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UNITED STATE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
BANNER CENTRAL FINANCE COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4821101
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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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PART I ....................................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS............................................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS....................................12
ITEM 3. DESCRIPTION OF PROPERTY...........................................................................16
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................17
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS......................................19
ITEM 6. EXECUTIVE COMPENSATION............................................................................20
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................24
ITEM 8. DESCRIPTION OF SECURITIES.........................................................................28
PART II ..................................................................................................32
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS........32
ITEM 2. LEGAL PROCEEDINGS.................................................................................33
ITEM 3. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS......................................................33
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES...........................................................33
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.........................................................33
PART F/S .................................................................................................35
PART III .................................................................................................50
ITEMS 1 AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS.......................................................50
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
Banner Central Finance Company, or Banner Central Finance, was
incorporated in Delaware as a wholly owned subsidiary of Central Financial
Acceptance Corporation, or Central Financial on September 5, 2000. Central
Financial was formed in April 1996 by Banner Holdings, Inc., or Banner Holdings.
On June 24, 1996, Banner Holdings contributed to Central Financial its
investment in its subsidiaries that operated its small loan automobile sales,
travel and related businesses and its consumer products receivable portfolio.
Banner's Central Electric, Inc., or Banner's Central Electric, an affiliate of
Banner Holdings, generated the consumer products receivable portfolio through
sales of merchandise at Banner's Central Electric's retail stores.
In July 1996, Central Financial's common stock was listed on the
NASDAQ National Market when Central Financial sold 2,127,000 shares of its
common stock constituting 29.2% of its total common outstanding shares in an
initial public offering. On June 1, 1999, Central Financial's common stock was
delisted from the NASDAQ National Market as a result of its inability to achieve
a sufficient market value of public float and now trades on the OTC Bulletin
Board.
In February 1999, West Coast Private Equity Partners, L.P., or
West Coast, the parent company of Banner Holdings, approved a plan to liquidate
Banner Holdings. As a result, West Coast and its coinvestors directly own
5,150,000, or approximately 72%, of Central Financial's 7,166,000 common shares
outstanding.
On September 6, 2000, Central Financial's Board of Directors
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 shareholders of all of the common stock
of its two wholly-owned subsidiaries, one of which is our company. 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 Central Financial's other wholly owned subsidiary, Hispanic Express, Inc., or
Hispanic Express.
On September 29, 2000, stockholders owning a majority of the
outstanding shares of Central Financial's common stock approved the Plan.
The dissolution and liquidation of Central Financial and the
distribution of our common stock of under the Plan is intended to enhance
stockholder value over the long term. Central Financial's Board of Directors
also believes that the implementation of the Plan will
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allow us to concentrate on the businesses of our subsidiaries and will provide
us with greater flexibility in pursuing our business objectives, independent of
Hispanic Express.
In connection with the Plan, and pursuant to this registration
statement on Form 10, we are registering our shares of common stock under the
Securities Exchange Act of 1934, as amended. 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 "BCFC"
if, after the Liquidation Date, at least one market maker submits application to
the OTC Bulletin Board in which it represents that:
- It desires to represent 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.
Except as otherwise expressly noted, this section of this
registration statement is written as if Central Financial had contributed three
of its subsidiaries to us on the earliest date that this section discusses.
These subsidiaries are Central Installment Credit Corporation, Central Financial
Acceptance/Insurance Agency and Central Premium Finance Company. Through these
subsidiaries, we presently have two principal businesses: purchased consumer
receivables and origination and sale of second trust mortgages.
PURCHASED CONSUMER RECEIVABLES
We purchase consumer finance receivables, referred to as the
Consumer Products Portfolio, which our customers generate for the purchase of
high quality brand name consumer products, electronics, appliances, and
furniture sold by Banner's Central Electric, an affiliate of ours. Banner's
Central Electric operates 5 retail stores in the greater Los Angeles area.
Our customers are typically low-income Hispanics, between the
ages of 21 and 45, earn less than $25,000 per year, have little or no savings,
and have limited or short term employment histories. In addition, our customers
typically have no or limited prior credit histories and are generally unable to
secure credit from traditional lending sources.
We base our credit decisions on our assessment of a customer's
ability to repay the obligation. In making a credit decision, in addition to the
size of the obligation, we generally consider a customer's income level, type,
and length of employment, stability of residence, personal references, and prior
credit history with us. We also obtain a credit bureau report and rating, if
available, and seek to confirm other credit-related information. We, however,
are more susceptible to the risk that our customers will not satisfy their
repayment obligations than are less specialized consumer finance companies or
consumer finance companies that have more stringent underwriting criteria.
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We also provide Banner's Central Electric with electronics,
appliances and furniture inventory, which we acquire and hold for them until
sold to our customers.
MORTGAGE BUSINESS
In mid-1998, we introduced a business segment, which originated,
sold and serviced second trust mortgages to Hispanic customers primarily in the
Los Angeles area. We originated and sold second trust mortgages of $2.7 million
in the six months ended June 30, 2000 and $5.2 million in 1999, to Hispanic
Express. Our primary source of income is origination fees, which we earn when a
loan is funded. Historically, we have funded the loans and subsequently sold
them to Hispanic Express.
OTHER BUSINESS ACTIVITY
We also provide financing to consumers for the purchase of
products and services that independent retailers sell. Historically, we have had
relationships with approximately 75 retailers in the greater Los Angeles area.
However, in 1998 and 1999, we phased out of substantially all of these
independent relationships. From 1995 through March 31, 1999, we also financed
the sale of used automobiles primarily sold by Banner's Central Electric. In May
1997, Banner's Central Electric discontinued the sale of used automobiles and
currently we no longer provide financing for this business.
We began to offer financing for the sale of automobile insurance
that we sell as a broker for major automobile insurers. In recent years, the
large automobile insurance companies have started to offer direct financing, and
accordingly, our premium financing activity has declined significantly. We
currently continue to sell automobile insurance to low-income Hispanics and
operate through 3 offices in the greater Los Angeles area.
BUSINESS STRATEGY
Historically, our major business activity has been providing
financing to the low-income Hispanic customers purchasing brand name consumer
products from Banner's Central Electric. In 1997, West Coast, which controls
Banner's Central Electric, made a strategic decision to de-emphasize this and
certain other business lines and concentrate its resources and capital on
building its small loan and travel business, which are now owned and operated by
Hispanic Express. Accordingly, since 1997 Banner's Central Electric's retail
sales have declined significantly with a corresponding decrease in the level of
consumer receivables purchased by us from them.
Our receivables portfolios relating to our financing of
independent retailers and our premium finance business have also experienced
significant declines. We expect these trends to continue in the future and, as a
result, our current portfolio of purchased receivables should continue to
decline, thus providing capital to reinvest in other business opportunities,
including our mortgage business.
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In 1998, we determined that continued growth of the Hispanic
market, particularly in the greater Los Angeles area, would create a business
opportunity to provide mortgage financing for both new homeowners and
refinancing of existing homes, or for small home equity loans generally in the
range of $5,000 to $12,000. In mid-1998, we commenced our mortgage business and
began to provide small second trust mortgages, which we have sold to Hispanic
Express, pursuant to an operating agreement. See "Item 7. Certain Relationships
and Related Transactions - Operating Agreement."
In August 2000, Hispanic Express, through its wholly-owned
subsidiary, Central Consumer Finance Company, entered into a new credit
agreement with a bank group, which limits its ability to finance mortgage
receivables. Accordingly, we have obtained an Option Agreement to reacquire the
mortgage portfolio sold to them and have commenced a business strategy to
initiate second mortgages for independent financial institutions or hold them
for our own account. See "Item 7. Certain Relationships and Related Transactions
- Option Agreement."
COMPANY OPERATIONS
In order to provide cost savings and operating efficiencies, we
entered into an operating agreement with Hispanic Express under which Hispanic
Express provides us with certain services, including, credit applications,
receivable servicing, payment applications, accounting, legal and management
information systems. See "Item 7. Certain Relationships and Related Transactions
- Operating Agreement."
CREDIT PROCEDURES
We have developed uniform guidelines and procedures for
evaluating credit applications. We take credit applications at each of the
Banner's Central Electric stores and then generally transmit them electronically
through our computer system or facsimile machines to our credit processing
facility, where all credit approval and verification is centralized. We also
take credit applications at each of the independent retail locations for which
we provide financing, and generally transmit them to our credit processing
facility via facsimile. We believe that our underwriting policies and procedures
allow us to respond quickly to credit requests. We typically respond to credit
applicants within one hour. We believe that because of our prompt response, many
customers prefer to deal with us instead of our competitors.
Our credit managers and credit approvers make their decisions on
a case by case basis and are influenced by, among other things, whether an
applicant is a new or existing customer. New applicants complete standardized
credit applications which contain information concerning income level,
employment history, stability of residence, driver's license or state
identification card, social security number, capacity to pay and personal
references. We also verify the applicant's employment and residence and
depending on the relevant factors may verify other pertinent information. We
also obtain a credit bureau report and rating, if available, and seek to confirm
other credit-related information. For an established customer, the credit
process currently includes a review of the customer's credit and payment history
with us, and depending on the size of the transaction an updated verification of
employment and residence. Because we offer multiple lines of credit, we review
the aggregate amount that a customer owes.
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In cases where a customer makes a request for a substantial
increase in his or her aggregate outstanding balance, we will obtain a credit
bureau report and will seek to confirm employment. In instances where the
applicant has no or limited credit history, we may require a co-signer with
appropriate credit status to sign the contract and may, in the installment
credit business, also require a down payment. See "Business Considerations and
Certain Factors that May Affect Future Results of Operations and Stock Price -
Credit Risk Associated with Customers; Lack of Collateral."
PAYMENT AND COLLECTIONS
Industry studies estimate that a significant percentage of the
adult population in the United States does not maintain a checking account,
which is a standard prerequisite for obtaining a consumer loan, credit card or
other form of credit from most consumer credit sources. Our customers are
required to make their monthly payments using a payment schedule that we provide
to them. The vast majority of our customers make their payments in cash at our
locations or at our payment facilities in Banner's Central Electric's stores.
