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, 1999
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, 19th 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 |_|
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, 1999
---------------------- ------------------------------------
Common stock $.01 par value 20,288,875
<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.
This Form 10Q may contain forward-looking statements which are
inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified based on current expectations. Please refer to
the "Risk Factors" setforth in the Company's Form 10K filed with the
Securities and Exchange Commission for the fiscal year ended June 30,
1999. Actual results and the timing of certain events could differ
materially from those indicated in the forward-looking statements as a
result of these and other factors.
2
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
<S> <C> <C>
ASSETS
Loans receivable, net $30,697,000 $21,936,000
Loans held for sale 11,115,000 8,922,000
Cash 2,439,000 4,229,000
Cash - restricted 2,111,000 1,728,000
Accounts receivables - loans sold 6,444,000 8,982,000
Accounts and other receivables 1,609,000 2,681,000
Prepaid expenses and deposits 645,000 464,000
Leasehold improvements, furniture and equipment,
net of accumulated depreciation 1,340,000 1,207,000
Servicing assets 5,089,000 4,761,000
Residual interests 11,122,000 10,877,000
Deferred income taxes 982,000 1,000,000
Security Deposit 144,000 131,000
Deferred financing costs, net of
accumulated amortization 767,000 669,000
Other Assets 604,000 450,000
----------- ------------
TOTAL ASSETS $75,108,000 $68,037,000
=========== ============
LIABILITIES and SHAREHOLDERS' EQUITY
LIABILITIES
Advances under credit facilities $44,576,000 $39,488,000
Accounts payable & accrued expenses 795,000 643,000
Due to participants 1,796,000 1,640,000
Allowance for estimated future losses on loans sold 83,000 77,000
Debentures 5,387,000 4,725,000
Notes Payable 95,000 120,000
Customer deposits 2,483,000 2,197,000
------------ ------------
Total liabilities 55,215,000 48,890,000
============ ============
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
20,288,875 and 20,288,875 respectively 202,000 202,000
Additional paid in capital 12,906,000 12,659,000
Retained earnings 6,337,000 5,865,000
Accumulated other comprehensive income 448,000 421,000
------------ -----------
Total shareholders' equity 19,893,000 19,147,000
------------ -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $75,108,000 $68,037,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30, 1999
<S> <C> <C> <C>
1999 1998 1997
REVENUES:
Gain on sale of loans $ 2,119,000 $ 2,671,000 $ 1,400,000
Interest income 1,132,000 1,010,000 491,000
Service fee income 685,000 420,000 247,000
Miscellaneous 577,000 525,000 243,000
------------ --------- ---------
Total revenues 4,513,000 4,626,000 2,381,000
------------ --------- ---------
EXPENSES:
Operating costs 2,102,000 2,091,000 1,283,000
General and administrative 775,000 722,000 367,000
Interest 854,000 836,000 355,000
------------ --------- ---------
Total expenses 3,731,000 3,649,000 2,005,000
------------ --------- ---------
Income before provision for income taxes 782,000 977,000 376,000
Provision for income taxes 310,000 410,000 151,000
------------ ----------- ----------
NET INCOME $ 472,000 $ 567,000 $ 225,000
=============================================
NET INCOME PER COMMON SHARE
Earnings per share, basic $ 0.02 $ 0.03 $ 0.01
Earnings per share, diluted $ 0.02 $ 0.03 $ 0.01
Weighted average number of common shares 20,288,875 19,856,304 17,341,243
---------------------------------------------
Weighted average number of common shares
and dilutive securities outstanding 24,188,438 24,430,814 18,701,278
---------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Accumulated
---------------------- Additional Other
Number Paid-in Retained Comprehensive Comprehensive
of Shares Amount Capital Earnings Income Income Total
----------- --------- ------------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30,1999 20,288,875 $ 202,000 $ 12,659,000 $5,865,000 $ 421,000 $ 19,147,000
For the three months
ended September 30,
1999
Net Income - - 472,000 - 472,000 472,000
Warrants exercised -
Pre-confirmation net
operating loss
utilization - 247,000 - - 247,000
Change in unrealized
gain on residual
interests, net
of income tax effect - - - - 27,000 27,000 27,000
----------- ------------- ------------- ------------- ------------ ---------------- -------------
Balance, September 30,
1999 20,288,875 $ 202,000 $ 12,906,000 $6,337,000 448,000 $ 499,000 $ 19,893,000
=========== ============= ============= ============= ============ ================ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PART I - FINANCIAL STATEMENT
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
1999 1998
<S> <C> <C>
---------- ----------
Cash flows from operating activities:
Net income $ 472,000 $ 567,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 438,000 353,000
Utilization of pre-confirmation net operating losses 247,000 332,000
Provisions for credit losses 29,000 52,000
Loans held for sale (2,193,000) 968,000
Restricted cash (383,000) 191,000
Accounts receivable - loans sold 2,538,000 170,000
Accounts and other loans receivable 1,072,000 (212,000)
Servicing asset (591,000) (516,000)
Due to participants 156,000 1,045,000
Security deposits (13,000)
Prepaid expenses (181,000) 48,000
Other Assets (154,000)
Accounts payable & accrued expenses 152,000 (387,000)
