<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1994
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission file number 1-10522
PIONEER FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2479273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1750 East Golf Road, Schaumburg, Illinois 60173
(Address of principal executive, offices) (Zip Code)
Registrant's telephone number, including area code (708) 995-0400
Indicate by a check mark whether the registrant (1) has filed all
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
____ ____
The number of shares of the registrant's common stock, $1.00 par
value per share, outstanding as of April 29, 1994 was 6,943,902.
This document consists of 15 sequentially numbered pages.
The exhibit index appears on page 13.
1
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PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per
share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> (Unaudited)
ASSETS
Investments-Note 1
Securities available for sale
Fixed maturities, at fair value <C> <C>
(cost: $241,821) $ 238,638 $ -
Fixed maturities, at cost
(fair value: $263,263) - 257,717
Equity securities, at fair value
(cost: 1994-$13,647; 1993-$12,382) 18,447 17,436
Fixed maturities held to maturity, at amortized cost
(fair value: 1994-$343,734; 1993-$325,540) 365,455 326,512
Mortgage loans--at unpaid balance 2,532 3,201
Real estate--at cost, less accumulated depreciation 14,085 -
Policy loans--at unpaid balance 22,816 23,988
Short-term investments--at cost,
which approximates fair value 23,884 45,352
Total Investments 685,857 674,206
Cash 15,532 23,379
Premiums and other receivables, less
allowance for doubtful accounts 20,459 20,734
Amounts on deposit and due from reinsurers 73,534 74,366
Accrued investment income 9,028 8,482
Deferred policy acquisition costs 256,832 260,432
Land, building and equipment-at cost, less
accumulated depreciation 22,225 22,248
Deferred federal income taxes 5,350 3,922
Other 20,499 20,502
$1,109,316 $1,108,271
__________ __________
</TABLE>
2
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<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
(Unaudited)
<S>
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Policy liabilities: <C> <C>
Future policy benefits $ 605,642 $ 610,734
Unearned premiums 85,416 87,945
Policy and contract claims 187,933 189,389
Other 14,527 15,037
893,518 903,105
General expenses and other liabilities 58,794 48,442
Short-term notes payable 4,609 5,575
Long-term notes payable 1,050 1,125
Convertible Subordinated Debentures 57,477 57,477
1,015,448 1,015,724
Redeemable Preferred Stock, no par value:
$2.125 cumulative convertible exchangeable
preferred stock
Authorized: 5,000,000 shares
Issued and outstanding:
(1994: 927,300 shares; 1993: 947,000 shares) 23,182 23,675
Stockholders' Equity
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1994-6,943,900; 1993-6,900,000) 6,944 6,900
Additional paid-in capital 29,101 28,814
Unrealized appreciation of
available-for-sale securities 1,051 3,285
Retained earnings 38,412 34,645
Less treasury stock at cost (4,822) (4,772)
Total Stockholders' Equity 70,686 68,872
$1,109,316 $1,108,271
__________ ___________
See notes to condensed consolidated financial statements.
</TABLE>
3
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PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Income:
Premiums and policy charges $172,898 $155,343
Net investment income 11,104 10,041
Other income and realized gains
from investments 7,263 4,328
191,265 169,712
Benefits and expenses:
Benefits 121,069 107,058
Insurance and general expenses 42,146 38,648
Interest expense 1,147 474
Amortization of deferred policy
acquisition costs 19,980 20,056
184,342 166,236
INCOME BEFORE INCOME TAXES 6,923 3,476
Federal income taxes 2,423 1,181
NET INCOME 4,500 2,295
PREFERRED STOCK DIVIDENDS 493 507
INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ 4,007 $ 1,788
_________ _________
NET INCOME PER COMMON SHARE
Primary $ .60 $ .26
Fully Diluted $ .40 $ .26
DIVIDENDS DECLARED
PER COMMON SHARE $ .0375 $ -
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 6,731 6,796
Fully Diluted 13,107 8,321
See notes to condensed consolidated financial statements.
</TABLE>
4
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PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
(In thousands) Three Months Ended
March 31,
1994 1993
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,953 $ 8,791
INVESTING ACTIVITIES
Net decrease in short-term
investments 21,468 11,754
Purchases of investments (78,254) (68,134)
Sale of investments 16,381 25,619
Maturities of investments 27,018 26,474
Net purchase of property and equipment (521) (306)
NET CASH USED BY
INVESTING ACTIVITIES (13,908) (4,593)
FINANCING ACTIVITIES
Repayments of notes payable (1,041) (5,713)
Proceeds from sale of agent receivables 6,784 5,036
Transfer of collections on previously
sold agent receivables (6,920) (4,969)
Dividends paid (503) (510)
Stock options exercised 294 --
Purchase of treasury stock (50) (244)
Retirement of preferred stock (493) (155)
Other 37 44
NET CASH USED BY
FINANCING ACTIVITIES (1,892) (6,511)
DECREASE IN CASH (7,847) (2,313)
CASH AT BEGINNING OF PERIOD 23,379 18,686
CASH AT END OF PERIOD $ 15,532 $ 16,373
__________ __________
See notes to condensed consolidated financial statements.
