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, 1998
[ ] 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.)
2200 CITY CENTER II, 301 COMMERCE
ST., 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
9.50% TRUST PREFERRED SECURITIES AMERICAN 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: $17,947,826
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,
1999, AS REPORTED ON THE AMERICAN STOCK EXCHANGE, WAS APPROXIMATELY $13,669,597.
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, 1999, THE REGISTRANT HAD OUTSTANDING 3,204,846 SHARES OF COMMON
STOCK.
DOCUMENT INCORPORATED BY REFERENCE
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT'S 1999
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 5, 1999, ARE INCORPORATED BY
REFERENCE IN PART III.
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INDEX
PAGE NUMBER
ITEM 1. DESCRIPTION OF BUSINESS 3
PRODUCTS AND MARKETS 3
CLIENTS 4
ACCOUNT DEBTORS 5
COMPETITION 6
GOVERNMENT REGULATION 6
EMPLOYEES 7
ITEM 2. DESCRIPTION OF PROPERTY 7
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 9
ITEM 7. FINANCIAL STATEMENTS 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 29
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS: COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT 29
ITEM 10. EXECUTIVE COMPENSATION 29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 30
(A) EXHIBITS 30
(B) REPORTS ON FORM 8-K 30
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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 purchased receivables and inventory loans, in which a substantial
portion of such receivables and inventory loans were transferred into KBK
Receivables Corporation ("SPC"), also known as a special purpose corporation.
Under this structure, SPC continues to sell 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 periodic revenue in the form of a
servicing fee as outlined in the servicing agreement.
In 1992, KBK expanded the then existing Houston, Texas marketing office and
established corporate, regional and national marketing headquarters in Fort
Worth, Texas. Through the acquisition of Coastal Financial Resources, Inc.
("Coastal") in December of 1994, a marketing office was established in New
Orleans, Louisiana giving expanded market coverage across the Gulf Coast. In
addition, the Company established offices in Los Angeles, California in 1996 and
St. Louis, Missouri in 1998.
The Company's plan for continued growth in 1999 is based primarily on
growth in earning assets from the markets currently served. Continued marketing
of KBK's Correspondent Banker Program(TM) has allowed KBK to establish a network
of commercial banks to source deals in exchange for a participation in the deal
or an origination fee. Another element of the Company's growth plan is the
introduction of new products and services. The Company's strategy also includes
the pursuit of opportunistic acquisitions and formation of key partnerships.
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 2200 City Center II, 301 Commerce Street, 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 1998, 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
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selling of third party products to existing customers. These products may
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 an office 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 a substantial number of the nation's largest
markets. At some point the Company expects to support such correspondent
services through the addition of marketing offices in these locations.
Clients
The Company's client portfolio of purchased receivables totaled 229 clients
in nineteen different states during 1998 compared to 175 clients in eleven
states during 1997. During 1998, two clients made up more than 5% of total
managed receivables, or 6.5%, and 5.0% of total managed receivables, at year end
1998. 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 if the aggregate of
all facilities (loan and/or working capital facilities) to any single client
(and its affiliates) exceeds $5,000,000 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 ($2.0 million at December 31, 1998, and $1.9 million at
December 31, 1997) or 20% of the Company's net worth ($5.1 million at December
31, 1998, and $4.9 million at December 31, 1997). 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, 1998, there were two clients who
exceeded this limitation. The largest client outstanding balance at December 31,
1998, was $10.1 million or 39.7% of net worth, as compared to $7.6 million or
30.9% of net worth at December 31, 1997. The second client had $7.8 million
outstanding at December 31, 1998 or 30.7% of net worth. The Company is in the
process of reducing the client concentration on these accounts 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, 1998, as well as outstanding receivables under
management by type of client business at December 31, 1998, and December 31,
1997, and the related percentages thereon. The Company purchased $669 million of
receivables in 1998, or $135 million increase over the $534 million purchased in
1997.
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<TABLE>
<CAPTION>
GROSS PURCHASED GROSS PURCHASED
TOTAL VOLUME RECEIVABLES RECEIVABLES
OF PURCHASED PERCENT UNDER MANAGEMENT PERCENT UNDER MANAGEMENT PERCENT
BUSINESS OF CLIENT RECEIVABLES FOR OF OUTSTANDING AT OF OUTSTANDING AT OF
(RECEIVABLES) THE YEAR 1998 TOTAL DECEMBER 31, 1998 TOTAL DECEMBER 31, 1997 TOTAL
- ------------------ --------------- ------- ------------------- ---------- ------------------- ---------
(dollars in (dollars in (dollars in
thousands) thousands) thousands)
<S> <C> <C> <C> <C> <C> <C>
Engineering & Construction $135,315 20.2% $ 13,087 16.5% $ 12,408 16.4%
Wholesale, Retail Sales .. 102,306 15.3 13,888 17.6 13,837 18.4
Services ................. 67,795 10.1 5,493 6.9 7,158 9.5
Energy Related ........... 67,249 10.1 9,605 12.1 8,635 11.4
Manufacturing ............ 43,850 6.6 3,625 4.6 6,167 8.2
Transportation ........... 25,946 3.9 2,953 3.7 1,389 1.8
Agriculture .............. 24,929 3.7 1,677 2.1 286 .4
Communications ........... 6,704 1.0 809 1.0 886 1.2
Real Estate .............. 1,706 0.3 0 0.0 0 0.0
Environmental Services ... 322 0.0 0 0.0 0 0.0
Unclassified ............. 0 0.0 718 0.9 118 0.2
Pool Purchases* .......... 192,940 28.8 27,355 34.6 24,499 32.5
-------- ----- -------- ----- -------- -----
Total .............. $669,062 100.0% $ 79,210 100.0% $ 75,383 100.0%
======== ===== ======== ===== ======== =====
</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.
The following table indicates the composition of the Company's loan
balances under management by type of client business for the years ended
December 31, 1998 and 1997, and the related percentages thereon. The Company's
outstanding loan balance grew to $75,537, or $40,333 increase over the $35,204
balance at December 31, 1997.
<TABLE>
<CAPTION>
LOAN BALANCE PERCENT LOAN BALANCE PERCENT
OUTSTANDING AS OF OF OUTSTANDING AT OF
BUSINESS OF CLIENT (LOANS) DECEMBER 31,1998 TOTAL DECEMBER 31, 1997 TOTAL
- -------------------------- -------------------- ---------- ------------------ ----------
(dollars in (dollars in
thousands) thousands)
<S> <C> <C> <C> <C>
Manufacturing ....................... $28,442 37.7% $11,734 33.3%
Energy Related ...................... 12,791 16.9 12,793 36.3
Transportation ...................... 9,177 12.1 0 .0
Services ............................ 8,896 11.8 0 .0
Engineering and Construction ........ 6,601 8.7 7,111 20.2
Other ............................... 3,671 4.9 1,560 4.4
Wholesale and Retail Sales .......... 3,032 4.0 1,006 2.9
Agriculture ......................... 2,927 3.9 1,000 2.9
------- ------ ------- -----
Total ......................... $75,537 $100.0% 35,204 100.0%
======= ====== ======= =====
</TABLE>
Account Debtors
During 1998 and 1997, the accounts receivable under management underlying
the Company's working capital facility portfolio represented 7,012 and 7,721
different debtor entities, respectively. The most significant concentration in
1998 was debtors in the wholesale and retail sales industry. This category of
debtors made up 19% of the total balance of purchased receivables under
management outstanding at December 31, 1998, as compared to 24% at December 31,
1997. 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.
