worth office. Other
operating expenses increased $173,000 or 13.4% to $1.5 million for the nine
months ended September 30, 1998 from $1.3 million in the same period of 1997 due
to the increased marketing expenses related to the Company's growth. This growth
also generated a $97,000 increase in professional fees from $189,000 during the
nine months ended September 30, 1997 to $285,000 for the same period in 1998.
Income taxes of $1.1 million for the nine months ended September 30, 1998
were 16.5% more than the $954,000 of income taxes for the same period of 1997,
even though income before taxes for the nine months ended September 30, 1998
increased 38.2% compared to the nine months ended September 30, 1997. A 33.9%
increase in federal income taxes was offset by a 86.1% decrease in state income
taxes due primarily to a state tax adjustment recorded in the third quarter of
1998 relative to the tax effect of the sale of assets into the conduit facility.
As a result of the foregoing, net income of the Company for the nine months
ended September 30, 1998 increased $743,000, or 53.0%, to $2.1 million from $1.4
million for the same period in 1997.
Total assets increased 46% from $56.4 million at December 31, 1997 to $82.6
million at September 30, 1998. This increase is primarily related to the net
change in accounts receivable and loans receivable during the period from $43.9
million at December 31, 1997 to $73.2 million at September 30, 1998. This
increase in assets was funded by a $16.6 million increase in bank borrowings and
a $3.5 million increase in commercial paper during the first nine months of
1998. During the quarter ended September 30, 1998, a significant receivable
balance of the Company was deemed non-performing due to fraudulent invoices
being sold to KBK. To potentially offset the unsecured portion of the
receivables purchased balance, KBK was offered and accepted an ownership
interest in a newly formed entity. Accordingly, the $1,750,000 estimated value
of the ownership interest in this entity has been reclassed from non-performing
assets to other assets as an equity investment in the new entity.
Stockholders' equity increased $936,000, from $24.6 million at December 31,
1997 to $25.5 million at September 30, 1998, resulting from net income of $2.1
million and a reduction of $1.2 million for treasury stock purchases during the
nine months ended September 30, 1998. The Company paid no dividends on its
Common Stock for the nine months ended September 30, 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The following table sets forth the results of operations and certain other
data of the Company for the years ended December 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned...................................... $85,621 $50,941
Owned.................................................. 46,582 50,941
Total revenue............................................ $15,191 100% $12,201 100%
Interest expense......................................... 2,666 17 2,590 21
Provision for credit losses.............................. 875 6 245 2
Operating expenses....................................... 8,198 54 6,909 57
Income taxes............................................. 1,388 9 906 7
------- --- ------- ---
Net income............................................... $ 2,064 14% $ 1,551 13%
======= === ======= ===
</TABLE>
Average net earning assets under management increased 68.1% to $85.6
million for the year ended December 31, 1997, from $50.9 million for the year
ended December 31, 1996. Reflecting the increase in assets, total revenue
increased 24.5%, or $3.0 million, to $15.2 million for the year ended December
31, 1997, from $12.2 million for the year ended December 31, 1996. Although
largely offset by $34.7 million growth in
35
<PAGE> 36
average assets owned and managed, average net earning assets owned for the year
ended December 31, 1997 decreased $4.4 million from the year ended December 31,
1996, due to the assets sold into the conduit facility. The sale of assets
resulted in a $9.0 million adjustment to interest income and a $2.7 million
adjustment to interest expense, which netted to $6.3 million in servicing spread
income during the year ended December 31, 1997.
Interest expense increased slightly to $2.7 million for the year ended
December 31, 1997 compared with $2.6 million for the year ended December 31,
1996. Although average funded debt decreased from $34.6 million in 1996 to $31.2
million in 1997 due to significant financing through the conduit facility,
rising interest rates during the year generated the increase in interest
expense. Interest expense improved to 17.5% of total revenue for 1997 from 21.2%
of total revenue for 1996.
The provision for credit losses was $875,000 for 1997 compared to $245,000
for 1996, representing a 257.1% increase. During 1997, the Company had
charge-offs of $765,000 while recovering $210,000. Net charge-offs for 1997 of
$555,000 and a provision of $875,000 for 1997 resulted in an allowance for
credit losses of $1.9 million or 4.2% of gross receivables outstanding as of
December 31, 1997 (3.3% of average receivables). During 1996, the Company had
charge-offs of $404,000 while recovering $38,000, resulting in net charge-offs
of $366,000. The Company's 1996 provision for credit losses of $245,000 brought
the allowance for credit losses to $1.6 million, or 1.9% of gross receivables
outstanding (2.7% of average receivables outstanding during December 31, 1996).
Operating expenses increased $1.3 million, or 18.7%, to $8.2 million or
54.0% of total revenue for 1997 compared with $6.9 million or 57.0% of total
revenue for 1996. This increase was primarily a result of increased salaries and
benefits and other employment expenses of $886,000, related to support staff and
management added in 1997 to support the Company's growth and increased business
activity. Occupancy expenses increased $196,000, resulting primarily from
increased lease expense associated with the expansion of the corporate offices.
Also related to this expansion was a $242,000 increase in amortization and
depreciation expense for 1997 due to the leasehold improvements and addition of
fixed assets.
Income taxes of $1.4 million for 1997 were 53.2% higher than the income
taxes of $906,000 for 1996 due to higher income before taxes.
As a result of the above, net income of the Company for 1997 increased
$513,000, or 33.1%, to $2.1 million or 13.6% of total revenue, from $1.6 million
or 12.7% of total revenue in 1996.
Total assets decreased 37% from December 31, 1996 to $56.4 million as of
December 31, 1997. This decrease was the result of the sale of $67.0 million in
assets into the conduit facility, which was partially offset by additional
fundings on accounts receivable and loans receivable during 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The following table sets forth the results of operations and certain other
data of the Company for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average Net Earning Assets............................... $50,941 $34,501
Total revenue............................................ $12,201 100% $10,944 100%
Interest expense......................................... 2,590 21 1,652 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%
======= === ======= ===
</TABLE>
36
<PAGE> 37
Receivables purchased in 1996 averaged $46.7 million, approximately $6.6
million, or 16.5%, over the 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 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.
Interest expense increased $938,000, or 56.8%, to $2.6 million for 1996
compared with $1.7 million for 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 debts 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).
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
$150,000 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 $55,000
increase in direct marketing and marketing support expenses such as travel,
entertainment, telephone, and postage, a $64,000 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 income before taxes.
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.
Total assets increased 44% from December 31, 1995 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. Although average
assets increased 38% 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.
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.
37
<PAGE> 38
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements generally increase proportionately to
the increase in earning assets. The method of funding the portfolio changed
significantly during 1997 with the implementation of the asset sale. As a result
of the assets sold into the conduit facility, total average net earning assets
owned decreased $5.7 million, from $50.4 million during the first nine months of
1997 to $44.7 million in the first nine months of 1998, while average net
earning assets managed and owned increased from $82.1 million to $112.1 million
during the same period.
KBK Financial maintains a $55.0 million, multi-bank line of credit ("Credit
Facility") which had $50.0 million committed and $48.7 million outstanding at
November 10, 1998, $11.1 million more than the $37.6 million outstanding at
September 30, 1998. The Credit Facility is comprised of a $40.0 million
Revolving Credit Facility ("Revolving Facility"), a $5.0 million Over Advance
Facility which allows for borrowing base availability to fund amounts in excess
of client concentration limits and a $5.0 million bridge facility for funding
certain mezzanine loans. Under the Credit Facility, KBK Financial is entitled to
the issuance of one or more letters of credit which in total shall not exceed
the lesser of $5.0 million or the remainder of the Revolving Facility borrowing
base, less all amounts outstanding on the Revolving Facility. As of November 16,
1998, there was $39.4 million outstanding under the Revolving Facility, $4.3
million outstanding under the Over Advance Facility, $5.0 million outstanding
under the bridge facility, and $600,000 in letters of credit outstanding under
the Revolving Facility. The Credit Facility provides for maximum borrowings of
the lesser of (i) $50.0 million or (ii) the amount of a borrowing base (based on
a percentage of eligible loans and accounts receivable, as defined in the loan
agreement governing the Credit Facility, net of excluded amounts). There was no
available credit under this line as of November 10, 1998. Borrowings under the
Revolving Facility portion of the Credit Facility bear interest at the agent
banks' prime rate or applicable LIBOR plus 1.75%, at KBK Financial's election,
and expire on May 31, 2000. Borrowings under the bridge facility and the Over
Advance Facility portion of the Credit Facility bear interest at the agent
banks' prime rate plus 1.25%. The bridge facility expires on December 12, 1998.
The Over Advance Facility expires on May 14, 1999; however, the lenders may
terminate this portion of the facility at any time upon 120 days prior written
notice to KBK Financial.
Borrowings under the Credit Facility are secured by all accounts receivable
of KBK Financial (including all accounts receivable purchased by KBK Financial
from its clients) which are not sold to KBK Receivables, all notes receivable of
KBK Financial which are not sold to KBK Receivables, all inventory of KBK
Financial now owned or acquired, all instruments, chattel paper, documents and
general intangibles of KBK Financial now owned or acquired, an assignment of all
security interests, mortgages and liens securing the foregoing and all proceeds
of the foregoing. The Credit Facility provides that KBK Financial is permitted
to contribute and sell, free of liens, and grant security interests in,
accounts, chattel paper, instruments and general intangibles to KBK Receivables
pursuant to the purchase and sale agreement. The terms of the Credit Facility
require KBK Financial to comply with certain financial covenants and include the
maintenance of a certain tangible net worth, limitations on its debt to tangible
net worth, and an interest coverage ratio which requires that KBK Financial'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 Financial to the
lesser of (i) KBK Financial's after tax income for such fiscal year or (ii)
50.0% of the amount by which KBK Financial's after tax income exceeds the
cumulative amount of dividends permitted to be paid under such tests, but not so
paid.
Thus, KBK Financial is effectively restricted in its ability to pay cash
dividends to the Company. 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 December 31, 1997) of Common Stock. At
September 30, 1998, 304,567 shares of Common Stock had been repurchased and
placed in the treasury at a cost of $2.6 million (net of 100,000 shares issued
to the former
38
<PAGE> 39
shareholders of Coastal Financial Resources, Inc., which was acquired by the
Company in 1994). All of such purchases have been funded out of the general
funds of the Company, which had the result of increasing the outstanding balance
under the Credit Facility.
In May 1998, the Company, through KBK Financial, reinstated its commercial
paper program ("CP Program"). During the 19 year period preceding mid-1994, KBK
used the proceeds from the private issuance of short-term, unrated commercial
paper to finance a portion of its portfolio. The CP Program was canceled by
management concurrent with the Company's June 1994 initial public offering of
Common Stock. Under the CP Program, certificates may be issued for tenures
ranging from 30 to 270 days at interest rates comparable to the Company's
alternative unsecured funding sources. The certificates are placed directly by
the Company; however, the Company reserves the right to name a placement agent
in the future. The certificates are not rated by any independent agency and the
Company does not maintain a back-up liquidity facility to support outstanding
certificates. During the second quarter of 1998, KBK Financial issued
certificates aggregating $3.5 million to qualified investors. Each certificate
carries a coupon rate of 10% per annum and currently mature on November 16 and
December 14, 1998.
Future sources of liquidity to fund growth in earning assets will come from
the sale of earning assets, the issuance of unsecured and secured corporate debt
obligations, preferred and common stock, as well as from traditional bank
financing.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 130 "Reporting Comprehensive Income,"
which is required to be adopted for fiscal years beginning after December 15,
1997. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS 130 did not have a material impact on
the Company's consolidated financial statements.
IMPACT OF THE YEAR 2000 ISSUE
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive data by the Company's computerized
information systems. The year 2000 is critical to these systems as many computer
programs are written using two digits rather than four to define the applicable
year. As a result, any of the Company's computer applications that have
date-sensitive programs may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruptions, including but not limited to a temporary inability to
process transactions, communicate with customers and financial institutions and
update internal accounting systems. If not corrected, such disruptions could
have a significant impact on the Company's operations.
The Company has initiated a Company-wide program to prepare the Company's
computer systems and applications for the year 2000. Based on present
information, the Company believes that it will be able to achieve year 2000
compliance through modification of some existing programs and the replacement of
other programs with new programs that are already year 2000 compliant. The
Company will utilize both internal and external resources to reprogram, or
replace, and test software for year 2000 compliance. The Company plans to
complete the year 2000 conversion project by July 1, 1999. The total project
costs are estimated to be immaterial and will be expensed as incurred.
The Company is taking steps to resolve year 2000 compliance issues that may
be created by clients, debtors and financial institutions with whom the Company
does business. However, there can be no guarantee that the systems of other
entities will be converted timely. A failure to convert by another entity could
have a significant adverse effect on the Company.
The costs of the year 2000 conversion project and the date on which the
Company plans to complete the project are based on management's best estimates,
which were derived using numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other
39
<PAGE> 40
factors. There can be no guarantee that these estimates will be achieved and
actual results could vary significantly from current estimates.
The Company does not have a written contingency plan to address the issues
that could arise should the Company or any of its clients or debtors not be
prepared to accommodate year 2000 issues timely. The Company believes that in an
emergency it could revert to the use of manual systems that do not rely on
computers.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the documents incorporated by reference herein,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. These statements are
identified by words such as "may," "will," "expects," "anticipates," "intends,"
"plans," "estimates," "should" and words of similar import. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and otherwise, may
differ materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in this section and "Risk Factors."
MANAGEMENT
ROBERT J. MCGEE, 44, has served as Chairman of the Board, Director and Chief
Executive Officer of the Company since the Company acquired KBK Financial in
February 1992 and was elected President in January 1994. Prior to his
association with the Company, Mr. McGee was Chairman of the Board of Texas
Commerce Bank, Fort Worth, National Association from September 1989 to April
1992.
KENNETH H. JONES, JR., 63, has served as Vice Chairman of the Company and as a
director since January 1995. Prior to his employment by the Company, Mr. Jones
was a partner at the Fort Worth law firm of Decker, Jones, McMackin, McClane,
Hall and Bates, P.C., where he remains of counsel. Mr. Jones is a director of
AmeriCredit Corporation, an automobile finance company. Mr. Jones is also a
director of Hallmark Financial Services, Inc., an insurance premium finance and
claims adjusting company.
J. DUGAN SMITH, 38, has served as President of KBK Financial since September
1997. He joined KBK Financial in May 1996 as Executive Vice President and Chief
Credit Officer of the Company. Prior to joining the Company, Mr. Smith was
Executive Vice President and Senior Credit Officer for Victoria Bank & Trust
Company in Victoria, Texas, from 1987 to May 1996 and prior thereto was employed
by Texas Commerce Bancshares in Houston for almost 10 years.
L. ALLEN JARBOE, 45, was named Executive Vice President and Chief Credit Officer
of the Company effective April, 1998. Prior to joining the Company, Mr. Jarboe
was with Barnett Bank in Jacksonville, Florida, NationsBank -- San Antonio and
First City Bank in Houston.
JACK R. ROPER, 44, has served as Executive Vice President of Servicing of the
Company since January 1994, and has been an executive of KBK Financial since
1989.
JAY K. TURNER, 44, joined the Company in February 1998 as Executive Vice
President and Chief Financial Officer. Prior to joining the Company, Mr. Turner
was Managing Director of Investment Banking with Rauscher Pierce Refsnes in
Dallas, Texas and prior to that served as Managing Director of Corporate Finance
for KPMG Peat Marwick in New York and Texas.