Customer deposits 286,000 (49,000)
---------- ----------
Net cash provided by operating activities 1,875,000 2,562,000
---------- ----------
Cash flows from investing activities:
Loans originated and purchased (9,209,000) (7,437,000)
Principal collections & sale of loans receivable 425,000 397,000
Origination of residual interests (535,000) (657,000)
Principal collections of residual interests 335,000 208,000
Acquisition of equipment (206,000) (57,000)
---------- ----------
Net cash used in investing activities (9,190,000 (7,546,000)
---------- ----------
Cash flows from financing activities:
Net Borrowings under credit lines 5,088,000 3,790,000
Proceeds from debentures 662,000 -
Principal payments on debt (25,000) (27,000)
Net borrowings from affiliates - 1,077,000
Increase in deferred financing cost (200,000) (34,000)
Proceeds from exercise of warrants - 88,000
----------- -----------
Net cash provided by financing activities 5,525,000 4,894,000
----------- -----------
Net decrease in cash (1,790,000) (90,000)
Cash - beginning of period 4,229,000 1,730,000
------------ -----------
Cash - end of period $ 2,439,000 $1,640,000
============ ===========
Supplemental disclosures of cash flow information:
--------------------------------------------------
Cash paid during period for interest expense $ 775,509 $ 371,000
------------ ----------
Cash paid during period for income taxes $ 189,512 $ 527,000
------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED September 30, 1999
(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, 1999 are not necessarily indicative of
the results that may be expected for the year ending June 30, 2000. 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, 1999.
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.
7
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(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 in the secondary market on a non-recourse 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 collectability of principal.
8
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
Per share information
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, 1998 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,
1999 and 1998 are as follows:
1999 1998
---- ----
Balance at June 30 $914,000 $ 641,000
Provision for loan losses 28,000 86,000
Write-off (39,000) (55,000)
---------- -----------
Balance at September 30 $ 903,000 $ 672,000
========== ===========
9
<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, 1999
Results of Operations - Quarter Ended September 30, 1999 vs.
Quarter Ended September 30, 1998
The Company recorded net income of approximately $472,000 (or $.02 per
basic share) for the three months ended September 30, 1999, as compared to net
income of approximately $567,000 (or $.03 per basic share) for the three months
ended September 30, 1998.
Revenues for the three months ended September 30, 1999 totaled
$4,513,000 compared to $4,626,000 at September 30, 1998 a decrease of 2.4%. At
September 30, 1999, the Company maintained a serviced loan portfolio of 497
loans, which approximated $273,921,000 as compared to 383 loans, which
approximated $196,865,000 at September 30, 1998.
Gain on sale of loans decreased from $2,671,000 at September 30, 1998
to $2,119,000 at September 30, 1999, a decrease of 21%. This decrease can be
attributed to lower premiums earned on the sale of the guaranteed portion of the
loan. The average premium earned on loans sold during the quarter ended
September 30, 1999 was approximately 107% as compared to approximately 110% for
the quarter ended September 30, 1998. In some instances the Company has elected
to sell the guaranteed portion of the loans at par. The Company believes that by
selling the guaranteed loans at par it should earn higher service fees over the
estimated life of the loans. The Company will continue to evaluate market
conditions in determining whether to sell at par or at a premium.
Interest income increased from approximately $1,010,000 for the three
months ended September 30, 1998 to approximately $1,132,000 for the three months
ended September 30, 1999, or by approximately 12%. This was due to an increase
in the average outstanding and performing retained loan portfolio held by the
Company during the three months ended September 30, 1999. The performing and
retained loan portfolio was $45,207,000 at September 30, 1999 compared to
$35,361,000 at September 30, 1998.
Service fee income, increased by approximately 63% from the prior
year's quarter, due in part to the Company's increased serviced and sold loan
portfolio which approximated $212,516,000 at September 30, 1999 compared to
$142,411,000 at September 30, 1998. In addition, the Company continues to earn
additional residual interest income on unguaranteed loans securitized and
guaranteed loans sold. Service fees and residual interest earned on those
guaranteed loans sold in the secondary market have ranged between .50% and
4.41%.
Loans in the aggregate amount of approximately $34,267,000 were funded
by the Company during the three months ended September 30, 1999, as compared to
loans in the aggregate principal amount of approximately $29,795,000 for the
three months ended September 30, 1998. The guaranteed principal amounts of the
loans funded during the three months ended September 30, 1999 aggregated
$24,891,000 compared to approximately, $21,624,000 for the prior year's period.
10
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED SEPTEMBER 30, 1999
Results of Operations - Quarter Ended September 30, 1999 vs.