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<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 1998 TOTAL DECEMBER 31, 1998 TOTAL DECEMBER 31, 1997 TOTAL
- --------------- ----------------- ---------------- ----------------- ----------- ----------------- ----------
(dollars in (dollars in (dollars in
thousands) thousands) thousands)
<S> <C> <C> <C> <C> <C> <C>
Wholesale, Retail Sales .... $156,064 23.3% $ 15,263 19.3% $ 17,860 23.7%
Energy Related ............. 99,081 14.8 13,749 17.3 10,365 13.8
Transportation ............. 70,980 10.6 6,535 8.3 5,298 7.0
Services ................... 56,563 8.5 6,592 8.3 4,507 6.0
Manufacturing .............. 42,294 6.3 4,660 5.9 3,509 4.7
Engineering & Construction . 19,820 3.0 1,812 2.3 3,286 4.3
Federal, State & Local Govt 17,646 2.6 1,156 1.5 1,332 1.8
Communications ............. 5,174 .8 957 1.2 611 .8
Environmental Services ..... 4,273 .6 95 .1 805 1.0
Real Estate ................ 2,309 .4 305 .4 0 0.0
Agriculture ................ 1,256 .2 75 .1 7 .0
Unclassified ............... 662 .1 656 .8 3,304 4.4
Pool Purchases* ............ 192,940 28.8 27,355 34.5 24,499 32.5
-------- ----- -------- ----- -------- -----
Totals ............. $669,062 100.0% $ 79,210 100.0% $ 75,383 100.0%
======== ===== ======== ===== ======== =====
</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.
During 1998 and 1997, 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 generally 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 sold or pledged to the
Company are subject to
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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
purchased or pledged receivables make compliance with FACA impractical or
impossible, or make the protections afforded by FACA unavailable to the Company.
As a result, the Company does not always comply with FACA when it purchases or
receives a pledge of receivables where the Federal Government is the account
debtor, causing all assignments of receivables purchased by the Company to which
the Federal Government is the account debtor to be unenforceable by the Company
as regards the Federal Government. Such failure to comply with FACA has no
effect on the validity of assignment or pledge among the Company, the client and
third parties other than the Federal Government. Non-compliance with FACA causes
the Company to lose any right it may have to receive payments directly from the
Federal Government or cause the Federal Government to acknowledge the Company's
claim in such receivables. However, FACA does not limit the Company's ability to
require its clients to direct payments made by the Federal Government to a
lockbox controlled by the Company. The Federal Government also has significant
rights of setoff in connection with its contractual payments. Typically, the
Company can protect itself from certain rights of setoff by account debtors,
either by pursuing its rights against clients for breach of representation
regarding the absence of setoffs with respect to purchased receivables, or
sending the account debtors a notice of assignment pursuant to the Uniform
Commercial Code. In cases where the Federal Government is the account debtor, an
assignee must comply with FACA in order to protect itself from such setoffs,
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 1998 and 1997, respectively, the Federal Government comprised
2.6% and 1.7% 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 LAWS. Usury laws generally limit the amount of interest that a
creditor may contract for, charge or receive in connection with the loan of
money. In the State of Texas (in which the Company's primary offices are
presently located), state law prohibits creditors from contracting for,
charging, reserving, taking or receiving interest at a rate in excess of a
varying index. For loans in which the interest rate is fixed, the usury ceiling
is equal to the index preceding the week in which the contract is entered into.
For varying rate loans, the index floats. Under the provisions of Texas law, the
index may never exceed 24% per year (or, in the case of business purpose loans
exceeding $250,000, 28% per year). If the amount of the index is less than 18%
per year, the creditor may, nevertheless, charge interest pursuant to a written
agreement at the rate of 18% per year. Because of the low interest rate
environment, the Texas usury ceiling has, since early in 1985, prohibited a
business creditor from contracting for, charging, reserving, taking or receiving
interest at a rate in excess of 18% per year. Section 339.004 of the Texas
Finance Code defines an "account purchase transaction" as an agreement in which
a commercial enterprise sells accounts receivable at a discount with or without
a related repurchase obligation. This law provides that the amount of any
discount associated with the purchase or any fees paid to an account service
provider is not interest. Also, Section 9.102 of the Texas Business & Commerce
Code provides that the parties' characterization of an account purchase
transaction is conclusive that the transaction is not a loan.
Employees
The Company had 77 full-time and two part-time employees at December 31,
1998, of whom eight were employed in executive and administrative positions and
sixteen (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 and
Houston, Texas, New Orleans, Louisiana, Pasadena, California, and St. Louis,
Missouri under lease agreements expiring at various dates through 2004. The
Company believes that its
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facilities are adequate to meet the Company's needs in these markets; however,
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange and the
Pacific Stock Exchange. At March 11, 1999, there were 69 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
following table provides market data for the Company's common stock based on
closing prices:
PER SHARE MARKET DATA
QUARTER 1998 1997
------- -------------------- -------------------
HIGH LOW HIGH LOW
------- ------- ------ ------
First $ 14.63 $ 10.50 $ 5.06 $ 3.75
Second 12.88 9.88 5.50 3.88
Third 11.63 9.50 7.13 4.63
Fourth 9.94 8.38 13.13 6.75
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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, 1998. 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. ("KBK"),
KBK Receivables Corporation ("SPC"), and KBK Capital Trust I (the "Trust"), is
an independent financial services company that provides a broad line of
financial products and services to middle market commercial businesses with
credit needs of less than $10 million. KBK was founded in 1962 as a factoring
company for energy-related receivables in Texas. Factoring has served as the
cornerstone of KBK's growth. In 1994, KBK began introducing new products in an
effort to expand its client base and to meet the needs of its existing clients
as their credit quality improves. These products include purchase revolvers,
working capital loans, term loans and mezzanine loans.
KBK's client base consists primarily of businesses with annual revenues ranging
from $1 million to $50 million. The Company's clients typically have rapidly
expanding operations which drive their need for capital. KBK strives to provide
fast, flexible and creative solutions that are tailored to meet these needs.
This approach has provided KBK with a strong reputation in the middle market and
a well-diversified client base. The Company's clients are located in nineteen
states and are engaged in a range of businesses, including energy-related,
manufacturing, wholesale and retail distribution, and other businesses. The
Company has consistently employed a disciplined credit approach which has
enabled it to increase earning assets, minimize credit losses and generate 36
consecutive years of profitability.
The Company's factoring facilities generally involve an on-going or revolving
agreement to purchase eligible new receivables. Factoring involves the Company's
purchase and the clients' true sale of accounts receivable which usually are
individually ledgered, invoice-by-invoice on the Company's books. The Company
offers a full range of factoring products and services, including notification,
non-notification, verification, non-verification and non-recourse factoring as
well as several other hybrid variations. The obligors or "debtors" of the
factored receivables typically represent large, financially strong businesses,
many of which are ranked in Fortune Magazine's Fortune 1000 list. As of December
31, 1998, KBK's portfolio of owned and managed receivables purchased under
factoring facilities totaled $51.1 million. The Company's yield on its factoring
portfolio was 21.6% in 1998 and 20.2% in 1997.
In addition to factoring or purchasing accounts receivable on a specific
"invoice-by-invoice" ledgered basis, the Company also purchases accounts
receivable as a revolving "pool." Under this arrangement, the client sells all
receivables, and when they are generated by the business, KBK makes periodic
advances upon a request by the client, in aggregate amounts up to the client's
maximum availability limit. The Company's yield on purchase revolvers was 12.6%
in 1998 and 14.2% in 1997.
KBK's commercial loan portfolio includes working capital and term loan
facilities that are typically secured by a first lien on accounts receivable,
inventory, equipment, owner-occupied real estate or other assets. The working
capital lines of credit have maturities of up to two years, while term loans are
structured with monthly payments and maturities which typically range from one
to five years. Most of the Company's commercial loan products are priced on a
floating rate basis over the Company's announced base rate. During 1998 and
1997, the Company's yield on its commercial loan portfolio was 12.4% and 12.1%,
respectively.
