1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 2001.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER: 000-31747
BANNER CENTRAL FINANCE COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4821101
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5480 EAST FERGUSON DRIVE
COMMERCE, CALIFORNIA 90022
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (323) 720-8600
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X} No [ ]
Number of shares outstanding of the Registrant's Common Stock, as of November
14, 2001 7,417,400:
Traditional Small Business Disclosure Format. Yes [x] No [ ]
2
BANNER CENTRAL FINANCE COMPANY
FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 200. . . 3
Condensed Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- -------------
ASSETS
Cash and cash equivalents. . . . . . . . . . . $ 11,743,000 $ 77,000
Finance receivables, net . . . . . . . . . . . 13,803,000 23,709,000
Prepaid expenses and other current assets. . . 56,000 10,000
Note receivable from affiliate . . . . . . . . - 2,493,000
Receivable from related party. . . . . . . . . 158,000 -
Inventory. . . . . . . . . . . . . . . . . . . 2,710,000 3,559,000
Deferred income taxes. . . . . . . . . . . . . 383,000 330,000
Property and equipment, net. . . . . . . . . . 3,741,000 116,000
Intangible and other assets, net . . . . . . . 642,000 661,000
-------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . $ 33,236,000 $ 30,955,000
============== =============
LIABILITIES AND STOCKHOLDERS EQUITY
Accrued expenses and other current liabilities $ 922,000 $ 1,414,000
-------------- -------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . 922,000 1,414,000
Minority interest in subsidiary. . . . . . . . 493,000 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY
Stockholders equity. . . . . . . . . . . . . . 31,821,000 29,541,000
-------------- -------------
Total stockholders equity. . . . . . . . . . . 31,821,000 29,541,000
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY. . . $ 33,236,000 $ 30,955,000
============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2001 2000 2001 2000
----------- ----------- ----------- ----------
REVENUES
Interest income. . . . . . . . . . . . . . . . $1,040,000 $1,584,000 $ 3,553,000 $5,232,000
Net sales. . . . . . . . . . . . . . . . . . . 2,189,000 - 5,915,000 -
Other income . . . . . . . . . . . . . . . . . 632,000 585,000 1,937,000 1,663,000
----------- ----------- ----------- ----------
Total revenues . . . . . . . . . . . . . . . . 3,861,000 2,169,000 11,405,000 6,895,000
----------- ----------- ----------- ----------
COSTS AND EXPENSES
Operating expenses . . . . . . . . . . . . . . 2,089,000 2,167,000 5,315,000 4,642,000
Provision for credit losses. . . . . . . . . . 545,000 568,000 2,165,000 1,422,000
Cost of sales. . . . . . . . . . . . . . . . . 1,383,000 - 3,677,000 -
Depreciation and amortization. . . . . . . . . 54,000 17,000 128,000 56,000
----------- ----------- ----------- ----------
TOTAL COSTS AND EXPENSES . . . . . . . . . . . 4,071,000 2,752,000 11,285,000 6,120,000
----------- ----------- ----------- ----------
Income (loss) from operations. . . . . . . . . (210,000) (583,000) 120,000 775,000
Provision (benefit) for income taxes . . . . . (74,000) (233,000) 58,000 310,000
----------- ----------- ----------- ----------
NET (LOSS) INCOME. . . . . . . . . . . . . . . $ (136,000) $ (350,000) $ 62,000 $ 465,000
=========== =========== =========== ==========
Earnings (loss) per common share (unaudited):
Basic. . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.05) $ 0.01 $ 0.06
Diluted. . . . . . . . . . . . . . . . . . $ (0.02) $ (0.05) $ 0.01 $ 0.06
Shares used in calculating earnings (loss)
per common share:
Basic. . . . . . . . . . . . . . . . . . . 7,411,000 7,166,000 7,276,000 7,166,000
Diluted. . . . . . . . . . . . . . . . . . 7,411,000 7,166,000 7,277,000 7,166,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 62,000 $ 465,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . 128,000 56,000
Provision for credit losses. . . . . . . . . . . . 2,165,000 1,422,000
Deferred income taxes. . . . . . . . . . . . . . . 23,000 76,000
Changes in assets and liabilities:
Prepaid expenses and other current assets . . . (46,000) 85,000
Receivables from related party. . . . . . . . . (158,000) -
Inventory . . . . . . . . . . . . . . . . . . . 796,000 611,000
Accrued expenses and other current liabilities. (492,000) 813,000
------------ ------------
Net cash provided by operating activities. . . . . . 2,478,000 3,528,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract receivables
collected, net of recoveries . . . . . . . . . . 7,741,000 3,505,000
Decrease in note receivable from affiliate . . . . . 1,212,000 -
Capital expenditures . . . . . . . . . . . . . . . . (16,000) (12,000)
------------ ------------
Net cash provided by investing activities . . . . . 8,937,000 3,493,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable. . . . . . . . . . . . . . - (1,800,000)
Proceeds from issuance of stock. . . . . . . . . . . 251,000 -
