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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, 2004
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 September 30, 2004
----- ------------------------------------
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, 2004
TABLE OF CONTENTS
Item No. Page
PART I
ITEM 1. BUSINESS ..............................................1
ITEM 2. PROPERTIES ............................................8
ITEM 3. LEGAL PROCEEDINGS .....................................8
PART II
ITEM 6. SELECTED FINANCIAL DATA ...............................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION .........10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ....................................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..........22
ITEM 9A. CONTROLS AND PROCEDURES ..............................24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT ...........................................24
ITEM 11. EXECUTIVE COMPENSATION ...............................24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS .........................................25
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ...............27
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ..............28
PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended September 30,
2004 ("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
"Item 1. Business--Factors That May Affect Future Results of Operations,
Financial Condition or Business" section of this report. If any of the events
described in "Item 1. 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. 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 subsidiary. 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 deposited into the customer's bank account within 24
hours. This lending subsidiary also sells credit life insurance products
over the Internet. The lending activities of this subsidiary have increased
in the past year because we entered into third party marketing agreements
in October 2003 with companies who market and sell products over the
Internet to military service members. These agreements have expanded our
ability to help additional military customers who need
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financing to effectuate Internet purchases as well as other needs. Either
party may terminate these agreements after 30 days written notice.
Another subsidiary operates our retail network of 24 offices located in 14
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. 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 72 retail merchants. Retail installment
contracts are finance receivable 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
Customers
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 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.
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Lending Activities
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.
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.
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.
When appropriate 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 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 2004, approximately 45.9% of the number and 28.3% 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 bank account through the National Automated Clearinghouse Association. As
of September 30, 2004, 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.
3
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 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,
4
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.
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.
Employee Relations
At September 30, 2004, we employed approximately 290 persons, none of whom
were represented by labor unions. We believe that our employee relations are
good.
5
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 OUR JUNIOR
SUBORDINATED 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 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 our junior subordinated
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.
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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 67.0% 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.
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, 2004,
we could request up to $21.6 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, 2004, we had approximately 3,600 customers who separated from the military
prior to repaying our loan and who in the aggregate owed us approximately $6.5
million. Based on historical charge-off models, management believes this could
result in approximately $3.9 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, 2004, our reinsurance
subsidiary had the ability to pay us up to $1,789,690 in dividends pursuant to
these laws
7
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, 2004, 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, Inc. 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 2004, the senior lending agreement prohibits us from paying our
parent more than $700,000 for strategic planning services, professional
services, 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.
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.
RISK OF LOSS OF MATERIAL VENDOR.
Portions of our marketing efforts are dependent on the services provided by
certain vendors. If those marketing efforts are unsuccessful or if we lose the
relationship with these third party vendors, we may experience a reduction in
our originations of loans. Such reduction may have an adverse impact on our
results of operations and financial condition. See "--General".
ITEM 2. PROPERTIES
Our operations are generally conducted on leased premises under operating
leases with terms not normally exceeding five years. At September 30, 2004, we
had 30 leased operating facilities in the United States. Please see Note 7 to
our Consolidated Financial Statements for information concerning our lease
obligations. The furniture, equipment and other personal property that we own
represents less than 4% of our total assets at September 30, 2004 and is
therefore not significant in relation to our total assets.
ITEM 3. LEGAL PROCEEDINGS
We are currently involved in various litigation matters in the ordinary
course of our business. We are not currently involved in any litigation or other
proceeding that we expect, either individually or in the aggregate, will have a
material adverse effect on our financial condition, results of operations and
cash flows.
8
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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation." The data as of, and for the fiscal years ended September 30, 2004,
2003, 2002, 2001 and 2000 has been derived from our audited consolidated
financial statements and related notes.
As of, and For the Years Ended September 30,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------
(dollars in thousands, except per share amounts)
Consolidated Balance
Sheet Data:
Finance receivables (1).. $ 198,407 $ 165,895 $ 159,011 $ 137,314 $ 127,746
Allowance for credit
losses................. $ (11,241) $ (9,221) $ (6,221) $ (4,421) $ (3,833)
Total assets............. $ 198,272 $ 165,842 $ 159,997 $ 141,328 $ 132,067
Senior indebtedness:
Revolving lines of
credit (2)............. $ 15,234 $ 12,293 $ 12,718 $ 12,310 $ 10,851
Amortizing term notes.. $ 121,912 $ 99,471 $ 97,925 $ 83,847 $ 80,466
Junior subordinated
debt (3)............... $ 23,222 $ 21,437 $ 21,396 $ 20,973 $ 19,204
Total equity............. $ 25,894 $ 20,756 $ 17,320 $ 14,861 $ 13,070
Consolidated Statement
of Operations Data:
Revenue:
Finance income......... $ 54,059 $ 50,003 $ 45,884 $ 38,965 $ 34,670
Insurance premiums
and commissions....... 5,120 5,288 4,652 4,561 4,467
Other income,fees and
commissions........... 1,696 1,646 1,755 1,596 1,313
--------- --------- --------- --------- ---------
Total revenue............ 60,875 56,937 52,291 45,122 40,450
Provision for credit
losses................. 10,588 12,168 10,594 8,264 7,476
Interest expense......... 9,063 9,325 9,599 9,455 8,334
--------- --------- --------- --------- ---------
Net revenue.............. 41,224 35,444 32,098 27,403 24,640
Operating expenses....... 32,101 29,325 27,589 24,052 21,727
--------- --------- --------- --------- ---------
Income before income
taxes.................. 9,124 6,119 4,509 3,351 2,913
Provision for income
taxes.................. 3,136 2,139 1,645 1,210 1,055
--------- --------- --------- --------- ---------
Net income............... $ 5,988 $ 3,980 $ 2,864 $ 2,141 $ 1,858
========= ========= ========= ========= =========
Net income per share:
Basic and diluted...... $ 349.43 $ 232.25 $ 167.14 $ 124.91 $ 108.39
========= ========= ========= ========= =========
Cash dividends per
common share............. $ 49.61 $ 31.75 $ 23.63 $ 20.39 $ 16.05
========= ========= ========= ========= =========
_______________________
(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
$2,613,823, $1,712,841, $1,941,831, $1,839,521, and $1,244,413
as of September 30, 2004, 2003, 2002, 2001 and 2000, respectively.
(3) Our junior subordinated debentures which are registered with the
Securities and Exchange Commission are sometimes referred to in this annual
report and the accompanying financial statements as junior subordinated
debentures, debentures, notes or investment notes.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
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 "Item 1.
Business--Lending Activities." Our finance receivables have fixed interest rates
and typically have a maturity of less than 48 months. During fiscal 2004, the
size of our average finance receivable at origination was approximately $3,300.
