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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2001.
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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, 2000
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: $9,174,000
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 20, 2001, the aggregate market value of the voting stock of the
registrant held by non-affiliates of the registrant was $852,000 (computed based
on the average bid and asked prices of a share of the Common Stock on March 20,
2001)
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: 7,166, 000 at March 20, 2001
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED PART OF FORM 10-KSB INTO WHICH INCORPORATED
DEFINITIVE PROXY STATEMENT FOR THE DEFINITIVE PROXY STATEMENT FOR THE
2001 ANNUAL MEETING OF STOCKHOLDERS PART III
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TABLE OF CONTENTS
PAGE
PART I .................................................................................... 1
Item 1. Description of Business..................................................... 1
Item 2. Properties.................................................................. 14
Item 3. Legal Proceedings........................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......................... 14
PART II ................................................................................... 14
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....... 14
Item 6. Management's Discussion and Analysis and Results of Operations.............. 15
Item 7. Financial Statements........................................................ 22
Item 8. Changes in and Disagreements with Accountants and Financial Disclosure...... 41
Part III .................................................................................. 41
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........................... 41
Item 10.Executive Compensation...................................................... 41
Item 11.Security Ownership of Certain Beneficial Owners and Management.............. 41
Item 12.Certain Relationships and Related Transactions.............................. 41
Item 13.Exhibits and Reports on Form 8-K............................................ 42
Signatures.......................................................................... 44
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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.Business -- Business Considerations and Certain Factors that May Affect Future
Results of Operations and Stock Price."
COMPANY OVERVIEW
On September 6, 2000, the Board of Directors of Central Financial
Acceptance Corporation, or Central Financial, approved a Plan of Complete
Dissolution, Liquidation and Distribution, or the Plan, which 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 on September 6, 2000, one of which
was our company, Banner Central Finance, and the other of which was Hispanic
Express, Inc., or Hispanic Express. Banner Central Finance and Hispanic Express
were formed on September 5, 2000 to accomplish the Plan.
On September 29, 2000, West Coast Private Equity Partners, L.P.,
or West Coast, which owned a majority of the outstanding shares of Central
Financial's common stock, voted to approve the Plan. On February 28, 2001, the
Plan was completed and Central Financial was dissolved and liquidated.
The dissolution and liquidation of Central Financial and the
distribution of the common stock of Banner Central Finance and Hispanic Express
under the Plan was intended to separate Central Financial into two publicly held
companies and to enhance stockholder value over the long term. The businesses of
Banner Central Finance and Hispanic Express have distinct investment, operating
and financial characteristics. The Board of Directors of Central Financial
believed that implementing the Plan would enable the investment community to
analyze more effectively the investment characteristics, performance and future
prospects of each business, enhancing the likelihood that each would achieve
appropriate market recognition of its value. The Board of Central Financial also
believed that the Plan would allow Banner Central Finance and Hispanic Express
to concentrate on their respective businesses and provide each company with
greater flexibility in pursuing their independent business objectives.
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Pursuant to the Plan, each holder of Central Financial common
stock received, for every share of common stock of Central Financial owned by
such holder on February 28, 2001, one share of our common stock and one share of
common stock of Hispanic Express. As further described below, the various
businesses that are conducted by Banner Central Finance are conducted through
certain subsidiary companies. These subsidiaries were, prior to the formation of
Banner Central Finance, owned by Central Finance (see the "before" chart below).
Following completion of the Plan on February 28, 2001, Banner Central Finance
and Hispanic Express fully controlled their respective subsidiaries (see the
"after" chart below) and began to carry on the businesses that were previously
conducted when such subsidiaries were owned directly by Central Finance (see the
"after" chart below).
In connection with the Plan, Central Financial contributed all of
its assets and business to Hispanic Express and Banner Central Finance.
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 now 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.
- 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 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.
Set forth below are charts that illustrate the relationships among
the companies discussed above, before and after the consummation of the Plan.
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[FLOW CHART]
BEFORE*
[FLOW CHART]
AFTER*
* Each subsidiary is wholly-owned by its respective parent company.
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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
PURCHASED CONSUMER RECEIVABLES
We purchase consumer finance receivables pursuant to a Financing
Agreement with Banner's Central Electric, Inc., or Banner's Central Electric, an
affiliate of ours, which has granted us the exclusive right to purchase the
receivables it originates when it sells its inventory at its retail stores.
These purchased receivables are referred to as the Consumer Products Portfolio.
Banner's Central Electric operates four retail stores in the greater Los Angeles
area, and its inventory consists 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. Pursuant to the Financing Agreement that we have entered into with
Banner's Central Electric, we have agreed to acquire and have available to
transfer to Banner's Central Electric up to $6 million of inventory which they
sell to their customers. See "Item 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 temporarily suspended making
second mortgage loans pending evaluations of whether we can 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 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
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foreseeable future we anticipate that we will only originate mortgage loans for
other financial institutions.
OTHER BUSINESS ACTIVITY
We also provide financing to consumers for the purchase of
products and services sold by independent retailers. Historically, we have had
relationships with approximately 75 retailers in the greater Los Angeles area.
However, in 1998 and 1999, we phased out substantially all of these independent
relationships. From 1995 through March 31, 1999, we also financed the sale of
used automobiles primarily sold by Banner's Central Electric. In May 1997,
Banner's Central Electric discontinued the sale of used automobiles and
currently we no longer provide financing for this business.
We began to offer financing for the sale of automobile insurance
in 1996 that we sell as a broker for major automobile insurers. 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
Over the next eighteen months, we anticipate that interest income
earned on the Consumer Products Portfolio and on second trust mortgages will
constitute the majority of our revenue from financing activities and that our
levels of interest income will most likely decrease as these portfolios decline
over this period. Corresponding to the decline in our receivables, we anticipate
that our level of liquidity will increase, providing funds to invest in future
business activities; although we currently have not identified any business in
which we intend to invest such funds.
