UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-24220
KBK CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2416103
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
301 COMMERCE, SUITE 2200, FORT WORTH, TEXAS 76102-4122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 258-6000
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR
SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $0.01 PAR VALUE 3,274,033
(SHARES OUTSTANDING AS OF JUNE 30, 1998)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
==============================================================================
Page 1 of 15
<PAGE>
KBK CAPITAL CORPORATION
FORM 10-QSB -- Quarter Ended June 30, 1998
Page
Number
PART I. FINANCIAL INFORMATION
Item 1- Financial Statements
Consolidated Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997 2
Consolidated Statements of Income for the Three Months
Ended June 30, 1998 and 1997 (unaudited) and the Six
Months Ended June 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity
for the Year Ended December 31, 1997 and Six Months Ended
June 30, 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 (unaudited) and June 30, 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-13
PART II. OTHER INFORMATION
Item 1- Legal Proceedings 14
Item 4- Submission of Matters to a Vote of Security Holders 14
Item 5- Other Information 14
Item 6- Exhibits and Reports on Form 8-K 15
Signatures 15
1
<PAGE>
PART 1. - ITEM 1 - FINANCIAL STATEMENTS
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
(unaudited)
---------------------------------
ASSETS
<S> <C> <C>
Cash ....................................................................................... $ 2,144,118 $ 4,869,516
Accounts receivable, net ................................................................... 14,569,967 9,778,292
Loans receivable, net ...................................................................... 45,009,803 23,863,677
Retained interest in sold assets, net ...................................................... 13,592,575 12,148,609
Less allowance for credit losses ........................................................... (1,959,940) (1,928,629)
---------------------------------
Total receivables, net ........................................................... 71,212,405 43,861,949
Premises and equipment, net of accumulated depreciation of
$1,860,762 and $1,499,307 at June 30, 1998 and
December 31, 1997, respectively .................................................. 2,072,722 2,176,747
Intangible assets, less accumulated amortization of ........................................ 2,075,177
and $1,908,099 at June 30, 1998 and .............................................. 3,678,316 3,875,072
December 31, 1997, respectively
Other assets ............................................................................... 1,830,988 1,617,648
---------------------------------
$ 80,938,549 $ 56,400,932
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank line of credit ........................................................................ $ 38,400,000 $ 21,000,000
Commercial paper ........................................................................... 3,500,000 --
Due to clients ............................................................................. 13,169,311 9,814,897
Accounts payable and other liabilities ..................................................... 461,952 767,793
Income taxes payable ....................................................................... -- 11,307
Deferred revenue ........................................................................... 317,445 238,023
---------------------------------
Total liabilities ...................................................... 55,848,708 31,832,020
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value. Authorized 100,000 shares; no
shares issued and outstanding .................................................... -- --
Common stock, $.01 par value. Authorized 10,000,000 shares; issued
3,548,600 shares and outstanding 3,274,033 at June 30, 1998 and
issued 3,547,200 shares and outstanding 3,342,033 at December 31, 1997 ........... 35,486 35,472
Additional paid-in capital ................................................................. 16,594,591 16,584,805
Retained earnings .......................................................................... 10,724,387 9,301,001
Treasury stock ............................................................................. (2,264,623) (1,352,366)
---------------------------------
Total stockholders' equity ............................................. 25,089,841 24,568,912
---------------------------------
$ 80,938,549 $ 56,400,932
=================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earned discount income ..................................... $ 550,186 $ 570,361 $1,042,297 $2,927,350
Interest income - Loans .................................... 1,100,156 724,623 1,924,069 1,563,591
Servicing fees ............................................. 2,039,437 1,802,634 4,045,529 1,802,634
Other income - Fees ........................................ 945,464 550,379 1,720,602 953,457
---------- ---------- ---------- ----------
Total revenue ...................................... 4,635,243 3,647,997 8,732,497 7,247,032
Interest expense ........................................... 678,638 609,668 1,169,930 1,699,932
---------- ---------- ---------- ----------
Income after interest expense ..................... 3,956,605 3,038,329 7,562,567 5,547,100
Provision for credit losses ................................ 400,000 200,000 700,000 275,000
---------- ---------- ---------- ----------
Income after interest expense and
provision for credit losses ................... 3,556,605 2,838,329 6,862,567 5,272,100
Operating expenses:
Salaries and employee benefits ......................... 1,281,143 1,067,665 2,458,301 2,120,582