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The Company's mezzanine loan product, which was introduced in 1998, offers an
attractive financing alternative for customers whose growth has outpaced their
borrowing capacity from senior debt sources. The Company's strategy with respect
to mezzanine loans is to extend the duration of its current relationships and
offer the Company's traditional products to new customers. It is anticipated
that KBK's mezzanine financings will typically have fixed interest rates as well
as warrants to acquire equity in the borrower. Since introducing the product in
the first quarter of 1998, the Company has reviewed approximately 182
transactions. As of December 31, 1998 the Company has funded two loans for an
aggregate investment of $5.0 million.
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
underwriting, legal, accounting and other offering expenses were $8,626,000.
Pursuant to the Stock Repurchase Plan initiated in 1995, the Company holds
355,867 shares of Treasury Stock at a cost of $3,059,577, as of December 31,
1998.
During 1998, KBK maintained a $55,000,000 multi-bank revolving line of credit
("Credit Facility"), maturing on April 30, 2001 and bearing interest at the
banks' prime rate or LIBOR plus 1.75% at the election of KBK, and secured by
substantially all of KBK's assets. At December 31, 1998, $55,000,000 was
committed with outstanding indebtedness under this Credit Facility of
$26,000,000 ($10,000,000 at an interest rate of 7.75%, and $16,000,000 at 7.00%)
and there were $2,394,817 in letters of credit outstanding under this revolving
line of credit. At December 31, 1997, $45,000,000 was committed with outstanding
indebtedness of $21,000,000 ($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. 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,
limitations on chargeoffs and non-performing assets and an interest coverage
ratio. The Credit Facility also provides for a borrowing base against eligible
receivables and eligible loans pursuant to the terms of the Credit Facility. KBK
was in compliance with the financial covenants and borrowing base limitations,
and there was approximately $26,605,000 and $2,500,000 in available credit under
this line at December 31, 1998 and 1997, respectively.
During 1997, KBK completed a sale of purchased receivables and inventory loans,
in which a substantial portion of KBK's owned receivables and inventory loans
were transferred into SPC, also known as a special purpose corporation. Under
this structure, SPC continues to sell eligible receivables 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 periodic revenue in the form of a servicing fee. As of
December 31, 1998 and 1997, KBK had $75.0 million and $67.0 million,
respectively, of receivables and inventory loans outstanding in the conduit
facility and during 1998 and 1997 the Company had recorded approximately $7.9
million and $6.3 million, respectively, in fees related to managing and
servicing such assets. Currently, the Company has the ability to fund up to
$75.0 million through the conduit facility and expects this limit to be
increased to $100.0 million as the result of continued growth in earning assets.
The financing provided by this facility is off-balance sheet and the Company
realizes no gain on transfer of the assets to the conduit. Servicing income is
credited as received. The Company believes that the conduit facility will enable
it to significantly expand its owned and managed portfolio while simultaneously
minimizing its balance sheet leverage.
In 1998, the Company issued 1,725,000 shares of 9.50% mandatorily redeemable
Trust Preferred Securities through its subsidiary, KBK Capital Trust I. The
principal assets of the Trust are 9.50% subordinated debentures of the Company
due 2028. The approximately $16.0 million in net proceeds from the sale of the
securities were invested by the Trust in the debentures. The Company in turn
utilized the funds from the debentures as an equity investment in KBK, and KBK
repaid approximately $16.0 million of short-term indebtedness.
Over the past five years, the Company has posted strong growth in revenue and
consistent profitability within reasonable leverage levels. Revenues have
increased from $6.9 million for 1994 to $17.9 million for 1998. This growth was
largely attributed to an increase in KBK's total assets under management, which
rose from $52.4 million as of December 31, 1994 to $154.7 million as of December
31, 1998. Net income increased from $1.6 million in 1994 to $2.4 million in
1998.
STRATEGY
The Company's long-term goal is to be a leader in providing financial products
and services to middle market businesses in the United States. By serving the
financial and capital needs of this growing segment, the Company believes that
it can achieve strong growth and generate a return on assets above other
financial institutions. The Company believes that it has been very successful in
achieving an appropriate balance between asset growth, asset quality and
profitability through strict adherence to proven systems for
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origination, underwriting and monitoring. During the course of the past five
years, the Company has leveraged its existing market presence into new product
lines to enable its clients to transition into lower-priced financial products
and services as their business expanded and credit quality improved.
Additionally, the Company expanded its geographic presence in key metropolitan
markets through both new office openings and the development of relationships
with regional correspondent banks. The Company remains committed to focusing on
its core middle market commercial finance business. Going forward, KBK's growth
strategies include increasing market penetration, introducing additional
products and services, expanding market presence and pursuing strategic
acquisitions and partnerships.
INCREASE MARKET PENETRATION. A critical aspect of KBK's long-term growth
objective is to increase its earning asset base from existing markets. The
Company's strategy is to (i) continue improving the productivity of its
marketing force through extensive market planning and a compensation program
tied directly to targeted objectives, (ii) add additional marketing
professionals and (iii) train its marketing force to cross-sell existing and new
products. Each year, KBK's account officers are required to develop a marketing
plan with respect to existing customer business and new business prospects. This
active business development program is designed to enable KBK account officers
to identify an ample number of new high-quality business opportunities, thereby
improving selectivity and increasing market penetration. In order to meet their
objectives, account officers are provided with on-going training in the areas of
credit analysis, product application and relationship development and retention.
EXPAND PRODUCT LINE. Another element of KBK's growth plan is the continued
introduction of new products and services. Since 1995, the Company has
introduced a variety of commercial finance products and services designed to
meet the needs of its core middle market clients, broaden its client base and
diversify its portfolio mix. Many of these products enable KBK's former
factoring clients to transition to other financial products and services as
their credit quality improves and, accordingly, have allowed the Company to
lengthen the duration of its relationships. In addition, a growing component of
KBK's portfolio is comprised of conventional commercial loans extended to
clients with more than two years of tenure with the Company. The mezzanine
market has also generated a number of high quality conventional commercial loan
prospects.
EXPAND MARKET PRESENCE. Today, KBK maintains a significant presence in
five large metropolitan areas (Dallas/Fort Worth, Houston, Los Angeles, New
Orleans and St. Louis). KBK's goal is to have a physical presence in a
substantial number of the nation's largest markets. The Company has a two-step
approach that enables KBK to establish wholesale client relationships and an
asset base prior to committing to the overhead expenses associated with opening
a new office. Through its Correspondent Banker(TM) Program, KBK has established
a network of local or regional commercial banks to source deals in exchange for
a participation in the deal or an origination fee. Once an adequate portfolio
has been established to justify incremental costs, the Company may establish a
new marketing office.
The foundation of the Correspondent Banker(TM) Program is a computer-based
scanning and imaging system for factoring across the Internet. This system was
originally developed for use in the Company's own marketing offices. However, in
late 1996, the Company began prototyping the system and filed a patent
application covering the process in 1998. Under this method, the bank identifies
prospective factoring clients. Both KBK and the bank underwrite each new client,
and KBK also reviews and underwrites each individual invoice. After the credit
analysis and underwriting are performed, the bank funds the invoice. KBK
administers the collection process and the bank and KBK split revenue and any
losses. The Company's St. Louis area office, opened in early 1998, is primarily
focused on marketing this system to community banks across the country.
Currently, KBK has five banks operating under contracts for the system.