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<PAGE> 41
The Board of Directors of the Company is divided into three classes. At
each annual meeting of the stockholders, directors constituting one class are
elected for a three-year term. The Board of Directors currently consists of
eight members. The following table sets forth certain information respecting
directors of the Company as of September 30, 1998:
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE EXPIRES PRESENT PRINCIPAL OCCUPATION
---- --- -------- --------- ---------------------------------
<S> <C> <C> <C> <C>
Robert J. McGee........................ 44 1992 1999 Chairman of the Board, Director
and Chief Executive Officer of
the Company
Kenneth H. Jones, Jr................... 63 1995 2000 Vice Chairman of the Company
Daniel R. Feehan....................... 47 1992 1999 President, Chief Operating
Officer and a Director of Cash
America International, Inc.
Thomas L. Healey....................... 64 1994 1999 Private investments
Martha V. Leonard...................... 61 1996 2000 Private investments
R. Earl Cox, III....................... 64 1996 2000 Chairman of Tandy Crafts, Inc.
Harris A. Kaffie....................... 48 1996 2001 Partner in Kaffie Brothers
Thomas M. Simmons...................... 45 1995 2001 Managing Director in Houston
Office of Spencer Stuart & Co.
</TABLE>
Approximately 39% of the Common Stock is beneficially owned by senior
management and directors with the remaining 61% held by institutional and other
public holders.
KBK CAPITAL TRUST I
KBK Capital Trust I (the "Trust") is a statutory business trust formed
under Delaware law pursuant to (i) an original declaration of trust, as amended
and restated (the "Declaration") executed by KBK, as sponsor of the Trust (the
"Sponsor"), the Delaware Trustee (as defined herein) and the Regular Trustees
(as defined herein) of the Trust and (ii) the filing of a certificate of trust
with the Secretary of State of the State of Delaware. Unless earlier terminated
pursuant to the Declaration, the Trust will terminate on December 31, 2048. The
Company will directly or indirectly acquire Trust Common Securities in an
aggregate liquidation amount equal to 3.0% of the aggregate liquidation amount
of the Trust Preferred Securities. The Trust Common Securities will rank pari
passu, and payment will be made thereon pro rata, with the Trust Preferred
Securities, except that, upon the occurrence and during the continuance of a
Debenture Event of Default or a default by KBK under the Guarantee, the rights
of the holders of the Trust Common Securities to payment in respect of
distributions and payments upon liquidation, redemption and otherwise will be
subordinated to the rights of the holders of the Trust Preferred Securities. The
assets of the Trust will consist principally of the Debentures. The Trust exists
for the sole purpose of (i) issuing the Trust Securities representing undivided
beneficial interests in the assets of the Trust, (ii) making distributions to
holders of Trust Securities, (iii) investing the gross proceeds of the issuance
of the Trust Securities in the Debentures, and (iv) engaging in only those other
activities necessary or incidental thereto.
The Trust initially will have five trustees. A majority of the trustees of
the Trust are individuals who are employees or officers of or who are affiliated
with KBK (the "Administrative Trustees"). Pursuant to the Declaration, the
number of Administrative Trustees initially is three. The fourth trustee is a
financial institution that is unaffiliated with KBK and that acts as property
trustee and indenture trustee (the "Property Trustee" and, together with the
Administrative Trustees, the "Regular Trustees") for purposes of the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The fifth trustee
is an entity that maintains its principal place of business in the State of
Delaware (the "Delaware Trustee"). Initially, The First National Bank of
Chicago, a national banking association, is the Property Trustee and Wilmington
Trust Company, a Delaware banking corporation, is the Delaware Trustee until, in
each case, removed or replaced by the Administrative Trustees. The First
National Bank of Chicago will also act as indenture trustee under the
41
<PAGE> 42
Guarantee (the "Trust Guarantee Trustee") and under the Subordinated Indenture
(the "Subordinated Debt Trustee"). See "Description of the Guarantee" and
"Description of the Trust Preferred Securities."
The Property Trustee will hold title to the Debentures for the benefit of
the holders of the Trust Securities, and the Property Trustee will have the
power to exercise all rights, powers and privileges under the Subordinated
Indenture as the holder of the Debentures. In addition, the Property Trustee
will maintain exclusive control of a segregated non-interest bearing bank
account (the "Property Account") to hold all payments made in respect of the
Debentures for the benefit of the holders of Trust Securities. KBK, as the
direct or indirect holder of all of the Trust Common Securities, will have the
right to appoint, remove or replace any of the Regular Trustees and the Delaware
Trustee and to increase or decrease the number of Regular Trustees (except that
upon the occurrence and during the continuance of a Trust Enforcement Event, the
Property Trustee may be removed and a successor appointed only by the holders of
a majority in liquidation amount of the Trust Preferred Securities), provided
that the number of Regular Trustees shall be at least three, the majority of
which shall be Administrative Trustees. KBK will pay all fees and expenses
related to the Trust and this offering. See "Description of the Debentures."
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, if any, are as set
forth in the Declaration and the Delaware Business Trust Act, as amended (the
"Trust Act"). See "Description of the Trust Preferred Securities." The
Declaration, the Subordinated Indenture and the Guarantee will be qualified
under and also incorporate by reference the terms of the Trust Indenture Act.
The Property Trustee will act as indenture trustee for the Debentures, the
Declaration and the Guarantee for purposes of complying with the Trust Indenture
Act.
The place of business and telephone number of the Trust are the principal
executive offices and telephone number of KBK. See "The Company."
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
This summary of certain provisions of the Trust Preferred Securities and
the Declaration does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Declaration
(a copy of which is filed as an exhibit to the registration statement of which
this Prospectus is a part, and a copy of which may be obtained from the
corporate trust office of the Property Trustee), the Trust Act and the Trust
Indenture Act which is incorporated by reference in the Declaration. Wherever
particular defined terms of the Declaration are referred to herein, such defined
terms are incorporated herein by reference.
GENERAL
Pursuant to the terms of the Declaration, the Administrative Trustees, on
behalf of the Trust, will issue the Trust Preferred Securities and the Trust
Common Securities. The Trust Preferred Securities will represent preferred
undivided beneficial interests in the assets of the Trust and the Trust Common
Securities will represent subordinated undivided beneficial interests in the
assets of the Trust. All of the Trust Common Securities will be owned by KBK.
The Trust Preferred Securities will rank pari passu, and payments will be made
thereon pro rata, with the Trust Common Securities except as described under the
caption "-- Subordination of Trust Common Securities." Legal title to the
Debentures will be held by the Property Trustee in trust for the benefit of the
holders of the Trust Securities. The Declaration does not permit the issuance by
the Trust of any securities other than the Trust Securities or the incurrence of
any indebtedness by the Trust. The payment of distributions out of money held by
the Trust, and payments upon redemption of the Trust Preferred Securities or
liquidation of the Trust, are guaranteed by KBK to the extent described under
"Description of the Guarantee." The Guarantee is held by The First National Bank
of Chicago, as the Trust Guarantee Trustee, for the benefit of the holders of
the Trust Preferred Securities. The Guarantee does not cover payment of
distributions when the Trust does not have sufficient and available funds to pay
such distributions. The remedy of a holder of Trust Preferred Securities in such
an event is as described under the captions "-- Trust Enforcement Events;
Notice," "-- Enforcement of Certain Rights by Holders of Trust Preferred
Securities" and "-- Voting Rights; Amendment of the Declaration" below.
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DISTRIBUTIONS
Distributions on the Trust Preferred Securities will be payable at the
annual rate of 9.50% of the liquidation amount of $10 per Trust Preferred
Security. Distributions will accumulate from the date of the original issuance
of the Trust Preferred Securities and will be payable quarterly in arrears on
February 28, May 31, August 31 and November 30 of each year to holders of record
on the applicable record date, commencing February 28, 1999 when, as and if
available for payment by the Property Trustee, except as otherwise described
below. Distributions to which holders of the Trust Preferred Securities are
entitled but are not paid on the scheduled payment date will accumulate
additional distributions thereon at 9.50% per annum, compounded quarterly from
the relevant Distribution Date. The amount of distributions payable for any
period will be computed on the basis of a 360-day year of twelve 30-day months,
and for any period shorter than a full quarterly period, on the basis of the
actual number of days elapsed in a 90-day period. In the event that any date on
which distributions are payable on the Trust Preferred Securities is not a
Business Day, the payment of the distributions payable on such date will be made
on the next succeeding day that is a Business Day and without any additional
distributions or other payment in respect of any such delay, except that, if
such Business Day is in the next succeeding calendar year, such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on such payment date (each date on which distributions are
payable in accordance with the foregoing, a "Distribution Date"). A "Business
Day" shall mean any day other than a Saturday or a Sunday, or a day on which the
corporate trust office of the Property Trustee or the Subordinated Debt Trustee
(as defined herein) is closed for business.
So long as no Debenture Event of Default has occurred and is continuing,
KBK has the right under the Subordinated Indenture to defer the payment of
interest on the Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the stated maturity of the
Debentures. As a consequence of any such election, quarterly distributions on
the Trust Preferred Securities will be deferred by the Trust during any such
Extension Period. Deferred distributions to which holders of the Trust Preferred
Securities are entitled will accumulate additional distributions thereon at
9.50% per annum, compounded quarterly from the relevant Distribution Date. The
term "distributions" as used herein shall include any such additional
distributions. During any such Extension Period, KBK may not, and may not cause
any of its subsidiaries to, (i) declare or pay any dividends or distributions
on, or redeem, purchase or acquire, or make a liquidation payment with respect
to, any of KBK's capital stock (except for dividends or distributions in shares
of, or options, warrants or rights to subscribe for or purchase shares of, its
capital stock and conversions or exchanges of common stock of one class into
common stock of another class) or (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of KBK that rank pari
passu with or junior to the Debentures (other than (a) any redemption,
liquidation, interest, principal or guarantee payment by KBK where the payment
is made by way of securities (including capital stock) that rank pari passu with
or junior to the securities on which such, redemption, liquidation, interest,
principal or guarantee payment is being made; (b) payments under the Guarantee;
(c) purchases of Common Stock related to the issuance of Common Stock under any
of KBK's benefit plans for its directors, officers or employees; (d) as a result
of a reclassification of KBK's capital stock or the exchange or conversion of
one series or class of KBK's capital stock for another series or class of KBK's
capital stock; or (e) the purchase of fractional interests in shares of KBK's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged). Prior to the termination of
any such Extension Period, KBK may further extend such Extension Period,
provided that no Extension Period may exceed 20 consecutive quarters or extend
beyond the stated maturity of the Debentures. Upon the termination of any such
Extension Period and the payment on the next Interest Payment Date coinciding
with or next following the end of such Extension Period (whichever is earliest)
of all amounts then due to the persons in whose names the Debentures are
registered at the close of business on the regular record date next preceding
such Interest Payment Date, KBK may elect to begin a new Extension Period. See
"Description of the Debentures -- Option to Extend Interest Payment Period" and
"Certain Federal Income Tax Consequences -- Original Issue Discount."
KBK has no current intention of invoking an Extension Period.
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Distributions with respect to the Trust Preferred Securities must be paid
on the dates payable to the extent that the Trust has funds available for the
payment of such distributions in the Property Account. The funds of the Trust
available for distribution to holders of the Trust Preferred Securities will be
limited to payments under the Debentures in which the Trust will invest the
proceeds from the issuance and sale of the Trust Securities. See "Description of
the Debentures." If KBK does not make interest payments on such Debentures, the
Property Trustee will not have funds available to pay distributions on the Trust
Preferred Securities. The payment of distributions (if and to the extent the
Trust has funds on hand available for the payment of such distributions) is
guaranteed by KBK as set forth herein under the caption "Description of the
Guarantee."
Distributions on the Trust Preferred Securities will be payable to the
holders thereof as they appear on the register of the Trust on the relevant
record dates, which shall be the fifteenth day (whether or not a Business Day)
of the month of the relevant Distribution Date. As long as the Trust Preferred
Securities remain in book-entry form, subject to any applicable laws and
regulations and the provisions of the Declaration, each such payment will be
made as described under the caption "-- Book-Entry Only Issuance -- The
Depository Trust Company."
TRUST SPECIAL EVENT EXCHANGE
At any time following the occurrence and the continuation of a Trust Tax
Event or a Trust Investment Company Event (each as defined herein), the
Administrative Trustees shall direct the Property Trustee to exchange all
outstanding Trust Securities for Debentures having an unpaid principal amount
equal to the aggregate liquidation amount of the Trust Securities to be
exchanged and to dissolve the Trust, provided that, in the case of a Trust Tax
Event, KBK shall have the right to direct that less than all, or none, of the
Trust Securities be so exchanged if and for so long as KBK shall have elected to
pay any Additional Sums such that the net amounts received by the holders of
Trust Securities not so exchanged in respect of distributions are not reduced as
a result of such Trust Tax Event, and shall not have revoked any such election
or failed to make such payments.
A "Trust Special Event" means a Trust Tax Event or a Trust Investment
Company Event. A "Trust Tax Event" means the delivery to the Property Trustee,
on behalf of the Trust, of an opinion of counsel, rendered by a law firm having
a national tax and securities practice (which opinion shall not have been
rescinded by such law firm), to the effect that, as a result of any amendment
to, or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the date of the original
issuance of the Trust Preferred Securities, there is more than an insubstantial
risk in each case after the date hereof that (i) the Trust is, or will be within
90 days of the date thereof, subject to United States federal income tax with
respect to income received or accrued on the Debentures; (ii) the Trust is, or
will be within 90 days of the date thereof, subject to more than a de minimis
amount of other taxes, duties or other governmental charges; or (iii) interest
payable by KBK on such Debentures is not, or within 90 days of the date thereof
will not be, deductible by KBK, in whole or in part, for United States federal
income tax purposes. A "Trust Investment Company Event" means the delivery to
the Property Trustee, on behalf of the Trust, of an opinion of counsel, rendered
by a law firm having a recognized national tax and securities practice and
experienced in matters under the Investment Company Act of 1940, as amended (the
"Investment Company Act") (which opinion shall not have been rescinded by such
law firm), to the effect that, as a result of the occurrence of a change in law
or regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority (a
"Change in 1940 Act Law"), there is more than an insubstantial risk that the
Trust is, or will be within 90 days of the date thereof, considered an
"investment company" that is required to be registered under the Investment
Company Act, which Change in 1940 Act Law becomes effective on or after the date
of the original issuance of the Trust Preferred Securities.
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"Additional Sums" means the additional amounts (which shall constitute part
of the payments on the Debentures) as may be necessary in order that the amount
of distributions then due and payable by the Trust on the outstanding Trust
Securities shall not be reduced as a result of any additional taxes, duties and
other governmental charges to which the Trust has become subject as a result of
a Trust Tax Event.
Holders of Trust Preferred Securities, by purchasing such Trust Preferred
Securities, will be deemed to have agreed to be bound by these exchange
provisions in regard to the exchange of such Trust Preferred Securities for
Debentures on the terms described above. See "Risk Factors -- Special Event
Exchange or Redemption."
