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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-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number: 000-31749
HISPANIC EXPRESS , INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4821102
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5480 EAST FERGUSON DRIVE
COMMERCE, CALIFORNIA 90022
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (323) 720-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par
value $0.01 per share (Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant based upon the closing sale price of the Common Stock on March 20,
2001, as reported on the Over the Counter Bulletin Board, was approximately
$852,000. Shares of Common Stock held by each executive officer and director and
each person owning more than 5% of the outstanding Common Stock of the
Registrant have been excluded in that such persons may be deemed to be
affiliates of the Registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Number of shares outstanding of the Registrant's Common Stock, as of March 20,
2001: 7,166,000
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED PART OF FORM 10-K INTO WHICH INCORPORATED
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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
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Item 1. Description of Business..............................................................................1
Item 2. Properties..........................................................................................20
Item 3. Legal Proceedings...................................................................................20
Item 4. Submission of Matters to a Vote of Security Holders.................................................21
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................21
Item 6. Selected Financial Data.............................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........................................35
Item 8. Financial Statements and Supplementary Data.........................................................35
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure..............................35
Item 10. Directors and Executive Officers of the Registrant..................................................36
Item 11. Executive Compensation..............................................................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management......................................36
Item 13. Certain Relationships and Related Transactions......................................................36
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................37
Signatures....................................................................................................39
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ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Certain matters discussed in this Annual Report on Form 10-K 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 Hispanic
Express, Inc. and its subsidiaries (the "Company" which may be referred to as
"we," "our" and "us," or "Hispanic Express") 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, Hispanic Express, and the other of which was Banner Central
Finance Company, or Banner Central Finance. Hispanic Express and Banner Central
Finance 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 Hispanic Express and Banner Central Finance
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
Hispanic Express and Banner Central Finance 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 Hispanic Express and Banner Central Finance
to concentrate on their respective businesses and provide each company with
greater flexibility in pursuing their independent business objectives.
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 Banner Central Finance. As further described below, the various
businesses that are conducted by Hispanic Express are conducted through certain
subsidiary companies. These subsidiaries were, prior to the formation of
Hispanic Express, owned by Central Finance (see the "before" chart below).
Following
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completion of the Plan, Hispanic Express and Banner Central Finance 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 Hispanic Express all of the
issued and outstanding capital stock of Central Consumer Finance
Company, Centravel, Inc. and BCE Properties I, Inc., each of
which are now wholly-owned subsidiaries of Hispanic Express.
Central Consumer Finance Company has four wholly-owned
subsidiaries, namely, Central Check Cashing, Inc., Central
Financial Acceptance Corporation Accidental & Health
Reinsurance, Limited, Central Finance Reinsurance, Ltd. and
Central Consumer Company of Nevada. As a result of these
contributions, Hispanic Express through its subsidiaries is
engaged in the consumer financial products business and the
travel services business.
- Central Financial contributed to Banner Central Finance all of
the issued and outstanding capital stock of Central Installment
Credit Corporation, Central Financial Acceptance/Insurance
Agency and Central Premium Finance Company, each of which are
wholly-owned subsidiaries of Banner Central Finance. In
addition, Central Financial contributed to Central Installment
Credit Corporation the assets and liabilities of the mortgage
business owned by Central Consumer Finance Company. As a result
of these contributions, Banner Central Finance through its
subsidiaries is engaged in the purchased consumer receivables
business, the mortgage business and the sale and financing of
automobile insurance.
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 common stock trades on the OTC Bulletin Board under the symbol
"HXPR." Our principal executive offices are located at 5480 East Ferguson Drive,
Commerce, California 90022, and our telephone number is (323)720-8600.
COMPANY BUSINESS
CONSUMER FINANCIAL PRODUCTS BUSINESS
Through our consumer financial products business, serve the Hispanic
population, primarily in California, and we:
- provide small, unsecured, personal loans;
- finance travel related services sold by our travel business;
- provide insurance products; and
- provide check cashing and money transfer services.
Our consumer financial products business caters to the low-income
Hispanic population by locating our facilities primarily in Hispanic
communities, advertising in Spanish, and employing Spanish as the primary
language spoken at our locations.
Our customers typically have been 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, customers of our consumer
financial products business typically have no or limited prior credit histories
and are generally unable to secure credit from traditional lending sources.
Historically, our consumer financial products business has grown by
introducing financial products we felt would well serve the low-income Hispanic
community. In December of 1992, we began offering our unsecured, closed-end,
small loans, generally ranging from $350 to $1,500, for personal, family or
household purposes.
In May 1997, we introduced a financial product involving the issuance of
a card, called an "Efectiva Card." The Efectiva Card provides our customers with
the ability to access their established lines of credit with us by withdrawing
cash from our cash dispensing machines. Our cash dispensing machines are
proprietary and are not part of any network system. At December 31, 2000, we
operated cash dispensing machines in eight of our finance and travel locations.
In October 1997, we entered into an agreement with Kmart Corporation, or
Kmart, to install our cash dispensing machines at 10 Kmart locations in Southern
California. In January 1998, we agreed to expand our relationship with Kmart and
install cash dispensing machines in additional Kmart stores, and had machines in
35 locations at the end of December 31, 1999. In the fourth quarter of 2000, we
terminated the agreement with Kmart and had no cash dispensing machines in Kmart
locations at December 31, 2000.
As a complementary business line in 1995, we began to offer financing of
travel tickets, which we sell at our travel locations. In 1998, we began to
offer fee-based check cashing and money transfer services in stand-alone check
cashing centers we operate.
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In our consumer financial products business we also act as an
intermediary for an independent insurance carrier that sells credit life and
credit accident and health insurance to our customers. Beginning in mid-1996,
the independent insurance carrier reinsured the credit life and credit accident
and health risk with a newly formed subsidiary we established. As a result of
this reinsurance arrangement, the credit risk remains with us.
TRAVEL SERVICES BUSINESS
Through our travel business we are a leading retail seller of discount
airline tickets to Hispanics residing in the United States who travel to Latin
America. For the years ended December 31, 2000 and 1999, our travel service
operations generated gross bookings of approximately $155 million and $144
million, respectively. We began our travel business in July 1995 with a single
location and through the assumption of leases in real estate, which had
previously held travel offices, have grown to 131 travel locations. We presently
have 113 travel locations in California and also operate in Arizona, Colorado,
Nevada, Illinois and Texas. We cater to the Hispanic population by locating our
travel stores in Hispanic communities, advertising in Spanish and employing
Spanish as the primary language spoken at our locations.
We sell both published and non-published fares. Non-published fares are
tickets we buy from airlines, under special price contracts, and resell to
consumers at discounts off the airlines' published fares. We have rights to buy
these non-published fares under contracts from 11 airlines, including, American,
Delta, United, Continental, Mexicana, Aeromexico and Taca. Our contracts are
generally for one year or less and can be canceled on short notice. In addition,
these contracts do not require the airlines to deal with us exclusively or
provide us with a specific quantity of tickets. Under our contracts, we purchase
tickets only when we have an order and, therefore, we do not have inventory
costs. We also offer a full complement of regular published fares for both
domestic and Latin American air travel on which we earn a commission. Our travel
business also earns significant performance-based incentive compensation,
referred to as "override commissions" from certain airlines with whom we do
business. The price at which we purchase our tickets and the commission we earn
on published fares are determined by the individual airlines and are subject to
frequent change and cancellation.
In June 1999, we made a decision to conduct our travel business on the
Internet targeting bilinguals, Hispanic and English-speaking non-Hispanics, who
are increasingly utilizing the Internet to purchase travel to Latin America. To
accomplish this, we established two Internet sites, Vuelabarato.com (fly cheap)
and 4GreatFares.com, and began to advertise these sites in both Spanish and
English newspapers and on outdoor billboards in California. For the years ended
December 31, 2000 and 1999, we spent $0.6 million and $0.3 million,
respectively, on Internet advertising.
However, reacting to changing market conditions, we made a decision in
May 2000 to significantly curtail our Internet operations and to reduce both our
related future advertising and personnel expenses.
DEMOGRAPHIC TRENDS AND MARKET OPPORTUNITY
Since 1950, Hispanics have been the fastest growing minority group in
the United States. The Hispanic population in Latin America has also experienced
strong growth and this trend is expected to continue. As an established provider
of consumer financial products and travel services to the Hispanic community, we
believe we are well positioned to capitalize on the projected growth in the
Hispanic population in the United States.
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- As of 2000, the U.S. Hispanic population totaled approximately
33 million people and grew approximately 58% during the period
1990 to 2000 and is expected to continue to rise;
- Ten major markets account for over 60% of the Hispanic
population and purchasing power in the U.S. These markets are
Los Angeles, San Francisco/San Jose, San Diego, New York,
Houston, San Antonio, McAllen/Brownsville, Dallas/Fort Worth,
Miami and Chicago.
BUSINESS STRATEGY
Recognizing the demographic trends, our strategy is to establish
ourselves as a leading Spanish-language provider of consumer financial products
and travel services to the Hispanic population residing in the United States. To
achieve this objective, we plan on continuing to implement the following
initiatives for the foreseeable future.
- To open travel agencies in the United States, which cater to the
growing Hispanic population;
- To use our increasing market share to continue to negotiate
favorably discounted non-published fares from the airlines;
- To sell these discounted fares through our travel agencies and
via the Internet both to Hispanics and non-Hispanics seeking
travel to Latin America;
- To establish new strategic relationships that will permit us to
offer additional travel products, hotels and tours, which we
will sell through our travel stores and our Internet sites; and
- To increase our distribution network through new stand-alone
travel locations.
COMPANY OPERATIONS
SMALL LOAN BUSINESS
In December 1992, we began offering unsecured, closed-end, small loans
ranging from $350 to $1,500 for personal, family or household purposes at the
flagship retail store of one of our affiliates, Banner's Central Electric, Inc.
Prior to beginning this business, we determined that there was a significant
demand for small loans, and that financial institutions in our geographic market
were not making loans of less than $1,500 and did not have adequate underwriting
experiences to serve the low-income Hispanic population. Beginning in May 1997,
we began offering unsecured open-end small loans that can be accessed through
our proprietary ATM network with our Efectiva Card. In response to higher
delinquencies in the fourth quarter of 2000, we began to implement a program to
reduce customer credit limits on our Efectiva Card to amounts generally not to
exceed $500. At December 31, 2000, our small loan business was operating through
eight facilities, which were our finance centers.
TRAVEL SALES AND FINANCE
We began our travel business in mid-1995, offering sales of airline
tickets, as well as financing for such purchases. We believe that we are
currently the largest providers of travel services to the Hispanic population in
California. Substantially all of our ticket sales are for
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international travel, which generally provides a higher commission structure
than does domestic travel. At December 31, 2000, we operated through 131
locations, of which 113 are located in California and 18 are located outside of
California. We believe that both our small loan and travel product lines can be
offered out of 1,000 - 1,500 square foot locations, and that these locations can
efficiently offer additional financial products and services which we anticipate
we will make available in the future.
OTHER BUSINESS ACTIVITIES
We act as an intermediary for an independent insurance carrier that
sells credit life and credit accident and health insurance to our customers.
Through this arrangement, we sell policies to our customers within limitations
established by agency contracts with that insurer. Credit life insurance
provides for the payment in full of the borrower's credit obligation to the
lender if the borrower dies. Credit accident and health insurance provides for
repayment of loan installments to the lender during the insured's period of
involuntary unemployment resulting from disability, illness or injury. Premiums
for such credit insurance are at the maximum authorized rates and are stated
separately in our disclosure to customers, as required by the Truth-in-Lending
Act and applicable state statutes. We do not act as an intermediary with respect
to the sale of credit insurance to non-borrowers. We earn a commission from the
insurance carrier on the sale of credit insurance, which is based in part on the
claims experience on policies that the insurance carrier sells through us.
Beginning in mid-1996, the independent insurance carrier reinsured the credit
life and credit accident and health risk with a newly formed subsidiary of ours.
As a result of this reinsurance arrangement, the credit risk remains with us.
In 1998, we began to charge our customers a fee on payroll checks that
they cash at our facilities and to offer check cashing services at certain of
our financial centers.
CREDIT PROCEDURES
We have developed uniform guidelines and procedures for evaluating
credit applications for installment credit travel sales and small loans. We take
credit applications at all of our locations and at each of Banner's Central
Electric's stores. We 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 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 with our credit verifiers and depending
on the relevant factor may verify other pertinent information. We also obtain a
credit bureau report and rating, if available, and seek to confirm other
credit-related information.
For an established customer, the credit process currently includes a
review of the customer's credit and payment history with us, and depending on
the size of the transaction an updated verification of employment and residence.
