<PAGE> 1
SCHEDULE 14C INFORMATION
Information Statement Pursuant To Section 14 (C)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement
CENTRAL FINANCIAL ACCEPTANCE CORP
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, Par Value $.01 Per Share
2) Aggregate number of securities to which transaction applies:
7,166,000
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
$3.8125
4) Proposed maximum aggregate value of transaction: $27,320,375.00
5) Total fee paid: $5,464.08
[ ] Fee previously paid with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
----------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------
3) Filing Party:
--------------------------------------------------------
4) Date Filed:
----------------------------------------------------------
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[CENTRAL FINANCIAL ACCEPTANCE CORPORATION LETTERHEAD]
Dear Stockholder:
This letter and the accompanying Information Statement are being sent to
you to inform you that your Board of Directors and stockholders owning a
majority of the outstanding common stock of Central Financial Acceptance
Corporation, or Central Financial, have approved a Plan of Complete Dissolution,
Liquidation and Distribution, or the Plan.
The Plan provides for the dissolution and liquidation of Central
Financial, and the liquidating distribution to you of all of the common stock of
our two subsidiaries, Hispanic Express, Inc. and Banner Central Finance Company.
Hispanic Express and Banner Central Finance operate through their subsidiaries
all of our businesses.
- Hispanic Express operates our businesses which provide consumers
financial products and services and travel services; and
- Banner Central Finance operates our businesses which originate,
sell and service mortgage loans and purchases, consumer
receivables which are generated from the sale of consumer
products.
Under the Plan, you will become the owner of one share of common stock
of each of Hispanic Express and Banner Central Finance for every share of
Central Financial common stock that you own on the date that Central Financial
dissolves and liquidates under the Plan, or the Liquidation Date. We have not
yet set the Liquidation Date. We will notify you when we do so. On the
Liquidation Date:
- Central Financial will dissolve and liquidate under the Plan;
- no further transfers of your shares of common stock of Central
Financial will be made on our stock books; and
- Central Financial will transfer to its exchange agent
certificates representing all of the outstanding shares of the
common stock of Hispanic Express and Banner Central Finance for
the benefit of holders of record of Central Financial common
stock as of the Liquidation Date.
As discussed in more detail in the Information Statement, we are
liquidating, dissolving and distributing the common stock of Hispanic Express
and Banner Central Finance to enhance the values of Hispanic Express and Banner
Central Finance to their ultimate stockholders, by allowing each company to
focus on the pursuit of its independent business objectives.
It is contemplated that when the shares of common stock of Hispanic
Express and Banner Central Finance are distributed to you, each of Hispanic
Express and Banner Central Finance will become a separate publicly held company.
Each of the companies will be headquartered in Commerce, California.
I encourage you to read the attached Information Statement carefully as
it provides more details about the dissolution and liquidation of Central
Financial and the distribution of the shares of common stock of Hispanic Express
and Banner Central Finance. We believe this transaction presents exciting
opportunities for both companies and you as their future stockholders. I thank
you for your past support of Central Financial and would encourage you to
continue to support Hispanic Express and Banner Central Finance as we move
forward.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
securities and exchange commission or any state securities commission
<PAGE> 3
passed upon the accuracy or adequacy of this information statement. Any
representation to the contrary is a criminal offense.
This information statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities.
The date of this Information Statement is October __, 2000. We are
sending this Information Statement to Central Financial stockholders on or
around October __, 2000.
Best regards,
Gary M. Cypres
Chairman of the Board
<PAGE> 4
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
INFORMATION STATEMENT PERTAINING TO
THE DISSOLUTION AND LIQUIDATION OF
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
AND
THE DISTRIBUTION OF THE COMMON STOCK OF
HISPANIC EXPRESS, INC.
AND
BANNER CENTRAL FINANCE COMPANY
TO
THE STOCKHOLDERS
OF
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Plan of Complete Dissolution, Liquidation and Distribution ..................... 1
Discussion of Hispanic Express, Inc. ........................................... 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations .................................. 32
Quantitative and Qualitative Disclosure About Market Risk ...................... 42
Management ..................................................................... 42
Consolidated Financial Statements - Hispanic Express, Inc. ..................... 54
Discussion of Banner Central Finance Company ................................... 72
Management's Discussion and Analysis of
Financial Condition and Results of Operations .................................. 81
Quantitative And Qualitative Disclosures About Market Risk...................... 85
Management ..................................................................... 85
Consolidated Financial Statements - Banner Central Finance Company ............. 93
Forward Looking Statements and Available Information............................ 108
</TABLE>
INFORMATION STATEMENT
This Information Statement is being furnished solely to provide
information to our stockholders who will receive shares of common stock of
Hispanic Express and Banner Central Finance in connection with the liquidation
and dissolution of Central Financial. This document is not, and is not to be
construed as, an inducement or encouragement to buy or sell any securities of
Central Financial, Hispanic Express or Banner Central Finance. We believe the
information contained in this Information Statement to be accurate as of the
date set forth on its cover. Changes may occur after that date. We will not
update the information except in the normal course of our respective public
disclosures.
STOCKHOLDERS WITH QUESTIONS MAY CALL:
For questions relating to the liquidation and dissolution of Central
Financial and the distribution and delivery of Hispanic Express and Banner
Central Finance's common stock certificates, call Gary M. Cypres at: (323)
720-8600.
We have not authorized any person to give any information or to make any
representations other than those contained in this information statement.
Therefore, if given or made, such information or representations must not be
relied upon as having been authorized.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE NOT REQUESTED TO SEND US A
PROXY.
i
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CENTRAL FINANCIAL ACCEPTANCE CORPORATION
PLAN OF COMPLETE DISSOLUTION, LIQUIDATION AND DISTRIBUTION
GENERAL
In April 1996, Central Financial was formed by Banner Holdings, Inc., or
Banner Holdings. On June 24, 1996, Banner Holdings contributed to Central
Financial its investment in its subsidiaries that operated its small loan
automobile sales, travel and related businesses and its consumer products
receivable portfolio. Banner's Central Electric, Inc., or Banner's Central
Electric, an affiliate of Banner Holdings, generated the consumer products
receivable portfolio through sales of merchandise at Banner's Central Electric's
retail stores. In July 1996, our common stock was listed on the NASDAQ National
Market when we sold 2,127,000 shares of our common stock constituting 29.2% of
our total common outstanding shares in an initial public offering.
On June 1, 1999, our common stock was delisted from the NASDAQ National
Market as a result of its inability to achieve a sufficient market value of
public float and now trades on the OTC Bulletin Board.
In February 1999, West Coast Private Equity Partners, L.P., or West
Coast, the parent company of Banner Holdings, approved a plan to liquidate
Banner Holdings. As a result, West Coast and its coinvestors directly own
5,150,000, or approximately 72%, of Central Financial's 7,166,000 common shares
outstanding.
On September 6, the Board of Directors approved the Plan. On September
29, 2000, stockholders owning a majority of the outstanding shares of our common
stock approved the Plan.
The Plan provides for the dissolution and liquidation of Central
Financial, and the liquidating distribution, or the Distribution, to you of all
of the common stock of our two subsidiaries, Hispanic Express and Banner Central
Finance. Our businesses will operate through subsidiaries of Hispanic Express
and Banner Central Finance. Pursuant to the Plan, each holder of Central
Financial common stock will, for every share of common stock of Central
Financial owned by such holder on the Liquidation Date, become the owner of one
share of common stock of each of Hispanic Express and Banner Central Finance.
BACKGROUND AND REASONS FOR THE PLAN OF COMPLETE DISSOLUTION, LIQUIDATION AND
DISTRIBUTION
The Board of Directors of Central Financial determined, for the reasons
set forth below, to separate Central Financial into two publicly held companies:
- Hispanic Express, which owns and operates our businesses, which
provide consumer financial products and services, and travel
services; and
- Banner Central Finance, which owns and operates our businesses,
which originate, sell and service mortgage loans, and that
purchase consumer receivables that are generated from the sale
of brand name consumer products principally by Banner's Central
Electric.
The dissolution and liquidation of Central Financial and the
distribution of the common stock of Hispanic Express and Banner Central Finance
under the Plan is intended to enhance stockholder value over the long term. The
businesses of Hispanic Express and Banner Central Finance have distinct
investment, operating and financial characteristics. The Board of Directors
believes that implementing
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<PAGE> 7
the Plan will enable the investment community to analyze more effectively the
investment characteristics, performance and future prospects of each business,
enhancing the likelihood that each will achieve appropriate market recognition
of its value. The Board also believes that the implementation of the Plan will
allow Hispanic Express and Banner Central Finance to concentrate on their
respective businesses and provide each company with greater flexibility in
pursuing their independent business objectives.
A stockholder of Central Financial will have the same percentage
ownership interest in Hispanic Express and Banner Central Finance after the
consummation of the Plan as he had in Central Financial before the consummation
of the Plan. We believe that after the consummation of the Plan current
stockholders and other future investors will have the ability to make separate
investment decisions regarding each of Hispanic Express and Banner Central
Finance and their respective businesses.
MANNER OF EFFECTING THE PLAN
Under the Plan, Central Financial will distribute to you one share of
common stock of each of Hispanic Express and Banner Central Finance for each
share of Central Financial common stock that you hold of record as of the
Liquidation Date. We have not yet set the Liquidation Date. We will notify you
when we do so. On the Liquidation Date:
- Central Financial will dissolve and liquidate under the Plan;
- no further transfers of your shares of common stock of Central
Financial will be made on our stock books; and
- Central Financial will transfer to its exchange agent,
certificates representing all of the issued and outstanding
shares of the common stock of Hispanic Express and Banner
Central Finance, for the benefit of and distribution to the
holders of record of Central Financial common stock as of the
Liquidation Date.
You will not have to pay anything for the shares of Hispanic Express and
Banner Central Finance common stock that we distribute to you. You will not have
any rights of dissent with respect to any part of the transactions that are
discussed in this Information Statement.
The Board of Directors of Central Financial has reserved the right to
abandon, defer or modify the Plan, including the distribution of the common
stock of Hispanic Express and Banner Central Finance, at any time prior to the
date of the Distribution.
The consummation of the Distribution is subject to a number of
conditions including:
- the common stock of Hispanic Express and Banner Central Finance
must have been registered under the Exchange Act; and
- Central Financial, on the one hand, and Hispanic Express and
Banner Central Finance, on the other hand, must have furnished
to the other all documents, agreements and assignments necessary
to effect the Plan and consummate the Distribution.
TRADING OF COMMON STOCK
There is currently no public market for the shares of the common stock
of Hispanic Express and Banner Central Finance, and we do not know whether a
trading market will develop on or after the date on which such shares are
distributed to you. The common stock of Central Financial currently trades on
the OTC Bulletin Board. We would expect the shares of common stock of Hispanic
Express and Banner
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<PAGE> 8
Central Finance Common Stock to also trade on the OTC Bulletin Board under the
symbols "HEXI" and "BCFC" if, after the Liquidation Date, at least one market
maker submits application to the OTC Bulletin Board in which it represents that:
- it desires to represent Hispanic Express and Banner Finance
Company as a market maker; and
- it has satisfied all applicable requirements of the Securities
and Exchange Commission and the National Association of
Securities Dealers.
Immediately after the Distribution, there are expected to be
approximately 7,166,000 shares each of Hispanic Express and Banner Central
Finance common stock issued and outstanding.
Shares of Hispanic Express and Banner Central Finance common stock
distributed to you will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of Hispanic Express and Banner
Central Finance under the Securities Act of 1933, as amended, or the Securities
Act. Persons who may be deemed to be affiliates of Hispanic Express and Banner
Central Finance after the Distribution generally include individuals or entities
that control, are controlled by, or are under common control with, Hispanic
Express and Banner Central Finance, and may include the directors of Hispanic
Express and Banner Central Finance as well as principal stockholders of Hispanic
Express and Banner Central Finance. Persons who are affiliates of Hispanic
Express and Banner Central Finance will be permitted to sell their shares of
Hispanic Express and Banner Central Finance common stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemption
afforded by Rule 144 thereunder. However, under applicable law and because of
the substantial control it has over Hispanic Express and Banner Central Finance,
West Coast will have "restricted securities" under Rule 144.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN AND THE DISTRIBUTION
INTRODUCTION
The following is a summary of the material U.S. Federal income tax
consequences of the liquidation of Central Financial under the Internal Revenue
Code of 1986, as amended, or the Revenue Code, in effect at the date of this
Information Statement. This summary is included for general information purposes
only. This summary does not discuss all aspects of federal income taxation that
may be relevant to a particular stockholder in light of his or her personal tax
circumstances and does not discuss all of the tax consequences that may be
relevant to certain types of stockholders (such as financial institutions,
broker-dealers, persons who are not citizens or residents of the United States
or who are foreign corporations, foreign partnerships or foreign estates or
trusts as to the United States, stockholders who acquire their shares through
the exercise of any employee stock options or otherwise as compensation, and
persons who receive payments in respect of options to acquire shares) subject to
special treatment under the federal income tax laws. This summary also does not
discuss the tax consequences to subsequent purchasers of Hispanic Express and
Banner Central Finance Common Stock and is limited to stockholders that hold
Central Financial Common Stock as capital assets within the meaning of Section
1221 of the Revenue Code.
All Central Financial stockholders should consult their own tax advisors
regarding the appropriate income tax treatment of them as a result of the
liquidation of Central Financial, including the application of federal, state,
local and foreign tax laws, and the effect of possible changes in tax laws that
may affect the income tax consequences described below.
3
<PAGE> 9
TAX TREATMENT OF DISTRIBUTION OF HISPANIC EXPRESS AND BANNER CENTRAL STOCK
The stockholders of Hispanic Express and Banner Central Finance will be
treated as having sold their shares of Central Financial, for federal tax
purposes, in an amount equal to the fair market value of Hispanic Express and
Banner Central Finance common stock at the time of Distribution. After the
Distribution, Central Financial will notify its stockholders and the Internal
Revenue Service, or the IRS, of the fair market value of Hispanic Express and
Banner Central Finance common stock. For this purpose, Central Financial will
determine the fair market value of Hispanic Express and Banner Central Finance
common stock based upon an evaluation of all relevant factors, including the
trading price of the Hispanic Express and Banner Central Finance Common Stock
following the date of the Distribution. Central Financial's determination of the
fair market value of Hispanic Express and Banner Central common stock is not
binding on the IRS.
The basis of Hispanic Express and Banner Central Finance common stock
received by a stockholder will be equal to its fair market value as of the date
of liquidation. Stockholders will commence a new holding period for shares of
Hispanic Express and Banner Central Finance common stock upon the liquidation of
Central Financial.
The liquidation of Central Financial and the distribution of shares of
Hispanic Express and Banner Central Finance in the liquidation will not qualify
as a tax-free split up under Section 355 of the Revenue Code. Accordingly,
Central Financial will recognize gain or loss on the distribution of the
Hispanic Express and Banner Central Finance shares in the liquidation. Central
Financial expects that the result in this instance will be a capital loss that
is not expected to be utilized by Central Financial.
The former Central Financial stockholders will report gain or loss on
the distribution to them of the Hispanic Express shares and the Banner Central
Finance shares. This gain or loss will be equal to the difference between their
tax basis for their Central Financial shares and the value of the Hispanic
Express shares and Banner Central Finance shares distributed to them in the
liquidation of Central Financial.
Central Financial stockholders who hold their Central Financial shares
as capital assets will have a capital gain or capital loss as a result of the
Central Financial liquidation. The gain or loss will be long term or short term
depending on whether or not their holding period for their Central Financial
shares is in excess of one year. For individuals, long term capital gains are
taxed at a maximum federal rate of 20%. Capital losses may only offset capital
gains in the case of a corporate taxpayer. Capital losses may only offset
capital gains plus up to $3,000 in ordinary income in the case of an individual
taxpayer. Unused capital losses are subject to carryover rules.
TAX TREATMENT OF INCOME OR LOSS OF HISPANIC EXPRESS AND BANNER CENTRAL
Hispanic Express and Banner Central Finance will each be classified as a
corporation for federal income tax purposes and their income will be subject to
the federal corporate income tax.
The consummation of the dissolution and liquidation of Central Financial
is not conditioned upon the receipt of any ruling from the IRS or any opinion of
counsel as to tax matters.
4
<PAGE> 10
CERTAIN RELATIONSHIPS AND AGREEMENTS AMONG
CENTRAL FINANCIAL,
HISPANIC EXPRESS,
BANNER CENTRAL FINANCE
AND
AFFILIATES
INTRODUCTION
In connection with the Plan, Central Financial, Hispanic Express, Banner
Central Finance and Central Rents, Inc. have entered into various agreements for
the purpose of defining the ongoing relationships among them. Since Central
Financial currently owns both Hispanic Express and Banner Central Finance, these
agreements are not the result of arm's-length negotiations. We believe, however,
that these agreements are at least as favorable to Hispanic Express and Banner
Central Finance as those that could have been obtained from unaffiliated third
parties. The following is a summary of the material terms of the agreements. See
Notes 1 and 9 to Hispanic Express's and Banner Central Finance's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Information
Statement.
CONTRIBUTION, ASSUMPTION AND INDEMNIFICATION AGREEMENT
Central Financial entered into a contribution, assumption and
indemnification agreement, referred to as the Contribution Agreement, with
Hispanic Express and Banner Central Finance. The Contribution Agreement covers
the following matters:
Contribution of Central Financial Subsidiaries. The Contribution
Agreement provides for the contribution of all of the assets and businesses of
Central Financial to Hispanic Express and Banner Central Finance. Specifically:
- Central Financial contributed to Hispanic Express all of the
issued and outstanding capital stock of Central Consumer Finance
Company, Centravel, Inc. and BCE Properties I, Inc. Central
Consumer Finance Company has four wholly-owned subsidiaries,
namely, Central Check Cashing, Inc., Central Financial
Acceptance Corporation Accident & Health Reinsurance, Limited,
Central Finance Reinsurance, Ltd. and Central Consumer Company
of Nevada; and
- Central Financial contributed to Banner Central Finance all of
the issued and outstanding capital stock of Central Installment
Credit Corporation, Central Financial Acceptance/Insurance
Agency and Central Premium Finance Company.
Contribution of Additional Property. The Contribution Agreement provides
for the contribution by Central Financial of additional property from time to
time, prior to or upon its dissolution and liquidation, if Central Financial
should choose to do so.
Assumption of Liabilities. The Contribution Agreement provides for the
assumption by Hispanic Express of all of the liabilities of Central Financial,
whether these liabilities are known or unknown, or existed at the time that the
Contribution Agreement became effective or come into existence at a later time.
Indemnification. The Contribution Agreement provides for the
indemnification of Central Finance by Hispanic Express against all liabilities,
such as lawsuits or other claims by third parties. In addition, the Contribution
Agreement provides for the indemnification of the Central Financial stockholders
at the Liquidation Date by Hispanic Express upon the dissolution and liquidation
of Central
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<PAGE> 11
Financial. However, there is always the possibility that Hispanic Express will
cease to exist or that it will not have sufficient assets to fully indemnify
Central Financial or the Central Financial stockholders. There is also the
possibility that the indemnification obligations discussed in this section may
not be enforceable under applicable law. In any such case, there would be the
possibility that the Central Financial stockholders would be personally liable
after the Liquidation Date for third party claims made against Central
Financial, on a pro-rata basis and to the extent of the amount distributed to
such stockholders in the Distribution.
FINANCING AGREEMENT
Banner's Central Electric and Banner Central Finance have entered into
an agreement, referred to as the Financing Agreement, pursuant to which Banner's
Central Electric grants Banner Central Finance the exclusive right, at Banner
Central Finance's option, to purchase without recourse consumer finance
receivables originated by Banner's Central Electric for sales of merchandise at
Banner's Central Electric stores in operation on the date of the Financing
Agreement and for all stores which Banner's Central Electric may determine to
open in the future during the term of the Financing Agreement. Banner Central
Finance is not obligated to provide financing to any particular Banner's Central
Electric customers, or to offer financing at any Banner's Central Electric
location or locations. As part of this agreement, Banner Central Finance will
agree to provide Banner's Central Electric with up to $6 million of inventory or
inventory financing as long as the Financing Agreement remains in effect and
Banner's Central Electric will agree to provide Banner Central Finance, at no
charge, an amount of floor space at Banner's Central Electric's stores as Banner
Central Finance may from time to time request. The Financing Agreement has a
term of 10 years. Banner Central Finance or Banner's Central Electric may
terminate the Financing Agreement at any time upon one-year's prior written
notice to either party.
OPERATING AGREEMENT
Hispanic Express and Banner Central Finance have entered into an
agreement, referred to as the Operating Agreement, which covers the following
matters:
Allocation of Business Opportunities. Due to the potential conflicts of
interest resulting from the relationships among Hispanic Express and Banner
Central Finance, the Operating Agreement provides that Hispanic Express and its
subsidiaries and Banner Central Finance and its subsidiaries will not, without
prior written consent of each other, directly or indirectly, engage in or enter
any business which the other is currently engaged in.
Management and Other Services. The Operating Agreement provides that
Hispanic Express and its subsidiaries are obligated to provide to Banner Central
Finance and its subsidiaries and Banner Central Finance and its subsidiaries are
obligated to utilize, certain services, including management information
systems, employee benefit plans, legal and accounting, insurance, computer and
data processing systems. These arrangements will continue until terminated by
Hispanic Express or Banner Central Finance upon one-year's prior written notice.
Termination may be made on a service-by-service basis or in its entirety. Banner
Central Finance will pay Hispanic Express its actual cost of providing services
to Banner Central Finance. If such services involve an allocation of expenses,
Hispanic Express shall determine the allocation on the basis of the percentage
utilization of such service or Hispanic Express's management's best estimate
thereof.
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<PAGE> 12
Employee Benefits. The Operating Agreement provides that Hispanic
Express and Banner Central Finance will assume all liabilities under the
existing employee welfare benefit and profit sharing plans of Central Financial
with respect to the employees of Hispanic Express and Banner Central Finance and
their subsidiaries who have become employees of each company. The Operating
Agreement also provides that the employment by Hispanic Express and Banner
Central Finance of individuals who were employees of Central Financial and the
subsidiaries prior to the Distribution will not be deemed a severance of
employment from Central Finance and the subsidiaries for the purpose of any
policy, plan, program or agreement that provides for the payment of severance,
salary continuation or similar benefits. The Operating Agreement also provides
for Hispanic Express to assume Central Financial's Supplemental Executive
Retirement Plan.
Guaranty of Banner Central Finance Debt. The Operating Agreement
provides that so long as the Financing Agreement is in effect Hispanic Express
will guarantee up to $4 million of bank or similar financing which Banner
Central Finance may borrow in connection with the purchases of consumer
receivables generated from Banner's Central Electric.
TAX SHARING AGREEMENT
Central Financial, Hispanic Express and Banner Central Finance have
entered into a tax sharing agreement, referred to as the Tax Sharing Agreement,
providing for:
- the payment of federal, state and other income tax remittances
or refunds for periods during which Hispanic Express and Banner
Central Finance are included in the same consolidated group for
federal income tax purposes;
- the allocation of responsibility for the filing of such tax
returns;
- the conduct of tax audits and the handling of tax controversies;
and
- various related matters.
For periods during which Hispanic Express and Banner Central Finance
were included in Central Financial's consolidated federal and state income tax
returns, Hispanic Express and Banner Central Finance will each be required to
pay its allocable portion of the consolidated federal, state and other income
tax liabilities and will be entitled to receive refunds determined as if
Hispanic Express and Banner Central Finance and its subsidiaries had filed
separate income tax returns. With respect to Central Financial's liability for
payment of taxes for all periods during which Hispanic Express and Banner
Central Finance were so included in Central Financial's consolidated federal
income tax returns, Hispanic Express and Banner Central Finance will indemnify
Central Financial for all federal, state, and other income tax liabilities for
such periods. The date of the Distribution will be the last day on which
Hispanic Express and Banner Central Finance are required to be included in
Central Financial's consolidated federal income tax returns.
OPTION AGREEMENT
Hispanic Express and Banner Central Finance have entered into an option
agreement, referred to as the Option Agreement, pursuant to which Hispanic
Express grants Banner Central Finance an option to reacquire the mortgages
Banner Central Finance sells to Hispanic Express. The exercise price of the
option under the Option Agreement, at Banner Central Finance's option, may be in
the form of cash or an interest-bearing promissory note. The Option Agreement
has a term of two years.
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<PAGE> 13
TRADEMARK LICENSE
Banner's Central Electric, Hispanic Express, Banner Central Finance and
Central Rents, Inc., an affiliate of Central Financial, have entered into a
trademark license, referred to as the Trademark License. Under the Trademark
License, Banner's Central Electric grants to Hispanic Express, Banner Central
Finance and Central Rents, Inc. and each of their subsidiaries, whether such
subsidiaries exist now or come into existence at a later time, the right to
license the federally registered trademark "CFAC." The Trademark License is
non-exclusive and has an initial term of one year. The Trademark License can
terminated by any party to it upon one year's written notice, and Banner's
Central Electric can terminate the Trademark License at any time if there is a
change in control of Hispanic Express, Banner Central Finance or Central Rents,
Inc.
OTHER TRANSACTIONS WITH AFFILIATES
Hispanic Express and Banner Central Finance, or their respective
subsidiaries, may enter into additional agreements, arrangements and
transactions or agreements that modify the agreements described above, after the
consummation of the Distribution. Any such agreements, arrangements and
transactions will be determined through negotiations between Hispanic Express
and Banner Central Finance or their respective subsidiaries. Since West Coast
may control both Hispanic Express and Banner Central Finance, such negotiations
will not be at arm's length. See "Certain Relationships."
CERTAIN RELATIONSHIPS
After the consummation of the Plan, West Coast and its coinvestors will
beneficially own or otherwise control an aggregate of approximately 72% of the
outstanding common stock of each of Hispanic Express and Banner Central Finance.
In addition, Gary Cypres, the managing general partner of West Coast, will be
the Chairman of the Board, Chief Executive Officer and President of Hispanic
Express, and Chairman of the Board, Chief Executive Officer and Chief Financial
Officer of Banner Central Finance and Banner's Central Electric. As such, West
Coast will be able to elect the entire Board of Directors, adopt amendments to
Hispanic Express's and Banner Central Finance's certificate of incorporation, or
effect a merger, sale of assets or other fundamental corporate transactions
without the approval of Hispanic Express's and Banner Central Finance's other
stockholders. West Coast will be able to control the direction and future
operations of Hispanic Express and Banner Central Finance, including decisions
regarding the issuance of additional shares of common stock and other
securities. As long as West Coast is a majority stockholder of Hispanic Express
and Banner Central Finance, it will be impossible for third parties to obtain
control of Hispanic Express and Banner Central Finance through purchases of
Common Stock not beneficially owned or otherwise controlled by West Coast. West
Coast and Mr. Cypres may also have conflicts of interest with respect to
transactions concerning Hispanic Express, Banner Central Finance and Banner's
Central Electric.
BENEFICIAL STOCK OWNERSHIP OF DIRECTORS AND OFFICERS
The following table shows, as of August 31, 2000, the Central Financial
common stock that our directors and executive officers beneficially own and
those shares of our common stock owned by all executive officers and directors
as a group.
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<PAGE> 14
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED(1)
---------------------------
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES(2) CLASS(3)
------------------------ --------- ----------
<S> <C> <C>
Gary M. Cypres(4) ................................. 5,312,500 72.6%
Edward Valdez(5) .................................. 8,500 *
William R. Sweet(6) ............................... 3,800 *
Jose de Jesus Legaspi(7) .......................... 2,800 *
Salvatore J. Caltagirone(7) ....................... 2,800 *
All directors and executive officers as a group
(6 persons)(8) .................................... 5,330,400 72.8%
</TABLE>
-------------------
* Less than 1%.
(1) See footnote 1 in table included below.
(2) Except as otherwise note below, each individual named in the table
directly or indirectly has sole voting and investment power with respect
to the shares shown which each such individual beneficially owns.
(3) Shares of Central Financial Common Stock issuable upon exercise of stock
options exercisable within 60 days of August 31, 2000 are considered
outstanding for computing the percentage of the person holding those
options but are not considered outstanding for computing the percentage
of any other person.
(4) Consists of 5,150,000 shares held of record by Banner Holdings 77,500
shares held directly by Mr. Cypres, 12,500 shares owned by Mr. Cypres'
spouse and 12,500 shares held by or in trust by Mr. Cypres and his
spouse for their children. An additional 60,000 shares is included
representing options exercisable within 60 days of August 31, 2000. Of
the 5,312,500 shares, Mr. Cypres shares voting and investment power of
25,000 shares with is spouse and 5,150,000 shares with West Coast.
(5) Consists of 2,100 shares directly owned by Mr. Valdez and 6,400 shares
issuable upon exercise of stock options exercisable within 60 days of
August 31, 2000.
(6) Consists of 1,000 shares directly owned by Mr. Sweet and 2,800 shares
issuable upon exercise of stock options exercisable within 60 days of
August 31, 2000.
(7) Consists of 2,800 shares issuable upon exercise of stock options
exercisable within 60 days of August 31, 2000.
(8) Consists of 91,200 shares issuable upon exercise of stock options
exercisable within 60 days of August 31, 2000.
BENEFICIAL STOCK OWNERSHIP OF 5% STOCKHOLDER
The following table shows, as of August 31, 2000, all persons or
entities we know to be "beneficial owners" of more than five percent of our
common stock. This information is based on Schedules 13D and 13G reports filed
with the Securities and Exchange Commission, or the Commission, by each of the
persons and entities listed in the table below. If you wish, you may obtain
these reports from the Commission.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED(1)
-----------------------------
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(2) SHARES(3) CLASS(4)
--------------------------------------- --------- ----------
<S> <C> <C>
Gary M. Cypres(5) .............................. 5,312,500 72.6%
Banner Holdings, Inc.(6) ....................... 5,150,000 70.4%
West Coast Private Equity Partners, L.P.(6) .... 5,150,000 70.4%
Wellington Management Company, LLP(7) .......... 684,200 9.3%
</TABLE>
------------
(1) "Beneficial ownership" is a technical term broadly defined by the
Commission to mean more than ownership in the usual sense. So, for
example, you "beneficially" own Central Financial common stock not only
if you hold it directly, but also if you directly or indirectly (through
a relationship, a position as a director or trustee, or a contract or
understanding), have (or share) the power to vote the stock, to invest
it, to sell it or you currently have the right to acquire it or the
right to acquire it within 60 days of August 31, 2000.
(2) The address for Mr. Cypress, Banner Holdings and West Coast is
5480 East Ferguson Drive, Commerce, California 90022, and the
address for Wellington Management Company, LLP, or Wellington
Management, is 75 State Street, Boston, Massachusetts 02109.
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<PAGE> 15
(3) Except as otherwise noted below, each person and entity named in the
table directly or indirectly has sole voting and investment power with
respect to the shares shown which each such person or entity
beneficially owns.
(4) Shares of Central Financial common stock issuable upon exercise of stock
options exercisable within 60 days of August 31, 2000 are considered
outstanding for computing the percentage of the person or entity holding
those options but are not considered outstanding for computing the
percentage of any other person or entity.
(5) Consists of 5,150,000 shares held of record by Banner Holdings, 77,500
shares held directly by Mr. Cypres, 12,500 shares owned by Mr. Cypres'
spouse and 12,500 shares held by or in trust by Mr. Cypres and his
spouse for their children. An additional 60,000 shares is included
representing options exercisable within 60 days of August 31, 2000. Of
the 5,312,500 shares, Mr. Cypress shares voting and investment power of
25,000 shares with his spouse and 5,150,000 shares with West Coast.
(6) Banner's Central Electric is the record owner of 5,150,000 shares. West
Coast controls Banner Holdings and beneficially owns 5,150,000 shares
through its control of Banner Holdings. Mr. Cypres is Chairman of the
Board, Chief Executive Officer and President of Banner Holdings and
managing general partner of West Coast. He controls Central Financial
through West Coast.
