Prospectus Supplement Dated February 14, 2005 Filed Pursuant to Rule 424(b)(3)
to Prospectus Dated February 10, 2005 of Registration Number 333-103293
Pioneer Financial Services, Inc.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended: December 31, 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
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant has (1) filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of December 31, 2004
----- -----------------------------------
Common Stock, $100 par value 17,136 shares
PIONEER FINANCIAL SERVICES, INC.
FORM 10-Q
December 31, 2004
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item No. Page
1. Consolidated Financial Statements..........................................3
Consolidated Balance Sheets at December 31, 2004 and September 30, 2004....3
Consolidated Statements of Income for the three months ended
December 31, 2004 and 2003..................................................4
Consolidated Statements of Retained Earnings for the three months
ended December 31, 2004 and year ended September 30, 2004...................5
Consolidated Statements of Cash Flows for the three months ended
December 31, 2004 and 2003..................................................6
Condensed Notes to Consolidated Financial Statements........................7
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................8
3. Quantitative and Qualitative Disclosures About Market Risk.................16
4. Controls and Procedures....................................................16
PART II
OTHER INFORMATION
1 Legal Proceedings..........................................................17
2. Changes in Securities and Use of Proceeds..................................18
3. Defaults upon Senior Securities............................................18
4. Submission of Matters to a Vote of Security Holders........................18
5. Other Information..........................................................18
6. Exhibits ..................................................................19
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
2004 2004
------------------ ----------------
(unaudited)
Cash and cash equivalents $ 1,530,756 $ 2,078,178
Other investments 2,056,202 2,055,923
Finance receivables:
Direct receivables 194,431,575 176,691,292
Retail installment contracts 22,052,848 21,715,543
------------------ ----------------
Finance receivables before allowance
for credit losses 216,484,423 198,406,835
Allowance for credit losses (12,200,868) (11,240,868)
------------------ -----------------
Net finance receivables 204,283,555 187,165,967
Furniture and equipment, net 1,562,220 1,539,838
Unamortized computer software 1,138,172 1,225,146
Deferred income taxes 4,063,100 3,692,100
Prepaid and other assets 375,795 514,801
------------------ -----------------
Total assets $ 215,009,800 $ 198,271,953
================== =================
LIABILITIES AND STOCKHOLDER'S EQUITY
December 31, September 30,
2004 2004
----------------------- -----------------------
(unaudited)
Revolving credit line - banks $ 16,496,515 $ 12,620,000
Revolving credit line - affiliate 1,996,103 2,613,823
Accounts payable 1,353,056 2,012,486
Accrued expenses and other liabilities 10,452,834 9,997,410
Amortizing term notes 133,842,508 121,912,164
Investment notes 23,275,459 23,222,252
----------------------- -----------------------
Total liabilities $ 187,416,475 $ 172,378,135
----------------------- -----------------------
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 25,879,725 24,180,218
----------------------- -----------------------
Total stockholder's equity 27,593,325 25,893,818
----------------------- -----------------------
Total liabilities and stockholder's
equity $ 215,009,800 $ 198,271,953
======================= =======================
See Notes to Condensed Consolidated Financial Statements
3
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
December 31,
-----------------------------------
2004 2003
-----------------------------------
(unaudited)
Revenue
Finance income $ 15,394,361 $ 13,274,672
Insurance premiums
and commissions 1,304,810 1,294,981
Other income, fees
and commissions 470,532 470,854
--------------- ----------------
Total revenue 17,169,703 15,040,507
Provision for credit losses 3,304,181 2,688,645
Interest expense 2,537,038 2,203,637
--------------- ----------------
Net revenue 11,328,484 10,148,225
Operating expenses
Employee costs 5,401,796 5,427,466
Facilities 1,345,093 1,278,145
Marketing 586,706 615,519
Professional fees and other 1,053,034 801,885
--------------- ----------------
Total operating expenses 8,386,629 8,123,015
Income before income taxes 2,941,855 2,025,210
Provision for income taxes 1,041,000 728,100
--------------- ----------------
Net income $ 1,900,855 $ 1,297,110
=============== ================
Net income per share, basic
and diluted $ 110.93 $ 75.70
=============== ================
See Notes to Condensed Consolidated Financial Statements
4
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Year Ended
December 31, September 30,
-----------------------------------
2004 2004
-----------------------------------
(unaudited)
Retained earnings, beginning of period $ 24,180,218 $ 19,042,480
Net income 1,900,855 5,987,855
Dividends paid ($11.75 and $49.61 per share) (201,348) (850,117)
------------------ --------------
Retained earnings, end of period $ 25,879,725 $ 24,180,218
================== ==============
See Notes to Condensed Consolidated Financial Statements
5