For our customers who are paid their wages by check but who do not maintain
checking accounts, we cash such checks at no charge in order to facilitate
account payments.
We consider payments past due if a borrower fails to make any
payment in full on or before its due date, as specified in our receivables
contracts that the customers signs. We currently attempt to contact borrowers
whose payments are not received by the due date within 10 days after such due
date. We contact these borrowers by both letter and telephone. If no payment is
remitted to us after the initial contact, we make additional contacts every
seven days, and, after a loan becomes 31 days delinquent, we generally turn over
the account to our credit collectors. Under our guidelines, we generally charge
off and turn over an account to a collection agency when we determine that the
account is uncollectible, which is typically when the account is 150 days past
due.
FINANCE CONTRACTS
Each of the finance contracts is in Spanish and English and
requires monthly financing payments. State and federal regulations govern many
of the terms, conditions and disclosures in the finance contracts. See
"Regulation." When a qualifying customer with an open account balance increases
the amount outstanding with an additional purchase or loan, the customer
executes a new contract for the new aggregate balance and, with the proceeds,
pays off the original contract.
INSURANCE
We maintain various insurance policies of the type, and in the
amounts, which are usual for our business. We maintain coverage for business
interruptions, including interruptions resulting from computer failure. We
believe that our insurance coverage is adequate.
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MANAGEMENT INFORMATION SYSTEMS
Under the operating agreement with Hispanic Express, we will use
Hispanic Express's management information systems. Hispanic Express has invested
significant resources to develop a proprietary system that integrates all major
aspects of our business. The computer system uses a high-range IBM AS-400 as our
server, which provides on-line, real-time information processing services to
terminals located in each of our locations and in Hispanic Express's centralized
credit-processing facility. The system allows for complete processing of our
- consumer product finance, including application
processing and credit approval;
- acquisition of credit bureau reports, accessing the
payment history of all active accounts;
- preparation of contracts;
- payment posting; and
- all other collection-monitoring activities.
In addition, the system provides customized reports to analyze
each of our portfolios on a daily, weekly and monthly basis. We believe that the
computer system is sufficient to maintain our business lines and portfolios
without the need for a material additional investment in management information
systems. Hispanic Express has adopted procedures designed to minimize the effect
of systems failures and other types of potential problems, including routine
backup and off-site storage of computer tapes, as well as redundancy and
"mirroring" of certain computer processes.
COMPETITION
The installment credit business is highly competitive. Through
our relationship with Banner's Central Electric and other retailers, we compete
with those department stores, discount stores and other retail outlets which
also provide credit to low-income consumers. The largest national and regional
competitors have significantly greater resources than we do. Competition may
arise from new sources having the expertise and resources to enter our markets
either through expansion of operations or acquisitions.
ADVERTISING
We actively advertise primarily in Hispanic television and radio,
and through newspapers and direct mail targeting both our present and former
customers, and potential customers who have used other sources of consumer
credit. We believe that our advertising contributes significantly increases our
ability to compete effectively with other providers of credit.
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EMPLOYEES
At September 30, 2000, we employed a total of 41 full-time
employees. None of our employees are represented by a union or are covered by a
collective bargaining agreement. We believe that our relations with our
employees are good.
REGULATION
GENERAL
Our finance operations are subject to extensive regulation.
Violation of statutes and regulations applicable to us may result in actions for
damages, claims for refunds of payments made, certain fines and penalties,
injunctions against certain practices and the potential forfeiture of rights to
repayment of loans. Changes in state and federal statutes and regulations may
affect us. We, together with industry associations, actively lobby in the states
in which we operate. Although we are not aware of any pending or proposed
legislation that could have a material adverse effect on our business, we cannot
assure that future regulatory changes will not adversely affect our lending
practices, operations, profitability or prospects.
STATE REGULATION
Consumer Product Portfolio. In California, the California Retail
Installment Sales Act, or the "Unruh Act," regulates our consumer product
financing business. The Unruh Act requires us to disclose to our customers,
among other matters,
- the conditions under which we may impose a finance
change;
- the method of determining the balance which is subject
to a finance charge;
- the method used to determine the amount of the finance
charge; and
- the minimum periodic payment required.
In addition, the Unruh Act provides consumer protection against unfair or
deceptive business practices by:
- regulating the contents of retail installment sales
contracts;
- setting forth the respective rights and obligations of
buyers and sellers; and
- regulating the maximum legal finance rate or charge and
limiting other fees on installment credit sales.
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Insurance Premium Finance. The State of California Department of
Financial Institutions regulates our insurance premium finance business. In
general, state law and regulations set forth requirements and procedures for:
- the cancellation of policies and collection of unearned
premiums;
- regulating the form and content of premium finance
agreements;
- limiting the amount of finance, delinquency,
cancellation and other fees we may charge; and
- prescribing notice periods for the cancellation of
policies for nonpayment.
FEDERAL REGULATION
We are subject to extensive federal regulation as well, including
the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit
Reporting Act and the regulations thereunder and the Federal Trade Commission's
Credit Practices Rule. These laws require us to provide full disclosure of the
key terms of each loan to every prospective borrower, prohibit misleading
advertising, protect against discriminatory lending practices and proscribe
unfair credit practices. Among the key disclosure items under the
Truth-in-Lending Act are the terms of repayment, the total finance charge and
the annual rate of finance charge or "Annual Percentage Rate: on each loan. The
Equal Credit Opportunity Act prohibits creditors from discriminating against
loan applicants on the basis of race, color, sex, age or martial status.
Regulation B issued under the Equal Credit Opportunity Act requires creditors to
make certain disclosures regarding consumer rights and advise consumers whose
credit applications are not approved of the reasons for the rejection. The Fair
Credit Reporting Act requires us to provide certain information to consumers
whose credit applications are not approved on the basis of a report obtained
from a consumer-reporting agency. The Credit Practices Rule limits the types of
property a creditor may accept as collateral to secure a consumer loan.
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS AND STOCK PRICE
Discussions of certain matters contained in this Information
Statement may constitute forward-looking statements under Section 21E of the
Exchange Act. These statements may involve risks and uncertainties. These
forward-looking statements relate to, among other things, expectations of the
business environment in which we operate in, projections of future performance,
perceived opportunities in the market and statements regarding our mission and
vision. Our actual results, performance and achievements may differ
significantly from the results, performance or achievements expressed or implied
in such forward-looking statements. The following is a summary of some of the
important factors that could affect our future results of operations and/or our
stock price, and should be considered carefully.
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ABSENCE OF OPERATING HISTORY
Our Company was formed on September 5, 2000 and we do not have an
operating history as a separate stand-alone company. Our success will depend, in
large part, of the ability of our management to implement its business strategy.
ABSENCE OF TRADING MARKET
There is currently no public market for the shares of our common
stock, and we do not know whether a trading market will develop on or after the
date such shares are distributed to you. If we do become a publicly traded
company, the price at which our common stock would trade cannot be predicted.
The price at which our common stock would trade will be determined by the market
place and may be influenced by many factors, including the limited amount of
public float for our common stock, investors perception of our dividend policy
(see "Description of Securities - Dividends") and general economic and market
considerations, particularly in California.
ABSENCE OF DIVIDEND
We do not currently intend to pay regular cash dividends on our
common stock. Our dividend policy will be reviewed from time to time by our
Board of Directors in light of our earnings and financial position and other
business considerations that our Board of Directors considers relevant.
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 that they can repossess
in the event of a borrower's default. At June 30, 2000 and at December 31, 1999,
net finance receivables of our consumer products portfolio, which accounts for
substantially all of our net receivables, had accounts with payments 31 days or
more past due as a percentage of end of period net receivables of 6.4%, and
5.9%, respectively. For the six months ended June 30, 2000 and 1999, and the
twelve months ended December 31, 1999 and 1998, the consumer products portfolio
had net write-offs of $0.8 million, and $1.2 million and $2.5 million and $2.5
million, respectively. We cannot assure that we will
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not experience increases in delinquencies and net write-offs, which would
require additional increases in the provisions for credit losses. For
information concerning our credit quality experience, see "Management's
Discussion and Analysis and Results of Operations - Consumer Products Portfolio
Trend" and "Delinquency Experience and Allowance for Credit Losses."
GENERAL ECONOMIC RISK
The risks associated with our business become more significant in
an economic slowdown or recession. During periods of economic slowdown or
recession we have experienced and may again experience a decreased demand for
our financial products and services and an increase in rates of delinquencies
and the frequency and severity of losses. Our actual rates of delinquencies and
frequency and severity of losses have been in the past and may be in the future
higher under adverse economic conditions than those generally experienced in the
consumer finance industry. Any sustained period of economic slowdown or
recession could materially adversely affect its financial condition and results
of operations. See "Management's Discussion and Analysis and Results of
Operations - Consumer Products Portfolio Trend" and "Delinquency Experience and
Allowance for Credit Losses."
DEPENDENCE ON CALIFORNIA MARKET
Substantially all of our businesses are located, and
substantially all of our revenues are generated in California. To date,
substantially all of our operations have been in Southern California. Therefore,
our performance depends upon economic conditions in California, and in Southern
California in particular, and may be adversely affected by social factors or
natural disasters in California. During the early 1990's, California experienced
adverse economic conditions. A decline in the California economy could have a
material adverse effect on our results of operations and financial condition.
DEPENDENCE OF CONSUMER PRODUCTS PORTFOLIO ON BANNER'S CENTRAL ELECTRIC
Our consumer products portfolio consists of consumer finance
receivables generated from products that Banner's Central Electric sells. The
performance of the consumer products portfolio and the ability to continue this
business line, therefore, depends substantially upon the success of Banner's
Central Electric's stores and its decision and ability to remain in business,
over which we have no control. The consumer products portfolio accounted for
substantially all of our gross receivables portfolio as of June 30, 2000.
SEASONAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We historically experience the highest demand for our financial
products and services between October and December, and experience the lowest
demand for our financial products and services between January and March. These
significant seasonal fluctuations in our business directly impact our operating
results and cash needs. Should we decide to hold the mortgages we originate in
our own account or exercise the option to reacquire the mortgage portfolio we
sold Hispanic Express, we will need to obtain a bank line of credit. There
cannot be
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any assurances that we may be able to obtain bank financing to support our
mortgage business or that we can obtain such financing on terms satisfying to
us.