DISTRIBUTION OF DEBENTURES
At any time, KBK will have the right to dissolve the Trust and, after
satisfaction of the liabilities of creditors of the Trust as provided by
applicable law, cause the Debentures to be distributed to the holders of the
Trust Preferred Securities in liquidation of the Trust. There can be no
assurance as to the market price for the Debentures distributed to the holders
of the Trust Preferred Securities after such a termination of the Trust. Under
current United States federal income tax law and interpretations and assuming,
as expected, the Trust is treated as a grantor trust, a distribution of the
Debentures should not be a taxable event to the Trust and holders of the Trust
Preferred Securities. Should there be a change in law, a change in legal
interpretation, a Trust Special Event or other circumstances, however, the
distribution could be a taxable event to holders of the Trust Preferred
Securities. See "Certain Federal Income Tax Consequences -- Redemption of Trust
Preferred Securities for Debentures or Cash Upon Liquidation of the Trust."
After the liquidation date fixed for any distribution of Debentures for
Trust Preferred Securities (i) such Trust Preferred Securities will no longer be
deemed to be outstanding, (ii) DTC or its nominee, as the record holder of such
Trust Preferred Securities, will receive a registered Global Certificate or
certificates representing the Debentures to be delivered upon such distribution
and (iii) any certificates representing such Trust Preferred Securities not held
by DTC or its nominee will be deemed to represent the Debentures having a
principal amount equal to the liquidation amount of such Trust Preferred
Securities, and bearing accrued and unpaid interest in an amount equal to the
accrued and unpaid distributions on such Trust Preferred Securities until such
certificates are presented to the Property Trustee for transfer or reissuance.
OPTIONAL REDEMPTION
Except as provided under the caption "-- Mandatory Redemption" below, the
Trust Preferred Securities may not be redeemed by the Trust prior to November
30, 2001.
On and after such date, upon any permitted redemption by KBK of Debentures,
the Trust Preferred Securities are subject to redemption, in whole or in part,
at 100% of the liquidation amount thereof plus accrued and unpaid distributions,
if any, to the date fixed for redemption.
The Trust may not redeem the Trust Preferred Securities in part unless all
accumulated and unpaid distributions have been paid in full on all outstanding
Trust Preferred Securities. If fewer than all the outstanding Trust Preferred
Securities are to be redeemed, the Trust Preferred Securities to be so redeemed
will be selected as described under the captions "-- Book-Entry Only
Issuance -- The Depository Trust Company" and "-- Redemption Procedures."
MANDATORY REDEMPTION
Upon repayment of the Debentures at maturity or as a result of the
acceleration of the Debentures upon the occurrence of a Debenture Event of
Default, the proceeds from such repayment will be applied to redeem Trust
Securities having an aggregate liquidation amount equal to the aggregate
principal amount of Debentures so repaid at a price equal to the respective
liquidation amount of the Trust Preferred Securities together with accumulated
and unpaid distributions on the Trust Securities to the date of redemption. In
the case of acceleration of the Debentures, the Trust Preferred Securities will
be redeemed only when the proceeds of repayment of the Debentures have actually
been received by the Trust. In addition, as described
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above under the caption "-- Trust Special Event Exchange," upon the occurrence
of a Trust Special Event, Trust Preferred Securities shall be exchanged for
Debentures unless, in the case of a Trust Tax Event, KBK shall have elected to
pay any Additional Sums such that the net amounts of distributions received by
the holders of any Trust Preferred Securities not so exchanged are not reduced
as a result of such Tax Event, and shall not have revoked any such election or
failed to make such payments.
REDEMPTION PROCEDURES
Trust Preferred Securities redeemed on the date fixed for redemption shall
be redeemed at the redemption price with the applicable proceeds from the
contemporaneous redemption of the Debentures. Redemptions of the Trust Preferred
Securities shall be made and the redemption price shall be payable on the
redemption date only to the extent that the Trust has funds on hand available
for the payment of such redemption price. See also "-- Subordination of Trust
Common Securities."
Notice of any redemption of Trust Preferred Securities (which notice will
be irrevocable) will be given by the Property Trustee to KBK and each record
holder of Trust Preferred Securities that are being redeemed not fewer than 30
nor more than 60 days prior to the redemption date. If the Property Trustee or
the organization then serving as the depository for the Trust Preferred
Securities (the "Clearing Agency") gives a notice of redemption in respect of
the Trust Preferred Securities and the Property Trustee has received for deposit
available funds sufficient for such redemption by 10:00 a.m., New York City
time, on the redemption date, then, by 12:00 noon, New York City time, on the
redemption date, to the extent funds are available, the Property Trustee will
deposit irrevocably with DTC or the Clearing Agency, as the case may be, funds
sufficient to pay the applicable redemption price and will give DTC or the
Clearing Agency, as the case may be, irrevocable instructions and authority to
pay the redemption price to the holders of such Trust Preferred Securities. See
"-- Book-Entry Only Issuance -- The Depository Trust Company." If such Trust
Preferred Securities are no longer in book-entry form, the Property Trustee, to
the extent funds are available, will irrevocably deposit with the entity
designated as paying agent (the "Paying Agent") funds sufficient to pay the
applicable redemption price and will give the Paying Agent irrevocable
instructions and authority to pay the redemption price to the holders thereof
upon surrender of their certificates evidencing such Trust Preferred Securities.
Notwithstanding the foregoing, distributions payable on or prior to the
redemption date for any Trust Preferred Securities called for redemption shall
be payable to the holders of such Trust Preferred Securities as of the relevant
record date for the related Distribution Date. If notice of redemption shall
have been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of such Trust Preferred Securities so called
for redemption will cease (including the accumulation of distributions on the
Trust Preferred Securities), except the right of the holders of such Trust
Preferred Securities to receive the redemption price, but without interest on
such redemption price, and such Trust Preferred Securities will cease to be
outstanding. In the event that any date fixed for redemption of Trust Preferred
Securities is not a Business Day, then payment of the redemption price on such
date will be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will be
made on the immediately preceding Business Day. In the event that payment of the
redemption price in respect of Trust Preferred Securities called for redemption
is improperly withheld or refused and not paid either by the Trust or by KBK
pursuant to the Guarantee as described under "Description of the Guarantee"
herein, distributions on such Trust Preferred Securities will continue to
accumulate at 9.50% per annum, from the redemption date originally established
by the Trust to the date such redemption price is actually paid, in which case
the actual payment date will be the date fixed for redemption for purposes of
calculating the redemption price.
Subject to applicable law (including, without limitation, United States
federal securities law), KBK, or its subsidiaries, may at any time and from time
to time purchase outstanding Trust Preferred Securities by tender, in the open
market or by private agreement.
Payment of the redemption price on the Trust Preferred Securities and any
distribution or exchange of Debentures to holders of Trust Preferred Securities
shall be made to the applicable record holders thereof as they appear on the
register for such Trust Preferred Securities on the relevant record date, which
shall be the fifteenth day (whether or not a Business Day) prior to the
redemption date or liquidation date, as applicable.
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If less than all of the Trust Securities are to be redeemed on a redemption
date, then the aggregate liquidation amount of such Trust Securities to be
redeemed shall be allocated pro rata among the Trust Securities. The particular
Trust Preferred Securities to be redeemed shall be selected not more than 60
days prior to the redemption date by the Property Trustee from the outstanding
Trust Preferred Securities not previously called for redemption, by lot or by
such method as the Property Trustee shall deem fair and appropriate and which
may provide for the selection for redemption of portions (equal to $10 or an
integral multiple of $10 in excess thereof) of the liquidation amount of the
Trust Preferred Securities. The Property Trustee shall promptly notify KBK and
the holders of the Trust Preferred Securities to be redeemed in writing of the
Trust Preferred Securities selected for redemption and, in the case of any Trust
Preferred Securities selected for partial redemption, the liquidation amount
thereof to be redeemed; it being understood that, in the case of Trust Preferred
Securities held by DTC (or any successor) or its nominee, the distribution of
the proceeds of such redemption will be made in accordance with the procedures
of DTC or its nominee. For all purposes of the Declaration, unless the context
otherwise requires, all provisions relating to the redemption of Trust Preferred
Securities shall relate, in the case of any Trust Preferred Securities redeemed
or to be redeemed only in part, to the portion of the aggregate liquidation
amount of Trust Preferred Securities which has been or is to be redeemed.
Notice of any redemption of Debentures will be mailed at least 30 days but
not more than 60 days before the redemption date to each holder of Debentures to
be redeemed at its registered address. Unless KBK defaults in payment of the
redemption price, on and after the redemption date interest ceases to accrue on
such Debentures or portions thereof called for redemption.
SUBORDINATION OF TRUST COMMON SECURITIES
Payment of distributions on, and the redemption price of, the Trust
Securities, as applicable, shall be made pro rata based on the liquidation
amount of such Trust Securities; provided, however, that if on any Distribution
Date or redemption date, a Debenture Event of Default or an event of default
under the Guarantee shall have occurred and be continuing, no payment of any
distribution on, or redemption price of, any of the Trust Common Securities, and
no other payment on account of the redemption, liquidation or other acquisition
of such Trust Common Securities, shall be made unless payment in full in cash of
all accumulated and unpaid distributions on all of the outstanding Trust
Preferred Securities for all distribution periods terminating on or prior
thereto, or in the case of payment of the redemption price the full amount of
such redemption price on all of the outstanding Trust Preferred Securities then
called for redemption, shall have been made or provided for, and all funds
available to the Property Trustee shall first be applied to the payment in full
in cash of all distributions on, or redemption price of, the Trust Preferred
Securities then due and payable.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution of the Trust
(each, a "Liquidation"), the holders of the Trust Preferred Securities at that
time will be entitled to receive out of the assets of the Trust, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, distributions in an amount equal to the aggregate of the stated liquidation
amount of $10 per Trust Preferred Security plus accumulated and unpaid
distributions thereon to the date of payment (the "Liquidation Distribution"),
unless, in connection with such Liquidation, after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, Debentures in an
aggregate unpaid principal amount equal to the aggregate stated liquidation
amount of, with an interest rate identical to the distribution rate of, and
accrued and unpaid interest equal to accumulated and unpaid distributions on,
the Trust Preferred Securities, have been distributed on a pro rata basis to the
holders of Trust Preferred Securities in exchange for such Trust Preferred
Securities. See "-- Distribution of Debentures."
If such Liquidation Distribution can be paid only in part because the Trust
has insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Trust on the Trust
Preferred Securities shall be paid on a pro rata basis. KBK, as holder of the
Trust Common Securities, will be entitled to receive Liquidation Distributions
upon any such liquidation pro rata with the
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holders of the Trust Preferred Securities, except that if a Debenture Event of
Default or an event of default under the Guarantee has occurred and is
continuing, the Trust Preferred Securities shall have a priority over the Trust
Common Securities.
Pursuant to the Declaration, the Trust shall automatically dissolve upon
expiration of its term and shall dissolve on the first to occur of: (i) certain
events of bankruptcy, dissolution or liquidation of KBK; (ii) upon the
distribution of the Debentures to the holders of the Trust Securities, if the
Sponsor has given written instructions to the Property Trustee to terminate the
Trust (which direction may be given in the sole discretion of KBK, as Sponsor);
(iii) the redemption, conversion or exchange of all of the Trust Securities;
(iv) the entry by a court of competent jurisdiction of an order for the
dissolution of the Trust; and (v) the occurrence of a Trust Special Event except
in the case of a Trust Tax Event following which KBK has elected to pay any
Additional Sums such that the net amount received by holders of Trust Preferred
Securities in respect of distributions is not reduced as a result of such Trust
Tax Event and KBK has not revoked any such election or failed to make such
payment.
TRUST ENFORCEMENT EVENTS; NOTICE
Within 90 days after the occurrence of any Trust Enforcement Event (that
is, the occurrence of a Debenture Event of Default) or a default by KBK in
respect of any of its obligations under the Guarantee actually known to the
Property Trustee, the Property Trustee shall transmit notice of such event to
the holders of the Trust Preferred Securities, the Administrative Trustees and
KBK, as Sponsor, unless such event shall have been cured or waived. KBK, as
Sponsor, and the Administrative Trustees, on behalf of the Trust, are required
to file annually with the Property Trustee a certificate as to whether or not
they are in compliance with all the conditions and covenants applicable to them
under the Declaration.
If a Debenture Event of Default or a default under the Guarantee has
occurred and is continuing, the Trust Preferred Securities shall have a
preference over the Trust Common Securities upon dissolution of the Trust as
described above. See "-- Liquidation Distribution Upon Dissolution." The
existence of a Debenture Event of Default does not entitle the holders of Trust
Preferred Securities to accelerate the maturity thereof except to the extent
described below under the caption "-- Enforcement of Certain Rights by Holders
of Trust Preferred Securities."
In the case of any Debenture Event of Default, KBK as holder of the Trust
Common Securities will be deemed to have waived any right to act with respect to
any such Debenture Event of Default until such Debenture Event of Default with
respect to the Trust Preferred Securities has been cured, waived or otherwise
eliminated. Until any such Debenture Event of Default with respect to the Trust
Preferred Securities has been so cured, waived or otherwise eliminated, the
Property Trustee shall act solely on behalf of the holders of the Trust
Preferred Securities and not on behalf of KBK as holder of the Trust Common
Securities, and only the holders of the Trust Preferred Securities will have the
right to direct the Property Trustee to act on their behalf.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing, the
Property Trustee, as the sole holder of the Debentures, shall have the right
under the Subordinated Indenture to declare the principal of and interest on the
Debentures immediately due and payable, and, accordingly, the holders of Trust
Preferred Securities would rely on the enforcement by the Property Trustee of
its rights as a holder of the Debentures against KBK. In addition, the holders
of a majority in aggregate liquidation amount of the Trust Preferred Securities
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee or to direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, including the right to direct the Property Trustee to exercise the
remedies available to it as a holder of the Debentures. If the Property Trustee
fails to enforce its rights as holder of the Debentures after a request therefor
by a holder of Trust Preferred Securities, such holder may proceed to enforce
such rights directly against KBK. Notwithstanding the foregoing, if a Debenture
Event of Default has occurred and is continuing and such event is attributable
to the failure of KBK to pay interest or
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principal on the Debentures on the date such interest or principal is otherwise
payable (or in the case of redemption, on the redemption date), then a holder of
Trust Preferred Securities may directly institute a Legal Action against KBK for
enforcement of payment to such holder of the principal of or interest on the
Debentures having a principal amount equal to the aggregate liquidation amount
of the Trust Preferred Securities of such holder on or after the respective due
date specified in the Debentures. In connection with such Legal Action, KBK will
be subrogated to the rights of such holder of Trust Preferred Securities under
the Declaration to the extent of any payment made by KBK to such holder of Trust
Preferred Securities in such Legal Action. The holders of Trust Preferred
Securities will not be able to exercise directly against KBK any other remedy
available to the Property Trustee unless the Property Trustee first fails to do
so.
