As filed with the Securities and Exchange Commission on August 14, 2001.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2001
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 |
For the transition period from ____________ to ______________
Commission file number: 000-31747
BANNER CENTRAL FINANCE COMPANY
| Delaware (State or other jurisdiction of incorporation or organization) | 95-4821101 (I.R.S. Employer Identification Number) |
5480 East Ferguson Drive
Commerce, California 90022
(Address of principal executive offices) (Zip Code)
Issuer’s telephone number, including area code:(323) 720-8600
| Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] | ||
| Number of shares outstanding of the Registrant’s Common Stock, as of August 14, 2001: 7,410,000 | ||
| Traditional Small Business Disclosure Format. Yes [X] No [ ] |
1
BANNER CENTRAL FINANCE COMPANY
FORM 10-QSB
INDEX
| Page No. | ||||
| PART I. | FINANCIAL INFORMATION | |||
| Item 1. | Condensed Consolidated Financial Statements: | |||
| Condensed Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 | 3 | |||
| Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2001 and 2000 | 4 | |||
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 | 5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
| PART II. | OTHER INFORMATION | |||
| Item 6. | Exhibits and Reports on Form 8-K | 18 | ||
| Signatures | 19 | |||
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| (Unaudited) | ||||||||
| June 30, | December 31, | |||||||
| 2001 | 2000 | |||||||
ASSETS | ||||||||
| Cash and cash equivalents | $ | 3,709,000 | $ | 77,000 | ||||
| Finance receivables, net | 16,777,000 | 23,709,000 | ||||||
| Prepaid expenses and other current assets | 243,000 | 10,000 | ||||||
| Note receivable from affiliate | 5,325,000 | 2,493,000 | ||||||
| Inventory | 2,855,000 | 3,559,000 | ||||||
| Deferred income taxes | 360,000 | 330,000 | ||||||
| Property and equipment, net | 3,766,000 | 116,000 | ||||||
| Intangible and other assets, net | 648,000 | 661,000 | ||||||
| TOTAL ASSETS | $ | 33,683,000 | $ | 30,955,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Accrued expenses and other current liabilities | $ | 1,191,000 | $ | 1,414,000 | ||||
| Income taxes payable | 51,000 | — | ||||||
| TOTAL LIABILITIES | 1,242,000 | 1,414,000 | ||||||
| Minority interest in subsidiary | 491,000 | — | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
| Stockholders’ equity | 31,950,000 | 29,541,000 | ||||||
| Total stockholders’ equity | 31,950,000 | 29,541,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 33,683,000 | $ | 30,955,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||||
Revenues | |||||||||||||||||
| Interest income | $ | 1,152,000 | $ | 1,786,000 | $ | 2,513,000 | $ | 3,648,000 | |||||||||
| Net sales | 2,780,000 | — | 3,726,000 | — | |||||||||||||
| Other income | 647,000 | 519,000 | 1,305,000 | 1,078,000 | |||||||||||||
| Total revenues | 4,579,000 | 2,305,000 | 7,544,000 | 4,726,000 | |||||||||||||
Costs and expenses | |||||||||||||||||
| Operating expenses | 1,906,000 | 1,142,000 | 3,226,000 | 2,475,000 | |||||||||||||
| Provision for credit losses | 746,000 | 436,000 | 1,620,000 | 854,000 | |||||||||||||
| Cost of sales | 1,715,000 | — | 2,294,000 | — | |||||||||||||
| Depreciation and amortization | 53,000 | 20,000 | 74,000 | 39,000 | |||||||||||||
Total costs and expenses | 4,420,000 | 1,598,000 | 7,214,000 | 3,368,000 | |||||||||||||
| Income from operations | 159,000 | 707,000 | 330,000 | 1,358,000 | |||||||||||||
| Provision for income taxes | 66,000 | 282,000 | 132,000 | 543,000 | |||||||||||||
Net income | $ | 93,000 | $ | 425,000 | $ | 198,000 | $ | 815,000 | |||||||||
| Earnings per common share (unaudited): | |||||||||||||||||
| Basic | $ | 0.01 | $ | 0.06 | $ | 0.03 | $ | 0.11 | |||||||||
| Diluted | $ | 0.01 | $ | 0.06 | $ | 0.03 | $ | 0.11 | |||||||||
| Shares used in calculating earnings per common share: | |||||||||||||||||
| Basic | 7,247,000 | 7,166,000 | 7,207,000 | 7,166,000 | |||||||||||||
| Diluted | 7,247,000 | 7,166,000 | 7,207,000 | 7,166,000 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||||
| June 30, | ||||||||||
| 2001 | 2000 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
| Net income | $ | 198,000 | $ | 815,000 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 74,000 | 39,000 | ||||||||
| Provision for credit losses | 1,620,000 | 854,000 | ||||||||
| Deferred income taxes | — | 10,000 | ||||||||
| Changes in assets and liabilities: | ||||||||||
