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 quarterly period ended December 31, 1998
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-14065
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BLC FINANCIAL SERVICES, INC.
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Delaware 75-1430406
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(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
645 Madison Avenue, 18th Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-751-5626
-----------------------------
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by 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 |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 1998
------------ --------------------------------
Common stock $.01 par value 19,918,449
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying financial statements and information are submitted as
required by Form 10-Q. The financial information does not include all
disclosures that are required by generally accepted accounting principles.
In the opinion of management, all adjustments that are necessary to
present fairly, the financial position of BLC Financial Services, Inc.
(the "Company") for the periods included, have been made.
2
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Loans receivable, net $15,486,000 $22,040,000
Loans held for sale 4,733,000 7,160,000
Cash 3,841,000 1,730,000
Cash - restricted 2,283,000 1,768,000
Accounts receivables - loans sold 7,350,000 8,252,000
Accounts and other receivables 1,062,000 1,006,000
Prepaid expenses and deposits 591,000 433,000
Leasehold improvements, furniture and equipment,
net of accumulated depreciation 796,000 742,000
Servicing assets 4,219,000 3,270,000
Residual interests 7,125,000 5,057,000
Deferred income taxes 943,000 991,000
Deferred financing costs, net of
accumulated amortization 748,000 832,000
----------- -----------
TOTAL ASSETS $49,177,000 $53,281,000
=========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable $22,230,000 $32,541,000
Accounts payable & accrued expenses 787,000 1,163,000
Due to participants 1,679,000 264,000
Allowance for estimated future losses on loans sold 422,000 466,000
Debentures 3,328,000 3,328,000
Debt 1,000,000 46,000
Customer deposits 1,654,000 1,204,000
----------- -----------
Total liabilities 31,100,000 39,012,000
----------- -----------
SHAREHOLDERS' EQUITY
Preferred Stock, $.10 par value:
Authorized - 2,000,000 shares issued and outstanding - none
Common Stock, $0.01 par value:
Authorized - 35,000,000 shares issued and outstanding
19,918,449 and 19,778,449 respectively 199,000 197,000
Additional paid in capital 12,247,000 10,840,000
Retained earnings 5,094,000 2,762,000
Unrealized gain on residual interests, net of income taxes 537,000 470,000
----------- -----------
Total shareholders' equity 18,077,000 14,269,000
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $49,177,000 $53,281,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
-------------------------- ------------------------
December 31, December 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of loans $ 4,772,000 $ 3,370,000 $ 7,443,000 $ 4,770,000
Interest income 1,108,000 821,000 2,118,000 1,312,000
Service fee income 730,000 381,000 1,150,000 628,000
Origination income 258,000 447,000 753,000 687,000
Miscellaneous -- 1,000 30,000 3,000
----------- ----------- ----------- -----------
Total revenues 6,868,000 5,020,000 11,494,000 7,400,000
----------- ----------- ----------- -----------
EXPENSES:
Operating costs 2,380,000 1,624,000 4,471,000 2,904,000
General and administrative 736,000 448,000 1,458,000 815,000
Interest 843,000 683,000 1,679,000 1,038,000
----------- ----------- ----------- -----------
Total expenses 3,959,000 2,755,000 7,608,000 4,757,000
----------- ----------- ----------- -----------
Income before provision for income taxes 2,909,000 2,265,000 3,886,000 2,643,000
Provision for income taxes 1,144,000 820,000 1,554,000 971,000
----------- ----------- ----------- -----------
NET INCOME $ 1,765,000 $ 1,445,000 $ 2,332,000 $ 1,672,000
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
Earnings per share, basic $ 0.09 $ 0.08 $ 0.12 $ 0.10
=========== =========== =========== ===========
Earnings per share, diluted $ 0.07 $ 0.07 $ 0.10 $ 0.09
=========== =========== =========== ===========
Weighted average number of common shares 19,918,449 17,426,825 19,887,378 17,384,034
----------- ----------- ----------- -----------
Weighted average number of common shares
and dilutive securities outstanding 24,216,814 19,292,114 24,323,814 19,111,931
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Gain on
Number of Paid in Retained Residual
Shares Amount Capital Earnings Interests Total
==========================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 19,778,449 $197,000 $10,840,000 $2,762,000 $470,000 $14,269,000
For the six months ended December 31, 1998:
Net income -- -- 2,332,000 -- 2,332,000
Warrants exercised 140,000 2,000 86,000 88,000
Pre-confirmation net operating loss utilization -- 1,321,000 -- -- 1,321,000
Change in unrealized gain on residual
interests, net of income tax effect -- -- -- -- 67,000 67,000
---------- -------- ----------- ---------- -------- -----------
Balance, December 31, 1998 19,918,449 $199,000 $12,247,000 $5,094,000 $537,000 $18,077,000
========== ======== =========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONSENSED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $1,765,000 $1,445,000 $2,332,000 $1,672,000
Unrealized gain on residual interests,
net of tax 20,000 46,000 67,000 69,000
---------- ---------- ---------- ----------
Comprehensive Income $1,785,000 $1,491,000 $2,399,000 $1,741,000
========== ========== ========== ==========
</TABLE>
<PAGE>
PART I - FINANCIAL STATEMENT
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,332,000 $ 1,672,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation & amortization 662,000 200,000
Utilization of pre-confirmation net operating losses 1,321,000 826,000
Provisions for credit losses 182,000 (50,000)
Convert Interest Accrual to notes Payable 540,000
Changes in assets and liabilities:
Loans held for sale 2,427,000 (4,258,000)
Restricted cash (515,000)
Accounts receivable - loans sold 902,000 121,000
Accounts and other loans receivable (56,000) (303,000)
Servicing asset (1,293,000)
Due to participants 1,415,000 314,000
Prepaid expenses and deposits (158,000) (155,000)
Accounts payable & accrued expenses (376,000) 329,000
Customer deposits 450,000 851,000
------------ ------------
Net cash provided by (used in) operating activities 7,293,000 87,000
------------ ------------
Cash flows from investing activities:
Loans originated and purchased (13,762,000) (15,559,000)
Principal collections & sale of loans receivable 20,090,000 11,486,000
Origination of residual interests (2,389,000)
Principal collections of residual interests 436,000 41,000
Acquisition of equipment (108,000) (354,000)
------------ ------------
Net cash used in investing activities 4,267,000 (4,386,000)
------------ ------------
Cash flows from financing activities:
Net Borrowings under credit lines 7,906,000 19,696,000
Proceeds from debentures -- 2,773,000
Principal payments on notes payable (18,217,000) (13,050,000)
Principal payments on debt 954,000 (55,000)
Net borrowings from affiliates -- (1,887,000)
Increase in deferred financing cost (180,000) (388,000)
Proceeds from exercise of warrants 88,000 503,000
------------ ------------
Net cash provided by financing activities (9,449,000) 7,592,000
------------ ------------
Net increase (decrease) in cash 2,111,000 3,293,000
Cash - beginning of period 1,730,000 803,000
------------ ------------
Cash - end of period $ 3,841,000 $ 4,096,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during period for interest expense $ 1,743,309 $ 422,000
============ ============
Cash paid during period for income taxes $ 545,689 $ 75,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in conformity with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and the
applicable rules of the Securities and Exchange Commission. 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
six-month period ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1999. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended June 30, 1998.
Principles of consolidation and preparation
The accompanying consolidated financial statements include the accounts of
BLC Financial Services, Inc. (the "Company") and its wholly owned subsidiaries.
Business operations
The Company is primarily engaged in the business of originating, selling
and servicing loans to small businesses under the Section 7(a) Guaranteed Loan
Program ("7(a) Program") sponsored by the United States Small Business
Administration ("SBA"). Additionally, the Company originates, sells and services
loans to businesses under the United States Department of Agriculture ("USDA")
Rural Business - Cooperative Business and Industry ("B&I") Guaranteed Loan
Program.