MERGER OR CONSOLIDATION OF TRUSTEES
Any corporation into which the Property Trustee, Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Property Trustee, Delaware
Trustee or any Administrative Trustee shall be a party, or any corporation
succeeding to all or substantially all the corporate trust business of such
Trustee, shall be the successor of such Trustee under the Declaration, provided
such corporation shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. The Trust may, with the consent of the Administrative Trustees
and without the consent of the Property Trustee, the Delaware Trustee or the
holders of the Trust Preferred Securities, merge with or into, consolidate,
amalgamate, be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to a trust organized as such under the laws
of any state, provided that (i) if the Trust is not the survivor of such
transaction, such successor entity either (a) expressly assumes all of the
obligations of the Trust with respect to the Trust Securities or (b) substitutes
for the Trust Preferred Securities other securities having substantially the
same terms as the Trust Preferred Securities (the "Successor Securities") so
long as the Successor Securities rank the same as the Trust Preferred Securities
rank in priority with respect to distributions and payments upon liquidation,
redemption and otherwise; (ii) KBK expressly appoints a trustee of such
successor entity possessing the same powers and duties as the Property Trustee
as the holder of the Debentures; (iii) the Successor Securities are listed, or
any Successor Securities will be listed upon notification of issuance, on any
national securities exchange or other organization on which the Trust Preferred
Securities are then listed, if any; (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Trust Preferred Securities (including any Successor Securities) to be downgraded
by any nationally recognized statistical rating organization; (v) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Trust Preferred Securities (including any Successor Securities) in any material
respect (other than with respect to any dilution of the holders' interest in the
new entity); (vi) such successor entity has a purpose identical to that of the
Trust; (vii) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, KBK has received an opinion from nationally
recognized independent counsel to the Trust experienced in such matters to the
effect that (a) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease will not adversely affect the rights, preferences
and privileges of the holders of the Trust Preferred Securities (including any
Successor Securities) in any material respect (other than with respect to any
dilution of the holders' interest in the new entity), (b) following such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, neither
the Trust nor such successor entity will be required to register as an
investment company under the Investment Company Act, and (c) following such
merger, consolidation, amalgamation, replacement conveyance, transfer or lease,
the Trust (or such successor entity) will not be taxable as a corporation for
United States federal income tax purposes; and (viii) KBK or any permitted
successor or assignee owns all of the trust common securities of such successor
entity and guarantees the obligations of such successor entity under the
Successor Securities at least to the extent provided by the Guarantees.
Notwithstanding the
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foregoing, the Trust shall not, except with the consent of holders of 100% in
aggregate liquidation amount of the Trust Securities, consolidate, amalgamate,
merge with or into, be replaced by or convey, transfer or lease its properties
and assets substantially as an entirety to any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it, if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust or the successor entity to be taxable as a corporation for
United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE DECLARATION
Except as provided below and under the caption "Description of the
Guarantee -- Amendments and Assignment" and as otherwise required by law and the
Declaration, the holders of the Trust Preferred Securities will have no voting
rights.
The Declaration may be amended from time to time by a majority of the
Administrative Trustees (and in certain circumstances, the Property Trustee and
the Delaware Trustee), without the consent of the holders of the Trust Preferred
Securities, (i) to cure any ambiguity or to correct or supplement any provisions
in the Declaration that may be defective or inconsistent with any other
provision, or to amend any other provisions with respect to matters or questions
arising under the Declaration that shall not be inconsistent with the other
provisions of the Declaration; (ii) to add to the covenants, restrictions or
obligations of KBK; (iii) to conform to any change in the Investment Company Act
or written change in interpretation or application of the rules and regulations
promulgated thereunder by any legislative body, court, government agency or
regulatory authority; (iv) to conform to any change in the Trust Indenture Act
or written change in interpretation or application of the rules and regulations
promulgated thereunder by any legislative body, court, government agency or
regulatory authority; or (v) to modify, eliminate or add to any provision of the
Declaration to such extent as may be necessary to ensure that the Trust will be
classified for United States federal income tax purposes as a grantor trust at
all times that any Trust Securities are outstanding or to ensure that the Trust
will not be treated as an "investment company" required to be registered under
the Investment Company Act; provided, however, that such amendments do not have
a material adverse effect on the rights, preferences or privileges of any holder
of Trust Securities, and any amendments of the Declaration shall become
effective when notice thereof is given to the holders of Trust Securities.
Notwithstanding the foregoing, if any proposed amendment provides for, or the
Administrative Trustees otherwise propose to effect, (i) any action that would
adversely affect the powers, preferences or special rights of the Trust
Securities, whether by way of amendment to the Declaration or otherwise, or (ii)
the dissolution, winding-up or termination of the Trust other than pursuant to
the terms of the Declaration, then the holders of the Trust Securities voting
together as a single class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of at least a majority in aggregate liquidation amount of the Trust
Securities affected thereby; provided that if any amendment or proposal referred
to in clause (i) above would adversely affect only the Trust Preferred
Securities or the Trust Common Securities, then only the affected class will be
entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of a majority in aggregate
liquidation amount of such class of the Trust Securities.
No amendment or modification may be made to the Declaration if such
amendment or modification would (i) cause the Trust to fail to be classified as
a grantor trust for United States federal income tax purposes, (ii) cause the
Trust to be taxable as a corporation for such purposes, (iii) reduce or
otherwise adversely affect the powers of the Property Trustee in contravention
of the Trust Indenture Act or (iv) cause the Trust to be deemed an "investment
company" which is required to be registered under the Investment Company Act.
Subject to the requirement of the Property Trustee receiving the opinion
described in the last sentence of this paragraph, the holders of a majority in
aggregate liquidation amount of Trust Preferred Securities will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Property Trustee or to direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee, as holder of the Debentures, (i) to
exercise the remedies available to it under the Subordinated Indenture as holder
of the Debentures and (ii) to consent
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to any amendment, modification, or termination of the Subordinated Indenture or
the Debentures where such consent shall be required; provided, however, that
where a consent or action under the Subordinated Indenture would require the
consent or act of the holders of more than a majority of the aggregate principal
amount of Debentures affected thereby, only the holders of the percentage of the
aggregate liquidation amount of the Trust Preferred Securities which is at least
equal to the percentage required under the Subordinated Indenture may direct the
Property Trustee to give such consent or take such action on behalf of the
Trust; provided, further, however, that under certain circumstances the Property
Trustee shall have the right to decline to follow any such direction. The
Property Trustee shall notify all holders of the Trust Preferred Securities of
any notice of any Trust Enforcement Event received from KBK with respect to the
Debentures. Except with respect to directing the time, method and place of
conducting a proceeding for a remedy as described above, the Property Trustee
shall not take any of the actions described in clauses (i) or (ii) above unless
the Property Trustee has received an opinion of independent tax counsel to the
effect that as a result of such action, the Trust will not be taxable as a
corporation for United States federal income tax purposes and that after such
action each holder of Trust Securities will continue to be treated as owning an
undivided beneficial ownership interest in the Debentures.
A waiver of a Debenture Event of Default will constitute a waiver of the
corresponding Trust Enforcement Event. Any required approval or direction of
holders of Trust Preferred Securities may be given at a separate meeting of
holders of Trust Preferred Securities convened for such purpose, at a meeting of
all of the holders of Trust Securities or pursuant to written consent. The
Administrative Trustees will cause a notice of any meeting at which holders of
Trust Preferred Securities are entitled to vote, or of any matter upon which
action by written consent of such holders is to be taken, to be mailed to each
holder of record of Trust Preferred Securities. Each such notice will include a
statement setting forth the following information: (i) the date of such meeting
or the date by which such action is to be taken; (ii) a description of any
resolution proposed for adoption at such meeting on which such holders are
entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents.
No vote or consent of the holders of Trust Preferred Securities will be
required for the Trust to redeem and cancel the Trust Preferred Securities in
accordance with the Declaration.
Notwithstanding that holders of Trust Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the Trust
Preferred Securities that are beneficially owned at such time by KBK or any
entity directly or indirectly controlled by, or under direct or indirect common
control with, KBK shall not be entitled to vote or consent and shall, for
purposes of such vote or consent, be treated as if such Trust Preferred
Securities were not outstanding, except for Trust Preferred Securities purchased
or acquired by KBK or its affiliates in connection with transactions effected by
or for the account of customers of KBK or any of its subsidiaries or in
connection with the distribution or trading of such Trust Preferred Securities;
provided, however, that persons (other than affiliates of KBK) to whom KBK or
any of its subsidiaries have pledged Trust Preferred Securities may vote or
consent with respect to such pledged Trust Preferred Securities pursuant to the
terms of such pledge.
The procedures by which holders of Trust Preferred Securities may exercise
their voting rights are described below. See "-- Book-Entry Only Issuance -- The
Depository Trust Company."
Holders of the Trust Preferred Securities will have no rights to appoint or
remove the Regular Trustees or the Delaware Trustee, who may be appointed,
removed or replaced solely by KBK, as the holder of all the Trust Common
Securities, provided that, upon the occurrence and during the continuance of a
Trust Enforcement Event, the Property Trustee may be removed and a successor
appointed only by the holders of a majority in aggregate liquidation amount of
the Trust Preferred Securities.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depository (the
"Depository") for the Trust Preferred Securities. The Trust Preferred Securities
will be issued only as fully-registered securities registered in the name of
Cede & Co. (DTC's nominee). One or more fully-registered global Trust Preferred
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Securities certificates ("Global Certificates"), representing the total
aggregate number of Trust Preferred Securities, will be issued and will be
deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Participants in DTC
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
Participants and by the American Stock Exchange, the New York Stock Exchange,
and the National Association of Securities Dealers, Inc. Access to the DTC
system is also available to others such as securities brokers and dealers, banks
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its Participants are on file with the Commission.
Purchases of Trust Preferred Securities within the DTC system must be made
by or through Participants, which will receive a credit for the Trust Preferred
Securities on DTC's records. The ownership interest of each actual purchaser of
Trust Preferred Securities ("Beneficial Owner") is in turn to be recorded on the
Participants' and Indirect Participants' records. Beneficial Owners will not
receive written confirmation from DTC of their purchases, but Beneficial Owners
are expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the
Participants or Indirect Participants through which the Beneficial Owners
purchased Trust Preferred Securities. Transfers of ownership interests in the
Trust Preferred Securities are to be accomplished by entries made on the books
of Participants and Indirect Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Trust Preferred Securities, except in the event that use of the
book-entry system for the Trust Preferred Securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Trust Preferred
Securities; DTC's records reflect only the identity of the Participants to whose
accounts such Trust Preferred Securities are credited, which may or may not be
the Beneficial Owners. The Participants and Indirect Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Certificate, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Trust Preferred Securities represented thereby
for all purposes under the Declaration and the Trust Preferred Securities. No
Beneficial Owner of an interest in a Global Certificate will be able to transfer
that interest except in accordance with DTC's applicable procedures, in addition
to those provided for under the Declaration.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Trust Preferred Securities (including the presentation of
Trust Preferred Securities for exchange as described below) only at the
direction of one or more Participants to whose account the DTC interests in the
Global Certificates are credited and only in respect of such portion of the
aggregate liquidation amount of Trust Preferred Securities as to which such
Participant or Participants has or have given such direction. Also, if there is
a Trust Enforcement Event under the Trust Preferred Securities, DTC will
exchange the Global Certificates for Certificated Securities, which it will
distribute to its Participants in accordance with its customary procedures.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
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Redemption notices in respect of the Trust Preferred Securities held in
book-entry form will be sent to Cede & Co. If less than all of the Trust
Preferred Securities are being redeemed, DTC will determine the amount of the
interest of each Participant to be redeemed in accordance with its procedures.
Although voting with respect to the Trust Preferred Securities is limited,
in those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to Trust Preferred Securities. Under its usual
procedures, DTC would mail an Omnibus Proxy to the Trust as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Participants to whose accounts the Trust Preferred
Securities are allocated on the record date (identified in a listing attached to
the Omnibus Proxy).
Distributions on the Trust Preferred Securities held in book-entry form
will be made to DTC in immediately available funds. DTC's practice is to credit
Participants' accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payments on such payment date. Payments by Participants and
Indirect Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participants and Indirect Participants and not of DTC, the Trust or the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of any distributions to DTC is the responsibility of the
Trust, disbursement of such payments to Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners is the
responsibility of Participants and Indirect Participants.
Except as described, a Beneficial Owner of an interest in a Global
Certificate will not be entitled to receive physical delivery of Trust Preferred
Securities. Accordingly, each Beneficial Owner must rely on the procedures of
DTC to exercise any rights under the Trust Preferred Securities.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Certificates among Participants of DTC, DTC
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trust will have any responsibility for the performance by DTC or its
Participants or Indirect Participants under the rules and procedures governing
DTC. DTC may discontinue providing its services as securities depository with
respect to the Trust Preferred Securities at any time by giving notice to the
Trust. Under such circumstances in the event that a successor securities
depository is not obtained, Trust Preferred Security certificates are required
to be printed and delivered to the Property Trustee. Additionally, the Trust
(with the consent of the Company) may decide to discontinue use of the system of
book-entry transfers through DTC or any successor depository. In that event,
certificates for the Trust Preferred Securities will be printed and delivered to
the Property Trustee. In each of the above circumstances, the Company will
appoint a Paying Agent with respect to the Trust Preferred Securities.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Trust
Preferred Securities as represented by a Global Certificate.
PAYMENT
Payments in respect of the Trust Preferred Securities represented by the
Global Certificates shall be made to DTC, which shall credit the relevant
accounts at DTC on the scheduled payment dates or, in the case of certificated
securities, if any, such payments shall be made by check mailed to the address
of the holder entitled thereto as such address shall appear on the books and
records of the Trust. The Paying Agent shall be permitted to resign as Paying
Agent upon 30 days written notice to the Administrative Trustees. In the event
that The First National Bank of Chicago shall no longer be the Paying Agent, the
Administrative Trustees shall appoint a successor to act as Paying Agent (which
shall be a bank or trust company).
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REGISTRAR, TRANSFER AGENT, AND PAYING AGENT
The Property Trustee will act as registrar, transfer agent and Paying Agent
for the Trust Preferred Securities.
Registration of transfers of Trust Preferred Securities will be effected
without charge by or on behalf of the Trust, but upon payment (with the giving
of such indemnity as the Trust may require) in respect of any tax or other
government charges which may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Trust Preferred Securities after such Trust Preferred Securities
have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, prior to the occurrence of a default with respect to
the Trust Securities, undertakes to perform only such duties as are specifically
set forth in the Declaration and, after default, shall exercise the same degree
of care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provisions, the Property Trustee is under no obligation
to exercise any of the powers vested in it by the Declaration at the request of
any holder of Trust Preferred Securities, unless offered reasonable indemnity by
such holder against the costs, expenses and liabilities which might be incurred
thereby. The holders of Trust Preferred Securities will not be required to offer
such indemnity in the event such holders, by exercising their voting rights,
direct the Property Trustee to take any action following a Trust Enforcement
Event.
GOVERNING LAW
The Declaration and the Trust Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the 1940 Act or
characterized as other than a grantor trust for United States federal income tax
purposes. In this connection, the Regular Trustees are authorized to take any
action, not inconsistent with applicable law, the certificate of trust or the
Declaration that the Regular Trustees determine in their discretion to be
necessary or desirable for such purposes as long as such action does not
adversely affect the interests of the holders of the Trust Preferred Securities.
Holders of the Trust Preferred Securities have no preemptive rights.
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DESCRIPTION OF THE GUARANTEE
The Guarantee will be executed and delivered by KBK concurrently with the
issuance by the Trust of the Trust Preferred Securities for the benefit of the
holders from time to time of such Trust Preferred Securities. The First National
Bank of Chicago will act as trustee ("Trust Guarantee Trustee") under the
Guarantee. This summary of certain provisions of the Guarantee does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Guarantee (a copy of which is filed as an exhibit
to the registration statement of which this Prospectus is a part, and a copy of
which may be obtained from the Trust Guarantee Trustee). The Trust Guarantee
Trustee will hold the Guarantee for the benefit of the holders of the Trust
Preferred Securities.
