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As filed with the Securities and Exchange
Commission on March 29, 2002.
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, 2001
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 22,
2002, as reported on the Over the Counter Bulletin Board, was approximately
$5,720,900. 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 22, 2002: 6,975,990
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated Part of Form 10-K into which Incorporated
- --------------------------------- -----------------------------------------
Definitive Proxy Statement for the Definitive Proxy Statement for the
2002 Annual Meeting of Stockholders Part III
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TABLE OF CONTENTS
PAGE No.
- --------------------------------------------------------------------------------
Item 1. Description of Business .............................................3
Item 2. Properties .........................................................20
Item 3. Legal Proceedings ..................................................20
Item 4. Submission of Matters to a Vote of Security Holders.................20
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ........................................21
Item 6. Selected Financial Data.............................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................23
Item 8. Financial Statements and Supplementary Data.........................34
Item 9. Changes in and Disagreements with Accountants
and Financial Disclosure ...........................................34
Item 10. Directors and Executive Officers of the Registrant..................35
Item 11. Executive Compensation .............................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management .....35
Item 13. Certain Relationships and Related Transactions......................35
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....36
Signatures....................................................................37
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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. Description of Business -- Business Considerations
and Certain Factors that May Affect Future Results of Operations and Stock
Price."
Company Overview
On February 28, 2001, Central Financial Acceptance Corporation, or Central
Financial, completed a Plan of Complete Dissolution, Liquidation and
Distribution, or the Plan, which provided for the dissolution and liquidation of
Central Financial, and the liquidating distribution to its stockholders of all
the common stock of the two subsidiaries that were wholly-owned by Central
Financial, one of which was our company, Hispanic Express, and the other of
which was Banner Central Finance Company, or Banner Central Finance. 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 Finance Company of Nevada. As a result of
these contributions, Hispanic Express through its subsidiaries was
engaged in the consumer financial products business and the travel
services business at the time of liquidation to shareholders.
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- Central Financial contributed to Banner Central Finance all of the
issued and outstanding capital stock of Central Installment Credit
Corporation, Central Financial Acceptance/Insurance Agency and Central
Premium Finance Company, each of which are wholly-owned subsidiaries
of Banner Central Finance. In addition, Central Financial contributed
to Central Installment Credit Corporation the assets and liabilities
of the mortgage business owned by Central Consumer Finance Company. As
a result of these contributions, Banner Central Finance through its
subsidiaries is engaged in the purchased consumer receivables
business, the mortgage business and the sale and financing of
automobile insurance at the time of liquidation to shares.
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, we have
historically served the Hispanic population, primarily in California, and we
have:
- provided small, unsecured, personal loans;
- financed travel related services sold by our travel business;
- provided insurance products; and
- provided check cashing and money transfer services.
Our consumer financial products business has catered 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.
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.
In the Fall of 2000, we experienced rising delinquency trends in our small
loan portfolio as a response to a five-week bus strike in Los Angeles and
deteriorating economic conditions. As a result of these higher delinquency
levels, which continued into 2001, we tightened our credit standards and
consequently, made significantly less small loans in 2000 and through the first
eight months of 2001 than we had made in the previous years. In September of
2001, we made a decision to temporarily curtail making small loans and to
evaluate in the Fall of 2002 whether to reactivate this business or not.
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As a complementary business line in 1995, we began to offer financing of
travel tickets, which we sell at our travel locations. In January 2002, we
temporarily curtailed our financing of travel tickets, and will reevaluate this
decision in the Fall of 2002. The financing of travel tickets has not been a
significant part of our travel business. In 1998, we began to offer fee-based
check cashing and money transfer services in stand-alone check cashing centers
we operate.
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, 2001, 2000, and 1999 our travel
service operations generated gross bookings of approximately $151 million, $155
million and $143 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 127 travel locations. We
presently have 107 travel locations in California and also operate in Arizona,
Colorado, Nevada, North Carolina, Illinois, Oregon 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.
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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 and in 2001 closed this
operation.
Our operating results for the twelve months ended December 31, 2001,
reflect the overall weakness in the economy throughout the year and the sharp
slowdown in travel after the terrorist attacks of September 11, 2001.
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.
- As of 2000, the U.S. Hispanic population totaled approximately 33
million people, 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 current strategy is to establish
ourselves as a leading Spanish-language provider of 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 establish new strategic relationships that will permit us to
offer additional travel products, hotels and tours, which we will sell
through our travel stores.
We will also evaluate whether or not to reactivate our consumer product
finance business during 2002.
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.
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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, which continued in 2001, we
tightened our credit policies and implemented a program to reduce customer
credit limits on our Efectiva Card. In September of 2001, as a result of
continued high delinquency levels, we made a decision to temporarily curtail our
small loan business and evaluate in the Fall of 2002 whether to reactivate this
business or not.
Travel Sales
We began our travel business in mid-1995, offering sales of airline
tickets. We believe that we are currently the largest provider of travel
services to the Hispanic population in California. Substantially all of our
ticket sales are for international travel, which generally provides a higher
commission structure than does domestic travel. At December 31, 2001, we
operated through 127 locations, of which 107 are located in California and 20
are located outside of California. Our locations are generally stand-alone
facilities and occupy 1,000-1,500 square feet and employ one to two persons.
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 primary as
an add-on basis to the small loan business. 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 the
contraction in our small loan business, this business activity has experienced
significant declines in the levels of insurance we sell to our customers. 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. Historically,
we have taken credit applications at all of our locations. We have then
generally transmitted 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
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procedures allowed us to respond quickly to credit requests. We have typically
responded 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 have made 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 have verified the applicant's employment and residence with
our credit verifiers and depending on the relevant factor may verify other
pertinent information. We also obtained a credit bureau report and rating, if
available, and confirmed other credit-related information.