Amortization of intangible assets ...................... 98,378 94,897 196,756 189,279
Occupancy and equipment ................................ 368,871 314,348 727,976 613,115
Professional fees ...................................... 72,148 55,474 186,871 102,457
Other .................................................. 540,504 450,098 944,644 809,985
---------- ---------- ---------- ----------
Total operating expenses .............................. 2,361,044 1,982,482 4,514,548 3,835,418
---------- ---------- ---------- ----------
Income before income taxes ............................ 1,195,561 855,847 2,348,019 1,436,682
Income taxes:
Federal ................................................ 406,415 302,209 783,516 503,466
State .................................................. 71,970 51,918 141,117 83,385
---------- ---------- ---------- ----------
Total income taxes .................................... 478,385 354,127 924,633 586,851
---------- ---------- ---------- ----------
Net income ................................................. $ 717,176 $ 501,720 $1,423,386 $ 849,831
========== ========== ========== ==========
Net income per share-basic ................................. $ 0.22 $ 0.15 $ 0.43 $ 0.26
========== ========== ========== ==========
Net income per share-diluted ............................... $ 0.19 $ 0.15 $ 0.37 $ 0.26
========== ========== ========== ==========
Weighted-average common shares
outstanding-basic ...................................... 3,274,033 3,310,133 3,296,058 3,310,133
========== ========== ========== ==========
Weighted-average common shares
outstanding-diluted .................................... 3,788,359 3,316,724 3,819,515 3,315,565
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional Total
Shares paid-in Retained Treasury stockholders'
Outstanding Amount capital earnings stock equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 .......... 3,310,133 $35,472 $16,370,555 $ 7,236,521 $(1,502,633) $ 22,139,915
Purchase of treasury stock .......... (18,100) -- -- -- (179,233) (179,233)
Issuance of common stock ............ 50,000 -- 214,250 -- 329,500 543,750
Net Income .......................... -- -- -- 2,064,480 -- 2,064,480
----------------------------------------------------------------------------------------
Balance, December 31, 1997 .......... 3,342,033 $35,472 $16,584,805 $ 9,301,001 $(1,352,366) $ 24,568,912
Purchase of treasury stock .......... (69,400) -- -- -- (912,257) (912,257)
Issuance of common stock ............ 1,400 14 9,786 -- -- 9,800
Net Income .......................... -- -- -- 1,423,386 -- 1,423,386
----------------------------------------------------------------------------------------
Balance, June 30, 1998 .............. 3,274,033 $35,486 $16,594,591 $10,724,387 $(2,264,623) $ 25,089,841
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ...................................................... $ 1,423,386 $ 849,831
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization .............................. 571,705 469,830
Provision for credit losses ................................ 700,000 275,000
Decrease (increase) in acounts receivable, net ............. (5,460,364) 46,166,581
Net increase in retained interest in sold assets ........... (1,518,326) (15,253,094)
Increase in other assets ................................... (213,340) (246,162)
Increase in due to clients ................................. 3,354,414 1,343,441
Decrease in accounts payable and other liabilities ......... (305,841) (372,955)
Increase in interest payable for the sold assets ........... 74,360 193,289
Increase (decrease) in income taxes payable ................ (11,307) 125,040
Increase (decrease) in deferred revenue .................... 79,422 (59,417)
------------ ------------
Net cash provided by (used in) operating activities (1,305,891) 33,491,384
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in loans receivable, net ........... (21,146,126) 3,848,722
Purchase of premises and equipment ......................... (270,924) (567,110)
------------ ------------
Net cash provided by (used in) investing activities (21,417,050) 3,281,612
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (repayments to) the banks .............. 17,400,000 (36,000,000)
Increase in commercial paper ............................... 3,500,000 --
Repurchase of common stock ................................. (912,257) --
Issuance of common stock ................................... 9,800 --
------------ ------------
Net cash provided by (used in) financing activities 19,997,543 (36,000,000)
------------ ------------
Net increase (decrease) in cash ................... (2,725,398) 772,996
Cash at beginning of period ..................................... 4,869,516 1,361,225
------------ ------------
Cash at end of period ........................................... $ 2,144,118 $ 2,134,221
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL. The consolidated financial statements of KBK Capital Corporation
(the "Company") and its wholly owned subsidiaries, KBK Financial, Inc. ("KBK")
and KBK Receivables Corporation ("SPC"), included herein, are unaudited for all
periods ended June 30, 1998 and 1997. However, such unaudited statements reflect
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary to fairly depict the results for the periods
presented. Certain information and note disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP"), have been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission. The Company believes that
the disclosures made herein are adequate to make the information presented not
misleading.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year. It is suggested that these consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and notes thereto for the years ended December 31, 1997 and 1996
which are included in the Company's 1997 annual report.