PURSUE STRATEGIC ACQUISITIONS AND PARTNERSHIPS. Also important to the
Company's strategy is the pursuit of opportunistic acquisitions and formation of
key partnerships. The Company focuses on acquisition candidates who can expand
KBK's origination capabilities, product line, cross-selling potential and market
penetration, as well as those which add to its asset base. Given current
conditions in the specialty finance market, the Company's management continually
evaluates potential acquisition opportunities. Accordingly, at any particular
time, the Company may be involved in negotiations (at various stages) to acquire
other companies.
In addition to acquisitions, KBK will continue to explore partnerships
which complement or leverage the Company's product portfolio or client
relationships. During the past several years, KBK has formed a number of
important partnerships. For example, KBK currently offers equipment lease
financing through third party equipment leasing companies.
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RESULTS OF OPERATIONS ANALYSIS
1998 COMPARED TO 1997
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------
(dollars in thousands)
Average Net Earning Assets
Managed And Owned ............. $118,441 $ 85,621
Owned ......................... $ 49,567 $ 46,582
Total revenue .................... $ 17,948 100% $ 15,191 100%
Interest expense ................. 3,149 18% 2,666 17%
Provision for credit losses ...... 1,500 8% 875 6%
Operating expenses ............... 9,679 54% 8,198 54%
Income taxes ..................... 1,227 7% 1,388 9%
-------- --- -------- ---
Net income ....................... $ 2,393 13% $ 2,064 14%
Average net earning assets under management increased 38.3% to $118.4 million
for the year ended December 31, 1998, from $85.6 million for the year ended
December 31, 1997. Reflecting the increase in assets, total revenue increased
18.1%, or $2.8 million, for the year ended December 31, 1998, from year ended
December 31, 1997, total revenue of $15.2 million. Average net earning assets
owned for the year ended December 31, 1998 increased 6.4%, or $3.0 million, from
the year ended December 31, 1997.
Interest expense increased 18.1% to $3.1 million for the year ended December 31,
1998 compared with $2.7 million for the year ended December 31, 1997. Average
funded debt increased from $31.2 million in 1997 to $34.1 million in 1998, in
order to fund the $3.0 million growth in net earning assets owned. Because this
increase was funded primarily through the issuance of the Trust Preferred
Securities, which carry a higher interest rate than the bank debt, the Company's
interest expense increased.
The provision for credit losses was $1.5 million for 1998 compared to $875,000
for 1997, representing a 71.4% increase. During 1998, the Company had
charge-offs of $1.5 million while recovering $3,000. Net charge-offs for 1998 of
$1.5 million and a provision of $1.5 million for 1998 resulted in an allowance
for credit losses of $2.0 million or 2.5% of gross receivables outstanding as of
December 31, 1998 (3.2% of average owned receivables outstanding during 1998).
During 1997, the Company had charge-offs of $765,000 while recovering $210,000,
resulting in net charge-offs of $555,000. The Company's 1997 provision for
credit losses of $875,000 brought the allowance for credit losses to $ 1.9
million, or 4.2% of gross receivables outstanding as of December 31, 1997 (3.4%
of average owned receivables outstanding during 1997). 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
1998.
Operating expenses increased $1.5 million, or 18.1%, to $9.7 million or 54.0% of
total revenue for 1998 compared with $8.2 million or 54.0% of total revenue for
1997. This increase was primarily a result of increased salaries and benefits
and other employment expenses of $898,000, related to support staff and
management added in 1998 to support the Company's growth and increased business
activity. This growth also generated $235,000 increase in other operating
expenses related to marketing efforts. Occupancy expenses increased $223,000,
resulting primarily from increased lease expense associated with the expansion
of the corporate offices and system enhancements.
Income taxes of $1.2 million for 1998 were 12.0% lower than the income taxes of
$1.4 million for 1997 due to a reduction in state franchise taxes related to the
sale of assets into the conduit.
As a result of the above, net income of the Company for 1998 increased $329,000,
or 15.9%, to $2.4 million or 13.3% of total revenue, from $2.1 million or 13.6%
of total revenue in 1997.
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 and in 1998
with the sale of the Trust Preferred Securities. Total average net earning
assets increased by $3.0 million, from $46.6 million in 1997 to $49.6 million in
1998. The Company continues to search for ways to employ its capital and to
expand its portfolio through increased market
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penetration, expansion of its current product line, expansion of market
presence, and pursuit of strategic acquisitions and partnerships which enable
the Company to provide complete financial services to middle-market businesses.
KBK maintained a $55.0 million, multi-bank line of credit which had $55.0
million committed and $26.0 million outstanding at December 31, 1998, $5.0
million more than the $21.0 million outstanding at December 31, 1997. The Credit
Facility provides for maximum borrowings of the lesser of (i) $55 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 $26.6 million in available credit
under this line as of December 31, 1998. Borrowings under the Credit Facility
bear interest at the agent banks' prime rate or applicable LIBOR plus 1.75% at
KBK's discretion and expire on April 30, 2001.
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 interest, 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, limitations
on chargeoffs and non-performing assets, 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.
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. As of
December 31, 1998, KBK had issued three certificates with a balance outstanding
of $2,000,000 ($1,000,000 at a coupon rate of 7.75%, maturing January 13, 1999
and $1,000,000 at a coupon rate of 8.75%, maturing June 11, 1999). The
commercial paper balance included $1,000,000 issued to a Director of 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
(15.7% of the outstanding shares at year end 1998) of the Company's common stock
at the current market price. At December 31, 1998 and 1997, 355,867 and 205,167
shares of common stock were held in the treasury at a cost of $3.1 million and
$1.4 million, respectively. 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 $33.6 million increase in outstanding loans and accounts receivable
purchased as of December 31, 1998 was funded by the $16.0 million proceeds from
the issuance of the Trust Preferred Securities, a $7.4 million increase in
balances due to clients, a $2.0 million issuance of commercial paper, and a $5.0
million increase in the balance outstanding under the bank line of credit.
During 1999, the Company plans to increase the asset sale conduit to $100
million as needed for funding asset growth.
The Company expended $715,000 and $845,000 on premises and equipment in 1998 and
1997, 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 enhancements of its management information systems for providing
tracking and supporting new products.
IMPACT OF THE YEAR 2000 ISSUE
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive data by the Company's computerized
information systems. The year 2000 is critical to these systems as many computer
programs were written using two digits rather than four to define the applicable
year. As a result, any of the Company's computer applications that have
date-sensitive programs may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruptions, including, but not limited to, a temporary inability to
process transactions,
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communicate with customers and financial institutions and update internal
accounting systems. If not corrected, such disruptions could have a significant
impact on the Company's operations.
The Company has initiated a Company-wide program to prepare the Company's
computer systems and applications for the year 2000. Based on present
information, the Company believes that it will be able to achieve year 2000
compliance through modification of some existing programs and the replacement of
other programs with new programs that are already year 2000 compliant. The
Company will utilize both internal and external resources to reprogram, or
replace, and test software for year 2000 compliance. The Company plans to
complete the year 2000 conversion project by July 1, 1999. The total project
costs are estimated to be immaterial and will be expensed as incurred.
The Company is taking steps to resolve year 2000 compliance issues that may be
created by clients, debtors and financial institutions with whom the Company
does business. However, there can be no guarantee that the systems of other
entities will be converted timely. A failure to convert by another entity could
have a significant adverse effect on the Company.
The costs of the year 2000 conversion project and the date on which the Company
plans to complete the project are based on management's best estimates, which
were derived using numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could vary significantly from current estimates.
The Company does not have a written contingency plan to address the issues that
could arise should the Company or any of its clients or debtors not be prepared
to accommodate year 2000 issues timely. The Company believes that in an
emergency it could revert to the use of manual systems that do not rely on
computers.