For an established customer, the credit process historically included 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 offered multiple lines of credit, we review the aggregate amount that
a customer owes. In cases where a customer made a request for a substantial
increase in his or her aggregate outstanding balance, we obtained an updated
credit bureau report and sought to confirm employment. In instances where the
applicant had 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 delinquency trends were negatively impacted by a bus strike in the
Los Angeles area, which lasted approximately five weeks and by deteriorating
economic conditions, which continued into 2001. As a result, we tightened our
credit guidelines in the fourth quarter of 2000 and implemented a program to
reduce customer credit limits, and continued this policy into 2001. In September
of 2001, as a result of continued high delinquency levels, we made a decision to
temporarily curtail our small loan business and to evaluate in the Fall of 2002
whether to reactivate the business or not. 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 facility located in the Banner Central Finance store. 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
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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 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.
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.
Employees
At December 31, 2001, we employed a total of 253 full-time employees and 32
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;
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- 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.
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
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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.
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.
Business Considerations and Certain Factors that May Affect Future Results
of Operations and Stock Price
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 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
Historically, our customers have generally been between the ages of 21 and
45, earned less than $25,000 per year, had little or no savings, and had limited
or short-term employment histories. In addition, our customers typically had no
prior credit histories and were 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 had generally consider a customer's
income level, type and length of employment, stability of residence, personal
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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.
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 Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Trends", and "Delinquency
Experience and Allowance for Credit Losses."
Need for Senior Credit Facility
Should we decide to reactivate our small loan business our operations will
be affected by the availability of financing and the terms, thereof, as we
require substantial capital to finance this business beyond our present capital
resources.
Historically, we had a Line of Credit with a number of banks, the most
current with Union Bank of California, N.A, as agent. Although the Line of
Credit permitted us to borrow up to $35 million, the amount of credit available
at any one time was limited to 70% of "eligible contracts" as defined in the
credit agreement. The Line of Credit was paid off and terminated in 2001.
Relationships with Airlines
We derive substantially all of our travel services revenue from a
combination of:
- sales of discounted airfares;
- 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
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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. 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.
On March 18, 2002, Delta Airlines, Inc. announced that it would stop paying base
travel agents commissions for tickets sold in the United States. Shortly,
thereafter, American Airlines, Continental Airlines, Inc. and Northwest Airlines
Corporation announced similar reductions and most travel experts believe that
all airlines will eliminate all commissions in the near future. In response to
these changes, travel agencies will have to charge service fees to their
customers in order to generate revenue.
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 declined less
severely. 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, and the
years ended December 31, 2000 and 2001. In response to the cessation of Taesa,
Mexicana and Aeromexico, which are controlled by a common parent company,
reduced commissions on routes from North America and Tijuana to parts of Mexico.
Ability of the Company to Execute Its Business Strategy
Our financial performance will depend in part on our ability to:
- 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
16
expansion with companies that may have significantly greater financial resources
than we do. We cannot assure that we will be able to locate suitable 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 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. Historically, we did not
believe that 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.
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. 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.
17
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 that 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 and September 11, 2001
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 other events, including the September 11, 2001 terrorist attack.
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.
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:
18
- 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 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 65% of our computing transactions are processed through the SABRE systems.
If SABRE, or we 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.
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,
19
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. 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
- 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.
20
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.
Historically, our consumer finance business has been 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.
We believe that we are in compliance in all material respects with
applicable local, state, and federal laws, rules and regulations, however,
should we reactivate our consumer finance business, 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 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 us, 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 owned by BCE Properties II, Inc., a subsidiary of Banner
Central Finance, 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.
Item 4. Submission of Matters to A Vote of Security Holders
No matters have been submitted to a vote of our stockholders.
21
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 15, 2002, there
were approximately, 120 beneficial holders and approximately six initial holders
of record of our common stock.
During 2001, the range of high and low sales price (not including markups,
markdowns or commission) for each quarterly period was, according to OTC
Bulletin Board, the following:
High Low
------ ------
Quarter ended March 31, 2001 (1) -- --
Quarter ended June 30, 2001 $0.85 $0.68
Quarter ended September 30, 2001 $1.55 $0.81
Quarter ended December 31, 2001 $1.85 $1.05
(1)There were no shares traded in the quarter ended March 31, 2001.
Dividend Information
We have never paid and have no present intention of paying cash dividends
on our common stock. We anticipate that we will retain all earnings for use in
our business, and we do not anticipate paying cash dividends for the foreseeable
future. Any determination in the future to pay dividends will depend on our
financial condition, capital requirements, results of operations, contractual
limitations, legal restrictions, and any other factors our Board of Directors
deems relevant.
Item 6. Selected Financial Data
The following selected consolidated financial data with respect to our
consolidated financial position as of December 31, 2001 and 2000 and our results
of operations for the years ended December 31, 2001, 2000 and 1999 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, 1999
and 1998, and our results of operations for the years ended December 31, 1998
and 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 are unaudited.
22
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share data)
Years Ended December 31,
------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Statements of Income Data:
Revenues:
Interest income $ 14,393 $ 15,010 $ 14,747 $ 13,028 $ 6,840
Travel services 8,716 8,961 14,270 14,872 12,475
Other income (1) 6,365 7,954 10,885 9,759 5,674
-------- -------- -------- -------- --------
Total Revenues 29,474 31,925 39,902 37,659 24,989
-------- -------- -------- -------- --------
Costs and Expenses:
Operating expenses 16,891 17,738 24,215 28,857 17,304
Provision for credit losses 5,318 5,952 6,531 9,406 5,938
Impairment of goodwill and Other assets -- -- -- -- 4,351
Interest expense 3,406 3,212 3,202 2,930 419
Depreciation and amortization 750 1,151 1,556 1,826 1,583
-------- -------- -------- -------- --------
Income (loss) from operations 3,109 3,872 4,398 (5,360) (4,606)
Gain on sale of property -- -- -- -- 179
-------- -------- -------- -------- --------
Income (loss) before taxes 3,109 3,872 4,398 (5,360) (4,427)
Provision (benefit) for income tax 1,217 1,549 1,759 (1,938) (1,338)
-------- -------- -------- -------- --------
Net income (loss) 1,892 $ 2,323 $ 2,639 $ (3,422) $ (3,089)
======== ======== ======== ======== ========
Per Share Data:
Net loss per common share:
Basic $ (0.44)
Diluted $ (0.44)
Weighted average shares outstanding:
Basic 7,091
Diluted 7,091
Pro Forma Per Share Data (Unaudited):
Pro forma net loss per common share:
Basic $ (0.48)
Diluted $ (0.48)
Pro forma weighted average shares outstanding:
Basic 7,166
Diluted 7,166
(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.
23
December 31,
-------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and short-term investments $ 5,003 $ 7,847 $ 5,208 $ 4,528 $21,315
Receivables, net 55,494 61,131 55,380 43,787 7,548
Total assets 86,159 91,976 86,608 74,538 45,653
Notes payable 40,850 40,000 40,000 23,600 --
Stockholders' equity 38,864 45,053 38,843 40,640 37,332 (1)
(1)In February 2002, we announced that the implementation of FAS 142 would
result in a write-off of approximately $8 million of goodwill in the first
quarter of 2002.
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. Description of 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. In 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.
24
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 our delinquencies have in the
fourth quarter of 2000 and through the first eight months of 2001 increased, and
in response, we tightened our credit guidelines and implemented a program to
reduce customer credit limits in our receivables portfolios. As a result of
continued high delinquency levels in 2001, we made a decision in September 2001
to temporarily curtail our small loan business and to evaluate in the fall of
2002 whether to reactivate this business or not. As a result of these policies
and decisions, our overall portfolio of net finance receivables has declined to
$7,548,000 at December 31, 2001 compared to $43,787,000 December 31, 2000. The
decline in the balance of our receivables portfolios has resulted in a declining
level of interest income earned as shown under "Financial Trends." In the fourth
quarter of 2000, we also 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 continued this policy throughout 2001. In
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. In 2001, we wrote-off $4,351,000 million of
goodwill and other long-lived assets of which $2,183,000 related to our travel
business and $2,168,000, which related to our finance business.
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.
25
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,
------------------------------
1999 2000 2001
------- ------- -------
Gross receivable (at end of period) $55,737 $42,633 $ 8,121
Deferred administrative fees, ATM fees and
insurance revenues (at end of period) 1,865 1,581 44
------- ------- -------
Net carrying value $53,872 $41,052 $ 8,077
======= ======= =======
Average net receivable $56,640 $48,703 $23,705
Number of contracts (at end of period 87,118 70,758 26,280
Average net contract balance (at end of period) $ 618 $ 580 $ 307
Total interest income (1) $13,584 $11,867 $ 5,924
Total administrative fee and ATM fee income $ 3,870 $ 3,437 $ 1,956
Late charge and extension fee income $ 1,926 $ 1,954 $ 1,469
Provision for credit losses $ 6,241 $ 9,154 $ 5,591
Provision for credit loss as a percentage of
average net receivable 11.0% 18.8% 23.6%
Net write-offs $ 6,319 $10,450 $ 5,036
Net write-offs as a percentage of average net
receivable 11.2% 21.4% 21.2%
Average interest rate on average net receivable 24.0% 24.4% 25.0%
(1) 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.
26
Travel Finance Portfolio
(Dollars in thousands, except
average contract balance)
Years Ended December 31,
----------------------------
1999 2000 2001
---- ---- ----
Gross receivable (at end of period) $ 4,489 $ 4,348 $ 1,714
======= ======= =======
Average net receivables $ 4,455 $ 4,503 $3,198
Number of contracts (at end of period) 11,506 10,569 5,634
Average net contract balance (at end of period) $ 390 $ 411 $ 304
Total interest income $ 1,163 $ 1,161 $ 916
Late charge and extension fee income $ 216 $ 214 $ 122
Provision for credit losses $ 290 $ 252 $ 347
Provision for credit loss as a percentage of
average net receivable 6.5% 5.5% 10.9%
Net write-offs $ 290 $ 324 $ 272
Net write-offs as a percentage of average net
receivable 6.5% 7.1% 8.5%
Average interest rate on average net receivable 26.1% 25.8% 28.6%
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, 2000 December 31, 2001
December 31, 1999 versus versus
versus
December 31, 1998 December 31, 1999 December 31, 2000
------------------------- ------------------------------ ---------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
Increase (decrease) in interest
income
Small Loan Portfolio $ 318 $ (526) $ (208) $(1,912) $ 195 $(1,717) $(6,100) $ 157 $(5,943)
Travel Portfolio $ (84) $ 12 $ (72) $ 12 $ (14) $ (2) $ (337) $ 92 $ (245)
27
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,
reduced customer credit limits and we reevaluated our current charge-off
policies and charged-off accounts that were past due at December 31, 2001 and
2000, and which did not make any payments after their respective year ends.
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.
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.
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.
28
Finance Receivables(1)
(Dollars in thousands)
Years Ended December 31,
----------------------------------
1999 2000 2001
--------- -------- --------
Past due accounts 31 days or more (gross receivable) $ 3,113 $ 859 $ 731
Accounts with payments 31 days or more past due as a
percentage of end of period gross receivables 5.1% 1.8% 7.4%
Allowance for credit losses $ 2,981 $ 1,613 $ 2,243
Allowance for credit losses as a percentage of gross
receivables 4.9% 3.4% 22.8%
(1) Includes receivables in our small loan and travel finance portfolios
In 1999, 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
continued to increase again in the years ended December 31, 2000 and 2001. The
increases occurred primarily with respect to our existing customers, rather than
new credit customers. We believe these increases were primarily a result of
excessive credit burdens for some customers, due to an aggregate over extension
of credit in the marketplace and by deteriorating economic conditions.
Additionally, delinquency trends were negatively impacted in the year ended
December 31, 2000 by a five-week bus strike in the Los Angeles area. In response
to our decision to curtail making loans in 2001, and concerns we had about the
impact of this decision on delinquent trends, we provided an additional
allowance for credit losses during the twelve months ended December 31, 2001. As
of December 31, 2001, 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, increased from 1.8% and 3.4%,
respectively, as of December 31, 2000 to 7.4% and 22.8%, respectively, as of
December 31, 2001. In light of this we suspended this business, and will
reevaluate in the Fall of 2002.
29
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Total revenues in the year ended December 31, 2001 decreased to $25.0
million from $37.7 million in the year ended December 31, 2000, a decrease of
$12.7 million or 33.6%.
Total interest income for the year ended December 31, 2001 decreased to
$6.8 million from $13.0 million in the year ended December 31, 2000, a decrease
of $6.2 million or 47.5%. This decrease was primarily due to a decrease of
$5.9 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
$23.7 million for the year ended December 31, 2001 compared to the average
balance of $48.7 million for the year ended December 31, 2000, reflecting the
affect of our tightened credit guidelines and our suspension of making small
loans in September of 2001.
Revenues earned on the sales of travel services decreased to $12.5 million
for the year ended December 31, 2001 compared to $14.9 million in the year ended
December 31, 2000, a decrease of $2.4 million or 16.1%. This decrease was due to
a decrease in commissions and override commissions earned on the sale of airline
tickets, and a slowdown in airline traffic as a result of the terrorist attack
on September 11, 2001, and deteriorating economic conditions.
Other income for the year ended December 31, 2001 decreased to $5.7 million
from $9.8 million in the year ended December 31, 2000, a decrease of
$4.1 million or 41.9%. 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 $1.5 million, and
a decrease of $2.0 million of income earned on our sale of credit insurance
products, and a decrease of $0.6 million in late charge income.
The decrease in other income fees was primarily due to a decrease in the
average balance of the small loan portfolio in the year ended December 31, 2001
compared to the year ended December 31, 2000. The average interest rate earned
on the small loan portfolio was 25.0% for the year ended December 31, 2001
compared to 24.4% in the year ended December 31, 2000.
Operating expenses for the year ended December 31, 2001 decreased to
$17.3 million from $28.9 million in the year ended December 31, 2000, a decrease
of $11.6 million or 40.0%. Of this decrease $2.0 million was attributable to
expenses related to our travel business, of which $1.0 million was related to
expenses of our Internet/travel operations, which we closed in July 2000. The
remaining decrease in operating expenses was primarily due to a reductions in
credit and collection expenses, and general corporate office expenses,
reflecting our reduced levels of business activity.
The provision for credit losses in the year ended December 31, 2001
decreased to $5.9 million from $9.4 million in the year ended December 31, 2000,
a decrease of $3.5 million or 36.9%. This decrease was primarily attributable to
a decrease in the average net receivables portfolios in the twelve months ended
December 31, 2001.
Interest expense for the year ended December 31, 2001 decreased to
$0.4 million from $2.9 million in the year ended December 31, 2000, a decrease
of $2.5 million or 85.9%.
30
This decrease is primarily due to a declining average balance of debt
outstanding in the year ended December 31, 2001 compared to the year ended
December 31, 2000.
Depreciation and amortization for the year ended December 31, 2001
decreased to $1.6 million from $1.8 million in the year ended December 31, 2000,
a decrease of $0.2 million or 13.9% primarily due to write-off of goodwill and
other long-lived assets.
For the year ended December 31, 2001, we recorded a charge of $4.4 million
for the impairment of goodwill and other long-lived assets. The charge was
comprised of (a) an impairment of goodwill of $3.3 million; and, (b) the
write-off of computer software, equipment and fixtures of $0.9 million, and
deferred loan fees of $0.2 million.
As a result of the foregoing factors, net loss in the year ended December
31, 2001 was $3.1 million compared to a net loss of $3.4 million in the year
ended December 31, 2000.
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.
31
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.
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.
Liquidity and Capital Resources
We have historically financed our operations primarily through cash flow
generated from operations and borrowings under our notes payable. During 2001,
as a result of the deteriorating economic climate the Company continued to
tightened its credit guidelines, which as a consequence has resulted in a
continued contraction in our receivable portfolios. The contraction in the
receivable portfolios generated funds that were used to pay off the Company's
line of credit with Union Bank of California in April 2001 and note payable to
Banner Central Finance on September 30, 2001. The Company terminated its line of
credit with Union Bank of California on September 7, 2001. The Company has cash
and short-term investments of $21.5 million at December 31, 2001. These cash
balances and cash flows generated from operations and contraction of our
receivable portfolios will be used to finance our operations and to fund future
investments which the Company may make.
Net cash provided from operations totaled $10.8 million, $10.6 million and
$15.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively. In each of these periods the source of cash primarily consisted of
net operating income after non-cash items. Non-cash items in each of 2001, 2000
and 1999 included depreciation and amortization, loss on disposal of fixed
assets, impairment of goodwill and other 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, income taxes receivable,
accrued expenses and other current liabilities, and other assets.
32
Net cash provided by investing activities totaled $21.3 million for the
year ended December 31, 2001. Net cash used in investing activities totaled $0.1
million and $9.2 million for the years ended December 31, 2000 and 1999,
respectively. In 2001, net cash provided by investing activities included $0.9
million of proceeds from the sale of property and fixed assets and $9.8 million
of cash used to purchase short-term investments. Net cash provided by and used
in investing activities in each of the years consisted of installment contracts
and other contract receivables collected (originated) and capital expenditures.
The decrease in our finance portfolios generated net cash flow of $30.3 million
in 2001.
Net cash used in financing activities totaled $25.1 million, $11.2 million
and $8.8 million in the years ended December 31, 2001, 2000 and 1999,
respectively. In 2001 and 2000, net cash used in financing activities consisted
of repayment of notes payable totaling $24.8 million and $16.4 million. Capital
contributions from Central Financial of $5.3 million 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.
Based on our current business plan, we expect our existing capital
resources will adequately satisfy our long-term working capital. Our capital
resources will be further enhanced as we continue on to contract our small loans
and travel receivables portfolios.
See Item 1. " - Business Considerations and Certain Factors that May Affect
Future Results of Operations and Stock Price - Restrictions Imposed by the Line
of Credit," and Item 1. " - 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 July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142). They also issued Statement of Financial Accounting
Standards No. 143, Accounting for Obligations Associated with the Retirement of
Long-Lived Assets (SFAS 143), and Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144), in August and October 2001, respectively.
SFAS 141 requires all business combinations initiated after June 30, 2001
be accounted for under the purchase method. SFAS 141 supersedes APB Opinion No.
16, Business Combinations, and Statement of Financial Accounting Standards No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises, and is
effective for all business combinations initiated after June 30, 2001.
SFAS 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, a company is no
longer required to amortize goodwill and other intangible assets with indefinite
lives, but will be subject to periodic testing for impairment. SFAS 142
supersedes APB Opinion No. 17, Intangible Assets. Effective January 1, 2002, the
33
Company will adopt SFAS 142. Adoption of SFAS 142 will result in a goodwill
impairment charge of approximately $8 million, because of a decline in the fair
value of the Company's travel business.
SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective in fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS 143 will not have a
material impact on its consolidated results of operations and financial position
upon adoption. The company plans to adopt SFAS 143 effective January 1, 2003.
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS 144
superseded Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. The provisions of
SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively. The
Company plans to adopt SFAS 144 effective January 1, 2002 and does not expect
that the adoption will have a material impact on its consolidated results of
operations and financial position.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial data for the years
ended December 31, 2001 and 2000.
2001
-------------------------------------------------
December 31, September 30, June 30, March 31,
----------- ------------- --------- ---------
(In thousands, except per share data)
Revenues $ 4,521 $ 5,759 $ 6,920 $ 7,789
Income (loss) before provision
(benefit) for income taxes $(2,432) $(2,021) $ (65) $ 91
Net income (loss) $(1,460) $(1,645) $ (39) $ 55
Net income (loss)
per common share:
Basic $ (0.21) $ (0.23) $(0.01) $ 0.01
Diluted $ (0.21) $ (0.23) $(0.01) $ 0.01
2000
-------------------------------------------------
December 31, September 30, June 30, March 31,
----------- ------------- --------- ---------
(In thousands, except per share data)
Revenues $ 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)
Net income (loss)
per common share:
Basic $ (0.38) $ (0.10) $ -- $ --
Diluted $ (0.38) $ (0.10) $ -- $ --
34
The following items summarize the material and unusual items that impacted
the 2001 and 2000 quarterly results of operations:
In the fourth quarter of 2001, the Company recorded a charge of $2.2
million for the impairment of goodwill.
In the third quarter of 2001, the Company recorded a charge in the amount
of $2.2 million for the impairment of goodwill and other long-lived assets. The
charge was comprised of (a) impairment of goodwill $1.1 million; and, (b)
write-off of computer software, equipment and fixtures of $0.9 million and
deferred loan fees of $0.2 million.
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 a lease 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.
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
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, 2001.
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, 2001.
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, 2001.
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, 2001.
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, 2001.
36
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.
Description
-----------
Exhibit No.
- -----------
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*
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.*
99 Letter from Registrant to Securities and Exchange Commission Relating
to Arthur Andersen LLP
(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.
37
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 29th day of
March 2002.
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 March 29, 2002
-------------------------- Directors, President and
Chief Executive Officer
Gary M. Cypres
/s/ Howard E. Weitzman Vice President and Chief March 29, 2002
-------------------------- Financial Officer
Howard Weitzman
/s/ Salvatore J. Caltagirone Director March 29, 2002
----------------------------
Salvatore J. Caltagirone
/s/ William R. Sweet Director March 29, 2002
----------------------------
William R. Sweet
38
EXHIBIT INDEX
Description
Exhibit No.
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*
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.*
99 Letter from Registrant to Securities and Exchange Commission Related to
Arthur Andersen LLP
(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.
F-1
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-2
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, 2001 and 2000, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hispanic Express, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
Los Angeles, California
March 22, 2002
F-3
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2001 2000
------------ ------------
ASSETS
Cash $ 11,521,000 $ 4,528,000
Short-term investments 9,794,000 --
Restricted cash 230,000 --
Finance receivables, net 7,548,000 43,787,000
Prepaid expenses and other current assets 559,000 950,000
Deferred income taxes 1,819,000 946,000
Income taxes receivable 33,000 3,903,000
Property and equipment, net 5,966,000 7,935,000
Intangible and other assets, net 8,183,000 12,489,000
------------ ------------
TOTAL ASSETS $ 45,653,000 $ 74,538,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ -- $ 23,600,000
Accrued expenses and other current liabilities 7,002,000 8,844,000
Capital lease obligation 228,000 --
Note payable to related party -- 1,213,000
Accounts payable to related party 1,091,000 241,000
------------ ------------
Total liabilities 8,321,000 33,898,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 10,000,000 shares authorized,
7,166,000 shares issued 72,000 72,000
Additional paid-in capital 27,481,000 27,481,000
Retained earnings 9,998,000 13,087,000
------------ ------------
37,551,000 40,640,000
Less treasury stock, 190,010 shares at cost in 2001 (219,000) --
------------ ------------
Total stockholders' equity 37,332,000 40,640,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,653,000 $ 74,538,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------
2001 2000 1999
---- ---- ----
Revenues
Interest income
Small loan portfolio $ 5,924,000 $ 11,867,000 $ 13,584,000
Travel finance portfolio 916,000 1,161,000 1,163,000
------------ ------------ ------------
Total interest income 6,840,000 13,028,000 14,747,000
Travel services, net 12,475,000 14,872,000 14,270,000
Other income 5,674,000 9,759,000 10,885,000
------------ ------------ ------------
Total revenues 24,989,000 37,659,000 39,902,000
------------ ------------ ------------
Costs and Expenses
Operating expenses 17,304,000 28,857,000 24,215,000
Provision for credit losses 5,938,000 9,406,000 6,531,000
Impairment of goodwill and other assets 4,351,000 -- --
Interest expense, net 419,000 2,930,000 3,202,000
Depreciation and amortization 1,583,000 1,826,000 1,556,000
------------ ------------ ------------
Total costs and expenses 29,595,000 43,019,000 35,504,000
------------ ------------ ------------
Income (loss) from operations (4,606,000) (5,360,000) 4,398,000
Gain on sale of property 179,000 -- --
------------ ------------ ------------
Income (loss) before provision(benefit) for
income taxes (4,427,000) (5,360,000) 4,398,000
Provision (benefit) for income taxes (1,338,000) (1,938,000) 1,759,000
------------ ------------ ------------
Net income (loss) $ (3,089,000) $ (3,422,000) $ 2,639,000
============ ============ ============
Per Share Data:
Net loss per common share
Basic
Diluted $ (0.44)
Shares used in calculating net loss per $ (0.44)
common share:
Basic 7,091,000
Diluted 7,091,000
Pro Forma Per Share Data (Unaudited):
Pro forma net loss per common share:
Basic $ (0.48)
Diluted $ (0.48)
Pro forma shares used in calculating pro forma
net loss per common shares:
Basic 7,166,000
Diluted 7,166,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
--------------------- Paid-in Retained
Shares Amount Capital Earnings
--------- ------ --------- ----------
Balance, December 31, 1998 -- $ -- $31,183,000 $13,870,000
Capital distribution to
related party (8,143,000)
Retirement of treasury shares
of predecessor company (706,000)
Net income 2,639,000
--------- ------ ---------- ----------
Balance, December 31, 1999 -- -- 22,334,000 16,509,000
Pro forma issuance of common
stock 7,166,000 72,000 (72,000)
Capital contribution from
related party 5,266,000
Retirement of treasury shares
of predecessor company (47,000)
Net loss (3,422,000)
--------- ------ ---------- ----------
Balance, December 31, 2000 7,166,000 72,000 27,481,000 13,087,000
Purchase of treasury shares
Net loss (3,089,000)
--------- ------ ---------- ----------
Balance, December 31, 2001 7,166,000 $72,000 $27,481,000 $ 9,998,000
========= ====== ========== ==========
Treasury Stock
---------------------
Shares Amount Total
-------- -------- ---------
Balance, December 31, 1998 -- $ -- $45,053,000
Capital distribution to
related party (8,143,000)
Retirement of treasury shares
of predecessor company (706,000)
Net income 2,639,000
-------- -------- ----------
Balance, December 31, 1999 -- -- 38,843,000
Pro forma issuance of common
stock --
Capital contribution from
related party 5,266,000
Retirement of treasury shares
of predecessor company (47,000)
Net loss (3,422,000)
-------- -------- ----------
Balance, December 31, 2000 -- -- 40,640,000
Purchase of treasury shares 190,010 (219,000) (219,000)
Net loss (3,089,000)
-------- -------- ----------
Balance, December 31, 2001 190,010 $(219,000) $37,332,000
======== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,089,000) $ (3,422,000) $ 2,639,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,583,000 1,826,000 1,556,000
Gain on sale of property (179,000) -- --
Loss on disposal of fixed assets -- 1,725,000 --
Impairment of goodwill and other assets 4,351,000
Provision for credit losses 5,938,000 9,406,000 6,531,000
Deferred income taxes (873,000) 555,000 382,000
Changes in assets and liabilities:
Prepaid expenses and other assets 391,000 (2,305,000) 617,000
Income tax receivable 3,870,000 -- --
Restricted cash (230,000) -- 1,195,000
Note receivable from affiliate -- 2,344,000 1,588,000
Other assets 6,000 (690,000) --
Accrued expenses and other current liabilities (1,842,000) 1,175,000 942,000
Accounts payable to related party 850,000 -- --
------------ ------------ ------------
Net cash provided by operating activities 10,776,000 10,614,000 15,450,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract receivables
(originated & acquired) collected, net of
recoveries 30,301,000 2,091,000 (878,000)
Increase in short-term investments (9,794,000) -- --
Proceeds from sale of property 892,000 -- --
Capital expenditures (69,000) (2,204,000) (2,920,000)
Purchase of leasehold interests and other -- -- (5,442,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 21,330,000 (113,000) (9,240,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable (23,600,000) (16,400,000) --
Repayment of note payable to related party (1,213,000) -- --
Repayment of capital lease obligation (81,000) -- --
Capital contribution from (distribution to) related
party -- 5,266,000 (8,143,000)
Retirement of treasury shares of predecessor company -- (47,000) (706,000)
Purchase of treasury stock (219,000) -- --
------------ ------------ ------------
Net cash used in financing activities (25,113,000) (11,181,000) (8,849,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 6,993,000 (680,000) (2,639,000)
CASH, BEGINNING OF PERIOD 4,528,000 5,208,000 7,847,000
------------ ------------ ------------
CASH, END OF PERIOD $ 11,521,000 $ 4,528,000 $ 5,208,000
============ ============ ============
CASH PAID DURING THE YEAR FOR:
INTEREST $ 559,000 $ 3,132,000 $ 3,362,000
INCOME TAXES $ 20,000 $ 5,000 $ 2,301,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
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 was 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 the year
ended December 31, 1999. (See Note 7).
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. In September
2001, the Company temporarily suspended making unsecured small loans and in
January 2002, the Company temporarily suspended the financing of travel tickets.
The Company will evaluate to reactivate these business activities in the Fall of
2002. 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-8
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Summary of Significant Accounting Principles
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of 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 and by
deteriorating economic conditions, which continued in 2001. As a result, the
Company's delinquencies increased in the fourth quarter of 2000 and throughout
2001 and, in response, the Company tightened its credit guidelines and in the
fourth quarter 2000 implemented a program to reduce customer credit limits and
continued this policy into 2001.
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, 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
F-9
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, 2001, 2000 and 1999
amounted to $1,573,000, $480,000, and $497,000, 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 was being 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.
For the year ended December 31, 2001, the Company recorded an impairment
loss of $4,351,000. The charge was comprised of (a) impairment loss on the
write-off of goodwill of $3,263,000; (b) the write-off of computer software,
equipment and fixtures of $859,000; and, (c) the write-off of deferred loan fees
of $229,000.
F-10
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,
---------------------------------------
2001 2000 1999
----------- ----------- ------------
Late charges $ 1,591,000 $2,168,000 $ 2,142,000
Membership and administrative fees 1,956,000 3,437,000 3,870,000
Insurance products and other 2,127,000 4,154,000 4,873,000
----------- ---------- -----------
$ 5,674,000 $9,759,000 $10,885,000
=========== ========== ===========
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, 2001, in
management's opinion, the deferred tax asset is realizable.
F-11
Advertising - The Company advertises primarily on Hispanic television and
radio, and through newspapers and direct mail. All advertising costs are
expensed as incurred. Advertising expense for the years ended December 31, 2001,
2000 and 1999 were $771,000, $1,613,000, and $1,571,000, respectively.
Concentration of Credit Risk - The Company places its temporary cash and
cash investments with high quality financial institutions. Management monitors
the financial creditworthiness of these financial institutions. As of December
31, 2001, such investments of $10,193,000 were in excess of insured limits.
Short-term investments are comprised of investments in high grade commercial
paper with a maturity of less than 30 days. The Company's 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 Company's management
believes that the fair value of the Company's financial instruments approximates
their carrying values as of December 31, 2001 and 2000.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made to prior year
financial statements to conform to the current year presentation.
New Accounting Pronouncements - In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141), and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). They also
issued Statement of Financial Accounting Standards No. 143, Accounting for
Obligations Associated with the Retirement of Long-Lived Assets (SFAS 143), and
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), in August and October
2001, respectively.
SFAS 141 requires all business combinations initiated after June 30, 2001
be accounted for under the purchase method. SFAS 141 supersedes APB Opinion No.
16, Business Combinations, and Statement of Financial Accounting Standards No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises, and is
effective for all business combinations initiated after June 30, 2001.
F-12
SFAS 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, a company is no
longer required to amortize goodwill and other intangible assets with indefinite
lives, but will be subject to periodic testing for impairment. SFAS 142
supersedes APB Opinion No. 17, Intangible Assets. Effective January 1, 2002, the
Company will adopt SFAS 142. Adoption of SFAS 142 will result in a goodwill
impairment charge of approximately $8 million to write-off the remaining
goodwill on the Company's financial statements, because of a decline in the fair
value of the Company's travel business.
SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective in fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS 143 will not have a
material impact on its consolidated results of operations and financial position
upon adoption. The Company plans to adopt SFAS 143 effective January 1, 2003.
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS 144
superseded Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. The provisions of
SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively. The
Company plans to adopt SFAS 144 effective January 1, 2002 and does not expect
that the adoption will have a material impact on its consolidated results of
operations and financial position.
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-13
4. Finance Receivables
Finance receivables consist of:
December 31,
-----------------------------
2001 2000
----------- ------------
Gross finance receivables:
Small loan portfolio $ 8,121,000 $42,633,000
Travel finance portfolio 1,714,000 4,348,000
----------- -----------
9,835,000 46,981,000
----------- -----------
Less:
Allowance for credit losses 2,243,000 1,613,000
Deferred administrative, Efectiva
membership and transaction fees and
insurance revenues 44,000 1,581,000
----------- -----------
Finance receivables, net $ 7,548,000 $43,787,000
=========== ===========
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,
------------------------------
2001 2000
---- ----
Small loan portfolio:
Past due 31 days plus $687,000 $824,000
======== ========
Travel finance portfolio:
Past due 31 days plus $ 44,000 $ 35,000
======== ========
The allowance for credit losses includes the following:
Years Ended December 31,
---------------------------------------------
2001 2000 1999
---------- ------------ ------------
Allowance for credit losses,
beginning of the year $ 1,613,000 $ 2,981,000 $ 3,059,000
Provision for credit losses 5,938,000 9,406,000 6,531,000
Charge-offs, net of recoveries (5,308,000) (10,774,000) (6,609,000)
------------ ------------ ------------
Allowance for credit losses,
end of year $ 2,243,000 $ 1,613,000 $ 2,981,000
============ ============ ============
F-14
5. Property and Equipment
Property and equipment, net consists of:
December 31,
------------------------------
2001 2000
---------- ------------
Land $1,568,000 $1,936,000
Building and improvements 3,768,000 4,125,000
Furniture, equipment and software 1,572,000 3,726,000
Equipment under capital lease 309,000 --
---------- ----------
7,217,000 9,787,000
Less: accumulated depreciation 1,251,000 1,852,000
---------- ----------
$5,966,000 $7,935,000
========== ==========
6. Intangible and Other Assets
Intangible and other assets, net consists of:
December 31,
-------------------------------
2001 2000
----------- -----------
Goodwill $ 9,446,000 $13,533,000
Deferred loan costs on line of credit -- 564,000
Non-compete agreements 408,000 408,000
Other 3,000 3,000
----------- -----------
9,857,000 14,508,000
Less: accumulated amortization 1,674,000 2,019,000
----------- -----------
$ 8,183,000 $12,489,000
=========== ===========
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. Notes payable allocated to the Company
were $40,000,000 at December 31, 1999. (See Note 1)
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 7.8% in 2001 and 9.1% in 2000. The Union Bank Line of
Credit was repaid on April 23, 2001, and the Company terminated the credit
facility on September 7, 2001. The Company wrote-off the balance of deferred
loan cost of $229,000 with the termination.
F-15
The Company entered into a capital lease in the amount of $309,000 for
computer equipment. The capital lease requires payments of $10,000 per month
until maturity in February 2004. The present value of future payments at 5.6%
was $228,000 at December 31, 2001.
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.
The provision (benefit) for income taxes consists of the following:
Years Ended December 31,
------------------------------------------
2001 2000 1999
----------- ------------ -----------
Current:
Federal $ (465,000) $(2,493,000) $ 1,114,000
State -- -- 263,000
----------- ----------- -----------
(465,000) (2,493,000) 1,377,000
Deferred:
Federal (664,000) 472,000 294,000
State (209,000) 83,000 88,000
----------- ----------- -----------
(873,000) 555,000 382,000
----------- ----------- -----------
Provision (benefit) for income taxes $(1,338,000) $(1,938,000) $ 1,759,000
=========== =========== ===========
A reconciliation of the provision (benefit) for income taxes to the
statutory rate is as follows:
Years Ended December 31,
----------------------------
2001 2000 1999
------ ------ ------
Federal income taxes at statutory rate (35.0%) (35.0%) 35.0%
State franchise taxes, net of federal benefit (4.2%) (1.7%) 4.5%
Amortization of goodwill 0.3% 0.3% 0.3%
Impairment of goodwill 8.5% -- --
Other 0.2% 0.2% 0.2%
------ ------ -----
(30.2%) (36.2%) 40.0%
====== ====== =====
F-16
The tax effects of temporary differences giving rise to the deferred income
tax assets and liabilities are as follows:
December 31,
---------------------------
2001 2000
----------- -----------
Deferred tax assets:
Allowance for credit losses $ 961,000 $ 691,000
Accrued liabilities 976,000 719,000
Deferred revenues 57,000 764,000
Federal net operating loss carryforward 85,000 --
State net operating loss carryforward 413,000 343,000
Other 162,000 182,000
----------- -----------
Total deferred tax assets 2,654,000 2,699,000
----------- -----------
Deferred tax liabilities:
Fixed assets (467,000) (621,000)
Intangible assets (63,000) (907,000)
State taxes (255,000) (175,000)
Other (50,000) (50,000)
----------- -----------
Total deferred tax liabilities (835,000) (1,753,000)
----------- -----------
Net deferred tax asset $ 1,819,000 $ 946,000
=========== ===========
At December 31, 2001, federal net operating loss carryforwards of
approximately $250,000 are available to offset future federal taxable income
until December 31, 2021, the Company also has state net operating loss
carryforwards of approximately $4,670,000 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 $2,050,000,
$3,150,000 and $4,373,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
F-17
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 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., a subsidiary of Banner Central Finance, for
its executive and administrative offices. The new lease is for a period of 15
years with annual rent of $300,000 per year subject to CPI increases. Rent
expense paid related to the lease was $300,000 in 2001. 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. On February 28,
2001, the lease was assumed by Banner Central Finance in connection with their
purchase of the net assets of the retail store. Rent income related to this
lease was $200,000 in 2001.
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,
2001, the Company had accounts payable in the amount of $1,091,000 to Banner
Central Finance, which was paid off in January 2002.
At December 31, 2000, the Company had a note payable to Banner Central
Finance in the amount of $1,213,000, which bears interest at 7.5% per annum and
was paid on September 30, 2001.
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
F-18
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. At December 31, 2001, options to
purchase 797,000 shares at a value of $1.53 of Common Stock of Hispanic Express
have been 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. All other options vest over a period of five years from
the issue date and expire ten years after the issue date. Options exercisable
were 403,600 at December 31, 2001. There were 107,000 shares forfeited during
2001. At December 31, 2001, 303,000 shares of Common Stock remain available for
future grants of options under the 2000 Plan. The options are subject to certain
vesting and cancellation provisions, and may not be granted at less than the
market value of the Company's Common Stock on the date of grant of the option.
None of the options granted have been included in the computation of
diluted earnings per share reflected in the Consolidated Statements of Income
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.
SFAS 123 defines a fair value based method of accounting for employee stock
compensation plans, but allows for the continuation of the intrinsic value based
method of accounting to measure compensation cost prescribed by Accounting
Principles Board Opinion No. 25. For companies electing not to change their
accounting, SFAS 123 requires pro-forma disclosures of earnings and earnings per
share as if the change in accounting provision of SFAS 123 has been adopted.
Had compensation cost for the 2000 Plan been determined consistent with
SFAS 123, the Company's net loss and net loss per share common share would have
increased to the following pro forma amounts:
2001
----------------
Net loss As Reported $ (3,089,000)
Net loss Pro forma $ (3,362,000)
Per Common share - Basic:
Net loss As Reported $ (0.44)
Net loss Pro forma $ (0.47)
Per Common share - Diluted:
Net loss As Reported $ (0.44)
Net loss Pro forma $ (0.47)
F-19
The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following weighted average assumptions used for
grants: dividend yield of 0.0%, expected volatility of 68.8%, risk free interest
rate of 5.0% and lives of five years. The weighted average remaining contractual
life is 9.2 years. The weighted average exercise price of the options at
December 31, 2001 was $1.53.
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,
2001, 2000 and 1999, amounted to approximately $277,000, $277,000 and $77,000,
respectively. The SERP accrual amounted to $829,000 and $552,000 at December 31,
2001 and 2000, respectively, which is included in accrued expenses and other
current liabilities.
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 and
the Chairman and another executive officer elected to defer 100% of their bonus
for the year ended December 31, 2001 and elected to invest in an account which
mirrors the performance of the Company's common stock. At December 31, 2001,
deferred compensation for these accounts were $456,000, which is included in
accrued expenses and other current liabilities.
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
F-20
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.
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, 2001, 2000 and 1999 is
as follows:
F-21
Consumer Corporate
Finance Travel Overhead Total
----------- ------------ ------------ ------------
For the Year Ended December 31, 2001:
Interest income $ 6,840,000 $ -- $ -- $ 6,840,000
Other income 5,674,000 12,475,000 -- 18,149,000
------------ ------------ ------------ ------------
Total revenue $ 12,514,000 $ 12,475,000 $ -- $ 24,989,000
============ ============ ============ ============
Pre-tax segment earnings (loss) $ 801,000 $ (1,347,000) $ (3,881,000) $ (4,427,000)
Segment assets $ 23,850,000 $ 12,098,000 $ 9,705,000 $ 45,653,000
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 $ 62,283,000 $ 12,255,000 $ -- $ 74,538,000
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
14. Commitments and Contingencies
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,
------------------------
2002 $2,035,000
2003 1,487,000
2004 910,000
2005 451,000
2006 339,000
Thereafter 2,910,000
----------
$8,132,000
==========
F-22
Aggregate rental expense for the years ended December 31, 2001, 2000 and
1999 were $2,222,000, $3,559,000, and $3,141,000, 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 limitation, up to $4 million of bank or
similar financing which Banner Central Finance may borrow. At December 31, 2001,
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.
* * * * * *
EXHIBIT 99
HISPANIC EXPRESS, INC.
5480 FERGUSON DRIVE, COMMERCE, CA 90022
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
March 29, 2002
Ladies and Gentlemen:
This will confirm that Hispanic Express, Inc. (the "Company") has received a
letter from Arthur Andersen LLP ("Arthur Andersen") with respect to Arthur
Andersen's audit of the Company's consolidated financial statements for the year
ended December 31, 2001. Arthur Andersen's letter certifies that the audit was
subject to Arthur Andersen's quality control system for the U.S. accounting and
auditing practice to provide reasonable assurance that the engagement was
conducted in compliance with professional standards, that there was appropriate
continuity of Arthur Andersen personnel working on the audit and availability of
national office consultation. Availability of foreign afflilates is not relevant
to this audit.
Very truly yours,
/s/ Howard E. Weitzman
Howard E. Weitzman
Vice President, Chief Financial Officer