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31,
2004 2003
--------------------------------
Cash Flows from Operating Activities:
Net income $ 1,900,855 1,297,110
Items not requiring (providing) cash:
Provision for credit losses on
finance receivables 3,304,181 2,688,645
Depreciation and amortization 258,354 188,644
Compounded interest added to
investment notes 279,239 248,141
Deferred income taxes (371,000) (170,171)
Changes in:
Accounts payable and accrued
expenses 397,101 (394,318)
Other 139,006 67,864
-------------- ---------------
Net cash provided by operating
activities 5,907,736 3,925,915
-------------- ---------------
Cash Flows from Investing Activities:
Loans originated (51,515,245) 39,361,820)
Loans purchased (4,918,625) (3,807,752)
Loans repaid 36,012,101 31,653,537
Capital expenditures (194,041) (166,474)
Net cash used in investing activit (20,615,810) (11,682,509)
-------------- ---------------
Cash Flows from Financing Activities:
Net borrowing under lines of credit 2,657,688 337,485
Proceeds from borrowings 24,612,956 18,341,270
Repayment of borrowings (12,908,644) (10,673,428)
Dividends paid (201,348) (167,076)
-------------- ---------------
Net cash provided by
financing activities 14,160,652 7,838,251
-------------- ---------------
Net Increase/(Decrease) in Cash (547,422) 81,657
Cash, Beginning of Period 2,078,178 2,039,109
-------------- ---------------
Cash, End of Period $ 1,530,756 2,120,766
=============== ===============
Additional Cash Flow Information:
Interest paid $ 2,361,741 $ 2,145,399
Income taxes paid $ 5,688 $ 645,344
See Notes to Condensed Consolidated Financial Statements
6
PIONEER FINANCIAL SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and December 31, 2003
(Unaudited)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Concentration
Pioneer Financial Services, Inc., a Missouri corporation (the "Company"),
is a specialized financial services company which originates and services
consumer loans and provides other products and financial services exclusively to
U.S. active duty or retired career military personnel or U.S. Department of
Defense employees. The Company's revenues are primarily earned from the making
of direct loans and the purchase of retail installment contracts. The Company
also earns revenues from commissions from the sale of credit-related insurance
placed with non-related insurance companies and from reinsurance premiums on
credit accident and health insurance. Additionally, the Company sells non-loan
related products and services, including roadside assistance programs and
discount healthcare cards.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Pioneer Financial Services, Inc. (a wholly-owned subsidiary of Pioneer Financial
Industries, Inc.) and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated from the
accompanying consolidated financial statements. Certain information and note
disclosures normally included in the Company's annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements should
be read in conjunction with the Company's annual consolidated financial
statements filed with the Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the 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.
Information with respect to December 31, 2004 and 2003, and the periods
then ended, have not been audited by the Company's independent auditors, but in
the opinion of management reflect all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the financial
condition and operations of the Company. The results of operations for the three
months ended December 31, 2004 and 2003 are not necessarily indicative of
results to be expected for the entire fiscal year. The condensed consolidated
balance sheet and retained earnings statement as of September 30, 2004 has been
derived from the Company's audited consolidated balance sheet and retained
earnings statement.
NOTE 2: NET INCOME PER SHARE
Net income per share is computed based upon the weighted-average common
shares outstanding of 17,136 during each period. There are no potentially
dilutive securities issued and outstanding.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The discussion set forth below, as well as other portions of this quarterly
report, contains forward-looking statements within the meaning of federal
securities law. Words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," "continue," "predict," or other similar words, identify
forward-looking statements. Forward-looking statements include statements
regarding our management's intent, belief or current expectation about, among
other things, trends affecting the markets in which we operate, our business,
financial condition and growth strategies. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those predicted in the forward-looking statements as a result of
various factors, including, but not limited to, those risk factors set forth in
our registration statement on Form S-1, as amended (No. 333-103293). Other
factors not identified herein could also have such an effect. If any of these
risk factors occur, they could have an adverse effect on our business, financial
condition and results of operation. When considering forward-looking statements
keep these risk factors in mind. These forward-looking statements are made as of
the date of this filing. You should not place undue reliance on any
forward-looking statement. We are not obligated to update forward-looking
statements and will not update any forward-looking statements in this Quarterly
Report to reflect future events or developments.
