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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended: March 31, 2003
OR
[ ] 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: 333-103293
Pioneer Financial Services, Inc.
(Exact name of Registrant as specified in its charter)
Missouri 44-0607504
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 Belleview Avenue, Suite 300, Kansas City, Missouri 64112
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 756-2020
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant has (1) filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 [ ] No
[X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of March 31, 2003
----- --------------------------------
Common Stock, $100 par value 17,136 shares
PIONEER FINANCIAL SERVICES, INC.
FORM 10Q
March 31, 2003
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item No. Page
1. CONSOLIDATED FINANCIAL STATEMENTS........................................................................3
---------------------------------
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2003 AND SEPTEMBER 30, 2002.....................................3
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CONSOLIDATED STATEMENTS OF INCOME FOR THREE MONTHS ENDED AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002....4
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND YEAR ENDED
----------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002.......................................................................................5
------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002...................6
--------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...............................................................7
------------------------------------------
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................8
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3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................................15
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PART II
OTHER INFORMATION
1 LEGAL PROCEEDINGS.......................................................................................15
-----------------
2. CHANGES IN SECURITIES AND USE OF PROCEEDS...............................................................15
-----------------------------------------
3. DEFAULTS UPON SENIOR SECURITIES.........................................................................15
-------------------------------
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................15
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5. OTHER INFORMATION.......................................................................................15
-----------------
6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................15
--------------------------------
PART I
ITEM 1: Consolidated Financial Statements
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
2003 2002
--------------------- --------------------
(unaudited)
Cash $ 1,567,246 $ 1,150,863
Other investments 1,968,689 1,868,509
Finance receivables:
Direct receivables 144,684,316 139,663,612
Retail installment contracts 19,191,046 19,347,567
--------------------- -------------------
Finance receivables before allowance
for credit losses 163,875,362 159,011,179
Allowance for credit losses (8,220,868) (6,220,869)
--------------------- --------------------
Net finance receivables 155,654,494 152,790,310
Furniture and equipment, net 1,328,531 1,577,950
Deferred income taxes 3,130,422 2,331,000
Prepaid and other assets 323,797 278,154
--------------------- --------------------
Total assets $ 163,973,179 $159,996,786
===================== ====================
LIABILITIES AND STOCKHOLDER'S EQUITY
March 31, September 30,
2003 2002
--------------------- --------------------
(unaudited)
Revolving credit line - banks $ 10,616,000 $ 10,776,000
Revolving credit line - affiliate 1,972,026 1,941,831
Accounts payable 1,173,588 1,240,629
Accrued expenses and other liabilities 10,856,009 9,396,204
Amortizing and single pay term notes 99,535,915 97,925,405
Junior subordinated notes 20,952,995 21,396,438
--------------------- --------------------
Total liabilities 145,106,533 142,676,507
--------------------- --------------------
Stockholder's equity
Common stock, $100 par value; authorized
20,000 shares; issued and outstanding
17,136 shares 1,713,600 1,713,600
Retained earnings 17,153,046 15,606,679
--------------------- --------------------
Total stockholder's equity 18,866,646 17,320,279
--------------------- --------------------
Total liabilities and stockholder's equity $ 163,973,179 $ 159,996,786
===================== ====================
3
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------------------- ------------------------------------------
2003 2002 2003 2002
------------------ -------------------- ------------------ -------------------
Revenue
Finance income $12,247,687 $10,892,354 $25,183,434 $22,249,381
Insurance premiums
and commissions 1,360,896 1,115,133 2,695,656 2,276,465
Other income, fees
and commissions 333,463 356,164 934,567 803,586
------------------ -------------------- ------------------ -------------------
Total revenue 13,942,046 12,363,651 28,813,657 25,329,432
Provision for credit losses 3,010,016 2,215,405 6,422,910 4,724,873
