UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO __________
COMMISSION FILE NUMBER: 0-24220
KBK CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2416103
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
301 COMMERCE, SUITE 2200, FORT WORTH, TEXAS 76102-4122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 258-6000
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $0.01 PAR VALUE 3,244,033
(SHARES OUTSTANDING AS OF SEPTEMBER 30, 1998)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES [ ] NO [X]
==============================================================================
<PAGE>
KBK CAPITAL CORPORATION
FORM 10-QSB -- Quarter Ended September 30, 1998
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1- Financial Statements
Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Income for the
Three Months Ended September 30, 1998 and
1997 (unaudited) and the Nine Months Ended
September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Changes in
Stockholders' Equity for the Year
Ended December 31, 1997 and Nine Months
Ended September 30, 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and
1997 (unaudited) 6
Notes to Consolidated Financial Statements 7-8
Item 2- Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
PART II. OTHER INFORMATION
Item 1- Legal Proceedings 15
Item 6- Exhibits and Reports on Form 8-K 15
Signatures 15
2
<PAGE>
PART 1. - ITEM 1 - FINANCIAL STATEMENTS
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPT. 30, 1998 DEC. 31, 1997
(UNAUDITED)
----------------- ---------------
ASSETS
<S> <C> <C>
Cash ..................................................... $ -- $ 4,869,516
Accounts receivable, net ................................. 5,248,925 9,778,292
Loans receivable, net .................................... 56,877,762 23,863,677
Retained interest in sold assets, net .................... 13,001,986 12,148,609
Less allowance for credit losses ......................... (1,942,815) (1,928,629)
------------ ------------
Total receivables, net .............................. 73,185,858 43,861,949
Premises and equipment, net of accumulated depreciation of
$2,059,528 and $1,499,307 at September 30, 1998 and
December 31, 1997, respectively ..................... 2,056,448 2,176,747
Intangible assets, less accumulated amortization of
$2,173,556 and $1,908,099 at September 30, 1998 and
December 31, 1997, respectively...................... 3,579,937 3,875,072
Other assets ............................................. 3,757,938 1,617,648
------------ ------------
Total assets ..................................... $ 82,580,181 $ 56,400,932
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank line of credit ...................................... $ 37,580,195 $ 21,000,000
Commercial paper ......................................... 3,500,000 --
Due to clients ........................................... 15,448,761 9,814,897
Accounts payable and other liabilities ................... 312,982 767,793
Income taxes payable ..................................... -- 11,307
Deferred revenue ......................................... 232,840 238,023
------------ ------------
Total liabilities ................................ 57,074,778 31,832,020
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value. Authorized 100,000
shares; no shares issued and outstanding ............ -- --
Common stock, $.01 par value. Authorized 10,000,000
shares; issued 3,548,600 shares and outstanding
3,244,033 at September 30,1998 and issued 3,547,200
shares and outstanding 3,342,033 at December 31, 1997 35,486 35,472
Additional paid-in capital ............................... 16,594,591 16,584,805
Retained earnings ........................................ 11,444,679 9,301,001
Treasury stock ........................................... (2,569,353) (1,352,366)
------------ ------------
Total stockholders' equity ........................ 25,505,403 24,568,912
------------ ------------
$ 82,580,181 $ 56,400,932
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 1998 SEPT. 30, 1997 SEPT. 30, 1998 SEPT. 30, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Earned discount income ............... $ 336,003 $ 335,836 $ 1,378,300 $ 3,263,185
Interest income - Loans .............. 1,446,892 795,340 3,370,961 2,368,987