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 upon the growth in
our 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,
1999, finance receivables have increased at a 13.0% annual compounded rate from
$107.9 million to $198.4 million at September 30, 2004. The aggregate finance
receivable increase of 19.6% for fiscal year 2004 is attributable in part to the
presence of third party marketing agreements entered into in October 2003 with
companies that market and sell products over the Internet to military service
members. These agreements have expanded our ability to help additional military
customers who need financing to effectuate Internet purchases as well as other
needs. We plan to continue to pursue innovative and efficient methods to
distribute our loans, including looking for opportunities to expand the Internet
portion of our business and adding new retail offices as we evaluate new
military markets and possible products. See "--Results of Operations" and
"--Loan Origination".
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 81.6% of our total revenues in
fiscal 2004, 80.9% of our revenues in fiscal 2003 and 79.4% of our revenues in
fiscal 2002. See "Item 1. Business--Lending Activities".
Retail Installment Contracts. We purchase retail installment contracts from
approximately 72 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 7.4% of our
total revenues in fiscal 2004. See "Item 1. Business--Lending Activities".
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 6.5% of our total revenues in
fiscal 2004. See "Item 1. Business--Insurance Operations."
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
10
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 1.9% of our total revenues in fiscal 2004. 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. See "Item 1. Business--Insurance
Operations."
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 2004.
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,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------
(dollars in thousands, except average note balance)
Finance Receivables:
Finance receivables
balance................ $ 198,407 $ 165,895 $ 159,011 $ 137,314 $ 127,746
Average note balance..... $ 2,403 $ 2,117 $ 1,946 $ 1,753 $ 1,763
Total finance income..... $ 54,059 $ 50,003 $ 45,884 $ 38,965 $ 34,670
Total number of
notes................... 82,565 78,364 81,726 78,316 72,478
Direct Loans:
Finance receivables
balance ................ $ 176,691 $ 147,095 $ 139,664 $ 117,098 $ 102,397
Percent of finance
receivables............... 89.05% 88.67% 87.83% 85.28% 80.16%
Average note balance...... $ 2,446 $ 2,123 $ 1,959 $ 1,767 $ 1,746
Number of notes........... 72,242 69,291 71,302 66,264 58,635
Retail Installment Contracts:
Finance receivables
balance ................ $ 21,716 $ 18,800 $ 19,348 $ 20,216 $ 25,349
Percent of finance
receivables............... 10.95% 11.33% 12.17% 14.72% 19.84%
Average note balance...... $ 2,104 $ 2,072 $ 1,856 $ 1,677 $ 1,831
Number of notes........... 10,323 9,073 10,424 12,052 13,843
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 "Item 1. 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."
11
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, 2004,
2003, 2002, 2001 and 2000:
As of, and For the Years Ended September 30,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------
(dollars in thousands)
Finance receivables
balance................ $ 198,407 $ 165,895 $ 159,011 $ 137,314 $ 127,746
Average finance
receivables ........... $ 180,858 $ 164,578 $ 149,729 $ 131,741 $ 118,901
Average interest bearing
liabilities (1)........ $ 144,179 $ 131,483 $ 125,561 $ 111,195 $ 100,614
Total finance income..... $ 54,059 $ 50,003 $ 45,884 $ 38,965 $ 34,670
Total interest expense... $ 9,063 $ 9,325 $ 9,599 $ 9,455 $ 8,334
_____________________________
(1) Averages are computed using month-end balances.
Results of Operations
Year Ended September 30, 2004 Compared to Year Ended September 30, 2003.
Finance Receivables. Our aggregate finance receivables grew 19.6% during
fiscal 2004 to $198.4 million on September 30, 2004 from $165.9 on September 30,
2003. This growth was due primarily to increases in finance receivables from our
Internet subsidiary, which receivables grew by more than $25.4 million or 43.2%
from $58.8 million in fiscal 2003 to $84.2 million in fiscal 2004. The Internet
is a lower-cost method of loan origination and proceed distribution, and we plan
to continue the growth of this distribution channel in the future.
Total Revenues. Total revenues in fiscal 2004 increased to $60.9 million
from $56.9 million in fiscal 2003, an increase of $4.0 million or 6.9%. These
revenues consisted of:
o Finance income in fiscal 2004 increased to $54.1 million from $50.0
million in fiscal 2003, an increase of $4.1 million or 8.1%. Our
average finance receivables increase 9.8% during 2004. The increase in
finance receivables was primarily attributable to an increase in our
loan originations and our average loan size due to the higher credit
worthiness of our customers with higher military rank.
o Insurance premium and commission revenues in fiscal 2004 decreased to
$5.1 million from $5.3 million in fiscal 2003, a decrease of $.2
million or 3.2%. 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.
Provision for Credit Losses. Provision for credit losses in fiscal 2004
decreased to $10.6 million from $12.2 million in fiscal 2003, a decrease of $1.6
million or 13.0%. While our average direct loan portfolio grew by 9.8%, the net
charge-offs incurred in connection with our finance receivables in fiscal 2004
decreased to $8.6 million from $9.2 million in fiscal 2003, a decrease of $.6
million or 6.5%. Net charge-offs were 4.7% of the average finance receivable
balance for fiscal 2004 compared to 5.8% in fiscal 2003. The decrease in net
charge-offs resulted from enhanced collection processes implemented in fiscal
2004. Finance receivable balances 60-days or more past due as a percentage of
finance receivables was approximately 2.9% at both September 30, 2004 and 2003.
Our allowance for credit losses at September 30, 2004 increased to $11.2 million
from $9.2 million at September 30, 2003, an increase of $2.0 million or 21.9%.
This increase reflects the 19.6% growth in our aggregate finance receivables
during fiscal 2004 and our continuing concern regarding the uncertainty
surrounding Middle-East hostilities. If this situation were to continue to
result in a protracted war, the involvement of the military personnel in armed
hostilities may increase payment delinquencies and charge-offs. See "Item 1.
Business--Factors That May Affect Future Results of Operations, Financial
Condition or Business--If a large number of our borrowers are wounded in combat,
our profits may be adversely affected."
Interest Expense. Interest expense in fiscal 2004 decreased to $9.1 million
from $9.3 million in fiscal 2003, a decrease of $.2 million or 2.8%. Our average
interest bearing liabilities increased by $12.7 million or 9.7% during fiscal
2004. However, this increase was offset by decreased interest rates. The
weighted average interest rate on our debt declined to 6.3% in fiscal 2004 from
7.1% in fiscal 2003.
12
Operating Expenses. Operating expenses in fiscal 2004 increased to $32.1
million from $29.3 million in fiscal 2003, an increase of $2.8 million or 9.5%.
This increase was primarily due to a growth in employment costs of $1.9 million
at our Internet subsidiary to accommodate the significant growth in our direct
lending. To better leverage the Pioneer Services brand we engaged in more
national and regional corporate sponsorships throughout the year, which caused a
$.5 million increase in our marketing expenses.
Net Income. In fiscal 2004, income before income taxes was $9.1 million and
net income was $6.0 million as compared to fiscal 2003 income before income
taxes of $6.1 million and net income of $4.0 million.
