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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
AMENDMENT 2
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 EACH CLASS
TO BE SO REGISTERED 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......................... 15
Item 3. Description of Property................................................................ 21
Item 4. Security Ownership of Certain Beneficial Owners and Management......................... 21
Item 5. Directors, Executive Officers, Promoters and Control Persons........................... 23
Item 6. Executive Compensation................................................................. 25
Item 7. Certain Relationships and Related Transactions......................................... 28
Item 8. Description of Securities.............................................................. 32
Part II ............................................................................................... 36
Item 1. Market Price and Dividends on the Registrant's Common Equity and Other Stockholder
Matters................................................................................ 36
Item 2. Legal Proceedings...................................................................... 37
Item 3. Change in and Disagreements with Accountants........................................... 37
Item 4. Recent Sales of Unregistered Securities................................................ 37
Item 5. Indemnification of Directors and Officers.............................................. 37
Part III ............................................................................................... 39
Items 1 and 2. Index to and Description of Exhibits........................................... 39
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
On September 6, 2000, the Board of Directors of Central Financial
Acceptance Corporation, or Central Financial, approved a Plan of Complete
Dissolution, Liquidation and Distribution, or the Plan, which provides for the
dissolution and liquidation of Central Financial, and the liquidating
distribution to its stockholders of all the common stock of its two wholly-owned
subsidiaries, one of which is our company, Banner Central Finance Company, or
Banner Central Finance, and the other of which is Hispanic Express, Inc., or
Hispanic Express. Pursuant to the Plan, each holder of Central Financial common
stock will, for every share of common stock 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 Hispanic Express. Throughout this registration
statement we use the terms "Banner Central Finance," "we," "our" and "us" to
refer to Banner Central Finance and its subsidiaries. As further described
below, the various businesses that are conducted by Banner Central Finance are
conducted through these subsidiaries. These subsidiaries were, prior to the
formation of Banner Central Finance, owned by Central Finance (see the "before"
chart below). In September 2000, Central Finance formed Banner Central Finance
(and Hispanic Express) as part of the Plan, under which Central Finance will
dissolve and liquidate, leaving Banner Central Finance and Hispanic Express to
own their respective subsidiaries (see the "after" chart below) and to carry on
the businesses that were previously conducted when such subsidiaries were owned
directly by Central Finance (see the "after" chart below). As of the date of
this registration statement, the Plan, is partially completed, which means that
Central Financial has formed the two new wholly-owned subsidiaries (Banner
Central Finance and Hispanic Express) and has contributed its
previously-existing subsidiaries to these new subsidiaries. However, because the
Plan has not been fully consummated, Central Finance has not dissolved and
liquidated and is still the parent company of Banner Central Finance and
Hispanic Express.
In connection with the adoption of the Plan, Central Financial
contributed all of its assets and business to Banner Central Finance and
Hispanic Express. Specifically:
- Central Financial contributed to Banner Central Finance all
of the issued and outstanding capital stock of Central
Installment Credit Corporation, Central Financial
Acceptance/Insurance Agency and Central Premium Finance
Company, all of which are wholly-owned subsidiaries of Banner
Central Finance. In addition, Central Financial contributed
to Central Installment Credit Corporation the assets and
liabilities of the mortgage business owned by Central
Consumer Finance Company. As a result of these contributions,
Banner Central Finance through its subsidiaries will be
engaged in the purchased consumer receivables business, the
mortgage business and the sale and financing of automobile
insurance. It is anticipated that Banner Central Finance will
not conduct any business activities apart from those of its
subsidiaries.
- 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.,
all of which are wholly-owned subsidiaries of Hispanic
Express. Central Consumer Finance Company has four
wholly-owned subsidiaries, namely, Central Check Cashing,
Inc., Central Financial Acceptance Corporation Accidental &
Health Reinsurance, Limited, Central Finance Reinsurance,
Ltd. and Central Consumer Company of Nevada. As a result of
these contributions, Hispanic Express through its
subsidiaries will be engaged in the consumer
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financial products business and the travel services business.
It is anticipated that Hispanic Express will not conduct any
business activities apart from those of its subsidiaries.
Set forth below are charts that illustrate the relationships among the
companies discussed above, before and after the consummation of the Plan:
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[CHART]
BEFORE*
[CHART]
AFTER*
*Each subsidiary is wholly-owned by its respective parent company.
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On September 29, 2000, West Coast Private Equity Partners, L.P., or
West Coast, owning a majority of the outstanding shares of Central Financial's
common stock, voted to approve the Plan. It is anticipated that the Liquidation
Date will be January 31, 2001.
The dissolution and liquidation of Central Financial and the
distribution of the common stock of Banner Central Finance and Hispanic Express
under the Plan is intended to separate Central Financial into two publicly held
companies and to enhance stockholder value over the long term. The businesses
of Banner Central Finance and Hispanic Express have distinct investment,
operating and financial characteristics. The Board of Directors believes that
implementing the Plan will enable the investment community to analyze more
effectively the investment characteristics, performance and future prospects of
each business, enhancing the likelihood that each will achieve appropriate
market recognition of its value. The Board also believes that the
implementation of the Plan will allow Banner Central Finance and Hispanic
Express to concentrate on their respective businesses and provide each company
with greater flexibility in pursuing their independent business objectives.
A stockholder of Central Financial will have the same percentage
ownership interest in Hispanic Express and Banner Central Finance after the
consummation of the Plan (though on a direct basis) as he had in Central
Financial before the consummation of the Plan. We believe that after the
consummation of the Plan current stockholders and future investors will have
the ability to make separate investment decisions regarding each of Banner
Central Finance and Hispanic Express and their respective businesses.
In connection with the Plan, all of our shares of our common stock
will be distributed to the stockholders of our parent company, Central
Financial. We are registering such shares of common stock under the Securities
Exchange Act of 1934, as amended by filing this Form 10-SB registration
statement because we desire that the shares of our common stock that such
stockholders receive under the Plan be traded on the OTC Bulletin Board, for
which the filing of this registration statement is a prerequisite. The common
stock of Central Financial currently trades on the OTC Bulletin Board under the
symbol "CFAC." We would expect our shares of common stock to also trade on the
OTC Bulletin Board under the symbol "BCFC" if, after the Liquidation Date, at
least one market maker submits an application to the OTC Bulletin Board in
which it represents that:
- it desires to represent us as a market maker; and
- it has satisfied all applicable requirements of the
Securities and Exchange Commission and the National
Association of Securities Dealers.
There is currently no public market for our shares of common stock,
and we do not know whether a trading market will develop on or after the
Liquidation Date.
Company Business
PURCHASED CONSUMER RECEIVABLES
We purchase consumer finance receivables referred to as the Consumer
Products Portfolio, pursuant to a Financing Agreement with Banner's Central
Electric, Inc., or Banner's
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Central Electric, an affiliate of ours, which has granted us the exclusive
right to purchase the receivables it originates when it sells its inventory at
its retail stores. Banner's Central Electric operates five retail stores in the
greater Los Angeles area, and its inventory consists of consumer electronics,
appliances and furniture. The consumer finance receivables we purchase are held
until they mature and we earn interest income on them during the time they are
outstanding. Pursuant to the Financing Agreement that we have entered into with
Banner's Central Electric, we have agreed to acquire and have available to
transfer to Banner's Central Electric up to $6 million of inventory which they
sell to their customers. See "Item 7. Certain Relationships and Related Party
Transactions."
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.
MORTGAGE BUSINESS
In mid-1998, we started to provide second trust mortgages on
residential properties ranging from $5,000 to $12,000 to Hispanic customers
primarily in the Los Angeles area. Our primary source of income on these
mortgages is origination fees and the interest income we earn during the time
the mortgage is outstanding. In August 2000, we temporarily suspended making
second mortgage loans pending evaluations of whether we can obtain long-term
financing from financial institutions to support future growth. We anticipate
that by the end of March 2001, we should be able to complete our evaluation of
whether we can obtain long-term financing for our mortgage business.
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 in
1996 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
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has declined significantly. We currently continue to sell automobile insurance
to low-income Hispanics and operate through three offices in the greater Los
Angeles area.
BUSINESS STRATEGY
Over the next eighteen months, we anticipate that interest income
earned on our portfolio of purchased receivables and second trust mortgages
will constitute substantially all of our revenue and that our levels of
interest income will most likely decrease as these portfolios decline over this
period. Corresponding to the decline in our receivables, we anticipate that our
level of liquidity will increase providing funds to invest in the future
business activities; although, we currently have not identified any business
which we intend to invest these funds in.
Historically, our major business activity has been providing financing
to the low-income Hispanic customers purchasing consumer products from Banner's
Central Electric. In 1997, Banner's Central Electric made a strategic decision
to de-emphasize this business line. 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.
Although declining, we anticipate that interest income earned on the purchased
receivables will continue to be a majority of our future income. See "Business
Consideration and Certain Factors that May Affect Future Results of Operations
and Stock Price - Dependence of Consumer Finance Portfolio on Banner's Central
Electric and Changing Business Focus."
