Prospectus Supplement Filed Pursuant to Rule 424(b)(3)
Dated February 13, 2004
to Prospectus Dated January 13, 2004 of
Pioneer Financial Services, Inc. Registration Number 333-103293
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended: December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-103293
Pioneer Financial Services, Inc.
(Exact name of Registrant as specified in its charter)
Missouri 44-0607504
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 Belleview Avenue, Suite 300, Kansas City, Missouri 64112
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 756-2020
________________________________________________________________________________
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant has (1) filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes [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 December 31, 2003
----- -----------------------------------
Common Stock, $100 par value 17,136 shares
PIONEER FINANCIAL SERVICES, INC.
FORM 10-Q
December 31, 2003
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item No. Page
1. Consolidated Financial Statements..................................3
Consolidated Balance Sheets at December 31, 2003 and
September 30, 2003.................................................3
Consolidated Statements of Income for the three months
ended December 31, 2003 and 2002...................................4
Consolidated Statements of Retained Earnings for the three
months ended December 31, 2003 and year ended September 30, 2003...5
Consolidated Statements of Cash Flows for the three months
ended December 31, 2003 and 2002...................................6
Condensed Notes to Consolidated Financial Statements...............7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................7
3. Quantitative and Qualitative Disclosures About Market Risk........16
4. Controls and Procedures...........................................16
PART II
OTHER INFORMATION
1. Legal Proceedings.................................................16
2. Changes in Securities and Use of Proceeds.........................16
3. Defaults upon Senior Securities...................................17
4. Submission of Matters to a Vote of Security Holders...............17
5. Other Information.................................................17
6. Exhibits and Reports on Form 8-K..................................17
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
2003 2003
----------------- -----------------
(unaudited)
Cash $ 2,120,766 $ 2,039,109
Other investments 1,959,771 1,962,614
Finance receivables:
Direct receivables 156,575,717 147,095,062
Retail installment contracts 18,596,428 18,799,693
----------------- -----------------
Finance receivables before allowance
for credit losses 175,172,145 165,894,755
Allowance for credit losses (9,670,868) (9,220,868)
----------------- -----------------
Net finance receivables 165,501,277 156,673,887
Furniture and equipment, net 1,447,750 1,467,077
Deferred income taxes 3,534,871 3,364,700
Prepaid and other assets 266,995 334,859
----------------- -----------------
Total assets $ 174,831,430 $ 165,842,246
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
December 31, September 30,
2003 2003
----------------- -----------------
(unaudited)
Revolving credit line - banks $ 11,220,054 $ 10,580,000
Revolving credit line - affiliate 1,964,926 1,712,841
Accounts payable 924,316 945,038
Accrued expenses and other liabilities 10,011,996 10,940,246
Amortizing and single pay term notes 107,230,964 99,471,296
Junior subordinated notes 21,593,060 21,436,745
----------------- -----------------
Total liabilities $ 152,945,316 $ 145,086,166
----------------- -----------------
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 20,172,514 19,042,480
----------------- -----------------
Total stockholder's equity 21,886,114 20,756,080
----------------- -----------------
Total liabilities and stockholder's equity $ 174,831,430 $ 165,842,246
================= =================
See notes to consolidated financial statements.
3
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
December 31,
------------------------
2003 2002
----------- -----------
(unaudited)
Revenue
Finance income $13,274,672 $12,935,747
Insurance premiums
and commissions 1,294,981 1,334,760
Other income, fees
and commissions 470,854 601,104
----------- -----------
Total revenue 15,040,507 14,871,611
Provision for credit 2,688,645 3,412,894
Interest expense 2,203,637 2,427,544
----------- -----------
Net revenue 10,148,225 9,031,173
Operating expenses
Employee costs 5,427,466 4,588,535
Facilities 1,278,145 1,231,495
Marketing 615,519 541,692
Professional fees 385,303 547,946
Other 416,582 369,061
----------- -----------
Total operating expenses 8,123,015 7,278,729
Income before income taxes 2,025,210 1,752,444
Provision for income taxes 728,100 642,366
----------- -----------
Net income $ 1,297,110 $ 1,110,078
=========== ===========
Net income per share, basic and
diluted $ 75.70 $ 64.78
=========== ===========
See notes to consolidated financial statements.