2. BANK LINE OF CREDIT. KBK maintains a $55.0 million multi-bank line of credit
("Credit Facility"), which had $45.0 million committed at June 30, 1998, and is
secured by substantially all of KBK's assets. The Credit Facility is comprised
of a $40.0 million Revolving Credit Facility ("Revolving Facility") and a $5.0
million "Over Advance" Facility which allows for borrowing base availability to
fund amounts in excess of client concentration limits. Under this revolving
credit facility, KBK is entitled to the issuance of one or more letters of
credit which in total shall not exceed the lesser of $5.0 million or the
remainder of the revolving borrowing base, less all amounts outstanding on the
revolving credit facility. In May 1998, KBK renegotiated its bank loan agreement
to include a $5.0 million bridge facility to allow the Company to finance
certain mezzanine loans at the banks' prime rate plus 1.25%. This portion of the
facility expires October 12, 1998 and is a sublimit under the total bank
commitment. 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 May 14, 1999; however, the lenders may terminate this
portion of the facility at any time upon 120 days prior written notice to KBK.
As of June 30, 1998, there was $35.6 million outstanding under the Revolving
Facility, $2.8 million outstanding under the Over Advance Facility, and there
were $1.5 million in letters of credit outstanding under this revolving line of
credit. There were no amounts outstanding under the mezzanine portion of the
Credit 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 June 30, 1998, KBK was in
compliance with the financial covenants and borrowing base limitations, and
there was $6.3 million in available credit under this line.
6
<PAGE>
3. STOCKHOLDERS' EQUITY. During the quarter ended June 30, 1998, the Company
acquired 10,000 shares of its common stock in private purchases pursuant to the
Stock Repurchase Plan initiated in 1995.
The Company has repurchased 274,567 net shares since the Repurchase Program was
initiated. The Company issued 1,400 shares of its common stock in connection
with the exercise of employee stock options per the terms of the Company's 1994
Stock Option Plan.