Overview
We originate and service consumer loans and provide other financial
products and services on a worldwide basis, exclusively to active duty or
retired career U.S. military personnel or U.S. Department of Defense employees.
We make direct loans to our customers through our network of retail sales
offices and over the Internet. We also purchase retail installment sales
contracts from retail merchants who sell consumer goods to active duty or
retired career U.S. military personnel or U.S. Department of Defense employees.
We refer to these consumer loans and retail installment contracts as finance
receivables.
Our finance receivables are effectively unsecured with fixed interest rates
and typically have a maturity of less than 48 months. During the first three
months of fiscal 2005, the size of our average finance receivable at origination
was approximately $3,310. A large portion of our customers are unable to obtain
traditional financing from banks, credit unions or savings and loan associations
due to factors such as their age, likelihood of relocation and lack of credit
history.
Further improvement of our profitability is dependent in large part upon
the growth in our outstanding finance receivables, the maintenance of loan
quality, acceptable levels of borrowing costs and operating expenses and the
ongoing introduction of innovative new products and services to our customer
base. Since September 30, 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.
Sources of Income
We earn 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.
Finance Receivables
Our finance receivables are comprised of direct loans and retail
installment contracts. The following table sets forth certain information about
the components of our finance receivables as of the ends of the periods
presented:
8
As of, and For the Three
Months Ended
December 31,
------------------------------------------------------
2004 2003
------------------------------------------------------
(dollars in thousands, except for average note balance)
Finance Receivables:
Finance receivables balance $ 216,484 $ 175,172
Average note balance $ 2,443 $ 2,188
Total finance income $ 15,394 $ 13,275
Total number of notes 88,632 80,077
Direct Loans:
Finance receivables balance $ 194,431 $ 156,576
Percent of finance receivables 89.81% 89.38%
Average note balance $ 2,500 $ 2,202
Number of notes 77,763 71,099
Retail Installment Contracts:
Finance receivables balance $ 22,053 $ 18,596
Percent of finance receivables 10.19% 10.62%
Average note balance $ 2,029 $ 2,071
Number of notes 10,869 8,978
Net Interest Margin
The principal component of our profitability is our net interest margin,
which is the difference between the interest we earn on finance receivables and
the interest we pay on borrowed funds. In some states, statutes regulate the
interest rates that we may charge our customers while in other states
competitive market conditions establish the interest rates we may charge.
Differences also exist in the interest rates we earn on the various components
of our finance receivable portfolio.
Unlike our interest income, our interest expense is sensitive to general
market interest rate fluctuations. These general market fluctuations directly
impact our cost of funds. Our general inability to increase the interest rates
earned on new and existing finance receivables restricts our ability to react to
increases in our cost of funds. Accordingly, increases in market interest rates
generally will narrow our interest rate spread and lower our profitability,
while decreases in market interest rates generally will widen our interest rate
spread and increase our profitability. An increase in market interest rates may
result in a reduction in our profitability and impair our ability to pay
interest and principal on the notes.
The following table presents important data relating to our net interest
margin as of the ends of the periods presented:
9
As of, and For the Three
Months Ended
December 31,
-----------------------------
2004 2003
-----------------------------
(dollars in thousands)
Finance receivables balance $ 216,484 $ 175,172
Average finance receivables (1) $ 208,915 $ 171,092
Average interest bearing liabilities (1) $ 162,579 $ 134,520
Total finance income $ 15,394 $ 13,275
Total interest expense $ 2,537 $ 2,204
- ---------------------------------------
(1) Averages are computed using month-end balances.
Results of Operations
Three Months Ended December 31, 2004 Compared to Three Months Ended
December 31, 2003
Finance Receivables. Our aggregate finance receivables increased 9.1%
during the first quarter of fiscal 2005 to $216.5 million on December 31, 2004
from $198.4 million on September 30, 2004. Increased loan originations in the
first quarter of fiscal 2005 generated the highest quarterly gain in finance
receivables in our company history. This increase was due primarily to increases
in finance receivables from the Internet, which grew by more than $12.2 million
or 14.5%. The Internet is a lower-cost method of loan origination and proceeds
distribution, and we plan to continue the growth of this distribution channel in
the future.
Total Revenues. Total revenues in the first quarter of fiscal 2005
increased to $17.2 million from $15.0 million in the first quarter of fiscal
2004, an increase of $2.2 million or 14.2%. This increase was primarily due to
an increase in average finance receivables to $208.9 million in the first
quarter of fiscal 2005 from $171.1 million in the first quarter fiscal 2004, an
increase of 22.1%.
Provision for Credit Losses. The provision for credit losses in the first
quarter of fiscal 2005 increased to $3.3 million from $2.7 million in the first
quarter of fiscal 2004, an increase of $.6 million or 22. 9%. Net charge-offs of
finance receivables in the first quarter of fiscal 2005 increased to $2.3
million from $2.2 million in the first quarter of fiscal 2004, an increase of
$.1 million or 4.5%. Net charge-offs as a percentage of average finance
receivables for the first quarter of fiscal 2005 decreased to 4.5% from 5.2% for
the first quarter of fiscal 2004. Our allowance for credit losses at December
31, 2004 increased to $12.2 million from $11.2 million at September 30, 2004, an
increase of $1.0 million, or 8.5%. These changes reflect the increase in our
average finance receivables portfolio for the three months ended December 31,
2004, and our continuing concern regarding the uncertainty surrounding
Middle-East hostilities. See also "--Credit Loss Experience and Provision for
Credit Losses."
Interest Expense. Interest expense in the first quarter of fiscal 2005
increased to $2.5 million from $2.2 million in the first quarter of fiscal 2004,
an increase of $.3 million or 15.1%. Our average interest bearing liabilities
for the three months ended December 31, 2004 increased by $29.5 million or 21.5%
compared to the three months ended December 31, 2003. The weighted average
interest rate declined to 6.1% in the first quarter of fiscal 2005 from 6.4% in
the first quarter of fiscal 2004.
Operating Expense. Operating expenses in the first quarter of fiscal 2005
increased to $8.4 million from $8.1 million in the first quarter of fiscal 2004,
an increase of $.3 million or 3.2%. This increase was due to higher professional
fees primarily from ongoing business matters that occur in the normal course of
business, including preparation for future Sarbanes Oxley regulations.
Net Income. Income before taxes in the first quarter of fiscal 2005 was
$2.9 million and net income was $1.9 million compared to income before taxes of
$2.0 million and net income of $1.3 million during the first quarter of fiscal
2004.
Three Months Ended December 31, 2003 Compared to Three Months Ended
December 31, 2002
10
Finance Receivables. Our aggregate finance receivables increased 5.6%
during the first quarter of fiscal 2004 to $175.2 million on December 31, 2003
from $165.9 million on September 30, 2003. This increase was due primarily to
increases in finance receivables from the Internet, which grew by more than
$12.6 million or 24%. The Internet is a lower-cost method of loan origination
and proceed distribution, and we plan to continue to increase this distribution
channel in the future.
Provision for Credit Losses. The provision for credit losses in the first
quarter of fiscal 2004 decreased to $2.7 million from $3.4 million in the first
quarter of fiscal 2003, a decrease of $.7 million or 21. 2%. Net charge-offs of
finance receivables in the first quarter of fiscal 2004 decreased to $2.2
million from $2.5 million in the first quarter of fiscal 2003, a decrease of $.3
million or 10.8%. The decrease in net charge-offs reflects the reduction in
60-day delinquent accounts in the portfolio due to enhanced collection efforts.
Our allowance for credit losses at December 31, 2003 increased to $9.7 million
from $9.2 million at September 30, 2003, an increase of $.5 million, or 4.9%.
The increase reflects the increase in our average finance receivables portfolio
for the three months ended December 31, 2003 compared to the three months ended
December 31, 2002, as well as our concern regarding uncertainty surrounding the
Middle-East hostilities.
Interest Expense. Interest expense in the first quarter of fiscal 2004
decreased to $2.2 million from $2.4 million in the first quarter of fiscal 2003,
a decrease of $.2 million or 9.2%. This decrease is the result of lower interest
rates charged on our borrowings even though our average interest bearing
liabilities for the three months ended December 31, 2003 increased by $.8
million or .7% compared to the three months ended December 31, 2002. The
weighted average interest rate declined to 6.4% in the first quarter of fiscal
2004 from 7.0% in the first quarter of fiscal 2003.
