As filed with the Securities and Exchange Commission on May 14, 2002.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934
For the transition period from ____________ to ______________
Commission file number: 000-31747
BANNER CENTRAL FINANCE COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 95-4821101
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5480 East Ferguson Drive
Commerce, California 90022
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (323) 720-8600
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Number of shares outstanding of the Registrant's Common Stock, as of May 14,
2002: 7,417,400
Traditional Small Business Disclosure Format. Yes [X] No [ ]
2
BANNER CENTRAL FINANCE COMPANY
FORM 10-QSB
INDEX
Page No.
--------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001................................................. 3
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2002 and 2001............................................ 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001..................................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................17
Signatures...................................................................18
3
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
------------ ------------
ASSETS
Cash $ 2,186,000 $ 1,987,000
Short-term investments 16,800,000 12,694,000
Finance receivables, net 7,843,000 11,047,000
Prepaid expenses and other current assets 218,000 218,000
Due from affiliate 294,000 997,000
Inventory 896,000 1,297,000
Deferred income taxes 826,000 594,000
Property and equipment, net 3,725,000 3,742,000
Goodwill, net 635,000 --
----------- -----------
TOTAL ASSETS $32,788,000 $33,211,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other current liabilities $ 1,101,000 $ 1,185,000
----------- -----------
TOTAL LIABILITIES 1,101,000 1,185,000
Minority interest 500,000 497,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 10,000,000 shares authorized,
7,417,400 shares issued 74,000 74,000
Additional paid-in capital 21,814,000 21,814,000
Retained earnings 9,299,000 9,641,000
----------- -----------
Total stockholders' equity 31,187,000 31,529,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,788,000 $33,211,000
=========== ===========
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
4
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------------
2002 2001
----------- ------------
Revenues
Interest income $ 593,000 $ 1,361,000
Retail sales 1,504,000 946,000
Other income 742,000 658,000
----------- -----------
Total revenues 2,839,000 2,965,000
----------- -----------
Costs and Expenses
Operating expenses 1,584,000 1,320,000
Provision for credit losses 177,000 874,000
Cost of sales 983,000 579,000
Depreciation and amortization 31,000 21,000
----------- -----------
Total costs and expenses 2,775,000 2,794,000
----------- -----------
Income before provision for income taxes
and cumulative effect of accounting change 64,000 171,000
Provision for income taxes 25,000 66,000
----------- -----------
Income before cumulative effect of
accounting change 39,000 105,000
Cumulative effect of accounting change, net of tax (381,000) --
----------- -----------
Net income (loss) $ (342,000) $ 105,000
=========== ===========
Basic and diluted net income (loss) per common
share before cumulative effect of accounting
change $ -- $ 0.01
Cumulative effect of accounting change (0.05) --
----------- -----------
Basic and diluted net income (loss) per common
share $ (0.05) $ 0.01
=========== ===========
Average basic and diluted common shares 7,417,000 7,166,000
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
5
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2001
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (342,000) $ 105,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Cumulative effect of accounting change 381,000 --
Depreciation and amortization 31,000 21,000
Provision for credit losses 177,000 874,000
Deferred income taxes 22,000 --
Changes in assets and liabilities:
Prepaid expenses and other current assets -- (62,000)
Due from affiliate 703,000 --
Inventory 401,000 379,000
Accrued expenses and other current liabilities (84,000) (500,000)
Income taxes payable -- 66,000
---------- ----------
Net cash provided by operating activities 1,289,000 883,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract receivables
collected, net of recoveries 3,027,000 3,426,000
Increase in short-term investments (4,106,000) --
Increase in note receivable from affiliate (4,113,000) --
Capital expenditures (11,000) (7,000)
----------- ----------
Net cash used in investing activities (1,090,000) (694,000)
----------- ----------
NET INCREASE IN CASH 199,000 189,000
CASH, BEGINNING OF PERIOD 1,987,000 77,000
----------- ----------
CASH, END OF PERIOD $ 2,186,000 266,000
=========== ==========
CASH PAID DURING THE YEAR FOR:
INTEREST $ -- $ --
INCOME TAXES -- --
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
6
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Nature of Operations
Basis of Presentation - The condensed consolidated financial statements of
Banner Central Finance Company ("Banner Central Finance" or the "Company") are
unaudited, other than the consolidated balance sheet at December 31, 2001. In
the opinion of the Company's management, all adjustments of a normal recurring
nature necessary for a fair statement of interim periods presented have been
included. The results for interim periods are not necessarily indicative of
results to be expected for the entire year. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements for the year ended December 31, 2001, and the notes thereto
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
2001.