4. SALE OF ASSETS. In April 1997, KBK completed a sale of its purchased
receivable and inventory loan portfolio, in which a substantial portion of KBK's
owned receivables and inventory loans were transferred into SPC, a newly created
and wholly-owned subsidiary, also known as a special purpose corporation. Under
this structure, SPC sells eligible receivables to a conduit, which in turn
issues commercial paper to fund its ongoing purchase of assets. This structure
allows KBK to effectively fund its portfolio of earning assets on a non-recourse
basis, through the commercial paper conduit, potentially resulting in a
substantial reduction in its funding costs. The nature of this sale is a
"Revolving Period" sale where receivables are transferred at the inception and
periodically (weekly or monthly) thereafter for a five year period. During the
Revolving Period, SPC uses most of the cash collections to purchase additional
receivables from KBK. The transfer of earning assets into SPC, and subsequent
sale to the commercial paper conduit, is treated as a sale pursuant to GAAP. The
assets sold to SPC and the commercial paper conduit continue to be serviced by
KBK, which receives on-going revenue in the form of a servicing fee which is
derived from the receipts generated from the transferred earning assets, less
interest and fees paid to the commercial paper holders and the conduit facility
sponsors. Neither a servicing asset 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 $13,592,575 as of June 30, 1998
remains on the consolidated balance sheet and represents amounts due from the
conduit.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
THE FOLLOWING COMMENTARY PRESENTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIODS
PRESENTED. CERTAIN OF THE STATEMENTS INCLUDED BELOW, INCLUDING THOSE REGARDING
FUTURE FINANCIAL PERFORMANCE OR RESULTS OR THOSE THAT ARE NOT HISTORICAL FACTS,
ARE, OR CONTAIN, "FORWARD-LOOKING" INFORMATION AS THAT TERM IS DEFINED IN THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE WORDS "EXPECT," "BELIEVE,"
"ANTICIPATE," "PROJECT," "ESTIMATE," AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THE COMPANY CAUTIONS READERS THAT ANY SUCH
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE OR EVENTS AND SUCH
STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING, BUT NOT
LIMITED TO, INDUSTRY CONDITIONS, GENERAL ECONOMIC CONDITIONS, INTEREST RATES,
COMPETITION, ABILITY OF THE COMPANY TO SUCCESSFULLY MANAGE ITS GROWTH, AND OTHER
FACTORS DISCUSSED BELOW AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR
THE YEAR ENDED DECEMBER 31, 1997. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT,
THOSE ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM THOSE INDICATED OR
IMPLIED IN THE FORWARD-LOOKING STATEMENTS. THIS NARRATIVE SHOULD BE READ IN
CONJUNCTION WITH INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES APPEARING IN
7
<PAGE>
THIS REPORT AND THE AUDITED FINANCIAL STATEMENTS APPEARING IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997.
The Company, through its wholly owned subsidiaries, KBK and SPC, 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. Thus, the Company often relies primarily on the quality
of the assets and account debtors of the client, rather than the financial
condition of the client itself.
In one product line of its working capital financings, the Company
purchases accounts receivable for a negotiated price, usually less than their
face amount, based upon the size, age and type of accounts being purchased, the
quality of client documentation and the Company's judgment as to the payment
history and creditworthiness of the account debtors. The Company generates
revenue through a combination of fixed and variable discounts which are
negotiated on a client-by-client basis. Fixed discount income is recognized for
financial accounting purposes in the month the related receivable is purchased.
Variable discount income is recorded on an accrual basis over the period between
the date the underlying receivable is purchased and the date the receivable is
collected.
In some cases, the Company purchases accounts receivable as a "pool" from
its clients. These working capital financings generally involve clients with
more financial stability, larger volumes of invoices to purchase, and more
sophisticated management information and reporting systems. The Company deducts
a discount from the face amount of the purchased invoices based upon the number
of days between the purchase date and the date the underlying receivables are
collected.
The Company also provides other types of financing to middle-market
businesses, including, among other things, working capital and equipment loans
at a negotiated spread over KBK's floating base rate. Consistent with its goal
of being the single source of financing for its middle-market clients, the
Company has expanded its product line to include a mezzanine product. This
product offers an attractive financing alternative for clients whose growth has
outpaced their borrowing capacity from traditional senior debt sources.
In its secured commercial lending activities, the Company typically obtains
an appraisal of the underlying collateral and extends credit based upon a
negotiated percentage of the appraised collateral value. The maturity of these
facilities generally does not exceed five years. The interest income on these
loans is recognized on the accrual method. The interest rate charged on loans is
based upon a negotiated spread over KBK's floating base rate and is payable
monthly.
8
<PAGE>
The Company also offers 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.
RESULTS OF OPERATIONS
ANALYSIS OF SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
The following tables set forth the results of operations and certain other data
of the Company for the second quarter of 1998 and the second quarter of 1997.