Servicing fees ....................... 1,851,287 2,219,520 5,896,816 4,022,154
Other income - Fees .................. 865,703 485,276 2,586,305 1,428,680
----------- ---------- ----------- -----------
Total revenue ................... 4,499,885 3,835,972 13,232,382 11,083,006
Interest expense ..................... 834,401 506,042 2,004,331 2,205,975
----------- ---------- ----------- -----------
Income after interest expense ... 3,665,484 3,329,930 11,228,051 8,877,031
Provision for credit losses .......... 400,000 300,000 1,100,000 575,000
----------- ---------- ----------- -----------
Income after interest expense and
provision for credit losses . 3,265,484 3,029,930 10,128,051 8,302,031
Operating expenses:
Salaries and employee benefits .. 1,263,409 1,126,608 3,721,710 3,247,194
Amortization of intangible assets 98,379 94,898 295,135 284,177
Occupancy and equipment ......... 379,825 324,120 1,107,801 937,238
Professional fees ............... 98,352 92,914 285,223 188,535
Other ........................... 518,905 473,353 1,463,559 1,290,168
----------- ---------- ----------- -----------
Total operating expenses ...... 2,358,870 2,111,893 6,873,428 5,947,312
----------- ---------- ----------- -----------
Income before income taxes .... 906,614 918,037 3,254,623 2,354,719
Income taxes:
Federal ......................... 308,246 312,084 1,091,762 815,550
State ........................... (121,934) 55,072 19,183 138,457
----------- ---------- ----------- -----------
Total income taxes ............ 186,312 367,156 1,110,945 954,007
----------- ---------- ----------- -----------
Net income ........................... $ 720,302 $ 550,881 $ 2,143,678 $ 1,400,712
=========== ========== =========== ===========
Net income per share-basic ........... $ 0.22 $ 0.17 $ 0.65 $ 0.42
=========== ========== =========== ===========
Net income per share-diluted ......... $ 0.19 $ 0.16 $ 0.57 $ 0.42
=========== ========== =========== ===========
Weighted-average common shares
outstanding-basic ................ 3,264,943 3,310,133 3,285,572 3,310,133
=========== ========== =========== ===========
Weighted-average common shares
outstanding-diluted .............. 3,718,293 3,386,002 3,785,404 3,339,306
=========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL TOTAL
SHARES PAID-IN RETAINED TREASURY STOCKHOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS STOCK EQUITY
---------- ------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,310,133 $35,472 $16,370,555 $ 7,236,521 $(1,502,633) $ 22,139,915
Purchase of treasury stock (18,100) -- -- -- (179,233) (179,233)
Issuance of common stock .. 50,000 -- 214,250 -- 329,500 543,750
Net Income ................ -- -- -- 2,064,480 -- 2,064,480
---------- ------- ----------- ----------- ----------- ------------
Balance, December 31, 1997 3,342,033 $35,472 $16,584,805 $ 9,301,001 $(1,352,366) $ 24,568,912
Purchase of treasury stock (99,400) -- -- -- (1,216,987) (1,216,987)
Issuance of common stock .. 1,400 14 9,786 -- -- 9,800
Net Income ................ -- -- -- 2,143,678 -- 2,143,678
---------- ------- ----------- ----------- ----------- ------------
Balance, September 30, 1998 3,244,033 $35,486 $16,594,591 $11,444,679 $(2,569,353) $ 25,505,403
========== ======= =========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30, 1998 SEPT. 30, 1997
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ................................................. $ 2,143,678 $ 1,400,712
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................ 868,850 720,396
Provision for credit losses .......................... 1,100,000 575,000
Decrease in accounts receivable, net ................. 3,443,553 44,391,232
Net increase in retained interest in sold assets ..... (927,737) (9,993,044)
Increase in other assets ............................. (2,140,290) (273,556)
Increase in due to clients ........................... 5,633,864 1,432,385
Decrease in accounts payable and other liabilities ... (454,811) (348,679)
Increase in interest payable for the sold assets ..... 74,360 193,289
Increase (decrease) in income taxes payable .......... (11,307) 67,442
Decrease in deferred revenue ......................... (5,183) (31,145)
------------ ------------