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 5.6% of the average finance
receivable balance in fiscal 2003 compared to 5.9% 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 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.
13
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.
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,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
--------- ----------- ---------- ---------- --------
(dollars in thousands)
Finance receivables
balance................ $ 198,407 $ 165,895 $ 159,011 $ 137,314 $ 127,746
Finance receivables
balances 60 days or
more past due.......... $ 5,863 $ 4,836 $ 5,580 $ 6,369 $ 5,176
Finance receivables
balances 60 days or
more past due as a
percent of finance
receivables............ 2.95% 2.92% 3.51% 4.64% 4.05%
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.
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 finance receivable portfolio is described in "--Critical Accounting
Policies".
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 45% 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 in the percentage of net charge-offs to average monthly balance
outstanding resulted primarily from more effective collection efforts.
14
As of, and For the Years Ended, September 30,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-------- --------- -------- -------- -------
(dollars in thousands)
Direct Loans:
Loans charged-off...... $ 9,951 $ 10,287 $ 9,555 $ 8,752 $ 7,791
Less recoveries........ 1,352 1,048 869 1,080 965
-------- --------- -------- -------- -------
Net charge-offs........ $ 8,599 $ 9,239 $ 8,686 $ 7,672 $ 6,826
======== ========= ======== ======== =======
Average monthly balance
outstanding (1)........ $160,829 $145,511 $130,223 $108,939 $95,780
Percentage of net charge-offs
to average monthly balance
outstanding............ 5.35% 6.35% 6.67% 7.04% 7.13%
________________________
(1) Averages are computed using month-end balances.
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 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 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,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-------- --------- -------- -------- -------
(dollars in thousands)
Retail Installment Contracts:
Contracts charged-off.. $ 36 $ 83 $ 190 $ 221 $ 338
Less recoveries........ 67 154 82 217 220
-------- --------- -------- -------- -------
Net charge-offs
(recoveries).......... $ (31) $ (71) $ 108 $ 4 $ 118
======== ========= ======== ======== =======
Average monthly balance
outstanding (1)........ $ 20,028 $ 19,067 $ 19,506 $ 22,802 $23,121
Percentage of net
charge-offs to average
monthly balance
outstanding............ (0.16)% (0.37)% 0.55% 0.02% 0.51%
____________________________
(1) Averages are computed using month-end balances.
15
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,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-------- --------- -------- -------- --------
(dollars in thousands)
Average finance
receivables (1)...... $180,858 $164,578 $149,729 $131,741 $118,901
Provision for credit
losses............... $ 10,588 $ 12,168 $ 10,594 $ 8,264 $ 7,476
Net charge-offs........ $ 8,568 $ 9,168 $ 8,794 $ 7,676 $ 6,944
Net charge-offs as a
percentage of average
finance receivables.. 4.74% 5.57% 5.87% 5.83% 5.84%
Allowance for credit
losses............... $ 11,241 $ 9,221 $ 6,221 $ 4,421 $ 3,833
Allowance as a percentage
of average finance
receivables.......... 6.22% 5.60% 4.15% 3.36% 3.22%
_______________________
(1) Averages are computed using month-end balances.
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."
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,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(dollars in thousands)
Balance, beginning
of period............ $ 9,221 $ 6,221 $ 4,420 $ 3,833 $ 3,301
-------- -------- -------- -------- --------
Charge-offs:
Loans charged-off.... (9,987) (10,370) (9,745) (8,973) (8,129)
Recoveries........... 1,419 1,202 952 1,296 1,185
-------- -------- -------- -------- --------
Net charge-offs........ (8,568) (9,168) (8,793) (7,677) (6,944)
Provision for credit
losses............... 10,588 12,168 10,594 8,264 7,476
-------- -------- -------- -------- --------
Balance, end of
period............... $ 11,241 $ 9,221 $ 6,221 $ 4,420 $ 3,833
======== ======== ======== ======== ========
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.
16
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, 2004 increased to $5.9 million from $4.8 million at September
30, 2003, an increase of $1.1 million or 21.2%, as compared to the increase in
our finance receivables of 19.6%. Finance receivable balances 60-day or more
past due as a percent of finance receivables was 2.95% and 2.92% at September
30, 2004 and 2003, respectively. See "--Delinquency Experience".
Loan Origination
Our loan origination is the most important factor in determining our future
revenues. Our loan origination in fiscal 2004 increased to $237.4 million from
$188.5 million in fiscal 2003, an increase of $48.9 million or 26.0%. The
increase in our loan originations was partly due to marketing agreements
(primarily with one third party vendor) which we entered into in the first
quarter of our fiscal 2004. These third party vendors market products via the
Internet to military service members. These marketing efforts contributed $31.5
million or 64.5% of the $48.9 million overall increase in loan originations. See
"Item 1. Business--General".
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,
-----------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(dollars in thousands, except for average note amounts)
Total Loan Origination:
Gross balance........ $ 237,381 $ 188,464 $ 191,931 $ 158,594 $ 158,220
Number of finance
receivable notes..... 71,713 59,670 67,483 62,123 63,123
Average note amount.... $ 3,310 $ 3,158 $ 2,844 $ 2,553 $ 2,507
Direct Loans:
Gross balance.......... $ 217,391 $ 173,013 $ 175,932 $ 144,693 $ 134,870
Number of finance
receivable notes..... 64,939 55,075 62,532 57,576 54,558
Average note amount.... $ 3,348 $ 3,141 $ 2,813 $ 2,513 $ 2,472
Retail Installment
Contracts:
Gross balance.......... $ 19,990 $ 15,451 $ 15,999 $ 13,901 $ 23,350
Number of finance
receivable notes..... 6,774 4,595 4,951 4,547 8,565
Average note amount.... $ 2,951 $ 3,363 $ 3,231 $ 3,057 $ 2,726
Liquidity and Capital Resources
A relatively high ratio of borrowings to invested capital is customary in
consumer finance activities due to the quality and term of the assets employed.
Our principal use of cash is to make new loans and purchase retail installment
contracts. We use our borrowings to fund the difference between the cash used to
make new loans and purchase retail installment contracts, and the cash generated
from loan repayments and operations. This amount is generally our cash used in
investing activities. Cash used in investing activities in fiscal 2004 was
approximately $43.2 million, compared to $16.8 million in fiscal 2003. This
increase is primarily due to the growth in our loan originations, which grew by
approximately $48.9 million or 26.0%.
Investing activities in fiscal 2004 were primarily funded by $18.5 million
from operating activities and $24.7 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. 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.
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, ten (10) 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
17
September 30, 2004, we could request up to approximately $21.6 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 March 31, 2004, all the banks
of that are a party to our senior lending agreement have indicated in writing
their willingness to participate in fundings up to an aggregate of $200.0
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 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 $20.0 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.