Operating Expense. Operating expenses in the first quarter of fiscal 2004
increased to $8.1 million from $7.3 in the first quarter fiscal 2003 an increase
of $.8 million or 11.6%. This increase was primarily due to employment costs, as
a result of building infrastructure in the retail network and renewed efforts to
create a technology solution by integrating lending, point of sale, and customer
relationship management systems to enhance efficiencies in the future. In
addition, we entered into agreements with third parties, who sell products via
the Internet, to provide financing solutions for their military customer base.
Net Income. Income before taxes in the first quarter of fiscal 2004 was
$2.0 million and net income was $1.3 million compared to income before taxes of
$1.8 million and net income of $1.1 million during the first quarter of fiscal
2003.
Delinquency Experience
Our customers are required to make monthly payments of interest and
principal. We analyze our delinquencies on a recency delinquency basis. A loan
is delinquent under the recency method when a full payment (95% or more of the
contracted payment amount) has not been received for 60 days after the last full
payment. We rarely grant extensions or deferments, or allow account revision,
rewriting, renewal or rescheduling in order to bring otherwise delinquent
accounts current.
The following sets forth our delinquency experience for accounts for which
payments are 60 days or more past due and allowance for credit losses for our
finance receivables as of the ends of the periods presented:
As of
December 31, December 31,
----------------------------------
2004 2003
----------------------------------
(dollars in thousands)
Finance receivables balances $ 216,484 $ 175,172
Finance receivables balances 60 days
or more past due $ 7,512 $ 5,179
Finance receivables balances 60 days
or more past due as a percent of
finance receivables 3.47% 2.96%
11
Credit Loss Experience and Provision for Credit Losses
General. Our provisions for credit losses are charged to income in amounts
sufficient to maintain our allowance for credit losses at a level considered
adequate to cover the probable losses inherent in our existing finance
receivable portfolio. Historical credit loss experience, delinquency of finance
receivables, the value of underlying collateral, current economic conditions,
current military activities and management's judgment are factors used in
assessing the overall adequacy of the allowance and corresponding provision for
credit losses. Our allowance for credit losses is developed primarily for our
direct finance receivable portfolio as our retail installment contracts are
generally covered by dealer reserves.
Direct Loans. Our charge-off policy is based on an account-by-account
review of delinquent receivables on a recency basis. Finance receivables are
charged-off when management deems them to be uncollectible through our normal
collection procedures or they become 270 days past due. The 270-day limit is set
forth in 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 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 presents net charge-offs on direct loans and net
charge-offs as a percentage of direct loans. The decrease shown on this table in
the percentage of net charge-offs to average monthly balance outstanding
resulted primarily from more effective collection efforts as of the ends of the
periods presented:
As of, and For the Three
Months Ended
December 31,
--------------------------------
2004 2003
--------------------------------
(dollars in thousands)
Direct Loans:
Loans charged-off $ 2,713 $ 2,484
Less recoveries 358 251
-------------- ---------------
Net charge-offs $ 2,355 $ 2,233
============== ===============
Average monthly balance of
outstanding (1) $ 187,026 $ 152,335
Percentage of net charge-offs to average
monthly balance outstanding (2) 5.04% 5.86%
- -------------------------------------
(1) Averages are computed using month-end balances.
(2) December 31, 2004 and 2003 are annualized for comparison purpose.
Retail Installment Contracts. Under our retail merchant reserve
arrangements, we withhold a percentage (usually between five and ten percent) of
the principal amount of the retail installment contract purchased. The amounts
withheld from a particular retail merchant are recorded in a specific reserve
account. Any losses incurred on the retail installment contracts purchased from
that retail merchant are charged against its specific reserve account. Upon the
retail merchant's request, and no more often than annually, we pay the retail
merchant the amount by which its specific reserve account exceeds 15% of the
aggregate outstanding balance on all retail installment contracts purchased from
them, less losses we have sustained, or reasonably could sustain, due to debtor
defaults, collection expenses, delinquencies and breaches of our agreement with
the retail merchant. Our allowance for credit losses is charged only to the
extent that the loss on a retail installment contract exceeds the originating
retail merchant's specific reserve account at the time of the loss.
