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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
AMENDMENT NO. 2 TO
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
HISPANIC EXPRESS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4821102
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5480 EAST FERGUSON DRIVE
COMMERCE, CALIFORNIA 90022
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (213) 720-8600
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Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of class)
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TABLE OF CONTENTS
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PAGE
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Item 1. Description of Business.............................................. 1
Item 2. Financial Information................................................ 24
Item 3. Properties........................................................... 39
Item 4. Security Ownership of Certain Beneficial Owners and Management....... 39
Item 5. Directors and Executive Officers..................................... 42
Item 6. Executive Compensation............................................... 44
Item 7. Certain Relationships and Related Transactions....................... 49
Item 8. Legal Proceedings.................................................... 53
Item 9. Market Price of and Dividends on Registrant's Common Equity
and Related Stockholder Matters...................................... 53
Item 10. Recent Sales of Unregistered Securities.............................. 54
Item 11. Description of Registrant's Securities to be Registered.............. 55
Item 12. Indemnification of Directors and Officers............................ 58
Item 13. Financial Statements and Supplementary Data.......................... 58
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ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
On September 6, 2000, the Board of Directors of Central Financial
Acceptance Corporation, or Central Financial, approved a Plan of Complete
Dissolution, Liquidation and Distribution, or the Plan, which provides for the
dissolution and liquidation of Central Financial, and the liquidating
distribution to its stockholders of all the common stock of its two wholly-owned
subsidiaries, one of which is our company, Hispanic Express, Inc., or Hispanic
Express, and the other of which is Banner Central Finance Company, or 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 date that Central Financial dissolves and liquidates under the
Plan, or the Liquidation Date, become the owner of one share of our common stock
and one share of common stock of Banner Central Finance. Throughout this
registration statement we use the terms "Hispanic Express," "we," "our" and "us"
to refer to Hispanic Express and its subsidiaries. As further described below,
the various businesses that are conducted by Hispanic Express are conducted
through these subsidiaries. These subsidiaries were, prior to the formation of
Hispanic Express, owned by Central Finance (see the "before" chart below). In
September 2000, Central Finance formed Hispanic Express (and Banner Central
Finance) as part of the Plan, under which Central Finance will dissolve and
liquidate, leaving Hispanic Express and Banner Central Finance to own their
respective subsidiaries (see the "after" chart below) and to carry on the
businesses that were previously conducted when such subsidiaries were owned
directly by Central Finance (see the "after" chart below). As of the date of
this registration statement, the Plan is partially completed, which means that
Central Financial has formed the two new wholly-owned subsidiaries (Hispanic
Express and Banner Central Finance) and has contributed its previously-existing
subsidiaries to these new subsidiaries. However, because the Plan has not been
fully consummated, Central Finance has not dissolved and liquidated and is still
the parent company of Hispanic Express and Banner Central Finance.
In connection with the adoption of the Plan, Central Financial
contributed all of its assets and business 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., each of
which are wholly-owned subsidiaries of Hispanic Express. Central
Consumer Finance Company has four wholly-owned subsidiaries,
namely, Central Check Cashing, Inc., Central Financial
Acceptance Corporation Accidental & Health Reinsurance, Limited,
Central Finance Reinsurance, Ltd. and Central Consumer Company
of Nevada. As a result of these contributions, Hispanic Express
through its subsidiaries will be engaged in the consumer
financial products business and the travel services business. It
is anticipated that Hispanic Express will not conduct any
business activities apart from those of its subsidiaries.
- Central Financial contributed to Banner Central Finance all of
the issued and outstanding capital stock of Central Installment
Credit Corporation, Central
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Financial Acceptance/Insurance Agency and Central Premium
Finance Company, each of which are wholly-owned subsidiaries of
Banner Central Finance. In addition, Central Financial
contributed to Central Installment Credit Corporation the assets
and liabilities of the mortgage business owned by Central
Consumer Finance Company. As a result of these contributions,
Banner Central Finance through its subsidiaries will be engaged
in the purchased consumer receivables business, the mortgage
business and the sale and financing of automobile insurance. It
is anticipated that Banner Central Finance will not conduct any
business activities apart from those of its subsidiaries.
Set forth below are charts that illustrate the relationships among the
companies discussed above, before and after the consummation of the Plan.
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[FLOW CHART]
BEFORE*
[FLOW CHART]
AFTER*
* Each subsidiary is wholly-owned by its respective parent company.
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On September 29, 2000, West Coast Private Equity Partners, L.P., or West
Coast, owning a majority of the outstanding shares of Central Financial's common
stock, voted to approve the Plan. It is anticipated that the Liquidation Date
will be January 31, 2001.
The dissolution and liquidation of Central Financial and the
distribution of the common stock of Hispanic Express and Banner Central Finance
under the Plan are intended to separate Central Financial into two publicly held
companies and 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
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 (though on a direct basis) as he had in Central
Financial before the consummation of the Plan. We believe that after the
consummation of the Plan current stockholders and future investors will have the
ability to make separate investment decisions regarding each of Hispanic Express
and Banner Central Finance and their respective businesses.
In connection with the Plan, all of our shares of our common stock will
be distributed to the stockholders of our parent company, Central Financial. We
are registering such shares of common stock under the Securities Exchange Act of
1934, as amended by filing this Form 10 registration statement because we desire
that the shares of our common stock that such stockholders receive under the
Plan be traded on the OTC Bulletin Board, for which the filing of this
registration statement is a prerequisite. The common stock of Central Financial
currently trades on the OTC Bulletin Board under the symbol "CFAC". We would
expect our shares of common stock to also trade on the OTC Bulletin Board under
the symbol "HEXI" if, after the Liquidation Date, at least one market maker
submits an application to the OTC Bulletin Board in which it represents that:
- it desires to represent us as a market maker; and
- it has satisfied all applicable requirements of the Securities
and Exchange Commission and the National Association of
Securities Dealers.
There is currently no public market for our shares of common stock, and
we do not know whether a trading market will develop on or after the Liquidation
Date.
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COMPANY BUSINESS
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.
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 had machines in
35 locations at the end of December 31, 1999. 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 20, and may make
further reductions or curtail the program depending on business conditions.
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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. 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 131 travel locations. We presently
have 115 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.
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 nine months ended September 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
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advertising and personnel expenses. As a result of this decision, our Internet
sales experienced a significant decrease in activity in the second and third
quarter 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. To
achieve this objective, we plan on continuing to implement the following
initiatives for the foreseeable future.
- To open travel agencies in the United States, which cater to the
growing Hispanic population;
- To use our increasing market share to continue to negotiate
favorably discounted non-published fares from the airlines;
- To sell these discounted fares through our travel agencies and
via the Internet both to Hispanics and non-Hispanics seeking
travel to Latin America;
- 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; and
- To increase our distribution network through new stand-alone
travel locations.
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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 September 30, 2000, our small loan business was operating
through 47 facilities, 26 of which were our finance centers, 20 of which were at
Kmart locations, and one of which is 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 September 30, 2000, we
operated through 131 locations, of which 115 are located in California and 16
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 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.
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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.
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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 November 30, 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
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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 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.
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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 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
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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
This registration statement discusses certain matters that may involve
risks and uncertainties. This registration statement contains statements that
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 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
We were 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, on 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 marketplace 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 general economic and market considerations, particularly in
California. We anticipate that if we become a publicly traded company, we will
have approximately 138 initial beneficial holders and approximately six initial
holders of record of our common stock, and that the public float will be
1,939,000 common shares.
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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
We have entered into a Contribution Agreement with Central Financial,
which, among other things, provides for the indemnification of Central Financial
by us against all liabilities, such as lawsuits or other claims by third
parties. In addition, the Contribution Agreement provides for indemnification by
us of Central Financial's stockholders at the Liquidation Date upon the
dissolution and liquidation of Central Financial. However, there is always the
possibility that we may cease to exist or that we may not have sufficient assets
to fully indemnify Central Financial or its stockholders.
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 September 30, 2000 and 1999 our gross finance
receivables had accounts with payments 31 days or more past due, as a percentage
of end of period gross receivables, of 7.2% and 5.6%, respectively. At December
31, 1999, 1998 and 1997 gross finance receivables had accounts with payments 31
days or more past due as a percentage of end of period gross receivables of
5.1%, 4.1% and 8.1%, respectively. For the nine months ended September 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 $4.4
million, $4.6 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. Because 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
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<PAGE> 17
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."
