UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24220
KBK CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2416103
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
301 COMMERCE STREET, SUITE 2200, FORT
WORTH, TEXAS 76102
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 258-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, .01 PAR VALUE AMERICAN STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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
CHECK IF DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF REGULATION
S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENT TO
THIS FORM 10-KSB [ ]
ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR: $15,191,038
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, BASED UPON THE CLOSING SALE PRICE OF THE COMMON STOCK ON MARCH 11,
1998, AS REPORTED ON THE AMERICAN STOCK EXCHANGE, WAS APPROXIMATELY $23,367,325.
SHARES OF COMMON STOCK HELD BY EACH OFFICER AND DIRECTOR AND BY EACH PERSON WHO
OWNS 10% OR MORE OF THE OUTSTANDING COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH
PERSONS MAY BE DEEMED TO BE AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS
IS NOT NECESSARILY A CONCLUSIVE DETERMINATION FOR OTHER PURPOSES.
AS OF MARCH 11, 1998, THE REGISTRANT HAD OUTSTANDING 3,282,633 SHARES OF COMMON
STOCK.
DOCUMENT INCORPORATED BY REFERENCE
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT'S 1998 ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD MAY 6, 1998, ARE INCORPORATED BY REFERENCE
IN PART III.
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INDEX
PAGE NUMBER
ITEM 1. DESCRIPTION OF BUSINESS 3
PRODUCTS AND MARKETS 4
SOURCES OF CAPITAL 4
CLIENTS 5
ACCOUNT DEBTORS 6
COMPETITION 7
GOVERNMENT REGULATION 7
EMPLOYEES 8
ITEM 1. DESCRIPTION OF PROPERTY 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
ITEM 7. FINANCIAL STATEMENTS 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 31
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS: COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT 31
ITEM 10. EXECUTIVE COMPENSATION 31
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 31
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 31
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 32
(A) EXHIBITS 32
(B) REPORT ON FORM 8-K 32
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PART I
CERTAIN OF THE STATEMENTS INCLUDED BELOW, INCLUDING THOSE REGARDING FUTURE
FINANCIAL PERFORMANCE OR RESULTS OR THAT ARE NOT HISTORICAL FACTS, ARE OR
CONTAIN "FORWARD-LOOKING" INFORMATION AS THAT TERM IS DEFINED IN THE SECURITIES
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 THAT 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 OR INCLUDED BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-KSB.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, THOSE ACTUAL RESULTS AND OUTCOMES MAY
DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS.
ITEM 1. DESCRIPTION OF BUSINESS
KBK Capital Corporation (the "Company") was incorporated in Delaware in
1992 to acquire its wholly owned subsidiary, KBK Financial, Inc. ("KBK"), a
commercial financial institution. KBK, in operation since 1962, is principally
engaged in providing financing to middle-market businesses through loans secured
by accounts receivable, inventory, equipment, owner-occupied real estate or
other assets of the borrower and through the discounted purchase of accounts
receivable. KBK or its predecessors have been engaged in the purchase of
accounts receivable for over thirty-five years. 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 KBK Receivables Corporation ("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.
Since 1992, KBK has expanded the existing Houston, Texas marketing office;
established corporate, regional and national marketing headquarters in Fort
Worth, Texas; moved the Houston operations center to Fort Worth; and opened a
regional marketing office in San Antonio, Texas. Additionally, through the
acquisition of Coastal Financial Resources, Inc. ("Coastal") in December of
1994, marketing offices were established in Lafayette and New Orleans, Louisiana
giving expanded market coverage across the Gulf Coast. The office in Lafayette,
Louisiana was consolidated into the New Orleans office at year end 1996. During
1996, the Company opened offices in Irvine, California (Los Angeles metropolitan
area) and Santa Clara, California (San Jose/San Francisco metropolitan area).
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 plans to open an office in St. Louis, Missouri during the second 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. The Company has also
announced the consolidation of its Irvine and Santa Clara offices into a new and
expanded office in Pasadena, California. This expansion is expected to enhance
the Company's ability to service the needs of its growing customer base in the
California market.
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Unless otherwise noted, all references to the "Company" include KBK Capital
Corporation, KBK, SPC and its predecessors. The principal executive offices of
the Company are located at 301 Commerce Street, Suite 2200, Fort Worth, Texas
76102 and the telephone number is (817) 258-6000.
Products and Markets
The Company's business is providing financing to middle-market businesses
through loans secured by accounts receivable, inventory, equipment,
owner-occupied real estate or other assets of the borrower and through the
discounted purchase of accounts receivable. During 1997, the Company further
expanded its product line to include a mezzanine product, which offers an
attractive financing alternative for clients whose growth has outpaced their
borrowing capacity from traditional senior debt sources. It is the Company's
intention to offer a comprehensive product line of financing to commercial
businesses in the middle-market in order to provide a single source of financing
for these businesses. The Company may also generate fees and revenues through
the cross selling of third party products to existing customers. These products
include lease financing and structuring and brokering asset securitizations.
As of March 1998, Dun & Bradstreet Market Place Information indicated that,
nationwide, there are approximately 390,000 businesses with annual revenues in
the $1 million to $50 million range whose industries the Company feels are
appropriate to target as potential clients. The Company would like to deliver
its products from marketing offices located in at least ten large metropolitan
markets throughout the United States. The opening of offices in St. Louis,
Missouri and the expansion of the California office are consistent with this
strategy of growth.
The Company has traditionally marketed its services, in part, by soliciting
referrals from providers of financial services to small businesses, such as
commercial bankers, lawyers and accountants. Management believes these sources
refer quality clients who are more likely to have the financial information and
reporting systems required for the Company's purchase of accounts receivable. In
addition, the Company relies on referrals from current and former clients and
direct inquiries from potential clients resulting from the Company's reputation
established over its long tenure in the business. The Company has developed a
formal network of correspondents who bring prospective client packages to KBK
for consideration. Such correspondents receive a fee when the Company actually
advances funds to the client referred. The Company has identified ten standard
metropolitan statistical areas (SMSA's) as having the highest concentrations of
small commercial businesses in the United States. The Company's goal is to
develop correspondent networks in each of the five SMSA's not currently served
(New York City, Chicago, Boston, Philadelphia, and Atlanta). At some point the
Company expects to support such correspondent services through the addition of
marketing offices in these locations.
Sources of Capital
The Company's capital requirements generally increase proportionately to
increases in earning assets. The method of funding the portfolio changed
significantly during 1997 with the sale of assets into a securitization conduit.
The Company funds its earning assets through its equity (which was $24.6 million
at December 31, 1997, and $22.1 million at December 31, 1996), through the sale
of assets and through borrowings from commercial banks under a revolving line of
credit.
KBK maintained a $55,000,000 multi-bank line of credit ("Credit Facility")
which had $45,000,000 committed at December 31, 1997, and secured by
substantially all of KBK's assets. The Credit Facility is comprised of a
$40,000,000 Revolving Credit Facility ("Revolving Facility") and a $5,000,000
"Over Advance" Facility which allows for borrowing base availability to fund
amounts in excess of client concentration limits. Borrowings under the Revolving
Facility portion
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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. At December 31, 1996, $65,000,000 was committed with outstanding
indebtedness of $58,000,000 ($14,000,000 at an interest rate of 8.25%,
$21,000,000 at 6.93%, $16,500,000 at 7.04% and $6,500,000 at 7.18%). In April of
1997, proceeds of the sale of assets discussed above were used to reduce the
bank indebtedness by $39 million. As of December 31, 1997, there was $21,000,000
outstanding under the Revolving Facility ($15,000,000 at an interest rate of
7.75%, and $6,000,000 at 7.66%) and there were $367,500 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
December 31, 1997, KBK was in compliance with the financial covenants and
borrowing base limitations, and there was $2,500,000 in available credit under
this line.
Future sources of liquidity to fund growth in earning assets will come from
increased sales of receivables, the issuance of unsecured and secured corporate
debt obligations, preferred and common stock, as well as from traditional bank
financing.
Clients
The Company's client portfolio totaled 175 clients in eleven different
states during 1997 compared to 174 clients in eleven states during 1996. During
1997, three clients made up more than 5% of total earning assets, or 16.6%,
10.9% and 5.7% of total receivables at year end 1997. The concentration in each
of these clients is being reduced through the participation of loans or accounts
receivable purchase facilities to other financial institutions. The Company
requires Board approval of any client facility (loan and/or working capital
facility) in excess of $3,000,000 of committed funds.
The Company's general policy has been to limit its exposure in a single
client to an amount which does not exceed the greater of the Company's allowance
for credit losses ($1.9 million at December 31, 1997, and $1.6 million at
December 31, 1996) or 20% of the Company's net worth ($4.9 million at December
31, 1997, and $4.4 million at December 31, 1996). The Company currently limits
its credit exposure to any one client, net of participations to other financial
institutions, to approximately 25% of capital, or $6 million after receiving
approval from its Board of Directors. Based on facts and circumstances,
exceptions are made to this policy, with Board approval, and there can be no
assurance that the Company's exposure to a particular client at any time will
not exceed such limits. At December 31, 1997, there was one client who exceeded
this limitation. The largest client outstanding balance at December 31, 1997,
was $7.6 million or 30.9% of net worth, as compared to $11.6 million or 52.4% of
net worth at December 31, 1996. The Company is in the process of reducing the
client concentration on this account to conform to its current concentration
policy.
The following table indicates the composition of the Company's total volume
of purchased receivables under management by type of client business for the
year ended December 31, 1997, as well as outstanding receivables under
management by type of client business at December 31, 1997, and December 31,
1996, and the related percentages thereon. The Company purchased $534 million of
receivables in 1997, or $119 million increase over the $415 million purchased in
1996.
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<TABLE>
<CAPTION>
Gross Gross
Purchased Purchased
Total Receivables Receivables
Volume of Under Under
Purchased Management Management
Receivable Outstanding Outstanding
for Percent at Percent at Percent
BUSINESS OF THE YEAR of DECEMBER of DECEMBER 31, of
CLIENT 1997 TOTAL 31, 1997 TOTAL 1996 TOTAL
------ ---- ------- -------- ----- ---- -----
(dollars in (dollars in
thousands) thousands)
<S> <C> <C> <C> <C> <C> <C>
Energy
Related $ 79,589 14.9% $ 8,635 11.4% $ 8,694 16.0%
Engineering &
Construction 87,184 16.3 12,408 16.4 9,596 17.0
Transportation 11,113 2.1 1,389 1.8 1,079 1.9
Manufacturing 43,513 8.1 6,167 8.2 3,747 6.7
Wholesale,
Retail Sales 105,120 19.7 13,837 18.4 13,030 23.4
Agriculture 5,372 1.0 286 .4 788 1.4
Environmental
Services 238 .1 0 .0 237 .4
Communications 7,890 1.5 886 1.2 494 .9
Services 71,254 13.4 7,158 9.5 6,482 11.7
Unclassified 5,288 1.0 118 .2 3,118 5.6
Pool Purchases* 116,961 21.9 24,499 32.5 8,320 15.0
------- ---- ------ ---- ----- ----
Total $533,522 100.0% $75,383 100.0% $55,585 100.0%
======= ====== ====== ====== ====== ======
</TABLE>
- ---------------
*Pool purchases are not recorded as individual invoice purchases but as a
collection of invoices which have been purchased and recorded as the aggregate
sum of receivables purchased.
Account Debtors
During 1997 and 1996, the accounts receivable under management underlying
the Company's working capital facility portfolio represented 7,721 and 5,832
different debtor entities, respectively. The most significant concentration in
1997 was debtors in the wholesale and retail sales industry. This category of
debtors made up 24% of the total balance of purchased receivables under
management outstanding at December 31, 1997, as compared to 16% at December 31,
1996. Due to the Company's long established history in this industry, management
does not feel this level of industry concentration is a significant negative
concentration.
<TABLE>
<CAPTION>
Total Volume Gross Purchased Gross Purchased Gross Purchased
of Receivables Receivables Receivables Receivables
Under Management Under Management Under Management Under Management
Purchased in Percent of Outstanding at Percent of Outstanding at Percent of
ACCOUNT DEBTORS 1997 TOTAL DECEMBER 31, 1997 Total DECEMBER 31, 1996 TOTAL
- --------------- ---------------- ---------------- ----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Engineering &
Construction $23,006 4.3 3,286 4.3 1,773 3.2%
Federal, State &
Local Govt. 13,199 2.5 1,332 1.8 1,687 3.0
Transportation 53,866 10.1 5,298 7.0 6,234 11.2
Manufacturing 31,643 5.9 3,509 4.7 7,513 13.5
Wholesale,
Retail Sales 119,860 22.5 17,860 23.7 8,717 15.7
Agriculture 2,762 .5 7 .0 405 .7
Environmental
Services 3,476 .7 805 1.0 79 .1
Communications 5,369 1.0 611 .8 119 .2
Services 40,190 7.5 4,507 6.0 4,273 7.7
Unclassified 22,744 4.3 3,304 4.4 6,810 12.3
Pool Purchases* 116,961 21.9 24,499 32.5 8,320 15.0
Energy Related 100,446 18.8 10,365 13.8 9,655 17.4
------- ---- ------ ---- ----- ----
Totals $533,522 100.0% $75,383 100.0% $55,585 100.0%
======== ====== ======== ====== ======= ======
</TABLE>
*Pool purchases are not recorded as individual invoice purchases but as a
collection of invoices which have been purchased and recorded as the aggregate
sum of receivables purchased.
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During 1997 and 1996, no individual account debtor's total receivables
purchased by the Company exceeded 5.0% of the total volume of receivables
purchased during such year. Due to the constantly changing nature of the
Company's clients and the changing volume and nature of receivables which
clients may offer the Company for purchase, the receivables purchased from the
Company's clients regularly result in the Company holding receivables from one
account debtor which constitute 5% to 10% of outstanding receivables then held
by the Company. There may also be times when a related group of debtors exceed
such levels of concentration. These concentrations are in excess of the
Company's allowance for credit losses and can be a significant percentage of the
Company's net worth. This account debtor concentration exposes the Company to
credit risk with respect to particular account debtors which could have a
material effect on the Company's operations. Although specific exposure limits
are set for each account, which at any time does not exceed 20% of the Company's
net worth, exceptions are regularly made to this policy, and there can be no
assurance that the Company's exposure to a particular account debtor (or group
of affiliated account debtors) will not at any time exceed such percentage.
Competition
The Company encounters significant competition from factoring companies,
asset based lenders, commercial banks and other financial institutions engaged
in secured lending. Due to the size of facilities offered by the Company and the
size of target clients, the Company competes with a large number of local and
regional sources of financing, as well as large national competitors. Many of
these competitors have significantly greater financial and other resources than
the Company and have access to capital markets at a lower cost than the Company
is currently able to obtain.
The Company's larger competitors include Heller Financial, CIT, and
Associates Capital. Other competitors include Congress Financial, FINOVA, the
Foothill Group, a subsidiary of NORWEST, and Fremont Financial. Competitors in
the working capital product area include Riviera Finance, Creekwood Financial,
and Metro Factors. The competition for earning assets has had the effect of
reducing yields due to the competitive nature of the business and the increasing
strength of many clients in the current economic expansion.
Government Regulation
FEDERAL ASSIGNMENT OF CLAIMS ACT. In connection with certain of its clients
whose account debtors include the United States or departments or agencies
thereof (the "Federal Government"), certain receivables acquired by the Company
are subject to the Federal Assignment of Claims Act ("FACA"). FACA provides that
an assignment of a client's contractual claim for monies due from the Federal
Government will be enforceable against the Federal Government by a third party
assignee of such client only under limited circumstances. Certain aspects of the
Company's purchases of receivables make compliance with FACA impractical or
impossible, or make the protections afforded by FACA unavailable to the Company.
As a result, the Company does not always comply with FACA when it purchases
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 as regards
the Federal Government. Such failure to comply with FACA has no effect on the
validity of assignment among the Company, the client and third parties other
than the Federal Government. Non-compliance with FACA causes the Company to lose
any right it may have to receive payments directly from the Federal Government
or cause the Federal Government to acknowledge the Company's claim in such
receivables. 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
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representation regarding the absence of setoffs with respect to purchased
receivables, or sending the account debtors a notice of assignment pursuant to
the Uniform Commercial Code. In cases where the Federal Government is the
account debtor, an assignee must comply with FACA in order to protect itself
from such setoffs, thus the Company is unable to avail itself of such protection
(other than by pursuing its rights against clients for breach of
representations). The Federal Government has broad setoff rights, including
setoffs for unpaid taxes and setoffs arising from other contracts between the
client and the Federal Government. During 1997 and 1996, respectively, the
Federal Government comprised 1.7% and 4.0% of the account debtors for the
Company's total volume of purchased 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
or receiving interest at a rate in excess of a varying index. For loans in which
the interest rate is fixed, the usury ceiling is equal to the index preceding
the week in which the contract is entered into. For varying rate loans, the
index floats. Under the provisions of Texas law, the index may never exceed 24%
per year (or, in the case of business purpose loans exceeding $250,000, 28% per
year). If the amount of the index is less than 18% per year, the creditor may,
nevertheless, charge interest at the rate of 18% per year. Because of the low
interest rate environment, the Texas usury ceiling has, since early in 1985,
prohibited a business creditor from contracting for, charging or receiving
interest at a rate in excess of 18% per year. On June 16, 1995 the Legislature
of the State of Texas passed House Bill 3101 effective August 28, 1995,
resolving several issues related to the purchase of accounts receivable. Under
the bill as enacted into law, an "account purchase transaction" is defined as an
agreement in which a commercial enterprise sells accounts receivable at a
discount with or without a related repurchase obligation. This law amended
chapter one of the Consumer Credit Code to provide that the amount of any
discount associated with the purchase or any fees paid to an account service
provider are not interest. Also, the law provides that the parties'
characterization of an account purchase transaction is conclusive that the
transaction is not a loan.