4
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Year Ended
December 31, September 30,
2003 2003
---------------- ----------------
(unaudited)
Retained earnings, beginning of period $ 19,042,480 $ 15,606,679
Net income 1,297,110 3,979,869
Dividends paid ($9.75 and $31.75 per share) (167,076) (544,068)
---------------- ----------------
Retained earnings, end of period $ 20,172,514 $ 19,042,480
================ ================
See notes to consolidated financial statements.
5
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended December 31,
2003 2002
--------------- --------------
Cash Flows from Operating Activities:
Net income $ 1,297,110 $ 1,110,078
Items not requiring (providing) cash:
Provision for credit losses on
finance receivables 2,688,645 3,412,894
Depreciation and amortization 188,644 199,589
Compounded interest added to
junior subordinated debt 248,141 241,968
Deferred income taxes (170,171) (337,127)
Changes in:
Accounts payable and accrued (394,318) 795,675
expenses
Other 67,864 (161,266)
--------------- --------------
Net cash provided by operating
activities 3,925,915 5,261,811
--------------- --------------
Cash Flows from Investing Activities:
Loans originated (39,361,820) (39,900,568)
Loans purchased (3,807,752) (4,075,718)
Loans repaid 31,653,537 30,385,215
Capital expenditures (166,474) (57,573)
Securities purchased 0 (113,410)
Securities matured 0 112,884
--------------- --------------
Net cash used in investing
activities (11,682,509) (13,649,170)
--------------- ---------------
Cash Flows from Financing Activities:
Net borrowing under lines of credit 337,485 996,212
Proceeds from borrowings 18,341,270 19,633,710
Repayment of borrowings (10,673,428) (11,191,696)
Dividends paid (167,076) 0
--------------- ---------------
Net cash provided by
financing activities 7,838,251 9,438,226
--------------- ---------------
Net Increase in Cash 81,657 1,050,867
Cash, Beginning of Period 2,039,109 1,150,863
--------------- ---------------
Cash, End of Period $ 2,120,766 $ 2,201,730
=============== ===============
Additional Cash Flow Information:
Interest paid $ 2,145,399 $ 2,370,027
Income taxes paid $ 645,344 $ 334,860
See notes to consolidated financial statements.
6
PIONEER FINANCIAL SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and December 31, 2002
(Unaudited)
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
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. Certain information and
note disclosures normally included in the Company's annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the Company's annual
consolidated financial statements filed with the Securities and Exchange
Commission.
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.
Information with respect to December 31, 2003 and 2002, and the periods
then ended, have not been audited by the Company's independent auditors, but
in the opinion of management reflect all adjustments (which include only
normal recurring adjustments) necessary for the fair presentation of the
financial condition and operations of the Company. The results of
operations for the three months ended December 31, 2003 and 2002 are not
necessarily indicative of results to be expected for the entire fiscal year.
The condensed consolidated balance sheet and retained earnings statement as
of September 30, 2003 has been derived from the Company's audited
consolidated balance sheet.
NOTE 2: NET INCOME PER SHARE
Net income per share is computed based upon the weighted-average common
shares outstanding of 17,136 during each period. There are no potentially
dilutive securities issued and outstanding.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The discussion set forth below, as well as other portions of this
quarterly report, contains forward-looking statements within the meaning of
federal securities law. Words such as "may," "will," "expect," "anticipate,"
"believe," "estimate," "continue," "predict," or other similar words,
identify forward-looking statements. Forward-looking statements include
statements regarding our management's intent, belief or current expectation
about, among other things, trends affecting the markets in which we operate,
our business, financial condition and growth strategies. Although we believe
that the expectations reflected in these forward-looking statements are
7
based on reasonable assumptions, forward-looking statements are not guarantees
of future performance and involve risks and uncertainties. Actual results may
differ materially from those predicted in the forward-looking statements as a
result of various factors, including, but not limited to, those risk factors
set forth in our registration statement on Form S-1, as amended (No.
333-103293). Other factors not identified herein could also have such an
effect. If any of these risk factors occur, they could have an adverse
effect on our business, financial condition and results of operation. When
considering forward-looking statements keep these risk factors in mind.
These forward-looking statements are made as of the date of this filing. You
should not place undue reliance on any forward-looking statement. We are not
obligated to update forward-looking statements and will not update any
forward-looking statements in this Quarterly Report to reflect future events
or developments.
