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 MARCH 31, 1998
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-24220
KBK CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2416103
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
301 COMMERCE, SUITE 2200, FORT WORTH, TEXAS 76102-4122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 258-6000
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING
12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE
SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST
90 DAYS. YES X NO
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $0.01 PAR VALUE 3,282,633
(SHARES OUTSTANDING AS OF MARCH 31, 1998)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
================================================================================
Page 1 of 12
<PAGE>
KBK CAPITAL CORPORATION
FORM 10-QSB -- Quarter Ended March 31, 1998
<TABLE>
<CAPTION>
Page
Number
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<S> <C>
Consolidated Balance Sheets at March 31, 1998 (unaudited) and
December 31, 1997 2
Consolidated Statements of Income for the Three Months Ended March
31, 1998 (unaudited) and March 31, 1997 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for the
Year Ended December 31, 1997 and Three Months Ended March 31, 1998
(unaudited) 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 (unaudited) and March 31, 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-11
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
<PAGE>
PART 1. - ITEM 1 - FINANCIAL STATEMENTS
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Mar. 31, 1998 Dec. 31, 1997
(unaudited)
--------------------------------
Assets
<S> <C> <C>
Cash ................................................................ $ 6,293,994 $ 4,869,516
Accounts receivable, net ............................................ 10,081,160 9,778,292
Loans receivable, net ............................................... 27,406,922 23,863,677
Retained interest in sold assets .................................... 10,122,438 12,148,609
Less allowance for credit losses .................................... (1,959,268) (1,928,629)
------------ ------------
Total receivables, net ......................................... 45,651,252 43,861,949
Premises and equipment, net of accumulated depreciation of
$1,668,771 and $1,499,307 at March 31, 1998 and
December 31, 1997, respectively ................................ 2,093,787 2,176,747
Intangible assets, less accumulated amortization of $1,976,799
and $1,908,099 at March 31, 1998 and ........................... 3,776,694 3,875,072
December 31, 1997, respectively
Other assets ........................................................ 1,734,852 1,617,648
------------ ------------
$ 59,550,579 $ 56,400,932
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Bank line of credit ................................................. $ 24,000,000 $ 21,000,000
Due to clients ...................................................... 9,782,167 9,814,897
Accounts payable and other liabilities .............................. 543,678 767,793
Income taxes payable ................................................ 389,986 11,307
Deferred revenue .................................................... 321,893 238,023
------------ ------------
Total liabilities ................................. 35,037,724 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
3,547,200 shares and outstanding 3,282,633 and 3,342,033
at March 31, 1998 and December 31, 1997 ........................ 35,472 35,472
Additional paid-in capital .......................................... 16,584,805 16,584,805
Retained earnings ................................................... 10,007,201 9,301,001
Treasury stock ...................................................... (2,114,623) (1,352,366)
------------ ------------
Total stockholders' equity ........................ 24,512,855 24,568,912
------------ ------------
$ 59,550,579 $ 56,400,932
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
(unaudited) (unaudited)
------------- -------------
Earned discount income ......................... $ 492,101 $2,356,989
Interest income - Loans ........................ 823,913 838,968
Servicing fees ................................. 2,006,092 --
Other income - Fees ............................ 775,138 403,078
---------- ----------
Total revenue ........................ 4,097,244 3,599,035
Interest expense ............................... 491,292 1,090,264
---------- ----------
Income after interest expense ........ 3,605,952 2,508,771
Provision for credit losses .................... 300,000 75,000
---------- ----------
Income after interest expense and
provision for credit losses ...... 3,305,952 2,433,771
Operating expenses:
Salaries and employee benefits ....... 1,177,158 1,000,769
Amortization of intangible assets .... 98,378 94,382
Occupancy and equipment .............. 359,105 298,767
Professional fees .................... 114,723 46,983
Other ................................ 404,140 412,035
---------- ----------
Total operating expenses ......... 2,153,504 1,852,936
---------- ----------