Historically, our major business activity has been to provide
financing to low-income Hispanic customers who purchase consumer products from
Banner's Central Electric. In 1997, Banner's Central Electric made a strategic
decision to de-emphasize this business line. Accordingly, since 1997, Banner's
Central Electric's retail sales have declined significantly with a corresponding
decrease in the level of consumer receivables purchased by us from them.
Although declining, we anticipate that interest income earned on the purchased
receivables will continue to be a majority of our future income. 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. See "Business
Considerations and Certain Factors that May Affect Future Results of Operations
and Stock Price -- Dependence of Consumer Finance Portfolio on Banner's Central
Electric and Changing Business Focus."
Since mid-1998, when we commenced our mortgage business, our
portfolio of second trust mortgages has grown significantly and in August 2000,
we suspended making any new second mortgage loans pending evaluation of whether
we can obtain long-term financing from financial institutions to support future
growth and to evaluate future economic conditions
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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 we continue to evaluate our mortgage
business and have not determined whether long-term financing is or is not
available or otherwise decided not to build our mortgage business. Accordingly
for the foreseeable future, we anticipate that we will let our portfolio
liquidate over the life of the outstanding mortgages which generally have an
average life of four years remaining.
Our receivables portfolio relating to our financing of independent
retailers has also experienced a significant decline as a result of our
decisions in 1998 and 1999 to phase out of substantially all of these
relationships. Our receivables relating to our financing of automobile insurance
premiums has also declined in recent years and we ceased operations in 2000 as a
result of the insurance companies for which we act as brokers beginning to offer
financing directly to customers. We do not expect that our financing of
independent retailers will be a significant portion of our ongoing operations in
the future. At December 31, 2000 and 1999, the aggregate of these receivables
portfolios was $454,000, and $2,718,000, respectively.
COMPANY OPERATIONS
In order to provide cost savings and operating efficiencies, we
entered into an operating agreement with Hispanic Express under which Hispanic
Express provides us with certain services, including, credit applications,
receivable servicing, payment applications, accounting, legal and management
information systems. See "Item 12. Certain Relationships and Related Party
Transactions."
CREDIT PROCEDURES
Purchased Finance Receivables -- We have developed uniform
guidelines and procedures for evaluating credit applications. We take credit
applications at each of the Banner's Central Electric stores and then generally
transmit them electronically through our computer system or facsimile machines
to our credit processing facility, where all credit approval and verification is
centralized. We also take credit applications at each of the independent retail
locations for which we provide financing, and generally transmit them to our
credit processing facility via facsimile. We believe that our underwriting
policies and procedures allow us to respond quickly to credit requests. We
typically respond to credit applicants within one hour. We believe that because
of our prompt response, many customers prefer to deal with us instead of our
competitors.
Our credit managers and credit approvers make their decisions on a
case by case basis and are influenced by, among other things, whether an
applicant is a new or existing customer. New applicants complete standardized
credit applications which contain information concerning income level,
employment history, stability of residence, driver's license or state
identification card, social security number, capacity to pay and personal
references. We also verify the applicant's employment and residence and
depending on the relevant factors may verify other pertinent information. We
also obtain a credit bureau report and rating, if available, and seek to confirm
other credit-related information.
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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 purchased 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 a deteriorating economic climate in the
markets we operate. As a result, we tightened our credit guidelines in the
fourth quarter of 2000, which normally is our period of greatest financing
activity. See "Business Considerations and Certain Factors that May Affect
Future Results of Operations and Stock Price -- Credit Risk Associated with
Customer; Lack of Collateral."
Mortgages -- We have developed uniform guidelines and procedures
for evaluating mortgage applications. Our underwriting guidelines require a
credit bureau report on each application, which is reviewed with the applicant's
credit history in order to determine if the applicant's credit history meets our
guidelines. A number of factors determine a loan applicant's creditworthiness,
including, debt ratios, payment history, and the combined loan to value for all
existing mortgages on a property. Our guidelines also require that we obtain
independent appraisals on all mortgage properties prior to funding of a loan.
See "Business Considerations and Certain Factors that May Affect Future Results
of Operations and Stock Price -- Mortgage Portfolio Risks and Need for a Line of
Credit."
PAYMENT AND COLLECTIONS
Industry studies estimate that a significant percentage of the
adult population in the United States does not maintain a checking account,
which is a standard prerequisite for obtaining a consumer loan, credit card or
other form of credit from most consumer credit sources. Our customers are
required to make their monthly payments using a payment schedule that we provide
to them. The vast majority of our customers make their payments in cash at our
locations or at our payment facilities in Banner's Central Electric's stores.
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.
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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's management information systems. Hispanic Express has invested
significant resources to develop a proprietary system that integrates all major
aspects of our business. The computer system uses a high-range IBM AS-400 as our
server, which provides on-line, real-time information processing services to
terminals located in each of our locations and in Hispanic Express's centralized
credit-processing facility. The system allows for complete processing of our:
- consumer product finance 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.
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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, 2000, we employed a total of 34 full-time
employees and 2 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
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- regulating the maximum legal finance rate or charge and
limiting other fees on installment credit sales.
Mortgage Business. We originate mortgages under the California
Finance Lender's License issued by the Department of Corporations. We are
monitored and regulated by the Department of Corporations and are subject to
annual audits. Under the jurisdiction of the Department of Corporations we are
regulated on such items as minimum loan amounts, restrictions on mortgage
companies to which we can deliver loans, and certain fees and charges. These
fees and charges include appraisal fees, escrow and reconveyance fees. Interest
rate and finance charges are not regulated by the Department of Corporations.