Employees
The Company had 62 full-time and four part-time employees at December 31,
1997, of whom six were employed in executive and administrative positions and
seventeen (including one executive officer) were employed in marketing. None of
the Company's employees are a party to any collective bargaining agreement, and
the Company considers its relations with employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its offices at each of its locations in Fort Worth,
Houston and San Antonio, Texas, New Orleans, Louisiana, Pasadena, California,
and St. Louis, Missouri 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation other than routine proceedings
incidental to its business, and the Company does not expect that these
proceedings will have a material adverse effect on the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since January 18, 1996, the Company's common stock has been traded on the
American Stock Exchange and the Pacific Stock Exchange. Prior to that time, it
was traded on the NASDAQ National Market System. At March 11, 1998, there were
48 holders of record of the Company's common stock. The Company has not paid or
declared dividends on its common stock during the two most recent fiscal years
and does not currently intend to pay cash dividends on its common stock in the
foreseeable future. The Credit Facility of KBK effectively limits dividends to
the Company. Under the terms of the Credit Facility, the limitation on dividends
by KBK to the Company at December 31, 1997 was $1.6 million. The following table
provides market data for the Company's common stock based on closing prices:
PER SHARE MARKET DATA
Quarter 1997 1996
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First $ 5.06 $ 3.75 $ 7.50 $ 6.50
Second 5.50 3.88 7.63 6.38
Third 7.13 4.63 7.38 4.88
Fourth 13.13 6.75 5.25 3.94
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING COMMENTARY PRESENTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CERTAIN OF THE
STATEMENTS INCLUDED BELOW, INCLUDING THOSE REGARDING FUTURE FINANCIAL
PERFORMANCE OR RESULTS OR THAT ARE NOT HISTORICAL FACTS, ARE OR CONTAIN
"FORWARD-LOOKING" INFORMATION AS THAT TERM IS DEFINED IN THE SECURITIES 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 IN THE FORWARD-LOOKING
STATEMENTS. THIS REVIEW SHOULD BE READ IN CONJUNCTION WITH INFORMATION PROVIDED
IN THE FINANCIAL STATEMENTS, ACCOMPANYING NOTES AND SELECTED FINANCIAL DATA
APPEARING ELSEWHERE IN THIS REPORT.
OVERVIEW
The Company, through its wholly owned subsidiaries KBK Financial, Inc. and
KBK Receivables Corporation, is a commercial financial institution providing
financing to middle-market businesses through loans secured by accounts
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. The yield on purchased receivables during 1997 averaged 20.2%.
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 yield on "pool" receivables averaged 14.2% during 1997.
10
<PAGE>
Total purchased and "pool" receivables managed and owned as of December 31,
1997, increased to $76.8 million from $55.6 million as of December 31, 1996. Due
to the $67.0 million sale of assets into the securitization conduit, outstanding
accounts receivable decreased to $9.8 million at December 31, 1997.
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.
During 1997, the Company's managed and owned loans increased $8.6 million
to approximately $36.0 million. Due to the $12.1 million sale of assets into the
securitization conduit, outstanding loans decreased to $23.9 million at December
31, 1997. The Company's yield on outstanding loans during 1997 averaged 12.1%.
Interest income from these loans accounted for 20.5% of total revenue for 1997
compared to 11.2% for 1996. Interest income and amounts outstanding under such
facilities are expected to increase in 1998 due to the continuing demand for
this type of financing. The Company believes that loans receivable subject the
Company to less of the seasonality and volatility inherent in its purchased
accounts receivable portfolio.
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.
In December 1994, the Company acquired Coastal Financial Resources, Inc.,
based in Abbeville, Louisiana, pursuant to a Purchase Agreement (the
"Agreement") for 400,000 shares of Company stock valued at $1.3 million and up
to 200,000 shares of the Company's common stock to be issued ratably in
increments of 66,667 shares for 1995, 1996 and 1997. The additional shares would
be issued if certain attributable earnings goals with respect to the acquired
business were met in each of the three years. No shares were issued under the
Agreement for 1995. During 1996, the Agreement was modified to include broader
definitions of earning assets and revenue eligible for attributable earnings.
Pursuant to the Agreement, 100,000 common shares were issued from treasury stock
(50,000 in 1996 and 50,000 in 1997).
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 plans to open 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. The Company has also
announced the consolidation of 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.
Continuing growth depends heavily on the Company's ability to evaluate,
underwrite and process the financing requests from middle-market businesses.
This may require the addition of experienced marketing, operations, support and
executive staff, as well as additional funding resources to support new business
and growth in earning assets.
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RESULTS OF OPERATIONS ANALYSIS
1997 COMPARED TO 1996
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------------------
(dollars in thousands)
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%
==============================================================================
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, for the year ended December 31, 1997, from
year ended December 31, 1996, total revenue of $12.2 million. Although largely
offset by $34.7 million growth in average assets owned and managed, average net
earning assets owned at year ended December 31, 1997 decreased $4.4 million from
the year ended December 31, 1996, due to the assets sold into the securitization
conduit. 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 $34.7 million in 1996 to $31.2
million in 1997 due to significant financing through the securitization conduit,
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 (3.4% 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).
The Company believes that the allowance for credit losses is adequate in light
of the historical loss experience and the risk inherent in the earning asset
portfolio at year-end 1997.
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
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<PAGE>
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 pre-tax operating profits.
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.
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 $4.3 million, from $50.9 million in 1996 to $46.6 million in
1997. 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 maintained a $55 million, multi-bank line of credit ("Credit Facility")
which had $21 million outstanding and $45 million committed at December 31,
1997, $37 million less than the $58 million outstanding at December 31, 1996.
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 December 31, 1997, there was $21.0 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 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
$2.5 million in available credit under this line as of December 31, 1997.
Borrowings under the Revolving Facility portion of the Credit Facility bear
interest at the agent banks' prime rate or applicable LIBOR plus 1.75% at KBK's
discretion and expire on May 31, 2000. Borrowings under the Over Advance
Facility portion of the Credit Facility bear interest at the agent banks' prime
rate plus 1.25% and expire on August 19, 1998; however, the lenders may
terminate this portion of the facility at any time upon 120 days prior written
notice to KBK.
Borrowings under the Credit Facility are secured by all accounts receivable
of KBK (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
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<PAGE>
tests, but not so paid. Thus, KBK is effectively restricted in its ability to
pay cash dividends to the Company. Under the terms of the Credit Facility, the
limitation on dividends by KBK to the Company as of December 31, 1997, was $1.6
million.
At year-end 1996, the Company was not in compliance with its borrowing base
limitations. Concentrations in several of the Company's largest clients resulted
in borrowings in excess of the eligible borrowing base by approximately $4
million. The Company received waivers for the technical default from the bank
group and an amendment to the Credit Facility to allow for greater client
concentration limits under the borrowing base. The Over Advance Facility
amendment allowed up to $5 million in additional borrowing base limits, but did
not increase the overall committed amount of the Facilities outstanding at year
end 1996. Borrowings under the amended Credit Facility, to the extent of the
expanded concentration limits in the borrowing base, bear interest at the banks'
prime rate plus 1.5%. Due to the subsequent collections in purchased receivables
through repayments occurring after year-end 1996, KBK possessed sufficient cash
resources to fund new and existing facilities until the Credit Facility was
amended. 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 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 December 31, 1997, 205,167 shares of
common stock had been placed in the treasury at a cost of $1.4 million (net of
100,000 shares issued to the former Coastal shareholders). 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.
The decrease in outstanding loans and accounts receivable purchased as of
December 31, 1997, resulted from the sale of $79.1 million in loans and accounts
receivable into the securitization conduit during 1997. The $66.7 million in
proceeds from these sales were used for loan and accounts receivables fundings
as well as a $37.0 million reduction in bank borrowings. During 1998, the
Company plans to increase the assets sold to the conduit to $100 million as
needed for funding asset growth.
The Company expended $845,000 and $1.2 million on premises and equipment in
1997 and 1996, respectively, principally in connection with upgrades to its
management information systems, computer equipment, office furniture and
equipment, and leasehold improvements. The Company funded such expenditures from
internally generated funds or borrowings under the Credit Facility. The Company
plans to continue to enhance its management information systems for providing,
tracking and supporting new products.
YEAR 2000
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
computer systems to malfunction in the Year 2000, and may lead to significant
business delays in the United States. The Company has considered the impact of
Year 2000 issues on its computer systems and applications and has developed an
action plan to be Year 2000 compliant. Based on analysis performed, the
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<PAGE>
ultimate costs of addressing this issue are inestimable at this time; however,
management does not believe these costs will have a material impact on the
Company's future operations.
CHANGES IN FINANCIAL CONDITION
Total assets decreased 37% to $56.4 million as of December 31, 1997. This
decrease was the result of the sale of $66.7 million in assets into the
securitization conduit, which was partially offset by additional fundings on
accounts receivable and loans receivable during 1997. The Company's allowance
for credit losses stood at $1.9 million on December 31, 1997, 4.2% of gross
outstanding accounts receivable or 3.4% of average accounts receivable
purchased. At year-end 1996, the allowance for credit losses was $1.6 million,
1.9% of gross outstanding accounts receivable or 2.7% of average accounts
receivable purchased. Management believes that the Company's allowance for
credit losses is adequate as of December 31, 1997 and 1996.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 128 "Earnings per Share," which was
required to be adopted for financial statements issued for annual or interim
periods after December 15, 1997. The Company adopted this standard which
requires a change in the presentation of earnings per share (EPS) to replace
primary and fully diluted EPS with a presentation of basic and diluted EPS and
to restate EPS for all periods presented. The adoption of SFAS 128 did not have
a material impact on the Company's consolidated financial statements.
In June 1996, the Financial Accounting Standards Board issued SFAS 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which provides authoritative guidance as to accounting and
financial reporting for transfers and servicing of financial assets and
extinguishment of liabilities. The adoption of this standard by the Company in
1997 did not have a material impact on the Company's consolidated financial
statements.
15
<PAGE>
PART II
ITEM 7. FINANCIAL STATEMENTS
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Earned discount income ...................................... $ 3,777,299 $ 9,777,834
Interest income - Loans ..................................... 3,119,138 1,368,828
Servicing fees (note 2) ..................................... 6,314,147 --
Other Income - Fees ......................................... 1,980,454 1,054,669
------------ ------------
Total revenue ......................................... 15,191,038 12,201,331
Interest expense ............................................ 2,665,552 2,590,257
------------ ------------
Income after interest expense ............................ 12,525,486 9,611,074
Provision for credit losses (note 4) ........................ 875,000 245,000
------------ ------------
Income after interest expense and provision for credit losses 11,650,486 9,366,074
Operating expenses:
Salaries and employee benefits ........................... 4,431,018 3,545,033
Amortization of intangible assets ........................ 379,075 361,529
Occupancy and equipment .................................. 1,285,128 846,542
Professional fees ........................................ 250,542 343,920
Other .................................................... 1,852,314 1,811,713
------------ ------------
Total operating expenses ................................. 8,198,077 6,908,737
------------ ------------
Income before income taxes .................................. 3,452,409 2,457,337
Income tax expense (benefit):
Federal (note 8):
Current ............................................... 1,278,513 882,261
Deferred .............................................. (2,557) (45,524)
State .................................................... 111,973 69,358
------------ ------------
Total income taxes ................................. 1,387,929 906,095
------------ ------------
Net income ......................................... $ 2,064,480 $ 1,551,242
=============================================================================================
Earnings per share - basic (note 9) ......................... $ .62 $ .47
Weighted-average common shares outstanding - basic (note 9) . 3,308,533 3,333,910
Earnings per share - diluted (note 9) ....................... $ .60 $ .45
Weighted-average common shares outstanding - diluted (note 9) 3,427,783 3,435,838
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 December 31
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash ..................................................................... $ 4,869,516 $ 1,361,225
Accounts receivable, net (notes 4 and 6) ................................. 9,778,292 55,584,786
Loans receivable, net (notes 4 and 6) .................................... 23,863,677 27,375,655
Retained interest in sold assets (note 2)................................. 12,148,609 --
Less allowance for credit losses ......................................... (1,928,629) (1,608,253)
------------ ------------
Total receivables, net ................................................ $ 43,861,949 81,352,188
Premises and equipment, net of accumulated depreciation of $1,499,307
and $878,646 at December 31, 1997 and 1996, respectively (note 5) 2,176,747 1,952,568
Intangible assets less accumulated amortization of $1,908,099 and
$1,529,024 at December 31, 1997 and 1996, respectively (note 3) ....... 3,875,072 3,710,397
Other assets (note 8) .................................................... 1,617,648 1,370,113
------------ ------------
Total assets .......................................................... $ 56,400,932 $ 89,746,491
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank line of credit (note 6) ............................................. $ 21,000,000 $ 58,000,000
Due to clients (note 7) .................................................. 9,814,897 8,245,544
Accounts payable and other liabilities ................................... 767,793 1,135,067
Income taxes payable ..................................................... 11,307 --
Deferred revenue ......................................................... 238,023 225,965
------------ ------------
Total liabilities ............................................... 31,832,020 67,606,576
------------ ------------
Stockholders' equity (notes 10 and 11):
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
3,342,033 and 3,310,133 shares at December 31, 1997 and 1996 ....... 35,472 35,472
Additional paid-in capital ............................................ 16,584,805 16,370,555
Retained earnings ..................................................... 9,301,001 7,236,521
Treasury stock ........................................................ (1,352,366) (1,502,633)
------------ ------------
Total stockholders' equity ............................................ 24,568,912 22,139,915
Commitments and contingencies (notes 3, 6, 10, 11, 12, 13) ............... -- --
------------ ------------
Total liabilities and stockholders' equity ............................ $ 56,400,932 $ 89,746,491
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional Total
Shares paid-in Retained Treasury stockholders'
outstanding Amount capital earnings stock equity
----------- ------ ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 . 3,397,200 $35,472 $ 16,500,555 $5,685,279 $ (933,750) $21,287,556
Purchase of stock for treasury
(note 10) ............... (137,067) -- -- -- (886,383)
Issuance of common stock
(note 3) ................ 50,000 -- (130,000) -- 317,500 187,500
Net income for 1996 .......... -- -- -- 1,551,242 -- 1,551,242
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 . 3,310,133 $35,472 $ 16,370,555 7,236,521 $(1,502,633) $22,139,915
Purchase of stock for
treasury
(note 10) ............... (18,100) -- -- -- (179,233)
Issuance of common stock
(note 3) ................ 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
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ...................................................... $ 2,064,480 $ 1,551,242
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................... 999,736 739,901
Provision for credit losses ................................. 875,000 245,000
Gain on sale of assets ...................................... -- (6,634)
Decrease (increase) in accounts receivable, net ............. 45,251,870 (15,612,727)
Net increase in retained interest in sold assets ............ (12,434,923) --
Increase in other assets .................................... (247,535) (556,751)
Increase in due to clients .................................. 1,569,353 1,028,382
Increase (decrease) in accounts payable and other liabilities (367,274) 656,366
Increase in interest payable for the sold assets ............ 286,314 --
Increase (decrease) in income taxes payable ................. 11,307 (228,878)
Increase in deferred revenue ................................ 12,058 225,965
------------ ------------
Net cash provided by (used in) operating activities ........ $ 38,020,386 $(11,958,134)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable, net .......................... $ 3,511,978 $(21,229,546)
Purchases of premise and equipment ............................. (844,840) (1,246,091)
Proceeds from sale of assets ................................... -- 160,410
------------ ------------
Net cash provided by (used in) investing activities ...... $ 2,667,138 $(22,315,227)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (prepayments to) the banks ................. $(37,000,000) $ 25,000,000
Repurchase of common stock ..................................... (179,233) (886,383)
------------ ------------
Net cash provided by (used in) financing activities ...... $(37,179,233) $ 24,113,617
Net increase (decrease) in cash .......................... 3,508,291 (10,159,744)
Cash at beginning of period ...................................... 1,361,225 11,520,969
------------ ------------
Cash at end of period ............................................ $ 4,869,516 $ 1,361,225
=================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ....................... $ 3,192,252 $ 1,703,861
Income taxes paid .............................................. $ 997,000 $ 1,165,000
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements presented herein reflect consolidated statements
for KBK Capital Corporation (the "Company") and its wholly owned subsidiaries,
KBK Financial, Inc., ("KBK") and KBK Receivables Corporation, ("SPC"). In June
of 1994, the Company sold 949,500 shares of common stock in an initial public
offering at a price to the public of $10.50 per share. Net proceeds from such
sale were $8,626,033. On December 30, 1994, the Company acquired the stock of
Coastal Financial Resources, Inc. ("Coastal"), for 400,000 shares of the
Company's common stock in a transaction accounted for using the purchase method
of accounting. Coastal was merged into KBK simultaneously with its acquisition.
All material intercompany balances and transactions have been eliminated in
consolidation.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles ("GAAP") and to practices within the finance
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated balance sheets and
revenues and expenses for the period. The Company provides financial services
through the extension of secured loans and the discounted purchase of accounts
receivable.
EARNED DISCOUNT INCOME AND INTEREST INCOME
Variable discount income from purchased receivables and interest income
from loans receivable are recorded on an accrual basis in accordance with the
terms of the agreements. Fixed discounts from accounts receivable are earned in
the month in which the receivables are purchased. The financial result of this
method of recognizing such fixed discounts does not differ materially from the
accrual method utilized in recognizing variable discounts.
LOANS RECEIVABLE
Loans receivable are recorded at cost, less the related allowance for
impaired notes receivable. Management, considering current information and
events regarding the borrowers' ability to repay their obligations, considers a
note to be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the note
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the note's effective interest rate. Impairment losses are included
in the allowance for credit losses through a charge to provision for credit loss
expense. Cash receipts on impaired notes receivable are applied to reduce the
principal amount of such notes until the principal has been recovered and are
recognized as interest income, thereafter. Prior periods have not been restated.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents the provision charged to
operations, less accounts receivable or loans receivable charged off, net of
recoveries. The allowance for credit losses is an amount which, in the judgment
of management, is adequate to absorb the estimated losses from accounts
receivable or loans receivable on the Company's books. The amount of credit loss
provision is set with reference to the adequacy of the allowance. Management's
periodic evaluation of the adequacy of the allowance is based upon the Company's
past credit loss experience, known and inherent
20
<PAGE>
risks in the receivables, adverse situations that may affect repayment, the
potential for additional costs to perfect title to collateral and current and
prospective economic situations.