Interest expense 2,405,378 2,414,289 4,832,922 4,818,746
------------------ -------------------- ------------------ -------------------
Net revenue 8,526,652 7,733,957 17,557,825 15,785,813
Operating Expenses
Employment costs 4,825,395 4,205,099 9,413,931 8,364,844
Facilities 1,295,535 1,468,153 2,527,029 2,942,799
Marketing 279,843 304,927 821,535 808,285
Professional fees 683,625 506,994 1,231,572 857,349
Other 296,281 253,590 665,343 605,195
------------------ -------------------- ------------------ -------------------
Total operating expenses 7,380,679 6,738,763 14,659,410 13,578,472
------------------ -------------------- ------------------ -------------------
Income before income taxes 1,145,973 995,194 2,898,415 2,207,341
Provision for income taxes 440,647 358,438 1,083,013 801,175
------------------ -------------------- ------------------ -------------------
Net income $ 705,326 $ 636,756 $ 1,815,402 $ 1,406,166
================== ==================== ================== ===================
Net income per share, basic and
diluted $ 41.16 $ 37.16 $ 105.94 $ 82.06
================== ==================== ================== ===================
4
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Six Months Ended March Year Ended
31, September 30,
2003 2002
------------------------- -------------------------
(unaudited)
Retained earnings, beginning of period $15,606,679 $13,147,497
Net income 1,815,402 2,864,104
Dividends paid ($15.70 and $23.63 per share) (269,035) (404,922)
------------------------- -------------------------
Retained earnings, end of period $17,153,046 $15,606,679
========================= =========================
5
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended March 31,
2003 2002
------------------------ ------------------------
Cash flows from Operating Activities:
Net income $ 1,815,402 $1,406,166
Items not requiring (providing) cash:
Provision for credit losses on
finance receivables 6,422,910 4,724,873
Depreciation 402,476 464,194
Compounded interest added to
junior subordinated debt 580,308 511,919
Deferred income taxes (799,422) (343,732)
Loss on disposal/donation of
equipment 23,701 6,301
Changes in:
Accounts payable and accrued
expenses 1,870,597 (294,115)
Other (45,643) 90,051
------------------------ ------------------------
Net cash provided by operating
activities 10,270,329 6,565,657
------------------------ ------------------------
Cash Flows From Investing Activities:
Loans originated (60,876,484) (59,007,081)
Loans purchased (7,978,352) (7,683,748)
Loans repaid 59,567,742 53,369,035
Capital expenditures (176,758) (200,839)
Securities purchased (313,066) (217,605)
Securities matured 212,886 100,000
------------------------ ------------------------
Net cash used in investing activities (9,564,032) (13,640,238)
------------------------ ------------------------
Cash Flows from Financing Activities:
Net borrowing under lines of credit (607,638) (405,512)
Proceeds from issuance of
long-term debt 23,133,710 26,840,444
Repayment of long-term debt (22,546,951) (19,330,494)
Dividends paid (269,035) (199,977)
------------------------ ------------------------
Net cash used in financing
activities (289,914) 6,904,461
Activities
------------------------ ------------------------
Net Increase (Decrease) in Cash 416,383 (170,120)
Cash, Beginning of period 1,150,863 2,428,899
------------------------ ------------------------
Cash, End of period $ 1,567,246 $ 2,258,779
======================== ========================
Additional Cash Flow Information:
Interest paid $ 4,850,114 $ 4,801,468
Income taxes paid $ 703,387 $ 1,811,721
6
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and September 30, 2002
(Unaudited)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pioneer Financial Services, Inc., a Missouri corporation (the "Company"), is a
specialized financial services company which originates and services consumer
loans and provides other products and financial services exclusively to active
duty or retired career military personnel or Department of Defense employees.
The Company's revenues are primarily earned from the making of direct loans and
the purchase of retail installment contracts. The Company also earns revenues
from commissions from the sale of credit-related insurance placed with
non-related insurance companies and from reinsurance premiums on credit accident
and health insurance. Additionally, the Company sells non-loan related products
and services, including roadside assistance programs and discount healthcare
cards.
The accompanying consolidated financial statements include the accounts of
Pioneer Financial Services, Inc. (a wholly-owned subsidiary of Pioneer Financial
Industries, Inc.) and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated from the
accompanying consolidated financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Information with respect to March 31, 2003 and 2002, and the periods then ended,
have not been audited by the Company's independent auditors, but in the opinion
of management reflect all adjustments (which include only normal recurring
adjustments) necessary for the fair presentation of the financial condition and
operations of the Company. The results of operations for the three months and
six months ended March 31, 2003 and 2002 are not necessarily indicative of
results to be expected for the entire fiscal year.