CHANGES IN FINANCIAL CONDITION
Total assets increased 55.4% to $87.6 million as of December 31, 1998. This
increase resulted primarily from the $37.3 million growth in loans receivable,
which was partially offset by the $9.8 million decrease in the retained interest
in sold assets. The Company's allowance for credit losses stood at $2.0 million
on December 31, 1998, 2.5% of gross outstanding accounts receivable or 3.2% of
average owned receivables outstanding during 1998. At year-end 1997, the reserve
for credit losses was $1.9 million, 4.2% of gross outstanding accounts
receivable or 3.4% of average owned receivables outstanding during 1997.
Management believes that the Company's allowance for credit losses is adequate
as of December 31, 1998 and 1997.
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.
In June of 1997, the Financial Accounting Standards Board issued SFAS 131
"Disclosures about Segments of an Enterprise and Related Information," which is
required to be adopted for fiscal years beginning after December 15, 1997. This
statement requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate, and their major customers. The adoption of SFAS 131 did not have a
material impact on the Company's consolidated financial statements.
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PART II
ITEM 7. FINANCIAL STATEMENTS
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
-----------------------------
1998 1997
- --------------------------------------------------------------------------------
Earned discount income ......................... $ 1,569,617 $ 3,777,299
Interest income - Loans ........................ 5,137,815 3,119,138
Servicing fees (note 2) ........................ 7,914,684 6,314,147
Other income - Fees ............................ 3,325,710 1,980,454
----------------------------
Total revenue ............................ 17,947,826 15,191,038
Interest expense (note 7) ...................... 3,148,469 2,665,552
----------------------------
Income after interest expense ............... 14,799,357 12,525,486
Provision for credit losses (note 4) ........... 1,500,000 875,000
----------------------------
Income after interest expense and
provision for credit losses .................. 13,299,357 11,650,486
Operating expenses:
Salaries and employee benefits (note 16) .... 5,329,177 4,431,018
Amortization of intangible assets ........... 393,513 379,075
Occupancy and equipment (note 14) ........... 1,507,620 1,285,128
Professional fees ........................... 348,398 250,542
Other ....................................... 2,100,201 1,852,314
----------------------------
Total operating expenses ................. 9,678,909 8,198,077
----------------------------
Income before income taxes .................. 3,620,448 3,452,409
Income tax expense (benefit):
Federal (note 10):
Current .................................. 1,135,868 1,278,513
Deferred ................................. 182,316 (2,557)
State ....................................... (90,542) 111,973
----------------------------
Total income taxes ....................... 1,227,642 1,387,929
----------------------------
Net income ............................... $ 2,392,806 $ 2,064,480
============================
Earnings per share - basic (note 11) ........... $ .73 $ .62
===============================================================================
Weighted-average common shares
outstanding - basic (note 11) ................ 3,264,789 3,308,533
===============================================================================
Earnings per share - diluted (note 11) ......... $ .64 $ .60
===============================================================================
Weighted-average common shares
outstanding - diluted (note 11) .............. 3,744,106 3,427,783
===============================================================================
See accompanying notes to consolidated financial statements.
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KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
-----------------------------
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (note 6)
Cash ......................................................... $ 136,223 $ 4,869,516
Accounts receivable, net ..................................... 15,924,170 9,778,292
Loans receivable, net ........................................ 61,147,544 23,863,677
Retained interest in sold assets (note 2)..................... 2,377,884 12,148,609
Less allowance for credit losses ............................. (1,949,573) (1,928,629)
-----------------------------
Total receivables, net (note 4) ..................... 77,500,025 43,861,949
Premises and equipment, net of accumulated depreciation
of $2,269,494 and $1,499,307 at December 31, 1998
and 1997, respectively (note 5) ........................... 2,105,945 2,176,747
Intangible assets less accumulated amortization
of $2,271,934 and $1,908,099 at
December 31, 1998 and 1997, respectively .................. 3,481,559 3,875,072
Other investments (note 3) ................................... 1,750,000 --
Other assets (notes 3 and 10) ................................ 2,646,869 1,617,648
-----------------------------
Total assets ........................................ $ 87,620,621 $ 56,400,932
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank line of credit (note 6) ................................. $ 26,000,000 $ 21,000,000
Mandatorily redeemable preferred securities (note 7) ......... 15,965,232 --
Commercial paper (note 8) .................................... 2,000,000 --
Due to clients (note 9) ...................................... 17,232,335 9,814,897
Accounts payable and other liabilities (note 7) .............. 736,428 767,793
Income taxes payable ......................................... -- 11,307
Deferred revenue ............................................. 257,322 238,023
-----------------------------
Total liabilities ................................... 62,191,317 31,832,020
Stockholders' equity (notes 3, 12, 13, and 17):
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 3,550,738 shares
and outstanding 3,194,871 at December 31, 1998
and issued 3,547,200 shares and outstanding
3,342,033 shares at December 31, 1997 .................. 35,507 35,472
Additional paid-in capital ................................ 16,759,567 16,584,805
Retained earnings ......................................... 11,693,807 9,301,001
Treasury stock, at cost, 355,867 shares at
December 31,1998 and 205,167 shares at
December 31, 1997 ...................................... (3,059,577) (1,352,366)
-----------------------------
Total stockholders' equity ................................ 25,429,304 24,568,912
Commitments and contingencies (notes 6, 7, 12, 13, 14, 15, 17) -----------------------------
Total liabilities and stockholders' equity .......... $ 87,620,621 $ 56,400,932
==============================================================================================
</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, 1998 and 1997
<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, 1996 . 3,310,133 $ 35,472 $ 16,370,555 $ 7,236,521 $ (1,502,633) $ 22,139,915
Purchase of stock for treasury
(note 12) .............. (18,100) -- -- -- (179,233) (179,233)
Issuance of common stock
(note 3) ............... 50,000 -- 214,250 -- 329,500 543,750
Net income ................... -- -- -- 2,064,480 -- 2,064,480
----------------------------------------------------------------------------------------
Balance at December 31, 1997 . 3,342,033 35,472 16,584,805 9,301,001 (1,352,366) 24,568,912
Purchase of stock for treasury
(note 12) .............. (150,700) -- -- -- (1,707,211) (1,707,211)
Exercise of stock options
(note 13) .............. 1,400 14 9,786 -- -- 9,800
Issuance of common stock
(note 17) .............. 2,138 21 19,101 -- -- 19,122
Issuance of stock options
(note 3) ............... -- -- 145,875 -- -- 145,875
Net income ................... -- -- -- 2,392,806 -- 2,392,806
----------------------------------------------------------------------------------------
Balance at December 31, 1998 . 3,194,871 $ 35,507 $ 16,759,567 $ 11,693,807 $ (3,059,577) $ 25,429,304
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 17
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ...................................................... $ 2,392,806 $ 2,064,480
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 1,163,700 999,736
Provision for credit losses ............................... 1,500,000 875,000
(Increase) decrease in accounts receivable, net............ (7,624,934) 45,251,870
Net (increase) decrease in retained interest in sold assets 9,760,267 (12,434,923)
Increase in other assets .................................. (883,346) (247,535)
Increase in due to clients ................................ 7,417,438 1,569,353
Decrease in accounts payable and other liabilities ........ (31,365) (367,274)
Increase in interest payable for the sold assets .......... 10,458 286,314
Increase (decrease) in income taxes payable ............... (11,307) 11,307
Increase in deferred revenue .............................. 19,299 12,058
-----------------------------
Net cash provided by operating activities .............. 13,713,016 38,020,386
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable, net ............. (39,033,867) 3,511,978
Sale of premises and equipment ............................... 15,400 --
Purchases of premises and equipment .......................... (714,785) (844,840)
-----------------------------
Net cash provided by (used in) investing activities .... (39,733,252) 2,667,138
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (repayments of) bank line of credit ...... 5,000,000 (37,000,000)
Issuance of mandatorily redeemable preferred securities, net . 15,965,232 --
Increase in commercial paper ................................. 2,000,000 --
Exercise of stock options .................................... 9,800 --
Issuance of common stock ..................................... 19,122 --
Repurchase of common stock ................................... (1,707,211) (179,233)
-----------------------------
Net cash provided by (used in) financing activities .... 21,286,943 (37,179,233)
-----------------------------
Net increase (decrease) in cash ........................ (4,733,293) 3,508,291
Cash at beginning of year ....................................... 4,869,516 1,361,225
-----------------------------
Cash at end of year ............................................. $ 136,223 $ 4,869,516
=================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest ....................................... $ 2,839,381 $ 3,192,252
Income taxes paid ............................................ $ 1,595,000 $ 997,000
See note 3 for additional supplemental cash flow information
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 18
<PAGE>
KBK CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements presented herein reflect the consolidated financial
statements for KBK Capital Corporation (the "Company") and its wholly owned
subsidiaries, KBK Financial, Inc., ("KBK"), KBK Receivables Corporation, ("SPC")
and KBK Capital Trust I, (the "Trust"). 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 $8,626,000. 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, and actual results could differ from those
estimates. The Company provides financial services through the extension of
secured loans and the discounted purchase of accounts receivable.