Overview
We originate and service consumer loans and provide other financial
products and services on a worldwide basis, exclusively to active duty or
retired career 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 with fixed interest
rates and typically have a maturity of less than 48 months. During the first
three months of fiscal 2004, the size of our average finance receivable at
origination was approximately $3,203. A large portion of our customers are
unable to obtain traditional financing from banks, credit unions or savings
and loan associations due to factors such as their age, likelihood of
relocation and lack of credit history.
Further improvement of our profitability is dependent in large part upon
the growth in our outstanding finance receivables, the maintenance of loan
quality, acceptable levels of borrowing costs and operating expenses and the
ongoing introduction of innovative new products and services to our customer
base. Since September 30, 1998, finance receivables have increased at a
12.9% annual compounded rate from $90.3 million to $165.9 million at
September 30, 2003. We anticipate this trend will continue as our
originations grow through existing and planned new retail offices and through
the Internet. Use of the Internet to extend loans is a lower cost method of
origination. We plan to continue 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.
8
Finance Receivables
Our finance receivables are comprised of direct loans and retail
installment contracts. The following table sets forth certain information
about the components of our finance receivables:
As of, and For the Three
Months Ended
December 31,
---------------------------------
2003 2002
---------------------------------
(dollars in thousands,
except for average note balance)
Finance Receivables:
Finance receivable balance $ 175,172 $ 170,089
Average note balance $ 2,188 $ 2,024
Total finance income $ 13,275 $ 12,936
Total number of notes 80,077 84,021
Direct Loans:
Notes receivable balance $ 156,576 $ 150,889
Percent of finance receivables 89.38% 88.71%
Average note balance $ 2,202 $ 2,039
Number of notes 71,099 73,985
Retail Installment Contracts:
Notes receivable balance $ 18,596 $ 19,200
Percent of finance receivable 10.62% 11.29%
Average note balance $ 2,071 $ 1,914
Number of notes 8,978 10,036
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. 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.
9
The following table presents important data relating to our net interest
margin:
As of, and For the Three
Months Ended
December 31,
-------------------------
2003 2002
-------------------------
(dollars in thousands)
Finance receivables balance $ 175,172 $ 170,089
Average finance receivables(1) $ 171,092 $ 165,697
Average interest bearing liabilities(1) $ 134,520 $ 132,424
Total finance income $ 13,275 $ 12,936
Total interest expense $ 2,204 $ 2,428
Provision for credit losses $ 2,689 $ 3,413
Net charge-offs $ 2,239 $ 2,513
- ----------------------------
(1) Averages are computed using month-end balances.
Results of Operations
Three Months Ended December 31, 2003 Compared to Three Months Ended
December 31, 2002
Finance Receivables. Our aggregate finance receivables increased 5.6%
during the first quarter of fiscal 2004 to $175.2 million on December 31, 2003
from $165.9 million on September 30, 2003. This increase was due primarily to
increases in finance receivables from the Internet, which grew by more than
$12.6 million or 24%. The Internet is a lower-cost method of loan origination
and proceed distribution, and we plan to continue to increase this distribution
channel in the future.
Provision for Credit Losses. The provision for credit losses in the first
quarter of fiscal 2004 decreased to $2.7 million from $3.4 million in the first
quarter of fiscal 2003, a decrease of $.7 million or 21.2%. Net charge-offs of
finance receivables in the first quarter of fiscal 2004 decreased to $2.2
million from $2.5 million in the first quarter of fiscal 2003, a decrease of $.3
million or 10.8%. The decrease in net charge-offs reflects the reduction in
60-day delinquent accounts in the portfolio due to enhanced collection
efforts. Our allowance for credit losses at December 31, 2003 increased to $9.7
million from $9.2 million at September 30, 2003, an increase of $.5 million, or
4.9%. The increase reflects the increase in our average finance receivables
portfolio for the three months ended December 31, 2003 compared to the three
months ended December 31, 2002, as well as our concern regarding uncertainty
surrounding the Middle-East hostilities.
Interest Expense. Interest expense in the first quarter of fiscal 2004
decreased to $2.2 million from $2.4 million in the first quarter of fiscal 2003,
a decrease of $.2 million or 9.2%. This decrease is the result of lower interest
rates charged on our borrowings even though our average interest bearing
liabilities for the three months ended December 31, 2003 increased by $.8
million or .7% compared to the three months ended December 31, 2002. The
weighted average interest rate declined to 6.2% in the first quarter of fiscal
2003 from 7.0% in the first quarter of fiscal 2002.