(7) Based on a Schedule 13G filed with the SEC on February 11, 2000. These
shares are held of record by Wellington Management's clients. Of the
684,200 shares, Wellington Management shares the power to vote 436,000
of these shares and shares the power to dispose of all of these shares
in its capacity as investment advisor to these clients.
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<PAGE> 16
DISCUSSION OF
HISPANIC EXPRESS, INC.
INTRODUCTION
Certain matters discussed in this Information Statement may constitute
forward-looking statements under Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
These statements may involve risks and uncertainties. These forward-looking
statements relate to, among other things, expectations of the business
environment in which Hispanic Express and its subsidiaries (which may be
referred to collectively as "Hispanic Express" or, "we" or "us" in this
"DISCUSSION OF HISPANIC EXPRESS, INC." section of this Information Statement)
operate in, projections of future performance, perceived opportunities in the
market and statements regarding our mission and vision. Our actual results,
performance, or achievements may differ significantly from the results,
performance, or achievements expressed or implied in such forward-looking
statements. For discussion of the factors that might cause such a difference,
see "Business -- Business Considerations and Certain Factors that May Affect
Future Results of Operations and Stock Price."
COMPANY OVERVIEW
Hispanic Express was incorporated in Delaware on September 5, 2000. Our
principal executive offices are located at 5480 East Ferguson Drive, Commerce,
California 90022, and our telephone number is (323) 720-8600. This section of
this Information Statement is written as if Central Financial had contributed
three of its subsidiaries to Hispanic Express on the earliest date that this
section discusses. These subsidiaries are BCE Properties I, Inc, Central
Consumer Finance Company and Centravel, Inc. Hispanic Express, through these
subsidiaries, presently has two principal businesses: consumer financial
products and travel services.
CONSUMER FINANCIAL PRODUCTS BUSINESS
Through our consumer financial products business, we have served the
Hispanic population, primarily in California, and we:
- provide small, unsecured, personal loans;
- finance travel related services sold by our travel business;
- provide insurance products; and
- provide check cashing and money transfer services.
Our consumer financial products business caters to the low-income
Hispanic population by locating our facilities primarily in Hispanic
communities, advertising in Spanish, and employing Spanish as the primary
language spoken at our locations.
Our customers typically have been between the ages of 21 and 45, earn
less than $25,000 per year, have little or no savings, and have limited or
short-term employment histories. In addition, customers of our consumer
financial products business typically have no or limited prior credit histories
and are generally unable to secure credit from traditional lending sources.
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<PAGE> 17
Historically, our consumer financial products business has grown by
introducing financial products we felt would well serve the low-income Hispanic
community. In December of 1992, we began offering, our unsecured, closed-end,
small loans, generally ranging from $350 to $1,500, for personal, family or
household purposes.
In May 1997, we introduced a new financial product involving the
issuance of a card, called an "Efectiva Card." The Efectiva Card provides our
customers with the ability to access their established lines of credit with us
by withdrawing cash from our cash dispensing machines. Our cash dispensing
machines are proprietary and are not part of any network system.
In October 1997, we entered into an agreement with Kmart Corporation, or
Kmart, to install our cash dispensing machines at 10 Kmart locations in Southern
California. In January 1998, we agreed to expand our relationship with Kmart and
install cash dispensing machines in additional Kmart stores and we presently
have machines in 35 locations. At certain times of the year, we also place our
employees at the Kmart stores in kiosks to receive and process applications for
the Efectiva Card. The agreement, which can be terminated for any reason by
either Kmart or us, upon 30 days' written notice, requires us to pay a monthly
license fee to Kmart for each location, plus certain monetary incentives for
each loan we make, and to pay all costs and expenses related to the installation
and maintenance of our cash dispensing machines and our on-site employees. In
September 2000, we made a decision to reduce the number of Kmart locations, in
which we have our cash dispensing machines, to 15.
As a complementary business line in 1995, we began to offer financing of
travel tickets which we sell at our travel locations. In 1998, we began to offer
fee based check cashing and money transfer services in stand alone check cashing
centers we operate.
In our consumer financial products business we also act as an
intermediary for an independent insurance carrier that sells credit life and
credit accident and health insurance to our customers. Through this arrangement,
we sell policies to our customers within limitations established by agency
contracts with that insurer. Credit life insurance provides for the payment in
full of the borrower's credit obligation to the lender if the borrower dies.
Credit accident and health insurance provides for repayment of loan installments
to the lender during the insured's period of involuntary unemployment resulting
from disability, illness or injury. Premiums for such credit insurance are at
the maximum authorized rates and are stated separately in our disclosure to
customers, as required by the Truth-in-Lending Act and applicable state
statutes. We do not act as an intermediary with respect to the sales of credit
insurance to non-borrowers. We earn a commission from the insurance carrier on
the sale of credit insurance, which is based in part on the claims experience on
policies that the insurance carrier sells through us. Beginning in mid-1996, the
independent insurance carrier reinsured the credit life and credit accident and
health risk with a newly formed subsidiary we established. As a result of this
reinsurance arrangement, the credit risk remains with us.
TRAVEL SERVICES BUSINESS
Through our travel business we are a leading retail seller of discount
airline tickets to Hispanics residing in the United States who travel to Latin
America. In 1999, our travel service operations generated gross bookings of
approximately $144 million. We began our travel business in July 1995 with a
single location and through the assumption of leases in real estate, which had
previously held travel offices, have grown to 140 travel locations. We presently
have 126 travel locations in California and also operate in Arizona, Colorado,
Nevada, Illinois and Texas. We cater to the Hispanic population by locating our
travel stores in Hispanic communities, advertising in Spanish and employing
Spanish as the primary language spoken at our locations.
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<PAGE> 18
We sell both published and non-published fares. Non-published fares are
tickets we buy from airlines, under special price contracts, and resell to
consumers at discounts off the airlines' published fares. We have rights to buy
these non-published fares under contracts from 11 airlines, including, American,
Delta, United, Continental, Mexicana, Aeromexico and Taca. Our contracts are
generally for one year or less and can be canceled on short notice. In addition,
these contracts do not require the airlines to deal with us exclusively or
provide us with a specific quantity of tickets. Under our contracts, we purchase
tickets only when we have an order and, therefore, we do not have inventory
costs. We also offer a full complement of regular published fares for both
domestic and Latin American air travel on which we earn a commission. Our travel
business also earns significant performance-based incentive compensation,
referred to as "override commissions" from certain airlines with whom we do
business. The price at which we purchase our tickets and the commission we earn
on published fares are determined by the individual airlines and are subject to
frequent change and cancellation.
In June 1999, we made a decision to conduct our travel business on the
Internet targeting bilinguals, Hispanic and English-speaking non-Hispanics, who
are increasingly utilizing the Internet to purchase travel to Latin America. To
accomplish this, we established two Internet sites, Vuelabarato.com (fly cheap)
and 4GreatFares.com, and began to advertise these sites in both Spanish and
English newspapers and on outdoor billboards in California. For the twelve
months ended December 31, 1999 and the six months ended June 30, 2000 we spent
$0.3 million and $0.7 million, respectively, on Internet advertising.
However, reacting to changing market conditions, we made a decision in
May 2000 to significantly curtail our Internet operations and to reduce both our
related future advertising and personnel expenses. As a result of this decision,
our Internet sales experienced a significant decrease in activity in May and
June of 2000 and we expect that future levels of business will be at lower
levels than experienced in the first quarter of 2000.
DEMOGRAPHIC TRENDS AND MARKET OPPORTUNITY
Since 1950, Hispanics have been the fastest growing minority group in
the United States. The Hispanic population in Latin America has also experienced
strong growth and this trend is expected to continue. As an established provider
of consumer financial products and travel services to the Hispanic community, we
believe we are well positioned to capitalize on the projected growth in the
Hispanic population in the United States.
- As of 1998, the U.S. Hispanic population totaled approximately
30 million people (11% of the U.S. population) and is expected
to grow to approximately 41 million people by the year 2010;
- Total U.S. Hispanic purchasing power exceeded $270 billion in
1998, up from $94 billion in 1984, and is expected to continue
to rise; and
- Ten major markets account for over 60% of the Hispanic
population and purchasing power in the U.S. These markets are
Los Angeles, San Francisco/San Jose, San Diego, New York,
Houston, San Antonio, McAllen/Brownsville, Dallas/Fort Worth,
Miami and Chicago.
BUSINESS STRATEGY
Recognizing the demographic trends, our strategy is to establish
ourselves as a leading Spanish-language provider of consumer financial products
and travel services to the Hispanic population residing in the United States. We
intend to achieve this objective through the following initiatives.
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<PAGE> 19
- We plan to continue to open travel agencies in the United
States, which cater to the growing Hispanic population;
- We plan to use our increasing market share to continue to
negotiate favorably discounted non-published fares from the
airlines;
- We plan to sell these discounted fares through our travel
agencies and via the Internet to both Hispanics and
non-Hispanics seeking travel to Latin America;
- We intend to establish new strategic relationships that will
permit us to offer additional travel products, hotels and tours,
which we will sell through our travel stores and our Internet
sites;
- We plan to increase our distribution network through new
stand-alone travel locations; and
- We plan to develop other financial products and services, which
we believe can be successfully introduced to our Hispanic
customer base and introduce them through our distribution
system.
COMPANY OPERATIONS
SMALL LOAN BUSINESS
In December 1992, we began offering unsecured, closed-end, small loans
ranging from $350 to $1,500 for personal, family or household purposes at
Banner's Central Electric's flagship retail store. Prior to beginning this
business, we determined that there was a significant demand for small loans, and
that financial institutions in our geographic market were not making loans of
less than $1,500 and did not have adequate underwriting experiences to serve the
low-income Hispanic population. Beginning in May 1997, we began offering
unsecured open-end small loans that can be accessed through our ATM network with
our Efectiva Card. At December 31 1999, our small loan business was operating
through 60 facilities, 25 of which were our finance centers and 34 of which were
at Kmart locations, and one at a Wal-Mart location.
TRAVEL SALES AND FINANCE
As a complementary business line, in mid-1995 we began our travel
business, offering sales of airline tickets, as well as the financing of such
purchases. We believe that we are currently the largest providers of travel
services to the Hispanic population in California. Substantially all of our
ticket sales are for international travel, which generally provides a higher
commission structure than does domestic travel. At June 30, 2000, we operated
through 140 locations, of which 126 are located in California and 14 are located
outside of California. We believe that both our small loan and travel product
lines can be offered out of 1,000 - 1,500 square foot locations, and that these
locations can efficiently offer additional financial products and services which
we anticipate we will make available in the future.
OTHER BUSINESS ACTIVITIES
We act as an intermediary for an independent insurance carrier that
sells credit life and credit accident and health insurance to our customers.
Through this arrangement, we sell policies to our customers within limitations
established by agency contracts with that insurer. Credit life insurance
provides for the payment in full of the borrower's credit obligation to the
lender if the borrower dies. Credit accident and health insurance provides for
repayment of loan installments to the lender during the insured's period of
involuntary unemployment resulting from disability, illness or injury. Premiums
for such credit insurance are at the maximum authorized rates and are stated
separately in our disclosure to
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<PAGE> 20
customers, as required by the Truth-in-Lending Act and applicable state
statutes. We do not act as an intermediary with respect to the sale of credit
insurance to non-borrowers. We earn a commission from the insurance carrier on
the sale of credit insurance, which is based in part on the claims experience on
policies that the insurance carrier sells through us. Beginning in mid-1996, the
independent insurance carrier reinsured the credit life and credit accident and
health risk with a newly formed subsidiary of ours. As a result of this
reinsurance arrangement, the credit risk remains with us. In 1998, we began to
charge our customers a fee on payroll checks that they cash at our facilities
and to offer check cashing services at certain of our financial centers.
CREDIT PROCEDURES
In late 1996, we took a number of steps to improve collections and
credit quality. We hired a senior executive in the credit and collections field.
In December 1996, we installed an autodialer to assist our collections personnel
in successfully contacting past due borrowers.
We have developed uniform guidelines and procedures for evaluating
credit applications for installment credit travel sales and small loans. We take
credit applications at all of our locations, at each of Banner's Central
Electric's stores and at each Kmart location that has our cash dispensing
machines. We then generally transmit them electronically through our computer
system or facsimile machines to our credit processing facility, where all credit
approval and verification is centralized. We believe that our underwriting
policies and procedures allow us to respond quickly to credit requests. We
typically respond to credit applicants within one hour. We believe that because
of our prompt response, many customers prefer to deal with us instead of our
competitors.
Our credit managers and credit approvers make their decisions on a case
by case basis and are influenced by, among other things, whether an applicant is
a new or existing customer. New applicants complete standardized credit
applications which contain information concerning income level, employment
history, stability of residence, driver's license or state identification card,
social security number, capacity to pay and personal references. We also verify
the applicant's employment and residence with our credit verifiers and depending
on the relevant factor may verify other pertinent information. We also obtain a
credit bureau report and rating, if available, and seek to confirm other
credit-related information. For an established customer, the credit process
currently includes a review of the customer's credit and payment history with
us, and depending on the size of the transaction an updated verification of
employment and residence. Because we offer multiple lines of credit, we review
the aggregate amount that a customer owes. In cases where a customer makes a
request for a substantial increase in his or her aggregate outstanding balance,
we will obtain an updated credit bureau report and will seek to confirm
employment. In instances where the applicant has no or limited credit history,
we may require a co-signer with appropriate credit status to sign the contract
and may, in the travel installment credit business, also require a down payment.
See - "Business Considerations and Credit Factors that May Affect Future Results
of Operations and Stock Price - Credit Risk Associated with Customers; Lack of
Collateral."
PAYMENT AND COLLECTIONS
Industry studies estimate that a significant amount of the adult
population in the United States does not maintain a checking account, which is a
standard prerequisite for obtaining a consumer loan, credit card or other form
of credit from most consumer credit sources. Our customers are required to make
their monthly payments using a payment schedule that we provide to them. The
vast majority of our customers make their payments in cash at our locations or
at our payment facilities in Banner's Central Electric's stores. For our
customers who are paid their wages by check but who do not maintain checking
accounts, we cash such checks for a fee in order to facilitate account payments.
15
<PAGE> 21
We consider payments past due if a borrower fails to make any payment in
full on or before its due date, as specified in the installment credit or small
loan contract or mortgage the customer signs. We currently attempt to contact
borrowers whose payments are not received by the due date within 10 days after
such due date. We contact these borrowers by both letter and telephone. In
December 1996, we installed an autodialer which makes up to 500 telephone calls
per hour to assist our collections personnel in successfully contacting past due
borrowers. If no payment is remitted to us after the initial contact, we make
additional contacts every seven days, and, after a loan becomes 31 days
delinquent, we generally turn over the account to our credit collectors. Under
our guidelines, we generally charge off and turn over an account to a collection
agency when we determine that the account is uncollectible, which is typically
when the account is 150 days past due.
THIRD PARTY SYSTEMS
The travel information we utilize to conduct our business is provided to
each of our travel stores and our Internet business through global distribution
systems, operated by SABRE, Amadeus, and Worldspan. SABRE, Amadeus and Worldspan
are world leaders in the electronic distribution of travel-related products and
services. Global distribution systems provide us with electronic booking systems
and databases containing flight schedules and availability, and published fares
information for approximately 400 airlines located throughout the world.
The global distribution systems are provided to us under three to
five-year contracts, without charges, as long as we maintain a certain level of
booking. Our contracts also provide for incentives if we exceed certain
performance criteria.
ADVERTISING
We actively advertise primarily in Hispanic newspapers targeting both
our present and former customers, and potential customers who have used other
travel agencies to book travel. We also advertise in English newspapers to
promote our English-language Internet site.
EMPLOYEES
At August 31, 2000, we employed a total of 386 full-time employees and
173 part-time employees in its businesses. Our employees are not represented by
a union or covered by a collective bargaining agreement. We believe that our
relations with our employees are good.
SUPERVISION AND REGULATION
CONSUMER FINANCE OPERATIONS REGULATION
Our consumer finance operations are subject to extensive regulation.
Violation of statutes and regulations applicable to us may result in actions for
damages, claims for refunds of payments made, certain fines and penalties,
injunctions against certain practices and the potential forfeiture of rights to
repayment of loans. Changes in state and federal statutes and regulations may
affect us. We, together with industry associations, actively lobby in the states
in which we operate. Although we are not aware of any pending or proposed
legislation that could have a material adverse effect on our business, we cannot
assure that future regulatory changes will not adversely affect our lending
practices, operations, profitability or prospects.
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<PAGE> 22
STATE REGULATION OF CONSUMER PRODUCT AND TRAVEL FINANCE
In California, the California Retail Installment Sales Act, or the Unruh
Act, regulates our installment travel finance and small loan business. The Unruh
Act requires us to disclose to our customers, among other matters:
- the conditions under which we may impose a finance charge;
- the method of determining the balance which is subject to a
finance charge;
- the method used to determine the amount of the finance charge;
and
- the minimum periodic payment required.
In addition, the Unruh Act provides consumer protection against unfair or
deceptive business practices by:
- regulating the contents of installment sales contracts;
- setting forth the respective rights and obligations of buyers
and sellers; and
- regulating the maximum legal finance rate or charge and limiting
other fees on installment sales.
SMALL LOAN BUSINESS
Small loan consumer finance companies are subject to extensive
regulation, supervision and licensing under various federal and state statutes,
ordinances and regulations. In general, these statutes establish maximum loan
amounts and interest rates and the types and maximum amounts of fees and other
costs that may be charged. In addition, state laws regulate collection
procedures, the keeping of books and records and other aspects of the operation
of small-loan consumer finance companies. State agency approval generally is
required to open new branch offices. Accordingly, our ability to expand by
acquiring existing offices and opening new offices has depended, in part, on
obtaining the necessary regulatory approvals.
Each facility that offers small loans must be separately licensed under
the laws of California. Licenses granted by the regulatory agencies are subject
to renewal every year and may be revoked for failure to comply with applicable
state and federal laws and regulations. In California, licenses may be revoked
only after an administrative hearing.
INSURANCE BUSINESSES
In California, the State of California Department of Insurance regulates
our insurance businesses. In general, this agency issues regulations which
require us to, among other things, maintain fiduciary fund and trust accounts
and follow specific market, general business and claims practices.
FEDERAL LENDING REGULATION
We are subject to extensive federal regulation as well, including the
Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit
Reporting Act and the regulations thereunder and the Federal Trade Commission's
Credit Practices Rule. These laws require us to provide full disclosure of the
principal terms of each loan to every prospective borrower, prohibit misleading
advertising, protect against discriminatory lending practices and proscribe
unfair credit practices. Among the key disclosure
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<PAGE> 23
items under the Truth-in-Lending Act are the terms of repayment, the total
finance charge and the annual rate of finance charge or "Annual Percentage Rate"
on each loan. The Equal Credit Opportunity Act prohibits creditors from
discriminating against loan applicants on certain bases, including race, color,
sex, national origin, age or marital status. Regulation B issued under the Equal
Credit Opportunity Act requires creditors to make certain disclosures regarding
consumer rights and advise consumers whose credit applications are not approved
of the reasons for the rejection. The Fair Credit Reporting Act requires us to
provide certain information to consumers whose credit applications are not
approved on the basis of a report obtained from a consumer-reporting agency. The
Credit Practices Rule limits the types of property a creditor may accept as
collateral to secure a consumer loan.
CHECK CASHING REGULATION
The California Department of Justice regulates our check cashing
business. In general, state law and regulations set forth requirements and
procedures which require us to, among other things, limit the amount of fees we
may charge, renew our check casher's permit annually and post a schedule of the
fees we charge for check cashing services in each of our locations.
TRAVEL AGENCY REGULATION
Each of our travel locations are travel agencies that are regulated by
the Airline Reporting Corporation, or ARC. The ARC represents the major
scheduled airline carriers and sets the operating rules for travel agencies. We
are required to submit weekly reports to the ARC and to meet certain procedural,
funding and bonding requirements that the ARC sets. In California, under the
Seller of Travel Act, we are required to register as a seller of travel, comply
with certain disclosure requirements and participate in the State's restitution
fund. We also are subject to regulation by the United States Department of
Transportation, or the DOT, by regulations applicable to business generally and
by laws or regulations directly applicable to access online commerce. However,
it is possible that laws and regulations may be adopted with respect to the
Internet or commercial online services covering issues such as user privacy,
pricing, content, copyrights, distribution, antitrust and characteristics and
quality of products and services. Further, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws. Such laws would likely impose additional burdens on companies
conducting business online.
Moreover, in many states, there is currently great uncertainty whether
or how existing laws governing issues such as property ownership, sales and
other taxes, libel and personal privacy apply to the Internet and commercial
online services. Tax authorities in a number of states, as well as a
Congressional advisory commission, are currently reviewing the appropriate tax
treatment of companies engaged in online commerce, and new state tax regulations
may subject us to additional state sales and income taxes. Federal legislation
imposing certain limitations on the ability of states to impose taxes on
Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as this
legislation is known, imposes on electronic commerce a three-year moratorium on
state and local taxes imposed after October 1, 1998, but only where such taxes
are discriminatory on Internet access.
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS AND STOCK PRICE
Discussions of certain matters contained in this Information Statement
may constitute forward-looking statements under Section 27A of the Securities
Act and Section 21E of the Exchange Act. These statements may involve risks and
uncertainties. These forward-looking statements relate to, among other things,
expectations of the business environment in which we operate in, projections of
future performance, perceived opportunities in the market and statements
regarding our mission and vision. Our actual results, performance and
achievements may differ significantly from the results, performance or
18
<PAGE> 24
achievements expressed or implied in such forward-looking statements. The
following is a summary of some of the important factors that could affect our
future results of operations and/or our stock price, and should be considered
carefully.
ABSENCE OF OPERATING HISTORY
Hispanic Express was formed on September 5, 2000 and we do not have an
operating history as a separate stand-alone company. Our success will depend, in
large part, of the ability of the management to implement its business strategy.
ABSENCE OF TRADING MARKET
There is currently no public market for the shares of our common stock,
and we do not know whether a trading market will develop on or after the date
such shares are distributed to you. If we do become a publicly traded company,
the price at which our common stock would trade cannot be predicted. The price
at which our common stock would trade will be determined by the market place and
may be influenced by many factors, including the limited amount of public float
for Hispanic Express common stock, investors' perception of our dividend policy
(See "Absence of Dividend" and "DIVIDEND") and general economic and market
considerations, particularly in California.
ABSENCE OF DIVIDEND
We do not currently intend to pay regular cash dividends on our Common
Stock. Our dividend policy will be reviewed from time to time by our Board of
Directors in light of our earnings and financial position and other business
considerations that our Board of Directors considers relevant.
LIABILITY FOR THIRD PARTY CLAIMS
The Contribution Agreement provides for the indemnification of Central
Financial by Hispanic Express against all liabilities, such as lawsuits or other
claims by third parties. In addition, the Contribution Agreement provides for
your indemnification at the Liquidation Date by Hispanic Express upon the
dissolution and liquidation of Central Financial. However, there is always the
possibility that Hispanic Express will cease to exist or that it will not have
sufficient assets to fully indemnify Central Financial or you. There is also the
possibility that the indemnification obligations of Hispanic Express may not be
enforceable under applicable law. In any such case, there would be the
possibility that you would be personally liable after the Liquidation Date for
third party claims made against Central Financial, on a pro-rata basis and to
the extent of the amount distributed to you in the Distribution.
CREDIT RISK ASSOCIATED WITH CUSTOMERS; LACK OF COLLATERAL
Our customers are typically between the ages of 21 and 45, earn less
than $25,000 per year, have little or no savings, and have limited or short-term
employment histories. In addition, our customers typically have no prior credit
histories and are unable to secure credit from traditional lending sources. We
base our credit decisions primarily on our assessment of a customer's ability to
repay the obligation. In making a credit decision, in addition to the size of
the obligation, we generally consider a customer's
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income level, type and length of employment, stability of residence, personal
references and prior credit history with us. We, however, are more susceptible
to the risk that our customers will not satisfy their repayment obligations than
are less specialized consumer finance companies or consumer finance companies
that have more stringent underwriting criteria.
Because we rely on the creditworthiness of our customers for repayment
and do not rely on collateral securing the debt, we experience actual rates of
losses higher than lenders who have collateral which they can repossess in the
event of a borrower's default. At June 30, 2000 and 1999 our net finance
receivables had accounts with payments 31 days or more past due, as a percentage
of end of period net receivables, of 6.3% and 5.0%, respectively. At December
31, 1999, 1998 and 1997 net finance receivables had accounts with payments 31
days or more past due as a percentage of end of period net receivables of 5.1%,
4.1% and 8.1%, respectively. For the six months ended June 30, 2000 and 1999,
and the twelve months ended December 31, 1999, 1998 and 1997, the portfolios
comprising the finance receivables had net write-offs of $2.8 million, $2.9
million, $6.6 million, $8.7 million and $5.3 million, respectively. We cannot
assure that we will not experience increases in delinquencies and net write-offs
which would require additional increases in the provisions for credit losses.
Such increases would adversely affect results of operations if we were not able
to increase the rate charged on receivables to reflect the additional risks in
its portfolios. Since we presently charge the maximum allowable interest rates
on our small loan products, further increases in delinquencies and write-offs
will adversely affect results of our operations. For information concerning our
credit quality experience, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Trends", and
"Delinquency Experience and Allowance for Credit Losses."
GENERAL ECONOMIC RISK
The risks associated with our businesses become more significant in an
economic slowdown or recession. During periods of economic slowdown or recession
we have experienced and may again experience a decreased demand for our
financial products and travel services and an increase in rates of delinquencies
and the frequency and severity of losses. Our actual rates of delinquencies and
frequency and severity of losses have been in the past and may be in the future
higher under adverse economic conditions than those generally experienced in the
consumer finance industry. Any sustained period of economic slowdown or
recession could materially adversely affect our financial condition and results
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Trends", and "Delinquency Experience and
Allowance for Credit Losses."
MORTGAGE PORTFOLIO RISKS
The credit risks associated with our second mortgage loans, including
applicable loan to value ratios, and the credit and income histories of the
mortgagors are generally higher than in conventional conforming mortgage loans
and may lead to higher delinquency rates. Also, our businesses may be materially
and adversely affected by declining real estate values as our security interest
in the property securing such loans is subordinated to the interest of the first
mortgage holder. If the value of the property securing the second mortgage loan
is not sufficient to repay the borrowers obligation to the first mortgage holder
upon foreclosure, or if there is no additional value in such property after
satisfying the borrowers obligation to the first mortgage loan holder, the
borrowers obligation to us will likely not be satisfied. Our mortgage business
will depend upon Banner Central Finance for the origination and purchase of our
mortgage loans and there is no assurance that Banner Central Finance will
continue to conduct this business or that we could successfully compete with
other mortgage originators if we relied upon independent brokers to acquire our
mortgages.
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INTEREST RATE RISK
The net interest spread, which is the difference between the average
interest rate on average net receivables and the average interest rate on
average interest bearing liabilities, or the Net Interest Spread, partially
determines our profitability in our consumer financial products business.
Because we pay a floating interest rate on borrowings under our Line of Credit
(as defined below), increases in such rate have at times decreased, and in the
future may decrease, our Net Interest Spread. This may have a material adverse
effect on our results of operations and financial condition.
The interest rate we are allowed to charge our customers on our small
loans is limited under California law. Presently, we generally charge the
maximum interest rate permitted in California on the majority of our small loan
portfolios. There is no corresponding interest rate limitation on installment
travel sales. Increases in the interest rate we charge our customers could
reduce demand for our financial products and services which, in turn, could
decrease our net income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Supervision and Regulation - Small
Loan Business."
NEED FOR SENIOR CREDIT FACILITY
We require substantial capital to finance our business. Consequently,
our ability to maintain our current level of operations and to expand our
operations will be affected by the availability of financing and the terms
thereof.
Currently, we fund our business activities under a revolving loan
agreement dated August 11, 2000 with several banks, including, Union Bank of
California, N.A. as agent, or the Line of Credit, which expires August 11, 2003.
Although the Line of Credit permits us to borrow up to $55 million, the amount
of credit available at any one time is limited to 70% of "eligible contracts" as
defined in our credit agreement.
In addition, our inability at any time to renew or replace our Line of
Credit or other senior credit facilities on acceptable terms could have a
material adverse effect on our results of operations and financing condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
RESTRICTIONS IMPOSED BY THE LINE OF CREDIT
All of the assets and stock of Central Consumer Finance Company, or
Central Consumer (which is our wholly-owned subsidiary), and its subsidiaries
have been pledged as collateral for the amounts that Central Consumer borrows
under its Line of Credit.
The Line of Credit requires, among other things, that we maintain
specific financial ratios and satisfy certain financial tests with respect to
Central Consumer. At June 30, 2000, Central Consumer and subsidiaries had total
assets of approximately $70 million and stockholders' equity of approximately
$30 million. Our ability to meet these financial ratios and financial tests can
be affected by events beyond our control, and we cannot assure that we will meet
these tests. The Line of Credit also restricts, among other things, Central
Consumer's ability to
- incur additional indebtedness;
- pay indebtedness prior to the date when due;
- pay dividends, make certain other restricted payments or
consummate certain asset sales;
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- merge or consolidate with any other person;
- enter into certain transactions with affiliates; and
- incur indebtedness that is subordinate in priority and right of
payment to amounts outstanding under the Line of Credit.
At present time, Central Consumer is in compliance with the financial
ratios and tests. However, the breach of any of these covenants could result in
a default under the Line of Credit. In the event of a default under the Line of
Credit, the lenders could seek to declare all amounts outstanding under the Line
of Credit, together with accrued and unpaid interest, to be immediately due and
payable. If we were unable to repay the amounts, the lenders under the Line of
Credit could proceed against the collateral that we granted to them to secure
our indebtedness, which is a significant portion all of our and our
subsidiaries' tangible assets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
RELATIONSHIPS WITH AIRLINES
We derive substantially all of our travel services revenue from a
combination of:
- sales of discounted air fares;
- commissions on published fares for both domestic travel and
travel to Latin America; and
- performance based compensation referred to as "override
commissions."
We depend on our airlines for access to non-published fares for which we
have no long-term or exclusive contracts. Our business could be hurt if the
airlines we do business with:
- refuse to renew our contracts for non-published fares;
- renew the contracts on less favorable terms; or
- cancel our contracts.
Non-published fares are tickets we acquire from the airlines and resell to our
customers at discounts off published fares. We have contracts with 11 airlines
that permit us to acquire non-published fares. These contracts are typically for
a short period, are cancelable on short notice and do not require the airlines
to provide us with a specific quantity of tickets or deal with us exclusively.
A significant portion of our revenue depends on regular and override
commissions paid to us by the airlines for bookings made through our travel
stores and Internet sites. The airlines we do business with are not obligated to
pay any specific commissions, or to pay commissions at all.
Most recently, there has been a general trend by the airlines to reduce
commissions paid to travel agents in order to reduce their distribution costs,
and many travel experts believe that airlines will eliminate all commissions in
the near future. In response to these changes, many travel agencies, including
us, have begun to charge service fees to their customers.
Although our domestic travel business has been subject to the same
downward trends on commission rates, our commission rates on tickets to Latin
America, which account for approximately 75% of our travel business, have not,
historically, been subject to these general trends. From time to time,
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however, certain airlines have reduced commission rates on Latin American
routes, but have generally reinstated them in order to meet competitive
conditions. We believe that the pressure on airlines to reduce their
distribution costs will continue and affect our present Latin American
commission rates, and we have begun to charge service fees in certain markets
where commissions have been reduced and are prepared to introduce service
charges throughout all of our travel stores should conditions warrant it.