NOTE 2: NET INCOME PER SHARE
Net income per share is computed based upon the weighted-average common shares
outstanding of 17,136 during each period. There are no potentially dilutive
securities issued and outstanding.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion set forth below, as well as other portions of this Quarterly
Report, contains forward-looking statements within the meaning of federal
securities law. Words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," "continue," "predict," or other similar words, identify
forward-looking statements. Forward-looking statements include statements
regarding our management's intent, belief or current expectation about, among
other things, trends affecting the markets in which we operate, our business,
financial condition and growth strategies. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those predicted in the forward-looking statements as a result of
various factors, including, but not limited to, those risk factors set forth in
our registration statement on Form S-1, as amended (No. 333-103293). If any of
these risk factors occur, they could have an adverse effect on our business,
financial condition and results of operation. When considering forward-looking
statements keep these risk factors in mind. These forward-looking statements are
made as of the date of this filing. You should not place undue reliance on any
forward-looking statement. We are not obligated to update forward-looking
statements and will not
7
update any forward-looking statements in this Quarterly Report to reflect future
events or developments.
Overview
We originate and service consumer loans and provide other financial
products and services on a worldwide basis, exclusively to active duty or
retired career military personnel or Department of Defense employees. We make
direct loans to our customers through our network of retail sales offices and
over the Internet. We also purchase retail installment sales contracts from
retail merchants who sell consumer goods to active duty or retired career
military personnel or Department of Defense employees. We refer to these
consumer loans and retail installment contracts as finance receivables.
Our finance receivables are generally unsecured with fixed interest
rates and typically have a maturity of less than 48 months. During the first six
months of fiscal 2003, the size of our average finance receivable at origination
was approximately $3,043. A large portion of our customers are unable to obtain
traditional financing from banks, credit unions or savings and loan associations
due to factors such as their age, likelihood of relocation and lack of credit
history.
Further improvement of our profitability is dependent in large part
upon the growth in our outstanding finance receivables, the maintenance of loan
quality, acceptable levels of borrowing costs and operating expenses and the
ongoing introduction of innovative new products and services to our customer
base. Since September 30, 1998, finance receivables have increased at a 15.2%
annual compounded rate from $90.3 million to $159.0 million at September 30,
2002. The increase reflects the higher volume of loans generated through our
existing retail offices and through the Internet and the addition of new retail
offices to our network. To support our growth, we continuously seek to introduce
new products and services to our customer base. In addition to new insurance and
savings products we introduced to selected markets in the third and fourth
quarters of fiscal 2002, we sell discount health care cards, roadside assistance
program and offer an array of free services to our customers.
Finance Receivables
Our finance receivables are comprised of direct loans and retail installment
contracts. The following table sets forth certain information about the
components of our finance receivables as of the ends of the periods presented:
As of, and For the Six As of, and For the Years
Months Ended, Ended
March 31, September 30,
-------------------------------------------------------------------
2003 2002 2002 2001
-------------------------------------------------------------------
(dollars in thousands)
Total Finance Receivables:
Finance receivables balance $163,875 $146,512 $159,011 $137,314
Average note balance 2,018 1,839 1,946 1,753
Total finance income 25,183 22,249 45,884 38,965
Total number of notes 81,194 79,673 81,726 78,316
Direct Loans:
Notes receivable balance $144,684 $126,999 $139,664 $117,098
Percent of finance receivables 88.29% 86.68% 87.83% 85.28%
Average note balance 2,023 1,854 1,959 1,767
Number of notes 71,519 68,489 71,302 66,264
Retail Installment Contracts:
Notes receivable balance $19,191 $19,513 $19,348 $20,216
Percent of finance receivables 11.71% 13.32% 12.17% 14.72%
Average note balance 1,984 1,745 1,856 1,677
Number of notes 9,675 11,184 10,424 12,052
8
Net Interest Margin
The principal component of our profitability is our net interest
margin, which is the difference between the interest we earn on finance
receivables and the interest we pay on borrowed funds. In some states, statutes
regulate the interest rates that we may charge our customers while in other
states competitive market conditions establish the interest rates we may charge.
Differences also exist in the interest rates we earn on the various components
of our finance receivable portfolio.