Insurance Premium Finance. The State of California Department of
Financial Institutions regulates our insurance premium finance business. In
general, state law and regulations set forth requirements and procedures for:
- the cancellation of policies and collection of unearned
premiums;
- regulating the form and content of premium finance
agreements;
- limiting the amount of finance, delinquency, cancellation
and other fees we may charge; and
- prescribing notice periods for the cancellation of policies
for nonpayment.
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.
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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 do not have an
operating history as a separate stand-alone company. Our success will depend, in
large part, on the ability of our management to implement its business strategy.
ABSENCE OF 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, 2000 and 1999, net finance
receivables of our consumer products portfolio, which accounts for substantially
all of our net receivables, had accounts with payments 31 days or more past due
as a percentage of end of period net receivables of 1.4% and 5.9%, respectively.
For the year ended December 31, 2000 and 1999, the consumer products portfolio
had net write-offs of $3.3 million and $2.5 million, respectively. In the fourth
quarter of 2000, our purchased 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 a deteriorating economic climate, our
delinquencies have increased and in the fourth quarter of 2000, we reevaluated
our charge-off policy and we charged-off customers accounts which were past due
at December 31, 2000 and which did not make any payments after the year end. 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."
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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
Substantially all of our businesses are located, and substantially
all of our revenues are generated in California. To date, substantially all of
our operations have been in Southern California. Therefore, our performance
depends upon economic conditions in California, and in Southern California in
particular, and may be adversely affected by social 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.
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. The performance of the Consumer Products
Portfolio and the ability to continue this business line, therefore, depends
substantially upon the success of Banner's Central Electric's retail stores and
its decision and ability to remain in business over which we have no control.
Also, since 1997, Banner's Central Electric's sales have declined significantly
with a corresponding decline in the level of receivables we purchase from them
and, accordingly, we have begun to change our strategic business focus away from
the purchase of these receivables toward our mortgage business. 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.
MORTGAGE PORTFOLIO RISKS AND NEED FOR A LINE OF CREDIT
The credit risks associated with our second mortgage loans,
including applicable loan to value ratios, and the credit and income histories
of the mortgagors are generally higher than in conventional conforming mortgage
loans and may lead to higher delinquency rates. Also, our businesses may be
materially and adversely affected by declining real estate values as our
security interest in the property securing such loans is subordinated to the
interest of the first mortgage holder. If the value of the property securing the
second mortgage loan is not sufficient to repay the borrower's obligation to the
first mortgage holder upon foreclosure, or if there is no additional value in
such property after satisfying the borrower's obligation to the first mortgage
loan holder, the borrower's obligation to us will likely not be satisfied. If we
are to grow our mortgage business we will require substantial capital to finance
our future operations. Consequentially, our ability to expand our operations
will be dependent upon obtaining financing
12
15
and the terms thereof. Although we have suspended making mortgage loans, there
cannot be any assurance that we will be successful in obtaining such a line and
terms thereof.
SEASONAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We historically experience the highest demand for our purchased
finance receivables between October and December, and experience the lowest
demand for our purchased finance receivables between January and March. These
significant seasonal fluctuations in our business directly impact our operating
results and cash needs.
COMPETITION
The installment credit business is highly competitive. Through our
relationship with Banner's Central Electric and other retailers, we compete with
those department stores, discount stores and other retail outlets which also
provide credit to low-income consumers. The largest national and regional
competitors have significantly greater resources than we do. Competition may
arise from new sources having the expertise and resources to enter our markets
either through expansion of operations or acquisitions. Our competitors in the
mortgage business include other consumer finance companies, mortgage banking
companies, commercial banks, credit unions, savings associations and insurance
companies. The largest national and regional competitors have more capital, more
locations and greater economic resources than we do.
IMPACT OF GOVERNMENT REGULATION
Our operations are regulated by federal, state and local
government authorities and are subject to various laws and judicial and
administrative decisions imposing various requirements and restrictions. These
requirements and restrictions include, among other things:
- regulating credit granting activities;
- establishing maximum interest rates and charges;
- requiring disclosures to customers;
- governing secured transactions;
- setting collection repossession and claims handling
procedures; and
- regulating insurance claims practices and procedures, and
other trade practices.
Although we believe that we are in compliance in all material
respects with applicable local, state and federal laws, rules and regulations,
we cannot assure that more restrictive laws, rules and regulations will not be
adopted in the future which may make compliance more difficult or expensive,
restrict our ability to purchase or finance installment sales, further limit or
restrict the amount of interest and other charges imposed in installment sales
originated by us or by third-party retailers, or otherwise materially adversely
affect our business or prospects. See "Business -- Regulation."
13
16
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 is owned by an affiliate company, BCE
Properties II, Inc. located at 5480 East Ferguson Drive, Commerce, California
90022. We do not pay any rent for this space. We believe that our executive
offices are adequate for current and future needs. On February 28, 2001, Central
Financial contributed 80% of the outstanding common stock of BCE Properties II,
Inc. to us. We lease certain facilities of our automobile insurance operations
under month to month contracts.
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,
2001, there were approximately, 138 beneficial holders and approximately six
initial holders of record of our common stock.
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.
14
17
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 $27.3 million at December 31, 2000
compared to $35.5 million at December 31, 1999, primarily reflecting continued
decline in our Consumer Products Portfolio. In 1997, West Coast made a strategic
decision to de-emphasize Banner's Central Electric's business and, since then,
Banner's Central Electric retail sales have declined significantly with a
corresponding decrease in the level of consumer receivables that we purchased
from them. Our gross receivables of the Consumer Products Portfolio declined to
$21.3 million at December 31, 2000 compared to $27.8 million at December 31,
1999. Our Consumer Products Portfolio historically increases during the period
between October through December reflecting higher holiday retail credit sales
at Banner's Central Electric stores, which we subsequently purchase. Our
portfolio of receivables, which we generate from customers of independent
retailers, has also experienced significant decline as a result of our decisions
in 1998 and 1999 to phase out substantially all of these relationships. Our
portfolio of automobile insurance premiums, which we finance, also declined in
2000 and 1999, as a result of the insurance companies for which we act as
brokers beginning to offer financing directly to their customers.
Our Mortgage Portfolio increased to $5.6 million at December 31,
2000 compared to $5.0 million and at December 31, 1999. In August 2000, we made
a decision to temporarily suspend making any new mortgage loans pending an
evaluation by management of whether we can obtain long-term financing from
financial institutions to support future growth. In September 2000, we began to
originate first and second mortgage loans for other financial institutions for
which we earn an origination fee. We continue to evaluate our mortgage business
and for the foreseeable future will only originate mortgage loans for other
financial institutions.
15
18
RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999
---------- ----------
REVENUES:
Interest income $ 6,785 $ 7,821
Other income 2,389 2,804
Transaction fees from affiliate -- 799
---------- ----------
Total Revenue 9,174 11,424
---------- ----------
COSTS AND EXPENSES:
Operating expenses 5,837 6,713
Provision for credit losses 2,707 2,719
---------- ----------
Total Costs and Expenses 8,544 9,432
---------- ----------
Income before taxes 630 1,992
Income tax expenses 252 797
---------- ----------
Net Income $ 378 $ 1,195
========== ==========
PRO FORMA PER SHARE DATA (UNAUDITED):
Basic earnings per share $ 0.05
Diluted earnings per share $ 0.05
Weighted average number of
common shares outstanding 7,166,000
16
19
CONSUMER PRODUCTS PORTFOLIO TREND
CONSUMER PRODUCTS PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE CONTRACT BALANCE)
YEARS ENDED
DECEMBER 31,
---------------------
2000 1999
------- -------
Gross receivable (at end of period) $21,254 $27,788
Deferred interest (at end of period) 2,312 2,787
------- -------
Net receivable (at end of period) 18,942 25,001
Deferred insurance revenues (at end of period) 40 69
------- -------
Net carrying value 18,902 $24,932
======= =======
Average net receivable $23,649 $26,359
Number of contracts (at end of period) 40,154 56,010
Average net contract balance $ 589 $ 471
Total interest income 5,557 6,477
Late charge and extension fee income 1,189 1,283
Provision for credit losses 2,531 2,475
Provision for credit loss as a percentage
of average net receivable 10.7% 9.4%
Net write-offs 3,292 2,474
Net write-offs as a percentage of average
net receivable 13.9% 9.4%
Average interest rate on average net
receivable 25.1% 24.6%
MORTGAGE PORTFOLIO
At December 31, 2000 and 1999, the gross receivables of the
mortgage portfolio were $5.6 million, and $5.0 million, respectively. The number
of mortgage loans outstanding at December 31, 2000 and 1999 were 688 and 505,
respectively. The average interest rate on the portfolio for the years ended
December 31, 2000 and 1999 was 17.3%, and 14.7%, respectively.
At December 31, 2000 and 1999, there was $0.4 million and $0.2
million of receivables with balances over 31 days past due.
DELINQUENCY EXPERIENCE AND ALLOWANCE FOR CREDIT LOSSES
Borrowers under our contracts are required to make monthly
payments. The following 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.
17
20
FINANCE RECEIVABLES(1)
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------
2000 1999
---- ------
Past due accounts 31 days or more (gross receivable): $263 $2,205
Accounts with payments 31 days or more past due as a percentage of
end of period gross receivables 1.2% 7.2%
Allowance for credit losses $508 $1,619
Allowance for credit losses as a percentage of net receivables 2.1% 5.9%
(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 $0.3 million at the end of December 31, 2000 compared to $2.2
million at the end of December 31, 1999. These declines primarily reflect the
decline in the aggregate level of our finance receivables portfolios during
these periods and accelerated write-offs during 2000. As a percentage of the end
of period gross finance receivables, accounts with 31 days or more past due
decreased to 1.2% at December 31, 2000 from 7.2% at December 31, 1999. We
believe the rise in the provision for credit losses and write-offs during 2000
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 a bus strike which commenced in September 2000 and lasted
approximately five weeks. Although the allowance for credit losses at December
31, 2000 decreased to $0.5 million from $1.6 million at December 31, 1999,
expressed as percentage of net receivables the allowance for credit losses
decreased to 2.1% at December 31, 2000 compared to 5.9% at December 31, 1999.
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
21
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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenues in the year ended December 31, 1999 decreased to $11.4
million from the $15.0 million in the year ended December 31, 1998, a decrease
of $3.6 million.
Interest income for the year ended December 31, 1999 decreased to
$7.8 million compared to $10.0 million in the year ended December 31, 1998, a
decrease of $2.2 million. Of this decrease, $0.8 million was due to a decrease
in interest income earned on our consumer products portfolio as a result of the
decreased level of receivables we purchased from Banner's Central Electric,
reflecting Banner's Central Electric's declining retail sales. For the year
ended December 31, 1999 our gross consumer products portfolio averaged $26.4
million compared to $30.7 million in the year ended December 31, 1998. The
remaining decrease was primarily attributable to a $0.8 million and $0.6 million
decrease in interest income earned on our independent retailer and premium
finance portfolios, respectively, reflecting the declining trends in these
portfolios. Also contributing to the decline was a decrease in interest income
earned on our independent retailers and premium finance portfolios as a result
of our decision to phase out of substantially all of our independent retailer
relationships and insurance companies (for which we act as broker) because they
are offering financing directly to customers.