Banner Central Finance was formed in September 2000. On September 6, 2000,
the Board of Directors of Central Financial Acceptance Corporation ("Central
Financial") approved a Plan of Complete Dissolution, Liquidation and
Distribution (the "Plan") under which Central Financial's subsidiaries were
reorganized into two public companies, Banner Central Finance and Hispanic
Express, Inc. ("Hispanic Express"). On September 29, 2000, the majority of the
stockholders of Central Financial voted to approve the Plan. 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 5), including provisions for the allocation of
certain costs and expenses. Management of Banner Central Finance believes that
such agreements provide for reasonable allocation of costs and expenses between
the parties.
The formation of Banner Central Finance has been accounted for at
historical cost, in a manner similar to a pooling of interests. The accompanying
condensed consolidated financial statements reflect the combined operations of
Banner Central Finance and its subsidiaries, as if they had been consolidated at
the beginning of the periods presented.
On February 28, 2001, Central Financial contributed 80% of the outstanding
common stock of BCE Properties II, Inc. to the Company. For financial reporting
purposes the contribution was recorded on a historical cost basis and resulted
in an increase in stockholders' equity of approximately $1,967,000. On February
28, 2001, the Company purchased certain assets and assumed certain obligations
of a retail store previously owned and operated by Banner 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 experienses the highest demand
for its financial products and services between October and December.
7
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting Change
In January 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which
requires companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life. SFAS 142 requires that goodwill and intangible
assets deemed to have an indefinite useful life be reviewed for impairment upon
adoption of SFAS 142 (January 1, 2002) and annually thereafter. Under SFAS 142,
goodwill impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. This methodology differs from the Company's
previous policy, in accordance with accounting standards existing at that time,
of using undiscounted cash flows to determine if goodwill is recoverable. Upon
adoption of SFAS 142 in the first quarter of 2002, the Company recorded a
one-time, non-cash charge, net of tax of approximately $381,000 to reduce the
carrying value of its goodwill. The charge is comprised of goodwill associated
with our automobile insurance operations. Such charge is non-operational in
nature and is reflected as a cumulative effect of an accounting change in the
accompanying condensed consolidated statements of income. In calculating the
impairment charge, the fair value of the impaired reporting unit was estimated
using a market valuation model. In assessing the impairment of goodwill,
management considered the current operating results and future expectations of
the auto insurance business.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2002, are as follows:
Balance, January 1, 2002 $ 635,000
Cumulative effect of accounting change (635,000)
Balance, March 31, 2002 -----------
$ --
===========
The following table reconciles reported net income in 2001 to adjusted net
income which excludes the effect of amortization expense, net of tax:
Net income for the three months ended March 31, 2001, as reported $ 105,000
Adjustment for goodwill amortization, net of tax 4,000
------------
Net income for the three months ended March 31, 2001, as adjusted $ 109,000
============
Basic and diluted net income per common share for the
three months ended March 31, 2001, as reported $ 0.01
Adjustment for goodwill amortization, net of tax --
------------
Basic and diluted net income per common share for the
three months ended March 31, 2001, as adjusted $ 0.01
============
3. Earnings Per Share
Basic net income (loss) per common share is computed by dividing net income
(loss) available to common shareholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted net income (loss) per
share is computed by dividing net income (loss) available to common shareholders
by the weighted-average number of shares of common stock outstanding during the
period increased to include the number of additional common shares that would
have been outstanding if dilutive potential common shares had been issued. The
dilutive effect of outstanding options is reflected in diluted net income (loss)
per share by application of the treasury stock method. Options to purchase
454,600 shares of common stock that were outstanding at March 31, 2002, were not
included in the computation of diluted net income (loss) per share for the three
months ended March 31, 2002 because the effect would be antidilutive. At March
31, 2001, the exercise price of options to purchase shares of common stock was
greater than the average market price of the Company's common stock during this
period and, therefore, the effect would be antidilutive. Basic and diluted net
income per share for the three months ended March 31, 2001 is based on the
number of shares of common stock issued by the Company pursuant to the Plan and
are assumed to be outstanding as of January 1, 2001.