A large percentage of our travel business depends upon a limited number
of airlines and our business could be hurt if any of these carriers temporarily
curtail operations, were shut down, or went out of business. In November of
1999, Taesa Airlines, one of the major Mexican carriers, was shut down by the
Mexican government and eventually was declared bankrupt. The suspension and
ultimate cessation of Taesa Airlines had a significant adverse effect on our
operations in the fourth quarter of 1999, our busiest travel season. Results for
the year ending December 31, 2000, we will also be adversely impacted and will
remain as such until the Taesa route system is absorbed by other airline
carriers. In response to the cessation of Taesa, Mexicana and Aeromexico, which
are controlled by a common parent company, reduced commissions on routes from
Tiajuana to other parts of Mexico. To offset this decline in commissions, we
have begun to charge our customers a service charge.
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
Our financial performance will depend in part on our ability to
- successfully develop and introduce new financial products and
services;
- integrate new travel locations into our operations;
- generate satisfactory performance or enhance performance at
these locations;
- maintain our airline contracts and commission rates or increase
our fees;
- enter contracts with other providers of travel and
travel-related services; and
- maintain our present relationship with Kmart.
Expansion of our business may negatively impact our operating results,
particularly during periods immediately following the expansions. In addition,
we cannot assure that we will be able to profitably implement our business
strategy in new geographical areas. Furthermore, we may compete for expansion
with companies that may have significantly greater financial resources than we
do. We cannot assure that we will be able to locate suitable new locations for
our travel business, or that any operations that we open or acquire will be
effectively and profitably integrated into our existing operations.
DEPENDENCE ON CALIFORNIA MARKET
The majority of our consumer financial products business, our mortgage
business, and our travel facilities are located in California and the majority
of our revenues are generated in California. Therefore, our performance depends
upon general economic conditions in California and Southern California, in
particular, and may be adversely affected by social factors or natural disasters
in California. A decline in the California economy could have a material adverse
effect on our results of operations and financial condition.
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COMPETITION
The small loan consumer finance industry is a highly fragmented segment
of the consumer finance industry. There are numerous small loan consumer finance
companies operating in the United States. Many of these companies have
substantially greater resources than we do and their entry or expansion within
our markets could have a material adverse effect on our business strategy and
results of our operations and financial condition. We do not believe we compete
with commercial banks, savings and loans and most other consumer finance
lenders, because these institutions typically do not make loans of less than
$1,500.
We compete with traditional travel agencies, ticket consolidators,
Internet travel companies and with the airlines. In the United States Hispanic
market, we believe that we are the largest providers of leisure air travel to
Hispanic customers traveling to Latin America. We face strong competition on a
regional basis from local retail operators, and also face potential competition
from larger more traditional travel agencies, who may establish travel agencies
or form strategic alliances in Hispanic areas in the future. Some of these
agencies have greater financial and marketing resources then we do. We cannot
assure that our present or future competitors will not exert significant
competitive pressures on us, which could have a material adverse effect on our
results of operations and financial condition.
We compete in our recently established Internet travel business with a
variety of Internet travel companies such as CheapTickets, Inc., Priceline.com,
Inc. and Previewtravel.com, all of which have greater brand recognition,
significantly greater financial, marketing and other resources than we do.
Certain of these companies may also be able to secure airline contracts from our
travel providers on more favorable terms than we can obtain. We cannot be
assured that we will be able to compete successfully against current and future
competitors. We also face competition from travel consolidators, who also sell
their services directly to customers by telephone and on the Internet. As the
market for online travel grows, there can be no assurance that our ticket
providers will permit us to continue to sell airline tickets online.
Among other factors, our success depends heavily on our access to
non-published fares, on our brand recognition and on the ability of our systems
to integrate our non-published fares with published fares to offer customers a
broad choice. Our competitors may enter into strategic or commercial
relationships with larger, established and well-financed companies. Some of our
competitors have agreements to buy non-published fares from our major suppliers.
Our competitors may be able to induce one or more of our suppliers of
non-published fares, through pricing, equity or other incentives, to cease doing
business with us, or to do business with us on less favorable terms. They might
also be able to build strong brand recognition in the Hispanic leisure travel
market, through widespread advertising and other marketing efforts. Certain of
our competitors may be able to devote greater resources to marketing and
promotional campaigns on the Internet if they began to promote Hispanic travel
opportunities. Competitors may also devote substantially more resources to
website and systems development than we do. Any or all of these developments
could bring heavy competitive pressures to bear on us.
SEASONALITY
Our businesses are seasonal, reflecting fluctuations in leisure travel
patterns and consumer demand for small loans. Historically, travel sales
increase in the second and fourth quarter of the year, reflecting summer and
Christmas travel, and decline in the first and third quarter. The summer and
Christmas seasonal cycles are fairly predictable, but may shift or be altered,
reflecting changes in the economy, availability of airline capacity and travel
prices. These seasonal fluctuations in our business directly impact our
operating results and cash flow. Travel sales in general may be impacted by
political instability in Latin America, terrorism, fuel price escalation,
weather, airline or other travel related strikes
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and news of airline disasters. We experience the highest demand for our
financial products and services between October and December and experience the
lowest demand between January and March.
RELIANCE ON THIRD PARTY SYSTEMS
Our travel business is limited to those airlines that provide
comprehensive travel information through the global distribution systems we
utilize. There can be no assurance that the airlines we currently have contracts
with will continue to sell their services through SABRE, Amadeus and Worldspan,
or that we would be able to establish new relationships to ensure uninterrupted
access to a comprehensive supply of travel information should the airlines that
we have relationships with elect to not use the global distribution systems,
that we currently employ. In addition, we are dependent on our global
distribution system supplier to continue to offer and maintain their service.
Any discontinuation of its service or any reduction in its performance, that
requires us to replace such service would be disruptive to our business and
could require substantial expenditures and time to transition us to an
alternative global distribution system.
TRAVEL INDUSTRY DISRUPTIONS
A decline in leisure travel or disruptions in travel generally could
hurt our business. Leisure travel is highly sensitive to personal discretionary
spending levels and thus tends to decline during general economic downturns. In
addition, other adverse trends or events that tend to reduce leisure travel are
likely to hurt our business. These may include political instability, regional
hostilities, terrorism, fuel price escalation, travel-related accidents, bad
weather, and airline or other travel-related strikes.
A number of airlines are currently in various stages of negotiation with
unions representing their employees. If those negotiations fail and the unions
elect to strike or effect a slowdown, our business could be harmed.
E-COMMERCE
Major online service providers and the Internet itself have experienced
outages and other delays as a result of software and hardware failures and could
face such outages and delays in the future. Outages and delays are likely to
affect the level of Internet usage and the processing of transactions on the
VuelaBarato.com and 4GreatFares.com websites. It is unlikely that we could make
up for the level of orders lost in those circumstances by increased phone
orders. In addition, the Internet could lose its viability by reason of delays
in the development or adoption of new standards to handle increased levels of
activity or of increased government regulation. The adoption of new standards or
government regulation may require us to incur substantial compliance costs.
GROWTH MANAGEMENT
We have rapidly and significantly expanded our operations and anticipate
further significant expansion. Our inability to manage growth effectively could
hurt our business.
We have recently added a number of key managerial and technical
employees, and we expect to add additional key personnel in the future. This
expansion has placed, and we expect it will continue to place, a significant
strain on our management, operational and financial resources. To manage the
expected growth of our operations and personnel, we plan to:
- improve and upgrade transaction-processing, operational,
customer service and financial systems and financial procedures
and controls;
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- maintain and expand our relationships with various travel
service suppliers, Internet portals and other travel-related
website companies and other third parties necessary to our
business;
- continue to attract, train and manage our employee base; and
- implement a disaster recovery program.
TECHNOLOGY
We may not be able to keep up with the Internet's rapid technological
and other changes. The Internet travel industry in which we compete is
characterized by:
- rapid technological change;
- changes in user and customer requirements and preferences;
- frequent new product and service introductions embodying new
technologies;
- the emergence of new industry standards and practices; and
- the emerging importance of the Internet and the proliferation of
companies offering Internet-based products and services.
These developments could quickly render our existing online sites and
proprietary technology and systems obsolete. Our inability to modify or adapt
our infrastructure in a timely manner or the expenses incurred in making such
adaptations could hurt our Internet business.
As a result, we will be required to continually improve the performance,
features and reliability of our services, particularly in response to
competitive offerings. The success of our Internet travel business will depend,
in part, on our ability to enhance our existing services and develop new
services in a cost-effective and timely manner. The development of proprietary
technology entails significant technical and business risks and requires
substantial expenditures and lead-time. We may not be able to adapt successfully
to customer requirements or emerging industry standards. In addition, the
widespread adoption of Internet, networking or telecommunications technologies
or other technologies could require us to incur substantial expenditures to
modify or adapt our Internet travel services or infrastructure.
In addition, our computer and communications systems are vulnerable to
business interruptions. Our ability to receive and fill orders through our
travel call center and provide high-quality customer service largely depends on
the efficient and uninterrupted operation of our computer and communications
hardware systems. The occurrence of interruptions, delays, loss of data or the
inability to accept and confirm customer reservations could hurt our travel
business.
Our online servers and our call center are located in Commerce,
California; the SABRE Group's computers are located in Tulsa, Oklahoma. These
systems and operations are vulnerable to damage or interruption from power loss,
telecommunications failure, hacker break-ins, natural disasters and similar
events.
Although we have adopted network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These kinds of events could lead to interruptions, delays, loss of
data or the inability to accept and confirm customer reservations. The
occurrence of any of the foregoing risks could hurt our business.
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DOMAIN NAMES
We currently hold the Internet domain names "www.VuelaBarato.com" and
"www.4GreatFares.com." Third parties may acquire domain names that infringe or
otherwise decrease the value of our trademarks and other proprietary rights that
may hurt our business. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in the United States and in
foreign countries is subject to change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. The relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. As a result, we may not acquire or maintain the
"www.VuelaBarato.com" and "www.4GreatFares.com" domain names in all the
countries in which we conduct business.
SERVICE INTERRUPTIONS
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the airline
industry to make airline ticket reservations. Any interruption in these
third-party services or a deterioration in their performance could hurt our
business. If our arrangement with any of these third parties is terminated, we
may not find an alternative source of systems support on a timely basis or on
commercially reasonable terms. We rely on third parties to print our airline
tickets and arrange for their delivery. We rely on third parties to host our
online system's infrastructure, web and database servers. We predominately rely
on SABRE for our general reservations system, including customer profiling,
making reservations and credit card verification and confirmations. Currently,
over 90% of our computing transactions are processed through the SABRE systems.
If we, or SABRE, ever elect to terminate the existing relationship, we
would be forced to convert to another provider. This conversion could require a
substantial commitment of time and resources and hurt our business.
SECURITY BREACHES
Online security breaches could hurt our business. In our Internet travel
business, secured transmission of confidential information over public networks
is essential to maintain consumer and supplier confidence. If any compromise of
our security were to occur, it could hurt our business. Concerns over the
security of transactions conducted on the Internet and the potential compromise
of customer privacy may inhibit the growth of commercial online services as a
means of conducting commercial transactions. We have expended resources to
protect against security breaches and to alleviate problems caused by such
breaches, and we may need to make further expenditures for this purpose in the
future. We maintain an extensive confidential database of customer profiles and
transaction information. Our current security measures may not be adequate and
advances in computer capabilities, new discoveries in the field of cryptography,
or other events or developments may result in a compromise or breach of the
methods we use to protect customer transaction and personal data.
A party who can circumvent our security might be able to misappropriate
proprietary information or cause disruptions in our operations. Security
breaches could also expose us to a risk of loss or litigation and possible
liability for failing to secure confidential customer information.
MANAGEMENT AND KEY EMPLOYEE DEPENDENCE
Our management team is headed by Gary Cypres, our Chairman of the Board,
Chief Executive Officer and President and consists of a number of key corporate
employees, who as executive officers of Hispanic Express and its predecessors
have contributed to the development of the businesses that now
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comprise Hispanic Express. All of our executive officers are, and following the
date of the Distribution will continue to be executive officers of Hispanic
Express. The loss of the services of any of these executive officers or other
key employees could hurt our business. If we lose our key personnel or cannot
recruit additional personnel, our business may suffer.
Our future success also depends on our ability to identify, attract,
hire, train, retain and motivate other highly skilled technical, managerial,
marketing and customer service personnel. Competition for such personnel is
intense. We may not be able to attract, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties in attracting
a sufficient number of qualified software developers for our future online
services and transaction-processing systems. The failure to retain and attract
necessary technical, managerial, marketing and customer service personnel could
hurt our business and impair our growth strategy. Although none of our employees
are represented by a labor union, our employees may join or form a labor union.
BUSINESS EXPANSION
Our business could be hurt if we do not offer new products and services
successfully. We plan to introduce new and expanded products and services. Our
inability to generate revenues from such expanded products and services or
products sufficient to offset their development or offering cost could hurt our
business. Such additional products and services may include secured financing
products, as well as hotel, tour, cruise reservations and car rentals. We may
not be able to offer such products or services in a cost-effective or timely
manner and our efforts may not be successful.
Further, any new product or service that is not favorably received by
customers could damage our reputation or brand name. Expansion of our services
could also require significant additional expenses and may strain our
management, financial and operational resources.
ACQUISITION STRATEGIES
Our business could be hurt if we make acquisitions that are not
successful. We may in the future broaden the scope and content of our business
through the acquisition of existing complementary businesses. We may not be
successful in overcoming problems encountered in connection with such
acquisitions, and our inability to do so could hurt our business. We may
consider the acquisition of companies providing similar services in other
markets or in other sectors of the travel industry in the future. Future
acquisitions would expose us to increased risks. These include risks associated
with:
- the assimilation of new operations, sites and personnel; the
diversion of resources from our existing businesses, sites and
technologies;
- the inability to generate revenues from new sites or content
sufficient to offset associated acquisition costs;
- the maintenance of uniform standards, controls, procedures and
policies; and
- the impairment of relationships with employees and customers as
a result of integration of new businesses.
Acquisitions may also result in additional expenses associated with
amortization of acquired intangible assets or potential businesses.
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REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
Certain segments of the travel industry are heavily regulated by the
United States and other governments. Accordingly, certain services offered by us
are affected by such regulations. New legislation or regulation, the application
of laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and commercial online services could hurt our business.
Our consumer finance business is regulated by federal, state and local
government authorities and are subject to various laws and judicial and
administrative decisions imposing various requirements and restrictions. These
requirements and restrictions include, among other things,
- regulating credit granting activities;
- establishing maximum interest rates and charges;
- requiring disclosures to customers;
- governing secured transactions;
- setting collection, repossession and claims handling procedures;
and
- regulating insurance claims practices and procedures, and other
trade practices.
Although we believe that we are in compliance in all material respects with
applicable local, state, and federal laws, rules and regulations, we cannot
assure that more restrictive laws, rules and regulations will not be adopted in
the future which may make compliance more difficult or expensive, restrict our
ability to purchase or finance installment sales or small loans, further limited
or restrict the amount of interest and other charges imposed in installment
sales or small loans originated by retailers or Hispanic Express, or otherwise
materially adversely affect our business or prospects. See "Supervision and
Regulation."
PROPERTIES
Our executive and administrative offices occupy approximately 30,000
square feet of a building (which is owned by an affiliate company, BCE
Properties II, Inc.) located at 5480 East Ferguson Drive, Commerce, California
90022. We believe that our executive and administrative offices are adequate for
current needs and that additional space in our headquarters is available for
future expansion. We also believe that our payment centers are adequate for our
present and anticipated needs. We own a 86,000 square foot property in Los
Angeles, on which we operate a payment and loan center, and rent approximately
30,000 square feet of retail space to Banner's Central Electric. All of our
other locations are leased pursuant to short-term leases.
LEGAL PROCEEDINGS
We are involved in certain legal proceedings arising in the normal
course of our business. We do not believe the outcome of these matters will have
a material adverse effect on us.
DIVIDENDS
We have never paid and have no present intention of paying cash
dividends on our Common Stock. We anticipate that we will retain all earnings
for use in our business, and we do not anticipate paying cash dividends for the
foreseeable future. Any determination in the future to pay dividends will
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depend on our financial condition, capital requirements, results of operations,
contractual limitations, legal restrictions and any other factors our Board of
Directors deems relevant.
SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to our
consolidated financial position as of December 31, 1999 and 1998 and our results
of operations for the years ended December 1, 1999, 1998 and 1997 has been
derived from our audited consolidated financial statements appearing elsewhere
in this Information Statement. This information should be read in conjunction
with such consolidated financial statements and the notes thereto. The selected
financial data with respect to our consolidated financial position as of
December 31, 1997, 1996 and 1995 and our results of operations for the years
ended December 31, 1996 and 1995 has been derived from our audited consolidated
financial statements, which are not presented herein.
The selected financial data with respect to our consolidated financial
position as of June 30, 2000, and our results of operations for the six months
ended June 30, 2000 and 1999, respectively, have been derived from unaudited
financial statements, which in our opinion reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of operations for the unaudited periods. The results of operations for
the interim periods are not necessary indicative of results of operations for
the full calendar year.
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HISPANIC EXPRESS, INC.
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ --------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues:
Interest income $ 5,271 $10,652 $14,393 $15,028 $15,103 $ 7,710 $ 7,138
Travel services 371 2,449 8,716 8,961 14,270 5,675 6,983
Other income(1) 1,782 4,314 6,365 7,954 10,884 5,369 5,298
------- ------- ------- ------- ------- ------- -------
Total Revenues 7,424 17,415 29,474 31,943 40,257 18,754 19,419
------- ------- ------- ------- ------- ------- -------
Costs and Expenses:
Operating expenses 2,492 6,553 16,891 17,738 24,215 10,447 13,400
Provision for credit losses 1,598 3,744 5,318 5,952 6,580 2,858 3,035
Interest expense 3,277 3,200 3,406 3,212 3,202 1,686 1,655
Depreciation and amortization 341 147 750 1,151 1,556 625 851
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes (284) 3,771 3,109 3,890 4,704 3,138 478
Provision (benefit) for income tax (114) 1,508 1,217 1,556 1,882 1,257 191
------- ------- ------- ------- ------- ------- -------
Net Income $ (170) $ 2,263 $ 1,892 $ 2,334 $ 2,822 $ 1,881 $ 287
======= ======= ======= ======= ======= ======= =======
PRO FORMA PER SHARE DATA:
Net income per common share:
Basic $ 0.39 $ 0.04
Diluted $ 0.39 $ 0.04
Shares used in calculating pro
forma net income per common
share
Basic 7,166 7,166
Diluted 7,166 7,166
</TABLE>
(1) Other income includes administrative and membership fees charged on
certain small loan contracts, late charges, revenue from the sale of
insurance products and fees charged for check cashing.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------------------- ----------------------
(Dollars in thousands)
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash $ 57 $ 5,927 $ 5,003 $ 7,847 $ 5,208 $ 5,313 $ 4,550
Receivables, net 30,881 50,370 54,795 60,942 59,899 57,420 55,839
Total assets 35,174 74,099 85,460 91,785 91,127 86,696 85,284
Notes payable 40,850 40,850 40,850 40,000 40,000 36,200 28,100
Stockholder's equity (deficit) (8,752) 24,849 38,864 45,380 43,780 40,605 47,318
</TABLE>
31
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
information under "Selected Financial Data" and our Consolidated Financial
Statements and Notes thereto and other financial data, included elsewhere in
this Information Statement. Certain statements under this caption constitute
"forward-looking statements" under Section 27A of the Securities Act and Section
21E of the Exchange Act, which involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in these
forward-looking statements. Factors that might cause such a difference, include
but are not limited to, credit quality, economic conditions, airline
relationships and commissions, technology, competition in the geographic and
business areas in which we conduct our operations, fluctuations in interest
rates and government regulation. For additional information concerning these
factors and others, see "Business -- Business Considerations and Certain Factors
that May Affect Future Results of Operations and Stock Price."
OVERVIEW
In pursuit of our business strategy since 1992, we have grown by
introducing financial products and travel services we felt would well serve the
Hispanic community. In December of 1992, we began offering, our unsecured,
closed-end, small loans, generally ranging from $350 to $1,500, for personal,
family or household purposes. On June 1995, we commenced our travel services
business and began offering financing for the travel tickets we sold.
In 1996, we expanded our travel business by assuming the leases to 70
retail locations, which had previously offered travel services.
In May 1997, we introduced a new financial product involving the
issuance of a card, called an "Efectiva Card." The Efectiva Card provides our
customers with the ability to access their established lines of credit with us
by withdrawing cash from our cash dispensing machines. Our cash dispensing
machines are proprietary and are not part of any network system.
In October 1997, we entered into an agreement with Kmart to install our
cash dispensing machines at 10 Kmart locations in Southern California. In
January 1998, Kmart and we agreed to expand the relationship and install cash
dispensing machines in additional Kmart stores and presently have machines in 35
Kmart locations and in 26 other locations, which we own or operate. At certain
times of the year, we also place our employees at the Kmart stores in kiosks we
provide to receive and process applications for our Efectiva Cards. The
agreement, which can be terminated for any reason by either Kmart or us, upon 30
days written notice, requires us to pay a monthly license fee to Kmart for each
location, plus certain monetary incentives for each loan we make, and to pay all
costs and expenses related to the installation and maintenance of our cash
dispensing machines and our on-site employees. In September, we made a decision
to reduce the number of Kmart locations, which we have our cash dispensing
machines, to 15.
Historically, we provided payroll check cashing services to our
customers free of charge when they come into our finance centers to pay on their
accounts. In mid-1998, however, we began to charge for such services and to
offer cashing services in certain of our loan centers.
In March 1999, we again expanded our travel business by assuming the
leases to 24 retail locations, which had previously offered travel services.
As a result of the changes in products and services offered and changes
in distribution channels, results of operations are not readily comparable from
year to year or from period to period, and are not necessarily indicative of
future operating results.
32
<PAGE> 38
FINANCIAL TRENDS
PORTFOLIOS
The following sets forth certain information relating to our portfolios
for the periods indicated:
<TABLE>
<CAPTION>
SMALL LOAN PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE CONTRACT BALANCE)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross receivable (at end of period) $ 58,659 $ 62,248 $ 56,411 $ 55,883 $ 50,454
Deferred interest (at end of period) 1,414 445 674 345 700
-------- -------- -------- -------- --------
Net receivable (at end of period) 57,245 61,803 55,737 55,538 49,754
Deferred administrative fees, ATM fees
and insurance revenues (at end of period) 1,668 2,169 1,865 1,432 1,308
-------- -------- -------- -------- --------
Net carrying value $ 55,577 $ 59,634 $ 53,872 $ 54,106 $ 48,446
======== ======== ======== ======== ========
Average net receivable(1) $ 51,496 $ 55,312 $ 56,640 $ 58,945 $ 52,158
Number of contracts (at end of period) 111,000 95,403 87,118 89,055 80,565
(2)
Average net contract balance $ 507 $ 558 $ 627 $ 626 $ 632
Total interest income(3) 13,056 13,792 13,584 7,044 6,136
Total administrative fee and ATM fee income 2,341 3,433 3,870 2,021 1,802
Late charge and extension fee income 217 73 1,926 923 1,102
Provision for credit losses 4,990 5,329 6,290 2,755 2,899
Provision for credit loss as a
percentage of average net
receivable(4) 9.9% 9.6% 11.1% 9.4% 11.1%
Net write-offs 4,998 7,904 6,319 2,755 2,745
Net write-offs as a percentage of
average net receivable(4) 9.7% 14.3% 11.6% 9.3% 10.5%
Average interest rate on average net
receivable(4) 25.4% 24.9% 24.0% 23.9% 23.5%
</TABLE>
(1) Average net receivable is defined as the average gross receivables less
the average deferred interest and insurance.
(3) In 1997, the number of contracts is higher as a result of many customers
having more than one account open in that comprise the small loan
portfolio. In years prior to 1997, the small loan portfolio was
principally made up of on small loans.
(2) Amounts represent interest on the small loan portfolio, excluding
administrative and membership fees, late and other included in other
income in the consolidated statement of income appearing elsewhere
herein.
(4) Percentage for the six months ended June 30, 1999 and 2000 are
annualized.
33
<PAGE> 39
<TABLE>
<CAPTION>
TRAVEL FINANCE PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE CONTRACT BALANCE)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Gross receivable (at end of period) $ 6,165 $ 4,988 $ 4,929 $ 4,759 $ 4,893
Deferred interest (at end of period) 460 432 440 410 461
------- ------- ------- ------- -------
Net receivable (at end of period) $ 5,705 $ 4,556 $ 4,489 $ 4,349 $ 4,432
======= ======= ======= ======= =======
Average net receivables(1) 5,231 4,775 4,455 4,350 4,334
Number of contracts (at end of period) 14,435 12,250 11,506 11,754 10,880
Average net contract balance $ 395 $ 365 $ 375 $ 356 $ 392
Total interest income 1,338 1,235 1,163 561 530
Late charge and extension fee income 279 176 216 104 100
Provision for credit losses 328 623 290 103 93
Provision for credit loss as a
percentage of average net receivable(2) 6.3% 13.0% 6.5% 4.7% 4.3%
Net write-off's 328 776 290 103 88
Net write-off's as a percentage of
average net receivable(2) 6.3% 16.3% 6.5% 9.8% 4.1%
Average interest rate on average net
receivable(2) 25.6% 25.9% 26.1% 25.8% 24.5%
</TABLE>
(1) Average net receivable is defined as the average gross receivables, less
the average deferred interest and
(2) Percentage for the six months ended June 30, 1999 and 2000 are
annualized.
The following sets forth certain information relating to our portfolios
for the periods indicated.
MORTGAGE PORTFOLIO
At June 30, 2000 and December 31, 1999 and 1998, the gross receivables
of the mortgage portfolio was $6.6 million, $5.0 million and $0.3 million,
respectively. The number of mortgage loans outstanding at June 30, 2000, and
December 31 1999 and 1998 were 739, 505 and 16, respectively. The average
interest rate on the portfolio for these periods was 15%.
At June 30, 2000, and December 31, 1999, there was $0.2 million and $0.1
million of receivables with balances over 31 days past due.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table separates the changes in net interest income between
changes in average balances, or Volume, and average rates, or Rate, for the
average net receivables of the small loan and travel portfolio (dollars in
thousands) for the periods presented.
34
<PAGE> 40
<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
VERSUS VERSUS VERSUS
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------------- ------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ------ ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in
interest income
Small Loan Portfolio 3,207 163 3,370 956 (215) 741 318 (526) (208)
Travel Portfolio 351 21 372 (118) 15 (103) (84) 12 (72)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 2000
VERSUS VERSUS
JUNE 30, 1998 JUNE 30, 1999
---------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in
interest income
Small Loan Portfolio 521 (223) 298 (798) (110) (908)
Travel Portfolio (72) 5 (67) (2) (29) (31)
</TABLE>
CREDIT QUALITY
The provision for credit losses in our small loan and travel portfolios
are made following the origination of loans over the period that the events
giving rise to the credit losses are estimated to occur. Our portfolios comprise
smaller-balance, homogenous loans that are evaluated collectively to determine
an appropriate allowance for credit losses. The allowance for credit losses is
maintained at a level considered adequate to cover losses in the existing
portfolios. We pursue collection of past due accounts, and when the
characteristics of an individual account indicates that collection is unlikely,
the account is charged off and turned over to a collection agency. In 1998, we
changed our policy to automatically charge-off delinquent accounts over 150 days
past due. Prior to that, we generally charged off delinquent accounts when they
were 181 days and beyond past due.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of revenues. Our management's periodic evaluation
of the adequacy of the allowance is based on our past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay and current economic conditions.
For information concerning our provisions for credit loses and
charge-offs experienced in our small loan and travel portfolios. See "Financial
Trends - Portfolios" above.
PAYMENT AND COLLECTIONS
Industry studies estimate that a significant percentage of the adult
population in the United States do not maintain a checking account, which is a
standard prerequisite for obtaining a consumer loan credit card or other form of
credit from most consumer credit sources. Our customers are required to make
their monthly payments using a payment schedule or statement that we provide to
them. The vast majority of our customers make their payments in cash at our
payment facilities in Banner's Central Electric's stores.
We consider payments past due if a borrower fails to make any payment in
full on or before its due date, as specified in the installment credit or small
loan contract the customer signs. We currently attempt to contact borrowers
whose payments are not received by the due date within 10 days after such due
date. We contact these borrowers by both letter and telephone. If no payment is
remitted to us after the initial contact, we make additional contacts every
seven days, and, after a loan becomes 31 days delinquent, we generally turn over
the account to our credit collectors. Under our guidelines, we
35
<PAGE> 41
generally charge off and turn over an account to a collection agency when we
determine that the account is uncollectible, which is typically when the account
is 150 days past due.
DELINQUENCY EXPERIENCE AND ALLOWANCE FOR CREDIT LOSSES
Borrowers under our contracts are required to make monthly payments. The
following sets forth our delinquency experience for accounts with payments 31
days or more past due and allowance for credit losses for our finance
receivables.
<TABLE>
<CAPTION>
FINANCE RECEIVABLES(1)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Past due accounts 31 days or more (gross
receivable): $ 5,218 $ 2,779 $ 3,113 $ 3,040 $ 3,512
Accounts with payments 31 days or more past
due as a percentage of end of period
gross receivables 8.1% 4.1% 5.1% 5.0% 6.3%
Allowance for credit losses $ 5,787 $ 3,059 $ 3,030 $ 3,059 $ 3,232
Allowance for credit losses as a percentage of
net receivables 9.2% 4.6% 5.0% 5.1% 6.0%
</TABLE>
(1) Includes receivables in our small loan and travel finance portfolios.
Beginning in 1996, delinquencies and net write-offs in our receivable
portfolios increased to levels which were substantially higher than those we
have historically experienced in such portfolios. These trends continued during
1997. The increases occurred primarily with respect to our existing customers,
rather than new credit customers. We believe these increases were a result of
excessive credit burdens for some customers, due to an aggregate over extension
of credit in the marketplace, coupled with uncertainty over legislative reforms
potentially impacting our customers and their extended families. Both the
accounts with payments 31 days or more past due as a percentage of end of period
gross receivables, and the allowance for credit losses as a percentage of net
receivables declined from 8.1% and 9.2% as of December 31, 1997 to 4.1% and 4.6%
as of December 31, 1998, respectively, due to our decision in 1998 to write-off
substantially all of the receivables at year-end which were more than 150 days
past due.
In late 1996 and 1997, we took a number of steps to improve collections
and credit quality. We hired a senior executive in the credit and collections
field. In December 1996, we installed an autodialer to assist our collections
personnel in successfully contacting past due borrowers. In November 1998, we
completed installation of our Lexon, front-end credit scoring system. This
system allows us to track new credit applications and capture and analyze
customer credit data more effectively. This system also eliminated the need for
expensive data lines and terminal which were replaced by fax machines to
transmit applications to the central input location at our corporate
headquarters. Notwithstanding these measures, we cannot assure that the trend in
increased delinquencies and net write-offs will not continue.
36
<PAGE> 42
RESULTS OF OPERATIONS
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Total revenues in the six months ended June 30, 2000 increased to $19.4
million from $18.8 million in the six months ended June 30, 1999, an increase of
$0.6 million or 3.5%.
Total interest income for the six months ended June 30, 2000 decreased
to $7.1 million from $7.7 million in the six months ended June 30, 1999, a
decrease of $0.6 million or 7.4%. This decrease was primarily due to a decrease
of $0.9 million in the interest earned on the small loan portfolio as a result
of a decrease in the average balance of the small loan portfolio, which averaged
$52.2 million for the six months ended June 30, 2000 compared to the average
balance of $58.9 million for the six months ended June 30, 1999, offset by a
$0.4 million increase in interest income earned on the mortgage portfolio.