Quarter Ended Quarter Ended
June 30, 1998 June 30, 1997
(unaudited) (unaudited)
-----------------------------------------------
(dollars in thousands)
Average Net Earning Assets
Managed and Owned ............ $112,587 $81,307
Owned ........................ 45,943 43,050
Total Revenue ..................... 4,635 100.0% 3,648 100.0%
Interest Expense .................. 679 14.6% 610 16.7%
Provision for Credit Losses ....... 400 8.6% 200 5.5%
Operating Expense ................. 2,361 50.9% 1,982 54.3%
Income Taxes ...................... 478 10.3% 354 9.7%
Net Income ........................ 717 15.5% 502 13.8%
Average net earning assets (managed and owned) increased 38% to $112.6 million
for the quarter ended June 30, 1998 from $81.4 million for the quarter ended
June 30, 1997. Reflecting the increase in assets, total revenue increased 27%,
or $987,000 to $4.6 million for the quarter ended June 30, 1998 from the quarter
ended June 30, 1997 total revenue of $3.6 million. Average net earning assets
owned at the quarter ended June 30, 1998 increased $2.9 million from the quarter
ended June 30, 1997. The sale of assets resulted in a $3.1 million adjustment to
interest income and a $1.1 million adjustment to interest expense, which netted
to $2.0 million in servicing spread income during the quarter ended June 30,
1998.
Interest expense increased 11% to $679,000 for the second quarter of 1998
compared with $610,000 for the second quarter of 1997. This increase resulted
from the $2.4 million increase in average funded debt required to support the
increase in net average earning assets.
A provision for credit losses of $400,000 was recorded for the second quarter of
1998, compared to $200,000 for the second quarter of 1997. During the second
quarter of 1998 the Company had net chargeoffs of $399,000 compared to $40,000
of net recoveries for the second quarter of 1997. The increase in chargeoffs was
due to final settlement of litigation related to a bankrupt client. The
allowance for credit losses at June 30, 1998 of $2.0 million represents 2.7% of
total outstanding loans and accounts receivables (which includes retained
interest in sold assets) and 4.4% of average net earning assets owned for the
quarter then ended. The allowance for credit losses at June 30, 1997 of $1.8
million represented 3.8% of total outstanding loans and accounts receivables and
3.1% of average net earning assets owned for the quarter then ended. Management
believes the current allowance is adequate to cover potential losses which might
result from the purchased accounts receivable and loan portfolio at June 30,
1998.
9
<PAGE>
Operating expenses of $2.4 million for the three months ended June 30, 1998
increased $379,000, or 19%, compared with $2.0 million for the three months
ended June 30, 1997. Employment related expense constituted $213,000 of the
increase, due to increased staffing in the underwriting, operations and
marketing departments of the Company. Occupancy and equipment expense increased
$55,000 to $369,000 for the quarter ended June 30, 1998 compared to $314,000 for
the quarter ended June 30, 1997, primarily related to the Company's growth
resulting in additional occupancy and systems costs in the corporate offices.
The Company's growth also generated a $75,000 increase in marketing related
expenses to $241,000 for the quarter ended June 30, 1998 compared to $166,000
for the quarter ended June 30, 1997.
Income taxes of $478,000 for the second quarter of 1998 were 35% greater than
the $354,000 of income taxes for the second quarter of 1997, due to the 40%
increase in income before taxes.
As a result of the foregoing, net income of the Company for the second quarter
of 1998, increased to $717,000 from $502,000 for the second quarter of 1997.
ANALYSIS OF SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997
The following table sets forth the results of operations and certain other
data of the Company for the six months ended June 30, 1998 and 1997.