Because we offer multiple lines of credit, we review the aggregate amount that a
customer owes. In cases where a customer makes a request
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for a substantial increase in his or her aggregate outstanding balance, we will
obtain an updated credit bureau report and will seek to confirm employment. 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
travel installment credit business, also require a down payment. In the fourth
quarter of 2000, our loan 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 and began ti implement a program to
reduce customer credit limits on our Efectiva Card to amounts generally not to
exceed $500 in the fourth quarter of 2000, which is normally our period of
greatest loan activity. See - "Business Considerations and Credit Factors that
May Affect Future Results of Operations and Stock Price - Credit Risk Associated
with Customers; Lack of Collateral."
PAYMENT AND COLLECTIONS
Industry studies estimate that a significant amount 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. For our
customers who are paid their wages by check but who do not maintain checking
accounts, we cash such checks for a fee in order to facilitate account payments.
We consider payments past due if a borrower fails to make any payment in
full on or before its due date, as specified in the installment credit or small
loan contract or mortgage 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. In
December 1996, we installed an autodialer which makes up to 500 telephone calls
per hour to assist our collections personnel in successfully contacting past due
borrowers. 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.
THIRD PARTY SYSTEMS
The travel information we utilize to conduct our business is provided to
each of our travel stores and our Internet business through global distribution
systems, operated by SABRE, Amadeus, and Worldspan. SABRE, Amadeus and Worldspan
are world leaders in the electronic distribution of travel-related products and
services. Global distribution systems provide us with electronic booking systems
and databases containing flight schedules and availability, and published fares
information for approximately 400 airlines located throughout the world.
The global distribution systems are provided to us under three to
five-year contracts, without charges, as long as we maintain a certain level of
booking. Our contracts also provide for incentives if we exceed certain
performance criteria.
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ADVERTISING
We actively advertise primarily in Hispanic newspapers and direct mail,
targeting both our present and former customers, and potential customers who
have used other sources of consumer credit and travel services. We also
advertise in English newspapers to promote our English-language Internet site.
EMPLOYEES
At December 31, 2000, we employed a total of 350 full-time employees and
122 part-time employees. Our employees are not represented by a union or covered
by a collective bargaining agreement. We believe that our relations with our
employees are good.
SUPERVISION AND REGULATION
CONSUMER FINANCE OPERATIONS REGULATION
Our consumer 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 OF CONSUMER PRODUCT AND TRAVEL FINANCE
In California, the California Retail Installment Sales Act, or the Unruh
Act, regulates our installment travel finance and small loan business. The Unruh
Act requires us to disclose to our customers, among other matters:
- the conditions under which we may impose a finance charge;
- 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 installment sales contracts;
- setting forth the respective rights and obligations of buyers
and sellers; and
- regulating the maximum legal finance rate or charge and limiting
other fees on installment sales.
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SMALL LOAN BUSINESS
Small loan consumer finance companies are subject to extensive
regulation, supervision and licensing under various federal and state statutes,
ordinances and regulations. In general, these statutes establish maximum loan
amounts and interest rates and the types and maximum amounts of fees and other
costs that may be charged. In addition, state laws regulate collection
procedures, the keeping of books and records and other aspects of the operation
of small-loan consumer finance companies. State agency approval generally is
required to open new branch offices. Accordingly, our ability to expand by
acquiring existing offices and opening new offices has depended, in part, on
obtaining the necessary regulatory approvals.
Each facility that offers small loans must be separately licensed under
the laws of California. Licenses granted by the regulatory agencies are subject
to renewal every year and may be revoked for failure to comply with applicable
state and federal laws and regulations. In California, licenses may be revoked
only after an administrative hearing.
INSURANCE BUSINESSES
In California, the State of California Department of Insurance regulates
our insurance businesses. In general, this agency issues regulations which
require us to, among other things, maintain fiduciary fund and trust accounts
and follow specific market, general business and claims practices.
FEDERAL LENDING 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
principal 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 certain bases, including race, color, sex, national origin,
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.
CHECK CASHING REGULATION
The California Department of Justice regulates our check cashing
business. In general, state law and regulations set forth requirements and
procedures which require us to, among other things, limit the amount of fees we
may charge, renew our check casher's permit annually and post a schedule of the
fees we charge for check cashing services in each of our locations.
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TRAVEL AGENCY REGULATION
Each of our travel locations are travel agencies that are regulated by
the Airline Reporting Corporation, or ARC. The ARC represents the major
scheduled airline carriers and sets the operating rules for travel agencies. We
are required to submit weekly reports to the ARC and to meet certain procedural,
funding and bonding requirements that the ARC sets. In California, under the
Seller of Travel Act, we are required to register as a seller of travel, comply
with certain disclosure requirements and participate in the State's restitution
fund. We also are subject to regulation by the United States Department of
Transportation, or the DOT, by regulations applicable to business generally and
by laws or regulations directly applicable to access online commerce. However,
it is possible that laws and regulations may be adopted with respect to the
Internet or commercial online services covering issues such as user privacy,
pricing, content, copyrights, distribution, antitrust and characteristics and
quality of products and services. Further, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws. Such laws would likely impose additional burdens on companies
conducting business online.
Moreover, in many states, there is currently great uncertainty whether
or how existing laws governing issues such as property ownership, sales and
other taxes, libel and personal privacy apply to the Internet and commercial
online services. Tax authorities in a number of states, as well as a
Congressional advisory commission, are currently reviewing the appropriate tax
treatment of companies engaged in online commerce, and new state tax regulations
may subject us to additional state sales and income taxes. Federal legislation
imposing certain limitations on the ability of states to impose taxes on
Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as this
legislation is known, imposes on electronic commerce a three-year moratorium on
state and local taxes imposed after October 1, 1998, but only where such taxes
are discriminatory on Internet access.
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.
LIABILITY FOR THIRD PARTY CLAIMS
We have entered into a Contribution Agreement with Central Financial,
which, among other things, provides for the indemnification of Central Financial
by us against all liabilities, such as lawsuits or other claims by third
parties. In addition, the Contribution Agreement provides for indemnification by
us of Central Financial's stockholders at the Liquidation Date upon the
dissolution and liquidation of Central Financial. However, there is
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always the possibility that we may cease to exist or that we may not have
sufficient assets to fully indemnify Central Financial or its stockholders.
CREDIT RISK ASSOCIATED WITH CUSTOMERS; 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 which they can repossess in the
event of a borrower's default. At December 31, 2000, 1999, and 1998 gross
finance receivables had accounts with payments 31 days or more past due as a
percentage of end of period gross receivables of 1.8%, 5.1% and 4.1%,
respectively. For the years ended December 31, 2000, 1999 and 1998, the
portfolios comprising the finance receivables had net write-offs of $10.8
million, $6.6 million and $8.7 million, respectively. In the fourth quarter of
2000, our loan business was negatively impacted by a bus strike in the Los
Angeles area which lasted approximately five weeks. As a result of the bus
strike 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 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. Such increases would
adversely affect results of operations if we are not able to increase the rate
charged on receivables to reflect the additional risks in its portfolios.
Because we presently charge the maximum allowable interest rates on our small
loan products, further increases in delinquencies and write-offs will adversely
affect results of our operations. For information concerning our credit quality
experience, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Trends", and "Delinquency Experience and
Allowance for Credit Losses."
GENERAL ECONOMIC RISK
The risks associated with our businesses 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 travel 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 our financial condition and results
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Trends", and "Delinquency Experience and
Allowance for Credit Losses."
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INTEREST RATE RISK
The net interest spread, which is the difference between the average
interest rate on average net receivables and the average interest rate on
average interest bearing liabilities, or the Net Interest Spread, partially
determines our profitability in our consumer financial products business.
Because we pay a floating interest rate on borrowings under our Line of Credit
(as defined below), increases in such rate have at times decreased, and in the
future may decrease, our Net Interest Spread. This may have a material adverse
effect on our results of operations and financial condition.
The interest rate we are allowed to charge our customers on our small
loans is limited under California law. Presently, we generally charge the
maximum interest rate permitted in California on the majority of our small loan
portfolios. There is no corresponding interest rate limitation on installment
travel sales. Increases in the interest rate we charge our customers could
reduce demand for our financial products and services which, in turn, could
decrease our net income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Supervision and Regulation - Small
Loan Business."
NEED FOR SENIOR CREDIT FACILITY
Our ability to maintain our current level of operations and to expand
our operations will be affected by the availability of financing and the terms
thereof as we require substantial capital to finance our business.
Currently, we fund our business activities under one of our subsidiary's
revolving loan agreements dated August 11, 2000, as amended, with several banks,
including, Union Bank of California, N.A. as agent, or the Line of Credit, which
expires August 11, 2003. Although the Line of Credit permits us to borrow up to
$35 million (as amended, subsequent to year-end), the amount of credit
available at any one time is limited to 70% of "eligible contracts" as defined
in our credit agreement.
In addition, our inability at any time to renew or replace our Line of
Credit or other senior credit facilities on acceptable terms could have a
material adverse effect on our results of operations and financing condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
RESTRICTIONS IMPOSED BY THE LINE OF CREDIT
All of the assets and stock of Central Consumer Finance Company, or
Central Consumer (which is our wholly-owned subsidiary), and its subsidiaries
have been pledged as collateral for the amounts that Central Consumer borrows
under its Line of Credit.
The Line of Credit requires, among other things, that we maintain
specific financial ratios and satisfy certain financial tests with respect to
Central Consumer. At December 31, 2000, Central Consumer and subsidiaries had
total assets of approximately $59.0 million and stockholders' equity of
approximately $33.0 million. Our ability to meet these financial ratios and
financial tests can be affected by events beyond our control, and we cannot
assure that we will meet these tests. The Line of Credit also restricts, among
other things, Central Consumer's ability to
- incur additional indebtedness;
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- pay indebtedness prior to the date when due;
- pay dividends, make certain other restricted payments or
consummate certain asset sales;
- merge or consolidate with any other person;
- enter into certain transactions with affiliates; and
- incur indebtedness that is subordinate in priority and right of
payment to amounts outstanding under the Line of Credit.
At present time, Central Consumer is in compliance with the financial
ratios and tests. However, the breach of any of these covenants could result in
a default under the Line of Credit. In the event of a default under the Line of
Credit, the lenders could seek to declare all amounts outstanding under the Line
of Credit, together with accrued and unpaid interest, to be immediately due and
payable. If we were unable to repay the amounts, the lenders under the Line of
Credit could proceed against the collateral that we granted to them to secure
our indebtedness, which is a significant portion all of our and our
subsidiaries' tangible assets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
RELATIONSHIPS WITH AIRLINES
We derive substantially all of our travel services revenue from a
combination of:
- sales of discounted air fares;
- commissions on published fares for both domestic travel and
travel to Latin America; and
- performance based compensation referred to as "override
commissions."
We depend on our airlines for access to non-published fares for which we
have no long-term or exclusive contracts. Our business could be hurt if the
airlines we do business with:
- refuse to renew our contracts for non-published fares;
- renew the contracts on less favorable terms; or
- cancel our contracts.
Non-published fares are tickets we acquire from the airlines and resell
to our customers at discounts off published fares. We have contracts with 11
airlines that permit us to acquire non-published fares. These contracts are
typically for a short period, are cancelable on short notice and do not require
the airlines to provide us with a specific quantity of tickets or deal with us
exclusively.
A significant portion of our revenue depends on regular and override
commissions paid to us by the airlines for bookings made through our travel
stores and Internet
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sites. The airlines we do business with are not obligated to pay any specific
commissions, or to pay commissions at all.
Most recently, there has been a general trend by the airlines to reduce
commissions paid to travel agents in order to reduce their distribution costs,
and many travel experts believe that airlines will eliminate all commissions in
the near future. In response to these changes, many travel agencies, including
us, have begun to charge service fees to their customers.
Although our domestic travel business has been subject to the same
downward trends on commission rates, our commission rates on tickets to Latin
America, which account for approximately 75% of our travel business, have not,
historically, been subject to these general trends. From time to time, however,
certain airlines have reduced commission rates on Latin American routes, but
have generally reinstated them in order to meet competitive conditions. We
believe that the pressure on airlines to reduce their distribution costs will
continue and affect our present Latin American commission rates, and we have
begun to charge service fees in certain markets where commissions have been
reduced and are prepared to introduce service charges throughout all of our
travel stores should conditions warrant it.