Net cash provided by operating activities ......... 9,724,977 38,134,032
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans receivable, net ..... (33,014,085) 6,531,891
Purchase of premises and equipment ................... (453,416) (731,422)
------------ ------------
Net cash provided by (used in) investing activities (33,467,501) 5,800,469
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (repayments to) the banks ........ 16,580,195 (40,500,000)
Increase in commercial paper ......................... 3,500,000 --
Repurchase of common stock ........................... (1,216,987) --
Issuance of common stock ............................. 9,800 --
------------ ------------
Net cash provided by (used in) financing activities 18,873,008 (40,500,000)
------------ ------------
Net increase (decrease) in cash ................... (4,869,516) 3,434,501
Cash at beginning of period ................................ 4,869,516 1,361,225
------------ ------------
Cash at end of period ...................................... $ -- $ 4,795,726
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL. The consolidated financial statements of KBK Capital Corporation
(the "Company") and its wholly owned subsidiaries, KBK Financial, Inc. ("KBK")
and KBK Receivables Corporation ("SPC"), included herein, are unaudited for all
periods ended September 30, 1998 and 1997. However, such unaudited statements
reflect all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary to fairly depict the results for the
periods presented. Certain information and note disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles ("GAAP"), have been condensed or omitted pursuant to rules
and regulations of the Securities and Exchange Commission. The Company believes
that the disclosures made herein are adequate to make the information presented
not misleading.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year. It is suggested that these consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and notes thereto for the years ended December 31, 1997 and 1996
which are included in the Company's 1997 annual report.
2. OTHER ASSETS. 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 value of the ownership
interest of this entity has been reclassed from non-performing assets to other
assets as an equity investment in the new entity.
3. BANK LINE OF CREDIT. KBK maintains a $55.0 million multi-bank line of credit
("Credit Facility"), which had $50.0 million committed at September 30, 1998,
and is secured by substantially all of KBK's assets. 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 this revolving credit
facility, KBK 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 borrowing base, less all amounts outstanding on the revolving credit
facility. Borrowings under the Revolving Facility portion of the Credit Facility
bear interest at the agent banks' prime rate or LIBOR plus 1.75%, at the
election of KBK, and mature 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, and the Over Advance Facility matures 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. As of September 30, 1998, there was $36.6
million outstanding under the Revolving Facility, $1.0 million outstanding under
the Over Advance Facility, no
7
<PAGE>
balance outstanding under the bridge facility and there were $1.7 million in
letters of credit outstanding under this revolving line of credit. The terms of
the Credit Facility require KBK to comply with certain financial covenants and
include the maintenance of a certain tangible net worth, limitations on its debt
to tangible net worth, an interest coverage ratio and restrictions on payments
of dividends. The Credit Facility also provides for a borrowing base against
eligible receivables and eligible loans pursuant to the terms of the Credit
Facility. At September 30, 1998, KBK was in compliance with the financial
covenants and borrowing base limitations, and there was $9.9 million in
available credit under this line.
4. STOCKHOLDERS' EQUITY. During the quarter ended September 30, 1998, the
Company acquired 30,000 shares of its common stock in open market purchases
pursuant to the Stock Repurchase Plan initiated in 1995. The Company has
repurchased 304,567 net shares since the Repurchase Program was initiated.