GENERAL
KBK will irrevocably and unconditionally agree to pay in full on a
subordinated basis, to the extent set forth herein, the Guarantee Payments (as
defined herein) to the holders of the Trust Preferred Securities, as and when
due, regardless of any defense, right of set-off or counterclaim that the Trust
may have or assert other than the defense of payment. The following payments
with respect to the Trust Preferred Securities, to the extent not paid by or on
behalf of the Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accumulated and unpaid distributions required to be paid on
the Trust Preferred Securities, to the extent that the Trust has funds on hand
available therefor at such time, (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption to the extent that the Trust
has funds on hand available therefor at such time, or (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust (unless the
Debentures are distributed to holders of the Trust Preferred Securities or in
connection with the redemption of all of the Trust Preferred Securities), the
lesser of (a) the Liquidation Distribution, to the extent that the Trust has
funds on hand available therefor at such time, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Trust Preferred
Securities. KBK's obligation to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by KBK to the holders of the Trust
Preferred Securities or by causing the Trust to pay such amounts to such
holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust's obligations under the Trust Preferred Securities, but will apply
only to the extent that the Trust has funds sufficient to make such payments,
and is not a guarantee of collection. If KBK does not make interest payments on
the Debentures held by the Trust, the Trust will not be able to pay
distributions on the Trust Preferred Securities and will not have funds
available therefor.
KBK has, through the Guarantee, the Declaration, the Debentures and the
Subordinated Indenture, taken together, fully, irrevocably and unconditionally
guaranteed all of the Trust's obligations under the Trust Preferred Securities.
No single document standing alone or operating in conjunction with fewer than
all of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Trust's obligations under the
Trust Preferred Securities. See "Relationship Among the Trust Preferred
Securities, the Debentures and the Guarantee."
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Trust Common
Securities to the same extent as the Guarantee, except that upon the occurrence
and during the continuation of a Trust Enforcement Event or a default under the
Guarantee, holders of Trust Preferred Securities shall have priority over
holders of Trust Common Securities with respect to distributions and payments on
liquidation, redemption or otherwise.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of KBK and will rank
subordinate and junior in right of payment to all other liabilities of KBK
(except the guarantee of the Trust Common Securities) and will rank pari passu
with the most senior preferred stock, if any, issued from time to time by KBK
and senior to the Common Stock of KBK. The terms of the Trust Preferred
Securities provide that each holder by acceptance thereof, consents and agrees
to the subordination and other provisions of the Guarantee.
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The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Trust Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust or upon
distribution of the Debentures to the holders of the Trust Preferred Securities.
The Guarantee does not place a limitation on the amount of additional
indebtedness that may be incurred by KBK or any of its subsidiaries.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority in aggregate liquidation amount of
the outstanding Trust Preferred Securities. The manner of obtaining any such
approval will be as set forth under "Description of the Trust Preferred
Securities -- Voting Rights; Amendment of the Declaration." All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of KBK and shall inure to the benefit of
the holders of the Trust Preferred Securities then outstanding.
CERTAIN COVENANTS OF KBK
KBK will covenant in the Guarantee that if and so long as (i) the Trust is
the holder of all the Debentures, (ii) a Trust Tax Event in respect of the Trust
has occurred and is continuing, and (iii) KBK has elected, and has not revoked
such election, to pay Additional Sums in respect of the Trust Securities, KBK
will pay to the Trust such Additional Sums. KBK will also covenant that it will
not, and it will not cause any of its subsidiaries to, (I) declare or pay any
dividends on, make distributions with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of KBK's capital
stock (except for dividends or distributions in shares of, or options, warrants
or rights to subscribe for or purchase shares of, its capital stock and
conversions or exchanges of common stock of one class into common stock of
another class) or (II) make any payments of principal, interest or premium, if
any, on or repay or repurchase or redeem any debt securities (including
guarantees of indebtedness for money borrowed) of KBK that rank pari passu with
or junior to the Debentures (other than (a) any redemption, liquidation,
interest, principal or guarantee payment by KBK where the payment is made by way
of securities (including capital stock) that rank pari passu with or junior to
the securities on which such redemption, interest, principal or guarantee
payment is being made; (b) payments under the Guarantees; (c) purchases of
Common Stock related to the issuance of Common Stock under any of KBK's benefit
plans for its directors, officers or employees; (d) as a result of a
reclassification of KBK's capital stock or the exchange or conversion of one
series or class of KBK's capital stock for another series or class of KBK's
capital stock; and (e) the purchase of fractional interests in shares of KBK's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged), if at such time (i) for any
distribution period, full distributions on a cumulative basis on any Trust
Securities have not been paid, (ii) there shall have occurred and be continuing
any Debenture Event of Default or any event of which KBK has actual knowledge
that, with the giving of notice or the lapse of time, or both, would constitute
a Debenture Event of Default, (iii) KBK shall be in default of any obligations
under the Guarantees, or (iv) KBK shall have given notice of its selection of an
Extension Period as provided in the Subordinated Indenture and shall not have
rescinded such notice, or such Extension Period, or any extension thereof, shall
be continuing.
For so long as Trust Preferred Securities are outstanding, KBK will
covenant (i) to maintain directly or indirectly 100% ownership of the Trust
Common Securities, provided that certain successors which are permitted pursuant
to the Subordinated Indenture may succeed to KBK's ownership of the Trust Common
Securities and (ii) not to voluntarily terminate, wind-up or liquidate the
Trust, except in connection with (a) a distribution of the Debentures to the
holders of the Trust Securities in liquidation of the Trust, (b) the redemption
of all Trust Securities or (c) certain mergers, consolidations or amalgamations
permitted by the Declaration. KBK will also covenant to use its commercially
reasonable efforts, consistent with the terms and
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provisions of the Declaration, to cause the Trust to remain classified as a
grantor trust and not taxable as a corporation for United States federal income
tax purposes. As part of the Guarantee, KBK will agree that it will honor all
obligations described therein relating to the exchange of the Trust Securities
for Debentures.
GUARANTEE EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of KBK
to perform any of its payment or other obligations thereunder. The holders of a
majority in aggregate liquidation amount of the Trust Preferred Securities have
the right (i) to waive any past default under the Guarantee and its consequences
and (ii) to direct the time, method and place of conducting any proceeding for
any remedy available to the Trust Guarantee Trustee in respect of the Guarantee
or exercising any trust or power conferred upon the Trust Guarantee Trustee
under the Guarantee.
If the Trust Guarantee Trustee fails to enforce the Guarantee, any holder
of the Trust Preferred Securities may institute a legal proceeding directly
against KBK to enforce its rights under the Guarantee without first instituting
a legal proceeding against the Trust, the Trust Guarantee Trustee or any other
person or entity. In addition, any record holder of Trust Preferred Securities
shall have the right, which is absolute and unconditional, to proceed directly
against KBK to obtain Guarantee Payments, without first waiting to determine if
the Trust Guarantee Trustee has enforced the Guarantee or instituting a legal
proceeding against the Trust, the Trust Guarantee Trustee or any other person or
entity. KBK has waived any right or remedy to require that any action be brought
first against the Trust, or any other person or entity, before proceeding
directly against KBK.
KBK, as guarantor, is required to file annually with the Trust Guarantee
Trustee a certificate as to whether or not KBK is in compliance with all the
conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE TRUST GUARANTEE TRUSTEE
The Trust Guarantee Trustee, other than during the occurrence and
continuance of a default by KBK in performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use under the circumstances
in the conduct of his or her own affairs. Subject to this provision, the Trust
Guarantee Trustee is under no obligation to exercise any of the powers vested in
it by the Guarantee at the request of any holder of Trust Preferred Securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect (i) upon
full payment of the redemption price of the Trust Preferred Securities, (ii)
upon distribution of Debentures to the holders of all of the Trust Preferred
Securities in exchange for all of the Trust Preferred Securities or (iii) upon
full payment of the amounts payable upon liquidation of the Trust. The Guarantee
will continue to be effective or will be reinstated, as the case may be, if at
any time any holder of Trust Preferred Securities must restore payment of any
sums under such Trust Preferred Securities or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
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DESCRIPTION OF THE DEBENTURES
The Debentures are to be issued under a Subordinated Indenture (the
"Subordinated Indenture"), between KBK and The First National Bank of Chicago,
as trustee (the "Subordinated Debt Trustee"), a copy of which is filed as an
exhibit to the registration statement of which this Prospectus is a part, and
copies of which may be obtained from the Subordinated Debt Trustee at its
corporate trust office. The terms of the Debentures include those stated in the
Subordinated Indenture and made a part thereof by reference to the Trust
Indenture Act in effect on the date of the Subordinated Indenture. This summary
of certain terms of the Debentures and the Subordinated Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Subordinated Indenture, including the definitions of certain
terms therein, and the Trust Indenture Act. Capitalized terms used in this
section and not otherwise defined in this section have the respective meanings
assigned to them in the Subordinated Indenture.
GENERAL
The Debentures will be unsecured and will rank junior and be subordinate in
right of payment to all Senior Debt of KBK. The Debentures will be limited in
aggregate principal amount to $15,450,000 ($17,767,500 if the Underwriters'
over-allotment option is exercised in full), such amount being the sum of the
aggregate stated liquidation amount of the Trust Preferred Securities and
capital contributed by KBK in exchange for the Trust Common Securities. The
Subordinated Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of KBK, whether under the Subordinated Indenture or
any existing or other indenture that KBK may enter into in the future or
otherwise. See "-- Subordination" below.
Concurrently with the issuance of the Trust Preferred Securities, the Trust
will invest the proceeds thereof and the consideration paid by KBK for the Trust
Common Securities in the Debentures. The Debentures will be in the principal
amount equal to the aggregate stated liquidation amount of the Trust.
The Debentures are not subject to any sinking fund provision. The entire
principal amount of the Debentures will mature, and become due and payable,
together with any accrued and unpaid interest thereon, on November 30, 2028.
INTEREST
The Debentures will bear interest at the annual rate of 9.50% per annum,
payable quarterly in arrears on February 28, May 31, August 31 and November 30
of each year, commencing on February 28, 1999 (each, an "Interest Payment
Date"), to the person in whose name each Debenture is registered at the close of
business on the fifteenth day (whether or not a Business Day) of the month of
such Interest Payment Date (the "Regular Record Date"), subject to certain
exceptions. It is anticipated that, until the Liquidation, if any, of the Trust,
each Debenture will be held in the name of the Property Trustee in trust for the
benefit of the holders of the Trust Securities. The amount of interest payable
for any period will be computed on the basis of a 360-day year of twelve 30-day
months. In the event that any date on which interest is payable on the
Debentures is not a Business Day, then payment of the interest payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect of any such delay), except that if such
Business Day is in the next succeeding calendar year, then such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on such Interest Payment Date. Accrued interest that is
not paid on the applicable Interest Payment Date will bear additional interest
on the amount thereof (to the extent permitted by law) at 9.50% per annum,
compounded quarterly. The term "interest" as used herein shall include quarterly
interest payments, interest on quarterly interest payments not paid on the
applicable Interest Payment Date and Additional Sums, as applicable.
GLOBAL SECURITIES
If distributed to holders of the Trust Preferred Securities in connection
with the involuntary or voluntary dissolution, winding-up or liquidation of the
Trust as a result of the occurrence of a Trust Special Event, the Debentures
will be issued in the same form as the Trust Preferred Securities that such
Debentures replace. Any Global Certificate will be replaced by one or more
global securities (each, a "Global Security")
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registered in the name of the depository or its nominee. Except under the
limited circumstances described below, the Debentures represented by the Global
Security will not be exchangeable for, and will not otherwise be issuable as,
Debentures in definitive form. The Global Securities described above may not be
transferred except by the depository to a nominee of the depository or by a
nominee of the depository to the depository or another nominee of the depository
or to a successor depository or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in a Global Security.
Except as provided below, owners of beneficial interests in a Global
Security will not be entitled to receive physical delivery of Debentures in
definitive form and will not be considered the holders thereof for any purpose
under the Subordinated Indenture, and no Global Security representing Debentures
shall be exchangeable, except for another Global Security of like denomination
and tenor to be registered in the name of the depository or its nominee or to a
successor depository or its nominee. Accordingly, each beneficial owner of Trust
Preferred Securities must rely on the procedures of DTC, or if such person is
not a Participant, on the procedures of the Participant through which such
person owns its interest to exercise any rights of a holder under the
Subordinated Indenture.
If Debentures are distributed to holders of Trust Preferred Securities in
liquidation of such holders' interests in the Trust and a Global Security is
issued, DTC will act as securities depository for the Debentures represented by
such Global Security. For a description of DTC and the specific terms of the
depository arrangements, see "Description of the Trust Preferred
Securities -- Book-Entry Only Issuance -- The Depository Trust Company." As of
the date of this Prospectus, the description therein of DTC's book-entry system
and DTC's practices as they relate to purchases, transfers, notices and payments
with respect to the Trust Preferred Securities apply in all material respects to
any debt obligations represented by one or more Global Securities held by DTC.
KBK may appoint a successor to DTC or any successor depository in the event DTC
or such depository is unable or unwilling to continue as a depository for the
Global Securities.
None of KBK, the Subordinated Debt Trustee, any Paying Agent or the
Securities Registrar will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests of the Global Security representing such Debentures or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
A Global Security shall be exchangeable for Debentures registered in the
names of persons other than DTC or its nominee only if (i) DTC notifies KBK that
it is unwilling or unable to continue as a depository for such Global Debenture
and no successor depository shall have been appointed by KBK within 90 days, or
if at any time DTC ceases to be a "clearing agency" registered under the
Exchange Act at a time when DTC is required to be so registered to act as such
depository and no such successor depository has been appointed within 90 days by
the Company, (ii) KBK in its sole discretion determines that such Global
Security shall be so exchangeable, or (iii) there shall have occurred and be
continuing an Event of Default with respect to such Global Security. Any Global
Security that is exchangeable pursuant to the preceding sentence shall be
exchangeable for definitive certificates registered in such names as DTC shall
direct. It is expected that such instructions will be based upon directions
received by DTC from its Participants with respect to ownership of beneficial
interests in such Global Security. In the event that Debentures are issued in
definitive form, such Debentures will be in denominations of $10 and integral
multiples thereof and may be transferred or exchanged at the offices described
in "-- Payment and Paying Agent" below.
PAYMENT AND PAYING AGENT
Payments on Debentures represented by a Global Security will be made to
DTC, as the depository for the Debentures. In the event Debentures are issued in
definitive form, principal of and any interest on Debentures will be payable,
the transfer of the Debentures will be registrable, and the Debentures will be
exchangeable for Debentures of other denominations of a like aggregate principal
amount at the corporate trust office of the Subordinated Debt Trustee or at the
office of such Paying Agent or Paying Agents as KBK may designate, except that
at the option of KBK payment of any interest may be made (i) by check mailed to
the address of
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the Person entitled thereto as such address shall appear in the Security
Register or (ii) by wire transfer to an account maintained by the Person
entitled thereto as specified in the Security Register, provided that proper
transfer instructions have been received by the Regular Record Date. Payment of
any interest on Debentures will be made to the Person in whose name such
Debentures are registered at the close of business on the Regular Record Date
for such interest, except in the case of Defaulted Interest. The Regular Record
Date for the interest payable on any Interest Payment Date shall be the
fifteenth day (whether or not a Business Day) of the month of such Interest
Payment Date. KBK may at any time designate additional Paying Agents or rescind
the designation of any Paying Agent.