Since mid-1998, when we commenced our mortgage business, our portfolio
of second trust mortgages has grown significantly and in August 2000, we
temporarily suspended making any new second mortgage loans pending evaluation
of whether we can obtain long-term financing from financial institutions to
support future growth. In September 2000, we began to originate first and
second mortgage loans for other financial institutions for which we earn an
origination fee and will continue this business if we cannot obtain long-term
financing to build our portfolio of second trust mortgages. Should we conclude
that long-term financing is not available or otherwise decide not to build our
mortgage business, we anticipate that we will let our portfolio liquidate over
the life of the outstanding mortgages which generally have an average life of
four years remaining.
Our receivables portfolio relating to our financing of independent
retailers has also experienced a significant decline as a result of our
decision in 1998 and 1999 to phase out of substantially all of these
relationships. Our receivables relating to our financing of automobile
insurance premiums has also declined in recent years as a result of the
insurance companies for which we act as brokers for offering financing directly
to customers. We do not expect that our financing of independent retailers and
automobile insurance premiums businesses will be a significant portion of our
ongoing operations in the future. At December 31, 1998 and 1999, and September
30, 2000, the aggregate of these receivables portfolios was $791,000,
$2,718,000, and $6,850,000, respectively.
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,
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accounting, legal and management information systems. See "Item 7. Certain
Relationships and Related Party Transactions - Operating Agreement."
CREDIT PROCEDURES
Purchased Finance Receivables - We have developed uniform guidelines
and procedures for evaluating credit applications. We take credit applications
at each of the Banner's Central Electric stores and then generally transmit
them electronically through our computer system or facsimile machines to our
credit processing facility, where all credit approval and verification is
centralized. We also take credit applications at each of the independent retail
locations for which we provide financing, and generally transmit them to our
credit processing facility via facsimile. We believe that our underwriting
policies and procedures allow us to respond quickly to credit requests. We
typically respond to credit applicants within one hour. We believe that because
of our prompt response, many customers prefer to deal with us instead of our
competitors.
Our credit managers and credit approvers make their decisions on a
case by case basis and are influenced by, among other things, whether an
applicant is a new or existing customer. New applicants complete standardized
credit applications which contain information concerning income level,
employment history, stability of residence, driver's license or state
identification card, social security number, capacity to pay and personal
references. We also verify the applicant's employment and residence and
depending on the relevant factors may verify other pertinent information. We
also obtain a credit bureau report and rating, if available, and seek to
confirm other credit-related information. For an established customer, the
credit process currently includes a review of the customer's credit and payment
history with us, and depending on the size of the transaction an updated
verification of employment and residence. Because we offer multiple lines of
credit, we review the aggregate amount that a customer owes. In cases where a
customer makes a request for a substantial increase in his or her aggregate
outstanding balance, we will obtain a credit bureau report and will seek to
confirm employment. In instances where the applicant has no or limited credit
history, we may require a co-signer with appropriate credit status to sign the
contract and may, in the installment credit business, also require a down
payment. See "Business Considerations and Certain Factors that May Affect
Future Results of Operations and Stock Price - Credit Risk Associated with
Customer; Lack of Collateral."
Mortgages - We have developed uniform guidelines and procedures for
evaluating mortgage applications. Our underwriting guidelines require a credit
bureau report on each application, which is reviewed with the applicant's
credit history in order to determine if the applicant's credit history meets
our guidelines. A number of factors determine a loan applicant's
creditworthiness, including, debt ratios, payment history, and the combined
loan to value for all existing mortgages on a property. Our guidelines also
require that we obtain independent appraisals on all mortgage properties prior
to funding of a loan. See "Business Considerations and Certain Factors that May
Affect Future Results of Operations and Stock Price - Mortgage Portfolio Risks
and Need for a Line of Credit."
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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 contract
that the customer signs. We currently attempt to contact borrowers whose
payments are not received by the due date within 10 days after such due date.
We contact these borrowers by both letter and telephone. If no payment is
remitted to us after the initial contact, we make additional contacts every
seven days, and, after a loan becomes 31 days delinquent, we generally turn
over the account to our credit collectors. Under our guidelines, we generally
charge off and turn over an account to a collection agency when we determine
that the account is uncollectible, which is typically when the account is 150
days past due. We accrue interest income on our account until we charge it off.
FINANCE CONTRACTS AND MORTGAGE LOANS
Each of the finance contracts and mortgage loans 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 finance
contract balance increases the amount outstanding with an additional purchase
or loan, the customer executes a new finance contract for the new aggregate
balance and, with the proceeds, pays off the original contract.
INSURANCE
We maintain various insurance policies of the type, and in the
amounts, which are usual for our business. We maintain coverage for business
interruptions, including interruptions resulting from computer failure. We
believe that our insurance coverage is adequate.
MANAGEMENT INFORMATION SYSTEMS
Under the operating agreement with Hispanic Express, we will use
Hispanic Express's management information systems. Hispanic Express has
invested significant resources to develop a proprietary system that integrates
all major aspects of our business. The computer system uses a high-range IBM
AS-400 as 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
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- consumer product finance contracts, 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.
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 significantly increases our ability to
compete effectively with other providers of credit.
EMPLOYEES
At November 30, 2000, we employed a total of 39 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.
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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.
Mortgage Business. We originate mortgages under the California Finance
Lender's License issued by the Department of Corporations. We are monitored and
regulated by the Department of Corporations and are subject to annual audits.
Under the jurisdiction of the Department of Corporations we are regulated on
such items as minimum loan amounts, restrictions on mortgage companies to which
we can deliver loans, and certain fees and charges. These fees and charges
include appraisal fees, escrow and reconveyance fees. Interest rate and finance
charges are not regulated by the Department of Corporations.
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.
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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 marital status.
Regulation B issued under the Equal Credit Opportunity Act requires creditors
to make certain disclosures regarding consumer rights and advise consumers
whose credit applications are not approved of the reasons for the rejection.
The Fair Credit Reporting Act requires us to provide certain information to
consumers whose credit applications are not approved on the basis of a report
obtained from a consumer-reporting agency. The Credit Practices Rule limits the
types of property a creditor may accept as collateral to secure a consumer
loan.
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS AND STOCK PRICE
This Registration Statement discusses certain matters that may involve
risks and uncertainties. This registration statement contains statements that
relate to, among other things, expectations of the business environment in
which we operate in, projections of future performance, perceived opportunities
in the market and statements regarding our mission and vision. Our actual
results, performance and achievements may differ significantly from the
results, performance or achievements expressed or implied in such statements.
The following is a summary of some of the important factors that could affect
our future results of operations and/or our stock price, and should be
considered carefully.
ABSENCE OF OPERATING HISTORY
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, on 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
marketplace and may be influenced by many factors, including the limited amount
of public float for our common stock, investors' perception of our dividend
policy (See "Absence of Dividend") and general economic and market
considerations, particularly in California. We anticipate that if we become a
publicly traded company, we will have approximately 138 initial beneficial
holders and approximately six initial holders of record of our common stock,
and that the public float will be 1,939,000 common shares.
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ABSENCE OF DIVIDEND
We do not currently intend to pay regular cash dividends on our common
stock. Our dividend policy will be reviewed from time to time by our Board of
Directors in light of our earnings and financial position and other business
considerations that our Board of Directors considers relevant.
CREDIT RISK ASSOCIATED WITH PURCHASED ACCOUNTS RECEIVABLES; 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 September 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 7.0%, and
5.9%, respectively. For the nine months ended September 30, 2000 and 1999, and
the twelve months ended December 31, 1999 and 1998, the consumer products
portfolio had net write-offs of $1.2 million, and $1.7 million and $2.5 million
and $2.5 million, respectively. We cannot assure that we will not experience
increases in delinquencies and net write-offs, which would 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."
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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 ON CONSUMER FINANCE PORTFOLIO OF BANNER'S CENTRAL ELECTRIC AND
CHANGING BUSINESS FOCUS
Historically, our major source of revenue has been derived from the
consumer finance receivables we purchase from Banner's Central Electric. 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 retail stores and its decision and ability to remain in
business over which we have no control. Also, since 1997, Banner's Central
Electric's sales have declined significantly with a corresponding decline in
the level of receivables we purchase from them and, accordingly, we have begun
to change our strategic business focus away from the purchase of these
receivables toward our mortgage business.
MORTGAGE PORTFOLIO RISKS AND NEED FOR A LINE OF CREDIT
The credit risks associated with our second mortgage loans, including
applicable loan to value ratios, and the credit and income histories of the
mortgagors are generally higher than in conventional conforming mortgage loans
and may lead to higher delinquency rates. Also, our businesses may be
materially and adversely affected by declining real estate values as our
security interest in the property securing such loans is subordinated to the
interest of the first mortgage holder. If the value of the property securing
the second mortgage loan is not sufficient to repay the borrower's obligation
to the first mortgage holder upon foreclosure, or if there is no additional
value in such property after satisfying the borrower's obligation to the first
mortgage loan holder, the borrower's obligation to us will likely not be
satisfied. If we are to continue to grow our mortgage business we will require
substantial capital to finance our future operations. Consequentially, our
ability to expand our operations will be dependent upon obtaining financing and
the terms thereof. To date, we have had preliminary discussions with financial
institutions about obtaining a line of credit for our mortgage business, but
there cannot be any assurance that we will be successful in obtaining such a
line.
SEASONAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We historically experience the highest demand for our purchased
finance receivables between October and December, and experience the lowest
demand for our purchased finance receivables between January and March. These
significant seasonal fluctuations in our business directly impact our operating
results and cash needs.
13
<PAGE> 16
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. Our competitors in the
mortgage business include other consumer finance companies, mortgage banking
companies, commercial banks, credit unions, savings associations and insurance
companies. The largest national and regional competitors have more capital,
more locations and greater economic resources than we do.
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."
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
14
<PAGE> 17
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 relate to matters that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in these statements. Factors that might cause such a difference,
include but are not limited to, credit quality, economic conditions 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."
OVERVIEW
Our aggregate portfolio of gross receivables from which we derived the
majority of our revenues declined to $29.8 million at September 30, 2000
compared to $35.5 million and $41.0 million at December 31, 1999 and 1998,
respectively, primarily reflecting continued decline in our Consumer Products
Portfolio. In 1997, West Coast made a strategic decision to de-emphasize
Banner's Central Electric's business and since then Banner's Central Electric
retail sales have declined significantly with a corresponding decrease in the
level of consumer receivables that we purchased from them. Our gross
receivables of the Consumer Products Portfolio declined to $22.8 million at
September 30, 2000 compared to $27.8 million and $33.9 million at December 31,
1999 and 1998, respectively. Our Consumer Products Portfolio historically
increases from the period between October through December reflecting higher
holiday retail credit sales at Banner's Central Electric stores, which we
subsequently purchase. Our portfolio of receivables, which we generate from
customers of independent retailers, has also experienced significant decline as
a result of our decision in 1998 and 1999 to phase out substantially all of
these relationships. Our portfolio of automobile insurance premiums, which we
finance, has also declined in 1998 and 1999, and in the nine months ended
September 30, 2000, as a result of the insurance companies that we act as
brokers for offering financing directly to their customers.
Our Mortgage Portfolio increased to $6.3 million at September 30, 2000
compared to $5.0 million and $0.3 million at December 31, 1999 and 1998,
respectively. In August 2000, we made a decision to temporarily suspend making
any new mortgage loans pending evaluation of whether we can obtain long-term
financing from financial institutions to support future growth. In September
2000, we began to originate first and second mortgage loans for other financial
institutions for which we earn an origination fee.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousand, except per share data)
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1998 1999 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Interest income .............. $ 9,960 $ 7,821 $ 6,006 $ 5,232
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
4,070 2,804 2,245 1,663
Other income
Transaction fee from affiliate 933 799 519 --
---------- ---------- ---------- ----------
Total Revenue 14,963 11,424 8,770 6,895
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Operating expenses 8,639 6,713 4,988 4,698
Provision for credit losses 2,862 2,719 1,859 1,422
---------- ---------- ---------- ----------
Total Costs and Expenses 11,501 9,432 6,847 6,120
---------- ---------- ---------- ----------
Income before taxes 3,462 1,992 1,923 775
Income tax expenses 1,384 797 769 310
---------- ---------- ---------- ----------
Net Income $ 2,078 $ 1,195 $ 1,154 $ 465
========== ========== ========== ==========
PRO FORMA PER SHARE DATA:
Basic earnings per share $ 0.17 $ 0.06
Diluted earnings per share $ 0.17 $ 0.06
Weighted average number of
Common shares outstanding 7,166 7,166
CONSUMER PRODUCTS PORTFOLIO TREND
</TABLE>
<TABLE>
<CAPTION>
CONSUMER PRODUCTS PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE CONTRACT BALANCE)
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1999 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross receivable (at end of period) $ 33,886 $ 27,788 $ 26,153 $ 22,771
Deferred interest (at end of period) 3,333 2,787 2,395 2,244
---------- ---------- ---------- ----------
Net receivable (at end of period) 30,553 25,001 23,758 20,527
Deferred insurance revenues (at end of period) 94 69 71 50
---------- ---------- ---------- ----------
Net carrying value $ 30,459 $ 24,932 $ 23,687 $ 20,477
========== ========== ========== ==========
Average net receivable $ 30,655 $ 26,359 $ 27,035 $ 22,805
Number of contracts (at end of period) 62,897 56,010 52,051 43,908
Average net contract balance $ 496 $ 471 $ 470 $ 470
Total interest income 7,224 6,477 4,985 4,268
Late charge and extension fee income 1,343 1,283 985 889
Provision for credit losses 2,404 2,475 1,727 1,395
Provision for credit loss as a percentage
of average net receivable (1) 7.8% 9.4% 8.5% 8.2%
Net write-offs 2,541 2,474 1,727 1,245
Net write-offs as a percentage of average
net receivable (1) 8.3% 9.4% 8.5% 7.3%
Average interest rate on average net
Receivable (1) 23.6% 24.6% 24.6% 25.0%
</TABLE>
(1) Percentages for the nine months ended September 30, 1999 and 2000 are
annualized.
16
<PAGE> 19
MORTGAGE PORTFOLIO
At September 30, 2000 and December 31, 1999 and 1998, the gross
receivables of the mortgage portfolio was $6.3 million, $5.0 million and $0.3
million, respectively. The number of mortgage loans outstanding at September
30, 2000, and December 31 1999 and 1998 were 737, 505 and 18, respectively. The
average interest rate on the portfolio for the nine months ended September 30,
2000 and years ended December 31, 1999 and 1998, was 15.6%, 14.7% and 14.5%,
respectively.
At September 30, 2000, and December 31, 1999, there was $0.3 million
and $0.2 million of receivables with balances over 31 days past due.
DELINQUENCY EXPERIENCE AND ALLOWANCE FOR CREDIT LOSSES
Borrowers under our contracts are required to make monthly payments.
The following sets forth our delinquency experience for accounts with payments
31 days or more past due and allowance for credit losses for our finance
receivables.
<TABLE>
<CAPTION>
FINANCE RECEIVABLES (1)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1999 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Past due accounts 31 days or more (gross receivable): $ 2,334 $ 2,205 $ 2,210 $ 1,502
Accounts with payments 31 days or more past due as a 5.7% 7.2% 7.5% 6.4%
percentage of end of period gross receivables
Allowance for credit losses $ 1,590 $ 1,619 $ 1,590 $ 1,441
Allowance for credit losses as a percentage of net 4.3% 5.9% 5.9% 6.8%
receivables
</TABLE>
(1) Includes our consumer products, independent retailer and premium finance
portfolios.
Our finance receivables accounts which were 31 days or more past due
decreased to $1.5 million at the end of September 30, 2000 compared to $2.2
million at the end of September 30, 1999 and $2.2 million at the end of
December 31, 1999. These declines primarily reflect the decline in the
aggregate level of our finance receivables portfolios during these periods. As
a percentage of the end of period gross finance receivables, accounts with 31
days or more past due decreased to 6.4% at September 30, 2000 from 7.2% at
December 31, 1999, reflecting more stringent credit guidelines which were
implemented following a rise in this percentage at the end of December 31, 1999
as compared to December 31, 1998. We believe the rise experienced in this
percentage during 1999 was a result of excessive credit burdens for some
customers due to an aggressive over extension of credit in the market place in
which we compete. Although the allowance for credit losses at September 30,
2000 decreased to $1.4
17
<PAGE> 20
million from $1.6 million at December 31, 1999, expressed as percentage of net
receivables the allowance for credit losses increased to 6.8% at September 30,
2000 compared to 5.9% at December 31, 1999, primarily as a result of the
continuing decline of the aggregate receivables portfolios.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Total revenue in the nine months ended September 30, 2000 decreased to
$6.9 million from $8.8 million in the nine months ended September 30, 1999, a
decrease of $1.9 million.
Interest income for the nine months ended September 30, 2000 decreased
to $5.2 million from $6.0 million in the nine months ended September 30, 1999,
a decrease of $0.8 million. This decrease was primarily due to a decrease in
our Consumer Products Portfolio as a result of a decreased level of receivables
purchased from Banner's Central Electric, reflecting Banner's Central
Electric's declining retail sales. For the nine months ended September 30,
2000, our net consumer products portfolio averaged $22.8 million compared to
$27.0 million in the nine months ended September 30, 1999. Also contributing to
the decline was a decrease in interest income earned on our independent
retailers and premium finance portfolio, as a result of our decision to phase
out of substantially all of our independent retailer relationships and
insurance companies (for which we act as broker) because they are offering
financing directly to customers.