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 one of our subsidiary's
revolving loan agreements 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.
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<PAGE> 18
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 September 30, 2000, Central Consumer and subsidiaries had
total assets of approximately $62 million and stockholders' equity of
approximately $31 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;
- 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:
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<PAGE> 19
- 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, 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
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<PAGE> 20
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 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 Tijuana 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.
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
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<PAGE> 21
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.
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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 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.
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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;
- 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
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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.
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.
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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 our executive officers and our predecessors have contributed
to the development of the businesses that now comprise Hispanic Express. All of
our executive officers are, and following the Liquidation Date 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.
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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.
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.
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Our consumer finance business is regulated by federal, state and local
government authorities and is 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 by our company, or otherwise
materially adversely affect our business or prospects. See "Supervision and
Regulation."
ITEM 2. FINANCIAL INFORMATION
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 31, 1999, 1998 and 1997 has been
derived from our audited consolidated financial statements appearing elsewhere
in this registration 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 September 30, 2000, and our results of operations for the nine
months ended September 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
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operations for the interim periods are not necessarily indicative of results of
operations for the full calendar year.
HISPANIC EXPRESS, INC.
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- --------------------
1995 1995 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 $ 15,010 $ 14,747 $ 11,251 $ 9,871
Travel services 371 2,449 8,716 8,961 14,270 10,241 11,173
Other income (1) 1,782 4,314 6,365 7,954 10,885 8,012 7,629
-------- -------- -------- -------- -------- -------- --------
Total Revenues 7,424 17,415 29,474 31,925 39,902 29,504 28,673
-------- -------- -------- -------- -------- -------- --------
Costs and Expenses:
Operating expenses 2,492 6,553 16,891 17,738 24,215 16,633 21,063
Provision for credit losses 1,598 3,744 5,318 5,952 6,531 4,614 5,099
Interest expense 3,277 3,200 3,406 3,212 3,202 2,468 2,371
Depreciation and amortization 341 147 750 1,151 1,556 1,025 1,284
-------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes (284) 3,771 3,109 3,872 4,398 4,764 (1,144)
Provision (benefit) for income tax (114) 1,508 1,217 1,549 1,759 1,908 (457)
-------- -------- -------- -------- -------- -------- --------
Net Income $ (170) $ 2,263 $ 1,892 $ 2,323 $ 2,639 $ 2,856 $ (687)
======== ======== ======== ======== ======== ======== ========
PRO FORMA PER SHARE DATA:
Net income per common share:
Basic $ 0.37 $ (0.10)
Diluted $ 0.37 $ (0.10)
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, SEPTEMBER 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 $ 5,817 $ 5,141
Receivables, net 30,881 50,370 54,795 60,613 54,962 52,864 47,747
Total assets 35,174 74,099 85,460 91,458 86,190 83,669 79,830
Notes payable 40,850 40,850 40,850 40,000 40,000 34,100 25,100
Stockholder's equity (deficit) (8,752) 24,849 38,864 45,053 38,843 40,781 43,375
</TABLE>
26
<PAGE> 29
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 registration statement. Certain statements under this caption relate to
matters that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in these 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. We had machines in 35 Kmart
locations, and in 26 other locations which we own or operate, at the end of
December 31, 1999. 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 in which
we have our cash dispensing machines to 20, and may make further reductions or
curtail the program depending upon business conditions.
27
<PAGE> 30
Since December 31, 1998 our overall portfolio of net finance receivables
has declined primarily as a result of a decrease in our Small Loan Portfolio
reflecting more stringent credit approval guidelines and increased competition
from major credit card companies seeking to penetrate the Hispanic market in the
geographic areas in which we operate. The decline in the balance in our Small
Loan Portfolio has resulted in a declining level of interest income earned on
our finance receivables portfolio as shown under "Financial Trends."
During the nine months ended September 30, 2000, our portfolio of net
finance receivables continued to decline and amounted to $47.7 million at
September 30, 2000 compared to $52.9 million at the end of September 30, 1999.
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.
During the last six months of 1999, we began to significantly build our
infrastructure to support our Internet travel business and in the first half of
2000 we increased our advertising expenditures for this business. In July 2000,
in response to changing market conditions, we made a decision to curtail our
Internet activities, including, reducing staff levels, advertising and other
related costs, and we wrote-off approximately $0.2 million of in process
software development costs which we decided not to complete, and recorded
severance charges of approximately $0.3 million.
In September 2000, we decided to reduce the number of Kmart locations in
which we have our cash dispensing machines and to close 6 check cashing
locations which were not performing satisfactorily, and recorded a charge of
approximately $0.8 million, representing the write-off of leasehold
improvements, fixed assets and future discounted rent at these locations. Also,
in September 2000, certain of our loan and travel locations were negatively
impacted by a bus strike in the Los Angeles area which lasted approximately five
weeks.
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.
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<PAGE> 31
FINANCIAL TRENDS
PORTFOLIOS
The following sets forth certain information relating to our portfolios for the
periods indicated:
SMALL LOAN PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE CONTRACT BALANCE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ---------------------
1997 1998 1999 1999 2000
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Gross receivable (at end of period) $ 58,659 $62,248 $56,411 $53,656 $49,147
Deferred interest (at end of period) 1,414 445 674 319 652
-------- ------- ------- ------- -------
Net receivable (at end of period) 57,245 61,803 55,737 53,337 48,495
Deferred administrative fees, ATM fees and
insurance revenues (at end of period) 1,668 2,169 1,865 1,589 1,365
-------- ------- ------- ------- -------
Net carrying value $ 55,577 $59,634 $53,872 $51,748 $47,130
======== ======= ======= ======= =======
Average net receivable (1) $ 51,496 $55,312 $56,640 $56,073 $49,911
Number of contracts (at end of period) (2) 111,000 95,403 87,118 86,227 79,519
Average net contract balance $ 507 $ 558 $ 627 $ 615 $ 611
Total interest income (3) 13,056 13,792 13,584 10,395 9,049
Total administrative fee and ATM fee income 2,341 3,433 3,870 2,957 2,641
Late charge and extension fee income 217 73 1,926 1,423 1,497
Provision for credit losses 4,990 5,329 6,241 4,437 4,925
Provision for credit loss as a percentage of
average net receivable (4) 9.9% 9.6% 11.0% 10.6% 13.2%
Net write-offs 4,998 7,904 6,319 4,457 4,250
Net write-offs as a percentage of average net
receivable (4) 9.7% 14.3% 11.6% 10.6% 11.4%
Average interest rate on average net receivable (4) 25.4% 24.9% 24.0% 24.7% 24.2%
</TABLE>
(1) Average net receivable is defined as the average gross receivables less
the average deferred interest and insurance.
(2) In 1997, the number of contracts is higher as a result of many customers
having more than one account open in the portfolio that comprises the
Small Loan Portfolio.
(3) 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 nine months ended September 30, 1999 and 2000 is
annualized.
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<PAGE> 32
TRAVEL FINANCE PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE CONTRACT BALANCE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Gross receivable (at end of period) $ 6,165 $ 4,988 $ 4,929 $ 5,036 $ 5,158
Deferred interest (at end of period) 460 432 440 447 528
------- ------- ------- ------- -------
Net receivable (at end of period) $ 5,705 $ 4,556 $ 4,489 $ 4,589 $ 4,630
======= ======= ======= ======= =======
Average net receivables (1) 5,231 4,775 4,455 4,403 4,422
Number of contracts (at end of period) 14,435 12,250 11,506 11,811 11,109
Average net contract balance $ 395 $ 365 $ 375 $ 370 $ 400
Total interest income 1,338 1,235 1,163 856 822
Late charge and extension fee income 279 176 216 153 158
Provision for credit losses 328 623 290 177 174
Provision for credit loss as a percentage of
average net receivable (2) 6.3% 13.0% 6.5% 5.4% 5.3%
Net write-off's 328 776 290 177 154
Net write-off's as a percentage of average net
receivable (2) 6.3% 16.3% 6.5% 5.4% 4.6%
Average interest rate on average net receivable (2) 25.6% 25.9% 26.1% 25.9 24.8%
</TABLE>
(1) Average net receivable is defined as the average gross receivables, less
the average deferred interest.
