SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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.
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Delaware 75-143040
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(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
645 Madison Avenue, 19th Floor , New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-751-5626
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 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 1 - FINANCIAL STATEMENTS
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
December 31, June 30,
1999 1999
---- ----
<S> <C> <C>
ASSETS
Loans receivable, net $19,836,000 $21,936,000
Loans held for sale 13,544,000 8,922,000
Cash 3,717,000 4,229,000
Cash - restricted 1,810,000 1,728,000
Accounts receivables - loans sold 11,938,000 8,982,000
Accounts and other receivables 1,714,000 2,681,000
Prepaid expenses and deposits 583,000 464,000
Leasehold improvements, furniture and equipment,
net of accumulated depreciation 1,297,000 1,207,000
Servicing Assets 6,041,000 4,761,000
Residual Interests 13,156,000 10,877,000
Deferred income taxes 838,000 1,000,000
Security deposits 144,000 131,000
Deferred financing costs, net of
accumulated amortization 1,390,000 669,000
Other assets 664,000 450,000
----------- ------------
TOTAL ASSETS $76,672,000 $68,037,000
=========== ============
LIABILITIES and SHAREHOLDERS' EQUITY
LIABILITIES
Advances under credit facilities $41,061,000 $39,488,000
Accounts payable & accrued expenses 1,458,000 643,000
Due to participants 1,927,000 1,640,000
Allowance for estimated future losses on loans sold 112,000 77,000
Debentures 6,246,000 4,725,000
Notes Payable 365,000 120,000
Customer deposits 2,116,000 2,197,000
---------- -----------
TOTAL LIABILITIES 53,285,000 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 14,032,000 12,659,000
Retained earnings 8,489,000 5,865,000
Accumulated other comprehensive income 664,000 421,000
----------- -----------
Total shareholders' equity 23,387,000 19,147,000
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $76,672,000 $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>
For the three months ended For the six months ended
December 31, December 31,
<S> <C> <C> <C> <C>
1999 1998 1999 1998
REVENUES:
Gain on sale of loans $ 5,793,000 $ 4,772,000 $ 7,912,000 $ 7,443,000
Interest income 1,292,000 1,108,000 2,424,000 2,118,000
Service fee income 709,000 730,000 1,394,000 1,150,000
Origination income 488,000 258,000 996,000 753,000
Miscellaneous 44,000 - 113,000 30,000
---------- --------- ---------- ----------
Total revenues 8,326,000 6,868,000 12,839,000 11,494,000
---------- --------- ---------- ----------
EXPENSES:
Operating costs 2,754,000 2,380,000 4,856,000 4,471,000
General and administrative 909,000 736,000 1,684,000 1,458,000
Interest 1,100,000 843,000 1,954,000 1,679,000
Total expenses ---------- --------- --------- ---------
4,763,000 3,959,000 8,494,000 7,608,000
---------- --------- --------- ---------
Income before provision for income taxes 3,563,000 2,909,000 4,345,000 3,886,000
Provision for income taxes 1,410,000 1,144,000 1,720,000 1,554,000
------------ ------------ ----------- -----------
NET INCOME $ 2,153,000 $ 1,765,000 $ 2,625,000 $ 2,332,000
============ ============ =========== ===========
NET INCOME PER COMMON SHARE
Earnings per share, basic $ 0.11 $ 0.09 $ 0.13 $ 0.12
Earnings per share, diluted $ 0.09 $ 0.07 $ 0.11 $ 0.10
Weighted average number of common shares 20,288,875 19,918,449 20,288,875 19,887,378
---------- ---------- ---------- ----------
Weighted average number of common shares
and dilutive securities outstanding 24,999,307 24,216,814 25,135,234 24,323,814
---------- ---------- ---------- ----------
</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 SIX MONTHS ENDED DECEMBER 31, 1999
(Unaudited)
<TABLE>
Accumulated
Common Stock Additional Other
Number of Paid in Retained Comprehensive Comprehensive
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 six months
ended December 31, 1999:
Net income - - 2,624,000 - 2,624,000 2,624,000
Warrants exercised -
Pre-confirmation net
operating loss utilization - 1,373,000 - - 1,373,000
Change in unrealized
gain on residual
interests, net of
income tax effect - - - - 243,000 243,000 243,000