Revenues earned on the sales of travel services increased to $7.0
million for the six months ended June 30, 2000 compared to $5.7 million in the
six months ended June 30, 1999, an increase of $1.3 million or 23.0%. This
increase was primarily due to the operation of 38 new travel stores in 1999
whose leases were assumed from outside parties.
Other income for the six months ended June 30, 2000 decreased to $5.3
million from $5.4 million in the six months ended June 30, 1999, a decrease of
$0.1 million or 1.3%. Other income primarily includes:
- administrative fees earned on the small loan portfolio;
- membership fees earned on the Efectiva Card; and
- late charge income and extension fees and income earned on the
sale of insurance products.
This slight decrease was primarily due to:
- a reduction in Efectiva membership and administrative fees
earned on the small loan portfolio of $0.2 million;
- a decrease of $0.4 million of income earned on our sale of
credit insurance products; and
- an offsetting increase of $0.4 million in check cashing fees.
The decrease in income in our Efectiva membership and administrative fees and
insurance products was primarily due to a decrease in the average balance of the
small loan portfolio in the six months ended June 30, 2000 compared to the six
months ended June 30, 1999. The average interest rate earned on the small loan
portfolio was 23.5% for the six months ended June 30, 2000 compared to 23.9% in
the six months ended June 30, 1999. The increase in check cashing fees was
primarily attributable to increases in fees charged on this service and an
increase in the number of locations offering this service.
Operating expenses for the six months ended June 30, 2000 increased to
$13.4 million from $10.4 million in the six months ended June 30, 1999, an
increase of $3.0 million. Of this increase $1.7 was attributable to expenses
related to the expansion of the travel business and $1.3 million was
attributable to increased expenditures for advertising and staff for our
Internet business.
37
<PAGE> 43
The provision for credit losses in the six months ended June 30, 2000
increased to $3.0 million from $2.9 million in the six months ended June 30,
1999, an increase of $0.1 million or 6.2%. This increase was primarily
attributable to increased delinquencies in the small loan portfolio.
Interest expense for the six months ended June 30, 2000 of $1.7 million
remained flat with the amount incurred for the six months ended June 30, 1999,
primarily reflecting a declining average balance of debt outstanding for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999,
offset by an increase in the cost of borrowings during the six months ended June
30, 2000.
Depreciation and amortization for the six months ended June 30, 2000
increased to $0.9 million from $0.6 million in the six months ended June 30,
1999, an increase of $0.3 million or 36.2% primarily due to increased
amortization of goodwill resulting from the assumption of leases for our new
travel stores.
As a result of the foregoing, net income in the six months ended June
30, 2000 decreased to $0.3 million from the $1.9 million in the six months ended
June 30, 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total revenues in the year ended December 31, 1999 increased to $40.3
from $31.9 million in the year ended December 31, 1998, an increase of $8.4
million or 26.0%.
Total interest income for the year ended December 31, 1999 increased to
$15.1 million from $15.0 million in the year ended December 31, 1998, an
increase of $0.1 million or 0.5%. This increase was primarily due to an increase
in interest earned on the mortgage portfolio of $0.3 million, offset by a
decrease in interest earned on the small loan portfolio as a result of a
decrease in the average balance of the small loan portfolio for the year ended
December 31,1999 compared to the average balance for the year ended December 31,
1998. The average interest rate we earned on the small loan portfolio was 24.0%
in the year ended December 31, 1999 compared to 24.9% in the year ended December
31, 1998.
Revenues earned on the sales of travel services increased to $14.3
million for the year ended December 31,1999 compared to $9.0 million for the
year ended December 31, 1998, an increase of $5.3 million or 59.2%. This
increase was primarily due to the operations of 38 travel locations on leases
assumed during 1999, increases in revenues from existing travel stores and
improvements in override commissions earned in 1999.
Other income for the year ended December 31, 1999 increased to $10.9
million from $8.0 million in the year ended December 31, 1998, an increase of
$2.9 million or 36.8%. Other income in the year ended December 31, 1999 includes
an increase of $2.0 million in late fees we charged on the small loan portfolio.
A change in the law, effective January 1, 1999, allowed us to charge late fees
on a greater portion of our small loan portfolio. The remaining increase of $0.9
in other income for the year ended December 31, 1999 was primarily due to an
increase in administration and membership fees of $0.4 million and an increase
of $0.4 million in check cashing income as a result of increasing fees we charge
and the volume of checks we cashed.
Operating expenses for the year ended December 31, 1999 increased to
$24.2 million from $17.7 million in the year ended December 31, 1998, an
increase of $6.5 million or 36.5%. Of this increase, approximately $4.1 million
was attributable to the expansion of the travel business, $0.6 million was due
to increases in direct expenses relating to increased check cashing activities,
$0.3 million was due to costs incurred in connection with our attempt to acquire
Mission Savings and Loan and $1.5 million was due to increases in corporate
overhead.
38
<PAGE> 44
The provision for credit losses in the year ended December 31, 1999
increased to $6.6 million from $6.0 million in the year ended December 31, 1998,
an increase of $0.6 million or 10.6%. This increase was primarily attributable
to increased delinquencies.
Interest expense for the year ended December 31, 1999 of $3.2 million
remained flat with the amount incurred for the year ended December 31, 1998.
Deprecation and amortization for the year ended December 31, 1999
increased to $1.6 million from $1.2 million in the year ended December 31, 1998
an increase of $0.4 million or 35.2%. The increase was primarily due to
increased amortization of goodwill resulting from assumption of leases for
travel stores in 1999.
As a result of the foregoing factors, net income in the year ended
December 31, 1999 increased to $2.8 million compared to $2.3 million in the year
ended December 31, 1998, an increase of $0.5 million.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Total revenues in the year ended December 31, 1998 increased to $31.9
million from $29.5 million in the year ended December 31, 1997, an increase of
$2.4 million or 8.4%.
Total interest income for the year ended December 31, 1998 increased to
$15.0 million from $14.4 million in the year ended December 31, 1997, an
increase of $0.6 million or 4.4%. This increase was attributable to an increase
in interest income of $0.7 million in the small loan portfolio, which averaged
$55.3 million in the year ended December 31, 1998 compared to $51.5 million in
the year ended December 31, 1997. The majority of the increase was due to the
growth of the Efectiva Card. The average interest rate earned on the small loan
portfolio was 24.9% for the year ended December 31, 1998 compared to 25.4% for
the year ended December 31, 1997 reflecting changes in the composition of the
portfolio.
Revenues earned on the sales of travel services increased to $9.0
million for the year ended December 31, 1998 compared to $8.7 million for the
year ended December 31, 1997, an increase of $0.3 million or 2.8%. This net
increase was primarily attributable to an increase in commission rates earned on
airline ticket sales in 1998 as compared to 1997.
Other income for the year ended December 31, 1998 increased to $8.0
million from $6.4 million in the year ended December 31, 1997 an increase of
$1.6 million or 25.0%. Other income in the year ended December 31, 1998 includes
a decrease of $1.2 million in administrative fee income earned on small loans,
an increase of $2.3 million in membership fees from the Efectiva Card, a $0.2
million decrease in late charges, and an increase of $0.7 million in insurance
product and other revenues.
Operating expenses in the year ended December 31, 1998 increased to
$17.7 million from $16.9 million in the year ended December 31, 1997, an
increase of $0.8 million. This increase was primarily due to an increase in
salary and other expenses incurred in connection with the increase in the small
loan business and an increase in expenses attributable to the expansion of the
check cashing business.
The provision for credit losses in the year ended December 31, 1998
increased to $6.0 million from $5.3 million in the year ended December 31, 1997,
an increase of $0.7 million or 11.9%. This increase was primarily due to an
increase in the provision for credit losses of $0.3 million in the small loan
portfolio as a result of the increase in the average balance of the portfolio
and an increase of $0.4 million in the travel finance portfolio, as a result of
increasing delinquencies.
39
<PAGE> 45
Interest expense in the year ended December 31, 1998 decreased to $3.2
million from $3.4 million in the year ended December 31, 1997, a decrease of
$0.2 million or 5.7%. This decrease was primarily due to a decrease in the
interest rate charged on the bank line of credit.
Depreciation and amortization expense in the year ended December 31,
1998 increased to $1.2 million from $0.8 million in the year ended December 31,
1997, an increase of $0.4 million or 53.5%. The increase is primarily due to an
increase in the amortization expense in connection with goodwill generated on
the leases we assumed for our travel business.
As a result of the foregoing factors, net income in the year ended
December 31, 1998 increased to $2.3 million compared to $1.9 million in the year
ended December 31, 1997, an increase of $.04 million.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through cash flow generated
from operations borrowings under our lines of credit and periodic capital
contributions made by Central Financial.
Net cash provided from operations totaled $8.0 million and $11.0 million
in the six months ended June 30, 2000 and 1999, respectively.
We received capital contributions from Central Financial totaling $3.3
million for the six months ended June 30, 2000 and made a capital distribution
totaling $6.7 million to Central Financial for the six months ended June 30,
1999. Cash flow generated from operations and changes in capital as a result of
capital transactions with Central Financial provided funds to repay $11.9
million and $3.8 million of notes payable during the six months ended June 30,
2000 and 1999, respectively.
Net cash provided from operations totaled $15.7 million and $13.1
million for the years ended December 31, 1999 and 1998, respectively. Net cash
used by operations totaled $0.3 million for the year ended December 31, 1997.
Net cash flow from operations was insufficient to fund our outlays for capital
expenditures and the significant growth experienced in the small loan portfolio
in 1997 and 1998, which required cash outflow of $12.1 million and $9.7 million
for the years ended December 31, 1998 and 1997, respectively. To fund its
capital expenditures, repay $0.9 million of long-term debt in 1998, and support
the growth of the small loan portfolio, we relied on capital contributions from
Central Financial in the amount of $4.2 million and $12.1 million for the years
ended December 31, 1998 and 1997, respectively. For the year ended December 31,
1999, we generated sufficient cash from operations to fund the origination of
$5.5 million of loans, $2.9 million of capital expenditures, $5.4 million of
purchases of leasehold interests in travel stores and made a capital
distribution to Central Financial in the amount of $3.7 million.
We require substantial capital to finance our business. Consequently,
our current level of operations and our ability to expand will be affected by
the availability of financing and the terms thereof. Currently, we fund
financing activities and operations with borrowings made by Central Consumer,
our 100% owned subsidiary, under the Line of Credit which expires August 11,
2003. Central Consumer and all of its significant subsidiaries are guarantors
under the Line of Credit. At June 30, 2000, Central Consumer had total assets of
$70 million and stockholders' equity of approximately $30 million. Central
Consumer has pledged substantially all of its assets, including its receivables
and the stock of all of its significant subsidiaries as collateral for the
amounts it borrows under the Line of Credit. The maximum amount available under
the Line of Credit is $55 million. However, the amount of credit available at
any one time under the Line of Credit is limited to 70% of eligible contracts.
As of June 30, 2000 the total amount available to us, if the Line of Credit had
been in place, was $34 million, of which approximately $28.7 million was
outstanding, including letters of credit. Central Consumer pays commitment fees
to the lenders for the unused portion of the Line of Credit. These commitment
fees are equal to 37.5 basis
40
<PAGE> 46
points per year times the average daily amount by which the maximum amount
available under the Line of Credit exceed the amount we have borrowed under the
line.
Interest on amounts outstanding under the Line of Credit is, at the
option of Central Consumer, equal to either (a) 87.5 basis points above the
higher of the prime rate Union Bank of California, N.A. announces or the federal
funds rate plus 50 basis points, or (b) 225 basis points above the interest rate
per annum at which Union Bank of California, N.A., deposits in dollars to prime
banks in the London Eurodollar market. The aggregate amount of indebtedness
outstanding under the Line of Credit at June 30, 2000 would have bore interest
at the rate of 8.7%.
The Line of Credit restricts, among other things, Central Consumer's
ability to (1) incur additional indebtedness; (2) pay indebtedness prior to the
date when due; (3) pay dividends, make certain other restricted payments or
consummate certain assets sales; (4) merge or consolidate with any other person;
(5) enter into certain transactions with affiliates; (6) incur indebtedness that
is subordinate in priority and right of payment to amounts outstanding under the
Line of Credit; and, (7) make future acquisitions in excess of an aggregate
amount.
The Line of Credit also contains certain restrictive covenants that
require, among other things, Central Consumer to maintain specific financial
ratios and to satisfy certain financial tests. These include: (a) Interest
Coverage Ratio (as defined in the Line of Credit) as of the end of each quarter
of not less than 1.75 to 1.00 for the period August 11,2000 to July 31, 2001 and
1.75 to 1.00, thereafter; and, (b) Leverage Ratio (as defined in the Line of
Credit) as of the end of each quarter of no more than 2.00 to 1.00. Central
Consumer is also required to maintain a Tangible Net Worth (as defined in the
Line of Credit) as of the end of each quarter of not less than $23.5 million,
plus an amount equal to 75% of Net Income (as defined in the Line of Credit)
earned in each quarter (with no deduction for a net loss in a quarter), plus an
amount equal to 75% of the aggregate increases in stockholders' equity as a
result of the sale of any of Central Consumer's capital stock. The breach of any
of these covenants or other terms of the Line of Credit could result in a
default under the Line of Credit, in which event the lenders could seek to
declare all amounts outstanding under the Line of Credit, together with accrued
and unpaid interest, to be immediately due and payable. At June 30, 2000 Central
Consumer would have been in compliance with the financial ratios and tests.
In addition, our inability at any time to renew or replace our Line of
Credit or other senior credit facilities on acceptable terms could have a
material adverse effect on our results of operations and financial condition.
See " - Business Considerations and Certain Factors that May Affect Future
Results of Operations and Stock Price - Restrictions Imposed by the Line of
Credit," and " - Business Considerations and Certain Factors that May Affect
Future Results of Operations and Stock Price - Need for Senior Credit Facility."
Our Board of Directors has authorized open-market purchases of up to 3
million shares of our Common Stock, subject to applicable law and depending on
market considerations and other considerations that may affect open market
repurchases of such shares pursuant to authorization from time to time. Any
decision to purchase such shares will be based in the price of such shares and
whether we have capital available for such purchase.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," or SFAS No. 133, which establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at fair
value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the statement of income,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
The effective date of SFAS No. 133 was delayed by the issuance of SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133,"
41
<PAGE> 47
until fiscal years beginning after June 15, 2000. Hispanic Express plans to
adopt this statement on January 1, 2001. Management does not believe that
adoption of this statement will have a material effect on our financial position
or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk management discussion and the estimated amounts generated from
the analysis that follows are forward-looking statements of interest rate risk
assuming certain adverse market conditions occur. Actual results in the future
may differ materially from these projected results due to changes in our debt
mix and developments in the global financial markets. The analytical methods we
use to assess and mitigate these risks should not be considered projections of
future events or operating performances.
We are exposed to interest rate risk in the form of variable interest
rates on our Line of Credit. For the six months ended June 30, 2000 and the
twelve months ended December 31, 1999, the average interest rate charged on our
previous Line of Credit, which was $28.1 million at June 30, 2000 and $40.0
million at December 31, 1999, was 8.7% and 7.7%, respectively.
For an immediate 1.0% increase in interest rates projected after-tax
earning would decline approximately $0.2 million in 2000 and $0.2 million in
2001. An immediate 1.0% rise in interest rates is a hypothetical rate scenario,
used to estimate risk, and does not currently represent management's
expectations of future market developments.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following tables sets forth certain information at August 31, 2000
regarding our directors and executive officers, their ages and their positions
and offices with us.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary M. Cypres 56 Chairman of the Board, President and
Chief Executive Officer
Steve J. Olman 45 President of Centravel, Inc.
Ed Valdez 48 Vice President of Operations
Donald Keys 47 Vice President of Credit and
Collections
Howard Weitzman 38 Vice President and Chief Financial
Officer
Salvatore Caltagirone 57 Director
William R. Sweet 62 Director
Jose de Jesus Legaspi 47 Director
</TABLE>
GARY M. CYPRES has been our Chairman of the Board, Chief Executive Officer and
President since our formation. Mr. Cypres has also served as Central Financial's
Chairman of the Board, and Chief Executive Officer since its formation. Mr.
Cypres has been Chairman of the Board, Chief Executive Officer, President and
Chief Financial Officer of Banner Holdings and Banner's Central Electric since
February 1991, Chairman of the Board and Chief Executive Officer of Central
Rents, Inc. since June 1994 and managing general partner of West Coast since
March 1990. Prior to that, Mr. Cypres was a general partner of SC Partners, a
private investment banking and consulting firm. From 1983 to 1985, Mr. Cypres
was Chief Financial Officer of The Signal Companies. From 1973 to 1983, Mr.
Cypres was Senior Vice President of Finance at Wheelabrator-Frye Inc. Mr. Cypres
was a member of the Board of Trustees and a faculty member of The Amos Tuck
School of Business at Dartmouth College.
42
<PAGE> 48
It is contemplated that after the Distribution, Mr. Cypres will spend that
portion of his business time as may be required to oversee our operations and to
direct or implement our business strategies. Mr. Cypres will continue to spend a
portion of his business time as the managing general partner of West Coast, as
Chairman of the Board, Chief Executive Officer and Chief Financial Officer of
Banner's Central Electric, and as Chairman of the Board and Chief Executive
Officer of Central Rents, Inc. See "Certain Relationships."
STEPHEN J. OLMON has been the President of our travel division, Centravel, Inc.,
since May 10, 1999. Prior to joining us, Mr. Olmon was Vice President and
General Manager of Maritz Travel Company, Western Region from 1997 to 1998 and
Vice President Maritz Travel Company from 1974 to 1997.
EDWARD VALDEZ has been our Senior Vice President of Operations since our
formation and Central Financial's Vice President of Operations and Senior Credit
Manager business since 1996. Prior to 1996, Mr. Valdez was Senior Credit Manager
of Central's small loan business. Mr. Valdez has been working for Central
Finance or its predecessors for over 30 years.
DONALD KEYS has been our Senior Vice President of Credit and Collections since
our formation and held the same position since September 1998 for Central
Consumer. Prior to that, he held the position of Vice President of Collections
from February 1998 to September 1998 for Central Consumer. From April 1997 to
February 1998 he was Director of Special Accounts for Sterling, Inc. From August
1996 to March 1997 he was Vice President of Credit for Barrys, Inc. and from
July 1991 to July 1997 he was Director of Credit for Barrys, Inc.
HOWARD WEITZMAN has been our Chief Financial Officer since our formation and
Chief Financial Officer of our travel division, Centravel, Inc. since December
1996. From October 1994 to December 1996, Mr. Weitzman was Controller of Central
Rents, Inc., an affiliate of ours. From 1984 to 1994, Mr. Weitzman spent ten
years as a certified public accountant with Coopers & Lybrand LLP in Los
Angeles, California, most recently as Senior Manager
SALVATORE J. CALTAGIRONE has been one of our directors since our formation and a
director of Central Financial since September 1997. Mr. Caltagirone has been
retired since October 1994. From the fall of 1990 to October 1994, he was an
employee of G.M. Cypres & Company. From March 1987 to June 1990, he was employed
as the Managing Director of Henley Group.
WILLIAM R. SWEET has been one of our directors since our formation and a
director of Central Financial since September 1997. In July 1996, Mr. Sweet
retired from his position of Executive Vice President -- Wholesale Banking at
Union Bank of California, N.A., a position he had held since July 1985. Mr.
Sweet currently serves as a trustee of CNI Charter Funds.
JOSE DE JESUS LEGASPI has been one of our directors since our formation and a
director of Central Financial since July 1996. Since 1980, Mr. Legaspi has been
a principal of and broker at The Legaspi Company, a full-service commercial real
estate brokerage firm. In addition, since 1992, Mr. Legaspi has been a principal
of the FINCA Property Management Company, a residential and commercial real
estate management company. Mr. Legaspi is also a Commissioner of the Los Angeles
Department of Water and Power.
OTHER SIGNIFICANT EMPLOYEES
MARVIN A. TORRES has been President of our travel finance business since
December 1995. From April 1995 to December 1995, Mr. Torres was Vice President
of Operations for our travel finance business. From 1984 to 1995, Mr. Torres was
Vice President of Operations and General Manager at Solano Travel Service and
Costa Rica Holiday Tours in Los Angeles, California.
43
<PAGE> 49
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee and an
Audit Committee. The compensation Committee consists of Mr. Caltagirone and Mr.
Sweet and will have the authority to determine compensation for our executive
officers and to administer our 2000 Stock Option Plan. The Audit Committee
consists of Mr. Caltagirone, Mr. Sweet and Mr. Legaspi, and has have the
authority to make recommendations concerning the engagement of independent
public accountants, review with the independent public accountants the plans and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range, of the audit and non-audit fees and
review the adequacy of our internal accounting controls.
COMPENSATION OF THE BOARD OF DIRECTORS
We intend to pay our Board of Directors who are not also employees of
Hispanic Express, referred to as the Non-Employee Directors, an annual fee of
$15,000. Members of the Board of Directors who are our employees will not be
paid any Directors' fees. In addition, we may reimburse members of the Board of
Directors for expenses incurred in connection with their activities on our
behalf. Non-Employee Directors will also each receive options to purchase 18,000
shares of Common Stock at an exercise price to be determined by the Board of
Directors, under the 2000 Stock Option Plan. All options granted to the
Non-Employee Directors will be 40% vested with remaining balance to vest in
equal annual installments over 3 years beginning on the date of grant, subject
to continued service on the Board of Directors; however, no option can be
exercised until at least six months after the date of grant. We have entered
into agreements with all directors pursuant to which we have agreed to indemnify
them against certain claims arising out of their services as directors.
Directors are also entitled to the protection of certain indemnification
provisions in our Certificate of Incorporation and Bylaws. See "Compensation
Pursuant to Plans and Arrangements - Stock Option Plan" and "- Indemnification
Arrangements."
44
<PAGE> 50
EXECUTIVE COMPENSATION
The following table summarizes the compensation for the year ended
August 31, 2000 of our Chief Executive Officer and each of our other executive
officers.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS COMPENSATION
--------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Gary M. Cypres(2) $202,291 $ 30,000 180,000(8) $ 77,000(7)
Chairman of the Board, President
and Chief Executive Officer
Steven J. Olmon(3) $ 83,750 $ 5,000 -- --
President of Travel Division
Edward Valdez(4) $105,000 $ 15,000 -- --
Vice President of Operations
Donald Keys(5) $ 94,125 $ 7,000 -- --
Vice President of Credit and
Collections
Howard Weitzman(6) $107,720 $ 17,000 -- --
Vice President and Chief Financial
Officer
</TABLE>
(1) Certain of our executive officers receive benefits in addition to salary
and cash bonuses. The aggregate amount of such benefits, do not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus of
such Named Executive.
(2) Mr. Cypres became an executive officer of Hispanic Express upon its
formation.
(3) Mr. Olmon became an executive officer of Hispanic Express upon its
formation and joined Central Financial in May 10, 1999.
(4) Mr. Valdez became an executive officer of Hispanic Express upon its
formation.
(5) Mr. Keys became an executive officer of Hispanic Express upon its
formation.
(6) Mr. Weitzman became an executive officer of Hispanic Express upon its
formation.
(7) Represents amounts accrued under the Supplemental Executive Retirement
Plan for Mr. Cypres.
(8) Consists of 80,000 options granted on April 2, 1999 and 100,000 options
granted on July 14, 1999, both at $5.00 per share. The market price on
April 21, 1999 was $4.38 per share and the market price on July 14, 1999
was $4.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We have established a Compensation Committee. The Compensation Committee
consists of Mr. Caltagirone and Mr. Sweet. Prior to the establishment of the
Compensation Committee, decisions concerning the compensation of executive
officers were made by the Board of Directors of Central Financial. None of our
executive officers currently serves as a director or member of the Compensation
Committee of another entity or of any other committee of the Board of Directors
of another entity performing similar functions. See "Certain Relationships."
45
<PAGE> 51
COMPENSATION PURSUANT TO PLANS AND ARRANGEMENTS
Set forth below is information with respect to certain of our benefit
plans and employment arrangements pursuant to which cash and non-cash
compensation is proposed to be paid or distributed in the future to our
directors and executive officers. Base compensation does not include
compensation pursuant to any of the plans and arrangements described herein.
STOCK OPTION PLAN
Concurrent with the Distribution, Central Financial will terminate its
Stock Option Plan. The 2000 Stock Option Plan of Hispanic Express, or the 2000
Plan, has been approved by our Board of Directors and stockholders. The 2000
Plan provides that it is to be administered by a committee of the Board of
Directors, referred to as the Option Committee, consisting of at least two
independent directors. The Compensation Committee is expected to function as the
Option Committee. The Option Committee has the authority, within limitations as
set forth in the 2000 Plan, to establish rules and regulations concerning the
2000 Plan, to determine the persons to whom options may be granted, the number
of shares of Common Stock to be covered by each option, and the terms and
provisions of the option to be granted, provided, that such grants shall conform
with Section 260.140.41 of the California Securities Code. Subject to the terms
set forth in the 2000 Plan, the Option Committee has the right to cancel any
outstanding options and to issue new options on such terms and upon such
conditions as may be consented to by the optionee affected.
A total of 1,100,000 shares are reserved for issuance under the 2000
Plan. No individual may be granted options under the 2000 Plan with respect to
more than 550,000 shares during the duration of the 2000 Plan. It is expected
that options to purchase 764,000 shares of Common Stock will be granted to
eligible participants under the 2000 Plan effective upon the consummation of the
Distribution, including options to certain executive officers as set forth
below. Options granted pursuant to the 2000 Plan would vest over two different
time periods. Options granted which equal the number of options granted to
executive officers and employees under the Central Financial Stock Option Plan
will vest as they would have been vested under the Central Financial Stock
Option Plan at the time of distribution, except for those officers and employees
which had been with Central Financial or its predecessor company for a period in
excess of 5 years, which shall be 60% vested in total options granted to them.
Options granted to executive officers and employees which exceed the amounts
granted to them under the Central Financial Stock Option Plan will vest in such
options over a five-year period in equal annual amounts. Upon the effectiveness
of these grants, 336,000 shares of Common Stock will remain available for future
grants of options under the 2000 Plan.
The number of shares which may be granted under the 2000 Plan or under
any outstanding options will be proportionately adjusted in the event of any
stock dividend or if the Common Stock shall be split up, combined,
recapitalized, converted, exchanged, reclassified or in any way substituted.
Subject to the terms of the 2000 Plan, and in the event of a recapitalization,
merger, consolidation, rights offering, separation, reorganization or
liquidation, or any other change in our corporate structure or outstanding
shares, the Option Committee may make such equitable adjustments to the number
and class of shares available under the 2000 Plan or to any outstanding options
as it shall deem appropriate to prevent dilution or enlargement of rights. The
maximum term of any option granted pursuant to the 2000 Plan is ten years. In
general, shares subject to options granted under the 2000 Plan which expire,
terminate or are canceled without having been exercised in full become available
again for options grants.
The class of eligible persons under the 2000 Plan will consist of
directors and employees of, and consultants to, us or a parent or subsidiary of
ours, as determined by the Option Committee, except that Non-Employee Directors
can only receive fixed grants of options under the terms set forth in the 2000
Plan. See "Compensation of the Board of Directors." Options granted under the
2000 Plan may be
46
<PAGE> 52
incentive stock options, or ISOs, or non-qualified options, at the discretion of
the Option Committee; however, ISOs can only be granted to our employees or a
parent or subsidiary. The 2000 Plan provides that the exercise price of an
option (other than Non-Employee Director's option) will be fixed by the Option
Committee on the date of grant; however, the exercise price of an ISOs must be
not less than the fair market value of the Common Stock on the date of the
grant. The exercise price of an ISOs granted to any participant who owns stock
possessing more than 10% of the total combined voting power of all classes of
our outstanding stock must be at least equal to 110% of the fair market value of
the Common Stock on the date of grant and the rate of exercise shall be at least
twenty percent per year over five years. Any ISOs granted to such participants
also must expire within five years from the date of grant. Additionally, options
granted under the 2000 Plan will not be ISOs to the extent that aggregate fair
market value of the shares with respect to which ISOs under the 2000 Plan (or
under any other plan maintained by us or a parent or subsidiary of ours) first
become exercisable in any year exceeds $100,000. No options shall be granted
under the 2000 Plan or after the tenth anniversary of the adoption of the 2000
Plan.
Options will be non-transferable and non-assignable except by will, the
laws of descent and distribution, by instrument to an inter vivos or
testamentary trust in which the Options are to be passed to beneficiaries upon
the death of the trustor (settlor), or by gift to "immediate family" as defined
in 17 C.F.R. 240.16a-1(e). Options (other than Non-Employee Director's options)
are exercisable by the holder thereof subject to terms fixed by the Option
Committee. However, no option can be exercised until at least six months after
the date of grant.
Notwithstanding the above, an option will be exercisable immediately
upon the happening of any of the following (but in no event during the six-month
period following the date of grant or subsequent to the expiration of the term
of an option): (1) the holder's retirement on or after attainment of age 65; (2)
the holder's disability or death; (3) a "change of control" (as defined in the
2000 Plan) of us while the holder is in the employ or service of Hispanic
Express; or (4) the occurrence of such special circumstances or events as the
Option Committee determines merits special consideration, except with respect to
Non-Employee Directors' options, by such other method as the Option Committee
may permit from time to time.
If an option holder terminates employment with us or service as one of
our directors or as our consultant while holding an unexercised option, the
option will terminate 30 days after such termination of employment or service
unless the option holder exercises the option within such 30-day period.
However, all options held by an option holder will terminate immediately if the
termination is a result of a violation of such holder's duties. If cessation of
employment or service is due to retirement on or after attainment of age 65,
disability or death, the option holder or such holder's successor-in-interest,
as the case may be, is permitted to exercise any option within three months
after retirement or within one year after disability or death.
The 2000 Plan may be terminated and may be modified or amended by the
Option Committee or the Board of Directors at any time; provided, however, that
(1) no modification or amendment either increasing the aggregate number of
shares which may be issued under options or to any individual or modifying the
requirements as to eligibility to receive options will be effective without
stockholder approval within one year of the adoption of such amendment; and, (2)
no such termination, modification or amendment of 2000 Plan will alter or affect
the terms of any then outstanding options without the consent of the holders
thereof.
47
<PAGE> 53
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDER OPTIONS
NAME TO BE GRANTED
---- -------------
<S> <C>
Gary M. Cypres ........... 325,000
Steven J. Olmon .......... 50,000
Ed Valdez ................ 50,000
Donald Keys .............. 50,000
Howard Weitzman .......... 50,000
William Sweet ............ 18,000
Jose de Jesus Legaspi .... 18,000
Salvatore Caltagirone .... 18,000
</TABLE>
EMPLOYMENT AGREEMENTS
Mr. Cypres has entered into a new employment agreement with us and has
terminated his employment agreement with Central Financial dated July 1999.
Under the new employment agreement, Mr. Cypres will serve as our Chairman of the
Board, Chief Executive Officer and President for a period of five years at a
base salary of $325,000 for the period from January 1, 2001 to December 31,
2001, and then receive minimum yearly increases of $25,000 per annum until
December 31, 2005. Mr. Cypres' agreement also provides that he will participate
in the defined benefit Supplemental Executive Retirement Plan (as amended), or
the SERP Plan, that we have assumed liability for from Central Financial.
If Mr. Cypres is terminated "for cause," which definition generally
includes termination due to his willful gross failure to perform his duties
under the employment agreement, Mr. Cypres' personal dishonesty or breach of his
fiduciary duties or the employment agreement, then we will be obligated to pay
him only his base salary up to the date upon which we notify him of his
termination "for cause." If Mr. Cypres is terminated without "cause," becomes
disabled or dies, then we will be obligated to pay him or his estate, commencing
immediately, a lump sum payment equal to his base salary for the remaining term
of the employment agreement and to pay him or his estate under the SERP Plan as
if he had worked to his normal retirement date, which the employment agreement
provides is December 31, 2000.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In June 1996, Central Financial adopted the SERP Plan, which provides
supplemental retirement benefits to certain key management and employees.