A large percentage of our travel business depends upon a limited number
of airlines and our business could be hurt if any of these carriers temporarily
curtail operations, were shut down, or went out of business. In November of
1999, Taesa Airlines, one of the major Mexican carriers, was shut down by the
Mexican government and eventually was declared bankrupt. The suspension and
ultimate cessation of Taesa Airlines had a significant adverse effect on our
operations in the fourth quarter of 1999, our busiest travel season. Results for
the year ended December 31, 2000 were adversely impacted and will remain as such
until the Taesa route system is absorbed by other airline carriers. In response
to the cessation of Taesa, Mexicana and Aeromexico, which are controlled by a
common parent company, reduced commissions on routes from Tijuana to other parts
of Mexico. To offset this decline in commissions, we have begun to charge our
customers a service charge.
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
Our financial performance will depend in part on our ability to:
- successfully develop and introduce new financial products and
services;
- integrate new travel locations into our operations;
- generate satisfactory performance or enhance performance at
these locations;
- maintain our airline contracts and commission rates or increase
our fees; and
- enter contracts with other providers of travel and
travel-related services.
Expansion of our business may negatively impact our operating results,
particularly during periods immediately following any such expansion. In
addition, we cannot assure that we will be able to profitably implement our
business strategy in new geographical areas. Furthermore, we may compete for
expansion with companies that may have significantly greater financial resources
than we do. We cannot assure that we will be able to locate suitable
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new locations for our travel business, or that any operations that we may open
or acquire will be effectively and profitably integrated into our existing
operations.
DEPENDENCE ON CALIFORNIA MARKET
The majority of our consumer financial products business and our travel
facilities are located in California and the majority of our revenues are
generated in California. Therefore, our performance depends upon general
economic conditions in California and Southern California, in particular, and
may be adversely affected by social 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.
COMPETITION
The small loan consumer finance industry is a highly fragmented segment
of the consumer finance industry. There are numerous small loan consumer finance
companies operating in the United States. Many of these companies have
substantially greater resources than we do and their entry or expansion within
our markets could have a material adverse effect on our business strategy and
results of our operations and financial condition. We do not believe we compete
with commercial banks, savings and loans and most other consumer finance
lenders, because these institutions typically do not make loans of less than
$1,500.
We compete with traditional travel agencies, ticket consolidators,
Internet travel companies and with the airlines. In the United States Hispanic
market, we believe that we are the largest providers of leisure air travel to
Hispanic customers traveling to Latin America. We face strong competition on a
regional basis from local retail operators, and also face potential competition
from larger more traditional travel agencies, who may establish travel agencies
or form strategic alliances in Hispanic areas in the future. Some of these
agencies have greater financial and marketing resources then we do. We cannot
assure that our present or future competitors will not exert significant
competitive pressures on us, which could have a material adverse effect on our
results of operations and financial condition.
We compete in our recently established Internet travel business with a
variety of Internet travel companies such as CheapTickets, Inc., Priceline.com,
Inc. and Travelocity.com, all of which have greater brand recognition and
significantly greater financial, marketing and other resources than we do.
Certain of these companies may also be able to secure airline contracts from our
travel providers on more favorable terms than we can obtain. We cannot be
assured that we will be able to compete successfully against current and future
competitors. We also face competition from travel consolidators, who sell their
services directly to customers by telephone and on the Internet. As the market
for online travel grows, there can be no assurance that our ticket providers
will permit us to continue to sell airline tickets online.
Among other factors, our success depends heavily on our access to
non-published fares, on our brand recognition and on the ability of our systems
to integrate our non-published fares with published fares to offer customers a
broad choice. Our competitors may enter into strategic or commercial
relationships with larger, established and well-financed companies. Some of our
competitors have agreements to buy non-published fares from our major suppliers.
Our competitors may be able to induce one or more of our suppliers of
non-published fares, through pricing, equity or other incentives, to cease doing
business with us, or to do business with us on less favorable terms. They might
also be able to build strong brand recognition in the Hispanic leisure travel
market, through widespread advertising and other marketing efforts.
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Certain of our competitors may be able to devote greater resources to marketing
and promotional campaigns on the Internet if they began to promote Hispanic
travel opportunities. Competitors may also devote substantially more resources
to website and systems development than we do. Any or all of these developments
could bring heavy competitive pressures to bear on us.
SEASONALITY
Our businesses are seasonal, reflecting fluctuations in leisure travel
patterns and consumer demand for small loans. Historically, travel sales
increase in the second and fourth quarter of the year, reflecting summer and
Christmas travel, and decline in the first and third quarter. The summer and
Christmas seasonal cycles are fairly predictable, but may shift or be altered,
reflecting changes in the economy, availability of airline capacity and travel
prices. These seasonal fluctuations in our business directly impact our
operating results and cash flow. Travel sales in general may be impacted by
political instability in Latin America, terrorism, fuel price escalation,
weather, airline or other travel related strikes and news of airline disasters.
Historically, we experience the highest demand for our financial products and
services between October and December and experience the lowest demand between
January and March due to the holiday shopping season.
RELIANCE ON THIRD PARTY SYSTEMS
Our travel business is limited to those airlines that provide
comprehensive travel information through the global distribution systems we
utilize. There can be no assurance that the airlines we currently have contracts
with will continue to sell their services through SABRE, Amadeus and Worldspan,
or that we would be able to establish new relationships to ensure uninterrupted
access to a comprehensive supply of travel information should the airlines that
we have relationships with elect to not use the global distribution systems,
that we currently employ. In addition, we are dependent on our global
distribution system supplier to continue to offer and maintain their service.
Any discontinuation of its service, or any reduction in its performance, that
requires us to replace such service would be disruptive to our business and
could require substantial expenditures and time to transition us to an
alternative global distribution system.
TRAVEL INDUSTRY DISRUPTIONS
A decline in leisure travel or disruptions in travel generally could
hurt our business. Leisure travel is highly sensitive to personal discretionary
spending levels and thus tends to decline during general economic downturns. In
addition, other adverse trends or events that tend to reduce leisure travel are
likely to hurt our business. These may include political instability, regional
hostilities, terrorism, fuel price escalation, travel-related accidents, bad
weather, and airline or other travel-related strikes.
A number of airlines are currently in various stages of negotiation with
unions representing their employees. If those negotiations fail and the unions
elect to strike or effect a slowdown, our business could be harmed.
GROWTH MANAGEMENT
We have rapidly and significantly expanded our travel operations and
anticipate further significant expansion. Our inability to manage growth
effectively could hurt our business.
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We have added a number of key managerial and technical employees, and we
expect to add additional key personnel in the future. This expansion has placed,
and we expect it will continue to place, a significant strain on our management,
operational and financial resources. To manage the expected growth of our
operations and personnel, we plan to:
- improve and upgrade transaction-processing, operational,
customer service and financial systems and financial procedures
and controls;
- maintain and expand our relationships with various travel
service suppliers, Internet portals and other travel-related
website companies and other third parties necessary to our
business;
- continue to attract, train and manage our employee base; and
- implement a disaster recovery program.
TECHNOLOGY
Our computer and communications systems are vulnerable to business
interruptions. Our ability to receive and fill orders through our travel call
center and provide high-quality customer service largely depends on the
efficient and uninterrupted operation of our computer and communications
hardware systems. The occurrence of interruptions, delays, loss of data or the
inability to accept and confirm customer reservations could hurt our travel
business.
Our online servers and our call center are located in Commerce,
California; the SABRE Group's computers are located in Tulsa, Oklahoma. These
systems and operations are vulnerable to damage or interruption from power loss,
telecommunications failure, hacker break-ins, natural disasters and similar
events.
Although we have adopted network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These kinds of events could lead to interruptions, delays, loss of
data or the inability to accept and confirm customer reservations. The
occurrence of any of the foregoing risks could hurt our business.
SERVICE INTERRUPTIONS
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the airline
industry to make airline ticket reservations. Any interruption in these
third-party services or a deterioration in their performance could hurt our
business. If our arrangement with any of these third parties is terminated, we
may not find an alternative source of systems support on a timely basis or on
commercially reasonable terms. We rely on third parties to print our airline
tickets and arrange for their delivery. We rely on third parties to host our
online system's infrastructure, web and database servers. We predominately rely
on SABRE for our general reservations system, including customer profiling,
making reservations and credit card verification and confirmations. Currently,
over 90% of our computing transactions are processed through the SABRE systems.
If we, or SABRE, ever elect to terminate the existing relationship, we
would be forced to convert to another provider. This conversion could require a
substantial commitment of time and resources and hurt our business.
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MANAGEMENT AND KEY EMPLOYEE DEPENDENCE
Our management team is headed by Gary Cypres, our Chairman of the Board,
Chief Executive Officer and President, and consists of a number of key corporate
employees, who, as our executive officers of our company and our predecessors,
have contributed to the development of the businesses that now comprise Hispanic
Express. The loss of the services of any of these executive officers or other
key employees could hurt our business. If we lose our key personnel or cannot
recruit additional personnel, our business may suffer.
Our future success also depends on our ability to identify, attract,
hire, train, retain and motivate other highly skilled technical, managerial,
marketing and customer service personnel. Competition for such personnel is
intense. We may not be able to attract, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties in attracting
a sufficient number of qualified software developers for our future online
services and transaction-processing systems. The failure to retain and attract
necessary technical, managerial, marketing and customer service personnel could
hurt our business and impair our growth strategy. Although none of our employees
are represented by a labor union, our employees may join or form a labor union.
BUSINESS EXPANSION
Our business could be hurt if we do not offer new products and services
successfully. We plan to introduce new and expanded products and services. Our
inability to generate revenues from such expanded products and services or
products sufficient to offset their development or offering cost could hurt our
business. Such additional products and services may include secured financing
products, as well as hotel, tour, cruise reservations and car rentals. We may
not be able to offer such products or services in a cost-effective or timely
manner and our efforts may not be successful.
Further, any new product or service that is not favorably received by
customers could damage our reputation or brand name. Expansion of our services
could also require significant additional expenses and may strain our
management, financial and operational resources.
ACQUISITION STRATEGIES
Our business could be hurt if we make acquisitions that are not
successful. We may in the future broaden the scope and content of our business
through the acquisition of existing complementary businesses. We may not be
successful in overcoming problems encountered in connection with such
acquisitions, and our inability to do so could hurt our business. We may
consider the acquisition of companies providing similar services in other
markets or in other sectors of the travel industry in the future. Future
acquisitions would expose us to increased risks. These include risks associated
with:
- the assimilation of new operations, sites and personnel; the
diversion of resources from our existing businesses, sites and
technologies;
- the inability to generate revenues from new sites or content
sufficient to offset associated acquisition costs;
- the maintenance of uniform standards, controls, procedures and
policies; and
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- the impairment of relationships with employees and customers as
a result of integration of new businesses.
Acquisitions may also result in additional expenses associated with
amortization of acquired intangible assets or potential businesses.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
Certain segments of the travel industry are heavily regulated by the
United States and other governments. Accordingly, certain services offered by us
are affected by such regulations. New legislation or regulation, the application
of laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and commercial online services could hurt our business.
Our consumer finance business is regulated by federal, state and local
government authorities and is 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 or small loans, further limited
or restrict the amount of interest and other charges imposed in installment
sales or small loans originated by retailers or by our company, or otherwise
materially adversely affect our business or prospects. See "Supervision and
Regulation."
ITEM 2. PROPERTIES
Our executive and administrative offices occupy approximately 30,000
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, for which we pay an annual rental of $300,000, plus pro-rata shares of
common area charges and taxes, pursuant to a 15 year lease.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of our stockholders.
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 "HXPR". 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 21, 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to our
consolidated financial position as of December 31, 2000 and 1999 and our results
of operations for the years ended December 31, 2000, 1999 and 1998 has been
derived from our audited consolidated financial statements appearing elsewhere
in this Annual Report. This information should be read in conjunction with such
consolidated financial statements and the notes thereto. The selected financial
data with respect to our consolidated financial position as of December 31,
1998, and our results of operations for the year ended December 31, 1997 has
been derived from our audited consolidated financial statements, which are not
presented herein. The selected financial data with respect to our consolidated
financial position as of December 31, 1997 and 1996 and our results of
operations for the year ended December 31, 1996 are unaudited.
HISPANIC EXPRESS, INC.