---------- ------------ ------------ ----------- --------- ----------- -----------
Balance, December 31, 1999 20,288,875 $ 202,000 $ 14,032,000 $8,489,000 $664,000 $ 2,867,000 $23,387,000
========== ============ ============= =========== ========= =========== ===========
</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>
Six months ended
December 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,625,000 $ 2,332,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization
930,000 662,000
Utilization of pre-confirmation net operating losses 1,373,000 1,321,000
Provisions for credit losses 259,000 182,000
Loans held for sale (4,622,000) 2,427,000
Restricted cash (82,000) (515,000)
Accounts receivable - loans sold (2,956,000) 902,000
Accounts and other loans receivable 967,000 (56,000)
Servicing asset (1,831,000) (1,293,000)
Due to participants 287,000 1,415,000
Security deposits (13,000) -
Prepaid expenses (119,000) (158,000)
Other assets (214,000) -
Accounts payable & accrued expenses 815,000 (376,000)
Customer deposits (81,000) 450,000
------------ ----------
Net cash provided by (used in) operating activities (2,662,000) 7,293,000
------------ ----------
Cash flows from investing activities:
Loans originated and purchased (21,170,000) (13,762,000)
Principal collections & sale of loans receivable 23,046,000 20,090,000
Origination of residual interests (2,564,000) (2,389,000)
Principal collections of residual interests 689,000 436,000
Acquisition of equipment (237,000) (108,000)
----------- -----------
Net cash provided by (used in) investing activities (236,000) 4,267,000
----------- -----------
Cash flows from financing activities:
Net Borrowings under credit lines 21,382,000 7,906,000
Proceeds from issuance of debentures 1,521,000 -
Principal payments on debt 245,000 954,000
Principal payments on notes payable (19,809,000) (18,217,000)
Increase in deferred financing cost (953,000) (180,000)
Proceeds from exercise of warrants - 88,000
------------- ------------
Net cash provided by (used in) financing activities 2,386,000 (9,449,000)
------------- ------------
Net increase (decrease) in cash (512,000) 2,111,000
Cash - beginning of period 4,229,000 1,730,000
------------ -----------
Cash - end of period $ 3,717,000 $ 3,841,000
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during period for interest expense $ 1,817,000 $ 1,743,000
=========== ===========
Cash paid during period for income taxes $ 287,000 $ 546,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 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
six-month period ended December 31, 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. The Company sells the SBA and B&I guaranteed portion of the loans in
the secondary market, without recourse, and sells the majority of the remaining
SBA unguaranteed portions either as loan sales or securitizations. These sales
may be with limited recourse, full recourse, or no recourse.
7
<PAGE>
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 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 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. Contractual interest received on non-accrual 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
SIX MONTHS ENDED DECEMBER 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, with respect to assumed proceeds from the
exercise of dilutive options and warrants, using the treasury stock method
calculated based upon average market price for the period.
2. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses for the six months ended December 31, 1999
and 1998 are as follows:
1999 1998
------- --------
Balance at June 30, $ 914,000 $ 641,000
Provision for loan loss 223,000 226,000
Write-off (39,000) (103,000)
----------- -----------
Balance at December 31, $ 1,098,000 $764,000
=========== ===========
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 DECEMBER 31, 1999
Results of Operations - Quarter Ended December 31, 1999 vs.
Quarter Ended December 31, 1998
The Company recorded net income of approximately $2,153,000 (or $.11 per
basic share) for the three months ended December 31, 1999, as compared to net
income of approximately $1,765,000 (or $.09 per basic share) for the three
months ended December 31, 1998.