ABILITY TO EXECUTE OUR BUSINESS STRATEGY
Our financial performance will depend on our ability to
successfully develop new financial products or services, or that, such products
and services when implemented will be successful, or that, we can successfully
increase our mortgage business.
COMPETITION
Each of our businesses operates in highly competitive industries.
We compete against a large number of national and regional firms engaged in such
businesses, many of which have substantially greater resources than we do. We
cannot assure that our present or future competitors will not exert significant
competitive pressures on us that could have a material adverse effect on our
results of operations and financial condition.
IMPACT OF GOVERNMENT REGULATION
Our operations are regulated by federal, state and local
government authorities and are subject to various laws and judicial and
administrative decisions imposing various requirements and restrictions. These
requirements and restrictions include, among other things:
- regulating credit granting activities;
- establishing maximum interest rates and charges;
- requiring disclosures to customers;
- governing secured transactions;
- setting collection repossession and claims handling
procedures; and
- regulating insurance claims practices and procedures,
and other trade practices.
Although we believe that we are in compliance in all material
respects with applicable local, state and federal laws, rules and regulations,
we cannot assure that more restrictive laws, rules and regulations will not be
adopted in the future which may make compliance more difficult or expensive,
restrict our ability to purchase or finance installment sales, further limit or
restrict the amount of interest and other charges imposed in installment sales
originated by us or by third-party retailers, or otherwise materially adversely
affect our business or prospects. See "Business - Regulation."
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DEPENDENCE UPON KEY PERSONNEL
Our success depends substantially on certain members of our
senior management, in particular Mr. Cypres, our Chairman of the Board, Chief
Executive Officer, and Chief Financial Officer. The loss of the services of Mr.
Cypres could materially adversely affect our business and financial condition.
We do not maintain key man life insurance
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
information in our Consolidated Financial Statements and Notes thereto and other
financial data included elsewhere in this Information Statement. Certain
statements under this caption constitute "forward-looking statements" under
Section 21E of the Exchange Act which involve risks and uncertainties. Our
actual results may differ significantly from the results discussed in these
forward-looking statements. Factors that might cause such a difference, include
but are not limited to, credit quality, economic conditions competition in the
geographic and business areas in which we conduct our operations, fluctuations
in interest rates and government regulation. For additional information
concerning these factors see "Business - Business Considerations and Certain
Factors that May Affect Future Results of Operations and Stock Price."
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousand, except per share data)
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1998 1999 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Interest Income $ 9,942 $ 7,466 $ 4,078 $ 3,177
Other income 4,070 2,804 1,497 1,078
Transaction fee from affiliate 933 799 428 -
---------- ---------- ---------- ----------
Total Revenue 14,945 11,069 6,003 4,255
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COSTS AND EXPENSES:
Operating Expenses 8,639 6,713 3,274 2,514
Provision for credit losses 2,862 2,670 1,349 840
---------- ---------- ---------- ----------
Total Costs and Expenses 11,501 9,383 4,623 3,354
---------- ---------- ---------- ----------
Income before taxes 3,444 1,686 1,380 901
Income tax expenses 1,377 674 552 361
---------- ---------- ---------- ----------
Net Income $ 2,067 $ 1,012 $ 828 $ 540
========== ========== ========== ==========
PRO FORMA PER SHARE DATA:
Basic earnings per share $ 0.14 $ 0.08
Diluted earnings per share $ 0.14 $ 0.08
Weighted average number of
common shares outstanding 7,166 7,166
</TABLE>
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CONSUMER PRODUCTS PORTFOLIO TREND
At June 30, 2000, substantially all of our finance receivables
were in our consumer products portfolio.
<TABLE>
<CAPTION>
CONSUMER PRODUCTS PORTFOLIO
(DOLLARS IN THOUSAND, EXCEPT AVERAGE CONTRACT BALANCE)
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1999 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross receivable (at end of period) $ 33,886 $ 27,788 $ 28,622 $ 24,842
Deferred interest (at end of period) 3,333 2,787 2,662 2,420
---------- ---------- ---------- ----------
Net receivable (at end of period) 30,553 25,001 25,960 22,422
Deferred insurance revenues (at end of period) 94 69 81 50
---------- ---------- ---------- ----------
Net carrying value $ 30,459 $ 24,932 $ 25,879 $ 22,372
========== ========== ========== ==========
Average net receivable $ 30,655 $ 26,359 $ 28,169 $ 23,502
Number of contracts (at end of period) 62,897 56,010 55,736 47,557
Average net contract balance $ 496 $ 471 $ 473 $ 471
Total interest income 7,224 6,477 3,448 2,979
Late charge and extension fee income 1,343 1,283 650 564
Provision for credit losses 2,404 2,475 1,248 835
Provision for credit loss as a percentage
of average net receivable (1) 7.8% 9.4% 8.9% 7.1%
Net write-offs 2,541 2,474 1,248 835
Net write-offs as a percentage of average
net receivable (1) 8.3% 9.4% 8.9% 7.1%
Average interest rate on average net
Receivable (1) 23.6% 24.6% 24.5% 25.4%
</TABLE>
(1) Percentages for the six months ended June 30, 1999 and 2000 are annualized.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Total revenue in the six months ended June 30, 2000 decreased to
$4.3 million from $6.0 million in the six months ended June 30, 1999 a decrease
of $1.7 million.
Interest income for the six months ended June 30, 2000 decreased
to $3.2 million from $4.1 million in the six months ended June 30, 1999 a
decrease of $0.9 million. Of this decrease $0.5 million was due to a decrease in
our consumer products portfolio as a result of a decrease level of receivables
purchased from Banner's Central Electric. For the six months ended June 30, 2000
our gross consumer products portfolio averaged $23.5 million compared to
13
<PAGE> 16
$28.1 million in the six months ended June 30, 1999. The remaining decrease of
$0.4 million was primarily attributable to a decrease in interest income earned
on our independent retailer and premium finance portfolios, respectively.
Other income for the six months ended June 30, 2000 declined to
$1.1 million from $1.5 million in the six months ended June 30, 1999, a decrease
of $0.4 million. Other income primarily includes late charges and other fees
charged on the receivables portfolio and the sale of automobile insurance. Of
the decrease approximately $0.1 million was due to a decline in late charges and
other fees primarily reflecting the decrease level of the finance receivables
portfolio and $0.3 million was due to a decrease in the level of automobile
insurance sold. The transaction fee received from Banner's Central Electric was
eliminated effective January 1, 2000.
Operating expenses for the six months ended June 30, 2000
decreased to $2.5 million for $3.3 million in the six months ended June 30,
1999, a decrease of $0.8 million. This decrease was primarily due to a reduction
in salary and overhead expenses corresponding to the decrease in revenues in the
six months ended June 30, 2000. As a percentage of interest and other income
operating expenses were 59.0% and 58.7% in the six months ended June 30, 2000
and 1999, respectively.
The provision for credit losses decreased to $0.8 million in the
six months ended June 30, 2000 compared to $1.3 million in the six months ended
June 30, 1999. This decrease was primarily due to a decrease in the average
receivable portfolio in the six months ended June 30, 2000 compared to the six
months ended June 30, 1999 and decreased delinquencies.
As a result of the foregoing factors, net income in the six
months ended June 30, 2000 decreased to $0.5 million from $0.8 million in the
six months ended June 30, 1999.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenues in the year ended December 31, 1999 decreased to $11.1
million from the $14.9 million in the year ended December 31, 1998, a decrease
of $3.8 million.
Interest income for the year ended December 31, 1999 decrease to
$7.5 million compared to $9.9 million in the year ended December 31, 1998, a
decrease of $2.4 million. Of this decrease $0.8 million was due to a decrease in
interest income earned on our consumer products portfolio as a result of
decreased level of receivables we purchased from Banner's Central Electric. For
the year ended December 31, 1999 our gross consumer products portfolio averaged
$26.4 million compared to $30.1 million in the year ended December 31, 1998. The
remaining decrease was primarily attributable to a $0.8 million and $0.6 million
decrease in interest income earned on our independent retailer and premium
finance portfolios, respectively, reflecting the declining trends in these
portfolios.
Other income for the year ended December 31, 1999 decreased to
$2.8 million from $4.1 million in the year ended December 31, 1998. A decline of
$1.3 million in the income primarily includes late charges and other fees
charged on the receivables portfolio and the sale of
14
<PAGE> 17
automobile insurance. Of the decrease, approximately $0.2 million was due to a
decline in late charges and other fees primarily reflecting the decreased level
of the finance receivables portfolio and $1.1 million due to a decrease in the
level of automobile insurance sold.
Transaction fees from an affiliate decreased to $0.8 million in
the year ended December 31, 1999 compared to $0.9 million in the year ended
December 31, 1998. Banner's Central Electric pays transaction fees to us based
upon the level of receivables we purchased from them. The decline in transaction
fees of $0.1 million reflected the decline in the level of receivables purchased
and a decline in the rate charged on each transaction
Operating expenses for the year ended December 31, 1999 decreased
to $6.7 million from $8.6 million in the year ended December 31, 1998, a
decrease of $1.9 million. This decrease was due to reductions in direct expenses
and corporate overhead reflecting the decreased level of business activity. As a
percentage of revenue, excluding transaction fees, operating expenses were 65.3%
in the year ended December 31, 1999 compared to 61.7% in the year ended December
31, 1998.
The provision for credit losses in the year ended December 31,
1999 was $2.7 million compared to $2.9 million in the year ended December 31,
1998. This decrease was due to a decreasing balance in the receivables
portfolio.
As a result of the foregoing factors, net income in the year
ended December 31, 1999 declined to $1.0 million compared to $2.1 million in the
year ended December 31, 1998, a decrease of $1.1 million.
Our Board of Directors has authorized open-market purchases of up
to 3 million shares of our common stock, subject to applicable law and depending
on market considerations and other considerations that may affect open market
repurchases of such shares pursuant to authorization from time to time. Any
decision to purchase such shares will be based on the price of such shares and
whether we have capital available for such purchase.
