As filed with the Securities and Exchange
Commission on March 29, 2002.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d)
Of the Securities and Exchange Act of 1934, as amended
For the Fiscal Year Ended December 31, 2001
COMMISSION FILE NUMBER: 000-31747
Banner Central Finance Company
5480 Ferguson Drive
Commerce, CA 90040
(Address of principal executive offices) (Zip Code)
Delaware 95-4821101
(State of Incorporation) (I.R.S. Employer Identification No.)
(323) 720-8600
(Registrant's Telephone No.)
Securities Registered under Section 12(b) of the Act:None
Name of each exchange on which registered: None
Securities Registered under Section 12(g) of the Act:Common Stock,
par value $0.01 per share
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
----- -----
Check if there is no disclosures of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements,
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year:$14,982,000
State the aggregate market value of the voting stock held by non affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
At March 15, 2002, the aggregate market value of the voting stock of the
registrant held by non-affiliates of the registrant was $6,037,200 (computed
based on the closing share price of the Common Stock on March 15, 2002)
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date: 7,417,400 at March 15, 2002
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated Part of Form 10-KSB into which Incorporated
-------------------------------- -------------------------------------------
Definitive Proxy Statement for the Definitive Proxy Statement for the
2002 Annual Meeting of Stockholders Part III
TABLE OF CONTENTS
Page
PART I ..................................................................... 1
Item 1. Description of Business..................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II...................................................................... 12
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters ........................................ 12
Item 6. Management's Discussion and Analysis and Results
of Operations .............................................. 13
Item 7. Financial Statements........................................ 20
Item 8. Changes in and Disagreements with Accountants and
Financial Disclosure ....................................... 39
Part III .....................................................................39
Item 9. Directors, Executive Officers, Promotoers and Control Persons;
Compliance with Section 16(a) of the Exchange Act........... 39
Item 10.Executive Compensation...................................... 39
Item 11.Security Ownership of Certain Beneficial Owners
and Management ............................................. 39
Item 12.Certain Relationships and Related Transactions.............. 39
Item 13.Exhibits and Reports on Form 8-K............................ 40
Signatures.......................................................... 41
1
PART I
Item 1. Description of Business
Introduction
Certain matters discussed in this Annual Report on Form 10-KSB 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 Company and its subsidiaries (the "Company" which may be
referred to as "we," "our" and "us," or "Banner Central Finance") 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."
Company Overview
On February 28, 2001, Central Financial Acceptance Corporation, or Central
Financial, completed a Plan of Complete Dissolution, Liquidation and
Distribution, or the Plan, which provided for the dissolution and liquidation of
Central Financial, and the liquidating distribution to its stockholders of all
the common stock of the two subsidiaries that were wholly-owned by Central
Financial, one of which was our company, Banner Central Finance, and the other
of which was Hispanic Express, Inc., or Hispanic Express. In connection with 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, each of which are wholly-owned subsidiaries
of Banner Central Finance. In addition, Central Financial contributed
to Central Installment Credit Corporation the assets and liabilities
of the mortgage business owned by Central Consumer Finance Company. As
a result of these contributions, Banner Central Finance through its
subsidiaries is engaged in the purchased consumer receivables
business, the mortgage business and the sale and financing of
automobile insurance at the time of the liquidating distribution to
shareholders.
- Central Financial contributed to Hispanic Express all of the issued
and outstanding capital stock of Central Consumer Finance Company,
Centravel, Inc. and BCE Properties I, Inc., each of which are now
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 is engaged in
the consumer financial products business and the travel services
business at the time of the liquidating distribution to shareholders.
Set forth below are charts that illustrate the relationships among the
companies discussed above, before and after the consummation of the Plan.
2
[FLOW CHART]
BEFORE*
[FLOW CHART]
AFTER*
*Each subsidiary is wholly-owned by its respective parent company.
3
Our shares of common stock trade on the OTC Bulletin Board under the symbol
"BCFN". Our principal executive offices are located at 5480 East Ferguson Drive,
Commerce, California 90022, and our telephone number is (323)720-8600.
Company Business
Retail Sales and Related Consumer Receivables
Historically, we have purchased consumer finance receivables pursuant to a
Financing Agreement with Banner's Central Electric, Inc., or Banner's Central
Electric, an affiliate of ours, which granted us the exclusive right to purchase
the receivables it originated when it sold its inventory at its retail stores.
These purchased receivables are referred to as the Consumer Products Portfolio.
Banner's Central Electric operated four retail stores in the greater Los Angeles
area, and its inventory consisted of consumer electronics, appliances and
furniture. The receivables in the Consumer Products Portfolio are held until
they mature and we earn interest income on them during the time they are
outstanding. On February 28, 2001, Central Financial purchased and contributed
to us the business and assets of the largest of Banner's Central Electric retail
stores for which it paid $392,000 and assumed a related lease from Hispanic
Express and in December, 2001 Banner's Central Electric ceased operations at two
of its remaining retail stores. Pursuant to the Financing Agreement that we
entered into with Banner's Central Electric, we 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. On December 31, 2001, the Financing
Agreement was terminated by mutual agreement of the parties. See "Item 12.
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 suspended making second mortgage loans pending
evaluations of whether we could obtain long-term financing from financial
institutions to support future growth and to evaluate future economic conditions
which could negatively impact our business. In September 2000, we also began to
4
originate mortgage loans for other financial institutions for which we earn an
origination fee. Currently, we continue the evaluation of our mortgage business
and for the foreseeable future we anticipate that we will only originate
mortgage loans for other financial institutions.
Other Business Activity
We began to offer financing for the sale of automobile insurance in 1996
that we sell as a broker for major automobile insurers. We continue to sell
automobile insurance to low-income Hispanics and operate through three offices
in the greater Los Angeles area. In recent years, the large automobile insurance
companies have started to offer direct financing, and accordingly, our premium
financing activity has declined significantly and we ceased our premium finance
operations in 2000.
Business Strategy
Historically, our major business activity has been to provide financing to
low-income Hispanic customers who purchased 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. In
February 28, 2001, Central Financial purchased and contributed to us the
business and assets of the largest of Banner's Central Electric retail stores
which will permit us to have greater control over operating decisions, which
impact our purchase receivables business and the levels of inventory we finance.
Also in December 2001, Banner's Central Electric ceased operations at two of its
remaining retail stores. Although declining, we anticipate that interest income
earned on the our consumer receivables and retail sales will generate a majority
of our future income. Our business strategy is to operate this retail business
and evaluate potential growth possibility for this or related retail businesses.
See Item 1. "Business Considerations and Certain Factors that May Affect Future
Results of Operations and Stock Price ."
Since mid-1998, when we commenced our mortgage business, our portfolio of
second trust mortgages have grown significantly; however, in August 2000, we
suspended making any new second mortgage loans pending evaluation of whether we
could obtain long-term financing from financial institutions to support future
growth and to evaluate future economic conditions which could negatively impact
this business. In September 2000, we began to originate first and second
mortgage loans for other financial institutions for which we earn an origination
fee. Currently, our business strategy is to concentrate our activities on
building our origination business through internal growth and possible
acquisitions. Accordingly for the foreseeable future, we anticipate that we will
let our mortgage portfolio liquidate over the life of the outstanding mortgages
which generally have an average life of three years remaining.
Company Operations
In order to provide cost savings and operating efficiencies, we entered
into an operating agreement with Hispanic Express under which Hispanic Express
provides us with certain services, including, credit applications, receivable
servicing, payment applications, accounting, legal and management information
systems. See "Item 12. Certain Relationships and Related Party Transactions."
5
Credit Procedures
Consumer Finance Receivables - We have developed uniform guidelines and
procedures for evaluating credit applications. We take credit applications at
our store and then generally transmit them electronically through our computer
system to our credit department, where all credit approval and verification is
centralized. We believe that our underwriting policies and procedures allow us
to respond quickly to credit requests. We typically respond to credit applicants
within one hour. We believe that because of our prompt response, many customers
prefer to deal with us instead of our competitors.
Our credit managers and credit approvers make their decisions on a case by
case basis and are influenced by, among other things, whether an applicant is a
new or existing customer. New applicants complete standardized credit
applications which contain information concerning income level, employment
history, stability of residence, driver's license or state identification card,
social security number, capacity to pay and personal references. We also verify
the applicant's employment and residence 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. 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. In the fourth quarter
of 2000, our consumer receivables business and delinquency trends were
negatively impacted by a bus strike in the Los Angeles area, which lasted
approximately five weeks, and by deteriorating economic conditions, which
continued into 2001. As a result, we tightened our credit guidelines in the
fourth quarter of 2000 and throughout 2001. See Item 1. "Business Considerations
and Certain Factors that May Affect Future Results of Operations and Stock Price
- Credit Risk Associated with Customer; Lack of Collateral."
Payment and Collections
Industry studies estimate that a significant percentage of the adult
population in the United States does not maintain a checking account, which is a
standard prerequisite for obtaining a consumer loan, credit card or other form
of credit from most consumer credit sources. Our customers are required to make
their monthly payments using a payment schedule that we provide to them. The
vast majority of our customers make their payments in cash at our locations or
at our payment facilities in Hispanic Express' locations.
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.
6
Finance Contracts and Mortgage Loans
Each of our 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 an operating agreement with Hispanic Express, we use Hispanic
Express' 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 mid-range IBM AS-400 as our
server, which provides on-line, real-time information processing services to
terminals located in each of our locations and in Hispanic Express's centralized
credit-processing facility. The system allows for complete processing of our:
- consumer product finance 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.
7
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 December 31, 2001, we employed a total of 71 full-time employees and 7
part 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, as summarized
below. Violation of statutes and regulations applicable to us may result in
actions for damages, claims for refunds of payments made, certain fines and
penalties, injunctions against certain practices and the potential forfeiture of
rights to repayment of loans. Changes in state and federal statutes and
regulations may affect us. We, together with industry associations, actively
lobby in the states in which we operate. Although we are not aware of any
pending or proposed legislation that could have a material adverse effect on our
business, we cannot assure that future regulatory changes will not adversely
affect our lending practices, operations, profitability or prospects.
State Regulation
Consumer Product Portfolio. In California, the California Retail
Installment Sales Act, or the "Unruh Act," regulates our consumer product
financing business. The Unruh Act requires us to disclose to our customers,
among other matters:
- the conditions under which we may impose a finance change;
- the method of determining the balance which is subject to a finance
charge;
- the method used to determine the amount of the finance charge; and
- the minimum periodic payment required.
In addition, the Unruh Act provides consumer protection against unfair
or deceptive business practices by:
- regulating the contents of retail installment sales contracts;
- setting forth the respective rights and obligations of buyers and
sellers; and
8
- regulating the maximum legal finance rate or charge and limiting
other fees on installment credit sales.
Mortgage Business. Historically, we have originated mortgages under the
California Finance Lender's License issued by the Department of Corporations. We
were monitored and regulated by the Department of Corporations and are subject
to annual audits. Under the jurisdiction of the Department of Corporations we
were 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. In
2001, we commenced originating loans for other financial institutions pursuant
to a California Department of Real Estate License.
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.
9
Business Considerations and Certain Factors That May Affect Future Results
of Operations and Stock Price
Absence of Operating History
We were formed on September 5, 2000 and we did not have an operating
history as a separate stand-alone company prior to that date. Our success will
depend, in large part, on the ability of our management to implement its
business strategy.
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 December 31, 2001 and 2000, net finance
receivables of our consumer products portfolio, which accounts for a substantial
portion of our net receivables, had accounts with payments 31 days or more past
due as a percentage of end of period gross receivables of 1.5% and 1.2%,
respectively. For the year ended December 31, 2001 and 2000, the consumer
products portfolio had net write-offs of $2.1 million and $3.3 million,
respectively. In the fourth quarter of 2000, our consumer receivables 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 and deteriorating
economic conditions, our delinquencies increased in the fourth quarter of 2000
and this trend continued in 2001. 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 Item 6. "Management's Discussion and Analysis and
Results of Operations - Consumer Products Portfolio Trend" and "Delinquency
Experience and Allowance for Credit Losses."
10
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 Item 6. "Management's Discussion and Analysis and Results of
Operations - Consumer Products Portfolio Trend" and "Delinquency Experience and
Allowance for Credit Losses."
Dependence on California Market
All of our businesses are located, and 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 and economic factors or natural disasters in California. A
decline in the California economy could have a material adverse effect on our
results of operations and financial condition.
Historical Dependence on Consumer Products Portfolio of Banner's Central
Electric and Changing Business Focus
Historically, our major source of revenue has been derived from our
Consumer Products Portfolio. 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. On February 28, 2001, Central Financial purchased and contributed to
us the business and assets of the largest of Banner's Central Electric retail
stores and in December 2001 Banner's Central Electric ceased operations at two
of its remaining retail stores.
Seasonal Fluctuations in Quarterly Operating Results
We historically experience the highest demand for retail sales and related
finance receivables between October and December, and experience the lowest
demand receivables between January and March. These significant seasonal
fluctuations in our business directly impact our operating results and cash
needs.
Competition
The installment credit business is highly competitive. 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
11
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.
Item 2. Properties
Our executive and administrative offices occupy approximately 5,000 square
feet of a building which located at 5480 East Ferguson Drive, Commerce,
California 90022. We believe that our executive offices are adequate for current
and future needs. We lease certain facilities of our automobile insurance
operations under month to month contracts.
12
Item 3. Legal Proceedings
We are involved in certain legal proceedings arising in the normal course
of our business. We do not believe the outcome of these matters will have a
material adverse effect on us.
Item 4. Submission of Matters to A Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
Our common stock is listed on the OTC Bulletin Board and trades under the
symbol "BCFN". There was no public market for our shares of common stock prior
to the completion of the Plan on February 28, 2001. As of March 20, 2002, there
were approximately, 123 beneficial holders and approximately six initial holders
of record of our common stock.
During 2001, the range of high and low sales price (not including markups,
markdowns or commission) for each quarterly period was, according to OTC
Bulletin Board, the following:
High Low
-------- -------
Quarter ended March 31, 2001 (1) $ -- $ --
Quarter ended June 30, 2001 $ 1.04 $ 0.73
Quarter ended September 30, 2001 $ 1.30 $ 0.94
Quarter ended December 31, 2001 $ 1.60 $ 1.12
(1) There were no shares traded in the quarter ended March 31, 2001.
Dividend Information
We have never paid and have no present intention of paying cash dividends
on our common stock. We anticipate that we will retain all earnings for use in
our business, and we do not anticipate paying cash dividends for the foreseeable
future. Any determination in the future to pay dividends will depend on our
financial condition, capital requirements, results of operations, contractual
limitations, legal restrictions and any other factors our Board of Directors
deems relevant.