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 and
amortizing notes. As of September 30, 2004, the outstanding balance under the
revolving credit line was approximately $12.6 million floating at prime rate, or
4.75%. 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 September 30, 2004, the
outstanding balance of the amortizing notes was approximately $121.9 million,
with interest rates fixed at 270 basis points over the ninety day moving average
of like-term Treasury notes at the time the amortizing notes were issued. All
amortizing notes have terms not to exceed 48 months, payable in equal monthly
principal and interest payments. As of September 30, 2004, we had approximately
214 amortizing notes outstanding with a weighted average maturity of
approximately 34.8 months and a weighted average interest rate of approximately
5.85%. 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 2004, the senior lending
agreement prohibits us from paying our parent more than $700,000 for strategic
planning services, professional services.
Under the senior lending agreement, 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 3.0% 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 80.0%. 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
50.0% of the cumulative positive net income earned during each of our fiscal
years ending after September 30, 2002, which approximates $17.5 million as of
September 30, 2004. 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 80.0% 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, 2004, we were in material
compliance with all loan covenants.
18
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 2.0%. At September 30, 2004,
there was $2.6 million outstanding under this credit facility with an interest
rate of 6.75%.
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)
2004 2003 2002 2001 2000
------- ------- ------ ------ ------
Revolving Credit Line (1):
Total facility....... $ 36,363 $ 31,000 $ 27,000 $ 23,000 $ 22,000
Balance at end of
year............... $ 15,234 $ 12,293 $ 12,718 $ 12,310 $ 10,851
Maximum available
credit (3)......... $ 21,129 $ 18,707 $ 14,282 $ 10,690 $ 11,149
Term Notes (2):
Total facility....... $167,000 $ 140,036 $ 125,470 $123,432 $ 99,755
Balance at end of
year............... $121,912 $ 99,471 $ 97,925 $ 83,847 $ 80,466
Maximum available
credit (3)......... $ 45,088 $ 40,565 $ 27,545 $ 39,585 $ 19,289
Total Revolving and
Term Notes (1)(2):
Total facility....... $203,363 $ 171,036 $ 152,470 $146,432 $121,755
Balance at end of
year............... $137,146 $ 111,764 $ 110,643 $ 96,157 $ 91,317
Maximum available
credit (3)......... $ 66,217 $ 59,273 $ 41,827 $ 50,275 $ 30,438
Credit facility
available (4)...... $ 21,579 $ 13,575 $ 11,589 $ 10,157 $ 7,813
Percent utilization
of the total
facility........... 67.44% 65.34% 72.60% 65.70% 75.00%
__________________________
(1) Includes revolving credit line from our parent.
(2) Includes 48-month amortizing 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 80.0%.
(4) Credit available based on the existing asset borrowing base and maintaining
a Senior Indebtedness to Net Notes Receivable Ratio of not more than 80.0%.
Outstanding Subordinated Debt. We also fund our liquidity needs through the
sale of our 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,
2004, we had issued approximately $23.2 million of these debentures at a
weighted average interest rate of 9.45%.
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.
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.
19
Critical Accounting Policies
General. 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. 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.
Allowance for Credit Losses and Provision for Credit Losses. 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.
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.
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, 2004 and provision for credit
losses and net income for fiscal 2004 would have changed as follows:
Increase (decrease)
----------------------------
(in thousands)
Highest Lowest
------- ------
Allowance for credit losses.......... $ 220 $(1,756)
Provision for credit losses.......... $ 220 $(1,756)
Net income........................... $(141) $1,124
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.
20
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."
Contractual Obligation. We have the following payment obligations under
current financing and leasing arrangements as of September 30, 2004:
Payments Due By Period
----------------------------------------------------------------
Less than
Contractual Obligations: Total 1 year 1-3 years 4-5 years After 5 years
-------------- ------------ ------------ ------------ -------------
Long-term debt................... $ 145,134,416 $ 52,559,195 $ 66,549,981 $ 17,191,467 $ 8,833,773
Operating leases................. 6,253,775 1,077,117 2,321,637 2,256,488 598,533
-------------- ------------ ------------ ------------ -------------
Total contractual cash
obligations................... $ 151,388,191 $ 53,636,312 $ 68,871,618 $ 19,447,955 $ 9,432,306
============== ============ ============ ============ =============
Amount of Commitment Expiration Per Period
----------------------------------------------------------------
Other Commercial Commitments: Total Amounts Less than
Committed 1 year 1-3 years 4-5 years Over 5 years
-------------- ------------ ------------ ------------ ------------
Lines of credit.................. $ 15,233,823 $ 15,233,823(1) --- --- ---
- --------------------------
(1) Includes $2,613,823 owed to our parent.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Risk Management
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.
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 2005, assuming
adjustments to, or refinancing at, rates available to us at September 30, 2004.
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........... $ (252,400) $ (126,200) $ 0 $ 126,200 $ 252,400
Amortizing term notes........... (839,175) (370,362) (98,451) 567,264 1,036,077
Junior subordinated debt........ (110,719) (53,940) (2,839) 59,618 116,397
----------- ----------- ----------- ----------- ------------
Total impact on interest
expense................ $(1,202,294) $ (550,502) $ (101,290) $ 753,082 $ 1,404,874
=========== =========== =========== =========== ============
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
22
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm...... 24
Consolidated Balance Sheets September 30, 2004 and 2003...... 25
Consolidated Statements of Income for the years ended 26
September 30, 2004, 2003 and 2002............................
Consolidated Statements of Retained Earnings for the years 27
ended September 30, 2004, 2003 and 2002......................
Consolidated Statements of Cash Flows for the years ended 28
September 30, 2004, 2003 and 2002............................
Notes to Consolidated Financial Statements................... 29
23
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its
operations and its cash flows for each of the years in the three-year period
ended September 30, 2004 in conformity with accounting principles generally
accepted in the United States of America.