Capital distribution to related party. . . . . . . . - (5,266,000)
------------ ------------
Net cash provided by (used in) financing activities. 251,000 (7,066,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,166,000 (45,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . 77,000 72,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . $11,743,000 $ 27,000
============ ============
CASH PAID DURING THE YEAR FOR:
INTEREST . . . . . . . . . . . . . . . . . . . $ - $ -
INCOME TAXES . . . . . . . . . . . . . . . . . 60,000 9,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation - The condensed consolidated financial statements of
Banner Central Finance Company ("Banner Central Finance" or the "Company") are
unaudited, other than the consolidated balance sheet at December 31, 2000. In
the opinion of the Company's management, all adjustments of a normal recurring
nature necessary for a fair statement of interim periods presented have been
included. The results for interim periods are not necessarily indicative of
results to be expected for the entire year. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements for the year ended December 31, 2000, and the notes thereto
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
2000.
Banner Central Finance was formed in September 2000 and was a wholly-owned
subsidiary of Central Financial Acceptance Corporation ("Central Financial"). 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, Banner Central
Finance Company and Hispanic Express, Inc. ("Hispanic Express"). On February 28,
2001, the Plan was completed and Central Financial was dissolved and liquidated
and Central Financial distributed to its stockholders 100% of the outstanding
Common Stock of Banner Central Finance and Hispanic Express. Pursuant to the
Plan, Central Financial contributed to Banner Central Finance its investment in
subsidiaries, which are engaged in selling and financing of automobile
insurance, its consumer products receivable portfolio and its mortgage business
and contributed to Hispanic Express its investment subsidiaries that are engaged
in the small loan, travel finance, check cashing and travel services businesses.
In addition, pursuant to the Plan, Banner Central Finance and Hispanic
Express entered into certain agreements for the purpose of defining their
ongoing relationship (See Note 4), including provisions for the allocation 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 interests. The accompanying
condensed 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.
On February 28, 2001, Central Financial contributed 80% of the outstanding
common stock of BCE Properties II, Inc. to the Company. For financial reporting
purposes the contribution was recorded on a historical cost basis and resulted
in an increase in stockholders' equity of approximately $1,900,000. On February
28, 2001, Central Financial purchased and contributed to the Company the
business, assets and certain obligations of a retail store previously operated
by Banner Central Electric, Inc. ("Central"), an affiliated company, for
approximately $392,000.
Nature of Operations - The Company: (i) 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 the
Company's retail store and retail stores owned by Central; (ii) provides
automobile insurance products and insurance premium financing to its customers;
and (iii) originates first and second trust mortgages. The Company's purchased
finance receivables business is dependent upon the business activity of the
Company's retail store and the retail stores owned by Central, which are located
in Southern California. Central has granted the Company the exclusive right to
purchase the receivables it originates when it sells its inventory at its retail
stores. The Company generally experiences the highest demand for its financial
products and services between October and December.
7
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
New Accounting Pronouncements - The Financial Accounting Standards Board
(FASB) has finalized new accounting standards covering business combinations,
goodwill and intangible assets. These new rules will consist of Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142,"Goodwill and Other Intangible Assets". The Company is currently
evaluating the impact of the new accounting standards on existing goodwill and
other intangible assets. In accordance with these new accounting standards, the
Company plans to adopt SFAS No. 141 and No. 142 on January 1, 2002.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by
dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The dilutive effect of outstanding
options is reflected in diluted earnings per share by application of the
treasury stock method. Options to purchase 465,000 shares of common stock
were outstanding at September 30, 2001. Basic earnings and diluted earnings per
share for the three and nine months ended September 30, 2000 is based on the
number of shares of common stock issued by the Company pursuant to the Plan and
are assumed to be outstanding as of January 1, 2000.