Quarter Ended September 30, 1998 (continued)
The increase in the Company's loan volume during the quarter ended
September 30, 1999 resulted from increased origination activities from the
consolidated efforts of the Company's loan production offices located in
Richmond and Alexandria, Virginia, Panama City, Florida, Wichita, Kansas,
McKinney, Texas, Seattle, Washington, Phoenix, Arizona, Charleston, South
Carolina, Omaha, Nebraska, Oklahoma City, Oklahoma, Memphis, Tennessee, Boston
Massachusetts and Tinton Falls, NJ.
At September 30, 1999, 34 proposed loans in the approximate aggregate
principal amount of $19,252,000 had received both Business Loan Center and SBA
approval and were awaiting closing. In addition, 73 proposed loans in the
approximate aggregate principal amount of $44,232,000 were approved by Business
Loan Center and awaiting submission to the SBA or awaiting SBA approval.
Business Loan Center's existing capital resources should enable it to fund these
loans and additional loans in process.
At September 30, 1999, five proposed loans in the approximate
aggregate principal amount of $15,845,000 had received both BLC Commercial
Capital Corp. and USDA approval and were awaiting closing. In addition, 11
proposed loans in the approximate aggregate principal amount of $30,705,000 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
$2,091,000 for the three months ended September 30, 1998 to approximately
$2,102,000 for the quarter ended September 30, 1999, an increase of less than
1%.
General and administrative expenses of approximately $775,000 for the
three months ended September 30, 1999 increased from approximately $722,000, an
increase of 7%. This increase is primarily due to additional loan production
rent expenditures.
Interest expense increased by approximately 2% during the three months
ended September 30, 1999 as compared to the prior year's period. Although the
Company increased its borrowings under its line of credit by approximately 23%,
this was offset by a reduction in the interest rate charged on the line of
credit.
11
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED SEPTEMBER 30, 1999
Liquidity and Capital Resources
The Company actively engages in commercial lending through Business
Loan Center, BLC Commercial Capital Corp., and BLC Capital Corp., and therefore,
the Company has a constant need for debt financing. Cash used by the Company and
its subsidiaries to fund loans, repay existing debt and to fund operating
expenses is currently provided only partially through collections on loans and
proceeds from loan sales. The remainder of the Company's cash requirements is
derived from existing capital and short and long-term borrowing.
The Company currently maintains a $50,000,000 credit facility to fund
both the guaranteed and unguaranteed portion of 7(a) Program loan originations,
as well as a $15,000,000 credit facility to fund both the guaranteed and
unguaranteed portion of B&I loans. During the year ended June 30, 1999, interest
rates on the 7(a) Program facility were reduced on both the guaranteed and
unguaranteed portion of the loan. Borrowings under the guaranteed line are
repaid immediately upon the sale of the guaranteed portion on the secondary
market.
The Company believes that its current capital resources and future
cash flows will be sufficient to meet its future financial obligations and
projected capital requirements, based on the resources provided by the credit
facilities described above, 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 receivable. Management
believes that the Company should be able to originate and fund at least $140
million in new loans during the fiscal year ending June 30, 2000. However, there
can be no assurances that the Company will be able to achieve this level.
12
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED September 30, 1999
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 may 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 recently completed testing its technical infrastructure
and hardware and has made the required remediations to computers that did not
pass preliminary testing. The Company expects these computers to be fully
operational in the Year 2000.
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. To date, the Company's costs
associated with Year 2000 issues have not been material.
The Company has received assurances from the vendor of its servicing
system, that their system is Year 2000 compliant. A dummy system was established
and has shown satisfactory results in the Year 2000 environment. However, 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 been estimated to be no greater than $70,000.
The Company has discussed its non-technology risks, (air conditioning
and heating, lighting, safety and security systems), with its property manager,
who has assured the Company these systems will be Year 2000 compliant prior to
December 31, 1999.
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, 1999.
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: November 15, 1999 By: /s/ Robert F. Tannenhauser
------------------------------
Robert F. Tannenhauser
President
By: /s/ Jennifer M. Goldstein
------------------------------
Jennifer M. Goldstein
Chief Financial Officer and
Treasurer
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-START> Jul-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 4,550,000
<SECURITIES> 11,122,000
<RECEIVABLES> 44,324,000
<ALLOWANCES> 903,000
<INVENTORY> 0
<CURRENT-ASSETS> 15,808,000
<PP&E> 1,985,000
<DEPRECIATION> 645,000
<TOTAL-ASSETS> 75,108,000
<CURRENT-LIABILITIES> 2,591,000
<BONDS> 5,387,000
0
0
<COMMON> 202,000
<OTHER-SE> 19,691,000
<TOTAL-LIABILITY-AND-EQUITY> 75,108,000
<SALES> 0
<TOTAL-REVENUES> 4,513,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,877,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 854,000
<INCOME-PRETAX> 782,000
<INCOME-TAX> 310,000
<INCOME-CONTINUING> 472,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472,000
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