Unlike our interest income, our interest expense is sensitive to
general market interest rate fluctuations. These general market fluctuations
directly impact our interest expense. Our general inability to increase the
interest rates earned on new and existing finance receivables restricts our
ability to react to increases in our. interest expense Accordingly, increases in
market interest rates generally will narrow our interest rate spread and lower
our profitability, while decreases in market interest rates generally will widen
our interest rate spread and increase our profitability.
The following table presents important data relating to our net
interest margin as of, and for the three months ended, March 31, 2002 and 2001
and as of, and for six months ended, March 31, 2002 and 2001.
As of, and For the Three Months As of, and For the Six Months
Ended, Ended,
March 31, March 31,
------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------
(dollars in thousands)
Finance receivables balance $163,875 $146,512 $163,875 $146,511
Average finance receivables $165,634 $147,484 $165,665 $145,810
Average interest bearing
liabilities (1) $131,613 $123,174 $131,496 $123,757
Total finance income $12,248 $10,892 $25,183 $22,249
Total interest expense $ 2,405 $ 2,414 $ 4,833 $ 4,819
- ---------------------
(1) Averages are computed using month-end balances during the years presented.
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Our aggregate finance receivables decreased 3.6% during second quarter
fiscal 2003 to $163.9 million on March 31, 2003 from $170.1 million on December
31, 2002. The second quarter is typically the lowest period for loan origination
and generally results in a decline in our finance receivables attributable in
part to the cyclical drop in demand for new loans and a higher number of payoffs
due to customers who use tax refunds to pay off our loans.
Total revenues during the second quarter of fiscal 2003 increased to
$13.9 million from $12.4 million in the second quarter of fiscal 2002, an
increase of $1.5 million or 12.8%.
Finance income during the second quarter of fiscal 2003 increased to
$12.2 million from $10.9 million in the second quarter of fiscal 2002, an
increase of $1.3 million or 12.4%. This increase is attributable to the 12.3%
increase in our average finance receivable portfolio.
9
Insurance premium and commission revenues in the second quarter of
fiscal 2003 increased to $1.4 million from $1.1 million in the second quarter of
fiscal 2002, an increase of $.3 million or 22.0%. This increase results
primarily from increased sales of credit insurance products.
The provision for credit losses in the second quarter of fiscal 2003
increased to $3.0 million from $2.2 million in the second quarter of fiscal
2002, an increase of $.8 million or 35.9%. Net charge-offs of finance
receivables in the second quarter of fiscal 2003 decreased to $1.9 million from
$2.0 million in the second quarter of fiscal 2002, a decrease of $.1 million or
2.8%. Net charge-offs as a percentage of average finance receivable balance in
the second quarter of fiscal 2003 was 4.6% compared to 5.3% in the second
quarter of fiscal 2002. Our allowance for credit losses at March 31, 2003
increased to $8.2 million from $6.2 million at September 30, 2002, an increase
of $2.0 million, or 32.1%. The increase in the provision and allowance for
credit losses reflects, among other things, the 12.3% increase in average
finance receivables over the last year, and our concern regarding uncertainty
surrounding possible Middle-East hostilities.
Interest expense in the second quarter of fiscal 2003 remained constant
at $2.4 million. While our average interest bearing liabilities for the three
months ended March 31, 2003 increased by $8.4 million or 5.7% compared to the
three months ended March 31, 2002, this increase was offset by decreased
interest rates. The weighted average interest rate declined to 6.9% in the
second quarter of fiscal 2003 from 7.8% in the second quarter of fiscal 2002.
Operating expense in the second quarter of fiscal 2003 increased to
$7.4 million from $6.8 million in the second quarter of fiscal 2002, an increase
of $.6 million or 9.5%. This increase was due, in part, to a $.6 million
increase in employment costs incurred in connection with our software
development team which is developing a comprehensive enterprise-wide software
application and continued infrastructure improvements in our Internet
distribution facility.
We generated income before income taxes of $1.1 million and net income
of $.7 million during the second quarter of fiscal 2003 compared to income
before income taxes of $1.0 million and net income of $.6 million during the
second quarter of fiscal 2002.
Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002
Our aggregate finance receivables grew 3.0% during the first six months
of fiscal 2003 to $163.9 million on March 31, 2003 from $159.0 on September 30,
2002. This growth is due primarily to increases in finance receivables from the
Internet, which grew by more than $4.7 million or 10%. The Internet is a
lower-cost method of loan origination and loan proceeds distribution, and we
plan to increase this distribution channel in the future.