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2001 2000
----------- -----------
NUMERATOR:
Net loss . . . . . . . . . . . . . . . . . $ (136,000) $ (350,000)
----------- -----------
DENOMINATOR:
Denominator for basic earnings (loss) per share
weighted average shares outstanding . . 7,411,000 7,166,000
Effect of dilutive securities:
Dilutive options . . . . . . . . . . . . . - -
----------- -----------
Dilutive potential common shares . . . . . - -
----------- -----------
Denominator for diluted earnings per share 7,411,000 7,166,000
=========== ===========
Basic earnings (loss) per share. . . . . . $ (0.02) $ (0.05)
Diluted earnings (loss) per share. . . . . $ (0.02) $ (0.05)
8
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
---------- ----------
NUMERATOR:
Net income . . . . . . . . . . . . . . . . $ 62,000 $ 465,000
---------- ----------
DENOMINATOR:
Denominator for basic earnings per share
weighted average shares outstanding. . 7,276,000 7,166,000
Effect of dilutive securities:
Dilutive options . . . . . . . . . . . . . 1,000 -
---------- ----------
Dilutive potential common shares . . . . . 1,000 -
---------- ----------
Denominator for diluted earnings per share 7,277,000 7,166,000
========== ==========
Basic earnings per share . . . . . . . . . $ 0.01 $ 0.06
Diluted earnings per share . . . . . . . . $ 0.01 $ 0.06
3. CERTAIN CONSOLIDATED FINANCIAL STATEMENT DETAILS
FINANCE RECEIVABLES SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
Gross finance receivables:
Consumer product portfolio. . . . . . . $12,944,000 $21,254,000
Mortgage portfolio. . . . . . . . . . . 3,801,000 5,585,000
Other portfolios. . . . . . . . . . . . 260,000 508,000
----------- -----------
17,005,000 27,347,000
----------- -----------
Less:
Deferred interest and insurance . . . . 1,419,000 2,407,000
Deferred loan origination fees. . . . . 320,000 548,000
Allowance for credit losses . . . . . . 1,463,000 683,000
----------- -----------
3,202,000 3,638,000
----------- -----------
Finance receivables, net. . . . . . . . $13,803,000 $23,709,000
=========== ===========
Customers are required to make monthly payments on the Company's receivable
contracts. The aggregate gross balance of accounts with payments 31 days or more
past due are:
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
Consumer Product Portfolio:
Past due 31 days plus . . . . . . . . $ 326,000 $ 257,000
========== ==========
Mortgage Portfolio:
Past due 31 days plus . . . . . . . . $ 436,000 $ 394,000
========== ==========
Other Portfolios:
Past due 31 days plus . . . . . . . . $ 2,000 $ 6,000
========== ==========
9
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The allowance for credit losses includes the following:
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2001 2000
------------ ------------
Allowance for credit losses, beginning
of the period. . . . . . . . . . . . . $ 1,145,000 $ 1,504,000
Provision for credit losses. . . . . . . . 545,000 568,000
Charge-offs, net of recoveries . . . . . . (227,000) (568,000)
------------ ------------
Allowance for credit losses, end of period $ 1,463,000 $ 1,504,000
============ ============
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
Allowance for credit losses, beginning
of the period. . . . . . . . . . . . . $ 683,000 $ 1,668,000
Provision for credit losses. . . . . . . . 2,165,000 1,422,000
Charge-offs, net of recoveries . . . . . . (1,385,000) (1,586,000)
------------ ------------
Allowance for credit losses, end of period $ 1,463,000 $ 1,504,000
============ ============
PROPERTY AND EQUIPMENT SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
Land. . . . . . . . . . . . . . . . . . . $1,203,000 $ -
Buildings and improvements. . . . . . . . 3,156,000 8,000
Furniture, equipment and software . . . . 179,000 168,000
---------- ---------
4,538,000 176,000
Less: Accumulated depreciation. . . . . . 797,000 60,000
---------- ---------
$3,741,000 $ 116,000
=========== ==========
INTANGIBLE AND OTHER ASSETS SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- ------------
Goodwill . . . . . . . . . . . . . . . . $ 780,000 $ 780,000
Less: Accumulated amortization . . . . . 138,000 119,000
--------- ---------
$ 642,000 $ 661,000
========== =========
10
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER INCOME THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2001 2000
--------- ---------
Late and extension charges. . . . . . $143,000 $341,000
Mortgage loan origination and fee
income. . . . . . . . . . . . . . 301,000 71,000
Insurance products and other. . . . . 188,000 173,000
-------- --------
$632,000 $585,000
======== ========
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
---------- ----------
Late and extension charges. . . . . . $ 535,000 $ 936,000
Mortgage loan origination and fee
income. . . . . . . . . . . . . . 804,000 155,000
Insurance products and other. . . . . 598,000 572,000
---------- ----------
$1,937,000 $1,663,000
========== ==========
4. RELATED PARTY TRANSACTIONS
In connection with its formation, the Company, Central Financial, Hispanic
Express and Central entered into certain agreements including, the Financing
Agreement, the Operating Agreement and the Tax Sharing Agreement, for defining
their ongoing relationships.