</TABLE>
5
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PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1994
NOTE 1 -- ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period
ended March 31, 1994 are not necessarily indicative of the
results that may be expected for the year ended December 31,
1994. For further information, refer to the consolidated
financial statements and footnotes thereto included in the
Pioneer Financial Services, Inc. ("Pioneer" or "the Company")
Annual Report on Form 10-K for the year ended December 31, 1993.
EARNINGS PER SHARE
Primary earnings per share of Common Stock are determined by
dividing net income for the period, less dividends on Preferred
Stock, by the weighted average number of common stock and common
stock equivalents (dilutive stock options) outstanding. Fully
diluted earnings per share assumes conversion of the Preferred
Stock outstanding and conversion of the Subordinated Debentures
with related interest added back to net income. Where the effect
of the assumed conversion on net earnings would be antidilutive,
fully diluted earnings per share represents the primary amount.
(See discussion in Exhibit 11 on page 14).
NEW ACCOUNTING STANDARD
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 115, "Accounting for
Certain Investments in Debt and Equity Securities". As of
January 1, 1994 the Company adopted the provisions of that
standard. The effect as of January 1, 1994 of adopting Statement
115 increased stockholders equity by $3,605,000 (net of
adjustments to deferred income taxes) to reflect the net
unrealized holding gains on securities previously carried at
amortized cost; there was no effect on net income as a result of
the adoption of Statement 115. In the three month period ended
March 31, 1994 those net unrealized holding gains decreased by
$5,674,000 (net of adjustments to deferred income taxes). The net
unrealized depreciation in the first quarter was due to the recent
increase in interest rates.
6
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NOTE 2 -- STOCKHOLDERS' EQUITY
The statutory accounting practices prescribed for Pioneer's
insurance subsidiaries by regulatory authorities differ from
GAAP. The combined statutory-basis capital and surplus of
Pioneer's direct insurance subsidiaries was $106,628,000 and
$106,567,000 at March 31, 1994 and December 31, 1993,
respectively. Statutory net income of the insurance subsidiaries
amounted to $692,000 and $1,034,000 for the three month periods
ended March 31, 1994 and 1993, respectively.
NOTE 3 -- INVESTMENTS
Realized investment gains for the three month periods ended March
31, 1994 and 1993 were $253,000 and $187,000, respectively.
NOTE 4 -- CONTINGENCIES
Pioneer and its subsidiaries are named as defendants in various
legal actions, some claiming significant damages, arising
primarily from claims under insurance policies, disputes with
agents, and other items. On May 11, 1994 the California
Insurance Department filed complaints against a subsidiary of the
Company for alleged violations of California consumer protection
rules. Pioneer's management and its legal counsel are of the
opinion that the disposition of these actions will not have a
material adverse effect on Pioneer's financial position.
7
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - First Three Months of 1994 Compared to
First Three Months of 1993.
Division Overview
The income (loss) before income taxes by division for the first
quarter of 1994 and 1993 respectively, are as follows (in
thousands):
Three Months
Ended March 31,
1994 1993
Insurance:
Accident and Health $ 3,627 $ 1,322
Life and Annuity 2,442 2,203
Marketing 3,066 824
Managed Care 101 61
Corp. Expenses & Interest (2,313) (934)
Total $ 6,923 $ 3,476
_______ _______
Accident and Health
The increase in pre-tax income for the three month period was
primarily due to continued cost reduction programs which reduced
the general expense ratio approximately 1%. The 1994 accident
and health loss ratios were consistent with the prior year. The
continued improvement in medicare supplement experience was
offset by higher than projected claims on the Company's major
hospital products.
Life and Annuity
The results for the first quarter of 1994 were consistent with
prior year amounts. The unit cost per policy in-force decreased
from $80 in 1993 to $72 in the first quarter of 1994. The
mortality in the first quarter of 1994 was slightly higher than
levels experienced in the same period last year. Despite the
overall decline in the Company's investment yields in 1994, the
interest spread on life and annuity business continued to improve
due to an aggressive crediting rate strategy.
Marketing
The increase in pre-tax income in 1994 as compared to 1993 is due
to a 28% increase in revenue coupled with cost reductions from
the consolidation of the division's career agent distribution
system.
8
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Managed Care
Managed care operations showed a small profit for the quarter
similar to the first quarter of 1993. The improvement compared
to losses experienced the last three quarters of 1993 was due to
the elimination of an unprofitable operating subsidiary in the
fourth quarter of 1993.
Corporate Expenses and Interest
Interest expense increased in 1994 as compared to 1993 due to the
issuance of the convertible subordinated debentures in July 1993.
Corporate general expense also increased due to the Company's
increased investor relations programs.
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported consolidated net income of $4,500,000 for
the quarter ended March 31, 1994 as compared to $2,295,000 for
the comparable period in 1993.
Total premiums and policy charges increased $17,555,000 or 11%
for the three month period in 1994 as compared to 1993. Accident
and health premiums increased $16,708,000 or 11% for the three
month period in 1994 compared to 1993. The premium increase was
primarily attributable to increased premiums from major hospital
products. A major portion of this increase in premiums was due
to the acquisition of Continental Life & Accident Company (CLAC)
completed in August 1993. Total premiums attributable to the
remaining mix of Medicare supplement and long-term care products
decreased $7,620,000 or 13% for the three month period in 1994 as
compared to 1993.
Net investment income increased $1,063,000 or 11% for the three
month period in 1994 as compared to 1993. Annualized investment
yields decreased for the three month period from 7.3% to 6.6% in
1994 as compared to 1993. The decrease in the investment yield
is due to the shortening of the Company's average duration and
the excess cash position maintained in the first two months of
the quarter due to the volitility of the financial markets.
Other income and realized investment gains increased $2,935,000
or 68% for the three month period in 1994 as compared to 1993.
The increase in other income was due to the acquisition of
Healthcare Review Corporation and CLAC. In addition, the Company
realized increased sales to unaffiliated customers in both the
Marketing and Managed Care Divisions. Realized investment gains
as well as the remaining other income generated by the Company's
non-insurance subsidiaries remained relatively unchanged.
9
<PAGE>
Total benefits increased $14,011,000 or 13% for the three month
period in 1994 as compared to 1993. Accident and health
benefits, which include the change in unearned premiums,
increased $14,132,000 or 15% for the three month period in 1994
as compared to 1993. The increase for the three month period was
due primarily to the increased amount of collected premiums. The
accident and health loss ratio increased to 68% from 66% for the
three month period in 1994 as compared to the same period in
1993. The higher loss ratios were primarily due to the change in
product mix from the acquisition of CLAC. The loss ratio on the
existing block of business was consistent with prior year levels.
Improved loss ratios on the medicare supplement products were
offset by higher than projected claims on the major hospital
business. Life and annuity benefits decreased $121,000 or 1% for
the three month period in 1994 as compared to 1993. The decrease
is due to a decrease in crediting rates on interest sensitive
life and annuity products.
The general expenses as a percent of premiums decreased for the
three month period in 1994 as compared to the same period in 1993
due to the continued emphasis on cost reduction in the Accident
and Health and Life Insurance Units. However, insurance and
general expenses (which includes commission compensation to
agents) increased $3,498,000 or 9% for the three month period in
1994 as compared to 1993 due to the 11% increase in premium and
policy charges primarily from the acquisition of CLAC.
Amortization of deferred policy acquisition costs decreased
$76,000 for the three months in 1994 as compared to 1993 due to
slightly reduced levels of new business. The Company continues
to monitor the profitability of its business on a quarterly
basis. Increased lapses or unprofitability on the business could
result in an increase in the amortization rate of deferred policy
acquisition costs, which would adversely impact future earnings.
The effective federal income tax rates increased in 1994 due to
the Revenue Reconciliation Act of 1993.
President Clinton presented his health care reform policy in
September 1993. Numerous proposals have been introduced to
Congress and the state legislatures to reform the current health
care system. Proposals have included, among other things,
modifications to the existing employer-based insurance system, a
quasi-regulated system of "managed competition" among health
plans and a single payer, public program which would replace some
of the Company's current major hospital products. Changes in
health care policy could significantly affect the Company's
Health Unit. The Company is unable to accurately predict what
effects these reforms may have on its future operations and is
unable to evaluate what impact the expectations of such reforms
may have had on past consumer behavior. The Company expects the
final package approved by Congress will differ significantly from
the program presented by President Clinton.
10
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The Company acquired its corporate headquarters in Schaumburg,
Illinois in January 1994. General expenses and other liabilities
increased due to the timing of payments due reinsurers. The
remaining balance sheet accounts remained relatively consistent
with December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated liquidity requirements are created and
met primarily by operations of its insurance subsidiaries. The
insurance subsidiaries' primary sources of cash are premiums,
investment income, and investment sales and maturities. The
primary uses of cash are operating costs, policy acquisition
costs, payments to policyholders and investment purchases.
In addition, liquidity requirements of the Company are created by
the dividend requirements of the $2.125 Preferred Stock, common
stock dividends, interest payments on the Convertible
Subordinated Debentures and other debt service requirements. The
Company's liquidity requirements are met primarily by dividends
declared by its subsidiaries. Payments of dividends by the
insurance subsidiaries to the Company is subject to certain
regulatory restrictions.