Total revenues in the first six months of fiscal 2003 increased to
$28.8 million compared to $25.3 million in the first six months of fiscal 2002,
an increase of $3.5 million or 13.8%.
Finance income in the first six months of fiscal 2003 increased to
$25.2 million from $22.2 million in first six months of fiscal 2002 an increase
of $3.0 million or 13.2%. This increase is attributable to the 13.6% increase in
our average finance receivable portfolio.
Insurance premium and commission revenues in the first six months of
fiscal 2003 increased to $2.7 million from $2.3 million in the first six months
of fiscal 2002, an increase of $.4 million or 18.4%. This is due to the growth
in our finance receivables as well as the introduction of enhanced theft
coverage for a credit insurance product in June 2002.
Other income, fees and commission revenues in the first six months of
fiscal 2003 increased to $.9 million from $.8 million in the first six months of
fiscal 2002, an increase of $.1 million or 16.3%. This revenue is comprised
primarily of commissions from sales of roadside assistance policies and health
discount cards. The increase is attributable to commissions from sales of
discount healthcare cards, which began in January of 2002.
The provision for credit losses in the first six months of fiscal 2003
increased to $6.4 million from $4.7 million in the first six months of fiscal
2002, an increase of $1.7 million or 35.9%. Net charge-offs of finance
receivables in the first six months of fiscal 2003 increased to $4.4 million
from $4.1 million in the first six months of fiscal 2002, an increase of $.3
million or 7.2%. Net charge-offs were 5.3% of the average finance receivable
balance for the six months ended March 31, 2003 compared to 5.7% for the six
months ended March 31, 2002. Our allowance for credit losses at March 31, 2003
increased to $8.2 million from $6.2 million at September 30, 2002, an
10
increase of $2.0 million or 32%. These increases are attributable, in part, to a
13.6% growth in our average finance receivable portfolio and uncertainty
regarding the Middle-East hostilities.
Interest expense for the first six months of fiscal 2003 remained
consistent with last year at $4.8 million. Our average interest bearing
liabilities for the six months ended March 31, 2003 increased by $7.7 million or
6.3% compared to the six months ended March 31, 2002. However, this increase was
offset by decreased interest rates. The weighted average interest rate on our
debt declined to 6.9% on March 31, 2003 from 7.8% on March 31, 2002.
Operating expenses for the first six months of fiscal 2003 increased to
$14.7 million from $13.6 million for the first six months of fiscal 2002, an
increase of $1.1 million or 8.0%. This increase is due primarily to increases in
employment costs and facilities costs. Employment costs increased by $1.0
million as we expanded the software development team that is developing a
comprehensive enterprise-wide software application and continued efforts to
build infrastructure, primarily in our Internet distribution facility, audit and
compliance, collections and product development teams.
We generated income before income taxes of $2.9 million and net income
of $1.8 million for the first six months of fiscal 2003 compared to income
before income taxes of $2.2 million and net income of $1.4 million for the first
six month of fiscal 2002.
Delinquency Experience
Our customers are required to make monthly payments of interest and
principal. We analyze our delinquencies on a recency delinquency basis. A loan
is delinquent under the recency method when a full payment (95% or more of the
contracted payment amount) has not been received for 60 days after the last full
payment. We rarely grant extensions or deferments, or allow account revision,
rewriting, renewal or rescheduling in order to bring otherwise delinquent
accounts current.
The following sets forth our delinquency experience for accounts for
which payments are 60 days or more past due and allowance for credit losses for
our finance receivables:
As of As of
March 31, September 30, September 30,
2003 2002 2001
------------------------------------------------------
(dollars in thousands)
Finance receivables balances $163,875 $159,011 $137,314
Finance receivables balances 60 days or more past due $ 5,266 $ 5,580 $ 6,369
Finance receivables balances 60 days or more past due
as a percent of finance receivables 3.21% 3.51% 4.64%
In September of 2001, we experienced an increase in delinquencies due
to the issues surrounding the September 11th tragedy. In an effort to be
sensitive to the activities of the military, we limited collection efforts
during the remainder of the month of September. As a result, we ended that year
with a delinquency amount in excess of our historical rates.