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 the Financing
Agreement, Central purchased $3.5 million and $13.8 million of inventory from
the Company during the nine months ended September 30, 2001 and 2000,
respectively. The Company can terminate the Financing Agreement at any time upon
one year's prior written notice to Central.
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 that Hispanic
Express will 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 $595,000 and
$1,624,000 for the three and nine months ended September 30, 2001, respectively,
and $755,000 and $2,410,000 for the three and nine months ended September 30,
2000, respectively.
11
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company, Central Financial and Hispanic Express 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. February 28, 2001 was the last day on which the
Company was required to be included in Central Financial's consolidated federal
income tax returns.
In connection with the contribution of the business, assets and assumption
of certain obligations by Central Financial of a retail store owned by Central,
an affiliated company, Central and the Company have agreed to use allocation
methods agreeable to both parties for the allocation of certain corporate
expenses of Central. In connection with the acquisition of the retail store, the
Company has agreed to assume the obligation of Central to sell certain inventory
at cost and lease certain retail space to Credit Starters LLC, an affiliated
Company, controlled by Gary Cypres, Chairman of the Company.
For the nine months ended September 30, 2000, the Company made a capital
distribution to Central Financial totaling $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.
Prior to September 30, 2001, the Company had a note receivable from
Hispanic Express in the amount of $5,325,000 which bore interest per annum at
the prime rate which averaged 6.75% for the nine months ended September 30,
2001. The note receivable was repaid by Hispanic Express on September 30, 2001.
Interest income earned on the note receivable from Hispanic Express was $90,000
and $213,000 for the three and nine months ended September 30, 2001,
respectively.
5. SEGMENT INFORMATION
The Company has identified four reporting segments in accordance with SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information",
the Consumer Receivables, Mortgage Loans, Other and Corporate Overhead. The
factors for determining the reportable segments were based on the distinct
nature of their operations. Other includes primarily the operations of the
retail store and automobile insurance operations in 2001 and the automobile
insurance and insurance premium finance operations in 2000.