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 estimated
impairment. 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 losses. 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.
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 of accounts receivable or loans
receivable. The amount of provision for credit losses 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 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.
Page 19
<PAGE>
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 is amortized on a straight-line basis over the life
of the agreement, approximately thirteen years, through March 31, 2005.
MANDATORILY REDEEMABLE PREFERRED SECURITIES
In 1998, the Company issued 1,725,000 shares of 9.50% mandatorily redeemable
Trust Preferred Securities ("Preferred Securities") through its subsidiary, the
Trust. The principal assets of the Trust are 9.50% subordinated debentures from
the Company due in 2028. The Preferred Securities are recorded at total proceeds
from the sale less the related offering costs and are classified as debt in the
accompanying consolidated balance sheets.
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
required 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.
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. SFAS
No. 123, "Accounting for Stock-Based Compensation," 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 (note 13).
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews for impairment of long-lived assets and certain identifiable
intangibles 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.
Page 20
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, retained interest in sold
assets, due to clients, accounts payable and accrued 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 and commercial paper
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 commercial paper and LIBOR
tranches of the line of credit. The carrying value of the mandatorily redeemable
preferred securities approximates fair value because of the relatively short
time period held in 1998.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In June of 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 did
not have a material impact on the Company's consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June of 1997, the Financial Accounting Standards Board issued SFAS 131
"Disclosures about Segments of an Enterprise and Related Information," which is
required to be adopted for fiscal years beginning after December 15, 1997. This
statement requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate, and their major customers. As KBK is not managed on a segmented
basis, the adoption of SFAS 131 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 purchased receivables and inventory
loans, in which a substantial portion of KBK's owned receivables and inventory
loans were transferred into SPC, also known as a special purpose corporation.
Under this structure, SPC continues to sell 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. The nature of these
sales 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.
The assets sold to SPC and the commercial paper conduit continue to be serviced
by KBK, which receives periodic revenue in the form of a servicing fee, as
outlined in the servicing agreement. Neither a servicing asset nor a servicing
liability is recorded due to the term of the receivables initially transferred
and the commitment obligation during the Revolving Period. The determination of
a value is not practicable and, therefore, no value is recorded. Although the
sale is on a non-recourse basis, KBK may in certain circumstances deem it
necessary to repurchase or replace specific receivables. No gain or loss results
from the sale of these receivables to SPC. A retained interest in the sold
assets remains on the consolidated balance sheets and represents the amounts due
from the conduit. This retained interest amounted to $2,377,884 and $12,148,609
at December 31, 1998 and 1997, respectively.
(3) SUPPLEMENTAL CASH FLOW INFORMATION
During 1996, the purchase agreement (the "Agreement") related to the Coastal
Financial Resources, Inc. (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 (see note 12). For the year ended
December 31, 1997, the criteria for the earnout provision was met, and 50,000
shares of common stock of the Company were issued from treasury shares to the
former Coastal shareholders at an average cost of $6.59 per share in 1997. This
had the effect of increasing goodwill by $543,750 in 1997. The 1997 issuance of
shares completed the Company's obligation under the Agreement.
During 1998, a receivable balance of the Company was deemed non-performing due
to allegedly fraudulent invoices being sold to KBK. To partially offset the
unsecured portion of the receivables purchased balance, KBK was offered and
accepted an ownership interest in a newly formed entity which took over the
operations of the company selling KBK the invoices. The ownership interest
Page 21
<PAGE>
of this newly formed entity, amounting to $1,750,000, has been included in other
investments as an equity investment in the new entity.
During 1998, 25,000 employee stock options were granted at an exercise price
less than the market price at the date of issuance. Accordingly, deferred
compensation of $145,875 was recorded as other assets. Amortization of this
amount to compensation expense is being recorded over a five year period. The
impact of this amortization to the consolidated financial statements in 1998 was
not material.
(4) RECEIVABLES
Receivables at December 31, 1998 and 1997 are summarized as follows:
1998 1997
- -----------------------------------------------------------------
Accounts receivable ............ $ 20,913,835 $ 15,144,857
Less participation ........ (4,989,665) (5,366,565)
Loans receivable ............... 70,888,085 30,612,240
Less participation ........ (10,080,859) (7,113,544)
Employee advances .............. 340,318 364,981
Retained interest in sold assets 2,377,884 12,148,609
-----------------------------
79,449,598 45,790,578
Less allowance for credit losses 1,949,573 1,928,629
-----------------------------
$ 77,500,025 $ 43,861,949
- -----------------------------------------------------------------
Accounts receivable are purchased from clients engaged in a variety of
industries including, but not limited to, wholesale and retail sales,
engineering and construction, energy, manufacturing, transportation, and
marketing related companies. The two largest clients represent 12.7% and 9.8%,
respectively, of total receivables or 39.7% and 30.7%, respectively, of
stockholders' equity at December 31, 1998. At December 31, 1997, the two largest
clients represented 16.6% and 10.9%, respectively, of total receivables or 30.9%
and 20.4%, respectively, of stockholders' equity.
At December 31, 1998, approximately 20.2% and 15.3% of the outstanding accounts
receivable under management were purchased from clients in engineering and
construction related and wholesale and retail related industries, respectively.
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, 1998, had outstanding accounts
receivable under management of $3.8 million and $3.4 million, which represented
approximately 4.8% and 4.2%, respectively, of the total outstanding accounts
receivables under management at that date. 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:
YEAR ENDED DECEMBER 31
---------------------------
1998 1997
- ----------------------------------------------------------
Balance at beginning of year $ 1,928,629 $ 1,608,253
Provision for credit losses 1,500,000 875,000
Charge-offs ................ (1,482,067) (764,884)
Recoveries ................. 3,011 210,260
---------------------------
Balance at end of year ..... $ 1,949,573 $ 1,928,629
- ----------------------------------------------------------
Page 22
<PAGE>
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 are summarized as follows:
ESTIMATED
USEFUL LIVES
1998 1997 IN YEARS
- ----------------------------------------------------------------------
Office equipment ............ $3,660,119 $3,018,806 3-7
Automotive .................. 96,754 75,833 5
Leasehold improvements ...... 618,566 581,415 2-10
------------------------------------
$4,375,439 $3,676,054
Less accumulated depreciation 2,269,494 1,499,307
------------------------------------
$2,105,945 $2,176,747
- ----------------------------------------------------------------------
(6) BANK LINE OF CREDIT
KBK maintains a $55,000,000 multi-bank revolving line of credit ("Credit
Facility"), maturing on April 30, 2001 and bearing interest at the agent bank's
prime rate or LIBOR plus 1.75% at the election of KBK, and secured by
substantially all of KBK's assets. At December 31, 1998, $55,000,000 was
committed with outstanding indebtedness under this Credit Facility of
$26,000,000 ($10,000,000 at an interest rate of 7.75%, and $16,000,000 at
7.00%). 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. There were $2,394,817 in letters
of credit outstanding at December 31, 1998. At December 31, 1997, $45,000,000
was committed with outstanding indebtedness of $21,000,000 ($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. 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, limitations on chargeoffs and non-performing assets and
an interest coverage ratio. The Credit Facility also provides for a borrowing
base against eligible receivables and eligible loans pursuant to the terms of
the Credit Facility. KBK was in compliance with the financial covenants and
borrowing base limitations, and there was approximately $26,605,000 and
$2,500,000 in available credit under this line at December 31, 1998 and 1997,
respectively.