Income before income taxes ....... 1,152,448 580,835
Income tax expense:
Federal
Current .......................... 377,101 201,257
Deferred ......................... -- --
State ................................ 69,147 31,467
---------- ----------
Total income taxes ............... 446,248 232,724
---------- ----------
Net income ....................... $ 706,200 $ 348,111
========== ==========
Net income per share-basic ....... $ 0.21 $ 0.11
========== ==========
Net income per share-diluted ..... $ 0.18 $ 0.11
========== ==========
Weighted-average common shares
outstanding-basic ............ 3,318,328 3,310,133
========== ==========
Weighted-average common shares
outstanding-diluted .......... 3,851,018 3,314,406
========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 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 stock for treasury ............. (18,100) -- -- -- (179,233) (179,233)
Issuance of common stock ................... 50,000 -- 214,250 -- 329,500 543,750
Net Income for 1997 ........................ -- -- -- 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 stock for treasury ............. (59,400) -- -- -- (762,257) (762,257)
Net Income for 1998 ........................ -- -- -- 706,200 -- 706,200
========== ======= =========== ========== =========== ============
Balance, March 31, 1998 .................... 3,282,633 $35,472 $16,584,805 $ 10,007,20 $(2,114,623) $ 24,512,855
========== ======= =========== ========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
Mar. 31, 1998 Mar. 31, 1997
(unaudited) (unaudited)
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ................................................................... $ 706,200 $ 348,111
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization .................................. 283,243 227,499
Provision for credit losses .................................... 300,000 75,000
Decrease (increase) in acounts receivable, net ................. (572,229) 2,173,695
Net increase (decrease) in retained interest in sold assets .... 1,965,412 --
Decrease (increase) in other assets ............................ (117,204) 151,903
Increase (decrease) in due to clients .......................... (32,730) (1,300,956)
Increase (decrease) in accounts payable and other liabilitie ... (224,115) 47,295
Increase in interest payable for the sold assets ............... 60,759 --
Increase (decrease) in income taxes payable .................... 378,679 26,128
Increase in deferred revenue ................................... 83,870 41,017
----------- -----------
Net cash provided by (used in) operating activities .... 2,831,885 1,789,692
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable, net .......................... (3,543,245) (1,245,454)
Purchase of premise and equipment .............................. (101,905) (251,386)
----------- -----------
Net cash used in investing activities .................. (3,645,150) (1,496,840)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (repayments to) the banks .................. 3,000,000 (1,654,077)
Repurchase of common stock ..................................... (762,257) --
----------- -----------
Net cash provided by (used in) financing activities .... 2,237,743 (1,654,077)
----------- -----------
Net increase (decrease) in cash ........................ 1,424,478 (1,361,225)
Cash at beginning of period .................................................. 4,869,516 1,361,225
----------- -----------
Cash at end of period ........................................................ $ 6,293,994 $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<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 March 31, 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, 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 three months ended March 31, 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 annual report.
2. BANK LINE OF CREDIT. KBK maintains a $55.0 million multi-bank line of credit
("Credit Facility"), which had $45.0 million committed at March 31, 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") and a $5.0
million "Over Advance" Facility which allows for borrowing base availability to
fund amounts in excess of client concentration limits. Borrowings under the
Revolving Facility portion of the Credit Facility bear interest at the banks'
prime rate or LIBOR plus 1.75% at the election of KBK and mature on May 31,
2000. Borrowings under the Over Advance Facility portion of the Credit Facility
bear interest at the banks' prime rate plus 1.25% and mature on August 19, 1998;
however, the lenders may terminate this portion of the facility at any time upon
120 days prior written notice to KBK. As of March 31, 1998, there was $24.0
million outstanding under the Revolving Facility and there were $37,000 in
letters of credit outstanding under this revolving line of credit. There were no
amounts outstanding under the Over Advance Facility. 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
March 31, 1998, KBK was in compliance with the financial covenants and borrowing
base limitations, and there was $3.8 million in available credit under this
line.