8
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Certain Consolidated Financial Statement Details
Finance Receivables
March 31, December 31,
2002 2001
----------- ------------
Gross finance receivables:
Consumer product portfolio $ 6,709,000 $ 8,938,000
Mortgage portfolio 2,425,000 3,028,000
Other portfolios 173,000 180,000
----------- -----------
9,307,000 12,146,000
----------- -----------
Less:
Deferred interest and insurance 10,000 12,000
Deferred loan origination fees 196,000 246,000
Allowance for credit losses 1,258,000 841,000
----------- -----------
1,464,000 1,099,000
----------- -----------
Finance receivables, net $ 7,843,000 $11,047,000
=========== ===========
Customers are required to make monthly payments on the Company's receivable
contracts. The aggregate gross balance of accounts with payments 31 days or more
past due are:
March 31, December 31,
2002 2001
---------- ------------
Consumer Product Portfolio:
Past due 31 days plus $142,000 $140,000
======== ========
Mortgage Portfolio:
Past due 31 days plus $239,000 $281,000
======== ========
Other Portfolios:
Past due 31 days plus $ -- $ --
======== ========
The allowance for credit losses includes the following:
Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
Allowance for credit losses, beginning
of the year $ 841,000 $ 683,000
Provision for credit losses 177,000 874,000
Recoveries (charge-offs, net of recoveries) 240,000 (784,000)
---------- -----------
Allowance for credit losses, end of period $1,258,000 $ 773,000
========== ===========
9
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
March 31, December 31,
2002 2001
---------- ------------
Land $1,203,000 $1,203,000
Buildings and improvements 3,202,000 3,188,000
Furniture, equipment and software 179,000 179,000
---------- ----------
4,584,000 4,570,000
Less: Accumulated depreciation 859,000 828,000
---------- ----------
$3,725,000 $3,742,000
========== ==========
Goodwill
March 31, December 31,
2002 2001
--------- ------------
Goodwill $ -- $ 780,000
Less: Accumulated amortization -- (145,000)
---------- ----------
$ -- $ 635,000
========== ==========
Other Income
Three Months Ended March 31,
----------------------------
2002 2001
-------- --------
Late and extension charges $ 92,000 $223,000
Mortgage loan origination fees 409,000 155,000
Insurance products and other 241,000 280,000
-------- --------
$742,000 $658,000
======== ========
5. Related Party Transactions
In connection with its formation, the Company, Central Financial, Hispanic
Express and Central entered into certain agreements; including, the Financing
Agreement, Operating Agreement and the Tax Sharing Agreement, for defining their
ongoing relationships.
The Financing Agreement grants the Company the exclusive right to provide
financing to Central customers for a term of ten years from the date of the Plan
and provides that any contracts purchased pursuant to this agreement will be at
face value. As part of the Financing Agreement, the Company has agreed to
provide Central with up to $6.0 million of inventory or inventory financing as
long as the Financing Agreement remains in effect and Central has agreed to
provide the Company, at no charge, an amount of floor space at Central's stores
as the Company from time to time requests. In connection with the Financing
Agreement, Central purchased $1.9 million of inventory from the Company during
the three months ended March 31, 2001. 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 totaled $434,000 and
$525,000 for the three months ended March 31, 2002 and 2001, respectively.
10
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company, Central Financial and Hispanic Express entered into a Tax
Sharing Agreement which provides, among other things, for the payment of
federal, state and other income tax remittances or refunds for periods during
which the Company was included in the same consolidated group for federal income
tax purposes, the allocation of responsibility for the filing of such tax
returns and various related matters. For periods in which the Company was
included in Central Financial's consolidated federal income tax returns, the
Company will be required to pay its allocable portion of the consolidated
federal, state and other income tax liabilities of the group and will be
entitled to receive refunds determined as if the Company had filed separate
income tax returns. With respect to Central Financial's liability for payment of
taxes for all periods during which the Company was so included in Central
Financial's consolidated federal income tax returns, the Company will indemnify
Central Financial for all federal, state and other income tax liabilities of the
Company for such periods. February 28, 2001 was the last day on which the
Company was required to be included in Central Financial's consolidated federal
income tax returns.
