<PAGE> 1
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 SEPTEMBER 30, 2000
[ ] 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 2,768,845
(SHARES OUTSTANDING AS OF OCTOBER 31, 2000)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
--- ---
================================================================================
<PAGE> 2
KBK CAPITAL CORPORATION
FORM 10-QSB -- Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at September 30, 2000 (unaudited) and December 31, 1999 2
Consolidated Statements of Income for the Three Months Ended September 30, 2000 and
1999 (unaudited) and Nine Months Ended September 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for the Year Ended
December 31, 1999 and the Nine Months Ended September 30, 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 5
1999 (unaudited)
Notes to Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
1
<PAGE> 3
PART 1. - ITEM 1 - FINANCIAL STATEMENTS
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
SEPT. 30, 2000 DEC. 31, 1999
(UNAUDITED)
-------------- --------------
<S> <C> <C>
ASSETS
Cash $ 756,658 $ 4,854,980
Accounts receivable, net 8,373,309 14,475,250
Loans receivable, net 74,072,467 77,328,257
Retained interest in sold assets 11,709,030 9,150,992
Less allowance for credit losses (2,199,403) (2,018,787)
-------------- --------------
Total receivables, net 91,955,403 98,935,712
Premises and equipment, net of accumulated depreciation of
$3,567,358 at September 30, 2000 and $3,023,383 at December 31, 1999,
respectively 1,180,579 1,607,567
Intangible assets, less accumulated amortization of $2,960,582
at September 30, 2000 and $2,665,447 at December 31, 1999, respectively 2,797,659 3,092,794
Other investments, net 1,210,000 1,250,000
Other assets 2,027,227 2,636,509
-------------- --------------
Total assets $ 99,927,526 $ 112,377,562
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank line of credit $ 45,000,000 $ 56,000,000
Mandatorily redeemable preferred securities 16,043,802 16,008,622
Commercial paper -- 100,000
Due to clients 13,229,082 15,060,845
Accounts payable and other liabilities 1,234,535 970,241
Deferred revenue 529,950 339,856
-------------- --------------
Total liabilities 76,037,369 88,479,564
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
3,577,485 shares and outstanding 2,823,845 at September 30, 2000 and
issued 3,577,485 shares and outstanding 2,985,829 at December 31, 1999 35,775 35,775
Additional paid-in capital 16,263,709 16,326,919
Retained earnings 12,698,031 11,833,443
Treasury stock, at cost, 753,640 shares at September 30, 2000
and 591,656 shares at December 31, 1999 (5,107,358) (4,298,139)
-------------- --------------
Total stockholders' equity 23,890,157 23,897,998
-------------- --------------
Total liabilities and stockholders' equity $ 99,927,526 $ 112,377,562
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 2000 SEPT. 30, 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earned discount income $ 341,420 $ 506,616 $ 1,260,014 $ 2,107,561
Interest income - Loans 2,248,016 2,008,314 7,256,032 5,785,791
Servicing fees 2,012,453 1,427,638 5,475,526 3,685,945
Other income - Fees 611,331 948,582 2,555,679 2,675,049
------------- ------------- ------------- -------------
Total revenue 5,213,220 4,891,150 16,547,251 14,254,346
Interest expense 1,650,447 1,426,715 5,286,076 3,934,125
------------- ------------- ------------- -------------
Income after interest expense 3,562,773 3,464,435 11,261,175 10,320,221
Provision for credit losses 550,000 400,000 1,898,000 1,200,000
Provision for impairment losses -- -- 40,000 --
------------- ------------- ------------- -------------
Income after interest expense and
provision for losses 3,012,773 3,064,435 9,323,175 9,120,221
Operating expenses:
Salaries and employee benefits 1,426,891 1,552,211 4,457,063 4,648,549
Amortization of intangible assets 98,378 98,379 295,134 295,135
Occupancy and equipment 353,554 390,878 1,125,346 1,215,878
Professional fees 120,988 115,663 491,696 743,865
Other 555,988 530,586 1,752,605 1,496,963
------------- ------------- ------------- -------------
Total operating expenses 2,555,799 2,687,717 8,121,844 8,400,390
------------- ------------- ------------- -------------
Gain on sale of marketable securities -- -- 290,859 --
------------- ------------- ------------- -------------
Income before income taxes 456,974 376,718 1,492,190 719,831
Income tax expense:
Federal 174,185 170,780 541,131 299,395
State 5,124 4,399 15,914 7,794