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
STATEMENTS OF INCOME DATA:
Revenues:
Interest income $ 10,652 $ 14,393 $ 15,010 $ 14,747 $ 13,028
Travel services 2,449 8,716 8,961 14,270 14,872
Other income (1) 4,314 6,365 7,954 10,885 9,759
----------- ----------- ----------- ----------- -----------
Total Revenues 17,415 29,474 31,925 39,902 37,659
----------- ----------- ----------- ----------- -----------
Costs and Expenses:
Operating expenses 6,553 16,891 17,738 24,215 28,857
Provision for credit losses 3,744 5,318 5,952 6,531 9,406
Interest expense 3,200 3,406 3,212 3,202 2,930
Depreciation and amortization 147 750 1,151 1,556 1,826
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes 3,771 3,109 3,872 4,398 (5,360)
Provision (benefit) for income tax 1,508 1,217 1,549 1,759 (1,938)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 2,263 $ 1,892 $ 2,323 $ 2,639 $ (3,422)
=========== =========== =========== =========== ===========
PRO FORMA PER SHARE DATA (UNAUDITED):
Net loss per common share:
Basic $ (0.48)
Diluted $ (0.48)
Weighted average shares outstanding::
Basic 7,166,000
Diluted 7,166,000
(1) Other income includes administrative and membership fees charged on
certain small loan contracts, late charges, revenue from the sale of
insurance products and fees charged for check cashing.
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DECEMBER 31,
-------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Cash $ 5,927 $ 5,003 $ 7,847 $ 5,208 $ 4,528
Receivables, net 50,370 54,795 60,613 54,962 43,465
Total assets 74,099 85,460 91,458 86,190 74,216
Notes payable 40,850 40,850 40,000 40,000 23,600
Stockholder's equity 24,849 38,864 45,053 38,843 40,640
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
information under "Selected Financial Data" and 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,
airline relationships and commissions, technology, 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 and others, see Item 1."Business -- Business Considerations and Certain
Factors that May Affect Future Results of Operations and Stock Price."
OVERVIEW
In pursuit of our business strategy, we have grown by introducing
financial products and travel services we felt would well serve the Hispanic
community. In December of 1992, we began offering our unsecured, closed-end,
small loans, generally ranging from $350 to $1,500, for personal, family or
household purposes. On June 1995, we commenced our travel services business and
began offering financing for the travel tickets we sold. In 1996, we expanded
our travel business by assuming the leases to 70 retail locations, which had
previously offered travel services.
In May 1997, we introduced a financial product involving the issuance of
a card, called an "Efectiva Card." The Efectiva Card provides our customers with
the ability to access their established lines of credit with us by withdrawing
cash from our cash dispensing machines. Our cash dispensing machines are
proprietary and are not part of any network system. At December 31, 2000, we
operated cash dispensing machines in eight of our finance and travel locations.
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In October 1997, we entered into an agreement with Kmart to install our
cash dispensing machines at 10 Kmart locations in Southern California. In
January 1998, Kmart and we agreed to expand the relationship and install cash
dispensing machines in additional Kmart stores. We had machines in 35 Kmart
locations, and in 26 other locations which we own or operate, at the end of
December 31, 1999. In the fourth quarter of 2000, we terminated the agreement
with Kmart and had no cash dispensing machines in Kmart locations at December
31, 2000.
Historically, we provided payroll check cashing services to our
customers free of charge when they come into our finance centers to pay on their
accounts. In mid-1998, however, we began to charge for such services and to
offer cashing services in certain of our loan centers.
In March 1999, we again expanded our travel business by assuming the
leases to 24 retail locations, which had previously offered travel services.
During the last six months of 1999, we began to significantly build our
infrastructure to support our Internet travel business and in the first half of
2000 we increased our advertising expenditures for this business. In July 2000,
in response to changing market conditions, we made a decision to curtail our
Internet activities, including, reducing staff levels, advertising and other
related costs, and we wrote-off approximately $0.2 million of in-process
software development costs which we decided not to complete, and recorded
severance charges of approximately $0.3 million.
In September 2000, we closed six check cashing locations which were not
performing satisfactorily, and recorded a charge of approximately $0.8 million,
representing the write-off of leasehold improvements, fixed assets and future
discounted rent at these locations. In the fourth quarter of 2000, certain of
our loan and travel locations were 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 market we serve, our
delinquencies have increased in our small loan portfolio and this resulted in an
increase in the provision for bad debts of approximately $2.9 million for the
year ended December 31, 2000. In the fourth quarter of 2000, we reevaluated our
current charge-off policy and charged-off accounts which were past due at
December 31, 2000 and which did not make any payments after year end and began
to implement a program to reduce customer credit limits on our Efectiva Card to
amounts generally not to exceed $500. In the fourth quarter of 2000, we also
made a decision to replace our computer system and recorded a charge in the
amount of $1.4 million to buyout the old computer system lease and write-off
certain software costs.
Since December 31, 1998, our overall portfolio of net finance
receivables has declined primarily as a result of a decrease in our Small Loan
Portfolio reflecting more stringent credit approval guidelines, decreased
customer credit lines and increased competition from major credit card companies
seeking to penetrate the Hispanic market in the geographic areas in which we
operate. The decline in the balance in our Small Loan Portfolio which we expect
to continue has resulted in a declining level of interest income earned on our
finance receivables portfolio as shown under "Financial Trends."
During the year ended December 31, 2000, our portfolio of net finance
receivables continued to decline and amounted to $43.5 million at December 31,
2000 compared to $55.0 million at December 31, 1999.
As a result of the changes in products and services offered and changes
in distribution channels, results of operations are not readily comparable from
year to year or from period to period, and are not necessarily indicative of
future operating results.
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FINANCIAL TRENDS
PORTFOLIOS
The following sets forth certain information relating to our portfolios for the
periods indicated:
SMALL LOAN PORTFOLIO
(DOLLARS IN THOUSANDS,
EXCEPT AVERAGE CONTRACT BALANCE)
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
------- ------- -------
Gross receivable (at end of period) $62,248 $56,411 $43,157
Deferred interest (at end of period) 445 674 524
------- ------- -------
Net receivable (at end of period) 61,803 55,737 42,633
Deferred administrative fees, ATM fees
and insurance revenues (at end of period) 2,169 1,865 1,581
------- ------- -------
Net carrying value $59,634 $53,872 $41,052
======= ======= =======
Average net receivable (1) $55,312 $56,640 $48,703
Number of contracts (at end of period) 95,403 87,118 70,758
Average net contract balance $ 558 $ 627 $ 580
Total interest income (2) 13,792 13,584 11,867
Total administrative fee and ATM fee income 3,433 3,870 3,437
Late charge and extension fee income 73 1,926 1,954
Provision for credit losses 5,329 6,241 9,154
Provision for credit loss as a percentage
of average net receivable 9.6% 11.0% 18.8%
Net write-offs 7,904 6,319 10,450
Net write-offs as a percentage of
average net receivable 14.3% 11.6% 21.4%
Average interest rate on average net receivable 24.9% 24.0% 24.4%
(1) Average net receivable is defined as the average gross receivables less
the average deferred interest and insurance.
(2) Amounts represent interest on the small loan portfolio, excluding
administrative and membership fees, late and other included in other
income in the consolidated statements of income appearing elsewhere
herein.
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TRAVEL FINANCE PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT
AVERAGE CONTRACT BALANCE)
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
------- ------- -------
Gross receivable (at end of period) $ 4,988 $ 4,929 $ 4,855
Deferred interest (at end of period) 432 440 507
------- ------- -------
Net receivable (at end of period) $ 4,556 $ 4,489 $ 4,348
======= ======= =======
Average net receivables (1) 4,775 4,455 4,503
Number of contracts (at end of period) 12,250 11,506 10,569
Average net contract balance $ 365 $ 375 $ 411
Total interest income 1,218 1,163 1,161
Late charge and extension fee income 176 216 214
Provision for credit losses 623 290 252
Provision for credit loss as a
percentage of average net receivable 13.0% 6.5% 5.5%
Net write-off's 776 290 324
Net write-off's as a percentage
of average net receivable 16.3% 6.5% 7.1%
Average interest rate on
average net receivable 25.9% 26.1% 25.8%
(1) Average net receivable is defined as the average gross receivables, less
the average deferred interest.
The following sets forth certain information relating to our portfolios
for the periods indicated.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table separates the changes in net interest income between
changes in average balances, or Volume, and average rates, or Rate, for the
average net receivables of the small loan and travel portfolio (dollars in
thousands) for the periods presented.
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
VERSUS VERSUS VERSUS
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------------- ---------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- ----- ------ ---- -----
Increase (decrease)
in interest income
Small Loan Portfolio 956 (220) 736 318 (526) (208) (1,912) 195 (1,717)
Travel Portfolio (118) 15 (103) (84) 12 (72) 12 (14) (2)
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CREDIT QUALITY
The provision for credit losses in our small loan and travel portfolios
are made following the origination of loans over the period that the events
giving rise to the credit losses are estimated to occur. Our portfolios comprise
smaller-balance, homogenous loans that are evaluated collectively to determine
an appropriate allowance for credit losses. The allowance for credit losses is
maintained at a level considered adequate to cover losses in the existing
portfolios. We pursue collection of past due accounts, and when the
characteristics of an individual account indicate that collection is unlikely,
the account is charged off and turned over to a collection agency. In 1998, we
changed our policy to automatically charge-off delinquent accounts over 150 days
past due. Prior to that, we generally charged off delinquent accounts when they
were 181 days and beyond past due. We accrue interest up to the time we charge
off an account. In the fourth quarter of 2000, our loan business was negatively
impacted by a bus strike in the Los Angeles area which lasted approximately five
weeks. As a result of the bus strike and a deteriorating economic climate, our
delinquencies have increased and in response we tightened our credit guidelines
and we reevaluated our current charge-off policies and charged-off accounts that
were past due at December 31, 2000 and which did not make any payments after
year end and we began to implement a program to reduce customer credit limits on
our Efectiva Card to amounts generally not to exceed $500.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Our management's periodic
evaluation of the adequacy of the allowance is based on our past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay and current economic conditions.
For information concerning our provisions for credit loses and
charge-offs experienced in our small loan and travel portfolios, see "Financial
Trends - Portfolios" above.
PAYMENT AND COLLECTIONS
Industry studies estimate that a significant percentage of the adult
population in the United States do not maintain a checking account, which is a
standard prerequisite for obtaining a consumer loan credit card or other form of
credit from most consumer credit sources. Our customers are required to make
their monthly payments using a payment schedule or statement that we provide to
them. The vast majority of our customers make their payments in cash at our
payment facilities 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 the installment credit or small
loan contract the customer signs. We currently attempt to contact borrowers
whose payments are not received by the due date within 10 days after such due
date. We contact these borrowers by both letter and telephone. If no payment is
remitted to us after the initial contact, we make additional contacts every
seven days, and, after a loan becomes 31 days delinquent, we generally turn over
the account to our credit collectors. Under our guidelines, we generally charge
off and turn over an account to a collection agency when we determine that the
account is uncollectible.
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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)
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1999 2000
-------- -------- ----------
Past due accounts 31 days or
more (gross receivable) $ 2,779 $ 3,113 $ 859
Accounts with payments 31 days or
more past due as a percentage of
end of period gross receivables 4.1% 5.1% 1.8%
Allowance for credit losses $ 3,059 $ 2,981 $ 1,613
Allowance for credit losses as
a percentage of net receivables 4.6% 4.9% 3.4%
(1) Includes receivables in our small loan and travel finance portfolios
In 1997, delinquencies and net write-offs in our receivable portfolios
increased to levels which were substantially higher than those we have
historically experienced in such portfolios. Delinquency and write-offs trends
improved in 1998, but began to increase again in the year ended December 31,
1999 and 2000. The increases occurred primarily with respect to our existing
customers, rather than new credit customers. We believe these increases were a
result of excessive credit burdens for some customers, due to an aggregate over
extension of credit in the marketplace, coupled with uncertainty over
legislative reforms potentially impacting our customers and their extended
families. Additionally, delinquency trends were negatively impacted in the year
ended December 31, 2000 by a five-week bus strike in the Los Angeles area and a
deteriorating economic climate in the market we serve. Both the accounts with
payments 31 days or more past due as a percentage of end of period gross
receivables, and the allowance for credit losses as a percentage of net
receivables increased from 4.1% and 4.6%, respectively, as of December 31, 1998
to 5.1% and 4.9%, respectively, as of December 31, 1999. As a result of the
increased delinquencies, we increased our allowance for credit losses to $3.0
million at December 31, 1999. As of December 31, 2000, the accounts with
payments 31 days or more past due as a percentage of the end of period gross
receivables, and the allowance for credit losses as a percentage of net
receivables, decreased from 5.1% and 4.9%, respectively, as of December 31, 1999
to 1.8% and 3.4%, respectively, as of December 31, 2000 due to our decision in
December 2000 to charge-off accounts at year-end that were past due and which
did not make any payments after year end. As a result of the increased
delinquencies, we increased our provision for credit losses by $2.9 million for
the year ended December 31, 2000.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Total revenues in the year ended December 31, 2000 decreased to $37.7
million from $39.9 million in the year ended December 31, 1999, a decrease of
$2.2 million or 5.6%.