LIQUIDITY AND CAPITAL RESOURCES
We primarily finance our operations through the cash flow
generated from operations and the liquidation of our receivables portfolios and
historically from capital contributions from Central Financial. Net cash flow
provided from operations totaled $2.1 million in the six months ended June 30,
2000, while net cash flow used in operations was $0.8 million in the six months
ended June 30, 1999.
Net cash flow used in operations for the year ended December 31,
1999 totaled $1.1 million, while net cash flow provided from operations in the
year ended December 31, 1998 was $5.3 million. During the six months ended June
30, 2000 and the twelve months ended December 31, 1999 and 1998, cash collected
from liquidation of our receivables portfolio was $3.0 million, $7.3 million and
$9.6 million, respectively. These amounts together with our cash flow from
operations and capital contributions permitted us to pay down debt in the
periods presented.
15
<PAGE> 18
We presently do not have a bank line of credit. Pursuant to an
operating agreement with Hispanic Express, Hispanic Express has agreed to
guarantee up to $4 million of bank borrowings to acquire consumer receivables
that we may purchase from Banner's Central Electric. Should we decide to hold
the mortgages we originate or exercise the option to reacquire the mortgages we
sold to Hispanic Express, we will need to obtain a bank line of credit.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk management discussion and the estimated amounts
generated from the analysis that follows are forward-looking statements of
interest rate risk assuming certain adverse market conditions occur. Actual
results in the future may differ materially from these projected results due to
changes in our debt mix and developments in the global financial markets. The
analytical methods we use to assess and mitigate these risks should not be
considered projections of future events or operating performances.
We are exposed to interest rate risk in the form of variable
interest rates on our Line of Credit. For the six months ended June 30, 2000 and
the twelve months ended December 31, 1999, the average interest rate charged on
our previous Line of Credit, which was $28.1 million at June 30, 2000 and $40.0
million at December 31, 1999, was 8.7% and 7.7%, respectively.
For an immediate 1.0% increase in interest rates projected
after-tax earning would decline approximately $0.2 million in 2000 and $0.2
million in 2001. An immediate 1.0% rise in interest rates is a hypothetical rate
scenario, used to estimate risk, and does not currently represent management's
expectations of future market developments.
ITEM 3. DESCRIPTION OF PROPERTY
Our executive and administrative offices occupy 5,000 feet of a
building which is owned by an affiliate of West Coast. We believe that our
executive and administrative offices are adequate for current and future needs.
16
<PAGE> 19
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of September 30, 2000, Central Financial owed 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 shareholders under the
Plan, our directors and executive officers will beneficially own our common
stock in the amounts and percentages shown on the following table:
<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%
Arturo Ochoa(5) ......................................... 5,000 *
William R. Sweet (6) .................................... 3,800 *
Salvatore J. Caltagirone (7) ............................ 2,800 *
All directors and executive officers as a group
(4 persons) (8) ......................................... 5,319,100 72.7%
</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 September 30, 2000.
(2) Except as otherwise note below, each individual named in the table
directly or indirectly has sole voting and investment power with respect
to the shares shown which each such individual beneficially owns.
(3) Shares of our common stock issuable upon exercise of stock options
exercisable within 60 days of September 30, 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 will be held of record as of September
30, 2000 by Banner Holdings 77,500 shares that will be held of record as
of September 30, 2000 directly by Mr. Cypres, 12,500 shares that will be
held of record as of September 30, 2000 by Mr. Cypres' spouse and 12,500
shares that will be 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 is included representing options exercisable within 60
days of September 30, 2000. Of the 5,312,500 shares, Mr. Cypres will
share voting and investment power of 25,000 shares with his spouse and
5,150,000 shares with West Coast.
(5) Consists of 5,000 shares issuable upon exercise of stock options
exercisable within 60 days of September 30, 2000.
(6) Consists of 1,000 shares that will be held of record as of September 30,
2000 directly by Mr. Sweet and 2,800 shares issuable upon exercise of
stock options exercisable within 60 days of September 30, 2000.
(7) Consists of 2,800 shares issuable upon exercise of stock options
exercisable within 60 days of September 30, 2000.
(8) Consists of 91,200 shares issuable upon exercise of stock options
exercisable within 60 days of September 30, 2000.
17
<PAGE> 20
BENEFICIAL STOCK OWNERSHIP OF 5% STOCKHOLDERS AS OF SEPTEMBER 30, 2000
The following table shows, as of September 30, 2000, all persons
or entities that will be "beneficial owners" of more than five percent of our
common stock pursuant to the Plan. This information is based on Schedules 13D
and 13G reports filed with the Securities and Exchange Commission relating to
beneficial ownership of Central Financial's common stock, which will be
liquidated and exchanged for shares of our common stock on a one-for-one basis
on the Liquidation Date. If you wish, you may obtain these reports from the
Securities and Exchange Commission.
<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%
Banner Holdings, Inc.(6)................................. 5,150,000 70.4%
West Coast Private Equity Partners, L.P.(6).............. 5,150,000 70.4%
Wellington Management Company, LLP(7).................... 684,200 9.3%
</TABLE>
(1) See footnote 1 in table included above.
(2) The address for Mr. Cypress, Banner Holdings and West Coast is 5480 East
Ferguson Drive, Commerce, California 90022, and the address for
Wellington Management Company, LLP, or Wellington Management, is 75
State Street, Boston, Massachusetts 02109.
(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 September 30, 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 will be held of record as of September
30, 2000 by Banner Holdings, 77,500 shares that will be held of record
as of September 30, 2000 directly by Mr. Cypres, 12,500 shares that will
be held of record as of September 30, 2000 by Mr. Cypres' spouse and
12,500 shares that will be 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 is included representing options exercisable within 60
days of September 30, 2000. Of the 5,312,500 shares, Mr. Cypress will
share voting and investment power of 25,000 shares with his spouse and
5,150,000 shares with West Coast.
(6) Banner's Central Electric will be the record owner of 5,150,000 shares
as of September 30, 2000. West Coast controls Banner Holdings and will
beneficially own 5,150,000 shares as of September 30, 2000 through its
control of Banner Holdings. Mr. Cypres is Chairman of the Board, Chief
Executive Officer and President of Banner Holdings and managing general
partner of West Coast. He will control our company through West Coast.
(7) 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.
18
<PAGE> 21
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following tables sets forth certain information at September
30, 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, Chief Executive Officer and
Chief Financial Officer
Arturo Ochoa 39 President
Salvatore Caltagirone 57 Director
William R. Sweet 62 Director
</TABLE>
GARY M. CYPRES has been our Chairman of the Board and Chief Financial Officer
since our formation and Chairman of the Board, Chief Executive Officer and
President of Hispanic Express since its formation. Mr. Cypres has been Chairman
of the Board, and Chief Executive Officer of Central Financial since its
formation in 1996, Chairman of the Board of Central since February 1991,
Chairman of the Board and Chief Executive Officer of Central Rents, Inc. since
June 1994 and managing general partner of West Coast since March 1990. Prior to
that, Mr. Cypres was a general partner of SC Partners, a private investment
banking and consulting firm. From 1983 to 1985, Mr. Cypres was Chief Financial
Officer of The Signal Companies. From 1973 to 1983, Mr. Cypres was Senior Vice
President of Finance at Wheelabrator-Frye Inc. Mr. Cypres was a member of the
Board of Trustees and a faculty member of The Amos Tuck School of Business at
Dartmouth College.
It is contemplated that after the distribution or our common stock to Central
Financial's shareholders, Mr. Cypres will spend that portion of his business
time as may be required to oversee our operations and to direct or implement our
business strategies, as contemplated by our operating agreement with Hispanic
Express. Mr. Cypres will continue to spend a portion of his business time as the
managing general partner of West Coast, as Chairman of the Board, Chief
Executive Officer and Chief Financial Officer of Banner's Central Electric, and
as Chairman of the Board and Chief Executive Officer of Central Rents, Inc. See
"Certain Relationships and Related Transactions."
ARTURO OCHOA has been our President since our formation. Since August 1998, Mr.
Ochoa has been President of Central Financial's mortgage business. Prior to
joining Central Financial, Mr. Ochoa was Area Manager and then Regional Vice
President with Home Savings of America. From 1983 to 1992 he served as a
District Manager with Transamerica Financial Services. Mr. Ochoa graduated from
the University of Southern California, School of Business.
SALVATORE J. CALTAGIRONE has been one of our directors since our formation and
director of Central Financial since September 1997. Mr. Caltagirone has been
retired since October 1994.
19
<PAGE> 22
From the fall of 1990 to October 1994, he was an employee of G.M. Cypres &
Company. From March 1987 to June 1990, he was employed as the Managing Director
of Henley Group.
WILLIAM R. SWEET has been one of our directors of the since our formation and
director of Central Financial since September 1997. In July 1996, Mr. Sweet
retired from his position of Executive Vice President -- Wholesale Banking at
Union Bank of California, N.A., a position he had held since July 1985. Mr.
Sweet currently serves as a trustee of CNI Charter Funds.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee
and an Audit Committee. The Compensation Committee consists of Mr. Caltagirone
and Mr. Sweet and will have the authority to determine compensation for our
executive officers and to administer our 2000 Stock Option Plan. The Audit
Committee consists of Mr. Caltagirone and Mr. Sweet, who have the authority to
make recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the plans and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range, of the audit and non-audit fees and
review the adequacy of our internal accounting controls.
ITEM 6. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table summarizes the compensation for the year
ended December 31, 1999 of our Chief Executive Officer and our other executive
officer whose compensation exceeded $100,000 for the year ended December 31,
1999.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS
-------------------------------------- ----------- --------- --------------
<S> <C> <C>
Gary M. Cypres (2) $ 25,000 $ -- --
Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer
Arturo Ochoa (3) $ 140,000 $ 20,000 --
President
</TABLE>
(1) Certain of our executive officers receive benefits in addition to salary
and cash bonuses. The aggregate amount of such benefits, do not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus of
such Named Executive.