Operating Expense. Operating expenses in the first quarter of fiscal 2004
increased to $8.1 million from $7.3 in the first quarter fiscal 2003 an increase
of $.8 million or 11.6%. This increase was primarily due to employment costs, as
a result of building infrastructure in the retail network and renewed efforts to
create a
10
technology solution by integrating lending, point of sale, and customer
relationship management systems to enhance efficiencies in the future. In
addition, we entered into agreements with third parties, who sell products via
the Internet, to provide financing solutions for their military customer base.
Net Income. Income before taxes in the first quarter of fiscal 2004 was
$2.0 million and net income was $1.3 million compared to income before taxes of
$1.8 million and net income of $1.1 million during the first quarter of fiscal
2003.
Delinquency Experience
Our customers are required to make monthly payments of interest and
principal. We analyze our delinquencies on a recency delinquency basis. A loan
is delinquent under the recency method when a full payment (95% or more of the
contracted payment amount) has not been received for 60 days after the last full
payment. We rarely grant extensions or deferments, or allow account revision,
rewriting, renewal or rescheduling in order to bring otherwise delinquent
accounts current.
The following sets forth our delinquency experience for accounts for
which payments are 60 days or more past due and allowance for credit losses
for our finance receivables:
As of
December 31, December 31,
2003 2002
-------------------------
(dollars in thousands)
Finance receivables balances $ 175,172 $ 170,089
Finance receivables balances 60 days
or more past due $ 5,179 $ 6,356
Finance receivables balances 60 days
or more past due as a percent of
finance receivables 2.96% 3.74%
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.
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 uncollectible 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 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
11
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 presents 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 Three
Months Ended
December 31,
------------------------
2003 2002
------------------------
(dollars in thousands)
Direct Loans:
Loans charged-off $ 2,484 $ 2,751
Less recoveries 251 251
------------------------
Net charge-offs $ 2,233 $ 2,500
========================
Average monthly balance of
outstanding (1) $152,335 $ 146,439
Percentage of net charge-offs to average
monthly balance outstanding(2) 5.86% 6.83%
- -------------------------------------
(1) Averages are computed using month-end balances.
(2) December 31, 2003 and 2002 are annualized for comparison purpose.
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 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 presents net charge-offs on retail installment
contracts and net charge-offs as a percentage of retail installment contracts:
12
As of, and For the Three
Months Ended
December 31,
----------------------
2003 2002
----------------------
(dollars in thousands)
Retail Installment Contracts:
Contracts charged-off $ 18 $ 32
Less recoveries 12 19
----------------------
Net charge-offs $ 6 $ 13
======================
Average monthly balance of
outstanding (1) $ 18,757 $ 19,258
Percentage of net charge-offs to average
monthly balance outstanding(2) 0.13% 0.26%
- -------------------------------------
(1) Averages are computed using month-end balances.
(2) December 31, 2003 and 2002 are annualized for comparison purpose.
The following table presents our allowance for credit losses on direct
loans and retail installment contracts:
As of, and For the Three
Months Ended
December 31,
----------------------
2003 2002
----------------------
(dollars in thousands)
Average finance receivables(1) $ 171,092 $ 165,697
Provision for credit losses $ 2,689 $ 3,413
Net charge-offs $ 2,239 $ 2,513
Net charge-offs as a percentage of
average finance receivables(2) 5.23% 6.07%
Allowance for credit losses $ 9,671 $ 7,121
Allowance as a percentage of average
finance receivables 5.65% 4.30%
- -------------------------------------
(1) Averages are computed using month-end balances.
(2) December 31, 2003 and 2002 are annualized for comparison purpose.
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 our registration statement on Form
S-1, as amended (No. 333-103293), "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Critical Accounting Policies."
13
The following table sets forth changes in the components of our
allowance for credit losses on direct loans and retail installment contracts:
As of, and For the Three
Months Ended
December 31,
----------------------
2003 2002
----------------------
(dollars in thousands)
Balance beginning of period $ 9,221 $ 6,221
---------------------
Charge-offs:
Loans charged-off (2,502) (2,783)
Recoveries 263 270
---------------------
Net charge-offs (2,239) (2,513)
Provision for credit losses 2,689 3,413
---------------------
Balance end of period $ 9,671 $ 7,121
=====================
Loan Origination
Our loan origination is an important factor in determining our future
revenues. Loan origination for the first three months of fiscal 2004
decreased to $61.2 million from $62.5 million for the first three months of
fiscal year 2003, a decrease of $1.3 million or 2.1%. While our originations
for the month of December 2003 achieved a record level of $23.3 million
compared to $23.1 million for December of 2002, the overall 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 our demand for loans.
