Prospectus Supplement Dated February Filed Pursuant to Rule 424(b)(3)
14, 2005 to Prospectus Dated
February 10, 2005 of
Pioneer Financial Services, Inc. Registration Number 333-103293
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended: March 31, 2005
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 March 31, 2005
----- --------------------------------
Common Stock, $100 par value 17,136 shares
PIONEER FINANCIAL SERVICES, INC.
FORM 10-Q
March 31, 2005
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item No. Page
1. Consolidated Financial Statements.......................................3
Consolidated Balance Sheets at March 31, 2005
and September 30, 2004..................................................3
Consolidated Statements of Income for the three
months ended and six months ended March 31,
2005 and 2004...........................................................4
Consolidated Statements of Retained Earnings
for the six months ended March 31, 2005 and
year ended September 30, 2004...........................................5
Consolidated Statements of Cash Flows for
the six months ended March 31, 2005 and 2004............................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.............17
4. Controls and Procedures................................................17
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 ..............................................................18
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
2005 2004
-------------- --------------
(unaudited)
Cash and cash equivalents $ 1,195,286 $ 2,078,178
Other investments 2,056,523 2,055,923
Finance receivables:
Direct receivables 191,206,680 176,691,292
Retail installment contracts 23,343,403 21,715,543
-------------- --------------
Finance receivables before allowance
for credit losses 214,550,083 198,406,835
Allowance for credit losses (12,200,868) (11,240,868)
-------------- --------------
Net finance receivables 202,349,215 187,165,967
Furniture and equipment, net 1,810,934 1,539,838
Unamortized computer software 1,024,360 1,225,146
Deferred income taxes 4,064,100 3,692,100
Prepaid and other assets 520,462 514,801
-------------- --------------
Total assets $ 213,020,880 $ 198,271,953
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
March 31, September 30,
2005 2004
-------------- --------------
(unaudited)
Revolving credit line - banks $ 13,985,000 $ 12,620,000
Revolving credit line - affiliate 1,624,495 2,613,823
Accounts payable 823,991 2,012,486
Accrued expenses and other liabilities 10,666,561 9,997,410
Amortizing term notes 133,813,079 121,912,164
Investment notes 23,038,195 23,222,252
-------------- ---------------
Total liabilities $ 183,951,321 $ 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 27,355,959 24,180,218
-------------- ---------------
Total stockholder's equity 29,069,559 25,893,818
-------------- ---------------
Total liabilities and stockholder's equity $ 213,020,880 $ 198,271,953
============== ===============
See Notes to Condensed Consolidated Financial Statements
3
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ ----------------------------
2005 2004 2005 2004
------------ ------------ ----------- -----------
(unaudited) (unaudited)
Revenue
Finance income $ 14,923,843 $ 12,964,111 $30,318,204 $26,238,783
Insurance premiums
and commissions 1,293,364 1,289,552 2,598,174 2,584,533
Other income, fees
and commissions 234,015 339,114 704,547 809,968
------------ ------------ ----------- -----------
Total revenue 16,451,222 14,592,777 33,620,925 29,633,284
Provision for credit losses 2,529,932 2,134,847 5,834,113 4,823,492
Interest expense 2,650,710 2,231,114 5,187,748 4,434,751
------------ ------------ ----------- -----------
Net revenue 11,270,580 10,226,816 22,599,064 20,375,041
Operating expenses
Employee costs 5,588,820 5,731,005 10,990,616 11,158,471
Facilities 1,367,000 1,175,000 2,712,093 2,453,145
Marketing 429,116 678,802 1,015,822 1,294,321
Professional fees and other 1,295,062 859,651 2,348,096 1,661,536
------------ ------------ ----------- -----------
Total operating expenses 8,679,998 8,444,458 17,066,627 16,567,473
Income before income taxes 2,590,582 1,782,358 5,532,437 3,807,568
Provision for income taxes 913,000 663,047 1,954,000 1,391,147
------------ ------------ ----------- -----------
Net income $ 1,677,582 $ 1,119,311 $ 3,578,437 $ 2,416,421
============ ============ =========== ===========
Net income per share, basic and
diluted $ 97.90 $ 65.32 $ 208.83 $ 141.01
============ ============ =========== ===========
See Notes to Condensed Consolidated Financial Statements
4
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Six Months Ended Year Ended
March 31, September 30,
----------------------------------
2005 2004
---------------------------------
(unaudited)
Retained earnings, beginning of period $ 24,180,218 $ 19,042,480
Net income 3,578,437 5,987,855
Dividends paid ($23.50 and $49.61 per share) (402,696) (850,117)
-------------- -------------
Retained earnings, end of period $ 27,355,959 $ 24,180,218
============== =============
See Notes to Condensed Consolidated Financial Statements
5
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31,
2005 2004
----------------------------
Cash Flows from Operating Activities:
Net income $ 3,578,437 $ 2,416,421
Items not requiring (providing) cash:
Provision for credit losses on
finance receivables 5,834,113 4,823,492
Depreciation and amortization 528,363 401,647
Compounded interest added to
investment notes 615,935 571,705
Deferred income taxes (372,000) (251,527)
Changes in:
Accounts payable and accrued
expenses (199,006) (447,290)
Other (5,661) (120,811)
----------- -----------
Net cash provided by operating
activities 9,980,181 7,393,637
----------- -----------
Cash Flows from Investing Activities:
Loans originated (82,854,537) (97,635,958)
Loans purchased (10,572,718) (9,551,012)
Loans repaid 72,409,894 92,726,184
Capital expenditures (599,273) (302,618)
Net cash used in investing activities (21,616,634) (14,763,404)
----------- -----------
Cash Flows from Financing Activities:
Net borrowing under lines of credit 55,334 1,796,082
Proceeds from borrowings 38,369,943 29,389,590
Repayment of borrowings (27,269,020) (23,732,143)
Dividends paid (402,696) (334,151)
----------- -----------
Net cash provided by
financing activities 10,753,561 7,119,378
----------- -----------
Net Decrease in Cash (882,892) (250,389)
Cash, Beginning of Period 2,078,178 2,039,109
----------- -----------
Cash, End of Period $ 1,195,286 $ 1,788,720
=========== ===========
Additional Cash Flow Information:
Interest paid $ 5,076,527 $ 4,385,827
Income taxes paid $ 1,870,988 $ 2,100,933
See Notes to Condensed Consolidated Financial Statements
6
PIONEER FINANCIAL SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 and March 31, 2004
(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 March 31, 2005 and 2004, and the periods
then ended, have not been audited by the Company's independent auditors, but in
the opinion of management reflect all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the financial
condition and operations of the Company. The results of operations for the three
months and six months ended March 31, 2005 and 2004 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 post effective amendment to registration statement on Form S-1, as amended
(No. 333-103293) filed with the Securities and Exchange Commission ("SEC") on
December 17, 2004. 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 six
months of fiscal 2005, the size of our average finance receivable at origination
was approximately $3,345. 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 8.1% for fiscal year 2005 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.
8
Finance Receivables
Our finance receivables are comprised of direct loans and retail
installment contracts. The following table sets forth certain information about
the components of our finance receivables as of the ends of the periods
presented:
As of, and For the Six As of, and For the
Months Ended Year Ended
March 31, September 30,
---------------------------------------------
2005 2004 2004
---------------------------------------------
(dollars in thousands, except for average note balance)
Finance Receivables:
Finance receivables balance $ 214,550 $ 176,222 $ 198,407
Average note balance $ 2,440 $ 2,230 $ 2,403
Total finance income $ 30,318 $ 26,239 $ 54,059
Total number of notes 87,927 79,009 82,565
Direct Loans:
Finance receivables balance $ 191,207 $ 155,703 $ 176,691
Percent of finance receivables 89.12% 88.36% 89.05%
Average note balance $ 2,495 $ 2,250 $ 2,446
Number of notes 76,647 69,194 72,242
Retail Installment Contracts:
Finance receivables balance $ 23,343 $ 20,519 $ 21,716
Percent of finance receivables 10.88% 11.64% 10.95%
Average note balance $ 2,069 $ 2,091 $ 2,104
Number of notes 11,280 9,815 10,323
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 As of, and For the Six
Months Ended Months Ended
March 31, March 31,
---------------------------- -------------------------
2005 2004 2005 2004
---------------------------- -------------------------
(dollars in thousands) (dollars in thousands)
Finance receivables balance $ 214,550 $ 176,222 $ 214,550 $ 176,222
Average finance receivables (1) $ 214,270 $ 173,962 $ 211,593 $ 172,527
Average interest bearing liabilities (1) $ 168,687 $ 138,000 $ 168,820 $ 137,483
Total finance income $ 14,924 $ 12,964 $ 30,318 $ 26,239
Total interest expense $ 2,651 $ 2,231 $ 5,188 $ 4,435
- -----------------------------------------
(1) Averages are computed using month-end balances.
Results of Operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March
31, 2004
Finance Receivables. Our aggregate finance receivables decreased 0.9%
during the second quarter of fiscal 2005 to $214.6 million on March 31, 2005
from $216.5 million on December 31, 2004 compared to a 0.6% increase during the
second quarter of fiscal 2004 to $176.2 million on March 31, 2004 from $175.2
million on December 31, 2003. The second quarter is typically the lowest period
for loan originations and generally results in a decline in our finance
receivables attributable in part to the cyclical drop in demand for new loans
and a higher number of payoffs due to customers who use tax refunds to pay off
our loans. The increase in last year's second quarter was due primarily to
increases in loan originations from the third party Internet relationships which
were entered into during first fiscal quarter of 2004.
Total Revenues. Total revenues in the second quarter of fiscal 2005
increased to $11.3 million from $10.2 million in the second quarter of fiscal
2004, an increase of $1.1 million or 10.8%. This increase was primarily due to
an increase in average finance receivables to $214.6 million in the second
quarter of fiscal 2005 from $176.2 million in the second quarter fiscal 2004, an
increase of 21.7%.
Provision for Credit Losses. The provision for credit losses in the
second quarter of fiscal 2005 increased to $2.5 million from $2.1 million in the
second quarter of fiscal 2004, an increase of $.4 million or 19%. Net
charge-offs of finance receivables in the second quarter of fiscal 2005
increased to $2.5 million from $1.9 million in the second quarter of fiscal
2004, an increase of $.6 million or 31.6%. Net charge-offs as a percentage of
average finance receivables for the second quarter of fiscal 2005 increased to
4.7% from 4.4% for the second quarter of fiscal 2004. These changes reflect the
increase in our average finance receivables for the three months ended March 31,
2005 compared to the same period in 2004. Allowance for credit losses at March
31, 2005 remained constant at $12.2 million from December 31, 2004 and as a
percentage of average finance receivables, remained constant at 5.7%. See also
"--Credit Loss Experience and Provision for Credit Losses."
Interest Expense. Interest expense in the second quarter of fiscal 2005
increased to $2.7 million from $2.2 million in the second quarter of fiscal
2004, an increase of $.5 million or 22.7%. Our average interest bearing
liabilities for the three months ended March 31, 2005 increased by $31 million
or 22.5% compared to the three months ended March 31, 2004. The weighted average
interest rate declined to 6.1% in the second quarter of fiscal 2005 from 6.5% in
the second quarter of fiscal 2004.
Operating Expense. Operating expenses in the second quarter of fiscal
2005 increased to $8.7 million from $8.4 million in the second quarter of fiscal
2004, an increase of $.3 million or 3.6%. This increase arose from professional
fees for ongoing business matters that occur in the normal course of business.
Net Income. Income before taxes in the second quarter of fiscal 2005
was $2.6 million and net income was $1.7 million compared to income before taxes
of $1.8 million and net income of $1.1 million during the second quarter of
fiscal 2004.
10
Six Months Ended March 31, 2005 Compared to Six Months Ended March
31, 2004
Finance Receivables. Our aggregate finance receivables increased 8.2%
during the first six months of fiscal 2005 to $214.6 million from $198.4 million
on September 30, 2004, compared to a 6.2% increase during the first six months
of fiscal 2004 to $176.2 million 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 $14.7 million or 17.5%. 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.
Total Revenues. Total revenues for the six months of fiscal 2005
increased to $33.6 million from $29.6 million for the first six months for
fiscal 2004, an increase of $4 million or 13.5 %. This increase was primarily
due to the increase in average finance receivables to $214.6 million in fiscal
2005 from $198.4 million in fiscal 2004, an increase of 8.2%.
Provision for Credit Losses. The provision for credit losses in the
first six months of fiscal 2005 increased to $5.8 million from $4.8 million in
the first six months of fiscal 2004, an increase of $1 million or 21%. Net
charge-offs of finance receivables in the first six months of fiscal 2005
increased to $4.9 million from $4.1 million in the first six months of fiscal
2004, an increase of $.8 million or 19.5%. Our allowance for credit losses at
March 31, 2005 increased to $12.2 million from $9.9 million at March 31, 2004,
an increase of $2.3 million, or 23%. These increases reflect the increase in our
average finance receivables portfolio and average delinquency balance 60 days or
more past due of approximately .5% for the six months ended March 31, 2005
compared to the six months ended March 31, 2004, as well as our concern
regarding uncertainty surrounding the Middle-East hostilities.
Interest Expense. Interest expense in the first six months of fiscal
2005 increased to $5.2 million from $4.4 million in the first six months of
fiscal 2004, an increase of $.8 million or 18.2%. This is the result of an
increase of $32 million in our average interest bearing liabilities for the six
months ended March 31,2005 or 23.3% compared to the six months ended March 31,
2004. The weighted average interest rate declined to 6.1% in the first six
months of fiscal 2005 from 6.5% in the first six months of fiscal 2004.
Operating Expense. Operating expenses in the first six months of fiscal
2005 increased to $17.1 million from $16.6 in the first six months of fiscal
2004 an increase of $.5 million or 3%. 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.
Net Income. Income before taxes in the first six months of fiscal 2005
was $5.5 million and net income was $3.6 million compared to income before taxes
of $3.8 million and net income of $2.4 million during the first six months of
fiscal 2004.
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.
11
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 the Six Months Ended As of
March 31, September 30,
2005 2004 2004
--------------------------------------------
(dollars in thousands)
Finance receivables balances $ 214,550 $ 176,222 $ 198,407
Finance receivables balances 60 days
or more past due $ 6,462 $ 4,388 $ 5,863
Finance receivables balances 60 days
or more past due as a percent of
finance receivables 3.01% 2.49% 2.96%
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 40% 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.
12
The following table presents net charge-offs on direct loans and net
charge-offs as a percentage of direct loans as of the ends of the periods
presented:
As of, and For the Three As of, and For the Six
Months Ended Months Ended
March 31, March 31,
-----------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------
(dollars in thousands)
Direct Loans:
Loans charged-off $ 2,965 $ 2,223 $ 5,679 $ 4,707
Less recoveries 425 312 784 559
-----------------------------------------------------
Net charge-offs $ 2,540 $ 1,911 $ 4,895 $ 4,148
=====================================================
Average monthly balance of
outstanding (1) $ 191,414 $154,769 $ 189,235 $ 153,552
Percentage of net charge-offs
to average monthly balance
outstanding (2) 5.31% 4.94% 5.17% 5.40%
- ---------------------------------------------
(1) Averages are computed using month-end balances.
(2) March 31, 2005 and 2004 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:
As of, and For the Three As of, and For the Six
Months Ended Months Ended
March 31, March 31,
-----------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------
(dollars in thousands)
Retail Installment Contracts:
Contracts charged-off $ 2 $ 6 $ 6 $ 24
Less recoveries 12 22 27 39
-----------------------------------------------------
Net charge-offs (recoveries) $ (10) $ (16) $ (21) $ (15)
=====================================================
Average monthly balance of
outstanding (1) $ 22,826 $ 19,193 $22,358 $ 18,975
Percentage of net charge-offs to average
monthly balance outstanding (2) -0.18% -0.33% -0.19% -0.16%
- ---------------------------------------------
(1) Averages are computed using month-end balances.
(2) March 31, 2005 and 2004 are annualized for comparison purpose.
13
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 As of, and For the Six
Months Ended Months Ended
March 31, March 31,
-------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------
(dollars in thousands)
Average finance receivables (1) $ 214,270 $ 173,962 $ 211,593 $ 172,527
Provision for credit losses $ 2,530 $ 2,135 $ 5,834 $ 4,823
Net charge-offs $ 2,530 $ 1,895 $ 4,874 $ 4,133
Net charge-offs as a percentage of
average finance receivables (2) 4.72% 4.36% 4.61% 4.79%
Allowance for credit losses $ 12,201 $ 9,911 $ 12,201 $ 9,911
Allowance as a percentage of average
finance receivables 5.69% 5.70% 5.77% 5.74%
- ---------------------------------------------
(1) Averages are computed using month-end balances.
(2) March 31, 2005 and 2004 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."
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 As of, and For the Six
Months Ended Months Ended,
March 31, March 31,
-------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------
(dollars in thousands)
Balance, beginning of period $ 12,201 $ 9,671 $ 11,241 $ 9,221
-------------------------------------------------------
Charge-offs:
Loans charged-off (2,967) (2,229) (5,685) (4,731)
Recoveries 437 334 811 598
-------------------------------------------------------
Net charge-offs (2,530) (1,895) (4,874) (4,133)
Provision for credit losses 2,530 2,135 5,834 4,823
-------------------------------------------------------
Balance, end of period $ 12,201 $ 9,911 $ 12,201 $ 9,911
=======================================================
14
Loan Origination
Our loan origination is an important factor in determining our future
revenues. While loan originations slowed slightly in the second quarter ended
March 31, 2005 overall for the first six months of fiscal 2005 loan originations
increased to $133.1 million from $107.2 million for the first six months of
fiscal year 2004, an increase of $25.9 million or 24.2%. See " Results of
Operations - Three Months Ended March 31, 2005 Compared to the Three Months
ended March 31, 2004 - Finance Receivables." The record volume in the first six
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 $22.3 million or 85.9% of the $25.9
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 As of, and For the Six
Months Ended Months Ended
March 31, March 31,
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
(dollars in thousands, except for average note amounts)
Total Loan Origination:
Gross balance $ 52,306 $ 46,041 $ 133,120 $ 107,187
Number of finance receivable notes 15,387 14,052 39,793 33,144
Average note amount $ 3,399 $ 3,276 $ 3,345 $ 3,234
Direct Loans:
Gross balance $ 46,158 $ 40,298 $ 121,601 $ 97,636
Number of finance receivable notes 13,362 11,927 35,912 29,840
Average note amount $ 3,454 $ 3,379 $ 3,386 $ 3,272
Retail Installment Contracts:
Gross balance $ 6,148 $ 5,743 $ 11,519 $ 9,551
Number of finance receivable notes 2,025 2,125 3,881 3,304
Average note amount $ 3,036 $ 2,703 $ 2,968 $ 2,891
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 six months of fiscal
2005 was approximately $21.6 million, which was funded from $10 million of cash
from operating activities and $10.8 million from financing activities. Cash used
in investing activities in the first six months of fiscal 2004 was approximately
$14.8 million, which were funded from $7.4 million of cash from operating
activities and $7.1 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
15
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 March 31, 2005, 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,
with an additional $50 million becoming available April 1,2005.
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 March 31, 2005, we could request up
to $22.2 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 March 31, 2005, 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 March 31, 2005,
there was $1.6 million outstanding under this credit facility with an interest
rate of 7.75%.
Senior Indebtedness Table. As of March 31, 2005 and 2004, 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:
As of March 31, As of September 30,
---------------- --------------- -------------------
2005 2004 2004
---------------- --------------- -------------------
(dollars in thousands)
Revolving Credit Line (1):
Total facility $ 36,695 $ 34,923 $ 36,363
Balance at end of period $ 15,609 $ 14,445 $ 15,234
Maximum available credit (3) $ 21,086 $ 20,478 $ 21,129
Term Notes (2)
Total facility $ 167,000 $ 154,233 $ 167,000
Balance at end of period $ 133,813 $ 104,977 $ 121,912
Maximum available credit (3) $ 33,187 $ 49,256 $ 45,088
Total Revolving and Term Notes (1) (2):
Total facility $ 203,695 $ 189,156 $ 203,363
Balance at end of period $ 149,422 $ 119,422 $ 137,146
Maximum available credit (3) $ 54,273 $ 69,734 $ 66,217
Credit facility available (4) $ 22,217 $ 21,555 $ 21,579
Percent utilization of the total facility 73.36% 63.13% 67.44%
- -------------------------------------------
(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%.
16
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 March 31, 2005, we had issued
approximately $23.0 million of these investment notes at a weighted average
interest rate of 9.2%.
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 as of the end
of the period covered by this report (evaluation date), and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of the
evaluation date. 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
The Company recently became aware that the Florida Attorney General
was planning to file a lawsuit against a subsidiary of the Company accusing it
of violating Florida lending laws and requiring it to comply with such laws in
connection with 216 loans that were made by a subsidiary of the Company during
the period December 2001 to March 2003. The Company has relied upon the case of
Pioneer Military Lending v. Manning, 2 F.3d 280 (8th Cir. 1993), the Eighth
Circuit Court of Appeals held that the Commerce Clause of the U.S. Constitution
prevents the lending laws of the state in which a non-resident military borrower
is stationed from regulating such loan transactions. In the eleven years since
the Manning decision, more than 25 states have accepted the rationale in that
decision and allowed the Company to utilize the aforementioned business model
without local state regulation. While not obligated to do so, the Company has
been cooperating fully with an inquiry conducted during the past two years by
the Florida Attorney General regarding the loans made from the Company's
subsidiary in Georgia to non-resident U.S. military personnel stationed in
Florida. In March 2005 the Company's subsidiary received another subpoena from
the Attorney General's Office, that the Company interpreted as indicating that
the Florida Attorney General was planning to file a lawsuit. The Company
believes it cannot continue to meet the borrowing needs of U.S. military
personnel if it is required to comply with the lending laws of each of the
significant number of states that have military installations. On April 29,
2005, Pioneer Military Lending of Georgia, Inc., a Georgia corporation and
wholly-owned subsidiary of the Company, filed a Complaint for Declaratory
Judgment, Injunctive Relief and Damages against Charlie Crist, the Attorney
General of Florida, in the United States District Court for the Northern
District of Florida. The complaint seeks a determination that, among other
things, the Company and its affiliates are not subject to Florida lending
17
laws and licensing requirements. See "Risk Factors- We are subject to many laws
and governmental regulations and any changes in these laws and regulations may
materially adversely affect its financial condition and business operations."
The Company is also currently involved in various litigation matters in
the ordinary course of business. Other than as described above, the Company is
not currently involved in any litigation or other proceeding that it expects,
either individually or in the aggregate, will have a material adverse effect on
its 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 March 31, 2005, we sold 352 notes in
an approximate aggregate principal amount of $7,668,000. For the quarter ended
March 31, 2005, we sold 57 notes in the approximate aggregate principal amount
of $1,581,000. 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 March 31, 2005 were approximately $437,000. Expenses incurred in the
second quarter of fiscal 2005 were approximately $25,000. Net proceeds from the
offering through March 31, 2005, were approximately $6,916,000.
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
18
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 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.
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 May 13, 2005
- ------------------------ and Sole Director
William D. Sullivan (Principal Executive Officer)
/s/ Randall J. Opliger Chief Financial Officer, May 13, 2005
- ------------------------ Treasurer and Secretary
Randall J. Opliger (Principal Financial Officer
and Principal Accounting Officer)
20