The accounting policies of these reportable segments are the same as those
described in the summary of significant accounting policies in the Company's
2000 Form 10-KSB. The Company evaluates the performance of its operating
segments based on revenues and operating income. Operating income for each
segment includes revenue and operating expenses directly attributable to the
segment. Operating income for each segment excludes other income and expense and
certain expenses that are managed outside the reportable segment. Costs excluded
from segment operating income include various corporate expenses and income
taxes. Corporate expenses include separately managed general and administrative
expenses. Summary information by segment follows:
12
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
REVENUES
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2001 2000
----------- ----------
Consumer Receivables. . . . . . $ 1,035,000 $ 1,643,000
Mortgage Loans. . . . . . . . . 450,000 314,000
Other . . . . . . . . . . . . . 2,376,000 212,000
Corporate Overhead. . . . . . . - -
----------- ----------
Total revenues. . . . . . . . . $ 3,861,000 $ 2,169,000
=========== ==========
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
----------- ----------
Consumer Receivables. . . . . . $ 3,601,000 $ 5,419,000
Mortgage Loans. . . . . . . . . 1,325,000 870,000
Other . . . . . . . . . . . . . 6,479,000 606,000
Corporate Overhead. . . . . . . - -
------------ -----------
Total revenues. . . . . . . . . $11,405,000 $ 6,895,000
============ ===========
INCOME(LOSS) FROM OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2001 2000
------------ -------------
Consumer Receivables . . . . . . $ 32,000 $ (889,000)
Mortgage Loans . . . . . . . . . 180,000 350,000
Other. . . . . . . . . . . . . . (287,000) 32,000
Corporate Overhead . . . . . . . (135,000) (76,000)
------------- ------------
Loss from operations . . . . . . $ (210,000) $ (583,000)
============= ============
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2001 2000
-------------- ------------
Consumer Receivables . . . . . . $ 425,000 $ 716,000
Mortgage Loans . . . . . . . . . 451,000 266,000
Other. . . . . . . . . . . . . . (281,000) (32,000)
Corporate Overhead . . . . . . . (475,000) (175,000)
-------------- ------------
Income from operations . . . . . $ 120,000 $ 775,000
============= ============
TOTAL ASSETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- -------------
Consumer Receivables . . . . . . $ 26,526,000 $ 24,886,000
Mortgage Loans . . . . . . . . . 3,217,000 4,913,000
Other. . . . . . . . . . . . . . 3,493,000 1,156,000
Corporate Overhead . . . . . . . - -
------------ ------------
Total assets . . . . . . . . . . $ 33,236,000 $ 30,955,000
============= ============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed in this Quarterly Report on Form 10-QSB may
constitute forward-looking statements under Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These statements may
involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which Banner
Central Finance and its subsidiaries (the "Company" which may be referred to as
"we" or "us," when referring only to the parent company) operate in, projections
of future performance, perceived opportunities in the market and statements
regarding our mission and vision. Our actual results, performance, or
achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements. For
discussion of the factors that might cause such a difference, see "Item 1.
Description of Business -- Business Considerations and Certain Factors that May
Affect Future Results of Operations and Stock Price" contained in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2000, as amended.
FINANCIAL TRENDS
PORTFOLIOS
The following sets forth certain information relating to our portfolios for
the periods indicated:
CONSUMER PRODUCT PORTFOLIO
--------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Gross receivable (at end of period) . . . . . . $12,944,000 $22,771,000 $12,944,000 $22,771,000
Deferred interest (at end of period). . . . . . 1,350,000 2,244,000 1,350,000 2,244,000
------------ ------------ ------------ ------------
Net receivable (at end of period) . . . . . . . 11,594,000 20,527,000 11,594,000 20,527,000
Deferred insurance revenues (at end of period). 17,000 50,000 17,000 50,000
------------ ------------ ------------ ------------
Net carrying value (at end of period) . . . . . $11,577,000 $20,477,000 $11,577,000 $20,477,000
============ ============ ============ ============
Average net receivable (1). . . . . . . . . . . $13,023,000 $21,445,000 $15,076,000 $22,805,000
Number of contracts (at end of period). . . . . 27,097 43,908 27,097 43,908
Average net contract balance (at end of period) $ 427 $ 470 $ 427 $ 470
Total interest income . . . . . . . . . . . . . $ 880,000 $ 1,289,000 $ 2,987,000 $ 4,268,000
Late charge and extension fee income. . . . . . 143,000 325,000 531,000 889,000
Provision for credit losses . . . . . . . . . . $ 489,000 $ 560,000 $ 1,950,000 $ 1,395,000
Provision for credit loss as a percentage of
average net receivable (2). . . . . . . . . 15.0% 10.4% 17.2% 8.2%
Net write-offs. . . . . . . . . . . . . . . . . $ 231,000 $ 410,000 $ 1,306,000 $ 1,245,000
Net write-offs as a percentage of average net
receivable (2). . . . . . . . . . . . . . . 7.1% 7.6% 11.6% 7.3%
Average interest rate on average net
receivable (2). . . . . . . . . . . . . . . 27.0% 24.0% 26.4% 25.0%
(1) Average net receivable is defined as the average gross receivables, less
the average deferred interest and insurance.
(2) Percentages for the three and nine months ended September 30, 2001 and
2000 are annualized.
14
CREDIT QUALITY
The provision for credit losses in our consumer product, mortgage and other
portfolios are made following the origination of loans over the period that the
events giving rise to the credit losses are estimated to occur. Our portfolios
comprise homogenous loans that are evaluated collectively to determine an
appropriate allowance for credit losses. The allowance for credit losses is
maintained at a level considered adequate to cover losses in the existing
portfolios. We pursue collection of past due accounts, and when the
characteristics of an individual account indicate that collection is unlikely,
the account is charged off and turned over to a collection agency. We accrue
interest up to the time we charge off an account. In the fourth quarter of 2000,
our loan business was negatively impacted by a bus strike in the Los Angeles
area which lasted approximately five weeks. As a result of the bus strike in
2000 and a deteriorating economic climate in 2001, our delinquencies have
increased and in response we tightened our credit guidelines and we reevaluated
our current charge-off policies and charged-off accounts that were past due at
the end of a calendar quarter and which did not make any payments thereafter.
Prior to that, our charge off policy was to automatically charge-off delinquent
accounts over 150 days past due.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Our management's periodic
evaluation of the adequacy of the allowance is based on our past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay and current economic conditions.
For information concerning our provisions for credit loses and charge-offs
experienced in our consumer product portfolios, see "Financial Trends -
Portfolios" above.
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 or statement that we provide to
them. The vast majority of our customers make their payments in cash at our
payment facilities.
We consider payments past due if a borrower fails to make any payment in
full on or before its due date, as specified in the installment credit or
mortgage loan contract the customer signs. We currently attempt to contact
borrowers whose payments are not received by the due date within 10 days after
such due date. We contact these borrowers by both letter and telephone. If no
payment is remitted to us after the initial contact, we make additional contacts
every seven days, and, after a loan becomes 31 days delinquent, we generally
turn over the account to our credit collectors. Under our guidelines, we
generally charge-off and turn over an account to a collection agency when we
determine that the account is uncollectible.
15
MORTGAGE PORTFOLIO
At September 30, 2001 and 2000, the gross receivables of the mortgage
portfolio were $3.8 million and $6.3 million, respectively. The number of
mortgage loans outstanding at September 30, 2001 and 2000 were 530 and 737,
respectively. The average interest rate on the portfolio for the nine months
ended September 30, 2001 and 2000 was 16.9%, and 15.0%, respectively. At
September 30, 2001 and 2000, there were $0.4 million and $0.3 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 table sets forth our delinquency experience for accounts with payments
31 days or more past due and allowance for credit losses for our finance
receivables.
FINANCE RECEIVABLES (1)
-----------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
----------- -----------
Past due accounts 31 days or more
(gross receivable) . . . . . . . . . . . $ 328,000 $1,502,000
Accounts with payments 31 days or
more past due as a percentage of end
of period gross receivables. . . . . . . 2.5% 6.4%
Allowance for credit losses. . . . . . . . . $1,151,000 $1,441,000
Allowance for credit losses as a percentage
of net receivables . . . . . . . . . . . 9.8% 6.8%
(1) Includes receivables in our consumer products and independent retailer
portfolios.
(2) Net receivables is defined as gross receivables, less deferred interest
and deferred administrative and insurance revenues.
Our finance receivables accounts which were 31 days or more past due
decreased to $0.3 million at September 30, 2001 compared to $1.5 million at
September 30, 2000. The accounts with payments 31 days or more past due as a
percentage of end of period gross receivables have decreased as a percentage of
gross receivables to 2.5% from 6.4% as of September 30, 2001 and 2000,
respectively. The decrease in percentage of accounts with payments 31 days or
more past due as a percentage of end of period gross receivables is primarily
due to a change in the Company's charge-off policy in December 2000. We believe
the rise in the provision for credit losses and write-offs during 2001 was a
result of excessive credit burdens for some customers partly due to an
aggressive over extension of credit in the marketplace and deteriorating
economic climate in the market we serve. The allowance for credit losses was
$1.2 million and $1.4 million at September 30, 2001 and 2000, respecitvely. The
allowance for credit losses as a percentage of net receivables increased to 9.8%
at September 30, 2001 from 6.8% at September 30, 2000.
16
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------
2001 2000 2001 2000
----------- ----------- ----------- ----------
REVENUES
Interest income . . . . . . . . . . . . $1,040,000 $1,584,000 $ 3,553,000 $5,232,000
Net sales . . . . . . . . . . . . . . . 2,189,000 - 5,915,000 -
Other income. . . . . . . . . . . . . . 632,000 585,000 1,937,000 1,663,000
----------- ----------- ----------- ----------
TOTAL REVENUES. . . . . . . . . . . . . 3,861,000 2,169,000 11,405,000 6,895,000
----------- ----------- ----------- ----------
COSTS AND EXPENSES
Operating expenses . . . . . . . . . . 2,089,000 2,167,000 5,315,000 4,642,000
Provision for credit losses . . . . . . 545,000 568,000 2,165,000 1,422,000
Cost of sales . . . . . . . . . . . . . 1,383,000 - 3,677,000 -
Depreciation and amortization . . . . . 54,000 17,000 128,000 56,000
----------- ----------- ----------- ----------
TOTAL COSTS AND EXPENSES. . . . . . . . 4,071,000 2,752,000 11,285,000 6,120,000
----------- ----------- ----------- ----------
Income (loss) from operations . . . . . (210,000) (583,000) 120,000 775,000
Provision (benefit) for income taxes. . (74,000) (233,000) 58,000 310,000
----------- ----------- ----------- ----------
NET (LOSS) INCOME . . . . . . . . . . . $ (136,000) $ (350,000) $ 62,000 $ 465,000
=========== =========== =========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Total revenue in the three months ended September 30, 2001 increased to
$3.9 million from $2.2 million in the three months ended September 30, 2000, an
increase of $1.7 million or 78.0%.
Interest income for the three months ended September 30, 2001 decreased to
$1.0 million from $1.6 million in the three months ended September 30, 2000, a
decrease of $0.6 million or 34.3%. This decrease was primarily due to a decrease
in our Consumer Products Portfolio as a result of a decreased level of
receivables purchased from Central, reflecting Central's declining retail sales.
For the three months ended September 30, 2001, our net consumer products
portfolio averaged $13.0 million compared to $21.4 million in the three months
ended September 30, 2000.
Net sales include retail sales from the retail store from the date Central
Financial contributed the operations to the Company on February 28, 2001. Prior
to the contribution, the retail store was owned and operated by Central.
Other income was $0.6 million for the three months ended September 30, 2001
and 2000, respectively. Other income primarily includes late charges and other
fees charged on the receivables portfolio, fees earned from originating first
and second trust mortgages for other financial institutions, and commissions and
fees earned from the sale of automobile insurance.
Operating expenses for the three months ended September 30, 2001 decreased
to $2.1 million from $2.2 million in the three months ended September 30, 2000,
a decrease of $0.1 million or 3.6%. Operating expenses relating to the purchased
consumer finance receivables business decreased in the three months ended
September 30, 2001 by $1.1 as compared to the same period in 2000. This decrease
was offset by $1.1 million of operating expenses of the retail store in the
three months ended September 30, 2001.
17
The provision for credit losses for the three months ended September 30,
2001 decreased to $0.5 million from $0.6 million in the three months ended
September 30, 2000. This decrease was primarily attributable to a decrease in
write-offs and delinquencies, as a result of a decrease in the average balance
of the consumer products portfolio. In the three months ended September 30,
2001, the Company also increased the provision for credit losses for the
mortgage portfolio by $0.1 million.
Cost of sales include the cost of retail sales from the retail store from
the date Central Financial contributed the operations to the Company on February
28, 2001. Cost of sales as a percentage of net retail sales was 63.2% for the
three months ended September 30, 2001.
As a result of the foregoing factors, net loss in the three months ended
September 30, 2001 decreased to $0.1 million from $0.4 million in the three
months ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE RESULTS OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Total revenue in the nine months ended September 30, 2001 increased to
$11.4 million from $6.9 million in the nine months ended September 30, 2000, an
increase of $4.5 million or 65.4%.
Interest income for the nine months ended September 30, 2001 decreased to
$3.6 million from $5.2 million in the nine months ended September 30, 2000, a
decrease of $1.6 million or 32.1%. This decrease was primarily due to a decrease
in our Consumer Products Portfolio as a result of a decreased level of
receivables purchased from Central, reflecting Central's declining retail sales.
For the nine months ended September 30, 2001, our net consumer products
portfolio averaged $15.1 million compared to $22.8 million in the nine months
ended September 30, 2000.
Net sales include retail sales from the retail store from the date Central
Financial contributed the operations to the Company on February 28, 2001. Prior
to contribution, the retail store was owned and operated by Central.
Other income for the nine months ended September 30, 2001 increased to $1.9
million from $1.7 million in the nine months ended September 30, 2000, an
increase of $0.2 million or 16.5%. Other income primarily includes late charges
and other fees charged on the receivables portfolio, fees earned from
originating first and second trust mortgages for other financial institutions,
and commissions and fees earned from the sale of automobile insurance. The
increase is primarily due to an increase in fees earned from originating first
and second trust mortgages for other financial institutions.
Operating expenses for the nine months ended September 30, 2001 increased
to $5.3 million from $4.6 million in the three months ended September 30, 2000,
an increase of $0.7 million or 14.5%. Operating expenses relating to the
purchased consumer finance receivables business decreased in the nine months
ended September 30, 2001 by $1.8 as compared to the same period in 2000. This
decrease was offset by $2.5 million of operating expenses of the retail store in
the nine months ended September 30, 2001.
The provision for credit losses for the nine months ended September 30,
2001 increased to $2.2 million from $1.4 million in the nine months ended
September 30, 2000. This increase was primarily attributable to increased
write-offs and delinquencies in the consumer products portfolio. In the nine
months ended September 30, 2001, the Company also increased the provision for
credit losses for the mortgage portfolio by $0.2 million.
Cost of sales include the cost of retail sales from the retail store from
the date Central Financial contributed the operations to the Company on February
28, 2001. Cost of sales as a percentage of net retail sales was 62.2% in 2001.
Prior to this date, the retail store was owned and operated by Central.
As a result of the foregoing factors, net income in the nine months ended
September 30, 2001 decreased to $0.1 million from $0.5 million in the nine
months ended September 30, 2000.
18
LIQUIDITY AND CAPITAL RESOURCES
We primarily finance our operations through the cash flow generated from
operations and the liquidation of our receivables portfolios and, historically,
from capital contributions from Central Financial.
Net cash flow provided by operating activities totaled $2.5 million and
$3.5 million in the nine months ended September 30, 2001 and 2000, respectively.
The source of cash primarily consisted of net operating income after non-cash
items. Non-cash items included depreciation and amortization provision for
credit losses and deferred income taxes. Other items affecting cash flows from
operating activities included cash flows from increases (decreases) in prepaid
expenses and other current assets, receivables from related party, inventory,
accrued expenses and other current liabilities, and income taxes payable.
Net cash provided by investing activities totaled $8.9 million and $3.5
million in the nine months ended September 30, 2001 and 2000, respectively. Net
cash provided by investing activities consisted of installment contracts and
other contract receivables collected in the amount of $7.7 million and $3.5
million in the nine months ended September 30, 2001 and 2000, respectively, and
a decrease in notes receivable from affiliate of $1.2 million in 2001.
Net cash provided by financing activities totaled $0.3 million for the nine
months ended September 30, 2001 and net cash used in financing activities
totaled $7.1 million for the nine months ended September 30, 2000. Net cash
provided by financing consisted of proceeds from issuance of stock totaling $0.3
million in the nine months ended September 30, 2001. Net cash used in financing
activities consisted of repayment of notes payable totaling $1.8 million and
capital distributions totaling $5.3 million to Central Financial in the nine
months ended September 30, 2000.
We presently do not have a bank line of credit. Pursuant to the Operating
Agreement with Hispanic Express, Hispanic Express has agreed to guarantee up to
$4.0 million of bank borrowings to acquire consumer receivables that we may
purchase from Central. 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 generate from the financing of retail sales at our
retail store and purchased receivables from Central 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.
19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANNER CENTRAL FINANCE COMPANY
November 14, 2001 /s/ Gary M Cypres
---------------------------
Gary Cypres
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer