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 March 31, 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, 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 |_|
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 March 31, 1999
--------------------------- -----------------------------
Common stock $.01 par value 20,262,624
<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>
March 31, June 30,
1999 1998
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Loans receivable, net $17,626,000 $22,040,000
Loans held for sale 5,917,000 7,160,000
Cash 3,107,000 1,730,000
Cash - restricted 762,000 638,000
Accounts receivables - loans sold 5,380,000 8,252,000
Accounts and other receivables 6,253,000 1,006,000
Prepaid expenses and deposits 382,000 433,000
Leasehold improvements, furniture and equipment,
net of accumulated depreciation 985,000 742,000
Servicing assets 4,555,000 3,270,000
Residual interests 8,711,000 5,721,000
Deferred income taxes 899,000 991,000
Deferred financing costs, net of
accumulated amortization 591,000 832,000
----------- -----------
TOTAL ASSETS $55,168,000 $52,815,000
=========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable $26,871,000 $32,541,000
Accounts payable & accrued expenses 1,377,000 1,163,000
Due to participants 1,483,000 264,000
Debentures 4,103,000 3,328,000
Debt 562,000 46,000
Customer deposits 1,591,000 1,204,000
----------- -----------
Total liabilities 35,987,000 38,546,000
----------- -----------
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
20,262,624 and 19,778,449 respectively 203,000 197,000
Additional paid in capital 12,675,000 10,840,000
Retained earnings 5,703,000 2,762,000
Accumulated other comprehensive income 600,000 470,000
----------- -----------
Total shareholders' equity 19,181,000 14,269,000
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $55,168,000 $52,815,000
=========== ===========
</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 For the nine months ended
-------------------------- -------------------------
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of loans $ 2,515,000 $ 2,096,000 $ 9,958,000 $ 6,865,000
Interest income 632,000 518,000 2,750,000 1,830,000
Service fee income 965,000 554,000 2,115,000 1,182,000
Origination income 316,000 236,000 1,069,000 923,000
Miscellaneous 2,000 32,000 32,000 35,000
----------- ----------- ----------- -----------
Total revenues 4,430,000 3,436,000 15,924,000 10,835,000
----------- ----------- ----------- -----------
EXPENSES:
Operating costs 2,117,000 1,467,000 6,588,000 4,371,000
General and administrative 712,000 482,000 2,170,000 1,298,000
Interest 594,000 527,000 2,273,000 1,565,000
----------- ----------- ----------- -----------
Total expenses 3,423,000 2,476,000 11,031,000 7,234,000
----------- ----------- ----------- -----------
Income before provision for income taxes 1,007,000 960,000 4,893,000 3,601,000
Provision for income taxes 398,000 358,000 1,952,000 1,329,000
----------- ----------- ----------- -----------
NET INCOME $ 609,000 $ 602,000 $ 2,941,000 $ 2,272,000
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
Earnings per share, basic $ 0.03 $ 0.03 $ 0.15 $ 0.13
=========== =========== =========== ===========
Earnings per share, diluted $ 0.03 $ 0.03 $ 0.13 $ 0.11
=========== =========== =========== ===========
Weighted average number of common shares 20,010,987 18,703,853 19,927,973 17,852,501
----------- ----------- ----------- -----------
Weighted average number of common shares
and dilutive securities outstanding 24,052,345 23,420,466 24,064,527 20,669,168
----------- ----------- ----------- -----------
</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 NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
Number of Paid in Retained Comprehensive
Shares Amount Capital Earnings Income 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 nine months ended March 31, 1999:
Net income -- -- 2,941,000 -- 2,941,000
Warrants exercised 484,175 6,000 274,000 280,000
Pre-confirmation net operating loss utilization -- 1,561,000 -- -- 1,561,000
Change in unrealized gain on residual
interests, net of income tax effect -- -- -- -- 130,000 130,000
----------- ---------- ----------- ----------- ---------- -----------
Balance, March 31, 1999 20,262,624 $ 203,000 $12,675,000 $ 5,703,000 $ 600,000 $19,181,000
=========== ========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PART I - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONSENSED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 609,000 $ 602,000 $2,941,000 $2,272,000
Unrealized gain on residual interests,
net of tax 63,000 35,000 130,000 102,000
---------- ---------- ---------- ----------
Comprehensive Income $ 672,000 $ 637,000 $3,071,000 $2,374,000
========== ========== ========== ==========
</TABLE>
6
<PAGE>
PART I - FINANCIAL STATEMENT
BLC FINANCIAL SERVICES, INC