20
<PAGE> 23
(2) Mr. Cypres became an executive officer of our company upon our
formation. In 1999, $25,000 of Mr. Cypres's total compensation paid by
Central Financial was allocated to our company. Concurrent with the
distribution of our common stock to Central Financial's shareholders,
Mr. Cypres will receive a yearly compensation of $75,000.
(3) Mr. Ochoa became an executive officer of our company upon our formation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We established a Compensation Committee, which consists of Mr.
Caltagirone and Mr. Sweet. Prior to the establishment of the Compensation
Committee, decisions concerning the compensation of executive officers were made
by the Board of Directors of Central Financial. None of our executive officers
currently serves as a director or member of the Compensation Committee of
another entity or of any other committee of the Board of Directors of another
entity performing similar functions. See "Certain Relationships."
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 the
shareholders of Central Financial, Central Financial will terminate its Stock
Option Plan. Our board of Directors and shareholder have approved the Banner
Central Finance Company 2000 Stock Option Plan, or the 2000 Plan. The 2000 Plan
provides that it is to 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 421,000 shares of common stock will be granted to
eligible participants under the 2000 Plan effective upon the closing of the
Distribution, including options to certain executive officers as set forth
below. Options granted pursuant to the 2000 Plan would vest over two different
time periods. Options granted which equal the number of Options granted to
executive officers and employees under the Central Financial Stock Option Plan
will vest as they would have been vested under the Central Financial Stock
Option Plan at the time of distribution, except for those officers and
21
<PAGE> 24
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, 679,000 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, reverse split,
recapitalized, converted, exchanged, reclassified or in any way substituted.
Subject to the terms of the 2000 Plan, and in the event of a recapitalization,
merger, consolidation, rights offering, separation, reorganization or
liquidation, or any other change in our corporate structure or outstanding
shares, the Option Committee may make such equitable adjustments to the number
and class of shares available under the 2000 Plan or to any outstanding options
as it shall deem appropriate to prevent dilution or enlargement of rights. The
maximum term of any option granted pursuant to the 2000 Plan is ten years. In
general, shares subject to options granted under the 2000 Plan which expire,
terminate or are canceled without having been exercised in full become available
again for options grants.
The class of eligible persons under the 2000 Plan will consist of
directors and employees of, and consultants to, us or a parent or subsidiary of
us, as determined by the Option Committee, except that nonemployee 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 nonemployee 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 and the rate of exercise
shall be at least twenty percent per year over five years. Additionally, options
granted under the 2000 Plan will not be ISOs to the extent that aggregate fair
market value of the shares with respect to which ISOs under the 2000 Plan (or
under any other plan maintained by us or a parent or subsidiary of ours) first
become exercisable
22
<PAGE> 25
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 nonemployee director's options)
are exercisable by the holder thereof subject to terms fixed by the Option
Committee. However, no option can be exercised until at least six months after
the date of grant.
Notwithstanding the above, an option will be exercisable
immediately upon the happening of any of the following (but in no event during
the six-month period following the date of grant or subsequent to the expiration
of the term of an option): (1) the holder's retirement on or after attainment of
age 65; (2) the holder's disability or death; (3) a "change of control" (as
defined in the 2000 Plan) of Banner Central Finance while the holder is in the
employ or service of Banner Finance Company; or (4) the occurrence of such
special circumstances or events as the Option Committee determines merits
special consideration, except with respect to nonemployee directors' options, by
such other method as the Option Committee may permit from time to time.
If an option holder terminates employment with us or service as
one of our directors or as our consultant while holing an unexercised option,
the option will terminate 30 days after such termination of employment or
service unless the option holder exercises the option within such 30-day period.
However, all options held by an option holder will terminate immediately if the
termination is a result of a violation of such holder's duties. If cessation of
employment or service is due to retirement on or after attainment of age 65,
disability or death, the option holder or such holder's successor-in-interest,
as the 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
Arturo Ochoa............................... 50,000
William Sweet.............................. 18,000
Salvatore Caltagirone...................... 18,000
</TABLE>
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<PAGE> 26
COMPENSATION OF THE BOARD OF DIRECTORS
We intend to pay to our Board of Directors who are not also our
employees, or the nonemployee directors, an annual fee of $5,000. Members of the
Board of Directors who are our employees will not be paid any Directors' fees.
In addition, we may reimburse members of the Board of Directors for expenses
incurred in connection with their activities on our behalf. Nonemployee
directors will also each receive options to purchase 18,000 shares of common
stock at an exercise price to be determined by the Board of Directors under the
2000 Stock Option Plan. All options granted to the nonemployee directors will be
40% vested with remaining balance to vest in equal annual installments over 3
years beginning on the date of grant, subject to continued service on the Board
of Directors; however, no option can be exercised until at least six months
after the date of grant. We will enter into agreements with all directors
pursuant to which we will agree to indemnify them against certain claims arising
out of their services as directors. Directors are also entitled to the
protection of certain indemnification provisions in our Certificate of
Incorporation and Bylaws. See "Compensation Pursuant to Plans and Arrangements -
Stock Option Plan" and "- Indemnification Arrangements."
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Plan, Central Financial, Hispanic Express,
our company and Central Rents, Inc. have entered into various agreements for the
purpose of defining the ongoing relationships among them. Since Central
Financial currently owns both Hispanic Express and our company, these agreements
are not the result of arm's-length negotiations. We believe, however, that these
agreements are at least as favorable to us as those that could have been
obtained from unaffiliated third parties. The following is a summary of the
material terms of the agreements. See Notes 1 and 9 to 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 and Hispanic Express. The
Contribution Agreement covers the following matters:
Contribution of Central Financial Subsidiaries. The Contribution
Agreement provides for the contribution of all of the assets and businesses of
Central Financial to us and to Hispanic Express. Specifically:
- Central Financial contributed to Hispanic Express all of
the issued and outstanding capital stock of Central
Consumer Finance Company, Centravel, Inc. and BCE
Properties I, Inc. Central Consumer Finance Company has
four wholly-owned subsidiaries, namely, Central Check
Cashing, Inc., Central Financial Acceptance Corporation
Accident & Health Reinsurance, Limited, Central Finance
Reinsurance, Ltd. and Central Consumer Company of
Nevada; and
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<PAGE> 27
- Central Financial contributed to our company all
of the issued and outstanding capital stock of
Central Installment Credit Corporation, Central
Financial Acceptance/Insurance Agency and
Central Premium Finance Company.
Contribution of Additional Property. The Contribution Agreement
provides for the contribution by Central Financial of additional property from
time to time, prior to or upon its dissolution and liquidation, if Central
Financial should choose to do so.
FINANCING AGREEMENT
We have entered into an agreement with Banner's Central Electric,
referred to as the Financing Agreement, pursuant to which Banner's Central
Electric granted us the exclusive right, at our option, to purchase without
recourse consumer finance receivables originated by Banner's Central Electric
for sales of merchandise at Banner's Central Electric stores in operation on the
date of the Financing Agreement and for all stores which Banner's Central
Electric may determine to open in the future during the term of the Financing
Agreement. We are not obligated to provide financing to any particular Banner's
Central Electric customers, or to offer financing at any Banner's Central
Electric location or locations. As part of this agreement, we have agreed to
provide Banner's Central Electric with up to $6 million of inventory or
inventory financing as long as the Financing Agreement remains in effect and
Banner's Central Electric has agreed to provide us, at no charge, an amount of
floor space at Banner's Central Electric's stores as we may from time to time
request. The Financing Agreement has a term of 10 years. Either of us may
terminate the Financing Agreement at any time upon one-year's prior written
notice to the other party.
OPERATING AGREEMENT
We have entered into an agreement with Hispanic Express, 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 Hispanic
Express, the Operating Agreement provides that we and our subsidiaries and
Hispanic Express and its subsidiaries will not, without prior written consent of
each other, directly or indirectly, engage in or enter any business which the
other is currently engaged in.
Management and Other Services. The Operating Agreement provides
that Hispanic Express and its subsidiaries are obligated to provide to us and
our subsidiaries and we and our 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. We will pay Hispanic Express its actual cost of providing
services to us. If such services involve an allocation of expenses, Hispanic
Express shall determine the allocation on the basis of the percentage
utilization of such service or its management's best estimate thereof.
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<PAGE> 28
Employee Benefits. The Operating Agreement provides that both we
and Hispanic Express 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 Hispanic Express 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 Hispanic Express of
individuals who were employees of Central Financial and the subsidiaries prior
to the distribution of our common stock to Central Financial's shareholders 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.
Guaranty of Our Debt. The Operating Agreement provides that so
long as the Financing Agreement between our company and Banner's Central
Electric is in effect, Hispanic Express will guarantee up to $4 million of bank
or similar financing, which we 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 a Central
Financial and Hispanic Express, 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
Hispanic Express 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 Hispanic Express were included in
Central Financial's consolidated federal and state income tax returns, we and
Hispanic Express 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 Hispanic Express were
so included in Central Financial's consolidated federal income tax returns, we
and Hispanic Express 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 our company are required to
be included in Central Financial's consolidated federal income tax returns.
OPTION AGREEMENT
We have entered into an option agreement with Hispanic Express,
referred to as the Option Agreement, pursuant to which Hispanic Express granted
us an option to reacquire
26
<PAGE> 29
mortgages that we sold to Hispanic Express. The exercise price of the option
under the Option Agreement, at our option, may be in the form of cash or an
interest-bearing promissory note. The Option Agreement has a term of two years.
SERVICE MARK LICENSE
We have entered into a Service Mark license, referred to as the
Service Mark License, with Banner's Central Electric, Hispanic Express and
Central Rents, Inc., an affiliate of Central Financial. Under the Service Mark
License, Banner's Central Electric granted to us, Hispanic Express and Central
Rents, Inc. and each of our respective subsidiaries, whether such subsidiaries
exist now or come into existence at a later time, the right to license the
federally registered trademark "CFAC." The Service Mark License is non-exclusive
and has an initial term of one year. The Service Mark License 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 at any time if there is a change in
control of our company, Hispanic Express or Central Rents, Inc.