Credit Loss Experience and Provision for Credit Losses
Our provisions for credit losses are charged to income in amounts
sufficient to maintain our allowance for credit losses at a level considered
adequate to cover the probable losses inherent in our existing finance
receivable portfolio. Historical credit loss experience, delinquency of finance
receivables, the value of underlying collateral, current economic conditions,
current military activities and management's judgment are factors used in
assessing the overall adequacy of the allowance and corresponding provision for
credit losses. Our allowance for credit losses is developed primarily for our
direct finance receivable portfolio as our retail installment contracts are
generally covered by dealer reserves.
Our charge-off policy is based on an account-by-account review of
delinquent receivables on a recency basis. Finance receivables are charged-off
when management deems them to be uncollectable through our normal collection
procedures or they become 270 days past due. The 270-day limit is required by
our senior lending agreement. Approximately one-third of our charge-offs occur
before an account is 180 days delinquent. Our
11
primary source of charge-offs is when a customer leaves the military prior to
repaying the finance receivable. We generally structure our loans so that the
entire amount is repaid prior to a customer's estimated separation from the
military, and the number of our customers who depart the military early has
remained relatively constant over time. We, however, cannot predict when or
whether a customer may depart from the military early. Accordingly, we cannot
implement any policy or procedure to ensure that we are repaid in full prior to
our customer leaving the military. Our second greatest source of loss is when a
customer declares bankruptcy.
The following table(s) present information about our credit loss
experience and allowance for credit losses.
As of, and For the Six As of, and For the Years
Months Ended, Ended,
March 31, September 30,
------------------------------------------------------------------
2003 2002 2002 2001
------------------------------------------------------------------
(dollars in thousands)
Direct loans:
Loans charged-off $ 4,991 $ 4,482 $ 9,555 $ 8,752
Less recoveries 504 390 869 1,080
----------------- ---------------- --------------- ----------------
Net charge-offs $ 4,487 $ 4,092 $ 8,686 $ 7,672
================= ================ =============== ================
Average monthly balance of direct loans
outstanding (1) $146,520 $126,211 $130,223 $108,939
Percentage of net charge-offs to average
monthly balance outstanding (2) 6.12% 6.48% 6.67% 7.04%
- -------------------
(1) Averages are computed using month-end balances.
(2) March 31, 2003 and 2002 are annualized for comparison purpose.
As of, and For the Six As of, and For the Years
Months Ended, Ended,
March 31, September 30,
------------------------------------------------------------------
2003 2002 2002 2001
------------------------------------------------------------------
(dollars in thousands)
Retail installment contracts:
Loans charged-off $ 58 $ 84 $ 190 $ 221
Less recoveries 118 46 82 217
----------------- ---------------- --------------- ----------------
Net charge-offs $ (60) $ 38 $ 108 $ 4
================= ================ =============== ================
Average monthly balance of retail
contracts outstanding (1) $19,146 $19,598 $19,506 $22,802
Percentage of net charge-offs to average
monthly balance outstanding (2) (0.63%) 0.39% 0.55% 0.02%
- --------------------
(1) Averages are computed using month-end balances.
(2) March 31, 2003 and 2002 are annualized for comparison purpose.
12
As of, and For the Three As of, and For the Six
Months Ended, Months Ended,
March 31, March 31,
------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------
(dollars in thousands)
Average total finance receivables (1) $165,634 $147,484 $165,665 $145,810
Provision for credit losses $ 3,010 $ 2,215 $ 6,423 $ 4,725
Net charge-offs $ 1,910 $ 1,965 $ 4,427 $ 4,130
Net charge-offs as a percentage of
average finance receivables (2) 4.61% 5.33% 5.34% 5.66%
Allowance for credit losses $ 8,221 $ 5,021 $ 8,221 $ 5,021
Allowance as a percentage of average
finance receivables 4.96% 3.40% 5.57% 3.44%
- ---------------------------
(1) Averages are computed using month-end balances.
(2) March 31, 2003 and 2002 are annualized for comparison purpose.