Other income for the nine months ended September 30, 2000 declined to
$1.7 million from $2.2 million in the nine months ended September 30, 1999, a
decrease of $0.5 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 $0.2 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 agreement under which we charged a
transaction fee to Banner's Central Electric was terminated effective January
1, 2000.
Operating expenses for the nine months ended September 30, 2000
decreased to $4.7 million from $5.0 million in the nine months ended September
30, 1999, a decrease of $0.3 million. Of this decrease, approximately $1.3 was
due to a reduction in salary and overhead expenses corresponding to the
decrease in revenues in the nine months ended September 30, 2000, offset by a
charge of approximately $1.0 million for the early termination of a lease. As a
percentage of interest and other income, operating expenses (net of the lease
termination charge) were 53.7% and 60.5% in the nine months ended September 30,
2000 and 1999, respectively.
The provision for credit losses decreased to $1.4 million in the nine
months ended September 30, 2000 compared to $1.9 million in the nine months
ended September 30, 1999. This decrease was primarily due to a decrease in the
average receivable portfolio in the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999, and to decreased
delinquencies.
18
<PAGE> 21
As a result of the foregoing factors, net income in the nine months
ended September 30, 2000 decreased to $0.5 million from $1.2 million in the
nine months ended September 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 $11.4
million from the $15.0 million in the year ended December 31, 1998, a decrease
of $3.6 million.
Interest income for the year ended December 31, 1999 decreased to $7.8
million compared to $10.0 million in the year ended December 31, 1998, a
decrease of $2.2 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 the
decreased level of receivables we purchased from Banner's Central Electric,
reflecting Banner's Central Electric's declining retail sales. For the year
ended December 31, 1999 our gross consumer products portfolio averaged $26.4
million compared to $30.7 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. Also contributing to the decline was a decrease in interest
income earned on our independent retailers and premium finance portfolios as a
result of our decision to phase out of substantially all of our independent
retailer relationships and insurance companies (for which we act as broker)
because they are offering financing directly to customers.
Other income for the year ended December 31, 1999 decreased to $2.8
million from $4.1 million in the year ended December 31, 1998. A decline of
$1.3 million in the income primarily includes late charges and other fees
charged on the receivables portfolio and the sale of automobile insurance. Of
the decrease, approximately $0.2 million was due to a decline in late charges
and other fees primarily reflecting the decreased level of the finance
receivables portfolio and $1.1 million due to a decrease in the level of
automobile insurance sold.
Transaction fees from an affiliate decreased to $0.8 million in the
year ended December 31, 1999 compared to $0.9 million in the year ended
December 31, 1998. Banner's Central Electric paid 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
63.2% in the year ended December 31, 1999 compared to 61.6% 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.
19
<PAGE> 22
As a result of the foregoing factors, net income in the year ended
December 31, 1999 declined to $1.2 million compared to $2.1 million in the year
ended December 31, 1998, a decrease of $0.9 million.
LIQUIDITY AND CAPITAL RESOURCES
We primarily finance our operations through the cash flow generated
from operations and the liquidation of our receivables portfolios and from
capital contributions from Central Financial.
Net cash flow provided from operations totaled $3.5 million and $0.2
million in the nine months ended September 30, 2000 and 1999, respectively. In
each of these periods the source of cash primarily consisted of net operating
income after non-cash items. Non-cash items in each of the periods included
depreciation and amortization, provision for credit losses and deferred income
taxes. Other items affecting cash flows from operating activities in each of
the periods included cash flows from increases (decreases) in prepaid expenses
and other current assets, inventory and accounts payable and accrued expenses.
Net cash flow used in operations for the year ended December 31, 1999
totaled $0.9 million, while net cash flow provided from operations in the year
ended December 31, 1998 was $5.3 million. In each of the years the source of
cash primarily consisted of net operating income after non-cash items. Non-cash
items in each of the periods included depreciation and amortization, provision
for credit losses and deferred income taxes. Other items affecting cash flows
from operating activities in each of the periods included cash flows from
increases (decreases) in prepaid expenses and other current assets and accounts
payable and accrued expenses, and inventory in 1999.
Net cash provided from investing activities totaled $3.5 million and
$5.0 million for the nine months ended September 30, 2000 and 1999,
respectively. Net cash provided by investing activities in each of the periods
consisted of installment contracts and other contract receivables, offset by
capital expenditures and cash flows from installment contracts returned to
Central in 1999.
Net cash provided from investing activities totaled $2.6 million and
$9.2 million for the years ended December 31, 1999 and 1998, respectively. Net
cash provided by investing activities in each of the years consisted of
installment contracts and other contract receivables collected, installment
contracts returned to Central, offset by capital expenditures.
Net cash used in financing activities totaled $7.1 million and $5.6
million for the nine months ended September 30, 2000 and 1999, respectively.
Net cash used in financing activities in each of the periods consisted of
repayment of notes payable totaling $1.8 million and $12.0 million for the nine
months ended September 30, 2000 and 1999, respectively. In addition, net cash
used in financing activities included capital distributions totaling $5.3
million to Central Financial for the nine months ended September 30, 2000 and
capital contributions from Central Financial totaling $6.4 million for the nine
months ended September 30, 1999.
Net cash used in financing activities totaled $2.1 million and $13.9
million for the years ended December 31, 1999 and 1998, respectively. Net cash
used in financing activities
20
<PAGE> 23
consisted of repayment of notes payable totaling $10.2 million and $10.0
million for the years ended December 31, 1999 and 1998, respectively, and
capital contributions totaling $8.1 million from Central Financial for the year
ended December 31, 1999 and capital distributions totaling $3.9 million for the
year ended December 31, 1998.
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 expand
our mortgage business, we will need to obtain a bank line of credit.
We expect that our existing capital resources will adequately satisfy
our working capital requirements for the next 12 months. We anticipate that the
level of receivables we purchase from Banner Central Electric will continue to
decline in the future and will provide us with capital resources in excess of
our working capital requirements. Our capital resources will be further
enhanced should we liquidate our portfolio of second trust mortgages. To date
we have not identified any other businesses in which to invest our excess
capital resources.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Historically, we have been exposed to interest rate risk in the form
of variable interest rates on our Line of Credit. For the nine months ended
September 30, 2000 and the twelve months ended December 31, 1999, the average
interest rate charged on our previous Line of Credit was 8.7% and 7.7%,
respectively. At September 30, 2000, we had no borrowings outstanding and no
line of credit.
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 do not pay any rent
for this space. We believe that our executive and administrative offices are
adequate for current and future needs. We lease certain facilities for our
automobile insurance operations under month to month contracts.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 13, 2000, Central Financial owned all 7,166,000 shares
of our outstanding common stock.
Following the liquidation of Central Financial and the distribution of
our common stock to Central Financial's stockholders under the Plan, our
directors and executive officers will beneficially own our common stock in the
amounts and percentages shown on the following
21
<PAGE> 24
table, based upon their respective ownership of Central Financial common stock
as of December 13, 2000:
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED(1)
-----------------------------------
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES(2) CLASS(3)
------------------------ --------------- --------------
<S> <C> <C>
Gary M. Cypres (4)............................... 5,312,500 72.6%
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 December 13, 2000.
(2) Except as otherwise noted below, each individual named in the table
directly or indirectly has sole voting and investment power with respect
to the shares shown which each such individual beneficially owns.
(3) Shares of our common stock issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000 are considered
outstanding for computing the percentage of the person holding those
options but are not considered outstanding for computing the percentage
of any other person.
(4) Consists of 5,150,000 shares that are held as of December 13, 2000 by
West Coast, Wells Fargo & Company and WLEP Pte. Ltd., for which Mr.
Cypres has voting power, 77,500 shares that are held of record as of
December 13, 2000 directly by Mr. Cypres, 12,500 shares that are held of
record as of December 13, 2000 by Mr. Cypres' spouse and 12,500 shares
that are held of record as of December 13, 2000 by or in trust by Mr.
Cypres and his spouse for their children. An additional 60,000 shares is
included representing options exercisable within 60 days of December 13,
2000. Of the 5,312,500 shares, Mr. Cypres will share voting and
investment power of 25,000 shares with his spouse.
(5) Consists of 5,000 shares issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000.
(6) Consists of 1,000 shares that are held of record as of December 13, 2000
directly by Mr. Sweet and 2,800 shares issuable upon exercise of stock
options exercisable within 60 days of December 13, 2000.
(7) Consists of 2,800 shares issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000.
(8) Consists of 91,200 shares issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000.