Total interest income for the year ended December 31, 2000 decreased to
$13.0 million from $14.7 million in the year ended December 31, 1999, a decrease
of $1.7 million or 11.7%. This decrease was primarily due to a decrease of $1.7
million in the interest earned on the small loan portfolio as a result of a
decrease in the average balance of the small loan portfolio, which averaged
$48.7 million for the year ended December 31, 2000 compared to the average
balance of $56.6 million for the year ended December 31, 1999.
Revenues earned on the sales of travel services increased to $14.9
million for the year ended December 31, 2000 compared to $14.3 million in the
year ended December 31, 1999, an increase of $0.6 million or 4.2%. This increase
was primarily due to the full year of operation of 38 new travel stores in 2000
whose leases were assumed from outside parties at various times in 1999.
Other income for the year ended December 31, 2000 decreased to $9.8
million from $10.9 million in the year ended December 31, 1999, a decrease of
$1.1 million or 10.3%. Other income primarily includes administrative fees
earned on the small loan portfolio, membership fees earned on the Efectiva Card,
late charge income and extension fees and income earned on the sale of insurance
products. This decrease was primarily due to a reduction in Efectiva membership
and administrative fees earned on the small loan portfolio of $0.4 million, and
a decrease of $1.1 million of income earned on our sale of credit insurance
products, which were offset by an increase of $0.4 million in check cashing
fees.
The decrease in income from our Efectiva membership and administrative
fees and insurance products was primarily due to a decrease in the average
balance of the small loan portfolio in the year ended December 31, 2000 compared
to the year ended December 31, 1999. The average interest rate earned on the
small loan portfolio was 24.4% for the year ended December 31, 2000 compared to
24.0% in the year ended December 31, 1999. The increase in check cashing fees
was primarily attributable to increases in fees charged on this service and an
increase in the number of locations offering this service.
Operating expenses for the year ended December 31, 2000 increased to
$28.9 million from $24.2 million in the year ended December 31, 1999, an
increase of $4.7 million or 19.2%. Of this increase $2.1 was attributable to
expenses related to the expansion of our travel business, $1.0 million was
attributable to the write-off of software development costs, severance costs and
increased advertising expenditures for our Internet travel business, which we
decided to curtail in July of 2000, $0.8 million was attributable to our
decision to replace our computer system and buyout the old computer system
lease, $0.8 million was attributable to charges incurred in connection with our
decision to terminate our agreement with Kmart and eliminate our cash dispensing
machines at 35 Kmart locations and shut down six check cashing locations which
were not performing satisfactorily.
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The provision for credit losses in the year ended December 31, 2000
increased to $9.4 million from $6.5 million in the year ended December 31, 1999,
an increase of $2.9 million or 44.0%. This increase was primarily attributable
to increased write-offs and delinquencies in the small loan portfolio.
Interest expense for the year ended December 31, 2000 decreased to $2.9
million from $3.2 million in the year ended December 31, 1999, a decrease of
$0.3 million or 8.5%. This decrease is primarily due to a declining average
balance of debt outstanding in the year ended December 31, 2000 compared to the
year ended December 31, 1999.
Depreciation and amortization for the year ended December 31, 2000
increased to $1.8 million from $1.6 million in the year ended December 31, 1999,
an increase of $0.2 million or 17.4% primarily due to increased amortization of
goodwill resulting from the assumption of leases for our new travel stores.
As a result of the foregoing factors, net loss in the year ended
December 31, 2000 was $3.4 million compared to net income of $2.6 million in the
year ended December 31, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenues in the year ended December 31, 1999 increased to $39.9
million from $31.9 million in the year ended December 31, 1998, an increase of
$8.0 million or 25.0%.
Total interest income for the year ended December 31, 1999 decreased to
$14.7 million from $15.0 million in the year ended December 31, 1998, a decrease
of $0.3 million or 1.8%. This decrease was primarily due to a decrease in
interest earned on the small loan portfolio as a result of a decrease in the
average balance of the small loan portfolio for the year ended December 31,1999
compared to the average balance for the year ended December 31, 1998. The
average interest rate we earned on the small loan portfolio was 24.0% in the
year ended December 31, 1999 compared to 24.9% in the year ended December 31,
1998.
Revenues earned on the sales of travel services increased to $14.3
million for the year ended December 31,1999 compared to $9.0 million for the
year ended December 31, 1998, an increase of $5.3 million or 59.2%. This
increase was primarily due to the operations of 38 travel locations on leases
assumed during 1999, increases in revenues from existing travel stores and
improvements in override commissions earned in 1999.
Other income for the year ended December 31, 1999 increased to $10.9
million from $8.0 million in the year ended December 31, 1998, an increase of
$2.9 million or 36.8%. Other income in the year ended December 31, 1999 includes
an increase of $1.9 million in late fees we charged on the small loan portfolio.
A change in the law, effective January 1, 1999, allowed us to charge late fees
on a greater portion of our small loan portfolio. The remaining increase of $1.0
in other income for the year ended December 31, 1999 was primarily due to an
increase in administration and membership fees of $0.4 million and an increase
of $0.4 million in check cashing income as a result of increasing fees we charge
and the volume of checks we cashed.
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Operating expenses for the year ended December 31, 1999 increased to
$24.2 million from $17.7 million in the year ended December 31, 1998, an
increase of $6.5 million or 36.5%. Of this increase, approximately $4.1 million
was attributable to the expansion of the travel business, $0.6 million was due
to increases in direct expenses relating to increased check cashing activities,
$0.3 million was due to costs incurred in connection with our attempt to acquire
Mission Savings and Loan and $1.5 million was due to increases in corporate
overhead.
The provision for credit losses in the year ended December 31, 1999
increased to $6.5 million from $6.0 million in the year ended December 31, 1998,
an increase of $0.5 million or 10.6%. This increase was primarily attributable
to increased delinquencies.
Interest expense for the year ended December 31, 1999 of $3.2 million
remained flat with the amount incurred for the year ended December 31, 1998.
Deprecation and amortization for the year ended December 31, 1999
increased to $1.6 million from $1.2 million in the year ended December 31, 1998
an increase of $0.4 million or 35.2%. The increase was primarily due to
increased amortization of goodwill resulting from assumption of leases for
travel stores in 1999.
As a result of the foregoing factors, net income in the year ended
December 31, 1999 increased to $2.6 million compared to $2.3 million in the year
ended December 31, 1998, an increase of $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through cash flow generated
from operations, borrowings under our lines of credit and periodic capital
contributions made by Central Financial.
Net cash provided from operations totaled $10.6 million, $15.5 million
and $13.1 million for the years ended December 31, 2000, 1999 and 1998,
respectively. In 2000, 1999 and 1998 the source of cash primarily consisted of
net operating income after non-cash items. Non-cash items in each of 2000, 1999
and 1998 included depreciation and amortization, loss on disposal of fixed
assets, provision for credit losses and deferred income taxes. Other items
affecting cash flows from operating activities in each of the years included
cash flows from increases (decreases) in notes receivable, prepaid expenses and
other assets, accrued expenses and other current liabilities, and other
intangibles.
Net cash used in investing activities totaled $0.1 million, $9.2 million
and $12.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Net cash used in investing activities in each of the years
consisted of installment contracts and other contract receivables collected
(originated), capital expenditures and the purchase of leasehold interests.
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Net cash used in financing activities totaled $11.2 million and $8.8
million in the years ended December 31, 2000 and 1999, respectively, and net
cash provided by financing activities totaled $3.0 million for the year ended
December 31, 1998. In 2000, net cash used in financing activities consisted of
repayment of notes payable totaling $16.4 million, capital contributions from
Central Financial in the amount of $5.3 and purchase of treasury stock of $0.1
million in 2000. In 1999, net cash used in financing activities consisted of
capital distributions to Central Financial in the amount of $8.1 million and
purchase of treasury stock of $0.7 million. In 1998, net cash provided by
financing activities consisted of capital contributions from Central Financial
in the amount of $3.9 offset by the repayment of long-term debt of $0.9 million.
We require substantial capital to finance our business. Consequently,
our current level of operations and our ability to expand will be affected by
the availability of financing and the terms thereof. Currently, we fund
operations and receivable financing activities with borrowings made by Central
Consumer, our 100% owned subsidiary, under the Line of Credit which expires
August 11, 2003. Central Consumer and all of its significant subsidiaries are
guarantors under the Line of Credit. At December 31, 2000, Central Consumer had
total assets of $59.0 million and stockholders' equity of approximately $33.0
million. Central Consumer has pledged substantially all of its assets, including
its receivables and the stock of all of its significant subsidiaries as
collateral for the amounts it borrows under the Line of Credit. The maximum
amount available under the Line of Credit, as amended, is $35 million (as
amended, subsequent to year end). However, the amount of credit available at any
one time under the Line of Credit is limited to 70% of eligible contracts. As of
December 31, 2000 the total amount available to us was $33.7 million, of which
approximately $24.2 million was outstanding, including letters of credit.
Central Consumer pays commitment fees to the lenders for the unused portion of
the Line of Credit. These commitment fees are equal to 37.5 basis points per
year times the average daily amount by which the maximum amount available under
the Line of Credit exceed the amount we have borrowed under the line.
Interest on amounts outstanding under the Line of Credit is, at the
option of Central Consumer, equal to either (a) 87.5 basis points above the
higher of the prime rate Union Bank of California, N.A. announces or the federal
funds rate plus 50 basis points, or (b) 225 basis points above the interest rate
per annum at which Union Bank of California, N.A., deposits in dollars to prime
banks in the London Eurodollar market. Borrowings under the Line of Credit bore
interest at the average rate of 9.1% in 2000.
The Line of Credit restricts, among other things, Central Consumer's
ability to (1) incur additional indebtedness; (2) pay indebtedness prior to the
date when due; (3) pay dividends, make certain other restricted payments or
consummate certain assets sales; (4) merge or consolidate with any other person;
(5) enter into certain transactions with affiliates; (6) incur indebtedness that
is subordinate in priority and right of payment to amounts outstanding under the
Line of Credit; and, (7) make future acquisitions in excess of an aggregate
amount.
The Line of Credit also contains certain restrictive covenants that
require, among other things, Central Consumer to maintain specific financial
ratios and to satisfy certain financial tests. These include: (a) Interest
Coverage Ratio (as defined in the Line of Credit) as of the end of each quarter
of not less than 1.75 to 1.00 for the period August 11, 2000 to July 31, 2001
and 2.25 to 1.00, thereafter; and, (b) Leverage Ratio (as defined in the Line of
Credit) as of the end of each quarter of no more than 2.00 to 1.00. Central
Consumer is also required to maintain a Tangible Net Worth (as defined in the
Line of Credit) as of the end of each quarter of not less than $23.5 million,
plus an amount equal to 75% of Net Income (as defined in the Line
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of Credit) earned in each quarter (with no deduction for a net loss in a
quarter), plus an amount equal to 75% of the aggregate increases in
stockholders' equity as a result of the sale of any of Central Consumer's
capital stock. The breach of any of these covenants or other terms of the Line
of Credit could result in a default under the Line of Credit, in which event the
lenders could seek to declare all amounts outstanding under the Line of Credit,
together with accrued and unpaid interest, to be immediately due and payable. At
December 31, 2000, Central Consumer was in compliance with the financial ratios
and tests.
Based on our current business plan, we expect our existing capital
resources will adequately satisfy our long-term working capital requirements
through the period of our Line of Credit which expires August 11, 2003. Future
working capital requirements, however, depend on many factors, including our
ability to execute on our business plan.
In addition, our inability at any time to renew or replace our Line of
Credit or other senior credit facilities on acceptable terms could have a
material adverse effect on our results of operations and financial condition.
See " - Business Considerations and Certain Factors that May Affect Future
Results of Operations and Stock Price - Restrictions Imposed by the Line of
Credit," and " - Business Considerations and Certain Factors that May Affect
Future Results of Operations and Stock Price - Need for Senior Credit Facility."
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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-Deferrral 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.
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UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial data for the years
ended December 31, 2000 and 1999:
2000
-----------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
-------- --------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue $8,986 $9,725 $9,392 $ 9,556
Income (loss) before provision
(benefit) for income taxes (4,216) (1,165) 30 (9)
Net income (loss) (2,735) (700) 18 (5)
Pro forma net income (loss)
per common share:
Basic $(0.38) $(0.10) $ -- $ --
Diluted $(0.38) $(0.10) $ -- $ --
1999
-----------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
-------- --------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue $10,398 $10,855 $9,898 $8,751
Income (loss) before provision
(benefit) for income taxes (366) 1,731 1,576 1,457
Net income (loss) (217) 1,037 945 874
Pro forma net income (loss)
per common share:
Basic $(0.03) $ 0.14 $0.13 $0.12
Diluted $(0.03) $ 0.14 $0.13 $0.12
The following items summarize the material and unusual items that impacted the
2000 and 1999 quarterly results of operations:
- - In the fourth quarter of 2000, the Company made a decision to replace its
computer system and recorded a charge in the amount of $1.4 million to
buyout the old computer system lease and write-off certain software costs.