The following table sets forth changes in the components of our
allowance for credit losses:
As of, and For the Three As of, and For the Six
Months Ended, Months Ended,
March 31, March 31,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
(dollars in thousands)
Balance beginning of period $ 7,121 $ 4,771 $ 6,221 $ 4,421
Additions:
Provision for credit losses 3,010 2,215 6,423 4,725
Recoveries 356 229 626 441
Deductions:
Charge-offs (2,266) (2,194) (5,049) (4,566)
----------------- ---------------- --------------- ----------------
Balance end of period $ 8,221 $ 5,021 $ 8,221 $ 5,021
================= ================ =============== ================
Loan Origination
Our loan origination is the most important factor in determining our
future revenues. Our loan origination for the first six months of fiscal 2003
increased to $96.0 million from $91.5 million for the first six months of fiscal
2002, an increase of $4.3 million or 4.6%. This increase was primarily the
result of an increase in direct loans, which experienced a $4.0 million, or 4.7%
increase from the first six months of fiscal 2002, due in large part to
increased Internet loan originations.
Our loan origination for the three months ended March 31, 2003
decreased to $33.5 million from $34.2 million loan origination for the three
months ended March 31, 2002, a decrease of $.7 million or 2.0%. This decrease
was due primarily to the deployment of troops to the Middle East.
As of, and For the Three As of, and For the Six
Months Ended, Months Ended,
March 31, March 31,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
(dollars in thousands, except for average note amounts)
Total Loan Origination:
Gross balance $33,533 $34,200 $96,010 $91,752
Number of notes 10,746 12,030 31,553 32,855
Average note amount $3,121 $2,843 $3,043 $2,793
13
Direct Loans:
Gross balance $29,630 $30,136 $88,032 $84,068
Number of notes 9,592 10,789 29,165 30,476
Average note amount $3,089 $2,793 $3,018 $2,759
Retail Installment Contracts:
Gross balance $ 3,903 $ 4,064 $7,978 $7,684
Number of notes 1,154 1,241 2,388 2,382
Average note amount $ 3,382 $ 3,275 $3,341 $3,226
Liquidity and Capital Resources
A relatively high ratio of borrowings to invested capital is customary
in consumer finance activities due to the quality and term of the assets
employed. Our principal use of cash is to make new loans and purchase retail
installment contracts. We use our borrowings to fund the difference between the
cash used to make new loans and purchase retail installment contracts, and the
cash generated from loan repayments. This amount is generally our cash used in
investing activities. Cash used in investing activities in the first six months
of fiscal 2003 was approximately $9.6 million, compared to $13.6 million in the
first six months of fiscal 2002.
Investing activities in the first six months of fiscal 2003 were
primarily funded by $10.3 million from operating activities. Financing
activities consist of borrowings under our senior lending agreement, an
unsecured revolving credit line from our parent, and junior subordinated
debentures.
Senior Indebtedness
Our senior lending agreement is an uncommitted facility which provides
common terms and conditions pursuant to which individual banks that are a party
to this agreement may choose to make loans to us in the future. Any bank may
elect not to participate in any future fundings at any time without penalty. As
of March 31, 2003, we could request up to $12.4 million in additional funds and
remain in compliance with the terms of our senior lending agreement. No bank,
however, has any contractual obligation to lend us these additional funds. The
Company is in compliance with all loan covenants at March 31, 2003.
As of March 31, 2003 and 2002 and September 30, 2002 and 2001, the
total borrowings and availability under our senior lending agreement and our
revolving line of credit from our parent company consisted of:
As of March 31, As of September 30,
------------------------------ --------------------------
2003 2002 2002 2001
---------- ---------- ---------- ----------
Revolving Credit Line (1):
Total facility $29,000 $23,000 $ 27,000 $23,000
Balance at end of period $12,588 $11,949 $ 12,718 $12,310
Maximum available credit $16,412 $11,051 $ 14,282 $10,690
Term Notes (2):
Total facility $133,448 $120,629 $ 125,470 $123,432
Balance at end of period $99,536 $91,857 $ 97,925 $83,847
Maximum available credit $33,912 $28,772 $ 27,545 $39,585
Total Revolving and Term
Notes (1)(2):
Total facility $162,448 $143,629 $152,470 $146,432
Balance at end of period $112,124 $103,806 $110,643 $ 96,157
Maximum available credit(3) $ 50,324 $ 39,823 $ 41,827 $ 50,275
Credit facility available (4) $ 12,400 $ 9,386 $ 11,589 $ 10,157
Percent utilization of the
total facility 69.02% 72.27% 72.60% 65.70%
14
- ----------------------
(1) Includes revolving credit line from our parent.