Management regularly reviews the portfolio of earning assets to identify
accounts which have or may become collection problems. When any account becomes
doubtful as to collection of discount or interest income, the account is placed
on non-accrual status. Any discount or interest income accrued during the
current year, but not received at the time its collectability becomes doubtful,
is reversed in that year to the extent deemed uncollectable. Additional
discounts and interest accrued in prior years which are subsequently determined
to have doubtful collectability are charged to the allowance for credit losses.
Payments of discount and interest income subsequently received on accounts or
relationships classified as non-accrual are recognized as received. After an
account relationship is placed on non-accrual status, no income is accrued until
circumstances indicate that such income is collectable.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed primarily using the straight-line method
over the useful lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to expense as incurred.
INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over fifteen
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through the operating cash flows of the acquired business.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
The noncompetition agreement (note 3) is amortized on a straight-line basis
over the life of the agreement. The agreement was extended an additional
thirty-six months in the fourth quarter of 1995, its term now ending March 31,
2005.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company files a consolidated Federal income tax return and reflects a
consolidated tax provision.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 128 "Earnings per Share," which was
required to be adopted for financial statements issued for annual or interim
periods after December 15, 1997. The Company adopted this standard which
requires a change in the presentation of
21
<PAGE>
earnings per share (EPS) to replace primary and fully diluted EPS with a
presentation of basic and diluted EPS and to restate EPS for all periods
presented. The adoption of SFAS 128 did not have a material impact on the
Company's consolidated financial statements.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1996 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provides the pro forma disclosure provisions of SFAS No. 123.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, retained interest in sold
assets, due to clients, accounts payable and other liabilities approximates fair
value because of the short maturity of these instruments. The carrying value of
loans receivable approximates fair value because the loans are earning interest
at floating rates which approximate rates currently offered by local lending
institutions for loans of similar terms to companies with comparable credit
risk. The carrying value of the Company's bank debt approximates fair value
because it bears interest at floating rates that are similar to current
borrowing rates for loans of comparable maturity and credit risk and because of
the short maturities of the LIBOR tranches of the line of credit.
RECLASSIFICATIONS
Certain amounts in 1996 have been reclassified to conform with 1997
presentation.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued SFAS 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which provides authoritative guidance as to accounting and
22
<PAGE>
financial reporting for transfers and servicing of financial assets and
extinguishment of liabilities. The adoption of this standard by the Company in
1997 did not have a material impact on the Company's consolidated financial
statements.
(2) 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 $12,148,609, remains on the consolidated balance sheet and
represents amounts due from the conduit.
(3) ACQUISITIONS AND SUPPLEMENTAL CASH FLOW INFORMATION
On December 30, 1994, the Company purchased 100% of the outstanding common
stock of Coastal ("Acquisition") from its prior owners, pursuant to a stock
exchange agreement. The Acquisition was accounted for using the purchase method
of accounting and, accordingly, the purchase price was allocated to assets and
liabilities based upon their estimated fair values as of the date of
acquisition. At December 31, 1994, goodwill of $2,181,283 was recorded as a
result of the Acquisition.
During 1996, the purchase agreement (the "Agreement") related to the
Coastal acquisition was amended to expand the definition of attributable
earnings pursuant to the Agreement for purposes of determining the issuance of
additional shares to former Coastal shareholders under an earnout provision of
the Agreement. For the years ended December 31, 1997 and 1996, the criteria for
the earnout provision were met, and 50,000 shares of common stock of the Company
were issued each year from treasury shares to the former Coastal shareholders at
an average cost of $6.59 and $6.35 per share in 1997 and 1996, respectively.
This had the effect of increasing goodwill by $543,750 in 1997 and $187,500 in
1996.
In 1992, the Company entered into a noncompetition agreement with the
previous owners of KBK. The noncompetition agreement, originally effective for
ten years subsequent to April 1, 1992, was amended to be effective through March
31, 2005. The consideration for the noncompetition agreement was $2,250,000 and
was paid in twelve quarterly installments of $187,500 each. The final two of
these installments were paid in the first quarter of 1995.
23
<PAGE>
(4) RECEIVABLES
Receivables at December 31, 1997 and 1996 are summarized as follows:
1997 1996
---- ----
Accounts receivable $ 15,144,857 $ 55,584,786
Less participation (5,366,565) ---
Loans receivable 30,612,240 30,839,703
Less participation (7,113,544) (3,868,117)
Employee advances 364,981 404,069
Retained interest in sold assets 12,148,609 ---
--------------- -------------
45,790,578 82,960,441
Less allowance for credit losses 1,928,629 1,608,253
--------------- -------------
$ 43,861,949 $ 81,352,188
=============== =============
Accounts receivable are purchased from clients engaged in a variety of
industries including, but not limited to, wholesale and retail, engineering and
construction, energy, manufacturing, transportation, marketing and
personnel-related companies. The two largest clients represent 16.6% and 10.9%,
respectively, of total receivables or 30.9% and 20.4%, respectively, of equity
at December 31, 1997. The Company has over 170 clients located in eleven states.
At December 31, 1997, approximately 18.4% and 16.5% of the outstanding accounts
receivable under management were purchased from clients in wholesale and retail
related and engineering and construction related industries, respectively.
The two largest debtors at December 31, 1997, had outstanding accounts
receivable under management of $3.6 million and $1.8 million, which represented
approximately 4.7% and 2.4%, respectively, of the total outstanding accounts
receivables under management at that date.
Accounts receivable generally have terms of 30 days and are normally
collected within 30 to 60 days from the date of purchase. Loans receivable are
secured by accounts receivable, inventory, and equipment, and generally
guaranteed by the individual or corporate owners of the business.
The following is an analysis of the activity in the allowance for credit
losses:
Years Ended December 31
1997 1996
------------- -------------
Balance at beginning of period $ 1,608,253 $1,729,171
Provision for credit losses 875,000 245,000
Charge-offs (764,884) (404,166)
Recoveries 210,260 38,248
------------- -------------
Balance at end of period $ 1,928,629 $1,608,253
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
Estimated useful lives
in years
1997 1996
---- ----
Office equipment $ 3,018,806 $2,705,084 3-7
Automotive 75,833 75,833 5
Leasehold improvements 581,415 50,297 2-10
------- ------
3,676,054 2,831,214
Less accumulated depreciation 1,499,307 878,646
--------- ----------
$ 2,176,747 $1,952,568
============ ==========
24
<PAGE>
(6) BANK LINE OF CREDIT
KBK maintained a $55,000,000 multi-bank line of credit ("Credit Facility')
which had $45,000,000 committed at December 31, 1997, and secured by
substantially all of KBK's assets. The Credit Facility is comprised of a
$40,000,000 Revolving Credit Facility ("Revolving Facility") and a $5,000,000
"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. At December 31, 1996, $65,000,000 was
committed with outstanding indebtedness of $58,000,000 ($14,000,000 at an
interest rate of 8.25%, $21,000,000 at 6.93%, $16,500,000 at 7.04% and
$6,500,000 at 7.18%). In April of 1997, proceeds of the sale of assets discussed
above were used to reduce the bank indebtedness by $39 million. As of December
31, 1997, there was $21,000,000 outstanding under the Revolving Facility
($15,000,000 at an interest rate of 7.75%, and $6,000,000 at 7.66%) and there
were $367,500 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 December 31, 1997, KBK was in compliance with
the financial covenants and borrowing base limitations, and there was $2,500,000
in available credit under this line.
The following is an analysis of the activity under the line of credit for
the periods indicated:
Years Ended December 31
1997 1996
---- ----
Average amount outstanding $ 31,201,000 $ 34,713,000
Maximum outstanding as of
any month-end $ 58,000,000 $ 58,000,000
Weighted-average interest rate 7.5% 7.2%
(7) DUE TO CLIENTS
The Company typically pays less than the face value of the invoice at the
time a receivable is purchased from a client. Upon collection of the purchased
invoices, amounts collected in excess of discount income and the initial payment
are remitted to clients. Such amounts may, in some instances, be applied to
offset uncollected account balances due to clients' breach of representations or
warranties.
25
<PAGE>
(8) INCOME TAXES
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses .............................. $ 655,734 $ 546,806
Deferred tax liabilities:
Premises and equipment, due to differences in depreciation (140,813) (119,561)
Amortization of non-compete agreement .................... (54,439) --
--------- ---------
Net deferred tax asset ................................... $ 460,482 $ 427,245
</TABLE>
No valuation allowance has been established for the deferred tax assets at
December 31, 1997 or 1996 as management believes that realizability of such
assets is more likely than not. The income tax expense was different than the
amount computed by using the U.S. Federal income tax rate of 34.0% as a result
of the following:
Years Ended December 31
1997 1996
---- ----
Computed "expected" tax expense .............. $1,173,819 $ 835,495
Nondeductible amortization ................... 51,683 44,401
State Income Tax, net ........................ 137,046 45,776
Other, net ................................... 25,381 (19,577)
---------- ---------
$1,387,929 $ 906,095
(9) EARNINGS PER SHARE
Earnings per share has been calculated in conformity with SFAS No. 128
"Earnings Per Share" and all prior periods have been restated. A reconciliation
between the weighted average shares outstanding used in the basic and diluted
EPS computations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Net Income ......................................... $2,064,480 $1,551,242
========== ==========
Weighted average shares outstanding - basic ........ 3,308,533 3,333,910
========== ==========
Earnings per share - basic ......................... $ .62 $ .47
========== ==========
Weighted average shares outstanding - basic ........ 3,308,533 3,333,910
Effect of dilutive securities:
Assumed exercise of stock options and warrants ..... 119,250 101,928
---------- ----------
Weighted average shares outstanding - diluted ...... 3,427,783 3,435,838
========== ==========
Earnings per share - diluted ....................... $ .60 $ .45
========== ==========
</TABLE>
(10) STOCKHOLDERS' EQUITY
In 1992, in connection with the formation of the Company, the Company sold
warrants to two former directors and one current director to purchase 500,000
shares of the Company's common stock. The warrants are exercisable at $5 per
share and expire on February 25, 2005.
In connection with the Company's initial public offering in June 1994, the
Company sold 949,500 shares of common stock in an initial public offering at a
price to the public of $10.50 per share. Net proceeds to the Company after
-26-
<PAGE>
underwriting, legal, accounting and other offering expenses were $8,626,000. As
discussed in note 1, on December 30, 1994, the Company issued 400,000 shares of
common stock in connection with the acquisition of Coastal. Pursuant to the
Stock Repurchase Plan initiated in 1995, the Company has acquired 205,167 shares
of Treasury Stock at a cost of $1,352,000, net of 100,000 shares of stock issued
to Coastal through December 31, 1997.
(11) STOCK OPTION PLANS
In 1994, the stockholders approved the 1994 Stock Option Plan for the
benefit of the employees and non-employee directors. Such plan replaced both
plans previously adopted by the Board and the stockholders. This Plan authorizes
the Company to grant incentive options or options which do not constitute
incentive options and an automatic grant of options which do not constitute
incentive options to non-employee directors. This Plan is administered by a
committee appointed by the Board of Directors. The aggregate number of shares
which may be issued under this plan shall not exceed 400,000 shares of common
stock of the Company. Such options become exercisable ratably over five years
from the date of grant and expire ten years from the grant date if not
exercised.
In 1996, the stockholders approved the 1996 Long-Term Incentive Plan for
the benefit of employees, consultants and advisors of the Company. This Plan
does not replace or affect the 1994 Stock Option Plan. The 1996 Plan is
administered by the Compensation Committee of the Board of Directors. The
Committee is authorized to grant to key employees, consultants and advisors of
the Company and its subsidiaries and affiliates, awards in the form of stock
options, performance shares, and restricted stock. In addition, the Committee
will have the authority to grant other stock-based awards in the form of stock
appreciation rights, restricted stock units, and stock unit awards. The types of
awards and terms of their issuance will be determined by the Committee and
specified in the option agreement evidencing the grant. A maximum of 325,000
shares of common stock may be issued under this Plan, with a 200,000 share
limitation for any individual. The Plan will expire ten years from the effective
date unless terminated earlier or extended by the Board of Directors.
At December 31,1997, there were 276,500 shares available for grant under
the two Stock Option Plans. The per share weighted-average fair value of stock
options granted during 1997 and 1996 was $3.05 and $4.00 on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: expected dividend yield of 0%, expected volatility of 39%,
risk-free interest rate of 6%, and an expected life of 9 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the proforma
amounts indicated below:
1997 1996
Net income As reported $2,064,000 $1,551,000
Pro Forma $2,025,000 $1,497,000
Net income per share - basic As reported $.62 $.47
Pro Forma $.61 $.45
Net income per share - diluted As reported $.60 $.45
Pro Forma $.59 $.44
-27-
<PAGE>
Pro forma net income reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of 10 years and compensation cost for options granted prior to January 1,
1996 is not considered.
Stock option activity during the periods indicated is as follows:
Number
of Weighted-Average
Shares Exercise Price
Balance at December 31, 1995 ................... 198,500 $6.43
Granted .................................. 188,000 6.31
Exercised ................................ -- --
Forfeited ................................ (57,000) 6.89
---------- -----
Balance at December 31, 1996 ................... 329,500 6.28
Granted .................................. 180,000 5.14
Exercised ................................ -- --
Forfeited ................................ (61,000) 5.08
---------- -----
Balance at December 31, 1997 448,500 5.86
========== =====
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
<S> <C> <C> <C> <C> <C> <C>
$4.06 to $5.75 275,000 8.15 years $5.09 69,800 $5.15
$6.00 to $7.25 145,000 7.49 6.72 70,600 6.60
$9.00 28,500 5.53 9.00 25,500 9.00
------- -------
$4.06 to $9.00 448,500 7.77 5.86 165,900 6.36
======= =======
</TABLE>
At December 31, 1997 and 1996, the number of options exercisable was
165,900 and 123,600, respectively, and the weighted-average exercise price of
those options was $6.36 and $6.37, respectively.
(12) COMMITMENTS
The Company has several noncancelable operating leases for office space.
Total rent expense incurred was $629,000 and $468,000, during 1997 and 1996. At
December 31, 1997, future minimum payments on noncancelable operating leases are
as follows:
Year Ending
DECEMBER 31
-----------
1998 $544,553
1999 517,599
2000 517,599
2001 513,585
2002 469,440
Thereafter 315,946
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<PAGE>
(13) FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK
The Company may have limited off-balance sheet risk due to agreements with
clients. In certain circumstances, the Company may have a commitment to continue
purchasing accounts receivable from a client during a 30-day notice period. A
notice of termination of the agreement is required, under some conditions,
before the agreement may be terminated.
The Company's exposure to credit loss with respect to future purchases of
accounts receivable, in the event of nonperformance by the other party, does not
exceed the amounts to be considered for purchase. The Company uses its
established credit policies to consider committing to purchase accounts
receivable, and all future purchases of receivables are contingent on the
individual clients maintaining specific credit and other standards at the time
of the purchase funding. The Company has $367,500 of outstanding letters of
credit at December 31, 1997.
The Company's average receivable purchases in a 30-day period (considered
to be the maximum future purchase commitment, although not a contractual
obligation) pursuant to its normal business practice were approximately
$44,500,000 and $34,600,000 for 1997 and 1996, respectively.
(14) INVESTMENT PLAN
In 1996, the Company adopted a defined contribution plan ("the "Plan") that
is a qualified plan under Section 401(k) of the Internal Revenue Code for the
benefit of KBK employees. The Plan is available to substantially all employees
with at least six months of employment. Employee contributions are voluntary.
The Company may, at the discretion of the Board, annually elect to match some
portion of employee contributions to this Plan. The Company currently matches
25% of every employee contribution subject to a 4% salary limit. The Company's
contributions to the Plan totaled $21,000 for 1997and $20,000 for 1996.
-29-
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
KBK CAPITAL CORPORATION:
We have audited the accompanying consolidated balance sheets of KBK Capital
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KBK Capital
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Fort Worth, Texas
January 23, 1998
KBK CAPITAL CORPORATION AND SUBSIDIARIES
QUARTERLY SUMMARY RESULTS (UNAUDITED)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
YTD 1997 YTD 1996
1997 4TH QTR 3RD QTR 2ND QTR 1ST QTR 1996 4TH QTR 3RD QTR 2ND QTR 1ST QTR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned ...................... $85,621 $96,218 $92,602 $81,368 $72,335 $50,941 $64,984 $51,043 $48,169 $39,566
Owned .................................... $46,582 $35,017 $35,906 $43,070 $72,335 $50,941 $64,984 $51,043 $48,169 $39,566
========================================================================================
Revenue .................................. $15,191 $ 4,108 $ 3,836 $ 3,648 $ 3,599 $12,201 $ 3,590 $ 3,070 $2,938 $ 2,603
Interest Expense ......................... 2,666 460 506 610 1,090 2,590 939 676 567 408
Operating Expenses ....................... 8,198 2,249 2,112 1,982 1,853 6,909 2,080 1,828 1,579 1,422
Operating profit ......................... 4,327 1,399 1,218 1,056 656 2,702 571 566 792 773
Provision for credit losses ............ 875 300 300 200 75 245 100 105 10 30
Pretax Income ............................ 3,452 1,099 918 856 581 2,457 471 461 782 743
Taxes .................................. 1,388 435 367 354 233 906 181 179 267 279
Net Consolidated Income .................. $ 2,064 664 551 502 348 $ 1,551 290 282 515 464
Earnings Per Share - basic ............... $ 0.62 $ 0.20 $ 0.17 $ 0.15 $ 0.11 $ 0.47 $ 0.09 $ 0.09 $ 0.15 $ 0.14
Earnings Per Share - diluted ............. $ 0.60 $ 0.18 $ 0.16 $ 0.15 $ 0.11 $ 0.45 $ 0.09 $ 0.08 $ 0.15 $ 0.13
</TABLE>
Page 30
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16( A)OF THE EXCHANGE ACT
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1998 Annual Meeting of Stockholders, under the captions "Election of
Directors," "Information Concerning Executive Officers" and "Section 16(a)
Beneficial Ownership Compliance" and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included in the Proxy Statement to
be filed pursuant to Regulation 14A in connection with the Company's 1998 Annual
Meeting of Stockholders, under the captions "Compensation of Executive Officers"
and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Proxy Statement to
be filed pursuant to Regulation 14A in connection with the Company's 1998 Annual
Meeting of Stockholders, under the captions "Share Ownership of Directors,
Executive Officers and Certain Beneficial Owners" and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Proxy Statement to
be filed pursuant to Regulation 14A in connection with the Company's 1998 Annual
Meeting of Stockholders, under the captions "Certain Relationships and Related
Party Transactions" and is incorporated herein by reference.
