10-Q 1 w42113e10-q.txt FORM 10-Q FOR THE PERIOD ENDED 09/30/2000 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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. 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)

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 OCTOBER 27, 2000 Common stock $.01 par value 22,061,443~~

-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 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. 1 3 PART I. FINANCIAL STATEMENTS BLC FINANCIAL SERVICES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. 2 4 BLC FINANCIAL SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 3 5 BLC FINANCIAL SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 4 6 BLC FINANCIAL SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 5 7 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. 6 8 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 9 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:

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 10 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 11 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. 10 12 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 13 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

BLC FINANCIAL SERVICES INC 10-Q