(2) Percentage for the nine months ended September 30, 1999 and 2000 is
annualized.
30
<PAGE> 33
The following sets forth certain information relating to our portfolios for the
periods indicated.
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.
<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>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
VERSUS VERSUS
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
-------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in
interest income
Small Loan Portfolio 141 (85) 226 (1,117) (229) (1,346)
Travel Portfolio (79) 10 (69) (4) (37) (33)
</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 indicate 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. We accrue interest up to the time we charge
off an account.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. 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.
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<PAGE> 34
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 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.
FINANCE RECEIVABLES (1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $ 3,284 $ 3,893
Accounts with payments 31 days or more past due as a
percentage of end of period gross receivables 8.1% 4.1% 5.1% 5.6% 7.3%
Allowance for credit losses $ 5,787 $ 3,059 $ 2,981 $ 3,039 $ 3,676
Allowance for credit losses as a percentage
of net receivables 9.2% 4.6% 4.9% 5.2% 6.9%
</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 and improved in 1998, but began to increase again in the twelve months
ended December 31, 1999 and the nine months ended September 30, 2000. The
increases occurred primarily with respect to our existing customers,
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<PAGE> 35
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. Additionally,
delinquency trends were negatively impacted in the nine months ended September
30, 2000 by a five-week bus strike in the Los Angeles area. 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. As of December 31, 1999 and September 30, 2000, the accounts with
payments 31 days or more past due as a percentage of the end of period gross
receivables, and the allowance for credit losses as a percentage of net
receivables, increased to 5.1% and 4.9% at December 31, 1999 and to 7.3% and
6.9% at September 30, 2000. As a result of the increased delinquencies, we
increased our allowance for credit losses to $3.1 million at the end of December
31, 1999 and further increased the allowance to $3.7 million at the end of
September 30, 2000.
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.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Total revenues in the nine months ended September 30, 2000 decreased to
$28.7 million from $29.5 million in the nine months ended September 30, 1999, a
decrease of $0.8 million or 2.8%.
Total interest income for the nine months ended September 30, 2000
decreased to $9.9 million from $11.3 million in the nine months ended September
30, 1999, a decrease of $1.4 million or 12.3%. This decrease was primarily due
to a decrease of $1.3 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 $49.9 million for the nine months ended September 30, 2000
compared to the average balance of $56.1 million for the nine months ended
September 30, 1999.
Revenues earned on the sales of travel services increased to $11.2
million for the nine months ended September 30, 2000 compared to $10.2 million
in the nine months ended September 30, 1999, an increase of $1.0 million or
9.1%. This increase was primarily due to the
33
<PAGE> 36
full nine months of operation of 38 new travel stores in 2000 whose leases were
assumed from outside parties at various times in 1999.
Other income for the nine months ended September 30, 2000 decreased to
$7.6 million from $8.0 million in the nine months ended September 30, 1999, a
decrease of $0.4 million or 4.8%. Other income primarily includes administrative
fees earned on the small loan portfolio, membership fees earned on the Efectiva
Card, 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 $0.3 million, and a decrease of $0.7 million of income earned on our sale of
credit insurance products, which were offset by an increase of $0.5 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 nine months ended September 30, 2000
compared to the nine months ended September 30, 1999. The average interest rate
earned on the small loan portfolio was 24.2% for the nine months ended September
30, 2000 compared to 24.7% in the nine months ended September 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 nine months ended September 30, 2000
increased to $21.1 million from $16.6 million in the nine months ended September
30, 1999, an increase of $4.5 million. Of this increase $2.2 was attributable to
expenses related to the expansion of our travel business, $1.0 million was
attributable to increased expenditures for advertising and other costs for our
Internet travel business and $0.5 million was attributable to the write-off of
software development and severance costs when we decided to curtail our Internet
activities during the nine months ended September 30, 2000. The remaining $0.8
million was attributable to charges incurred in connection with our decision to
eliminate our cash dispensing machines at 15 Kmart locations and shut down six
check cashing locations which were not performing satisfactorily.
The provision for credit losses in the nine months ended September 30,
2000 increased to $5.1 million from $4.6 million in the nine months ended
September 30, 1999, an increase of $0.5 million or 10.5%. This increase was
primarily attributable to increased delinquencies in the small loan portfolio.
Interest expense for the nine months ended September 30, 2000 decreased
to $2.4 million from $2.5 million in the nine months ended September 30, 1999, a
decrease of $0.1 million or 3.9%. This decrease is primarily due to a declining
average balance of debt outstanding for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999, offset by an increase in
the cost of borrowings during the nine months ended September 30, 2000.
Depreciation and amortization for the nine months ended September 30,
2000 increased to $1.3 million from $1.0 million in the nine months ended
September 30, 1999, an
34
<PAGE> 37
increase of $0.3 million or 25.3% primarily due to increased amortization of
goodwill resulting from the assumption of leases for our new travel stores.
As a result of the foregoing factors, net loss in the nine months ended
September 30, 2000 was $0.7 million compared to net income of $2.9 million in
the nine months ended September 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 $39.9
million from $31.9 million in the year ended December 31, 1998, an increase of
$8.0 million or 26.0%.
Total interest income for the year ended December 31, 1999 decreased to
$14.7 million from $15.0 million in the year ended December 31, 1998, a decrease
of $0.3 million or 1.8%. This decrease was primarily due to 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 $1.9 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 $1.0
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.
35
<PAGE> 38
The provision for credit losses in the year ended December 31, 1999
increased to $6.5 million from $6.0 million in the year ended December 31, 1998,
an increase of $0.5 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.
Depreciation 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 $2.6 million compared to $2.3 million in the year
ended December 31, 1998, an increase of $0.3 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
36
<PAGE> 39
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 $0.3 million in the travel finance portfolio, as a result of
increasing delinquencies.
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 $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily 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 $8.9 million and $14.2 million
in the nine months ended September 30, 2000 and 1999, respectively. In each of
these periods the source of cash primarily consisted of net operating income
after non-cash items. Non-cash items in each of the periods included
depreciation and amortization, provision for credit losses and deferred income
taxes, and loss on disposal of fixed assets in 2000. Other items affecting cash
flows from operating activities in each of the periods included cash flows from
increases (decreases) in notes receivable, prepaid expenses and other assets,
accrued expenses and other current liabilities, other intangible assets in 2000
and restricted cash in 1999.
Net cash provided from operations totaled $15.5 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. In
1999 and 1998 the source of cash primarily consisted of net operating income
after non-cash items. Non-cash items in 1999 and 1998 included depreciation and
amortization, provision for credit losses and deferred income taxes. Other items
affecting cash flows from operating activities in each of the years included
cash flows from increases (decreases) in notes receivable, prepaid expenses and
other assets,
37
<PAGE> 40
restricted cash, accrued expenses and other current liabilities, and other
intangibles in 1998 and 1997.
Net cash provided from investing activities totaled $0.8 million for the
nine months ended September 30, 2000 and net cash used in investing activities
totaled $3.2 million for the nine months ended September 30, 1999. Net cash
provided by investing activities in each of the periods consisted of installment
contracts and other contract receivables collected, offset by capital
expenditures and the purchase of leasehold interests in 1999.
Net cash used in investing activities totaled $9.2 million, $12.6
million and $12.7 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Net cash used in investing activities in each of the years
consisted of installment contracts and other contract receivables originated,
capital expenditures and the purchase of leasehold interests in 1999 and 1997.
Net cash used in financing activities totaled $9.7 million and $13.0
million for the nine months ended September 30, 2000 and 1999, respectively. Net
cash used in financing activities in each of the periods consisted of repayment
of notes payable totaling $14.9 million and $5.9 million and purchase of
treasury stock totaling $0.1 million and $0.7 million for the nine months ended
September 30, 2000 and 1999, respectively. In addition, net cash used in
financing activities included capital contributions from Central Financial
totaling $5.3 million for the nine months ended September 30, 2000 and capital
distributions totaling $6.4 million to Central Financial for the nine months
ended September 30, 1999.