- - In September 2000, the Company decided to reduce the number of Kmart
locations in which we had our cash dispensing machines and to close 6 check
cashing locations which were not performing satisfactorily, and recorded a
charge of approximately $0.8 million, representing the write-off of
leasehold improvements, fixed assets and future discounted rent at these
locations.
- - In July 2000, in response to changing market conditions, the Company
curtailed its travel internet activities including, reducing staff levels,
advertising and other related costs, and we wrote-off approximately $0.2
million in process software development costs which we decided not to
complete and recorded severance charges of approximately $0.3 million.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk management discussion and the estimated amounts generated from
the analysis that follows are forward-looking statements of interest rate risk
assuming certain adverse market conditions occur. Actual results in the future
may differ materially from these projected results due to changes in our debt
mix and developments in the global financial markets. The analytical methods we
use to assess and mitigate these risks should not be considered projections of
future events or operating performances.
We are exposed to interest rate risk in the form of variable interest
rates on the Line of Credit held by our wholly owned subsidiary. For the year
ended December 31, 2000, 1999 and 1998, the average interest rate charged on the
Company's lines of credit, which were $23.6 million at December 31, 2000 and
$40.0 million at December 31, 1999 and 1998, was 9.1%, 8.8% and 7.7%,
respectively.
For an immediate 1.0% increase in interest rates, projected after-tax
earning would decline approximately $0.1 million in 2001 and $0.1 million in
2002. An immediate 1.0% rise in interest rates is a hypothetical rate scenario
used to estimate risk, and does not currently represent management's
expectations of future market developments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K" for our financial statements, and the notes thereto, and the financial
statement schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
35
38
PART III
The Securities and Exchange Commission (the "SEC") allows us to
"incorporate by reference" the information we file with them, which means that
we can disclose important information to you by referring you to those
documents. The information incorporated by reference is considered to be part of
this Annual Report. We incorporate by reference in Items 10 to 13 below certain
sections of our definitive proxy statement, to be filed pursuant to Regulation
14A with the SEC within 120 days after December 31, 2000.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate by reference in this Annual Report the information
required by this Item 10 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 Hispanic Express 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 11. EXECUTIVE COMPENSATION
We incorporate by reference in this Annual Report the information
required by this Item 11 contained in the sections entitled "Information About
Directors and Executive Officers" and "Information About Hispanic Express 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 12. 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
CFAC 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate herein by reference in this Annual Report the information
required by this Item 13 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.
36
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS. Reference is made to the Index to Consolidated
Financial Statements on page F-1 for a list of financial statements
filed as part of this report.
FINANCIAL STATEMENT SCHEDULES. All financial statement schedules, except
for Schedule II, are omitted because of the absence of the conditions
under which they are required to be provided or because the required
information is included in the financial statements listed above and/or
related notes.
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.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation, as amended*
3.2 Bylaws*
4 Form of specimen common stock certificate*
10.1 Hispanic Express, Inc. 2000 Stock Option Plan*
10.2 Hispanic Express, Inc. Supplemental Executive Retirement Plan*
10.3 Hispanic Express, Inc. Executive Deferred Salary and Bonus
Plan*
10.4 Employment Agreement dated September 6, 2000 between Hispanic
Express, Inc. and Gary M. Cypres*
10.5 Contribution Agreement dated September 6, 2000 among Central
Financial Acceptance Corporation and Hispanic Express, Inc.*
10.6 Operating Agreement dated September 6, 2000 between Hispanic
Express, Inc. and Banner Central Finance Company*
10.7 Tax Sharing Agreement dated September 6, 2000 among Central
Financial Acceptance Corporation, Hispanic Express, Inc. and
Banner Central Finance Company*
10.8 [Reserved]
- ------------------
* Previously filed in Registration Statement Form 10 filed on October 11,
2000.
37
40
10.9 Service Mark License Agreement dated September 6, 2000 among
Banner's Central Electric, Inc. and Hispanic Express, Inc.*
10.10 Indemnification Agreement dated September 6, 2000 between
Hispanic Express, Inc. and certain directors and/or officers*
10.11 Credit Agreement dated as of August 11, 2000 among Central
Consumer Finance Company, the named Lenders and Union Bank of
California, N.A. as Agent*
10.12 Pledge Agreement dated as of August 11, 2000 among Central
Financial Acceptance Corporation and Union Bank of California,
N.A. as Agent*
10.13 Guaranty dated as of August 11, 2000 among Central Check
Cashing, Inc., Central Consumer Company of Nevada, and Union
Bank of California, N.A. as Agent*
10.14 Security Agreement dated as of August 11, 2000 among Central
Consumer Finance Company, Central Check Cashing, Inc., Central
Consumer Company of Nevada and Union Bank of California, N.A.
as Agent*
11 Statement of Computation of Earnings Per Share (this exhibit
is omitted because the information is shown in the financial
statements and the notes thereto)*
21 List of Subsidiaries of Hispanic Express, Inc.*
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 2000.
(c) EXHIBITS
Reference is made to the Exhibit Index and exhibits filed as part of
this report.
(d) ADDITIONAL FINANCIAL STATEMENTS
Not applicable.
- --------------------
* Previously filed in Registration Statement Form 10 filed on October 11,
2000.
38
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 30th day of
March 2001.
HISPANIC EXPRESS, INC.
By: /s/ Gary M. Cypres
-------------------------------------
Gary M. Cypres
Chairman of the Board,
President and Chief Executive Officer
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Gary M. Cypres Chairman of the Board of Directors, March 30, 2001
- --------------------------------------- President and Chief Executive Officer
Gary M. Cypres
/s/ Howard Weitzman Vice President and Chief Financial Officer March 30, 2001
- ---------------------------------------
Howard Weitzman
/s/ Salvatore J. Caltagirone Director March 30, 2001
- ---------------------------------------
Salvatore J. Caltagirone
/s/ Jose de Jesus Legaspi Director March 30, 2001
- ---------------------------------------
Jose de Jesus Legaspi
/s/ William R. Sweet Director March 30, 2001
- ---------------------------------------
William R. Sweet
39
42
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation, as amended*
3.2 Bylaws*
4 Form of specimen common stock certificate*
10.1 Hispanic Express, Inc. 2000 Stock Option Plan*
10.2 Hispanic Express, Inc. Supplemental Executive Retirement Plan*
10.3 Hispanic Express, Inc. Executive Deferred Salary and Bonus
Plan*
10.4 Employment Agreement dated September 6, 2000 between Hispanic
Express, Inc. and Gary M. Cypres*
10.5 Contribution Agreement dated September 6, 2000 among Central
Financial Acceptance Corporation and Hispanic Express, Inc.*
10.6 Operating Agreement dated September 6, 2000 between Hispanic
Express, Inc. and Banner Central Finance Company*
10.7 Tax Sharing Agreement dated September 6, 2000 among Central
Financial Acceptance Corporation, Hispanic Express, Inc. and
Banner Central Finance Company*
10.8 [Reserved]
10.9 Service Mark License Agreement dated September 6, 2000 among
Banner's Central Electric, Inc. and Hispanic Express, Inc.*
10.10 Indemnification Agreement dated September 6, 2000 between
Hispanic Express, Inc. and certain directors and/or officers*
10.11 Credit Agreement dated as of August 11, 2000 among Central
Consumer Finance Company, the named Lenders and Union Bank of
California, N.A. as Agent*
10.12 Pledge Agreement dated as of August 11, 2000 among Central
Financial Acceptance Corporation and Union Bank of California,
N.A. as Agent*
10.13 Guaranty dated as of August 11, 2000 among Central Check
Cashing, Inc., Central Consumer Company of Nevada, and Union
Bank of California, N.A. as Agent*
- -----------------
* Previously filed in Registration Statement Form 10 filed on October 11,
2000.
40
43
10.14 Security Agreement dated as of August 11, 2000 among Central
Consumer Finance Company, Central Check Cashing, Inc., Central
Consumer Company of Nevada and Union Bank of California, N.A.
as Agent*
11 Statement of Computation of Earnings Per Share (this exhibit
is omitted because the information is shown in the financial
statements and the notes thereto)*
21 List of Subsidiaries of Hispanic Express, Inc.*
(b) REPORTS ON FORM 8-K
(c) EXHIBITS
Reference is made to the Exhibit Index and exhibits filed as part of
this report.
(d) ADDITIONAL FINANCIAL STATEMENTS
Not applicable.
- ---------------------
* Previously filed in Registration Statement Form 10 filed on October 11,
2000.
41
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants...............................................................F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets..........................................................................F-3
Consolidated Statements of Income....................................................................F-4
Consolidated Statements of Stockholders' Equity......................................................F-5
Consolidated Statements of Cash Flows................................................................F-6
Notes to Consolidated Financial Statements...........................................................F-7
F-1
45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Hispanic Express, Inc.:
We have audited the accompanying consolidated balance sheets of Hispanic
Express, Inc., a Delaware corporation, and subsidiaries (the "Company") as of
December 31, 2000 and 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three 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 Hispanic Express,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three 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
F-2
46
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------------
2000 1999
----------- -----------
ASSETS
Cash $ 4,528,000 $ 5,208,000
Finance receivables, net 43,465,000 54,962,000
Prepaid expenses and other current assets 950,000 1,148,000
Note receivable from affiliate -- 890,000
Deferred income taxes 946,000 1,501,000
Income taxes receivable 3,903,000 1,400,000
Property and equipment, net 7,935,000 8,413,000
Intangible and other assets, net 12,489,000 12,668,000
----------- -----------
TOTAL ASSETS $74,216,000 $86,190,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $23,600,000 $40,000,000
Accrued expenses and other current liabilities 8,522,000 7,347,000
Note payable to related party 1,213,000 --
Accounts payable to related party 241,000 --
----------- -----------
TOTAL LIABILITIES 33,576,000 47,347,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Group equity 40,640,000 38,843,000
----------- -----------
Total stockholders' equity 40,640,000 38,843,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $74,216,000 $86,190,000
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
47
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998
------------ ------------ ------------
REVENUES
Interest income
Small loan portfolio $ 11,867,000 $ 13,584,000 $ 13,792,000
------------ ------------ ------------
Travel finance portfolio 1,161,000 1,163,000 1,218,000
------------ ------------ ------------
Total interest income 13,028,000 14,747,000 15,010,000
Travel services, net 14,872,000 14,270,000 8,961,000
Other income 9,759,000 10,885,000 7,954,000
------------ ------------ ------------
Total revenues 37,659,000 39,902,000 31,925,000
------------ ------------ ------------
COSTS AND EXPENSES
Operating expenses 28,857,000 24,215,000 17,738,000
Provision for credit losses 9,406,000 6,531,000 5,952,000
Interest expense 2,930,000 3,202,000 3,212,000
Depreciation and amortization expense 1,826,000 1,556,000 1,151,000
------------ ------------ ------------
Total costs and expenses 43,019,000 35,504,000 28,053,000
------------ ------------ ------------
Income (loss) before provision for income
taxes (5,360,000) 4,398,000 3,872,000
Provision (benefit) for income taxes (1,938,000) 1,759,000 1,549,000
------------ ------------ ------------
Net income (loss) $ (3,422,000) $ 2,639,000 $ 2,323,000
============ ============ ============
Pro forma net loss per common share:
(unaudited):
Basic $ (0.48)
Diluted $ (0.48)
Pro forma shares used in calculating pro
forma net loss per common share:
Basic 7,166,000
Diluted 7,166,000
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
48
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
GROUP EQUITY
-------------
Balance, December 31, 1997 $ 38,864,000
Capital contribution from related party 3,866,000
Net income for the year ended December 31, 1998 2,323,000
------------
Balance, December 31, 1998 45,053,000
Capital distribution to related party (8,143,000)
Retirement of treasury stock of predecessor company (706,000)
Net income for the year ended December 31, 1999 2,639,000
------------
Balance, December 31, 1999 38,843,000
Capital contribution from related party 5,266,000
Retirement of treasury stock of predecessor company (47,000)
Net loss for the year ended December 31, 2000 (3,422,000)
------------
Balance, December 31, 2000 $ 40,640,000
============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
49
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) $ (3,422,000) $ 2,639,000 $ 2,323,000
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Loss on disposal of fixed assets 1,725,000 -- --
Depreciation and amortization 1,826,000 1,556,000 1,151,000
Provision for credit losses 9,406,000 6,531,000 5,952,000
Deferred income taxes 555,000 382,000 1,209,000
Accounts payable and note receivable from 2,344,000 1,588,000 2,514,000
affiliates, net
Changes in assets and liabilities:
Prepaid expenses and other assets (2,305,000) 617,000 (633,000)
Restricted cash -- 1,195,000 (265,000)
Accrued expenses and other
current liabilities 1,175,000 942,000 661,000
Other intangible assets (690,000) -- 184,000
------------ ------------ ------------
Net cash provided by operating activities 10,614,000 15,450,000 13,096,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other
contract receivables
(originated & acquired) collected,
net of recoveries 2,091,000 (878,000) (11,189,000)
Capital expenditures (2,204,000) (2,920,000) (1,449,000)
Purchase of leasehold interests and other -- (5,442,000) --
------------ ------------ ------------
Net cash used in investing activities (113,000) (9,240,000) (12,638,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt -- -- (850,000)
Repayment of notes payable (16,400,000) -- --
Capital contribution from
(distribution to) related party 5,266,000 (8,143,000) 3,866,000
Purchase of treasury stock of predecessor company (47,000) (706,000) --
------------ ------------ ------------
Net cash provided by (used in)
financing activities (11,181,000) (8,849,000) 3,016,000
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (680,000) (2,639,000) 2,844,000
CASH, BEGINNING OF PERIOD 5,208,000 7,847,000 5,003,000
------------ ------------ ------------
CASH, END OF PERIOD $ 4,528,000 $ 5,208,000 $ 7,847,000
============ ============ ============
CASH PAID DURING THE YEAR FOR:
INTEREST $ 3,132,000 $ 3,362,000 $ 3,201,000
INCOME TAXES $ 5,000 $ 2,301,000 $ 1,025,000
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
50
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation - Hispanic Express, Inc. ("Hispanic Express" 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, Hispanic Express and Banner Central Finance Company
("Banner Central Finance"). 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 Central Financial's stockholders 100% of
the outstanding Common Stock of Hispanic Express and Banner Central Finance.