Revenues for the three months ended December 31, 1999 totaled $8,326,000
compared to $6,868,000 at December 31, 1998 an increase of 21%. At December 31,
1999, the Company maintained a serviced loan portfolio of 541 loans, which
approximated $308,829,000 as compared to 400 loans, which approximated
$209,460,000 at December 31, 1998.
Gain on sale of loans increased from $4,772,000 for the three months ended
December 31, 1998 to $5,793,000 for the three months ended December 31, 1999, an
increase of 21%. This is attributable to increases in loan originations and
sales of the guaranteed portions of loans originated. In addition, the Company
recognized gains from the sales of portions of its unguaranteed pool of SBA
loans in each period. These increases were partially offset by a reduction in
the premiums received on the guaranteed portion of loans sold during the three
months ended December 31, 1999. The average premium earned on loans sold during
the quarter ended December 31, 1999 was approximately 8.2% as compared to
approximately 10% for the quarter ended December 31, 1998. In some instances the
Company has elected to sell the guaranteed portion of the loans at par. Since
loans sold at par generally carry a higher spread between the interest earned
and the interest paid to the investor, 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 $1,108,000 for the three
months ended December 31, 1998 to approximately $1,292,000 for the three months
ended December 31, 1999, or by approximately 17%. This was due to an increase in
the average outstanding and performing retained loan portfolio held by the
Company during the three months ended December 31, 1999. The performing and
retained loan portfolio was $33,400,000 at December 31, 1999 compared to
$19,079,000 at December 31, 1998, however, it should be noted that a greater
proportion of loans originated during the quarter ended December 31, 1999
occurred in the final month of the quarter as compared to the prior year's
period.
10
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED DECEMBER 31, 1999
Results of Operations - Quarter Ended December 31, 1999 vs.
Quarter Ended December 31, 1998 (continued)
Service fee income was $730,000 as of December 31, 1998 (including a
one-time increase of $130,000 relating to the securitizations) as compared to
$709,000 at December 31, 1999. Prior to the one-time increase, service fee
income totaled $600,000 at December 31, 1998 as compared to $709,000 at December
31, 1999, representing an increase of 22%. During the quarter ended December 31,
1999, the average service fee earned on the sale of the guaranteed portion of
loans approximated 1.07% as compared to 1.66% for the quarter ended December 31,
1998. This decrease in service fee rates was offset by the increased serviced
and sold loan portfolio which approximated $250,934,000 at December 31, 1999
compared to $171,408,000 at December 31, 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 ranged between .50% and
4.4%.
Origination income increased from $258,000 at December 31, 1998 to $488,000
at December 31, 1999. This increase can be attributed to increased fees earned
on the origination and sales of non-SBA loans, as well as fees earned in
connection with packaging these and other SBA and B&I loans.
Loans in the aggregate amount of approximately $44,409,000 were funded by
the Company during the three months ended December 31, 1999, as compared to
loans in the aggregate principal amount of approximately $23,872,000 for the
three months ended December 31, 1998, an increase of 86%. The guaranteed
principal amounts of the loans funded during the three months ended December 31,
1999 aggregated $32,734,000 compared to approximately $17,011,000 for the prior
year's period.
The increase in the Company's loan volume during the quarter ended December
31, 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, Omaha, Nebraska, Oklahoma City, Oklahoma,
Boston Massachusetts and Tinton Falls, NJ.
In December 1999, the Company, through Business Loan Center Inc,
successfully completed the sale of approximately $23,200,000 in unguaranteed SBA
loans in conjunction with the closing of a revolving securitization facility
11
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED DECEMBER 31, 1999
Results of Operations - Quarter Ended December 31, 1999 vs.
Quarter Ended December 31, 1998 (continued)
totaling $75 million. This type of securitization structure provides for
periodic sales of the unguaranteed portion of SBA loans into a conduit facility
on a revolving basis. As part of this transaction, a subsidiary of the Company,
BLC Funding Corp., was required to retain approximately $1,600,000 of this loan
pool in a subordinated position.