BKD, LLP
Kansas City, Missouri
November 4, 2004
24
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND 2003
ASSETS
2004 2003
--------------- ---------------
Cash and cash equivalents $ 2,078,178 $ 2,039,109
Other investments 2,055,923 1,962,614
Finance receivables:
Direct receivables 176,691,292 147,095,062
Retail installment contracts 21,715,543 18,799,693
--------------- ---------------
Finance receivables before allowance
for credit losses 198,406,835 165,894,755
Allowance for credit losses (11,240,868) (9,220,868)
--------------- ---------------
Net finance receivables 187,165,967 156,673,887
Furniture and equipment, net 1,539,838 1,266,121
Unamortized computer software 1,225,146 200,956
Deferred income taxes 3,692,100 3,364,700
Prepaid and other assets 514,801 334,859
--------------- ---------------
Total assets $ 198,271,953 $ 165,842,246
=============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
Revolving credit line - banks $ 12,620,000 $ 10,580,000
Revolving credit line - affiliate 2,613,823 1,712,841
Accounts payable 2,012,486 945,038
Accrued expenses and other liabilities 9,997,410 10,940,246
Amortizing term notes 121,912,164 99,471,296
Investment notes 23,222,252 21,436,745
--------------- ---------------
Total liabilities 172,378,135 145,086,166
--------------- ---------------
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 24,180,218 19,042,480
--------------- ---------------
Total stockholder's equity 25,893,818 20,756,080
--------------- ---------------
Total liabilities and stockholder's equity $ 198,271,953 $ 165,842,246
=============== ===============
See Notes to Consolidated Financial Statements
25
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
2004 2003 2002
------------- -------------- -------------
Revenue
Finance income $ 54,058,834 $ 50,003,315 $ 45,883,890
Insurance premiums
and commissions 5,120,498 5,287,574 4,651,960
Other income, fees
and commissions 1,695,854 1,645,888 1,754,713
------------- -------------- -------------
Total revenue 60,875,186 56,936,777 52,290,563
Provision for credit losses 10,587,502 12,167,529 10,593,540
Interest expense 9,063,272 9,325,322 9,598,667
------------- -------------- -------------
Net revenue 41,224,412 35,443,926 32,098,356
Operating expenses
Employee costs 20,661,557 18,762,187 17,039,136
Facilities 4,988,827 4,997,806 6,141,365
Marketing 2,532,868 2,063,488 1,559,167
Professional fees and other 3,917,252 3,501,576 2,849,584
------------- -------------- -------------
Total operating expenses 32,100,504 29,325,057 27,589,252
------------- -------------- -------------
Income before income taxes 9,123,908 6,118,869 4,509,104
Provision for income taxes 3,136,053 2,139,000 1,645,000
------------- -------------- -------------
Net income $ 5,987,855 $ 3,979,869 $ 2,864,104
============= ============== =============
Net income per share, basic and
diluted $ 349.43 $ 232.25 $ 167.14
============= ============== =============
See Notes to Consolidated Financial Statements
26
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended September 30,
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Retained earnings, beginning of year $ 19,042,480 $ 15,606,679 $ 13,147,497
Net income 5,987,855 3,979,869 2,864,104
Dividends paid ($49.61, $31.75 and $23.63 per share) (850,117) (544,068) (404,922)
------------- ------------- -------------
Retained earnings, end of year $ 24,180,218 $ 19,042,480 $ 15,606,679
============= ============= =============
See Notes to Consolidated Financial Statements
27
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
-------------------------------------------------
2004 2003 2002
--------------- ------------- --------------
Cash Flows from Operating Activities:
Net income $ 5,987,855 $ 3,979,869 $ 2,864,104
Items not requiring (providing) cash:
Provision for credit losses on
finance receivables 10,587,502 12,167,528 10,593,540
Depreciation and amortization 687,296 735,784 1,165,973
Compounded interest added to
investment notes 1,203,862 1,190,811 1,111,331
Deferred income taxes (327,400) (1,033,700) (718,900)
Loss on disposal/donation of equipment 4,318 47,794 16,845
Changes in:
Accounts payable and accrued
expenses 531,441 812,819 1,066,145
Other (179,942) (56,705) 222,588
--------------- ------------- --------------
Net cash provided by operating
activities 18,494,932 17,844,200 16,321,626
--------------- ------------- --------------
Cash Flows from Investing Activities:
Loans originated (150,192,310) (120,036,891) (123,772,782)
Loans purchased (18,496,705) (15,451,391) (15,998,887)
Loans repaid 127,609,433 119,437,177 109,280,600
Capital expenditures (1,980,760) (661,840) (600,653)
Securities purchased (502,070) (317,970) (518,997)
Securities matured 400,000 213,000 383,635
--------------- ------------- --------------
Net cash used in investing activities (43,162,412) (16,817,915) (31,227,084)
--------------- ------------- --------------
Cash Flows from Financing Activities:
Net borrowing under lines of credit 2,534,153 10,642 641,414
Proceeds from borrowings 70,660,132 45,850,802 52,852,841
Repayment of borrowings (47,637,619) (45,455,415) (39,461,911)
Dividends paid (850,117) (544,068) (404,922)
--------------- ------------- --------------
Net cash provided by (used in)
financing activities 24,706,549 (138,039) 13,627,422
--------------- ------------- --------------
Net Increase/(Decrease) in Cash 39,069 888,246 (1,278,036)
Cash, Beginning of Year 2,039,109 1,150,863 2,428,899
--------------- ------------- --------------
Cash, End of Year $ 2,078,178 $ 2,039,109 $ 1,150,863
=============== ============= ==============
Additional Cash Flow Information:
Interest paid $ 7,759,735 $ 8,191,261 $ 8,462,313
Income taxes paid $ 4,538,865 $ 2,867,426 $ 3,047,633
See Notes to Consolidated Financial Statements
28
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004, 2003 AND 2002
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 approximately $204,900 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 accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported 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.
Cash Equivalents
- ----------------
The Company considers all liquid investments to be cash equivalents, which
consisted of a money market account at September 30, 2004 and 2003. From time to
time, the Company's cash accounts exceed federally insured limits.
Investments
- -----------
Investments consist primarily of certificates of deposit, amounting to $357,018
and $356,436 and debt securities, amounting to $1,698,905 and $1,606,178 at
September 30, 2004 and 2003, 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, 2004, $237,888
matures in less than one year and $1,461,017 matures between one and five years.
The recorded value of these investments approximates fair value at September 30,
2004 and 2003. Investments aggregating $1,855,923 and $1,862,614 at September
30, 2004 and 2003, respectively, were required as statutory reserves and are on
deposit with regulatory authorities or maintained in trust accounts.
29
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. Annual depreciation is computed using the
straight-line method. At September 30, 2004 and 2003, accumulated depreciation
was $3,153,661 and $2,848,330, 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.
30
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
- -------------------------------
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets to be held and
used is measured by comparison of the carrying amount of the asset to future net
cash flows expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amounts of the assets exceed the fair value less costs to
sell. The Company has not reported any provision for impairment of long-lived
assets.
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, 2004 and 2003, finance receivables totaled $198,406,835 and
$165,894,755, respectively; all receivables originated from direct loans and
retail installment contracts. Direct loans originated in 2004 and 2003 averaged
$3,348 and $3,141 with a weighted maturity of 26.1 and 25.7 months,
respectively, while retail installment contracts averaged $2,951 and $3,363 with
a weighted maturity of 26.9 and 29.6 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, 2004 and 2003. At September 30, 2004 and 2003, the accrual of
interest income had been suspended on $5,862,643 and $4,836,146 of loans,
respectively.
At September 30, 2004 and 2003, the fair value of notes receivable approximates
book value.