22
<PAGE> 25
BENEFICIAL STOCK OWNERSHIP OF 5% STOCKHOLDERS
The following table shows all persons or entities that will be
"beneficial owners" of more than five percent of our common stock following the
liquidation of Central Financial and the distribution of our common stock to
Central Financial's stockholders under the Plan, based on their respective
ownership of Central Financial common stock as of December 13, 2000.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED(1)
------------------ -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(2) NUMBER OF SHARES(3) PERCENT OF CLASS(4)
--------------------------------------- ------------------- -------------------
<S> <C> <C>
Gary M. Cypres(5)................................ 5,312,500 72.6%
West Coast Private Equity Partners, L.P.......... 3,665,047 51.15%
Wells Fargo & Company............................ 1,104,933 15.42%
WCEP Pte Ltd..................................... 380,020 5.30%
Wellington Management Company, LLP(6)............ 684,200 9.3%
</TABLE>
(1) See footnote 1 in table included above.
(2) The address for Mr. Cypres, and West Coast is 5480 East Ferguson Drive,
Commerce, California 90022, and the address for Wellington Management
Company, LLP, or Wellington Management, is 75 State Street, Boston,
Massachusetts 02109. The address for Wells Fargo & Company is 421
Montgomery Street, San Francisco, California 94103 and WCEP Pte. Ltd. is
c/o West Coast, 5480 East Ferguson Drive, Commerce, California 90022.
(3) Except as otherwise noted below, each person and entity named in the
table directly or indirectly has sole voting and investment power with
respect to the shares shown which each such person or entity
beneficially owns.
(4) Shares of our common stock issuable upon exercise of stock options
exercisable within 60 days of December 13, 2000 are considered
outstanding for computing the percentage of the person or entity holding
those options but are not considered outstanding for computing the
percentage of any other person or entity.
(5) Consists of 5,150,000 shares that are held as of December 13, 2000 by
West Coast, Wells Fargo & Company and WCEP Pte. Ltd. for which Mr.
Cypres has voting control. 77,500 shares that are held of record as of
December 13, 2000 directly by Mr. Cypres, 12,500 shares that are held of
record as of December 13, 2000 by Mr. Cypres' spouse and 12,500 shares
that are held of record as of December 13, 2000 by or in trust by Mr.
Cypres and his spouse for their children. An additional 60,000 shares is
included representing options exercisable within 60 days of December 13,
2000. Of the 5,312,500 shares, Mr. Cypres will share voting and
investment power of 25,000 shares with his spouse.
(6) Based on a Schedule 13G filed with the SEC on February 11, 2000 relating
to beneficial ownership of Central Financial's common stock by
Wellington Management's clients. Of the 684,200 shares, Wellington
Management shares the power to vote 436,000 of these shares and shares
the power to dispose of all of these shares in its capacity as
investment advisor to these clients.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following tables set forth certain information at December 13,
2000 regarding our directors and executive officers, their ages and their
positions and offices with us. There are no arrangements among or between any
of our directors or executive officers relating to their appointment or
election to the respective position in our company and there are no family
relationships among any of our directors or executive officers.
23
<PAGE> 26
<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 of our common stock to Central
Financial's stockholders, 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 J. OCHOA has been our President since our formation. Since August 1998,
Mr. Ochoa has been President of Central Financial's mortgage business. Prior to
joining Central Financial, Mr. Ochoa was Area Manager and then Regional Vice
President with Home Savings of America. From 1983 to 1992 he served as a
District Manager with Transamerica Financial Services. Mr. Ochoa graduated from
the University of Southern California, School of Business.
SALVATORE J. CALTAGIRONE has been one of our directors since our formation and
director of Central Financial since September 1997. Mr. Caltagirone has been
retired since October 1994. From the fall of 1990 to October 1994, he was an
employee of G.M. Cypres & Company. From March 1987 to June 1990, he was
employed as the Managing Director of Henley Group.
WILLIAM R. SWEET has been one of our directors 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
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<PAGE> 27
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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)
LONG-TERM
COMPENSATION
AWARDS
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS
--------------------------- ----------- ---------- ------------
<S> <C> <C> <C>
Gary M. Cypres (2) $ 25,000 $ -- --
Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer
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.
(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 stockholders,
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
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<PAGE> 28
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
stockholders of Central Financial, Central Financial will terminate its Stock
Option Plan. Our Board of Directors and stockholders 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 options to be granted,
provided, that such grants shall conform with Section 260.140.41 of the
California Securities Code. Subject to the terms set forth in the 2000 Plan,
the Option Committee has the right to cancel any outstanding options and to
issue new options on such terms and upon such conditions as may be consented to
by the optionee affected.
A total of 1,100,000 shares are reserved for issuance under the 2000
Plan. No individual may be granted options under the 2000 Plan with respect to
more than 550,000 shares during the duration of the 2000 Plan. It is expected
that options to purchase 421,000 shares of common stock will be granted to
eligible participants under the 2000 Plan effective upon the closing of the
Distribution, including options to certain executive officers as set forth
below. Options granted pursuant to the 2000 Plan would vest over two different
time periods. Options granted which equal the number of Options granted to
executive officers and employees under the Central Financial Stock Option Plan
will vest as they would have been vested under the Central Financial Stock
Option Plan at the time of distribution, except for those officers and
employees which had been with Central Financial or its predecessor company for
a period in excess of 5 years, which shall be 60% vested in total options
granted to them. Options granted to executive officers and employees which
exceed the amounts granted to them under the Central Financial Stock Option
Plan will vest in such Options over a five-year period in equal annual amounts,
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.
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<PAGE> 29
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 ISO 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 ISO 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 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
27
<PAGE> 30
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>
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 Banner's Central Electric have entered into various agreements for
the purpose of defining the ongoing relationships among them. Since Central
Financial currently owns both Hispanic Express and 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
28
<PAGE> 31
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. The Contribution Agreement
covers the following matters:
Contribution of Central Financial Subsidiaries. The Contribution
Agreement provides for the contribution of certain of the assets and businesses
of Central Financial to us. Specifically, Central Financial contributed to our
company all of the issued and outstanding capital stock of Central 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 that 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 party 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.
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<PAGE> 32
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.
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 stockholders
will not be deemed a severance of employment from Central Financial and its
subsidiaries for the purpose of any policy, plan, program or agreement that
provides for the payment of severance, salary continuation or similar benefits.
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 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
30
<PAGE> 33
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.
SERVICE MARK LICENSE AGREEMENT
We have entered into a Service Mark License Agreement, referred to as
the Service Mark License Agreement, with Banner's Central Electric. Under the
Service Mark License, Banner's Central Electric granted to us and each of our
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.
GUARANTY AGREEMENT
We entered into an Guaranty Agreement pursuant to which we have agreed
to assume all liabilities and responsibilities under the Central Financial
Supplemental Executive Retirement Plan or the SERP, solely and exclusively for
Mr. Cypres, should Hispanic Express default on its obligation to pay the
benefits due Mr. Cypres under the SERP.
Benefits under the SERP are equal to 60% of Mr. Cypres' final average
compensation as of the date he retires or terminates his employment. At
December 31, 1999, Mr. Cypres was fully vested under the SERP. The following
table shows the estimated annual retirement benefit that would be payable under
the SERP by us if Hispanic Express defaults on its obligation to pay such
benefit.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------
REMUNERATION 10 15 20 25 30 or more
------------ -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$250,000.................................. $150,000 $150,000 $150,000 $150,000 $150,000
275,000.................................. 165,000 165,000 165,000 165,000 165,000
300,000.................................. 180,000 180,000 180,000 180,000 180,000
325,000.................................. 195,000 195,000 195,000 195,000 195,000
</TABLE>
OTHER TRANSACTIONS WITH AFFILIATES
After completion of the distribution of our common stock to Central
Financial's stockholders, West Coast and its coinvestors will beneficially own
or otherwise control an aggregate of approximately 72% of our common stock. As
such, West Coast will be able to elect the entire Board of Directors, adopt
amendments to our Certificate of Incorporation, or effect a merger, sale of
assets, or other fundamental corporate transaction without the approval of our
other stockholders. West Coast will be able to control the direction of our
future operations, including decisions regarding the issuance of additional
shares of common stock and other securities. As long as West Coast is a
majority stockholder of our common stock, it will be
31
<PAGE> 34
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 stockholders 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 Officer, 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.
Prior to the distribution of our common stock to Central Financial's
stockholders, 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. 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
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 December 13, 2000, we had 7,166,000 shares of common stock
issued and outstanding. All shares of common stock to be issued in connection
with the distribution of our common stock to Central Financial's stockholders
will be fully paid and nonassessable.
The following summarizes the rights of holders of our common stock:
- each holder of common stock is entitled to one vote per share
on all matters to be voted upon by the stockholders, except
as discussed in "Anti-Takeover Effects of Provisions of Our
Certificate of Incorporation and Bylaws";
- subject to preferences that may apply to shares of preferred
stock that we may issue in the future, the holders of common
stock are entitled to
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<PAGE> 35
receive such lawful dividends as may be declared by the Board
of Directors;
- upon our liquidation, dissolution or winding up, the holders
of shares of common stock are entitled to receive a pro rata
portion of all of our assets remaining for distribution after
satisfaction of all our liabilities and the payment of any
liquidation preference of any outstanding preferred stock;
- there are no redemptive or sinking fund provisions applicable
to our common stock; and
- there are no preemptive, subscription or conversion rights
applicable to our common stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Some provisions of our certificate of incorporation and bylaws may
have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by our stockholders. Such provisions may also render the
removal of our current Board of Directors or management more difficult. These
provisions include:
Limitation of Liability. Our certificate of incorporation eliminates
the personal liability of our directors to us and our stockholders to the
fullest extent permitted by the 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.