19
22
Other income for the year ended December 31, 1999 decreased to
$2.8 million from $4.1 million in the year ended December 31, 1998. A decline of
$1.3 million in the income primarily includes late charges and other fees
charged on the receivables portfolio and the sale of automobile insurance. Of
the decrease, approximately $0.2 million was due to a decline in late charges
and other fees primarily reflecting the decreased level of the finance
receivables portfolio and $1.1 million due to a decrease in the level of
automobile insurance sold.
Transaction fees from an affiliate decreased to $0.8 million in
the year ended December 31, 1999 compared to $0.9 million in the year ended
December 31, 1998. Banner's Central Electric paid transaction fees to us based
upon the level of receivables we purchased from them. The decline in transaction
fees of $0.1 million reflected the decline in the level of receivables purchased
and a decline in the rate charged on each transaction
Operating expenses for the year ended December 31, 1999 decreased
to $6.7 million from $8.6 million in the year ended December 31, 1998, a
decrease of $1.9 million. This decrease was due to reductions in direct expenses
and corporate overhead reflecting the decreased level of business activity. As a
percentage of revenue, excluding transaction fees, operating expenses were 63.2%
in the year ended December 31, 1999 compared to 61.6% in the year ended December
31, 1998.
The provision for credit losses in the year ended December 31,
1999 was $2.7 million compared to $2.9 million in the year ended December 31,
1998. This decrease was due to a decreasing balance in the receivables
portfolio.
As a result of the foregoing factors, net income in the year ended
December 31, 1999 declined to $1.2 million compared to $2.1 million in the year
ended December 31, 1998, a decrease of $0.9 million.
LIQUIDITY AND CAPITAL RESOURCES
We primarily finance our operations through the cash flow
generated from operations and the liquidation of our receivables portfolios and
historically from capital contributions from Central Financial.
Net cash flow provided from operations totaled $3.3 million in the
year ended December 31, 2000 and net cash flow used in operations for the year
ended December 31, 1999 totaled $0.9 million. 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 in 2000 and 1999 included depreciation and
amortization, provision for credit losses and deferred income taxes. Other items
affecting cash flows from operating activities in each of the periods included
cash flows from increases (decreases) in notes receivable from affiliates,
prepaid expenses and other current assets, inventory and accounts payable and
accrued expenses.
Net cash provided by investing activities totaled $3.8 million and
$2.6 million for the years ended December 31, 2000 and 1999, respectively. Net
cash provided by investing activities in each of the periods consisted of
installment contracts and other contract receivables, offset by capital
expenditures, and cash flows from installment contracts returned to Banner's
Central Electric in 1999.
20
23
Net cash used in financing activities totaled $7.1 million and
$2.1 million for the years ended December 31, 2000 and 1999, respectively. Net
cash used in financing activities in each of the periods consisted of repayment
of notes payable totaling $1.8 million and $10.2 million for the years ended
December 31, 2000 and 1999, respectively. In addition, net cash used in
financing activities included capital distributions totaling $5.3 million to
Central Financial for the year ended December 31, 2000 and capital contributions
from Central Financial totaling $8.1 million for the year ended December 31,
1999.
We presently do not have a bank line of credit. Pursuant to an
operating agreement with Hispanic Express, Hispanic Express has agreed to
guarantee up to $4 million of bank borrowings to acquire consumer receivables
that we may purchase from Banner's Central Electric. Should we decide to expand
our mortgage business, we will need to obtain a bank line of credit.
We expect that our existing capital resources will adequately
satisfy our working capital requirements for the next 12 months. We anticipate
that the level of receivables we purchase from Banner's Central Electric will
continue to decline in the future and will provide us with capital resources in
excess of our working capital requirements. Our capital resources will be
further enhanced should we liquidate our portfolio of second trust mortgages. To
date we have not identified any other businesses in which to invest our excess
capital resources.
Our Board of Directors has authorized open-market purchases of up
to 3 million shares of our common stock, subject to applicable law and depending
on market considerations and other considerations that may affect open market
repurchases of such shares pursuant to authorization from time to time. Any
decision to purchase such shares will be based on the price of such shares and
whether we have capital available for such purchase.
21
24
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants................................ 23
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet............................................ 24
Consolidated Statements of Income..................................... 25
Consolidated Statements of Stockholders' Equity....................... 26
Consolidated Statements of Cash Flows................................. 27
Notes to Consolidated Financial Statements............................ 28
22
25
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, 2000, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 2000. 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, 2000, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 19, 2001
23
26
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
2000
-----------
ASSETS
Cash $ 77,000
Finance receivables, net 23,709,000
Prepaid expenses and other current assets 10,000
Notes receivable from affiliates 2,493,000
Inventory 3,559,000
Deferred income taxes 330,000
Property and equipment, net 116,000
Intangible and other assets, net 661,000
-----------
TOTAL ASSETS $30,955,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,414,000
-----------
TOTAL LIABILITIES 1,414,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Group equity 29,541,000
-----------
Total stockholders' equity 29,541,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,955,000
===========
The accompanying notes are an integral part of this
consolidated balance sheet.