3. STOCKHOLDERS' EQUITY. During the quarter ended March 31, 1998, the Company
acquired 59,400 shares of its common stock in open market and private purchases
pursuant to the Stock Repurchase Plan initiated in 1995. The Company has
repurchased 264,567 net shares since the Repurchase Program was initiated.
6
<PAGE>
4. SALE OF ASSETS. In April of 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 (daily 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 or 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 $10,122,438 as of March 31, 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 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 REVIEW SHOULD BE READ IN
CONJUNCTION WITH INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES APPEARING IN THIS REPORT AND THE AUDITED FINANCIAL STATEMENTS
APPEARING IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 1997.
The Company, through its wholly owned subsidiaries KBK Financial, Inc.
("KBK") and KBK Receivables Corporation ("SPC"), is a commercial financial
institution providing financing to middle-market businesses through loans
secured by accounts
7
<PAGE>
receivable, inventory, equipment, owner-occupied real estate
or other assets of the borrower and through the discounted purchase of their
accounts receivable. During 1997, KBK completed a sale of its purchased
receivable and inventory loan portfolio, in which a substantial portion of such
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 and inventory loans to a conduit,
which in turn issues commercial paper to fund its ongoing purchase of assets.
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.
The Company's clients are typically businesses that are experiencing
periods of rapid growth or some level of financial stress. Thus, the Company
often relies primarily on the quality of the assets and account debtors of the
client, rather than the financial condition of the client itself.
In one product line of its working capital financings, the Company
purchases accounts receivable for a negotiated price, usually less than their
face amount, based upon the size, age and type of accounts being purchased, the
quality of client documentation and the Company's judgment as to the payment
history and creditworthiness of the account debtors. The Company generates
revenue through a combination of Fixed and Variable Discounts which are
negotiated on a client-by-client basis. Fixed discount income is recognized for
financial accounting purposes in the month the related receivable is purchased.
Variable discount income is recorded on an accrual basis over the period between
the date the underlying receivable is purchased and the date the receivable is
collected.
In some cases, the Company purchases accounts receivable as a "pool" from
its clients. These working capital financings generally involve clients with
more financial stability, larger volumes of invoices to purchase, and more
sophisticated management information and reporting systems. The Company deducts
a discount from the face amount of the purchased invoices based upon the number
of days between the purchase date and the date the underlying receivables are
collected.
The Company also provides other types of financing to middle-market
businesses, including, among other things, working capital and equipment loans
at a negotiated spread over KBK's floating base rate. Consistent with its goal
of being the single source of financing for its middle-market clients, the
Company has expanded its product line to include a mezzanine product. This
product offers an attractive financing alternative for clients whose growth has
outpaced their borrowing capacity from traditional senior debt sources.
In its secured commercial lending activities, the Company typically
obtains an appraisal of the underlying collateral and extends credit based upon
a negotiated percentage of the appraised collateral value. The maturity of these
facilities generally does not exceed five years. The interest income on these
loans is recognized on the accrual method. The interest rate charged on loans is
based upon a negotiated spread over KBK's floating base rate and is payable
monthly.
The Company's plan for continued growth in 1998 is based primarily on
growth in earning assets from the markets currently served. In addition, the
Company opened an office in St. Louis, Missouri during the first quarter of
1998. The focus of this office will be a market presence in the mid-west United
States and continued marketing of KBK's Correspondent Banker Program(TM) to
commercial banks. Such correspondent banks vary in background and are primarily
located in Texas, California, Missouri and Louisiana. It is the Company's
intention to expand this network nationwide. During March 1998, the Company
consolidated its Irvine and Santa Clara offices into a new and expanded office
in Pasadena, California. This expansion move is expected to enhance the
Company's ability to service the needs of its growing customer base in the
California market.