Pursuant to the Plan, Central Financial contributed to Hispanic Express its
investment in subsidiaries, which are engaged in the small loan, travel finance
and travel services businesses, and contributed to Banner Central Finance, its
businesses engaged in selling and financing of automobile insurance, its
consumer products receivable portfolio and its mortgage business.
In addition, pursuant to the Plan, Hispanic Express and Banner Central
Finance entered into certain agreements for the purpose of defining their
ongoing relationship (See Note 9). The agreements entered into contain
provisions for the allocation of certain costs and expenses. Management of
Hispanic Express believes that such agreements provide for reasonable allocation
of costs and expenses between the parties.
The formation of Hispanic Express 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 Hispanic
Express and its subsidiaries, as if they had been consolidated at the beginning
of the periods presented. Hispanic Express has been allocated $23,600,000 of
notes payable outstanding for the year ended December 31, 2000 and $40,000,000
for each of the years ended December 31, 1999 and 1998. (See Note 7).
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) provides unsecured small loans to
its customers; (ii) provides travel services; (iii) originates and services
consumer finance receivables generated by the Company's customers for the
purchase of travel services sold by the Company; (iv) provides check cashing and
money transfer services; and, (v) provides insurance products. The majority of
the Company's business is focused in Southern California and the Company
experiences the highest demand for its financial products and services between
October and December and the second and fourth quarter for its travel services.
F-7
51
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Hispanic Express and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Finance Receivables - Finance receivables include receivables that arise
from unsecured, small loans, (referred to herein as the "Small Loan Portfolio")
and installment contracts that are originated when customers buy travel tickets,
(referred to herein as the "Travel Finance Portfolio"). Administrative fees are
charged on certain small loan contracts. The annual percentage rate varies
depending on the length of the contract and the amount of administrative fees.
The Small Loan Portfolio is comprised of closed-end loans that provide for
scheduled monthly payments generally not to exceed 12 months and revolver type
loans (referred to herein as "Efectiva") that require minimum monthly payments
equal to 5% of the outstanding balance. The Travel Finance Portfolio is
comprised of loans that provide for scheduled monthly payments generally not to
exceed 12 months.
The allowance for credit losses is provided for loans based on previous
experience or when events giving rise to the credit losses are estimated to have
occurred. The Company's portfolios are comprised of 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 inherent 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 150 days past due. In the
fourth quarter of 2000, the Company's loan business was negatively impacted by a
bus strike in the Los Angeles area which lasted approximately five weeks. As a
result of the bus strike, the Company's delinquencies increased and in the
fourth quarter of 2000, the Company tightened its credit guidelines to reflect
the increasing delinquency trends and a deteriorating economic climate. As a
result of the bus strike and deteriorating economic conditions in the market the
Company serves, its delinquencies increased and in December 2000, the Company
reevaluated its current charge-off policies and charged-off accounts that were
past due at December 31, 2000 and which 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 portfolios, adverse
situations that may affect the borrower's ability to repay and current economic
conditions. The Company's 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,
F-8
52
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 at the time the payment is
received. Recoveries for the years ended December 31, 2000, 1999, and 1998
amounted to $480,000, $497,000, and $364,000, 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 effective interest method.
Property and Equipment - Property and equipment are carried at cost.
Long-lived property is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such an asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long Lived Assets." If the
carrying amount of the asset exceeds the estimated undiscounted future cash
flows to be generated by the asset, an impairment loss would be recorded to
reduce the asset's carrying value to its estimated fair value.
Depreciation and amortization are computed primarily using the
straight-line method over the estimated lives of the assets, as follows:
Furniture, equipment and software .................... 5 to 10 years
Leasehold improvements ............................... Life of lease
Building and improvements ............................ 7 to 39 years
Intangible and Other Assets - Intangible and other assets primarily
consists of goodwill which arose in connection with the Company's purchase of
leasehold interests used for travel services and deferred line of credit costs
related to the Company's Line of Credit (See Note 7). Goodwill is being
amortized using the straight-line method over 30 years. The deferred line of
credit costs are amortized over the 3 year life of the Line of Credit. The
recoverability of goodwill 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 in the consolidated financial statements for the periods
presented.
F-9
53
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Recognition - Interest income on closed-end loans in the Small
Loan Portfolio and the Travel Finance Portfolio is deferred upon origination of
a loan (recorded as an off-set to finance receivables - See Note 4) and
recognized over the lives of the contracts using a method that approximates the
interest method. Administrative fees are deferred and recognized over the
estimated life of the Small Loan Portfolio using a method that approximates the
interest method. Membership fees arising from the Efectiva revolver loans are
deferred and recognized using the straight line method. Administrative fees and
membership fees are included in other income in the consolidated statements of
income. Premiums and commissions for credit life insurance are deferred and
recognized as revenue using the interest method. Premiums and commissions for
credit accident and health insurance are recognized over the terms of the
contracts and are included in other income in the consolidated statements of
income.
Other income consists of:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Late charges $ 2,168,000 $ 2,142,000 $ 249,000
Membership and administrative fees 3,437,000 3,870,000 3,433,000
Insurance products and other 4,154,000 4,873,000 4,272,000
----------- ----------- -----------
$ 9,759,000 $10,885,000 $ 7,954,000
=========== =========== ===========
Travel Services - Revenues and commissions from the sale of travel
tickets and services are recognized when earned, which is at the time the travel
reservation is ticketed. Such revenues are reported net of an allowance for
cancellations and refunds. Generally, ticket sales are nonrefundable and
cancellations and refunds are not significant. Volume bonus and override
commissions are recognized at the end of each monthly or quarterly measurement
period once the specified target has been achieved.
Insurance Liabilities -- The liability for losses and loss-adjustment
expenses, included in accrued expenses and other current liabilities, is based
on an amount determined from loss reports and individual cases and an amount,
based on past experience, for losses incurred but not reported. Such liabilities
are based on estimates and, while management believes that the amount is
adequate, the ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for establishing the
resulting liability are continually reviewed, and any adjustments are reflected
in earnings in the current period.
Income Taxes - The Company, Central Financial and Banner Central Finance
have entered a Tax Sharing Agreement (See Note 9). 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 consolidated 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
management's opinion the deferred tax asset is realizable.
F-10
54
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1999 and 1998 were $1,613,000, $1,571,000, and $1,109,000, 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 in excess of insured limits. The Company's small
loan business activity is with low-income customers located primarily in the
greater Los Angeles area. A significant portion of the Company's 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 be repaid is totally dependent
upon the general financial strength of the Company's borrowers. 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 $1,500.
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 generally stable rates of interest currently being charged in
comparison to the rates reflected in the existing portfolios. The carrying value
of the Company's notes payable approximates their fair value, as these notes
represent a series of short-term notes at floating interest rates not to exceed
interest of 8.75% (LIBOR) for amounts outstanding of $40 million or less. The
Company's management believes that the fair value of the Company's financial
instruments approximates their carrying values as of December 31, 2000 and 1999.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements - In 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.
F-11
55
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
3. PURCHASE OF LEASEHOLD INTERESTS
During 1999, the Company expanded its travel business through the
purchase and assumption of 38 leases in retail locations located primarily in
Southern and Central California and Dallas/Ft. Worth, Texas that were operating
travel stores. The aggregate purchase price for the leasehold interests was
approximately $5.0 million and has been accounted for under the purchase method
of accounting, and the results of these new travel offices have been included in
operations since the date the Company assumed the leases.
F-12
56
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCE RECEIVABLES
Finance receivables consist of:
DECEMBER 31,
-------------------------------
2000 1999
----------- -----------
Gross finance receivables:
Small loan portfolio $43,157,000 $56,411,000
Travel finance portfolio 4,855,000 4,929,000
----------- -----------
48,012,000 61,340,000
----------- -----------
Less:
Deferred interest 1,031,000 1,114,000
Allowance for credit losses 1,613,000 2,981,000
Deferred administrative, Efectiva
membership and transaction fees and insurance revenues 1,581,000 1,865,000
Credit insurance and reserves for
policyholder's benefits 322,000 418,000
----------- -----------
4,547,000 6,378,000
----------- -----------
Finance receivables, net $43,465,000 $54,962,000
=========== ===========
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:
DECEMBER 31,
-------------------------------
2000 1999
----------- -----------
Small loan portfolio:
Past due 31 days plus $ 824,000 $ 2,979,000
=========== ===========
Travel finance portfolio:
Past due 31 days plus $ 35,000 $ 134,000
=========== ===========
The allowance for credit losses includes the following:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Allowance for credit losses, beginning of the year $ 2,981,000 $ 3,059,000 $ 5,787,000
Provision for credit losses 9,406,000 6,531,000 5,952,000
Charge-offs, net of recoveries (10,774,000) (6,609,000) (8,680,000)
------------ ------------ ------------
Allowance for credit losses, end of year $ 1,613,000 $ 2,981,000 $ 3,059,000
============ ============ ============
F-13
57
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT
Property and equipment, net consists of:
DECEMBER 31,
-------------------------------
2000 1999
----------- -----------
Land $ 1,936,000 $ 1,568,000
Construction in progress -- 1,937,000
Building and improvements 4,125,000 1,441,000
Furniture, equipment and software 3,726,000 5,271,000
----------- -----------
9,787,000 10,217,000
Less: accumulated depreciation 1,852,000 1,804,000
----------- -----------
$ 7,935,000 $ 8,413,000
=========== ===========
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets, net consists of:
DECEMBER 31,
-------------------------------
2000 1999
----------- -----------
Goodwill $13,533,000 $13,533,000
Deferred loan costs on line of credit 564,000 764,000
Non-compete agreements 408,000 408,000
Other 3,000 3,000
----------- -----------
14,508,000 14,708,000
Less: accumulated amortization 2,019,000 2,040,000
----------- -----------
$12,489,000 $12,668,000
=========== ===========
F-14
58
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE
Central Financial entered into a credit agreement with several banks and
Wells Fargo Bank National Association, as Agent (the "Wells Fargo Line of
Credit"), on June 13, 1997 that provided for the issuance of notes up to
$100,000,000 subject to an allowable borrowing base. The Wells Fargo Line of
Credit was repaid on August 11, 2000. Borrowings under the facility bore
interest at a weighted average rate of 7.7%, and 8.0% in 1999 and 1998. Notes
payable allocated to the Company were $40,000,000 at December 31, 1999, and
1998. (See Note 1). Central Financial had Letters of Credit outstanding for
various purposes in the amount of $1,800,000 at December 31, 1999.