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,941,000 $ 2,272,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation & amortization 1,184,000 111,000
Utilization of pre-confirmation net operating losses 1,561,000 1,156,000
Provisions for credit losses 526,000 (50,000)
Convert Interest Accrual to notes Payable 1,237,000
Changes in assets and liabilities:
Loans held for sale 1,243,000 (2,304,000)
Restricted cash (124,000)
Accounts receivable - loans sold 2,872,000 (2,077,000)
Accounts and other loans receivable (5,247,000) (555,000)
Servicing asset (1,850,000)
Due from participants (31,000)
Due to participants 1,219,000 (524,000)
Prepaid expenses and deposits 51,000 (134,000)
Deferred tax asset 75,000
Deferred financed costs (534,000)
Accounts payable & accrued expenses 214,000 393,000
Customer deposits 387,000 677,000
------------ ------------
Net cash provided by (used in) operating activities 4,977,000 (288,000)
------------ ------------
Cash flows from investing activities:
Loans originated and purchased (20,591,000) (30,068,000)
Principal collections & sale of loans receivable 24,479,000 24,559,000
Origination of residual interests (3,507,000)
Principal collections of residual interests 739,000 139,000
Acquisition of equipment (403,000) (545,000)
------------ ------------
Net cash used in investing activities 717,000 (5,915,000)
------------ ------------
Cash flows from financing activities:
Net Borrowings under credit lines 16,664,000 6,910,000
Proceeds from debentures 775,000 3,328,000
Principal payments on notes payable (22,334,000)
Principal payments on debt 516,000 (82,000)
Net borrowings from affiliates -- (2,594,000)
Increase in deferred financing cost (218,000)
Proceeds from exercise of warrants 280,000 1,218,000
------------ ------------
Net cash provided by (used in) financing activities (4,317,000) 8,780,000
------------ ------------
Net increase (decrease) in cash 1,377,000 2,577,000
Cash - beginning of period 1,730,000 803,000
------------ ------------
Cash - end of period $ 3,107,000 3,380,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during period for interest expense $ 2,322,000 $ 639,000
============ ============
Cash paid during period for income taxes $ 869,000 $ 153,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 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
nine-month period ended March 31, 1999 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
NINE MONTHS ENDED MARCH 31, 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, 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
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
Per share information
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 nine months ended March 31, 1999 and
1998 are as follows:
Balance at June 30, 1998 $ 641,000 Balance at June 30, 1997 $ 901,000
Provision for loan losses 506,000 Provision for loan losses 74,000
Write-off (258,000) Write-off (124,000)
Recoveries 20,000 Recoveries -0-
--------- ---------
Balance at March 31, 1999 $ 909,000 Balance at March 31, 1998 $ 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 MARCH 31, 1999
Results of Operations:
Quarter Ended March 31, 1999 vs. Quarter Ended March 31, 1998
The Company recorded net income of approximately $609,000 (or $.03 per
share) for the three months ended March 31, 1999 as compared to net income of
approximately $602,000 (or $.03 per share) for the three months ended March 31,
1998. Net income before provision for income taxes was $1,007,000 for the
quarter ended March 31, 1999 as compared to $960,000 for the quarter ended March
31, 1998.
Revenues for the three months ended March 31, 1999 increased from
approximately $3,436,000 for the three months ended March 31, 1998 to
approximately $4,430,000, or approximately 29%. This rise in revenues can be
attributed to an increase in the total serviced loan portfolio of the Company as
well as an increase in loan originations and subsequent loan sales during the
respective periods. At March 31, 1999 the Company maintained a total serviced
loan portfolio of 422 loans which approximated $226,974,000 as compared to 321
loans approximating $140,600,000 at March 31, 1998.
Interest income increased from approximately $518,000 for the three months
ended March 31, 1998 to approximately $632,000 for the three months ended March
31, 1999, or by 22%. This was primarily due to an increase in the outstanding
retained loan portfolio held by the Company during the quarter, which included
both the unguaranteed portions of loans held as well as the guaranteed portion
of loans held for multiple disbursements and/or construction disbursements. The
Company's retained loan portfolio at March 31, 1999 approximated $19,945,000 as
compared to $14,439,000 at March 31, 1998. Offsetting this 38% portfolio
increase, was a decrease in the prime rate during these periods. At March 31,
1998, the prime rate, which is the base rate for all of the Company's loan
originations, was 8.5% as compared to a prime rate of 7.75% at March 31, 1999.
Service fee income increased by approximately 74% from the prior year's
quarter primarily due to the Company's increased serviced and sold loan
portfolio which approximated $187,574,000 at March 31, 1999 compared to
$127,000,000 at March 31, 1998. Servicing fees earned by the Company on those
guaranteed loans sold in the secondary market have ranged between .50% and 2.6%
per annum. In addition, the Company continues to earn additional residual
interest income, net of principal payments, on those unguaranteed loans
securitized during the prior fiscal year and has earned residual interest income
on the unguaranteed loans securitized during the current fiscal year.
Loans in the aggregate principal amount of approximately $28,106,000 were
originated and funded during the three months ended March 31, 1999, as compared
to loans in the aggregate principal amount of approximately $15,481,000 for the
three months ended March 31, 1998. The guaranteed principal amount of the loans
funded during the three months ended March 31, 1999 aggregated approximately
$20,860,000 as compared to the aggregate guaranteed principal of approximately
$11,000,000 for the prior year's period. During the three months ended March 31,
1999, approximately $18,963,000 of guaranteed loans were sold in the secondary
market at premium rates approximating 10%. This compares to $12,759,000 in
guaranteed loans sold in the secondary marketplace during the prior year's
quarter. The sale of these guaranteed loans together with the securitization of
the unguaranteed portion of loan pools during the quarter resulted in gains
11
<PAGE>
on the sale of loans of $2,515,000 for the three months ended March 31, 1999, as
compared to $2,096,000 for the same period last year.
On March 25, 1999, the Company sold the remaining prefunded loans relating
to its SBA Loan-Backed Adjustable Rate Certificates Series 1998-1 in the
aggregate principal amount of $4,844,000 as compared to the same period last
year when the Company sold prefunded loans in the amount of $3,500,000 relating
to its SBA Loan Backed Adjustable Rate Certificates Series 1997-1. The initial
securitization for each of these unguaranteed loan sales took place in December
of 1998 and1997, respectively.
The Company continues its loan origination activities through the
consolidated efforts of its loan production offices located in Richmond,
Virginia, Alexandria, Virginia (near Washington D.C.), Panama City, Florida,
Wichita, Kansas, Plano, Texas, Seattle, Washington, Charleston, South Carolina
and Phoenix, Arizona. During the quarter ended March 31, 1999, the Company
opened additional origination offices in Oklahoma City, Oklahoma, Boston,
Massachusetts, and Tinton Falls, New Jersey.
At March 31, 1999, 31 proposed loans in the aggregate principal amount of
approximately $16,042,000 had received both Business Loan Center and SBA
approval and were awaiting closing. An additional eight proposed loans in the
aggregate principal amount of approximately $6,490,000 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 March 31, 1999, six proposed loans in the approximate aggregate
principal amount of $12,345,000 had received both BLC Commercial Capital Corp.
and USDA approval and were awaiting closing. In addition, five proposed loans in
the approximate aggregate principal amount of $16,500,000 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 $1,467,000
for the three months ended March 31, 1998 to approximately $2,117,000 for the
quarter ended March 31, 1999. This increase resulted from increases in payroll,
commissions and travel associated with continued growth. With the addition of
new offices during the quarter, the Company experienced an unusually high rate
of operational expenses. It is expected that a corresponding increase in loan
origination levels, and therefore, revenues will result from these production
offices over the ensuing months.
General and administrative expenses of approximately $712,000 for the
three months ended March 31, 1999 increased from approximately $482,000 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 13 % during the three months
ended March 31, 1999 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 somewhat offset by an interest rate
reduction obtained by the Company from its lender.
12
<PAGE>
Results of Operations:
Nine Months Ended March 31, 1999 vs. Nine Months Ended March 31, 1998
The Company recorded net income of $2,941,000 (or $.15 per share) for the
nine months ended March 31, 1999, as compared to net income of approximately
$2,272,000 (or $.13 per share) for the nine months ended March 31, 1998. Net
income before provision for income taxes was $4,893,000 for the nine months
ended March 31, 1999 as compared to $3,601,000 for the nine months ended March
31, 1998.
Revenues for the nine months ended March 31, 1999 increased to
approximately $15,924,000 from $10,835,000 for the nine months ended March 31,
1998 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 $1,830,000 for the nine
months ended March 31, 1998 to approximately $2,750,000 for the nine months
ended March 31, 1999. This increase directly resulted from the increase in the
Company's performing retained loan portfolio which was partially offset by a
reduction in the prime interest rate, which is the base rate for the Company's
loan agreement.