The following table sets forth our overall loan originations and lending
activities by direct loans and retail installment contracts:
As of, and For the Three
Months Ended
December 31,
---------------------------------
2003 2002
---------------------------------
(dollars in thousands,
except for average note amounts)
Total Loan Origination:
Gross balance $ 61,146 $ 62,478
Number of notes 19,092 20,807
Average note amount $ 3,203 $ 3,003
Direct Loans:
Gross balance $ 57,338 $ 58,402
Number of notes 17,913 19,573
Average note amount $ 3,201 $ 2,984
Retail Installment Contracts:
Gross balance $ 3,808 $ 4,076
Number of notes 1,179 1,234
Average note amount $ 3,230 $ 3,303
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
14
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 the first three months of fiscal 2004 was
approximately $11.7 million, which was funded from $3.9 million of cash from
operating activities and $7.8 million from financing activities. Cash used in
investing activities in the first three months of fiscal 2003 was approximately
$13.7 million, which was funded from $5.3 million from operating activities
and $9.4 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. We anticipate that our cash inflow
from operations, borrowings under our senior lending agreement, and the
proceeds from the sale of subordinated debentures will be adequate to meet
our cash out flows to fund anticipated growth in our finance receivables,
operating expenses, repayment of indebtedness, and planned capital
expenditures.
Senior Indebtedness-Bank Debt.
Our senior lending agreement is an uncommitted facility, which provides
common terms and conditions pursuant to which individual banks that are a
party to this agreement may choose to make loans to us in the future. Any
bank may elect not to participate in any future fundings at any time without
penalty. As of December 31, 2003, we could request up to $19.7 million in
additional funds and remain in compliance with the terms of our senior
lending agreement. No bank, however, has any contractual obligation to lend
us these additional funds. As of December 31, 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 December 31, 2003, there was $2.0 million
outstanding under this credit facility with an interest rate of 6.00%.
Senior Indebtedness Table.
As of December 31, 2003 and 2002, the total borrowings and availability
under our senior lending agreement and our revolving line of credit from our
parent company consisted of:
As of December 31,
---------------------
2003 2002
--------- ----------
(dollars in thousands)
Revolving Credit Line (1):
Total facility $ 34,961 $ 29,000
Balance at end of period $ 13,185 $ 13,974
Maximum available credit $ 21,776 $ 15,026
Term Notes(2):
Total facility $ 156,565 $ 134,686
Balance at end of period $ 107,231 $ 106,563
Maximum available credit $ 49,334 $ 28,123
Total Revolving and Term Notes(1)(2):
Total facility $ 191,526 $ 163,686
Balance at end of period $ 120,416 $ 120,537
Maximum available credit(3) $ 71,110 $ 43,149
Credit facility available(4) $ 19,722 $ 9,831
Percent utilization of the
total facility 62.87% 73.64%
- -----------------------------------
(1) Includes revolving credit line from our parent.
(2) Includes amortizing notes and single payment term notes.
(3) Maximum available credit assuming proceeds in excess of the amounts shown
below under "Credit Facility Available" are used to increase qualifying
finance receivables and all terms of the senior lending agreement are met,
including maintaining a Senior Indebtedness to Net Receivable Ratio of not
more than 80%.
(4) Credit facility available based on the existing asset borrowing base and
maintaining a Senior Indebtedness to Net Receivable Ratio of not more than
80%.
15
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 December 31, 2003,
we had issued approximately $21.6 million of these junior subordinated
debentures at a weighted average interest rate of 9.52%.
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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our profitability and financial performance are sensitive to changes in
the U.S. Treasury yields and the spread between the effective rate of
interest we receive on customer loans and the interest rates we pay on our
borrowings. Our finance income is generally not sensitive to fluctuations in
market interest rates. The primary exposure that we face is changes in
interest rates on our borrowings. A substantial and sustained increase in
market interest rates could adversely affect our growth and profitability.
The overall objective of our interest rate risk management strategy is to
mitigate the effects of changing interest rates on our interest expense
through the utilization of short-term variable rate debt and medium and long
term fixed rate debt. We have not entered into any derivative instruments to
manage our interest rate risk.