Page 31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number
3.1 --Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on form SB-2, Registration
No. 33-77378-D).
3.2 --Bylaws of the Company and amendment thereto (incorporated by
reference to Exhibit 4.5 to the Registrant's Registration
Statement on Form S-8, Registration No. 33-89377).
4.1 --Specimen Stock Certificate for Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on form SB-2, Registration No.
33-77378-D).
4.2 --Form of Registration Rights Agreement between the
Company and the parties named therein, as amended (incorporated
by reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form
SB-2, Registration No. 33-77378-D).
10.1 --1992 Key Employee Stock Option Plan of the Company
(terminated), and forms of stock option agreements and
amendments thereto (incorporated by reference to Exhibit 10.1 to
the Registrant's
Registration Statement on Form SB-2, Registration No.
33-77378-D).
10.2 --1993 Non-Employee Director Stock Option Plan of the Company
(terminated), and form of stock option agreement (incorporated
by reference to Exhibit 10.2 to the Registrant's Registration
Statement on form SB-2, Registration No. 33-77378-D).
10.3 --1994 Stock Option Plan of the Company, and forms of stock
option agreements (incorporated by reference to Exhibit 10.3 to
the Registrant's Registration Statement on Form SB-2,
Registration No. 33-77378-D).
10.4 --Form of Indemnification Agreement between the Company and each
of its directors (incorporated by reference to Exhibit 10.4 to
the Registrant's Registration Statement on form SB-2,
Registration No.
33-77378-D).
10.5 --Stock Purchase Agreement dated as of April 2, 1992 among the
Company, KBK, Inc. and R. Doyle Kelley (incorporated by
reference to Exhibit 105 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-77378-D).
10.6 --Employment and Non-Competition Agreement dated April 7, 1992
between the Company and R. Doyle Kelley (incorporated by
reference to Exhibit 10.6 to the Registrant's Registration
statement on form SB-2, Registration No. 33-77378-D).
10.7 documents (incorporated by reference to Exhibit 10.7 to the
Registrant's registration Statement on form SB-2, Registration
No. 33-77378-D).
10.8 --Form of Warrants of the Company (incorporated by reference to
Exhibit 10.8 to the Registrant's Registration Statement on Form
SB-2, Registration No. 33-77378-D).
10.9 --Stock Exchange Agreement among KBK Capital Corporation and
Coastal, Inc. and the Owners of the outstanding capital stock of
Coastal Financial Resources, Inc. dated as of December 30, 1994.
*10.10 --Amended and Restated Letter Loan Agreement dated as of August
21, 1997 among KBK Financial, Inc., as borrower, and KBK Capital
Corporation, as guarantor, and the Banks listed on the signature
pages thereof and Bank One, Texas, N.A. as Agent.
21.1 --Subsidiary of the Company (incorporated by reference to
Exhibit 21.1 to the Registrant's Registration Statement on Form
SB-2, Registration No. 33-77378-D).
23.2 --Change of Control Employment Agreement.
*Filed herewith
+Management contract or compensatory plan or arrangement required to be filed as
an exhibit pursuant to Item 14(c) of Form 10-KSB.
(b) Report on form 8-K
The company did not file any reports on Form 8-K during the fourth quarter of
the year ended December 31, 1997.
Page 32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
KBK CAPITAL CORPORATION
Registrant
Date: March 27, 1998 By /s/ JAY K. TURNER
Jay K. Turner, Executive
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated below and on the dates indicated.
By /s/ ROBERT J. MCGEE Chairman and Chief Executive March 27, 1998
(Robert J. McGee) Officer
By /s/ JAY K. TURNER Executive Vice President and Chief March 27, 1998
(Jay K. Turner) Financial Officer (Principal
Financial Officer)
By /s/ DEBORAH B. WILKINSON Vice President and Controller March 27, 1998
(Deborah B. Wilkinson) (Principal Accounting Officer)
By /s/ KENNETH H. JONES, JR.) Vice Chairman and Director March 27, 1998
(Kenneth H. Jones, Jr.)
By /s/ THOMAS M. SIMMONS Director March 27, 1998
(Thomas M. Simmons)
By /s/ DANIEL R. FEEHAN Director March 27, 1998
(Daniel R. Feehan)
By /s/ THOMAS L. HEALEY Director March 27, 1998
(Thomas L. Healey)
By /s/ MARTHA V. LEONARD Director March 27, 1998
(Martha V. Leonard)
By /s/ R. EARL COX, III Director March 27, 1998
(R. Earl Cox, III)
By /s/ HARRIS A. KAFFIE Director March 27, 1998
(Harris A. Kaffie)
Page 33
THIRD AMENDED AND RESTATED LOAN AGREEMENT
August _____, 1997
Bank One, Texas, N.A., as Agent
910 Travis
Houston, Texas 77002
Gentlemen:
This Third Amended and Restated Loan Agreement ("AGREEMENT") confirms
the mutual agreements among KBK FINANCIAL, INC., a Delaware corporation
("BORROWER"), the lenders listed on Schedule 1 hereto (collectively, the
"LENDERS") and BANK ONE, TEXAS, N.A., a national banking association, as Agent
for itself and the other Lenders (in such capacity, the "AGENT") in connection
with the credit facility more fully described herein (the "CREDIT FACILITY"),
and fully amends and restates the rights and obligations of Borrower, the
Lenders and the Agent under that certain Second Amended and Restated Letter Loan
Agreement dated May 28, 1996 by and among Borrower, certain of the Lenders and
the Agent, as amended by First Amendment to Second Amended and Restated Letter
Loan Agreement dated August 30, 1996, Second Amendment to Second Amended and
Restated Letter Loan Agreement dated March 6, 1997, and Third Amendment to
Second Amended and Restated Letter Loan Agreement dated March 31, 1997
(collectively, the "PRIOR LOAN AGREEMENT").
Section 1. CREDIT FACILITY. Subject to the terms of this Agreement, the
Lenders agree to lend and Borrower agrees to borrow certain amounts
(collectively, the "CREDIT FACILITY") to be evidenced by the promissory notes
(collectively, the "NOTES") described hereinbelow, pursuant to the following
terms and conditions:
A. Revolving Credit Notes.
(a) REVOLVING NOTES: Borrower's obligation to repay the revolving
indebtedness portion of the Credit Facility (the "REVOLVING CREDIT
FACILITY") shall be evidenced by its execution of a promissory note (the
"BANK ONE NOTE") dated of even date herewith in the form attached hereto
as Exhibit "A-1", a promissory note (the "WELLS FARGO NOTE") dated of
even date herewith in the form attached hereto as Exhibit "A-2", a
promissory note (the "BANK OF AMERICA NOTE") dated of even date herewith
in the form attached hereto as Exhibit "A-3", a promissory note (the
"FLEET NOTE") dated of even date herewith in the form attached hereto as
Exhibit "A-4" and a promissory note (the "OVERTON NOTE") dated of even
date herewith in the form attached hereto as Exhibit "A-5".
(collectively the "REVOLVING NOTES").
(b) MAXIMUM REVOLVING CREDIT AVAILABILITY; ADVANCE PROCEDURE:
$55,000,000.00, subject to the limitations set forth in this Agreement,
including the Borrowing Base described in Section 5(d) hereof, and the
face amount of all outstanding letters of credit. Borrower may request
advances pursuant to the Revolving Credit Facility from Agent by
telephone at least (i) one (1) Business Day (hereinafter defined) prior
to the requested date of advance for advances accruing
<PAGE>
interest at the Prime Rate (as defined in Section 2 hereof), or (ii)
three (3) Business Days prior to the requested date of advance for
advances accruing interest at the LIBOR Rate (as defined in Section 2
hereof). Agent shall request each Lender to make available to Agent such
Lender's portion of the requested advance, as described in Section 10(k)
hereof. Agent shall advance to Borrower all funds delivered by the
Lenders to Agent for the purpose of funding such requested advance to
Borrower.
(c) TERM: Through May 31, 2000 (the "REVOLVING MATURITY DATE").
(d) RATE: The interest rate described in Section 2 of this
Agreement, not to exceed the maximum non-usurious rate permitted by
applicable law (the "MAXIMUM RATE").
(e) REPAYMENT TERMS: Accrued and unpaid interest shall be due and
payable on the last day of each calendar quarter (and, in addition, with
respect to LIBOR Loans at the end of each applicable Interest Period),
with the balance of unpaid principal and accrued and unpaid interest due
and payable on the Revolving Maturity Date.
(f) CONCERNING LETTERS OF CREDIT: On the terms and subject to the
conditions hereinafter set forth, Lenders agree to make advances under
the Revolving Credit Facility to Borrower for the issuance of one or
more letters of credit, the total aggregate face amount of which shall
not exceed at any one time the lesser of (i) 5,000,000.00 or (ii) the
remainder of (A) Revolving Borrowing Base less (B) all amounts
outstanding on the Revolving Credit Facility. No letter of credit issued
under the Revolving Credit Facility may have an expiration date later
than the Revolving Maturity Date. The issuances of all letters of credit
are subject to the execution by Borrower of Agent's standard
documentation therefor including, without limitation, provisions
regarding capital adequacy. The face amount of each letter of credit
issued under the Revolving Credit Facility shall be deemed an amount
outstanding thereunder. All letters of credit shall bear a fee, payable
in advance to Agent, for the benefit of the Lenders (except for $300 of
the fee, which shall be credited exclusively to Agent for Agent's
administration of each such letter of credit) equal to one percent (1%)
per annum of the face amount of such letter of credit. Any letter of
credit issued by Agent at the request of Borrower and outstanding on the
date hereof shall be deemed issued under the Revolving Credit Facility.
(g) COMMITMENT FEES: One-fourth of one percent (1/4%) per annum
of the average unused portion of the Current Committed Revolving Amount
(hereinafter defined), payable to Agent, for the benefit of the Lenders,
in arrears on the same day as each interest payment on the Notes.
(h) AGENT FEE: $10,000.00 per calendar year, payable to Agent on
or before May 1 of each calendar year throughout the Term of the Credit
Facility.
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<PAGE>
(i) PURPOSE: To renew and extend the obligations of Borrower to
the Lenders and the Agent pursuant to and described in the Prior Loan
Agreement (as amended), to enable Borrower to finance certain secured
loans and accounts receivable, and to support the issuance of up to
$5,000,000.00 in face amount of letters of credit.
B. Revolving Credit Notes (Over-Advance):
(a) REVOLVING NOTES (OVER-ADVANCE): Borrower's obligation to
repay the advanced portion in excess of the Revolving Credit Facility
(the "OVER-ADVANCE FACILITY") shall be evidenced by its execution of a
promissory note (the "BANK ONE OVER-ADVANCE NOTE") of even date herewith
in the form attached hereto as Exhibit "A-6", a promissory note (the
"WELLS FARGO OVER-ADVANCE NOTE") of even date herewith in the form
attached hereto as Exhibit "A-7", a promissory note (the "BANK OF
AMERICA OVER-ADVANCE NOTE") of even date herewith in the form attached
hereto as Exhibit "A-8", a promissory note (the "FLEET OVER-ADVANCE
NOTE") of even date herewith in the form attached hereto as Exhibit
"A-9" and a promissory note (the "OVERTON OVER-ADVANCE NOTE") dated of
even date herewith in the form attached hereto as Exhibit "A-10"
(collectively, the "OVER-ADVANCE NOTES").
(b) MAXIMUM OVER-ADVANCE AVAILABILITY; ADVANCE PROCEDURE:
$5,000,000.00, subject to the limitations set forth in this Agreement,
including the Borrowing Base described in Section 5(d) hereof. Borrower
may request advances pursuant to the Over-Advance Facility from Agent by
telephone at least (i) one (1) Business Day (hereinafter defined) prior
to the requested date of advance. Agent shall request each Lender to
make available such Lender's portion of the requested advance, as
described in Section 10(k) hereof. Agent shall advance to Borrower all
funds delivered by the Lenders to Agent for the purpose of funding such
requested advance to Borrower.
(c) TERM: Through August ____, 1998 [364 DAYS FROM CLOSING]
provided, however, the Lenders may, at any time, terminate this
Over-Advance Facility upon 120 days prior written notice to Borrower
(the "OVER-ADVANCE MATURITY DATE").
(d) RATE: The Prime Rate (as defined in Section 2 of this
Agreement) PLUS one and one-quarter percent (1-1/4%) (the "INDEX RATE"),
not to exceed the maximum non-usurious rate permitted by applicable law
(the "MAXIMUM RATE").
(e) REPAYMENT TERMS: Accrued and unpaid interest shall be due and
payable on the last day of each month, with the balance of unpaid
principal and accrued and unpaid interest due and payable on the
Over-Advance Maturity Date.
(f) PURPOSE: To temporarily fund advances which exceed the
current Borrowing Base limitations as set forth in Subsection 5(e)(1)(F)
and 5(e)(2)(F) hereof.
Section 2. INTEREST.
(a) Subject to the provisions of paragraphs (d), (f) and (g) of this
Section 2, Borrower
3
<PAGE>
shall pay interest on the outstanding principal amount of the Revolving Notes at
the Prime Rate per annum, unless Borrower has elected, pursuant to paragraph (c)
of this Section 2, that such interest shall accrue at the LIBOR Rate plus 1.75%.
(b) Borrower may, at any time upon the expiration of any Interest
Period, or at any other time with respect to a portion of the outstanding
principal balance of the Revolving Notes that does not constitute a LIBOR Loan,
elect that the per annum rate of interest on all or any portion of the
outstanding principal amount of the Revolving Notes accrue at the Prime Rate.
Accrued and unpaid interest on the Revolving Notes under this Section 2(b) shall
be calculated on the basis of a three hundred sixty-five (365) or three hundred
sixty-six (366) day year, as the case may be, and the actual number of days
elapsed.
(c) Upon three (3) Business Days written notice to Agent of such
election and of the Interest Period selected by Borrower, Borrower may,
effective upon the expiration of any Interest Period, or effective any other
time with respect to a portion of the outstanding principal balance of the
Revolving Notes that does not constitute a LIBOR Loan, elect that the per annum
rate of interest on at least $500,000.00 of the outstanding principal amount of
the Revolving Notes accrue at the LIBOR Rate plus one and three quarters percent
(1.75%), but only if at the time of such election no event of default exists
hereunder, and no more than three (3) other LIBOR Loans are outstanding on the
Revolving Credit Facility. Accrued and unpaid interest on each LIBOR Loan shall
be calculated on the basis of a three hundred sixty (360) day year, and the
actual number of days elapsed.
(d) (1) In the event that Agent shall have determined (which
determination shall, absent manifest error, be final, conclusive and binding):
(A) on any date for determining the LIBOR Rate for any
Interest Period, that by reason of any changes affecting the
LIBOR Market, adequate and fair means do not exist for
ascertaining the applicable interest rate on the basis provided
for in the definition of the LIBOR Rate; or
(B) at any time, that the relevant LIBOR Rate does not
represent the effective pricing to Agent for funding or
maintaining a LIBOR Loan, or Agent shall incur increased costs or
reductions in the amounts received or receivable hereunder in
respect of any LIBOR Loan, in any such case because of (i) any
change in any applicable law or governmental rule, regulation,
guideline or order or any interpretation thereof and including
the introduction of any new law or governmental rule, regulation,
guideline or order (such as, for example but not limited to, a
change in official reserve requirements) and/or (ii) other
circumstances which materially and adversely affect Agent or the
LIBOR Market or the position of Agent in such market; or
(C) at any time, that the making or continuance by Agent
of any LIBOR Loan has become unlawful by its compliance in good
faith with any law, governmental rule, regulation, guideline or
order (whether or not having the force of law and whether or not
failure to comply therewith would be unlawful), or has become
impracticable as a result of a contingency occurring which
materially
4
<PAGE>
and adversely affects the LIBOR Market;
then, and in any such event, Agent shall promptly after making such
determination give written notice to Borrower. Thereafter: (A) in the
case of clause (A) above, Borrower's right to elect the LIBOR Rate as
the basis for determining accrued interest on the Revolving Notes shall
be suspended until such time as Agent notifies Borrower that the
circumstances giving rise to such notice by Agent no longer exist, any
such election by Borrower will be void and interest on the Revolving
Notes shall, subject to the provisions of paragraphs (f) and (g) of this
Section 2, accrue and be payable pursuant to the provisions of paragraph
(b) of this Section 2; (B) in the case of clause (B) above, Borrower
shall pay to Agent, upon written demand therefor, such additional
amounts (in the form of an increased rate of, or a different method of
calculating, interest or otherwise as Agent in its sole discretion shall
determine) as shall be required to compensate Agent for such increased
costs or reduction in amounts received or receivable hereunder; provided
that Borrower shall have no obligation to make any payments of
additional amounts to the extent such increased costs or reductions in
amounts received or receivable hereunder are attributable to taxes based
on net income imposed on Agent by the United States of America (a
written notice as to additional amounts owed Agent, showing in
reasonable detail the basis for the calculation thereof, submitted to
Borrower by Agent shall, absent manifest error, be final, conclusive and
binding); and (C) in the case of clause (C) above, interest on the
Revolving Notes shall, subject to the provisions of paragraphs (f) and
(g) of this Section 2, accrue and be payable pursuant to the provisions
of paragraph (b) of this Section 2.
(2) Upon the occurrence of any of the circumstances described in
subparagraph (1)(A) or (C) of this Section 2(d), or if Borrower so
elects after the occurrence of an event described in subparagraph (1)(B)
of this Section 2(d), interest on the outstanding principal amount of
the Revolving Notes shall, subject to the provisions of paragraphs (f)
and (g) of this Section 2, forthwith accrue and be payable pursuant to
the provisions of paragraph (b) of this section 2.