Any monies deposited with the Subordinated Debt Trustee or any Paying
Agent, or then held by KBK in trust, for the payment of the principal of or
interest on any Debentures and remaining unclaimed for two years after such
principal or interest has become due and payable shall, at the request of KBK,
be repaid to KBK and the holder of such Debentures shall thereafter look, as a
general unsecured creditor, only to KBK for payment thereof.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
KBK has the right under the Subordinated Indenture to defer the payment of
interest on the Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the stated maturity of the
Debentures or any redemption date of the Debentures. At the end of such
Extension Period, KBK must pay all interest then accrued and unpaid (together
with additional interest thereon at the stated annual rate, compounded
quarterly, to the extent permitted by applicable law) on the Interest Payment
Date coinciding with or next following the end of such Extension Period
(whichever is earliest) to the persons in whose names the Debentures are
registered at the close of business on the Regular Record Date next preceding
such Interest Payment Date. During an Extension Period, interest will continue
to accrue and holders of Debentures (or holders of Trust Preferred Securities
while the Trust Preferred Securities are outstanding) will be required to accrue
interest income (in the form of OID) for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Interest Income and
Original Issue Discount."
During any such Extension Period, any default under either of the
Guarantees or any Debenture Event of Default (or there shall have occurred and
be continuing any event of which KBK has actual knowledge that, with the giving
of notice or lapse of time, or both, would constitute a Debenture Event of
Default), KBK shall not, and shall not permit any subsidiary to, (i) declare or
pay any dividends or distributions on, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of KBK's capital stock (except for
dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, its capital stock and conversions or
exchanges of common stock of one class into common stock of another class) or
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities (including guarantees of indebtedness
for money borrowed) of KBK that rank pari passu with or junior to the Debentures
(other than (a) any redemption, liquidation, interest, principal or guarantee
payment by KBK where the payment is made by way of securities (including capital
stock) that rank pari passu with or junior to the securities on which such
dividend, redemption, interest, principal or guarantee payment is being made;
(b) payments under the Guarantees; (c) purchases of Common Stock related to the
issuance of Common Stock under any of KBK's benefit plans for its directors,
officers or employees; (d) as a result of a reclassification of KBK's capital
stock or the exchange or conversion of one series or class of KBK's capital
stock for another series or class of KBK's capital stock; or (e) the purchase of
fractional interests in shares of KBK's capital stock pursuant to the conversion
or exchange provisions of such capital stock or the security being converted or
exchanged).
Prior to the termination of any such Extension Period, KBK may further
extend the Interest Payment Period, provided that no Extension Period may exceed
20 consecutive quarters or extend beyond the stated maturity of the Debentures
or any redemption date of the Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest Payment
Date, KBK may elect to begin a new Extension Period subject to the above
requirements. No interest shall be due and payable during
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an Extension Period, except at the end thereof. KBK shall give the Property
Trustee and the Subordinated Debt Trustee notice of its election to begin any
Extension Period at least one Business Day prior to the earlier of (i) the
record date for the date distributions on the Trust Preferred Securities would
have been payable (or, if no Trust Preferred Securities are outstanding, for the
date interest on the Debentures would have been payable) except for the election
to begin such Extension Period and (ii) the date the Property Trustee is (or, if
no Trust Preferred Securities are outstanding, the Subordinated Debt Trustee is)
required to give notice to the American Stock Exchange or other applicable
self-regulatory organization or to holders of such Trust Preferred Securities
(or, if no Trust Preferred Securities are outstanding, to the holders of such
Debentures) of such election. The Subordinated Debt Trustee and the Property
Trustee shall give notice of KBK's election to begin an Extension Period to the
holders of the Debentures and the Trust Preferred Securities, respectively.
MANDATORY REPAYMENT
Upon repayment of the Debentures at maturity or as a result of acceleration
upon the occurrence of a Debenture Event of Default, KBK will pay a price equal
to 100% of the principal amount of the Debentures, together with any accrued and
unpaid interest thereon. Any payment pursuant to this provision shall be made
prior to 12:00 noon, New York City time, on the date of maturity or acceleration
or at such other time on such earlier date as the parties thereto shall agree.
The Debentures are not entitled to the benefit of any sinking fund or, except as
set forth above or as a result of acceleration, any other provision for
mandatory prepayment.
OPTIONAL REDEMPTION
On and after November 30, 2001 and subject to the next succeeding sentence,
KBK will have the right, at any time and from time to time, to redeem the
Debentures, in whole or in part, upon notice given as provided below, at 100% of
the principal amount of the Debentures being redeemed, together with any accrued
but unpaid interest on the portion being redeemed.
For so long as the Trust is the holder of all the outstanding Debentures,
the proceeds of any such redemption will be used by the Trust to redeem Trust
Securities in accordance with their terms. KBK may not redeem the Debentures in
part unless all accrued and unpaid interest has been paid in full on all
outstanding Debentures. See "Description of the Trust Preferred
Securities -- Optional Redemption."
If, at the time of any optional redemption or mandatory repayment of the
Debentures, the Trust Securities remain outstanding, the redemption or repayment
proceeds shall be used to redeem the Trust Securities.
REDEMPTION PROCEDURES
Notices of any redemption of the Debentures and the procedures for such
redemption shall be as provided with respect to the Trust Preferred Securities
under the caption "Description of the Trust Preferred Securities -- Redemption
Procedures." Notice of any redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each holder of Debentures to be
redeemed at its registered address. Unless KBK defaults in payment of the
redemption price, on and after the redemption date interest ceases to accrue on
such Debentures or portions thereof called for redemption.
DISTRIBUTION OF DEBENTURES
At any time, KBK will have the right to dissolve the Trust and cause the
Debentures to be distributed to the holders of the Trust Preferred Securities in
liquidation of the Trust after satisfaction of liabilities to creditors of the
Trust as provided by applicable law. If distributed to holders of Trust
Preferred Securities in liquidation, the Debentures will initially be issued in
the form of one or more Global Securities and DTC, or any successor depository
for the Trust Preferred Securities, will act as depository for the Debentures.
It is anticipated that the depository arrangements for the Debentures would be
substantially identical to those in effect for the Trust Preferred Securities.
There can be no assurance as to the market price of any Debentures that may be
distributed to the holders of Trust Preferred Securities. For a description of
DTC and the terms of
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the depository arrangement, see "Description of the Trust Preferred
Securities -- Book-Entry Only Issuance -- The Depository Trust Company."
CERTAIN COVENANTS
For a description of certain covenants by KBK that apply if (a) a Debenture
Event of Default has occurred and is continuing (or there shall have occurred
and be continuing any event of which KBK has actual knowledge that, with the
giving of notice or lapse of time, or both, would constitute a Debenture Event
of Default), (b) KBK is in default of its obligations under the Guarantee or the
guarantee of the Trust Common Securities or (c) KBK shall have given notice of
its election to defer payments of interest on the Debentures by extending the
Interest Payment Period, see "-- Option to Extend Interest Payment Period."
So long as Trust Preferred Securities remain outstanding KBK will covenant
(i) to maintain directly or indirectly 100% ownership of the Trust Common
Securities, provided that certain successors which are permitted pursuant to the
Subordinated Indenture may succeed to KBK's ownership of the Trust Common
Securities; and (ii) not to voluntarily terminate, wind-up or liquidate the
Trust, except in connection with (A) a distribution of the Debentures to the
holders of Trust Securities in liquidation of the Trust, (B) the redemption of
all Trust Securities or (C) certain mergers, consolidations or amalgamations
permitted by the Declaration. KBK will also covenant to use its commercially
reasonable efforts, consistent with the terms and provisions of the Declaration,
to cause the Trust to remain classified as a grantor trust and not taxable as a
corporation for United States federal income tax purposes.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Subordinated Indenture provides that KBK may, without the consent of
the Subordinated Debt Trustee or the holders of any Debenture consolidate or
merge with, or sell, lease or transfer its properties and assets as, or
substantially as, an entirety to, any Person, provided that (i) either KBK is
the surviving entity or such successor Person expressly assumes or becomes a
co-obligor jointly and severally liable with respect to the due and punctual
payment of the principal of and interest on, the Debentures and the performance
or observance of every covenant and condition of the Subordinated Indenture on
the part of KBK to be performed or observed, (ii) immediately after giving
effect to the transaction, no Default or Event of Default exists, and (iii) KBK
has delivered the Officer's Certificate and Opinion of Counsel required by the
Subordinated Indenture. Any such successor Person shall succeed to and be
substituted for, and may exercise every right and power of, KBK under the
Subordinated Indenture with the same effect as if it had been named a party in
the Subordinated Indenture and KBK shall, except in the case of a lease, be
released and discharged from all its obligations under the Debentures and the
Subordinated Indenture. Notwithstanding the foregoing, the predecessor Person
may, in the alternative, elect not to be so released from such obligations,
provided that the predecessor Person and the successor Person shall agree,
pursuant to a supplemental Subordinated Indenture, to be co-obligors jointly and
severally with respect to all such obligations.
DEBENTURE EVENTS OF DEFAULT
An "Event of Default" will occur under the Subordinated Indenture with
respect to the Debentures upon: (a) default in the payment of the principal of
the Debentures at their maturity (whether or not prohibited by the subordination
provisions thereof); (b) default in the payment of any interest on the
Debentures when they become due and payable and continuance of such default for
a period of 30 days (whether or not prohibited by the subordination provisions
thereof); (c) default in the performance, or breach, of any term, covenant or
warranty contained in the Subordinated Indenture for a period of 60 days upon
giving written notice as provided in the Subordinated Indenture; (d) the
occurrence of certain events of bankruptcy; or (e) upon the voluntary or
involuntary dissolution, winding-up or termination of the Trust, except in
connection with the distribution of the Debentures to the holders of Trust
Securities in liquidation of the Trust, the redemption or exchange of all of the
Trust Securities, or certain mergers, consolidations or amalgamations, each as
permitted by the Declaration.
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The Subordinated Indenture provides that if an Event of Default with
respect to the Debentures shall have occurred and be continuing, either the
Subordinated Debt Trustee or the holders of not less than 25% in principal
amount of the Debentures then outstanding may declare the principal amount of
all the Debentures to be due and payable immediately upon giving written notice
as provided in the Subordinated Indenture. The Subordinated Indenture provides
that the holders of a majority in principal amount of the Debentures then
outstanding may rescind and annul such declaration and its consequences under
certain circumstances.
The holders of a majority in principal amount of the Debentures then
outstanding may waive past defaults under the Subordinated Indenture and its
consequences (except a continuing default in the payment of principal of or
interest on the Debentures or a default in respect of any covenant or provision
of the Subordinated Indenture which cannot be modified or amended by a
supplemental Subordinated Indenture without the consent of the holder of each
outstanding Debenture affected thereby).
Pursuant to the Subordinated Indenture, the holders of a majority in
aggregate principal amount of all the Debentures then outstanding may direct the
time, method, and place of conducting any proceeding for any remedy available to
the Subordinated Debt Trustee or exercising any trust or power conferred on the
Trustee, provided that such direction shall not be in conflict with any rule of
law or the Subordinated Indenture. Before proceeding to exercise any right or
power under the Subordinated Indenture at the direction of any holders, the
Subordinated Debt Trustee shall be entitled to receive from such holders
reasonable security or indemnity against the costs, expenses, and liabilities
which might be incurred by it in compliance with any such direction.
Under the terms of the Subordinated Indenture, KBK is required to furnish
to the Subordinated Debt Trustee annually an Officer's Certificate to the effect
that, to the best of such officer's knowledge, KBK is not in default in the
performance and observance of the terms, provisions and conditions of the
Subordinated Indenture or, if such officer has knowledge that KBK is in default,
specifying such default. The Subordinated Indenture requires the Subordinated
Debt Trustee to give to all holders of Debentures outstanding thereunder notice
of any Default by KBK in the manner provided in the Subordinated Indenture,
unless such Default shall have been cured or waived; however, except in the case
of a default in the payment of principal of or interest on any Debentures
outstanding thereunder, the Subordinated Debt Trustee is entitled to withhold
such notice in the event that the board of directors, the executive committee,
or a trust committee of directors or certain officers of the Subordinated Debt
Trustee in good faith determine that withholding such notice is in the interest
of the holders of such outstanding Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of KBK to pay principal or interest on the
Debentures on the date such principal or interest is otherwise payable, a holder
of Trust Preferred Securities may institute a Legal Action for payment after the
respective due date specified in the Debentures. KBK may not amend the
Subordinated Indenture to remove the foregoing right to bring a Legal Action
without the prior written consent of the holders of all of the Trust Preferred
Securities. Notwithstanding any payment made to such holder of Trust Preferred
Securities by KBK in connection with a Legal Action, KBK shall remain obligated
to pay the principal of or interest on the Debentures held by the Trust or the
Property Trustee and KBK shall be subrogated to the rights of the holder of such
Trust Preferred Securities with respect to payments on the Trust Preferred
Securities to the extent of any payments made by KBK to such holder in any Legal
Action.
SUBORDINATION
In the Subordinated Indenture, KBK has covenanted and agreed that any
Debentures issued thereunder will be subordinate and junior in right of payment
to all Senior Debt of KBK whether now existing or hereafter incurred. Upon any
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding-up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of KBK, the holders of Senior Debt will first be entitled
to receive payment in full of principal of and premium, if any, and interest, if
any, on such Senior Debt before the Property Trustee, on behalf of the holders
of the
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Debentures, will be entitled to receive or retain any payment in respect of the
principal of or interest on the Debentures.
In the event of the acceleration of the maturity of any Debentures, the
holders of all Senior Debt outstanding at the time of such acceleration will
first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of Debentures
will be entitled to receive or retain any payment in respect of the principal of
or interest on the Debentures.
No payment on account of principal or interest in respect of the Debentures
may be made if there shall have occurred and be continuing a default in any
payment with respect to Senior Debt, or an event of default with respect to any
Senior Debt resulting in the acceleration of the maturity thereof, or if any
judicial proceeding shall be pending with respect to any such default.
CHANGE IN CONTROL AND HIGHLY LEVERAGED TRANSACTIONS
The Subordinated Indenture contains no covenants or other provisions to
afford protection to holders of the Debentures in the event of a highly
leveraged transaction or a change in control of the Company.
MODIFICATION OF THE SUBORDINATED INDENTURE
The Subordinated Indenture provides that KBK and the Subordinated Debt
Trustee may enter into supplemental indentures without the consent of the
holders of Debentures to: (a) evidence the succession of another Person to KBK
under the Subordinated Indenture and the Debentures and the assumption by such
successor Person of the obligations of KBK thereunder; (b) evidence another
Person's becoming a co-obligor with respect to the obligations of KBK under the
Subordinated Indenture and the Debentures; (c) add covenants and Events of
Default for the benefit of the holders of all the Debentures or to surrender any
right or power conferred by the Subordinated Indenture upon KBK; (d) cure any
ambiguity or correct any inconsistency in the Subordinated Indenture; (e)
evidence the acceptance of appointment by a successor (including as a
co-obligor) Subordinated Debt Trustee; and (f) qualify the Subordinated
Indenture under the Trust Indenture Act.