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
(UNAUDITED) (UNAUDITED)
-----------------------------------------
(DOLLARS IN THOUSANDS)
Average Net Earning Assets
Managed and Owned ............ $106,909 $ 76,831
Owned ........................ 41,810 57,703
Total Revenue ..................... 8,732 100.0% 7,247 100.0%
Interest Expense .................. 1,170 13.4% 1,700 23.5%
Provision for Credit Losses ....... 700 8.0% 275 3.8%
Operating Expense ................. 4,514 51.7% 3,835 52.9%
Income Taxes ...................... 925 10.6% 587 8.1%
Net Income ........................ 1,423 16.3% 850 11.7%
Average net earning assets (managed and owned) increased 39% to $106.9 million
for the six months ended June 30, 1998 from $76.8 million for the six months
ended June 30, 1997. Reflecting this increase in earning assets, total revenue
increased 20%, or $1.5 million to $8.7 million for the six months ended June 30,
1998 compared to $7.2 for the same period in 1997. Although average net earning
assets owned for the six months ended June 30, 1998 decreased by $15.9 million
compared to the same period in 1997, the growth in average net earning assets
owned and managed was $30.1 million, which was offset by the assets sold into
the securitization conduit during the six months ended June 30, 1998.
Interest expense decreased 31% to $1.2 million for the six months ended June 30,
1998 from $1.7 million for the same period of 1997. This decrease is primarily
due to a $16.6 million decrease in the average outstanding balance under the
line of credit to $25.3 million for the six months ended June 30, 1998 from
$41.9 million for the same period in 1997 resulting from the sale of assets into
the securitization conduit beginning in April 1997.
10
<PAGE>
A provision for credit losses of $700,000 was recorded for the six months ended
June 30, 1998, as compared to $275,000 for the same period of 1997. During the
six months ended June 30, 1998, the Company had net charge-offs of $669,000
compared to $82,000 of net charge-offs for the same period of 1997. The
allowance for credit losses at June 30, 1998 of $2.0 million represents 2.7% of
total outstanding loans and accounts receivables and 4.8% of average net earning
assets owned for the six months then ended. The allowance for credit losses at
June 30, 1997 of $1.8 million was 3.1% of average earning assets owned for the
six months then ended. Management believes the current allowance is adequate to
cover potential losses which might result from the purchased accounts receivable
and loan portfolio at June 30, 1998.
Operating expense of $4.5 million for the six months ended June 30, 1998
increased $679,000, or 18%, compared with the $3.8 million for the same period
of 1997. Employment related expense increased $338,000 to $2.5 million for the
six months ended June 30, 1998 compared to $2.1 million for the same period of
1997. Most of this increase relates to the expansion of the marketing staff
subsequent to the second quarter of 1997. Occupancy expense increased $115,000
to $728,000 for the six months ended June 30, 1998, from $613,000 for the same
period of 1997 resulting primarily from the increased depreciation for equipment
and systems required in the Fort Worth office. Other operating expenses
increased $135,000 or 17% to $945,000 for the six months ended June 30, 1998
from $810,000 in the same period of 1997 due to the increased marketing expenses
related to the Company's growth. This growth also generated an $85,000 increase
in professional fees from $102,000 during the six months ended June 30, 1997 to
$187,000 for the same period in 1998.
Income taxes of $925,000 for the six months ended June 30, 1998 were 58% more
than the $587,000 of income taxes for the same period of 1997, due to the 63%
increase in income before taxes for the six months ended June 30, 1998 compared
to the six months ended June 30, 1997.
As a result of the foregoing, net income of the Company for the six months ended
June 30, 1998 increased $574,000, or 68%, to $1,423,000 from $850,000 for the
same period in 1997.
CHANGES IN FINANCIAL CONDITION
Total assets increased 43% from $56.4 million at December 31, 1997 to $80.9
million at June 30, 1998. This increase is primarily related to the net change
in accounts receivable and loans receivable during the quarter from $43.9
million at December 31, 1997 to $71.2 million at June 30, 1998. This increase in
assets was funded by a $17.4 million increase in bank borrowing and $3.5 million
in commercial paper during the first six months of 1998.
