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, 1996
[ ] 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 (847) 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 30, 1996 was 10,149,300.
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,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Investments-Note 1 and 3
Securities available for sale
Fixed maturities, at fair value
(cost: 1996-$623,569; 1995-$597,078) $ 626,982 $ 622,666
Equity securities, at fair value
(cost: 1996-$23,113; 1995-$13,333) 26,987 15,570
Fixed maturities held to maturity, at amortized cost
(fair value: 1996-$259,969; 1995-$252,728) 259,756 246,041
Mortgage loans--at unpaid balance 8,438 9,253
Real estate--at cost, less accumulated depreciation 18,197 18,250
Policy loans--at unpaid balance 80,415 79,122
Short-term investments--at cost,
which approximates fair value 86,978 51,690
Total Investments 1,107,753 1,042,592
Cash 17,442 20,274
Premiums and other receivables, less
allowance for doubtful accounts 26,493 23,429
Reinsurance receivables and amounts
on deposit with reinsurers 200,099 184,719
Accrued investment income 13,804 13,307
Deferred policy acquisition costs 226,089 219,874
Land, building and equipment-at cost, less
accumulated depreciation 27,242 26,433
Other 36,762 28,293
$1,655,684 $1,558,921
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $ 968,961 $ 961,127
Policy and contract claims 170,727 166,111
Unearned premiums 77,603 71,150
Other 18,754 16,077
1,236,045 1,214,465
General expenses and other liabilities 54,383 48,580
Amounts due to reinsurers 88,864 82,954
Deferred federal income taxes 801 2,393
Short-term notes payable 6,864 13,534
Long-term notes payable 6,620 21,504
Convertible subordinated debentures due 2000 9,475 9,695
Convertible subordinated notes due 2003 86,250 -
1,489,302 1,393,125
Redeemable Preferred Stock, no par value:
$2.125 cumulative convertible exchangeable
preferred stock
Authorized: 5,000,000 shares
Issued and outstanding:
(1996: 848,100 shares; 1995: 848,900 shares) 21,203 21,222
Stockholders' Equity
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1996-11,246,067; 1995-11,207,591) 11,246 11,208
Additional paid-in capital 72,637 72,198
Unrealized appreciation (depreciation) of
available-for-sale securities-Note 3 (1,078) 4,518
Retained earnings 72,594 66,870
Less treasury stock at cost
(1996-1,132,300 shares; 1995-1,132,300 shares) (10,220) (10,220)
Total Stockholders' Equity 145,179 144,574
$1,655,684 $1,558,921
See notes to condensed consolidated financial statements.
</TABLE>
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,
1996 1995
<S> <C> <C>
Income:
Premiums and policy charges $175,573 $169,575
Net investment income 17,991 17,497
Other income and realized gains
and losses from investments 12,614 6,947
206,178 194,019
Benefits and expenses:
Benefits 121,454 116,961
Insurance and general expenses 54,804 50,665
Interest expense 961 1,710
Amortization of deferred policy
acquisition costs 18,838 17,174
196,057 186,510
INCOME BEFORE INCOME TAXES 10,121 7,509
Federal income taxes 3,390 2,554
NET INCOME 6,731 4,955
PREFERRED STOCK DIVIDENDS 451 498
INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ 6,280 $ 4,457
NET INCOME PER COMMON SHARE
Primary $ .60 $ .73
Fully Diluted $ .54 $ .47
DIVIDENDS DECLARED
PER COMMON SHARE $ .055 $ .045
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 10,500 6,111
Fully Diluted 12,859 12,408
See notes to condensed consolidated financial statements.
</TABLE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 11,470 $ 12,386
INVESTING ACTIVITIES
Net decrease (increase) in
short-term investments (33,528) 26,457
Purchases of investments (83,753) (46,741)
Sale of investments 52,932 31,208
Maturities of investments 12,406 1,109
Net sale (purchase) of property and equipment (896) 313
Purchase of subsidiaries (22,739) (7,629)
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (75,578) 4,717
FINANCING ACTIVITIES
Net proceeds from debt offering 83,016 -
Increase in notes payable 5,848 20,610
Repayments of notes payable (27,401) (21,042)
Proceeds from sale of agent receivables 6,426 4,415
Transfer of collections on previously
sold agent receivables (5,467) (5,199)
Policyholder account deposits 10,882 10,064
Policyholder account withdrawals (11,260) (12,149)
Dividends paid - preferred (450) (457)
Dividends paid - common (556) (273)
Stock options exercised 231 335
Purchase of treasury stock - (485)
Retirement of preferred stock - (398)
Other 7 12
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 61,276 (4,567)
DECREASE IN CASH (2,832) (12,536)
CASH AT BEGINNING OF PERIOD 20,274 8,612
CASH AT END OF PERIOD $ 17,442 $ 21,148
See notes to condensed consolidated financial statements.
</TABLE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
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,
1996 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. 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, 1995.
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 and
Notes with related tax-effected interest added back to net income. (See
discussion in Exhibit 11 on page 15).
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 $139,341,000 and $115,423,000 at March 31, 1996 and December 31, 1995,
respectively. Statutory net income of the insurance subsidiaries amounted to
$3,800,000 and $1,825,000 for the three month periods ended March 31, 1996 and
1995, respectively.
NOTE 3 -- INVESTMENTS
Realized investment gains for the three month periods ended March 31, 1996 and
1995 were $459,000 and $317,000, respectively.
Unrealized depreciation of available-for-sale securities at March 31, 1996 of
$1,078,000 included unrealized appreciation of $6,733,000 less unrealized
appreciation of $8,374,000 on investments in escrow trust accounts pursuant to
agreements with certain reinsurers and net of deferred tax benefits of $563,000.
Unrealized appreciation on available-for-sale securities at December 31, 1995 of
$4,518,000 included gross appreciation of $27,150,000 less unrealized
appreciation of $17,397,000 on investments in escrow trust accounts pursuant to
agreements with certain reinsurers and net of deferred taxes and DAC adjustments
of $5,235,000.
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, reinsurance arbitrations, and other items.
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.
NOTE 5 -- BUSINESS COMBINATION
On March 12, 1996, Pioneer acquired for a cost of $26,400,000 the outstanding
common shares of Universal Fidelity Life Insurance Company (UFLIC). The
acquisition was accounted for by the purchase method and, accordingly, the
purchase price was allocated to assets and liabilities acquired based on
estimates of their fair values.
NOTE 6 -- CONVERTIBLE SUBORDINATED DEBENTURES
In March 1996 the Company issued $86,250,000 of 6 1/2% convertible subordinated
notes due 2003. Net proceeds from the offering totaled approximately
$83,000,000. The notes are convertible into the Company's common stock at any
time prior to maturity, unless previously redeemed, at a conversion price of
$20.00 per share.
NOTE 7 -- SUBSEQUENT EVENT
In April 1996, the Company exercised its right to redeem for cash or offer for
conversion to common stock all outstanding shares of its cumulative convertible
exchangeable preferred stock to be effective May 15, 1996. The total redemption
price per share will be $25.85 per share plus accrued and unpaid dividends to
the redemption date. Each share of preferred stock is convertible into 1.6
shares of common stock.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - First Three Months of 1996 Compared to First Three
Months of 1995
Overview
The information set forth below is based on the Company's major product lines.
<TABLE>
<CAPTION>
Three Months
Ended March 31
1996 1995
<S> <C> <C>
Revenues
Group Medical $ 104,381 $ 102,853
Senior Health 64,347 60,392
Life Insurance 30,432 27,807
Medical Utilization Management 7,018 2,967
TOTAL $ 206,178 $ 194,019
Pre-tax operating income
Group Medical $ 5,035 $ 4,776
Senior Health and Life 2,670 3,378
Life Insurance 2,842 489
Medical Utilization Management 672 536
Total pre-tax operating income before
corporate expense and interest 11,219 9,179
Corporate expense and interest (1,557) (1,987)
TOTAL $ 9,662 $ 7,192
</TABLE>
Group Medical
Revenue. Total revenue in the Group Medical Division increased $1.5 million, or
1%, from $102.9 million to $104.4 million.
Net investment income decreased $0.4 million, or 15%, from $2.6 million to $2.2
million, due to a reduction in invested assets caused by the decrease in major
medical in-force business. Total realized investment gains were relatively
unchanged compared to the first quarter of 1995.
Other income increased $0.9 million, or 25%, from $3.6 million to $4.5 million,
due to marketing commission overrides received from the sale of HMO products of
unaffiliated companies.
Benefits. The following table sets forth the earned premium, benefits, and loss
ratios for products issued by the Group Medical Division:
<TABLE>
<CAPTION>
Three Months
Ended March 31
1996 1995
<S> <C> <C>
Earned Premium (1) $ 98,898 $ 103,148
Benefits (1) 60,681 63,775
Loss Ratio 61.4% 61.8%
(1) In the Company's statement of consolidated income, accident and health
premium revenue represent premiums written; the changes in unearned
premiums are reflected in accident and health benefits.
</TABLE>
The loss ratio in 1996 was relatively unchanged from the first quarter of 1995.
The slight improvement was due to an increase in the level of managed care
savings and PPO penetration.
Insurance and General Expenses. Insurance and general expenses increased $0.1
million, from $29.0 million to $29.1 million. The increase related to the
slight increase in premium revenue.
The amortization of Deferred Policy Acquisition Costs (DAC) increased $0.5
million, or 5%, from $9.7 million to $10.2 million.
Senior Health and Life Division
Revenue. Total revenue in the Senior Health and Life Division increased $3.9
million, or 6%, from $60.4 million to $64.3 million. Senior health premium
increased $2.6 million, or 4%, from $58.0 million to $60.6 million due to a 51%
increase in new Medicare supplement sales.
Net investment income increased $0.6 million, or 27%, from $2.2 million to $2.8
million, primarily due to increased invested assets. The total realized gains
increased $0.2 million from $0.1 million to $0.3 million.
Benefits. The following table sets forth the earned premium, benefits, and loss
ratios for senior health products:
<TABLE>
<CAPTION>
Three Months
Ended March 31
1996 1995
<S> <C> <C>
Earned Premium (1) $ 57,653 $ 53,429
Benefits (1) 39,879 36,081
Loss Ratio 69.2% 67.5%
(1) In the Company's statement of consolidated income, accident and health
premium revenue represent premiums written; the changes in unearned
premiums are reflected in accident and health benefits.
</TABLE>
During the quarter, the division experienced higher medical claims ratios,
similar to the trend in 1995 when claims levels during the first two quarters
were higher than subsequent quarters. Although premium rate adjustments taking
effect throughout 1996 will have some impact, the company expects Medicare
supplement claims ratios to be about equal to or slightly higher than last year.
Insurance and General Expenses. Insurance and general expenses increased $0.6
million, or 5%, from $13.1 million to $13.7 million. The expense ratio remained
relatively unchanged. The decline in administrative expense levels was offset
by an increase in marketing expenses associated with new marketing initiatives.
The amortization of DAC increased $0.6 million, or 12%, from $5.1 million to
$5.7 million.
Life Insurance Divison
Revenue. Total revenue in the Life Insurance Division increased $2.6 million,
or 9%, from $27.8 million to $30.4 million. The increase was due primarily to
higher sales of the senior life insurance product marketed in conjunction with
Medicare supplement and long-term care policies.
Net investment income increased $0.2 million, or 2%, from $12.8 million to $13.0
million.
Benefits. Total life and annuity policy benefits increased $0.6 million, or 3%,
from $19.0 million to $19.6 million. This increase was primarily due to the
increased senior life insurance in-force.
Insurance and General Expenses. Insurance and general expenses decreased $0.9
million, or 16%, from $5.8 million to $4.9 million. The decrease was primarily
due to consolidation costs incurred pursuant to the acquisition of Connecticut
National Life (CNL) in the first quarter of 1995. The unit cost of
administration per policy in-force remained relatively constant in 1996.
The amortization of DAC remained relatively unchanged, with the increase in
senior life amortization offsetting a decrease in the amortization on the
traditional term life block of business.
Medical Utilization Managemen Division
Pre-tax income increased $0.2 million, or 40%, from $0.5 million to $0.7
million. This increase was primarily due to an increase in this division's
revenues of $4.0 million offset to a large extent by HMO start-up costs. The
increase in revenues was primarily due to expanded sales to unaffiliated clients
and the acquisition of ACMG, Inc. (ACMG) in the third quarter of 1995.
Corporate Expenses and Interest
Corporate expenses decreased $0.4 million, or 20%, from $2.0 million to $1.6
million. Interest expense decreased $0.7 million from $1.6 million to $0.9
million due to the conversion of the Company's 8% debentures in the third
quarter of 1995. The general corporate overhead increased due to expenses
incurred relative to the offering of the Company's 6 1/2% notes in the first
quarter of 1996.
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Income. The Company's consolidated net income increased $1.7 million, or
34%, from $5.0 million to $6.7 million. This increase was due primarily to
improved profitability in the Life Division as a result of lower expense levels
and mortality.
Premiums and Policy Charges. Total premiums and policy charges increased $6.0
million, or 4%, from $169.6 million to $175.6 million. This increase was due
primarily to the increase in accident and health premiums of $3.6 million, or
2%, which was due primarily to an increase in premiums from Medicare supplement
and long-term care products of $2.6 million, or 4%. Premiums from major medical
products increased $1.0 million or 1%. Life insurance premiums increased $2.4,
or 16%, primarily due to new business sales.
Net Investment Income. Net investment income increased $0.5 million, or 3%,
from $17.5 million to $18.0 million due to an increase in invested assets.
Annualized investment yields decreased from 7.0% to 6.8%.
Other Revenue. Other income and realized investment gains and losses increased
$5.7 million, or 83%, from $6.9 million to $12.6 million. The increase in other
income was due to the acquisition of ACMG and increased sales to unaffiliated
clients by the Medical Utilization Management Division. The remaining other
income generated by the Company's non-insurance subsidiaries and realized
investment gains remained relatively unchanged.
Benefits. Total benefits increased $4.5 million, or 4%, from $117.0 million to
$121.5 million. Accident and health benefits, which include the change in
unearned premiums, increased $4.0 million, or 4%, from $97.9 million to $101.9
million. The accident and health loss ratio increased to 64.2% from 63.8%.
Life and annuity benefits increased $.6 million, or 3%. This increase was due
to increased senior life insurance in-force.
Insurance and General Expenses. Insurance and general expenses (which includes
non-deferred commission compensation to agents) increased $4.1 million, or 8%,
from $50.7 million to $54.8 million. Expenses for the Medical Utilization
Management Division increased due to the increase in sales and the acquisition
of ACMG. Expenses in the insurance divisions remained relatively consistent
with the first quarter of 1995. Corporate expenses increased $0.4 million
primarily due to the March 1996 public offering of the Company's 6 1/2% notes.
Amortization of DAC. Amortization of DAC increased $1.6 million, or 9%, from
$17.2 million to $18.8 million.
Income Tax Rate. The effective federal income tax rate was 34% due to the
continued investment in non-taxable securities included in the Company's
portfolio.
Other. Investments, premiums and other receivables, amounts on deposit and due
from reinsurers, accrued investment income and other assets increased
principally due to the March 1996 acquisition of Universal Fidelity Life
Insurance Company (UFLIC). The decrease in short-term notes payable and the
long-term notes payable resulted from the use of proceeds from the Company's
March 1996 public offering of 6 1/2% nots to retire bank debt. General expenses
and other liabilities, and amounts due to reinsurers increased due primarily to
the acquisition of UFLIC. The remaining balance sheet amounts remained
relatively consistent with the amounts at December 31, 1995.
DEFERRED POLICY ACQUISITION COSTS
Under generally accepted accounting principles, a DAC asset is established to
match properly the costs of writing new business against the expected future
revenues or gross profits from the policies. The costs which are capitalized
and amortized consist of first-year commissions in excess of renewal comissions
and certain home office expenses related to selling, policy issue, and
underwriting.
The deferred acquisition costs for accident and health policies and traditional
life policies are amortized over future premium revenues of the business to
which the costs are related. The rate of amortization depends on the expected
pattern of future premium revenues for a block of policies. The scheduled
amortization for a block of policies is established when the policies are
issued. However, the actual amortization of DAC will reflect the actual
persistency and profitability of the business. For example, if actual policy
terminations are higher than expected or if future losses are anticipated, DAC
could be amortized more rapidly than originally scheduled or written-off, which
would reduce earnings in the applicable period.
EFFECT OF INFLATION
In pricing its insurance products, the Company gives effect to anticipated
levels of inflation; however, the Company believes that the high rate of medical
cost inflation during recent years has had an adverse impact on its major
hospital accident and health claims experience. The Company continues to
implement rate increases, as permitted by state regulations, in response to this
experience.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated liquidity requirements are created and met primarily
by operations of its subsidiaries. The insurance subsidiaries' primary sources
of cash are premiums, investment income, and investment sales and maturities.
The insurance subsidiaries' primary uses of cash are operating costs, policy
acquisition costs, payments to policyholders and investment purchases. In
addition, liquidity requirements of the holding company are created by the
dividend requirements of the $2.125 Preferred Stock, Common Stock dividends,
interest payments on the 8% Debentures, interest payments on the 6 1/2% Notes,
and other debt service requirements. These liquidity requirements of the
holding company have historically been met through dividends from the non-
insurance subsidiaries which receive payments primarily from fees charged for
administrative and marketing services provided to the Company's insurance
subsidiaries and other unaffiliated companies. Dividends from the insurance
subsidiaries could be required in the future to meet such liquidity
requirements.
The ability of the insurance subsidiaries to pay dividends and make other
payments to the Company is subject to state insurance department regulations
which generally permit dividends and other payments to be paid for any twelve
month period in amounts equal to the greater of (i) net gain from operations in
the case of a life insurance company or net income in the case of all other
insurance companies for the preceding calendar year or (ii) 10% of surplus as of
the preceding December 31st. Any dividends in excess of these levels require
the prior approval of the Director or Commissioner of the applicable state
insurance department. The amount of dividends that the Company's insurance
subsidiaries could pay in 1996 without prior approval is approximately $5.4
million.
Notwithstanding the foregoing, if insurance regulators otherwise determine that
payment of a dividend or any other payment to an affiliate would be detrimental
to an insurance subsidiary's policyholders or creditors because of the financial
condition of the insurance subsidiary or otherwise, the regulators may block
dividends or other payments to affiliates that would otherwise be permitted
without prior approval.
The Company's 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 contributions from the holding Company.
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. The
Company through a subsidiary has entered into agreements with an unaffiliated
corporation to provide financing for a portion of its agent commission advance
program through the sale of agent receivables. Proceeds from such sales for the
three month periods ended March 31, 1996 and 1995 were $6.4 million and $4.4
million, respectively. The termination date of the current program is
December 31, 1997, subject to extension or termination as provided therein. The
Company has retained approximately $13.2 million of agent advances at March 31,
1996.
In July 1993, the Company issued $57.5 million of 8% Debentures. Net proceeds
from the offering totaled approximately $54.0 million. The 8% 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. In
August 1995, the Company accepted the conversion of $46.9 million of the
outstanding 8% Debentures. The effect of the conversion was an increase in
stockholders' equity of $45.3 million and a charge of $3.5 million, net of
taxes, for payments to converting bondholders and other expenses relating to the
conversion.
In August 1993, a non-insurance subsidiary of the Company borrowed $1.5 million
to from a commercial bank to finance the acquisition of Healthcare Review
Corporation ("HRC"). Interest on the unsecured note is payable quarterly at the
lending bank's prime rate of interest. The note requires principal repayments
of $0.08 million per quarter plus interest through July 31, 1998.
In December 1994, a non-insurance subsidiary of the Company borrowed $0.4
million from a commercial bank to finance the purchase of real estate. The
note, which is secured by the real estate purchased, bears interest at the
lending bank's prime rate of interest and is payable quarterly, with principal
payments of $0.02 million, through December 1, 1999.
In January 1995, an insurance subsidiary of the Company issued a note in the
amount of $1.7 million as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the amount of capital losses
incurred by the Company on mortgage loan and real estate holdings of CNL through
January 31, 1997. Interest is payable on the note at the average earnings rate
of these investments, currently eight percent. The note matures in January
1997.
In June 1995, a non-insurance subsidiary of the Company borrowed $1.2 million
from a commercial bank in order to fund HMO development. Interest on this
secured facility is payable monthly at a fixed rate of 8.8%, with principal due
at maturity. This facility matures in June, 1996.
In June 1995, a non-insurance subsidiary of the Company entered into a $1.0
million line of credit arrangement with a commercial bank in order to finance
the subsidiary's working capital needs. Interest on this secured facility is
payable monthly at the lending bank's prime rate of interest. This facility
matures in June 1996.
In September 1995, a non-insurance subsidiary of the Company borrowed $3.3
million from a finance company to finance the purchase of certain equipment.
The note, which is secured by the equipment purchased, bears interest at a fixed
rate of 7.81% and has principal and interest payments of $0.04 million payable
monthly through August 2005.
The Company has a line of credit arrangement for short-term borrowings with four
banks amounting to $27.0 million through April 1996, all of which was unused at
March 31, 1996 (the "Credit Facility"). The line of credit arrangement can be
terminated, in accordance with the agreement, at the Company's option. The
Company expects that the Credit Facility will be extended at its maturity.
In March 1996, the Company issued $86.25 million of its 6 1/2% Notes. Net
proceeds from the offering totaled approximately $83.0 million. The notes are
convertible into the Company's Common Stock at any time prior to maturity,
unless previously redeemed, at a conversion price of $20.00 per share.