Concurrent with the Distribution, we will assume liability for Central
Financial's SERP Plan, including increases in future compensation by us which
will be reflected in the calculations of the final average compensation as
defined under the SERP Plan.
To vest in the SERP Plan, an employee must have at least 10 years of
service with us, including five years subsequent to the adoption of the plan. In
1996, Mr. Cypres was credited with 10 years of service with us and was treated
as having fulfilled his post-adoption service on December 31, 1997 by acting as
President and Chief Executive Officer of Central Financial through such date.
The Board of Directors determines participation in the SERP Plan. The SERP Plan
benefits are a function of length of service with us and final average
compensation (average monthly compensation during the 36 consecutive months of
the last 60 months of the participant's employment that produces the highest
average compensation, including salary and bonus).
Benefits are equal to a targeted percentage of final average
compensation as determined by the Board of Directors upon selection of the
employee to participate in the SERP Plan. In no case will the rate exceed sixty
percent (60%) of the final average compensation as of the date of the
participant's
48
<PAGE> 54
retirement or termination of employment, multiplied by the ratio of the actual
years of service as of the applicable event to the participant's years of
service projected to the participant's normal retirement date (the first day of
the month after the participant attains age 60). The SERP Plan also contains a
cost of living adjustment not to exceed 6% per annum. A vested participant who
terminates employment at or after his normal retirement date will receive the
full targeted percentage of his final average compensation. The SERP Plan
benefit is reduced, however, by the annuity value of the participant's benefit
under the Profit Sharing Plan. At December 31, 1999, only Mr. Cypres was a
participant in the SERP Plan.
The following table shows the estimated annual retirement benefits that
would be payable under the SERP Plan upon a participant's normal retirement date
on a straight life annuity basis, before any applicable offset for benefits
received under the Profit Sharing Plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------------------------
REMUNERATION 10 15 20 25 30 OR MORE
------------ -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$250,000 ....... $150,000 $150,000, $150,000 $150,000 $150,000
275,000 ....... 165,000 165,000 165,000 165,000 165,000
300,000 ....... 180,000 180,000 180,000 180,000 180,000
325,000 ....... 195,000 195,000 195,000 195,000 195,000
</TABLE>
As of December 31, 1999, Mr. Cypres was fully vested under the SERP Plan.
EXECUTIVE INCENTIVE BONUS PROGRAM
The Compensation Committee may grant contingent performance bonuses to
certain of our executive officers, including the Named Executive Officers. The
amounts of most incentive bonuses will be payable to the extent that a recipient
or we achieve performance goals established by our Board of Directors.
EXECUTIVE DEFERRED SALARY AND BONUS PLAN
We have adopted the Executive Deferred Salary and Bonus Plan, or the
EDP, which will cover the Named Executive Officers and certain other executives
of Hispanic Express. Pursuant to the EDP, a participant may elect to defer up to
50% of the participant's base salary and up to 100% of any bonus awarded
pursuant to our Executive Incentive Bonus Program. Elections under the EDP to
defer base salary and bonus are made annually prior to the commencement of each
year. Executives electing to participate in the program may invest deferred
amounts in either of two amounts: (1) which earns interest based upon the prime
rate; or (2) which mirrors the performance of our Common Stock price. Amounts
deferred are generally payable in a lump sum within 30 days after the
participant's termination of employment with us for any reason. Following the
consummation of the Distribution, the EDP will be administrated by the
Compensation Committee of the Board of Directors.
INDEMNIFICATION AGREEMENTS
We entered into Indemnification Agreements pursuant to which we will
agree to indemnify certain of our directors and officers against judgments,
claims, damages, losses and expenses incurred as a result of the fact that any
director or officer, in his capacity as such, is made or threatened to be made a
party to any suite or proceeding. Such persons will be indemnified to the
fullest extent now or hereafter permitted by the Delaware General Corporation
Law, or the DGCL. The Indemnification Agreements also provide for the
advancement of certain expenses to such directors and officers in connection
with any such suite or proceeding. Our Certificate of Incorporation and Bylaws
provide for indemnification of our
49
<PAGE> 55
directors and officers to the fullest extent permitted by the DGCL. See
"Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and
Bylaws - Limitation of Liability."
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 10,000,000 shares of common
stock, $.01 par value, of the Common Stock.
COMMON STOCK
Upon the consummation of the Distribution, we will have 7,166,000 shares
of Common Stock issued and outstanding. All shares of Common Stock to be issued
in connection with the Distribution will be fully paid and nonassessable.
The following summarizes the rights of holders of our Common Stock:
- each holder of Common Stock is entitled to one vote per share on
all matters to be voted upon by the stockholders, except as
discussed in "Anti-Takeover Effects of Provisions of Our
Certificate of Incorporation and Bylaws";
- subject to preferences that may apply to shares of preferred
stock that we may issue in the future, the holders of Common
Stock are entitled to receive such lawful dividends as may be
declared by the Board of Directors;
- upon our liquidation, dissolution or winding up, the holders of
shares of Common Stock are entitled to receive a pro rata
portion of all of our assets remaining for distribution after
satisfaction of all our liabilities and the payment of any
liquidation preference of any outstanding preferred stock;
- there are no redemptive or sinking fund provisions applicable to
our Common Stock; and
- there are no preemptive, subscription or conversion rights
applicable to our Common Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Some provisions of our certificate of incorporation and bylaws may have
an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by our stockholders. Such provisions may also render the
removal of the current Board of Directors or management of Hispanic Express more
difficult. These provisions include:
Limitation of Liability. Our certificate of incorporation eliminate the
personal liability of our directors to us and our stockholders to the fullest
extent permitted by the DGCL; provided, however, that directors shall be liable
to the extent provided by applicable law:
- for any breach of the directors' duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
- under Section 174 of the DGCL; or
50
<PAGE> 56
- for any transaction from which the director derived any improper
personal benefit.
Our bylaws authorize us to provide indemnification to our directors and
officers if they are made party to litigation by reason that such person was
acting reasonably on our behalf and in good faith. These provisions may reduce
the likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their duty of care.
Calling Special Meeting and Action by Written Consent. Special meetings
of our stockholders may be called only by our Board of Directors. This may make
it more difficult to change the composition of our board of directors or to
propose a transaction which could result in a change in control.
No Cumulative Voting. Our certificate of incorporation does not provide
for cumulative voting for any purpose. This ensures that the holder or holders
of a majority of our common shares entitled to vote in an election of directors
are able to elect all of the directors. This could deter investors from
acquiring a minority of our shares of our Common Stock in order to obtain a
board seat and influence corporate policy.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Under Section 203 of the DGCL, we may not engage in a "business
combination," which includes certain mergers, consolidations, asset sales and
stock issuances and certain other transactions resulting in a financial benefit
to an "interested stockholder," namely, any entity or person beneficially owning
15% or more of our outstanding voting stock and any entity or person affiliated
with such an entity or person, for three years following the time that
stockholder became an interested stockholder, unless;
- prior to such date our Board of Directors approved either the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder owned at least
85% of our voting stock outstanding at the time the transaction
commenced (excluding for the purposed of determining the number
of shares outstanding those shares owned by (x) persons who are
directors and also officers and (y) employee stock plans in
which employee participants do not have the right to determine
confidentially whether shares held subject to the plans will be
tendered in a tender or exchange offer); or
- on or subsequent to such date the business combination is
approved by the Board of Directors and of at least 66-2/3% of
the outstanding voting stock which is not owned by the
interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Common Stock is U.S. Stock
Transfer Corporation.
EFFECT OF QUASI-CALIFORNIA CORPORATION LAW
Section 2115 of the California General Corporation Law, or the CGCL,
provides that quasi-California corporations will be subject to certain
substantive provisions in the CGCL notwithstanding comparable provisions in the
law of the jurisdiction where the corporation is incorporated. Section 2115 is
applicable to foreign corporations that have more than half of their
stockholders residing in California
51
<PAGE> 57
and more than half of their business deriving from California. The determination
of whether a corporation is a quasi-California corporation is based upon
information contained in a certificate required to be filed within three months
and fifteen days after the end of the corporation's fiscal year or within 30
days after the filings of its franchise tax return, if an extension of time to
file such return was granted. Quasi-California corporations that are Large
Public Corporations (i.e., that have securities listed on the New York or
American stock exchanges, or securities designated for trading on the Nasdaq
National Market, if the corporation has at least 800 holders of its equity
securities as of the record date for its most recent annual meeting), are exempt
from the application of Section 2115.
We have qualified to do business in the State of California because we
have substantially all of our property, employees and operations in California.
Therefore, absent an exemption, we would be deemed to be a quasi-California
corporation.
Because we will be deemed to be a quasi-California corporation, certain
of the provisions for our Certificate of Incorporation and Bylaws would not be
authorized by California law. In addition, under California law, cumulative
voting for the election of directors is mandatory unless a corporation that is a
Large Public Corporation has expressly eliminated cumulative voting in its
articles of incorporation. Furthermore, California law with respect to the
payment of dividends is more restrictive than Delaware law. Under California
law, a corporation is prohibited from paying dividends unless (i) the retained
earnings of the corporation immediately prior to the distribution exceeds the
amount of the distribution; (ii) the assets of the corporation exceed 1 1/4
times its liabilities; or (iii) the current assets of the corporation exceed its
current liabilities, but if the average pretax net earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 1 1/4 times its current
liabilities. See "DIVIDENDS"
CERTAIN RELATIONSHIPS
After completion of the Distribution, West Coast and its coinvestors
will beneficially own or otherwise control an aggregate of approximately 72% of
our Common Stock. As such, West Coast will be able to elect the entire Board of
Directors, adopt amendments to our Certificate of Incorporation, or effect a
merger, sale of assets, or other fundamental corporate transaction without the
approval of our other stockholders. West Coast will be able to control the
direction of our future operations, including decisions regarding the issuance
of additional share of Common Stock and other securities. As long as West Coast
is a majority stockholder of our Common Stock, it will be impossible for third
parties to obtain control of us through purchases of Common Stock not
beneficially owned or otherwise controlled by West Coast.
Mr. Cypres is our Chairman of the Board, Chief Executive officer and
President, and is the Chairman of the Board, Chief Financial Officer and
President of Banner Central Finance and Chairman of the Board of Banner's
Central Electric. West Coast, of which Mr. Cypres is the managing general
partner, controls our Company. West Coast and Mr. Cypres may have conflicts of
interest with respect to transactions concerning us and our affiliates.
Additionally, West Coast controls other companies, including us, Banner Central
Finance and Banner's Central Electric, all of which may have divergent
interests. Banner's Central Electric owns and operates five installment credit
stores in greater Los Angeles.
Prior to the Distribution, Mr. Cypres rendered services to us through an
employment agreement with Central Financial. Concurrent with Distribution, Mr.
Cypres has entered into a five-year employment agreement with us pursuant to
which Mr. Cypres will act as Chairman of the Board, Chief Executive Officer and
President. In such capacities, Mr. Cypres will spend that portion of his
business time as is required to oversee our operations and to formulate and
direct the implementation of our
52
<PAGE> 58
business strategies. Mr. Cypress will continue to spend a portion of his
business time as the managing general partner of West Coast, as Chairman of the
Board, Chief Executive Officer and Chief Financial Officer of Banner Central
Finance, and as Chairman of the Board of Banner's Central Electric. See
"Management" and "Description of Capital Stock."
53
<PAGE> 59
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants .............. 55
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ......................... 56
Consolidated Statements of Income ................... 57
Consolidated Statements of Stockholders' Equity ..... 58
Consolidated Statements of Cash Flows ............... 59
Notes to Consolidated Financial Statements .......... 60
</TABLE>
54
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Hispanic Express, Inc.:
We have audited the accompanying consolidated balance sheets of Hispanic
Express, Inc., a Delaware corporation, and subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hispanic Express, Inc. as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
September 29, 2000
55
<PAGE> 61
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash $ 7,847,000 $ 5,208,000 $ 4,550,000
Restricted cash 1,195,000 -- --
Finance receivables, net 60,942,000 59,899,000 55,839,000
Prepaid expenses and other current assets 1,707,000 1,148,000 1,276,000
Note receivable from affiliate 2,478,000 890,000 --
Deferred income taxes 1,883,000 1,501,000 1,415,000
Income taxes receivable 1,458,000 1,400,000 946,000
Property and equipment, net 6,350,000 8,413,000 8,980,000
Intangible and other assets, net 7,925,000 12,668,000 12,278,000
----------- ----------- -----------
TOTAL ASSETS $91,785,000 $91,127,000 $85,284,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $40,000,000 $40,000,000 $28,100,000
Accrued expenses and other current liabilities 6,405,000 7,347,000 8,832,000
Accounts payable to related party -- -- 1,034,000
----------- ----------- -----------
Total liabilities 46,405,000 47,347,000 37,966,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Group equity 45,380,000 43,780,000 47,318,000
----------- ----------- -----------
Total stockholders' equity 45,380,000 43,780,000 47,318,000
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $91,785,000 $91,127,000 $85,284,000
=========== =========== ===========
</TABLE>
56
<PAGE> 62
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income
Small loan portfolio $13,056,000 $13,792,000 $13,584,000 $ 7,044,000 $ 6,137,000
Travel finance portfolio 1,337,000 1,218,000 1,163,000 561,000 530,000
Mortgage portfolio -- 18,000 356,000 105,000 471,000
----------- ----------- ----------- ----------- -----------
Total interest income 14,393,000 15,028,000 15,103,000 7,710,000 7,138,000
Travel services, net 8,716,000 8,961,000 14,270,000 5,675,000 6,983,000
Other income 6,365,000 7,954,000 10,884,000 5,369,000 5,298,000
----------- ----------- ----------- ----------- -----------
Total revenues 29,474,000 31,943,000 40,257,000 18,754,000 19,419,000
=========== =========== =========== =========== ===========
COSTS AND EXPENSES
Operating expenses 16,891,000 17,738,000 24,215,000 10,447,000 13,400,000
Provision for credit losses 5,318,000 5,952,000 6,580,000 2,858,000 3,035,000
Interest expense 3,406,000 3,212,000 3,202,000 1,686,000 1,655,000
Depreciation and amortization expense 750,000 1,151,000 1,556,000 625,000 851,000
----------- ----------- ----------- ----------- -----------
Total costs and expenses 26,365,000 28,053,000 35,553,000 15,616,000 18,941,000
----------- ----------- ----------- ----------- -----------
Income before provision for income
taxes 3,109,000 3,890,000 4,704,000 3,138,000 478,000
Provision for income taxes 1,217,000 1,556,000 1,882,000 1,257,000 191,000
----------- ----------- ----------- ----------- -----------
Net income $ 1,892,000 $ 2,334,000 $ 2,822,000 $ 1,881,000 $ 287,000
=========== =========== =========== =========== ===========
UNAUDITED PRO FORMA NET INCOME PER SHARE: (NOTE 1)
Pro forma net income per common share
(unaudited):
Basic $ 0.39 $ 0.04
Diluted $ 0.39 $ 0.04
Pro forma shares used in calculating
pro forma net income per common share
(unaudited):
Basic 7,166,000 7,166,000
Diluted 7,166,000 7,166,000
</TABLE>
57
<PAGE> 63
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
------------
<S> <C>
Balance, December 31, 1996 $ 24,849,000
Capital contribution from related party 12,123,000
Net income for the year ended December 31, 1997 1,892,000
------------
Balance, December 31, 1997 38,864,000
Capital contribution from related party 4,182,000
Net income for the year ended December 31, 1998 2,334,000
------------
Balance, December 31, 1998 45,380,000
Capital distribution to related party (3,716,000)
Equity adjustment for retirement of treasury stock of predecessor company (706,000)
Net income for the year ended December 31, 1999 2,822,000
------------
Balance, December 31, 1999 43,780,000
Capital contribution from related party (Unaudited) 3,298,000
Equity adjustment for retirement of treasury stock of predecessor company (47,000)
(Unaudited)
Net income for the six months ended June 30, 2000 (Unaudited) 287,000
------------
Balance, June 30, 2000 (Unaudited) $ 47,318,000
============
</TABLE>
58
<PAGE> 64
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 1,892,000 $ 2,334,000 $ 2,822,000 $ 1,881,000 $ 287,000
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Depreciation and amortization 750,000 1,151,000 1,556,000 625,000 851,000
Provision for credit losses 5,318,000 5,952,000 6,580,000 2,858,000 3,035,000
Deferred income taxes 101,000 1,209,000 382,000 (5,000) 86,000
Note receivable from affiliate, net (4,205,000) 2,514,000 1,588,000 3,064,000 1,924,000
Changes in assets and liabilities:
Prepaid expenses and other current assets 1,254,000 (633,000) 617,000 1,677,000 326,000
Restricted cash (930,000) (265,000) 1,195,000 (1,495,000) --
Accrued expenses and other current
liabilities (3,438,000) 661,000 942,000 2,349,000 1,485,000
Other intangible assets (1,058,000) 184,000 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (316,000) 13,107,000 15,682,000 10,954,000 7,994,000
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract
receivables (originated & acquired) collected,
net of recoveries (9,743,000) (12,146,000) (5,537,000) 664,000 1,025,000
Capital expenditures, net (2,838,000) (1,449,000) (2,920,000) (1,026,000) (1,028,000)
Purchase of leasehold interests and other (150,000) -- (5,442,000) (2,670,000) --
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (12,731,000) (13,595,000) (13,899,000) (3,032,000) (3,000)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt -- (850,000) -- -- --
Repayment of notes payable, net -- -- -- (3,800,000) (11,900,000)
Capital contribution from (distribution to)
related party 12,123,000 4,182,000 (3,716,000) (6,656,000) 3,298,000
Purchase of treasury stock -- -- (706,000) -- (47,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 12,123,000 3,332,000 (4,422,000) (10,456,000) (8,649,000)
------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (924,000) 2,844,000 (2,639,000) (2,534,000) (658,000)
CASH, BEGINNING OF PERIOD 5,927,000 5,003,000 7,847,000 7,847,000 5,208,000
------------ ------------ ------------ ------------ ------------
CASH, END OF PERIOD $ 5,003,000 $ 7,847,000 $ 5,208,000 $ 5,313,000 $ 4,550,000
============ ============ ============ ============ ============
CASH PAID DURING THE YEAR FOR:
INTEREST $ 3,445,000 $ 3,201,000 $ 3,362,000 $ 2,001,000 $ 1,919,000
INCOME TAXES $ 2,099,000 $ 1,025,000 $ 2,301,000 $ 556,000 $ 5,000
</TABLE>
59
<PAGE> 65
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation - Hispanic Express, Inc. ("Hispanic Express" or
the "Company") was formed in September 2000. On September 6, 2000 the Board of
Directors of Central Financial Acceptance Corporation ("Central Financial")
approved a Plan of Complete Dissolution, Liquidation and Distribution (the
"Plan") under which Central Financial's subsidiaries have been reorganized into
two public companies, Hispanic Express and Banner Central Finance Company
("Banner Central Finance"). The Plan was approved by the stockholders of Central
Financial on September 29, 2000. The Plan requires Central Financial to
distribute to Central Financial's stockholders 100% of the outstanding Common
Stock of Hispanic Express and Banner Central Finance. Pursuant to the Plan,
Central Financial will contribute to Hispanic Express its investment
subsidiaries, which are engaged in the small loan, travel finance and travel
services businesses and the receivable portion of its mortgage business, and
will contribute to Banner Central Finance, its businesses engaged in selling and
financing of automobile insurance, its consumer products receivable portfolio
and its mortgage origination business.
In addition, pursuant to the Plan, Hispanic Express and Banner Central
Finance have entered into certain agreements for the purpose of defining their
ongoing relationship (See Note 9). The agreements entered into contain
provisions for the allocation of certain costs and expenses. Management of
Hispanic Express believes that such agreements provide for reasonable allocation
of costs and expenses between the parties.
The formation of Hispanic Express has been accounted for at historical
cost, in a manner similar to a pooling of interest. The accompanying
consolidated financial statements reflect the combined operations of Hispanic
Express and its subsidiaries, as if they had been consolidated at the beginning
of the periods presented. For accounting purposes, Hispanic Express has been
allocated $40,000,000 of notes payable outstanding for each of the years ended
December 31, 1998 and 1999 and $28,100,000 for the six months ended June 30,
2000 (See Note 7).
Unaudited pro forma net income per share is based on the number of
common shares issued by the Company pursuant to the Plan that are assumed to be
outstanding as of January 1, 1999.
Nature of Operations - The Company (i) provides unsecured small loans to
its customers; (ii) provides travel services; (iii) originates and services
consumer finance receivables generated by the Company's customers for the
purchase of travel services sold by the Company; (iv) provides check cashing and
money transfer services and mortgage loan financing; and, (v) provides insurance
products. The majority of the Company's business is focused in Southern
California and the Company experiences the highest demand for its financial
products and services between October and December.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Hispanic Express and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Interim Consolidated Financial Information (Unaudited) - The interim
consolidated financial statements as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 and related footnote information are unaudited and
have been prepared on the same basis as the audited consolidated financial
statements. In the opinion of management, the interim unaudited consolidated
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation
60
<PAGE> 66
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of the results of these interim periods. The results for the six months ended
June 30, 2000 are not necessarily indicative of the operating results to be
expected for the entire year.
Finance Receivables - Finance receivables include receivables that arise
from unsecured, small loans, (referred to herein as the "Small Loan Portfolio"),
installment contracts that are originated when customers buy travel tickets,
(referred to herein as the "Travel Finance Portfolio"), and mortgage loan
receivables originated by Banner Central Finance, (referred to herein as the
"Mortgage Portfolio"). Administrative fees are charged on certain small loan
contracts. The annual percentage rate varies depending on the length of the
contract and the amount of administrative fees. The Small Loan Portfolio is
comprised of closed-end loans that provide for scheduled monthly payments
generally not to exceed 12 months and revolver type loans (referred to herein as
"Efectiva") that require minimum monthly payments equal to 5% of the outstanding
balance. The Travel Finance Portfolio is comprised of loans that provide for
scheduled monthly payments generally not to exceed 12 months and the Mortgage
Portfolio is comprised of loans that provide for scheduled monthly payments
ranging from 48 to 60 months.
The allowance for credit losses is provided for following the
origination or purchase of loans based on previous experience or when events
giving rise to the credit losses are estimated to have occurred. The Company's
portfolios comprise smaller-balance, homogeneous loans that are evaluated
collectively to determine an appropriate allowance for credit losses. The
allowance for credit losses is maintained at a level considered adequate by
management to cover losses in the existing portfolios. Collection of past due
accounts is pursued by the Company, and when the characteristics of an
individual account indicates that collection is unlikely, the account is charged
off and turned over to a collection agency. Accounts are generally charged off
when they are between 91 to 150 days past due.
Allowance for credit losses is increased by charges to the provision for
credit losses and decreased by charge-offs, net of recoveries. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolios, adverse
situations that may affect the borrower's ability to repay and current economic
conditions. The Company's customers are typically between the ages of 21 and 45
and earn less than $25,000 per year, have little or no savings and limited
short-term employment histories. In addition, the Company's customers typically
have no prior credit histories and are unable to secure credit from traditional
lending sources. The Company makes its credit decisions primarily on its
assessment of a customer's ability to repay the obligation. In making a credit
decision, in addition to the size of the obligation, the Company generally
considers a customer's income level, type and length of employment, stability of
residence, personal references and prior credit history with the Company. As a
result, the Company is more susceptible to the risk that its customers will not
satisfy their repayment obligations than are less specialized consumer lending
companies or consumer finance companies that have more stringent underwriting
criteria. Because the Company relies on the creditworthiness of its customers
for repayment and does not rely on collateral securing the debt, the Company
experiences actual rates of losses higher than lenders who have collateral which
they can repossess in the event of a borrower's default.
Recoveries on charge-offs are recognized as an addition to the allowance
for credit losses on the cash basis of accounting at the time the payment is
received. Recoveries for the years ended December 31, 1997, 1998, and 1999
amounted to $222,000, $364,000, and $497,000, respectively, and for the six
months ended June 30, 1999 and 2000 amounted to $258,000 and $254,000,
respectively.
Deferred insurance revenue arises from the deferral of the recognition
of revenue from certain credit insurance contracts. Insurance premium revenue is
recognized over the life of the related contract using a method that
approximates the effective interest method.
61
<PAGE> 67
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Property and Equipment - Property and equipment are carried at cost.
Long-lived property is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such an asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long Lived Assets." If the
carrying amount of the asset exceeds the estimated undiscounted future cash
flows to be generated by the asset, an impairment loss would be recorded to
reduce the asset's carrying value to its estimated fair value.
Depreciation and amortization are computed primarily using the
straight-line method over the estimated lives of the assets, as follows:
<TABLE>
<S> <C>
Furniture, equipment and software.................. 5 to 10 years
Leasehold improvements............................. Life of lease
Building and improvements.......................... 7 to 39 years
</TABLE>
Intangible and Other Assets - Intangible and other assets primarily
consists of goodwill which arose in connection with the Company's purchase of
leasehold interests used for travel services and deferred line of credit costs
related to the Company's Line of Credit (See Note 7). Goodwill is being
amortized using the straight-line method over 30 years. The deferred line of
credit costs are amortized over the 3 year life of the Line of Credit. The
recoverability of goodwill is analyzed annually based on undiscounted future
cash flows. If the carrying value of the intangible asset exceeds the estimated
undiscounted future cash flows, an impairment loss would be recorded to reduce
the asset's carrying value to its estimated fair value. No impairment loss has
been recorded in the consolidated financial statements for the periods
presented.
Income Recognition - Interest income on closed-end loans in the Small
Loan Portfolio and the Travel Finance Portfolio is deferred (recorded as an
off-set to finance receivables - See Note 4) and recognized over the lives of
the contracts using a method that approximates the interest method.
Administrative fees are deferred and recognized over the estimated life of the
Small Loan Portfolio using a method that approximates the interest method.
Membership fees arising from the Efectiva revolver loans are deferred and
recognized using the straight line method. Administrative fees and membership
fees are included in other income in the consolidated statements of income.
Premiums and commissions for credit life insurance are deferred and recognized
as revenue using the interest method. Premiums and commissions for credit
accident and health insurance are recognized over the terms of the contracts and
are included in other income in the consolidated statements of income.
Other income consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ----------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Late charges $ 496,000 $ 249,000 $ 2,142,000 $ 1,027,000 $ 1,111,000
Membership and administrative fees 2,341,000 3,433,000 3,870,000 2,021,000 1,802,000
Insurance products and other 3,528,000 4,272,000 4,872,000 2,321,000 2,385,000
----------- ----------- ----------- ----------- -----------
$ 6,365,000 $ 7,954,000 $10,884,000 $ 5,369,000 $ 5,298,000
=========== =========== =========== =========== ===========
</TABLE>
Travel Services - Revenues and commissions from the sale of travel
tickets and services are recognized when earned, which is at the time the travel
reservation is ticketed. Such revenues are reported net of an allowance for
cancellations and refunds. Generally, ticket sales are nonrefundable and
cancellations and refunds are not significant. Volume bonus and override
commissions are recognized at the end of each monthly or quarterly measurement
period once the specified target has been achieved.
62
<PAGE> 68
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Insurance Liabilities - The liability for losses and loss-adjustment
expenses, included in accrued expenses and other current liabilities, is based
on an amount determined from loss reports and individual cases and an amount,
based on past experience, for losses incurred but not reported. Such liabilities
are based on estimates and, while management believes that the amount is
adequate, the ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for establishing the
resulting liability are continually reviewed, and any adjustments are reflected
in earnings in the current period.
Income Taxes - The Company, Central Financial and Banner Central Finance
have entered a Tax Sharing Agreement (See Note 9). The Company follows SFAS No.
109, "Accounting for Income Taxes." Under SFAS No. 109, income tax expense
includes income taxes payable for the current year and the change in deferred
income tax assets and liabilities for the future tax consequences of events that
have been recognized in the Company's consolidated financial statements or
income tax returns. A valuation allowance is recognized to reduce the carrying
value of the deferred tax assets if it is more likely than not that some or all
of the deferred tax assets will not be realized.
Advertising - The Company advertises primarily on Hispanic television
and radio, and through newspapers and direct mail. All advertising costs are
expensed as incurred. Advertising expense for the years ended December 31, 1997,
1998 and 1999 were $1,580,000, $1,109,000 and $1,571,000, respectively, and for
the six months ended June 30, 1999 and 2000 amounted to $525,000 and $1,259,000,
respectively.
Concentration of Credit Risk - The Company places its temporary cash
and cash investments with high quality financial institutions. Management
monitors the financial creditworthiness of these financial institutions. As of
December 31, 1999, such investments were in excess of insured limits.
Fair Value of Financial Instruments - The carrying value of the
Company's finance receivables approximates their fair value due to their short
term nature and generally stable rates of interest currently being charged in
comparison to the rates reflected in the existing portfolios. The carrying value
of the Company's notes payable approximates their fair value, as these notes
represent a series of short-term notes at floating interest rates not to exceed
interest of 8.75% (LIBOR) for amounts outstanding of $40 million or less.
Management believes that the fair value of the Company's financial instruments
approximates their carrying values as of December 31, 1998 and 1999 and June 30,
2000.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Restricted Cash - At December 31, 1998, cash of $1,195,000 was held in a
trust account, in accordance with statutory regulations for insurance companies.
This cash balance was classified as restricted cash on the consolidated balance
sheet. There were no restricted cash balances at December 31, 1999 and June 30,
2000.
New Accounting Pronouncements - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying
63
<PAGE> 69
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the statement of income, and requires that a company formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
The effective date of SFAS No. 133 was delayed by the issuance of SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133," until fiscal years beginning
after June 15, 2000. The Company plans to adopt this statement on January 1,
2001. Management does not believe that adoption of this statement will have a
material effect on the Company's financial position or results of operations.
3. PURCHASE OF LEASEHOLD INTERESTS
During 1999, the Company expanded its travel business through the
purchase and assumption of 38 leases in retail locations located primarily in
Southern and Central California and Dallas/Ft. Worth, Texas that were operating
travel stores. The aggregate purchase price for the leasehold interests was
approximately $5.0 million and has been accounted for under the purchase method
of accounting, and the results of these new travel offices have been included in
operations since the date the Company assumed the leases.
4. FINANCE RECEIVABLES
Finance receivables consist of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- -----------
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Gross finance receivables:
Small loan portfolio $62,248,000 $56,411,000 $50,454,000
Travel finance portfolio 4,988,000 4,929,000 4,893,000
Mortgage portfolio 329,000 4,986,000 6,590,000
----------- ----------- -----------
67,565,000 66,326,000 61,937,000
Less:
Deferred interest 877,000 1,114,000 1,161,000
Allowance for credit losses 3,059,000 3,030,000 3,232,000
Deferred administrative, Efectiva
membership and transaction fees and
insurance revenues 2,169,000 1,865,000 1,308,000
Credit insurance and reserves for
policyholder's benefits 518,000 418,000 397,000
----------- ----------- -----------
6,623,000 6,427,000 6,098,000
----------- ----------- -----------
Finance receivables, net $60,942,000 $59,899,000 $55,839,000
=========== =========== ===========
</TABLE>
64
<PAGE> 70
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Customers are required to make monthly payments on the Company's
receivable contracts. The aggregate gross balance of accounts with payments 31
days or more past due are:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ----------
1998 1999 2000
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Small loan portfolio:
Past due 31 days plus $2,649,000 $2,979,000 $3,342,000
========== ========== ==========
Travel finance portfolio:
Past due 31 days plus $ 130,000 $ 134,000 $ 170,000
========== ========== ==========
</TABLE>
The gross balance of accounts with payments 31 days or more past due in
the mortgage portfolio were $0.1 million and $0.2 million at December 31, 1999
and June 30, 2000, respectively. There were no accounts with payments 31 days or
more past due in the mortgage portfolio at December 31, 1998.