The following table presents net charge-offs on retail installment
contracts and net charge-offs as a percentage of retail installment contracts as
of the ends of the periods presented:
12
As of, and For the Three
Months Ended
December 31,
--------------------------------
2004 2003
--------------------------------
(dollars in thousands)
Retail Installment Contracts:
Contracts charged-off $ 4 $ 18
Less recoveries 15 12
------------ -----------------
Net charge-offs (recoveries) $ (11) $ 6
============= =================
Average monthly balance of
outstanding (1) $ 21,890 $ 18,757
Percentage of net charge-offs to average
monthly balance outstanding (2) -0.20% 0.13%
- -------------------------------------
(1) Averages are computed using month-end balances.
(2) December 31, 2004 and 2003 are annualized for comparison purpose.
The following table presents our allowance for credit losses on finance
receivables as of the ends of the periods presented:
As of, and For the Three
Months Ended
December 31,
--------------------------------
2004 2003
--------------------------------
(dollars in thousands)
Average finance receivables (1) $ 208,915 $ 171,092
Provision for credit losses $ 3,304 $ 2,689
Net charge-offs $ 2,344 $ 2,239
Net charge-offs as a percentage of
average finance receivables (2) 4.49% 5.23%
Allowance for credit losses $ 12,201 $ 9,671
Allowance as a percentage of average
finance receivables 5.84% 5.65%
- -------------------------------------
(1) Averages are computed using month-end balances.
(2) December 31, 2004 and 2003 are annualized for comparison purpose.
Allowance for Credit Losses. The allowance for credit losses is maintained
at an amount which management considers sufficient to cover estimated future
losses. The Company has developed policies and procedures for assessing the
adequacy of the allowance for credit losses which take into consideration the
historical credit loss experience of the Company, delinquency trends, current
economic conditions, current or future military deployments, and the composition
of the finance receivable portfolio. The Company uses various ratio analyses in
evaluating prior finance receivable losses and delinquency experience. These and
other analyses are used to measure historical movement of finance receivables
through various levels of repayment, delinquency, and loss. These results and
management's judgment are used to estimate future losses and in establishing the
current provision and allowance for credit losses. These estimates are
influenced by factors outside the Company's control, such as economic conditions
and current or future military deployments. There is uncertainty inherent in
these estimates, making it reasonably possible that they could change in the
near term. See our annual report on Form 10-K; Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Critical
Accounting Policies."
13
The following table sets forth changes in the components of our allowance
for credit losses on finance receivables as of the ends of the periods
presented:
As of, and For the Three
Months Ended
December 31,
------------------------------
2004 2003
------------------------------
(dollars in thousands)
Balance, beginning of period $ 11,241 $ 9,221
------------------------------
Charge-offs:
Loans charged-off (2,717) (2,502)
Recoveries 373 263
------------------------------
Net charge-offs (2,344) (2,239)
Provision for credit losses 3,304 2,689
------------------------------
Balance, end of period $ 12,201 $ 9,671
==============================
Loan Origination
Our loan origination is an important factor in determining our future
revenues. Loan origination for the first three months of fiscal 2005 increased
to $80.8 million from $61.1 million for the first three months of fiscal year
2004, an increase of $19.7 million or 32.2%. The record volume in the first
three months of fiscal 2005 was achieved through the expansion of our Internet
distribution channel, partly through marketing agreements (primarily with one
third party), which we entered into in the first quarter of fiscal year 2004.
These third party vendors market products via the Internet to military service
members. These marketing efforts represent $12.0 million or 60.9% of the $19.7
million increase in loan originations. See our annual report on Form 10-K; Item
1, "Business- Lending Activities."
The following table sets forth our overall loan originations and lending
activities by direct loans and retail installment contracts as of the ends of
the periods presented:
As of, and For the Three
Months Ended
December 31,
-----------------------------------------------
2004 2003
-----------------------------------------------
(dollars in thousands,
except for average note amounts)
Total Loan Origination:
Gross balance $ 80,815 $ 61,146
Number of finance receivable notes 24,406 19,092
Average note amount $ 3,311 $ 3,203
Direct Loans:
Gross balance $ 75,444 $ 57,338
Number of finance receivable notes 22,550 17,913
Average note amount $ 3,346 $ 3,201
Retail Installment Contracts:
Gross balance $ 5,371 $ 3,808
Number of finance receivable notes 1,856 1,179
Average note amount $ 2,894 $ 3,230
14
In June 2004, we began an initiative to replace our legacy loan processing
system with a purchased software solution, which will provide the organization
with continued improvements in its loan origination, servicing and collection
processes. This new system is scheduled for launch in fiscal 2005.
Liquidity and Capital Resources
A relatively high ratio of borrowings to invested capital is customary in
consumer finance activities due to the quality and term of the assets employed.
