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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, 2000
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.
<TABLE>
<S> <C>
DELAWARE 75-1430406
(State or 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)
</TABLE>
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.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT OCTOBER 27, 2000
Common stock $.01 par value 22,061,443
</TABLE>
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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 10-Q 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" set
forth in the Company's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended June 30, 2000. 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.
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PART I. FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- --------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) (UNAUDITED)
<S> <C> <C>
Assets
Loans receivable -- net................................... $20,854 $22,291
Loans held for sale....................................... 5,842 7,494
Cash...................................................... 7,202 9,609
Restricted cash........................................... 1,864 1,860
Accounts receivable -- loans sold......................... 9,786 15,121
Accounts and other receivables............................ 2,126 1,803
Prepaid expenses and deposits............................. 652 592
Leasehold improvements, furniture and equipment, net of
accumulated depreciation............................... 1,253 1,288
Servicing assets.......................................... 7,507 7,189
Residual interests........................................ 17,284 16,794
Deferred financing costs, net of accumulated
amortization........................................... 1,046 1,132
Other assets.............................................. 647 723
------- -------
Total assets...................................... $76,063 $85,896
======= =======
Liabilities
Advances under credit facilities.......................... $36,353 $45,840
Accounts payable and accrued expenses..................... 1,262 2,073
Due to participants....................................... 2,239 2,466
Allowance for estimated future losses on loans sold....... 6 10
Convertible debentures.................................... 6,486 6,486
Customer deposits......................................... 1,773 2,443
Deferred income tax liability............................. 1,737 1,487
------- -------
Total liabilities................................. 49,856 60,805
------- -------
Shareholders' equity:
Preferred stock, $.10 par value:
Authorized -- 2,000,000 shares, issued and
outstanding -- none
Common stock, $.01 par value:
Authorized -- 35,000,000 shares, issued and outstanding
21,546,936 and 20,467,875, respectively............... 215 205
Additional paid-in capital................................ 13,744 12,923
Retained earnings......................................... 11,899 11,147
Notes receivable for exercise of options.................. (522) 0
Accumulated other comprehensive income -- unrealized gain
on residual interests.................................. 871 816
------- -------
Total shareholders' equity........................ 26,207 25,091
------- -------
Total liabilities and shareholders' equity........ $76,063 $85,896
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
2
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BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------ ------ ------
<S> <C> <C> <C>
Revenues:
Gain on sale of loans..................................... $3,195 $2,119 $2,671
Interest income........................................... 990 1,132 1,010
Service fee income........................................ 786 685 420
Miscellaneous............................................. 529 577 525
------ ------ ------
Total revenues.................................... 5,500 4,513 4,626
------ ------ ------
Expenses:
Operating costs........................................... 2,495 2,102 2,091
General and administrative................................ 808 775 722
Interest.................................................. 945 854 836
------ ------ ------
Total expenses.................................... 4,248 3,731 3,649
------ ------ ------
Income before provision for income taxes.................... 1,252 782 977
Provision for income taxes.................................. 500 310 410
------ ------ ------
Net income.................................................. $ 752 $ 472 $ 567
====== ====== ======
Earnings per share
Basic..................................................... $ 0.04 $ 0.02 $ 0.03
Diluted................................................... $ 0.03 $ 0.02 $ 0.03
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
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BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
COMMON STOCK FOR ACCUMULATED
------------------- ADDITIONAL EXERCISE OTHER
NUMBER OF PAID-IN RETAINED OF COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS OPTIONS INCOME
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) ---------- ------ ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 2000... 20,467,875 $205 $12,923 $11,147 $816
Net income... 752
Warrants and non-qualifiedoptions
exercised... 1,079,061 10 642 (522)
Pre-confirmation net operatingloss
utilization... 179
Change in unrealized gainon residual
interests, net of
income tax effect... 55
---------- ---- ------- ------- ----- ----
Balance, September 30, 2000... 21,546,936 $215 $13,744 $11,899 $(522) $871
========== ==== ======= ======= ===== ====
<CAPTION>
COMPREHENSIVE
INCOME TOTAL
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) ------------- -------
<S> <C> <C>
Balance, June 30, 2000... $25,091
Net income... 752 752
Warrants and non-qualifiedoptions
exercised... 130
Pre-confirmation net operatingloss
utilization... 179
Change in unrealized gainon residual
interests, net of
income tax effect... 55 55
---- -------
$807
====
Balance, September 30, 2000... $26,207
=======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE> 6
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
(IN THOUSANDS) -------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 752 $ 472
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 655 438
Provisions for credit losses........................... 150 29
Deferred income tax expense............................ 429 247
Loans held for sale.................................... 1,652 (2,193)
Changes in:
Restricted cash........................................ (4) (383)
Accounts receivable -- loans sold...................... 5,335 2,538
Accounts and other receivables......................... (323) 1,072
Servicing asset........................................ (725) (591)
Due to participants.................................... (227) 156
Prepaid expenses and other............................. (60) (348)
Accrued expenses....................................... (811) 152
Customer deposits...................................... (670) 286
------- -------
Net cash provided by operating activities......... 6,153 1,875
------- -------
Cash flows from investing activities:
Loans originated and purchased............................ (6,799) (9,209)
Principal collections and sales of loans receivable....... 8,159 425
Origination of residual interests......................... (1,163) (535)
Principal collections of residual interests............... 728 335
Acquisition of equipment.................................. (54) (206)
------- -------
Net cash provided by (used in) investing
activities....................................... 871 (9,190)
------- -------
Cash flows from financing activities:
Net borrowings under lines of credit...................... (9,487) 5,088
Net proceeds from debentures.............................. 0 662
Proceeds from issuance of common stock and exercise of
warrants and options................................... 130 0
Principal payments on notes payable....................... 0 (25)
Deferred financing cost................................... (74) (200)
------- -------
Net cash provided by (used in) financing
activities....................................... (9,431) 5,525
------- -------
Net decrease in cash........................................ (2,407) (1,790)
Cash at beginning of period................................. 9,609 4,229
------- -------
Cash at end of period....................................... $ 7,202 $ 2,439
======= =======
Supplemental disclosures of cash flow information:
Cash paid during period for interest expense.............. $ 997 $ 776
Cash paid during period for income taxes.................. $ 175 $ 190
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
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BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2000
(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, 2000 are not necessarily indicative of
the results that may be expected for the year ending June 30, 2001. 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, 2000.
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.
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.
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BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS
140") which is effective for periods beginning after December 15, 2000 for
certain provisions and transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. This statement
reconsidered and clarified certain provisions of and supercedes Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities". The Company does not
expect the adoption of FAS 140 to have a material impact on the Company's
results of operations, financial position or cash flows.
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.
DERIVATIVES
In connection with selling loans into a revolving securitization, the
Company enters into interest rate swaps in order to hedge against changes
between the prime rate and LIBOR. These are accounted for as cash flow hedges.
"Statement of Financial Accounting Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities" requires that the impact of cash flow hedges
be included in other comprehensive income until the related cash flow is
recognized in the statement of income.
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" ("FAS 138") which is effective for
periods beginning after June 15, 2000. This statement amends certain provisions
of FAS 133. The Company does not expect the adoption of FAS 138 to have a
material impact on the Company's results of operations, financial position or
cash flows.
7
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BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
2. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses for the three months ended September 30, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
(IN THOUSANDS) ------ ----
<S> <C> <C>
Balance at June 30,......................................... $1,153 $914
Provision for loan loss..................................... 154 28
Write-off................................................... 0 (39)
------ ----
Balance at September 30,.................................... $1,307 $903
====== ====
</TABLE>
3. SUBSEQUENT EVENTS
On October 31, 2000, BLC Financial Services, Inc. entered into a definitive
merger agreement to be acquired by Allied Capital Corporation ("Allied Capital")
through a stock for stock exchange. This transaction will create a private
portfolio company controlled by Allied Capital. Allied Capital also plans to
merge its small business portfolio and Allied Capital Express operations into
the new portfolio company. Allied Capital Express is Allied Capital's small
business lending division.
On November 3, 2000, a purported class action complaint was filed in
connection with this proposed merger transaction. See Part II, Item 1. Legal
Proceedings.
8
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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, 2000
RESULTS OF OPERATIONS -- QUARTER ENDED SEPTEMBER 30, 2000 VS. QUARTER ENDED
SEPTEMBER 30, 1999
The Company recorded net income of approximately $752,000 (or $.04 per
basic share) for the three months ended September 30, 2000, as compared to net
income of approximately $472,000 (or $.02 per basic share) for the three months
ended September 30, 1999.
Revenues for the three months ended September 30, 2000 totaled $5,500,000
compared to $4,513,000 at September 30, 1999 a 22% increase. This increase in
revenues resulted primarily from an increase in gain on sale of loans as well as
an increase in service fee income. At September 30, 2000, the Company maintained
a serviced loan portfolio of 655 loans, which approximated $388,000,000 as
compared to 497 loans, which approximated $273,921,000 at September 30, 1999.
Gain on sale of loans increased from $2,119,000 at September 30, 1999 to
$3,195,000 at September 30, 2000, a 51% increase. This increase can be
attributed to higher premiums earned on the sale of the guaranteed portions of
loans sold, as well as the securitization of $7,658,000 in unguaranteed loans in
the quarter. The average premium on loans sold during the quarter ended
September 30, 2000 was approximately 8%, as compared to 6% in the same quarter
last year. The Company sold $22,054,000 in guaranteed loans during the quarter
ended September 30, 2000 as compared to $22,683,000 in the quarter ended
September 30, 1999.
Interest income decreased from approximately $1,132,000 for the three
months ended September 30, 1999 to approximately $990,000 for the three months
ended September 30, 2000, or by approximately 13%. This decrease was due to the
securitization and sale of the unguaranteed portion of SBA loans during the
quarter ended September 30, 2000. The Company's performing and retained loan
portfolio held by the Company at September 30, 2000 was $31,444,000 compared to
$45,207,000 at September 30, 1999. This decrease in interest income was
partially offset by an increase in the prime rate, which increased to 9.5% at
September 30, 2000 from 8% at September 30, 1999.
Service fee income, increased by approximately 15% from the prior year's
quarter, due in part to the Company's increased serviced and sold loan portfolio
which approximated $332,615,000 at September 30, 2000 compared to $212,516,000
at September 30, 1999. This increase was partially offset by an overall decrease
in the service fee rates earned on the sale of the guaranteed portion of SBA
loans as well as an increase in the amortization or principal payments on the
residual interest. The Company continues to earn additional residual interest
income, on both the unguaranteed and guaranteed loans sold.
Loans in the aggregate amount of approximately $27,495,000 were funded by
the Company during the three months ended September 30, 2000, as compared to
loans in the aggregate principal amount of approximately $34,267,000 for the
three months ended September 30, 1999. The guaranteed principal amounts of the
loans funded during the three months ended September 30, 2000 aggregated
$20,581,000 compared to approximately, $24,891,000 for the prior year's period.
As of September 30, 2000, the Company's loan production offices were
located in Richmond and Alexandria, Virginia (near Washington D.C.), Panama
City, Florida, Wichita, Kansas, McKinney,
9
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Texas, Manalapan and Mt. Arlington, New Jersey, Seattle, Washington, Phoenix,
Arizona, Omaha, Nebraska, Oklahoma City, Oklahoma and Hartford, Connecticut.
At September 30, 2000, 32 proposed loans in the approximate aggregate
principal amount of $13,426,000 had received both Business Loan Center, Inc.
(Business Loan Center) and SBA approval and were awaiting closing. In addition,
70 proposed loans in the approximate aggregate principal amount of $40,241,000
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, 2000, one proposed loan in the approximate aggregate
principal amount of $1,400,000 had received both BLC Commercial Capital Corp.
and USDA approval and were awaiting closing. In addition, 8 proposed loans in
the approximate aggregate principal amount of $34,860,000 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 $2,102,000
for the three months ended September 30, 1999 to approximately $2,495,000 for
the quarter ended September 30, 2000, an increase of 19%. This was due to an
increase in payroll expenses as well as an increase in the allowance for credit
losses.
General and administrative expenses of approximately $808,000 for the three
months ended September 30, 2000 increased from approximately $775,000, an
increase of 4%.
Interest expense increased by approximately 11% during the three months
ended September 30, 2000 as compared to the prior year's period. This was due to
an overall increase in the borrowing base rate as well as increases in
borrowings under the B&I credit facility. This increase was partially offset by
a decrease in the average retained SBA loan portfolio at September 30, 2000, as
a result of the securitization of the SBA unguaranteed loans.
LIQUIDITY AND CAPITAL RESOURCES
The Company actively engages in commercial lending through Business Loan
Center, Inc., 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. Borrowings under the guaranteed line are
repaid immediately upon the sale of the guaranteed portion on the secondary
market.
The Company, through its subsidiary Business Loan Center, Inc., maintains a
revolving securitization facility totaling $75 million. This type of
securitization structure provides for periodic sales of the unguaranteed portion
of the SBA loans into a conduit facility on a revolving basis. As of September
30, 2000, the outstanding balance of loans sold into the facility approximated
$40,182,000.
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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 $190 million in new loans
during the fiscal year ending June 30, 2001. However, there can be no assurances
that the Company will be able to achieve this level.
11
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 3, 2000, a purported class action complaint (C.A. No. 18483)
was filed in the Delaware Court of Chancery on behalf of the shareholders of BLC
by Rebekah Benison, a purported shareholder of BLC, against Robert F.
Tannenhauser, Peter D. Blanck, Jerome B. Alenick, Robert W. D'Loren, Irwin E.
Redlener, Kenneth S. Schwartz, Robert W. Wien, BLC and Allied Capital. The
plaintiff alleges that the members of the BLC Board of Directors have breached
their fiduciary duties to BLC shareholders in approving the merger and related
transactions. Allied Capital is alleged to have aided and abetted this breach by
agreeing to the transaction. The plaintiff seeks various remedies, including an
injunction to prevent the consummation of the merger and compensatory damages in
an unspecified amount. BLC believes that this suit is without merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule
b. No reports were filed by the Company on Form 8-K during the fiscal
quarter ended September 30, 2000.
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.
By: /s/ ROBERT F. TANNENHAUSER
----------------------------------
Robert F. Tannenhauser
President
By: /s/ JENNIFER M. GOLDSTEIN
----------------------------------
Jennifer M. Goldstein
Chief Financial Officer and
Treasurer
Date: November 7, 2000
12