The Subordinated Indenture also provides that KBK and the Subordinated Debt
Trustee, with the consent of the holders of a majority in aggregate principal
amount of all outstanding Debentures to modify the Subordinated Indenture or the
rights of the holders of the Debentures; provided that KBK and the Subordinated
Debt Trustee may not, without the consent of the holder of each outstanding
Debenture affected thereby: (a) change the stated maturity of the principal of
or any installment of interest on any Debenture, or reduce the principal amount
thereof or the rate of interest thereon, (b) reduce the percentage in principal
amount of Debentures required for any such supplemental Subordinated Indenture
or for any waiver provided for in the Subordinated Indenture, (c) change KBK's
obligation to maintain an office or agency for payment of Debentures and the
other matters specified therein, or (d) modify any of the provisions of the
Subordinated Indenture relating to the execution of supplemental indentures with
the consent of holders of Debentures which are discussed in this paragraph or
modify any provisions relating to the waiver by holders of past defaults and
certain covenants, except to increase any required percentage or to provide that
certain other provisions of the Subordinated Indenture cannot be modified or
waived without the consent of the holder of each outstanding Debenture.
SATISFACTION AND DISCHARGE; LEGAL AND COVENANT DEFEASANCE
Under the terms of the Subordinated Indenture, KBK may satisfy and
discharge certain obligations to holders of Debentures which have not already
been delivered to the Subordinated Debt Trustee for cancellation and which have
either become due and payable or are by their terms due and payable within one
year or are to be called for redemption within one year by (i) depositing or
causing to be deposited with the Subordinated Debt Trustee funds in an amount
sufficient to pay the principal and interest to the date of such deposit (in
case of Debentures which have become due and payable) or to the Stated Maturity
or Redemption Date, as the case may be, (ii) paying or causing to be paid all
other sums payable under the Subordinated
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Indenture with respect to such Debentures, and (iii) delivering to the
Subordinated Debt Trustee an Officer's Certificate and Opinion of Counsel
relating to such satisfaction and discharge.
The Subordinated Indenture also provides that KBK and any other obligor, if
any, will be discharged from any and all obligations in respect of the
Debentures issued thereunder (excluding, however, certain obligations, such as
the obligation to register the transfer or exchange of such outstanding
Debentures, to replace stolen, lost, mutilated or destroyed certificates, to pay
principal and interest on the original stated due dates or specified redemption
date, to make any sinking fund payments, and to maintain paying agencies) on the
91st day following the deposit referred to in the following clause (i), subject
to the following conditions: (i) the irrevocable deposit, in trust, of cash or
U.S. Government Obligations (or a combination thereof) which through the payment
of interest and principal thereof in accordance with their terms will provide
cash in an amount sufficient to pay the principal and interest on the
outstanding Debentures on the Stated Maturity of such payments in accordance
with the terms of the Subordinated Indenture and the outstanding Debentures or
on any Redemption Date established pursuant to clause (iii) below; (ii) KBK's
receipt of an Opinion of Counsel based on the fact that (A) KBK has received
from, or there has been published by, the Internal Revenue Service a ruling, or
(B) since the date of the Subordinated Indenture, there has been a change in the
applicable federal income tax law, in either case, to the effect that, and
confirming that, the holders of the Debentures will not recognize income, gain
or loss for federal income tax purposes as a result of such deposit and
defeasance and will be subject to federal income tax on the same amount and in
the same manner and at the same times, as would have been the case if such
deposit and defeasance had not occurred; (iii) if the Debentures are to be
redeemed prior to Stated Maturity, notice of such redemption shall have been
duly given pursuant to the Subordinated Indenture or provision therefor
satisfactory to the Subordinated Debt Trustee shall have been made; (iv) no
Event of Default or event which with notice or lapse of time or both would
become an Event of Default will have occurred and be continuing on the date of
such deposit; and (v) KBK's delivery to the Subordinated Debt Trustee of an
Officer's Certificate and an Opinion of Counsel, each stating that the
conditions precedent under the Subordinated Indenture have been complied with.
Under the Subordinated Indenture, KBK also may discharge its obligations
referred to above under the captions "-- Certain Covenants" and
"-- Consolidation, Merger and Sale of Assets" included in this Prospectus, as
well as certain of its obligations relating to reporting obligations under the
Subordinated Indenture in respect of the Debentures on the 91st day following
the deposit referred to in clause (i) in the immediately preceding paragraph,
subject to satisfaction of the conditions described in clauses (i), (iii), (iv)
and (v) in the immediately preceding paragraph with respect to the Debentures
and the delivery of an Opinion of Counsel confirming that the holders of the
Debentures will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and covenant defeasance and will be subject
to federal income tax on the same amount and in the same manner and at the same
times, as would have been the case if such deposit and covenant defeasance had
not occurred.
NO PERSONAL, LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES OR STOCKHOLDERS
No director, officer, employee or stockholder, as such, of KBK or any of
its affiliates shall have any personal liability in respect of the obligations
of KBK under the Subordinated Indenture or the Debentures by reason of his, her
or its status as such.
APPLICABLE LAW
The Subordinated Indenture is, and the Debentures offered hereby will be,
governed by, and construed in accordance with, the laws of the State of New
York.
CONCERNING THE SUBORDINATED DEBT TRUSTEE
The Subordinated Indenture provides that, except during the continuance of
an Event of Default, the Subordinated Debt Trustee will perform only such duties
as are specifically set forth in the Subordinated Indenture. If an Event of
Default has occurred and is continuing, the Subordinated Debt Trustee will use
the
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same degree of care and skill in its exercise of the rights and powers vested in
it by the Subordinated Indenture as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Subordinated Indenture contains limitations on the rights of the
Subordinated Debt Trustee, should it become a creditor of KBK, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of such claims, as security or otherwise. The Subordinated Debt Trustee
is permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest, it must eliminate such conflict or resign.
The First National Bank of Chicago, a national banking association, is the
Subordinated Debt Trustee under the Subordinated Indenture.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES,
THE DEBENTURES AND THE GUARANTEE
As long as KBK makes payments of interest and other payments when due on
the Debentures, such payments will be sufficient to cover distributions and
other payments due on the Trust Preferred Securities, primarily because (i) the
aggregate principal amount of the Debentures will be equal to the sum of the
aggregate stated liquidation preference of the Trust Preferred Securities; (ii)
the interest rate and interest and other payment dates of the Debentures will
match the distribution rate and distribution and other payment dates for the
Trust Preferred Securities; (iii) KBK shall pay for all and any costs, expenses
and liabilities of the Trust except the Trust's obligations to holders of the
Trust Preferred Securities; and (iv) the Declaration of the Trust further
provides that the Trust will not engage in any activity that is not consistent
with the limited purposes of the Trust.
Payments of distributions and other amounts due on the Trust Preferred
Securities (to the extent the Trust has funds available for the payment of such
distributions) are irrevocably guaranteed by KBK as and to the extent set forth
under "Description of the Guarantee." Taken together, KBK's obligations under
the Debentures, the Subordinated Indenture, the Declarations of the Trust and
the Trust Guarantees provide a full, irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the Trust Preferred
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of each of the Trust's obligations under
the Trust Preferred Securities. If and to the extent that KBK does not make
payments on the Debentures, the Trust will not pay distributions or other
amounts due on the Trust Preferred Securities. The Guarantee does not cover
payment of distributions when the Trust does not have sufficient funds to pay
such distributions. In such event, the remedies of a holder of the Trust
Preferred Securities of the Trust are described herein under "Description of the
Guarantee -- Guarantee Events of Default." The obligations of KBK under the
Guarantees are unsecured and are subordinate and junior in right of payment to
all other liabilities of KBK.
Notwithstanding anything to the contrary in the Subordinated Indenture and
to the extent set forth therein, KBK has the right to set-off any payment it is
otherwise required to make thereunder with and to the extent KBK has theretofore
made, or is concurrently on the date of such payment making, a payment under the
Guarantee.
A holder of Trust Preferred Securities may institute a legal proceeding
directly against KBK to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Trust Guarantee Trustee, the Trust or
any other person or entity.
The Trust Preferred Securities evidence a beneficial interest in the Trust.
The Trust exists for the sole purpose of issuing the Trust Securities, making
distributions to holders of Trust Securities and investing the proceeds of the
issuance of the Trust Securities in the Debentures, and engaging in activities
incidental thereto. A principal difference between the rights of a holder of
Trust Preferred Securities and a holder of the Debentures is that a holder of
the Debentures is entitled to receive from KBK the principal amount of and
interest accrued on the Debentures held, while a holder of Trust Preferred
Securities is entitled to receive
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distributions from the Trust (or from KBK under the Guarantee) if and to the
extent the Trust has funds available for the payment of such distributions.
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Trust involving the liquidation of the Debentures, the holders of the Trust
Preferred Securities will be entitled to receive, out of assets held by the
Trust and after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, the liquidation distribution in cash. See
"Description of Trust Preferred Securities." Upon any voluntary or involuntary
liquidation or bankruptcy of KBK, the Property Trustee, as holder of the
Debentures of such Trust, would be a subordinated creditor of KBK, subordinated
in right of payment to all Senior Debt of KBK, but entitled to receive payment
in full of principal and interest, before any shareholders of KBK receive
payments or distributions. Since KBK is the guarantor under the Guarantees and
has agreed to pay for all costs, expenses and liabilities of the Trust (other
than the Trust's obligations to the holders of the Trust Preferred Securities),
the positions of a holder of Trust Preferred Securities and a holder of the
Debentures relative to other creditors and to shareholders of KBK in the event
of liquidation or bankruptcy of KBK would be substantially the same.
A default or event of default under any Senior Debt of KBK will not
constitute a Default or Event of Default under the Subordinated Indenture.
However, in the event of payment defaults under, or acceleration of, Senior Debt
of KBK, the subordination provisions of the Subordinated Indenture provide that
no payments may be made in respect of the Debentures until Senior Debt has been
paid in full or any payment default thereunder has been cured or waived. Failure
to make required payments on the Debentures would constitute an Event of Default
under the Subordinated Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material United States federal income tax
consequences of the purchase, ownership and disposition of the Trust Preferred
Securities. Unless otherwise stated, this summary deals only with Trust
Preferred Securities held as capital assets by holders who purchase the Trust
Preferred Securities upon original issuance. It does not deal with special
classes of holders such as banks, thrifts, real estate investment trusts,
regulated investment companies, insurance companies, dealers in securities or
currencies, tax-exempt investors, foreign corporations and persons who are not
citizens or residents of the United States (except to the extent discussed under
the heading "-- Certain United States Tax Consequences to Non-United States
Holders") or persons that will hold the Trust Preferred Securities as a position
in a "straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the United States Dollar or
the tax consequences to shareholders, partners or beneficiaries of a holder of
Trust Preferred Securities. Further, it does not include any description of any
alternative minimum tax consequences or the tax laws of any state or local
government or of any foreign government that may be applicable to the Trust
Preferred Securities. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis.
INVESTORS ARE ADVISED TO CONSULT THEIR TAX ADVISORS AS TO THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF TRUST
PREFERRED SECURITIES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE
EFFECT OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND OF POTENTIAL CHANGES
IN APPLICABLE TAX LAWS.
CLASSIFICATION OF THE DEBENTURES
KBK has taken the position that the Debentures will be classified for
United States federal income tax purposes as indebtedness of KBK under current
law and, by acceptance of Trust Preferred Securities, each holder covenants to
treat the Debentures as indebtedness and the Trust Preferred Securities as
evidence of an indirect beneficial ownership interest in the Debentures. No
assurance can be given, however, that such
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position of KBK will not be challenged by the Internal Revenue Service ("IRS")
or, if challenged, that such a challenge will not be successful. The remainder
of this discussion assumes that the Debentures will be classified as
indebtedness of KBK for United States federal income tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Trust Preferred Securities, Liddell,
Sapp, Zivley, Hill & LaBoon, L.L.P., United States tax counsel to the Trust and
KBK, will render its opinion generally to the effect that, under then current
law and assuming full compliance with the terms of the Declaration and the
Subordinated Indenture (and certain other documents), based on certain facts and
assumptions contained in such opinion, the Trust will be classified for United
States federal income tax purposes as a grantor trust and not as an association
taxable as a corporation. Accordingly, for United States federal income tax
purposes, each holder of Trust Preferred Securities generally will be considered
the owner of an undivided interest in the Debentures, and each holder will be
required to include in its gross income any stated interest or original issue
discount (as noted below) with respect to its allocable share of those
Debentures.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as described below, stated interest on the Debentures generally will
be taxable to a holder as ordinary income at the time it is accrued or paid in
accordance with the holder's regular method of tax accounting.
Under current Treasury regulations applicable to debt instruments issued on
or after August 13, 1996 (the "Regulations"), a "remote" contingency that stated
interest will not be timely paid will be ignored in determining whether such
stated interest is "qualified stated interest" and whether a debt instrument is
issued with OID. The Company believes that the likelihood of its exercising its
option to defer payments of interest is remote. Based on the foregoing, the
Company believes that stated interest on the Debentures will constitute
qualified stated interest and that the Debentures will not be considered to be
issued with OID at the time of their original issuance and, accordingly, a
holder should include in gross income such holder's allocable share of stated
interest on the Debentures in accordance with such holder's regular method of
tax accounting.
Under the Regulations, if the Company exercised its option to defer any
payment of interest, the Debentures would at that time be treated as having been
reissued with OID, and all stated interest on the Debentures would thereafter be
treated as OID as long as the Debentures remained outstanding. In such event,
all of a holder's interest income with respect to the Debentures would be
accounted for as OID on an economic accrual basis regardless of such holder's
method of tax accounting, and actual distributions of stated interest would not
be reported as income. Consequently, a holder would be required to include
stated interest on the Debentures in gross income, as OID, even though the
Company would not make any actual cash payments with respect to such interest
during an Extension Period.
The Regulations specific to such treatment have not been addressed in any
rulings or other interpretations by the IRS, and it is possible that the IRS
could take a position contrary to the interpretation herein.
Subsequent use of the term "interest" in this summary includes income in
the form of OID.
Because income on the Debentures will constitute interest or original issue
discount, corporate holders will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Debentures.
REDEMPTION OF TRUST PREFERRED SECURITIES
FOR DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under certain circumstances, the Debentures may be distributed to holders
in exchange for the Trust Preferred Securities. Under current law, such a
distribution to holders, for United States federal income tax purposes, would be
treated as a nontaxable event to each holder, and each holder would receive an
aggregate tax basis in the Debentures distributed equal to such holder's
aggregate tax basis in its Trust Preferred Securities exchanged therefor. A
holder's holding period in the Debentures so received would include the
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period during which the Trust Preferred Securities were held by such holder. If,
however, the exchange is caused by a Trust Tax Event which results in the Trust
being treated as an association taxable as a corporation, the distribution would
likely constitute a taxable event to the Trust and holders of the Trust
Preferred Securities.
Under certain circumstances described herein (see "Description of the Trust
Preferred Securities -- Trust Special Event Exchange or Redemption"), the
Debentures may be redeemed for cash and the proceeds of such redemption
distributed to holders in redemption of their Trust Preferred Securities. Under
current law, such a redemption would, for United States federal income tax
purposes, constitute a taxable disposition of the redeemed Trust Preferred
Securities, and a holder would recognize gain or loss in the same manner as if
it sold such redeemed Trust Preferred Securities for cash. See "-- Sales of
Trust Preferred Securities" below.