24
27
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999
----------- -----------
REVENUES
Interest income $ 6,785,000 $ 7,821,000
Other income 2,389,000 3,603,000
----------- -----------
Total revenues 9,174,000 11,424,000
----------- -----------
COSTS AND EXPENSES
Operating expenses 5,837,000 6,713,000
Provision for credit losses 2,707,000 2,719,000
----------- -----------
Total costs and expenses 8,544,000 9,432,000
----------- -----------
Income before provision for income taxes 630,000 1,992,000
Provision for income taxes 252,000 797,000
----------- -----------
Net income $ 378,000 $ 1,195,000
=========== ===========
UNAUDITED PRO FORMA DATA: (NOTE 1)
Pro forma net income per common share (Unaudited):
Basic $ 0.05
Diluted $ 0.05
Pro forma shares used in calculating pro forma net income per common share
(Unaudited):
Basic 7,166,000
Diluted 7,166,000
The accompanying notes are an integral part of these
consolidated financial statements.
25
28
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
GROUP EQUITY
------------
Balance, December 31, 1998 $ 25,091,000
Capital contribution from related party 8,143,000
Net income for the year ended December 31, 1999 1,195,000
------------
Balance, December 31, 1999 34,429,000
Capital distribution to related party (5,266,000)
Net income for the year ended December 31, 2000 378,000
------------
Balance, December 31, 2000 $ 29,541,000
============
The accompanying notes are an integral part of these
consolidated financial statements.
26
29
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 378,000 $ 1,195,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on disposal of fixed assets 60,000 --
Depreciation and amortization 70,000 180,000
Provision for credit losses 2,707,000 2,719,000
Deferred income taxes 230,000 (1,000)
Changes in assets and liabilities:
Notes receivable from affiliates (2,493,000) --
Prepaid expenses and other current assets 116,000 (99,000)
Inventory 1,334,000 (4,893,000)
Accounts payable and accrued expenses 860,000 (2,000)
------------ ------------
Net cash provided by (used in) operating
activities 3,262,000 (901,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract
receivables collected, net of recoveries 3,815,000 2,368,000
Installment contracts returned to Central -- 262,000
Capital expenditures, net (6,000) (48,000)
------------ ------------
Net cash provided by investing activities 3,809,000 2,582,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (1,800,000) (10,200,000)
Capital (distribution to) contribution from
related party (5,266,000) 8,143,000
------------ ------------
Net cash used in financing activities (7,066,000) (2,057,000)
------------ ------------
NET INCREASE(DECREASE) IN CASH 5,000 (376,000)
CASH, BEGINNING OF PERIOD 72,000 448,000
------------ ------------
CASH, END OF PERIOD $ 77,000 $ 72,000
============ ============
CASH PAID DURING THE PERIOD FOR:
INTEREST $ -- $ 144,000
INCOME TAXES $ 9,000 $ 825,000
The accompanying notes are an integral part of these
consolidated financial statements.
27
30
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation -- Banner Central Finance Company ("Banner
Central Finance" or the "Company") was formed in September 2000. On September 6,
2000 the Board of Directors of Central Financial Acceptance Corporation
("Central Financial") approved a Plan of Complete Dissolution, Liquidation and
Distribution (the "Plan") under which Central Financial's subsidiaries have been
reorganized into two public companies, 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 businesses
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 and travel services businesses.
In addition, pursuant to the Plan, Banner Central Finance and
Hispanic Express have entered into certain agreements for the purpose of
defining the ongoing relationship among them (See Note 6). The transaction and
agreements entered into contain provisions for the allocations of certain costs
and expenses. Management of Banner Central Finance believes that such agreements
provide for reasonable allocation of costs and expenses between the parties.
The formation of Banner Central Finance has been accounted for at
historical cost in a manner similar to a pooling of interest. The accompanying
consolidated financial statements reflect the combined operations of Banner
Central Finance and its subsidiaries, as if they had been consolidated at the
beginning of the periods presented. Banner Central Finance has been allocated
$1,800,000 of notes payable for the year ended December 31, 1999.
Unaudited pro forma net income per share is based on the number of
common shares issued by the Company pursuant to the Plan that are assumed to be
outstanding as of January 1, 2000.
Nature of Operations -- The Company: (i) purchases and services
consumer finance receivables generated by the Company's customers for purchases
of high quality brand name consumer products, appliances and furniture sold by
Banner's Central Electric, Inc. ("Central," an affiliated company) and by
independent retailers; (ii) provides automobile insurance products and insurance
premium financing to its customers; and (iii) originates second trust mortgages.
The Company's purchased finance receivables business is dependent upon the
business activity of Central, which is focused in Southern California. Central
has granted the Company the exclusive right to purchase the receivables it
originates when it sells its inventory
28
31
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
at its retail stores. The Company generally experiences the highest demand for
its financial products and services between October and December.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation -- The accompanying consolidated
financial statements include the accounts of Banner Central Finance and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Finance Receivables -- Finance receivables include installment
contracts that are purchased from Central, (referred to herein as the "Consumer
Product Portfolio"), mortgage loan receivables originated by the Company
(referred to herein as the "Mortgage Portfolio"), installment contracts that are
originated when customers buy used cars, installment contracts purchased from
unaffiliated third party retailers that sell products or services and
receivables that arise from automobile insurance premium contracts,
(collectively, referred to herein as the "Other Portfolio"). The annual
percentage rate varies depending on the length of the contract and the amount of
administrative fees. The contracts provide for scheduled monthly payments and
mature generally from 1 to 24 months in the Consumer Product Portfolio, 48-60
months in the Mortgage Portfolio and from 8 to 60 months in the Other Portfolio.
Certain direct loan origination costs are capitalized and
recognized into expense over the life of the related loan using a method that
approximates the interest method.
The allowance for credit losses is provided for loans based on
previous experience or when the events giving rise to credit losses are
estimated to have occurred. The Company's portfolios comprise generally
smaller-balance, homogeneous loans that are evaluated collectively to determine
an appropriate allowance for credit losses. The allowance for credit losses is
maintained at a level considered adequate by management to cover losses in the
existing portfolios. Collection of past due accounts is pursued by the Company,
and when the characteristics of an individual account indicates that collection
is unlikely, the account is charged off and turned over to a collection agency.
Accounts are generally charged off when they are between 91 and 150 days past
due. In the fourth quarter of 2000, the Company's Consumer Products Portfolio
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 in the markets the Company serves, delinquencies increased
and in December 2000, the Company reevaluated its current charge-off policy. As
a result of this reevaluation, the Company charged-off accounts that were past
due at December 31, 2000 and that did not make any payments after year end.
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
29
32
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
and current economic conditions. The Company's non-mortgage customers are
typically between the ages of 21 and 45 and earn less than $25,000 per year,
have little or no savings and limited short-term employment histories. In
addition, the Company's customers typically have no prior credit histories and
are unable to secure credit from traditional lending sources. The Company makes
its credit decisions primarily on its assessment of a customer's ability to
repay the obligation. In making a credit decision, in addition to the size of
the obligation, the Company generally considers a customer's income level, type
and length of employment, stability of residence, personal references and prior
credit history with the Company. As a result, the Company is more susceptible to
the risk that its customers will not satisfy their repayment obligations than
are less specialized consumer lending companies or consumer finance companies
that have more stringent underwriting criteria. Because the Company relies on
the creditworthiness of its customers for repayment and does not rely on
collateral securing the debt, the Company experiences actual rates of losses
higher than lenders who have collateral which they can repossess in the event of
a borrower's default.
Recoveries on charge-offs are recognized as an addition to the
allowance for credit losses on the cash basis of accounting and at the time the
payment is received. Expenses related to recoveries are included in operating
expenses. Recoveries for the years ended December 31, 2000 and 1999, amounted to
$644,000 and $514,000, 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
which it holds under a consignment arrangement until sold by Central.
Inventories are stated at the lower of cost or market. Cost is determined by the
average cost method.
Property and Equipment -- Property and equipment are carried at
cost. Long-lived property is reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of such an asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long Lived Assets." If the
carrying amount of the asset exceeds the estimated undiscounted future cash
flows to be generated by the asset, an impairment loss would be recorded to
reduce the asset's carrying value to its estimated fair value.
Depreciation and amortization are computed primarily using the
straight-line method over the estimated lives of the assets, as follows:
Furniture, equipment and software................................... 5 to 10 years
Leasehold improvements.............................................. Life of lease
30
33
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 2000 was $119,000.
Income Recognition -- Interest income on the Consumer Product
Portfolio is deferred upon origination of a loan (recorded as an off-set to
finance receivables -- See Note 3) and recognized over the lives of the
contracts using a method that approximates the interest method. Interest income
on the Other Portfolios and the Mortgage Portfolio are deferred and recognized
using the interest method. Transaction fees on contracts purchased from a
related party and origination fees earned on mortgages are deferred and
recognized using the interest method. Commissions income and broker fee income
from the sale of automobile insurance products is deferred and recognized over
the terms of the contracts, typically 12 months.
Other income consists of:
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999
---------- ----------
Other Income:
Late and extension charges $1,234,000 $1,408,000
Insurance products and other 1,155,000 1,396,000
Transaction fees from affiliate - 799,000
---------- ----------
$2,389,000 $3,603,000
========== ==========
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, 2000, in managements
opinion the deferred tax asset is realizable.
31
34
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 2000 and 1999 were $111,000 and $172,000, 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, 2000, such investments were not in excess of insured limits. The
Company's purchased receivables business activity is with low-income customers
located primarily in the greater Los Angeles area. A significant portion of the
customers' ability to repay their loans is dependent upon general economic
factors within the geographical area in which the Company operates. The
Company's loans are unsecured and, thereby, the Company's ability to get repaid
is totally dependent upon the general financial strength of the borrower. To
mitigate a portion of this risk, the Company generally limits the amount of a
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, 2000.
The fair value of mortgages is estimated by utilizing discounted
future cash flow calculations using interest rates currently being offered for
similar loans to borrowers with similar credit risks and for the remaining
estimated maturities. Substantially all of the Company's mortgages were issued
after January 1, 1999. Management believes the carrying value of the mortgage
portfolio approximates its carrying value as of December 31, 2000.
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.
32
35
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
New Accounting Pronouncements -- In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities," which was effective
for fiscal years beginning after June 15, 1999. The effective date of SFAS No.
133 was delayed by the issuance of SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of SFAS No.
133," until fiscal years beginning after June 15, 2000. SFAS No. 133, as amended
by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment by FASB Statement No. 133" issued in June 2000,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement requires the Company to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for the changes in the fair
value of a derivative depends on its classification as a hedging instrument or
trading instrument.
The Company adopted these statements on January 1, 2001. Adoption
of these statements did not have a material effect on the Company's financial
position or results of operations. The Company does not currently own any
derivative instruments.
33
36
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. FINANCE RECEIVABLES
DECEMBER 31,
2000
-----------
Finance Receivables consist of:
Consumer Product Portfolio $21,254,000
Mortgage Portfolio 5,585,000
Other Portfolios 508,000
-----------
27,347,000
Less: deferred interest and insurance 2,407,000
Less: deferred loan origination fees 548,000
Less: allowance for credit losses 683,000
-----------
$23,709,000
===========
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,
2000
------------
Consumer Product Portfolio:
Past due 31 days or more $ 257,000
============
Mortgage Portfolio:
Past due 31 days or more $ 394,000
============
Other Portfolios:
Past due 31 days or more $ 6,000
============
34
37
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The allowance for credit losses includes the following:
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999
----------- -----------
Allowance for credit losses, beginning of period $ 1,668,000 $ 1,590,000
Provision for credit losses 2,707,000 2,719,000
Charge-offs, net (3,692,000) (2,641,000)
----------- -----------
Allowance for credit losses, end of period $ 683,000 $ 1,668,000
=========== ===========
4. NOTES PAYABLE
Central Financial had a line of credit agreement with several
banks and Wells Fargo Bank National Association, as Agent, (the "Wells Fargo
Line of Credit"), that provided for the issuance of notes up to $100,000,000
subject to an allowable borrowing base. Borrowings under the facility bore
interest at a weighted average rate of 7.7% in 1999. Notes payable allocated to
the Company at December 31, 1999 was $1,800,000 (See Note 1). The note was
repaid in January 2000.