31
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: FINANCE RECEIVABLES (Continued)
Allowance for Credit Losses
- ---------------------------
Changes in the allowance for credit losses are as follows:
For the Year Ended September 30,
------------------------------------------------
2004 2003 2002
------------ ------------- ------------
Balance, beginning of year $ 9,220,868 $ 6,220,869 $ 4,420,869
------------ ------------- ------------
Charge-offs:
Loans charged off (9,987,389) (10,370,150) (9,744,584)
Recoveries 1,419,887 1,202,621 951,044
------------ ------------- ------------
Net charge-offs (8,567,502) (9,167,529) (8,793,540)
Provision for credit losses 10,587,502 12,167,528 10,593,540
------------ ------------- ------------
Balance, end of year $ 11,240,868 $ 9,220,868 $ 6,220,869
============ ============= ============
NOTE 3: BORROWINGS
Senior Lending Agreement
- ------------------------
On September 30, 2004, 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, 2004,
the Company had the ability to request up to $200.0 million in the form of
revolving credit lines and amortizing 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, 2004, pursuant to the terms of the senior
lending agreement, the Company could request up to $21,579,481 in additional
funds from ten banks. No bank, however, has any contractual obligation to lend
the Company these additional funds. This senior lending agreement matures
October 1, 2005.
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, 2004,
10 banks indicated in writing their willingness to participate in fundings up to
an aggregate of $200.0 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. 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 from the bank
electing not to participate would be repayable according to their original
terms.
32
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: BORROWINGS (Continued)
Advances outstanding under the revolving credit line were $12,620,000 and
$10,580,000 at September 30, 2004 and 2003, 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 4.75% at September 30, 2004. At September 30, 2004 and 2003,
the aggregate balance outstanding under amortizing notes was $121,912,164 and
$99,471,296, 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. There were 214 and 206 amortizing and term notes outstanding at
September 30, 2004 and 2003 with a weighted average interest rate of 5.85% and
6.43%, 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 3% 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
$12.5 million plus 50% of the cumulative net income during each fiscal year
ending after September 30, 2002 ($17,483,862 at September 30, 2004). 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. As of September 30, 2004 the
Company is in material compliance with all loan covenants.
Parent Company Line of Credit
- -----------------------------
The Company has an unsecured revolving line of credit for the amount equal to
the greater of two million dollars or 2.5% of the outstanding principle amount
of senior debt from its sole shareholder, Pioneer Financial Industries, Inc.,
which is due upon demand. The maximum outstanding principal was $3,363,304 at
September 30, 2004. Advances outstanding under this revolving line of credit
were $2,613,823 and $1,712,841 at September 30, 2004 and 2003, respectively.
Interest is charged at prime plus 2% (6.75% at September 30, 2004) and is
payable monthly.
Investment Notes
- ----------------
The Company has also borrowed through the issuance of investment notes with an
outstanding balance of $23,222,252 and $21,436,745 at September 30, 2004 and
2003, respectively. The investment notes 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
notes upon 30 days written notice. All notes are renewable for a like term at
the prevailing interest rate, unless presented for payment. The average note
size was $24,114 and $23,609, with a weighted interest rate of 9.45% and 9.51%
at September 30, 2004 and 2003, 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 the investment notes on a continuous basis. On January 13, 2004, the
Securities and Exchange Commission declared the Company's post-effective
amendment effective.
33
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: BORROWINGS (Continued)
The retainment percentages for the notes maturing in 2004 and 2003 are as
follows:
Fiscal Total Retainment
Year Retained Amount Due Percentage
------ ---------- ---------- ----------
2004 $1,635,342 $3,174,757 51.51%
2003 $ 659,700 $2,409,359 27.38%
Maturities
- ----------
A summary of maturities for the amortizing notes and investment
notes at September 30, 2004, follows:
Amortizing Investment
Term Notes Notes Total
------------- ------------ ------------
2005 $ 46,881,304 $ 5,677,891 $ 52,559,195
2006 37,328,953 2,350,047 39,679,000
2007 25,154,964 1,716,017 26,870,981
2008 12,359,730 2,129,461 14,489,191
2009 187,213 2,515,063 2,702,276
2010 - 1,683,649 1,683,649
2011 - 2,444,729 2,444,729
2012 - 1,816,035 1,816,035
2013 - 513,077 513,077
2014 and thereafter - 2,376,283 2,376,283
------------- ------------ ------------
Total 2004 $ 121,912,164 $ 23,222,252 $145,134,416
============= ============ ============
At September 30, 2004 and 2003, the fair value of borrowings approximates book
value.
NOTE 4: INCOME TAXES
The provision for income taxes included in the accompanying consolidated
statements of income consists of the following:
2004 2003 2002
---------- ----------- -----------
Taxes currently payable $3,463,453 $ 3,172,700 $ 2,363,900
Deferred income taxes (327,400) (1,033,700) (718,900)
---------- ----------- -----------
Total provision $3,136,053 $ 2,139,000 $ 1,645,000
========== =========== ===========
The tax effects of temporary differences related to deferred taxes shown on the
September 30, 2004 and 2003 consolidated balance sheets are as follows:
2004 2003
----------- -----------
Deferred tax assets:
Allowance for credit losses $ 4,046,700 $ 3,319,500
Accumulated depreciation (277,900) 8,100
Other (76,700) 37,100
----------- -----------
Net deferred tax asset $ 3,692,100 $ 3,364,700
=========== ===========
34
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INCOME TAXES (Continued)
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:
2004 2003 2002
----------- ----------- -----------
Provision for federal income taxes at statutory rate $ 3,100,071 $ 2,080,415 $ 1,533,095
Increase (decrease) in income tax provision resulting
from:
State and local income taxes, net of federal tax
benefit 37,754 47,478 39,232
Nondeductible expenses and other (1,772) 11,107 72,673
----------- ----------- -----------
Provision for income taxes $ 3,136,053 $ 2,139,000 $ 1,645,000
============ =========== ===========
NOTE 5: INTANGIBLE ASSETS
The carrying basis of recognized intangible assets (computer software) at
September 30, 2004 and 2003 were $2,507,966 and $1,296,685, respectively, and
the related accumulated amortization was $1,282,820 and $1,095,729,
respectively.
Amortization expense for the years ended September 30, 2004, 2003 and 2002 was
$187,091, $210,271 and $242,180, respectively. Amortization expense for the
years ending September 30, 2005, 2006 and 2007 is estimated to be $459,231,
$411,224 and $354,691, respectively.
NOTE 6: 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, 2004, 2003 and 2002
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 2004, 2003 and 2002, the Company made interest payments on this debt of
$145,313, $121,346 and $132,856, respectively.
During fiscal 2004, 2003 and 2002, the Company paid $694,663, $695,578, and
$734,596, respectively, to PFI for strategic planning, professional services and
service charges. 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 dated September 21, 2001, which automatically
renews annually, the Company sells health discount cards through its retail
sales offices on a commission basis. These health discount cards were developed
and procured through vendors by PFI and provided to the Company through a sales
agent agreement. The Company retains a commission for the sale of each card and
remits the remainder to PFI. The amount remitted to PFI was $529,808, $491,340
and $392,619 in fiscal 2004, 2003 and 2002, respectively, which approximates
costs. The Company's commissions on the sale of health cards were $794,821,
$717,767 and $675,483 in fiscal 2004, 2003 and 2002, respectively.