The following is an analysis of the activity under the line of credit for the
years indicated:
YEARS ENDED DECEMBER 31
------------------------------
1998 1997
- --------------------------------------------------------------------
Average amount outstanding ... $31,321,000 $31,201,000
- --------------------------------------------------------------------
Maximum outstanding as of
any month-end ............. $47,650,000 $58,000,000
- --------------------------------------------------------------------
Weighted-average interest rate 7.4% 7.5%
- --------------------------------------------------------------------
(7) MANDATORILY REDEEMABLE PREFERRED SECURITIES
In 1998, the Trust issued 1,725,000 shares of mandatorily redeemable Trust
Preferred Securities. The principal assets of the Trust are approximately $16.0
million in subordinated debentures issued by the Company. The subordinated
debentures, which are eliminated upon consolidation of the Trust with the
Company, bear interest at a rate of 9.50% and mature in 2028, subject to
extension or earlier redemption in certain events. The Company owns all of the
common securities of the Trust.
The Preferred Securities are redeemable for cash, at the option of the Trust, in
whole or in part, from time to time on or after November 30, 2001, at a
redemption price of $10.00 per share plus accumulated and unpaid distributions
thereon. The Preferred Securities will also be redeemable upon the repayment
either at maturity of the Debentures or as a result of the acceleration of the
Debentures upon an event of default.
Distributions on the Preferred Securities are cumulative and accrue at 9.50% per
annum on the sum of liquidation value thereof, plus unpaid distributions which
have been accrued in prior quarters. Accrued and unpaid distributions are
reflected in other liabilities in the accompanying consolidated balance sheets.
The obligations of the Company with respect to the issuance of the Preferred
Securities constitute an irrevocable guarantee by the Company of the Trust's
obligation with respect to the Preferred Securities.
Page 23
<PAGE>
Subject to certain limitations, the Company may, from time to time, defer
subordinated debenture interest payments to the Trust, which would result in a
deferral of distribution payments on the related Preferred Securities. In such
case, the distributions on the Preferred Securities will accumulate and compound
quarterly at 9.50% per annum.
The difference between the carrying value and liquidation value of the Preferred
Securities, $1,284,768 as of December 31, 1998, is being accreted over 15 years
by making periodic charges to the Company's earnings. This accretion and the
distributions noted above amounted to approximately $189,000 as of December 31,
1998 and are reflected in the accompanying consolidated statements of income as
interest expense.
(8) COMMERCIAL PAPER
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. As of
December 31, 1998, KBK had issued three certificates with a balance outstanding
of $2,000,000 ($1,000,000 at a coupon rate of 7.75%, maturing January 13, 1999
and $1,000,000 at a coupon rate of 8.75%, maturing June 11, 1999). The
commercial paper balance included $1,000,000 issued to a Director of the
Company.
(9) 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.
(10) INCOME TAXES
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1998 and 1997 are as follows:
1998 1997
- ------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses .............. $ 476,169 $ 655,734
Deferred tax liabilities:
Premises and equipment, due to differences
in depreciation ......................... (119,490) (140,813)
Amortization of non-compete agreement .... (78,513) (54,439)
------------------------
Net deferred tax asset ................... $ 278,166 $ 460,482
- ------------------------------------------------------------------------
No valuation allowance has been established for the deferred tax assets at
December 31, 1998 or 1997 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
1998 1997
- ---------------------------------------------------------------------------
Computed "expected" tax expense ........... $ 1,230,952 $ 1,173,819
Nondeductible amortization ................ 57,295 51,683
State Income Tax, net ..................... (59,758) 137,046
Other, net ................................ (847) 25,381
----------------------------
$ 1,227,642 $ 1,387,929
- ---------------------------------------------------------------------------
Page 24
<PAGE>
(11) EARNINGS PER SHARE
Following is a reconciliation between the weighted average shares outstanding
used in the basic and diluted EPS computations:
YEARS ENDED DECEMBER 31
------------------------
1998 1997
- ----------------------------------------------------------------------------
Net Income ...................................... $2,392,806 $2,064,480
========================
Weighted average shares outstanding - Basic ..... 3,264,789 3,308,533
========================
Earnings per share - Basic ...................... $ .73 $ .62
========================
Weighted average shares outstanding - Basic ..... 3,264,789 3,308,533
Effect of dilutive securities:
Assumed exercise of stock options and warrants 479,317 119,250
------------------------
Weighted average shares outstanding - Diluted ... 3,744,106 3,427,783
========================
Earnings per share - Diluted .................... $ .64 $ .60
============================================================================
(12) 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
underwriting, legal, accounting and other offering expenses were $8,626,000. On
December 30, 1994, the Company issued 400,000 shares of common stock in
connection with the acquisition of Coastal. Through December 31, 1997, an
additional 100,000 shares of the Company (50,000 shares in 1997) had been issued
to complete the earnout provision of the Coastal acquisition agreement. Pursuant
to the Stock Repurchase Plan initiated in 1995, the Company held 355,867 shares
of Treasury Stock at a cost of $3,059,577 as of December 31, 1998, and 205,167
shares of Treasury Stock at a cost of $1,352,366 as of December 31, 1997.
(13) 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 the Compensation
Committee of 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, 1998, there were 145,450 shares available for grant under the
two Plans. The per share weighted-average fair value of stock options granted
during 1998 and 1997 was $5.24 and $3.05 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 32%, risk-free interest
rate of 6%, and an expected life of 9 years.
Page 25
<PAGE>
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:
1998 1997
- ------------------------------------------------------------
Net income As reported ..... $ 2,393,000 $ 2,064,000
Pro Forma ....... $ 2,324,000 $ 2,025,000
Earnings per share - basic
As reported ..... $ .73 $ .62
Pro Forma ....... $ .71 $ .61
Earnings per share - diluted
As reported ..... $ .64 $ .60
Pro Forma ....... $ .62 $ .59
- ------------------------------------------------------------
Pro forma net income reflects only options granted in 1998 and 1997. 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, 1997 is not
considered.
Stock option activity during the periods indicated is as follows:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
- -------------------------------------------------------------------------
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
Granted ........................... 181,750 9.66
Exercised ......................... (1,400) 7.00
Forfeited ......................... (19,100) 6.31
- -------------------------------------------------------------------------
Balance at December 31, 1998 ...... 609,750 6.96
- -------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------------------
NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
$4.06 to $5.50............ 290,000 7.33 years $5.03
$6.00 to $7.25............ 136,000 6.46 6.71
$9.00 to $9.94............ 108,750 7.90 9.31
$11.00 TO $12.00.......... 75,000 9.00 11.45
- ------------------------------------------------------------------------------------
$4.06 TO $12.00........... 609,750 7.44 6.96
- ------------------------------------------------------------------------------------
</TABLE>
OPTIONS EXERCISABLE
- ---------------------------------------------------------------
NUMBER WEIGHTED
RANGE OF EXERCISABLE AT AVERAGE
EXERCISE PRICES 12/31/98 EXERCISE PRICE
- ---------------------------------------------------------------
$4.06 to $5.50........... 121,800 $5.04
$6.00 to $7.25........... 92,000 6.64
$9.00 to $9.94........... 24,600 9.00
$11.00 TO $12.00......... 30,000 11.33
- ---------------------------------------------------------------
$4.06 TO $12.00.......... 268,400 6.65
- ---------------------------------------------------------------
At December 31, 1998 and 1997, the number of options exercisable was 268,400 and
165,900, respectively, and the weighted-average exercise price of those options
was $6.65 and $6.36, respectively.