Investing activities are our principal use of cash, which is to make new loans
and purchase retail installment contracts. We use our borrowings to fund the
difference, if any, between the cash used to make new loans and purchase retail
installment contracts, and the cash generated from loan repayments. Cash used in
investing activities in the first three months of fiscal 2005 was approximately
$20.6 million, which was funded from $5.9 million of cash from operating
activities and $14.2 million from financing activities. Cash used in investing
activities in the first three months of fiscal 2004 was approximately $11.7
million, which were funded from $3.9 million of cash from operating activities
and $7.8 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 investment notes. We anticipate that our cash inflow from operations,
borrowings under our senior lending agreement, and the proceeds from the sale of
investment notes will be adequate to meet our cash out flows to fund anticipated
growth in our finance receivables, operating expenses, repayment of
indebtedness, and planned capital expenditures.
On or before March 31st of each year, each bank that is a party to the
senior lending agreement is to deliver to us a written indication of whether or
not it wishes to participate in future fundings and the amounts that it expects
to be willing to fund during the next 12 months. As of December 31, 2004, all
banks that are a party to our senior lending agreement have indicated in writing
their willingness to participate in the fundings up to an aggregate of $200
million, up from $185.5 million in fiscal year 2004.
Senior Indebtedness-Bank Debt. Our senior lending agreement is an
uncommitted facility, which provides common terms and conditions pursuant to
which individual banks that are a party to this agreement may choose to make
loans to us in the future. Any bank may elect not to participate in any future
fundings at any time without penalty. As of December 31, 2004, we could request
up to $20.9 million in additional funds and remain in compliance with the terms
of our senior lending agreement. No bank, however, has any contractual
obligation to lend us these additional funds. As of December 31, 2004, we were
in material compliance with all loan covenants.
Senior Indebtedness-Parent Debt. We also have a revolving line of credit,
payable on demand, from our parent, Pioneer Financial Industries, Inc. Interest
on this facility accrues at the prime rate plus 2%. At December 31, 2004, there
was $2.0 million outstanding under this credit facility with an interest rate of
7.25%.
Senior Indebtedness Table. As of December 31, 2004 and 2003, the total
borrowings and availability under our senior lending agreement and our revolving
line of credit from our parent company consisted of the following amounts for
the ends of the periods presented:
15
As of December 31,
--------------------------------
2004 2003
-----------------------------
(dollars in thousands)
Revolving Credit Line (1):
Total facility $ 36,758 $ 34,961
Balance at end of period $ 18,493 $ 13,185
Maximum available credit (3) $ 18,265 $ 21,776
Term Notes (2):
Total facility $ 167,000 $ 156,565
Balance at end of period $ 133,843 $ 107,231
Maximum available credit (3) $ 33,157 $ 49,334
Total Revolving and Term Notes (1) (2):
Total facility $ 203,758 $ 191,526
Balance at end of period $ 152,336 $ 120,416
Maximum available credit (3) $ 51,422 $ 71,110
Credit facility available (4) $ 20,852 $ 19,722
Percent utilization of the total facility 74.76% 62.87%
- ------------------------------------
(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 facility available based on the existing asset borrowing base and
maintaining a Senior Indebtedness to Net Receivable Ratio of not more than
80.0%
Outstanding Investment Notes. We also fund our liquidity needs through the
sale of unsecured investment notes. These notes have varying fixed interest
rates and are subordinate to all senior indebtedness. We can redeem these notes
at any time upon 30 days written notice. As of December 31, 2004, we had issued
approximately $23.3 million of these investment notes at a weighted average
interest rate of 9.4%.
The sale of these notes provides us with additional liquidity and capital
resources. Issuing these notes 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 notes.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our profitability and financial performance are sensitive to changes in the
U.S. Treasury yields and the spread between the effective rate of interest we
receive on customer loans and the interest rates we pay on our borrowings. Our
finance income is generally not sensitive to fluctuations in market interest
rates. The primary exposure that we face is changes in interest rates on our
borrowings. A substantial and sustained increase in market interest rates could
adversely affect our growth and profitability. The overall objective of our
interest rate risk management strategy is to mitigate the effects of changing
interest rates on our interest expense through the utilization of short-term
variable rate debt and medium and long term fixed rate debt. We have not entered
into any derivative instruments to manage our interest rate risk. For more
information about this item see our annual report of Form 10-K; Item 7A,
"Quantitative And Qualitative Disclosures About Market Risk-Interest Rate Risk
Management."