In March 1996, the Company issued notes totaling $5.8 million as a portion of
the acquisition price of UFLIC. The notes bear interest payable quarterly, at a
rate of 6% with principal payable in two equal installments on the first and
second anniversary of the closing. The notes are backed by letters of credit.
The Company's debt agreements include provisions requiring maintenance of
minimum working capital and risk based capital and limiting the Company's
ability to incur additional indebtedness. The Company's debt agreements also
restrict the amount of retained earnings which is available for dividends and
require the maintenance of certain minimum insurance company ratings at the
Company's subsidiaries.
In February 1996, the Company's Board of Directors announced a quarterly Common
Stock dividend of 5.5 cents per share, with an expectation of a total of 22
cents per share to be paid for 1996.
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 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. Although the Company has
the ability and intent to hold those securities to maturity, there could occur
infrequent and unusual conditions under which it would sell certain of these
securities. Those conditions would include a significant deterioration of the
issuer's creditworthiness, significant changes in tax law affecting the taxation
of securities, a significant business acquisition or disposition, and changes in
regulatory capital requirements or permissible investments.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion of a new long-lived assets accounting standard and a new stock-
based employee compensation accounting standard and the impact of these
standards on the financial statements of the Company, see Note 2 of Notes to
Consolidated Financial Statements.
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
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the first
quarter of 1996.
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.
May 10, 1996 /s/ Peter W. Nauert
Date Peter W. Nauert
Chairman and Chief Executive Officer
May 10, 1996 /s/ David I. Vickers
Date David I. Vickers
Treasurer and Chief Financial Officer
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,
1996 1995
<S> <C> <C>
Net income
$ 6,731 $ 4,955
Average shares outstanding 10,105 5,903
Common Stock equivalents from
dilutive stock options,
based on the treasury stock
method using average market
price 395 208
TOTAL-PRIMARY 10,500 6,111
Common Stock equivalents from
dilutive stock options, based
on the treasury stock method
using closing market price - 48
Additional shares assuming
conversion of
Preferred Stock 1,358 1,362
Additional shares assuming
conversion of
Subordinated Debentures and Notes
1,001 4,887
TOTAL-FULLY DILUTED 12,859 12,408
Net income per share-
Primary* $ .60 $ .73
Net income per share-
Fully Diluted** $ .54 $ .47
* Primary net income per share was calculated after deducting dividends
on Preferred Stock of $451,000 and $498,000 for the three month periods
ended March 31, 1996 and 1995 respectively.
** Fully diluted net income per share was calculated after adding tax
effected interest and amortization of offering costs on Subordinated
Debentures and Notes of $196,000 and $870,000 for the three month
periods ended March 31, 1996 and 1995 respectively.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 626,982
<DEBT-CARRYING-VALUE> 259,756
<DEBT-MARKET-VALUE> 259,969
<EQUITIES> 26,987
<MORTGAGE> 8,438
<REAL-ESTATE> 18,197
<TOTAL-INVEST> 1,107,753
<CASH> 17,442
<RECOVER-REINSURE> 4,784
<DEFERRED-ACQUISITION> 226,089
<TOTAL-ASSETS> 1,655,684
<POLICY-LOSSES> 968,961
<UNEARNED-PREMIUMS> 77,603
<POLICY-OTHER> 170,727
<POLICY-HOLDER-FUNDS> 18,754
<NOTES-PAYABLE> 109,209<F1>
0
21,203<F2>
<COMMON> 11,246<F3>
<OTHER-SE> 133,933<F4>
<TOTAL-LIABILITY-AND-EQUITY> 1,655,684
175,573
<INVESTMENT-INCOME> 17,991
<INVESTMENT-GAINS> 459
<OTHER-INCOME> 12,155
<BENEFITS> 121,454
<UNDERWRITING-AMORTIZATION> 18,838
<UNDERWRITING-OTHER> 54,804
<INCOME-PRETAX> 10,121
<INCOME-TAX> 3,390
<INCOME-CONTINUING> 6,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,731
<EPS-PRIMARY> .60
<EPS-DILUTED> .54
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes short-term and long-term borrowings and convertible subordinated
debentures and notes.
<F2>Redeemable preferred stock at par value.
<F3>Common stock at par value.
<F4>Includes additional paid in capital and retained earnings less unrealized
depreciation and treasury stock.
</FN>
</TABLE>