8
<PAGE>
RESULTS OF OPERATIONS
ANALYSIS OF FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
The following tables set forth the results of operations and certain other data
of the Company for the first quarter of 1998 and the first quarter of 1997.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
----------------------------------------------------
(UNAUDITED) (UNAUDITED)
(dollars in thousands)
<S> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned $101,252 $72,335
Owned 37,698 72,335
Total Revenue 4,097 100.0% 3,599 100.0%
Interest Expense 491 12.0% 1,090 30.3%
Provision for Credit Losses 300 7.3% 75 2.1%
Operating Expense 2,154 52.6% 1,853 51.5%
Income Taxes 446 10.9% 233 6.4%
Net Income 706 17.2% 348 9.7%
</TABLE>
Average net earning assets (managed and owned) increased 40% to $101.3 million
for the quarter ended March 31, 1998 from $72.3 million for the quarter ended
March 31, 1997. Reflecting the increase in assets, total revenue increased 14%,
or $498,000 to $4.1 million for the quarter ended March 31, 1998 from the
quarter ended March 31, 1997 total revenue of $3.6 million. Due to the assets
sold into the securitization conduit during the first quarter of 1998, average
net earning assets owned at the quarter ended March 31, 1998 decreased $34.6
million from the quarter ended March 31, 1997. The sale of assets resulted in a
$3.1 million adjustment to interest income and a $1.1 million adjustment to
interest expense, which netted to $2.0 million in servicing spread income during
the quarter ended March 31, 1998.
Interest expense decreased 55% to $491,000 for the first quarter of 1998
compared with $1,090,000 for the first quarter of 1997. The sale of assets into
the securitization conduit resulted in a decrease in average funded debt of
$35.5 million from $57.4 million for the quarter ended March 31, 1997 to $21.9
million for the quarter ended March 31, 1998.
A provision for credit losses of $300,000 was recorded for the first quarter of
1998, compared to $75,000 for the first quarter of 1997. During the first
quarter of 1998 the Company had net chargeoffs of $269,000 compared to $122,000
of net charge-offs for the first quarter of 1997. The allowance for credit
losses at March 31, 1998 of $2.0 million represents 4.1% of total outstanding
loans and accounts receivables (which includes retained interest in sold assets)
and 5.2% of average net earning assets owned for the quarter then ended. The
allowance for credit losses at March 31, 1997 of $1.6 million represented 1.9%
of total outstanding loans and accounts receivables and 2.2% of average net
earning assets owned for the quarter then ended. Management believes the current
allowance is adequate to cover potential losses which might result from the
purchased accounts receivable and loan portfolio at March 31, 1998.
9
<PAGE>
Operating expenses of $2.2 million for the three months ended March 31, 1998
increased $301,000, or 16%, compared with $1.9 million for the three months
ended March 31, 1997. Employment related expense constituted $176,000 of the
increase, due to increased staffing in the underwriting, operations and
marketing departments of the Company. Occupancy expense increased $60,000 to
$359,000 for the quarter ended March 31, 1998 compared to $299,000 for the
quarter ended March 31, 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 $68,000 increase in professional fees to
$115,000 for the quarter ended March 31, 1998 compared to $47,000 for the
quarter ended March 31, 1997.
Income taxes of $446,000 for the first quarter of 1998 were 91% greater than the
$233,000 of income taxes for the first quarter of 1997, due to the 99% increase
in income before taxes.
As a result of the foregoing, net income of the Company for the first quarter of
1998, increased to $706,000 from $348,000 for the first quarter of 1997.
CHANGES IN FINANCIAL CONDITION
Total assets increased 6% from $56.4 million at December 31, 1997 to $59.6
million at March 31, 1998. This increase is primarily related to the net change
in accounts receivable and loans receivable during the quarter from $43.9
million at December 31, 1997 to $45.7 million at March 31, 1998. This increase
in assets was funded by a $3.0 million increase in bank borrowing during the
first quarter of 1998.
Stockholders' equity decreased $56,000, from $24.6 million at December 31, 1997
to $24.5 million at March 31, 1998 resulting from net income of $706,000 and
treasury stock purchases of $762,000 during the quarter ended March 31, 1998.