In December 1998 the Company, through Business Loan Center, Inc., completed
the sale of its SBA Loan-Backed Adjustable Rate Class A Certificates 1998-1 in
the approximate aggregate principal amount of $24,317,000. The Class A
Certificates received a 'AAA' ("Triple A") rating from Duff & Phelps Credit
Rating Company. The Class B Certificates in the approximate amount of $2,114,000
were acquired by Business Loan Center Financial Corp. II, also a wholly owned
subsidiary of the Company. The Class A and Class B Certificates also included
approximately $5 million in loans, which were funded in the subsequent quarter.
At December 31, 1999, 39 proposed loans in the approximate aggregate
principal amount of $19,646,000 had received both Business Loan Center and SBA
approval and were awaiting closing. In addition, 79 proposed loans in the
approximate aggregate principal amount of $49,184,000 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 December 31, 1999, three proposed loans in the approximate aggregate
principal amount of $7,645,000 had received both BLC Commercial Capital Corp.
and USDA approval were awaiting closing. In addition, five proposed loans in the
approximate aggregate principal amount of $18,225,000 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 $2,380,000
for the three months ended December 31, 1998 to approximately $2,754,000 for the
quarter ended December 31, 1999, an increase of 16%. This increase can be
attributed to increased in payroll, commissions and travel associated with
continued growth.
General and administrative expenses of approximately $909,000 for the three
months ended December 31, 1999 increased from approximately $736,000, an
increase of 24%. This increase is primarily due to general growth in overhead as
the Company continues to expand its origination network.
12
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED DECEMBER 31, 1999
Results of Operations - Quarter Ended December 31, 1999 vs.
Quarter Ended December 31, 1998 (continued)
Interest expense increased by approximately 30% during the three months
ended December 31, 1999 as compared to the prior year's period, as a result of
increased borrowings to meet the Company's increased loan demand and an increase
in the base borrowing rate in December 1999, which subsequently decreased.
13
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED DECEMBER 31, 1999
Results of Operations - Six Months Ended December 31, 1999 vs.
Six Months Ended December 31, 1998
The Company recorded net income of $2,625,000 (or $.13 per share) for the
six months ended December 31, 1999, as compared to net income of approximately
$2,332,000 (or $.12 per share) for the six months ended December 31, 1998.
Revenues for the six months ended December 31, 1999 increased to approximately
$12,839,000 from $11,494,000 for the six months ended December 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.
The majority of guaranteed portions of loans originated during the six
months ended December 31, 1999 were sold in the secondary market immediately
subsequent to the closing of each loan. Gains on the sale of both the guaranteed
and unguaranteed portion of loans for the six months ended December 31, 1999
approximated $7,912,000, as compared to approximately $7,443,000 for the six
months ended December 31, 1998.
Generating these revenues were loans originated during the six months ended
December 31, 1999, which approximated $78,676,000 as compared to loans in the
approximate aggregate principal amount of $53,667,000 for the six months ended
December 31, 1998. The guaranteed principal amount of the loans originated
during the six months ended December 31, 1999 aggregated approximately
$57,625,000, as compared to the aggregate guaranteed principal of approximately
$38,635,000 for the prior year's period.
Interest income increased from approximately $2,118,000 for the six months
ended December 31, 1998 to approximately $2,424,000 for the six months ended
December 31, 1999 or by 14%. This increase directly resulted from the increase
in the Company's performing retained loan portfolio.
Service fee income increased from approximately $1,150,000 for the six
months ended December 31, 1998 to approximately $1,394,000 for the six months
ended December 31, 1999. This 21% increase directly resulted from the increased
serviced loan portfolio, as Business Loan Center continues to earn servicing
fees of between 1.0% and 4.4% per annum on the guaranteed and unguaranteed
portion of those loans sold . Additionally, during the six months ended December
31, 1998, a one-time increase of $130,000 relating to the securitizations was
made. Prior to the one time increase, service fee income totaled $1,020,000 at
December 31, 1998 as compared to $1,394,000 at December 31, 1999. The Company
14
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED DECEMBER 31, 1999
Results of Operations - Six Months Ended December 31, 1999 vs.