The allowance for credit losses includes the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Allowance for credit $ 5,795,000 $ 5,787,000 $ 3,059,000 $ 3,059,000 $ 3,030,000
losses, beginning of the
year
Provision for credit losses 5,318,000 5,952,000 6,580,000 2,858,000 3,035,000
Charge-offs, net of recoveries (5,326,000) (8,680,000) (6,609,000) (2,858,000) (2,833,000)
----------- ----------- ----------- ----------- -----------
Allowance for credit
losses, end of year $ 5,787,000 $ 3,059,000 $ 3,030,000 $ 3,059,000 $ 3,232,000
=========== =========== =========== =========== ===========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, net consist of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- -----------
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Land $ 1,936,000 $ 1,568,000 $ 1,568,000
Construction in progress -- 1,937,000 --
Building and improvements 254,000 1,441,000 4,119,000
Furniture, equipment and software 5,225,000 5,271,000 5,557,000
----------- ----------- -----------
7,415,000 10,217,000 11,244,000
Less: accumulated depreciation 1,065,000 1,804,000 2,264,000
----------- ----------- -----------
$ 6,350,000 $ 8,413,000 $ 8,980,000
=========== =========== ===========
</TABLE>
65
<PAGE> 71
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets, net consist of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- -----------
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Goodwill $ 8,483,000 $13,533,000 $13,533,000
Deferred loan costs 764,000 764,000 764,000
Non-compete agreements 8,000 408,000 408,000
Other 3,000 3,000 3,000
----------- ----------- -----------
9,258,000 14,708,000 14,708,000
Less: accumulated amortization 1,333,000 2,040,000 2,430,000
----------- ----------- -----------
$ 7,925,000 $12,668,000 $12,278,000
=========== =========== ===========
</TABLE>
7. NOTES PAYABLE
During 1997, Central Financial had a line of credit agreement with Bank
of America National Trust and Savings Association (the "Bank of America Line of
Credit") that provided for the issuance of notes up to $60,000,000 and a line of
credit agreement with Wells Fargo Bank National Association (the "Old Wells
Fargo Line of Credit") that provided for the issuance of notes up to
$50,000,000. The Bank of America Line of Credit and Old Well Fargo Line of
Credit were repaid on June 13, 1997. Borrowings under the Bank of America Line
of Credit and Old Well Fargo Line of Credit facility bore interest at weighted
average rates of 9.1% and 7.9%, respectively, in 1997.
Central Financial entered into a new credit agreement with several banks
and Wells Fargo Bank National Association, as Agent, (the "Wells Fargo Line of
Credit") on June 13, 1997 that provided for the issuance of notes up to
$100,000,000 subject to an allowable borrowing base. The Wells Fargo Line of
Credit was repaid on August 11, 2000. Borrowings under the facility bore
interest at a weighted average rate of 8.3%, 8.0%, and 7.7% in 1997, 1998 and
1999, respectively, and 7.9% and 8.7% for the six months ended June 30, 1999 and
2000, respectively. Notes payable allocated to the Company at December 31, 1998,
1999 and June 30, 2000 was $40,000,000, $40,000,000 and $28,100,000,
respectively (See Note 1). Central Financial had Letters of Credit outstanding
for various purposes in the amount of $300,000, $1,800,000 and $550,000 at
December 31, 1998, 1999 and June 30, 2000, respectively. The amount of unused
credit under the facility was limited by the allowable borrowing base and was
approximately $11.3 million at June 30, 2000.
Central Financial was required to pay a commitment fee of 0.375% per
annum for unused portions of its lines of credit. These fees totaled $150,000,
$251,000 and $246,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, and $102,000 and $83,000 for the six months ended June 30, 1999
and 2000, respectively. These amounts have been allocated to the Company and are
included in operating expenses in the consolidated statements of income for the
periods presented.
On August 11, 2000, a new credit agreement was entered into with several
banks and Union Bank of California, N.A. as Agent ("Union Bank Line of Credit)
that provides for the issuance of notes up to $55,000,000 subject to an
allowable borrowing base (See Note 14).
66
<PAGE> 72
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES
The Company, Central Financial and Banner Central Finance have entered a
Tax Sharing Agreement (See Note 9). The income tax provisions as presented in
the accompanying consolidated financial statements are based upon the amount the
Company would have paid as if it filed separate income tax returns for the
periods presented.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CURRENTLY PAYABLE:
Federal $ 767,000 $ 264,000 $ 1,213,000 $ 1,104,000 $ 92,000
State 349,000 83,000 287,000 158,000 13,000
----------- ----------- ----------- ----------- -----------
1,116,000 347,000 1,500,000 1,262,000 105,000
----------- ----------- ----------- ----------- -----------
DEFERRED:
Federal 88,000 970,000 294,000 (4,000) 67,000
State 13,000 239,000 88,000 (1,000) 19,000
----------- ----------- ----------- ----------- -----------
101,000 1,209,000 382,000 (5,000) 86,000
----------- ----------- ----------- ----------- -----------
Provision for income taxes $ 1,217,000 $ 1,556,000 $ 1,882,000 $ 1,257,000 $ 191,000
=========== =========== =========== =========== ===========
</TABLE>
A reconciliation of the provision for income taxes to the statutory rate
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------
1997 1998 1999 1999 2000
------ ------ ------ --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Federal income taxes at statutory 35.0% 35.0% 35.0% 35.0% 35.0%
rate
State franchise taxes, net of federal 4.3% 4.5% 4.5% 4.5% 4.5%
benefit
Amortization of goodwill 0.3% 0.3% 0.3% 0.3% 0.3%
Other -0.5% 0.2% 0.2% 0.3% 0.2%
------ ------ ------ ------ ------
39.1% 40.0% 40.0% 40.1% 40.0%
====== ====== ====== ====== ======
</TABLE>
The tax effects of temporary differences giving rise to the deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------- -----------
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Allowance for credit losses $ 1,377,000 $ 1,244,000 $ 1,236,000
Deferred revenues 942,000 869,000 869,000
Fixed assets (378,000) (713,000) (783,000)
Other (58,000) 101,000 93,000
----------- ----------- -----------
Net deferred tax asset $ 1,883,000 $ 1,501,000 $ 1,415,000
=========== =========== ===========
</TABLE>
67
<PAGE> 73
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. RELATED PARTY TRANSACTIONS
In connection with its formation, the Company, Central Financial and
Banner Central Finance entered into certain agreements; the Operating Agreement;
the Option Agreement, and the Tax Sharing Agreement for defining their ongoing
relationships.
The Operating Agreement provides, among other things, that the Company
and its subsidiaries are obligated to provide to Banner Central Finance, and
Banner Central Finance is obligated to utilize, certain services, including
receivable servicing and collection and payment processing, accounting,
management information systems and employee benefits. The Operating Agreement
also provides for the Company to guarantee up to $4,000,000 of bank or similar
financing of Banner Central Finance, pursuant to certain conditions. If such
services involve an allocation of expenses, such allocation shall be made on a
reasonable basis. To the extent that such services directly relate to the
finance portion of the consumer products business contributed by Central
Financial to Banner Central Finance, or to the extent that other costs are
incurred by the Company or its subsidiaries that directly relate to Banner
Central Finance, Banner Central Finance is obligated to pay the Company and its
subsidiaries the actual cost of providing such services or incurring such costs.
The Operating Agreement continues until terminated by either the Company or
Banner Central Finance upon one year's prior written notice. Termination may be
made on a service-by-service basis or in total. Such allocated expenses to
Banner Central Finance totaled $6,495,000, $5,529,000 and $4,373,000 for the
years ended December 31, 1997, 1998 and 1999, respectively, and $2,074,000 and
$1,650,000 for the six months ended June 30, 1999 and 2000, respectively.
Pursuant to the Option Agreement, the Company granted Banner Central
Finance an option, exercisable for a two-year period commencing one year from
the date of the Plan, to acquire all of the mortgages the Company purchased from
Banner Central Finance at an exercise price equal to their book value upon
exercise. If Banner Central Finance exercises the Option, the exercise price is
payable in cash or an interest bearing note.
The Company, Central Financial and Banner Central Finance have entered
into a Tax Sharing Agreement which provides, among other things, for the payment
of federal, state and other income tax remittances or refunds for periods during
which the Company was included in the same consolidated group for federal income
tax purposes; the allocation of responsibility for the filing of such tax
returns and various related matters. For periods in which the Company was
included in Central Financial's consolidated federal income tax returns, the
Company will be required to pay its allocable portion of the consolidated
federal, state and other income tax liabilities of the group and will be
entitled to receive refunds determined as if the Company had filed separate
income tax returns. With respect to Central Financial's liability for payment of
taxes for all periods during which the Company was so included in Central
Financial's consolidated federal income tax returns, the Company will indemnify
Central Financial for all federal, state and other income tax liabilities of the
Company for such periods. The date of the consummation of the Plan will be the
last day on which the Company will be required to be included in Central
Financial's consolidated federal income tax returns.
10. STOCK OPTION PLAN
In connection with the Plan, the Company adopted the 2000 Stock Option
Plan (the "2000 Plan"). Subject to the terms of the 2000 Plan, a total of
1,100,000 shares of authorized Common Stock have been reserved for issuance
pursuant to terms and conditions as determined by the Board of Directors. During
the duration of the 2000 Plan, no individual may be granted options of more than
550,000 shares. Options to purchase 764,000 shares of Common Stock will be
granted to eligible participants under the 2000 Plan. Executive officers and
employees receiving options will be vested in such options in an
68
<PAGE> 74
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
amount that they would have been vested under the Central Financial Stock Option
Plan at the time of consummation of the Plan, except for those officers and
employees which had been with Central Financial or its predecessor for a period
in excess of five years, which shall be 60% vested in total options granted to
them. Upon the effectiveness of these grants, 336,000 shares of Common Stock
will remain available for future grants of options under the 2000 Plan. The
options have a maximum duration of five years and are subject to certain vesting
and cancellation provisions, and may not be granted at less than the market
value of the Company's Common Stock on the date of grant of the option.
11. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
During June 1996, Central Financial adopted a Supplemental Executive
Retirement Plan (the "SERP Plan") which provides supplemental retirement
benefits to certain key management employees. To vest in the SERP Plan, an
employee must have at least ten years of service with the Company, including
five years subsequent to the adoption of the SERP Plan. Concurrent with the
adoption of the Plan, the Company will assume all liabilities of the SERP Plan.
The unfunded SERP Plan expense for the years ended December 31, 1997, 1998 and
1999, amounted to approximately $77,000 each year, and for the six months ended
June 30, 1999 and 2000 amounted to $38,000 for each period.
12. INDUSTRY SEGMENTS
The Company has identified two reporting segments in accordance with
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information", the Consumer Finance Business and the Travel Business. The factors
for determining the reportable segments were based on the distinct nature of
their operations. They are managed as separate business units because each
requires and is responsible for executing a unique business strategy. The
Consumer Finance Business includes the Small Loan Portfolio, Travel Finance
Portfolio, Mortgage Loan Portfolio and insurance and other products provided to
customers of the Consumer Finance Business. The Company's Travel Business is
comprised of the retail travel stores and travel internet business.
Substantially all of the operations of the above businesses are concentrated in
California.
The accounting policies of these reportable segments are the same as
those described in the summary of significant accounting policies. Management
evaluates and monitors segment performance primarily through revenues and
earnings before interest and taxes. The results of operations and financial
position of the reporting segments are discussed below.
Revenues for the Consumer Finance Business for the years ended December
31, 1997, 1998 and 1999 were $20.8 million, $22.9 million and $26.0 million,
respectively, and for the six months ended June 30, 1999 and 2000 were $13.1
million and $12.4 million, respectively. Revenues for the Travel Business for
the years ended December 31, 1997, 1998 and 1999 were $8.7 million, $9.0 million
and $14.3 million, respectively, and for the six months ended June 30, 1999 and
2000 were $5.7 million and $7.0 million, respectively.
Income before provision for income taxes for the Consumer Finance
Business for the years ended December 31, 1997, 1998 and 1999 were $4.7 million,
$4.3 million and $5.6 million, respectively, and for the six months ended June
30, 1999 and 2000 were $3.5 million and $3.2 million, respectively. Loss before
benefit for income taxes for the Travel Business for the years ended December
31, 1997, 1998 and 1999 were $1.6 million, $0.4 million and $0.9 million,
respectively, and for the six months ended June 30, 1999 and 2000 were $0.4
million and $2.7 million, respectively. For segment reporting purposes,
corporate overhead allocated to the Consumer Finance Business for the years
ended December 31, 1997, 1998 and 1999 amounted to $0.5 million, $0.5 million
and $0.7 million, respectively, and for six months ended June 30, 1999 and 2000
amounted to $0.4 million and $0.3 million, respectively; and corporate
69
<PAGE> 75
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
overhead allocated to the Travel Business for the years ended December 31, 1997,
1998 and 1999 amounted to $2.3 million, $2.0 million and $3.8 million,
respectively, and for six months ended June 30, 1999 and 2000 amounted to $1.8
million and $1.9 million, respectively.
Total assets in the Consumer Finance Business as of December 31, 1998,
1999 and June 30, 2000 were $83.3 million, $78.7 million and $71.9 million,
respectively. Total assets in the Travel Business as of December 31, 1998, 1999
and June 30, 2000 were $8.5 million, $12.4 million and $13.4 million,
respectively.
Capital expenditures for the Consumer Finance Business for the years
ended December 31, 1997, 1998 and 1999 were $2.7 million, $1.3 million and $2.5
million, respectively, and for the six months ended June 30, 1999 and 2000 were
$0.8 million and $0.6 million, respectively. Capital expenditures for the Travel
Business for the years ended December 31, 1997, 1998 and 1999 were $0.1 million,
$0.1 million and $0.4 million, respectively, and for the six months ended June
30, 1999 and 2000 were $0.2 million and $0.4 million, respectively. In addition,
the aggregate purchase price for 38 leasehold interests of travel stores in the
Travel Business in 1999 was approximately $5.0 million.
13. COMMITMENTS AND CONTINGENCIES
The Company leases computer equipment under operating leases which
expire at various times through 2002. The Company's finance and travel centers
are leased under noncancelable operating leases that generally have two to
five-year terms with options to renew. The aggregate minimum lease commitments
under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S> <C>
2000 $3,058,000
2001 2,395,000
2002 1,219,000
2003 427,000
2004 175,000
----------
$7,274,000
==========
</TABLE>
Aggregate rental expense for the years ended December 31, 1997, 1998 and
1999 were $2,418,000, $2,268,000, and $3,141,000, respectively, and for the six
months ended June 30, 1999 and 2000 were $1,439,000 and $1,799,000,
respectively.
Concurrent with the Plan, the Company has entered into a new employment
agreement with the Chairman of the Board of Directors for a period of five
years, expiring December 31, 2005, at a base salary of $325,000 per year for the
period from January 1, 2001 to December 31, 2002, and then receive yearly
minimum increases of $25,000 per annum with eligibility to participate in the
Company's executive compensation plans. Any changes to the agreement require
approval of the Board of Directors.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. Management of the Company believes
that litigation currently pending will not have a material adverse effect on the
Company's financial position or results of operations.
14. SUBSEQUENT EVENT
On August 11, 2000, the Company entered into a new credit agreement with
several banks and Union Bank of California, N. A. as Agent ("Union Bank Line of
Credit) that provided for the issuance of notes up to $55,000,000. Borrowings
under the Union Bank Line of Credit is limited to 70% of eligible
70
<PAGE> 76
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
receivable contracts as defined in the credit agreement. Substantially all of
the assets and stock of Central Consumer Finance Company ("Central Consumer"), a
wholly owned subsidiary of the Company, has been pledged as collateral for
amounts borrowed under the Union Bank Line of Credit. The Union Bank Line of
Credit requires, among other things, that the Company maintain specific
financial ratios and satisfy certain financial covenants with respect to Central
Consumer and restricts, among other things, Central Consumer's ability to incur
additional indebtedness, pay dividends, make certain restricted payments or
consummate certain asset sales. At June 30, 2000, Central Consumer and its
subsidiaries had total assets of approximately $70.0 million and stockholders'
equity of approximately $30.0 million. Interest on the Union Bank Line of Credit
is determined at the Company's option, equal to either, (a) 87.5 basis points
above the higher of the prime rate Union Bank of California announces or the
federal funds rate plus 50 basis points or (b) 225 basis points above the
interest rate per annum at which Union Bank of California offers deposits in
dollars to prime banks in the London Eurodollar market.
Upon execution of the Plan, the Company entered into a new lease with
BCE Properties II, Inc., an affiliated company, for its executive and
administrative offices. The new lease is for a period of 15 years with annual
rent of $300,000 per year subject to CPI increases. Additionally, the Company
entered into a 15 year agreement to lease approximately 30,000 square feet of
retail space to Banner's Central Electric, Inc., an affiliated company, with
annual rent of $200,000 per year subject to CPI increases.
* * * * * *
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DISCUSSION OF
BANNER CENTRAL FINANCE COMPANY
INTRODUCTION
Certain matters discussed in this Information Statement may constitute
forward-looking statements under Section 27A of the Securities Act, and Section
21E of the Exchange Act. These statements may involve risks and uncertainties.
These forward-looking statements relate to, among other things, expectations of
the business environment in which Banner Central Finance and its subsidiaries
which may be referred to collectively as "Banner Central Finance," "we" or "us"
in this "DISCUSSION OF BANNER CENTRAL FINANCE COMPANY" section of this
Information Statement, operate in, projections of future performance, perceived
opportunities in the market and statements regarding our mission and vision. Our
actual results, performance, or achievements may differ significantly from the
results, performance, or achievements expressed or implied in such
forward-looking statements. For discussion of the factors that might cause such
a difference, see "Business - Business Considerations and Certain Factors that
May Affect Future Results of Operations and Stock Price."
COMPANY OVERVIEW
Banner Central Finance was incorporated in Delaware on September 5,
2000. Our principal executive offices are located at 5480 East Ferguson Drive,
Commerce, California 90022, and our telephone number is (323) 720-8600. This
section of this Information Statement is written as if Central Financial had
contributed three of its subsidiaries to Banner Finance Company on the earliest
date that this section discusses. These subsidiaries are Central Installment
Credit Corporation, Central Financial Acceptance/Insurance Agency and Central
Premium Finance Company. Banner Central Finance, through these subsidiaries,
presently has two principal businesses: purchased consumer receivables and
origination and sale of second trust mortgages.
PURCHASED CONSUMER RECEIVABLES
We purchase consumer finance receivables, referred to as the Consumer
Products Portfolio, which our customers generate for the purchase of high
quality brand name consumer products, electronics, appliances, and furniture
sold by Banner's Central Electric, an affiliate of ours. Banner's Central
Electric operates 5 retail stores in the greater Los Angeles area.
Our customers are typically low-income Hispanics, between the ages of 21
and 45, earn less than $25,000 per year, have little or no savings, and have
limited or short term employment histories. In addition, our customers typically
have no or limited prior credit histories and are generally unable to secure
credit from traditional lending sources.
We base our credit decisions on our assessment of a customer's ability
to repay the obligation. In making a credit decision, in addition to the size of
the obligation, we generally consider a customer's income level, type, and
length of employment, stability of residence, personal references, and prior
credit history with us. We also obtain a credit bureau report and rating, if
available, and seek to confirm other credit-related information. We, however,
are more susceptible to the risk that our customers will not satisfy their
repayment obligations than are less specialized consumer finance companies or
consumer finance companies that have more stringent underwriting criteria.
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We also provide Banner's Central Electric with electronics, appliances
and furniture inventory, which we acquire and hold for them until sold to our
customers.
MORTGAGE BUSINESS
Prior to the formation of Banner Finance Company, we did originate and
sell and service second trust mortgages to Hispanic customers primarily in the
Los Angeles area. We introduced the business in mid-1998 and have originated and
sold second trust mortgages of $2.7 million in the six months ended June 30,
2000 and $5.2 million in 1999, to Hispanic Express, an affiliated company. Our
primary source of income is origination fees, which we earn when a loan is
funded. Historically, we have funded the loan and subsequently sold them to
Hispanic Express.
OTHER BUSINESS ACTIVITY
We also provide financing to consumers for the purchase of products and
services that independent retailers sell. Historically, we have had
relationships with approximately 75 retailers in the greater Los Angeles area.
However, in 1998 and 1999, we have phased out of substantially all of these
independent relationships. From 1995 through March 31, 1999, we also financed
the sale of used automobiles primarily sold by Banner's Central Electric. In May
1997, Banner's Central Electric discontinued the sale of used automobiles and
currently we no longer provide financing for this business.
We began to offer financing for the sale of automobile insurance that we
sell as a broker for major automobile insurers. In recent years, the large
automobile insurance companies have started to offer direct financing, and
accordingly, our premium financing activity has declined significantly. We
currently continue to sell automobile insurance to low-income Hispanics and
operate through 3 offices in the greater Los Angeles area.
BUSINESS STRATEGY
Historically, our major business activity has been providing financing
to the low-income Hispanic customers purchasing brand name consumer products
from Banner's Central Electric. In 1997, West Coast, which controls Banner's
Central Electric, made a strategic decision to de-emphases this and certain
other business lines and concentrate its resources and capital on building its
small loan and travel business, which are now owned and operated by Hispanic
Express. Accordingly, since 1997 Banner's Central Electric Inc.'s retail sales
have declined significantly with a corresponding decrease in the level of
consumer receivables we purchased from them.
Also our receivables portfolios relating to our financing of independent
retailers and our premium finance business have also experienced significant
declines. We expect these trends to continue in the future and, as a result, our
current portfolio of purchased receivables should continue to decline, thus,
providing capital to reinvest in other business opportunities, including our
mortgage business.
In 1998, we determined that continued growth of the Hispanic market,
particularly in the greater Los Angeles area, would create a business
opportunity to provide mortgage financing for both new homeowners and
refinancing of existing homes, or for small home equity loans generally in the
range of $5,000 to $12,000. In mid-1998, we commenced our mortgage business and
began to provide small second trust mortgages, which we have sold to Hispanic
Express, pursuant to our Operating Agreement.
In August 2000, Hispanic Express, through its wholly-owned subsidiary,
Central Consumer Finance Company, entered into a new credit agreement with a
bank group, which limits its ability to finance its mortgage receivables.
Accordingly, we have obtained an Option Agreement to reacquire the
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mortgage portfolio sold to them and have commenced a business strategy to
initiate second mortgages for independent financial institutions or hold them
for our own account.
COMPANY OPERATIONS
In order to provide cost savings and operating efficiencies, we entered
into the Operating Agreement with Hispanic Express under which Hispanic Express
provides us with certain services, including, credit applications, receivable
servicing, payment applications, accounting, legal and management information
systems.
CREDIT PROCEDURES
We have developed uniform guidelines and procedures for evaluating
credit applications. We take credit applications at each of the Banner's Central
Electric stores and then generally transmit them electronically through our
computer system or facsimile machines to our credit processing facility, where
all credit approval and verification is centralized. We also take credit
applications at each of the independent retail locations for which we provide
financing, and generally transmit them to our credit processing facility via
facsimile. We believe that our underwriting policies and procedures allow us to
respond quickly to credit requests. We typically respond to credit applicants
within one hour. We believe that because of our prompt response, many customers
prefer to deal with us instead of our competitors.
Our credit managers and credit approvers make their decisions on a case
by case basis and are influenced by, among other things, whether an applicant is
a new or existing customer. New applicants complete standardized credit
applications which contain information concerning income level, employment
history, stability of residence, driver's license or state identification card,
social security number, capacity to pay and personal references. We also verify
the applicant's employment and residence and depending on the relevant factors
may verify other pertinent information. We also obtain a credit bureau report
and rating, if available, and seek to confirm other credit-related information.
For an established customer, the credit process currently includes a review of
the customer's credit and payment history with us, and depending on the size of
the transaction an updated verification of employment and residence. Because we
offer multiple lines of credit, we review the aggregate amount that a customer
owes. In cases where a customer makes a request for a substantial increase in
his or her aggregate outstanding balance, we will obtain a credit bureau report
and will seek to confirm employment. In instances where the applicant has no or
limited credit history, we may require a co-signer with appropriate credit
status to sign the contract and may, in the installment credit business, also
require a down payment. See "Business Considerations and Credit Factors that May
Affect Future Results of Operations and Stock Price - Credit Risk Associated
with Customers; Lack of Collateral."
PAYMENT AND COLLECTIONS
Industry studies estimate that a significant percentage of the adult
population in the United States does not maintain a checking account, which is a
standard prerequisite for obtaining a consumer loan, credit card or other form
of credit from most consumer credit sources. Our customers are required to make
their monthly payments using a payment schedule that we provide to them. The
vast majority of our customers make their payments in cash at our locations or
at our payment facilities in Banner's Central Electric's stores. For our
customers who are paid their wages by check but who do not maintain checking
accounts, we cash such checks at no charge in order to facilitate account
payments.
We consider payments past due if a borrower fails to make any payment in
full on or before its due date, as specified in our receivables contracts that
the customers signs. We currently attempt to contact borrowers whose payments
are not received by the due date within 10 days after such due date. We contact
these borrowers by both letter and telephone. If no payment is remitted to us
after the initial
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contact, we make additional contacts every seven days, and, after a loan becomes
31 days delinquent, we generally turn over the account to our credit collectors.
Under our guidelines, we generally charge off and turn over an account to a
collection agency when we determine that the account is uncollectible, which is
typically when the account is 150 days past due.
FINANCE CONTRACTS
Each of the finance contracts is in Spanish and English and requires
monthly financing payments. State and federal regulations govern many of the
terms, conditions and disclosures in the finance contracts. See "Regulation of
Banner Central Finance." When a qualifying customer with an open account balance
increases the amount outstanding with an additional purchase or loan, the
customer executes a new contract for the new aggregate balance and, with the
proceeds, pays off the original contract.
INSURANCE
We maintain various insurance policies of the type, and in the amounts,
which are usual for our business. We maintain coverage for business
interruptions, including interruptions resulting from computer failure. We
believe that our insurance coverage is adequate.
MANAGEMENT INFORMATION SYSTEMS
Under the Operating Agreement with Hispanic Express, we will use
Hispanic Express's management information systems. Hispanic Express has invested
significant resources to develop a proprietary system that integrates all major
aspects of our business. The computer system uses a high-range IBM AS-400 as the
Banner Central Finance server, which provides on-line, real-time information
processing services to terminals located in each of Central's locations and in
Hispanic Express's centralized credit-processing facility. The system allows for
complete processing of our
- consumer product finance, including application processing and
credit approval;
- acquisition of credit bureau reports, accessing the payment
history of all active accounts;
- preparation of contracts;
- payment posting; and
- all other collection-monitoring activities.
In addition, the system provides customized reports to analyze each of our
portfolios on a daily, weekly and monthly basis. We believe that the computer
system is sufficient to maintain our business lines and portfolios without the
need for a material additional investment in management information systems.
Hispanic Express has adopted procedures designed to minimize the effect of
systems failures and other types of potential problems, including routine backup
and off-site storage of computer tapes, as well as redundancy and "mirroring" of
certain computer processes.
COMPETITION
The installment credit business is highly competitive. Through our
relationship with Banner's Central Electric and other retailers, we compete with
those department stores, discount stores and other retail outlets which also
provide credit to low-income consumers. The largest national and regional
competitors have significantly greater resources than we do. Competition may
arise from new sources
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having the expertise and resources to enter our markets either through expansion
of operations or acquisitions.
ADVERTISING
We actively advertise primarily in Hispanic television and radio, and
through newspapers and direct mail targeting both our present and former
customers, and potential customers who have used other sources of consumer
credit. We believe that our advertising contributes significantly increases our
ability to compete effectively with other providers of credit.
EMPLOYEES
At August 31, 2000, we employed a total of 41 full-time employees. None
of our employees are represented by a union or are covered by a collective
bargaining agreement. We believe that our relations with our employees are good.
REGULATION OF BANNER CENTRAL FINANCE
GENERAL
Our finance operations are subject to extensive regulation. Violation of
statutes and regulations applicable to us may result in actions for damages,
claims for refunds of payments made, certain fines and penalties, injunctions
against certain practices and the potential forfeiture of rights to repayment of
loans. Changes in state and federal statutes and regulations may affect us. We,
together with industry associations, actively lobby in the states in which we
operate. Although we are not aware of any pending or proposed legislation that
could have a material adverse effect on our business, we cannot assure that
future regulatory changes will not adversely affect our lending practices,
operations, profitability or prospects.
STATE REGULATION
Consumer Product Portfolio. In California, the California Retail
Installment Sales Act (the "Unruh Act") regulates our consumer product financing
business. The Unruh Act requires us to disclose to our customers, among other
matters,
- the conditions under which we may impose a finance change;
- the method of determining the balance which is subject to a
finance charge;
- the method used to determine the amount of the finance charge;
and
- the minimum periodic payment required.
In addition, the Unruh Act provides consumer protection against unfair or
deceptive business practices by:
- regulating the contents of retail installment sales contracts;
- setting forth the respective rights and obligations of buyers
and sellers; and
- regulating the maximum legal finance rate or charge and limiting
other fees on installment credit sales.
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Insurance Premium Finance. The State of California Department of
Financial Institutions regulates our insurance premium finance business. In
general, state law and regulations set forth requirements and procedures for:
- the cancellation of policies and collection of unearned
premiums;
- regulating the form and content of premium finance agreements;
- limiting the amount of finance, delinquency, cancellation and
other fees we may charge; and
- prescribing notice periods for the cancellation of policies for
nonpayment.
FEDERAL REGULATION
We are subject to extensive federal regulation as well, including the
Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit
Reporting Act and the regulations thereunder and the Federal Trade Commission's
Credit Practices Rule. These laws require us to provide full disclosure of the
key terms of each loan to every prospective borrower, prohibit misleading
advertising, protect against discriminatory lending practices and proscribe
unfair credit practices. Among the key disclosure items under the
Truth-in-Lending Act are the terms of repayment, the total finance charge and
the annual rate of finance charge or "Annual Percentage Rate: on each loan. The
Equal Credit Opportunity Act prohibits creditors from discriminating against
loan applicants on the basis of race, color, sex, age or martial status.
Regulation B issued under the Equal Credit Opportunity Act requires creditors to
make certain disclosures regarding consumer rights and advise consumers whose
credit applications are not approved of the reasons for the rejection. The Fair
Credit Reporting Act requires us to provide certain information to consumers
whose credit applications are not approved on the basis of a report obtained
from a consumer-reporting agency. The Credit Practices Rule limits the types of
property a creditor may accept as collateral to secure a consumer loan.
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS AND STOCK PRICE
Discussions of certain matters contained in this Information Statement
may constitute forward-looking statements under Section 27A of the Securities
Act and Section 21E of the Exchange Act. These statements may involve risks and
uncertainties. These forward-looking statements relate to, among other things,
expectations of the business environment in which we operate in, projections of
future performance, perceived opportunities in the market and statements
regarding our mission and vision. Our actual results, performance and
achievements may differ significantly from the results, performance or
achievements expressed or implied in such forward-looking statements. The
following is a summary of some of the important factors that could affect our
future results of operations and/or our stock price, and should be considered
carefully.
ABSENCE OF OPERATING HISTORY
Our Company was formed on September 5, 2000 and we do not have an
operating history as a separate stand-alone company. Our success will depend, in
large part, of the ability of our management to implement its business strategy.
ABSENCE OF TRADING MARKET
There is currently no public market for the shares of our common stock,
and we do not know whether a trading market will develop on or after the date
such shares are distributed to you. If we do become a publicly traded company,
the price at which our
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common stock would trade cannot be predicted. The price at which our common
stock would trade will be determined by the market place and may be influenced
by many factors, including the limited amount of public float for our common
stock, investors perception of our dividend policy (See "Absence of Dividend"
and "DIVIDENDS") and general economic and market considerations, particularly in
California.