The Company paid no dividends on its common stock for quarter ended March 31,
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 securitization conduit, total average net earning
assets decreased by $34.6 million, from $72.3 million during the first quarter
of 1997 to $37.7 million in the first quarter of 1998. The Company continues to
search for ways to employ its capital and to expand its portfolio through the
expansion of its current product line, the addition of new product lines such as
secured loan facilities, the acquisition or development of new products and the
addition of services related to financing middle-market businesses.
KBK maintains a $55.0 million, multi-bank line of credit ("Credit Facility")
which had $45.0 million committed and $24.0 million outstanding at March 31,
1998, $3.0 million more than the $21 million outstanding at December 31, 1997.
The Credit Facility is comprised of a $40.0 million Revolving Credit Facility
("Revolving Facility") and a $5.0 million "Over Advance" Facility which allows
for borrowing base availability to fund amounts in excess of client
concentration limits. As of March 31, 1998, there was $24.0 million outstanding
under the Revolving Facility and no balance outstanding under the Over Advance
Facility. The Credit Facility provides for maximum borrowings of the lesser of
(i) $45.0 million or (ii) the amount of a borrowing base (based 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 $3.8 million
in available credit under this line as of March 31, 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's discretion and expire
on May 31, 2000. Borrowings under the Over Advance Facility portion of the
Credit Facility bear interest at the agent banks' prime rate plus 1.25% and
10
<PAGE>
expire on August 19, 1998; however, the lenders may terminate this portion of
the facility at any time upon 120 days prior written notice to KBK.
Borrowings under the Credit Facility are secured by all accounts receivable of
KBK (including all accounts receivable purchased by KBK from its clients), all
inventory of KBK now owned or acquired, all instruments, chattel paper,
documents and general intangibles of KBK now owned or acquired, an assignment of
all security interests, mortgages and liens securing the foregoing and all
proceeds of the foregoing. The Credit Facility provides that KBK is permitted to
contribute and sell, free of liens, and grant security interests in, accounts,
chattel paper, instruments and general intangibles to SPC pursuant to the
purchase and sale agreement. The terms of the Credit Facility require KBK to
comply with certain financial covenants and include the maintenance of a certain
tangible net worth, limitations on its debt to tangible net worth, and an
interest coverage ratio which requires that KBK's ratio of income before
interest and taxes to interest expense, over the last four quarters, be no less
than 1.5 to 1. Additionally, the Credit Facility restricts the payment of
dividends in any fiscal year by KBK to the lesser of (i) KBK's after tax income
for such fiscal year or (ii) 50.0% of the amount by which KBK's after tax income
exceeds the cumulative amount of dividends permitted to be paid under such
tests, but not so paid.
Thus, 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 year end 1997) of the Company's common stock
at the current market price. At March 31, 1998, 264,567 shares of common stock
had been repurchased and placed in the treasury at a cost of $2.1 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 may
have had the result of increasing the outstanding balance under the Credit
Facility.
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.
11
<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 MAY 14, 1998 /s/ JAY K. TURNER
Jay K. Turner,
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 47,610,520
<ALLOWANCES> (1,959,268)
<INVENTORY> 0
<CURRENT-ASSETS> 5,511,546
<PP&E> 3,762,558
<DEPRECIATION> 1,668,771
<TOTAL-ASSETS> 59,550,579
<CURRENT-LIABILITIES> 35,037,724
<BONDS> 0
0
0
<COMMON> 35,472
<OTHER-SE> 24,512,855
<TOTAL-LIABILITY-AND-EQUITY> 59,550,579
<SALES> 0
<TOTAL-REVENUES> 4,097,244
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,153,504
<LOSS-PROVISION> (300,000)
<INTEREST-EXPENSE> 491,292
<INCOME-PRETAX> 1,152,448
<INCOME-TAX> 446,248
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 706,200
<EPS-PRIMARY> .21
<EPS-DILUTED> .18
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