8
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION (continued)
Loan and revenue recognition
The Company's policy is to sell the SBA or USDA guaranteed portion of all
loans that it originates, at a premium, in the secondary market on a nonrecourse
basis. The guaranteed portion of the loans receivable that have been originated,
but not yet sold, are carried at the lower of aggregate cost or market value.
Market value is determined by outside commitments from investors or current
yield on similar loans. Loans receivable held for investment are stated at the
principal amount outstanding less deferred income.
Upon the sale of the loans, the Company allocates the cost, based upon the
relative fair values, to the guaranteed portion of the loan, the unguaranteed
portion of the loan, the servicing asset and residual interest, if any.
Gain on sales of loans receivable principally represents the present value
of the differential between the interest rates charged by the Company and the
interest rates passed on to the purchaser of the receivables, after considering
the effects of estimated prepayments, repurchases and normal servicing fees.
Gains on the sale of loans receivable are recorded on the trade date using the
specific identification method.
The Company generally ceases to accrue interest income on loan receivables
which become 90 days delinquent. The Company then categorizes these loans as
being in liquidation, and takes appropriate steps to attempt to collect the loan
in full. Any interest received on delinquent loans is either applied against
principal or reported as interest income, according to management's judgement as
to the collectibility of principal.
9
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
Per share information
During Fiscal Year 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" (FAS
128) which is effective for periods ended after December 15, 1997 and requires
that upon adoption, all prior periods be restated. Basic EPS is determined using
net income divided by the weighted average shares outstanding during the period.
Diluted EPS is computed by dividing net income, plus the after tax effect of the
interest expense on the convertible debentures, by the weighted average shares
outstanding, assuming all dilutive potential common shares were issued using the
treasury stock method calculated based upon average market price for the period.
2. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses for the six months ended December 31, 1998
and 1997 are as follows:
1998 1997
---- ----
Balance at June 30 $ 641,000 $ 901,000
Provision for loan losses 226,000 74,000
Write-off (103,000) (124,000)
Recoveries -0- -0-
--------- ---------
Balance at December 31 $ 764,000 $ 851,000
========= =========
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED December 31, 1998
Results of Operations:
Quarter Ended December 31, 1998 vs. Quarter Ended December 31, 1997
The Company recorded net income of approximately $1,765,000 (or $.09 per
share) for the three months ended December 31, 1998 as compared to net income of
approximately $1,445,000 (or $.08 per share) for the three months ended December
31, 1997.
Revenues for the three months ended December 31, 1998 increased from
approximately $5,020,000 for the three months ended December 31, 1997 to
approximately $6,868,000, or approximately 37%. This increase can be attributed
to the Company's increased loan portfolio which is due to increases in loan
originations as well as loans sold. In addition, the Company recognized a gain
from the sale of a portion of its unguaranteed pool of SBA loans. At December
31, 1998 the Company maintained a total serviced loan portfolio of 400 loans
which approximated $209,460,000 as compared to 306 loans approximating
$130,842,000 at December 31, 1997.
Interest income increased from approximately $821,000 for the three months
ended December 31, 1997 to approximately $1,108,000 for the three months ended
December 31, 1998, or by approximately 35%. This was primarily due to an
increase in the average outstanding retained loan portfolio held by the Company
during the quarter. The unguaranteed performing and retained portion of the loan
portfolio at December 31, 1998 approximated $14,345,000 as compared to
$11,300,000 at December 31, 1997, after taking into consideration the effects of
the securitization in this quarter compared to the same quarter last year. At
December 30, 1998, the Company sold its SBA Loan-Backed Adjustable Rate Class A
Certificate 1998-1 in the aggregate principal amount of $24,317,000, compared to
December 1, 1997 when the Company sold $18,000,000 of its SBA Loan Backed
Adjustable Rate Class A Certificates 1997-1. Substantially all performing loans
at both December 31, 1998 and December 31, 1997 bore interest rates ranging from
10.25% to 11.25%.