| Prepaid expenses and other current assets | (233,000 | ) | 97,000 | |||||||
| Inventory | 713,000 | 443,000 | ||||||||
| Accrued expenses and other current liabilities | (223,000 | ) | 110,000 | |||||||
| Income taxes payable | 51,000 | — | ||||||||
| Net cash provided by operating activities | 2,200,000 | 2,368,000 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
| Installment contracts and other contract receivables collected, net of recoveries | 5,312,000 | 1,422,000 | ||||||||
| Increase in note receivable from affiliate | (4,113,000 | ) | — | |||||||
| Capital expenditures | (11,000 | ) | (11,000 | ) | ||||||
| Net cash provided by investing activities | 1,188,000 | 1,411,000 | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
| Repayment of note payable | — | (1,800,000 | ) | |||||||
| Proceeds from issuance of stock | 244,000 | — | ||||||||
| Capital distribution to related party | — | (1,982,000 | ) | |||||||
| Net cash provided by (used in) financing activities | 244,000 | (3,782,000 | ) | |||||||
| NET INCREASE IN CASH | 3,632,000 | 3,000 | ||||||||
| CASH, BEGINNING OF PERIOD | 77,000 | 72,000 | ||||||||
| CASH, END OF PERIOD | $ | 3,709,000 | $ | 69,000 | ||||||
| CASH PAID DURING THE YEAR FOR: | ||||||||||
| INTEREST | $ | — | $ | — | ||||||
| INCOME TAXES | — | 9,000 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Nature of Operations
Basis of Presentation— The condensed consolidated financial statements of Banner Central Finance Company (“Banner Central Finance” or the “Company”) are unaudited, other than the consolidated balance sheet at December 31, 2000. In the opinion of the Company’s management, all adjustments of a normal recurring nature necessary for a fair statement of interim periods presented have been included. The results for interim periods are not necessarily indicative of results to be expected for the entire year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2000, and the notes thereto in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000.
Banner Central Finance was formed in September 2000 and was a wholly-owned subsidiary of Central Financial Acceptance Corporation (“Central Financial”). On September 6, 2000 the Board of Directors of Central Financial Acceptance Corporation (“Central Financial”) approved a Plan of Complete Dissolution, Liquidation and Distribution (the “Plan”) under which Central Financial’s subsidiaries have been reorganized into two public companies, Banner Central Finance Company and Hispanic Express, Inc. (“Hispanic Express”). On February 28, 2001, the Plan was completed and Central Financial were dissolved and liquidated and Central Financial distributed to its stockholders 100% of the outstanding Common Stock of Banner Central Finance and Hispanic Express. Pursuant to the Plan, Central Financial contributed to Banner Central Finance its investment in subsidiaries, which are engaged in selling and financing of automobile insurance, its consumer products receivable portfolio and its mortgage business and contributed to Hispanic Express its investment subsidiaries that are engaged in the small loan, travel finance, check cashing and travel services businesses.
In addition, pursuant to the Plan, Banner Central Finance and Hispanic Express entered into certain agreements for the purpose of defining their ongoing relationship (See Note 4), including provisions for the allocation of certain costs and expenses. Management of Banner Central Finance believes that such agreements provide for reasonable allocation of costs and expenses between the parties.
The formation of Banner Central Finance has been accounted for at historical cost, in a manner similar to a pooling of interests. The accompanying condensed consolidated financial statements reflect the combined operations of Banner Central Finance and its subsidiaries, as if they had been consolidated at the beginning of the periods presented.
On February 28, 2001, Central Financial contributed 80% of the outstanding common stock of BCE Properties II, Inc. to the Company. For financial reporting purposes the contribution was recorded on a historical cost basis and resulted in an increase in stockholders’ equity of approximately $1,900,000. On February 28, 2001, Central Financial purchased and contributed to the Company the business, assets and certain obligations of retail store previously operated by Banner Central Electric, Inc. (“Central”), an affiliated company, which acquired for $392,000.
Nature of Operations— The Company: (i) purchases and services consumer finance receivables generated by the Company’s customers for purchases of high quality brand name consumer products, appliances and furniture sold by the Company’s retail store and retail stores owned by Central; (ii) provides automobile insurance products and insurance premium financing to its customers; and
6
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(iii) originates first and second trust mortgages. The Company’s purchased finance receivables business is dependent upon the business activity of the Company’s retail store and the retail stores owned by Central, which are located in Southern California. Central has granted the Company the exclusive right to purchase the receivables it originates when it sells its inventory at its retail stores. The Company generally experiences the highest demand for its financial products and services between October and December.
New Accounting Pronouncements— The Financial Accounting Standards Board (FASB) has finalized new accounting standards covering business combinations, goodwill and intangible assets. These new rules will consist of Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company is currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. In accordance with these new accounting standards, the Company plans to adopt SFAS No. 141 and No. 142 on January 1, 2002.
2. Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The dilutive effect of outstanding options is reflected in diluted earnings per share by application of the treasury stock method. Options to purchase 472,000 shares of common stock that were outstanding at June 30, 2001, were not included in the computation of diluted earnings per share for the three and six months ended June 30, 2001 because the options’ exercise price was greater than the average market price of the Company’s common stock during this period and, therefore, the effect would be antidilutive. Basic earnings and diluted earnings per share for the three and six months ended June 30, 2000 is based on the number of shares of common stock issued by the Company pursuant to the Plan and are assumed to be outstanding as of January 1, 2000.
The following table sets forth the computation of basic and diluted earnings per share:
| Three Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
Numerator: | ||||||||
| Net income | $ | 93,000 | $ | 425,000 | ||||
Denominator: | ||||||||
| Denominator for basic earnings per share — weighted average shares outstanding | 7,247,000 | 7,166,000 | ||||||
| Effect of dilutive securities: | ||||||||
| Dilutive options | — | — | ||||||
| Dilutive potential common shares | — | — | ||||||
| Denominator for diluted earnings per share | 7,247,000 | 7,166,000 | ||||||
| Basic earnings per share | $ | 0.01 | $ | 0.06 | ||||
| Diluted earnings per share | $ | 0.01 | $ | 0.06 | ||||
| Six Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
Numerator: | ||||||||
| Net income | $ | 198,000 | $ | 815,000 | ||||
Denominator: | ||||||||
| Denominator for basic earnings per share — weighted average shares outstanding | 7,207,000 | 7,166,000 | ||||||
7
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
| Six Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Effect of dilutive securities: | ||||||||
| Dilutive options | — | — | ||||||
| Dilutive potential common shares | — | — | ||||||
| Denominator for diluted earnings per share | 7,207,000 | 7,166,000 | ||||||
| Basic earnings per share | $ | 0.03 | $ | 0.11 | ||||
| Diluted earnings per share | $ | 0.03 | $ | 0.11 | ||||
3. Certain Consolidated Financial Statement Details
Finance Receivables
| June 30, | December 31, | |||||||
| 2001 | 2000 | |||||||
| Gross finance receivables: | ||||||||
| Consumer product portfolio | $ | 15,475,000 | $ | 21,254,000 | ||||
| Mortgage portfolio | 4,286,000 | 5,585,000 | ||||||
| Other portfolios | 268,000 | 508,000 | ||||||
| 20,029,000 | 27,347,000 | |||||||
| Less: | ||||||||
| Deferred interest and insurance | 1,728,000 | 2,407,000 | ||||||
| Deferred loan origination fees | 379,000 | 548,000 | ||||||
| Allowance for credit losses | 1,145,000 | 683,000 | ||||||
| 3,252,000 | 3,638,000 | |||||||
| Finance receivables, net | $ | 16,777,000 | $ | 23,709,000 | ||||
Customers are required to make monthly payments on the Company’s receivable contracts. The aggregate gross balance of accounts with payments 31 days or more past due are:
| June 30, | December 31, | ||||||||
| 2001 | 2000 | ||||||||
| Consumer Product Portfolio: | |||||||||
| Past due 31 days plus | $ | 116,000 | $ | 257,000 | |||||
| Mortgage Portfolio: | |||||||||
| Past due 31 days plus | $ | 290,000 | $ | 394,000 | |||||
| Other Portfolios: | |||||||||
| Past due 31 days plus | $ | 3,000 | $ | 6,000 | |||||
8
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
The allowance for credit losses includes the following:
| Three Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Allowance for credit losses, beginning of the period | $ | 773,000 | $ | 1,590,000 | ||||
| Provision for credit losses | 746,000 | 436,000 | ||||||
| Charge-offs, net of recoveries | (374,000 | ) | (402,000 | ) | ||||
| Allowance for credit losses, end of period | $ | 1,145,000 | $ | 1,624,000 | ||||
| Six Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Allowance for credit losses, beginning of the period | $ | 683,000 | $ | 1,590,000 | ||||
| Provision for credit losses | 1,620,000 | 854,000 | ||||||
| Charge-offs, net of recoveries | (1,158,000 | ) | (820,000 | ) | ||||
| Allowance for credit losses, end of period | $ | 1,145,000 | $ | 1,624,000 | ||||
Property and Equipment
| June 30, | December 31, | |||||||
| 2001 | 2000 | |||||||
| Land | $ | 1,203,000 | $ | — | ||||
| Buildings and improvements | 3,150,000 | 8,000 | ||||||
| Furniture, equipment and software | 179,000 | 168,000 | ||||||
| 4,532,000 | 176,000 | |||||||
| Less: Accumulated depreciation | 766,000 | 60,000 | ||||||
| $ | 3,766,000 | $ | 116,000 | |||||
Intangible and Other Assets
| June 30, | December 31, | |||||||
| 2001 | 2000 | |||||||
| Goodwill | $ | 780,000 | $ | 780,000 | ||||
| Less: Accumulated amortization | 132,000 | 119,000 | ||||||
| $ | 648,000 | $ | 661,000 | |||||
Other Income
| Three Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Late and extension charges | $ | 169,000 | $ | 257,000 | ||||
| Mortgage loan origination and fee income | 284,000 | 43,000 | ||||||
| Insurance products and other | 194,000 | 219,000 | ||||||
| $ | 647,000 | $ | 519,000 | |||||
9
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
| Six Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Late and extension charges | $ | 392,000 | $ | 595,000 | ||||
| Mortgage loan origination and fee income | 503,000 | 84,000 | ||||||
| Insurance products and other | 410,000 | 399,000 | ||||||
| $ | 1,305,000 | $ | 1,078,000 | |||||
4. Related Party Transactions
In connection with its formation, the Company, Central Financial, Hispanic Express and Central entered into certain agreements; including, the Financing Agreement, the Operating Agreement and the Tax Sharing Agreement, for defining their ongoing relationships.
The Financing Agreement grants the Company the exclusive right to provide financing to Central customers for a term of ten years from the date of the Plan and provides that any contracts purchased pursuant to this agreement will be at face value. As part of the Financing Agreement, the Company has agreed to provide Central with up to $6.0 million of inventory or inventory financing as long as the Financing Agreement remains in effect and Central has agreed to provide the Company, at no charge, an amount of floor space at Central’s stores as the Company from time to time requests. In connection with the Financing Agreement, Central purchased $2.8 million and $9.2 million of inventory from the Company during the six months ended June 30, 2001 and 2000, respectively. The Company can terminate the Financing Agreement at any time upon one year’s prior written notice to Central.
The Operating Agreement provides, among other things, that Hispanic Express or its affiliates are obligated to provide to the Company, and the Company is obligated to utilize, certain services, including receivables servicing, collections, payments, applications, accounting, management information systems and employee benefits. The Operating Agreement also provides that Hispanic Express will guarantee up to $4,000,000 of bank or similar financing of the Company, pursuant to certain conditions. To the extent that such services directly relate to the finance portion of the consumer products business contributed by Central Financial to the Company, or to the extent that other costs are incurred by Hispanic Express or its affiliates that directly relate to the Company, the Company is obligated to pay Hispanic Express or its affiliates the actual cost of providing such services or incurring such costs. The Operating Agreement continues until terminated by either the Company or Hispanic Express upon one year’s prior written notice. Termination may be made on a service-by-service basis or in total. Allocated expenses totaled $504,000, and $1,029,000 for the three and six months ended June 30, 2001, respectively, and $743,000 and $1,655,000 for the three and six months ended June 30, 2000, respectively.
The Company, Central Financial and Hispanic Express entered into a Tax Sharing Agreement which provides, among other things, for the payment of federal, state and other income tax remittances or refunds for periods during which the Company was included in the same consolidated group for federal income tax purposes, the allocation of responsibility for the filing of such tax returns and various related matters. For periods in which the Company was included in Central Financial’s consolidated federal income tax returns, the Company will be required to pay its allocable portion of the consolidated federal, state and other income tax liabilities of the group and will be entitled to receive refunds determined as if the Company had filed separate income tax returns. With respect to Central Financial’s liability for payment of taxes for all periods during which the Company was so included in Central Financial’s consolidated federal income tax returns, the Company will indemnify Central Financial for all federal, state and other income tax liabilities of the Company for such periods. February 28, 2001 was the last day on which the Company was required to be included in Central Financial’s consolidated federal income tax returns.
10
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
In connection with the contribution of the business, assets and assumptions of certain obligations by Central Financial of a retail store owned by Central, an affiliated company, Central and the Company have agreed to use allocation methods agreeable to both parties for the allocation of certain corporate expenses of Central. In connection with the acquisition of the retail store, the Company has agreed to assume the obligation of Central to sell certain inventory at cost and lease certain retail space to Credit Starters LLC, an affiliated Company, controlled by Gary Cypres, Chairman of the Company.
For the six months ended June 30, 2000, the Company made a capital distribution to Central Financial totaling $1,982,000. The capital transactions for the periods presented reflect contributions and distributions arising from the changing levels of the Company’s receivables portfolios.
At June 30, 2001, the Company had a note receivable from Hispanic Express in the amount of $5,325,000 which bears interest per annum at the prime rate calculated at the beginning of each month (6.75% at June 30, 2001) and is payable on March 31, 2004, unless an event of default occurs at which time the notes becomes immediately due. Interest income earned on the note receivable from Hispanic Express was $100,000 and $123,000 for the three and six months ended June 30, 2001, respectively.
5. Segment Information
The Company has identified four reporting segments in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”, the Consumer Receivables, Mortgage Loans, Other and Corporate Overhead. The factors for determining the reportable segments were based on the distinct nature of their operations. Other includes primarily the operations of the retail store and automobile insurance operations in 2001 and the automobile insurance and insurance premium finance operations in 2000.
The accounting policies of these reportable segments are the same as those described in the summary of significant accounting policies in the Company’s 2000 Form 10-KSB. The Company evaluates the performance of its operating segments based on revenues and operating income. Operating income for each segment includes revenue and operating expenses directly attributable to the segment. Operating income for each segment excludes other income and expense and certain expenses that are managed outside the reportable segment. Costs excluded from segment operating income include various corporate expenses and income taxes. Corporate expenses include separately managed general and administrative expenses. Summary information by segment follows:
Revenues
| Three Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Consumer Receivables | $ | 1,157,000 | $ | 1,863,000 | ||||
| Mortgage Loans | 455,000 | 268,000 | ||||||
| Other | 2,967,000 | 174,000 | ||||||
| Corporate Overhead | — | — | ||||||
| Total revenues | $ | 4,579,000 | $ | 2,305,000 | ||||
| Six Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Consumer Receivables | $ | 2,566,000 | $ | 3,776,000 | ||||
| Mortgage Loans | 875,000 | 556,000 | ||||||
| Other | 4,103,000 | 394,000 | ||||||
| Corporate Overhead | — | — | ||||||
| Total revenues | $ | 7,544,000 | $ | 4,726,000 | ||||
11
BANNER CENTRAL FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
Income From Operations
| Three Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Consumer Receivables | $ | 194,000 | $ | 865,000 | ||||
| Mortgage Loans | 148,000 | (76,000 | ) | |||||
| Other | — | (33,000 | ) | |||||
| Corporate Overhead | (183,000 | ) | (49,000 | ) | ||||
| Income from operations | $ | 159,000 | $ | 707,000 | ||||
| Six Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Consumer Receivables | $ | 393,000 | $ | 1,605,000 | ||||
| Mortgage Loans | 271,000 | (84,000 | ) | |||||
| Other | 6,000 | (64,000 | ) | |||||
| Corporate Overhead | (340,000 | ) | (99,000 | ) | ||||
| Income from operations | $ | 330,000 | $ | 1,358,000 | ||||
Total Assets
| June 30, | December 31, | |||||||
| 2001 | 2000 | |||||||
| Consumer Receivables | $ | 29,005,000 | $ | 24,886,000 | ||||
| Mortgage Loans | 3,703,000 | 4,913,000 | ||||||
| Other | 975,000 | 1,156,000 | ||||||
| Corporate Overhead | — | — | ||||||
| Total assets | $ | 33,683,000 | $ | 30,955,000 | ||||
12
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report on Form 10-QSB may constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which Banner Central Finance Company and its subsidiaries (the “Company” which may be referred to as “we” or “us,” when referring only to the parent company) operate in, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. Our actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such forward-looking statements. For discussion of the factors that might cause such a difference, see “Item 1. Description of Business — Business Considerations and Certain Factors that May Affect Future Results of Operations and Stock Price” contained in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000, as amended.
Financial Trends
Portfolios
The following sets forth certain information relating to our portfolios for the periods indicated:
| Consumer Product Portfolio | ||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||
| Gross receivable (at end of period) | $ | 15,475,000 | $ | 24,842,000 | $ | 15,475,000 | $ | 24,842,000 | ||||||||
| Deferred interest (at end of period) | 1,643,000 | 2,420,000 | 1,643,000 | 2,420,000 | ||||||||||||
| Net receivable (at end of period) | 13,832,000 | 22,422,000 | 13,832,000 | 22,422,000 | ||||||||||||
| Deferred insurance revenues (at end of period) | 24,000 | 50,000 | 24,000 | 50,000 | ||||||||||||
| Net carrying value (at end of period) | $ | 13,808,000 | $ | 22,372,000 | $ | 13,808,000 | $ | 22,372,000 | ||||||||
| Average net receivable(1) | $ | 14,925,000 | $ | 22,910,000 | $ | 16,074,000 | $ | 23,502,000 | ||||||||
| Number of contracts (at end of period) | 40,554 | 47,557 | 40,554 | 47,557 | ||||||||||||
| Average net contract balance (at end of period) | $ | 359 | $ | 472 | $ | 394 | $ | 471 | ||||||||
| Total interest income | $ | 967,000 | $ | 1,471,000 | $ | 2,107,000 | $ | 2,979,000 | ||||||||
| Late charge and extension fee income | 168,000 | 321,000 | 388,000 | 564,000 | ||||||||||||
| Provision for credit losses | $ | 664,000 | $ | 417,000 | $ | 1,461,000 | $ | 835,000 | ||||||||
| Provision for credit loss as a percentage of average net receivable(2) | 17.8 | % | 7.3 | % | 18.2 | % | 7.1 | % | ||||||||
| Net write-offs | $ | 390,000 | $ | 417,000 | $ | 1,075,000 | $ | 835,000 | ||||||||
| Net write-offs as a percentage of average net receivable(2) | 10.5 | % | 7.3 | % | 13.4 | % | 7.1 | % | ||||||||
| Average interest rate on average net receivable(2) | 25.9 | % | 25.7 | % | 26.2 | % | 25.4 | % | ||||||||
| (1) | Average net receivable is defined as the average gross receivables, less the average deferred interest and insurance. | |
| (2) | Percentages for the three and six months ended June 30, 2001 and 2000 are annualized. |
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Mortgage Portfolio
At June 30, 2001 and 2000, the gross receivables of the mortgage portfolio were $4.3 million and $6.6 million, respectively. The number of mortgage loans outstanding at June 30, 2001 and 2000 were 574 and 739, respectively. The average interest rate on the portfolio for the six months ended June 30, 2001 and 2000 was 16.9%, and 15.0%, respectively.
At June 30, 2001 and 2000, there were $0.3 million and $0.2 million of receivables with balances over 31 days past due.
Delinquency Experience and Allowance for Credit Losses
Borrowers under our contracts are required to make monthly payments. The following table sets forth our delinquency experience for accounts with payments 31 days or more past due and allowance for credit losses for our finance receivables.
| Finance Receivables(1) | ||||||||
| Six Months Ended June 30, | ||||||||
| 2001 | 2000 | |||||||
| Past due accounts 31 days or more (gross receivable) | $ | 119,000 | $ | 1,783,000 | ||||
| Accounts with payments 31 days or more past due as a percentage of end of period gross receivables | 0.8 | % | 6.8 | % | ||||
| Allowance for credit losses | $ | 894,000 | $ | 1,639,000 | ||||
| Allowance for credit losses as a percentage of net receivables | 6.4 | % | 7.1 | % | ||||
| (1) | Includes receivables in our consumer products, independent retailer and premium finance portfolios. |
Our finance receivables accounts which were 31 days or more past due decreased to $0.1 million at June 30, 2001 compared to $1.8 million at June 30, 2000. These declines primarily reflect the decline in the aggregate level of our finance receivables portfolios and accelerated write-offs in the fourth quarter of 2000 and the first six months of 2001. As a percentage of the end of period gross finance receivables, accounts with 31 days or more past due decreased to 0.8% at June 30, 2001 from 6.8% at June 30, 2000. We believe the rise in the provision for credit losses and write-offs during 2001 was a result of excessive credit burdens for some customers partly due to an aggressive over extension of credit in the marketplace in which we compete and partly due to a bus strike which commenced in September 2000 and lasted approximately five weeks. The allowance for credit losses at June 30, 2001 decreased to $0.9 million from $1.6 million at June 30, 2000, expressed as percentage of net receivables the allowance for credit losses decreased to 6.4% at June 30, 2001 compared to 7.1% at June 30, 2000.
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The following tables summarize the results of operations of the Company for the three and six months ended June 30, 2001 and 2000:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||
Revenues | ||||||||||||||||
| Interest income | $ | 1,152,000 | $ | 1,786,000 | $ | 2,513,000 | $ | 3,648,000 | ||||||||
| Net sales | 2,780,000 | — | 3,726,000 | — | ||||||||||||
| Other income | 647,000 | 519,000 | 1,305,000 | 1,078,000 | ||||||||||||
| Total revenues | 4,579,000 | 2,305,000 | 7,544,000 | 4,726,000 | ||||||||||||
Costs and expenses | ||||||||||||||||
| Operating expenses | 1,906,000 | 1,142,000 | 3,226,000 | 2,475,000 | ||||||||||||
| Provision for credit losses | 746,000 | 436,000 | 1,620,000 | 854,000 | ||||||||||||
| Cost of sales | 1,715,000 | — | 2,294,000 | — | ||||||||||||
| Depreciation and amortization | 53,000 | 20,000 | 74,000 | 39,000 | ||||||||||||
Total costs and expenses | 4,420,000 | 1,598,000 | 7,214,000 | 3,368,000 | ||||||||||||
| Income from operations | 159,000 | 707,000 | 330,000 | 1,358,000 | ||||||||||||
| Provision for income taxes | 66,000 | 282,000 | 132,000 | 543,000 | ||||||||||||
Net income | $ | 93,000 | $ | 425,000 | $ | 198,000 | $ | 815,000 | ||||||||
Three Months Ended June 30, 2001 Compared With The Results of Operations For The Three Months Ended June 30, 2000
Total revenue in the three months ended June 30, 2001 increased to $4.6 million from $2.3 million in the three months ended June 30, 2000, an increase of $2.3 million or 98.7%.
Interest income for the three months ended June 30, 2001 decreased to $1.2 million from $1.8 million in the three months ended June 30, 2000, a decrease of $0.6 million or 35.5%. This decrease was primarily due to a decrease in our Consumer Products Portfolio as a result of a decreased level of receivables purchased from Central, reflecting Central’s declining retail sales. For the three months ended June 30, 2001, our net consumer products portfolio averaged $14.9 million compared to $22.9 million in the three months ended June 30, 2000.
Net sales include retail sales from the retail store from the date Central Financial contributed the operations to the Company on February 28, 2001. Prior to the contribution, the retail store was owned and operated by Central.
Other income for the three months ended June 30, 2001 increased to $0.6 million from $0.5 million in the three months ended June 30, 2000, an increase of $0.1 million or 24.7%. Other income primarily includes late charges and other fees charged on the receivables portfolio, fees earned from originating first and second trust mortgages for other financial institutions, and commissions and fees earned from the sale of automobile insurance. The increase is primarily due to an increase in fees earned from originating first and second trust mortgages for other financial institutions.
Operating expenses for the three months ended June 30, 2001 increased to $1.9 million from $1.1 million in the three months ended June 30, 2000, an increase of $0.8 million or 66.9%. Operating expenses relating to the purchased consumer finance receivables business decreased in the three months ended June 30, 2001 by $0.2 as compared to the same period in 2000. This decrease was offset by $1.0 million of operating expenses of the retail store in the three months ended June 30, 2001.
The provision for credit losses for the three months ended June 30, 2001 increased to $0.7 million
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from $0.4 million in the three months ended June 30, 2000. This increase was primarily attributable to increased write-offs and delinquencies in the consumer products portfolio. In the three months ended June 30, 2001, the Company also increased the provision for credit losses for the mortgage portfolio by $0.1 million.
Cost of sales include the cost of retail sales from the retail store from the date Central Financial contributed the operations to the Company on February 28, 2001. Cost of sales as a percentage of net retail sales was 61.7% for the three months ended June 30, 2001.
As a result of the foregoing factors, net income in the three months ended June 30, 2001 decreased to $0.1 million from $0.4 million in the three months ended June 30, 2000.
Six Months Ended June 30, 2001 Compared With The Results of Operations For The Six Months Ended June 30, 2000
Total revenue in the six months ended June 30, 2001 increased to $7.5 million from $4.7 million in the six months ended June 30, 2000, an increase of $2.8 million or 59.6%.
Interest income for the six months ended June 30, 2001 decreased to $2.5 million from $3.6 million in the six months ended June 30, 2000, a decrease of $1.1 million or 31.1%. This decrease was primarily due to a decrease in our Consumer Products Portfolio as a result of a decreased level of receivables purchased from Central, reflecting Central’s declining retail sales. For the six months ended June 30, 2001, our net consumer products portfolio averaged $16.1 million compared to $23.5 million in the six months ended June 30, 2000.
Net sales include retail sales from the retail store from the date Central Financial contributed the operations to the Company on February 28, 2001. Prior to contribution, the retail store was owned and operated by Central.
Other income for the six months ended June 30, 2001 increased to $1.3 million from $1.1 million in the six months ended June 30, 2000, an increase of $0.2 million or 21.1%. Other income primarily includes late charges and other fees charged on the receivables portfolio, fees earned from originating first and second trust mortgages for other financial institutions, and commissions and fees earned from the sale of automobile insurance. The increase is primarily due to an increase in fees earned from originating first and second trust mortgages for other financial institutions.
Operating expenses for the six months ended June 30, 2001 increased to $3.2 million from $2.5 million in the three months ended June 30, 2000, an increase of $0.7 million or 30.3%. Operating expenses relating to the purchased consumer finance receivables business decreased in the six months ended June 30, 2001 by $0.6 as compared to the same period in 2000. This decrease was offset by $1.3 million of operating expenses of the retail store in the six months ended June 30, 2001.
The provision for credit losses for the six months ended June 30, 2001 increased to $1.6 million from $0.9 million in the six months ended June 30, 2000. This increase was primarily attributable to increased write-offs and delinquencies in the consumer products portfolio. In the six months ended June 30, 2001, the Company also increased the provision for credit losses for the mortgage portfolio by $0.2 million.
Cost of sales include the cost of retail sales from the retail store from the date Central Financial contributed the operations to the Company on February 28, 2001. Cost of sales as a percentage of net retail sales was 61.6% in the first quarter of 2001. Prior to this date, the retail store was owned and operated by Central.
As a result of the foregoing factors, net income in the six months ended June 30, 2001 decreased to $0.2 million from $0.8 million in the six months ended June 30, 2000.
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Liquidity and Capital Resources
We primarily finance our operations through the cash flow generated from operations and the liquidation of our receivables portfolios and, historically, from capital contributions from Central Financial.
Net cash flow provided by operating activities totaled $2.2 million and $2.4 million in the six months ended June 30, 2001 and 2000, respectively. The source of cash primarily consisted of net operating income after non-cash items. Non-cash items included depreciation and amortization provision for credit losses and deferred income taxes. Other items affecting cash flows from operating activities included cash flows from increases (decreases) prepaid expenses and other current assets, inventory, accrued expenses and other current liabilities, and income taxes payable.
Net cash provided by investing activities totaled $1.2 million and $1.4 million in the six months ended June 30, 2001 and 2000, respectively. Net cash provided by investing activities consisted of installment contracts and other contract receivables collected in the amount of $5.3 million and $1.4 million in the six months ended June 30, 2001 and 2000, respectively, offset by an increase in notes receivable from affiliate of $4.1 million in 2001.
Net cash provided by financing activities totaled $0.2 million for the six months ended June 30, 2001 and net cash used in financing activities totaled $3.8 million for the six months ended June 30, 2000. Net cash provided by financing consisted of proceeds from issuance of stock totaling $0.2 million in the six months ended June 30, 2001. Net cash used in financing activities consisted of repayment of notes payable totaling $1.8 million and capital distributions totaling $2.0 million to Central Financial in the six months ended June 30, 2000.
We presently do not have a bank line of credit. Pursuant to the Operating Agreement with Hispanic Express, Hispanic Express has agreed to guarantee up to $4.0 million of bank borrowings to acquire consumer receivables that we may purchase from Central. Should we decide to expand our mortgage business, we will need to obtain a bank line of credit.
We expect that our existing capital resources will adequately satisfy our working capital requirements for the next 12 months. We anticipate that the level of receivables we generate from the financing of retail sales at our retail store and purchased receivables from Central will continue to decline in the future and will provide us with capital resources in excess of our working capital requirements. Our capital resources will be further enhanced should we liquidate our portfolio of second trust mortgages. To date we have not identified any other businesses in which to invest our excess capital resources.
Our Board of Directors has authorized open-market purchases of up to 3 million shares of our common stock, subject to applicable law and depending on market considerations and other considerations that may affect open market repurchases of such shares pursuant to authorization from time to time. Any decision to purchase such shares will be based on the price of such shares and whether we have capital available for such purchase.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | Exhibits |
| None. |
| (b) | Reports on Form 8-K |
| None. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BANNER CENTRAL FINANCE COMPANY | ||
| | ||
| August 14, 2001 | /s/ Gary M Cypres | |
| Gary M. Cypres Chairman of the Board, Chief Executive Officer and Chief Financial Officer | ||
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