5. SALE OF ASSETS. In April 1997, KBK completed a sale of its purchased
receivable and inventory loan portfolio, in which a substantial portion of KBK's
owned receivables and inventory loans were transferred into SPC, a newly created
and wholly-owned subsidiary, also known as a special purpose corporation. Under
this structure, SPC sells eligible receivables to a conduit, which in turn
issues commercial paper to fund its ongoing purchase of assets. This structure
allows KBK to effectively fund its portfolio of earning assets on a non-recourse
basis, through the commercial paper conduit, potentially resulting in a
substantial reduction in its funding costs. The nature of this sale is a
"Revolving Period" sale where receivables are transferred at the inception and
periodically (weekly or monthly) thereafter for a five year period. During the
Revolving Period, SPC uses most of the cash collections to purchase additional
receivables from KBK. The transfer of earning assets into SPC, and subsequent
sale to the commercial paper conduit, is treated as a sale pursuant to GAAP. The
assets sold to SPC and the commercial paper conduit continue to be serviced by
KBK, which receives on-going revenue in the form of a servicing fee which is
derived from the receipts generated from the transferred earning assets, less
interest and fees paid to the commercial paper holders and the conduit facility
sponsors. Neither a servicing asset nor a servicing liability is recorded due to
the term of the receivables initially transferred and the commitment obligation
during the Revolving Period. The determination of a value is not practicable and
therefore, no value is recorded. Although the sale is on a non-recourse basis,
KBK may in certain circumstances deem it necessary to repurchase or replace
specific receivables. No gain or loss results from the sale of these
receivables. Because the sold assets are moved "off-balance sheet," the
financial statements of the Company are significantly impacted. A retained
interest in the sold assets, in the amount of $13,001,986 as of September 30,
1998, remains on the consolidated balance sheet and represents amounts due from
the conduit.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
THE FOLLOWING COMMENTARY PRESENTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIODS
PRESENTED. CERTAIN OF THE STATEMENTS INCLUDED BELOW, INCLUDING THOSE REGARDING
FUTURE FINANCIAL PERFORMANCE OR RESULTS OR THOSE THAT ARE NOT HISTORICAL FACTS,
ARE, OR CONTAIN, "FORWARD-LOOKING" INFORMATION AS THAT TERM IS DEFINED IN THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE WORDS "EXPECT," "BELIEVE,"
"ANTICIPATE," "PROJECT," "ESTIMATE," AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THE COMPANY CAUTIONS READERS THAT
8
<PAGE>
ANY SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE OR EVENTS AND SUCH
STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING, BUT NOT
LIMITED TO, INDUSTRY CONDITIONS, GENERAL ECONOMIC CONDITIONS, INTEREST RATES,
COMPETITION, ABILITY OF THE COMPANY TO SUCCESSFULLY MANAGE ITS GROWTH, AND OTHER
FACTORS DISCUSSED BELOW AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR
THE YEAR ENDED DECEMBER 31, 1997. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT,
THOSE ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM THOSE INDICATED OR
IMPLIED IN THE FORWARD-LOOKING STATEMENTS. THIS NARRATIVE SHOULD BE READ IN
CONJUNCTION WITH INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES APPEARING IN THIS REPORT AND THE AUDITED FINANCIAL STATEMENTS
APPEARING IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 1997.
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.
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. 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.
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.
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.
RESULTS OF OPERATIONS
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
The following tables set forth the results of operations and certain other data
of the Company for the third quarter of 1998 and the third quarter of 1997.
9
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
(UNAUDITED) (UNAUDITED)
--------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned ......... $122,811 $ 92,602
Owned ..................... 50,845 35,906
Total Revenue .................. 4,500 100.0% 3,836 100.0%
Interest Expense ............... 835 18.6% 506 13.2%
Provision for Credit Losses .... 400 8.9% 300 7.8%
Operating Expense .............. 2,359 52.4% 2,112 55.1%
Income Taxes ................... 186 4.1% 367 9.5%
Net Income ..................... 720 16.0% 551 14.4%
</TABLE>
Average net earning assets (managed and owned) increased 32.6% to $122.8 million
for the quarter ended September 30, 1998 from $92.6 million for the quarter
ended September 30, 1997. Reflecting the increase in assets, total revenue
increased 17.3%, or $664,000, to $4.5 million for the quarter ended September
30, 1998 from $3.8 million for the quarter ended September 30, 1997. Average net
earning assets owned at the quarter ended September 30, 1998 increased $15.0
million from the quarter ended September 30, 1997.
Interest expense increased 65.0% to $835,000 for the third quarter of 1998
compared with $506,000 for the third quarter of 1997. This increase resulted
from the $16.3 million increase in average funded debt required to support the
increase in net average earning assets.