In connection with the Company's purchase of certain assets and assumption
of certain obligations of a retail store previously owned and operated by
Central, an affiliated company, Central and the Company have agreed to use
allocation methods agreeable to both parties for the allocation of certain
corporate expenses of Central in 2001. Central closed its remaining two stores
in the fourth quarter of 2001 and ceased operations. In connection with the
acquisition of the retail store, the Company agreed to assume the obligation of
Central to sell certain inventory at cost to Credit Starters LLC, an affiliated
Company, controlled by Gary Cypres, Chairman of the Board in return for a
percentage of the pre-tax profit of this business.
At March 31, 2002 and December 31, 2001 the Company had amounts receivable
from Hispanic Express in the amount of $294,000 and $997,000, respectively. At
March 31, 2001, the Company had a note receivable from Hispanic Express in the
amount of $5,325,000 which bears interest per annum at the prime rate calculated
at the beginning of each month (8.0% at March 31, 2001) and was paid on
September 30, 2001. Interest income earned on notes receivable from Hispanic
Express was $23,000 in the three months ended March 31, 2001.
6. Segment Information
The Company's reportable segments are (i) consumer receivables, (ii)
mortgage loans, (iii) other and (iv) corporate. Other includes the operations of
the retail store and automobile insurance operations.
The accounting policies of these reportable segments are the same as those
described in the summary of significant accounting policies in the Company's
2001 Form 10-KSB. The Company evaluates the performance of its operating
segments based on revenues and operating income. Operating income for each
segment includes revenue and operating expenses directly attributable to the
segment. Operating income for each segment excludes other income and expense and
certain expenses that are managed outside the reportable segment. Costs excluded
from segment operating income include various corporate expenses and income
taxes. Corporate expenses include separately managed general and administrative
expenses. Summary information by segment follows:
Revenues
Three Months Ended March 31,
-----------------------------
2002 2001
--------- ----------
Consumer Receivables $ 586,000 $1,410,000
Mortgage Loans 554,000 419,000
Other 1,699,000 1,136,000
Corporate -- --
---------- ----------
Total revenues $2,839,000 $2,965,000
========== ==========
11
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Income From Operations
Three Months Ended March 31,
-----------------------------
2002 2001
--------- ----------
Consumer Receivables $ 107,000 $ 199,000
Mortgage Loans 248,000 123,000
Other (118,000) 6,000
Corporate (173,000) (157,000)
--------- ----------
Income from operations $ 64,000 $ 171,000
========= ==========
Total Assets
March 31, December 31,
2002 2001
----------- ------------
Consumer Receivables $ 6,259,000 $ 8,714,000
Mortgage Loans 2,105,000 2,921,000
Other 4,324,000 5,738,000
Corporate 20,090,000 15,838,000
----------- -----------
Total assets $32,778,000 $33,211,000
=========== ===========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed in this Quarterly Report on Form 10-QSB may
constitute forward-looking statements under Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These statements may
involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which Banner
Central Finance Company and its subsidiaries (the "Company" which may be
referred to as "we" or "us," when referring only to the parent company) operate
in, projections of future performance, perceived opportunities in the market and
statements regarding our mission and vision. Our actual results, performance, or
achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements. For
discussion of the factors that might cause such a difference, see "Item 1.
Description of Business -- Business Considerations and Certain Factors that May
Affect Future Results of Operations and Stock Price" contained in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2001, as amended.
Financial Trends
Portfolios
Our aggregate portfolio of gross receivables from which we derived the
majority of our revenues declined to $9.3 million compared to $12.1 million at
December 31, 2001 and $20.8 million at March 31, 2001, primarily reflecting
continued decline in our Consumer Products Portfolio. Prior to 2001, Central
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,
the Company purchased certain assets and assumed certain obligations of the
largest of Central's retail stores for which it paid $392,000 and assumed a
related lease from Hispanic Express. In December 2001, Central ceased operations
at two of its remaining retail stores. Our gross receivables of the Consumer
Products Portfolio declined to $6.7 million at March 31, 2002 compared to $8.9
million at December 31, 2001 and $15.5 million at March 31, 2001.
Our Mortgage Portfolio decreased to $2.4 million at March 31, 2002 compared
to $3.0 million at December 31, 2001 and $4.9 million and at March 31, 2001. 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 we will only originate mortgage loans for other financial institutions.