OTHER TRANSACTIONS WITH AFFILIATES
After completion of the distribution of our common stock to
Central Financial's shareholders, 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 Hispanic Express, 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 shareholders of Central Financial.
Any such agreements, arrangements and transactions will be determined through
negotiations between us and Hispanic Express 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 Chief Financial, and is the Chairman of the Board, Chief Executive Officer
and President of Hispanic Express and Chairman of the Board of Banner's Central
Electric. West Coast, of which Mr. Cypres is the managing general partner,
controls our company. West Coast and Mr. Cypres may have conflicts of interest
with respect to transactions concerning us and our affiliates. Additionally,
West Coast controls other companies, including us, Hispanic Express 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.
27
<PAGE> 30
Prior to the distribution of our common stock to Central
Financial's shareholders, Mr. Cypres rendered services to us through an
employment agreement with Central Financial. Effective as of September 6, 2000,
Mr. Cypres is employed by our company and will receive compensation at the rate
of $75,000 per year. Mr. Cypres will act as Chairman of the Board, Chief
Executive Officer and Chief Financial Officer. In such capacities, Mr. Cypres
will spend that portion of his business time as is required to oversee our
operations and to formulate and direct the implementation of our business
strategies. Mr. Cypress will continue to spend a portion of his business time as
the managing general partner of West Coast, as Chairman of the Board, Chief
Executive Officer and President of Hispanic Express, and as Chairman of the
Board of Banner's Central Electric. See "Management" and "Description of
Securities."
ITEM 8. DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 10,000,000 shares of
common stock, $.01 par value.
As of the Liquidation Date, we will have 7,166,000 shares of
common stock issued and outstanding and held by approximately six shareholders
of record. All shares of common stock to be issued in connection with the
distribution of our common stock to Central Financial's shareholders 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.
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<PAGE> 31
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 our current Board of Directors or management more difficult. These
provisions include:
Limitation of Liability. Our certificate of incorporation
eliminate the personal liability of our directors to us and our stockholders to
the fullest extent permitted by the Delaware General Corporation Law; 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 Delaware General Corporation
Law; or
- for any transaction from which the director derived any
improper personal benefit.
Our bylaws authorize us to provide indemnification to our
directors and officers if they are made party to litigation by reason that such
person was acting reasonably on our behalf and in good faith. These provisions
may reduce the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care.
Calling Special Meeting and Action by Written Consent. Special
meetings of our stockholders may be called only by our Board of Directors. This
may make it more difficult to change the composition of our board of directors
or to propose a transaction which could result in a change in control.
No Cumulative Voting. Our certificate of incorporation does not
provide for cumulative voting for any purpose. This ensures that the holder or
holders of a majority of our common shares entitled to 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 Delaware General Corporation Law, 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
29
<PAGE> 32
stockholder," namely, any entity or person beneficially owning 15% or more of
our outstanding voting stock and any entity or person affiliated with such an
entity or person, for three years following the time that stockholder became an
interested stockholder, unless;
- prior to such date our Board of Directors approved
either the business combination or the transaction which
resulted in the stockholder becoming an interested
stockholder;
- upon consummation of the transaction which resulted in
the stockholder becoming an interested stockholder owned
at least 85% of our voting stock outstanding at the time
the transaction commenced (excluding for the purposed of
determining the number of shares outstanding those
shares owned by (x) persons who are directors and also
officers and (y) employee stock plans in which employee
participants do not have the right to determine
confidentially whether shares held subject to the plans
will be tendered in a tender or exchange offer); or
- on or subsequent to such date the business combination
is approved by the Board of Directors and of at least
66-2/3% of the outstanding voting stock which is not
owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S.
Stock Transfer Corporation.
EFFECT OF QUASI-CALIFORNIA CORPORATION LAW
Section 2115 of the California General Corporation Law, or the
California General Corporation Law, provides that quasi-California corporations
will be subject to certain substantive provisions in the California General
Corporation Law 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.
30
<PAGE> 33
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.
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<PAGE> 34
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER 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 "BCFC" if, after the Liquidation Date,
at least one market maker submits application to the OTC Bulletin Board in which
it represents that:
- it desires to represent 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 held by approximately six
shareholders of record. In addition, approximately 421,000 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 shareholders 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
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<PAGE> 35
operations, contractual limitations, legal restrictions and any other factors
our Board of Directors deems relevant.
ITEM 2. LEGAL PROCEEDINGS
We are involved in certain legal proceeding arising in the normal
course of business. We do not believe the outcome of these matters will have a
material effect on us.
ITEM 3. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On September 5, 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 Central Installment Credit Corporation, Central Financial
Acceptance/Insurance Agency and Central Premium Finance Company.
There were no underwriters employed in connection with any of the
transactions set forth in this Item 15.
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 5. 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 suite or proceeding. Such persons will be indemnified to
the fullest extent now or hereafter permitted by the Delaware General
Corporation Law. The Indemnification Agreements also provide for the advancement
of certain expenses to such directors and officers in connection with any such
suite or proceeding.
DELAWARE CORPORATE LAW, CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation eliminate the personal liability
of our directors to us and our stockholders to the fullest extent permitted by
the Delaware General Corporation Law; provided, however, that directors shall be
liable to the extent provided by applicable law:
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<PAGE> 36
- 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 Delaware General Corporation
Law; 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.
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<PAGE> 37
PART F/S
35
<PAGE> 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Banner Central Finance Company:
We have audited the accompanying consolidated balance sheet of Banner Central
Finance Company, a Delaware corporation, and subsidiaries, (the "Company") as of
December 31, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Banner Central Finance Company
as of December 31, 1999, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
September 29, 2000
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<PAGE> 39
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 72,000 $ 69,000
Finance receivables, net 25,294,000 21,414,000
Prepaid expenses and other current assets 99,000 2,000
Inventory 4,893,000 4,450,000
Deferred income taxes 560,000 563,000
Property and equipment, net 235,000 226,000
Intangible and other assets, net 693,000 674,000
------------ ------------
TOTAL ASSETS $ 31,846,000 $ 27,398,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 1,800,000 $ --
Accounts payable and accrued expenses 554,000 664,000
------------ ------------
Total liabilities 2,354,000 664,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Group equity 29,492,000 26,734,000
------------ ------------
Total stockholders' equity 29,492,000 26,734,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,846,000 $ 27,398,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE> 40
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1998 1999 1999 2000
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 9,942,000 $ 7,466,000 $ 4,078,000 $ 3,177,000
Other income 5,003,000 3,603,000 1,925,000 1,078,000
----------- ----------- ----------- -----------
Total revenues 14,945,000 11,069,000 6,003,000 4,255,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Operating expenses 8,639,000 6,713,000 3,274,000 2,514,000
Provision for credit losses 2,862,000 2,670,000 1,349,000 840,000
----------- ----------- ----------- -----------
Total costs and expenses 11,501,000 9,383,000 4,623,000 3,354,000
----------- ----------- ----------- -----------
Income before provision for income taxes 3,444,000 1,686,000 1,380,000 901,000
Provision for income taxes 1,377,000 674,000 552,000 361,000
----------- ----------- ----------- -----------
Net income $ 2,067,000 $ 1,012,000 $ 828,000 $ 540,000
=========== =========== =========== ===========
UNAUDITED PRO FORMA DATA: (NOTE 1)
Pro forma net income per common share
(Unaudited):
Basic $ 0.14 $ 0.08
Diluted $ 0.14 $ 0.08
Pro forma shares used in calculating pro
forma net income per common share
(Unaudited):
Basic 7,166,000 7,166,000
Diluted 7,166,000 7,166,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 41
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
------------
<S> <C>
Balance, December 31, 1997 $ 26,879,000
Capital distribution to related party (4,182,000)
Net income for the year ended December 31, 1998 2,067,000
------------
Balance, December 31, 1998 24,764,000
Capital contribution from related party 3,716,000
Net income for the year ended December 31, 1999 1,012,000
------------
Balance, December 31, 1999 29,492,000
Capital distribution to related party (Unaudited) (3,298,000)
Net income for the six months ended June 30, 2000 (Unaudited) 540,000
------------
Balance, June 30, 2000 (Unaudited) $ 26,734,000
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE> 42
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1998 1999 1999 2000
------------ ------------ ------------ ------------
CASH FLOWS FROM (Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 2,067,000 $ 1,012,000 $ 828,000 $ 540,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 103,000 180,000 53,000 39,000
Provision for credit losses 2,862,000 2,670,000 1,349,000 840,000
Deferred income taxes 194,000 (1,000) 5,000 (3,000)
Changes in assets and liabilities:
Prepaid expenses and other current assets 318,000 (99,000) (13,000) 97,000
Inventory -- (4,893,000) (3,053,000) 443,000
Accounts payable and accrued expenses (256,000) (2,000) 26,000 110,000
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities 5,288,000 (1,133,000) (805,000) 2,066,000
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract receivables
(originated and acquired) collected, net of recoveries 9,588,000 7,289,000 6,049,000 3,040,000
Capital expenditures, net (37,000) (48,000) (61,000) (11,000)
------------ ------------ ------------ ------------
Net cash provided by investing activities 9,551,000 7,241,000 5,988,000 3,029,000
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable, net (10,000,000) (10,200,000) (12,000,000) (1,800,000)
Capital (distribution to) contribution from
related party (4,182,000) 3,716,000 6,656,000 (3,298,000)
------------ ------------ ------------ ------------
Net cash used in financing activities (14,182,000) (6,484,000) (5,344,000) (5,098,000)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 657,000 (376,000) (161,000) (3,000)
CASH, BEGINNING OF PERIOD (209,000) 448,000 448,000 72,000
------------ ------------ ------------ ------------
CASH, END OF PERIOD $ 448,000 $ 72,000 $ 287,000 $ 69,000
============ ============ ============ ============
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 656,000 $ 144,000 $ 85,000 $ --
INCOME TAXES $ 908,000 $ 825,000 $ 244,000 $ 9,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE> 43
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation - Banner Central Finance Company ("Banner
Central Finance" or the "Company") was formed in September 2000. On September 6,
2000 the Board of Directors of Central Financial Acceptance Corporation
("Central Financial") approved a Plan of Complete Dissolution, Liquidation and
Distribution (the "Plan") under which Central Financial's subsidiaries have been
reorganized into two public companies, Hispanic Express, Inc. ("Hispanic
Express") and Banner Central Finance. The Plan was approved by the stockholders
of Central Financial on September 29, 2000. The Plan requires Central Financial
to distribute to Central Financial's stockholders 100% of the outstanding Common
Stock of Hispanic Express and Banner Central Finance. Pursuant to the Plan,
Central Financial will contribute to Hispanic Express its investment
subsidiaries, which are engaged in the small loan, travel finance and travel
services businesses and the receivable portion of its mortgage business and will
contribute to Banner Central Finance, its businesses engaged in selling and
financing of automobile insurance, its consumer products receivable portfolio
and its mortgage origination business.