Stockholders' equity increased $521,000, from $24.6 million at December 31, 1997
to $25.1 million at June 30, 1998 resulting from net income of $1.4 million and
a reduction of $912,000 for treasury stock purchases during the six months ended
June 30, 1998. The Company paid no dividends on its common stock for the six
months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements generally increase proportionately to the
increase in earning assets. The method of funding the portfolio changed
significantly during 1997 with the implementation of the asset sale. As a result
of the assets sold into the securitization conduit, total average net earning
assets owned decreased $15.9 million, from $57.7 million during the first half
of 1997 to $41.8 million in the first half of 1998, while average net earning
assets managed and owned increased from $76.8 million to $106.9 million during
the same period. The Company continues to search for ways to employ its capital
11
<PAGE>
and to expand its portfolio through the expansion of its current product line,
the addition of new product lines such as secured loan facilities, the
acquisition or development of new products and the addition of services related
to financing middle-market businesses.
KBK maintains a $55.0 million, multi-bank line of credit ("Credit Facility")
which had $45.0 million committed and $38.4 million outstanding at June 30,
1998, $17.4 million more than the $21 million outstanding at December 31, 1997.
The Credit Facility is comprised of a $40.0 million Revolving Credit Facility
("Revolving Facility"), or a $5.0 million "Over Advance" Facility which allows
for borrowing base availability to fund amounts in excess of client
concentration limits. The "Revolving Facility" includes $5,000,000 bridge
facility for funding certain mezzanine loans at the banks' prime rate plus
1.25%. As of June 30, 1998, there was $35.6 million outstanding under the
Revolving Facility, $2.8 million outstanding under the Over Advance Facility,
and there were $1.5 million in letters of credit outstanding under this
revolving line of credit. The Credit Facility provides for maximum borrowings of
the lesser of (i) $45.0 million or (ii) the amount of a borrowing base (based on
a percentage of eligible loans and accounts receivable, as defined in the loan
agreement governing the Credit Facility, net of excluded amounts). There was
$6.3 million in available credit under this line as of June 30, 1998. Borrowings
under the Revolving Facility portion of the Credit Facility bear interest at the
agent banks' prime rate or applicable LIBOR plus 1.75% at KBK'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 May 14, 1999; 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) which
are not sold to SPC, all notes receivable of KBK which are not sold to SPC, all
inventory of KBK now owned or acquired, all instruments, chattel paper,
documents and general intangibles of KBK now owned or acquired, an assignment of
all security interests, mortgages and liens securing the foregoing and all
proceeds of the foregoing. The Credit Facility provides that KBK is permitted to
contribute and sell, free of liens, and grant security interests in, accounts,
chattel paper, instruments and general intangibles to SPC pursuant to the
purchase and sale agreement. The terms of the Credit Facility require KBK to
comply with certain financial covenants and include the maintenance of a certain
tangible net worth, limitations on its debt to tangible net worth, and an
interest coverage ratio which requires that KBK's ratio of income before
interest and taxes to interest expense, over the last four quarters, be no less
than 1.5 to 1. Additionally, the Credit Facility restricts the payment of
dividends in any fiscal year by KBK to the lesser of (i) KBK's after tax income
for such fiscal year or (ii) 50.0% of the amount by which KBK's after tax income
exceeds the cumulative amount of dividends permitted to be paid under such
tests, but not so paid.
Thus, KBK is effectively restricted in its ability to pay cash dividends to the
Company. The Company has not paid dividends on its common stock and currently
does not intend to pay cash dividends; rather, it intends to retain its cash for
the continued expansion of its business and the continuation of the stock
repurchase program initiated in November 1995.
Under the Company's stock repurchase program, the Company may buy back in open
market transactions, block trades or private transactions, up to 500,000 shares
(15% of the outstanding shares at year end 1997) of the Company's common stock.
At June 30, 1998, 274,567 shares of common stock had been repurchased and placed
in the treasury at a cost of $2.3 million (net of 100,000 shares issued to the
former shareholders of Coastal Financial Resources, Inc., which was acquired by
the Company in 1994). All of such purchases have been funded out of the general
funds of the Company, which may have had the result of increasing the
outstanding balance under the Credit Facility.