13
Item 6. 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 Annual Report. 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
Item 1. "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 $12.1 million at December 31, 2001 compared
to $25.0 million at December 31, 2000, primarily reflecting continued decline in
our Consumer Products Portfolio. In 1997, Banner's Central Electric made a
strategic decision to de-emphasize this business and, since then, its retail
sales have declined significantly with a corresponding decrease in the level of
consumer receivables that we purchased from them. On February 28, 2001, Central
Financial purchased and contributed to us the business and assets of the largest
of Banner's Central Electric retail stores for which it paid $392,000 and
assumed a related lease from Hispanic Express and in December, 2001 Banner's
Central Electric ceased operations at two of its remaining retail stores. Our
gross receivables of the Consumer Products Portfolio declined to $8.9 million at
December 31, 2001 compared to $18.9 million at December 31, 2000. Our Consumer
Products Portfolio historically increases during the period between October
through December reflecting higher holiday retail credit sales.
Our Mortgage Portfolio decreased to $3.0 million at December 31, 2001
compared to $5.6 million and at December 31, 2000. In August 2000, we made a
decision to suspend making any new mortgage loans. In September 2000, we began
to originate first and second mortgage loans for other financial institutions
for which we earn an origination fee. For the foreseeable future will only
originate mortgage loans for other financial institutions.
14
Results of Operations
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended
December 31,
----------------------------
2001 2000
----------- ------------
Revenues:
Retail sales $ 8,009 $ --
Interest income 4,361 6,785
Other income 2,612 2,389
----------- -----------
Total revenue 14,982 9,174
----------- -----------
Costs and expenses:
Operating expenses 7,505 5,837
Cost of sales 5,415 --
Provision for credit losses 2,445 2,707
----------- -----------
Total costs and expenses 15,365 8,544
----------- -----------
Income (loss) before taxes (383) 630
Provision (benefit) for income taxes (153) 252
----------- -----------
Net income (loss) $ (230) $ 378
=========== ===========
Per Share Data:
Net loss per common share:
Basic $ (0.03)
Diluted $ (0.03)
Weighted average shares outstanding:
Basic 7,312,000
Diluted 7,312,000
Pro Forma Per Share Data (Unaudited):
Net income per common share:
Basic $ 0.05
Diluted $ 0.05
Weighted average shares outstanding:
Basic 7,166,000
Diluted 7,166,000
15
Consumer Products Portfolio Trend
Consumer Products Portfolio
(Dollars in thousands, except average contract balance)
Years Ended
December 31,
---------------------
2001 2000
-------- --------
Gross receivable (at end of period) $ 8,938 $18,942
Deferred insurance revenues (at end of period) 12 40
------- -------
Net carrying value $ 8,926 $18,902
======= =======
Average net receivable $13,890 $23,649
Number of contracts (at end of period) 21,736 40,154
Average net contract balance (at end of period) $ 411 $ 589
Total interest income 3,657 5,557
Late charge and extension fee income 648 1,189
Provision for credit losses 2,172 2,531
Provision for credit loss as a percentage
of average net receivable 15.6% 10.7%
Net write-offs 2,089 3,292
Net write-offs as a percentage of average
net receivable 15.0% 13.9%
Average interest rate on average net
receivable 26.3% 25.1%
Mortgage Portfolio
At December 31, 2001 and 2000, the gross receivables of the mortgage
portfolio were $3.0 million, and $5.6 million, respectively. The number of
mortgage loans outstanding at December 31, 2001 and 2000 were 448 and 688,
respectively. The average interest rate on the portfolio for the years ended
December 31, 2001 and 2000 was 16.9% and 17.3% respectively.
At December 31, 2001 and 2000, there was $0.3 million and $0.4 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.
16
Finance Receivables(1)
(Dollars in Thousands)
Years Ended December 31,
------------------------
2001 2000
-------- --------
Past due accounts 31 days or more (gross receivable): $ 140 $ 263
Accounts with payments 31 days or more past due as a
percentage of end of period gross receivables 1.5% 1.2%
Allowance for credit losses $ 614 $ 508
Allowance for credit losses as a percentage of net
receivables 6.7% 2.1%
(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 $0.1 million at the end of December 31, 2001 compared to $0.3
million at the end of December 31, 2000. These declines primarily reflect the
decline in the aggregate level of our finance receivables portfolios during
these periods and accelerated write-offs during 2001. As a percentage of the end
of period gross finance receivables, accounts with 31 days or more past due
increased to 1.5% at December 31, 2001 from 1.2% at December 31, 2000. We
believe the rise in the provision for credit losses and write-offs as a
percentage of average net receivables during 2001 was a result of excessive
credit burdens for some customers partly due to an aggressive over extension of
credit in the marketplace in which we compete and partly due to soft economic
conditions. As a result of these trends, the allowance for credit losses at
December 31, 2001 increased to $0.6 million from $0.5 million at December 31,
2000, expressed as percentage of net receivables the allowance for credit losses
increased to 6.7% at December 31, 2001 compared to 2.1% at December 31, 2000.
Year Ended December 31, 2001 Compared to the Year ended December 31, 2000
Total revenue in the year ended December 31, 2001 increased to $15.0
million from $9.2 million in the year ended December 31, 2000, an increase of
$5.8 million.
Retail sales amounted to $8.0 million for 2001, reflecting our purchase of
the assets of a retail store acquired from an affiliated company on February 28,
2001.
Interest income for the year ended December 31, 2001 decreased to $4.4
million from $6.8 million in the year ended December 31, 2000, a decrease of
$2.4 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 year ended December 31, 2001, our net consumer products
portfolio averaged $13.9 million compared to $23.6 million in the year ended
December 31, 2000. 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
17
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, 2001 increased to $2.6 million
from $2.4 million in the year ended December 31, 2000, an increase of $0.2
million. Other income primarily includes fees earned in the origination of
mortgages, late charges and other fees charged on the receivables portfolio and
the sale of automobile insurance. Of the increase $0.8 million related to an
increase in mortgage loan origination fees offset by a decrease of $0.6 million
due to a decline in late charges and other fees primarily reflecting the
decreased level of the finance receivables portfolio.
Operating expenses for the year ended December 31, 2001 increased to $7.5
million from $5.8 million in the year ended December 31, 2000, an increase of
$1.7 million or 28.6%. Of this increase, approximately $3.5 million was due to
the operating expenses of the retail store in the year ended December 31, 2001,
offset by a reduction in operating expenses of $1.8 million relating to the
consumer finance receivables business.
Cost of sales include the cost of retail sales from the retail store for
the year ended December 31, 2001. Cost of sales as a percentage of net retail
sales was 67.6% in 2001.
The provision for credit losses decreased to $2.4 million for the year
ended December 31, 2001 from $2.7 million in the year ended December 31, 2000, a
decrease of $0.3 million or 9.7%. As a percentage of interest and other income
the provision for credit losses increased in the year ended December 31, 2001 to
35.1% from 29.5% in the year ended December 31, 2000. The increase in percentage
was due to a rise in delinquencies in 2001 as a result of excessive credit
burden for some customers due to an aggressive over extension of credit in the
market place in which we complete and to a bus strike which commenced in
September 2000 and lasted approximately five weeks.
As a result of the foregoing factors, net loss in the year ended December
31, 2001 was $0.2 million compared to net income of $0.4 million in the year
ended December 31, 2000.
Year Ended December 31, 2000 Compared to the Year ended December 31, 1999
Total revenue in the year ended December 31, 2000 decreased to $9.2 million
from $11.4 million in the year ended December 31, 1999, a decrease of $2.2
million or 19.7%.
Interest income for the year ended December 31, 2000 decreased to $6.8
million from $7.8 million in the year ended December 31, 1999, a decrease of
$1.0 million or 13.2%. 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 year ended December 31, 2000, our net consumer
products portfolio averaged $23.6 million compared to $26.4 million in the year
ended December 31, 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.
18
Other income for the year ended December 31, 2000 declined to $2.4 million
from $2.8 million in the year ended December 31, 1999, a decrease of $0.4
million or 14.8%. 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 decreased level of the finance receivables
portfolio and $0.2 million was primarily 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 year ended December 31, 2000 decreased to $5.8
million from $6.7 million in the year ended December 31, 1999, a decrease of
$0.9 million or 13.0%. Of this decrease, approximately $1.9 million was due to a
reduction in salary and overhead expenses corresponding to the decrease in
revenues in the year ended December 31, 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 52.8% and 63.2% in the year ended December 31, 2000 and 1999,
respectively.
The provision for credit losses was to $2.7 million in each of the years
ended December 31, 2000 and 1999. As a percentage of interest and other income
the provision for credit losses increased in the year ended December 31, 2000 to
29.5% from 25.6% in the year ended December 31, 1999. The increase in percentage
was due to a rise in delinquencies in 2000 as a result of excessive credit
burden for some customers due to an aggressive over extension of credit in the
market place in which we complete and to a bus strike which commenced in
September 2000 and lasted approximately five weeks.
As a result of the foregoing factors, net income in the year ended December
31, 2000 decreased to $0.4 million from $1.2 million in the year ended December
31, 1999.
Liquidity and Capital Resources
We have historically financed our operations primarily through cash flow
generated from operations and borrowings under our notes payable. During 2001,
as a result of the deteriorating economic climate the Company continued to
tightened its credit guidelines, and this coupled with a reduction in
receivables we have purchased from Banner Central Electric and a decision to
curtail originating mortgages has resulted in a continued contraction in our
receivable portfolios. The Company has cash and short-term investments of $14.7
million at December 31, 2001. These cash balances and cash flows generated from
operations and contraction of our receivable portfolios will be used to finance
our operations and to fund future investments which the Company may make.
Net cash flow provided from operations totaled $3.0 million and 3.3 million
in the year ended December 31, 2001 and 2000, 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
19
cash flows from increases (decreases) in notes receivable from related party,
prepaid expenses and other current assets, inventory and accounts payable and
accrued expenses.
Net cash used by investing activities totaled $1.3 million for the year
ended December 31, 2001. Net cash provided by investing activities totaled $3.8
million for the year ended December 31, 2000. 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 a
decrease in notes receivable and an increase in short-term investments in 2001.
Net cash provided by financing activities totaled $0.3 million for the year
ended December 31, 2001. Net cash used in financing activities totaled $7.1
million for the year ended December 31, 2000, respectively. Net cash provided by
financing activities in 2001 consisted of issuance of common stock totaling $0.3
million. Net cash used in financing activities in 2000 consisted of repayment of
notes payable totaling $1.8 million and capital distributions totaling $5.3
million to Central Financial for the year ended December 31, 2000, respectively.
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. Should we decide
to expand our mortgage business, we may 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. Our capital resources will
be further enhanced as 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.
20
Item 7. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants......................................21
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet..................................................22
Consolidated Statements of Income...........................................23
Consolidated Statements of Stockholders' Equity.............................24
Consolidated Statements of Cash Flows.......................................25
Notes to Consolidated Financial Statements..................................26
21
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, 2001, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 2001. 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
and subsidiaries as of December 31, 2001, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Los Angeles, California
March 22, 2002
22
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
2001
---------------------
ASSETS
Cash $ 1,987,000
Short term investments 12,694,000
Finance receivables, net 11,047,000
Prepaid expenses and other current assets 218,000
Notes receivable from affiliates 997,000
Inventory 1,297,000
Deferred income taxes 594,000
Property and equipment, net 3,742,000
Intangible and other assets, net 635,000
-----------
TOTAL ASSETS $33,211,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,185,000
-----------
Total liabilities 1,185,000
Minority interest 497,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 10,000,000 shares authorized,
7,417,400 shares issued 74,000
Additional paid-in capital 21,814,000
Retained earnings 9,641,000
-----------
Total stockholders' equity 31,529,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,211,000
===========
The accompanying notes are an integral part of this consolidated
balance sheet.
23
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------
2001 2000
------------ ------------
Revenues
Retail Sales $ 8,009,000 $ --
Interest income 4,361,000
6,785,000
Other income 2,612,000 2,389,000
------------ ------------
Total revenues 14,982,000 9,174,000
------------ ------------
Costs and Expenses
Operating expenses 7,505,000 5,837,000
Cost of sales 5,415,000 --
Provision for credit losses 2,445,000 2,707,000
------------ ------------
Total costs and expenses 15,365,000 8,544,000
------------ ------------
Income (loss) before provision for income taxes (383,000) 630,000
Provision (benefit) for income taxes (153,000) 252,000
------------ ------------
Net income (loss) $ (230,000) $ 378,000
============ ============
Per Share Data:
Net loss per common share:
Basic $ (0.03)
Diluted $ (0.03)
Shares used in calculating net loss per common share:
Basic 7,312,000
Diluted 7,312,000
Pro Forma Per Share Data (Unaudited):
Pro forma net income per common share:
Basic $ 0.05
Diluted $ 0.05
Pro forma shares used in calculating pro forma
net income per common share:
Basic 7,166,000
Diluted 7,166,000
The accompanying notes are an integral part of these consolidated financial
statements.
24
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
--------------------- Paid-in Retained
Shares Amount Capital Earnings Total
---------- ----------- ------------ ------------ ------------
Balance, December 31, 1999 -- $ -- $ 24,936,000 $ 9,493,000 $ 34,429,000
Pro forma issuance of common stock 7,166,000 72,000 (72,000) --
Capital distribution to related party (5,266,000) (5,266,000)
Net income 378,000 378,000
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 7,166,000 72,000 19,598,000 9,871,000 29,541,000
Contribution from related party 1,967,000 1,967,000
Exercise of stock options 251,400 2,000 249,000 251,000
Net loss (230,000) (230,000)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 7,417,400 $ 74,000 $ 21,814,000 $ 9,641,000 $ 31,529,000
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
25
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (230,000) $ 378,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on disposal of fixed assets -- 60,000
Depreciation and amortization 173,000 70,000
Provision for credit losses 2,445,000 2,707,000
Deferred income taxes (264,000) 230,000
Changes in assets and liabilities:
Receivable from related party (997,000) (2,493,000)
Prepaid expenses and other current assets (142,000) 116,000
Inventory 2,262,000 1,334,000
Accounts payable and accrued expenses (274,000) 860,000
------------ ------------
Net cash provided by operating activities 2,973,000 3,262,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract receivables
collected, net of recoveries 10,217,000 3,815,000
Increase in short-term investments (12,694,000) --
Decrease in note receivable from affiliate 1,212,000 --
Capital expenditures, net (49,000) (6,000)
------------ ------------
Net cash provided by (used in) investing
activities (1,314,000) 3,809,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable -- (1,800,000)
Proceeds from exercise of stock options 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 IN CASH 1,910,000 5,000
CASH, BEGINNING OF PERIOD 77,000 72,000
------------ ------------
CASH, END OF PERIOD $ 1,987,000 $ 77,000
============ ============
CASH PAID DURING THE PERIOD FOR:
INTEREST $ -- $ --
INCOME TAXES $ 80,000 $ 9,000
The accompanying notes are an integral part of these consolidated financial
statements.
26
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") 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 were
reorganized into two public companies, Banner Central Finance 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 6), 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 $1,967,000. On February 28, 2001, the
Company purchased certain assets and assumed certain obligations of a retail
store previously operated by Banner's Central Electric, Inc. ("Central"), an
affiliated company, for approximately $392,000.
Nature of Operations - The Company: (i) provides consumer financing related
to the sale of high quality brand name consumer products, appliances and
furniture sold by our retail store and historically by retail stores owned by
Central; (ii) provides automobile insurance products; and (iii) originates first
and second trust mortgages. The Company generally experiences the highest demand
for its financial products and services between October and December.
27
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
Finance Receivables - Finance receivables primarly include installment
contracts that have been historically purchased from Central, and installment
contracts originated by the Company after the acquisition of a retail store from
Central on February 28, 2001 (referred to herein as the "Consumer Product
Portfolio"), and mortgage loan receivables originated by the Company (referred
to herein as the "Mortgage Portfolio"). The annual percentage rate varies
depending on the length of the contract and the amount of administrative fees.
The contracts provide for scheduled monthly payments and mature generally from 1
to 24 months in the Consumer Product Portfolio, and 48 to 60 months in the
Mortgage 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 60 and 150 days past
due.
Allowance for credit losses is increased by charges to the provision for
credit losses and decreased by charge-offs, net of recoveries. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay and current economic
conditions. The Company's 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
28
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 years ended December 31, 2001 and 2000, amounted to $995,000
and $644,000, respectively.
Deferred insurance revenue arises from the deferral of the recognition of
revenue from certain credit insurance contracts. Insurance premium revenue is
recognized over the life of the related contract using a method that
approximates the interest method.
Inventories - The Company purchases consumer product inventory for sale in
its retail business. Inventories are stated at the lower of cost or market. Cost
is determined by the average cost method.
Property and Equipment - Property and equipment are carried at cost.
Long-lived property is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such an asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long Lived Assets." If the
carrying amount of the asset exceeds the estimated undiscounted future cash
flows to be generated by the asset, an impairment loss would be recorded to
reduce the asset's carrying value to its estimated fair value.
Depreciation and amortization are computed primarily using the
straight-line method over the estimated lives of the assets, as follows:
Furniture, equipment and software....................... 5 to 10 years
Leasehold improvements.................................. Life of lease
Building and improvements............................... 30 years
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 December 31, 2001 was
$145,000.
Income Recognition - Interest income on the Consumer Product Portfolio and
Mortgage Portfolio is recognized using the interest method. Origination fees
29
earned on mortgages are deferred and recognized over the life of the loan using
the interest method. Commissions income and broker fee income from the sale of
automobile insurance products is deferred and recognized over the terms of the
contracts, typically 12 months.
Other income consists of:
Years ended December 31,
---------------------------
2001 2000
---------- ----------
Other Income:
Late and extension charges $ 653,000 $1,234,000
Mortgage loan origination fees 933,000 148,000
Insurance products and other 1,026,000 1,007,000
---------- ----------
$2,612,000 $2,389,000
========== ==========
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. At December 31, 2001, in management's
opinion, the asset is realizable.
Advertising - The Company advertises primarily on Hispanic television and
radio, and through newspapers and direct mail. All advertising costs are
expensed as incurred. Advertising expense for the years ended December 31, 2001
and 2000 were $170,000 and $111,000, 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, 2001, such investments of $1,907,000 were in excess of insured limits.
Short-term investments are comprised of investments in high grade commercial
paper with a maturity of less than 30 days. 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
30
loans is dependent upon general economic factors within the geographical area in
which the Company operates. The Company's loans are considered 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 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.
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. The Company's management
believes that the fair value of the Company's financial instruments approximates
their carrying values as of December 31, 2001.
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. Management believes the carrying value of the mortgage portfolio
approximates its carrying value as of December 31, 2001.
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 July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141), and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). They also
issued Statement of Financial Accounting Standards No. 143, Accounting for
Obligations Associated with the Retirement of Long-Lived Assets (SFAS 143), and
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), in August and October
2001, respectively.
SFAS 141 requires all business combinations initiated after June 30, 2001
be accounted for under the purchase method. SFAS 141 supersedes APB Opinion No.
16, Business Combinations, and Statement of Financial Accounting Standards No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises, and is
effective for all business combinations initiated after June 30, 2001.
SFAS 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, a company is no
longer required to amortize goodwill and other intangible assets with indefinite
lives, but will be subject to periodic testing for impairment. SFAS 142
supersedes APB Opinion No. 17, Intangible Assets. Effective January 1, 2002, the
Company will adopt SFAS 142. Adoption of SFAS 142 will result in a goodwill
impairment charge of approximately $635,000, because of a decline in the fair
value of the Company's insurance business.
31
SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective in fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS 143 will not have a
material impact on its consolidated results of operations and financial position
upon adoption. The Company plans to adopt SFAS 143 effective January 1, 2003.
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS 144
superseded Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. The provisions of
SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively. The
Company plans to adopt SFAS 144 effective January 1, 2002 and does not expect
that the adoption will have a material impact on its consolidated results of
operations and financial position.
32
3. Finance Receivables
December 31,
2001
-----------
Finance Receivables consist of:
Consumer Product Portfolio $ 8,938,000
Mortgage Portfolio 3,028,000
Other portfolios 180,000
-----------
12,146,000
Less: deferred insurance 12,000
Less: deferred loan origination fees 246,000
Less: allowance for credit losses 841,000
-----------
$11,047,000
===========
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:
December 31,
2001
--------------------
Consumer Product Portfolio:
Past due 31 days or more $140,000
========
Mortgage Portfolio:
Past due 31 days or more $281,000
========
Other Portfolios:
Past due 31 days or more $ --
========
33
The allowance for credit losses includes the following:
Years Ended December 31,
------------------------
2001 2000
--------- ----------
Allowance for credit losses, beginning of period $ 683,000 $ 1,668,000
Provision for credit losses 2,445,000 2,707,000
Charge-offs, net (2,287,000) (3,692,000)
----------- -----------
Allowance for credit losses, end of period $ 841,000 $ 683,000
=========== ===========
4. Property and Equipment
Property and equipment, net consists of:
December 31,
2001
------------
Land $1,203,000
Building and improvements 3,188,000
Furniture, equipment and software 179,000
----------
4,570,000
Less: accumulated depreciation 828,000
----------
$3,742,000
==========
5. Income Taxes
The Company, Central Financial and Hispanic Express have entered into a Tax
Sharing Agreement (See Note 6). The income tax provision as presented in the
accompanying consolidated financial statements are based upon the amount the
Company would have paid as if it filed separate income tax returns for the
periods presented.
The provision (benefit) for income taxes consists of the following:
December 31,
-----------------------------
2001 2000
---------- ----------
Current:
Federal $ 108,000 $ 19,000
State 3,000 3,000
--------- ---------
111,000 22,000
Deferred:
Federal (234,000) 196,000
State (30,000) 34,000
--------- ---------
(264,000) 230,000
--------- ---------
Provision (benefit) for income taxes $(153,000) $ 252,000
========= =========
34
A reconciliation of the provision for income taxes to the statutory rates is as
follows:
December 31,
------------------------------
2001 2000
------------ -----------
Federal income taxes at statutory rate 35.0% 35.0%
State franchise taxes, net of federal
benefit 5.0% 5.0%
----- -----
40.0% 40.0%
===== =====
The tax effects of temporary differences giving rise to the deferred income tax
assets and (liabilities) are as follows:
December 31,
2001
-----------
Deferred tax assets:
Allowance for credit losses $ 358,000
Inventory 118,000
Deferred loan origination fees 131,000
Accrued expenses 73,000
Other 80,000
---------
Total deferred tax assets 760,000
Deferred tax liabilities:
Intangible assets (141,000)
Other (25,000)
---------
Total deferred tax liabilities (166,000)
---------
Net deferred tax asset $ 594,000
=========
6. Related Party Transactions
In connection with the Plan, the Company, Central Financial, Hispanic
Express and Central entered into certain agreements, including the "Financing
Agreement," the "Tax Sharing Agreement" and the "Operating Agreement".
35
The Financing Agreement granted 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, the Company purchased $3.8 million and $15.6 million of inventory
during the years ended December 31, 2001 and 2000, respectively. On December 31,
2001, the Financing Agreement was terminated by mutual consent of the parties.
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 from services utilized
under the Operating Agreement totaled $2,050,000, and $3,150,000 for the years
ended December 31, 2001 and 2000, respectively.
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. The date of the consummation of the Plan will be the
last day on which the Company will be required to be included in Central
Financial's consolidated federal income tax returns.
In connection with the 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
36
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 provide certain retail space at the retail store to Credit Starters
LLC, an affiliated company, controlled by Gary Cypres, Chairman of the Company,
in return for a percentage of the pre-tax profit of this business, which
amounted to $41,000 for the year ended December 31, 2001.
In connection with the adoption of the Plan, Hispanic Express entered into
a new lease with BCE Properties II, Inc., a subsidiary of the Company for its
executive and administrative offices. The new lease is for a period of 15 years
with annual rent of $300,000 per year subject to CPI increases. Rent income
related to this lease was $300,000 in 2001. On February 28, 2001, the Company
assumed a 15-year agreement to lease approximately 30,000 square feet of retail
space in connection with the purchase of certain net assets of a retail store
previously owned by Central with annual rent of $200,000 per year subject to CPI
increases. Rent expense related to this lease was $167,000 in 2001.
For the year ended December 31, 2000, the Company made a capital
distribution to Central Financial 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.
At December 31, 2000, the Company had a note receivable from Hispanic
Express in the amount of $1,213,000 which bears interest at 7.5% per annum and
was paid on September 30, 2001. At December 31, 2000, the Company also had a
note receivable from BCE Properties II, Inc. in the amount of $1,280,000 which
bore interest at 7.5% per annum.
7. Stock Option Plan
On February 28, 2001, 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. All options previously granted by Central
Finance under its Stock Option Plan were terminated and certain optionees under
such Stock Option Plan were granted options to purchase shares of common stock
of Banner Central Finance under the 2000 Plan. Options to purchase 491,000
shares of Common Stock of Banner Central Finance were granted to eligible
participants $1.00 per share under the 2000 Plan. On February 28, 2001,
executive officers and employees receiving options were vested in such options
in an amount that they would have been vested under the Central Financial Stock
Option Plan at the time of completion 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, were 60% vested in total options granted to them.
Additional options to purchase 225,000 shares of common stock of the Company
were granted at $0.94 per share in 2001. In 2001, options to purchase 251,400
shares of common stock of the Company were exercised at $1.00 per share. At
December 31, 2001, 384,000 shares of Common Stock remain available for future
grants of options under the 2000 Plan. The weighted average share price of
vested and unvested shares are $1.00 and $0.97, respectively. 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 granted have been included in the computation of
diluted earnings per share reflected in the Consolidated Statements of Income.
Upon issuance of the options in future periods, 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.
37
SFAS 123 defines a fair value based method of accounting for employee stock
compensation plans, but allows for the continuation of the intrinsic value based
method of accounting to measure compensation cost prescribed by Accounting
Principles Board Opinion No. 25. For companies electing not to change their
accounting, SFAS 123 requires pro-forma disclosures of earnings and earnings per
share as if the change in accounting provision of SFAS 123 has been adopted.
Had compensation cost for this plan been determined consistent with SFAS
123, the Company's net loss and net loss per share common share would have
increased to the following pro forma amounts:
2001
----------------
Net loss As Reported $ (230,000)
Net loss Pro forma $ (309,000)
Per Common share - Basic:
Net loss As Reported $ (0.03)
Net loss Pro forma $ (0.04)
Per Common share - Diluted:
Net loss As Reported $ (0.03)
Net loss Pro forma $ (0.04)
The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following weighted average assumptions used for
grants: dividend yield of 0.0%, expected volatility of 37.9%, risk-free interest
rate of 5.0% and lives of five years. The weighted average remaining contractual
life is 9.3 years.
8. Segment Information
The Company's reportable segments are (i) consumer receivables, (ii)
mortgage loans, (iii) other and (iv) corporate overhead. Other includes
primarily the operations of the retail store and automobile insurance operations
in 2001 and the automobile insurance and insurance premium financing operations
in 2001. Information about these segments for years ended December 31, 2001 and
2000 is as follows:
Consumer Corporate
Receivables Mortgage Other Overhead Total
----------------- -------------- --------------- --------------- -------------
For the Year Ended December 31, 2001
Interest income $ 3,657,000 $ 654,000 $ 50,000 $ -- $ 4,361,000
Other income 689,000 1,169,000 8,763,000 -- 10,621,000
------------ ------------ ------------ ------------ ------------
Total revenue $ 4,346,000 $ 1,823,000 $ 8,813,000 $ -- $ 14,982,000
============ ============ ============ ============ ============
Pre-tax segment earnings (loss) $ 405,000 $ 629,000 $ (953,000) $ (464,000) $ (383,000)
Segment assets $ 8,714,000 $ 2,921,000 $ 5,738,000 $ 15,838,000 $ 33,211,000
For the Year Ended December 31, 2000
Interest income $ 5,557,000 $ 938,000 $ 290,000 $ -- $ 6,785,000
Other income 1,197,000 346,000 846,000 -- 2,389,000
------------ ------------ ------------ ------------ ------------
Total revenue $ 6,754,000 $1,284,000 $ 1,136,000 $ -- $ 9,174,000
Pre-tax segment earnings (loss) $ 429,000 $ 362,000 $ 142,000 $ (303,000) $ 630,000
Segment assets $ 24,886,000 $ 4,913,000 $ 1,156,000 $ -- $ 30,955,000
38
9. Commitments and Contingencies
The Company leases office space for its automobile insurance business under
operating leases on a month-to-month basis. Aggregate rental expense for the
years ended December 31, 2001 and 2000 were $67,000 and $70,000, 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 during
2000. The Company presently conducts these operations in a newly constructed
facility.
The Company entered into an Guaranty Agreement with Hispanic Express
pursuant to which it 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.
10. Executive Deferred Salary and Bonus Plan
On January 1, 2002, the Company adopted the Executive Deferred Salary and
Bonus Plan, or the EDP, which covers the executive officers and certain other
executives, elected to participate in the EDP. Pursuant to the EDP, a
participant may elect to defer up to 50% of the participant's base salary and up
to 100% of any bonus awarded pursuant to the Executive Incentive Bonus Program.
Elections under the EDP to defer base salary and bonus are made annually prior
to the commencement of each year. Executives electing to participate in the
program may invest deferred amounts in either of two accounts: (1) which earns
interest based upon the prime rate; or (2) which mirrors the performance of the
Company's common stock price. Amounts deferred are generally payable in a lump
sum within 30 days after the participant's termination of employment with the
Company for any reason. The EDP is administrated by the Compensation Committee
of the Board of Directors. The Chairman of the Board of Directors and another
executive officer elected to defer 100% of their bonus for the year ended
December 31, 2001 and elected to invest in an account which mirrors the
performance of the Company's common stock. At December 31, 2001, deferred
compensation for these accounts were $147,000, which is included in accrued
expenses and other current liabilities.
* * * * *
39
Item 8. Changes in and Disagreements With Accountants and Financial Disclosure
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
We incorporate by reference in this Annual Report the information required
by this Item 9 contained in the sections entitled "Discussion of Proposals
Recommended by the Board -- Proposal 1: Elect Four Directors -- Nominees,"
"Information About Directors and Executive Officers," and "Information About
Banner Central Finance Common Stock Ownership -- Did Directors, Executive
Officers and Greater-Than-10% Stockholders Comply With Section 16(a) Beneficial
Ownership Reporting in 2001?" of our definitive proxy statement, to be filed
pursuant to Regulation 14A with the SEC within 120 days after December 31, 2001.
Item 10. Executive Compensation
We incorporate by reference in this Annual Report the information required
by this Item 10 contained in the sections entitled "Information About Directors
and Executive Officers" and "Information About Banner Central Finance Common
Stock Ownership -- Compensation Committee Interlocks and Insider Participation"
of our definitive proxy statement, to be filed pursuant to Regulation 14A with
the SEC within 120 days after December 31, 2001.
Item 11. Security Ownership of Certain Beneficial Owners and Management
We incorporate by reference in this Annual Report the information required
by this Item 12 contained in the section entitled "Information About Banner
Central Finance Common Stock Ownership" of our definitive proxy statement, to be
filed pursuant to Regulation 14A with the SEC within 120 days after December 31,
2001.
Item 12. Certain Relationships and Related Transactions
We incorporate herein by reference in this Annual Report the information
required by this Item 12 contained in the section entitled "Information About
Directors and Executive Officers -- Certain Relationships and Related
Transactions" of our definitive proxy statement, to be filed pursuant to
Regulation 14A with the SEC within 120 days after December 31, 2001.
40
Item 13. Exhibits and Reports on Form 8-K
Form 8-K. No reports on Form 8-K were filed by the registrant.
List of Exhibits. The following is a list of exhibits filed as a part
of this report, including any management contracts or compensatory
plans or arrangements required to be filed as an exhibit to this
report. Such management contracts or compensatory plans or
arrangements are identified in the list below.
Description
Exhibit No.
3.1 Certificate of Incorporation, as amended (incorporated by reference
to Exhibit 2.1 filed with the Registration Statement on Form 10-SB
filed on October 11, 2000 ("Form 10-SB"))
3.2 Bylaws (incorporated by reference to Exhibit 2.2 filed with the
Form 10-SB)
4 Form of specimen common stock certificate (incorporated by reference
to Exhibit 3 filed with the Form 10-SB)
10.1 Banner Central Finance Company 2000 Stock Option Plan (incorporated by
reference to Exhibit 6.1 filed with the Form 10-SB)
10.2 Contribution Agreement dated September 6, 2000 among Central Financial
Acceptance Corporation and Banner Central Finance Company (incorporated
by reference to Exhibit 6.2 filed with the Form 10-SB)
10.3 Financing Agreement dated September 6, 2000 between Banner Central
Finance Company and Banner's Central Electric, Inc.
(incorporated by reference to Exhibit 6.3 filed with the Form 10-SB)
10.4 Operating Agreement dated September 6, 2000 between Hispanic Express,
Inc. and Banner Central Finance Company (incorporated by reference to
Exhibit 6.4 filed with the Form 10-SB)
10.5 Tax-Sharing Agreement dated September 6, 2000 among Hispanic Express,
Inc. among Central Financial Acceptance Corporation, Hispanic
Express, Inc. and Banner Central Finance Company (incorporated
by reference to Exhibit 6.5 filed with the Form 10-SB)
10.6 Service Mark License dated September 6, 2000 among Banner's Central
Electric, Inc. and Banner Central Finance Company
(incorporated by reference to Exhibit 6.7 filed with the Form 10-SB)
10.7 Form of Indemnification Agreement between Banner Central Finance
Company and certain directors and/or officers (incorporated by
reference to Exhibit 6.8 filed with the Form 10-SB)
10.8 Supplemental Executive Retirement Plan Guaranty Agreement between
Banner Central Finance Company and Hispanic Express, Inc.
(incorporated by reference to Exhibit 6.9 filed with an amendment to
the Form 10-SB as filed on January 5, 2001)
10.9 Banner Central Finance Company Executive Deferred Salary and Bonus Plan
99 Letter from Registrant to Securities and Exchange Commission
41
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: March 29, 2002 By: /s/ Gary M. Cypres
------------------------------
Gary M. Cypres
Chairman, Chief Executive Officer
and Chief Financial Officer
Signature Title Date
/s/ Gary M. Cypres Chairman of the Board of Directors, March 29, 2002
--------------------------------------- and Chief Financial Officer
Gary M. Cypres
/s/ Salvatore J. Caltagirone Director March 29, 2002
------------------------------------------
Salvatore J. Caltagirone
/s/ William R. Sweet Director March 29, 2002
----------------------------------------
William R. Sweet
EXHIBIT 99
BANNER CENTRAL FINANCE COMPANY
5480 FERGUSON DRIVE, COMMERCE, CA 90022
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
March 29, 2002
Ladies and Gentlemen:
This will confirm that Banner Central Finance Company. (the "Company") has
received a letter from Arthur Andersen LLP ("Arthur Andersen") with respect to
Arthur Andersen's audit of the Company's consolidated financial statements for
the year ended December 31, 2001. Arthur Andersen's letter certifies that the
audit was subject to Arthur Andersen's quality control system for the U.S.
accounting and auditing practice to provide reasonable assurance that the
engagement was conducted in compliance with professional standards, that there
was appropriate continuity of Arthur Andersen personnel working on the audit and
availability of national office consultation. Availability of personnel at
foreign affiliates is not relevant to this audit.
Very truly yours,
/s/ Gary M. Cypres
------------------------------------
Gary M. Cypres
Chief Financial Officer
EXHIBIT 10.9
BANNER CENTRAL FINANCE COMPANY
EXECUTIVE DEFERRED SALARY AND BONUS PLAN
EFFECTIVE JANUARY 1, 2002
EXHIBIT 10.9
BANNER CENTRAL FINANCE COMPANY
EXECUTIVE DEFERRED SALARY AND BONUS PLAN
1. Purpose. The purpose of the Plan is to attract competent officers
and key executives by offering flexible compensation opportunities; to
motivate these executives to promote the growth and profitability of
the Company; and to associate the interests of these executives with
those of the Company.
2. Definitions. When used in this Plan, unless the context otherwise
requires:
(a) "Account" shall mean the record maintained by the Company
reflecting Executive's Deferred Amounts and the interest
credited thereon, as provided for in this Plan.
(b) "Account Balance" shall mean at any time the total of the
amounts credited to the Executive's Account and any accrued
but not credited interest in accordance with the provisions of
the Plan.
(c) "Board of Directors" shall mean the Board of Directors of
Banner Central Finance Company
(d) "Bonus" shall mean, at any time, the gross amount of the bonus
payable to the Executive under the Company's Executive
Incentive Bonus Program (or any other similar bonus program
hereafter established by the Company), before giving effect to
any deferral agreement hereunder.
(e) "Committee" shall mean the Compensation Committee appointed
by the Board of Directors.
(f) "Company" shall mean Banner Central Finance Company.
(g) "Deferred Amount" shall mean the amount by which the Salary
and/or Bonus is reduced from time to time as agreed upon by
the Executive and the Company and deferred in accordance with
the terms of the Plan. The Deferred Amount may be a dollar
amount or a percentage of Salary and/or Bonus.
(h) "Employee" shall mean any person (including an officer)
actively employed by the Company on a full-time, salaried
basis.
(i) "Employed" or "Employment" shall mean performing services
as an employee on a full time basis for the Company.
(j) "Executive" shall mean an Employee who is an officer or key
executive of the Company Employed in a high-ranking
executive or managerial capacity.
(k) "Participant" shall mean an Executive selected by the
Committee and whose participation in the Plan for a calendar
year has been approved.
(l) "Plan" shall mean this Executive Deferred Salary and Bonus
Plan, as from time to time amended and in effect.
(m) "Salary" shall mean, at any time, the gross amount of base
compensation being paid to the Executive for Employment,
before giving effect to any deferral agreement hereunder.
3. Administration. The Plan shall be administered by the Committee,
which shall have full and discretionary authority to interpret the
Plan, to establish rules and regulations relating to the Plan, to
determine the criteria for eligibility to participate in the Plan, to
select Participants in the Plan, and to make all other determinations
and take all other actions necessary or appropriate for the proper
administration of the Plan. The Committee's interpretation of the
Plan, and all actions taken within the scope of its authority, shall
be final and binding on the Company, its stockholders, Participants,
Employees, former Employees and beneficiaries.
4. Eligibility and Participation. Participation in the Plan for a
calendar year (and for the period beginning on the effective date of
the Plan and ending December 31, of each year the Plan is in
existence), shall be limited to those key Executives whom the
Committee shall select, on the basis of such Executive's impact on the
long-term success of the Company, and who might benefit from the
deferral of amounts otherwise constituting current compensation.
5. Deferral of Salary and/or Bonus. A Participant may, subject to the
terms and conditions of this Plan, elect to defer payment of a maximum
of 50% of Salary, and/or a maximum of 100% of Bonus, annually under
this Plan by completing the form prescribed by the Committee. The form
shall constitute an agreement between the Company and the Employee as
to the amount of Salary and/or Bonus to be deferred pursuant to the
Plan. The Committee may further limit deferral by individual
Participants, for any reason it deems advisable.
(a) Election. An election to defer Salary shall be made on or before
the last regular working day of the Company of the calendar year
preceding the calendar year for which the Salary and/or Bonus
agreement is to be made and shall be effective upon delivery (or in
the event the form is mailed by certified mail, return receipt
requested, on the date of mailing) of the deferral form to the
Company. Notwithstanding the preceding sentence, in the calendar year
in which this Plan is initially adopted and in the case of an
individual who becomes an Executive during a calendar year, a
Participant's election to defer Salary that would otherwise be payable
after the date of the election, and/or all or a portion of the Bonus
payable with respect to the period after the date of the election, may
be made up to 30 days after the effective date of the Plan or the
individual becomes an Executive and eligible to participate herein,
whichever is applicable. The election made to reduce Salary and/or
Bonus by a Participant must remain in effect for an entire calendar
year (or, in the case of the calendar year in which this Plan is
adopted or the calendar year in which an individual becomes an
Executive, the remaining portion of such calendar year to which the
deferral election relates) and may not be changed by any action taken
by the Participant thereafter.
6. Executive Deferred Amounts. The Participant, after making the
election under 5(a) above, may elect to have the Executive Deferred
Amounts invested in an account that accrues interest as set forth in
(a) below or invested in an account which measures the performance of
the Company's common stock price as set forth in (b) below.
(a) Accounts and Interest Credited on Deferred Accounts. A separate
Account shall be established and maintained for each Participant,
which Account shall reflect the Deferred Amount and all interest
credited thereon from time to time. Each Participant's Account Balance
shall be credited quarterly with interest as of the end of each
calendar quarter, with the first such credit being made as of March
31, 2002. In the event a Participant's Account Balance is paid other
than at the end of any calendar quarter, he shall be credited with
interest thereon from the end of the immediately preceding the
calendar quarter to the date of payment. No interest shall be credited
to a Participant's Account after the payment of such Participant's
Account Balance. Interest to be credited for any period shall be at a
rate equal to the average prime rate which Union Bank of California,
N.A. charged from time to time during a 360-day year of twelve 30-day
months.
(b) Accounts and Changes in the Company's Common Stock Price on
Deferred Accounts. A separate amount shall be established and
maintained for each Participant, which the accounts shall reflect the
Participant's deferred amount as if it had been invested in the
Company's common stock. Each Participant's account balance shall be
credit or debited as of the end of each calendar quarter, with the
changes in the Company's common stock price, as reflected on the OTB,
that accrued from the time the Executive established such account to
the end of the calendar year quarter.
7. Payment on Deferred Amount. The Deferred Amount, plus interest
credited thereon pursuant to Subsection 6(a) or increases or decreases
credited or charged therein pursuant to Subsection 6(b) hereof, upon
the Participant's termination of Employment for any reason will be
paid to the Participant (or, in the event of the Participant's death,
the person or estate determined under Section 6 hereof) in a lump sum
within 30 days after such termination.
8. Acceleration of Payment of Deferred Amount. Payment of the Deferred
Amount plus interest changes thereto pursuant to 6(a) or 6(b) above
may occur prior to the Participant's termination of Employment under
the following circumstances:
(a) At any time prior to complete payment of the Participant's Account
Balance, the Company may pay to the Participant an amount not greater
than that portion of the Deferred Amount that the Committee
determines, in its sole discretion, is necessary to meet an
Unforeseeable Emergency. For purposes of this paragraph, an
Unforeseeable Emergency shall mean an unanticipated emergency that is
caused by an event beyond the control of the Participant and that
would result in severe financial hardship to the Participant if early
withdrawal of the Participant's Account Balance were not permitted.
The Participant shall apply in writing to the Committee for any
payment under this paragraph and shall furnish to the Committee such
information as the Committee deems necessary and appropriate to make
its determination; and,
(b) In no event may payment of the Deferred Amount, and interest
thereon, or any portion thereof, be accelerated in any manner other
than as provided above.
9. Designation Of Beneficiary. A Participant may designate a
beneficiary or beneficiaries who, in the event of the Participant's
death prior to full payment of his Account Balance hereunder, shall
receive payment of the Account Balance due under the Plan. Such
designation shall be made by the Participant on a form prescribed by
the Committee. The Participant may, at any time, change or revoke such
designation. A beneficiary designation, or revocation of a prior
beneficiary designation, will be effective only if it is made in
writing on a form provided by the Company, signed by the Participant
and received by the Company. If the Participant does not designate a
beneficiary or the beneficiary dies prior to receiving any payment of
the Account Balance, the Account Balance payable under the Plan shall
be paid to the Participant's estate.
10. Amendment and Termination. The Board of Directors may at any time
amend or terminate this Plan. No amendment or termination shall
adversely affect a Participant's rights to or interest in the Account
Balance credited prior thereto without the Participant's consent.
11. Miscellaneous Provisions.
(a) This Plan is not a contract for employment of the Employee for a
certain period of time. Neither the establishment of this Plan, nor
any action taken hereunder, shall be construed as giving any Employee
any right to be retained in the Employ of the Company.
(b) A Participant's rights and interest under the Plan are not subject
in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of the
Participant or the Participant's beneficiary.
(c) It is the intention of the parties that the Plan be unfunded for
tax purposes and for purposes of Title I of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The Company shall
not be required to establish any special or separate fund, or to make
any other segregation of assets, to assure payment of the Account
Balance. Participants have the status of general unsecured creditors
of the Company and the Plan constitutes a mere promise by the Company
to make benefit payments in the future.
(d) To the extent that the Plan is considered to be a plan for
purposes of ERISA, it shall be considered an unfunded plan maintained
primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees, within the
meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
12. Withholding and Payments. The Company shall have the right to
deduct from any amount to be paid to any Participant or beneficiary
any taxes or other amounts required by law to be withheld.
13. Effective Date. The Plan shall be effective on and after January
1, 2002 and shall include bonus awards earned in 2001, but paid in
2002.