In addition, pursuant to the Plan, Hispanic Express and Banner
Central Finance have entered into certain agreements for the purpose of defining
the ongoing relationship among them (See Note 6). The transaction and agreements
entered into contain provisions for the allocations of certain costs and
expenses. Management of Banner Central Finance believes that such agreements
provide for reasonable allocation of costs and expenses between the parties.
The formation of Banner Central Finance has been accounted for at
historical costs in a manner similar to a pooling of interest. The accompanying
consolidated financial statements reflect the combined operations of Banner
Central Finance and its subsidiaries, as if they had been consolidated at the
beginning of the periods presented. For accounting purposes, Banner Central
Finance has been allocated $1,800,000 of notes payable for the year ended
December 31, 1999 (See Note 4).
Unaudited pro forma net income per share is based on the number
of common shares issued by the Company pursuant to the Plan that are assumed to
be outstanding as of January 1, 1999.
Nature of Operations - The Company (1) purchases and services
consumer finance receivables generated by the Company's customers for purchases
of high quality brand name consumer products, appliances and furniture sold by
Banner's Central Electric, Inc. ("Central," an affiliated company) and by
independent retailers; (2) provides automobile insurance products and insurance
premium financing to its customers; and (3) originates and sells second trust
mortgages to Hispanic Express. The Company's business is focused in Southern
California and the Company experiences the highest demand for its financial
products and services between October and December.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation - The accompanying consolidated
financial statements include the accounts of Banner Central Finance and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Interim Consolidated Financial Information (Unaudited) - The
interim consolidated financial statements as of June 30, 2000 and for the six
months ended June 30, 2000 and 1999 and related footnote information are
unaudited and have been prepared on the same basis as the audited consolidated
financial statements. In the opinion of management, the interim unaudited
consolidated financial statements include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair
41
<PAGE> 44
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
presentation of these interim periods. The results for the six months ended June
30, 2000 are not necessarily indicative of the operating results to be expected
for the entire year.
Finance Receivables - Finance receivables include installment
contracts that are purchased from Central, (referred to herein as the "Consumer
Product Portfolio"), installment contracts that are originated when customers
buy used cars, installment contracts purchased from unaffiliated third party
retailers that sell products or services and receivables that arise from
automobile insurance premium contracts, (collectively, referred to herein as the
"Other Portfolio"). The annual percentage rate varies depending on the length of
the contract and the amount of administrative fees. The contracts provide for
scheduled monthly payments and mature generally from 1 to 24 months in the
Consumer Product Portfolio, and from 8 to 60 months in the Other Portfolio.
Certain direct loan origination costs are capitalized and
recognized into expense over the life of the related loan using a method that
approximates the interest method.
The allowance for credit losses is provided for following the
origination of the loans based on pervious experience or when the events giving
rise to credit losses are estimated to have occurred. The Company's portfolios
comprise generally of smaller-balance, homogeneous loans that are evaluated
collectively to determine an appropriate allowance for credit losses. The
allowance for credit losses is maintained at a level considered adequate by
management to cover losses in the existing portfolios. Collection of past due
accounts is pursued by the Company, and when the characteristics of an
individual account indicates that collection is unlikely, the account is charged
off and turned over to a collection agency. Accounts are generally charged off
when they are between 91 and 150 days past due.
Allowance for credit losses is increased by charges to the
provision for credit losses and decreased by charge-offs, net of recoveries.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
and current economic conditions. The Company's customers are typically between
the ages of 21 and 45 and earn less than $25,000 per year, have little or no
savings and limited short-term employment histories. In addition, the Company's
customers typically have no prior credit histories and are unable to secure
credit from traditional lending sources. The Company makes its credit decisions
primarily on its assessment of a customer's ability to repay the obligation. In
making a credit decision, in addition to the size of the obligation, the Company
generally considers a customer's income level, type and length of employment,
stability of residence, personal references and prior credit history with the
Company. As a result, the Company is more susceptible to the risk that its
customers will not satisfy their repayment obligations than are less specialized
consumer lending companies or consumer finance companies that have more
stringent underwriting criteria. Because the Company relies on the
creditworthiness of its customers for repayment and does not rely on collateral
securing the debt, the Company experiences actual rates of losses higher than
lenders who have collateral which they can repossess in the event of a
borrower's default.
Recoveries on charge-offs are recognized as an addition to the
allowance for credit losses on the cash basis of accounting and at the time the
payment is received. Expenses related to recoveries are included in operating
expenses. Recoveries for the six months ended June 30, 2000 and June 30, 1999,
and the years ended December 31, 1999, and 1998, amounted to $377,000, and
$415,000, and $848,000 and $961,000, respectively.
Deferred insurance revenue arises from the deferral of the
recognition of revenue from certain credit insurance contracts. Insurance
premium revenue is recognized over the life of the related contract using a
method that approximates the interest method.
42
<PAGE> 45
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Inventories - The Company purchases consumer product inventory
which it holds under a consignment arrangement until sold by Central.
Inventories are stated at the lower of cost or market. Cost is determined by the
average cost method.
Property and Equipment - Property and equipment are carried at
cost. Long-lived property is reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of such an asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long Lived Assets." If the
carrying amount of the asset exceeds the estimated undiscounted future cash
flows to be generated by the asset, an impairment loss would be recorded to
reduce the asset's carrying value to its estimated fair value.
Depreciation and amortization are computed primarily using the
straight-line method over the estimated lives of the assets, as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture, equipment and software................................... 5 to 10 years
Leasehold improvements.............................................. Life of lease
</TABLE>
Intangible Assets - Intangible assets primarily arose in
connection with the Company's acquisition of the net assets of an automobile
insurance business during 1996. The excess of the purchase price over the fair
value of net assets acquired is being amortized using the straight-line method
over 30 years. The recoverability of the excess of the purchase price over the
fair value of net assets acquired is analyzed annually based on undiscounted
future cash flows. If the carrying value of the intangible asset exceeds the
estimated undiscounted future cash flows, an impairment loss would be recorded
to reduce the asset's carrying value to its estimated fair value. No impairment
loss has been recorded to date.
Income Recognition - Interest income on the Consumer Product
Portfolio is deferred (recorded as an off-set to finance receivables - See Note
3) and recognized over the lives of the contracts using a method that
approximates the interest method. Interest income on the Other Portfolio is
deferred and recognized using the interest method. Transaction fees on contracts
purchased from a related party are deferred and recognized using the interest
method. Commissions income and broker fee income from the sale of automobile
insurance products is deferred and recognized over the terms of the contracts,
typically 12 months.
Other income consists of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1998 1999 1999 2000
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Other Income
Late and extension charges $1,585,000 $1,408,000 $ 737,000 $ 595,000
Insurance products and other 3,418,000 2,195,000 1,188,000 483,000
---------- ---------- ---------- ----------
$5,003,000 $3,603,000 $1,925,000 $1,078,000
========== ========== ========== ==========
</TABLE>
Income Taxes - The Company, Central Financial and Hispanic
Express have entered into a Tax-Sharing Agreement (See Note 6). The Company
follows SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, income
tax expense includes income taxes payable for the current year and the change in
deferred income tax assets and liabilities for the future tax consequences of
events that
43
<PAGE> 46
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
have been recognized in the Company's financial statements or income tax
returns. A valuation allowance is recognized to reduce the carrying value of the
deferred tax assets if it is more likely than not that some or all of the
deferred tax assets will not be realized.
Advertising - The Company advertises primarily on Hispanic
television and radio, and through newspapers and direct mail. All advertising
costs are expensed as incurred. Advertising expense for the six months ended
June 30, 2000 and 1999, and the years ended December 31, 1999 and 1998 were
$70,000 and $107,000, and $172,000 and $134,000, respectively.
Fair Value of Financial Instruments - The carrying value of the
Company's finance receivables approximates their fair value due to their short
term nature and generally stable rates of interest currently being charged in
comparison to the rates reflected in the existing portfolios. Management
believes that the fair value of the Company's financial instruments approximates
their carrying values as of June 30, 2000 and December 31, 1999.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements - In June 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of income, and requires that a company formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
The effective date of SFAS No. 133 was delayed by the issuance of
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133," until fiscal years beginning
after June 15, 2000. The Company plans to adopt this statement on January 1,
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.
44
<PAGE> 47
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. FINANCE RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
Finance Receivables consist of: (Unaudited)
<S> <C> <C>
Consumer Product Portfolio $ 27,788,000 $ 24,842,000
Other Portfolios 2,718,000 1,485,000
------------ ------------
30,506,000 26,327,000
Less: deferred interest and insurance 3,056,000 2,570,000
Less: deferred loan origination fees 537,000 704,000
Less: allowance for credit losses 1,619,000 1,639,000
------------ ------------
$ 25,294,000 $ 21,414,000
============ ============
</TABLE>
Customers are required to make monthly payments on installment contracts. The
aggregate gross balance of accounts with payments 31 days or more past due are:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
Consumer Product Portfolio:
Past due 31 days or more $ 1,470,000 $ 1,429,000
============= =============
Other Portfolios:
7 Past due 31 days or more $ 370,000 $ 354,000
============= =============
</TABLE>
Included in the other portfolios are delinquencies on canceled automobile
insurance premium contracts. Since the Company seeks recovery of unearned
premiums from the insurance companies, which can take up to 90 days, loans are
not considered delinquent until more than 90 days past due. The amount greater
than 90 days was $303,000 and $306,000 at December 31, 1999 and June 30, 2000,
respectively.
