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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------- ------------
COMMISSION FILE NUMBER: 0-24220
KBK CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2416103
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
301 COMMERCE, SUITE 2200, FORT WORTH, TEXAS 76102-4122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 258-6000
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- ----
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $0.01 PAR VALUE 3,204,846
(SHARES OUTSTANDING AS OF MARCH 31, 1999)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
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Page 1 of 12
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KBK CAPITAL CORPORATION
FORM 10-QSB -- Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at March 31, 1999 (unaudited) and December 31, 1998 2
Consolidated Statements of Income for the Three Months Ended March 31, 1999 3
(unaudited) and 1998 (unaudited)
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 4
(unaudited) and 1998 (unaudited)
Notes to Consolidated Financial Statements 5-7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7-11
PART II. OTHER INFORMATION 12
Item 1 - Legal Proceedings 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
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PART 1. - ITEM 1 - FINANCIAL STATEMENTS
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MAR. 31, 1999 DEC. 31, 1998
(UNAUDITED)
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<S> <C> <C>
Cash $ 14,558,511 $ 136,223
Accounts receivable, net 13,421,710 15,924,170
Loans receivable, net 61,920,533 61,147,544
Retained interest in sold assets, net 4,240,639 2,377,884
Less allowance for credit losses (1,974,673) (1,949,573)
------------- -------------
Total receivables, net 77,608,209 77,500,025
Premises and equipment, net of accumulated depreciation of
$2,476,916 and $2,269,494 at March 31, 1999 and
December 31, 1998, respectively 2,008,092 2,105,945
Intangible assets, less accumulated amortization of $2,370,312 and
$2,271,934 at March 31, 1999 and December 31, 1998, respectively 3,383,181 3,481,559
Other investments 1,750,000 1,750,000
Other assets 2,322,922 2,646,869
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Total assets $ 101,630,915 $ 87,620,621
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank line of credit $ 42,000,000 $ 26,000,000
Mandatorily redeemable preferred securities 15,975,721 15,965,232
Commercial paper 2,000,000 2,000,000
Due to clients 16,315,177 17,232,335
Accounts payable and other liabilities 106,789 736,428
Income taxes payable -- --
Deferred revenue 69,725 257,322
------------- -------------
Total liabilities 76,467,412 62,191,317
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value. Authorized 100,000 shares; no
shares issued and outstanding -- --
Common stock, $.01 par value. Authorized 10,000,000 shares; issued
3,560,713 shares and outstanding 3,204,846 at March 31,1999 and
issued 3,550,738 shares and outstanding 3,194,871 at December 31, 1998
35,607 35,507
Additional paid-in capital 16,241,996 16,759,567
Retained earnings 11,945,477 11,693,807
Treasury stock, at cost, 355,867 shares at March 31, 1999 and
December 31, 1998 (3,059,577) (3,059,577)
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Total stockholders' equity 25,163,503 25,429,304
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Total liabilities and stockholders' equity $ 101,630,915 $ 87,620,621
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
(UNAUDITED) (UNAUDITED)
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<S> <C> <C>
Earned discount income $ 541,606 $ 492,101
Interest income - Loans 1,666,007 823,913
Servicing fees 1,588,640 2,006,092
Other income - Fees 916,910 775,138
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Total revenue 4,713,163 4,097,244
Interest expense 1,226,403 491,292
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Income after interest expense 3,486,760 3,605,952
Provision for credit losses 400,000 300,000
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Income after interest expense and provision for credit losses 3,086,760 3,305,952
Operating expenses:
Salaries and employee benefits 1,600,335 1,177,158
Amortization of intangible assets 98,378 98,378
Occupancy and equipment 429,339 359,105
Professional fees 121,203 114,723
Other 450,291 404,140
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Total operating expenses 2,699,546 2,153,504
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Income before income taxes 387,214 1,152,448
Income tax expense:
Federal 131,670 377,101
State 3,874 69,147
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Total income taxes 135,544 446,248
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Net income $ 251,670 $ 706,200
========== ==========
Earnings per share - basic $ 0.08 $ 0.21
========== ==========
Weighted-average common shares outstanding - basic 3,289,206 3,318,328
========== ==========
Earnings per share - diluted $ 0.07 $ 0.18
========== ==========
Weighted-average common shares outstanding - diluted 3,589,145 3,851,018
========== ==========
</TABLE>
See accompanying notes to financial statements.