(e) Borrower shall compensate Agent, for the benefit of the Lenders,
upon its written request (which request shall set forth in reasonable detail the
basis for requesting such amounts and the calculation thereof and shall, absent
manifest error, be final, conclusive and binding), for all losses, expenses and
liabilities (including, without limitation, any loss, interest, expense, penalty
or other amounts paid or incurred by Agent in connection with any deposits or
funds liquidated or re-employed by Agent, to the extent not received by Agent in
connection with the re-employment of such funds) which Agent sustains (1) if any
repayment or prepayment (including, without limitation, payment after
acceleration) of any LIBOR Loan occurs on a date which is not the last day of
the Interest Period applicable thereto, (2) if any prepayment of any LIBOR Loan
is not made on any date specified in a notice of prepayment given by Borrower,
or (3) as a consequence of (i) any default by Borrower in repaying any interest
or principal on any Revolving Note or any other indebtedness of Borrower to
Agent or any other Lender when required by the terms of this Agreement, or (ii)
an election made by Borrower pursuant to paragraph (d)(2) of this Section 2. The
calculation of all amounts payable to Agent under this paragraph (e) shall be
made on the assumption that Agent has funded each LIBOR Loan through the
purchase of a Eurodollar deposit bearing interest at the LIBOR Rate plus one and
three quarters percent (1.75%) in an amount equal to the amount of such LIBOR
Loan with a maturity equivalent to the Interest Period applicable
5
<PAGE>
to such LIBOR Loan, and through the transfer of such Eurodollar deposit from an
office of Agent outside the United States to an office of Agent in the
United States; provided that Agent or any Lender may make advances under the
Credit Facility in any manner that it chooses in its sole discretion and the
foregoing assumption shall only be made in order to calculate amounts payable
under this Section 2.
(f) In the event that Agent shall have determined that the adoption of
any requirement of law, rule or regulation regarding capital adequacy, or any
change therein or in the interpretation or application thereof, or compliance by
Agent with any request or directive regarding capital adequacy made or issued
(whether or not having the force of law and whether or not non-compliance
therewith would be unlawful) from any central bank or other governmental
authority or agency, does or will have the effect of increasing the amount of
capital required or expected to be maintained by Agent (or any corporation
controlling Agent), and Agent shall determine that such increase is based upon
the existence of Agent's commitment or obligations hereunder with respect to
making LIBOR Loans and other commitments or obligations of this type, then from
time to time upon the written demand by Agent to Borrower, Borrower shall pay to
Agent such additional amount or amounts as will compensate Agent for any
increased costs or reduced rate of return on capital or assets of Agent
resulting from such circumstances. A certificate as to any such additional
amount or amounts showing in reasonable detail the basis for the calculation
thereof submitted to Borrower by Agent shall, absent manifest error, be final,
conclusive and binding.
(g) In the event that, and for so long as any event of default hereunder
shall have occurred and be continuing, then and in any such event, the
outstanding principal amount of the Revolving Notes and the Over-Advance Notes
shall bear interest at the Maximum Rate.
(h) As used herein, the following terms shall have the following
meanings:
(1) "BUSINESS DAY" shall mean a day other than a Saturday or
Sunday, when Agent is open for business.
(2) "INTEREST PERIOD" shall mean the interest period to be
applicable to any LIBOR Loan, each of which Interest Periods shall be
either a one month period, two month period, three month period, or six
month period; provided, however,
(A) if any Interest Period would otherwise expire on a day
which is not a Business Day, such Interest Period shall expire on
the next succeeding Business Day; provided, that if any Interest
Period would otherwise expire on a day which is not a Business
Day but is a day of the month after which no further Business Day
occurs in such month, such Interest Period shall expire on the
immediately preceding Business Day;
(B) if any Interest Period begins on a day for which there
is no numerically corresponding day in the calendar month at the
end of such Interest Period, such Interest Period shall end on
the last Business Day of such calendar month; and
(C) no Interest Period shall extend beyond the final
maturity date of the
6
<PAGE>
Notes.
(3) "LIBOR LOAN" shall mean at least $500,000.00 of the
outstanding principal balance of the Revolving Notes as to which
Borrower has elected the LIBOR Rate option pursuant to this Section 2.
(4) "LIBOR MARKET" shall mean the-London interbank Eurocurrency
market.
(5) "LIBOR RATE" shall mean, with respect to each Interest
Period, the rate per annum quoted by Agent as the rate which Agent, in
accordance with its usual practice, is offering first-class banks in the
LIBOR Market for deposits of dollars (lawful money of the United States
of America) for such Interest Period at or about 11:00 a.m. London,
England time two (2) Business Days prior to the beginning of such
Interest Period for delivery on the first day of such Interest Period.
(6) "PRIME RATE" shall mean at any time the variable rate of
interest then most recently announced publicly by Agent (or any
successor to all or substantially all of its assets) as its prime rate
of interest and, without notice to Borrower or any other person, such
rate of interest shall change as and when changes in that prime rate of
interest are announced.
(i) The Over-Advance Notes shall accrue interest at the rate set forth
in Section 1(B)(d) hereof.
Section 3. REPRESENTATION AND WARRANTIES. Borrower represents and
warrants to Agent that, as of the date hereof and as of the date of each advance
under the Credit Facility:
(a) ORGANIZATION, AUTHORITY. ETC. Borrower is a corporation, duly
organized, legally existing and in good standing under the laws of the State of
Delaware and is qualified as a foreign corporation in all jurisdictions where
such qualification is necessary. Borrower is authorized to execute this
Agreement, the Notes, and all the other Loan Documents (hereinafter defined),
and those documents or instruments, when executed and delivered will be valid
and binding obligations of Borrower, enforceable in accordance with their terms
and do not violate the provisions of the corporate charter or bylaws of Borrower
or any contract, agreement, law or regulation to which Borrower is subject.
(b) FINANCIAL STATEMENTS. All financial statements of Borrower delivered
to Agent are complete and correct and have been prepared in accordance with
generally accepted accounting principles, consistently applied. The data and
records pertaining to the Collateral, and the financial statements dated June
30, 1997 of Borrower (the "PRIOR FINANCIAL STATEMENTS") delivered to Agent are
complete and correct in all material respects, have been prepared in accordance
with generally accepted accounting principles consistently applied and no
material adverse change in the condition of Borrower, financial or otherwise,
has occurred since the date of the most recent financial statements of Borrower
in Agent's Possession.
(c) INVESTMENTS AND LIABILITIES. Borrower has not made any investments
or incurred
7
<PAGE>
any liabilities except (i) for investments made and liabilities incurred in the
ordinary course of business or (ii) as disclosed in the most recent financial
statements of Borrower in Agent's possession.
(d) TITLE. Borrower has good title to its assets and properties, free
and clear of adverse claims, except as disclosed in the most recent financial
statements of Borrower in Agent's possession, and except for any adverse claims
arising in connection with assets contributed or sold to KBK Receivables
Corporation ("KBK RECEIVABLES") under the Purchase and Sale Agreement, dated as
of April 11, 1997, between the Borrower and KBK Receivables (the "SALE
AGREEMENT").
(e) TAX RETURNS. Borrower has filed all federal and state income tax
returns required to be filed as of the date of this Agreement and has paid all
taxes or assessments related to said returns.
(f) NO DEFAULT. To the best knowledge of Borrower, Borrower is not, and
after giving effect to any requested advance hereunder will not be, in default
in any respect under this Agreement, any other Loan Document, or any contract,
agreement or instrument to which Borrower is a party or by which Borrower may be
bound, and to the best knowledge of Borrower, Borrower is in compliance with all
applicable laws and regulations.
(g) ERISA; MARGIN SECURITIES. To the best knowledge of Borrower, no fact
exists, including but not limited to any reportable event or prohibited
transaction (as defined in the Employee Retirement Income Security Act of 1974,
as amended ["ERISA"]) which might constitute grounds for termination of any plan
of Borrower or appointment of a trustee to administer such plan. Borrower does
not own any "margin security" or "margin stock" as defined in Regulations G, U,
or X of the Board of Governors of the Federal Reserve System.
(h) PATENTS. ETC. Borrower has all patents, licenses, trademarks,
franchises and the like necessary to conduct its business and is not aware of
any conflict with the rights of others.
(i) NO UNTRUE STATEMENTS. Neither this Agreement nor any other
information furnished by Borrower to Agent or any Lender contains any untrue
statement of a material fact or omits a material fact necessary to make the
statements not misleading.
(j) STATUS OF COLLATERAL. With respect to the Collateral (hereinafter
defined), to Borrower's knowledge: the Collateral and all documents related
thereto, including guaranties, if any (all of which documents are collectively
referred to herein as the "COLLATERAL LOAN DOCUMENTS") and each of them are
enforceable according to their terms; at the time of the execution of this
Agreement, Borrower has good title to the Collateral and all collateral loan
documents; Lenders have (or upon execution of the Loan Documents shall have) a
first priority perfected security interest in the Collateral; all parties to the
Collateral and collateral loan documents have full capacity to contract;
Borrower has no knowledge of any facts which impair the validity of the
Collateral; all filings and recordings required by law have been completed and
complied with; all Collateral represent obligations which are not contingent or
disputable; Borrower has no knowledge of any fact which would impair the general
performance of the obligations under the Collateral or Borrower's rights under
the Collateral (other than the customary rate of non-compliance, which rate of
non-compliance is in the ordinary course of business and consistent with
Borrower's operating
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history); the Collateral have not been sold or pledged to a third party; the
Borrower owns all of the Collateral free and clear of any liens, security
interests or encumbrances; PROVIDED, HOWEVER, that the Borrower shall be
permitted to contribute and sell, and grant security interests in, accounts,
chattel paper, instruments and general intangibles to KBK Receivables pursuant
to the Sale Agreement, unless Borrower has represented to Lender that such items
are Collateral Accounts (hereinafter defined).
(k) No litigation, investigation, or governmental proceeding is pending,
or, to the knowledge of any of Borrower's officers, threatened against or
affecting Borrower, which may result in any material adverse change in
Borrower's business, properties or operations.
Section 4. REPORTING REQUIREMENTS. Borrower will deliver the following
reports to Agent:
(a) ANNUAL FINANCIAL STATEMENTS: As soon as available, and in any event
within 120 days after the end of each fiscal year of Guarantor, a copy of the
annual audited consolidated financial statement of Guarantor (including
Borrower) prepared in conformity with generally accepted accounting principles,
certified (with no material qualifications or exceptions) by independent public
accountants selected by Guarantor and acceptable to Lender, which show the
consolidated and consolidating financial condition of Guarantor (including
Borrower) at the close of such fiscal year and the results of operations during
such fiscal year, and shall include, but not be limited to, a profit and loss
statement, balance sheet and such other matters as Lenders may reasonably
request.
(b) QUARTERLY FINANCIAL STATEMENTS: As soon as available, and in any
event within 45 days after the end of each calendar quarter, unaudited
consolidated financial statements showing the consolidated and consolidating
financial condition of Guarantor (including Borrower) at the close of each such
quarter and the results of operations during such quarter, which financial
statements shall include, but shall not be limited to, a profit and loss
statement, balance sheet, cash flow statement, Compliance Certificate in the
form of EXHIBIT "D" hereto, together with such other information as may be
deemed necessary or appropriate by Lender, and such other matters as Lender may
reasonably request; such statements shall be prepared in accordance with
generally accepted accounting principles and certified on the face thereof by
the chief financial officer or other officer acceptable to Lender, or any person
acceptable to Lender, and shall be forwarded to Lender with a letter of
transmittal from such officer in which such officer shall certify that Borrower
is in compliance with all of the covenants contained in this Agreement and
further stating that no Event of Default exists in the performance by Borrower
of any of the other terms, conditions and covenants required under this
Agreement to be performed by Borrower.
(c) QUARTERLY REPORTS: Within thirty (30) days after the last day of
each calendar quarter, a portfolio performance report ("PORTFOLIO REPORT") in
such detail and containing such information as Agent may request, as of the last
day of such quarter, with respect to all Eligible Loans (defined below) of
Borrower, certified by an authorized financial officer of Borrower, which
Portfolio Report describes: (i) the original balance of each Eligible Loan; (ii)
the current outstanding balance of each such Eligible Loan as of the close of
business on the immediately preceding calendar quarter's end; (iii) the current
"Grade" in accordance with Borrower's Credit and Collections Policy; and (iv) an
itemization of each past due Eligible Loan. "Borrower's Credit and
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Collection Policy" shall mean those credit and collection policies and practices
of Borrower, related to the promissory notes and related note documents
comprising the Eligible Loans, as same is amended form time to time.
(d) MONTHLY REPORTS: As soon as available, and in any event within
thirty (30) days after the end of each month, Borrower shall deliver to Lenders
(i) a Borrowing Base Report and Compliance Certificate in the form of EXHIBITS
"B" AND "D" attached hereto together with such other information or confirmation
thereof as may be deemed necessary or appropriate by Lender, and (ii) a report
in such detail and containing such information as Agent may request, as of the
last day of such month, of all Collateral Accounts grouped into columns of 0-30
days from invoice date, 31-60 days from invoice date, 61-90 days from invoice
date, and over 90 days from invoice date, and (3) a report listing the ten
Borrower's Clients (which may be identified by their client numbers) from whom
Borrower has purchased the largest aggregate amount of Collateral Accounts
outstanding as of the last day of such month, together with the amounts owed on
such accounts receivable by the account debtors thereon as of such date,
certified by an authorized financial officer of Borrower.
(e) NOTICE OF DEFAULT: Within three (3) days after Borrower has or
should have knowledge of the occurrence of a default under this Agreement,
notice of such default together with Borrower's plans to correct such default.
(f) NOTICE OF LITIGATION: Promptly, but in any event within fifteen (15)
days after receipt of service of the petition, notice of any litigation against
Borrower in which the claimed liability of Borrower is greater than $500,000.00
(or alleging unspecified damages) if such claim is not fully covered by
insurance.
(g) OTHER INFORMATION: Such other information as Agent may request from
time to time.
(h) BUSINESS PLANS: On or before December 31 of each year, Borrower's
business plan for the following year.
Section 5. AFFIRMATIVE COVENANTS.
(a) COMPLIANCE AND PERFORMANCE. Borrower will comply with all statutes
and governmental regulations and will pay all taxes, assessments, governmental
charges, claims for labor and the like. Borrower will maintain its corporate
existence and will remain in good standing in all jurisdictions in which it is
required to be qualified and will maintain its properties in good and workable
condition at all times. Borrower will perform all obligations under this
Agreement, and under all indentures, agreements, and contracts by which Borrower
is bound. Borrower will maintain with financially sound and reputable insurers
acceptable to Agent, insurance with respect to its properties and business
against such liabilities, casualties, risks and contingencies as is customary
for its business naming Agent as loss payee with respect to any insurance
covering collateral securing the loans hereunder, and will, upon Agent's
request, provide satisfactory evidence of such insurance. Upon Agent's request,
Borrower will provide Agent and/or Agent's representatives access to Borrower's
books, records and properties at such times during ordinary business hours as
Agent may request.
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(b) REIMBURSEMENT: INDEMNITY. Borrower will reimburse Agent and each
Lender for all legal fees and expenses incurred by Agent and the Lenders in the
preparation of this Agreement and the other Loan Documents, and for all other
costs and expenses incurred by Agent and the Lenders in connection with this
Agreement including, without limitation, any and all legal fees and expenses
incurred in the enforcement of this Agreement or any of the other Loan Documents
and all costs Agent or any Lender may incur in evaluating collateral or
reviewing Borrower's financial records. Borrower and Guarantor agree, jointly
and severally, to indemnify and hold Agent and each Lender harmless from any
costs or expenses incurred by Agent or any Lender as a result of the provisions
of federal, state and local environmental laws and ordinances, including without
limitation the Comprehensive Environmental Response, Compensation and Liability
Act, as such laws and ordinances may relate to Borrower, Guarantor, or any
property or operations of Borrower or Guarantor.
(c) CURRENT COMMITTED AMOUNT. At no time may the outstanding amount
under the Credit Facility exceed the lesser of (i) the Borrowing Base, or (ii)
the maximum amount allowable under the Credit Facility (the "CURRENT COMMITTED
AMOUNT"). The Current Committed Revolving Amount and the Current Committed
Over-Advance Amount shall never exceed the respective amounts agreed upon by all
of the Lenders and Borrower, as established by letter agreement in the form of
EXHIBIT "E" annexed hereto (the "CURRENT COMMITMENT LETTER"). Until Borrower
gives written notice to Agent and the Lenders that the Current Committed Amount
has decreased, the Current Committed Amount shall be the amount most recently
agreed upon by Lenders and Borrower. Borrower shall have the right, upon giving
at least three (3) Business Days' notice to Agent and the Lenders, to decrease
either the Current Committed Revolving Amount or the Current Committed
Over-Advance Amount to any multiple of $1,000,000.00, but may not do so more
often than once during each calendar quarter. In the event the Current Committed
Amount is so reduced, it may not be subsequently increased without the written
consent of Agent and the Lenders. Borrower acknowledges and agrees that the
Lenders are under no obligation to so increase the Current Committed Amount, and
that the Lenders will consider doing so only upon the written request of
Borrower, which request may not be made by Borrower more often than once during
each calendar quarter.
(d) BORROWING BASE.
(1) The borrowing base for the Revolving Credit Facility (the
"REVOLVING BORROWING BASE") shall be the sum of (i) eighty percent (80%)
of the outstanding balance of the sum of all Eligible Loans owing to
Borrower by Borrower's Clients (as used herein, a "BORROWER'S CLIENT" is
a person or entity from whom Borrower purchases accounts receivable,
chattel paper, promissory notes, and liens and security interests
securing same or to whom Borrower advances loans and such indebtedness
is evidenced by the collateral documents), plus (ii) eighty-five percent
(85%) of the amount by which the sum of all Eligible Collateral Accounts
purchased by Borrower from Borrower's Clients exceeds the sum of all
amounts attributable to such Eligible Collateral Accounts which are or
may be due to Borrower's Clients. If at any time the amount outstanding
under the Revolving Facility is greater than the Revolving Borrowing
Base at such time, Borrower shall immediately make a prepayment on the
Revolving Note in an amount sufficient to reduce the aggregate
outstanding amounts thereof to an amount not more than the
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Revolving Borrowing Base.