5. INCOME TAXES
The Company, Central Financial and Hispanic Express have entered
into a Tax Sharing Agreement (See Note 6). The income tax provision as presented
in the accompanying consolidated financial statements are based upon the amount
the Company would have paid as if it filed separate income tax returns for the
periods presented.
The provision for income taxes consists of the following:
DECEMBER 31,
-----------------------------
2000 1999
--------- ---------
CURRENT:
Federal $ 19,000 $ 699,000
State 3,000 99,000
--------- ---------
22,000 798,000
DEFERRED:
Federal 196,000 (1,000)
State 34,000 --
--------- ---------
230,000 (1,000)
--------- ---------
Provision for income taxes $ 252,000 $ 797,000
========= =========
35
38
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A reconciliation of the provision for income taxes to the statutory rates is as
follows:
DECEMBER 31,
--------------------
2000 1999
----- -----
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,
2000
------------
Deferred tax assets:
Allowance for credit losses $ 296,000
Deferred loan origination fees 237,000
---------
Total deferred tax assets 533,000
---------
Deferred tax liabilities:
Intangible assets (143,000)
Other (60,000)
---------
Total deferred tax liabilities (203,000)
---------
Net deferred tax asset $ 330,000
=========
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".
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, the Company purchased $15.6 million and $13.8 million
of inventory during the years ended December 31, 2000 and 1999, respectively, of
which $3.6 million is included in inventory at December 31, 2000. The Company
can terminate the Financing Agreement at any time upon one year's prior written
notice to Central. Prior to January 1, 2000, the Company purchased receivables
from Central at face value less a transaction fee and could return to Central
certain levels of purchased receivables. For the year ended December 31, 1999,
the transaction fees amounted to $0.8 million and the receivables returned to
Central were $0.3 million.
36
39
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
$3,150,000, and $4,373,000 for the years ended December 31, 2000 and 1999,
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.
For the year ended December 31, 1999, the Company received a
capital contribution from Central Financial of $8,143,000. 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 is payable on January 2, 2004. The Company also had a note receivable
from BCE Properties II, Inc., an affiliated company, in the amount of $1,280,000
which bears interest at 7.5% per annum. On February 28, 2001, the note
receivable was converted to a mortgage receivable which bears interest at 7.5%
per annum and requires monthly payments of $15,000 commencing March 1, 2001
through maturity on February 1, 2011.
37
40
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 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. Upon
the effectiveness of these grants, 609,000 shares of Common Stock remain
available for future grants of options under the 2000 Plan. The options have a
maximum duration of five years and are subject to certain vesting and
cancellation provisions, and may not be granted at less than the market value of
the Company's Common Stock on the date of grant of the option.
None of the options 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.
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 automobile insurance and insurance premium financing operations.
Information about these segments for years ended December 31, 2000 and 1999 is
as follows:
38
41
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONSUMER CORPORATE
RECEIVABLES MORTGAGE OTHER OVERHEAD TOTAL
----------- --------- ----------- ----------- -----------
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 $ 362,0000 $ 142,000 $ (303,000) $ 630,000
Segment assets $24,886,000 $ 4,913,000 $ 1,156,000 $ -- $30,955,000
For the Year Ended December 31, 1999
Interest income $ 7,131,000 $ 355,000 $ 335,000 $ -- $ 7,821,000
Other income 2,119,000 98,000 1,386,000 -- 3,603,000
----------- --------- ----------- ----------- -----------
Total revenue $ 9,250,000 $ 453,000 $ 1,721,000 $ -- $11,424,000
=========== ========= =========== =========== ===========
Pre-tax segment earnings (loss) $ 2,106,000 $ 163,000 $ (135,000) $ (279,000) $ 1,992,000
Segment assets $30,659,000 $ 4,470,000 $ 1,654,000 $ -- $36,783,000
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, 2000 and 1999 were $70,000 and $72,000,
respectively.
In August 2000, the Company entered into an agreement which
provides for the early termination of a lease with a third party where it was
conducting a significant portion of its business. In connection therewith, the
Company has recorded a charge of $997,000, which is included in operating
expenses. The Company presently conducts these operations in a newly constructed
facility and is provided additional space by Central in connection with the
Financing Agreement.
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.
39
42
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. SUBSEQUENT EVENTS
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 will be recorded on a historical
cost basis and will result in an increase in stockholders' equity of
approximately $1,800,000. On February 28, 2001, Central Financial purchased and
contributed to the Company the business and assets of a retail store which it
acquired from Central for $392,000.
* * * * *
40
43
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 2000?" of our definitive proxy
statement, to be filed pursuant to Regulation 14A with the SEC within 120 days
after December 31, 2000.
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, 2000.
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, 2000.
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, 2000.
41
44
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)
42
45
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)
43
46
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 30, 2001 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 30, 2001
--------------------------------------- Chief Executive Officer and Chief
Gary M. Cypres Financial Officer
/s/ Salvatore J. Caltagirone Director March 30, 2001
---------------------------------------
Salvatore J. Caltagirone
/s/ William R. Sweet Director March 30, 2001
---------------------------------------
William R. Sweet
44