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KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MAR. 31, 1999 MAR. 31, 1998
(UNAUDITED) (UNAUDITED)
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 251,670 $ 706,200
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 335,054 283,243
Provision for credit losses 400,000 300,000
(Increase) decrease in accounts receivable, net 2,127,560 (572,229)
Net (increase) decrease in retained interest in sold assets (1,802,324) 1,965,412
(Increase) decrease in other assets 323,947 (117,204)
Decrease in due to clients (917,158) (32,730)
Decrease in accounts payable and other liabilities (629,639) (224,115)
Increase (decrease) in interest payable for the sold assets (60,431) 60,759
Increase in income taxes payable -- 378,679
Increase (decrease) in deferred revenue (187,597) 83,870
------------ ------------
Net cash provided by (used in) operating activities (158,918) 2,831,885
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable, net (772,989) (3,543,245)
Purchases of premises and equipment (128,334) (101,905)
------------ ------------
Net cash used in investing activities (901,323) (3,645,150)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from bank line of credit 16,000,000 3,000,000
Purchase of stock warrants (572,500) --
Exercise of stock options 38,360
Issuance of common stock 16,669 --
Repurchase of common stock -- (762,257)
------------ ------------
Net cash provided by financing activities 15,482,529 2,237,743
------------ ------------
Net increase in cash 14,422,288 1,424,478
Cash at beginning of period 136,223 4,869,516
------------ ------------
Cash at end of period $ 14,558,511 $ 6,293,994
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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KBK CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL. The consolidated financial statements of KBK Capital Corporation
(the "Company") and its wholly owned subsidiaries, KBK Financial, Inc.,
("KBK"), KBK Receivables Corporation, ("SPC") and KBK Capital Trust I, (the
"Trust"), included herein, are unaudited as of and for all periods ended March
31, 1999 and 1998. However, such unaudited statements reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary to fairly depict the results for the periods presented.
Certain information and note disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles
("GAAP"), have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission. The Company believes that the
disclosures made herein are adequate to make the information presented not
misleading.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year. It is suggested that these consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and notes thereto for the years ended December 31, 1998 and 1997
which are included in the Company's 1998 annual report.
2. SALE OF ASSETS. In April 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
and inventory loans 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 and inventory loans 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 and inventory loans 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 and/or inventory loans.
No gain or loss results from the sale of these receivables and inventory loans
to SPC. A retained interest in the sold assets remains on the consolidated
balance sheets and represents amounts due from the conduit. This retained
interest amounted to $4,240,639 as of March 31, 1999.
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3. OTHER INVESTMENTS. 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 of this newly formed entity, amounting to $1,750,000, has
been included in other investments as an equity investment in the new entity.
4. BANK LINE OF CREDIT. KBK maintains a $62.9 million 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 March 31, 1999, $62.9 million
was committed with outstanding indebtedness under this Credit Facility of $42.0
million. 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 $1.3 million in
letters of credit outstanding at March 31, 1999. 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 charge-offs 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. At March 31, 1999, KBK was in compliance with the financial
covenants and borrowing base limitations, and there was $8.6 million in
available credit under this line.
5. 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. 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, $1,274,279 as of March 31, 1999,
is being accreted over 15 years by making periodic charges to the Company's
earnings. This accretion and the distributions noted above amounted to
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approximately $415,000 for the quarter ended March 31, 1999 and are reflected
in the accompanying consolidated statements of income as interest expense.
6. STOCKHOLDERS' EQUITY. The Company acquired no shares of its common stock
during the quarter ended March 31, 1999. 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 March 31, 1999. 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.