A provision for credit losses of $400,000 was recorded for the third quarter of
1998, compared to $300,000 for the third quarter of 1997. During the third
quarter of 1998 the Company had net chargeoffs of $417,000 compared to $258,000
of net chargeoffs for the third quarter of 1997. The increase in chargeoffs
resulted from final resolution of several nonperforming relationships. The
allowance for credit losses at September 30, 1998 of $1.9 million represents
2.6% of total outstanding loans and accounts receivable (which includes retained
interest in sold assets) and 3.8% of average net earning assets owned for the
quarter then ended. The allowance for credit losses at September 30, 1997 of
$1.8 million represented 4.4% of total outstanding loans and accounts receivable
and 5.1% of average net earning assets owned for the quarter then ended.
Management believes the current allowance is adequate to cover potential losses
which might result from the purchased accounts receivable and loan portfolio at
September 30, 1998.
Operating expenses of $2.4 million for the three months ended September 30, 1998
increased $247,000, or 11.7% compared with $2.1 million for the three months
ended September 30, 1997. Employment related expense constituted $137,000 of the
increase, due to additional executive management hired in 1998. Occupancy and
equipment expense increased $56,000 to $380,000 for the quarter ended September
30, 1998 compared to $324,000 for the quarter ended September 30, 1997,
primarily related to the Company's growth resulting in additional occupancy and
systems costs in the corporate offices. The Company's growth also generated a
$52,000 increase in marketing related expenses to $247,000 for the quarter ended
September 30, 1998 compared to $195,000 for the quarter ended September 30,
1997.
Income taxes of $186,000 for the third quarter of 1998 were 49.3% less than the
$367,000 of income taxes for the third quarter of 1997, 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 securitization conduit.
10
<PAGE>
As a result of the foregoing, net income of the Company for the third quarter of
1998 increased to $720,000 from $551,000 for the third quarter of 1997.
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 Expense .............. 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 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.
11
<PAGE>
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 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.
CHANGES IN FINANCIAL CONDITION
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.
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 $5.6 million, from $50.4 million during the first nine months of
1997 to $44.8 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.
12
<PAGE>
KBK Financial maintains a $55.0 million, multi-bank line of credit ("Credit
Facility") which had $50.0 million committed and $37.6 million outstanding at
September 30, 1998, $16.6 million more than the $21.0 million outstanding at
December 31, 1997. 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 borrowing base, less
all amounts outstanding on the Revolving Facility. As of September 30, 1998,
there was $36.6 million outstanding under the Revolving Facility, $1.0 million
outstanding under the Over Advance Facility, no balance outstanding under the
bridge facility, and $1.7 million 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
$9.9 million in available credit under this line as of September 30, 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 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 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.
13
<PAGE>
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. The Company has filed a registration statement with the Securities
and Exchange Commission for the issuance of 1,000,000 Trust Preferred Securities
by KBK Capital Trust I, a Delaware statutory business trust, for an aggregate
offering price of $25.0 million, the proceeds of which will be used by the Trust
to purchase the Company's Subordinated Debentures due 2028. Net proceeds will be
used by KBK to repay certain of its outstanding short term indebtedness and for
general corporate purposes.
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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any litigation other than routine proceedings
incidental to its business and the Company does not expect that these
proceedings will have a material adverse effect on the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KBK CAPITAL CORPORATION
Date OCTOBER 23, 1998 /s/ JAY K. TURNER
Jay K. Turner,
Executive Vice President and Chief
Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 75,128,673
<ALLOWANCES> (1,942,815)
<INVENTORY> 0
<CURRENT-ASSETS> 7,337,875
<PP&E> 4,115,976
<DEPRECIATION> 2,059,528
<TOTAL-ASSETS> 82,580,181
<CURRENT-LIABILITIES> 57,074,778
<BONDS> 0
0
0
<COMMON> 35,486
<OTHER-SE> 25,469,917
<TOTAL-LIABILITY-AND-EQUITY> 82,580,181
<SALES> 0
<TOTAL-REVENUES> 4,499,885
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,358,870
<LOSS-PROVISION> 400,000
<INTEREST-EXPENSE> 834,401
<INCOME-PRETAX> 906,614
<INCOME-TAX> 186,312
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 720,302
<EPS-PRIMARY> .22
<EPS-DILUTED> .19
</TABLE>