------------- ------------- ------------- -------------
Total income taxes 179,309 175,179 557,045 307,189
------------- ------------- ------------- -------------
Net income $ 277,665 $ 201,539 $ 935,145 $ 412,642
============= ============= ============= =============
Earnings per share-basic $ 0.10 $ 0.06 $ 0.33 $ 0.13
============= ============= ============= =============
Weighted-average common shares outstanding-basic 2,827,728 3,176,254 2,880,651 3,221,598
============= ============= ============= =============
Earnings per share-diluted $ 0.10 $ 0.06 $ 0.33 $ 0.12
============= ============= ============= =============
Weighted-average common shares outstanding-diluted 2,828,623 3,251,208 2,881,085 3,390,023
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
----------------------------- Additional Total
Shares paid-in Retained Treasury stockholders'
Outstanding Amount capital earnings stock equity
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 3,194,871 $ 35,507 $ 16,759,567 $ 11,693,807 $ (3,059,577) $ 25,429,304
Purchase of stock for treasury (239,608) -- -- -- (1,271,280) (1,271,280)
Exercise of stock options 23,800 238 117,270 -- -- 117,508
Purchase of stock warrants -- -- (572,500) -- -- (572,500)
Issuance of common stock from
treasury 3,819 -- -- (10,439) 32,718 22,279
Issuance of common stock 2,947 30 22,582 -- -- 22,612
Net Income -- -- -- 150,075 -- 150,075
------------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999 2,985,829 35,775 16,326,919 11,833,443 (4,298,139) 23,897,998
Purchase of stock for treasury (174,500) -- -- -- (897,095) (897,095)
Issuance of common stock from
treasury 12,516 -- -- (70,557) 87,876 17,319
Forfeiture of stock options -- -- (63,210) -- -- (63,210)
Net Income -- -- -- 935,145 -- 935,145
------------- ------------- ------------- ------------- ------------- -------------
Balance at September 30, 2000 2,823,845 $ 35,775 $ 16,263,709 $ 12,698,031 $ (5,107,358) $ 23,890,157
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
KBK CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
(UNAUDITED) (UNAUDITED)
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 935,145 $ 412,642
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 874,290 952,102
Provision for credit losses 1,898,000 1,200,000
Provision for impairment losses 40,000 --
Gain on sale of assets -- 2,363
Decrease in accounts receivable, net 4,384,557 2,397,799
Net increase in retained interest in sold assets (2,567,276) (9,286,561)
Decrease in other assets 546,072 463,112
Decrease in due to clients (1,831,763) (3,825,417)
Increase (decrease) in accounts payable and other liabilities 264,294 (141,908)
Increase (decrease) in interest payable for the sold assets 9,238 (100,423)
Increase (decrease) in deferred revenue 190,094 (97,049)
--------------- ---------------
Net cash provided by (used in) operating activities 4,742,651 (8,023,340)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans receivable, net 3,255,790 (6,961,960)
Proceeds from sale of assets -- 10,001
Purchases of premises and equipment (116,987) (282,220)
--------------- ---------------
Net cash provided by (used in) investing activities 3,138,803 (7,234,179)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (repayments of) bank line of credit (11,000,000) 23,000,000
Purchase of stock warrants -- (572,500)
Decrease in commercial paper -- (1,400,000)
Repurchase of common stock (897,095) (286,008)
Exercise of stock options -- 41,608
Issuance of common stock 17,319 30,856
--------------- ---------------
Net cash provided by (used in) financing activities (11,979,776) 20,813,956
--------------- ---------------
Net increase (decrease) in cash (4,098,322) 5,556,437
Cash at beginning of period 4,854,980 136,223
--------------- ---------------
Cash at end of period $ 756,658 $ 5,692,660
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
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 September 30,
2000 and 1999. 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 accounting principles generally accepted
in the United States of America ("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 nine months ended September 30, 2000 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, 1999 and 1998
which are included in the Company's 1999 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 a servicing agreement between SPC and KBK. 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 $11,709,030 and $9,150,992 at
September 30, 2000 and December 31, 1999, respectively.