Net cash used in financing activities totaled $8.8 million in the year
ended December 31, 1999 and net cash provided by financing activities totaled
$3.0 million and $12.1 million for the years ended December 31, 1998 and 1997,
respectively. Net cash used in financing activities consisted of capital
distributions totaling $8.1 million to Central Financial and purchase of
treasury stock totaling $0.7 million for the year ended December 31, 1999. Net
cash provided by financing activities consisted of capital contributions from
Central Financial in the amount of $3.9 million offset by the repayment of
long-term debt of $0.9 million in the year ended December 31, 1998 and capital
contributions from Central Financial in the amount of $12.1 million for the year
ended December 31, 1997.
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
operations and receivable financing activities 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 September 30, 2000, Central Consumer had
total assets of $62 million and stockholders' equity of approximately $31
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 September 30, 2000 the total amount available to us
was $34.0 million, of which
38
<PAGE> 41
approximately $25.7 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 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. Borrowings under the Line of Credit bore
interest at the average rate of 8.8% in 2000.
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 September 30, 2000,
Central Consumer was in compliance with the financial ratios and tests.
We expect that our existing capital resources will adequately satisfy
our working capital requirements for the next 12 months. Future working capital
requirements, however, depend on many factors, including our ability to execute
on our business plan. Based on our current business plan, we expect our existing
capital resources will adequately satisfy our long-term working capital
requirements through the period of our Line of Credit which expires August 11,
2003.
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
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<PAGE> 42
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 on 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," until fiscal years beginning
after June 15, 2000. We plan 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 the Line of Credit held by our wholly owned subsidiary. For the nine
months ended September 30, 2000 and the twelve months ended December 31, 1999,
the average interest rate charged on the Company's lines of credit, which were
$25.1 million at September 30, 2000 and $40.0 million at December 31, 1999, was
8.8% 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%
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<PAGE> 43
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.
ITEM 3. 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, for which we pay an annual rental of $300,000, plus pro-rata shares of
common area charges and taxes, pursuant to a 15 year lease.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 13, 2000, Central Financial owned all 7,166,000 shares of
our outstanding common stock.
Following the liquidation of Central Financial and the distribution of
our common stock to Central Financial's stockholders under the Plan, our
directors and executive officers will beneficially own our common stock in the
amounts and percentages shown on the following table, based upon their
respective ownership of Central Financial common stock as of December 13, 2000:
<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%
Steve J. Olman(5) .................................. 4,000 *
Edward Valdez(6) ................................... 8,500 *
Donald Keyes(7) .................................... 5,000 *
Howard Weitzman(8) ................................. 5,000 *
William R. Sweet(9) ................................ 3,800 *
Jose de Jesus Legaspi(10) .......................... 2,800 *
Salvatore J. Caltagirone(10) ....................... 2,800 *
All directors and executive officers as a group
(8 persons)(11) ................................... 5,344,400 72.8%
</TABLE>
-------------------
* Less than 1%
(1) "Beneficial ownership" is a technical term broadly defined by the
Securities and Exchange Commission to mean more than ownership in the
usual sense. So, for example, you "beneficially" own our 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, for the purposes of this table, within 60
days of December 13, 2000.
(2) Except as otherwise noted 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 our common stock issuable upon exercise of stock options
exercisable within 60 days of December 13, 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 that are held as of December 13, 2000 by
West Coast, Wells Fargo & Company and WCEP Pte. Ltd., for which Mr.
Cypres has voting power, 77,500 shares that are held of record as of
December 13, 2000 directly
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<PAGE> 44
by Mr. Cypres, 12,500 shares that are held of record as of December 13,
2000 by Mr. Cypres' spouse and 12,500 shares that are held of record as
of September 30, 2000 by or in trust by Mr. Cypres and his spouse for
their children. An additional 60,000 shares are included representing
options exercisable within 60 days of December 13, 2000. Of the
5,312,500 shares, Mr. Cypres will share voting and investment power of
25,000 shares with his spouse.
(5) Consists of 4,000 shares issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000 that will be held
directly by Mr. Olman.
(6) Consists of 2,100 shares that are held of record as of December 13, 2000
directly by Mr. Valdez and 6,400 shares issuable upon exercise of stock
options exercisable within 60 days of December 13, 2000.
(7) Consists of 5,000 shares issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000 that will be held
directly by Mr. Keyes.
(8) Consists of 5,000 shares issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000 that will be held
directly by Mr. Weitzman.
(9) Consists of 1,000 shares that are held of record as of December 13, 2000
directly by Mr. Sweet and 2,800 shares issuable upon exercise of stock
options exercisable within 60 days of December 13, 2000.
(10) Consists of 2,800 shares issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000.
(11) Consists of 91,200 shares issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000.
BENEFICIAL STOCK OWNERSHIP OF 5% STOCKHOLDERS
The following table shows all persons or entities that will be
"beneficial owners" of more than five percent of our common stock following the
liquidation of Central Financial and the distribution of our common stock to
Central Financial's stockholders under the Plan, based on their respective
ownership of Central Financial common stock as of December 13, 2000.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED(1)
------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(2) NUMBER OF SHARES(3) PERCENT OF CLASS(4)
--------------------------------------- ------------------- -------------------
<S> <C> <C>
Gary M. Cypres(5) ............................ 5,312,500 72.6%
West Coast Private Equity Partners, L.P. ..... 3,665,047 51.15%
Wells Fargo & Company ........................ 1,104,933 15.42%
WCEP Pte. Ltd. ............................... 380,020 5.30%
Wellington Management Company, LLP(6) ........ 684,200 9.3%
</TABLE>
(1) See footnote 1 in table included above.
(2) The address for Mr. Cypres, 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. The address for Wells Fargo & Company is 421
Montgomery Street, San Francisco, California 94103 and WCEP Pte.
Ltd. is c/o West Coast, 5480 East Ferguson Drive, Commerce, California
90022.
(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 our common stock issuable upon exercise of stock options
exercisable within 60 days of December 13, 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 that are held as of December 13, 2000 by
West Coast, Wells Fargo & Company, and WCEP Pte. Ltd., for which Mr.
Cypres has voting control, 77,500 shares that are held of record as of
December 13, 2000 directly by Mr. Cypres, 12,500 shares that are held of
record as of December 13, 2000 by Mr. Cypres' spouse and 12,500 shares
that are held of record as of December 13, 2000 by or in trust by Mr.
Cypres and his spouse for their children. An
42
<PAGE> 45
additional 60,000 shares are included representing options exercisable
within 60 days of December 13, 2000. Of the 5,312,500 shares, Mr. Cypres
will share voting and investment power of 25,000 shares with his spouse.
(6) Based on a Schedule 13G filed with the SEC on February 11, 2000 relating
to beneficial ownership of Central Financial's common stock 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.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following tables sets forth certain information at December 13, 2000
regarding our directors and executive officers, their ages and their positions
and offices with us. There are no arrangements among or between any of our
directors or executive officers relating to their appointment or election to the
respective position in our company and there are no family relationships among
any of our directors or executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary M. Cypres 56 Chairman of the Board, President, Chief
Executive Officer and Secretary
Steve J. Olmon 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.
It is contemplated that after the liquidation of Central Financial and the
distribution of our common stock to Central Financial's stockholders, Mr. Cypres
will spend that portion of his
43
<PAGE> 46
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., an affiliate of ours. 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 Financial's small loan business. Mr. Valdez has worked for Central
Financial 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. From 1984 to 1994, Mr. Weitzman was 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.
44
<PAGE> 47
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.
45
<PAGE> 48
ITEM 6. 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 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 $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 these benefits does not exceed
the lesser of $50,000 or 10% of their total annual salary and bonus.
(2) Mr. Cypres became an executive officer of our company upon our
formation.
(3) Mr. Olmon became an executive officer of our company upon our formation
and joined Central Financial in May 10, 1999.
(4) Mr. Valdez became an executive officer of our company upon our
formation.
(5) Mr. Keys became an executive officer of our company upon our formation.
(6) Mr. Weitzman became an executive officer of our company upon our
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, to purchase shares of
common stock of Central Financial. Upon the consummation of the Plan,
these options will terminate and be replaced with options to purchase
shares of common stock of Hispanic Express. See "Executive
Compensation-Stock Option Plan." 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. 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."