13
The following sets forth certain information relating to our portfolios for
the periods indicated:
Consumer Product Portfolio
Three Months Ended March 31,
----------------------------
2002 2001
----------- ------------
Gross receivable (at end of period) $ 6,709,000 $15,467,000
Deferred insurance (at end of period) 9,000 31,000
----------- -----------
Net carrying value (at end of period) $ 6,700,000 $15,436,000
=========== ===========
Average net receivable (1) $ 7,781,000 $17,574,000
Number of contracts (at end of period) 17,000 41,900
Average net contract balance (at end of period) $ 394 $ 369
Total interest income $ 483,000 $ 1,140,000
Late charge and extension fee income 91,000 220,000
Provision for credit losses $ 147,000 $ 797,000
Provision for credit loss as a percentage of
average net receivable (2) 7.6% 18.1%
Net write-offs (net recoveries) $ (240,000) $ 685,000
Net write-offs (net recoveries) as a percentage of
average net receivable (2) (12.3%) 15.6%
Average interest rate on average net
receivable (2) 24.8% 25.9%
(1) Average net receivable is defined as the average gross receivables, less
the average deferred insurance.
(2) Percentages for the three months ended March 31, 2002 and 2001 are
annualized.
Mortgage Portfolio
At March 31, 2002 and 2001, the gross receivables of the mortgage portfolio
were $2.4 million, and $4.9 million, respectively. The number of mortgage loans
outstanding at March 31, 2002 and 2001 were 402 and 629, respectively. The
average interest rate on the portfolio for the three months ended March 31, 2002
and 2001 was 17.6%, and 17.9%, respectively.
At March 31, 2002 and 2001, there were $0.2 million of receivables in each
of the periods with balances over 31 days past due.
14
Delinquency Experience and Allowance for Credit Losses
Borrowers under our contracts are required to make monthly payments. The
following table sets forth our delinquency experience for accounts with payments
31 days or more past due and allowance for credit losses for our finance
receivables.
Finance Receivables (1)
Three Months Ended March 31,
----------------------------
2002 2001
------------ --------------
Past due accounts 31 days or more $ 142,000 $ 214,000
(gross receivable)
Accounts with payments 31 days or
more past due as a percentage of end
of period gross receivables 2.1% 1.4%
Allowance for credit losses $ 1,002,000 $ 612,000
Allowance for credit losses as a percentage
of net receivables 14.6% 3.9%
(1) Includes receivables in 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 March 31, 2002 compared to $0.2 million at March
31, 2001. These declines primarily reflect the decline in the aggregate level of
our finance receivables portfolios and accelerated write-offs in the first
quarter of 2002 and 2001. As a percentage of the end of period gross finance
receivables, accounts with 31 days or more past due increased to 2.1% at March
31, 2002 from 1.4% at March 31, 2001. We believe the increase in delinquencies
were a result of excessive credit burdens for some customers, due to an
aggregate over extension of credit in the marketplace and a deteriorating
economic climate in the market we serve. The allowance for credit losses at
March 31, 2002 increased to $1.0 million from $0.6 million at March 31, 2001. As
a percentage of net receivables the allowance for credit losses increased to
14.6% at March 31, 2002 compared to 3.9% at March 31, 2001.
15
The following tables summarize the results of operations of the Company for
the three months ended March 31, 2002 and 2001:
Three Months Ended
March 31,
---------------------------
2002 2001
----------- ------------
Revenues
Interest income $ 593,000 $ 1,361,000
Retail sales 1,504,000 946,000
Other income 742,000 658,000
----------- -----------
Total revenues 2,839,000 2,965,000
----------- -----------
Costs and Expenses
Operating expenses 1,584,000 1,320,000
Provision for credit losses 177,000 874,000
Cost of sales 983,000 579,000
Depreciation and amortization 31,000 21,000
----------- -----------
Total costs and expenses 2,775,000 2,794,000
----------- -----------
Income before provision for income taxes
and cumulative effect of accounting change 64,000 171,000
Provision for income taxes 25,000 66,000
---------- -----------
Income before cumulative effect of
Accounting change 39,000 105,000
Cumulative effect of accounting change (381,000) --
----------- -----------
Net income (loss) $ (342,000) $ 105,000
=========== ===========
Three Months Ended March 31, 2002 Compared With The Results of Operations For
The Three Months Ended March 31, 2001
Total revenue in the three months ended March 31, 2002 decreased to $2.8
million from $3.0 million in the three months ended March 31, 2001, a decrease
of $0.2 million or 4.2%.