ABSENCE OF DIVIDEND
We do not currently intend to pay regular cash dividends on our Common
Stock. Our dividend policy will be reviewed from time to time by our Board of
Directors in light of our earnings and financial position and other business
considerations that our Board of Directors considers relevant.
LIABILITY FOR THIRD PARTY CLAIMS
The Contribution Agreement provides for the indemnification of Central
Finance by Hispanic Express against all liabilities, such as lawsuits or other
claims by third parties. In addition, the Contribution Agreement provides for
your indemnification at the Liquidation Date by Hispanic Express upon the
dissolution and liquidation of Central Financial. However, there is always the
possibility that Hispanic Express will cease to exist or that it will not have
sufficient assets to fully indemnify Central Financial or you. There is also the
possibility that the indemnification obligations of Hispanic Express may not be
enforceable under applicable law. In any such case, there would be the
possibility that you would be personally liable after the Liquidation Date for
third party claims made against Central Financial, on a pro-rata basis and to
the extent of the amount distributed to you in the Distribution.
CREDIT RISK ASSOCIATED WITH CUSTOMERS; LACK OF COLLATERAL
Our customers are typically between the ages of 21 and 45, earn less
than $25,000 per year, have little or no savings, and have limited or short-term
employment histories. In addition, our customers typically have no prior credit
histories and are unable to secure credit from traditional lending sources. We
base our credit decisions primarily on our assessment of a customer's ability to
repay the obligation. In making a credit decision, in addition to the size of
the obligation, we generally consider a customer's income level, type and length
of employment, stability of residence, personal references and prior credit
history with us. We, however, are more susceptible to the risk that our
customers will not satisfy their repayment obligations than are less specialized
consumer finance companies or consumer finance companies that have more
stringent underwriting criteria.
Because we rely on the creditworthiness of our customers for repayment
and do not rely on collateral securing the debt, we experience actual rates of
losses higher than lenders who have collateral which they can repossess in the
event of a borrower's default. At June 30, 2000 and at December 31, 1999, net
finance receivables of our consumer products portfolio, which accounts for
substantially all of our net receivables, had accounts with payments 31 days or
more past due as a percentage of end of period net receivables of 6.4%, and
5.9%, respectively. For the six months ended June 30, 2000 and 1999, and the
twelve months ended December 31, 1999 and 1998, the consumer products portfolio
had net write-offs of $0.8 million, and $1.2 million and $2.5 million and $2.5
million, respectively. We cannot assure that we will not experience increases in
delinquencies and net write-offs which would
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require additional increases in the provisions for credit losses. For
information concerning our credit quality experience, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Consumer Products Portfolio Trend" and "Delinquency Experience and Allowance for
Credit Losses."
GENERAL ECONOMIC RISK
The risks associated with our business become more significant in an
economic slowdown or recession. During periods of economic slowdown or recession
we have experienced and may again experience a decreased demand for our
financial products and services and an increase in rates of delinquencies and
the frequency and severity of losses. Our actual rates of delinquencies and
frequency and severity of losses have been in the past and may be in the future
higher under adverse economic conditions than those generally experienced in the
consumer finance industry. Any sustained period of economic slowdown or
recession could materially adversely affect its financial condition and results
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Consumer Products Portfolio Trend" and "Delinquency
Experience and Allowance for Credit Losses."
DEPENDENCE ON CALIFORNIA MARKET
Substantially all of our businesses are located, and substantially all
of our revenues are generated in California. To date, substantially all of our
operations have been in Southern California. Therefore, our performance depends
upon economic conditions in California, and in Southern California in
particular, and may be adversely affected by social factors or natural disasters
in California. During the early 1990's, California experienced adverse economic
conditions. A decline in the California economy could have a material adverse
effect on our results of operations and financial condition.
DEPENDENCE OF CONSUMER PRODUCTS PORTFOLIO ON BANNER'S CENTRAL ELECTRIC
Our consumer products portfolio consists of consumer finance receivables
generated from products that Banner's Central Electric sells. The performance of
the consumer products portfolio and the ability to continue this business line,
therefore, depends substantially upon the success of Banner's Central Electric's
stores and its decision and ability to remain in business, over which we have no
control. The consumer products portfolio accounted for substantially all of our
gross receivables portfolio as of June 30, 2000.
SEASONAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We historically experience the highest demand for our financial products
and services between October and December, and experience the lowest demand for
our financial products and services between January and March. These significant
seasonal fluctuations in our business directly impact our operating results and
cash needs. Should we decide to hold the mortgages we originate in our own
account or exercise the option to reacquire the mortgage portfolio we sold
Hispanic Express, we will need to obtain a bank line of credit. There cannot be
any assurances that we may be able to obtain bank financing to support our
mortgage business or that we can obtain such financing on terms satisfying to
us.
ABILITY OF BANNER CENTRAL FINANCE TO EXECUTE ITS BUSINESS STRATEGY
Our financial performance will depend on our ability to successfully
develop new financial products or services, or that, such products and services
when implemented will be successful, or that, we can successfully increase our
mortgage business.
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COMPETITION
Each of our businesses operates in highly competitive industries. We
compete, against a large number of national and regional firms engaged in such
businesses, many of which have substantially greater resources than we do. We
cannot assure that our present or future competitors will not exert significant
competitive pressures on us which could have a material adverse effect on our
results of operations and financial condition. See "Company Operations -
Competition."
IMPACT OF GOVERNMENT REGULATION
Our operations are regulated by federal, state and local government
authorities and are subject to various laws and judicial and administrative
decisions imposing various requirements and restrictions. These requirements and
restrictions include, among other things:
- regulating credit granting activities;
- establishing maximum interest rates and charges;
- requiring disclosures to customers;
- governing secured transactions;
- setting collection repossession and claims handling procedures;
and
- regulating insurance claims practices and procedures, and other
trade practices.
Although we believe that we are in compliance in all material respects with
applicable local, state and federal laws, rules and regulations, we cannot
assure that more restrictive laws, rules and regulations will not be adopted in
the future which may make compliance more difficult or expensive, restrict our
ability to purchase or finance installment sales, further limit or restrict the
amount of interest and other charges imposed in installment sales originated by
retailers or Banner Finance Company, or otherwise materially adversely affect
our business or prospects. See "Business - Regulation of Banner Central
Finance."
DEPENDENCE UPON KEY PERSONNEL
Our success depends substantially on certain members of our senior
management, in particular Mr. Cypres, our Chairman of the Board, Chief Executive
Officer, and Chief Financial Officer. The loss of the services of Mr. Cypres
could materially adversely affect our business and financial condition. We do
not maintain key man life insurance.
PROPERTIES
Our executive and administrative offices occupy 5,000 feet of a building
which is owned by an affiliate of West Coast. We believe that our executive and
administrative offices are adequate for current and future needs.
LEGAL PROCEEDINGS
We are involved in certain legal proceedings arising in the normal
course of business. We do not believe the outcome of these matters will have a
material effect on us.
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DIVIDENDS
We have never paid and have no present intention of paying cash
dividends on our Common Stock. We anticipate that we will retain all earnings
for use in our business, and we do not anticipate paying cash dividends for the
foreseeable future. Any determination in the future to pay dividends will depend
on our financial condition, capital requirements, results of operations,
contractual limitations, legal restrictions and any other factors our Board of
Directors deems relevant.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
information in our Consolidated Financial Statements and Notes thereto and other
financial data included elsewhere in this Information Statement. Certain
statements under this caption constitute "forward-looking statements" under
Section 27A of the Securities Act and Section 21E of the Exchange Act which
involve risks and uncertainties. Our actual results may differ significantly
from the results discussed in these forward-looking statements. Factors that
might cause such a difference, include but are not limited to, credit quality,
economic conditions competition in the geographic and business areas in which we
conduct our operations, fluctuations in interest rates and government
regulation. For additional information concerning these factors see "Business -
Business Considerations and Certain Factors that May Affect Future Results of
Operations and Stock Price."
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousand, except per share data)
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1998 1999 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Interest Income $ 9,942 $ 7,466 $ 4,078 $ 3,177
Other income 4,070 2,804 1,497 1,078
Transaction fee from affiliate 933 799 428 --
------- ------- ------- -------
Total Revenue 14,945 11,069 6,003 4,255
------- ------- ------- -------
COSTS AND EXPENSES:
Operating Expenses 8,639 6,713 3,274 2,514
Provision for credit losses 2,862 2,670 1,349 840
------- ------- ------- -------
Total Costs and Expenses 11,501 9,383 4,623 3,354
------- ------- ------- -------
Income before taxes 3,444 1,686 1,380 901
Income tax expenses 1,377 674 552 361
------- ------- ------- -------
Net Income $ 2,067 $ 1,012 $ 828 $ 540
======= ======= ======= =======
PRO FORMA PER SHARE DATA:
Basic earnings per share $ 0.14 $ 0.08
Diluted earnings per share $ 0.14 $ 0.08
Weighted average number of
common shares outstanding 7,166 7,166
</TABLE>
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CONSUMER PRODUCTS PORTFOLIO TREND
At June 30, 2000, substantially all of our finance receivables were in
our consumer products portfolio.
<TABLE>
<CAPTION>
CONSUMER PRODUCTS PORTFOLIO
(DOLLARS IN THOUSAND, EXCEPT AVERAGE CONTRACT
BALANCE)
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ---------------------
1998 1999 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross receivable (at end of period) $33,886 $27,788 $28,622 $24,842
Deferred interest (at end of period) 3,333 2,787 2,662 2,420
------- ------- ------- -------
Net receivable (at end of period) 30,553 25,001 25,960 22,422
Deferred insurance revenues (at end of period) 94 69 81 50
------- ------- ------- -------
Net carrying value $30,459 $24,932 $25,879 $22,372
======= ======= ======= =======
Average net receivable $30,655 $26,359 $28,169 $23,502
Number of contracts (at end of period) 62,897 56,010 55,736 47,557
Average net contract balance $ 496 $ 471 $ 473 $ 471
Total interest income 7,224 6,477 3,448 2,979
Late charge and extension fee income 1,343 1,283 650 564
Provision for credit losses 2,404 2,475 1,248 835
Provision for credit loss as a percentage
of average net receivable (1) 7.8% 9.4% 8.9% 7.1%
Net write-offs 2,541 2,474 1,248 835
Net write-offs as a percentage of average
net receivable (1) 8.3% 9.4% 8.9% 7.1%
Average interest rate on average net
Receivable (1) 23.6% 24.6% 24.5% 25.4%
</TABLE>
(1) Percentages for the six months ended June 30, 1999 and 2000 are
annualized.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Total revenue in the six months ended June 30, 2000 decreased to $4.3
million from $6.0 million in the six months ended June 30, 1999 a decrease of
$1.7 million.
Interest income for the six months ended June 30, 2000 decreased to $3.2
million from $4.1 million in the six months ended June 30, 1999 a decrease of
$0.9 million. Of this decrease $0.5 million was due to a decrease in our
consumer products portfolio as a result of a decrease level of receivables
purchased from Banner's Central Electric. For the six months ended June 30, 2000
our gross consumer products portfolio averaged $23.5 million compared to $28.1
million in the six months ended June 30, 1999. The remaining decrease of $0.4
million was primarily attributable to a decrease in interest income earned on
our independent retailer and premium finance portfolios, respectively.
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Other income for the six months ended June 30, 2000 declined to $1.1
million from $1.5 million in the six months ended June 30, 1999, a decrease of
$0.4 million. Other income primarily includes late charges and other fees
charged on the receivables portfolio and the sale of automobile insurance. Of
the decrease approximately $0.1 million was due to a decline in late charges and
other fees primarily reflecting the decrease level of the finance receivables
portfolio and $0.3 million was due to a decrease in the level of automobile
insurance sold. The transaction fee received from Banner's Central Electric was
eliminated effective January 1, 2000.
Operating expenses for the six months ended June 30, 2000 decreased to
$2.5 million for $3.3 million in the six months ended June 30, 1999, a decrease
of $0.8 million. This decrease was primarily due to a reduction in salary and
overhead expenses corresponding to the decrease in revenues in the six months
ended June 30, 2000. As a percentage of interest and other income operating
expenses were 59.0% and 58.7% in the six months ended June 30, 2000 and 1999,
respectively.
The provision for credit losses decreased to $0.8 million in the six
months ended June 30, 2000 compared to $1.3 million in the six months ended June
30, 1999. This decrease was primarily due to a decrease in the average
receivable portfolio in the six months ended June 30, 2000 compared to the six
months ended June 30, 1999 and decreased delinquencies.
As a result of the foregoing factors, net income in the six months ended
June 30, 2000 decreased to $0.5 million from $0.8 million in the six months
ended June 30, 1999.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenues in the year ended December 31, 1999 decreased to $11.1 million
from the $14.9 million in the year ended December 31, 1998, a decrease of $3.8
million.
Interest income for the year ended December 31, 1999 decrease to $7.5
million compared to $9.9 million in the year ended December 31, 1998, a decrease
of $2.4 million. Of this decrease $0.8 million was due to a decrease in interest
income earned on our consumer products portfolio as a result of decreased level
of receivables we purchased from Banner's Central Electric. For the year ended
December 31, 1999 our gross consumer products portfolio averaged $26.4 million
compared to $30.1 million in the year ended December 31, 1998. The remaining
decrease was primarily attributable to a $0.8 million and $0.6 million decrease
in interest income earned on our independent retailer and premium finance
portfolios, respectively, reflecting the declining trends in these portfolios.
Other income for the year ended December 31, 1999 decreased to $2.8
million from $4.1 million in the year ended December 31, 1998. A decline of $1.3
million in the income primarily includes late charges and other fees charged on
the receivables portfolio and the sale of automobile insurance. Of the decrease,
approximately $0.2 million was due to a decline in late charges and other fees
primarily reflecting the decreased level of the finance receivables portfolio
and $1.1 million due to a decrease in the level of automobile insurance sold.
Transaction fees from an affiliate decreased to $0.8 million in the year
ended December 31, 1999 compared to $0.9 million in the year ended December 31,
1998. Banner's Central Electric pays transaction fees to us based upon the level
of receivables we purchased from them. The decline in transaction fees of $0.1
million reflected the decline in the level of receivables purchased and a
decline in the rate charged on each transaction.
Operating expenses for the year ended December 31, 1999 decreased to
$6.7 million from $8.6 million in the year ended December 31, 1998, a decrease
of $1.9 million. This decrease was due to reductions in direct expenses and
corporate overhead reflecting the decreased level of business activity.
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<PAGE> 89
As a percentage of revenue, excluding transaction fees, operating expenses were
65.3% in the year ended December 31, 1999 compared to 61.7% in the year ended
December 31, 1998.
The provision for credit losses in the year ended December 31, 1999 was
$2.7 million compared to $2.9 million in the year ended December 31, 1998. This
decrease was due to a decreasing balance in the receivables portfolio.
As a result of the foregoing factors, net income in the year ended
December 31, 1999 declined to $1.0 million compared to $2.1 million in the year
ended December 31, 1998, a decrease of $1.1 million.
Our Board of Directors has authorized open-market purchases of up to 3
million shares of our Common Stock, subject to applicable law and depending on
market considerations and other considerations that may affect open market
repurchases of such shares pursuant to authorization from time to time. Any
decision to purchase such shares will be based in the price of such shares and
whether we have capital available for such purchase.
LIQUIDITY AND CAPITAL RESOURCES
We primarily finance our operations through the cash flow generated from
operations and the liquidation of our receivables portfolios and historically
from capital contributions from Central Financial. Net cash flow provided from
operations totaled $2.1 million in the six months ended June 30, 2000, while net
cash flow used in operations was $0.8 million in the six months ended June 30,
1999.
Net cash flow used in operations for the year ended December 31, 1999
totaled $1.1 million, while net cash flow provided from operations in the year
ended December 31, 1998 was $5.3 million. During the six months ended June 30,
2000 and the twelve months ended December 31, 1999 and 1998, cash collected from
liquidation of our receivables portfolio was $3.0 million, $7.3 million and $9.6
million, respectively. These amounts together with our cash flow from operations
and capital contributions permitted us to pay down debt in the periods
presented.
We presently do not have a bank line of credit. Pursuant to the
Operating Agreement, Hispanic Express will agree to guarantee up to $4 million
of bank borrowings to acquire consumer receivables we purchase from Banner's
Central Electric. Should we decide to hold the mortgages we originate or
exercise the option to reacquire the mortgages we sold to Hispanic Express, we
will need to obtain a bank line of credit.
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<PAGE> 90
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk management discussion and the estimated amounts generated from
the analysis that follows are forward-looking statements of interest rate risk
assuming certain adverse market conditions occur. Actual results in the future
may differ materially from these projected results due to changes in our debt
mix and developments in the global financial markets. The analytical methods we
use to assess and mitigate these risks should not be considered projections of
future events or operating performances.
We are exposed to interest rate risk in the form of variable interest
rates on our Line of Credit. For the six months ended June 30, 2000 and the
twelve months ended December 31, 1999, the average interest rate charged on our
previous Line of Credit, which was $28.1 million at June 30, 2000 and $40.0
million at December 31, 1999, was 8.7% and 7.7%, respectively.
For an immediate 1.0% increase in interest rates projected after-tax
earning would decline approximately $0.2 million in 2000 and $0.2 million in
2001. An immediate 1.0% rise in interest rates is a hypothetical rate scenario,
used to estimate risk, and does not currently represent management's
expectations of future market developments.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following tables sets forth certain information at August 31, 2000
regarding our directors and executive officers, their ages and their positions
and offices with us.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary M. Cypres 56 Chairman of the Board, Chief Executive
Officer and Chief Financial Officer
Alejandro Ochoa 39 President
Salvatore Caltagirone 57 Director
William R. Sweet 62 Director
</TABLE>
GARY M. CYPRES has been our Chairman of the Board and Chief Financial Officer
since our formation and Chairman of the Board, Chief Executive Officer and
President of Hispanic Express since its formation. Mr. Cypres has been Chairman
of the Board, and Chief Executive Officer of Central Financial Acceptance
Corporation since its formation in 1996, Chairman of the Board of Central since
February 1991, Chairman of the Board and Chief Executive Officer of Central
Rents, Inc. since June 1994 and managing general partner of West Coast since
March 1990. Prior to that, Mr. Cypres was a general partner of SC Partners, a
private investment banking and consulting firm. From 1983 to 1985, Mr. Cypres
was Chief Financial Officer of The Signal Companies. From 1973 to 1983, Mr.
Cypres was Senior Vice President of Finance at Wheelabrator-Frye Inc. Mr. Cypres
was a member of the Board of Trustees and a faculty member of The Amos Tuck
School of Business at Dartmouth College.
It is contemplated that after the Distribution, Mr. Cypres will spend that
portion of his business time as may be required to oversee our operations and to
direct or implement our business strategies. Mr. Cypres will continue to spend a
portion of his business time as the managing general partner of West Coast, as
Chairman of the Board, Chief Executive Officer and Chief Financial Officer of
Banner's Central Electric, and as Chairman of the Board and Chief Executive
Officer of Central Rents, Inc. See "Certain Relationships."
ALEJANDRO J. OCHOA, has been our President since our formation. Since August
1998, Mr. Ochoa has been President of Central Financial's mortgage business.
Prior to joining Central Financial, Mr. Ochoa was Area Manager and then Regional
Vice President with Home Savings of America. From 1983 to 1992 he served as a
District Manager with Transamerica Financial Services. Mr. Ochoa graduated from
the University of Southern California, School of Business.
SALVATORE J. CALTAGIRONE has been one of our directors since our formation and
director of Central Financial since September 1997. Mr. Caltagirone has been
retired since October 1994. From the fall of 1990 to October 1994, he was an
employee of G.M. Cypres & Company. From March 1987 to June 1990, he was employed
as the Managing Director of Henley Group.
WILLIAM R. SWEET has been one of our directors of the since our formation and
director of Central Financial since September 1997. In July 1996, Mr. Sweet
retired from his position of Executive Vice President -- Wholesale Banking at
Union Bank of California, N.A., a position he had held since July 1985. Mr.
Sweet currently serves as a trustee of CNI Charter Funds.
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<PAGE> 91
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee consists of Mr. Caltagirone and Mr.
Sweet and will have the authority to determine compensation for our executive
officers and to administer our 2000 Stock Option Plan. The Audit Committee
consists of Mr. Caltagirone and Mr. Sweet, who have the authority to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range, of the audit and non-audit fees and review the
adequacy of our internal accounting controls.
COMPENSATION OF THE BOARD OF DIRECTORS
We intend to pay to our Board of Directors who are not also our
employees, or the Non-Employee Directors, an annual fee of $5,000. Members of
the Board of Directors who are our employees will not be paid any Directors'
fees. In addition, we may reimburse members of the Board of Directors for
expenses incurred in connection with their activities on our behalf.
Non-Employee Directors will also each receive options to purchase 18,000 shares
of Common Stock at an exercise price to be determined by the Board of Directors
under the 2000 Stock Option Plan. All options granted to the Non-Employee
Directors will be 40% vested with remaining balance to vest in equal annual
installments over 3 years beginning on the date of grant, subject to continued
service on the Board of Directors; however, no option can be exercised until at
least six months after the date of grant. We will enter into agreements with all
directors pursuant to which we will agree to indemnify them against certain
claims arising out of their services as directors. Directors are also entitled
to the protection of certain indemnification provisions in our Certificate of
Incorporation and Bylaws. See "Compensation Pursuant to Plans and Arrangements -
Stock Option Plan" and "- Indemnification Arrangements."
EXECUTIVE COMPENSATION
The following table summarizes the compensation for the year ended
December 31, 1999 of our Chief Executive Officer and each of our other executive
officers.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Gary M. Cypres(2) $ 25,000 $ - -
Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer
Alejandro Ochoa(3) $140,000 $20,000 -
President
</TABLE>
(1) Certain of our executive officers receive benefits in addition to salary
and cash bonuses. The aggregate amount of such benefits, do not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus of
such Named Executive.
(2) Mr. Cypres became an executive officer of Banner Finance Company upon
its formation. In 1999, $25,000 of Mr. Cypres' total compensation paid
by Central Financial was allocated to Banner Central Finance. Concurrent
with the Distribution, Mr. Cypres will receive a yearly compensation of
$75,000.
(3) Mr. Ochoa became an executive officer of Banner Finance Company upon its
formation.
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<PAGE> 92
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We established a Compensation Committee. The Compensation Committee
consists of Mr. Caltagirone and Mr. Sweet. Prior to the establishment of the
Compensation Committee, decisions concerning the compensation of executive
officers were made by the Board of Directors of Central Financial. None of our
executive officers currently serves as a director or member of the Compensation
Committee of another entity or of any other committee of the Board of Directors
of another entity performing similar functions. See "Certain Relationships."
EXECUTIVE INCENTIVE BONUS PROGRAM
The Compensation Committee may grant contingent performance bonuses to
certain of our executive officers, including the Named Executive Officers. The
amounts of most incentive bonuses will be payable to the extent that a recipient
or we achieve performance goals established by our Board of Directors.
COMPENSATION PURSUANT TO PLANS AND ARRANGEMENTS
Set forth below is information with respect to certain of our benefit
plans and employment arrangements pursuant to which cash and non-cash
compensation is proposed to be paid or distributed in the future to our
directors and executive officers. Base compensation does not include
compensation pursuant to any of the plans and arrangements described herein.
STOCK OPTION PLAN
Concurrent with the Distribution, Central Financial will terminate its
Stock Option Plan. The 2000 Stock Option Plan, or the 2000 Plan, has been
approved by our Board of Directors and stockholders. The 2000 Plan provides that
it is to be administered by a committee of the Board of Directors, referred to
as the Option Committee, consisting of at least two independent directors. The
Compensation Committee is expected to function as the Option Committee. The
Option Committee has the authority, within limitations as set forth in the 2000
Plan, to establish rules and regulations concerning the 2000 Plan, to determine
the persons to whom options may be granted, the number of shares of Common Stock
to be covered by each option, and the terms and provisions of the option to be
granted, provided, that such grants shall conform with Section 260.140.41 of the
California Securities Code. Subject to the terms set forth in the 2000 Plan, the
Option Committee has the right to cancel any outstanding options and to issue
new options on such terms and upon such conditions as may be consented to by the
optionee affected.
A total of 1,100,000 shares are reserved for issuance under the 2000
Plan. No individual may be granted options under the 2000 Plan with respect to
more than 550,000 shares during the duration of the 2000 Plan. It is expected
that options to purchase 421,000 shares of Common Stock will be granted to
eligible participants under the 2000 Plan effective upon the closing of the
Distribution, including options to certain executive officers as set forth
below. Options granted pursuant to the 2000 Plan would vest over two different
time periods. Options granted which equal the number of Options granted to
executive officers and employees under the Central Financial Stock Option Plan
will vest as they would have been vested under the Central Financial Stock
Option Plan at the time of distribution, except for those officers and employees
which had been with Central Financial or its predecessor company for a period in
excess of 5 years, which shall be 60% vested in total options granted to them.
Options granted to executive officers and employees which exceed the amounts
granted to them under the Central Financial Stock Option Plan will vest in such
Options over a five-year period in equal annual amounts. Upon the effectiveness
of these grants, 679,000 shares of Common Stock will remain available for future
grants of options under the 2000 Plan.
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<PAGE> 93
The number of shares which may be granted under the 2000 Plan or under
any outstanding options will be proportionately adjusted in the event of any
stock dividend or if the Common Stock shall be split, reverse split,
recapitalized, converted, exchanged, reclassified or in any way substituted.
Subject to the terms of the 2000 Plan, and in the event of a recapitalization,
merger, consolidation, rights offering, separation, reorganization or
liquidation, or any other change in our corporate structure or outstanding
shares, the Option Committee may make such equitable adjustments to the number
and class of shares available under the 2000 Plan or to any outstanding options
as it shall deem appropriate to prevent dilution or enlargement of rights. The
maximum term of any option granted pursuant to the 2000 Plan is ten years. In
general, shares subject to options granted under the 2000 Plan which expire,
terminate or are canceled without having been exercised in full become available
again for options grants.
The class of eligible persons under the 2000 Plan will consist of
directors and employees of, and consultants to, us or a parent or subsidiary of
us, as determined by the Option Committee, except that Non-Employee Directors
can only receive fixed grants of options under the terms set forth in the 2000
Plan. See "Compensation of the Board of Directors." Options granted under the
2000 Plan may be incentive stock options, or ISOs, or non-qualified options, at
the discretion of the Option Committee; however, ISOs can only be granted to our
employees or a parent or subsidiary. The 2000 Plan provides that the exercise
price of an option (other than Non-Employee Director's option) will be fixed by
the Option Committee on the date of grant; however, the exercise price of an
ISOs must be not less than the fair market value of the Common Stock on the date
of the grant. The exercise price of an ISOs granted to any participant who owns
stock possessing more than 10% of the total combined voting power of all classes
of our outstanding stock must be at least equal to 110% of the fair market value
of the Common Stock on the date of grant. Any ISOs granted to such participants
also must expire within five years from the date of grant and the rate of
exercise shall be at least twenty percent per year over five years.
Additionally, options granted under the 2000 Plan will not be ISOs to the extent
that aggregate fair market value of the shares with respect to which ISOs under
the 2000 Plan (or under any other plan maintained by us or a parent or
subsidiary of ours) first become exercisable in any year exceeds $100,000. No
options shall be granted under the 2000 Plan or after the tenth anniversary of
the adoption of the 2000 Plan.
Options will be non-transferable and non-assignable except by will, the
laws of descent and distribution, by instrument to an inter vivos or
testamentary trust in which the Options are to be passed to beneficiaries upon
the death of the trustor (settlor), or by gift to "immediate family" as defined
in 17 C.F.R. 240.16a-1(e). Options (other than Non-Employee Director's options)
are exercisable by the holder thereof subject to terms fixed by the Option
Committee. However, no option can be exercised until at least six months after
the date of grant.
Notwithstanding the above, an option will be exercisable immediately
upon the happening of any of the following (but in no event during the six-month
period following the date of grant or subsequent to the expiration of the term
of an option): (1) the holder's retirement on or after attainment of age 65; (2)
the holder's disability or death; (3) a "change of control" (as defined in the
2000 Plan) of Banner Central Finance while the holder is in the employ or
service of Banner Finance Company; or (4) the occurrence of such special
circumstances or events as the Option Committee determines merits special
consideration, except with respect to Non-Employee Directors' options, by such
other method as the Option Committee may permit from time to time.
If an option holder terminates employment with us or service as one of
our directors or as our consultant while holing an unexercised option, the
option will terminate 30 days after such termination of employment or service
unless the option holder exercises the option within such 30-day period.
However, all options held by an option holder will terminate immediately if the
termination is a result of a violation of such holder's duties. If cessation of
employment or service is due to retirement on or after attainment of age 65,
disability or death, the option holder or such holder's successor-in-interest,
as the
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<PAGE> 94
case may be, is permitted to exercise any option within three months after
retirement or within one year after disability or death.
The 2000 Plan may be terminated and may be modified or amended by the
Option Committee or the Board of Directors at any time; provided, however, that
(1) no modification or amendment either increasing the aggregate number of
shares which may be issued under options or to any individual or modifying the
requirements as to eligibility to receive options will be effective without
stockholder approval within one year of the adoption of such amendment; and, (2)
no such termination, modification or amendment of 2000 Plan will alter or affect
the terms of any then outstanding options without the consent of the holders
thereof.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDER OPTIONS
NAME TO BE GRANTED
---- -------------
<S> <C>
Gary M. Cypres ........... 325,000
Alejandro Ochoa .......... 50,000
William Sweet ............ 18,000
Salvatore Caltagirone .... 18,000
</TABLE>
INDEMNIFICATION ARRANGEMENTS
We have entered into Indemnification Agreements pursuant to which we
agree to indemnify certain of our directors and officers against judgments,
claims, damages, losses and expenses incurred as a result of the fact that any
director or officer, in his capacity as such, is made or threatened to be made a
party to any suite or proceeding. Such persons will be indemnified to the
fullest extent now or hereafter permitted by the DGCL. The Indemnification
Agreements will also provide for the advancement of certain expenses to such
directors and officers in connection with any such suite or proceeding. Our
Certificate of Incorporation and Bylaws provide for indemnification of our
directors and officers to the fullest extent permitted by the DGCL. See
"Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and
Bylaws - Limitation of Liability."
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 10,000,000 shares of Common
Stock, $.01 par value, or the Common Stock.
COMMON STOCK
Upon the consummation of the Distribution, we will have 7,166,000 shares
of Common Stock issued and outstanding. All shares of Common Stock to be issued
in connection with the Distribution will be fully paid and nonassessable.
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<PAGE> 95
The following summarizes the rights of holders of our Common Stock:
- each holder of Common Stock is entitled to one vote per share on
all matters to be voted upon by the stockholders, except as
discussed in "Anti-Takeover Effects of Provisions of Our
Certificate of Incorporation and Bylaws";
- subject to preferences that may apply to shares of preferred
stock that we may issue in the future, the holders of Common
Stock are entitled to receive such lawful dividends as may be
declared by the Board of Directors;
- upon our liquidation, dissolution or winding up, the holders of
shares of Common Stock are entitled to receive a pro rata
portion of all of our assets remaining for distribution after
satisfaction of all our liabilities and the payment of any
liquidation preference of any outstanding preferred stock;
- there are no redemptive or sinking fund provisions applicable to
our Common Stock; and
- there are no preemptive, subscription or conversion rights
applicable to our Common Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Some provisions of our certificate of incorporation and bylaws may have
an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by our stockholders. Such provisions may also render the
removal of the current Board of Directors or management of Hispanic Express more
difficult. These provisions include:
Limitation of Liability. Our certificate of incorporation eliminate the
personal liability of our directors to us and our stockholders to the fullest
extent permitted by the DGCL; provided, however, that directors shall be liable
to the extent provided by applicable law:
- for any breach of the directors' duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
- under Section 174 of the DGCL; or
- for any transaction from which the director derived any improper
personal benefit.