On August 11, 2000, Central Consumer Finance Company ("Central
Consumer"), a wholly owned subsidiary of the Company entered into a new credit
agreement with several banks and Union Bank of California, N. A. as Agent
("Union Bank Line of Credit) that provided for the issuance of notes up to
$35,000,000 as amended subsequent to year end. Borrowings under the facility
bore interest at a weighted average rate of 9.1% in 2000. Central Financial had
Letters of Credit outstanding for various purposes in the amount of $550,000 at
December 31, 2000. Borrowings under the Union Bank Line of Credit is limited to
70% of eligible receivable contracts as defined in the credit agreement. The
total amount of available credit under the facility was limited to $33.7 million
at December 31, 2000, of which $24.2 million was outstanding, including letters
of credit. Substantially all of the assets and stock of Central Consumer has
been pledged as collateral for amounts borrowed under the Union Bank Line of
Credit. The Union Bank Line of Credit requires, among other things, that Central
Consumer maintain specific financial ratios and satisfy certain financial
covenants and restricts, among other things, Central Consumer's ability to incur
additional indebtedness, pay dividends, make certain restricted payments or
consummate certain asset sales. At December 31, 2000, Central Consumer and its
subsidiaries had total assets of approximately $59.0 million and stockholders'
equity of approximately $33.0 million. Interest on the Union Bank Line of Credit
is determined at the Central Consumer's option, equal to either, (a) 87.5 basis
points above the higher (x) of the prime rate Union Bank of California announces
or (y) the federal funds rate plus 50 basis points or (b) 225 basis points above
the interest rate per annum at which Union Bank of California offers deposits in
dollars to prime banks in the London Eurodollar market.
Central Financial is required to pay a commitment fee of 0.375% per
annum for unused portions of its lines of credit. These fees totaled $141,000,
$246,000 and $251,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. These amounts have been allocated to the Company and are included
in operating expenses in the consolidated statements of income for the periods
presented.
8. INCOME TAXES
The Company, Central Financial and Banner Central Finance have entered a
Tax Sharing Agreement (See Note 9). The income tax provisions 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.
F-15
59
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision (benefit) for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998
----------- ----------- -----------
CURRENT:
Federal $(2,493,000) $ 1,114,000 $ 259,000
State -- 263,000 81,000
----------- ----------- -----------
(2,493,000) 1,377,000 340,000
----------- ----------- -----------
DEFERRED:
Federal 472,000 294,000 970,000
State 83,000 88,000 239,000
----------- ----------- -----------
555,000 382,000 1,209,000
----------- ----------- -----------
Provision (benefit) for income taxes $(1,938,000) $ 1,759,000 $ 1,549,000
=========== =========== ===========
A reconciliation of the provision (benefit) for income taxes to the
statutory rate is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
----- ---- ----
Federal income taxes at statutory rate (35.0)% 35.0% 35.0%
State franchise taxes, net of federal benefit (1.7)% 4.5% 4.5%
Amortization of goodwill 0.3% 0.3% 0.3%
Other 0.2% 0.2% 0.2%
----- ---- ----
(36.2)% 40.0% 40.0%
===== ==== ====
F-16
60
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences giving rise to the deferred
income tax assets and liabilities are as follows:
DECEMBER 31,
------------------------------
2000 1999
----------- -----------
Deferred tax assets:
Allowance for credit losses $ 691,000 $ 1,244,000
Accrued liabilities 719,000 554,000
Deferred revenues 764,000 869,000
State net operating loss carryforward 343,000 --
Other 182,000 414,000
---------- ----------
Total deferred tax assets 2,699,000 3,081,000
---------- ----------
Deferred tax liabilities:
Fixed assets (621,000) (713,000)
Intangible assets (907,000) (826,000)
State taxes (175,000) (10,000)
Other (50,000) (31,000)
---------- ----------
Total deferred tax liabilities (1,753,000) (1,580,000)
---------- ----------
Net deferred tax asset $ 946,000 $1,501,000
========== ==========
At December 31, 2000, state net operating losses carryforwards of
approximately $3,900,000 are available to offset future state taxable income
until December 31, 2010.
9. RELATED PARTY TRANSACTIONS
In connection with its formation, the Company, Central Financial and
Banner Central Finance entered into certain agreements; including, the Operating
Agreement and the Tax Sharing Agreement, for defining their ongoing
relationships.
The Operating Agreement provides, among other things, that the Company
is obligated to provide to Banner Central Finance, and Banner Central Finance is
obligated to utilize, certain services, including receivable servicing and
collection and payment processing, accounting, management information systems
and employee benefits. The Operating Agreement also provides for the Company to
guarantee up to $4,000,000 of bank or similar financing of Banner Central
Finance, pursuant to certain conditions. If such services involve an allocation
of expenses, such allocation shall be made on a reasonable basis. To the extent
that such services directly relate to the finance portion of the consumer
products business contributed by Central Financial to Banner Central Finance, or
to the extent that other costs are incurred by the Company or its subsidiaries
that directly relate to Banner Central Finance, Banner Central Finance is
obligated to pay the Company and its subsidiaries the actual cost of providing
such services or incurring such costs. The Operating Agreement continues until
terminated by either the Company or Banner Central Finance upon one year's prior
written notice. Termination may be made on a service-by-service basis or in
total. Such allocated expenses to Banner Central Finance totaled $3,150,000,
$4,373,000 and $5,529,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company, Central Financial and Banner Central Finance have 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
F-17
61
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated federal income tax returns, the Company will indemnify Central
Financial for all federal, state and other income tax liabilities of the Company
for such periods. The date of the consummation of the Plan will be the last day
on which the Company will be required to be included in Central Financial's
consolidated federal income tax returns.
In connection with the adoption of the Plan, the Company entered into a
new lease with BCE Properties II, Inc., an affiliated company, for its executive
and administrative offices. The new lease is for a period of 15 years with
annual rent of $300,000 per year subject to CPI increases. Additionally, the
Company entered into a 15 year agreement to lease approximately 30,000 square
feet of retail space to Banner's Central Electric, Inc., an affiliated company,
with annual rent of $200,000 per year subject to CPI increases.
For the year ended December 31, 1998, the Company received capital
contributions from its parent company of $3,866,000 respectively, which was used
to support receivable growth, fund capital assets, acquire leasehold interests
and build cash reserves. For the twelve months ended December 31, 1999, the
Company made a capital distribution to its parent company of $8,143,000. For the
year ended December 31, 2000, the Company received capital contributions from
its parent company of $5,266,000, which was used primarily to repay notes
payable. At December 31, 2000, the Company had a note payable in the amount of
$1,213,000 to Banner Central Finance, which bears interest at 7.5% per annum and
is payable on January 2, 2004.
10. 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 Hispanic Express under the 2000 Plan. Options to purchase 797,000 shares of
Common Stock of Hispanic Express 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 consummation
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,
303,000 shares of Common Stock will 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.
F-18
62
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
None of the options granted have been included in the computation of
diluted earnings per share reflected in the Consolidated Statements of Income
since it was anti-dilutive. Upon issuance of the options in future periods
earnings per share may be diluted to the extent that the average market price of
the Company's stock exceeds the option exercise price.
11. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
During June 1996, Central Financial adopted a Supplemental Executive
Retirement Plan (the "SERP Plan") which provides supplemental retirement
benefits to certain key management employees. In connection with the Plan, on
February 28, 2001, the Company assumed all liabilities of the SERP Plan. To vest
in the SERP Plan, an employee must have at least ten years of service with the
Company or its predecessor, including five years subsequent to the adoption of
the SERP Plan. The unfunded SERP Plan expense for the years ended December 31,
2000, 1999 and 1998, amounted to approximately $277,000, $77,000 and $77,000,
respectively.
12. EXECUTIVE DEFERRED SALARY AND BONUS PLAN
On February 28, 2001, in connection with the Plan, the Company adopted
the Executive Deferred Salary and Bonus Plan, or the EDP, which covers the
executive officers and certain other executives elected to participate in the
EDP. Pursuant to the EDP, a participant may elect to defer up to 50% of the
participant's base salary and up to 100% of any bonus awarded pursuant to the
Executive Incentive Bonus Program. Elections under the EDP to defer base salary
and bonus are made annually prior to the commencement of each year. Executives
electing to participate in the program may invest deferred amounts in either of
two accounts: (1) which earns interest based upon the prime rate; or (2) which
mirrors the performance of the Company's common stock price. Amounts deferred
are generally payable in a lump sum within 30 days after the participant's
termination of employment with the Company for any reason. The EDP is
administrated by the Compensation Committee of the Board of Directors. The
Chairman of the Board of Directors elected to defer 50% of his base salary for
the year ended December 31, 2001 and elected to invest in an account which
mirrors the performance of the Company's common stock.
13. SEGMENT INFORMATION
The Company has identified three reporting segments in accordance with
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", the Consumer Finance Business, Travel Business and Corporate
Overhead. The factors for determining the reportable segments were based on the
distinct nature of their operations. The Consumer Finance Business and Travel
Business are managed as separate business units because each requires and is
responsible for executing a unique business strategy. The Consumer Finance
Business includes the Small Loan Portfolio, Travel Finance Portfolio and
insurance and other products provided to customers of the Consumer Finance
Business. The Company's Travel Business is comprised of the retail travel stores
and travel internet business. Corporate Overhead is comprised of unallocated
corporate overhead expenses. Substantially all of the operations of the above
businesses are concentrated in California.
F-19
63
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accounting policies of these reportable segments are the same as
those described in the summary of significant accounting policies. Information
about these segments as of and for the years ended December 31, 2000, 1999, and
1998 is as follows:
CONSUMER CORPORATE
FINANCE TRAVEL OVERHEAD TOTAL
------------ ------------ ------------- ------------
For the Year Ended December 31, 2000:
Interest income $ 13,028,000 $ -- $ -- $ 13,028,000
Other income 9,759,000 14,872,000 -- 24,631,000
------------ ------------ ------------- ------------
Total revenue $ 22,787,000 $ 14,872,000 $ -- $ 37,659,000
============ ============ ============= ============
Pre-tax segment earnings (loss) $ 522,000 $ 135,000 $ (6,017,000) $ (5,360,000)
Segment assets $ 62,317,000 $ 12,255,000 $ -- $ 74,572,000
For the Year Ended December 31, 1999:
Interest income $ 14,747,000 $ -- $ -- $ 14,747,000
Other income 10,885,000 14,270,000 -- 25,155,000
------------ ------------ ------------- ------------
Total revenue $ 25,632,000 $ 14,270,000 $ -- $ 39,902,000
============ ============ ============= ============
Pre-tax segment earnings (loss) $ 8,549,000 $ 2,868,000 $ (7,019,000) $ 4,398,000
Segment assets $ 73,824,000 $ 12,366,000 $ -- $ 86,190,000
For the Year Ended December 31, 1998:
Interest income $ 15,010,000 $ -- $ -- $ 15,010,000
Other income 7,954,000 8,961,000 -- 16,915,000
------------ ------------ ------------- ------------
Total revenue $ 22,964,000 $ 8,961,000 $ -- $ 31,925,000
============ ============ ============= ============
Pre-tax segment earnings (loss) $ 8,856,000 $ 1,596,000 $ (6,580,000) $ 3,872,000
Segment assets $ 82,922,000 $ 8,536,000 $ -- $ 91,458,000
14. COMMITMENTS AND CONTINGENCIES
The Company leases computer equipment under operating leases which
expire at various times through 2002. The Company's finance and travel centers
are leased under noncancelable operating leases that generally have two to
five-year terms with options to renew. The Company has a headquarters lease with
an affiliate, see Note 9, for a period of 15 years. The aggregate minimum lease
commitments under these leases are as follows:
YEARS ENDED DECEMBER 31,
2001 $2,397,000
2002 1,634,000
2003 938,000
2004 500,000
2005 346,000
Thereafter 2,925,000
----------
$8,740,000
==========
F-20
64
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate rental expense for the years ended December 31, 2000, 1999 and
1998 were $3,559,000, $3,141,000, and $2,268,000, respectively.
Concurrent with the Plan, the Company entered into a new employment
agreement with the Chairman of the Board of Directors for a period of five
years, expiring December 31, 2005, at a base salary of $325,000 per year for the
period from January 1, 2001 to December 31, 2001, and then receive yearly
minimum increases of $25,000 per annum with eligibility to participate in the
Company's executive compensation plans. Any changes to the agreement require
approval of the Board of Directors.
The Operating Agreement, as described in Note 9, provides that, the
Company will guarantee, subject to certain limitations, up to $4 million of bank
or similar financing which Banner Central Finance may borrow. At December 31,
2000, the Company had not guaranteed any amounts under this agreement.
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 operations.
* * * * * *
F-21