The allowance for credit losses includes the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1998 1999 1999 2000
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Allowance for credit losses, beginning of period $2,048,000 $1,590,000 $1,590,000 $1,619,000
Provision for credit losses 2,862,000 2,670,000 1,349,000 840,000
Charge-offs 3,320,000 2,641,000 1,349,000 820,000
---------- ---------- ---------- ----------
Allowance for credit losses, end of period $1,590,000 $1,619,000 $1,590,000 $1,639,000
========== ========== ========== ==========
</TABLE>
45
<PAGE> 48
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE
Central Financial had a line of credit agreement with several banks and Wells
Fargo Bank National Association, as Agent, (the "Wells Fargo Line of Credit"),
that provided for the issuance of notes up to $100,000,000 subject to an
allowable borrowing base. Borrowings under the facility bore interest at a
weighted average rate of 8.0% and 7.7% in 1998 and 1999, respectively, and 7.9%
and 8.7% for the six months ended June 30, 1999 and 2000, respectively. Notes
payable allocated to the Company at December 31, 1999 was $1,800,000 (See Note
1). The note was repaid in January 2000.
5. INCOME TAXES
The Company, Central Financial and Hispanic Express have entered into a
Tax-Sharing Agreement (See Note 6). The income tax provision as presented in the
accompanying consolidated financial statements are based upon the amount the
Company would have paid as if it filed separate income tax returns for the
periods presented.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- -------------------------
1998 1999 1999 2000
----------- --------- --------- ---------
(Unaudited)
CURRENT:
<S> <C> <C> <C> <C>
Federal $ 1,035,000 $ 591,000 $ 479,000 $ 318,000
State 148,000 84,000 68,000 46,000
----------- --------- --------- ---------
1,183,000 675,000 547,000 364,000
DEFERRED:
Federal 170,000 (1,000) 4,000 (2,000)
State 24,000 -- 1,000 (1,000)
----------- --------- --------- ---------
194,000 (1,000) 5,000 (3,000)
----------- --------- --------- ---------
Provision for income taxes $ 1,377,000 $ 674,000 $ 552,000 $ 361,000
=========== ========= ========= =========
</TABLE>
A reconciliation of the provision for income taxes to the statutory rates is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999 1999 2000
------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Federal income taxes at statutory rate 35.0% 35.0% 35.0% 35.0%
State franchise taxes, net of federal benefit 5.0% 5.0% 5.0% 5.0%
------ ------ ------ ------
40.0% 40.0% 40.0% 40.0%
====== ====== ====== ======
</TABLE>
46
<PAGE> 49
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences giving rise to the deferred income tax
assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
Allowance for credit losses $ 647,000 $ 655,000
Amortization of goodwill (37,000) (42,000)
Other (50,000) (50,000)
------------ ------------
Net deferred tax asset $ 560,000 $ 563,000
============ ============
</TABLE>
6. RELATED PARTY TRANSACTIONS
In connection with its formation, the Company, Central Financial,
Hispanic Express and Central entered into certain agreements (the "Financing
Agreement," the "Option Agreement," the "Tax-Sharing Agreement" and the
"Operating Agreement").
The Financing Agreement grants the Company the exclusive right to
provide financing to Central customers for a term of ten years from the date of
the Plan and provides that any contracts purchased pursuant to this agreement
will be at face value. As part of the Financing Agreement, the Company has
agreed to provide Central with up to $6.0 million of inventory or inventory
financing as long as the Financing Agreement remains in effect and Central has
agreed to provide the Company, at no charge, an amount of floor space at
Central's stores as the Company from time to time requests. In connection with
this Financing Agreement, the Company purchased $13.8 million and $11.6 million
of inventory during the year ended December 31, 1999 and six months ended June
30, 2000, respectively, of which $4.9 million and $4.5 million is included in
inventory at December 31, 1999 and June 30, 2000, respectively. The Company can
terminate the Financing Agreement at any time upon one year's prior written
notice to Central. Prior to January 1, 2000, the Company purchased receivables
from Central at face value less a transaction fee and could return to Central
certain levels of purchased receivables. For the years ended December 31, 1999
and 1998, the transaction fees amounted to $0.8 million and $0.9 million, and
the receivables returned to Central were $0.2 million and $1.5 million,
respectively.
Pursuant to the Option Agreement, Hispanic Express granted the
Company an option, exercisable for a two-year period commencing one year from
the date of the Plan, to acquire all of the mortgages the Company sold to
Hispanic Express at an exercise price equal to their book value at the time of
exercise. If the Company exercises the Option, the exercise price is payable in
cash or an interest-bearing note.
The Operating Agreement provides, among other things, that
Hispanic Express or their affiliates are obligated to provide to the Company,
and the Company is obligated to utilize, certain services, including receivables
servicing, collections, payments, applications, accounting, management
information systems and employee benefits. The Operating Agreement also provides
for Hispanic Express to guarantee up to $4,000,000 of bank or similar financing
of the Company, pursuant to certain conditions. To the extent that such services
directly relate to the finance portion of the consumer products business
contributed by Central Financial to the Company, or to the extent that other
costs are incurred by Hispanic Express or their affiliates that directly relate
to the Company, the Company is obligated to pay Hispanic Express or their
affiliates the actual cost of providing such services or incurring such costs.
The Operating Agreement continues until terminated by either the Company or
Hispanic Express upon one year's prior written notice. Termination may be made
on a service-by-service basis or in total. Allocated expenses totaled
$1,650,000, and $2,074,000 for the six months ended June 30, 2000 and 1999 and
$4,373,000 and $5,529,000 for the years ended December 31, 1999, and 1998,
respectively.
47
<PAGE> 50
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company, Central Financial and Hispanic Express have entered
into a Tax-Sharing Agreement which provides, among other things, for the payment
of federal, state and other income tax remittances or refunds for periods during
which the Company was included in the same consolidated group for federal income
tax purposes; the allocation of responsibility for the filing of such tax
returns and various related matters. For periods in which the Company was
included in Central Financial's consolidated federal income tax returns, the
Company will be required to pay its allocable portion of the consolidated
federal, state and other income tax liabilities of the group and will be
entitled to receive refunds determined as if the Company had filed separate
income tax returns. With respect to Central Financial's liability for payment of
taxes for all periods during which the Company was so included in Central
Financial's consolidated federal income tax returns, the Company will indemnify
Central Financial for all federal, state and other income tax liabilities of the
Company for such periods. The date of the consummation of the Plan will be the
last day on which the Company will be required to be included in Central
Financial's consolidated federal income tax returns.
7. STOCK OPTION PLAN
In connection with the Plan, the Company adopted the 2000 Stock
Option Plan (the "2000 Plan"). Subject to the terms of the 2000 Plan, a total of
1,100,000 shares of authorized Common Stock have been reserved for issuance
pursuant to terms and conditions as determined by the Board of Directors. During
the duration of the 2000 Plan, no individual may be granted options of more than
550,000 shares. Options to purchase 421,000 shares of Common Stock will be
granted to eligible participants under the 2000 Plan effective upon the
consummation of the Plan. Executive officers and employees receiving options
will be vested in such options in an amount that they would have been vested
under the Central Financial Stock Option Plan at the time of consummation of the
Plan, except for those officers and employees which had been with Central
Financial or its predecessor for a period in excess of five years, which shall
be 60% vested in total options granted to them. Upon the effectiveness of these
grants, 679,000 shares of Common Stock will remain available for future grants
of options under the 2000 Plan. The options have a maximum duration of five
years and are subject to certain vesting and cancellation provisions, and may
not be granted at less than the market value of the Company's Common Stock on
the date of grant of the option.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases which have
expired and are currently on a month-to-month basis. Aggregate rental expense
for the six months ended June 30, 2000 and 1999 were $34,000 and $36,000,
respectively, for the years ended December 31, 1999 and 1998 were $72,000 and
$73,000, respectively.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. Management of the Company believes
that litigation currently pending will not have a material adverse effect on the
Company's financial position or results of its operations.
48
<PAGE> 51
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. SUBSEQUENT EVENT
In August 2000, the Company entered into an agreement which
provides for the early termination of a lease with a third party where it was
conducting a significant portion of its business. In connection therewith, the
Company has recorded a charge of approximately $1,000,000. The Company presently
conducts these operations in a newly constructed facility and is provided space
by Central in connection with the Financing Agreement (See Note 6).
* * * * *
49
<PAGE> 52
PART III
ITEMS 1 AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
2.1 Certificate of Incorporation, as amended.
2.2 Bylaws.
3 Form of specimen common stock certificate.
6.1 Banner Central Finance Company 2000 Stock Option Plan.
6.2 Contribution Agreement dated September 6, 2000 among Central Financial
Acceptance Corporation and Banner Central Finance Company.
6.3 Financing Agreement dated September 6, 2000 between Banner Central
Finance Company and Banner's Central Electric, Inc.
6.4 Operating Agreement dated September 6, 2000 between Hispanic Express,
Inc. and Banner Central Finance Company.
6.5 Tax-Sharing Agreement dated September 6, 2000 among Hispanic Express,
Inc. among Central Financial Acceptance Corporation, Hispanic Express,
Inc. and Banner Central Finance Company.
6.6 Option Agreement dated September 6, 2000 between Hispanic Express, Inc.
and Banner Central Finance Company.
6.7 Service Mark License dated September 6, 2000 among Banner's Central
Electric, Inc., Hispanic Express, Inc., Banner Central Finance Company
and Central Rents, Inc.
6.8 Form of Indemnification Agreement between Banner Central Finance Company
and certain directors and/or officers.
</TABLE>
50
<PAGE> 53
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of
1934, as amended, the registrant caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
BANNER CENTRAL FINANCE COMPANY
Date: October 11, 2000 By: /s/ Gary M. Cypres
---------------------------------------
Gary M. Cypres
Chairman, Chief Executive Officer and
Chief Financial Officer
51