SALES OF TRUST PREFERRED SECURITIES
A holder that sells Trust Preferred Securities will recognize gain or loss
equal to the difference between the amount realized on the sale of the Trust
Preferred Securities and the holder's adjusted tax basis in such Trust Preferred
Securities. A holder's adjusted tax basis in the Trust Preferred Securities
generally will be its initial purchase price increased by any original issue
discount previously includible in such holder's gross income to the date of
disposition and decreased by payments other than qualified stated interest
received on the Trust Preferred Securities to the date of disposition. In
general, such gain or loss will be a capital gain or loss. Any capital gain will
be (a) long-term capital gain if the holder held the Trust Preferred Securities
for more than 12 months or (b) short-term capital gain if the holder held the
Trust Preferred Securities for 12 months or less as of the effective date of the
Merger. Long-term capital gain of individuals currently is taxed at a maximum
rate of 20%. Short-term capital gain of individuals is taxed as ordinary income.
Ordinary income of individuals is currently taxed at a maximum rate of 39.6%.
The Trust Preferred Securities may trade at a price that does not
accurately reflect the value of accrued but unpaid interest with respect to the
underlying Debentures. A holder who disposes of his Trust Preferred Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid interest on the Debenture through the date of
disposition in income as ordinary income, and to add such amount to his adjusted
tax basis in his pro rata share of the underlying Debentures deemed disposed of.
To the extent the selling price is less than the holder's adjusted tax basis
(which basis will include, in the form of original issue discount, all accrued
but unpaid interest), a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
MARKET DISCOUNT AND BOND PREMIUM
Holders that purchase the Trust Preferred Securities at a price that is
greater or less than the adjusted issue price of such holder's proportionate
share of the Debentures (which generally should approximate the face amount plus
accrued but unpaid interest on the Debentures) may be considered to have
acquired their undivided interests in the Debentures with market discount or
acquisition premium as such phrases are defined for United States federal income
tax purposes. Such holders are advised to consult their tax advisors as to the
income tax consequences of the ownership and disposition of the Trust Preferred
Securities.
INFORMATION REPORTING TO HOLDERS
The Trust will report the original issue discount, if any, that accrued
during the year with respect to the Debentures, and any gross proceeds received
by the Trust from the retirement or redemption of the Debentures, annually to
the holders of record of the Trust Preferred Securities and the IRS. The Trust
currently intends to deliver such reports to holders of record prior to January
31, following each calendar year. It is anticipated that persons who hold Trust
Preferred Securities as nominees for Beneficial Owners will report the required
tax information to Beneficial Owners on Form 1099.
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BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, Trust Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will generally be
allowed as a credit against the holder's federal income tax provided the
required information is timely filed with the IRS.
POSSIBLE TAX LEGISLATION
As a part of President Clinton's Fiscal 1999 and 1998 Budget Proposals, the
Treasury Department proposed legislation that, among other things, would have
treated as equity for United States federal income tax purposes certain debt
instruments that are not shown as indebtedness on the consolidated balance sheet
of KBK, which proposed legislation has not been enacted to date. No assurance
can be given that the Proposed Legislation will not ultimately be enacted in the
future, that such future legislation will not have a retroactive effective date
and that such future legislation will not prevent KBK from deducting interest on
the Debentures. Such an event would constitute a Trust Tax Event and would
permit the Trust to exchange the Trust Preferred Securities, in whole or in
part, for the Debentures or redeem, in whole or in part, the Trust Preferred
Securities and corresponding Debentures.
CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
General. The following is a general discussion of certain United States
federal income and estate tax consequences of the ownership and disposition of
Trust Preferred Securities by a "Non-United States Holder" and does not deal
with tax consequences arising under the laws of any foreign, state, or local
jurisdiction. As used herein, a "Non-United States Holder" is a person or
entity that, for United States federal income tax purposes, is not a citizen or
resident of the United States, a corporation, partnership, or other entity
created or organized under the laws of the United States or a political
subdivision thereof, or an estate or trust, the income of which is subject to
United States federal income taxation regardless of its source, or that
otherwise is subject to United States federal income taxation on a net basis in
respect of the Trust Preferred Securities. The tax treatment of the holders of
the Trust Preferred Securities may vary depending upon their particular
situations. Certain holders (including insurance companies, tax exempt
organizations, financial institutions and broker-dealers) may be subject to
special rules not discussed below. Prospective investors who are Non-United
States Holders are urged to consult their tax advisors regarding the United
States federal tax consequences of owning and disposing of Trust Preferred
Securities, as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdiction.
Interest. Interest (including original issue discount) received or accrued
by a Non-United States Holder of Trust Preferred Securities will not be subject
to United States federal income or withholding tax if such interest is not
effectively connected with the conduct of a trade or business within the United
States by such Non-United States Holder and (i) the Non-United States Holder
does not actually or constructively own 10% or more of the total voting power of
all voting stock of KBK and is not a controlled foreign corporation with respect
to which KBK is a "related person" within the meaning of the Code and (ii) the
beneficial owner of the Trust Preferred Securities certifies, under penalty of
perjury, that the beneficial owner is not a United States person and provide the
beneficial owner's name and address.
Gain on Disposition of Trust Preferred Securities. A Non-United States
Holder will generally not be subject to United States federal income tax on gain
recognized on a sale, redemption or other disposition of a Trust Preferred
Security unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder and
(ii) in the case of a Non-United States Holder who is a nonresident alien
individual and holds the Trust Preferred Security as a capital asset, such
holder is present in the United States for 183 or more days in the taxable year
and certain other requirements are met.
Federal Estate Taxes. A Trust Preferred Security beneficially owned by an
individual who is a Non-United States Holder at the time of his or her death
generally will not be subject to United States federal estate tax as a result of
such individual's death, provided that (i) such individual does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of KBK entitled to
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vote within the meaning of section 871(h)(3) of the Code, and (ii) interest
payments (including payments of original issue discount) with respect to the
Debentures would not have been, if received at the time of such individual's
death, effectively connected with the conduct of a U.S. trade or business within
the United States by such individual.
Information Reporting and Backup Withholding. KBK must report annually to
the IRS and to each Non-United States Holder the amount of interest paid to such
holder and the amount of any tax withheld. These information reporting
requirements apply regardless of whether withholding is required. Copies of the
information returns reporting such interest and withholding may also be made
available to the tax authorities in the country in which the Non-United States
Holder resides under the provisions of an applicable income tax treaty.
In the case of payments of interest to Non-United States Holders, temporary
Treasury regulations provide that the 31% backup withholding tax and certain
information reporting will not apply to such payments with respect to which
either the requisite certification, as described above, has been received or an
exemption has otherwise been established; provided that neither KBK nor its
payment agent has actual knowledge that the holder is a United States person or
that the conditions of any other exemption are not in fact satisfied. Under
temporary Treasury regulations, these information reporting and backup
withholding requirements will apply, however, to the gross proceeds paid to a
Non-United States Holder on the disposition of the Trust Preferred Securities by
or through a United States office of a United States or foreign broker, unless
the holder certifies to the broker under penalty of perjury as to its name,
address and status as a foreign person or the holder otherwise establishes an
exemption. Information reporting requirements, but not backup withholding, will
also apply to a payment of the proceeds of a disposition of the Trust Preferred
Securities by or through a foreign office of a United States broker or foreign
brokers with certain types of relationships to the United States. Neither
information reporting nor backup withholding generally will apply to a payment
of the proceeds of a disposition of the Trust Preferred Securities by or through
a foreign office or foreign broker not subject to the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the IRS.
Recently published final Treasury regulations (the "Final Withholding
Regulations") make a number of important changes to the procedures for income
tax withholding and certification of eligibility for the portfolio interest
exemption or for a reduced rate of income tax withholding based on an applicable
income tax treaty. In general, the Final Withholding Regulations do not
significantly alter substantive withholding requirements, but unify
certification procedures and clarify reliance standards. The Final Withholding
Regulations are scheduled to be effective for payments made on or after January
1, 2000, subject to certain transition rules. The Final Withholding Regulations
are quite complex. Non-United States Holders are strongly urged to consult their
own tax advisors regarding potential application of the Final Withholding
Regulations to payments on the Trust Preferred Securities in light of their
particular circumstances.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on pension, profit-sharing and other employee
benefit plans to which it applies (the "Plans") and on those persons who are
fiduciaries with respect to such Plans.
A fiduciary of a Plan should consider the fiduciary standards of ERISA in
the context of the Plan's particular circumstances before authorizing an
investment in the Trust Preferred Securities. Among other factors, such
fiduciary should consider (i) whether the investment satisfies the prudence
requirements of Section 404(a)(1)(B) of ERISA, (ii) whether the investment
satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA and
(iii) whether the investment is in accordance with the documents and instruments
governing the Plan as required by Section 404(a)(1)(D) of ERISA.
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A fiduciary of a Plan must also consider whether the acquisition of Trust
Preferred Securities and/or the operation of the Trust might result in direct or
indirect prohibited transactions under Section 406 of ERISA and Section 4975 of
the Code. In order to determine whether there are such prohibited transactions,
a fiduciary must determine the "plan assets" involved in the transaction. The
Department of Labor has promulgated regulations (the "DOL Regulations")
concerning whether or not a Plan's assets would be deemed to include an interest
in the underlying assets of an entity for purposes of ERISA if the Plan acquires
an "equity interest" in such entity (such as by acquiring Trust Preferred
Securities). The DOL Regulations provide a number of exceptions to these "plan
asset" rules. One exception states that the underlying assets of an entity such
as the Trust will not be considered "plan assets" if the Trust Preferred
Securities are publicly offered. For this purpose, the Trust Preferred
Securities are "publicly offered" if they are part of a class of securities that
is (1) widely held, (2) freely transferable, and (3) registered under Section
12(b) or 12(g) of the Exchange Act. It is expected that all of these
requirements will be satisfied with respect to the Trust Preferred Securities
offered hereunder and that the Trust Preferred Securities will not be subject to
the DOL Regulation's "plan asset" rules. There can be no assurance, however,
that such expectations will prove to be true. Due to the complexity of these
rules and the penalties imposed upon persons involved in prohibited
transactions, it is particularly important that potential Plan investors consult
with their counsel regarding the consequences under ERISA of their acquisition
and ownership of Trust Preferred Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Trust Preferred Securities, the Trust has agreed to sell to each
of the underwriters named below (the "Underwriters"), and each of the
Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc. and J.J.B.
Hilliard, W.L. Lyons, Inc. are acting as representatives (the
"Representatives"), has severally agreed to purchase, the number of Trust
Preferred Securities offered hereby set forth opposite its name:
<TABLE>
<CAPTION>
NUMBER OF TRUST
PREFERRED
UNDERWRITER SECURITIES
----------- ---------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc....................... 810,000
J.J.B. Hilliard, W.L. Lyons, Inc............................ 540,000
Advest, Inc................................................. 75,000
Southeast Research Partners, Inc............................ 75,000
---------
Total.................................................. 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Trust Preferred Securities
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. If any of the Trust Preferred Securities are
purchased by the Underwriters pursuant to the Underwriting Agreement, all such
Trust Preferred Securities (other than the Trust Preferred Securities covered by
the over-allotment option described below) must be so purchased.
The Company has been advised that the Underwriters propose to offer the
Trust Preferred Securities to the public initially at the price to the public
set forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not to exceed $0.20
per Trust Preferred Security. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $0.10 per Trust Preferred Security to any
other Underwriter and certain other dealers. After the completion of the
offering, the offering price and other selling terms may be changed by the
Underwriters.
In view of the fact that the proceeds of the sale of the Trust Preferred
Securities will ultimately be used to purchase the Debentures of the Company,
the Underwriting Agreement provides that the Company will pay as Underwriters'
Compensation to the Underwriters, an amount in immediately available funds of
$0.375 per Trust Preferred Security (or $562,500 in the aggregate) for the
accounts of the several Underwriters.
72
<PAGE> 73
The Trust has granted to the Underwriters an option to purchase up to
225,000 additional Trust Preferred Securities at the public offering price set
forth on the cover page hereof solely to cover over-allotments for which the
Underwriters will receive additional Underwriters' Compensation as described
above. Such option may be exercised once at any time until 30 days after the
date of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
The Company has agreed to reimburse the Representatives for the
out-of-pocket expenses incurred by the Representatives in connection with the
offering. In addition, the Company has agreed to reimburse the Representatives
for $30,000 of the fees and expenses of the Underwriters' legal counsel.
The Company and the Trust have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in respect
thereof. Such indemnification provisions would require the Company and the Trust
to hold the Underwriters harmless from and against any and all losses, claims,
damages, liabilities and judgments caused by any untrue statement contained in
this Prospectus or by any omission to state a material fact herein, except for
untrue statements or omissions based upon information relating to any
Underwriter furnished in writing to the Company and the Trust by such
Underwriter expressly for use in this Prospectus and subject to certain other
limitations.
The Representatives have advised the Company that the Underwriters will not
confirm sales of Trust Preferred Securities to accounts over which they exercise
discretionary authority.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the Trust
Preferred Securities. Specifically, the Underwriters may bid for and purchase
Trust Preferred Securities in the open market to cover syndicate short
positions. In addition, the Underwriters may bid for and purchase Trust
Preferred Securities in the open market to stabilize the price of the Trust
Preferred Securities. These activities may stabilize or maintain the market
price of the Trust Preferred Securities above independent market levels. The
Underwriters are not required to engage in these activities and may end these
activities at any time.
Prior to this offering, there has been no public market for the Trust
Preferred Securities. Therefore, no assurance can be given as to the liquidity
of the trading market for the Trust Preferred Securities or that an active
public market will develop.
The Trust Preferred Securities have been approved for listing on the
American Stock Exchange, subject to official notice of issuance, under the
symbol "KBK.Pr".
LEGAL MATTERS
Certain matters of Delaware law relating to the legality of the Trust
Preferred Securities, the validity of the Declaration, the formation of the
Trust and the legality under state law of the Trust Preferred Securities are
being passed upon by Potter Anderson & Corroon LLP, Wilmington, Delaware,
special Delaware counsel to the Trust and KBK. The legality under state law of
the Trust Guarantee and the Debentures will be passed upon on behalf of the
Trust and KBK by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Houston, Texas.
Certain United States federal income taxation matters will be passed upon on
behalf of the Trust and KBK by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
Certain legal matters will be passed upon on behalf of the Underwriters by
Andrews & Kurth L.L.P., Washington, D.C.
73
<PAGE> 74
EXPERTS
The consolidated financial statements of the Company and its subsidiaries
as of December 31, 1997, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1997, have been incorporated by reference
herein in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
74
<PAGE> 75
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE TRUST OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 4
Incorporation of Certain Documents by
Reference............................ 4
Forward-Looking Statements............. 5
Prospectus Summary..................... 6
Risk Factors........................... 13
Use of Proceeds........................ 18
The Company............................ 18
Ratio of Earnings to Fixed Charges..... 31
Capitalization......................... 32
Selected Financial Data................ 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 34
Management............................. 40
KBK Capital Trust I.................... 41
Description of the Trust Preferred
Securities........................... 42
Description of the Guarantee........... 55
Description of the Debentures.......... 58
Relationship Among the Trust Preferred
Securities, the Debentures and the
Guarantee............................ 66
Certain Federal Income Tax
Consequences......................... 67
ERISA Considerations................... 71
Underwriting........................... 72
Legal Matters.......................... 73
Experts................................ 74
</TABLE>
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1,500,000 TRUST PREFERRED SECURITIES
KBK CAPITAL TRUST I
9.50% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT
$10 PER TRUST PREFERRED SECURITY)
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY
KBK CAPITAL CORPORATION
------------------------
PROSPECTUS
------------------------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
J.J.B. HILLIARD,
W.L. LYONS, INC.
NOVEMBER 17, 1998
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