(2) The availability under the Over-Advance Facility (the
"OVER-ADVANCE BORROWING BASE") shall be an additional ten percent (10%)
of the Revolving Borrowing Base, but in no event shall the Over-Advance
Borrowing Base (i) exceed the amount determined in accordance with
Subsection (F) of the definition of both Eligible Loans and Eligible
Collateral Accounts in Section 5(e) below, or (ii) include loans from
Bender Shipbuilding or Ponder Industries.
(3) The Revolving Borrowing Base and the Over-Advance Borrowing
Base are herein collectively called the "BORROWING BASE."
(e) ELIGIBLE LOANS AND ELIGIBLE COLLATERAL ACCOUNTS.
(1) "ELIGIBLE LOANS" shall mean loans from Borrower to Borrower's
Clients, which strictly comply with the requirements of Section 5(f)
hereinbelow, but excluding any loan that meets one or more of the
following criteria: (A) one or more payments are past due by more than
ninety (90) days, (B) from a party closely affiliated with, related to,
or employed by Borrower or Guarantor, (C) from an obligor subject to
bankruptcy proceedings (unless such obligor's bankruptcy proceedings
predate the subject Loans), (D) original principal amount thereof is
less than $25,000, (E) from an obligor domiciled outside the United
States of America, and such obligation is not secured in a manner
satisfactory to Agent, (F) to the extent (but only to the extent) such
loan, when aggregated with all other loans (from the same or affiliated
obligor) comprising the Revolving Borrowing Base exceeds fifteen percent
(15%) of Borrower's Primary Capital as reflected on the most recent
financial statements of Borrower in Agent's possession, (G) which have
been sold or otherwise transferred by the Borrower to KBK Receivables
pursuant to the Sale Agreement, (H) has not been originated pursuant to
or does not satisfy, in all material respects, any of the applicable
requirements of Borrower's Credit and Collection Policy, (I) is not
denominated or payable in United States Dollars, (J) has an original
term to maturity of more than (x) 72 months with respect to term loans,
or (y) 24 months with respect to lines of credit, (K) has payment terms
that do not require monthly payments of interest, (L) is subject to
claims or offsets by the obligor thereof, (M) the obligor thereof is a
governmental agency or authority, (N) the primary business of the
obligor is involved in any one or more of the gaming, nuclear waste,
bio-tech, or real estate industries, (O) has a principal amortization
schedule of more than 10 years (with respect to term loans), or the
remaining principal balance is not due in less than six years from such
date, (P) if such note is secured by real estate and it fails to meet
all requirements of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, as amended, (Q) exceeds the aggregate of the
following, which has been pledged to secure same (i) 85% of appraised
value of equipment, (ii) 50% of the lesser of cost or appraised value of
inventory, (iii) 80% of the book value of receivables, (iv) 75% of
appraised value of real estate, and (v) 90% of market value of
marketable securities; provided, however, that only the funded amount to
an obligor in excess of the percentage limitations set forth in (i)
through (v) will be excluded from such Borrowing Base,
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(R) the portion of the Eligible Loan that is subject to participation
with other parties, or (S) any nonaccrual loans.
(2) "ELIGIBLE COLLATERAL ACCOUNTS" shall mean accounts receivable
purchased by Borrower from Borrower's Clients which are outstanding less
than ninety (90) days from date of purchase by Borrower and less than
one hundred twenty (120) days from the original invoice date, less all
interests in such accounts receivable sold, participated or syndicated
by Borrower, and excluding any account receivable that meets one or more
of the following criteria: (A) with a due date greater than ninety (90)
days from invoice date, (B) from an affiliate of Borrower, (C) from an
account debtor subject to bankruptcy proceedings (unless specifically
approved by Agent), (D) [INTENTIONALLY DELETED], (E) due from a foreign
account debtor which is not secured by a letter of credit in a manner
satisfactory to Agent, not covered by credit insurance issued by
American Credit Indemnity, The Export-Import Bank of the United States,
or such other insurer that is satisfactory to Agent or not otherwise
specifically approved by Agent (for purposes hereof, accounts receivable
owing by Petrozuata, C.A. purchased by Borrower from Kadco
International, Ltd., Inc. in an amount not to exceed $500,000
outstanding at any single time, and from entities, the majority of
equity interest in which is owned by Mobil, Chevron, Shell or Exxon,
shall be deemed approved by Agent), (F) to the extent (but only to the
extent) such account receivable, when aggregated with all other accounts
receivable of Borrower purchased from the Borrower's Client from whom
Borrower has purchased such account receivable, exceeds the greater of
(i) Borrower's allowance for credit loss, as reflected on the most
recent financial statements of Borrower in Agent's possession or (ii)
twenty percent (20%) of Borrower's Primary Capital as reflected on the
most recent financial statements of Borrower in Agent's possession, (G)
due from the federal government or any agency thereof to the extent the
sum of such governmental accounts receivable exceeds, in the aggregate,
twenty-five percent (25%) of Borrower's Primary Capital as reflected on
the most recent financial statements of Borrower in Agent's possession,
or (H) which has been sold or otherwise transferred by Borrower to KBK
Receivables pursuant to the Sale Agreement.
(f) SECURITY. The Notes and the other indebtedness hereunder shall be
secured by (i) all loans from Borrower to Borrower's Clients, now existing or
hereafter to come into existence, (ii) all accounts receivable of Borrower not
sold pursuant to the Sale Agreement (the "COLLATERAL ACCOUNTS") now existing or
hereafter to come into existence, (iii) all instruments, chattel paper,
documents and general intangibles of Borrower evidencing same, now owned or
hereafter acquired, (iv) an assignment of all security interests, mortgages and
liens securing the foregoing, and (v) all proceeds of the foregoing
(collectively, the "COLLATERAL").
(1) With respect to the Collateral that is comprised of
(i) chattel paper, documents and other such instruments evidencing both
an obligation and security interest or lease of specific goods, and (ii)
promissory notes and other such negotiable instruments evidencing a
right to the payment of money and are transferred by way of endorsement,
Borrower shall conspicuously mark same with the following indorsement:
"IF THIS IS CHATTEL PAPER OR OTHER SUCH INSTRUMENT EVIDENCING BOTH AN
OBLIGATION AND SECURITY INTEREST OR LEASE OF SPECIFIC GOODS, IT IS
HEREBY ASSIGNED TO BANK ONE, TEXAS, N.A., AS AGENT, UNDER THAT CERTAIN
THIRD
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AMENDED AND RESTATED LETTER LOAN AGREEMENT DATED AUGUST ___, 1997, AS
AMENDED; IF THIS IS A PROMISSORY NOTE OR OTHER SUCH NEGOTIABLE
INSTRUMENT EVIDENCING A RIGHT TO THE PAYMENT OF MONEY IT IS HEREBY
INDORSED PAY TO THE ORDER OF BANK ONE, TEXAS, N.A., WITH FULL RECOURSE."
(2) With respect to the Collateral that is secured by a
security interest in personal property (or otherwise subject to the
Business and Commerce Code of Texas), which is evidenced by a security
agreement, Borrower shall, upon request of Agent, assign to Lenders the
benefit of such security agreement by the following legend on the
security agreement: "ALL RIGHTS AND INTEREST IN AND TO THIS SECURITY
AGREEMENT ARE ASSIGNED TO BANK ONE, TEXAS, N.A., AS AGENT, UNDER THAT
CERTAIN THIRD AMENDED AND RESTATED LETTER LOAN AGREEMENT DATED AUGUST
__, 1997, AS AMENDED."
(3) Borrower shall (i) assign to Lender all real property
lien rights (with respect to the Collateral that is secured by a lien in
real property) by execution of assignments of notes and liens (in the
form annexed hereto as EXHIBIT "F"), (ii) upon request of Agent, assign
to Lenders all security interests (with respect to security interests
that are perfected by UCC filing) by execution of a UCC-3 assignment (in
the form annexed hereto as EXHIBIT "G"), and (iii) revise such legends,
endorsements and assignments in Agent's sole discretion to effectively
indicate that the Collateral has been assigned to Lenders to secure
Borrower's obligations hereunder.
(4) Borrower shall promptly deliver all original
Collateral and assignments to a location designated by Agent, and shall
take all other actions requested by Agent to maintain and perfect
Lenders' security interests in such Collateral.
(g) GUARANTY. The Notes and the other indebtedness hereunder shall be
guaranteed by KBK Capital Corporation, a Delaware corporation ("GUARANTOR").
Section 6. NEGATIVE COVENANTS.
(a) INVESTMENTS. Borrower will not make investments in any company,
person or entity, except in the ordinary course of its business. Guarantor will
not make investments in any company, person or entity other than Borrower,
except in the ordinary course of its business.
(b) MERGER AND CONSOLIDATION. Except as provided below, neither Borrower
nor Guarantor will merge or consolidate with any person, create any subsidiaries
(other than KBK Receivables), enter into any partnerships or joint ventures, or
acquire any other entity. Borrower and Guarantor may merge or consolidate with
an entity, so long as (i) Borrower or Guarantor, as the case may be, is the
surviving entity, (ii) in the case of Borrower, the acquired entity has assets
of less than $5,000,000, (iii) there is no "change in control" of Borrower or
Guarantor, and (iv) the acquired entity is in the same basic business as that of
Borrower and Guarantor. For purposes hereof, the phrase "CHANGE IN CONTROL"
shall mean any person or entity, including a group as
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contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, that acquires, owns or controls more than 50% of the outstanding shares
of the capital stock thereof.
(c) DIVIDENDS AND DISTRIBUTIONS. Borrower will not purchase or redeem
any stock of Borrower, or declare or pay any dividends or distributions in any
fiscal year that, in the aggregate, exceed the lesser of (i) the sum of the
Permitted Amount of Non-Discretionary Dividends for such fiscal year and the
Permitted Amount of Discretionary Dividends for such fiscal year or (ii) the
After-Tax Net Income of Borrower for such fiscal year; as used herein, (A)
"AFTER-TAX NET INCOME" shall mean the amount of net income Borrower would have
generated had Borrower's net income been subject to tax at the rate which
actually applies to the net income of Borrower during the period to which such
calculation relates; (B) "PERMITTED AMOUNT OF DISCRETIONARY DIVIDENDS" for any
given fiscal year of Borrower shall mean the sum of (i) fifty percent (50%) of
the amount, if any, by which the After-Tax Net Income of Borrower for Borrower's
prior fiscal year (as set forth in the audited financial statements of Borrower
delivered to the Lenders pursuant to of this Agreement) exceeds the Permitted
Amount of Non-Discretionary Dividends for such prior fiscal year and (ii) the
amount of the Borrower's Prior Year Dividend Account on the first day of the
fiscal year of Borrower as to which the calculation of Permitted Amount of
Discretionary Dividends is made; (C) "PERMITTED AMOUNT OF NON-DISCRETIONARY
DIVIDENDS" for any given fiscal year of Borrower shall mean the amount of taxes
that would otherwise have been payable by Borrower with respect to its net
income during such fiscal year had Borrower not been part of a consolidated
group; and (D) "PRIOR YEAR DIVIDEND ACCOUNT" shall mean an account which shall
begin on the date of this Agreement at $855,557 (0), and which shall increase by
the amount, if any, by which the Permitted Amount of Discretionary Dividends in
a given fiscal year of Borrower (commencing its fiscal year ending December 31,
199___) exceeds the amount of dividends actually paid by Borrower in such fiscal
year in excess of the Permitted Amount of Non-Discretionary Dividends for such
fiscal year, and which shall decrease by the amount of any dividends actually
paid by Borrower in such fiscal year which are attributable to the Prior Year
Dividend Account.
(d) SALE OF ASSETS. Neither Borrower nor Guarantor will sell, transfer
or otherwise dispose of any of its assets or enter into any arrangement
accomplishing substantially the same purpose, except that the foregoing
restrictions shall not apply to transactions in the ordinary course of business
or to interests sold, participated or syndicated in any Eligible Loans or any
Eligible Collateral Accounts, if such interests are not included in the
calculation of the Borrowing Base; PROVIDED, HOWEVER, that the Borrower shall be
permitted to sell, contribute and otherwise transfer assets to KBK Receivables
pursuant to the Sale Agreement, so long as such assets are not represented to
Lender as being Collateral Accounts.
(e) INDEBTEDNESS. Neither Borrower nor Guarantor will incur, create,
assume or guarantee in any manner any indebtedness, obligation or liability
(direct or contingent), other than the indebtedness under the Credit Facility,
except that Borrower and Guarantor may (i) incur, create, assume or guarantee
indebtedness, obligations and liabilities in the ordinary course of their
business, (ii) incur Funded Debt so long as the aggregate of all outstanding
Funded Debt of
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Borrower and Guarantor does not exceed $1,000,000.00, (iii) incur subordinated
debt, subject to approval of the Lenders, and (iv) incur debt in connection with
an interest rate hedging agreement (subject to the approval of Lenders)
(collectively, the "PERMITTED DEBT").
(f) LIENS. Neither Borrower nor Guarantor will create or permit to exist
any lien, security interest or other encumbrance on any of its properties or
assets except (1) as disclosed on the Prior Financial Statements, (2) as
disclosed on the balance sheet of Guarantor dated June 30, 1997 delivered to
Agent, (3) liens in favor of Agent, (4) liens securing Funded Debt up to an
aggregate amount of $1,000,000.00, (5) liens for taxes or other governmental
charges not yet due or contested in good faith, (6) liens in connection with
workers' compensation, unemployment insurance or other such obligations, (7)
legal or equitable encumbrances deemed to exist by reason of this or other
encumbrances deemed to exist by reason of this or other negative pledge
covenants, (8) legal or equitable encumbrances resulting from legal proceedings,
or (9) servitudes, easements and other similar property rights or (10) liens, if
any, with respect to the Permitted Debt.
(g) CAPITAL EXPENDITURES. Neither Borrower nor Guarantor will expend or
enter into any commitment to expend any amount for the acquisition or lease of
tangible, fixed or capital assets, including repairs, replacements and
improvements, which are capitalized under proper accounting practice, and which
exceeds, in the aggregate, $1,750,000 per calendar year.
Section 7. FINANCIAL COVENANTS.
(a) Borrower will not permit, as of the end of any fiscal quarter:
(1) its Tangible Net Worth to be less than $10,000,000.00;
(2) its ratio of Funded Debt to Primary Capital to be greater
than 3.0 to 1.0;
(3) its Interest Coverage Ratio to be less than 1.50 to 1.0.
(b) For the purposes of this Agreement, the following terms have the
following meanings:
(1) "DEBT" shall mean all liabilities which would be classified
as liabilities;
(2) "TANGIBLE NET WORTH" shall mean stockholder's equity LESS all
intangible assets such as goodwill and patent rights, PLUS Subordinated
Debt, LESS advances to affiliates other than KBK Receivables
Corporation;
(3) "SUBORDINATED DEBT" shall mean debt subordinated in a manner
satisfactory to Agent;
(4) "INTEREST COVERAGE RATIO" shall mean the ratio of (i) the sum
of net income of Borrower, plus taxes and interest expense, all for the
four previous fiscal quarters of Borrower, to (ii) interest expense of
Borrower during the four previous fiscal quarters of Borrower.
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(5) "FUNDED DEBT" shall mean all interest bearing liabilities
other than non-recourse debt issued by special purpose subsidiaries.
(6) "PRIMARY CAPITAL" shall mean Tangible Net Worth, plus the
allowance for credit losses.
All terms not expressly defined shall be defined in accordance with
generally accepted accounting principles. All determinations under this
Agreement shall be made in accordance with generally accepted accounting
principles consistently applied, except where expressly provided to the
contrary. All references to a preceding period shall mean the period ending as
of the end of the month, quarter or fiscal year for which the applicable report
is delivered. All references to a period immediately following shall mean the
period beginning on the first day of the month, quarter or fiscal year following
the end of the period for which the applicable report is delivered.
Section 8. DEFAULT AND REMEDIES. It shall constitute an event of default
hereunder if (a) Borrower fails to make when due any payment on any of the Notes
or on any other indebtedness hereunder, (b) Borrower fails to perform any of its
other agreements contained herein, (c) Borrower or Guarantor defaults under the
terms or provisions of any Loan Document or any other agreement, instrument or
document executed in connection with or as security for the Credit Facility, (d)
any representation or warranty of Borrower or Guarantor proves to have been
untrue when made, (e) any petition in bankruptcy is filed by Borrower or
Guarantor, or any order granting relief under any bankruptcy or receivership law
is filed with respect to Borrower or Guarantor, (f) Borrower or Guarantor
permits a monetary judgment against it in excess of $50,000.00 to remain
undischarged for a period in excess of thirty (30) days, or (g) Borrower or
Guarantor dissolves or (h) Borrower shall default in the payment of any
indebtedness of Borrower or in the performance of any of Borrower's obligations
and such default shall continue for more than any applicable period of grace or
(i) the commencement of the Liquidation Period (as such term is defined in the
Receivables Purchase Agreement, dated as of April 11, 1997, among Borrower, KBK
Receivables, Clipper Receivables Corporation, State Street Boston Capital
Corporation and the other parties thereto). Upon the occurrence of an event of
default specified in clause (a) or (e) above, or upon the breach of any covenant
set forth in Section 5(c), 5(d), 5(e) or 7 hereof, without notice to Borrower or
any other person, the obligations of the Lenders to fund additional loans to
Borrower shall be terminated. Upon the occurrence of any other event of default
specified above, upon five (5) days written notice to Borrower, but without
further notice to Borrower or any other person, the obligations of the Lenders
to fund additional loans to Borrower shall be terminated. Upon the occurrence of
an event of default specified in clause (e) above, immediately, and upon the
occurrence of any other event of default hereunder at the option of Agent upon
five (5) days written notice to Borrower, but without further notice to Borrower
or any other person, all indebtedness of Borrower to Agent and the Lenders shall
be immediately due and payable and Agent may take any other actions as may be
permitted by this Agreement, any other Loan Document or any other document or
instrument evidencing or securing the Credit Facility. Each of Borrower and
Guarantor expressly waives, except as set forth above, presentment, demand,
protest, notice of protest, or other notice of dishonor of any kind including,
without limitation, notice of intent to accelerate the maturity of the Notes and
other indebtedness hereunder and notice of acceleration of the maturity of the
Notes and other indebtedness hereunder.