46
<PAGE> 49
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 of our common stock to Central
Financial stockholders under the Plan, 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 will be administered by a committee of the Board of
Directors, referred to as the Option Committee. 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 749,000 shares of common stock will be granted to
eligible participants under the 2000 Plan effective as of the Liquidation Date,
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, subject to reasonable conditions such
as continued employment. Upon the effectiveness of these grants, 361,000 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
47
<PAGE> 50
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 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. Notwithstanding the foregoing, an Option may be granted with an
exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Internal Revenue
Code of 1986, as amended. 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, or a Ten Percent Stockholder,
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. Prior to the listing date, no Ten Percent Stockholder
shall be eligible for the grant of a nonqualified stock option unless the
exercise price of such option is at least 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. 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 our employ or service; or (4) the
occurrence of such special circumstances or events as the Option Committee
determines merits special
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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.
<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 ............................ 35,000
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.
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<PAGE> 52
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 a Supplemental Executive
Retirement Plan, or the SERP Plan, which provides supplemental retirement
benefits to certain key management and employees. Concurrent with the
distribution of our common stock to Central Financial's stockholders under the
Plan, 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 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.
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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 DEFERRED SALARY AND BONUS PLAN
We have adopted the Executive Deferred Salary and Bonus Plan, or the
EDP, which will cover the executive officers whose compensation information is
presented here and certain other of our executives. 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. As of the Liquidation Date, 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 have
agreed 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 suit 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 suit
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."
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Plan, Central Financial, Hispanic Express,
Banner Central Finance and Banner's Central Electric 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 us 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
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to our Consolidated Financial Statements appearing elsewhere in this
registration statement.
CONTRIBUTION AGREEMENT
We entered into a contribution agreement, referred to as the
Contribution Agreement, with Central Financial. The Contribution Agreement
covers the following matters:
Contribution of Central Financial Subsidiaries. The Contribution
Agreement provides for the contribution of certain of the assets and businesses
of Central Financial to us. Specifically, Central Financial contributed to our
company 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.
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 us 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 us against all liabilities, such as
lawsuits or other claims by third parties. In addition, the Contribution
Agreement provides for the indemnification by us of the Central Financial
stockholders at the Liquidation Date upon the dissolution and liquidation of
Central Financial. However, there is always the possibility that we will cease
to exist or that we 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.
OPERATING AGREEMENT
We have entered into an agreement with Banner Central Finance,
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 between us and Banner Central
Finance, the Operating Agreement provides that we and our 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.
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Management and Other Services. The Operating Agreement provides that
we and our 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 either of us 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 us our actual cost of
providing services to Banner Central Finance. If such services involve an
allocation of expenses, we shall determine the allocation on the basis of the
percentage utilization of such service or our management's best estimate
thereof.
Employee Benefits. The Operating Agreement provides that both we and
Banner Central Finance will assume all liabilities under the existing employee
welfare benefit and profit sharing plans of Central Financial with respect to
our employees and the employees of Banner Central Finance and the employees of
each of our subsidiaries who have become employees of each company. The
Operating Agreement also provides that the employment by us and Banner Central
Finance of individuals who were employees of Central Financial and the
subsidiaries prior to the distribution of our common stock to Central
Financial's stockholders will not be deemed a severance of employment from
Central Financial and its 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 that we
will 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 between Banner Central Finance
and Banner's Central Electric is in effect, we 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
We have entered into a tax sharing agreement with Central Financial
and Banner Central Finance, 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 we 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 we and Banner Central Finance were included
in Central Financial's consolidated federal and state income tax returns, we and
Banner Central
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<PAGE> 56
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 each of us and our subsidiaries had filed separate
income tax returns. With respect to Central Financial's liability for payment of
taxes for all periods during which we and Banner Central Finance were so
included in Central Financial's consolidated federal income tax returns, we 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.
SERVICE MARK LICENSE AGREEMENT
We have entered into a service mark license agreement, referred to
as the Service Mark License Agreement, with Banner's Central Electric. Under the
Service Mark License Agreement, Banner's Central Electric granted to us and our
subsidiaries, whether such subsidiaries exist now or come into existence at a
later time, the right to license the federally registered service mark "CFAC."
The Service Mark License Agreement is non-exclusive and has an initial term of
one year. The Service Mark License Agreement can be terminated by any party to
it upon one year's written notice, and Banner's Central Electric can terminate
the Service Mark License Agreement at any time if there is a change in control
of our company.
OTHER TRANSACTIONS WITH AFFILIATES
After completion of the distribution of our common stock to Central
Financial's stockholders, 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
shares 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.
Our company and Banner Central Finance, or our respective
subsidiaries, may enter into additional agreements, arrangements and
transactions or agreements that modify the agreements described above, after the
consummation of the distribution of our common stock to the stockholders of
Central Financial. Any such agreements, arrangements and transactions will be
determined through negotiations between us and Banner Central Finance or our
respective subsidiaries. Because West Coast may control both companies, such
negotiations will not be at arm's length.
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
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<PAGE> 57
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 of our common stock to Central Financial's
stockholders, Mr. Cypres has been rendering services to us through an employment
agreement with Central Financial. Concurrent with distribution of our common
stock to Central Financial's stockholders, 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 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 Central Finance, and as Chairman of the Board of Banner's Central
Electric. See "Management" and "Description of Capital Stock."
ITEM 8. 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.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
There is currently no public market for our shares of common stock,
and we do not know whether a trading market will develop on or after the
Liquidation Date. The common stock of Central Financial currently trades on the
OTC Bulletin Board. We would expect our shares of common stock to also trade on
the OTC Bulletin Board under the symbol "HEXI" if, after the Liquidation Date,
at least one market maker submits an application to the OTC Bulletin Board in
which it represents that:
- it desires to represent us as a market maker; and
- it has satisfied all applicable requirements of the
Securities and Exchange Commission and the National
Association of Securities Dealers.
In connection with the Plan, and pursuant to this registration
statement on Form 10, we are registering our common stock under the Securities
Exchange Act of 1934, as amended. Following the Liquidation Date we will have
7,166,000 share of our common stock outstanding, and we anticipate that if we
become a publicly traded company, we will have approximately 138 initial
beneficial holders and approximately six initial holders of record of our common
stock, and that the public float will be 1,939,000 common shares. Approximately
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749,000 shares of our common stock will be subject to outstanding options to
purchase, or securities convertible into shares of our common stock.
The shares of our common stock distributed in connection with the
Plan will be freely transferable, except for shares received by persons who may
be deemed to be "affiliates" of our company under the Securities Act of 1933, as
amended. Persons who may be deemed to be affiliates of our company after the
distribution of our common stock to Central Financial's stockholders generally
include individuals or entities that control, are controlled by, or are under
common control with us and may include our directors as well as our principal
stockholders. Persons who are our affiliates will be permitted to sell their
shares of our 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
us, West Coast will have "restricted securities" under Rule 144. We do not have
any agreements to register our common stock under the Securities Act, nor do we
currently anticipate that we will register our common stock under the Securities
Act.
DIVIDEND INFORMATION
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.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On September 6, 2000, we issued 7,166,000 shares of our common
stock, representing all of the outstanding shares of our common stock, to
Central Financial, in consideration for the contribution to us by Central
Financial of three of its subsidiaries on that date. The contributed
subsidiaries are BCE Properties, Inc, Central Consumer Finance Company and
Centravel, Inc.
There were no underwriters employed in connection with any of the
transactions set forth in this Item 10.
The securities were issued and considered to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, as a transaction by an issuer not involving a public offering.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Our authorized capital stock consists of 10,000,000 shares of common
stock, $.01 par value.
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As of December 13, 2000, we had 7,166,000 shares of common stock
issued and outstanding and held by approximately six stockholders of record. All
shares of common stock to be issued in connection with the distribution of our
common stock to Central Financial's stockholders 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 eliminates
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
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- 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.
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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 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"
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION AGREEMENTS
We entered into Indemnification Agreements pursuant to which we have
agreed 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 suit or proceeding. Such persons will be
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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 suit or proceeding.
DELAWARE CORPORATE LAW, CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation eliminates 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.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements together with the
notes thereto and the report thereon from Arthur Andersen LLP appearing on pages
F-1 through F-20 of this Form 10.