Service fee income increased by approximately 92% from the prior year's
quarter primarily due to the Company's increased serviced and sold loan
portfolio which approximated $171,408,000 at December 31, 1998 compared to
$103,695,000 at December 31, 1997. Servicing fees earned by the Company on those
SBA guaranteed loans sold in the secondary market have ranged between 1% and
2.6% per annum. In addition, the Company continues to earn additional residual
interest income, net of amortization, on those unguaranteed loans securitized
during the prior fiscal year and will earn residual interest income on the
unguaranteed loans securitized during the current fiscal year.
Loans in the aggregate principal amount of approximately $23,872,000 were
funded during the three months ended December 31, 1998, as compared to loans in
the aggregate principal amount of approximately $20,332,000 for the three months
ended December 31, 1997. The SBA-guaranteed principal amount of the loans funded
during the three months ended December 31, 1998 aggregated approximately
$17,011,000 as compared to the aggregate guaranteed principal of approximately
$14,712,000 for the prior year's period.
11
<PAGE>
The Company continues its loan origination activities through the
consolidated efforts of its loan production offices located in Richmond,
Virginia, Annandale, Virginia (near Washington D.C.), Indianapolis, Indiana,
Panama City and Orlando, Florida, Wichita, Kansas, Plano, Texas, Albuquerque,
New Mexico, Seattle, Washington, Charleston, South Carolina and Phoenix,
Arizona.
In December 1998 the Company, through Business Loan Center, Inc.,
successfully completed the sale of its SBA Loan-Backed Adjustable Rate Class A
Certificates 1998-1 in the approximate aggregate principal amount of
$24,317,000. The Class A Certificates received a 'AAA' ("Triple A") rating from
Duff & Phelps Credit Rating Company. The Class B Certificates in the approximate
amount of $2,114,000 were acquired by Business Loan Center Financial Corp II.,
also a wholly-owned subsidiary of the Company. The Class A and B Certificates
will pay annual interest rates of 6.75 percent and 6.95 percent, respectively,
during the initial accrual period. Thereafter, the Class A Certificates will pay
a per annum interest rate equal to the Prime Rate less 100 basis points. The
Class B Certificates will pay a per annum interest rate equal to the Prime Rate
less 80 basis points.
During the same quarter last year the Company also completed the sale of
its SBA Loan-Backed Adjustable Rate Class A Certificates 1997-1 in the
approximate aggregate principal amount of $18,000,000. The Class A Certificates
also received a Triple A rating from Duff & Phelps Credit Rating Company. The
Class B Certificates of $1,800,000 were purchased by Business Loan Center
Financial Corp., a wholly-owned subsidiary of the Company. These Class A and B
Certificates pay current annual interest rates of Prime less 190 basis points
while the Class B Certificates pay an interest rate of Prime less 150 basis
points.
At December 31, 1998, 29 proposed loans in the aggregate principal amount
of approximately $18,424,000 had received both Business Loan Center and SBA
approval and were awaiting closing. An additional 15 proposed loans in the
aggregate principal amount of approximately $11,845,000 had been approved by
Business Loan Center and were either awaiting submission to the SBA or had been
submitted to the SBA and were awaiting approval.
At December 31, 1998, six proposed loans in the approximate aggregate
principal amount of $16,300,000 had received both BLC Commercial Capital Corp
and USDA approval and were awaiting closing. In addition, four proposed loans in
the approximate aggregate principal amount of $9,195,000 were approved by BLC
Commercial Capital Corp and awaiting submission to the USDA or awaiting USDA
approval. BLC Commercial Capital Corp's existing capital resources should enable
it to fund these loans and additional loans in process.
The Company's operating expenses increased from approximately $1,624,000
for the three months ended December 31, 1997 to approximately $2,380,000 for the
quarter ended December 31, 1998. This increase resulted from increases in
payroll, commissions and travel associated with continued growth.
