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 September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 001-14065
BLC FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
Delaware 75-1430406
- --------------------------------------------------------------------------------
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
645 Madison Avenue, 18th Floor , New York, New York 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-751-5626
- --------------------------------------------------------------------------------
(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 |_|
<PAGE>
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 September 30, 1998
----- ---------------------------------
Common stock $.01 par value 19,918,449
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>
September 30, June 30,
1998 1998
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Loans receivable, net $28,994,000 $22,040,000
Loans held for sale 6,192,000 7,160,000
Cash 1,640,000 1,730,000
Cash - restricted 1,577,000 1,768,000
Accounts receivables - loans sold 8,082,000 8,252,000
Accounts and other receivables 1,218,000 1,006,000
Prepaid expenses and deposits 385,000 433,000
Leasehold improvements, furniture and equipment,
net of accumulated depreciation 749,000 742,000
Servicing assets 3,624,000 3,270,000
Residual interests 5,587,000 5,057,000
Deferred income taxes 957,000 991,000
Deferred financing costs, net of
accumulated amortization 725,000 832,000
----------- -----------
TOTAL ASSETS $59,730,000 $53,281,000
=========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable $36,331,000 $32,541,000
Accounts payable & accrued expenses 776,000 1,163,000
Due to participants 1,309,000 264,000
Allowance for estimated future losses on loans sold 432,000 466,000
Due to affiliates 1,077,000 --
Debentures 3,328,000 3,328,000
Debt 19,000 46,000
Customer deposits 1,155,000 1,204,000
----------- -----------
Total liabilities 44,427,000 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 11,258,000 10,840,000
Retained earnings 3,329,000 2,762,000
Unrealized gain on residual interests, net of income taxes 517,000 470,000
----------- -----------
Total shareholders' equity 15,303,000 14,269,000
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $59,730,000 $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)
For the three months ended
September 30,
-------------
1998 1997
----------- -----------
REVENUES:
Gain on sale of loans $ 2,671,000 $ 1,400,000
Interest income 1,010,000 491,000
Service fee income 420,000 247,000
Origination income 495,000 240,000
Miscellaneous 30,000 3,000
----------- -----------
Total revenues 4,626,000 2,381,000
----------- -----------
EXPENSES:
Operating costs 2,091,000 1,283,000
General and administrative 722,000 367,000
Interest 836,000 355,000
----------- -----------
Total expenses 3,649,000 2,005,000
----------- -----------
Income before provision for income taxes 977,000 376,000
Provision for income taxes 410,000 151,000
----------- -----------
NET INCOME $ 567,000 $ 225,000
=========== ===========
NET INCOME PER COMMON SHARE
Earnings per share, basic $ 0.03 $ 0.01
=========== ===========
Earnings per share, diluted $ 0.03 $ 0.01
=========== ===========
Weighted average number of common shares 19,856,304 17,341,243
----------- -----------
Weighted average number of common shares
and dilutive securities outstanding 24,430,814 18,701,278
----------- -----------
The accompanying notes are an integral part of these financial statements.
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 three months ended September 30, 1998:
Net income -- -- 567,000 -- 567,000
Warrants exercised 140,000 2,000 86,000 88,000
Pre-confirmation net operating loss utilization -- 332,000 -- -- 332,000
Change in unrealized gain on residual
interests, net of income tax effect -- -- -- -- 47,000 47,000
---------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 19,918,449 $ 199,000 $11,258,000 $ 3,329,000 $ 517,000 $15,303,000
========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PART I - FINANCIAL STATEMENT
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 567,000 $ 225,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation & amortization 353,000 60,000
Utilization of pre-confirmation net operating losses 332,000 112,000
Provisions for credit losses 52,000 --
Changes in assets and liabilities:
Loans held for sale 968,000 (1,856,000)
Restricted cash 191,000 --
Accounts receivable - loans sold 170,000 (507,000)
Accounts and other loans receivable (212,000) (172,000)
Servicing asset (516,000) --
Due to participants 1,045,000 36,000
Prepaid expenses and deposits 48,000 (128,000)
Accounts payable & accrued expenses (387,000) 100,000
Customer deposits (49,000) 139,000
----------- -----------
Net cash provided by (used in) operating activities 2,562,000 (1,991,000)
----------- -----------
Cash flows from investing activities:
Loans originated and purchased (7,437,000) (5,878,000)
Principal collections & sale of loans receivable 397,000 896,000
Origination of residual interests (657,000) --
Principal collections of residual interests 208,000 22,000
Acquisition of equipment (57,000) (54,000)