Interest income for the three months ended March 31, 2002 decreased to $0.6
million from $1.4 million in the three months ended March 31, 2001, a decrease
of $0.8 million or 56.4%. This decrease was primarily due to a decrease in our
Consumer Products Portfolio as a result of a decreased level of receivables
purchased from Central, reflecting Central's decision to close its remaining two
retail stores in December 2001. For the three months ended March 31, 2002, our
net consumer products portfolio averaged $7.8 million compared to $17.6 million
in the three months ended March 31, 2001.
Retail sales for the three months ended March 31, 2002 increased to $1.5
million from $0.9 million in the three months ended March 31, 2001. Retail sales
in 2001 include sales from the retail store from the date the Company purchased
the operations on February 28, 2001. Prior to purchase, the retail store was
owned and operated by Central.
Other income for each of the three months ended March 31, 2002 and 2001 was
$0.7 million. Other income primarily includes late charges and other fees
charged on the receivables portfolio, fees earned from originating first and
second trust mortgages for other financial institutions, and commissions and
fees earned from the sale of automobile insurance.
Operating expenses for the three months ended March 31, 2002 increased to
$1.6 million from $1.3 million in the three months ended March 31, 2001, an
increase of $0.3 million or 20.0%. The increase in operating expenses was
primarily due to an increase of $0.3 million in operating expenses of the retail
store in 2002.
16
The provision for credit losses for the three months ended March 31, 2002
decreased to $0.2 million from $0.9 million in the three months ended March 31,
2001, a decrease of $0.7 million or 79.7%. This decrease was primarily
attributable to a decrease in the net Consumer Products Portfolio, which
averaged $7.8 million in the three months ended March 31, 2002 compared to $17.6
million in the three months ended March 31, 2001.
Cost of sales include the cost of retail sales from the retail store from
the date Central Financial contributed the operations to the Company on February
28, 2001. Cost of sales as a percentage of net retail sales in 2002 and 2001
were 65.4% and 61.2%, respectively. Gross margins declined by 4.2 percentage
points in 2002 as a result of an increase in the mix of sales of lower margin
products.
Net loss was $0.3 million in the three months ended March 31, 2002 compared
to net income of $0.1 million in the three months ended March 31, 2001. In 2002,
the Company recorded a one-time, non-cash charge upon the adoption of SFAS 142
in the amount of $0.4 million to reduce the carrying value of its goodwill. The
charge is comprised of $0.6 million related to goodwill associated with our
automobile insurance operations net of tax benefits of $0.2 million.
Liquidity and Capital Resources
We have historically financed our operations primarily through cash flow
generated from operations and borrowings under our notes payable. As a result of
the deteriorating economic climate the Company continued to tighten its credit
guidelines, coupled with a reduction in receivables purchased from Central due
to Central's decision to cease operations of its two remaining retail stores in
December 2001 and a decision in 2001 to curtail originating mortgages has
resulted in a continued contraction in our receivable portfolios. The Company
had cash and short-term investments of $19.0 million at March 31, 2002. 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 by operating activities totaled $1.3 million and
$0.9 million in the three months ended March 31, 2002 and 2001, respectively.
The source of cash primarily consisted of net operating income after non-cash
items. Non-cash items included cumulative effect of account change, depreciation
and amortization, provision for credit losses and deferred income taxes. Other
items affecting cash flows from operating activities included cash flows from
increases (decreases) prepaid expenses and other current assets, due from
affiliate, inventory, accrued expenses and other current liabilities, and income
tax payable. . Net cash used in investing activities totaled $1.0 million and
$0.7 million in the three months ended March 31, 2002 and 2001, respectively.
Net cash provided by investing activities consisted of installment contracts and
other contract receivables collected in the amount of $3.0 million and $3.4
million in the three months ended March 31, 2002 and 2001, respectively, offset
by an increase in short-term investments of $4.1 million in 2002 and an increase
in notes receivable from affiliate of $4.1 million in 2001.
There were no cash flows from financing activities for the three months
ended March 31, 2002 and 2001.
We presently do not have a bank line of credit. Pursuant to the Operating
Agreement with Hispanic Express, Hispanic Express has agreed to guarantee up to
$4.0 million of bank borrowings. Should we decide to expand our mortgage
business and portfolio second trust mortgages 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.
17
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANNER CENTRAL FINANCE COMPANY
May 14, 2002 /s/ Gary M Cypres
---------------------------
Gary M. Cypres
Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer