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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 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
Securities registered pursuant to section 12 (b) of the Act:
None
Securities registered pursuant to section 12 (g) of the Act:
Title of Each Class
None
- --------------------------------------------------------------------------------
(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 [X ] No [ ]
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 June 30, 2003
---------------------------- -------------------------------
Common Stock, $100 par value 17,136 shares
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
PIONEER FINANCIAL SERVICES, INC.
FORM 10-K
September 30, 2003
TABLE OF CONTENTS
Item No. Page
PART I
1. Description of Business................................................3
2. Description of Property...............................................11
3. Legal Proceedings.....................................................11
PART II
6. Selected Financial Data...............................................12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................13
7A. Quantitative and Qualitative Disclosures About Market Risk............26
8. Financial Statements and Supplementary Data...........................27
PART III
10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.....................44
11. Executive Compensation................................................45
12. Security Ownership of Certain Beneficial Owners and Management........45
13. Certain Relationships and Related Transactions........................45
14. Controls and Procedures...............................................47
15. Exhibits, Financial Statements Schedules and Reports on Form 8-K......48
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PART 1
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended September 30,
2003 ("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 appear in a number of
places in this report and include statements regarding our 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 those set forth in the
"Business--Factors That May Affect Future Results of Operations, Financial
Condition or Business" section of this report. If any of the events described in
"Business--Factors That May Affect Future Results of Operations, Financial
Condition or Business" occur, they could have an adverse effect on our business,
financial condition and results of operation. When considering forward-looking
statements, you should keep these factors in mind as well as the other
cautionary statements in this report. You should not place undue reliance on any
forward-looking statement. We are not obligated to update forward-looking
statements.
ITEM 1. DESCRIPTION OF BUSINESS
General
We originate and service consumer loans, and provide other financial
products and services on a worldwide basis, exclusively to active duty or
retired career U.S. military personnel or U.S. Department of Defense employees.
We make direct loans to our customers through our network of retail sales
offices and via the Internet. We also purchase retail installment contracts from
retail merchants that sell consumer goods to active duty or retired career U.S.
military personnel or U.S. Department of Defense employees. We are not
associated with, nor are we endorsed by, the U.S. military or U.S. Department of
Defense. However, we do seek to maintain a positive, supportive relationship
with the military community. Through sponsorship and underwriting of U.S.
military programs and educational efforts, we actively support initiatives aimed
at improving the quality of life for U.S. military personnel and their families.
Our operations and financial products are also designed to meet the needs of
these military service personnel. Various aspects of our loan application
process, our suspension of collection efforts during Operation Desert Storm and
after September 11, 2001 and our emergency funeral assistance program were
designed to meet the unique needs of our customer base. We also offer credit
life, credit accident and health and credit property and casualty insurance to
our loan customers. This insurance is issued by a non-affiliated insurance
company. We also sell roadside assistance packages and discount healthcare cards
issued by an unaffiliated third party.
Our lending subsidiaries originate and service direct consumer loans made
to customers referred by our retail office network of 24 locations and our
unaffiliated strategic partners. Some subsidiaries also purchase retail
installment contracts generated by merchants when active duty or retired career
U.S. military personnel or U.S. Department of Defense employees purchase
consumer goods.
o We have three full service lending subsidiaries strategically located
throughout the United States. Our lending subsidiaries are responsible
for all direct lending activity. They receive applications from
customers, make all underwriting decisions, generate loan documents
and necessary disclosures, prepare loan disbursements, maintain loan
documentation and service outstanding direct loans. If a customer is
approved for a loan, in addition to loan disclosures, he receives
information regarding various types of credit insurance. If the
customer chooses to purchase this insurance, licensed insurance agent
employees of the lending subsidiary sell this coverage on behalf of an
unaffiliated insurance company.
o We have another lending subsidiary that also originates and services
loans to customers primarily via the Internet. It also originates
loans to customers referred by a German affiliate. Our Internet
lending capability allows customers to apply online via the Internet
and receive loan proceeds electronically. If a customer is approved
and accepts the loan offer, loan proceeds are generally
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deposited into the customer's bank account within 24 hours. This
lending subsidiary also sells credit life insurance products over the
Internet.
Another subsidiary operates our retail network of 24 offices located in 13
states. Our retail network offices are located in close proximity to, but not
on, U.S. military installations. They are typically located in retail strip
shopping centers. We continually review our retail network to determine how to
best deploy our resources and look for opportunities for expansion. Our
locations were strategically selected based on several criteria including market
size of military installation, convenience and growth and profitability
opportunities. The retail network sells various financial products and services,
roadside assistance packages and discount healthcare cards which are designed
for military personnel. At no charge to customers, our retail offices also
provide financial education courses, credit bureau analyses, living wills, auto
insurance quotes, child fingerprinting cards, and copying, fax and other
services. At selected locations within the retail network, licensed insurance
benefit counselors sell selected non-credit insurance and savings products. Our
retail network refers customers to our lending subsidiaries and expedites the
loan application process. None of our retail offices will expedite a loan
application process for residents of the state in which the office is located,
unless we have a lending license in that state.
We also have subsidiaries that purchase individual, and portfolios of,
retail installment contracts which meet our quality standards and return on
investment objectives from approximately 81 retail merchants. Retail installment
contracts are notes generated by a single purchase of consumer goods by active
duty or retired career U.S. military personnel or U.S. Department of Defense
employees. We generally acquire these contracts without recourse to the
originating merchant. However, most retail merchant reserve agreements allow us
to withhold funds from the merchant's proceeds to create reserves to be used in
the event a customer defaults and the loan is deemed uncollectable. Retail
installment contracts generally have maximum terms of 48 months. This subsidiary
also sells credit property insurance.
Our collection activities are generally performed by our lending
subsidiaries. Once an account reaches a certain delinquency level or the
customer becomes a civilian or declares bankruptcy, the account is transferred
to our collection subsidiary.
As discussed under "Insurance Operations" below, we have a subsidiary that
reinsures a portion of the accident and health credit insurance issued by an
unaffiliated insurance company in connection with loans we make.
Our subsidiaries' activities are supported by a centralized support
services subsidiary that provides the following services:
o Finance and accounting services
o Human resources and recruiting services
o Information technology services
o Marketing and solicitation services
Customer
We exclusively market and sell financial services and products to persons
who are, at the time the loan or sale is made, active duty or retired career
U.S. military personnel or U.S. Department of Defense employees. In general, 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.
In general, customers use our direct loans for purchases of appliances,
furniture, household electronics and other durable goods, emergency expenses,
vacations, auto purchases and debt consolidation. Where appropriate, we obtain
security interests in collateral, often consumer goods, to support repayment of
loans. However, the resale value of used consumer goods often makes foreclosure
and liquidation of this collateral uneconomical.
These borrowers are attracted to our loan products as a result of being
referred to us by an existing customer or by our marketing efforts. Retail
installment contracts are another source of loan customers. These customers have
demonstrated an apparent need to finance a retail purchase and a willingness to
use credit. After we purchase a retail installment contract, we often contact
the customer using various solicitation methods. We invite
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the customer to visit one of our retail network offices to discuss their overall
financial needs and consider our other products and services.
Seasonality
Our highest finance receivable demand occurs generally from October through
December, our first fiscal quarter. From January to March, our second fiscal
quarter, demand is generally lower and repayments higher. Demand is generally
stable in the third and fourth quarters. Consequently, we experience mild
seasonal fluctuations in our cash requirements during our first and second
quarters.
Direct Lending Activities
A risk in all consumer lending and retail sales financing transactions is
the customer's unwillingness or inability to repay obligations. Unwillingness to
repay is usually evidenced by a consumer's historical credit repayment record.
An inability to repay occurs after our initial credit evaluation and funding and
usually results from lower income due to early separation from the military or
reduction in rank, major medical expenses, or divorce. Occasionally, these types
of events are so economically severe that the customer files for protection
under the bankruptcy laws. We use standard underwriting guidelines at the time
the customer applies for a loan to help minimize the risk of unwillingness or
inability to repay. These guidelines are developed from past customer credit
repayment experience and are periodically revalidated based on current portfolio
performance. We use these guidelines to predict the relative likelihood of
credit applicants repaying their obligation to us. We extend credit to those
consumers who fit our underwriting guidelines. The amount and interest rate of
the loan or retail sales finance transaction are based upon the estimated credit
risk assumed.
In general, our loans are under $5,000, repayable in equal monthly
installments and have terms no longer than 48 months. In evaluating the
creditworthiness of potential customers, we primarily examine the individual's
debt to income ratio, discretionary income, military rank, time served in the
military and prior credit experience. Loans are limited to amounts that the
customer can reasonably be expected to repay from that discretionary income.
Loan repayment terms are generally structured to repay the entire loan prior to
the customer's estimated separation from the military. However, because we
cannot predict when or whether a customer may unexpectedly leave the military or
when or whether other events could occur which result in us not being repaid
prior to a customer's departure from the military, we cannot implement any
policy or procedure to ensure that we are repaid prior to the time our customers
leave the military.
All of our customers are required to complete standardized credit
applications in person at one of our retail network offices or to complete an
online application via the Internet. All of our retail network offices are
staffed and equipped to expedite loan applications electronically to one of the
lending subsidiaries for loan underwriting. Promptly, our lending subsidiary
employees verify the applicant's military service history and status including
rank, review credit histories using major credit reporting agencies and conduct
other review procedures as deemed necessary.
The majority of our customers submit a listing of personal property that
will be pledged as collateral to secure the loan, but we generally do not
perfect a security interest in that collateral. Often the current value of the
collateral does not exceed the expense of repossession. Accordingly, if the
customer were to default in the repayment of the loan, we may not be able to
recover the outstanding loan balance by resorting to the sale of collateral. In
a small number of transactions, based on the amount of the loan, we will perfect
a security interest in the collateral in the event of a change in the customer's
circumstances that might prevent the customer from repaying the loan as agreed.
We believe that the development and continual reinforcement of personal
relationships with customers improves our ability to monitor their
creditworthiness, reduce credit risk and generate loyal repeat customers. It is
not unusual for us to have made a number of loans to the same customer over the
course of several years, many of which were refinanced with a new loan after
approximately one third of the scheduled payments were made. In determining
whether to refinance existing loans, we typically require loans to be current on
a recency basis, and customers are required to complete a new credit
application. Rarely do we grant extensions or deferments, or allow account
revisions, rewriting renewal or rescheduling to bring an otherwise delinquent
account current. Our policy is that we do not refinance loans to cure a default
in principal or interest. Generally, we refinance existing loans when
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a portion of the new loan proceeds is used to repay the balance of the existing
loan and the remaining portion is advanced to the customer. We actively market
the opportunity to refinance existing loans prior to maturity, thereby
increasing the amount borrowed and increasing the fees and other income we
realize. In fiscal 2003, approximately 49% of the number and 28% of the amount
of our loan originations were refinancings of outstanding loans.
To reduce our credit risk, we encourage our customers to employ the
convenience of making their monthly loan payments electronically through payroll
deduction via the Government Allotment System or through an automatic debit of
their account through the National Automated Clearinghouse Association. As of
September 30, 2003, approximately 95% of our customers were utilizing these
options.
Credit Loss Experience
We closely monitor portfolio delinquency and loss rates in measuring the
quality of our portfolio and the potential for ultimate credit losses. We
attempt to control customer delinquency through careful evaluation of each
application and credit history at the time the loan is originated or purchased
and through appropriate collection activity. Collection efforts continue after
an account has been charged-off until it is determined that the cost of
collection efforts outweighs the benefits received.
Insurance Operations
Generally, where applicable laws permit, we sell various types of credit
insurance products offered by third party insurance companies to our customers.
We earn a pre-negotiated commission on the sale of credit insurance. The
customer's premiums for insurance coverage are financed as part of the
customer's loan.
Credit life insurance policies typically cover the life of the customer and
provide for the full payment of the outstanding loan balance in the event of the
customer's death, including war-related deaths. Credit accident and health
insurance policies provide for the payment of loan installments as they become
due while a customer is disabled due to illness or injury, including war-related
injuries. Credit property insurance is written to protect the property pledged
as security for the obligation. Purchases of credit life insurance and credit
accident and health insurance are entirely voluntary and at the customer's
discretion. Property insurance is expected for property pledged as collateral
unless the borrower provides evidence of coverage with another insurance carrier
naming us as payee.
We have a wholly-owned insurance subsidiary that reinsures a portion of the
credit accident and health insurance that we sell on behalf of an unaffiliated
insurance carrier, providing us with an additional source of income from the
earned reinsurance premiums. If these customers are injured or become ill,
including during war, this subsidiary will have payment obligations. The
liability we establish for possible losses related to our reinsurance operations
and the corresponding charges to our income to maintain this amount are
immaterial to our overall business.
The laws of the states in which we operate regulate our sale of insurance
to our customers by prescribing, among other things, the maximum amount of
coverage and term of policy and by fixing the permissible premium rates or
authorizing a state official to fix the maximum premium rates.
Regulation
Our consumer lending business is subject to extensive regulation,
supervision and licensing by various state departments of banking and other
state and federal agencies. We are also subject to various judicial and
administrative decisions of general applicability that also set requirements and
restrictions applicable to our lending activities. Failure to comply with these
requirements can lead to, among other sanctions, termination or suspension of
licenses, consumer litigation and administrative enforcement actions. In
addition, state and federal agencies have the authority to require a lender that
has violated existing laws to reimburse customers for fees or other charges.
Our lending subsidiaries are subject to detailed supervision by authorities
in the states where they are located. Legislation and regulations generally
require licensing, limit loan amounts, duration and charges for various
categories of loans, require adequate disclosure of certain contract terms and
limit collection practices and
6
creditor remedies. Licenses are renewable and may be subject to revocation for
violation of these laws and regulations. In addition, these states have usury
laws which limit the interest rates we may charge.
State and federal regulatory agencies, state attorneys general, the Federal
Trade Commission, and the U.S. Department of Justice have increased their focus
on certain types of lending practices by some companies in the subprime lending
industry, sometimes referred to as "predatory lending" practices. State and
federal governmental agencies have imposed sanctions for certain lending
practices, including, but not limited to, charging borrowers excessive fees,
making loans to refinance existing loans when there is no tangible benefit to
the borrower, imposing higher interest rates than a borrower's credit risk
warrants and failing to adequately disclose the material terms of loans to
borrowers.
We are subject to the Truth-in-Lending Act and Regulation Z promulgated
thereunder. This act requires us, among other things, to disclose pertinent
terms of our consumer loans, including the finance charge and the comparative
costs of credit expressed in terms of an annual percentage rate. These
disclosure requirements are designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans and
credit transactions in order to enable them to compare credit terms.
In addition, we are subject to the Equal Credit Opportunity Act which, in
part, prohibits credit discrimination on the basis of race, color, religion,
sex, marital status, national origin or age. Regulation B, promulgated under
this act, restricts the type of information that we may ask for or obtain in
connection with a credit application. It also requires us to make certain
disclosures regarding consumer rights and requires us to advise applicants who
are denied credit the reasons for the denial. In instances where a loan
application is denied or the rate or charge on a loan is increased as a result
of information obtained from a consumer credit agency, the act requires us to
supply the applicant with the name and address of the reporting agency.
Our insurance activities are also regulated by state and federal law, and
are subject to supervision by agencies having jurisdiction over consumer credit
and insurance. These regulations cover such matters as solicitation practices,
disclosure, policy terms, claims payment, premiums, premium financing and
permitted commissions. In addition, our reinsurance subsidiary is subject to
laws and regulations of the insurance authorities in the state of Arizona. These
regulations cover such matters as its capitalization, reserve requirements,
affiliate transactions, permitted investments and limitations on the amount of
dividends payable.
The Gramm-Leach-Bliley Act, which was signed into law at the end of 1999,
contains comprehensive consumer financial privacy restrictions. Various federal
enforcement agencies, including the Federal Trade Commission, have issued final
regulations to implement this act. These restrictions fall into two basic
categories. First, we must provide various notices to our customers about our
privacy policies and practices. Second, this act restricts us from disclosing
non-public personal information about the customer to non-affiliated third
parties, with certain exceptions. If we violate this law, regulators may require
us to discontinue disclosing information improperly and in certain circumstances
customers may have a private right of action if such disclosure is made without
the consent of the customer. We believe we have prepared the appropriate
consumer disclosures and internal procedures to address these requirements.
We have procedures and controls to monitor compliance with numerous federal
and state laws and regulations. However, because these laws and regulations are
complex and often subject to interpretation, or because of a result of
inadvertent errors, we may, from time to time, inadvertently violate these laws
and regulations. If more restrictive laws, rules and regulations are enacted or
more restrictive judicial and administrative interpretations of those laws are
issued, compliance with the laws could become more expensive or difficult.
The merchants who originate retail installment contracts purchased by us
also must comply with both state and federal credit and trade practice statutes
and regulations. If the merchants fail to comply with these statutes and
regulations, consumers may have rights of rescission and other remedies. In such
cases, we have a right under our agreement with the merchant to require the
merchant to repurchase the related retail installment contracts and to pay us
for any damages we incur or litigation costs, including attorney's fees and
costs. However, if we are unable to enforce our agreement with the merchant,
resulting consumer recession rights and remedies could have an adverse effect on
us.
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The Soldier's and Sailor's Civil Relief Act, in part, requires lenders to
reduce the interest rate charged on loans to customers who subsequently join the
military or are called to active duty. Generally, we only originate loans with
active duty and retired career military personnel. Therefore, this act does not
have a material affect on our business. Furthermore, our customers waive their
right to enforce this act at time of loan closing.
Although we believe our operations comply with current regulatory
requirements, we are unable to predict whether state or federal authorities will
require changes in our lending practices in the future, or the impact of those
changes on our profitability.
Competition
The markets in which we operate are competitive. Traditional competitors in
the consumer finance industry include independent finance companies, banks and
thrift institutions, credit unions, credit card issuers, leasing companies,
manufacturers and vendors. Some of these competitors are large companies that
have greater capital and technological and marketing resources than we do. These
competitors also have access to capital at a lower cost.
Competition varies by delivery system and geographic region. For example,
some competitors deliver their services exclusively via the Internet while
others exclusively through a branch network. We distribute our products using
both delivery channels. In addition, we compete with other consumer finance
companies on the basis of overall pricing of loans, including interest rates and
fees, and general convenience of obtaining the loan, including the location of
our retail offices to the military base.
We maintain product delivery flexibility and convenience, which we believe
offers us a competitive advantage. In addition, we believe that innovation is
necessary to compete in the industry, including enhanced customer service,
products designed for military personnel and use of the Internet for loan
processing and funding. While some of our customers might qualify for loans from
traditional lending sources, we believe they are attracted to our products and
services as a result of our exclusive commitment to the military market, an
understanding of the military culture, our products and services and our
expedited loan processing and funding.
Trade Names
A subsidiary of our parent has applied for federal trademark protection for
the name "Pioneer Services," other names we use in our business and the logo
that incorporates the "Pioneer Services" name. Trademark protection for certain
other names, logos and phrases we use in our business operations are being
applied for.
Employee Relations
At September 30, 2003, we employed approximately 300 persons, none of whom
were represented by labor unions. We believe that our employee relations are
good.
Factors That May Affect Future Results of Operations, Financial Condition or
Business
We have identified important risks and uncertainties that could affect our
results of operations, financial position, cash flow or business and that could
cause them to differ materially from our historical results of operations,
financial position, cash flow or business, or those contemplated by
forward-looking statements made herein or elsewhere, by, or on behalf of, us.
Factors that could cause or contribute to such differences include, but are not
limited to, those factors described below.
Lending exclusively to the military market may result in higher
delinquencies in our loan portfolio, which could result in a reduction in
profitability and impair our ability to pay interest and principal on the
debentures.
A large portion of our customers are unable to obtain financing from
traditional sources, such as commercial banks, due to factors such as their age,
likelihood of relocation and lack of credit history. Historically, we have
experienced higher delinquency rates than traditional financial institutions.
While we use underwriting standards and collection procedures designed to
mitigate the higher credit risk associated with lending to these borrowers, our
standards and procedures may not offer adequate protection against risks of
default. Higher than anticipated
8
delinquencies, foreclosures or losses on the loans we originate or purchase
would reduce our profitability, which could restrict our ability to pay interest
and principal on the debentures.
An increase in market interest rates may result in a reduction in our
profitability and impair our ability to pay interest and principal on the
debentures.
Sustained, significant increases in interest rates could unfavorably impact
our liquidity and profitability by reducing the interest rate spread between the
rate of interest we receive on loans and interest rates we must pay under our
outstanding bank debt and debentures. Any reduction in our profitability would
diminish our ability to pay interest and principal on the debentures.
Acts of war or terrorist attacks in the United States may cause disruption
in our business and may adversely affect the markets in which we operate, which
could affect our profitability and our ability to pay interest and principal on
the debentures.
Terrorist attacks in the United States in September 2001 caused major
instability in the U.S. financial markets. Additional attacks and the response
of the U.S. government may lead to additional armed hostilities or to further
acts of terrorism in the U.S. which may cause a further decline in the financial
markets and may contribute to a further decline in economic conditions. In
addition, the involvement of military personnel in armed hostilities may reduce
the demand for our products and services or increase payment delinquencies and
therefore reduce our revenues, possibly without immediate comparable reductions
in overhead. To the extent these events occur, our profitability and cash flow
could be reduced and our ability to pay interest and principal on the debentures
could be impaired.
If a large number of our borrowers are wounded in combat, our profits may
be adversely affected.
Our wholly-owned subsidiary reinsures a portion of the credit accident and
health insurance policies issued on the borrowers for the loans we originate.
These policies pay the loan payments as they become due during a customer's
disability due to illness or injury, including war-related injuries. Therefore,
if a large number of our borrowers are injured and disabled in combat, the
profitability of our insurance subsidiary would be impaired, which could impair
our ability to pay interest and principal on the debentures.
We are subject to many laws and governmental regulations, and any changes
in these laws or regulations may materially adversely affect our financial
condition and business operations.
Our operations are subject to regulation by federal authorities and state
banking, finance, consumer protection and insurance authorities and are subject
to various laws and judicial and administrative decisions imposing various
requirements and restrictions on our operations which, among other things,
require that we obtain and maintain certain licenses and qualifications, and
limit the interest rates, fees and other charges we may impose. Although we
believe we are in compliance in all material respects with applicable laws,
rules and regulations, there can be no assurance that we are or that any change
in such laws, or in the interpretations thereof, will not make our compliance
therewith more difficult or expensive or otherwise adversely affect our
financial condition or business operations. We are subject to regulation by
states where our lending subsidiaries are located. At this time, we are not
subject to consumer lending regulation in the states in which we only have
retail offices. If this were to change in the future, any resulting regulation
by the states in which we only have retail offices could adversely impact our
operating costs and our ability to repay the debentures.
Almost all of our borrowers are active duty military or federal government
employees who could be instructed not to do business with us, or their access to
the Government Allotment System could be denied.
When they deem it to be in the best interest of their personnel, military
commanders and supervisors of federal employees may instruct their personnel,
formally or informally, not to patronize a business. If military commanders or
federal employee supervisors at any given level determine one or more of our
retail offices or our Internet site to be off limits, we would be unable to do
new business with the potential customers they command or supervise.
Additionally, approximately 70.43% of our borrowers make their monthly loan
payments through the Government Allotment System. Military commanders or federal
employee supervisors could deny those they command or supervise access to these
programs, increasing our credit risk. Without access to sufficient new customers
or to the Government Allotment System, we may be forced to discontinue lending
and liquidate our portfolio of consumer loans and retail installment contracts.
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Our profitability and future growth depend on our continued access to bank
debt.
The profitability and growth of our business currently depends on our
ability to access bank debt at competitive rates, and we cannot guarantee that
such financing will be available in the future. Our bank debt is comprised of
individual loans from banks which are party to our senior lending agreement.
This 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. No bank has an
obligation to make any additional future loans to us. As of September 30, 2003,
we could request up to $20.95 million in additional funds pursuant to the terms
of the senior lending agreement signed October 1, 2003 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. If we are unable to
renew or replace our bank debt or find alternative financing at reasonable
rates, we may be forced to liquidate. If we are forced to liquidate, there can
be no assurance that we will be able to pay the interest and principal on the
debentures.
If a customer leaves the military prior to repaying our loan, there is an
increased risk that our loan will not be repaid.
The terms of repayment on the loans we make are generally structured so the
entire loan amount is repaid prior to the customer's estimated separation from
the military. If, however, a customer unexpectedly leaves the military or other
events occur which result in the loan not being repaid prior to our customer's
departure from the military, there is an increased chance that our loan will not
be repaid. Because we do not know whether or when a customer will leave the
military early, we cannot institute policies or procedures to ensure that the
entire loan is repaid before the customer leaves the military. As of September
30, 2003, we had approximately 4,000 customers who separated from the military
prior to repaying our loan and who in the aggregate owed us approximately $6.0
million. Based on historical charge-off models, management believes this could
result in approximately $3.27 million in charge-offs. If that amount increases
or the number of our customers who separate from the military prior to their
scheduled separation date materially increases, our charge-offs may increase.
Additional competition may decrease our profitability, which would
adversely affect our ability to repay the debentures.
We compete for business with a number of large national companies and banks
that have substantially greater resources, lower cost of funds, and a more
established market presence than we have. If these companies increase their
marketing efforts to include our market niche of borrowers, or if additional
competitors enter our markets, we may be forced to reduce our interest rates and
fees in order to maintain or expand our market share. Any reduction in our
interest rates or fees could have an adverse impact on our profitability and our
ability to repay our debentures.
The laws and regulations of the Arizona insurance authorities may restrict
our reinsurance subsidiary's ability to distribute available cash to us.
The operations of our wholly-owned reinsurance subsidiary are subject to
the laws and regulations of the insurance authorities in the state of Arizona.
Among other things, these laws and regulations place restrictions on the amount
of dividends that our reinsurance subsidiary can pay to us and require us to
maintain a certain capital structure. As of September 30, 2003, our reinsurance
subsidiary had the ability to pay us up to $1,327,929 in dividends pursuant to
these laws and regulations. If our reinsurance subsidiary does not continue to
satisfy these requirements, it may be prohibited from distributing available
cash to us, which may in turn impair our ability to pay interest and principal
on the debentures.
We are controlled by a single shareholder.
As of September 30, 2003, our sole shareholder, Pioneer Financial
Industries, Inc., owned all of the outstanding shares of our capital stock.
Various trusts controlled by William D. Sullivan control Pioneer Financial
Industries. Accordingly, Mr. Sullivan will be able to exercise significant
control over our affairs including, but not limited to, the election of
directors, operational decisions and decisions regarding the debentures. Our
senior lending agreement limits the amounts that we can pay to our parent each
year. In fiscal 2003, the senior lending agreement prohibits us from paying our
parent more than $700,000 for strategic planning services, professional
services, the use of intellectual property rights, product identification and
branding and service charges. Other than the covenants contained in our senior
lending agreement, there are no other contractual or regulatory limits on the
amounts we can pay to our parent or other affiliates.
10
Loss of key personnel could have an adverse effect on our operations.
The loss of certain key personnel could adversely affect our operations.
Our success depends in large part on the retention of a limited number of key
persons, including: William D. Sullivan, our Chief Executive Officer, and Thomas
H. Holcom, Jr., our President. We will likely undergo a difficult transition
period if we lose the services of either or both of these individuals.
ITEM 2. DESCRIPTION OF PROPERTY
Our operations are generally conducted on leased premises under operating
leases with terms not normally exceeding five years. At September 30, 2003, we
had 31 leased operating facilities in the United States. Please see Note 6 to
our Consolidated Financial Statements for information concerning our lease
obligations. The furniture, equipment and other personal property that we own
represents less than 1% of our total assets at September 30, 2003 and is
therefore not significant in relation to our total assets.
ITEM 3. LEGAL PROCEEDINGS
We are subject to claims and lawsuits that primarily involve routine
matters in the ordinary course of our business. We believe that the disposition
or ultimate resolution of such claims and lawsuits will not have a material
adverse effect on our financial position or results of operations.
11
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our audited consolidated financial statements and the related
notes, with other financial data included in this report and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
data as of, and for the fiscal years ended September 30, 2003, 2002, 2001, 2000
and 1999 has been derived from our audited consolidated financial statements and
related notes.
As of, and For the Years Ended September 30,
----------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share amounts)
Consolidated Balance Sheet Data:
Finance receivables (1)................ $ 165,895 $ 159,011 $ 137,314 $ 127,746 $ 107,935
Allowance for credit losses............ $ (9,221) $ (6,221) $ (4,421) $ (3,833) $ (3,301)
Total assets........................... $ 165,842 $ 159,997 $ 141,328 $ 132,067 $ 111,388
Senior indebtedness:
Revolving lines of credit (2)....... $ 12,293 $ 12,718 $ 12,310 $ 10,851 $ 9,138
Amortizing and single
pay term notes....... $ 99,471 $ 97,925 $ 83,847 $ 80,466 $ 64,561
Junior subordinated debt............... $ 21,437 $ 21,396 $ 20,973 $ 19,204 $ 17,908
Total equity........................... $ 20,756 $ 17,320 $ 14,861 $ 13,070 $ 11,488
Consolidated Statement of Operations
Data:
Revenue:
Finance income...................... $ 50,003 $ 45,884 $ 38,965 $ 34,670 $ 28,688
Insurance premiums and commissions.. 5,288 4,652 4,561 4,467 3,992
Other income, fees and
commissions.......... 1,646 1,755 1,596 1,313 113
---------- ---------- ---------- ---------- ----------
Total revenue.......................... 56,937 52,291 45,122 40,450 32,793
Provision for credit losses............ 12,168 10,594 8,264 7,476 6,577
Interest expense....................... 9,325 9,599 9,455 8,334 6,990
---------- ---------- ---------- ---------- ----------
Net revenue............................ 35,444 32,098 27,403 24,640 19,226
Operating expenses..................... 29,325 27,589 24,052 21,727 17,014
---------- ---------- ---------- ---------- ----------
Income before income taxes............. 6,119 4,509 3,351 2,913 2,212
Provision for income taxes............. 2,139 1,645 1,210 1,055 492
Net income............................. $ 3,980 $ 2,864 $ 2,141 $ 1,858 $ 1,720
========== ========== ========== ========== ==========
Net income per share:
Basic and diluted................... $ 232.25 $ 167.14 $ 124.91 $ 108.39 $ 100.43
========== ========== ========== ========== ==========
Cash dividends per common share..... $ 31.75 $ 23.63 $ 20.39 $ 16.05 $ 11.66
========== ========== ========== ========== ==========
- ----------------------
(1) Finance receivables balances are presented net of unearned finance charges,
unearned insurance commissions and discounts on purchases of retail
installment contracts.
(2) Includes debt to our parent under a revolving line of credit of
$1,712,841, $1,941,831, $1,839,521, $1,244,413, and $147,945 as of
September 30, 2003, 2002, 2001, 2000 and 1999, respectively.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 U.S. military personnel or U.S. 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 U.S. military personnel or U.S. Department of Defense employees.
We refer to these consumer loans and retail installment contracts as finance
receivables.
Our finance receivables are effectively unsecured. See "Business--Direct
Lending Activity." Our finance receivables have fixed interest rates and
typically have a maturity of less than 48 months. During fiscal 2003, the size
of our average finance receivable at origination was approximately $3,158. 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. Overall, our originations have decreased in fiscal 2003 by 1.8% as
compared with fiscal 2002. However, since September 30, 1998, finance
receivables have increased at a 12.94% annual compounded rate from $90.3 million
to $165.9 million at September 30, 2003. This increase reflects higher volume of
loans generated through our existing and new retail offices and through the
Internet. Use of the Internet to extend loans is a lower cost method of loan
origination. We plan to look for opportunities to expand the Internet portion of
our business and add new retail offices as we evaluate new military markets and
possible products.
Sources of Income
We derive revenues and resulting income from finance income derived from
direct consumer lending and retail installment contracts, commissions earned on
the sale of credit insurance products, credit reinsurance premiums, and
commissions earned on the sale of ancillary products and services. For purposes
of the following discussion, "revenues" means the sum of our finance income,
insurance premiums and commissions and other income.
Direct Lending. Our finance income from direct loans to customers consists
of interest and fees paid by the customer. Our interest income is based on the
risk adjusted interest rates we charge customers for loans. Interest rates vary
from loan to loan based on many factors, including the overall degree of credit
risk assumed and the interest rates allowed in the state where the loan is
originated. Substantially all of the fee income we derive from these loans
consists of origination, prepayment and late fees. Finance income from our
direct lending business comprised approximately 80.9% of our total revenues in
fiscal 2003, 79.4% of our revenues in fiscal 2002 and 74.3% of our revenues in
fiscal 2001.
Retail Installment Contracts. We purchase retail installment contracts from
approximately 81 retail merchants. Retail installment contracts are notes
receivable generated by a single purchase of consumer goods. Our revenue from
retail installment contracts consists of interest and fees. Like our direct
loans, interest rates charged on retail sales contracts vary from contract to
contract based on many factors, including the overall degree of credit risk
assumed and the interest rates allowed in the state where the loan is
originated. Substantially all of the fee income we derive from retail
installment contracts consists of prepayment and late fees. Interest and fee
income from retail installment contracts comprised approximately 7.0% of our
total revenues in fiscal 2003.
Credit Insurance Commissions. We sell credit life, credit accident and
health, and credit property insurance. Our income from the sale of these
products consists of commissions paid to us by an unaffiliated insurance company
that issues the policies. The commission rates are based on a pre-negotiated
schedule. Commissions are recognized ratably over the life of the policy. Credit
insurance commissions comprised approximately 6.9% of our total revenues in
fiscal 2003.
13
Credit Reinsurance Premiums. We have a wholly-owned insurance subsidiary
that reinsures a portion of the credit accident and health insurance sold in
connection with loans we make. A portion of the premiums for policies that we
sell for the unaffiliated insurance company are ceded to one of our
subsidiaries, providing us with an additional source of revenue. Net credit
reinsurance premiums comprised approximately 2.4% of our total revenues in
fiscal 2003. The liability we establish for possible losses related to our
reinsurance operations and the corresponding charges to our income to maintain
this amount are immaterial to our overall business.
Ancillary Products and Services. We also sell non-loan related products and
services including roadside assistance programs and discount healthcare cards.
Our revenues from the sale of these products and services consists of
commissions paid by an unaffiliated company. These sales commissions comprised
approximately 2.6% of our total revenues in fiscal 2003.
Finance Receivables
Our finance receivables are comprised of direct loans and retail
installment contracts. The following table sets forth the five year history of
certain information about the components of our finance receivables as of the
ends of the periods presented:
As of, and For the Years Ended, September 30
-------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except average note balance)
Finance Receivables:
Finance receivables balance ..... $ 165,895 $ 159,011 $ 137,314 $ 127,746 $ 107,935
Average note balance............. $ 2,117 $ 1,946 $ 1,753 $ 1,763 $ 1,714
Total finance income............. $ 50,003 $ 45,884 $ 38,965 $ 34,670 $ 28,688
Total number of notes............ 78,364 81,726 78,316 72,478 62,978
Direct Loans:
Notes receivable balance ........ $ 147,095 $ 139,664 $ 117,098 $ 102,397 $ 88,192
Percent of finance receivables... 88.67% 87.83% 85.28% 80.16% 81.71%
Average note balance............. $ 2,123 $ 1,959 $ 1,767 $ 1,746 $ 1,706
Number of notes.................. 69,291 71,302 66,264 58,635 51,693
Retail Installment Contracts:
Notes receivable balance ........ $ 18,800 $ 19,348 $ 20,216 $ 25,349 $ 19,744
Percent of finance receivables... 11.33% 12.17% 14.72% 19.84% 18.29%
Average note balance............. $ 2,072 $ 1,856 $ 1,677 $ 1,831 $ 1,750
Number of notes.................. 9,073 10,424 12,052 13,843 11,285
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 cost of funds. Our general inability to increase the interest rates
earned on new and existing finance receivables restricts our ability to react to
increases in our cost of funds. 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. See "Business--Factors That May Affect
Future Results of Operations, Financial Condition or Business--An increase in
market interest rates may result in a reduction in our profitability and impair
our ability to pay interest and principal on the debentures."
14
The following table presents a five year history of important data
relating to our net interest margin.
As of, and for the Years Ended, September 30,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(dollars in thousands)
Finance receivables balance ........ $165,895 $159,011 $137,314 $127,746 $107,935
Average finance receivables ........ $164,578 $149,729 $131,741 $118,901 $100,391
Average interest bearing
liabilities (1)................ $131,483 $125,561 $111,195 $100,614 $ 83,467
Total finance income ............... $ 50,003 $ 45,884 $ 38,965 $ 34,670 $ 28,688
Total interest expense ............. $ 9,325 $ 9,599 $ 9,455 $ 8,334 $ 6,990
Provision for credit losses......... $ 12,168 $ 10,594 $ 8,264 $ 7,476 $ 6,577
Net charge-offs..................... $ 9,168 $ 8,794 $ 7,676 $ 6,944 $ 5,980
- --------------
(1) Averages are computed using month-end balances during the years
presented.
Results of Operations
Year Ended September 30, 2003 Compared to Year Ended September 30, 2002
Finance Receivables. Our aggregate finance receivables grew 4.3% during
fiscal 2003 to $165.9 million on September 30, 2003 from $159.0 on September 30,
2002. This growth was due primarily to increases in finance receivables from the
Internet, which grew by more than $11.7 million or 25%. The Internet is a
lower-cost method of loan origination and proceed distribution, and we plan to
increase this distribution channel in the future.
Total Revenues. Total revenues in fiscal 2003 increased to $56.9 million
from $52.3 million in fiscal 2002, an increase of $4.6 million or 8.8%. These
revenues consisted of:
o Finance income in fiscal 2003 increased to $50.0 million from
$45.9 million in fiscal 2002, an increase of $4.1 million or
8.9%. This increase was primarily attributable to an increase in
our average loan size due to the higher credit worthiness of an
increased number of our customers with higher military rank.
o Insurance premium and commission revenues in fiscal 2003
increased to $5.3 million from $4.7 million in fiscal 2002, an
increase of $.6 million or 12.8%. This increase was also
primarily attributable to an increase in our average loan size
due to the higher credit worthiness of an increased number of our
customers with higher military rank.
o Other income, fees and commission revenues in fiscal 2003
decreased to $1.6 million from $1.8 million in fiscal 2002, a
decrease of $.2 million or 10.0%. This decrease was due primarily
to military deployments to the Middle East hostilities, which has
somewhat affected demand for our products.
Provision for Credit Losses. Provision for credit losses in fiscal 2003
increased to $12.2 million from $10.6 million in fiscal 2002, an increase of
$1.6 million or 15.1%. This increase was attributable, in part, to a 4% growth
in our direct loan portfolio and the uncertainty regarding the Middle East
hostilities. The net charge-offs incurred in connection with our finance
receivable in fiscal 2003 increased to $9.2 million from $8.8 million in fiscal
2002, an increase of $.4 million or 4.5%. This increase was consistent with the
increase in our finance receivable portfolio and was 5.57% of the average
finance receivable balance in fiscal 2003 compared to 5.87% in fiscal 2002.
Historically, our net charge-offs have been less than 6% of our average finance
receivables. Our allowance for credit losses at September 30, 2003 increased to
$9.2 million from $6.2 million at September 30, 2002, an increase of $3.0
million or 48.4%. This increase reflects, among other things, our concern
regarding uncertainty surrounding possible Middle East hostilities. If this
situation were to result in a protracted war, the involvement of military
personnel in armed hostilities may increase payment delinquencies and our
charge-offs. In addition, if a large number of our borrowers are wounded in
combat or killed in action, those customers without
15
credit insurance to pay off the loan for those types of events may not be able
to continue to pay their loans as agreed which may cause our delinquencies and
ultimately our charge-offs to increase.
Interest Expense. Interest expense in fiscal 2003 decreased to $9.3 million
from $9.6 million in fiscal 2002, a decrease of $.3 million or 3.1%. Our average
interest bearing liabilities increased by $5.9 million or 4.7% during fiscal
2003. However, this increase was offset by decreased interest rates. The
weighted average interest rate on our debt declined to 7.1% in fiscal 2003 from
7.5% in fiscal 2002.
Operating Expenses. Operating expenses in fiscal 2003 increased to $29.3
million from $27.6 million in fiscal 2002, an increase of $1.7 million or 6.2%.
This increase was primarily due to employment costs, which increased by $1.7
million as we continued efforts to build infrastructure, primarily in Internet
distribution facility and product development teams. Facilities costs decreased
by $1.1 million due in part to a change in our data services provider for our
different facilities throughout the United States. Marketing costs increased by
$.5 million due to an increase in initiatives to promote our brand of Pioneer
Services and new loan products designed to assist military personnel in need
during deployments. Professional fees also increased due to the preparation of
the registration statement and amendments to the registration statement in
connection with offering the debentures.
Net Income. In fiscal 2003, income before income taxes was $6.1 million and
net income was $4.0 million as compared to fiscal 2002 income before income
taxes of $4.5 million and net income of $2.9 million.
Year Ended September 30, 2002 Compared to Year Ended September 30, 2001
Financial Receivables. Our aggregate finance receivables grew 15.8% during
fiscal 2002 to $159.0 million on September 30, 2002 from $137.3 on September 30,
2001. This growth was due primarily to increases in finance receivables from the
Internet, which grew by more than $14.0 million or 42%. The Internet is a
lower-cost method of loan origination and proceed distribution, and we plan to
increase this distribution channel in the future.
Total Revenues. Total revenues in fiscal 2002 increased to $52.3 million
from $45.1 million in fiscal 2001, an increase of $7.2 million or 15.9%. These
consisted of:
o Finance income in fiscal 2002 increased to $45.9 million from
$39.0 million in fiscal 2001, an increase of $6.9 million or
17.8%. This increase was attributable to an increase in the
number of loans in our portfolio and an increase in our average
loan size due to the higher credit worthiness of an increased
number of our customers with higher military rank.
o Insurance premium and commission revenues in fiscal 2002
increased to $4.7 million from $4.6 million in fiscal 2001, an
increase of $.1 million or 2%. While the commissions on credit
insurance products remained strong, with growth of approximately
$.4 million or 14.4%, the premiums received by our insurance
subsidiary declined by $.3 million or 18.7%. This decline was due
to a reduced number of policies reinsured with our subsidiary by
an unaffiliated insurance carrier over the course of the year. We
do not anticipate this trend continuing.
o Other income, fees and commission revenues in fiscal 2002
increased to $1.8 million from $1.6 million in fiscal 2001, an
increase of $.2 million or 10.0%. This revenue was comprised
primarily of commissions from sales of roadside assistance
policies and health discount cards, as well as commissions from
the sale of prepaid cellular phones and phone cards prior to
September 1, 2001. The increase was attributable to commissions
from sales of discount healthcare cards, which began in January
of 2002.
Provisions for Credit Loss. Provision for credit losses in fiscal 2002
increased to $10.6 million from $8.3 million in fiscal 2001, an increase of $2.3
million or 28.2%. This increase was attributable, in part, to a 19% growth in
our direct loan portfolio and the uncertainty regarding the Middle-East
hostilities. The net charge-offs incurred in connection with our finance
receivable in fiscal 2002 increased to $8.8 million from $7.7 million in fiscal
2001, an increase of $1.1 million or 14.6%. This increase was consistent with
the increase in our finance receivable portfolio and was 5.87% of the average
finance receivable balance in fiscal 2002 compared to 5.83% in fiscal 2001.
Historically, our net charge-offs have been less than 6% of our average finance
receivables. Our allowance for credit losses at September 30, 2002 increased to
$6.2 million from $4.4 million at September 30, 2001, an increase of $1.8
million or 40.7%. This increase reflects, among other things, our concern
regarding uncertainty surrounding
16
possible Middle-East hostilities. If this situation were to result in a
protracted war, the involvement of military personnel in armed hostilities may
increase payment delinquencies and our charge-offs. In addition, if a large
number of our borrowers are wounded in combat or killed in action, those
customers without credit insurance to pay off the loan for those types of events
may not be able to continue to pay their loans as agreed which may cause our
delinquencies and ultimately our charge-offs to increase.
Interest Expense. Interest expense in fiscal 2002 increased to $9.6 million
from $9.5 million in fiscal 2001, an increase of $.1 million or 1.5%. Our
average interest bearing liabilities increased by $14.4 million or 12.9% during
fiscal 2002. However, this increase was offset by decreased interest rates. The
weighted average interest rate on our debt declined to 7.5% in fiscal 2002 from
8.2% in fiscal 2001.
Operating Expense. Operating expenses in fiscal 2002 increased to $27.6
million from $24.1 million in fiscal 2001, an increase of $3.5 million or 14.7%.
This increase was due primarily to increases in employment costs and facilities
costs. Employment costs increased by $3.0 million as we enlarged 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. Facilities costs increased by $1.0 million due primarily to
the move and expansion of our administrative offices in April 2001, opening of a
new retail sales office and the expansion of our Internet facility. Professional
fees decreased by $.4 million due to the resolution of a suit we filed against a
competitor in 2001.
Net Income. We generated income before income taxes of $4.5 million and net
income of $2.9 million in fiscal 2002 compared to income before income taxes of
$3.4 million and net income of $2.1 million in fiscal 2001.
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 the five year history of 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 September 30,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(dollars in thousands)
Finance receivables balances...... $ 165,895 $ 159,011 $ 137,314 $ 127,746 $ 107,935
Finance receivables balances 60
days or more past due........... $ 4,836 $ 5,580 $ 6,369 $ 5,176 $ 4,741
Finance receivables balances 60
days or more past due as a
percent of finance receivables.. 2.92% 3.51% 4.64% 4.05% 4.39%
Our 60-day delinquency accounts have consistently remained between 2.9% and
4.7% of the entire finance receivable portfolio. 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.
17
Credit Loss Experience and Provision for Credit Losses
General.
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 methodology for setting the allowance
for our direct finance receivable portfolio is described in " -- Critical
Accounting Policies," and the dealer reserves for our retail installment
contracts are discussed below.
Direct Loans.
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 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 from 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 shows a five-year historical picture of net charge-offs
on direct loans and net charge-offs as a percentage of direct loans. The
decrease shown on this table in the percentage of net charge-offs to average
monthly balance outstanding resulted primarily from more effective collection
efforts.
As of, and For the Years Ended, September 30,
-------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(dollars in thousands)
Direct Loans:
Loans charged-off.................. $ 10,287 $ 9,555 $ 8,752 $ 7,791 $ 6,683
Less recoveries.................... 1,048 869 1,080 965 693
-------- -------- -------- -------- --------
Net charge-offs.................... $ 9,239 $ 8,686 $ 7,672 $ 6,826 $ 5,990
======== ======== ======== ======== ========
Average monthly balance
outstanding (1).................... $145,511 $130,223 $108,939 $ 95,780 $ 82,114
Percentage of net charge-offs
to average monthly balance
outstanding........................ 6.35% 6.67% 7.04% 7.13% 7.29%
- -------------------
(1) Averages are computed using month-end balances during the years
presented.
Retail Installment Contracts.
Under our retail merchant reserve arrangements, we withhold a percentage
(usually between five and ten percent) of the principal amount of the retail
installment contract purchased. The amounts withheld from a particular retail
merchant are recorded in a specific reserve account. Any losses incurred on the
retail installment contracts purchased from that retail merchant are charged
against its specific reserve account. Upon the retail merchant's request, and no
more often than annually, we pay the retail merchant the amount by which its
specific reserve account exceeds 15% of the aggregate outstanding balance on all
retail installment contracts purchased from them, less losses we have sustained,
or reasonably could sustain, due to debtor defaults, collection expenses,
delinquencies and breaches of our agreement with the retail merchant. Our
allowance for credit losses is charged
18
only to the extent that the loss on a retail installment contract exceeds the
originating retail merchant's specific reserve account at the time of the loss.
The following table shows a five-year historical picture of net charge-offs
on retail installment contracts and net charge-offs as a percentage of retail
installment contracts. The fluctuation shown on this table in net charge-offs
indicates timing differences resulting from the collection of amounts charged
off in prior years.
As of, and For the Years Ended, September 30,
----------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(dollars in thousands)
Retail Installment Contracts:
Contracts charged-off............. $ 83 $ 190 $ 221 $ 338 $ 253
Less recoveries................... 154 82 217 220 264
-------- -------- -------- -------- --------
Net charge-offs (recoveries)...... $ (71) $ 108 $ 4 $ 118 $ (11)
======== ======== ======== ======== ========
Average monthly balance
outstanding (1)................. $ 19,067 $ 19,506 $ 22,802 $ 23,121 $ 18,277
Percentage of net charge-offs to
average monthly balance
outstanding..................... (0.37)% 0.55% 0.02% 0.51% (0.06)%
- --------------------
(1) Averages are computed using month-end balances during the years presented.
The following table sets forth the five year history of our allowance for
credit losses on direct loans and retail installment contracts:
As of, and For the Years Ended, September 30,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(dollars in thousands)
Average finance receivables (1). $164,578 $149,729 $131,741 $118,901 $100,391
Provision for credit losses..... $ 12,168 $ 10,594 $ 8,264 $ 7,476 $ 6,577
Net charge-offs................. $ 9,168 $ 8,794 $ 7,676 $ 6,944 $ 5,980
Net charge-offs as a percentage of
average finance receivables... 5.57% 5.87% 5.83% 5.84% 5.96%
Allowance for credit losses..... $ 9,221 $ 6,221 $ 4,421 $ 3,833 $ 3,301
Allowance as a percentage of
average finance receivables... 5.60% 4.15% 3.36% 3.22% 3.29%
- ------------------
(1) Averages are computed using month-end balances during the years presented.
Allowance for Credit Losses.
The allowance for credit losses is maintained at an amount which management
considers sufficient to cover estimated future losses. The Company has developed
policies and procedures for assessing the adequacy of the allowance for credit
losses which take into consideration the historical credit loss experience of
the Company, delinquency trends, current economic conditions, current or future
military deployments, and the composition of the finance receivable portfolio.
The Company uses various ratio analyses in evaluating prior finance receivable
losses and delinquency experience. These and other analyses are used to measure
historical movement of finance receivables through various levels of repayment,
delinquency, and loss. These results and management's judgment are used to
estimate future losses and in establishing the current provision and allowance
for credit losses. These estimates are influenced by factors outside the
Company's control, such as economic conditions and current or future military
deployments. There is uncertainty inherent in these estimates, making it
reasonably possible that they could change in the near term. See "-- Critical
Accounting Policies."
19
The following table sets forth the five year history of the components of
our allowance for credit losses on direct loans and retail installment
contracts:
As of, and For the Years Ended, September 30,
------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(dollars in thousands)
Balance beginning of period........ $ 6,221 $ 4,420 $ 3,833 $ 3,301 $ 2,704
Charge-offs:
Loans charged-off................ (10,370) (9,745) (8,973) (8,129) (6,936)
Recoveries....................... 1,202 952 1,296 1,185 956
Net charge-offs.................... (9,168) (8,793) (7,677) (6,944) (5,980)
Provision for credit losses........ 12,168 10,594 8,264 7,476 6,577
Balance end of period.............. $ 9,221 $ 6,221 $ 4,420 $ 3,833 $ 3,301
Nonearning Assets
Accrual of interest income is suspended when a payment has not been
received for 60 days or more, and the interest due exceeds an amount equal to 60
days of interest charges. The accrual is resumed when a full payment (95% or
more of the contracted payment amount) is received.
Nonearning assets represent those finance receivables on which both the
accrual of interest income has been suspended and for which no payment of
principal or interest has been received for more than 60 days. Nonearning assets
at September 30, 2003 decreased to $4.84 million from $5.58 million at
September 30, 2002, a decrease of $740,000 or 13.0%. This decrease was primarily
the result of enhanced collection efforts.
Loan Origination
Our loan origination is the most important factor in determining our future
revenues. Our loan origination in fiscal 2003 decreased to $188.5 million from
$191.9 million in fiscal 2002, a decrease of $3.4 million or 1.8%. This decrease
was due primarily to military deployments to the Middle East hostilities and
other deployments of military personnel for extended periods of time, which has
somewhat affected demand for our loans.
The following table sets forth the five year history of our overall loan
originations and lending activities by direct loan and retail installment
contract:
As of, and For the Years Ended September 30,
----------------------------------------------------------------------
(dollars in thousands, except for average note amounts)
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Total Loan Origination:
Gross balance................. $ 188,464 $ 191,931 $ 158,594 $ 158,220 $ 136,457
Number of notes............... 59,670 67,483 62,123 63,123 56,570
Average note amount........... $ 3,158 $ 2,844 $ 2,553 $ 2,507 $ 2,412
Direct Loans:
Gross balance................. $ 173,013 $ 175,932 $ 144,693 $ 134,870 $ 117,064
Number of notes............... 55,075 62,532 57,576 54,558 48,724
Average note amount........... $ 3,141 $ 2,813 $ 2,513 $ 2,472 $ 2,403
Retail Installment Contracts:
Gross balance................. $ 15,451 $ 15,999 $ 13,901 $ 23,350 $ 19,393
Number of notes............... 4,595 4,951 4,547 8,565 7,846
Average note amount........... $ 3,363 $ 3,231 $ 3,057 $ 2,726 $ 2,472
20
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.
Investing activities are our principal use of cash, which is to make new loans
and purchase retail installment contracts. We use our borrowings to fund the
difference, if any, between the cash used to make new loans and purchase retail
installment contracts, and the cash generated from loan repayments. Cash used in
investing activities in fiscal 2003 was $16.8 million which was funded from the
$17.8 million of cash from operating activities. Cash used in investing
activities in fiscal 2002 was $31.2 million and was primarily funded by $16.3
million from operating activities and $13.6 million from financing activities.
Financing activities primarily consist of borrowings and repayments
relating to our bank debt, an unsecured revolving credit line from our parent
and our junior subordinated debentures. Cash used in financing activities in
fiscal 2003 was $.1 million compared to cash provided of $13.6 million in fiscal
2002. There was no net increase in borrowings in fiscal 2003 because cash from
operating activities was sufficient to fund investing needs. Information about
the length to maturity of our debt may be found in Note 3 of the Notes to
Consolidated Financial Statements. The revolving credit line from our parent
consists of various borrowings at 2% above the prime rate. See Note 5 of the
Notes to Consolidated Financial Statements for general remunerations.
Senior Indebtedness-Bank Debt.
The senior lending agreement was amended and restated on October 1, 2003.
The terms of the senior lending agreement are substantially the same as before
the amendment. 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.
Currently, eleven (11) banks are a party to the senior lending agreement, as
amended. Any bank may elect not to participate in any future fundings at any
time without penalty. As of December 1, 2003, we could request up to
approximately $20.62 million in additional funds pursuant to the terms of the
senior lending agreement, as amended. No bank, however, has any contractual
obligation to lend us these additional funds. In connection with borrowing under
the senior lending agreement we are subject to certain financial and other
restrictive covenants.
On or before March 31 of each year, each bank that is a party to the senior
lending agreement is to deliver to us a written indication of whether or not it
wishes to participate in future fundings and the amounts that it expects to be
willing to fund during the next 12 months. As of December 1, 2003, ten (10)
banks of the eleven (11) that are a party to our senior lending agreement have
indicated in writing their willingness to participate in fundings up to an
aggregate of $185.5 million during the next 12 months, including all amounts
currently outstanding under the senior lending agreement.
If a bank were to elect not to participate in future fundings, any existing
borrowings from that bank under the revolving credit line would be payable in
twelve equal monthly installments. We anticipate that we would repay that amount
through borrowings from other banks participating in the senior lending
agreement. Any existing borrowings under amortizing notes or single pay term
notes from the bank electing not to participate would be repayable according to
their original terms. Currently, we limit the amount we borrow from any one bank
to $20 million. This limitation lessens our dependence on any one bank and the
potential effect on our operations and liquidity if that bank elects not to
participate in future financing. During fiscal 2000 and 2001, two banks elected
not to extend further credit to us, however, those banks were replaced with two
new banks prior to September 30, 2001, and our operations and liquidity were not
affected during that period.
Historically, we have had adequate time to replace any lender electing not
to participate in future fundings. However, there can be no assurance that we
will be able to replace a lender in the future or that a lender's decision not
to extend us further credit would not have a material adverse effect on our
liquidity. In the event we are unable to raise adequate capital under our senior
lending agreement, we would pursue alternative funding options. These
alternatives might include the securitization of our finance receivables,
obtaining committed financing from a bank syndicate, a private placement of debt
or equity, an expansion of our junior subordinated debenture program, or an
initial public offering of our equity.
Our senior lending agreement gives us access to a revolving credit line,
amortizing notes and single pay term notes. As of December 1, 2003, the
outstanding balance under the revolving credit line was approximately
21
$11.38 million floating at prime rate, or 4.0%. The revolving credit line is
payable upon demand in 12 equal monthly payments of principal and monthly
payments of interest on the outstanding principal on the tenth day of each
month. As of December 1, 2003, the outstanding balance of the amortizing notes
was approximately $100.7 million, with interest rates fixed at 270 basis points
over the ninety day moving average of like-term Treasury notes at the time the
notes were issued. All amortizing notes have terms not to exceed 48 months,
payable in equal monthly principal and interest payments. As of December 1,
2003, we had approximately 208 amortizing notes outstanding with a weighted
average maturity of approximately 33.9 months and a weighted average interest
rate of approximately 6.2%. The rates and terms of single pay term notes are
negotiable when issued and the interest rates are fixed for the term of the
note. These notes typically have a term of 36 to 48 months and require interest
only payments until maturity. As of December 1, 2003, we had 2 single pay term
notes outstanding in an aggregate amount of approximately $2 million, with a
weighted average maturity of approximately 2.87 months and a weighted average
interest rate of approximately 8.9%. Interest on all borrowings under our senior
lending agreement is payable monthly.
Substantially all of our assets secure this bank debt. The senior lending
agreement also limits, among other things, our ability to (1) incur additional
debt from the banks that are party to the agreement beyond that allowed by
specific financial ratios and tests, (2) pay dividends, (3) make certain other
restricted payments, (4) consummate certain asset sales and dispositions, (5)
merge or consolidate with any other person, and (6) incur additional debt for
borrowed money. In addition, the senior lending agreement limits the amounts
that we can pay to our parent each year. In fiscal 2003, the senior lending
agreement prohibits us from paying our parent more than $700,000 for strategic
planning services, professional services, the use of intellectual property
rights, product identification and branding and service charges.
Under the senior lending agreement, both before and after amendment, we are
also subject to certain financial covenants that require us, among other things,
to maintain specific financial ratios and to satisfy certain financial tests. In
part, these include: (a) an Allowance for Credit Losses (as defined in the
senior lending agreement, as amended) equal to or greater than the Allowance for
Credit Losses shown on our audited financial statements as of the end of our
most recent fiscal year and at no time less than 3% of our net receivables, (b)
a Senior Indebtedness to Tangible Net Worth Ratio (as defined in the senior
lending agreement, as amended) as of the end of each quarter to not greater than
4.75 to 1.00, and (c) a Senior Indebtedness to Net Receivable Ratio (as defined
in the senior lending agreement, as amended) as of the end of each quarter of no
more than 80%. We are also required to maintain a Consolidated Total Required
Capital (as defined in the senior lending agreement, as amended) of at least
$12.5 million plus 50% of the cumulative positive net income earned during each
of our fiscal years ending after September 30, 2002, which approximates $14.49
million as of September 30, 2003. The breach of any of these covenants or other
terms of the senior lending agreement could result in a default under the senior
lending agreement. If we breach certain financial covenants under the senior
lending agreement, the banks would have the right to receive 80% of all payments
we receive on our consumer loans and retail installment contracts. In addition,
if a default occurs the lenders could seek to declare all amounts outstanding
under the senior lending agreement, together with accrued and unpaid interest,
to be immediately due and payable. As of September 30, 2003, we were in material
compliance with all loan covenants.
Senior Indebtedness-Parent Debt.
We also have a revolving line of credit, payable on demand, from our
parent, Pioneer Financial Industries, Inc. Interest on this facility accrues at
the prime rate plus 2%. At September 30, 2003, there was $1.7 million
outstanding under this credit facility with an interest rate of 6.00%.
22
Senior Indebtedness Table.
The following table sets forth a five year history of the total borrowings
and availability under our senior lending agreement and our revolving line from
our parent, consisted of:
As of September 30,
----------------------------------------------------------------------
(dollars in thousands)
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Revolving Credit Line (1):
Total facility................ $ 31,000 $ 27,000 $ 23,000 $ 22,000 $ 20,000
Balance at end of year ...... $ 12,293 $ 12,718 $ 12,310 $ 10,851 $ 9,138
Maximum available credit (3).. $ 18,707 $ 14,282 $ 10,690 $ 11,149 $ 10,862
Term Notes (2):
Total facility................ $ 140,036 $ 125,470 $ 123,432 $ 99,755 $ 90,730
Balance at end of year........ $ 99,471 $ 97,925 $ 83,847 $ 80,466 $ 64,561
Maximum available credit (3).. $ 40,565 $ 27,545 $ 39,585 $ 19,289 $ 26,169
Total Revolving and Term Notes
(1)(2):
Total facility................ $ 171,036 $ 152,470 $ 146,432 $ 121,755 $ 110,730
Balance at end of year........ $ 111,764 $ 110,643 $ 96,157 $ 91,317 $ 73,699
Maximum available credit (3).. $ 59,273 $ 41,827 $ 50,275 $ 30,438 $ 37,031
Credit facility available (4). $ 13,575 $ 11,589 $ 10,157 $ 7,813 $ 10,008
Percent utilization of the total
facility.................... 65.34% 72.60% 65.70% 75.00% 66.60%
- ----------------
(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 available based on the existing asset borrowing base and
maintaining a Senior Indebtedness to Net Receivable Ratio of not more than
80%.
Outstanding Subordinated Debt.
We also fund our liquidity needs through the sale of unsecured junior
subordinated debentures. These debentures have varying fixed interest rates and
are subordinate to all senior indebtedness. We can redeem these debentures at
any time upon 30 days written notice. As of September 30, 2003, we had issued
approximately $21.4 million of these junior subordinated debentures at a
weighted average interest rate of 9.51%.
The sale of these debentures provides us with additional liquidity and
capital resources. Issuing these debentures increases our tangible net worth
which allows us to borrow larger amounts under our senior lending agreement. To
finance growth in our finance receivables portfolio, we intend to borrow
additional funds under our senior lending agreement from time to time as we sell
additional debentures.
Dividends From Subsidiaries.
Our reinsurance subsidiary is subject to the laws and regulations of the
state of Arizona which limit the amount of dividends our reinsurance subsidiary
can pay to us and require us to maintain a certain capital structure. In the
past, these regulations have not had a material impact on our reinsurance
subsidiary or its ability to pay dividends to us, and we do not expect these
regulations will have a material impact on our business or the business of our
reinsurance subsidiary in the future.
23
Impact of Inflation and General Economic Conditions
Although inflation has not had a material adverse effect on our financial
condition or results of operations, increases in the inflation rate generally
are associated with increased interest rates. A significant and sustained
increase in interest rates could unfavorably impact our profitability by
reducing the interest rate spread between the rate of interest we receive on our
customer loans and interest rates we pay under our senior lending agreement and
debentures. Inflation also may negatively affect our operating expenses.
Recent and Proposed Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity," which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS 150 requires an issuer to classify certain
financial instruments that include certain obligations, such as mandatory
redemption, repurchase of the issuer's equity, or settlement by issuing equity,
as liabilities or assets in some circumstances. Forward contracts to repurchase
an issuer's equity shares that require physical settlement in exchange for cash
are initially measured at the fair value of the shares at inception, adjusted
for any consideration or unstated rights or privileges, which is the same as the
amount that would be paid under the conditions specified in the contract if
settlement occurred immediately. Those contracts and mandatory redeemable
financial instruments are subsequently measured at the present value of the
amount to be paid at settlement, if both the amount of cash and the settlement
date are fixed, or, otherwise, at the amount that would be paid under the
conditions specified in the contract if settlement occurred at the reporting
date. Other financial instruments are initially and subsequently measured at
fair value, unless required by SFAS 150 or other generally accepted accounting
principles to be measured differently. It is the opinion of management that this
standard did not have a material impact on our financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose
(a) the nature of the guarantee; (b) the maximum potential amount of future
payments under the guarantee; (c) the carrying amount of the liability; and (d)
the nature and extent of any recourse provisions or available collateral that
would enable the guarantor to recover the amounts paid under the guarantee. FIN
45 also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the obligation it has undertaken in issuing the
guarantee at its inception.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements ending after December 15, 2002. It is the opinion of
management that the provisions of this standard did not have a material impact
on our financial position or results of operations.
Critical Accounting Policies
Our accounting and reporting policies are in accordance with accounting
principles generally accepted in the United States of America and conform to
general practices within the finance company industry. The significant
accounting policies used in the preparation of the consolidated financial
statements are discussed in Note 1 to the Consolidated Financial Statements.
Allowance for Credit Loss and Provision for Credit Loss.
Critical accounting policies require management to make estimates and
assumptions, which affect the reported amounts of assets, liabilities, income
and expenses. As a result, changes in these estimates and assumptions could
significantly affect our financial position and results of operations. We
consider our policies regarding the allowance and resulting provision for credit
losses to be our only critical accounting policy due to the significant degree
of management judgment that is applied in establishing the allowance and the
provision.
24
To manage our exposure to credit losses, we use credit risk scoring models
for finance receivables that we originate or perform due diligence
investigations for finance receivables that we purchase. In addition, we
generally structure the repayment terms so that the entire loan is repaid prior
to the customer's estimated separation from the military.
We have a credit committee that evaluates our finance receivable portfolio
quarterly. Our portfolio consists of a large number of relatively small,
homogenous accounts. None of our accounts is large enough to warrant individual
evaluation for impairment. Our credit committee considers numerous qualitative
and quantitative factors in estimating losses inherent in our finance receivable
portfolio, including the following:
o Civilian status
o Current or future military deployments
o Current economic conditions
o Prior finance receivable loss and delinquency experience
o The composition of our finance receivable portfolio
Our credit committee uses several ratios to aid in the process of
evaluating prior finance receivable loss and delinquency experience. Each ratio
is useful, but each has its limitations. These ratios include:
o Delinquency ratio - finance receivables 60 days or more past due as a
percentage of finance receivables
o Allowance ratio - allowance for finance receivable losses as a
percentage of finance receivables
o Charge-off ratio - net charge-offs as a percentage of the average of
finance receivables at the beginning of each month during the
period
o Charge-off coverage - allowance for finance receivable losses to net
charge-offs
We use migration analysis as one of the tools to determine the appropriate
amount of allowance for credit losses. Migration analysis is a statistical
technique that attempts to predict the future amount of losses for existing
pools of finance receivables. This technique applies empirically measured
historical movement of like finance receivables through various levels of
repayment, delinquency, and loss. These results are used to estimate future
losses for the finance receivables existing at the time of analysis. We
calculate migration analysis using different scenarios based on varying
assumptions in order to evaluate the widest range of possible outcomes.
Impact of using other estimates and assumptions.
If we had chosen to establish the allowance for credit losses at the
highest and lowest levels produced by the various migration analysis scenarios,
our allowance for credit losses at September 30, 2003 and provision for credit
losses and net income for fiscal 2003 would have changed as follows:
Increase (decrease)
----------------------
(in thousands)
Highest Lowest
------- -------
Allowance for credit losses............ $ 716 $(1,457)
Provision for credit losses............ 716 (1,457)
Net income............................. $ (458) $ 932
In addition to these models, our credit committee exercises its judgment,
based on each committee member's experience in the consumer finance industry,
when determining the amount of the allowance for finance receivable losses. We
consider this estimate to be a critical accounting estimate that affects our net
income in total and the pretax operating income of our business. See " -- Credit
Loss Experience and Provision for Credit Losses."
25
Contractual Obligations
We have the following payment obligations under current financing and
leasing arrangements as of September 30, 2003:
Payments Due By Period
------------------------------------------------------------
Less than
Contractual Obligations: Total 1 year 1-3 years 4-5 years After 5 years
------------ ------------ ------------ ------------ -------------
Long-term debt................... $120,908,041 $ 43,481,019 $ 59,149,387 $ 10,784,437 $ 7,493,198
Operating leases................. 3,540,833 696,533 1,355,894 1,211,273 277,133
------------ ------------ ------------ ------------ -------------
Total contractual cash
obligations.......... $124,448,874 $ 44,177,552 $ 60,505,281 $ 11,995,710 $ 7,770,331
============ ============ ============ ============ =============
Amount of Commitment Expiration Per Period
------------------------------------------------------------
Other Commercial Total Amounts Less than
Commitments: Committed 1 year 1-3 years 4-5 years Over 5 years
------------ ------------ ------------ ------------ -------------
Lines of credit................ $ 12,292,841 $ 12,292,841(1) --- --- ---
- -----------------
(1) Includes $1,712,841 owed to our parent.
ITEM 7A. 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. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations-Net Interest Margins."
The amounts set forth below show the impact on earnings of changes in
interest rates on our variable rate debt as of the time it is scheduled to
adjust, and upon the debt that is scheduled to mature during 2004, assuming
adjustments to, or refinancing at, rates available to us at September 30, 2003.
Changes in our interest expense for various possible fluctuations in the
interest rates of our debt for fiscal 2004 may be estimated as follows:
Decrease/increase: -2% -1% 0% +1% +2%
------------ ------------ ------------ ------------ -------------
Revolving credit line.......... $ (211,600) $ (105,800) $ 0 $ 105,800 $ 211,600
Amortizing and single
pay term notes....... (1,318,540) (914,080) (509,620) (105,160) 299,300
Junior subordinated debt....... (61,004) (30,654) (304) 30,047 60,397
------------ ------------ ------------ ------------ -------------
Total impact on
interest expense... $ (1,591,144) $ (1,050,534) $ (509,924) $ 30,687 $ 571,297
============ ============ ============ ============ =============
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
27
Index to Financial Statements
Page
Independent Accountants' Report......................................... 29
Consolidated Balance Sheets September 30, 2003 and 2002................. 30
Consolidated Statements of Income for the years ended September 30,
2003, 2002 and 2001..................................................... 31
Consolidated Statements of Retained Earnings for the years ended
September 30, 2003, 2002 and 2001....................................... 32
Consolidated Statements of Cash Flows for the years ended September 30,
2003, 2002 and 2001..................................................... 33
Notes to Consolidated Financial Statements.............................. 34
28
Independent Accountants' Report
-------------------------------
Board of Directors
Pioneer Financial Services, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Services, Inc., a Missouri corporation (the "Company"), as of
September 30, 2003 and 2002, and the related consolidated statements of income,
retained earnings and cash flows for each of the years in the three-year period
ended September 30, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Financial
Services, Inc. as of September 30, 2003 and 2002, and the results of its
operations and its cash flows for each of the years in the three-year period
ended September 30, 2003 in conformity with accounting principles generally
accepted in the United States of America.
/s/ BKD, LLP
------------------------------
BKD, LLP
Kansas City, Missouri
October 29, 2003
29
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
ASSETS
2003 2002
-------------- --------------
Cash $ 2,039,109 $ 1,150,863
Other investments 1,962,614 1,868,509
Finance receivables:
Direct receivables 147,095,062 139,663,612
Retail installment contracts 18,799,693 19,347,567
-------------- --------------
Finance receivables before allowance
for credit losses 165,894,755 159,011,179
Allowance for credit losses (9,220,868) (6,220,869)
-------------- --------------
Net finance receivables 156,673,887 152,790,310
Furniture and equipment, net 1,467,077 1,577,950
Deferred income taxes 3,364,700 2,331,000
Prepaid and other assets 334,859 278,154
-------------- --------------
Total assets $ 165,842,246 $ 159,996,786
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Revolving credit line - banks $ 10,580,000 $ 10,776,000
Revolving credit line - affiliate 1,712,841 1,941,831
Accounts payable 945,038 1,240,629
Accrued expenses and other liabilities 10,940,246 9,396,204
Amortizing and single pay term notes 99,471,296 97,925,405
Junior subordinated notes 21,436,745 21,396,438
-------------- --------------
Total liabilities 145,086,166 142,676,507
-------------- --------------
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 19,042,480 15,606,679
-------------- --------------
Total stockholder's equity 20,756,080 17,320,279
-------------- --------------
Total liabilities and stockholder's
equity $ 165,842,246 $ 159,996,786
============== ==============
See Notes to Consolidated Financial Statements
30
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30,
-----------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenue
Finance income $50,003,315 $45,883,890 $38,964,775
Insurance premiums
and commissions 5,287,574 4,651,960 4,561,416
Other income, fees
and commissions 1,645,888 1,754,713 1,595,834
----------- ----------- -----------
Total revenue 56,936,777 52,290,563 45,122,025
Provision for credit losses 12,167,529 10,593,540 8,264,275
Interest expense 9,325,322 9,598,667 9,454,989
----------- ----------- -----------
Net revenue 35,443,926 32,098,356 27,402,761
Operating Expenses
Employment costs 18,762,187 17,039,136 14,031,166
Facilities 4,997,806 6,141,365 5,094,921
Marketing 2,063,488 1,559,167 1,707,820
Professional fees 2,169,035 1,689,010 2,094,805
Other 1,332,541 1,160,574 1,123,629
----------- ----------- -----------
Total operating expenses 29,325,057 27,589,252 24,052,341
----------- ----------- -----------
Income before income taxes 6,118,869 4,509,104 3,350,420
Provision for income taxes 2,139,000 1,645,000 1,210,000
----------- ----------- -----------
Net income $ 3,979,869 $ 2,864,104 $ 2,140,420
=========== =========== ===========
Net income per share
basic and diluted $ 232.25 $ 167.14 $ 124.91
=========== =========== ===========
See Notes to Consolidated Financial Statements
31
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended September 30,
-------------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Retained earnings, beginning of
year $ 15,606,679 $ 13,147,497 $ 11,356,480
Net income 3,979,869 2,864,104 2,140,420
Dividends paid ($31.75; $23.63
and $20.39 per share) (544,068) (404,922) (349,403)
-------------- -------------- --------------
Retained earnings, end of year $ 19,042,480 $ 15,606,679 $ 13,147,497
============== ============== ==============
See Notes to Consolidated Financial Statements
32
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
----------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash Flows from Operating Activities:
Net income $ 3,979,869 $ 2,864,104 $ 2,140,420
Items not requiring (providing) cash:
Provision for credit losses on
finance receivables 12,167,528 10,593,540 8,264,275
Depreciation 735,784 1,165,973 863,190
Compounded interest added to
junior subordinated debt 1,190,811 1,111,331 1,017,212
Deferred income taxes (1,033,700) (718,900) (229,400)
Loss on disposal/donation of
equipment 47,794 16,845 38,174
Changes in:
Accounts payable and accrued
expenses 812,819 1,066,145 175,243
Other
(56,705) 222,588 (320,610)
------------ ------------ ------------
Net cash provided by
operating activities 17,844,200 16,321,626 11,948,504
------------ ------------ ------------
Cash Flows From Investing Activities:
Loans originated (120,036,891) (123,772,782) (102,097,953)
Loans purchased (15,451,391) (15,998,887) (13,901,139)
Loans repaid 119,437,177 109,280,600 98,755,408
Capital expenditures (661,840) (600,653) (898,809)
Securities purchased (317,970) (518,997) (115,444)
Securities matured 213,000 383,635 205,561
------------ ------------ ------------
Net cash used in investing
activities (16,817,915) (31,227,084) (18,052,376)
------------ ------------ ------------
Cash Flows from Financing Activities:
Net borrowing under lines of
credit 10,642 641,414 2,145,100
Proceeds from issuance of
long-term debt 45,850,802 52,852,841 33,995,980
Repayment of long-term debt (45,455,415) (39,461,911) (29,864,147)
Dividends paid (544,068) (404,922) (349,403)
------------ ------------ ------------
Net cash provided by
(used in) financing activities (138,039) 13,627,422 5,927,530
------------ ------------ ------------
Net Increase (Decrease) in Cash 888,246 (1,278,036) (176,342)
Cash, Beginning of Year 1,150,863 2,428,899 2,605,241
------------ ------------ ------------
Cash, End of Year $ 2,039,109 $ 1,150,863 $ 2,428,899
============ ============ ============
Additional Cash Flow Information:
Interest paid $ 8,191,261 $ 8,462,313 $ 8,371,853
Income taxes paid $ 2,867,426 $ 3,047,633 $ 1,265,830
See Notes to Consolidated Financial Statements
33
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Concentration
- --------------------------------------
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.
Principles of Consolidation and Business Combinations
- -----------------------------------------------------
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.
On September 30, 2003, the Company acquired three subsidiaries of Pioneer
Financial Industries, Inc. for $204,708 in cash. Because these entities and the
Company were under the common control of Pioneer Financial Industries, Inc., the
assets and liabilities acquired were recorded at their carrying amounts in the
accounts of the transferring entity as of September 30, 2003. Because the effect
on the Company's results of operations is not material for any period, the
Company has not presented the statement of financial position and other
financial information as though the assets and liabilities had been acquired as
of the beginning of fiscal year 2003 nor has it restated any financial
statements for prior periods.
Use of Estimates
- ----------------
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.
Investments
- -----------
Investments consist primarily of certificates of deposit, amounting to $356,436
and $355,873 and certain debt securities, amounting to $1,606,178 and $1,512,636
at September 30, 2003 and 2002, respectively. These debt securities, which the
Company has the positive intent and ability to hold until maturity, are
classified as held-to-maturity and valued at historical cost, adjusted for
amortization of premiums and accretion of discounts computed by the level-yield
method. Of the held-to-maturity debt securities at September 30, 2003, $422,010
matures in less than one year, $1,084,168 matures between one and five years and
$100,000 matures between six and ten years. The recorded value of these
investments approximates fair value at September 30, 2003 and 2002. Investments
aggregating $1,862,614 and $1,768,509 at September 30, 2003 and 2002,
respectively, were required as statutory reserves and are on deposit with
regulatory authorities or maintained in trust accounts.
34
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue Recognition
- -------------------
Interest income on finance receivables is recognized using a method which
approximates the level-yield method. Late charges are credited directly to
income when received. Accrual of interest income on finance receivables is
suspended when a payment has not been received for 60 days or more, and the
interest due exceeds an amount equal to 60 days of interest charges. The accrual
is resumed when a full payment (95% or more of the contracted payment amount) is
received.
Credit property, life, accident and health insurance premiums are placed with
non-related insurance companies. Premiums on such insurance are remitted to the
insurance companies, net of applicable advance commissions, which commissions
are credited to income ratably over policy terms. Retrospective insurance
commissions, if any, on this insurance are taken into income only as received.
Pioneer Military Insurance Company, a subsidiary of the Company, reinsures from
a non-affiliated insurance company risks on the credit accident and health
insurance policies written on a portion of loans to customers of the Company.
Reinsurance premiums are recognized as revenue over the period of risk in
proportion to the amount of insurance protection provided.
Allowance for Credit Losses
- ---------------------------
The allowance for credit losses is maintained at an amount which management
considers sufficient to cover estimated future losses. Finance receivables are
charged-off when management deems them to be uncollectable through normal
collection procedures or they become 270 days delinquent. The Company has
developed policies and procedures for assessing the adequacy of the allowance
for credit losses which take into consideration the historical credit loss
experience of the Company, delinquency trends, current economic conditions,
current or future military deployments, and the composition of the finance
receivable portfolio. The Company uses various ratio analyses in evaluating
prior finance receivable losses and delinquency experience. These and other
analyses are used to measure historical movement of finance receivables through
various levels of repayment, delinquency, and loss. The results and management's
judgment are used to estimate future losses and in establishing the current
provision and allowance for credit losses. These estimates are influenced by
factors outside the Company's control, such as economic conditions and current
or future military deployments. There is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term.
Furniture and Equipment
- -----------------------
Furniture and equipment are carried at cost and depreciated over the estimated
useful life of each asset. At September 30, 2003 and 2002, accumulated
depreciation was $3,944,059 and $4,076,860, respectively.
Software and Development Costs
- ------------------------------
The Company capitalizes purchased software which is ready for use and
amortizes the cost on a straight-line basis over its estimated useful life.
The Company capitalizes costs associated with software developed or obtained
for internal use when both the preliminary project stage is completed and
management has authorized further funding for the project. Management
generally authorizes further funding when it deems it is probable that the
project will be completed and used to perform the function intended.
Capitalized costs include only direct external costs and payroll and
payroll-related costs for employees directly associated with the internal-use
software project. Research and development costs and other computer software
maintenance costs related to software development are expensed as incurred.
Software development costs are amortized on a straight-line basis over the
estimated useful life of the software.
35
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Income Taxes
- ------------
The Company files its federal income tax return on a consolidated basis with its
parent company, Pioneer Financial Industries, Inc., and other affiliates. The
provision for income taxes in the accompanying consolidated statements of income
represents the Company's share of the consolidated income tax provision on a
separate return basis.
Deferred tax assets and liabilities are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
Fair Value of Financial Instruments
- -----------------------------------
The fair values of finance receivables and borrowings were calculated by
discounting expected cash flows, which method involves significant judgments by
management and uncertainties. Because no market exists for these financial
instruments and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values represent values
at which the respective financial instruments could be sold individually or in
the aggregate. The carrying amounts for cash, accounts payable and current
liabilities are a reasonable estimate of their fair values. The fair value of
other investments is based on quoted market prices. Additional information about
the fair value of financial instruments is contained in Notes 2 and 3.
NOTE 2: FINANCE RECEIVABLES
Loan Portfolio
- --------------
At September 30, 2003 and 2002, finance receivables totaled $165,894,755 and
$159,011,179, respectively; all receivables originated from direct loans and
retail installment contracts. Direct loans originated in 2003 and 2002 averaged
$3,141 and $2,813 with a weighted maturity of 25.7 and 24.2 months,
respectively, while retail installment contracts averaged $3,363 and $3,231 with
a weighted maturity of 29.6 and 30.1 months, respectively. Approximately 95% of
finance receivables were paid electronically via the Government Allotment System
or through the National Automated Clearinghouse Association for the years ended
September 30, 2003 and 2002. At September 30, 2003 and 2002, the accrual of
interest income had been suspended on $4,836,146 and $5,579,681 of loans,
respectively.
At September 30, 2003 and 2002, the fair value of notes receivable approximates
book value.
Allowance for Credit Losses
- ---------------------------
Changes in the allowance for credit losses are as follows:
36
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: FINANCE RECEIVABLES (Continued)
Year Ended September 30,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
Balance, beginning of year $ 6,220,869 $ 4,420,869 $ 3,832,868
Provision for credit losses 12,167,528 10,593,540 8,264,275
Loans charged off (10,370,150) (9,744,584) (8,972,679)
Recoveries 1,202,621 951,044 1,296,405
----------- ----------- -----------
Balance, end of year $ 9,220,868 $ 6,220,869 $ 4,420,869
=========== =========== ===========
NOTE 3: BORROWINGS
Senior Lending Agreement
- ------------------------
On September 30, 2003, the Company had a senior lending agreement with a group
of banks, which is an uncommitted facility that provides common terms and
conditions pursuant to which individual banks that are a party to this agreement
may choose to make loans to the Company in the future. At September 30, 2003,
the Company had the ability to request up to $171.0 million in the form of
revolving credit lines, amortizing notes and single pay term notes if it
satisfied all terms of its senior lending agreement including maintaining a
Senior Indebtedness to Net Receivable Ratio (as defined in the senior lending
agreement) of not more than 80%. Any bank may elect not to participate in any
future funding at any time without penalty. At September 30, 2003, pursuant to
the terms of the senior lending agreement , the Company could request up to
$13,574,972 in additional funds from nine banks. No bank, however, has any
contractual obligation to lend the Company these additional funds.
On or before March 31 of each year, each bank that is a party to the senior
lending agreement is to deliver to the Company a written indication of whether
or not it wishes to participate in future fundings and the amounts that it
expects to be willing to fund during the next 12 months. As of March 31, 2003,
nine banks indicated in writing their willingness to participate in fundings up
to an aggregate of $165.5 million during the next 12 months, including all
amounts currently outstanding under the senior loan agreement.
If a bank were to elect not to participate in future fundings, any existing
borrowings from that bank under the revolving credit line would be payable in
twelve equal monthly installments. The Company anticipates that it would repay
that amount through borrowings from other banks participating in the senior
lending agreement. Any existing borrowings under amortizing notes or single pay
term notes from the bank electing not to participate would be repayable
according to their original terms.
Advances outstanding under the revolving credit line were $10,580,000 and
$10,776,000 at September 30, 2003 and 2002, respectively. The revolving credit
line is payable upon demand in 12 equal monthly payments of principal. Interest
on borrowings under the revolving credit line is payable monthly and floats with
prime which was 4.00% at September 30, 2003. At September 30, 2003 and 2002, the
aggregate balance outstanding under amortizing and single pay term notes was
$99,471,296 and $97,925,405, respectively. Interest on the amortizing notes is
fixed at 270 basis points over the ninety day moving average of like-term
Treasury notes when issued and interest on the single pay notes is negotiable
when issued and fixed for the term of the note. There were 206 and 229
amortizing
37
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: BORROWINGS (Continued)
and term notes outstanding at September 30, 2003 and 2002 with a weighted
average interest rate of 6.43% and 7.42%, respectively. Interest on all
borrowings under the senior lending agreement is payable monthly. Substantially
all of the Company's assets secure this bank debt. The senior lending agreement
limits, among other things, the Company's ability to (1) incur additional debt
from the banks that are party to the agreement beyond that allowed by specific
financial ratios and tests, (2) pay dividends, (3) make certain other restricted
payments, (4) consummate certain asset sales and dispositions, (5) merge or
consolidate with any other person and (6) incur additional debt for borrowed
money.
The senior lending agreement also contains certain restrictive covenants that
require the Company, among other things, to maintain specific financial ratios
and to satisfy certain financial tests including: (a) an Allowance for Credit
Losses (as defined in the senior lending agreement) equal to or greater than the
Allowance for Credit Losses at the end of the prior fiscal year and at no time
less than 2% of net receivables, (b) a Senior Indebtedness to Tangible Net Worth
Ratio (as defined in the senior lending agreement) as of the end of each quarter
not greater than 4.75 to 1.00, and (c) Senior Indebtedness to Net Receivable
Ratio (as defined in the senior lending agreement) as of the end of each quarter
of no more than 80%. The Company is also required to maintain a Consolidated
Total Required Capital (as defined in the senior lending agreement) of at least
$9 million plus 50% of the cumulative net income during each fiscal year ending
after September 30, 1999 ($14,420,878 at September 30, 2003). The breach of any
of these covenants could result in a default under the senior lending agreement,
in which event the lenders could seek to declare all amounts outstanding to be
immediately due and payable. The Company is in compliance with all loan
covenants at September 30, 2003.
On October 1, 2003, this agreement was extended to mature on October 1, 2005.
There are no substantive changes in this new agreement that will affect the
Company's ability to borrow money or comply with its covenants.
Parent Company Line of Credit
- -----------------------------
The Company has a $2,000,000 unsecured revolving line of credit from its sole
shareholder, Pioneer Financial Industries, Inc., which is due upon demand.
Advances outstanding under this revolving line of credit were $1,712,841 and
$1,941,831 at September 30, 2003 and 2002. Interest is charged at prime plus 2%
(6.00% at September 30, 2003) and is payable monthly.
Junior Subordinated Debentures
- ------------------------------
The Company has also borrowed through the issuance of junior subordinated
debentures with an outstanding balance of $21,436,745 and $21,396,438 at
September 30, 2003 and 2002, respectively. The junior subordinated debentures
are non-redeemable before maturity by the holders, are issued at various rates
and mature one to ten years from date of issue. The Company, at its option, may
redeem and retire any or all of the debentures upon 30 days written notice. All
debentures are renewable for a like term at the prevailing interest rate, unless
presented for payment. The average debenture size was $23,609 and $22,035, with
a weighted interest rate of 9.51% and 9.44% at September 30, 2003 and 2002,
respectively.
On May 13, 2003, the Securities and Exchange Commission declared the Company's
registration statement effective permitting the sale of $25 million principal
amount of Junior Subordinated Debentures over a two-year period.
38
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: BORROWINGS (Continued)
The retainment percentages for the debentures maturing in 2003 and 2002 are
as follows:
Fiscal Total Retainment
Year Renewed Reinvested Retained Amount Due Percentage
- ----- ----------- ---------- -------- ---------- ----------
2003 $ 178,374 $ 481,326 $659,700 $2,409,359 27.38%
2002 $ 468,144 $ 260,923 $729,067 $2,215,641 32.91%
Maturities
- ----------
A summary of maturities for the amortizing and single pay term notes and junior
subordinated debentures at September 30, 2003, follows:
Amortizing and Junior
Single Pay Subordinated
Term Notes Debentures Total
-------------- ------------ -------------
2004 $ 40,446,002 $ 3,035,017 $ 43,481,019
2005 31,258,582 5,256,811 36,515,393
2006 20,404,070 2,229,924 22,633,994
2007 7,241,854 1,370,086 8,611,940
2008 120,788 2,051,709 2,172,497
2009 1,878,695
- 1,878,695
2010 1,527,577 1,527,577
-
2011 2,339,503 2,339,503
-
2012 1,270,560 1,270,560
-
2013 and thereafter 476,863 476,863
-------------- ------------ -------------
Total 2003 $ 99,471,296 $ 21,436,745 $ 120,908,041
============== ============ =============
39
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INCOME TAXES
The provision for income taxes included in the accompanying consolidated
statements of income consists of the following:
2003 2002 2001
----------- ----------- -----------
Taxes currently payable $ 3,172,700 $ 2,363,900 $ 1,439,400
Deferred income taxes (1,033,700) (718,900) (229,400)
Total provision $ 2,139,000 $ 1,645,000 $ 1,210,000
=========== =========== ===========
The tax effects of temporary differences related to deferred taxes shown on the
September 30, 2003 and 2002 consolidated balance sheets are as follows:
2003 2002
----------- -----------
Deferred tax assets:
Allowance for credit losses $ 3,319,500 $ 2,239,500
Accumulated depreciation 8,100 43,500
Other 37,100 48,000
----------- -----------
Net deferred tax asset $ 3,364,700 $ 2,331,000
=========== ===========
A reconciliation of the provision for income taxes at the normal federal
statutory rate of 34% to the provision included in the accompanying consolidated
statements of income is shown below:
2003 2002 2001
----------- ----------- -----------
Provision for federal income taxes
at statutory rate $ 2,080,415 $ 1,533,095 $ 1,139,143
Increase (decrease) in income tax
provision resulting from:
State and local income taxes,
net of federal tax benefit 47,478 39,232 38,900
Nondeductible expenses
11,107 72,673 31,957
------------ ----------- -----------
Provision for income taxes $ 2,139,000 $ 1,645,000 $ 1,210,000
=========== =========== ===========
40
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: RELATED PARTY TRANSACTIONS
A description of significant transactions with the Company's sole shareholder,
Pioneer Financial Industries, Inc. and other related entities (collectively
referred to as PFI) for the years ended September 30, 2003, 2002 and 2001
follows.
The Company has an unsecured revolving line of credit with PFI. The line of
credit is due on demand and interest accrues at the prime rate plus 2%. During
fiscal 2003, 2002 and 2001, the Company made interest payments on this debt of
$121,346, $132,856 and $170,109, respectively.
During fiscal 2003, 2002 and 2001, the Company paid $695,578, $734,596, and
$726,768, respectively, to PFI for strategic planning, professional services,
service charges and use of intellectual property rights, including names,
trademarks, websites, logos, branding rights and software. The amount charged to
the Company is based on PFI's costs plus a mark-up of not more than 50%.
Management of the Company believes the charges are a reasonable estimate of the
value received.
Pursuant to an agreement with PFI, the Company sold prepaid cellular phones and
phone cards through its retail sales offices. These phones and phone cards were
owned by PFI and provided to the Company on a consignment basis. The Company
retained a commission on each sale and remitted the remainder to PFI. The amount
remitted to PFI, net of its direct costs, approximated 12% of the retail sales
price and aggregated $0, $10,745, and $301,696 in fiscal 2003, 2002 and 2001,
respectively. The Company discontinued selling prepaid cellular phones and phone
cards in August 2001.
The Company shares with PFI a portion of the commission received on each health
discount card sold based on its agreement with PFI. The portion paid to PFI is
approximately 41% of the total commission received. During fiscal 2003, 2002 and
2001, the Company paid PFI a total of $491,340, $392,619 and $974, respectively,
in commissions and retained a total of $717,767, $675,483 and $3,101,
respectively. The amount remitted to PFI approximates its cost.
The Company pays PFI a fee of approximately $100 for each loan customer referral
for its Germany operations. During fiscal 2003, 2002 and 2001, the Company paid
referral fees of $597,715, $556,651 and $630,522, respectively, which
approximates the cost of identifying and making these referrals. On September
30, 2003, the Company purchased the German subsidiary from PFI for $41,877.
The Company leases certain office equipment, signs and automobiles from Midstate
Leasing, LLC, an entity owned by PFI's controlling shareholder and other
shareholders. These operating leases are generally for nine-month periods and
are automatically renewable. During fiscal 2003, 2002 and 2001, payments under
these leases totaled $192,389, $226,929 and $107,647, respectively.
The Company leases a building from PFI. The lease expired September 30, 2003.
Payments under the lease during fiscal 2003, 2002, and 2001 were $144,000,
$139,500 and $139,200, respectively.
The Company's customers execute a master credit agreement in connection with
direct loans. The extended effectiveness of this agreement helps expedite the
extension of subsequent loans to the customer. PFI's principal shareholder
developed and copyrighted the form of this agreement, and the Company licensed
it from him in return for a royalty pursuant to a trademark licensing agreement
that automatically renews annually. In fiscal 2003, the royalty averaged $2.47
per loan, and aggregated $135,786. In fiscal 2002 and 2001, the royalty averaged
$2.29 and $2.14 per loan, and aggregated $143,263 and $123,180, respectively.
On September 30, 2003, the Company purchased two other PFI subsidiaries for
$162,831 in cash.
41
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: RELATED PARTY TRANSACTIONS (Continued)
Amounts due to PFI under the revolving line of credit are discussed in Note 3.
There are no other amounts due to PFI or other related entities at September 30,
2003 and 2002.
A summary of these transactions follows:
Year Ended September 30,
---------------------------------
2003 2002 2001
--------- --------- ---------
Interest paid on note payable.............. $ 121,346 $ 132,856 $ 170,109
Professional services, strategic
planning, use of intellectual
property, product identification
and procurement charges.................. 695,578 734,596 726,768
Net proceeds from the sale of
prepaid cellular phones
and phone cards.......................... - 10,745 301,696
Commission on health discount cards........ 491,340 392,619 974
Loan customer referrals - Germany.......... 597,715 556,651 630,522
Lease payments for office
equipment, signs, vehicles............... 192,389 226,929 107,647
Rent expenses.............................. 144,000 139,500 139,200
Royalty payments for use of
copyrighted form ........................ 135,786 143,263 123,180
42
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: LEASE OBLIGATIONS
At September 30, 2003, the Company was obligated under non-cancelable operating
leases covering its facilities and certain equipment expiring through 2009.
Aggregate minimum annual rentals payable are summarized as follows:
Year Ending September 30:
2004 $ 696,533
2005 690,725
2006 665,169
2007 611,238
2008 600,035
Thereafter 277,133
The minimum rentals shown above do not include rents payable on a "month-
to-month" or "cancelable" basis. Rental expense charged against operations
totaled $1,701,984, $1,604,230 and $1,168,263, for the fiscal years ended
September 30, 2003, 2002 and 2001, respectively. Included in these amounts were
$336,389, $366,429 and $246,847, for the fiscal years ended September 30, 2003,
2002 and 2001, respectively, paid to an affiliated company.
NOTE 7: PROFIT-SHARING PLAN
The Company participates in a profit-sharing plan that covers substantially all
employees who are 21 years of age and have been employed by the Company for one
year. The Company contributes an amount to the plan each year that is determined
by the board of directors. The Company also matched one third of participant
401(k) deferrals up to a maximum of 5% of total compensation. Participant
interests are vested after three years of service. Contributions to the plan
were $705,321, $656,022 and $279,118, for the years ended September 30, 2003,
2002, and 2001 respectively.
NOTE 8: LITIGATION
The Company is subject to claims and lawsuits that are primarily in the ordinary
course of business. It's the opinion of management that the disposition or
ultimate resolution of such claims and lawsuits will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
43
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth information regarding each person who serves
as a director or executive officer of Pioneer as of September 30, 2003.
Name Age Position
William D. Sullivan 66 Chairman, Chief Executive Officer and
sole Director
Thomas H. Holcom, Jr. 57 President and Chief Operating Officer
Randall J. Opliger 46 Chief Financial Officer, Treasurer and
Secretary
William D. Sullivan is the Chairman and sole member of our board of
directors. He has been a director since 1957. Mr. Sullivan has been associated
with Pioneer since 1957 and has served in all levels of branch office operations
as well as all management and executive capacities. He has been our Chief
Executive Officer since 1963. Mr. Sullivan was one of the founders of a Kansas
City bank which merged with a multi-billion dollar bank holding company. After
20 years of service, he retired in 1987 as a member of their Kansas City
regional bank executive committee and its board of directors. In addition, he
has served as President of the National Second Mortgage Association, Kansas
Association of Financial Services and the Consumer Credit Counseling Service. He
is also former officer of the Missouri Financial Services Association and the
Better Business Bureau.
Thomas H. Holcom, Jr. is our President and Chief Operating Officer. He has
been associated with Pioneer since 1985 when he joined us as our Chief Financial
Officer. He was named President and Chief Operating Officer in September, 2000.
Prior to joining us, Mr. Holcom spent 19 years with a regional bank with assets
over $1 billion and was Executive Vice President of that bank. His career has
encompassed strategic planning, corporate finance, consulting, investments, risk
management and marketing. He served on the boards of numerous professional and
civic organizations.
Randall J. Opliger joined us as our Chief Financial Officer, Treasurer and
Secretary in April, 2000. From 1997 to March, 2000, Mr. Opliger held the chief
financial officer position with Propeller Creative Services, Inc., an
interactive web development company. Mr. Opliger received his CPA designation in
1982, and his prior experience includes both public accounting and other
executive level responsibilities, including serving as a chief financial officer
of a consumer finance company of a similar size.
44
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation we paid during each of
our last three fiscal years to our Chief Executive Officer and to the other two
executive officers whose total annual salary and bonus paid during fiscal year
2003 exceeded $100,000. As sole director, Mr. Sullivan has determined executive
compensation with input from Mr. Holcom, as President and Chief Operating
Officer.
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------------------
Name and Other Annual
Principal Position Salary Bonus Compensation
Year ($) ($) ($)
---- -------- -------- ------------
William D. Sullivan, 2003 $509,454 $250,000 $ 2,153 (1)
Chief Executive Officer 2002 $463,140 $250,000 $ 1,905 (1)
2001 $431,900 $250,000 $ 2,521 (1)
Thomas H. Holcom, Jr., 2003 $246,012 $320,000 $ 720 (1)
President and Chief 2002 $246,012 $300,000 $ 720 (1)
Operating Officer 2001 $246,012 $288,000 $ 720 (1)
Randall J. Opliger, 2003 $98,078 $80,000
Chief Financial Officer, 2002 $90,000 $90,000
Treasurer and Secretary 2001 $84,616 $52,207
- --------------------
(1) Amounts attributable to the non-business use of a company car.
Options Grants
We have not granted any options or equity-based incentives.
Employment Agreement
We have entered into an employment agreement with Randall J. Opliger
pursuant to which we have agreed to pay him a base salary. The employment
agreement may be terminated by either party upon five days notice, except that
we may terminate the agreement without notice for cause or if Mr. Opliger
violates any provision of the agreement. The agreement contains customary
non-disclosure provisions and prohibits Mr. Opliger from competing with us or
soliciting any of our customers or employees for two years following his
termination or resignation. In addition, both parties agree to arbitrate most
disputes arising under the agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of November 30, 2003, Pioneer Financial Industries, Inc., a Nevada
corporation, owns 17,136 shares of our common stock, which constitutes all of
our issued and outstanding shares of common stock. We have no other class of
capital stock authorized. The address of Pioneer Financial Industries is 955
South Virginia Avenue, Suite 116, Reno, Nevada 89502. Pioneer Financial
Industries has sole voting and investment power with respect to the shares of
our common stock set forth above. Neither our director nor any of our executive
officers own any shares of our common stock.
As of November 30, 2003, as the trustee or beneficiary of various trusts,
William D. Sullivan had sole or shared voting or investment power over 159,420
shares, or 88.61%, of the common stock of Pioneer Financial Industries, Inc.
Upon the death of Mr. Sullivan, the trust department of a commercial bank will
exercise the voting rights over these shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are privately held and after the sale of the debentures we will continue
to be privately held. Our sole shareholder, Pioneer Financial Industries, Inc.,
has the flexibility of structuring our operating activity so as to optimize our
ability to borrow capital for use in our lending activities and to reduce our
exposure to the risks of
45
developing new products and services. As a result, certain expenditures and
assets related to our operations have been paid for or financed by Pioneer
Financial Industries and its subsidiaries. We then lease or purchase these
products and services from them.
At September 30, 2003, we had borrowed $1,712,841 from our parent, Pioneer
Financial Industries, Inc. ("PFI"), pursuant to an unsecured revolving line of
credit. The line of credit is due on demand and interest accrues at the prime
rate plus 2%. During fiscal 2003, 2002 and 2001, we made interest payments on
this debt in the amount of $121,346, $132,856 and $170,109, respectively.
During fiscal 2003, 2002 and 2001, we paid $695,578, $734,596 and $726,768,
respectively, to our parent and its subsidiaries for strategic planning,
professional services and service charges, including (i) $157,995, $187,596 and
$172,728, respectively, paid to Pioneer Licensing Services, Inc. ("PLS"), to
acquire, develop and maintain intellectual property assets employed by us,
including names, trademarks, websites, logos, branding rights and software, and
to license those intellectual property rights to us as needed; and (ii)
$110,000, $120,000, and $118,680, respectively, paid to Penwith Corporation
("Penwith") for strategic planning and professional services, including product
identification and procurement.
During fiscal, 2002 and 2001, we sold prepaid cellular phones and phone
cards to our customers. Penwith sold us these phones and phone cards on a
consignment basis and, pursuant to an agreement, we in turn paid approximately
12% of the retail sales price to Penwith. Payments to Penwith aggregated $10,745
and $301,696 in fiscal, 2002 and 2001, respectively. We have discontinued
selling prepaid cellular phones and phone cards.
We share with Armed Services Benefits ("ASB"), a subsidiary of our parent,
a portion of the commission received on each health discount card sold based on
our agreement with ASB. The portion paid to ASB is approximately 41% of the
total commission received. During fiscal 2003, 2002 and 2001, we paid ASB a
total of $491,340, $392,619, and $974, respectively, in commissions and we
retained a total of $717,767, $675,483 and $3,101, respectively. The amount
remitted to ASB approximates its costs.
Pioneer Sales Services, GmbH ("PSS"), a German subsidiary of our parent,
receives a fee of approximately $100 for each loan customer it refers to one of
our lending subsidiaries. During fiscal 2003, 2002 and 2001, we paid this entity
$597,715, $556,651 and $630,522, respectively, which approximates its cost of
identifying and making these referrals.
Midstate Leasing, LLC ("Midstate"), an entity owned by the controlling
shareholder and certain other shareholders of our parent, leases certain office
equipment, signs and automobiles to several of our subsidiaries. These operating
leases are generally for nine month periods and are automatically renewable.
During fiscal 2003, 2002 and 2001, payments under these leases totaled $192,389,
$226,929 and $107,647, respectively.
We rent a building from Westport Investment Corp. ("Westport"), a
subsidiary of our parent. The lease expired on September 30, 2003. During fiscal
2003, 2002 and 2001, we made lease payments to Westport in the amount of
$144,000, $139,500 and $139,200, respectively.
Our customers execute a master credit agreement in connection with direct
loans. The extended effectiveness of this agreement helps expedite the extension
of subsequent loans to the customer. William D. Sullivan developed and
copyrighted the form of this agreement, and we license it from him in return for
a royalty. In fiscal 2003, the royalty averaged $2.47 per loan, and Mr. Sullivan
received a total of $135,786 in royalty payments. In fiscal 2002 and 2001, the
royalty averaged $2.29 and $2.14 per loan, respectively, with Mr. Sullivan
receiving a total of $143,263 and $123,180 in royalty payments, respectively.
As part of a corporate re-alignment, we purchased Pioneer Sales Services,
GmbH, Pioneer Licensing Services, Inc. and Pioneer Education Services, Inc. from
our parent on September 30, 2003. The purchase price we paid for these companies
was approximately $41,900, $106,000 and $57,000 respectively. The purchase price
was equal to the carrying amounts of the net assets of each purchased company.
46
The table below summarizes our transactions with affiliated parties:
Year Ended September 30,
-------------------------------------------
Person 2003 2002 2001
------ ---------- ---------- ----------
(dollars in thousands)
Interest paid on note payable.................... PFI $121,346 $132,856 $170,109
Professional services, strategic planning and
service charges................................ PFI 427,583 427,000 435,360
Develop and maintain intellectual property....... PLS 157,995 187,596 172,728
Product identification and procurement........... Penwith 110,000 120,000 118,680
Net proceeds from the sale of prepaid cellular
phones and phone cards......................... Penwith 10,745 301,696
Commission on health discount cards.............. ASB 491,340 392,619 974
Loan customer referrals.......................... PSS 597,715 556,651 630,522
Lease payments for office equipment, signs,
vehicles....................................... Midstate 192,389 226,929 107,647
Rent expenses.................................... Westport 144,000 139,500 139,200
Royalty payments for use of copyrighted form..... Mr. Sullivan 135,786 143,263 123,180
---------- ---------- ----------
Total payments to affiliates..................... $2,378,154 $2,337,159 $2,200,096
ITEM 14 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 end of the fiscal year which is the subject of
this Annual Report on Form 10-K. Based on this evaluation, our principal
executive officer and principal financial officer have concluded that the design
and operation of our 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.
47
ITEM 15 EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this registration
statement:
Exhibit
No. Description
- ------- -----------
3.1 Restated Articles of Incorporation of the Company (Incorporated
by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission on February 8, 2003 (Commission No.
333-103293) (the "Initial Registration Statement")).
3.2 Certificate of Amendment to Articles of Incorporation of the
Company (Incorporated by reference to Exhibit 3.2 of the Initial
Registration Statement).
3.3 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.3 of the Initial Registration Statement).
4.1 Form of indenture (Incorporated by reference to Exhibit 4.1 of
the Initial Registration Statement).
4.2 Form of debenture (Incorporated by reference to Exhibit 4.2 of
the Initial Registration Statement).
4.3 Form of debenture prior to November 1, 2002 (Incorporated by
reference to Exhibit 4.3 of the Initial Registration Statement).
4.7 Form of Agreement between the Company and various banks named in
Amended and Restated Senior Lending Agreement (Incorporated by
reference to Exhibit 4.7 of the Initial Registration Statement).
4.8 Promissory Note dated August 1, 2000, between the Company and
Pioneer Financial Industries, Inc. (Incorporated by reference to
Exhibit 4.8 of the Initial Registration Statement).
4.9 Amended and Restated Senior Lending Agreement dated October 1, 2003
among the Company and various banks named therein.
10.1 Form of Readi-Loan Licensing Agreement (Incorporated by reference
to Exhibit 10 of the Initial Registration Statement).
10.2 Office Building Lease dated January 31, 2001, between the Company
and Belletower Partners, L.L.C. (Incorporated by reference to
Exhibit 10.2 of the Initial Registration Statement).
10.3 Addendum to Office Building Lease between the Company and
Belletower Partners, L.L.C. (Incorporated by reference to Exhibit
10.3 of the Initial Registration Statement).
10.4 First Amendment to Office Building Lease dated July 19, 2001,
between the Company and Belletower Partners, L.L.C. (Incorporated
by reference to Exhibit 10.4 of the Initial Registration
Statement).
10.5 Employment Contract between the Company and Randall J. Opliger
(Incorporated by reference to Exhibit 10.5 of the Initial
Registration Statement).
10.6 Trademark Licensing Agreement dated October 10, 2000 between the
Company and Pioneer Licensing Services, Inc. (Incorporated by
reference to Exhibit 10.6 of the Initial Registration Statement).
10.7 Transfer of Shares dated as of September 30, 2003 between the
Company and Pioneer Financial Industries, Inc.
10.8 Capital Contribution Agreement dated as of September 30, 2003
between the Company and Pioneer Financial Industries, Inc.
10.9 Stock Purchase Agreement dated October 29, 2003 between the
Company and Pioneer Financial Industries, Inc.
10.10 Stock Purchase Agreement dated October 29, 2003 between the
Company and Pioneer Financial Industries, Inc.
12 Statement regarding computation of ratios (Incorporated by
reference to Exhibit 12 of the Initial Registration Statement).
21 Subsidiaries of the Company.
25 Statement of eligibility of trustee (Incorporated by reference to
Exhibit 25 of the Amendment No. 1).
23.1 Consent of BKD, LLP.
31.1 Certificate of the Chief Executive Officer of Pioneer Financial
Services, Inc. dated December 11, 2003 for the Annual Report on Form
10-K for the quarter ended September 30, 2003 filed pursuant to
Section 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
48
31.2 Certificate of the Chief Financial Officer of Pioneer Financial
Services, Inc. dated December 11, 2003 for the Annual Report on Form
10-K for the quarter ended September 30, 2003 filed pursuant to
Section 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1 18 U.S.C. Section 1350 Certification of Chief Executive Officer of
Pioneer Financial Services, Inc. dated December 11, 2003, which is
accompanying this Annual Report on Form 10-K for the quarter ended
September 30, 2003 and is treated as furnished rather filed in
reliance on the SEC's final rule dated June 5, 2003, Release No.
33-8238.
32.2 18 U.S.C. Section 1350 Certification of Chief financial Officer of
Pioneer Financial Services, Inc. dated December 11, 2003, which is
accompanying this Annual Report on Form 10-K for the quarter ended
September 30, 2003 and is treated as furnished rather filed in
reliance on the SEC's final rule dated June 5, 2003, Release No.
33-8238.
(b) REPORTS ON FORM 8-K
None
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
By: /s/ WILLIAM D. SULLIVAN
--------------------------------
William D. Sullivan
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
registration statement has been signed below by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ WILLIAM D. SULLIVAN Chief Executive Officer December 11, 2003
- -------------------------- and Sole Director
William D. Sullivan (Principal Executive Officer)
/s/ RANDALL J. OPLIGER Chief Financial Officer, December 11, 2003
- -------------------------- Treasurer and Secretary
Randall J. Opliger (Principal Financial Officer
and Principal Accounting
Officer)
50
Exhibit
No. Description
- ------- -----------
3.1 Restated Articles of Incorporation of the Company (Incorporated
by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission on February 8, 2003 (Commission No.
333-103293) (the "Initial Registration Statement")).
3.2 Certificate of Amendment to Articles of Incorporation of the
Company (Incorporated by reference to Exhibit 3.2 of the Initial
Registration Statement).
3.3 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.3 of the Initial Registration Statement).
4.1 Form of indenture (Incorporated by reference to Exhibit 4.1 of
the Initial Registration Statement).
4.2 Form of debenture (Incorporated by reference to Exhibit 4.2 of
the Initial Registration Statement).
4.3 Form of debenture prior to November 1, 2002 (Incorporated by
reference to Exhibit 4.3 of the Initial Registration Statement).
4.7 Form of Agreement between the Company and various banks named in
Amended and Restated Senior Lending Agreement (Incorporated by
reference to Exhibit 4.7 of the Initial Registration Statement).
4.8 Promissory Note dated August 1, 2000, between the Company and
Pioneer Financial Industries, Inc. (Incorporated by reference to
Exhibit 4.8 of the Initial Registration Statement).
4.9 Amended and Restated Senior Lending Agreement dated October 1, 2003
among the Company and various banks named therein.
10.1 Form of Readi-Loan Licensing Agreement (Incorporated by reference
to Exhibit 10 of the Initial Registration Statement).
10.2 Office Building Lease dated January 31, 2001, between the Company
and Belletower Partners, L.L.C. (Incorporated by reference to
Exhibit 10.2 of the Initial Registration Statement).
10.3 Addendum to Office Building Lease between the Company and
Belletower Partners, L.L.C. (Incorporated by reference to Exhibit
10.3 of the Initial Registration Statement).
10.4 First Amendment to Office Building Lease dated July 19, 2001,
between the Company and Belletower Partners, L.L.C. (Incorporated
by reference to Exhibit 10.4 of the Initial Registration
Statement).
10.5 Employment Contract between the Company and Randall J. Opliger
(Incorporated by reference to Exhibit 10.5 of the Initial
Registration Statement).
10.6 Trademark Licensing Agreement dated October 10, 2000 between the
Company and Pioneer Licensing Services, Inc. (Incorporated by
reference to Exhibit 10.6 of the Initial Registration Statement).
10.7 Transfer of Shares dated as of September 30, 2003 between the
Company and Pioneer Financial Industries, Inc.
10.8 Capital Contribution Agreement dated as of September 30, 2003
between the Company and Pioneer Financial Industries, Inc.
10.9 Stock Purchase Agreement dated October 29, 2003 between the
Company and Pioneer Financial Industries, Inc.
10.10 Stock Purchase Agreement dated October 29, 2003 between the
Company and Pioneer Financial Industries, Inc.
12 Statement regarding computation of ratios (Incorporated by
reference to Exhibit 12 of the Initial Registration Statement).
21 Subsidiaries of the Company.
23.1 Consent of BKD, LLP.
25 Statement of eligibility of trustee (Incorporated by reference to
Exhibit 25 of the Amendment No. 1).
51
31.1 Certificate of the Chief Executive Officer of Pioneer Financial
Services, Inc. dated December 11, 2003 for the Annual Report on Form
10-K for the quarter ended September 30, 2003 filed pursuant to
Section 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2 Certificate of the Chief Financial Officer of Pioneer Financial
Services, Inc. dated December 11, 2003 for the Annual Report on Form
10-K for the quarter ended September 30, 2003 filed pursuant to
Section 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1 18 U.S.C. Section 1350 Certification of Chief Executive Officer of
Pioneer Financial Services, Inc. dated December 11, 2003, which is
accompanying this Annual Report on Form 10-K for the quarter ended
September 30, 2003 and is treated as furnished rather filed in
reliance on the SEC's final rule dated June 5, 2003, Release No.
33-8238.
32.2 18 U.S.C. Section 1350 Certification of Chief financial Officer of
Pioneer Financial Services, Inc. dated December 11, 2003, which is
accompanying this Annual Report on Form 10-K for the quarter ended
September 30, 2003 and is treated as furnished rather filed in
reliance on the SEC's final rule dated June 5, 2003, Release No.
33-8238.
52