Six Months Ended December 31, 1998 (continued)
continues to earn additional residual interest income on those unguaranteed
loans securitized during the prior fiscal year and will earn residual interest
income on the unguaranteed loans securitized during the current fiscal year.
Origination income increased from $753,000 at December 31, 1998 to $996,000
at December 31, 1999. This increase can be attributed to increased fees earned
on the origination and sales of non-SBA loans, as well as fees earned in
connection with packaging these and other SBA and B&I loans.
Operating expenses of the Company increased by 9% over the prior year's
period primarily as a result of increased payroll expenses, commission
expenditures and travel associated with continued growth of the operations.
General and administrative expenses of approximately $1,684,000 for the six
months ended December 31, 1999 increased from approximately $1,458,000 for the
prior year's period as a result of general overhead growth.
Interest expense increased during the six months ended December 31, 1999 by
approximately 16% from the prior year's period due to increased borrowing to
meet the Company's increased loan demand and an increase in the base borrowing
rate in December 1999, which subsequently decreased.
15
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED DECEMBER 31, 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. Borrowings under the guaranteed line are
repaid immediately upon the sale of the guaranteed portion on the secondary
market.
On December 14, 1999, the Company, through its subsidiary Business Loan
Center, Inc. successfully completed the closing of a revolving securitization
facility totaling $75 million. The initial sale consisted of a pool of the
unguaranteed portion of SBA loans approximating $19.6 million. During the
quarter ended December 31, 1999, and subsequent to this initial sale, Business
Loan Center sold an additional pool totaling $3.6 million. This type of
securitization structure provides for periodic sales of the unguaranteed portion
of SBA loans into a conduit facility on a revolving basis.
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.
16
<PAGE>
BLC FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED DECEMBER 31, 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 would be
operational beginning on January 1, 2000.
The Company has not had any Year 2000 problems subsequent to December 31,
1999 and does not anticipate any in the future. However, the Company plans to
continue to conduct analyses of the Company's information technology systems and
Year 2000 testing procedures. To date, the Company's costs associated with Year
2000 issues have not been material, and management does not anticipate that the
costs which may be incurred subsequent to January 1, 2000 to exceed $50,000.
The Company's loan servicing system has continued to be fully operational
subsequent to January 1, 2000 after having received assurances from the vendor
of its servicing system, that their system is Year 2000 compliant. 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 continue to remain
unaffected by the Year 2000 functions, or that any such operational failure by
another company would not have a material adverse effect on the Company's
systems and operations.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - None
b. The Company filed one report on Form 8-K
during the fiscal quarter ended December 31,
1999 regarding the closing of the Company's
revolving securitization facility. This
filing took place on December 23, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLC Financial Services, Inc.
Date: February 14, 2000 By: /s/ Robert F. Tannenhauser
-------------------------------------
Robert F. Tannenhauser
President
By: /s/ Jennifer M. Goldstein
-------------------------------------
Jennifer M. Goldstein
Chief Financial Officer and Treasurer
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jul-1-1999
<PERIOD-END> Jun-30-2000
<CASH> 5,527,000
<SECURITIES> 13,156,000
<RECEIVABLES> 36,192,000
<ALLOWANCES> 1,098,000
<INVENTORY> 0
<CURRENT-ASSETS> 19,558,000
<PP&E> 2,016,000
<DEPRECIATION> 719,000
<TOTAL-ASSETS> 76,672,000
<CURRENT-LIABILITIES> 3,385,000
<BONDS> 6,246,000
0
0
<COMMON> 202,000
<OTHER-SE> 23,185,000
<TOTAL-LIABILITY-AND-EQUITY> 76,672,000
<SALES> 0
<TOTAL-REVENUES> 12,839,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,540,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,954,000
<INCOME-PRETAX> 4,345,000
<INCOME-TAX> 1,720,000
<INCOME-CONTINUING> 2,625,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,625,000
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.11
</TABLE>