Page 26
<PAGE>
(14) COMMITMENTS
The Company has several noncancelable operating leases for office space. Total
rent expense incurred was $687,000 and $629,000, during 1998 and 1997. At
December 31, 1998, future minimum payments on noncancelable operating leases are
as follows:
Year Ending
December 31
- ------------------------
1999 $772,589
2000 765,785
2001 761,541
2002 714,857
2003 376,187
Thereafter 43,762
(15) 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'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 $55,800,000 and
$44,500,000 for 1998 and 1997, respectively.
(16) 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
50% of every employee contribution subject to a 6% salary limit. The Company's
contributions to the Plan totaled $69,000 for 1998 and $21,000 for 1997.
(17) EMPLOYEE STOCK PURCHASE PLAN
In April of 1998, the Company adopted the 1998 Employee Stock Purchase Plan,
("the Stock Plan") which subsequently received shareholder approval. The Stock
Plan provides eligible full-time employees with an opportunity to purchase
common stock of the Company through payroll deductions. The aggregate number of
shares of common stock which may be purchased under the Stock Plan shall not
exceed 150,000 (subject to adjustment in the event of stock dividends, stock
splits, combinations of shares, recapitalizations or other changes in the
outstanding common stock). The exercise price for the stock purchase shall be
90% of the lower of the fair market value of the stock on the first day or the
last day of the calendar quarter of the applicable option period. The Stock Plan
became effective July 1, 1998. During 1998, 2,138 shares were purchased by
employees through the Stock Plan.
Page 27
<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, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for 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 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 as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas
January 22, 1999
KBK CAPITAL CORPORATION AND SUBSIDIARIES
QUARTERLY SUMMARY RESULTS (UNAUDITED)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
1998
YTD ------------------------------------------
1998 4TH QTR 3RD QTR 2ND QTR 1ST QTR
---------
<S> <C> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned ....... $118,441 $137,148 $122,811 $112,587 $101,252
Owned ................... 49,567 63,867 50,845 45,943 37,698
=====================================================
Revenue .................... $ 17,948 $ 4,715 $ 4,500 $ 4,635 $ 4,097
Interest Expense ........... 3,149 1,144 835 679 491
Operating Expenses ......... 9,679 2,805 2,359 2,361 2,154
-----------------------------------------------------
Operating profit ........... 5,120 766 1,306 1,595 1,452
-----------------------------------------------------
Provision for credit losses 1,500 400 400 400 300
-----------------------------------------------------
Pretax Income .............. 3,620 366 906 1,195 1,152
Taxes ...................... 1,227 117 186 478 446
-----------------------------------------------------
Net Income ................. $ 2,393 249 720 717 706
=====================================================
Earnings Per Share - Basic . $ .73 $ .08 $ .22 $ .22 $ .21
Earnings Per Share - Diluted $ .64 $ .08 $ .19 $ .19 $ .18
</TABLE>
<TABLE>
<CAPTION>
1997
YTD ------------------------------------------
1997 4TH QTR 3RD QTR 2ND QTR 1ST QTR
---------
<S> <C> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned ....... 85,621 $ 96,218 $ 92,602 $ 81,368 $ 72,335
Owned ................... $ 46,582 $ 35,017 $ 35,906 $ 43,070 $ 72,335
====================================================
Revenue .................... $ 15,191 $ 4,108 $ 3,836 $ 3,648 $ 3,599
Interest Expense ........... 2,666 460 506 610 1,090
Operating Expenses ......... 8,198 2,249 2,112 1,982 1,853
----------------------------------------------------
Operating profit ........... 4,327 1,399 1,218 1,056 656
----------------------------------------------------
Provision for credit losses 875 300 300 200 75
----------------------------------------------------
Pretax Income .............. 3,452 1,099 918 856 581
Taxes ...................... 1,388 435 367 354 233
----------------------------------------------------
Net Income ................. $ 2,064 664 551 502 348
====================================================
Earnings Per Share - Basic . $ 0.62 $ 0.20 $ 0.17 $ 0.15 $ 0.11
Earnings Per Share - Diluted $ 0.60 $ 0.18 $ 0.16 $ 0.15 $ 0.11
</TABLE>
Page 28
<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 1999 Annual Meeting of Stockholders, under the captions "Election of
Directors," "Information Concerning Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting 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 1999 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 1999 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 1999 Annual
Meeting of Stockholders, under the captions "Certain Relationships and Related
Party Transactions" and is incorporated herein by reference.
Page 29
<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 Aril 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.
10.11 --Amendment to Third Amended and Restated Loan Agreement
10.12 --Receivables Purchase Agreement (4/11/97)
10.13 --Purchase and Sale Agreement (4/11/97)
21.1 --Subsidiary of the Company (incorporated by reference to Exhibit
to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-77378-D).
+ Management contract or compensatory plan or arrangement
(b) Reports 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, 1998.
Page 30
<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 29, 1999 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By /s/ ROBERT J. MCGEE Chairman and Chief Executive Officer March 29, 1999
(Robert J. McGee)
By /s/ JAY K. TURNER Executive Vice President and Chief March 29, 1999
(Jay K. Turner) Financial Officer (Principal
Financial Officer)
By /s/ DEBORAH B. WILKINSON Vice President and Controller March 29, 1999
(Deborah B. Wilkinson) (Principal Accounting Officer)
By /s/ KENNETH H. JONES, JR.) Vice Chairman and Director March 29, 1999
(Kenneth H. Jones, Jr.)
By /s/ THOMAS SIMMONS Director March 29, 1999
(Thomas Simmons)
By /s/ DANIEL R. FEEHAN Director March 29, 1999
(Daniel R. Feehan)
By /s/ THOMAS L. HEALEY Director March 29, 1999
(Thomas L. Healey)
By /s/ MARTHA V. LEONARD Director March 29, 1999
(Martha V. Leonard)
By /s/ R. EARL COX, III Director March 29, 1999
(R. Earl Cox, III)
By /s/ HARRIS A. KAFFIE Director March 29, 1999
(Harris A. Kaffie)
</TABLE>
Page 31
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 136,223
<SECURITIES> 0
<RECEIVABLES> 79,449,598
<ALLOWANCES> (1,949,573)
<INVENTORY> 0
<CURRENT-ASSETS> 7,878,428
<PP&E> 4,375,439
<DEPRECIATION> 2,269,494
<TOTAL-ASSETS> 87,620,621
<CURRENT-LIABILITIES> 46,226,085
<BONDS> 0
15,965,232
0
<COMMON> 35,507
<OTHER-SE> 25,393,797
<TOTAL-LIABILITY-AND-EQUITY> 87,620,621
<SALES> 0
<TOTAL-REVENUES> 17,947,826
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,678,909
<LOSS-PROVISION> (1,500,000)
<INTEREST-EXPENSE> 3,148,469
<INCOME-PRETAX> 3,620,448
<INCOME-TAX> 1,227,642
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,392,806
<EPS-PRIMARY> .73
<EPS-DILUTED> .64
</TABLE>