During the first quarter of 1999, the Company paid $572,500 to repurchase from
a former director warrants to purchase 160,000 shares of the Company's common
stock. The remaining 340,000 warrants are exercisable at $5 per share and
expire on February 25, 2005.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following commentary presents management's discussion and analysis of the
Company's financial condition and results of operations for the periods
presented. Certain of the statements included below, including those regarding
future financial performance or results or those that are not historical facts,
are, or contain, "forward-looking" information as that term is defined in the
Securities Exchange Act of 1934, as amended. The words "expect," "believe,"
"anticipate," "project," "estimate," and similar expressions are intended to
identify forward-looking statements. The Company cautions readers that any such
statements are not guarantees of future performance or events and such
statements involve risks, uncertainties and assumptions, including, but not
limited to, industry conditions, general economic conditions, interest rates,
competition, ability of the Company to successfully manage its growth, and
other factors discussed below and in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 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 or
implied in the forward-looking statements. This narrative should be read in
conjunction with information provided in the financial statements and
accompanying notes appearing in this report and the audited financial
statements appearing in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998.
KBK Capital Corporation is the holding company for KBK Financial, Inc., an
independent financial services company that provides a broad line of financial
products and services to middle market commercial businesses with credit needs
of less than $10 million. 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 that 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
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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.
KBK's growth strategies include increasing market penetration and expanding its
market presence, extending its product line and opportunistically pursuing
strategic acquisitions and partnerships which will complement or leverage the
Company's product portfolio or client relationships.
RESULTS OF OPERATIONS
Analysis of First Quarter 1999 Compared to First Quarter 1998
The following table sets forth the results of operations and certain other data
of the Company for the first quarter of 1999 and the first quarter of 1998.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
(unaudited) (unaudited)
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Average Net Earning Assets
Managed and Owned $ 133,739 $ 101,252
Owned 69,712 37,698
Total Revenue 4,713 100.0% 4,097 100.0%
Interest Expense 1,226 26.0% 491 12.0%
Provision for Credit Losses 400 8.5% 300 7.3%
Operating Expense 2,700 57.3% 2,154 52.6%
Income Taxes 135 2.9% 446 10.9%
Net Income 252 5.3% 706 17.2%
</TABLE>
Average net earning assets (managed and owned) increased 32.1% to $133.7
million for the quarter ended March 31, 1999 from $101.3 million for the
quarter ended March 31, 1998. Approximately 71% of the asset growth related to
loans which carry a yield lower than the accounts receivable portfolio.
Therefore, the total revenue increased only 15.0%, or $616,000 to $4.7 million
for the quarter ended March 31, 1999 from the quarter ended March 31, 1998
total revenue of $4.1 million. The sale of assets resulted in $1.6 million in
servicing fee income during the quarter ended March 31, 1999.
Interest expense increased $735,000 to $1.2 million for the first quarter of
1999 compared with $491,000 for the first quarter of 1998. This increase
resulted from the $34.9 million increase in average funded debt required to
support the increase in net average earning assets. The trust preferred
securities comprised $16.0 million of the increased funding and carried a
significantly higher cost of funds than the bank debt. In addition, the net
effect of the increased revenue and increased interest expense was a decrease
of $119,000, or 3.3%, in income after interest expense for the quarter ended
March 31, 1999, compared to the prior year quarter.
A provision for credit losses of $400,000 was recorded for the first quarter of
1999, compared to $300,000 for the first quarter of 1998. During the first
quarter of 1999 the Company had net chargeoffs of $375,000 compared to $269,000
of net chargeoffs for the first quarter of 1998. The allowance for credit
losses at March 31, 1999 of $2.0 million represents 2.5% of total outstanding
loans and accounts receivables (which
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includes retained interest in sold assets) and 2.8% of average net earning
assets owned for the quarter then ended. The allowance for credit losses at
March 31, 1998 of $2.0 million represented 4.1% of total outstanding loans and
accounts receivables and 5.2% of average net earning assets owned for the
quarter then ended. Management believes the current allowance is adequate to
cover potential losses which might result from the purchased accounts
receivable and loan portfolio at March 31, 1999.
Operating expenses of $2.7 million for the three months ended March 31, 1999
increased $546,000, or 25.3%, compared with $2.2 million for the three months
ended March 31, 1998. Employment related expense constituted $423,000 of the
increase, due primarily to additional executive management hired subsequent to
the first quarter of 1998 and bonus accruals related to marketing production.