60
<PAGE> 63
EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
3.1 Certificate of Incorporation, as amended*
3.2 Bylaws*
4 Form of specimen common stock certificate*
10.1 Hispanic Express, Inc. 2000 Stock Option Plan*
10.2 Hispanic Express, Inc. Supplemental Executive Retirement Plan*
10.3 Hispanic Express, Inc. Executive Deferred Salary and Bonus Plan*
10.4 Employment Agreement dated September 6, 2000 between Hispanic Express,
Inc. and Gary M. Cypres*
10.5 Contribution Agreement dated September 6, 2000 among Central Financial
Acceptance Corporation and Hispanic Express, Inc.*
10.6 Operating Agreement dated September 6, 2000 between Hispanic Express,
Inc. and Banner Central Finance Company*
10.7 Tax Sharing Agreement dated September 6, 2000 among Central Financial
Acceptance Corporation, Hispanic Express, Inc. and Banner Central
Finance Company*
10.8 [Reserved]
10.9 Service Mark License Agreement dated September 6, 2000 among Banner's
Central Electric, Inc. and Hispanic Express, Inc.*
10.10 Indemnification Agreement dated September 6, 2000 between Hispanic
Express, Inc. and certain directors and/or officers*
10.11 Credit Agreement dated as of August 11, 2000 among Central Consumer
Finance Company, the named Lenders and Union Bank of California, N.A. as
Agent*
10.12 Pledge Agreement dated as of August 11, 2000 among Central Financial
Acceptance Corporation and Union Bank of California, N.A. as Agent*
10.13 Guaranty dated as of August 11, 2000 among Central Check Cashing, Inc.,
Central Consumer Company of Nevada, and Union Bank of California, N.A.
as Agent*
</TABLE>
------------
* Previously filed in Registration Statement Form 10 filed on October 11,
2000.
61
<PAGE> 64
<TABLE>
<CAPTION>
<S> <C>
10.14 Security Agreement dated as of August 11, 2000 among Central Consumer
Finance Company, Central Check Cashing, Inc., Central Consumer Company
of Nevada and Union Bank of California, N.A. as Agent*
11 Statement of Computation of Earnings Per Share (this exhibit is omitted
because the information is shown in the financial statements and the
notes thereto)*
21 List of Subsidiaries of Hispanic Express, Inc.*
27 Financial Data Schedule
</TABLE>
------------
* Previously filed in Registration Statement Form 10 filed on October 11,
2000.
62
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
HISPANIC EXPRESS, INC.
By: /s/Gary M. Cypres
-------------------------------------
January 5, 2001 Gary M. Cypres
Chairman of the Board, President
and Chief Executive Officer
63
<PAGE> 66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 67
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, as restated, for the exclusion of the mortgage
business--see Note 3. 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
November 20, 2000
F-2
<PAGE> 68
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- SEPTEMBER 30,
1998* 1999* 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash $ 7,847,000 $ 5,208,000 $ 5,141,000
Restricted cash 1,195,000 - -
Finance receivables, net 60,613,000 54,962,000 47,747,000
Prepaid expenses and other current assets 1,707,000 1,148,000 780,000
Note receivable from affiliate 2,478,000 890,000 1,229,000
Deferred income taxes 1,883,000 1,501,000 1,815,000
Income taxes receivable 1,460,000 1,400,000 1,389,000
Property and equipment, net 6,350,000 8,413,000 8,931,000
Intangible and other assets, net 7,925,000 12,668,000 12,798,000
----------- ----------- -----------
TOTAL ASSETS $91,458,000 $86,190,000 $79,830,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $40,000,000 $40,000,000 $25,100,000
Accrued expenses and other current liabilities 6,405,000 7,347,000 8,762,000
Accounts payable to related party - - 2,593,000
----------- ----------- -----------
TOTAL LIABILITIES 46,405,000 47,347,000 36,455,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Group equity 45,053,000 38,843,000 43,375,000
----------- ----------- -----------
Total stockholders' equity 45,053,000 38,843,000 43,375,000
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $91,458,000 $86,190,000 $79,830,000
=========== =========== ===========
</TABLE>
* Amounts have been restated for certain items more fully described in Note 3 --
Restatement of Financial Information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 69
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $ 10,395,000 $ 9,049,000
Travel finance portfolio 1,337,000 1,218,000 1,163,000 856,000 822,000
------------ ------------ ------------ ------------ ------------
Total interest income 14,393,000 15,010,000 14,747,000 11,251,000 9,871,000
Travel services, net 8,716,000 8,961,000 14,270,000 10,241,000 11,173,000
Other income 6,365,000 7,954,000 10,885,000 8,012,000 7,629,000
------------ ------------ ------------ ------------ ------------
Total revenues 29,474,000 31,925,000 39,902,000 29,504,000 28,673,000
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES
Operating expenses 16,891,000 17,738,000 24,215,000 16,633,000 21,063,000
Provision for credit losses 5,318,000 5,952,000 6,531,000 4,614,000 5,099,000
Interest expense 3,406,000 3,212,000 3,202,000 2,468,000 2,371,000
Depreciation and amortization expense 750,000 1,151,000 1,556,000 1,025,000 1,284,000
------------ ------------ ------------ ------------ ------------
Total costs and expenses 26,365,000 28,053,000 35,504,000 24,740,000 29,817,000
------------ ------------ ------------ ------------ ------------
Income (loss) before provision for income
taxes 3,109,000 3,872,000 4,398,000 4,764,000 (1,144,000)
Provision (benefit) for income taxes 1,217,000 1,549,000 1,759,000 1,908,000 (457,000)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,892,000 $ 2,323,000 $ 2,639,000 $ 2,856,000 $ (687,000)
============ ============ ============ ============ ============
UNAUDITED PRO FORMA NET INCOME PER SHARE: (NOTE 1)
Pro forma net income (loss) per common share (unaudited):
Basic $ 0.37 $ (0.10)
Diluted $ 0.37 $ (0.10)
Pro forma shares used in calculating pro forma
Net income (loss) per common share
(unaudited):
Basic 7,166,000 7,166,000
Diluted 7,166,000 7,166,000
</TABLE>
* Amounts have been restated for certain items more fully described in Note 3 --
Restatement of Financial Information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 70
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
GROUP EQUITY*
------------
<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 3,866,000
Net income for the year ended December 31, 1998 2,323,000
------------
Balance, December 31, 1998 45,053,000
Capital distribution to related party (8,143,000)
Equity adjustment for retirement of treasury stock of predecessor company (706,000)
Net income for the year ended December 31, 1999 2,639,000
------------
Balance, December 31, 1999 38,843,000
Capital contribution from related party (Unaudited) 5,266,000
Equity adjustment for retirement of treasury stock of predecessor company (Unaudited) (47,000)
Net loss for the nine months ended September 30, 2000 (Unaudited) (687,000)
------------
Balance, September 30, 2000 (Unaudited) $ 43,375,000
============
</TABLE>
*Amounts in 1999 and 1998 have been restated for certain items more fully
described in Note 3 -- Restatement of Financial Information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 71
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -----------------------------
1997 1998* 1999* 1999 2000
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (Unaudited)
OPERATING ACTIVITIES:
Net income (loss) $ 1,892,000 $ 2,323,000 $ 2,639,000 $ 2,856,000 $ (687,000)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Loss on disposal of fixed assets - - - - 414,000
Depreciation and amortization 750,000 1,151,000 1,556,000 1,025,000 1,284,000
Provision for credit losses 5,318,000 5,952,000 6,531,000 4,614,000 5,099,000
Deferred income taxes 101,000 1,209,000 382,000 (5,000) (314,000)
Note receivable from affiliate, net (4,205,000) 2,514,000 1,588,000 2,478,000 2,254,000
Changes in assets and liabilities:
Prepaid expenses and other assets 1,254,000 (633,000) 617,000 (361,000) 120,000
Restricted cash (930,000) (265,000) 1,195,000 1,195,000 -
Accrued expenses and other current liabilities (3,438,000) 661,000 942,000 2,383,000 1,415,000
Other intangible assets (1,058,000) 184,000 - - (728,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (316,000) 13,096,000 15,450,000 14,185,000 8,857,000
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract receivables
(originated & acquired) collected, net of
recoveries (9,743,000) (11,189,000) (878,000) 3,135,000 2,116,000
Capital expenditures, net (2,838,000) (1,449,000) (2,920,000) (1,950,000) (1,359,000)
Purchase of leasehold interests and other (150,000) - (5,442,000) (4,372,000) -
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities (12,731,000) (12,638,000) (9,240,000) (3,187,000) 757,000
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt - (850,000) - - -
Repayment of notes payable, net - - - (5,900,000) (14,900,000)
Capital contribution from (distribution to) related
party 12,123,000 3,866,000 (8,143,000) (6,422,000) 5,266,000
Purchase of treasury stock - - (706,000) (706,000) (47,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 12,123,000 3,016,000 (8,849,000) (13,028,000) (9,681,000)
------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (924,000) 2,844,000 (2,639,000) (2,030,000) (67,000)
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 $ 5,817,000 $ 5,141,000
============ ============ ============ ============ ============
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>
*Amounts have been restated for certain items more fully described in Note 3 --
Restatement of Financial Information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 72
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 and is anticipated that it will be consummated
on January 31, 2001. 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 will contribute to Banner Central Finance, its businesses engaged in selling
and financing of automobile insurance, its consumer products receivable
portfolio and its mortgage 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 $25,100,000 for the nine months ended September
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, (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.