----------- -----------
Net cash used in investing activities (7,546,000) (5,014,000)
----------- -----------
Cash flows from financing activities:
Net Borrowings under credit lines 3,790,000 8,359,000
Principal payments on notes payable -- (520,000)
Principal payments on debt (27,000) (27,000)
Net borrowings from affiliates 1,077,000 (144,000)
Increase in deferred financing cost (34,000) (350,000)
Proceeds from exercise of warrants 88,000 --
----------- -----------
Net cash provided by financing activities 4,894,000 7,318,000
----------- -----------
Net increase (decrease) in cash (90,000) 313,000
Cash - beginning of period 1,730,000 803,000
----------- -----------
Cash - end of period $ 1,640,000 1,116,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during period for interest expense $ 371,000 209,000
=========== ===========
Cash paid during period for income taxes $ 527,600 29,000
=========== ===========
</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)
Three Months Ended September 30,
--------------------------------
1998 1997
---- ----
Net Income $567,000 $225,000
Unrealized gain on residual interests,
net of tax 47,000 23,000
-------- --------
Comprehensive income $614,000 $248,000
======== ========
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 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
three-month period ended September 30, 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
THREE MONTHS ENDED SEPTEMBER 30, 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
THREE MONTHS ENDED SEPTEMBER 30, 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 three months ended September 30,
1998 and 1997 are as follows:
1998 1997
---- ----
Balance at June 30 $ 641,000 $ 901,000
Provision for loan losses 86,000 -0-
Write-off (55,000) -0-
Recoveries -0- -0-
--------- ---------
Balance at September 30 $ 672,000 $ 901,000
========= =========
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
SEPTEMBER 30, 1998
Results of Operations - Quarter Ended September 30, 1998 vs.
Quarter Ended September 30, 1997
The Company recorded net income of approximately $567,000 (or $.03 per
share) for the three months ended September 30, 1998, as compared to net income
of approximately $225,000 (or $.01 per share) for the three months ended
September 30, 1997.
Revenues for the three months ended September 30, 1998 increased from
approximately $2,381,000 at September 30, 1997 to $4,626,000 at September 30,
1997, or by approximately 94%. This can be attributed to the Company's increased
loan portfolio which is due to increases in loans originated as well as loans
sold. At September 30, 1998, the Company maintained a loan portfolio which
approximated $196,865,000 as compared to a portfolio which aggregated
approximately $115,190,000 at September 30, 1997.
Interest income increased from approximately $491,000 for the three months
ended September 30, 1997 to approximately $1,010,000 for the three months ended
September 30, 1998, or by approximately 106%. This resulted from an increase in
the retained loan portfolio held by the Company. The guaranteed performing and
retained portion of the loan portfolio at September 30, 1998 approximated
$6,192,000 compared to $2,965,000 at September 30, 1997, while, the unguaranteed
performing and retained portion of the loan portfolio at September 30, 1998
approximated $29,183,000 as compared to $14,264,000 at September 30, 1997. At
September 30, 1998, substantially all loans carried interest rates of Prime plus
2.75%.
Service fee income, increased by approximately 70% from the prior year's
quarter, due to the Company's increased serviced and sold loan portfolio which
approximated $144,996,000 at September 30, 1998 compared to $86,182,000 at
September 30, 1997. The SBA guaranteed loans sold in the secondary market during
the quarter ended September 30, 1998 yielded an average service fee of 1.96%,
while the USDA guaranteed loan sold in the secondary market yielded a service
fee of .50% in this quarter. The Company continues to earn additional residual
interest income, net of amortization, on those unguaranteed loans securitized
during the fiscal year ended June 30, 1998.
Loans in the aggregate principal amount of approximately $29,795,000 were
funded by the Company during the three months ended September 30, 1998, as
compared to loans in the aggregate principal amount of approximately $19,434,000
for the three months ended September 30, 1997. The guaranteed principal amounts
of the loans funded during the three months ended September 30, 1998 aggregated
approximately $21,624,000 as compared to the aggregate guaranteed principal of
approximately $13,669,000 for the prior year's period. The majority of the
guaranteed portion
11
<PAGE>
Results of Operations - Quarter Ended September 30, 1998 vs.
Quarter Ended September 30, 1997 (continued)
of these loans funded during the quarter ended September 30, 1998 were sold in
the secondary market immediately subsequent to the closing of each loan. Gains
on the sale of loans approximated $2,671,000 for the three months ended
September 30, 1998, as compared to approximately $1,400,000 for the three months
ended September 30, 1997.