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<PAGE>
Section 9. CLOSING. The initial funding of the Credit Facility shall be
subject to the receipt by Agent of the following documents, instruments and
certificates (which, with all previously executed loan documents relating to the
Credit Facility, are herein called the "LOAN DOCUMENTS"), each of which shall be
satisfactory in form and substance to Agent and its counsel:
(a) six (6) copies of this Agreement executed by Borrower and Guarantor:
(b) the promissory notes attached hereto as Exhibits "A-1" through
"A-10", executed by Borrower;
(c) a Specific Guaranty executed by Guarantor for the benefit of Fleet
Bank, N.A.;
(d) the Consent of Guarantor attached hereto, executed by Guarantor;
(e) the Current Commitment Letter stipulating amounts agreed to by all
Lenders;
(f) a certificate of the Secretary of each of Borrower and Guarantor,
certifying as to the Articles of Incorporation and Bylaws of each, director's
resolutions of each, and the signatures of authorized officers of each;
(g) resolutions of the Board of Directors of each of Borrower and
Guarantor:
(h) certificates of existence issued by the Secretary of State of
Delaware with respect to each of Borrower and Guarantor;
(i) certificates of good standing with respect to each of Borrower and
Guarantor;
(j) Borrowing Base Certificates as of the date hereof;
(k) Portfolio Report as of the date hereof;
(l) a current copy of the Borrower's Credit and Collection Policy; and
(m) such other documents and instruments as may be reasonably requested
by Agent or its counsel.
Section 10. THE AGENT.
(a) CREATION OF AGENCY. Each Lender hereby authorizes the Agent to take
such action on such Lender's behalf and exercise such powers as are delegated to
the Agent by the terms hereof, together with all such powers as are reasonably
incidental thereto. The relationship between the Agent and each Lender is that
of agent and principal only, and nothing herein shall (nor shall it be construed
so as to) constitute the Agent a trustee or fiduciary for or of any Lender, or
impose on the Agent any duties or obligations other than those for which express
provision is made herein. In performing its express duties and obligations
hereunder, the Agent shall have no liability to any Lender in the absence of
gross negligence or willful misconduct by the Agent. The Lenders expressly
acknowledge and agree that the Agent shall have no implied duties hereunder
including,
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<PAGE>
without limitation, any implied duty of good faith and fair dealing.
The Agent agrees that, upon the request of any Lender, it will use its best
efforts to obtain any information from or with respect to Borrower that is
available to Agent pursuant to the terms of this Agreement.
(b) PAYMENTS AND DISTRIBUTIONS. Each Lender hereby authorizes the Agent
to receive any and all payments which are or which may become due under this
Agreement, the Notes or any of the other Loan Documents. Each Lender and Agent
hereby authorize and instruct Borrower to make all payments which are or which
may become due under any of such Loan Documents directly to the Agent. Each
Lender hereby agrees that, in the event it receives any payment which should
have been made to the Agent pursuant to the terms of this Agreement, or in the
event it offsets any amounts placed on deposit with it by Borrower, it shall
immediately remit such payment or offset amount to the Agent for distribution in
accordance with the terms of this Agreement. Except as otherwise expressly
provided herein, the Agent shall distribute promptly to the Lenders all sums
received by the Agent as a payment on or related to any of the Loan Documents
ratably in proportion to the amount of each Lender's interest in the Credit
Facility listed on Schedule 1 hereto. In the event interest on the Notes accrues
at more than one rate, or the Agent receives any prepayment with respect to any
Note, all interest payments and all prepayments received by Agent hereunder
shall be distributed ratably among the Lenders in proportion to the amount of
each Lender's interest in the Credit Facility, regardless of whether the
interest or prepayment was purported to have been made with respect to less than
all of the Notes.
(c) NOTICES. The Agent will promptly advise each Lender of any actual
notice of a default of Borrower hereunder received by the Agent. The Agent shall
not be under any obligation to any Lender to ascertain or inquire as to the
performance or observance of any of the terms or conditions of this Agreement or
any other Loan Document to be performed or observed by Borrower. Each Lender
hereby agrees that it will, promptly upon receipt of actual notice thereof,
notify the Agent of the existence of any default of Borrower hereunder.
(d) INDEMNITY. Each Lender hereby agrees to, and shall, ratably in
proportion to the amount of each Lender's interest in the Credit Facility,
indemnify, to the extent not reimbursed by Borrower, the Agent against any loss,
expense (including legal fees) or liability (except such as results from the
Agent's own gross negligence or willful misconduct) which the Agent may suffer
or incur in connection with the implementation, administration or enforcement of
the Credit Facility or any of the Loan Documents.
(e) RELIANCE. In performing its duties and exercising its powers
hereunder, the Agent will be entitled to rely on (1) any communication believed
by it to be genuine and to have been sent or signed by the person by whom it
purports to have been sent or signed and (2) the opinions and statements of any
professional advisor selected by it in connection herewith, and the Agent shall
not be liable to any other party hereto for any consequence of any such
reliance.
(f) TRUTH OF REPRESENTATIONS. The Agent takes no responsibility for the
truth of any representations made herein, nor for the adequacy or enforceability
of this Agreement, and neither the Agent (except in the case of its gross
negligence or willful misconduct) nor any of its officers, directors, employees,
agents or representatives shall be liable for any action taken or omitted to be
taken by it or any of them under or pursuant to this Agreement, or for any
oversight or error of judgment.
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<PAGE>
(g) BUSINESS WITH BORROWER. Notwithstanding the agency herein
constituted, Bank One, in its individual capacity, may, without liability to
account, make loans to, accept deposits from and generally engage in any kind of
banking or trust business with Borrower. The Lenders expressly acknowledge and
agree that such activities shall not constitute (and shall not be construed to
constitute) a conflict of interest with the Agent's performance of its duties
hereunder.
(h) INDEPENDENT INVESTIGATIONS. Each Lender acknowledges that it has
taken and will take such independent action and make such investigations as it
deems necessary to inform itself as to the financial condition and affairs of
Borrower and, based upon such independent action and investigation,-it has
determined to enter into this Agreement.
(i) PRIOR ADJUDICATION OF CERTAIN ACTIONS. If, in the opinion of the
Agent, the distribution of any sum received by the Agent in such capacity
hereunder, under the Notes or under any other Loan Document, or the taking or
omitting to take of any action hereunder or thereunder, might involve the Agent
in liability, it may refrain from taking such action (or omitting to take such
action) until its right to take such action (or omit to take such action) shall
have been adjudicated by a court of competent jurisdiction. If a court of
competent jurisdiction shall adjudge that any amount received and distributed by
the Agent is to be paid to a person other than the recipient thereof, each
Lender or other person to whom any such distribution shall have been made shall
either repay to the Agent its proportionate share of the amount so adjudged to
be repaid or shall pay over the same in such a manner and to such persons as
shall be determined by such court.
(j) REMEDIES UPON DEFAULT. Upon the occurrence of an event of default
hereunder by Borrower, the Agent shall be entitled to elect which, if any,
remedies will be pursued with respect to the Credit Facility and the collateral
securing the same (including, without limitation, deeds or assignments in lieu
of any such proceedings). The Agent shall be entitled to select the method of
disposition of any collateral securing the Credit Facility, or may elect to not
pursue any or all remedies with respect to such collateral. Should such
proceedings result in the foreclosure of any security interest held by the Agent
or the Lenders, the Agent shall have the right to acquire such collateral at
foreclosure, and to bid therefor all or any portion of the indebtedness of
Borrower to the Lenders under the Credit Facility and, if the successful bidder
thereon, the Agent shall acquire such collateral as nominee for the Lenders and
operate and/or dispose of such collateral in the manner the Agent sees fit, all
expenses of operation and disposal of such collateral to be borne by the Lenders
ratably according to their respective interests in the Credit Facility. In
addition to the foregoing, upon the occurrence of an event of default hereunder
by Borrower (or, if in the opinion of the Agent, such a default seems imminent),
the Agent, subject to the provisions of paragraph (m) of this Section 10 shall
be entitled, should it so elect, to pursue any restructuring or modification of
the terms and provisions (including, without limitation, repayment provisions)
of the Credit Facility, the Notes, this Agreement and the other Loan Documents
as may be determined by the Agent in its discretion. The Agent, subject to the
provisions of paragraph (m) of this Section 10, shall have the right to release
Borrower from liability for repayment of all or any part of the Credit Facility
if the Agent determines such release may increase the amounts to be realized by
the Lenders under the Credit Facility or may decrease the costs of collection of
the Lenders. Each Lender hereby agrees to, and shall, ratably in proportion to
the amount of each Lender's interest in the Credit Facility, indemnify and hold
the Agent harmless from and against any and all loss, liability or expense
(except such as results from the Agent's own gross negligence or willful
20
<PAGE>
misconduct) incurred by the Agent in connection with its actions taken
hereunder, or in connection with any related document, after the occurrence of
an event of default hereunder by Borrower (including, without limitation,
actions taken to foreclose on, operate or dispose of any collateral and/or to
restructure the terms and provisions of the Credit Facility).
(k) FUNDINGS BY LENDERS. Agent shall notify the Lenders by telephone or
telecopy as promptly as practicable of a request for advance by Borrower and the
date on which such advance is requested to be made. Each Lender hereby agrees to
deposit with Agent, prior to 2:00 p.m. Houston time on the date such advance is
requested to be made, such Lender's portion of such advance, which shall be
determined by the percentage interest of such Lender in the Credit Facility.
(l) DEFAULT BY A LENDER. In the event any Lender fails to timely make
available to the Agent such Lender's pro rata portion of any loan made or to be
made pursuant to this Agreement or any other amount due from such Lender to
Agent hereunder or under any of the other Loan Documents, or upon the breach by
any Lender of any of its other obligations hereunder, such defaulting Lender
shall be referred to as a "DEFAULTING LENDER" and the Agent and other Lenders
shall have the rights described in this paragraph with respect to such
Defaulting Lender. Any amounts received by the Agent or any Lender (including
the Defaulting Lender) after the default causing such Lender to become a
Defaulting Lender shall be paid to the Lender or Lenders other than the
Defaulting Lender (the "NON-DEFAULTING LENDERS," whether one or more) in such
proportion as the interest of each Non-defaulting Lender bears to the interest
in the Credit Facility of all Non-defaulting Lenders. Further, the Agent and the
Non-defaulting Lenders shall have the right but not the obligation, to advance
monies on behalf of, or otherwise cure defaults of, the Defaulting Lender, and
the Defaulting Lender shall be liable to each such party for all amounts so
expended, such amounts to be repaid either through funds received or to be
received by the Agent or the other Lenders as a payment on the Notes or other
indebtedness hereunder, or otherwise through the general funds of such
Defaulting Lender. For so long as any Lender is a Defaulting Lender, such Lender
shall be deemed to have transferred and assigned to the Non-defaulting Lenders
all right, title and interest of such Defaulting Lender in and to the Credit
Facility, this Agreement, the Notes, and the other Loan Documents, as security
for the payment of all amounts owing from such Defaulting Lender to the
Non-defaulting Lenders or that may be advanced by the Non-defaulting Lenders to
or for the benefit of Borrower on behalf of such Defaulting Lender. Once all
obligations of the Defaulting Lender to the Agent and the other Lenders have
been satisfied, so that no default by such Lender exists hereunder, (1) the
Non-defaulting Lenders shall be deemed to have transferred and reassigned to
such Lender the right, title and interest of such Lender in and to the Credit
Facility previously transferred and assigned as security to the Non-defaulting
Lenders, (2) such Lender shall be entitled to be reinstated as a Lender
hereunder and (3) subject to the continued compliance with the terms hereof,
such Lender shall thereafter be entitled to receive all amounts payable with
respect to its interest in the Credit Facility.
(m) ACTIONS REQUIRING CONSENT OF THE LENDERS.
(1) Except as set forth in this paragraph (m), Agent shall be
entitled to take all action and exercise all powers relating to the
Credit Facility, the Loan Documents, and the Lenders' rights and
obligations thereunder.
(2) Agent is not authorized to, and shall not, undertake any of
the following
21
<PAGE>
actions without the written consent of all the Lenders:
(i) change the maximum availability hereunder, or the Current
Committed Amount;
(ii) change the rate of interest payable with respect to the
Credit Facility;
(iii) change the date on which any payment on the Credit
Facility is due or extend the final maturity date of any Credit
Facility;
(iv) waive any payment default under any Note;
(v) release any collateral securing the Credit Facility;
(vi) release Borrower or Guarantor from liability on the
Credit Facility;
(vii) accelerate the maturity of the Notes;
(viii) waive compliance by Borrower with, or amend the terms of,
Section 5(c), 5(d), 5(e) or 5(f) hereof, or any financial
covenant set forth in Section 7 hereof; or
(ix) amend or modify this Section 10(m)(2).
(3) Agent is not authorized to, and shall not, without the
written consent of Lenders holding at least seventy-five percent (75%)
of the interests in the Credit Facility waive compliance by Borrower
with, or amend the terms of, any covenant set forth in Section 4,
Section 5 (except as set forth in subsection (m)(2)(viii) above) or
Section 6 hereof.
(4) No Lender shall be entitled to take any action with respect
to the obligations owed to it under any Note, any Guaranty Agreement or
any other Loan Document including, without limitation, acceleration of
the maturity of such Lender's Note, it being agreed that all of such
actions shall be taken by Agent in the manner prescribed in this
Agreement.
(n) RESIGNATION; SUCCESSOR AGENT. The Agent may resign at any time from
the agency created hereby by giving written notice of such resignation to
Borrower and the Lenders, and the Agent shall be relieved of all duties and
obligations arising hereunder after the time of such resignation. Upon receipt
of notice of such resignation, the Lenders shall appoint a successor agent
hereunder or, if the Lenders fail to so appoint a successor agent within thirty
(30) days after receipt of notice of the resignation of the Agent, any Lender
may petition a court of competent jurisdiction to appoint a successor agent
hereunder. Upon appointment and acceptance of the agency created hereby by the
successor agent, such successor agent shall succeed to all the rights, duties
and obligations of the Agent hereunder.
(o) NO THIRD PARTY BENEFICIARY. Nothing in this Section 10, express or
implied, is
22
<PAGE>
intended or shall be construed to give to any person other than the
Lenders and the Agent (including, without limitation, Borrower) any right or
remedy, and all terms and provisions of this Section 10 shall be for the sole
benefit of the Lenders and the Agent.
Section 11. DISCLOSURE. Any additions or exceptions applicable to the
terms of this Agreement, the representations and warranties of Borrower herein
or the covenants hereof shall only be those disclosed in writing to Agent
concurrently with the execution hereof .
Section 12. MISCELLANEOUS.
(a) NOTICES. All notices shall be in writing or by telecopy or telegram,
confirmed in writing and shall be sufficient in all respects if delivered or
sent by registered or certified mail to the address set forth on the signature
page of this Agreement. Any party may, by proper written notice hereunder to the
other parties, change the address to which notices shall thereafter be sent.
(b) SUCCESSORS AND ASSIGNS. All covenants and agreements herein
contained by or on behalf of Borrower shall bind its successors and assigns. No
Lender shall be entitled to assign its rights and obligations under this
Agreement and the other Loan Documents, except (i) in the event that a financial
institution is the successor to all or substantially all of the assets of any
Lender, (ii) assignments to Affiliated Lenders, and (iii) to the extent
expressly set forth herein or therein. For purposes hereof, "AFFILIATED LENDERS"
shall mean any other financial institution directly or indirectly, controlling,
controlled by, or under common control with, such Lender.
(c) RENEWALS AND EXTENSIONS. All provisions of this Agreement shall
apply with equal force and effect to each and all renewals and extensions, in
whole or in part, of the Notes or the Credit Facility.
(d) PRIOR LOAN AGREEMENT. Agent, the Lenders and Borrower hereby agree
that this Agreement amends, restates and supersedes all prior agreements,
including without limitation, the Prior Loan Agreement, but in no way acts as a
release or relinquishment of the liens and/or security interests securing
payment of the indebtedness advanced pursuant to the Prior Loan Agreement and
such liens and/or security interests (including, without limitation, those
created by that certain Accounts Receivable and Inventory Security Agreement
dated March 5, 1993 as most recently amended by First Amendment to Amended and
Restated Accounts Receivable and Inventory Security Agreement of even date
herewith) are hereby renewed, extended, ratified, confirmed and carried forward
by Borrower in all respects to secure the Notes and the Credit Facility.
(e) NO WAIVER; REMEDIES CUMULATIVE. No course of dealing on the part of
Agent, any Lender or any officer or employee of Agent or any Lender, or any
failure or delay by Agent or any Lender with respect to exercising any right,
power, or privilege of Agent or any Lender under this Agreement or any other
Loan Document shall operate as a waiver thereof. The rights and remedies of
Agent and the Lenders under this Agreement and the other Loan Documents shall be
cumulative and the exercise or partial exercise of any such right or remedy
shall not preclude the exercise of any other right or remedy.
(f) GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE
DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED
23
<PAGE>
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
(g) INVALID PROVISIONS. In the event any one or more of the provisions
contained in this Agreement or any of the other Loan Documents shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement or the other Loan Documents. Furthermore, in lieu of such
invalid, illegal or unenforceable provision, there shall automatically be added
a provision as similar in terms to such invalid, illegal or unenforceable
provision as may be possible and as may be valid, legal and enforceable.
(h) USURY SAVINGS CLAUSE. Nothing contained in this Agreement or in any
of the other Loan Documents shall be construed to obligate Borrower, under any
circumstances whatsoever, to pay interest in excess of the maximum non-usurious
interest rate applicable to Borrower. In the event that any sums received from
Borrower are at any time under applicable law deemed to be in excess of the
maximum non-usurious amount Agent or the Lenders could collect under applicable
usury law, the effective rate of interest on the loans hereunder shall be
reduced to and be the maximum non-usurious interest rate permitted under
applicable law and Borrower and all sureties, endorsers and guarantors shall
accept as their sole remedy under such circumstances either the return of any
sums of interest which may have been collected and which produced a rate of
interest in excess of the applicable maximum non-usurious interest rate or the
application of those sums as a credit against the unpaid principal amount of the
loan, whichever remedy may be elected by Agent.
(i) HEADINGS. The captions, headings and arrangements used in this
Agreement are for convenience only and do not in any way affect. limit, amplify
or modify the terms and provisions hereof.
Section 13. ARBITRATION. The parties hereto agree to be bound by the
terms and provisions of the current Arbitration Program attached as Exhibit "C"
hereto, which is incorporated by reference herein, pursuant to which any and all
disputes shall be resolved by mandatory binding arbitration upon the request of
any party.
Section 14. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after
the date hereof, each reference in the other Loan Documents to the Loan
Agreement shall mean and be a reference to the Loan Agreement as amended and
restated hereby.
Section 15. ENTIRE AGREEMENT. THIS WRITTEN LOAN AGREEMENT, TOGETHER WITH
THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
24
<PAGE>
If this evidences your understanding of the agreements herein, please
execute in the space provided.
Sincerely,
KBK FINANCIAL, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice:
2200 City Center II
301 Commerce Street
Fort Worth, Texas 76102
Attention: Robert J. McGee
Telephone No.: 817/258-6020
Telecopy No.: 817/258-6110
ACCEPTED AND AGREED TO:
BANK ONE, TEXAS, N.A.
By: _______________________________
Barry A. Kelly, Senior Vice President
Address for Notice:
910 Travis
Houston, Texas 77002
Telephone No.: 713-751-3831
Telecopy No.: 713-751-6199
WELLS FARGO BANK (TEXAS), N.A.
By: _______________________________
Name:______________________________
Title:_______________________________
Address for Notice:
1000 Louisiana, 3rd Floor
Houston, Texas 77002
Telephone No.: 713-250-3784
25
<PAGE>
Telecopy No.: 713-250-7031
FLEET BANK, N.A.
By:___________________________________
Stephanie Wilson-Flaherty, Vice President
Address for Notice:
592 Fifth Avenue
Mail Stop NYNYF02A
New York, New York 10036
Telephone No.: (212) 819-6462
Telecopy No.: (212) 819-6518
OVERTON BANK AND TRUST, N.A.
By: _______________________________
Name:______________________________
Title:_______________________________
Address for Notice:
777 Main Street
Fort Worth, Texas 76102
Telephone No.: (817) 377-5046
Telecopy No.: (817) 336-5615
BANK OF AMERICA, TEXAS, N.A.
By:________________________________
George Smith, Vice President
Address for Notice:
333 Clay, Suite 3600
Houston, Texas 77002
Telephone No.: 713-652-3615
Telecopy No.: 713-652-3619
26
<PAGE>
GUARANTOR:
By execution hereof the undersigned Guarantor consents to the terms of
this Agreement including, without limitation, the obligations imposed pursuant
to Section 5(b) hereof and the waivers set forth in Section 8 hereof.
KBK CAPITAL CORPORATION
By: ______________________________
Name: ____________________________
Title: ___________________________
Address for Notice:
2200 City Center II
301 Commerce Street
Forth Worth, Texas 76102
27
<PAGE>
SCHEDULE 1
LENDER INTEREST IN CREDIT FACILITY
Bank One, Texas, N.A. 30%
Wells Fargo Bank (Texas), N.A. 20%
Bank of America, Texas, N.A. 20%
Fleet Bank, N.A. 20%
Overton Bank & Trust, N.A. 10%
<PAGE>
EXHIBIT "B"
REVOLVING CREDIT FACILITY
FORM OF
BORROWING BASE CERTIFICATE
Dated______________, 199__
In accordance with the Third Amended and Restated Loan Agreement
("Agreement") dated August _____, 1997 among KBK Financial, Inc. ("BORROWER"),
the lenders described therein and Bank One, Texas, N.A., as agent for itself and
the other lenders described therein (the "AGENT"), as the same has been amended
from time to time, I, an authorized financial officer of Borrower, hereby
certify to the Agent that the following schedule accurately states Borrower's
Borrowing Base with respect to the Revolving Credit Facility as of the date
hereof:
A. LOANS
1. Loans from Borrower to $________
Borrower's Clients
2. Plus: Outstanding Letters of Credit $________
3. Less: Loans sold to KBK Receivables $________
4. Less: Participated Portion of Loans $________
5. Net Amount of Loans $________
6. Less:
(A) One or more payments are past due by
more than 90 days $________
(B) Loans to Affiliates $________
(C) Loans to obligors subject to
bankruptcy proceedings $________
(D) Principal amount is less than $25,000 $________
(E) Foreign obligor $________
(F) Value of loans in excess of 15% of Borrower's
Primary Capital $________
(G) [Intentionally Deleted]
(H) Not in compliance with Borrower's Credit
and Collection Policy $________
(I) Is not denominated or payable in
United States Dollars $________
(J) Maturity of more than (x) 72 months with respect
to term loans, or (y) 24 months with respect
B-1
<PAGE>
to lines of credit $________
(K) Payment terms do not require monthly payments
of interest $________
(L) Subject to claims or offsets by the obligor
thereof $________
(M) Obligor is a governmental entity $________
(N) Obligor's primary business involves gaming,
nuclear waste, bio-tech, or real estate
industries $________
(O) Principal amortization schedule of more than
10 years (with respect to term loans), or the
remaining principal balance is not due in less
than six years from such date $________
(P) Does not comply with FIRREA $________
(Q) Exceeds aggregate of the following, which has
been pledged to secure same (i) 85% of appraised
value of equipment, (ii) 50% of the lesser of
cost or appraised value of inventory, (iii) 80%
of the book value of receivables, (iv) 75%
of appraised value of real estate, and (v) 90%
of market value of marketable securities;
provided, however, that only the funded
amount to an obligor in excess of the percentage
limitations set forth in (i) through (v) will
be excluded from such Borrowing Base $________
(R) [Intentionally Deleted]
(S) Nonaccrual Loans $________
7. Eligible Loans $________
8. 80% of Line 7 (Loan Borrowing Base) $________
B. COLLATERAL ACCOUNTS
1. Accounts Receivable purchased by Borrower from $________
Borrower's Clients
2. Less: Participations, etc. $________
3. Less: Accounts Sold to KBK Receivables $________
4. Net amount of Accounts Receivable $________
5. Less:
(A) Amounts due to clients $________
(B) Accounts more than 90 days from
B-2
<PAGE>
purchase date $________
(C) Accounts more than 120 days from
date of invoice $________
(D) Due date more than 90 days from invoice date $________
(E) Affiliate accounts $________
(F) Accounts from account debtors
subject to bankruptcy proceedings $________
(G) Excluded foreign accounts $________
(H) Value of accounts purchased from
Borrower's Clients in excess of the greater
of credit loss reserve or 20% of
Borrower's Primary Capital $________
(I) Value of governmental accounts over $________
25% of Borrower's Primary Capital
(J) [Intentionally Deleted]
6. Eligible Accounts Receivable $________
7. 85% of Line 6 (A/R Borrowing Base) $________
C. AVAILABLE BALANCE
1. Outstanding Loan Balance $________
2. Outstanding Letters of Credit $________
3. Sum of Lines C.1 and C.2 $________
4. Sum of Lines A.8 and B.7 (Borrowing Base) $________
5. Excess of Line C.4 over Line C.3 $________
D. OVER-ADVANCE
1. Revolving Borrowing Base (Line C.4 above) $________
2. The Lesser of: (i) 10% of Line D.1 or (ii) Amount from
Line A.6(F) $________
3. Outstanding Over-Advance Loan Balance $________
4. Excess of Line D.2 over Line D.3 $________
I further certify to the Agent that (a) no default under the Agreement
is existing on the date of this certificate, (b) the foregoing report is true
and correct as of the date hereof, and (c) the items mentioned herein constitute
collateral in accordance with the terms of the Agreement. Capitalized terms used
herein and not otherwise defined herein shall have the respective meanings given
thereto
B-3
<PAGE>
in the Agreement.
By:__________________________
Name:________________________
Title: Authorized Financial
Officer of KBK
<PAGE>
EXHIBIT "C"
[ARBITRATION AGREEMENT]
<PAGE>
EXHIBIT "D"
FORM OF
COMPLIANCE CERTIFICATE
FINANCIAL COVENANT REQUIRED RATIO/AMOUNT Actual
RATIO/AMOUNT
Tangible Net Worth $10,000,000.00 -----------
Ratio of Funded Debt to Not greater than 3.00 to 1.00 -----------
Primary Capital
Amount of other funded Not greater than $1,000,000 -----------
indebtedness
Interest Coverage Ratio Not less than 1.50 to 1.00 -----------
I further certify to the Agent that (a) no default under the Agreement
is existing on the date of this certificate, and (b) the foregoing report is
true and correct as of the date hereof. Capitalized terms used herein and not
otherwise defined herein shall have the respective meanings given thereto in the
Agreement.
By:_________________________________________
Name:_______________________________________
Title: Authorized Financial
Officer of KBK Financial, Inc.
<PAGE>
EXHIBIT "E"
[FORM OF]
CURRENT COMMITMENT LETTER
August _____, 1997
KBK Financial, Inc.
2200 City Center II
301 Commerce Street
Fort Worth, Texas 76102
Re: Third Amended and Restated Loan Agreement of even date herewith
(the "Loan Agreement"), among KBK Financial, Inc. ("Borrower"),
Bank One, Texas, N.A., Wells Fargo Bank (Texas), N.A., Bank of
America Texas, N.A., Overton Bank & Trust, N.A., and Fleet Bank,
N.A. (collectively, the "Banks")
Gentlemen:
In accordance with Section 5(c) of the Loan Agreement, the Borrower has
requested and the Banks hereby agree that, effective this date, the Current
Committed Amount allowable under the Credit Facility shall be as follows:
Current Committed Revolving Amount $40,000,000
Current Committed Over-Advance Amount $5,000,000
All capitalized terms used herein which have been defined in the Loan Agreement
have been used in accordance with the definitions ascribed to them in the Loan
Agreement.
Yours very truly,
BANK ONE, TEXAS, N.A.,
By:_____________________________
Name:___________________________
Title:____________________________
<PAGE>
WELLS FARGO BANK (TEXAS),
N.A.
By:_____________________________
Name:___________________________
Title:____________________________
BANK OF AMERICA, TEXAS, N.A.
By:_____________________________
Name:___________________________
Title:____________________________
FLEET BANK, N.A.
By:_____________________________
Name:___________________________
Title:____________________________
OVERTON BANK & TRUST, N.A.
By:_____________________________
Name:___________________________
Title:____________________________
ACKNOWLEDGED AND AGREED TO:
"BORROWER"
KBK FINANCIAL, INC.
By_________________________________
Name_______________________________
Title________________________________
"GUARANTOR"
KBK CAPITAL CORPORATION
<PAGE>
By_________________________________
Name_______________________________
Title________________________________
<PAGE>
CONSENT OF GUARANTOR
Dated as of August _____, 1997
The undersigned, KBK CAPITAL CORPORATION, as the Guarantor referred to
in the foregoing Amended and Restated Loan Agreement ("Amendment") Amendment,
hereby consents to the foregoing Amendment and hereby confirms to and agrees
with each Lender that (i) the guaranties in effect on the date hereof to which
Guarantor is a party are, and shall continue to be, in full force and effect and
are hereby confirmed and ratified in all respects except that, upon the
effectiveness of, and on and after the date of, the Amendment, all references in
the guaranties to the Loan Agreement, the Loan Documents, the Security Documents
and Notes shall mean the Loan Agreement, the Loan Documents, the Security
Documents and Notes, as modified, increased and amended by the Amendment and
(ii) the guaranties do, and shall continue to, guarantee the payment by the
Borrower to each Lender of its obligations under the Loan Agreement, the Loan
Documents, the Security Documents and Notes, as modified, increased and amended
by the Amendment.
KBK CAPITAL CORPORATION
By:_____________________________
Name:___________________________
Title:____________________________
<PAGE>
THIRD AMENDED AND RESTATED
LOAN AGREEMENT
KBK FINANCIAL, INC., AS BORROWER,
AND KBK CAPITAL CORPORATION, AS GUARANTOR
AND
BANK ONE, TEXAS, N.A., AS AGENT,
WELLS FARGO BANK (TEXAS), N.A.,
BANK OF AMERICA, TEXAS, N.A.,
OVERTON BANK AND TRUST, N.A., AND
FLEET BANK, N.A.
AS LENDERS
AUGUST ____, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. CREDIT FACILITY............................................... 1
A. Revolving Credit Notes............................................... 1
(a) REVOLVING NOTES............................................... 1
(b) MAXIMUM REVOLVING CREDIT AVAILABILITY; ADVANCE PROCEDURE:..... 1
(c) TERM.......................................................... 2
(d) RATE.......................................................... 2
(e) REPAYMENT TERMS............................................... 2
(f) CONCERNING LETTERS OF CREDIT.................................. 2
(g) COMMITMENT FEES............................................... 2
(h) AGENT FEE..................................................... 2
(i) PURPOSE....................................................... 3
B. Revolving Credit Notes (Over-Advance)................................ 3
(a) REVOLVING NOTES (OVER-ADVANCE)................................ 3
(b) MAXIMUM OVER-ADVANCE AVAILABILITY; ADVANCE PROCEDURE:......... 3
(c) TERM.......................................................... 3
(d) RATE.......................................................... 3
(e) REPAYMENT TERMS............................................... 3
(f) PURPOSE....................................................... 3
Section 2. INTEREST...................................................... 3
Section 3. REPRESENTATION AND WARRANTIES................................. 7
(a) ORGANIZATION, AUTHORITY. ETC......................................... 7
(b) FINANCIAL STATEMENTS................................................. 7
(c) INVESTMENTS AND LIABILITIES.......................................... 7
(e) TAX RETURNS.......................................................... 8
(f) NO DEFAULT........................................................... 8
(g) ERISA; MARGIN SECURITIES............................................. 8
(h) PATENTS. ETC......................................................... 8
(i) NO UNTRUE STATEMENTS................................................. 8
(j) STATUS OF COLLATERAL................................................. 8
Section 4. REPORTING REQUIREMENTS............................................... 9
(a) ANNUAL FINANCIAL STATEMENTS.......................................... 9
(b) QUARTERLY FINANCIAL STATEMENTS....................................... 9
(c) QUARTERLY REPORTS.................................................... 9
(d) MONTHLY REPORTS...................................................... 10
(e) NOTICE OF DEFAULT.................................................... 10
(f) NOTICE OF LITIGATION................................................. 10
(g) OTHER INFORMATION.................................................... 10
(h) BUSINESS PLANS....................................................... 10
Section 5. AFFIRMATIVE COVENANTS................................................ 10
(a) COMPLIANCE AND PERFORMANCE........................................... 10
(b) REIMBURSEMENT: INDEMNITY............................................. 10
i
<PAGE>
(c) CURRENT COMMITTED AMOUNT............................................. 11
(d) BORROWING BASE....................................................... 11
(e) ELIGIBLE LOANS AND ELIGIBLE COLLATERAL ACCOUNTS...................... 12
(f) SECURITY............................................................. 13
(g) GUARANTY............................................................. 14
Section 6. NEGATIVE COVENANTS................................................... 14
(a) INVESTMENTS.......................................................... 14
(b) MERGER AND CONSOLIDATION............................................. 14
(c) DIVIDENDS AND DISTRIBUTIONS.......................................... 14
(d) SALE OF ASSETS....................................................... 15
(e) INDEBTEDNESS......................................................... 15
(f) LIENS................................................................ 15
Section 7. FINANCIAL COVENANTS.................................................. 16
Section 8. DEFAULT AND REMEDIES................................................. 17
Section 9. CLOSING.............................................................. 17
Section 10. THE AGENT............................................................ 18
(a) CREATION OF AGENCY................................................... 18
(b) PAYMENTS AND DISTRIBUTIONS........................................... 18
(c) NOTICES.............................................................. 19
(d) INDEMNITY............................................................ 19
(e) RELIANCE............................................................. 19
(f) TRUTH OF REPRESENTATIONS............................................. 19
(g) BUSINESS WITH BORROWER............................................... 19
(h) INDEPENDENT INVESTIGATIONS........................................... 19
(i) PRIOR ADJUDICATION OF CERTAIN ACTIONS................................ 20
(j) REMEDIES UPON DEFAULT................................................ 20
(k) FUNDINGS BY LENDERS.................................................. 20
(l) DEFAULT BY A LENDER.................................................. 21
(m) ACTIONS REQUIRING CONSENT OF THE LENDERS............................. 21
(n) RESIGNATION; SUCCESSOR AGENT......................................... 22
(o) NO THIRD PARTY BENEFICIARY........................................... 22
Section 11. DISCLOSURE........................................................... 22
Section 12. MISCELLANEOUS........................................................ 23
(a) NOTICES.............................................................. 23
(b) SUCCESSORS AND ASSIGNS............................................... 23
(c) RENEWALS AND EXTENSIONS.............................................. 23
(d) PRIOR LOAN AGREEMENT................................................. 23
(e) NO WAIVER; REMEDIES CUMULATIVE....................................... 23
(f) GOVERNING LAW........................................................ 23
(g) INVALID PROVISIONS................................................... 23
(h) USURY SAVINGS CLAUSE................................................. 24
(i) HEADINGS............................................................. 24
Section 13. ARBITRATION.......................................................... 24
ii
<PAGE>
Section 14. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS........................ 24
Section 15. ENTIRE AGREEMENT..................................................... 24
</TABLE>
iii
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM (Identity specific financial statements) AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,869,516
<SECURITIES> 0
<RECEIVABLES> 45,790,578
<ALLOWANCES> (1,928,629)
<INVENTORY> 0
<CURRENT-ASSETS> 5,492,720
<PP&E> 3,676,054
<DEPRECIATION> 1,499,307
<TOTAL-ASSETS> 56,400,932
<CURRENT-LIABILITIES> 31,832,020
<BONDS> 0
0
0
<COMMON> 35,472
<OTHER-SE> 24,533,440
<TOTAL-LIABILITY-AND-EQUITY> 56,400,932
<SALES> 0
<TOTAL-REVENUES> 15,191,038
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,198,077
<LOSS-PROVISION> (875,000)
<INTEREST-EXPENSE> 2,665,552
<INCOME-PRETAX> 3,452,409
<INCOME-TAX> 1,387,929
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,064,480
<EPS-PRIMARY> .62
<EPS-DILUTED> .60
</TABLE>