During the last six months of 1999, the Company began to
significantly build its infrastructure to support its Internet travel business
and in the first half of 2000 the Company increased its advertising expenditures
for this business. In July 2000, in response to changing
F-7
<PAGE> 73
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
market conditions, the management of the Company made a decision to curtail the
Company's Internet activities, including, reducing staff levels, advertising and
other related costs, and the Company wrote-off approximately $0.2 million in
process software development costs which management decided not to complete, and
recorded severance charges of approximately $0.3 million.
In September 2000, the management of the Company decided to reduce
the number of Kmart locations in which the Company has its cash dispensing
machines and to close 6 check cashing locations which were not performing
satisfactory, and recorded a charge of approximately $0.8 million, representing
the write-off of leasehold improvements, fixed assets and future discounted rent
at these locations. Also, in September 2000, certain of the Company's loan and
travel locations were negatively impacted by a bus strike in the Los Angeles
area which lasted approximately five weeks.
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 September 30, 2000 and for the
nine months ended September 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 of the
results of these interim periods. The results for the nine months ended
September 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") and installment contracts that are originated when customers buy
travel tickets, (referred to herein as the "Travel Finance 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.
The allowance for credit losses is provided for loans based on
previous experience or when events giving rise to the credit losses are
estimated to have occurred. The Company's portfolios are comprised 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
F-8
<PAGE> 74
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
nine months ended September 30, 1999 and 2000 amounted to $389,000 and $362,000,
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.
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:
F-9
<PAGE> 75
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Late charges $ 496,000 $ 249,000 $ 2,142,000 $ 1,582,000 $ 1,658,000
Membership and administrative fees
2,341,000 3,433,000 3,870,000 2,957,000 2,641,000
Insurance products and other 3,528,000 4,272,000 4,873,000 3,473,000 3,330,000
----------- ----------- ----------- ----------- -----------
$ 6,365,000 $ 7,954,000 $10,885,000 $ 8,012,000 $ 7,629,000
=========== =========== =========== =========== ===========
</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.
F-10
<PAGE> 76
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended September 30, 1999 and 2000 amounted
to $974,000 and $1,468,000, 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 and September 30, 2000, such investments were in excess of
insured limits. The Company's small loan business activity is with low-income
customers located primarily in the greater Los Angeles area. A significant
portion of the Company's customers' ability to repay their loans is dependent
upon general economic factors within the geographical area in which the Company
operates. The Company's loans are unsecured and, thereby, the Company's ability
to be repaid is totally dependent upon the general financial strength of the
Company's borrowers. To mitigate a portion of this risk, the Company generally
limits the amount of a loan to a single customer to an amount not to exceed
$1,500.
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
September 30, 2000.
F-11
<PAGE> 77
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 sheets. There were no restricted cash balances at December
31, 1999 and September 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 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. RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the years
ended December 31, 1999 and 1998 to reflect the contribution of the mortgage
business from Central Financial to Banner Central Finance, which was previously
reported in the financial statements of the Company. The previously reported
financial statements of the Company were prepared in accordance with accounting
principles generally accepted in the United States and were restated to reflect
the reclassification of the mortgage business from the Company to Banner Central
Financial. The impact of these adjustments on the Company's financial results as
originally reported is summarized below:
F-12
<PAGE> 78
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1999
---------------------------- ----------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Interest income $15,028,000 $15,010,000 $15,103,000 $14,747,000
Other income 16,915,000 16,915,000 25,154,000 25,155,000
----------- ----------- ----------- -----------
Total revenues $31,943,000 $31,925,000 $40,257,000 $39,902,000
=========== =========== =========== ===========
Net income $ 2,334,000 $ 2,323,000 $ 2,822,000 $ 2,639,000
=========== =========== =========== ===========
Net income per share $ 0.39 $ 0.37
=========== ===========
Retained earnings at
end of year $45,380,000 $45,053,000 $43,780,000 $38,843,000
=========== =========== =========== ===========
</TABLE>
4. 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.
F-13
<PAGE> 79
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FINANCE RECEIVABLES
Finance receivables consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Gross finance receivables:
Small loan portfolio $62,248,000 $56,411,000 $49,147,000
Travel finance portfolio 4,988,000 4,929,000 5,158,000
----------- ----------- -----------
67,236,000 61,340,000 54,305,000
Less:
Deferred interest 877,000 1,114,000 1,180,000
Allowance for credit losses 3,059,000 2,981,000 3,676,000
Deferred administrative, Efectiva membership and 2,169,000 1,865,000 1,365,000
transaction fees and insurance revenues
Credit insurance and reserves for policyholder's
benefits 518,000 418,000 337,000
----------- ----------- -----------
6,623,000 6,378,000 6,558,000
----------- ----------- -----------
Finance receivables, net $60,613,000 $54,962,000 $47,747,000
=========== =========== ===========
</TABLE>
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,
-------------------------- SEPTEMBER 30,
1998 1999 2000
---------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
Small loan portfolio:
Past due 31 days plus $2,649,000 $2,979,000 $3,729,000
---------- ---------- ----------
Travel finance portfolio:
Past due 31 days plus $ 130,000 $ 134,000 $ 164,000
---------- ---------- ----------
</TABLE>
The allowance for credit losses includes the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Allowance for credit losses,
beginning of the year $ 5,795,000 $ 5,787,000 $ 3,059,000 $ 3,059,000 $ 2,981,000
Provision for credit losses 5,318,000 5,952,000 6,531,000 4,614,000 5,099,000
Charge-offs, net of recoveries (5,326,000) (8,680,000) (6,609,000) (4,634,000) (4,404,000)
----------- ----------- ----------- ----------- -----------
Allowance for credit losses,
end of year $ 5,787,000 $ 3,059,000 $ 2,981,000 $ 3,039,000 $ 3,676,000
=========== =========== =========== =========== ===========
</TABLE>
F-14
<PAGE> 80
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT
Property and equipment, net consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Land $ 1,936,000 $ 1,568,000 $ 1,936,000
Construction in progress - 1,937,000 -
Building and improvements 254,000 1,441,000 4,326,000
Furniture, equipment and software 5,225,000 5,271,000 5,053,000
----------- ----------- -----------
7,415,000 10,217,000 11,315,000
Less: accumulated depreciation 1,065,000 1,804,000 2,384,000
----------- ----------- -----------
$ 6,350,000 $ 8,413,000 $ 8,931,000
=========== =========== ===========
</TABLE>
7. INTANGIBLE AND OTHER ASSETS
Intangible and other assets, net consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Goodwill $ 8,483,000 $13,533,000 $13,533,000
Deferred loan costs 764,000 764,000 690,000
Non-compete agreements 8,000 408,000 408,000
Other 3,000 3,000 3,000
----------- ----------- -----------
9,258,000 14,708,000 14,634,000
Less: accumulated amortization 1,333,000 2,040,000 1,836,000
----------- ----------- -----------
$ 7,925,000 $12,668,000 $12,798,000
=========== =========== ===========
</TABLE>
F-15
<PAGE> 81
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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 Wells Fargo Line of
Credit were repaid on June 13, 1997. Borrowings under the Bank of America Line
of Credit and Old Wells 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. Notes payable allocated to the Company was $40,000,000 at December 31,
1998, and 1999. (See Note 1). Central Financial had Letters of Credit
outstanding for various purposes in the amount of $300,000, and $1,800,000 at
December 31, 1998, and 1999, respectively.