Service fee income increased from approximately $1,182,000 for the nine
months ended March 31, 1998 to approximately $2,115,000 for the nine months
ended March 31, 1999. This 78% increase directly resulted from the increased
serviced loan portfolio, as the Company continues to earn servicing fees of
between .50% 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 principal payments, on those unguaranteed loans
securitized during the prior fiscal year and has earned residual interest income
on the unguaranteed loans securitized during the current fiscal year.
Gains on the sale of both the guaranteed and unguaranteed portion of loans
for the nine months ended March 31, 1999 approximated $9,958,000, as compared to
approximately $6,865,000 for the nine months ended March 31, 1998. Generating
these revenues were loans originated during the nine months ended March 31, 1999
which approximated $81,773,000 as compared to loans in the approximate aggregate
principal amount of $55,232,000 for the nine months ended March 31, 1998. The
SBA-guaranteed principal amount of the loans originated during the nine months
ended March 31, 1999 aggregated approximately $59,495,000, as compared to the
aggregate guaranteed principal of approximately $39,088,000 for the prior year's
period. The majority of loans originated during the nine month periods were sold
in the secondary market immediately subsequent to the closing of each loan, at
premium rates approximating 10%.
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 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 paid
annual interest rates of 6.75 percent and 6.95 percent, respectively, during the
initial accrual period. Thereafter, the Class A Certificates have paid a per
annum interest rate equal to the Prime Rate less 100 basis points. The Class B
Certificates paid 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
13
<PAGE>
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.
Operating expenses of the Company increased by 51% over the prior year's
period primarily as a result of an increase in the number of employees which led
to higher payroll and fringe benefits expenses as well as an increase in
commission and travel associated with continued growth of the operations.
General and administrative expenses of approximately $2,170,000 for the
nine months ended March 31, 1999 increased from approximately $1,298,000 for the
prior year's period as a result of opening new offices, general corporate
services, and amortization of costs associated with the additional financing
obtained during prior years.
Interest expense increased during the nine months ended March 31, 1999 by
approximately 45% from the prior year's period due to increased borrowing to
meet the continued growth in loan production activity during this period.
14
<PAGE>
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 which was increased to
$50,000,000 during the nine months ended March 31, 1999, 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 nine months ended March 31, 1999, 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 lines.
The Class A and B Certificates 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.
In addition, the Company, through a private placement in convertible
debentures, raised an initial $775,000 during the quarter ended March 31, 1999.
The debentures are convertible into common stock at the greater of $3.50 per
share or 130% of the average market price per share for the five business days
immediately preceding the date the subscription is accepted by the Company. The
debentures have a four year term and pay interest quarterly at the rate of 9%
per annum.
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 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
15
<PAGE>
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 has been testing its technical infrastructure and hardware
and, based on information available to date, and expects them to be fully
operational in the Year 2000. The Company has already remediated several
computers that did not pass the preliminary testing. The Company will continue
to evaluate whether to repair, retire or upgrade or replace systems and
components with priorities 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. 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.
While the Company has received assurances from the vendor of its servicing
system compliance with Year 2000, the Company will continue its testing to
ensure compliance. A dummy system has already been established and testing has
commenced. 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.
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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - None
b. A Form 8K was filed by the Company on February 12, 1999
reporting the sale of its SBA Loan Backed Adjustable
Rate Class A and Class B Certificate Series 1998-1.
17
<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: May 17, 1999 By:
--------------------------------------
Robert F. Tannenhauser
President
By:
------------------------------
Jennifer M. Goldstein
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 3,869,000
<SECURITIES> 8,711,000
<RECEIVABLES> 29,259,000
<ALLOWANCES> 909,000
<INVENTORY> 0
<CURRENT-ASSETS> 17,932,000
<PP&E> 1,489,000
<DEPRECIATION> (503,000)
<TOTAL-ASSETS> 55,168,000
<CURRENT-LIABILITIES> 3,422,000
<BONDS> 4,103,000
0
0
<COMMON> 203,000
<OTHER-SE> 18,978,000
<TOTAL-LIABILITY-AND-EQUITY> 55,168,000
<SALES> 2,515,000
<TOTAL-REVENUES> 4,430,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,423,000
<LOSS-PROVISION> 280,000
<INTEREST-EXPENSE> 594,000
<INCOME-PRETAX> 1,007,000
<INCOME-TAX> 398,000
<INCOME-CONTINUING> 609,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 609,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>