General and administrative expenses of approximately $736,000 for the
three months ended December 31, 1998 increased from approximately $448,000 for
the prior year's period primarily due to additional loan production offices,
corporate services and amortization of costs associated with the additional
financing obtained throughout the past fiscal year.
Interest expense increased by approximately 23% during the three months
ended December
12
<PAGE>
31, 1998 as compared to the prior year's period. The increase was due to
increased borrowing to meet the continued growth in loan production activities
during this period which was offset by an interest rate reduction obtained by
the Company from its lender.
Results of Operations:
Six Months Ended December 31, 1998 vs. Six Months Ended December 31, 1997
The Company recorded net income of $2,332,000 (or $.12 per share) for the
six months ended December 31, 1998, as compared to net income of approximately
$1,672,000 (or $.10 per share) for the six months ended December 31, 1997.
Revenues for the six months ended December 31, 1998 increased to approximately
$11,494,000 from $7,400,000 for the six months ended December 31, 1997 as a
result of greater loan originations, an increased serviced loan portfolio and
gains on the sale of both the guaranteed and unguaranteed portion of loans.
Interest income increased from approximately $1,312,000 for the six months
ended December 31, 1997 to approximately $2,118,000 for the six months ended
December 31, 1997, or by 61%. This increase directly resulted from the increase
in the Company's performing retained loan portfolio.
Service fee income increased from approximately $628,000 for the six
months ended December 31, 1997 to approximately $1,150,000 for the six months
ended December 31,1997. This 83% increase directly resulted from the increased
serviced loan portfolio, as Business Loan Center continues to earn servicing
fees of between 1.0% and 2.62% per annum on the guaranteed portion of those
loans loan sold in the secondary market. The Company continues to earn
additional residual interest income, net of amortization, on those unguaranteed
loans securitized during the prior fiscal year and will earn residual interest
income on the unguaranteed loans securitized during the current fiscal year.
The majority of loans originated during the six months ended December 31,
1998 were sold in the secondary market immediately subsequent to the closing of
each loan. Gains on the sale of both the guaranteed and unguaranteed portion of
loans for the six months ended December 31, 1998 approximated $7,443,000, as
compared to approximately $4,770,000 for the six months ended December 31, 1997.
Generating these revenues were loans originated during the six months ended
December 31, 1998 which approximated $53,667,000 as compared to loans in the
approximate aggregate principal amount of $39,766,000 for the six months ended
December 31, 1997. The SBA-guaranteed principal amount of the loans originated
during the six months ended December 31, 1998 aggregated approximately
$38,635,000, as compared to the aggregate guaranteed principal of approximately
$28,381,000 for the prior year's period.
Operating expenses of the Company increased by 54% over the prior year's
period primarily as a result of an increase in the number of employees which led
to higher payroll expenses as well as an increase in commission and travel
associated with continued growth of the operations.
General and administrative expenses of approximately $1,458,000 for the
six months ended December 31, 1998 increased from approximately $815,000 for the
prior year's period as a result of opening of new offices, corporate services
and amortization of costs associated with the additional financing obtained
during prior years.
13
<PAGE>
Interest expense increased during the six months ended December 31, 1998
by approximately 62% from the prior year's period due to increased borrowing to
meet the continued growth in loan production activity during this period.
LIQUIDITY AND CAPITAL RESOURCES
By actively engaging in commercial lending, the Company has a constant
need for debt financing. Cash used to fund loans, repay existing debt, and fund
operations is currently provided by loan collections, loan sales, and short and
long-term borrowings.
The Company currently maintains two credit lines with Transamerica
Business Credit Corporation. The first facility, which was recently increased to
$50,000,000, is utilized to fund both the guaranteed and unguaranteed portion of
7(a) Program loan originations, while the second facility provides for financing
of up to $15,000,000 in both the guaranteed and unguaranteed portion of B&I
Program loan originations. During the six months ended December 31, 1998,
interest rates on the 7(a) Program facility were reduced on both the guaranteed
and unguaranteed portion of the loan. Borrowings under both of the guaranteed
lines are repaid immediately upon the sale of the guaranteed portion on the
secondary market.