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 facility bore interest at a weighted average rate of 8.8%
in 2000. Central Financial had Letters of Credit outstanding for various
purposes in the amount of $550,000 at September 30, 2000. Borrowings under the
Union Bank Line of Credit is limited to 70% of eligible receivable contracts as
defined in the credit agreement. The total amount of available credit under the
facility was limited to $34.0 million at September 30, 2000, of which $25.7
million was outstanding, including letters of credit. 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 September 30, 2000, Central Consumer and its
subsidiaries had total assets of approximately $62 million and stockholders'
equity of approximately $31 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.
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 and
$175,000 and $116,000 for nine months ended September 30, 1999 and 2000,
respectively. These amounts have been allocated to the
F-16
<PAGE> 82
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company and are included in operating expenses in the consolidated statements of
income for the periods presented.
9. 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 (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CURRENTLY PAYABLE:
Federal $ 767,000 $ 259,000 $ 1,114,000 $ 1,468,000 $ (110,000)
State 349,000 81,000 263,000 445,000 (33,000)
----------- ----------- ----------- ----------- -----------
1,116,000 340,000 1,377,000 1,913,000 (143,000)
----------- ----------- ----------- ----------- -----------
DEFERRED:
Federal 88,000 970,000 294,000 (4,000) (241,000)
State 13,000 239,000 88,000 (1,000) (73,000)
----------- ----------- ----------- ----------- -----------
101,000 1,209,000 382,000 (5,000) (314,000)
----------- ----------- ----------- ----------- -----------
Provision for income taxes $ 1,217,000 $ 1,549,000 $ 1,759,000 $ 1,908,000 $ (457,000)
=========== =========== =========== =========== ===========
</TABLE>
A reconciliation of the provision (benefit) for income taxes to the
statutory rate is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Federal income taxes at statutory rate 35.0% 35.0% 35.0% 35.0% (35.0%)
State franchise taxes, net of federal benefit 4.3% 4.5% 4.5% 4.5% (4.5%)
Amortization of goodwill 0.3% 0.3% 0.3% 0.3% (0.3%)
Other -0.5% 0.2% 0.2% 0.3% -
---- ---- ---- ---- ----
39.1% 40.0% 40.0% 40.1% (39.8%)
==== ==== ==== ==== ====
</TABLE>
F-17
<PAGE> 83
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences giving rise to the deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Allowance for credit losses $ 1,377,000 $ 1,244,000 $ 1,351,000
Deferred revenues 942,000 869,000 869,000
Fixed assets (378,000) (713,000) (818,000)
Other (58,000) 101,000 413,000
----------- ----------- -----------
Net deferred tax asset $ 1,883,000 $ 1,501,000 $ 1,815,000
=========== =========== ===========
</TABLE>
10. RELATED PARTY TRANSACTIONS
In connection with its formation, the Company, Central Financial and
Banner Central Finance entered into certain agreements; the Operating Agreement;
and the Tax Sharing 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 $3,289,000 and
$2,410,000 for the nine months ended September 30, 1999 and 2000, respectively.
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
F-18
<PAGE> 84
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In connection with the adoption 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.
For the twelve months ended December 31, 1997 and 1998, the Company
received capital contributions from its parent company of $12,123,000 and
$3,866,000 respectively, which was used to support receivable growth, fund
capital assets, acquire leasehold interests and build cash reserves. For the
twelve months ended December 31, 1999, the Company made a capital distribution
to its parent company of $8,143,000 and for the nine months ended September 30,
2000, the Company received a capital contribution from its parent company of
$5,266,000. The $5,266,000 capital contribution was used primarily to repay
notes payable during the nine months ended September 30, 2000.
11. 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 749,000 shares of Common Stock will be
granted to eligible participants under the 2000 Plan. Upon consummation of the
Plan, which is anticipated to be January, 31, 2001, 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, 351,000 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.
None of the Options which will be granted have been included in the
computation of diluted earnings per share reflected in the Consolidated
Statements of Income. Upon issuance of the Options in future periods earnings
per share may be diluted to the extent that the average market price of the
Company's stock exceeds the Option exercise price.
F-19
<PAGE> 85
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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 nine months ended
September 30, 1999 and 2000 amounted to $51,000 for each period.
13. SEGMENT INFORMATION
The Company has identified three reporting segments in accordance
with SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information", the Consumer Finance Business, Travel Business and Corporate
Overhead. The factors for determining the reportable segments were based on the
distinct nature of their operations. The Consumer Finance Business and Travel
Business 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 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. Corporate Overhead is comprised of unallocated
corporate overhead expenses. 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. Information
about these segments as of and for the nine months ended September 30, 2000 and
1999 and for the years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
CONSUMER CORPORATE
FINANCE TRAVEL OVERHEAD TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
For the Nine Months Ended September 30, 2000 (unaudited)
Interest income $ 9,871,000 $ - $ - $ 9,871,000
Other income
7,629,000 11,173,000 - 18,802,000
------------ ------------ ------------ ------------
Total revenue $ 17,500,000 $ 11,173,000 $ - $ 28,673,000
============ ============ ============ ============
Pre-tax segment earnings (loss) $ 4,156,000 $ (206,000) $ (4,637,000) $ (687,000)
Segment assets $ 66,396,000 $ 13,434,000 $ - $ 79,830,000
For the Nine Months Ended September 30, 1999 (unaudited)
Interest income $ 11,251,000 $ - $ - $ 11,251,000
Other income 8,012,000 10,241,000 - 18,253,000
------------ ------------ ------------ ------------
</TABLE>
F-20
<PAGE> 86
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSUMER CORPORATE
FINANCE TRAVEL OVERHEAD TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 19,263,000 $ 10,241,000 $ - $ 29,504,000
============ ============ ============ ============
Pre-tax segment earnings (loss) $ 7,496,000 $ 2,729,000 $ (5,461,000) $ 4,764,000
Segment assets $ 70,053,000 $ 13,616,000 $ - $ 83,669,000
For the Year Ended December 31, 1999
Interest income $ 14,747,000 $ - $ - $ 14,747,000
Other income 10,885,000 14,270,000 - 25,155,000
------------ ------------ ------------ ------------
Total revenue $ 25,632,000 $ 14,270,000 $ - $ 39,902,000
============ ============ ============ ============
Pre-tax segment earnings (loss) $ 8,549,000 $ 2,868,000 $ (7,019,000) $ 4,398,000
Segment assets $ 73,824,000 $ 12,366,000 $ - $ 86,190,000
</TABLE>
F-21
<PAGE> 87
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSUMER CORPORATE
FINANCE TRAVEL OVERHEAD TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
For the Year Ended December 31, 1998
Interest income $ 15,010,000 $ - $ - $ 15,010,000
Other income 7,954,000 8,961,000 - 16,915,000
------------ ------------ ------------ ------------
Total revenue $ 22,964,000 $ 8,961,000 $ - $ 31,925,000
============ ============ ============ ============
Pre-tax segment earnings (loss) $ 8,856,000 $ 1,596,000 $ (6,580,000) $ 3,872,000
Segment assets $ 82,922,000 $ 8,536,000 $ - $ 91,458,000
For the Year Ended December 31, 1997
Interest income $ 14,393,000 $ - $ - $ 14,393,000
Other income 6,365,000 8,716,000 - 15,081,000
------------ ------------ ------------ ------------
Total revenue $ 20,758,000 $ 8,716,000 $ 29,474,000
============ ============ ============ ============
Pre-tax segment earnings (loss) $ 7,693,000 $ 698,000 $ (5,282,000) $ 3,109,000
Segment assets $ 78,861,000 $ 6,599,000 $ - $ 85,460,000
</TABLE>
14. 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
nine months ended September 30, 1999 and 2000 were $2,267,000 and $3,806,000,
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.
F-22
<PAGE> 88
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Operating Agreement, as described in "Note 9 Related Party
Transactions," provides that, so long as the Financing Agreement is in effect,
the Company will guarantee up to $4 million of bank or similar financing which
Banner Central Finance may borrow. At September 30, 2000, the Company has not
guaranteed any amounts under this agreement.
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.
* * * * * *
F-23