The Company's life and health insurance subsidiaries require
capital to fund acquisition costs incurred in the initial year of
policy issuance and to maintain adequate surplus levels for
regulatory purposes. These capital requirements have been met
principally from internally generated funds, including premiums
and investment income, and capital provided from reinsurance and
the financing or sale of agent debit balances.
The Company has offered agent commission financing to certain of
its agents and marketing organizations which consists primarily
of annualization of first year commissions. This means that when
the first year premium is paid in installments, the Company will
advance a percentage of the commissions that the agent would
otherwise receive over the course of the first policy year. On
October 31, 1990, the Company through a subsidiary entered into
an agreement with an unaffiliated corporation to provide
financing for its agent commission financing program through the
sale of agent receivables. Proceeds from such sales for the
three month period ended March 31, 1994 and 1993 were $6.7
million and $5.0 million, respectively. This financing program
was replaced with an amended agreement which was executed on
October 1, 1992, to provide such subsidiary with the same type of
financing. Pursuant to this amended agreement the termination
date of the program is December 31, 1994, subject to extension or
termination as provided therein.
In July 1993 the Company issued $57.5 million of 8% convertible
subordinated debentures due 2000. Net proceeds from the offering
totaled approximately $54 million. The debentures are
convertible into the Company's common stock at any time prior to
maturity, unless previously redeemed, at a conversion price of
$11.75 per share.
11
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In August 1993 a subsidiary of the Company borrowed $1,500,000 to
finance the acquisition of Healthcare Review Corporation.
Interest on the note is payable quarterly at six percent. The
note requires principal repayments of $75,000 per quarter through
July 31, 1998.
The Company has a line of credit arrangement for short-term
borrowings with three banks amounting to $20,000,000 through
April 1996, all of which was unused at March 31, 1994. The line
of credit arrangement can be terminated, in accordance with the
agreement, at the Company's option.
In March 1994, the Company's Board of Directors announced a
quarterly Common Stock dividend of 3.75 cents per share, with an
expectation of a total of 15 cents per share to be paid for 1994.
Management believes that the diversity of the Company's
investment portfolio and the liquidity attributable to the large
concentration of investments in highly liquid United States
government agency securities provide sufficient liquidity to meet
foreseeable cash requirements. Because the Company's insurance
subsidiaries experience strong positive cash flows, including
sizeable monthly cash flows from mortgage-backed securities, the
Company does not expect its insurance subsidiaries to be forced
to sell the held to maturity investments prior to their
maturities and realize material losses or gains. However, if the
Company experiences changes in credit risk, it may be required to
sell assets whose fair value is less than carrying value and
incur losses.
Life insurance and annuity liabilities are generally long term in
nature although subject to earlier surrender as a result of the
policyholder's ability to withdraw funds or surrender the policy,
subject to surrender and withdrawal penalties. The Company
believes its policyholder liabilities should be backed by an
investment portfolio that generates predictable investment
returns. The Company seeks to limit exposure to risks associated
with interest rate fluctuations by concentrating its invested
assets principally in high quality, readily marketable debt
securities of intermediate duration and by attempting to balance
the duration of its invested assets with the estimated duration
of benefit payments arising from contract liabilities.
The Company has no material commitments for capital expenditures
at the present time.
12
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PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement of Computation
of Per Share Earnings
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the first
quarter of 1994.
13
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EXHIBIT 11
PIONEER FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Net income $ 4,500 $ 2,295
_______ _______
Average shares outstanding 6,380 6,796
Common Stock equivalents from
dilutive stock options,
based on the treasury stock
method using average market
price 351 --
TOTAL-PRIMARY 6,731 6,796
Additional shares assuming
conversion of
Preferred Stock 1,484 1,525
Additional shares assuming
conversion of
Subordinated Debentures 4,892 --
TOTAL-FULLY DILUTED 13,107 8,321
______ _____
Net income per share-
Primary* $ .60 $ .26
_______ _______
Net income per share-
Fully Diluted** $ .40 $ .26
_______ _______
* Primary earnings per share were calculated after
deducting dividends on Preferred Stock of $493,000 in
1994 and $507,000 in 1993.
** Fully diluted net income per share was calculated after
adding tax effected interest on Subordinated Debentures
of $747,000 for the three month period ending March 31,
1994. Fully diluted net income per share for the three
month period ending March 31, 1993 is equivalent to primary
net income per share because conversion of the Preferred
Stock was antidilutive.
14
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SIGNATURES
Pursuant to the requirements of the Securities and 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.
/s/ Peter W. Nauert
Date Peter W. Nauert
Chairman and Chief Executive Officer
/s/ David I. Vickers
Date David I. Vickers
Treasurer and Chief Financial Officer
15
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</TABLE>