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<PAGE> 36
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 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 by 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
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<PAGE> 37
extension of time to file such return was granted. Quasi-California
corporations that are Large Public Corporations (i.e., that have securities
listed on the New York or American stock exchanges, or securities designated
for trading on the Nasdaq National Market, if the corporation has at least 800
holders of its equity securities as of the record date for its most recent
annual meeting), are exempt from the application of Section 2115.
We have qualified to do business in the State of California because we
have substantially all of our property, employees and operations in California.
Therefore, absent an exemption, we would be deemed to be a quasi-California
corporation.
Because we will be deemed to be a quasi-California corporation,
certain of the provisions for our Certificate of Incorporation and Bylaws would
not be authorized by California law. In addition, under California law,
cumulative voting for the election of directors is mandatory unless a
corporation that is a Large Public Corporation has expressly eliminated
cumulative voting in its articles of incorporation. Furthermore, California law
with respect to the payment of dividends is more restrictive than Delaware law.
Under California law, a corporation is prohibited from paying dividends unless
(i) the retained earnings of the corporation immediately prior to the
distribution exceeds the amount of the distribution; (ii) the assets of the
corporation exceed 1 1/4 times its liabilities; or (iii) the current assets of
the corporation exceed its current liabilities, but if the average pretax net
earnings of the corporation before interest expense for the two years preceding
the distribution was less than the average interest expense of the corporation
for those years, the current assets of the corporation must exceed 1 1/4 times
its current liabilities.
35
<PAGE> 38
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
MARKET INFORMATION
There is currently no public market for our shares of common stock,
and we do not know whether a trading market will develop on or after the
Liquidation Date. The common stock of Central Financial currently trades on the
OTC Bulletin Board. We would expect our shares of common stock to also trade on
the OTC Bulletin Board under the symbol "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 shares of our common stock outstanding, and we anticipate that if we
become a publicly traded company, we will have approximately 138 initial
beneficial holders and approximately six initial holders of record of our
common stock, and that the public float will be 1,939,000 common shares.
Approximately 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 stockholders generally
include individuals or entities that control, are controlled by, or are under
common control with us and may include our directors as well as our principal
stockholders. Persons who are our affiliates will be permitted to sell their
shares of our common stock only pursuant to an effective registration statement
under the Securities Act or an exemption from the registration requirements of
the Securities Act, such as the exemption afforded by Rule 144 thereunder.
However, under applicable law and because of the substantial control it has
over us, West Coast will have "restricted securities" under Rule 144. We do not
have any agreements to register our common stock under the Securities Act, nor
do we currently anticipate that we will register our common stock under the
Securities Act.
DIVIDEND INFORMATION
We have never paid and have no present intention of paying cash
dividends on our common stock. We anticipate that we will retain all earnings
for use in our business, and we do not anticipate paying cash dividends for the
foreseeable future. Any determination in the future to pay dividends will
depend on our financial condition, capital requirements, results of
36
<PAGE> 39
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 proceedings 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 4.
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 suit 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 suit or
proceeding.
DELAWARE CORPORATE LAW, CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation eliminates the personal liability of
our directors to us and our stockholders to the fullest extent permitted by the
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;
37
<PAGE> 40
- 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 or care.
38
<PAGE> 41
<TABLE>
<CAPTION>
PART III
ITEMS 1 AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS
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 [Reserved]
6.7 Service Mark License dated September 6, 2000 among Banner's Central
Electric, Inc. and Banner Central Finance Company*
6.8 Form of Indemnification Agreement between Banner Central Finance
Company and certain directors and/or officers*
6.9 Supplemental Executive Retirement Plan Guaranty Agreement between
Banner Central Finance Company and Hispanic Express, Inc.
27 Financial Data Schedule
</TABLE>
--------
* Previously filed in Registration Statement Form 10-SB filed on October 11,
2000.
39
<PAGE> 42
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: January 5, 2001 By: /s/ Gary M. Cypres
---------------------------------------
Gary M. Cypres
Chairman, Chief Executive Officer and
Chief Financial Officer
40
<PAGE> 43
PART F/S
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants............................................................F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.......................................................................F-3
Consolidated Statements of Income.................................................................F-4
Consolidated Statements of Stockholders' Equity...................................................F-5
Consolidated Statements of Cash Flows.............................................................F-6
Notes to Consolidated Financial Statements........................................................F-7
</TABLE>
F-1
<PAGE> 44
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, as restated, for the inclusion of the mortgage
business - See Note 3. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 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
November 20, 2000
F-2
<PAGE> 45
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999* 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 72,000 $ 27,000
Finance receivables, net 30,231,000 25,304,000
Prepaid expenses and other current assets 99,000 14,000
Inventory 4,893,000 4,282,000
Deferred income taxes 560,000 484,000
Property and equipment, net 235,000 216,000
Intangible and other assets, net 693,000 668,000
-------------- --------------
TOTAL ASSETS $ 36,783,000 $ 30,995,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 1,800,000 $ --
Accounts payable and accrued expenses 554,000 1,367,000
-------------- --------------
TOTAL LIABILITIES 2,354,000 1,367,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Group equity 34,429,000 29,628,000
-------------- --------------
Total stockholders' equity 34,429,000 29,628,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,783,000 $ 30,995,000
============== ==============
</TABLE>
*Amounts have been restated for certain items more fully described in Note 3 -
Restatement of Financial Information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 46
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------------
1998* 1999* 1999 2000
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 9,960,000 $ 7,821,000 $ 6,006,000 $ 5,232,000
Other income 5,003,000 3,603,000 2,764,000 1,663,000
----------- ----------- ----------- -----------
Total revenues 14,963,000 11,424,000 8,770,000 6,895,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Operating expenses 8,639,000 6,713,000 4,988,000 4,698,000
Provision for credit losses 2,862,000 2,719,000 1,859,000 1,422,000
----------- ----------- ----------- -----------
Total costs and expenses 11,501,000 9,432,000 6,847,000 6,120,000
----------- ----------- ----------- -----------
Income before provision for 3,462,000 1,992,000 1,923,000 775,000
income taxes
Provision for income taxes 1,384,000 797,000 769,000 310,000
----------- ----------- ----------- -----------
Net income $ 2,078,000 $ 1,195,000 $ 1,154,000 $ 465,000
=========== =========== =========== ===========
UNAUDITED PRO FORMA DATA: (NOTE 1)
Pro forma net income per common share
(Unaudited):
Basic $ 0.17 $ 0.06
Diluted $ 0.17 $ 0.06
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>
*Amounts have been restated for certain items more fully described in Note 3 -
Restatement of Financial Information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 47
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
GROUP EQUITY*
--------------
<S> <C>
Balance, December 31, 1997 $ 26,879,000
Capital distribution to related party (3,866,000)
Net income for the year ended December 31, 1998 2,078,000
--------------
Balance, December 31, 1998 25,091,000
Capital contribution from related party 8,143,000
Net income for the year ended December 31, 1999 1,195,000
--------------
Balance, December 31, 1999 34,429,000
Capital distribution to related party (Unaudited) (5,266,000)
Net income for the nine months ended September 30, 2000
(Unaudited) 465,000
--------------
Balance, September 30, 2000 (Unaudited) $ 29,628,000
==============
</TABLE>
*Amounts have been restated for certain items more fully described in Note 3 -
Restatement of Financial Information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 48
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------------
1998* 1999* 1999 2000
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,078,000 $ 1,195,000 $ 1,154,000 $ 465,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 103,000 180,000 80,000 56,000
Provision for credit losses 2,862,000 2,719,000 1,859,000 1,422,000
Deferred income taxes 194,000 (1,000) 5,000 76,000
Changes in assets and liabilities:
Prepaid expenses and other current assets 318,000 (99,000) (49,000) 85,000
Inventory -- (4,893,000) (3,655,000) 611,000
Accounts payable and accrued expenses (256,000) (2,000) 842,000 813,000
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities
5,299,000 (901,000) 236,000 3,528,000
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract
receivables (originated and acquired)
collected, net of recoveries 7,123,000 2,368,000 4,781,000 3,505,000
Installment contracts returned to Central 2,138,000 262,000 245,000 --
Capital expenditures, net (37,000) (48,000) (72,000) (12,000)
------------ ------------ ------------ ------------
Net cash provided by investing activities 9,224,000 2,582,000 4,954,000 3,493,000
------------ ------------ ------------ ------------
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 (3,866,000) 8,143,000 6,422,000 (5,266,000)
------------ ------------ ------------ ------------
Net cash used in financing activities (13,866,000) (2,057,000) (5,578,000) (7,066,000)
------------ ------------ ------------ ------------
NET INCREASE(DECREASE) IN CASH 657,000 (376,000) (388,000) (45,000)
CASH, BEGINNING OF PERIOD (209,000) 448,000 448,000 72,000
------------ ------------ ------------ ------------
CASH, END OF PERIOD $ 448,000 $ 72,000 $ 60,000 $ 27,000
============ ============ ============ ============
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 656,000 $ 144,000 $ 105,000 $ --
INCOME TAXES $ 908,000 $ 825,000 $ 523,000 $ 9,000
</TABLE>
*Amounts have been restated for certain items more fully described in Note 3 -
Restatement of Financial Information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 49
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 and it is
anticipated that the Plan will be consummated on or about January 31, 2001. The
Plan requires Central Financial to distribute to Central Financial's
stockholders 100% of the outstanding Common Stock of Hispanic Express and
Banner Central Finance. Pursuant to the Plan, Central Financial will contribute
to Hispanic Express its investment subsidiaries, which are engaged in the small
loan, travel finance and travel services businesses and will contribute to
Banner Central Finance, its businesses engaged in selling and financing of
automobile insurance, its consumer products receivable portfolio and its
mortgage business.