On December 30, 1998 the Company successfully completed the sale of its
SBA Loan-Backed Adjustable Rate Class A Certificates 1998-1 in the approximate
aggregate principal amount of $24,317,000 which included a prefunded amount of
$4,600,000. The Class A Certificates received an Triple A rating from Duff &
Phelps Credit Rating Company. The Class B Certificates in the amount of
$2,114,000, which also included a prefunded amount of $400,000, were acquired by
Business Loan Center Financial Corp. II, a wholly-owned subsidiary of the
Company. Proceeds from the sale, were used to reduce the credit line that the
Company maintains with Transamerica Business Credit Corporation.
The Class A and B Certificates will pay annual interest rates of 6.75% and
6.95%, respectively, during the initial accrual period. Thereafter, the Class A
Certificates will pay a per annum interest rate equal to the prime rate less 100
basis points. The Class B Certificates will pay a per annum interest rate equal
to the prime rate less 80 basis points. The applicable interest rate earned on
the Class A and Class B Certificates will be adjusted on the first business day
of every January, April, July and October using the lowest Prime lending rate
published in the Eastern edition of the Wall Street Journal on the applicable
adjustment date. Principal payments on the SBA loans are passed through to the
holders of the Certificates on a pro-rata basis with the holders of the
guaranteed portion of the loans.
The credit lines, along with the anticipated proceeds from sales of both
the guaranteed and unguaranteed portion of loans in the secondary market, the
cash generated from the existing portfolio in the form of interest and servicing
income, and the regular principal repayments on loans
14
<PAGE>
receivable, enables the Company to believe that its current capital resources
and future cash flows will be sufficient to meet its future financial
obligations and projected capital requirements.
Year 2000 Update
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the Year
2000, these date code fields will need to accept four digit entries to
distinguish the twenty-first century dates. The Company uses software and
related technologies that will be affected by the Year 2000 problem, and has
been pursuing a strategy to ensure that all of its critical computer systems
will be operational beginning on January 1, 2000.
The Company is in the process of preparing an inventory of, evaluating and
testing its technical infrastructure and hardware and, based on information
available to date, the Company expects them to be fully operational in the Year
2000. Upon completion of this testing, the Company will have several options
including repair, replacement, upgrading or retirement of specific systems and
components, with priorities to be based on business risk assessment. While the
analysis of the Company's information technology systems continues, management
does not anticipate the costs associated with making all such systems Year 2000
compliant to exceed $50,000. Estimates of these costs will be assessed during
the Company's fiscal third quarter ending on March 31, 1999. To date, the
Company's costs associated with Year 2000 issues have not been material. In
addition, the Company has not yet begun to assess its non-information technology
risks, but anticipates doing so prior to June 30, 1999, the Company's fiscal
year end.
In addition, the Company will be testing its servicing system prior to
June 30, 1999, the Company's fiscal year end, to ensure that it is Year 2000
compliant. The Company has received assurance from its vendor that the servicing
system is Year 2000 compliant. In the event that the servicing system does not
operate properly, the Company could service each loan manually, which would
entail additional labor costs. These costs have yet to be determined.
There can be no assurance that other companies' computer systems and
applications on which the Company's operations rely will be timely converted, or
that any such failure to convert by another company would not have a material
adverse effect on the Company's systems and operations. Furthermore, there can
be no assurance that the software that the Company uses which has been
represented by the supplier of such software to be Year 2000 compliant contains
all necessary date code changes.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - None
b. No reports were filed by the Company on Form 8-K during the fiscal
quarter ended December 31, 1998
16
<PAGE>
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.
BLC Financial Services, Inc.
Date: February 16, 1999 By: /s/ Robert F. Tannenhauser
-----------------------------------
Robert F. Tannenhauser
President
By: /s/ Jennifer M. Goldstein
-----------------------------------
Jennifer M. Goldstein
Chief Financial Officer
17
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<NAME> BLC FINANCIAL SERVICES, INC.
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