During fiscal 2003 and 2002, the Company paid PFI a fee of approximately $100
for each loan customer referral for its Germany operations. Fees paid in fiscal
2003 and 2002 aggregated $597,715 and $556,651, respectively, which approximated
the cost of identifying and making these referrals. On September 30, 2003, the
Company purchased the German subsidiary from PFI.
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 2004, 2003 and 2002, payments under
these leases totaled $190,488, $192,389 and $226,929, respectively.
35
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: RELATED PARTY TRANSACTIONS (Continued)
The Company leased a building from PFI. The lease expired September 30, 2003.
Payments under the lease during fiscal 2003 and 2002 were $144,000 and $139,500,
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 2004, the royalty averaged $2.65
per loan, and aggregated $170,356. In fiscal 2003 and 2002, the royalty averaged
$2.47 and $2.29 per loan, and aggregated $135,786 and $143,263, respectively.
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,
2004 or 2003.
NOTE 7: LEASE OBLIGATIONS
At September 30, 2004, the Company was obligated under non-cancelable operating
leases covering its facilities and certain equipment expiring through 2010.
Aggregate minimum annual rentals payable are summarized as follows:
Year Ending September 30:
2005 $ 1,077,117
2006 1,137,972
2007 1,183,665
2008 1,234,329
2009 1,022,159
Thereafter 598,533
The minimum rentals shown above do not include rents payable on a
"month-to-month" or "cancelable" basis. Rental expense charged against
operations totaled $1,590,200, $1,701,984 and $1,604,230, for the fiscal years
ended September 30, 2004, 2003 and 2002, respectively. Included in these amounts
were $190,488, $336,389 and $366,429, for the fiscal years ended September 30,
2004, 2003 and 2002, respectively, paid to related parties.
NOTE 8: PROFIT-SHARING PLAN
The Company participates in a profit-sharing plan, which 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. In fiscal 2004 and 2003, the Company
matched 33.3% 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 $901,466, $705,321 and $656,022, for the years
ended September 30, 2004, 2003 and 2002, respectively.
NOTE 9: LITIGATION
The Company is subject to claims and lawsuits that arise 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.
36
ITEM 9A. 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.
PART III
ITEM 10. DIRECTORS and EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding each person who serves
as a director or executive officer of Pioneer as of September 30, 2004:
Name Age Position
---- --- --------
William D. Sullivan 67 Chairman, Chief Executive Officer and sole Director
Thomas H. Holcom, Jr. 58 President and Chief Operating Officer
Randall J. Opliger 47 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.
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
2004 exceeded $100,000. As sole director, Mr. Sullivan has determined executive
compensation with input from Mr. Holcom, as President and Chief Operating
Officer.
37
SUMMARY COMPENSATION TABLE
Annual Compensation
---------------------------------------------
Other Annual
Name and Salary Bonus Compensation
Principal Position Year ($) ($) ($)
- ------------------ ---- -------- -------- ------------
William D. Sullivan, 2004 $402,839 $300,000 $3,539 (1)
Chief Executive Officer 2003 $352,934 $250,000 $1,491 (1)
2002 $320,849 $250,000 $1,320 (1)
Thomas H. Holcom, Jr., 2004 $242,999 $335,000 $ 732 (1)
President and Chief Operating Officer 2003 $233,999 $320,000 $ 685 (1)
2002 $233,999 $300,000 $ 685 (1)
Randall J. Opliger, 2004 $106,386 $120,000
Chief Financial Officer, Treasurer and 2003 $ 98,078 $ 80,000
Secretary 2002 $ 90,000 $ 90,047
- ---------------
(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, 2004, 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, Inc. is
955 South Virginia Avenue, Suite 116, Reno, Nevada 89502. Pioneer Financial
Industries, Inc. 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, 2004, as the trustee or beneficiary of various trusts,
William D. Sullivan had sole or shared voting or investment power over 159,420
shares, or 88.6%, 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 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, Inc and its subsidiaries. We then
lease or purchase these products and services from them.
At September 30, 2004, we had borrowed $2,613,823 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 2.0%. During fiscal 2004, 2003 and 2002, we made interest payments on
this debt in the amount of $145,313, $121,346 and $132,856, respectively.
During fiscal 2004, 2003 and 2002, we paid $694,663, $695,578 and $734,596,
respectively, to our parent and its subsidiaries for strategic planning,
professional services and service charges, including (i) $0, $157,995 and
$187,596, respectively, paid to Pioneer Licensing Services, Inc. ("PLS"), to
acquire, develop and maintain intellectual property assets
38
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) $192,663, $110,000, and $120,000, respectively, paid to Penwith
Corporation ("Penwith") for strategic planning and professional services,
including product identification and procurement. On September 30, 2003, as part
of a corporate re-alignment, the Company purchased PLS from our parent Pioneer
Financial Industries, Inc. The purchase price paid was approximately $106,000,
which equaled the carrying amounts of the net assets of PLS.
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 2004, 2003 and 2002, we paid ASB a
total of $529,808, $491,340, and $392,619, respectively, in commissions and we
retained a total of $794,821, $717,767 and $675,483, respectively. The amount
remitted to ASB approximates its costs.
Pioneer Sales Services, GmbH ("PSS"), a Germany subsidiary, receives a fee
of approximately $100 for each loan customer it refers to one of our lending
subsidiaries. During fiscal 2003 and 2002, we paid this entity $597,715 and
$556,651, respectively, which approximates its cost of identifying and making
these referrals. On September 30, 2003, as part of a corporate re-alignment, the
Company purchased PSS from our parent Pioneer Financial Industries, Inc. The
purchase price paid was approximately $41,900, which equaled to the carrying
amounts of the net assets of PSS.
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 2004, 2003 and 2002, payments under these leases totaled $190,488,
$192,389 and $226,929, respectively.
Prior to this fiscal 2004, we rented a building from Westport Investment
Corp. ("Westport"), a subsidiary of our parent. The lease expired on September
30, 2003. During fiscal 2003 and 2002, we made lease payments to Westport in the
amount of $144,000 and $139,500, 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 2004, the royalty averaged $2.62 per loan, and Mr. Sullivan
received a total of $170,356 in royalty payments. In fiscal 2003 and 2002, the
royalty averaged $2.47 and $2.29 per loan, respectively, with Mr. Sullivan
receiving a total of $135,786 and $143,263 in royalty payments, respectively.