Origination income increased to $495,000 at September 30, 1998 from
$240,000 at September 30, 1997. The increase can be attributed to fees earned in
connection with the Piggyback Loan Program which originates first mortgage loans
in conjunction with the 7(a) Program loans.
The increase in the Company's loan volume during the quarter ended
September 30, 1998 resulted from increased origination activities from the
consolidated efforts of the Company's loan production offices located in
Richmond, Virginia, Annandale, Virginia (near Washington D.C.), Indianapolis,
Indiana, Panama City and Orlando, Florida, Baton Rouge, Louisiana, Wichita,
Kansas, Plano, Texas, Albuquerque, New Mexico, and Seattle, Washington. In
addition, during the quarter ended September 30, 1998, the Company opened two
new loan origination offices in Phoenix, Arizona and Charleston, South Carolina.
At September 30, 1998, 36 proposed loans in the approximate aggregate
principal amount of $22,291,000 had received both Business Loan Center and SBA
approval and were awaiting closing. In addition, 21 proposed loans in the
approximate aggregate principal amount of $14,092,000 were approved by Business
Loan Center and awaiting submission to the SBA or waiting SBA approval. Business
Loan Center's existing capital resources should enable it to fund these loans
and additional loans in process.
At September 30, 1998, one proposed loan in the approximate aggregate
principal amount of $1,000,000 had received both BLC Commercial Capital Corp and
USDA approval and was awaiting closing. In addition, seven proposed loans in the
approximate aggregate principal amount of $22,550,000 were approved by BLC
Commercial Capital Corp and awaiting submission to the USDA or waiting 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 $1,283,000
for the three months ended September 30, 1997 to approximately $2,091,000 for
the quarter ended September 30, 1998. This increase can be attributed to the
increase in payroll, commission and travel associated with the Company's
continued growth.
General and administrative expenses of approximately $722,000 for the
three months ended September 30, 1998 increased from approximately $367,000 for
the prior year's period in connection with the opening of new loan production
offices, corporate services and amortization of cost associated with the
additional financing obtained during the year.
12
<PAGE>
Results of Operations - Quarter Ended September 30, 1998 vs.
Quarter Ended September 30, 1997 (continued)
Interest expense increased by approximately 135% during the three months
ended September 30, 1998 as compared to the prior year's period. This increase
was directly attributable to increased borrowing to meet the continued growth in
loan production activities 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, at $35,000,000, 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. Interest rates on the 7(a) Program facility were recently reduced
to LIBOR plus 2.0% on the guaranteed portion of the loan and LIBOR plus 2.5% on
the unguaranteed loan portion. The B&I Program facility currently bears an
overall interest rate of 1.0% over the Prime rate. Borrowings under both of the
guaranteed lines are repaid immediately upon the sale of the guaranteed portion
on the secondary market.
The credit lines, along with the anticipated proceeds from sales of
guaranteed loans in the secondary market, the proceeds from periodic sales of
interests in the unguaranteed portion of loans, the cash generated from the
existing portfolio in the form of interest and servicing income, and the regular
principal repayments on loans 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
has yet to forecast the costs associated with making all such systems Year 2000
compliant. 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, its 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.
13
<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 September 30, 1998.
14
<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: January 22, 1999 By: /s/ Robert F. Tannenhauser
-------------------------------------
Robert F. Tannenhauser
President
By: /s/ Jennifer M. Goldstein
-------------------------------------
Jennifer M. Goldstein
Chief Financial Officer and Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,217,000
<SECURITIES> 5,587,000
<RECEIVABLES> 38,294,000
<ALLOWANCES> 672,000
<INVENTORY> 0
<CURRENT-ASSETS> 17,517,000
<PP&E> 1,141,000
<DEPRECIATION> 392,000
<TOTAL-ASSETS> 59,730,000
<CURRENT-LIABILITIES> 2,104,000
<BONDS> 0
0
0
<COMMON> 199,000
<OTHER-SE> 15,104,000
<TOTAL-LIABILITY-AND-EQUITY> 59,730,000
<SALES> 2,671,000
<TOTAL-REVENUES> 4,626,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,597,000
<LOSS-PROVISION> 52,000
<INTEREST-EXPENSE> 836,000
<INCOME-PRETAX> 977,000
<INCOME-TAX> 410,000
<INCOME-CONTINUING> 567,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 567,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