ITEM 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to
ensure that information required to be disclosed in the Company's reports
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures. Any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives. Our management, under the
supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days of the
filing date of this quarterly report on Form 10-Q. Based on this evaluation,
our Chief Executive Officer and Chief 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.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
We are subject to claims and lawsuits that primarily involve routine
matters in the ordinary course of 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.
ITEM 2. Changes in Securities and Use of Proceeds
On May 13, 2003, the Securities and Exchange Commission declared our
registration statement on Form S-1, as amended (File No. 333-103293),
effective. On January 13, 2004 the Securities and Exchange Commission
declared our post effective amendment as filed on Form S-1 (File No.
333-103293), effective. Pursuant to this registration statement, and the
accompanying prospectus, we registered and are offering up to $25,000,000 in
aggregate principal amount of our junior subordinated debentures, with a
maximum aggregate offering price of $25,000,000 on a continuous basis with an
expected termination in May 2005. We commenced the offering of these
16
junior subordinated debentures on May 20, 2003. We are currently offering the
debentures through our officers and employees directly without an underwriter or
agent. From May 20, 2003 to December 31, 2003, we sold 101 debentures in an
approximate aggregate principal amount of $2,015,000. For the quarter ended
December 31, 2003 we sold 19 debentures in the aggregate principal amount of
$341,270. Costs incurred in connection with the preparation of the initial
registration statement on Form S-1 were approximately $315,000. Our expenses
incurred in connection with the issuance and distribution of the junior
subordinated debentures from the date our registration statement became
effective, May 13, 2003, through December 31, 2003 were approximately $198,000.
Expenses incurred in the first quarter of fiscal 2004 were approximately
$61,000. Net proceeds from the offering through December 31, 2003, were
approximately $1,502,000.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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).
17
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. (Incorporated by reference to
Exhibit 10.7 of the Annual Report on Form 10-K for the fiscal year ended
September 30, 2003).
10.8 Capital Contribution Agreement dated as of September 30, 2003 between
the Company and Pioneer Financial Industries, Inc. (Incorporated by
reference to Exhibit 10.8 of the Annual Report on Form 10-K for the
fiscal year ended September 30, 2003).
10.9 Stock Purchase Agreement dated October 29, 2003 between the Company and
Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit
10.9 of the Annual Report on Form 10-K for the fiscal year ended
September 30, 2003).
10.10 Stock Purchase Agreement dated October 29, 2003 between the Company and
Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit
10.10 of the Annual Report on Form 10-K for the fiscal year ended
September 30, 2003).
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).
31.1 Certification of Chief Executive Officer pursuant to Rule 15d-15e.
31.2 Certification of Chief Financial Officer pursuant to Rule 15d-15e.
32.1 18 U.S.C. Section 1350 Certification of Chief Executive Officer.
32.2 18 U.S.C. Section 1350 Certification of Chief Financial Officer.
(b) Reports on Form 8-K
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER FINANCIAL SERVICES, INC.
Name Title Date
- ---- ----- ----
/s/ William D. Sullivan Chief Executive February 13,
- ----------------------- Officer 2004
William D. Sullivan and Sole Director
(Principal Executive
Officer)
/s/ Randall J. Opliger Chief Financial February 13,
- ------------------------ Officer, Treasurer 2004
Randall J. Opliger and Secretary
(Principal Financial
Officer and Principal
Accounting Officer
19
Exh. 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).
4.10 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).
4.11 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. (Incorporated by reference to
Exhibit 10.7 of the Annual Report on Form 10-K for the fiscal year ended
September 30, 2003).
10.8 Capital Contribution Agreement dated as of September 30, 2003 between
the Company and Pioneer Financial Industries, Inc. (Incorporated by
reference to Exhibit 10.8 of the Annual Report on Form 10-K for the
fiscal year ended September 30, 2003).
10.9 Stock Purchase Agreement dated October 29, 2003 between the Company and
Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit
10.9 of the Annual Report on Form 10-K for the fiscal year ended
September 30, 2003).
10.10 Stock Purchase Agreement dated October 29, 2003 between the Company and
Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit
10.10 of the Annual Report on Form 10-K for the fiscal year ended
September 30, 2003).
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).
31.1 Certification of Chief Executive Officer pursuant to Rule 15d-15e.
31.2 Certification of Chief Financial Officer pursuant to Rule 15d-15e.
32.1 18 U.S.C. Section 1350 Certification of Chief Executive Officer.
32.2 18 U.S.C. Section 1350 Certification of Chief Financial Officer.
20