Occupancy and equipment expense increased $70,000 to $429,000 for the quarter
ended March 31, 1999 compared to $359,000 for the quarter ended March 31, 1998,
primarily related to the Company's growth resulting in additional occupancy and
systems costs in the corporate offices. The Company's growth also generated a
$46,000 increase in other expenses to $450,000 for the quarter ended March 31,
1999 compared to $404,000 for the quarter ended March 31, 1998.
The decreased income after interest expense, coupled with increased operating
expenses, resulted in a 66.4% decrease in earnings compared to the first
quarter of 1998. Therefore, income taxes of $135,000 for the first quarter of
1999 were 69.7% less than the $446,000 of income taxes for the first quarter of
1998.
As a result of the foregoing, net income of the Company for the first quarter
of 1999, decreased to $252,000 from $706,000 for the first quarter of 1998.
CHANGES IN FINANCIAL CONDITION
Total assets increased 16.0% from $87.6 million at December 31, 1998 to $101.6
million at March 31, 1999. This increase is primarily related to the increase
in cash from $136,000 at December 31, 1998 to $14.6 million at March 31, 1999
and the corresponding increase in the bank line of credit from $26.0 million at
December 31, 1998 to $42.0 million at March 31, 1999. This increase in cash
resulted from anticipated client fundings which did not occur until April,
1999.
Stockholders' equity decreased $266,000, from $25.4 million at December 31,
1998 to $25.2 million at March 31, 1999, which was the net result of net income
of $252,000, stock option exercise and stock issuance totaling $55,000, and a
reduction of $572,500 for warrants purchased during the three months ended
March 31, 1999. The Company paid no dividends on its common stock for the three
months ended March 31, 1999.
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 $32.0 million, from $37.7 million during the quarter ended
March 31, 1998 to $69.7 million for the same period in 1999. The Company
continues to search for ways to employ its capital and to expand its portfolio
through increased market 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 maintains a $62.9 million 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,
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and secured by substantially all of KBK's assets. At March 31, 1999, $62.9
million was committed with outstanding indebtedness under this Credit Facility
of $42.0 million. 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 was $1.3
million in letters of credit outstanding at March 31, 1999. 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 charge-offs 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. At March 31, 1999, KBK was in compliance with the
financial covenants and borrowing base limitations, and there was $8.6 million
in available credit under this line.
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 March 31, 1999, KBK had issued three certificates with a balance outstanding
of $2,000,000 ($1,000,000 at a coupon rate of 7.75%, maturing May 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 March 31, 1999, 355,867 shares of common
stock were held in the treasury at a cost of $3.1 million. All of such
purchases have been funded out of the general funds of the Company, which may
have had the result of increasing the outstanding balance under the Credit
Facility.
Future sources of liquidity to fund growth in earning assets are anticipated
from the sale of earning assets, the issuance of unsecured and secured
corporate debt obligations, preferred and common stock issuance, as well as
from traditional bank financing.
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, 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.
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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.
11
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any litigation other than routine proceedings
incidental to its business and the Company does not expect that these
proceedings will have a material adverse effect on the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KBK CAPITAL CORPORATION
Date May 14, 1999 /s/ Jay K. Turner
------------------ -----------------------------------
Jay K. Turner,
Executive Vice President and Chief
Financial Officer
12
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,558,511
<SECURITIES> 0
<RECEIVABLES> 79,582,882
<ALLOWANCES> (1,974,673)
<INVENTORY> 0
<CURRENT-ASSETS> 7,456,103
<PP&E> 4,485,008
<DEPRECIATION> 2,476,916
<TOTAL-ASSETS> 101,630,915
<CURRENT-LIABILITIES> 76,467,412
<BONDS> 0
0
0
<COMMON> 35,607
<OTHER-SE> 25,127,896
<TOTAL-LIABILITY-AND-EQUITY> 101,630,915
<SALES> 0
<TOTAL-REVENUES> 4,713,163
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,699,546
<LOSS-PROVISION> 400,000
<INTEREST-EXPENSE> 1,226,403
<INCOME-PRETAX> 387,214
<INCOME-TAX> 135,544
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 251,670
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