Our bylaws authorize us to provide indemnification to our directors and
officers if they are made party to litigation by reason that such person was
acting reasonably on our behalf and in good faith. These provisions may reduce
the likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their duty of care.
Calling Special Meeting and Action by Written Consent. Special meetings
of our stockholders may be called only by our Board of Directors. This may make
it more difficult to change the composition of our board of directors or to
propose a transaction which could result in a change in control.
No Cumulative Voting. Our certificate of incorporation does not provide
for cumulative voting for any purpose. This ensures that the holder or holders
of a majority of our common shares entitled to
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<PAGE> 96
vote in an election of directors are able to elect all of the directors. This
could deter investors from acquiring a minority of our shares of our Common
Stock in order to obtain a board seat and influence corporate policy.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Under Section 203 of the DGCL, we may not engage in a "business
combination," which includes certain mergers, consolidations, asset sales and
stock issuances and certain other transactions resulting in a financial benefit
to an "interested stockholder," namely, any entity or person beneficially owning
15% or more of our outstanding voting stock and any entity or person affiliated
with such an entity or person, for three years following the time that
stockholder became an interested stockholder, unless;
- prior to such date our Board of Directors approved either the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder owned at least
85% of our voting stock outstanding at the time the transaction
commenced (excluding for the purposed of determining the number
of shares outstanding those shares owned by (x) persons who are
directors and also officers and (y) employee stock plans in
which employee participants do not have the right to determine
confidentially whether shares held subject to the plans will be
tendered in a tender or exchange offer); or
- on or subsequent to such date the business combination is
approved by the Board of Directors and of at least 66-2/3% of
the outstanding voting stock which is not owned by the
interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Common Stock is U.S. Stock
Transfer Corporation.
EFFECT OF QUASI-CALIFORNIA CORPORATION LAW
Section 2115 of the CGCL provides that quasi-California corporations
will be subject to certain substantive provisions in the CGCL notwithstanding
comparable provisions in the law of the jurisdiction where the corporation is
incorporated. Section 2115 is applicable to foreign corporations that have more
than half of their stockholders residing in California and more than half of
their business deriving from California. The determination of whether a
corporation is a quasi-California corporation is based upon information
contained in a certificate required to be filed within three months and fifteen
days after the end of the corporation's fiscal year or within 30 days after the
filings of its franchise tax return, if an extension of time to file such return
was granted. Quasi-California corporations that are Large Public Corporations
(i.e., that have securities listed on the New York or American stock exchanges,
or securities designated for trading on the Nasdaq National Market, if the
corporation has at least 800 holders of its equity securities as of the record
date for its most recent annual meeting), are exempt from the application of
Section 2115.
We have qualified to do business in the State of California because we
have substantially all of our property, employees and operations in California.
Therefore, absent an exemption, we would be deemed to be a quasi-California
corporation.
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<PAGE> 97
Because we will be deemed to be a quasi-California corporation, certain
of the provisions for our Certificate of Incorporation and Bylaws would not be
authorized by California law. In addition, under California law, cumulative
voting for the election of directors is mandatory unless a corporation that is a
Large Public Corporation has expressly eliminated cumulative voting in its
articles of incorporation. Furthermore, California law with respect to the
payment of dividends is more restrictive than Delaware law. Under California
law, a corporation is prohibited from paying dividends unless (i) the retained
earnings of the corporation immediately prior to the distribution exceeds the
amount of the distribution; (ii) the assets of the corporation exceed 1 1/4
times its liabilities; or (iii) the current assets of the corporation exceed its
current liabilities, but if the average pretax net earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 1 1/4 times its current
liabilities. See "DIVIDENDS"
CERTAIN RELATIONSHIPS
After completion of the Distribution, West Coast and its coinvestors
will beneficially own or otherwise control an aggregate of approximately 72% of
our Common Stock. As such, West Coast will be able to elect the entire Board of
Directors, adopt amendments to our Certificate of Incorporation, or effect a
merger, sale of assets, or other fundamental corporate transaction without the
approval of our other stockholders. West Coast will be able to control the
direction of our future operations, including decisions regarding the issuance
of additional share of Common Stock and other securities. As long as West Coast
is a majority stockholder of our Common Stock, it will be impossible for third
parties to obtain control of us through purchases of Common Stock not
beneficially owned or otherwise controlled by West Coast.
Mr. Cypres, is our Chairman of the Board, Chief Executive officer, and
Chief Financial Officer and is the Chairman of the Board, Chief Executive
Officer and President of Hispanic Express. West Coast, of which Mr. Cypres is
the managing general partner, controls our Company. West Coast and Mr. Cypres
may have conflicts of interest with respect to transactions concerning our
Company and its affiliates. Additionally, West Coast controls two companies
other than our Company, Hispanic Express and Central, all of which may have
divergent interests. Mr. Cypres is the Chairman of the Board of Central, which
owns and operates five installment credit stores in greater Los Angeles.
Prior to the Distribution, Mr. Cypres rendered services to our Company
through an employment agreement with Central Financial. Concurrent with
Distribution, Mr. Cypres will be employed by our Company and will receive
compensation at the rate of $75,000 per year. Mr. Cypres will act as Chairman of
the Board, Chief Executive Officer and Chief Financial Officer. In such
capacities, Mr. Cypres will spend that portion of his business time as is
required to oversee our operations and to formulate and direct the
implementation of our business strategies. Mr. Cypress will continue to spend a
portion of his business time as the Chairman of the Board, Chief Executive
Officer and President of Hispanic Express, managing general partner of West
Coast, and as Chairman of the Board of Central. See "Management" and
"Description of Capital Stock."
92
<PAGE> 98
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants .............. 94
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ......................... 95
Consolidated Statements of Income ................... 96
Consolidated Statements of Stockholders' Equity ..... 97
Consolidated Statements of Cash Flows ............... 98
Notes to Consolidated Financial Statements .......... 99
</TABLE>
93
<PAGE> 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Banner Central Finance Company:
We have audited the accompanying consolidated balance sheet of Banner Central
Finance Company, a Delaware corporation, and subsidiaries, (the "Company") as of
December 31, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Banner Central Finance Company
as of December 31, 1999, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
September 29, 2000
94
<PAGE> 100
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 72,000 $ 69,000
Finance receivables, net 25,294,000 21,414,000
Prepaid expenses and other current assets 99,000 2,000
Inventory 4,893,000 4,450,000
Deferred income taxes 560,000 563,000
Property and equipment, net 235,000 226,000
Intangible and other assets, net 693,000 674,000
----------- -----------
TOTAL ASSETS $31,846,000 $27,398,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 1,800,000 $-
Accounts payable and accrued expenses 554,000 664,000
----------- -----------
Total liabilities 2,354,000 664,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Group equity 29,492,000 26,734,000
----------- -----------
Total stockholders' equity 29,492,000 26,734,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,846,000 $27,398,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
95
<PAGE> 101
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 9,942,000 $ 7,466,000 $ 4,078,000 $ 3,177,000
Other income 5,003,000 3,603,000 1,925,000 1,078,000
----------- ----------- ----------- -----------
Total revenues 14,945,000 11,069,000 6,003,000 4,255,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Operating expenses 8,639,000 6,713,000 3,274,000 2,514,000
Provision for credit losses 2,862,000 2,670,000 1,349,000 840,000
----------- ----------- ----------- -----------
Total costs and expenses 11,501,000 9,383,000 4,623,000 3,354,000
----------- ----------- ----------- -----------
Income before provision for income 3,444,000 1,686,000 1,380,000 901,000
taxes
Provision for income taxes 1,377,000 674,000 552,000 361,000
----------- ----------- ----------- -----------
Net income $ 2,067,000 $ 1,012,000 $ 828,000 $ 540,000
=========== =========== =========== ===========
UNAUDITED PRO FORMA DATA: (NOTE 1)
Pro forma net income per common share
(Unaudited):
Basic $ 0.14 $ 0.08
Diluted $ 0.14 $ 0.08
Pro forma shares used in calculating pro
forma net income per common share
(Unaudited):
Basic 7,166,000 7,166,000
Diluted 7,166,000 7,166,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
96
<PAGE> 102
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
------------
<S> <C>
Balance, December 31, 1997 $ 26,879,000
Capital distribution to related party (4,182,000)
Net income for the year ended December 31, 1998 2,067,000
------------
Balance, December 31, 1998 24,764,000
Capital contribution from related party 3,716,000
Net income for the year ended December 31, 1999 1,012,000
------------
Balance, December 31, 1999 29,492,000
Capital distribution to related party (Unaudited) (3,298,000)
Net income for the six months ended June 30, 2000 (Unaudited) 540,000
------------
Balance, June 30, 2000 (Unaudited) $ 26,734,000
============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
97
<PAGE> 103
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 2,067,000 $ 1,012,000 $ 828,000 $ 540,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 103,000 180,000 53,000 39,000
Provision for credit losses 2,862,000 2,670,000 1,349,000 840,000
Deferred income taxes 194,000 (1,000) 5,000 (3,000)
Changes in assets and liabilities:
Prepaid expenses and other current assets 318,000 (99,000) (13,000) 97,000
Inventory -- (4,893,000) (3,053,000) 443,000
Accounts payable and accrued expenses (256,000) (2,000) 26,000 110,000
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 5,288,000 (1,133,000) (805,000) 2,066,000
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract
receivables (originated and acquired)
collected, net of recoveries 9,588,000 7,289,000 6,049,000 3,040,000
Capital expenditures, net (37,000) (48,000) (61,000) (11,000)
------------ ------------ ------------ ------------
Net cash provided by investing activities 9,551,000 7,241,000 5,988,000 3,029,000
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable, net (10,000,000) (10,200,000) (12,000,000) (1,800,000)
Capital (distribution to) contribution from
related party (4,182,000) 3,716,000 6,656,000 (3,298,000)
------------ ------------ ------------ ------------
Net cash used in financing activities (14,182,000) (6,484,000) (5,344,000) (5,098,000)
------------ ------------ ------------ ------------
NET INCREASE(DECREASE) IN CASH 657,000 (376,000) (161,000) (3,000)
CASH, BEGINNING OF PERIOD (209,000) 448,000 448,000 72,000
------------ ------------ ------------ ------------
CASH, END OF PERIOD $ 448,000 $ 72,000 $ 287,000 $ 69,000
============ ============ ============ ============
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 656,000 $ 144,000 $ 85,000 $ -
INCOME TAXES $ 908,000 $ 825,000 $ 244,000 $ 9,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
98
<PAGE> 104
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation - Banner Central Finance Company ("Banner Central
Finance" or the "Company") was formed in September 2000. On September 6, 2000
the Board of Directors of Central Financial Acceptance Corporation ("Central
Financial") approved a Plan of Complete Dissolution, Liquidation and
Distribution (the "Plan") under which Central Financial's subsidiaries have been
reorganized into two public companies, Hispanic Express, Inc. ("Hispanic
Express") and Banner Central Finance. The Plan was approved by the stockholders
of Central Financial on September 29, 2000. The Plan requires Central Financial
to distribute to Central Financial's stockholders 100% of the outstanding Common
Stock of Hispanic Express and Banner Central Finance. Pursuant to the Plan,
Central Financial will contribute to Hispanic Express its investment
subsidiaries, which are engaged in the small loan, travel finance and travel
services businesses and the receivable portion of its mortgage business and will
contribute to Banner Central Finance, its businesses engaged in selling and
financing of automobile insurance, its consumer products receivable portfolio
and its mortgage origination business.
In addition, pursuant to the Plan, Hispanic Express and Banner Central
Finance have entered into certain agreements for the purpose of defining the
ongoing relationship among them (See Note 6). The transaction and agreements
entered into contain provisions for the allocations of certain costs and
expenses. Management of Banner Central Finance believes that such agreements
provide for reasonable allocation of costs and expenses between the parties.
The formation of Banner Central Finance has been accounted for at
historical costs in a manner similar to a pooling of interest. The accompanying
consolidated financial statements reflect the combined operations of Banner
Central Finance and its subsidiaries, as if they had been consolidated at the
beginning of the periods presented. For accounting purposes, Banner Central
Finance has been allocated $1,800,000 of notes payable for the year ended
December 31, 1999 (See Note 4).
Unaudited pro forma net income per share is based on the number of
common shares issued by the Company pursuant to the Plan that are assumed to be
outstanding as of January 1, 1999.
Nature of Operations - The Company (1) purchases and services consumer
finance receivables generated by the Company's customers for purchases of high
quality brand name consumer products, appliances and furniture sold by Banner's
Central Electric, Inc. ("Central," an affiliated company) and by independent
retailers; (2) provides automobile insurance products and insurance premium
financing to its customers; and (3) originates and sells second trust mortgages
to Hispanic Express. The Company's business is focused in Southern California
and the Company experiences the highest demand for its financial products and
services between October and December.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Banner Central Finance and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
99
<PAGE> 105
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Interim Consolidated Financial Information (Unaudited) - The interim
consolidated financial statements as of June 30, 2000 and for the six months
ended June 30, 2000 and 1999 and related footnote information are unaudited and
have been prepared on the same basis as the audited consolidated financial
statements. In the opinion of management, the interim unaudited consolidated
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of these interim
periods. The results for the six months ended June 30, 2000 are not necessarily
indicative of the operating results to be expected for the entire year.
Finance Receivables - Finance receivables include installment contracts
that are purchased from Central, (referred to herein as the "Consumer Product
Portfolio"), installment contracts that are originated when customers buy used
cars, installment contracts purchased from unaffiliated third party retailers
that sell products or services and receivables that arise from automobile
insurance premium contracts, (collectively, referred to herein as the "Other
Portfolio"). The annual percentage rate varies depending on the length of the
contract and the amount of administrative fees. The contracts provide for
scheduled monthly payments and mature generally from 1 to 24 months in the
Consumer Product Portfolio, and from 8 to 60 months in the Other Portfolio.
Certain direct loan origination costs are capitalized and recognized
into expense over the life of the related loan using a method that approximates
the interest method.
The allowance for credit losses is provided for following the
origination of the loans based on pervious experience or when the events giving
rise to credit losses are estimated to have occurred. The Company's portfolios
comprise generally of smaller-balance, homogeneous loans that are evaluated
collectively to determine an appropriate allowance for credit losses. The
allowance for credit losses is maintained at a level considered adequate by
management to cover losses in the existing portfolios. Collection of past due
accounts is pursued by the Company, and when the characteristics of an
individual account indicates that collection is unlikely, the account is charged
off and turned over to a collection agency. Accounts are generally charged off
when they are between 91 and 150 days past due.
Allowance for credit losses is increased by charges to the provision for
credit losses and decreased by charge-offs, net of recoveries. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay and current economic
conditions. The Company's customers are typically between the ages of 21 and 45
and earn less than $25,000 per year, have little or no savings and limited
short-term employment histories. In addition, the Company's customers typically
have no prior credit histories and are unable to secure credit from traditional
lending sources. The Company makes its credit decisions primarily on its
assessment of a customer's ability to repay the obligation. In making a credit
decision, in addition to the size of the obligation, the Company generally
considers a customer's income level, type and length of employment, stability of
residence, personal references and prior credit history with the Company. As a
result, the Company is more susceptible to the risk that its customers will not
satisfy their repayment obligations than are less specialized consumer lending
companies or consumer finance companies that have more stringent underwriting
criteria. Because the Company relies on the creditworthiness of its customers
for repayment and does not rely on collateral securing the debt, the Company
experiences actual rates of losses higher than lenders who have collateral which
they can repossess in the event of a borrower's default.
Recoveries on charge-offs are recognized as an addition to the allowance
for credit losses on the cash basis of accounting and at the time the payment is
received. Expenses related to recoveries are
100
<PAGE> 106
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
included in operating expenses. Recoveries for the six months ended June
30, 2000 and June 30, 1999, and the years ended December 31, 1999, and 1998,
amounted to $377,000, and $415,000, and $848,000 and $961,000, respectively.
Deferred insurance revenue arises from the deferral of the recognition
of revenue from certain credit insurance contracts. Insurance premium revenue is
recognized over the life of the related contract using a method that
approximates the interest method.
Inventories - The Company purchases consumer product inventory which it
holds under a consignment arrangement until sold by Central. Inventories are
stated at the lower of cost or market. Cost is determined by the average cost
method.
Property and Equipment - Property and equipment are carried at cost.
Long-lived property is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such an asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long Lived Assets." If the
carrying amount of the asset exceeds the estimated undiscounted future cash
flows to be generated by the asset, an impairment loss would be recorded to
reduce the asset's carrying value to its estimated fair value.
Depreciation and amortization are computed primarily using the
straight-line method over the estimated lives of the assets, as follows:
<TABLE>
<S> <C>
Furniture, equipment and software.......... 5 to 10 years
Leasehold improvements..................... Life of lease
</TABLE>
Intangible Assets - Intangible assets primarily arose in connection with
the Company's acquisition of the net assets of an automobile insurance business
during 1996. The excess of the purchase price over the fair value of net assets
acquired is being amortized using the straight-line method over 30 years. The
recoverability of the excess of the purchase price over the fair value of net
assets acquired is analyzed annually based on undiscounted future cash flows. If
the carrying value of the intangible asset exceeds the estimated undiscounted
future cash flows, an impairment loss would be recorded to reduce the asset's
carrying value to its estimated fair value. No impairment loss has been recorded
to date.
Income Recognition - Interest income on the Consumer Product Portfolio
is deferred (recorded as an off-set to finance receivables - See Note 3) and
recognized over the lives of the contracts using a method that approximates the
interest method. Interest income on the Other Portfolio is deferred and
recognized using the interest method. Transaction fees on contracts purchased
from a related party are deferred and recognized using the interest method.
Commissions income and broker fee income from the sale of automobile insurance
products is deferred and recognized over the terms of the contracts, typically
12 months.
101
<PAGE> 107
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Other income consists of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1998 1999 1999 2000
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Other Income
Late and extension charges $1,585,000 $1,408,000 $ 737,000 $ 595,000
Insurance products and other 3,418,000 2,195,000 1,188,000 483,000
---------- ---------- ---------- ----------
$5,003,000 $3,603,000 $1,925,000 $1,078,000
========== ========== ========== ==========
</TABLE>
Income Taxes - The Company, Central Financial and Hispanic Express have
entered into a Tax Sharing Agreement (See Note 6). The Company follows SFAS No.
109, "Accounting for Income Taxes." Under SFAS No. 109, income tax expense
includes income taxes payable for the current year and the change in deferred
income tax assets and liabilities for the future tax consequences of events that
have been recognized in the Company's financial statements or income tax
returns. A valuation allowance is recognized to reduce the carrying value of the
deferred tax assets if it is more likely than not that some or all of the
deferred tax assets will not be realized.
Advertising - The Company advertises primarily on Hispanic television
and radio, and through newspapers and direct mail. All advertising costs are
expensed as incurred. Advertising expense for the six months ended June 30, 2000
and 1999, and the years ended December 31, 1999 and 1998 were $70,000 and
$107,000, and $172,000 and $134,000, respectively.
Fair Value of Financial Instruments - The carrying value of the
Company's finance receivables approximates their fair value due to their short
term nature and generally stable rates of interest currently being charged in
comparison to the rates reflected in the existing portfolios. Management
believes that the fair value of the Company's financial instruments approximates
their carrying values as of June 30, 2000 and December 31, 1999.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the statement
of income, and requires that a company formally document, designate, and assess
the effectiveness of transactions that receive hedge accounting.
The effective date of SFAS No. 133 was delayed by the issuance of SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133," until fiscal years beginning
after June 15, 2000. The Company plans to adopt this statement on January 1,
102
<PAGE> 108
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2001. Management does not believe that adoption of this statement will have a
material effect on the Company's financial position or results of operations.
3. FINANCE RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Finance Receivables consist of:
Consumer Product Portfolio $27,788,000 $24,842,000
Other Portfolios 2,718,000 1,485,000
----------- -----------
30,506,000 26,327,000
Less: deferred interest and insurance 3,056,000 2,570,000
Less: deferred loan origination fees 537,000 704,000
Less: allowance for credit losses 1,619,000 1,639,000
----------- -----------
$25,294,000 $21,414,000
=========== ===========
</TABLE>
Customers are required to make monthly payments on installment contracts. The
aggregate gross balance of accounts with payments 31 days or more past due are:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- ----------
(Unaudited)
<S> <C> <C>
Consumer Product Portfolio:
Past due 31 days or more $1,470,000 $1,429,000
========== ==========
Other Portfolios:
Past due 31 days or more $ 370,000 $ 354,000
========== ==========
</TABLE>
Included in the other portfolios are delinquencies on canceled automobile
insurance premium contracts. Since the Company seeks recovery of unearned
premiums from the insurance companies, which can take up to 90 days, loans are
not considered delinquent until more than 90 days past due. The amount greater
than 90 days was $303,000 and $306,000 at December 31, 1999 and June 30, 2000,
respectively.
The allowance for credit losses includes the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1998 1999 1999 2000
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Allowance for credit losses,
beginning of period $2,048,000 $1,590,000 $1,590,000 $1,619,000
Provision for credit losses 2,862,000 2,670,000 1,349,000 840,000
Charge-offs 3,320,000 2,641,000 1,349,000 820,000
---------- ---------- ---------- ----------
Allowance for credit losses, end
of period $1,590,000 $1,619,000 $1,590,000 $1,639,000
========== ========== ========== ==========
</TABLE>
103
<PAGE> 109
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE
Central Financial had a line of credit agreement with several banks and
Wells Fargo Bank National Association, as Agent, (the "Wells Fargo Line of
Credit"), that provided for the issuance of notes up to $100,000,000 subject to
an allowable borrowing base. Borrowings under the facility bore interest at a
weighted average rate of 8.0% and 7.7% in 1998 and 1999, respectively, and 7.9%
and 8.7% for the six months ended June 30, 1999 and 2000, respectively. Notes
payable allocated to the Company at December 31, 1999 was $1,800,000 (See Note
1). The note was repaid in January 2000.
5. INCOME TAXES
The Company, Central Financial and Hispanic Express have entered into a
Tax Sharing Agreement (See Note 6). The income tax provision as presented in the
accompanying consolidated financial statements are based upon the amount the
Company would have paid as if it filed separate income tax returns for the
periods presented.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------- -----------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CURRENT:
Federal $ 1,035,000 $ 591,000 $ 479,000 $ 318,000
State 148,000 84,000 68,000 46,000
----------- ----------- ----------- -----------
1,183,000 675,000 547,000 364,000
DEFERRED:
Federal 170,000 (1,000) 4,000 (2,000)
State 24,000 -- 1,000 (1,000)
----------- ----------- ----------- -----------
194,000 (1,000) 5,000 (3,000)
----------- ----------- ----------- -----------
Provision for income taxes $ 1,377,000 $ 674,000 $ 552,000 $ 361,000
=========== =========== =========== ===========
</TABLE>
A reconciliation of the provision for income taxes to the statutory rates is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -------------------
1998 1999 1999 2000
------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Federal income taxes at statutory rate 35.0% 35.0% 35.0% 35.0%
State franchise taxes, net of
federal benefit 5.0% 5.0% 5.0% 5.0%
------ ------ ------ ------
40.0% 40.0% 40.0% 40.0%
====== ====== ====== ======
</TABLE>
104
<PAGE> 110
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences giving rise to the deferred income tax
assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
--------- ---------
(Unaudited)
<S> <C> <C>
Allowance for credit losses $ 647,000 $ 655,000
Amortization of goodwill (37,000) (42,000)
Other (50,000) (50,000)
--------- ---------
Net deferred tax asset $ 560,000 $ 563,000
========= =========
</TABLE>
6. RELATED PARTY TRANSACTIONS
In connection with its formation, the Company, Central Financial,
Hispanic Express and Central entered into certain agreements (the "Financing
Agreement," the "Option Agreement," the "Tax Sharing Agreement" and the
"Operating Agreement").
The Financing Agreement grants the Company the exclusive right to
provide financing to Central customers for a term of ten years from the date of
the Plan and provides that any contracts purchased pursuant to this agreement
will be at face value. As part of the Financing Agreement, the Company has
agreed to provide Central with up to $6.0 million of inventory or inventory
financing as long as the Financing Agreement remains in effect and Central has
agreed to provide the Company, at no charge, an amount of floor space at
Central's stores as the Company from time to time requests. In connection with
this Financing Agreement, the Company purchased $13.8 million and $11.6 million
of inventory during the year ended December 31, 1999 and six months ended June
30, 2000, respectively, of which $4.9 million and $4.5 million is included in
inventory at December 31, 1999 and June 30, 2000, respectively. The Company can
terminate the Financing Agreement at any time upon one year's prior written
notice to Central. Prior to January 1, 2000, the Company purchased receivables
from Central at face value less a transaction fee and could return to Central
certain levels of purchased receivables. For the years ended December 31, 1999
and 1998, the transaction fees amounted to $0.8 million and $0.9 million, and
the receivables returned to Central were $0.2 million and $1.5 million,
respectively.
Pursuant to the Option Agreement, Hispanic Express granted the Company
an option, exercisable for a two-year period commencing one year from the date
of the Plan, to acquire all of the mortgages the Company sold to Hispanic
Express at an exercise price equal to their book value at the time of exercise.
If the Company exercises the Option, the exercise price is payable in cash or an
interest-bearing note.
The Operating Agreement provides, among other things, that Hispanic
Express or their affiliates are obligated to provide to the Company, and the
Company is obligated to utilize, certain services, including receivables
servicing, collections, payments, applications, accounting, management
information systems and employee benefits. The Operating Agreement also provides
for Hispanic Express to guarantee up to $4,000,000 of bank or similar financing
of the Company, pursuant to certain conditions. To the extent that such services
directly relate to the finance portion of the consumer products business
contributed by Central Financial to the Company, or to the extent that other
costs are incurred by Hispanic Express or their affiliates that directly relate
to the Company, the Company is obligated to pay Hispanic Express or their
affiliates the actual cost of providing such services or incurring such costs.
The Operating Agreement continues until terminated by either the Company or
Hispanic Express upon one year's prior written notice. Termination may be made
on a service-by-service basis or in total. Allocated
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BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
expenses totaled $1,650,000, and $2,074,000 for the six months ended June 30,
2000 and 1999 and $4,373,000 and $5,529,000 for the years ended December 31,
1999, and 1998, respectively.
The Company, Central Financial and Hispanic Express have entered into a
Tax Sharing Agreement which provides, among other things, for the payment of
federal, state and other income tax remittances or refunds for periods during
which the Company was included in the same consolidated group for federal income
tax purposes; the allocation of responsibility for the filing of such tax
returns and various related matters. For periods in which the Company was
included in Central Financial's consolidated federal income tax returns, the
Company will be required to pay its allocable portion of the consolidated
federal, state and other income tax liabilities of the group and will be
entitled to receive refunds determined as if the Company had filed separate
income tax returns. With respect to Central Financial's liability for payment of
taxes for all periods during which the Company was so included in Central
Financial's consolidated federal income tax returns, the Company will indemnify
Central Financial for all federal, state and other income tax liabilities of the
Company for such periods. The date of the consummation of the Plan will be the
last day on which the Company will be required to be included in Central
Financial's consolidated federal income tax returns.
7. STOCK OPTION PLAN
In connection with the Plan, the Company adopted the 2000 Stock Option
Plan (the "2000 Plan"). Subject to the terms of the 2000 Plan, a total of
1,100,000 shares of authorized Common Stock have been reserved for issuance
pursuant to terms and conditions as determined by the Board of Directors. During
the duration of the 2000 Plan, no individual may be granted options of more than
550,000 shares. Options to purchase 421,000 shares of Common Stock will be
granted to eligible participants under the 2000 Plan effective upon the
consummation of the Plan. Executive officers and employees receiving options
will be vested in such options in an amount that they would have been vested
under the Central Financial Stock Option Plan at the time of consummation of the
Plan, except for those officers and employees which had been with Central
Financial or its predecessor for a period in excess of five years, which shall
be 60% vested in total options granted to them. Upon the effectiveness of these
grants, 679,000 shares of Common Stock will remain available for future grants
of options under the 2000 Plan. The options have a maximum duration of five
years and are subject to certain vesting and cancellation provisions, and may
not be granted at less than the market value of the Company's Common Stock on
the date of grant of the option.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases which have
expired and are currently on a month-to-month basis. Aggregate rental expense
for the six months ended June 30, 2000 and 1999 were $34,000 and $36,000,
respectively, for the years ended December 31, 1999 and 1998 were $72,000 and
$73,000, respectively.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. Management of the Company believes
that litigation currently pending will not have a material adverse effect on the
Company's financial position or results of its operations.
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BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. SUBSEQUENT EVENT
In August 2000, the Company entered into an agreement which provides for
the early termination of a lease with a third party where it was conducting a
significant portion of its business. In connection therewith, the Company has
recorded a charge of approximately $1,000,000. The Company presently conducts
these operations in a newly constructed facility and is provided space by
Central in connection with the Financing Agreement (See Note 6).
* * * * *
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FORWARD-LOOKING STATEMENTS
This Information Statement contains various forward-looking statements
and includes statements concerning beliefs, plans, objectives, goals,
expectations, estimates, intentions, operations, and prospects regarding
Hispanic Express and Banner Central Finance, including statements that include
the words "may," "could," "should," "would," "believe," "expect," "anticipate,"
"estimate," "intend," "plan" or similar expressions. These forward-looking
statements are based upon current expectations and are subject to risk and
uncertainties. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Central Financial provides the
following cautionary statement identifying important factors (some of which are
beyond the control of Central Financial, Hispanic Express and Banner Central
Finance) which could cause the actual results or events to differ materially
from those set forth in or implied by the forward-looking statements and related
assumptions.
Such factors include the following:
- the presence in Hispanic Express's and Banner Central Finance's
market area of competitors with greater financial resources than
Hispanic Express and Banner Central Finance;
- the timely development of competitive new products and services
by Hispanic Express and Banner Central Finance and the
acceptance of those products and services by customers and
regulators (when required);
- the willingness of customers to substitute competitors' products
and services for those of Hispanic Express and Banner Central
Finance and vice versa;
- changes in consumer spending and savings habits;
- the effect of changing regional and national economic
conditions;
- the effects of trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of
the Federal Reserve System;
- significant changes in interest rates;
- inflation, stock and bond market, and monetary fluctuations;
- credit risks of consumer, and other lending activities;
- changes in federal and state financial services laws and
regulations;
- unanticipated regulatory or judicial proceedings; and
- other external developments which could materially impact
Hispanic Express' and Banner Central Finance's operational and
financial performance.
The foregoing list of important factors is not exclusive, and neither such list
nor any forward-looking statement takes into account the impact that any future
acquisition may have on Hispanic Express and Banner Central Finance and on any
such forward-looking statement.
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AVAILABLE INFORMATION
It is contemplated that when the shares of common stock of Hispanic
Express and Banner Central Finance are distribution to you, Hispanic Express and
Banner Central Finance will become publicly traded companies. In such event,
each company will be subject to the reporting requirements of the Exchange Act
and, in accordance therewith, will file reports, and proxy materials with the
Securities and Exchange Commission. Central Financial currently is subject to
the reporting requirements of the Exchange Act and, in accordance therewith,
files reports and proxy materials with the Securities and Exchange Commission.
Copies of such reports and materials, including the exhibits thereto, and the
other information filed by Central Financial with the Securities and Exchange
Commission can be inspected and copied at the public reference facilities of the
Securities and Exchange Commission, 450 Fifth Street N.W., Room 1024, Washington
D.C. 20549. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Securities and Exchange Commission, 450 Fifth
Street N.W., Room 1024, Washington D.C. 20549. Copies may also be obtained from
the Securities and Exchange Commission's Web Site (http://www.sec.gov).
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