The table below summarizes our transactions with affiliated parties:
Year Ended September 30,
---------------------------------------
Person 2004 2003 2002
------ ---------- ---------- ----------
Interest paid on line of credit.................. PFI $ 145,313 $ 121,346 $ 132,856
Professional services, strategic planning and
service charges................................ PFI 502,000 427,583 427,000
Develop and maintain intellectual property....... PLS 0 157,995 187,596
Product identification and procurement........... Penwith 192,663 110,000 120,000
Net proceeds from the sale of prepaid cellular
phones and phone cards......................... Penwith 0 0 10,745
Commission on health discount cards.............. ASB 529,808 491,340 392,619
Loan customer referrals.......................... PSS 0 597,715 556,651
Lease payments for office equipment, signs,
vehicles....................................... Midstate 190,488 192,389 226,929
Rent expenses.................................... Westport 0 144,000 139,500
Royalty payments for use of copyrighted form..... Mr. Sullivan 170,356 135,786 143,263
---------- ---------- ----------
Total payments to affiliates..................... $1,730,628 $2,378,154 $2,337,159
========== ========== ==========
39
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered in fiscal
years 2004 and 2003, respectively, by BKD, LLP for the audit of the Company's
annual financial statements and the review of the financial statements included
in our quarterly reports on Form 10-Q were $60,328 and $38,429, respectively.
Audit-Related Fees
The aggregate fees billed for audit-related services rendered in fiscal
years 2004 and 2003, respectively, by BKD, LLP, which are not reported under
"Audit Fees" above were $1,263 and $25,005, respectively. These fees were
primarily for assistance and review of our initial S-1 registration filing.
Tax Fees
The aggregate fees billed for tax services rendered in fiscal years 2004
and 2003, respectively, by BKD, LLP were $40,110 and $33,967, respectively.
These fees were primarily for preparation of federal and state taxes returns.
40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as exhibits to this annual report:
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 Amended and Restated Indenture dated as of December 15, 2004
(Incorporated by reference to Exhibit 4.1 of the Post Effective
Amendment No. 2 to the Registration Statement filed with the
Securities and Exchange Commission dated December 17, 2004 (Commission
No. 333-103293) ("Post Effective Amendment No.2").
4.2 Form of investment note certificate (Incorporated by reference to
Exhibit 4.2 of the Post Effective Amendment No. 2).
4.3 Form of junior subordinated 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).
4.9 Amended and Restated Senior Lending Agreement dated October 1, 2003
among the Company and various banks named therein (Incorporated by
reference to Exhibit 4.9 of the Post Effective Amendment No. 1 to the
Registration Statement filed with the Securities and Exchange
Commission dated December 12, 2003 (Commission No. 333-103293) ("Post
Effective Amendment No.1").
4.10 Promissory Note dated October 1, 2003 between the Company and Pioneer
Financial Industries, Inc.
4.11 Form of Rate Supplement (Incorporated by reference to Exhibit 4.11 of
the Post Effective Amendment No. 2).
4.12 Form of IRA Application (Incorporated by reference to Exhibit 4.12 of
the Post Effective Amendment No. 2).
4.13 Form of Offer to Purchase (Incorporated by reference to Exhibit 4.13
of the Post Effective Amendment No. 2).
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 Post Effective Amendment No. 1).
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 Post Effective Amendment No. 1).
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 Post Effective Amendment No. 1).
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 Post Effective Amendment No. 1).
12 Statement regarding computation of ratios (Incorporated by reference
to Exhibit 12 of the Post Effective Amendment No. 2).
21 Subsidiaries of the Company (Incorporated by reference to Exhibit 21
of the Post Effective Amendment No. 1).
31.1 Certificate of the Chief Executive Officer of Pioneer Financial
Services, Inc. dated December 21, 2004 for the Annual Report on Form
10-K for the year ended September 30, 2004.
31.2 Certificate of the Chief Financial Officer of Pioneer Financial
Services, Inc. dated December 21, 2004 for the Annual Report on Form
10-K for the year ended September 30, 2004.
32.1 18 U.S.C. Section 1350 Certification of Chief Executive Officer of
Pioneer Financial Services, Inc. dated December 21, 2004.
41
32.2 18 U.S.C. Section 1350 Certification of Chief financial Officer of
Pioneer Financial Services, Inc. dated December 21, 2004.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ WILLIAM D. SULLIVAN
--------------------------------
William D. Sullivan
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ WILLIAM D. SULLIVAN Chief Executive Officer December 21, 2004
- ------------------------------ and Sole Director
William D. Sullivan (Principal Executive Officer)
/s/ RANDALL J. OPLIGER Chief Financial Officer, December 21, 2004
- ------------------------------ Treasurer and Secretary
Randall J. Opliger (Principal Financial Officer
and Principal Accounting Officer)
43
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 Amended and Restated Indenture dated as of December 15, 2004
(Incorporated by reference to Exhibit 4.1 of the Post Effective
Amendment No. 2 to the Registration Statement filed with the
Securities and Exchange Commission dated December 17, 2004 (Commission
No. 333-103293) ("Post Effective Amendment No.2").
4.2 Form of investment note certificate (Incorporated by reference to
Exhibit 4.2 of the Post Effective Amendment No. 2).
4.3 Form of junior subordinated 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).
4.9 Amended and Restated Senior Lending Agreement dated October 1, 2003
among the Company and various banks named therein (Incorporated by
reference to Exhibit 4.9 of the Post Effective Amendment No. 1 to the
Registration Statement filed with the Securities and Exchange
Commission dated December 12, 2003 (Commission No. 333-103293) ("Post
Effective Amendment No.1").
4.10 Promissory Note dated October 1, 2003 between the Company and Pioneer
Financial Industries, Inc.
4.11 Form of Rate Supplement (Incorporated by reference to Exhibit 4.11 of
the Post Effective Amendment No. 2).
4.12 Form of IRA Application (Incorporated by reference to Exhibit 4.12 of
the Post Effective Amendment No. 2).
4.13 Form of Offer to Purchase (Incorporated by reference to Exhibit 4.13
of the Post Effective Amendment No. 2).
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 Post Effective Amendment No. 1).
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 Post Effective Amendment No. 1).
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 Post Effective Amendment No. 1).
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 Post Effective Amendment No. 1).
12 Statement regarding computation of ratios (Incorporated by reference
to Exhibit 12 of the Post Effective Amendment No. 2).
21 Subsidiaries of the Company (Incorporated by reference to Exhibit 21
of the Post Effective Amendment No. 1).
31.1 Certificate of the Chief Executive Officer of Pioneer Financial
Services, Inc. dated December 21, 2004 for the Annual Report on Form
10-K for the year ended September 30, 2004.
31.2 Certificate of the Chief Financial Officer of Pioneer Financial
Services, Inc. dated December 21, 2004 for the Annual Report on Form
10-K for the year ended September 30, 2004.
32.1 18 U.S.C. Section 1350 Certification of Chief Executive Officer of
Pioneer Financial Services, Inc. dated December 21, 2004.
32.2 18 U.S.C. Section 1350 Certification of Chief financial Officer of
Pioneer Financial Services, Inc. dated December 21, 2004.
44