In addition, pursuant to the Plan, Hispanic Express and
Banner Central Finance have entered into certain agreements for the purpose of
defining 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 cost 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 second trust mortgages.
The Company's purchased finance receivables business is dependent upon the
business activity of Banner's Central Electric, Inc., or Central, which is
focused in Southern California. Central is an affiliate of the Company that has
granted the Company the exclusive right to purchase the receivables it
originates when it sells its inventory at its retail stores. The
F-7
<PAGE> 50
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Company generally 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 September 30, 2000 and for the
nine months ended September 30, 2000 and 1999 and related footnote information
are unaudited and have been prepared on the same basis as the audited
consolidated financial statements. In the opinion of management, the interim
unaudited consolidated financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of
these interim periods. The results for the nine months ended September 30, 2000
are not necessarily indicative of the operating results to be expected for the
entire year.
Finance Receivables - Finance receivables include installment
contracts that are purchased from Central, (referred to herein as the "Consumer
Product Portfolio"), mortgage loan receivables originated by the Company
(referred to herein as the "Mortgage 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,
48-60 months in the Mortgage 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 loans based
on previous experience or when the events giving rise to credit losses are
estimated to have occurred. The Company's portfolios comprise generally
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.
F-8
<PAGE> 51
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 non-mortgage 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 nine months ended September 30, 2000 and
1999, and the years ended December 31, 1999 and 1998, amounted to $514,000 and
$663,000, 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.
Pursuant to the terms of a financing agreement entered into
in 1996 between Central and Central Installment Credit Company, a wholly owned
subsidiary of Central Financial, Central Financial returned to Central
purchased receivables with a book value, at the date of transfer, of $245,000
for the nine months ended September 30, 1999 and $262,000 and $2,138,000 for
the years ended December 31, 1999 and 1998, respectively.
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
F-9
<PAGE> 52
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Lived Assets." If the carrying amount of the asset exceeds the estimated
undiscounted future cash flows to be generated by the asset, an impairment loss
would be recorded to reduce the asset's carrying value to its estimated fair
value.
Depreciation and amortization are computed primarily using
the straight-line method over the estimated lives of the assets, as follows:
<TABLE>
<S> <C>
Furniture, equipment and software....................... 5 to 10 years
Leasehold improvements.................................. Life of lease
</TABLE>
Intangible Assets - Intangible assets primarily arose in
connection with the Company's acquisition of the net assets of an automobile
insurance business during 1996. The excess of the purchase price over the fair
value of net assets acquired is being amortized using the straight-line method
over 30 years. The recoverability of the excess of the purchase price over the
fair value of net assets acquired is analyzed annually based on undiscounted
future cash flows. If the carrying value of the intangible asset exceeds the
estimated undiscounted future cash flows, an impairment loss would be recorded
to reduce the asset's carrying value to its estimated fair value. No impairment
loss has been recorded to date. Accumulated amortization of intangibles as of
September 30, 2000 and December 31, 1999 was $112,000 and $93,000,
respectively.
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 and
our Mortgage Portfolio are deferred and recognized using the interest method.
Transaction fees on contracts purchased from a related party and origination
fees earned on mortgages 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.
F-10
<PAGE> 53
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Other income consists of:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1998 1999 1999 2000
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Other Income
Late and extension charges $1,585,000 $1,408,000 $1,083,000 $ 927,000
Insurance products and other 3,418,000 2,195,000 1,681,000 736,000
---------- ---------- ---------- ----------
$5,003,000 $3,603,000 $2,764,000 $1,663,000
========== ========== ========== ==========
</TABLE>
Income Taxes - The Company, Central Financial and Hispanic
Express have entered into a Tax-Sharing Agreement (See Note 6). The Company
follows SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, income
tax expense includes income taxes payable for the current year and the change
in deferred income tax assets and liabilities for the future tax consequences
of events that have been recognized in the Company's financial statements or
income tax returns. A valuation allowance is recognized to reduce the carrying
value of the deferred tax assets if it is more likely than not that some or all
of the deferred tax assets will not be realized.
Advertising - The Company advertises primarily on Hispanic
television and radio, and through newspapers and direct mail. All advertising
costs are expensed as incurred. Advertising expense for the nine months ended
September 30, 2000 and 1999, and the years ended December 31, 1999 and 1998
were $91,000 and $134,000, and $172,000 and $134,000, respectively.
Concentration of Credit Risk - The Company places its
temporary cash and cash investments with high quality financial institutions.
Management monitors the financial creditworthiness of these financial
institutions. As of December 31, 1999, such investments were in excess of
insured limits. The Company's purchased receivables business activity is with
low-income customers located primarily in the greater Los Angeles area. A
significant portion of the customers' ability to repay their loans is dependent
upon general economic factors within the geographical area in which the Company
operates. The Company's loans are unsecured and, thereby, the Company's ability
to get repaid is totally dependent upon the general financial strength of the
borrower. To mitigate a portion of this risk, the Company generally limits the
amount of a will loan to a single customer to an amount not to exceed $1,300.
The Company's mortgage business is also with customers located primarily in the
greater Los Angeles area. A significant portion of the customers' ability to
repay their mortgage loans is dependent upon general economic factors within
the area in which the Company operates. Although these loans are secured, the
Company is still dependent upon the general financial strength of the borrowers
and the value of the borrowers' residential property.
F-11
<PAGE> 54
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 the 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 September 30, 2000 and December 31,
1999.
The fair value of mortgages is estimated by utilizing
discounted future cash flow calculations using interest rates currently being
offered for similar loans to borrowers with similar credit risks and for the
remaining estimated maturities. Substantially all of the Company's mortgages
were issued after January 1, 1999. Management believes the carrying value of
the mortgage portfolio approximates its carrying value as of September 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 on 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. The Company does not currently own any derivative instruments.
F-12
<PAGE> 55
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the
years ended December 31, 1999 and 1998 to reflect the contribution of the
mortgage business from Central Financial to the Company, which was previously
reported in the financial statements of Hispanic Express. The previously
reported financial statements of the Company were prepared in accordance with
accounting principles generally accepted in the United States and were restated
to reflect the reclassification of the mortgage business from the Company to
Banner Central Finance. The impact of these adjustments on the Company's
financial results as originally reported is summarized below:
<TABLE>
<CAPTION>
1998 1999
------------------------------ -----------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Interest income $ 9,942,000 $ 9,960,000 $ 7,466,000 $ 7,821,000
Other income 5,003,000 5,003,000 3,603,000 3,603,000
------------ ------------ ------------ ------------
Total revenues $ 14,945,000 $ 14,963,000 $ 11,069,000 $ 11,424,000
============ ============ ============ ============
Net income $ 2,067,000 $ 2,078,000 $ 1,012,000 $ 1,195,000
============ ============ ============ ============
Net income per share $ 0.14 $ 0.17
============ ============
Retained earnings at
end of year $ 24,764,000 $ 25,091,000 $ 29,492,000 $ 34,429,000
============ ============ ============ ============
</TABLE>
4. FINANCE RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------
1998 1999 2000
----------- ----------- -------------
Finance Receivables consist of: (Unaudited)
<S> <C> <C> <C>
Consumer Product Portfolio $33,886,000 $27,788,000 $22,771,000
Mortgage Portfolio 327,000 4,986,000 6,256,000
Other Portfolios 6,835,000 2,718,000 791,000
----------- ----------- -----------
41,048,000 35,492,000 29,818,000
Less: deferred interest and insurance 3,807,000 3,056,000 2,370,000
Less: deferred loan origination fees 70,000 537,000 640,000
Less: allowance for credit losses 1,590,000 1,668,000 1,504,000
----------- ----------- -----------
$35,581,000 $30,231,000 $25,304,000
=========== =========== ===========
</TABLE>
F-13
<PAGE> 56
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, SEPTEMBER 30,
-------------------------- ---------------
1998 1999 2000
---------- ---------- ---------------
(Unaudited)
<S> <C> <C> <C>
Consumer Product Portfolio:
Past due 31 days or more $1,566,000 $ ,470,000 $1,442,000
========== ========== ==========
Mortgage Portfolio:
Past due 31 days or more $-- $ 153,000 $ 261,000
========== ========== ==========
Other Portfolios:
Past due 31 days or more $ 768,000 $ 735,000 $ 60,000
========== ========== ==========
</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 at December 31, 1999. There were no amounts greater
than 90 days at September 30, 2000.
F-14
<PAGE> 57
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The allowance for credit losses includes the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Allowance for credit losses, beginning of $ 2,048,000 $ 1,590,000 $ 1,590,000 $ 1,668,000
period
Provision for credit losses 2,862,000 2,719,000 1,859,000 1,422,000
Charge-offs, net (3,320,000) (2,641,000) (1,859,000) (1,586,000)
------------ ------------ ------------ ------------
Allowance for credit losses, end of period $ 1,590,000 $ 1,668,000 $ 1,590,000 $ 1,504,000
============ ============ ============ ============
</TABLE>
5. 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. Notes
payable allocated to the Company at December 31, 1999 was $1,800,000 (See Note
1). The note was repaid in January 2000.
6. 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, SEPTEMBER 30,
------------------------------ --------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
CURRENT:
Federal $ 1,041,000 $ 699,000 $ 669,000 $ 203,000
State 149,000 99,000 95,000 31,000
------------ ------------ ------------ ------------
1,190,000 798,000 764,000 234,000
DEFERRED:
Federal 170,000 (1,000) 4,000 66,000
State 24,000 -- 1,000 10,000
------------ ------------ ------------ ------------
194,000 (1,000) 5,000 76,000
------------ ------------ ------------ ------------
Provision for income taxes $ 1,384,000 $ 797,000 $ 769,000 $ 310,000
============ ============ ============ ============
</TABLE>
F-15
<PAGE> 58
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A reconciliation of the provision for income taxes to the statutory rates is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 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>
The tax effects of temporary differences giving rise to the deferred income tax
assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
Allowance for credit losses $ 647,000 $ 579,000
Amortization of goodwill (37,000) (45,000)
Other (50,000) (50,000)
------------ ------------
Net deferred tax asset $ 560,000 $ 484,000
============ ============
</TABLE>
7. RELATED PARTY TRANSACTIONS
In connection with its formation, the Company, Central
Financial, Hispanic Express and Central entered into certain agreements (the
"Financing 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 $11.8 million of inventory during the year ended December 31, 1999 and the
nine months ended September 30, 2000, respectively, of which $4.9 million and
$4.3 million is included in inventory at December 31, 1999 and September 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 nine months ended September 30, 1999 and the years ended December 31, 1999
and 1998, the transaction fees amounted to $0.5 million, $0.8 million and
F-16
<PAGE> 59
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
$0.9 million, respectively, and the receivables returned to Central were $0.2
million, $0.3 million and $2.1 million, respectively.
The Operating Agreement provides, among other things, that
Hispanic Express or its 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 its affiliates that directly
relate to the Company, the Company is obligated to pay Hispanic Express or its
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
$2,410,000, and $3,289,000 for the nine months ended September 30, 2000 and
1999 and $4,373,000 and $5,529,000 for the years ended December 31, 1999, and
1998, respectively.
The Company, Central Financial and Hispanic Express have
entered into a Tax-Sharing Agreement which provides, among other things, for
the payment of federal, state and other income tax remittances or refunds for
periods during which the Company was included in the same consolidated group
for federal income tax purposes, the allocation of responsibility for the
filing of such tax returns and various related matters. For periods in which
the Company was included in Central Financial's consolidated federal income tax
returns, the Company will be required to pay its allocable portion of the
consolidated federal, state and other income tax liabilities of the group and
will be entitled to receive refunds determined as if the Company had filed
separate income tax returns. With respect to Central Financial's liability for
payment of taxes for all periods during which the Company was so included in
Central Financial's consolidated federal income tax returns, the Company will
indemnify Central Financial for all federal, state and other income tax
liabilities of the Company for such periods. The date of the consummation of
the Plan will be the last day on which the Company will be required to be
included in Central Financial's consolidated federal income tax returns.
For the twelve months ended December 31, 1998, the Company
made a capital distribution to its parent company of $3,866,000 and received a
capital contribution for the twelve months ended December 31, 1999 of
$8,143,000. For the nine months ended September 30, 2000, the Company made a
capital distribution to its parent company of $5,266,000. The capital
transactions for the periods presented reflect contributions and distributions
arising from the changing levels of the Company's receivables portfolios.
F-17
<PAGE> 60
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. 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.
None of the options which will be granted have been included
in the computation of diluted earnings per share reflected in the Consolidated
Statement of Income. Upon issuance of the options in future periods, the
earnings per share may be diluted to the extent that the average market value
of the Company's stock exceeds the option exercise price.
9. SEGMENT INFORMATION
The Company's reportable segments are consumer receivables,
mortgage loans, other and corporate overhead. Other includes primarily the
automobile insurance and insurance premium financing operations. Information
about these segments as of, or for the nine months ended September 30, 2000 and
1999, and for the years ended December 31, 1999 and 1998 is as follows:
F-18
<PAGE> 61
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
CONSUMER CORPORATE
RECEIVABLES MORTGAGE OTHER OVERHEAD TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
For the Nine Months Ended September 30, 2000 (unaudited)
Interest income $ 4,483,000 $ 715,000 $ 34,000 $ -- $ 5,232,000
Other income 936,000 155,000 572,000 -- 1,663,000
------------ ------------ ------------ ------------ ------------
Total revenue $ 5,419,000 $ 870,000 $ 606,000 $ -- $ 6,895,000
============ ============ ============ ============ ============
Pre-tax segment earnings (loss) $ 716,000 $ 266,000 $ (32,000) $ (175,000) $ 775,000
Segment assets $ 24,323,000 $ 5,611,000 $ 1,061,000 $ -- $ 30,995,000
For the Nine Months Ended September 30, 1999 (unaudited)
Interest income $ 5,530,000 $ 184,000 $ 292,000 $ -- $ 6,006,000
Other income 1,602,000 55,000 1,107,000 -- 2,764,000
------------ ------------ ------------ ------------ ------------
Total revenue
$ 7,132,000 $ 239,000 $ 1,399,000 $ -- $ 8,770,000
============ ============ ============ ============ ============
Pre-tax segment earnings (loss) $ 2,078,000 $ 52,000 $ (69,000) $ (138,000) $ 1,923,000
Segment assets $ 28,609,000 $ 3,555,000 $ 1,902,000 $ -- $ 34,066,000
For the Year Ended December
31, 1999
Interest income $ 7,131,000 $ 355,000 $ 335,000 $ -- $ 7,821,000
Other income 2,119,000 98,000 1,386,000 -- 3,603,000
------------ ------------ ------------ ------------ ------------
Total revenue
$ 9,250,000 $ 453,000 $ 1,721,000 $ -- $ 11,424,000
============ ============ ============ ============ ============
Pre-tax segment earnings (loss) $ 2,106,000 $ 163,000 $ (135,000) $ (279,000) $ 1,992,000
Segment assets $ 30,659,000 $ 4,470,000 $ 1,654,000 $ -- $ 36,783,000
For the Year Ended December
31, 1998
Interest income $ 9,075,000 $ 18,000 $ 867,000 $ -- $ 9,960,000
Other income 3,230,000 3,000 1,770,000 -- 5,003,000
------------ ------------ ------------ ------------ ------------
Total revenue
$ 12,305,000 $ 21,000 $ 2,637,000 $ -- $ 14,963,000
============ ============ ============ ============ ============
Pre-tax segment earnings (loss) $ 3,082,000 $ (67,000) $ 133,000 $ (344,000) $ 3,462,000
Segment assets $ 33,781,000 $ 304,000 $ 3,563,000 $ -- $ 37,648,000
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space for its automobile insurance
business under operating leases which have expired and are currently on a
month-to-month basis. Aggregate rental expense for the nine months ended
September 30, 2000 and 1999 were $51,000 and
F-19
<PAGE> 62
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
$54,000, respectively, and for the years ended December 31, 1999 and 1998 were
$72,000 and $73,000, respectively.
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 $997,000, which is included in operating
expenses. The Company presently conducts these operations in a newly
constructed facility and is provided space by Central in connection with the
Financing Agreement.
The Company has entered into an Guaranty Agreement with
Hispanic Express pursuant to which it has agreed to assume all liabilities and
responsibilities under the Central Financial Supplemental Executive Retirement
Plan, or SERP, solely and exclusively for Mr. Cypres, should Hispanic Express
default on its obligations to pay the benefits due Mr. Cypres under the SERP.
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.
* * * * *
F-20