6
<PAGE> 8
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 that sold 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.
The Company has established a $540,000 provision for impairment loss related to
this asset. The estimated fair value of $1,210,000 as of September 30, 2000 was
determined by reference to the present value of the estimated future cash flows
of the asset.
4. BANK LINE OF CREDIT. KBK maintains a $72.9 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 September 30, 2000, $72.9
million was committed with outstanding indebtedness under this Credit Facility
of $45.0 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 $7.5 million or the remainder of the revolving borrowing base, less
all amounts outstanding on the revolving credit facility. There was $2,615,945
in letters of credit outstanding at September 30, 2000. 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 September 30, 2000, KBK was in compliance with the financial
covenants and borrowing base limitations, and there was $11.8 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 subordinated Debentures or as a result of the
acceleration of the subordinated 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 accounts payable and 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
7
<PAGE> 9
value of the Preferred Securities, $1,206,198 as of September 30, 2000, is being
accreted over 15 years by making periodic charges to the Company's earnings.
6. EARNINGS PER SHARE. Following is a reconciliation between the weighted
average shares outstanding used in the basic and diluted EPS computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 277,665 $ 201,539 $ 935,145 $ 412,642
=============== =============== =============== ===============
Weighted average common shares
outstanding - Basic 2,827,728 3,176,254 2,880,651 3,221,598
=============== =============== =============== ===============
Earnings per share - Basic $ 0.10 $ 0.06 $ 0.33 $ 0.13
=============== =============== =============== ===============
Effect of dilutive securities
Assumed exercise of stock options
and warrants 895 74,954 434 168,425
--------------- --------------- --------------- ---------------
Weighted average common shares
outstanding - Diluted 2,828,623 3,251,208 2,881,085 3,390,023
=============== =============== =============== ===============
Earnings per share - Diluted $ 0.10 $ 0.06 $ 0.33 $ 0.12
=============== =============== =============== ===============
</TABLE>
7. STOCKHOLDERS' EQUITY. Pursuant to an October 1999 agreement to repurchase
483,795 shares of its common stock over an 18-month period, the Company acquired
55,000 shares of its common stock for an aggregate purchase price of $291,5000
subsequent to the quarter ended September 30, 2000 on the settlement date of
October 2, 2000. Under the agreement, the per share prices are fixed, ranging
from $5.00 to $5.53, depending on the timing of the purchase. The stock is being
acquired from the previous shareholders of Coastal Financial Resources Inc.,
which was acquired by the Company in December, 1994.
Pursuant to the Stock Repurchase Plan initiated in 1995, the Company held
753,640 shares of Treasury Stock at a cost of $5,107,358 as of September 30,
2000. 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 1999, the Company paid $572,500
to repurchase from a former director warrants to purchase 160,000 shares. The
remaining 340,000 warrants are exercisable at $5 per share and expire on
February 25, 2005. During the Nine Months Ended September 30, 2000, $63,210 in
deferred compensation was reversed from other assets and recognized through
additional paid in capital as a result of in-the-money stock options being
forfeited.
8
<PAGE> 10
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, 1999. 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, 1999.
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 base. The Company's clients are located in twenty-one
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, 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 Third Quarter 2000 Compared to Third Quarter 1999
The following table sets forth the results of operations and certain other data
of the Company for the third quarter of 2000 and the third quarter of 1999.
9
<PAGE> 11
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
September 30, 2000 September 30, 1999
(unaudited) (unaudited)
------------------------------- -------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned $ 141,088 $ 129,183
Owned 79,245 77,096
Total Revenue 5,213 100.0% 4,891 100.0%
Interest Expense 1,650 31.7% 1,427 29.2%
Provision for Credit Losses 550 10.6% 400 8.2%
Operating Expense 2,556 49.0% 2,687 54.9%
Income Taxes 179 3.4% 175 3.6%
-------------- -------------- -------------- --------------
Net Income (Loss) 278 5.3% 202 4.1%
============== ============== ============== ==============
</TABLE>
Average net earning assets owned increased 2.8% to $79.2 million for the quarter
ended September 30, 2000 from $77.1 million for the quarter ended September 30,
1999. This increase in assets generated revenue growth of 6.6%, or $322,000, to
$5.2 million for the quarter ended September 30, 2000 from the quarter ended
September 30, 1999 total revenue of $4.9 million. Average net earning assets
under management increased 9.2% to $141.1 million for the quarter ended
September 30, 2000 from $129.2 million for the quarter ended September 30, 1999.
Interest expense increased $223,000 to $1.7 million for the third quarter of
2000 compared with $1.4 million for the third quarter of 1999. This increase
resulted from the $2.9 million increase in average funded debt required to
support the increase in net average earning assets, as well as increased
interest rates. The net effect of the increased revenue and interest expense was
an increase of $89,000, or 2.8%, in income after interest expense for the
quarter ended September 30, 2000, compared to the prior year quarter.
A provision for credit losses of $550,000 was recorded for the third quarter of
2000, compared to $400,000 for the third quarter of 1999. The $550,000 provision
for losses was recorded in consideration of the Company's valuation of the
portfolio as of September 30, 2000. During the third quarter of 2000 the Company
had net chargeoffs of $449,000 compared to $187,000 of net chargeoffs for the
third quarter of 1999. This increase in chargeoffs relates to final disposition
of a non-performing asset. The allowance for credit losses at September 30, 2000
of $2.2 million represents 2.3% of total outstanding loans and accounts
receivables (which 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 September 30, 1999 of $1.8 million represented 2.0% of total
outstanding loans and accounts receivables (which includes retained interest in
sold assets) and 2.3% 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 September 30, 2000.
Operating expenses of $2.6 million for the three months ended September 30, 2000
decreased $131,000, or 4.9%, compared with $2.7 million for the three months
ended September 30, 1999. This decrease resulted primarily from a decrease in
salaries and occupancy and equipment costs.
The decrease in operating expenses, combined with the increase in the provision
for credit losses and the $99,000 increase in income after interest expense,
resulted in a $80,000 increase in income before income taxes.
Income taxes increased to $179,000 for the third quarter of 2000 compared to
income taxes of $175,000 for the third quarter of 1999.
10
<PAGE> 12
As a result of the foregoing, net income of the Company for the third quarter of
2000 increased to $278,000 from $202,000 in income for the third quarter of
1999.
Analysis of Nine Months Ended September 30, 2000 Compared to Nine
Months Ended September 30, 1999
The following table sets forth the results of operations and certain
other data of the Company for the nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
(unaudited) (unaudited)
------------------------------- -------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Average Net Earning Assets
Managed and Owned $ 144,204 $ 129,777
Owned 86,502 72,790
Total Revenue 16,547 100.0% 14,254 100.0%
Interest Expense 5,286 31.9% 3,934 27.6%
Provision for Credit Losses 1,898 11.5% 1,200 8.4%
Provision for Impairment Loss 40 .2% -- --
Other Income 291 1.8% -- --
Operating Expense 8,122 49.1% 8,400 58.9%
Income Taxes 557 3.4% 307 2.2%
-------------- -------------- -------------- --------------
Net Income 935 5.7% 413 2.9%
============== ============== ============== ==============
</TABLE>
Average net earning assets owned increased 18.8% to $86.5 million for the nine
months ended September 30, 2000 from $72.8 million for the nine months ended
September 30, 1999. This increase in assets generated revenue growth of 16.1%,
or $2.3 million, to $16.5 million for the nine months ended September 30, 2000
compared to $14.3 million for the same period in 1999. The sale of assets
resulted in $5.5 million in servicing fee income during the nine months ended
September 30, 2000.
Interest expense increased 34.4% to $5.3 million for the nine months ended
September 30, 2000 from $3.9 million for the same period of 1999. This increase
resulted primarily from the $15.8 million increase in average funded debt
required to fund the increase in net average earning assets, as well as
increased interest rates. The net effect of the increased revenue and increased
interest expense was an increase of $941,000, or 9.1%, in income after interest
expense for the nine months ended September 30, 2000, compared to the same
period of the prior year.
A provision for credit losses of $1.9 million was recorded for the nine months
ended September 30, 2000, as compared to $1.2 million for the same period of
1999. The $1.9 million provision for losses was recorded in consideration of the
Company's valuation of the portfolio as of September 30, 2000. During the nine
months ended September 30, 2000, the Company had net charge-offs of $1.7 million
compared to $1.3 million of net charge-offs for the same period of 1999. The
allowance for credit losses at September 30, 2000 of $2.2 million represents
2.3% of total outstanding loans and accounts receivable (which includes retained
interest in sold assets) and 2.5% of average net earning assets owned for the
nine months then ended. The allowance for credit losses at September 30, 1999 of
$1.8 million was 2.0% of total outstanding loans and accounts receivable (which
includes retained interest in sold assets) and 2.5% of average net earning
assets owned for the nine months then ended. Management believes the current
allowance is adequate to cover potential losses, which might result from the
purchased accounts receivable and loan portfolio at September 30, 2000.
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Operating expense of $8.1 million for the nine months ended September 30, 2000
decreased $278,000, or 3.3%, compared with the $8.4 million for the same period
of 1999. This decrease resulted primarily from decreases in salaries and
professional fee expenditures, which were partially offset by increases in
marketing expenses.
During the first nine months of 2000, the Company recorded a $291,000 gain on
sale of marketable securities acquired through the exercise of warrants received
from a client of the Company. This gain on sale and the increased income after
interest expense totaled $1.2 million. This increase in revenue was partially
offset by the $738,000 increase in provision for credit losses and impairment
losses. These factors, combined with decreased operating expenses, resulted in a
107.2% increase in earnings compared to the nine months ended September 30,
1999. As a result, income taxes increased to $557,000 for the nine months ended
September 30, 2000, or 81.4%, as compared to $307,000 of income taxes for the
same period of 1999.
As a result of the foregoing, net income of the Company for the nine months
ended September 30, 2000 increased $522,000, or 126.4%, to $935,000 from
$413,000 for the same period in 1999.
CHANGES IN FINANCIAL CONDITION
Total assets decreased from $112.4 million at December 31, 1999 to $100.0
million at September 30, 2000. Stockholders' equity decreased $8,000, to $23.9
million at September 30, 2000, which was the net result of net income of
$935,000, treasury stock purchases of $897,000, stock issuance totaling $17,000
and $63,000 in forfeiture of stock options. The Company paid no dividends on its
common stock for the nine months ended September 30, 2000.
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 into SPC and
in 1998 with the sale of the Trust Preferred Securities. Total average net
earning assets increased by $13.7 million, from $72.8 million during the first
nine months of 1999 to $86.5 million for the same period in 2000. 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 and
pursuit of strategic acquisitions and partnerships which enable the Company to
provide complete financial services to middle-market businesses.
KBK maintains a $72.9 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 September 30, 2000, $72.9 million was
committed with outstanding indebtedness under this Credit Facility of $45.0
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
$7.5 million or the remainder of the revolving borrowing base, less all amounts
outstanding on the revolving credit facility. There was $2,615,945 in letters of
credit outstanding at September 30, 2000. 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 September 30, 2000, KBK was in compliance with the financial
covenants and borrowing base limitations, and there was $11.8 million in
available credit under this line.
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 1995.
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Under the Company's stock repurchase program, the Company may buy back in open
market transactions, block trades or private transactions, up to an aggregate of
500,000 shares (14.0% of the issued shares as of September 30, 2000) of the
Company's common stock at the current market price. In addition, the Company
entered into an agreement during 1999 to repurchase an aggregate 483,795 shares
of its common stock over an 18-month period. The per share prices are fixed,
ranging from $5.00 to $5.53, depending on the timing of the purchase. The stock
is being acquired from the previous shareholders of Coastal Financial Resources,
Inc., which was acquired by the Company in December, 1994. At September 30,
2000, the Company had repurchased 265,000 shares for an aggregate of $1,350,300.
At September 30, 2000, 753,640 shares of common stock were held in the treasury
at a cost of $5,107,358. 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 Company is currently negotiating a $350 million line of credit, which would
replace the existing bank line of credit and the funding through sales of assets
into the commercial paper conduit. The proposed facility will provide a source
of liquidity to fund future growth in earning assets.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any litigation other than routine proceedings
incidental to its business and the Company does not expect that these
proceedings will have a material adverse effect on the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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 November 14, 2000 /s/ Deborah B. Wilkinson
------------------ -----------------------------------
Deborah B. Wilkinson,
Executive Vice President, Chief
Financial Officer, Secretary
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27 Financial Data Schedule
</TABLE>