12
<PAGE>
In May 1998, the Company reinstated its commercial paper program (CP Program).
During the 19 year period preceding mid-1994, KBK used the proceeds from the
private issuance of short-term, unrated commercial paper to finance a portion of
its portfolio. The CP Program was canceled by management concurrent with its
June 1994 initial public offering of common stock. Under the Company's CP
Program, certificates may be issued for tenures ranging from 30 to 270 days at
interest rates comparable to the Company's alternative unsecured funding
sources. The certificates will be placed directly by the Company, however, the
Company reserves the right to name a placement agent in the future. The
certificates are not rated by any independent agency and the Company does not
maintain a back-up liquidity facility to support outstanding certificates.
During the second quarter, KBK issued certificates aggregating $3.5 million to
qualified investors. Each certificate carried a coupon rate of 10% per annum and
currently matures on September 15, 1998.
Future sources of liquidity to fund growth in earning assets will come from the
sale of earning assets, the issuance of unsecured and secured corporate debt
obligations, preferred and common stock, as well as from traditional bank
financing.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 130 "Reporting Comprehensive Income,"
which is required to be adopted for fiscal years beginning after December 15,
1997. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS 130 did not have a material impact on
the Company's consolidated financial statements.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any litigation other than routine proceedings
incidental to its business and the Company does not expect that these
proceedings will have a material adverse effect on the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following items were submitted to the stockholders of the Company at the
Annual Meeting of Stockholders held on May 6, 1998. Of the total 3,282,633
outstanding and authorized voting shares, there were present by proxy or in
person, 3,023,879 shares or 92% of the voting shares outstanding. The following
issues were presented to the stockholders for approval.
1. To elect two directors to serve for a term of three years;
2. To approve the KBK Capital Corporation 1998 Employee Stock Purchase
Plan;
3. To ratify the selection by the Board of Directors of KPMG Peat Marwick
LLP as independent auditors for the fiscal year ending December 31,
1998.
For Item 1, the following votes were cast for each of the nominees proposed by
the Board of the Company.
SHARES SHARES SHARES BROKER
NOMINEE VOTED FOR VOTED AGAINST WITHHELD NON-VOTES
------- --------- ------------- -------- ---------
Harris A. Kaffie 3,023,454 -0- 425 -0-
Thomas M. Simmons 3,023,479 -0- 400 -0-
In addition, the terms of Kenneth H. Jones, Jr., R. Earl Cox, III, Martha V.
Leonard, Robert J. McGee, Daniel R. Feehan, and Thomas L. Healey as directors
continued following the Annual Meeting.
For Item 2, shares voted FOR were 2,983,504 shares, 38,250 shares voted AGAINST,
and 2,125 shares ABSTAINED. There were no broker non-votes.
For Item 3, shares voted FOR were 3,023,479 shares, 0 shares voted AGAINST, and
400 shares ABSTAINED.
All three items were approved pursuant to the Company's Articles of
Incorporation and By-Laws.
ITEM 5 - OTHER INFORMATION
The Company's proxy statement on Schedule 14A dated April 6, 1998,
contains disclosure regarding the Company's bylaw provisions requiring timely
notice of a stockholder's proposal to be properly brought before the Company's
1999 annual meeting. As to any proposal that a stockholder intends to present to
stockholders without inclusion in the Company's proxy statement for the
Company's 1999 Annual Meeting of Stockholders, the proxies named in management's
proxy for that meeting will be entitled to exercise their discretionary
authority on that proposal by advising stockholders of such proposal and how
they intend to exercise their discretion to vote on such matter, unless the
stockholder making the proposal solicits proxies with respect to the proposal to
the extent required by Rule 14a-(c)(2) under the Securities Exchange Act of
1934, as amended.
14
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KBK CAPITAL CORPORATION
Date AUGUST 14, 1998 /s/ JAY K. TURNER
------------------------ ---------------------------------
Jay K. Turner,
Executive Vice President and Chief
Financial Officer
15
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<PERIOD-END> JUN-30-1998
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