(2) Includes amortizing notes and single payment term notes.
(3) Maximum available credit assuming proceeds in excess of the amounts
shown below under "Credit Facility Available" are used to increase
qualifying finance receivables and all terms of the senior lending
agreement are met, including maintaining a Senior Indebtedness to Net
Receivable Ratio of not more than 80%.
(4) Credit facility available based on the existing asset borrowing base
and maintaining a Senior Indebtedness to Net Receivable Ratio of not
more than 80%.
Recent Developments
On May 13, 2003, the SEC declared effective the Company's registration
statement registering up to $25,000,000 of the Company's junior subordinated
debentures. The Company intends to sell these debentures in principal amounts
ranging from $1,000 to $250,000 at rates set at the time the debenture is issued
to residents of Missouri, Kansas and Illinois on a continuous basis until May
2005. The sale of these debentures will provide the Company with additional
liquidity and capital resources. Issuing debentures increases the amount the
Company can borrow under its senior lending agreement. To finance the growth of
its finance receivables portfolio, the Company intends to borrow additional
funds under its senior lending agreement from time to time as it sells
additional debentures.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our profitability and financial performance are sensitive to changes in
the U.S. Treasury yields and the spread between the effective rate of interest
we receive on customer loans and the interest rates we pay on our borrowings.
Our finance income is generally not sensitive to fluctuations in market interest
rates. The primary exposure that we face is changes in interest rates on our
borrowings. A substantial and sustained increase in market interest rates could
adversely affect our growth and profitability. The overall objective of our
interest rate risk management strategy is to mitigate the effects of changing
interest rates on our interest expense through the utilization of short term
variable rate debt and medium and long term fixed rate debt. We have not entered
into any derivative instruments to manage our interest rate risk.
ITEM 4. Controls and Procedures
Our management, under the supervision and with the participation of
our principal executive officer and principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing date of this Quarterly Report on Form
10-Q. Based on this evaluation, our principal executive officer and principal
financial officer have concluded that the design and operation of our
15
disclosure controls and procedures are effective. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date the evaluation was completed.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On May 13, 2003, the Securities and Exchange Commission declared our
registration statement on Form S-1, as amended (File No. 333-103293) effective.
Pursuant to this registration statement, and the accompanying prospectus, we
registered and are offering up to $25,000,000 in aggregate principal amount of
our junior subordinated debentures, with a maximum aggregate offering price of
$25,000,000, on a continuous basis with an expected termination in May 2005. We
commenced the offering of these junior subordinated debentures on May 20, 2003.
As of May 31, 2003 we had sold no debentures. We are currently offering the
debentures through our officers and employees directly without an underwriter or
agent. Since the registration statement was not declared effective until May 13,
2003, no net proceeds from the offering, and no expenses were incurred in
connection with the issuance and distribution of the junior subordinated
debentures during the fiscal period ending March 31, 2003.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Form of indenture, which is attached as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, as amended
(Commission File No. 333-103293) is incorporated herein by
reference as Exhibit 4.1
4.2 Form of debenture, which is attached as Exhibit 4.2 to the
Company's Registration Statement on Form S-1, as amended
(Commission File No. 333-103293) is incorporated herein by
reference as Exhibit 4.2.
(b) Reports on Form 8-K
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pioneer Financial Services, Inc.
June 18, 2003 /s/ William D. Sullivan
- --------------------------- --------------------------------------------
Date William D. Sullivan
Chief Executive Officer
(Principal Executive Officer)
June 18, 2003 /s/ Randall J. Oplinger
- --------------------------- --------------------------------------------
Date Randall J. Opliger
Chief Financial Officer
(Principal Financial Officer)
17
CERTIFICATION
I, William D. Sullivan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pioneer
Financial Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involved management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 18, 2003
/s/ William D. Sullivan
-------------------------------------
William D. Sullivan
Chief Executive Officer
18
CERTIFICATION
I, Randall J. Opliger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pioneer
Financial Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involved management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 18, 2003 /s/ Randall J. Oplinger
------------------------------------
Randall J. Oplinger
Chief Financial Officer