ITEM 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to
ensure that information required to be disclosed in the Company's reports under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and
16
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. Any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives. Our management, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that the design and operation of our
disclosure controls and procedures are effective. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date the evaluation was completed.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
We are currently involved in various litigation matters in the ordinary
course of 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.
ITEM 2. Changes in Securities and Use of Proceeds
On May 13, 2003, the Securities and Exchange Commission declared our
registration statement on Form S-1, as amended (File No. 333-103293), effective.
On January 13, 2004 the Securities and Exchange Commission declared our post
effective amendment number 1 as filed on Form S-1 (File No. 333-103293),
effective. On February 10, 2005 the Securities and Exchange Commission declared
our post effective amendment number 2 as filed on From S-2 (File No.
333-103293), effective. Pursuant to the registration statement, and the
accompanying prospectus, we registered and are offering up to $25,000,000 in
aggregate principal amount of our investment notes, with a maximum aggregate
offering price of $25,000,000 on a continuous basis with an expected termination
of January 31, 2007 unless terminated earlier at our discretion. We commenced
the offering of these investment notes on May 20, 2003. We are currently
offering the notes through our officers and employees directly without an
underwriter or agent. From May 20, 2003 to December 31, 2004, we sold 295 notes
in an approximate aggregate principal amount of $6,087,000. For the quarter
ended December 31, 2004, we sold 48 notes in the approximate aggregate principal
amount of $1,079,000. Costs incurred in connection with the preparation of the
initial registration statement on Form S-1 were approximately $315,000. Our
expenses incurred in connection with the issuance and distribution of the
investment notes from the date our registration statement became effective, May
13, 2003, through December 31, 2004 were approximately $412,000. Expenses
incurred in the first quarter of fiscal 2005 were approximately $29,000. Net
proceeds from the offering through December 31, 2004, were approximately
$5,360,000.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
(a) Exhibits
3.1 Restated Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1, as amended, filed with the Securities and Exchange
Commission on February 8, 2003 (Commission No. 333-103293) (the
"Initial Registration Statement")).
3.2 Certificate of Amendment to Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.2 of the Initial Registration
Statement).
3.3 Amended and Restated By-Laws of the Company (Incorporated by reference
to Exhibit 3.3 of the Initial Registration Statement).
17
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 Investment Note 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 Annual Report on Form 10-K for the fiscal year
ended September 30, 2003).
10.8 Capital Contribution Agreement dated as of September 30, 2003 between
the Company and Pioneer Financial Industries, Inc. (Incorporated by
reference to Exhibit 10.8 of the Annual Report on Form 10-K for the
fiscal year ended September 30, 2003).
10.9 Stock Purchase Agreement dated October 29, 2003 between the Company
and Pioneer Financial Industries, Inc. (Incorporated by reference to
Exhibit 10.9 of the Annual Report on Form 10-K for the fiscal year
ended September 30, 2003).
10.10 Stock Purchase Agreement dated October 29, 2003 between the Company
and Pioneer Financial Industries, Inc. (Incorporated by reference to
Exhibit 10.10 of the Annual Report on Form 10-K for the fiscal year
ended September 30, 2003).
12 Statement regarding computation of ratios (Incorporated by reference
to Exhibit 12 of Post Effective Amendment No. 2).
21 Subsidiaries of the Company (Incorporated by reference to Exhibit 21
of the Post Effective Amendment No. 1).
25 Statement of eligibility of trustee (Incorporated by reference to
Exhibit 25 of the Amendment No. 1).
31.1 Certification of Chief Executive Officer pursuant to Rule 15d-15e.
31.2 Certification of Chief Financial Officer pursuant to Rule 15d-15e.
32.1 18 U.S.C. Section 1350 Certification of Chief Executive Officer.
18
32.2 18 U.S.C. Section 1350 Certification of Chief Financial Officer.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PIONEER FINANCIAL SERVICES, INC.
Name Title Date
- ---- ----- ----
/s/ William D. Sullivan
- ----------------------- Chief Executive Officer February 14, 2005
William D. Sullivan and Sole Director
(Principal Executive Officer)
/s/ Randall J. Opliger
- ---------------------- Chief Financial Officer, February 14, 2005
Randall J. Opliger Treasurer and Secretary
(Principal Financial Officer
and Principal Accounting Officer)