As filed with the Securities and Exchange Commission on May 14, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934
For the transition period from ____________ to ______________
Commission file number: 000-31749
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
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__
Number of shares outstanding of the Registrant's Common Stock, as of May 14,
2002: 6,975,990
2
HISPANIC EXPRESS, INC.
FORM 10-Q
INDEX
Page No.
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001.................................................. 3
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2002 and 2001............................................ 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001...................................... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................21
Signatures....................................................................22
3
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
------------ ------------
ASSETS
Cash $ 7,014,000 $ 11,521,000
Short-term investments 18,838,000 9,794,000
Restricted cash 230,000 230,000
Finance receivables, net 2,907,000 7,548,000
Prepaid expenses and other current assets 454,000 559,000
Deferred income taxes 1,819,000 1,819,000
Income taxes receivable 9,000 33,000
Property and equipment, net 5,910,000 5,966,000
Goodwill, net -- 8,035,000
Other intangibles and other assets, net 125,000 148,000
------------ ------------
TOTAL ASSETS $ 37,306,000 $ 45,653,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other current liabilities $ 7,570,000 $ 7,002,000
Capital lease obligation 202,000 228,000
Accounts payable to related party 319,000 1,091,000
------------ ------------
TOTAL LIABILITIES 8,091,000 8,321,000
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 1,881,000 9,998,000
------------ ------------
29,434,000 37,551,000
Less treasury stock, 190,010 shares at cost (219,000) (219,000)
------------ ------------
Total stockholders' equity 29,215,000 37,332,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,306,000 $ 45,653,000
============ ============
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
4
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2002 2001
------------- --------------
Revenues
Interest income
Small loan portfolio $ 387,000 $ 2,386,000
Travel finance portfolio 83,000 281,000
----------- -----------
Total interest income 470,000 2,667,000
Travel services, net 2,350,000 2,866,000
Other income 571,000 2,256,000
----------- -----------
Total revenues 3,391,000 7,789,000
Costs and Expenses
Operating expenses 3,417,000 4,820,000
Provision for credit losses -- 2,216,000
Interest expense -- 372,000
Depreciation and amortization 144,000 469,000
----------- ----------
Total costs and expenses 3,561,000 7,877,000
----------- ----------
Loss from operations (170,000) (88,000)
Other Income
Other income, net 88,000 --
Gain on sale of property -- 179,000
----------- ----------
Income (loss) before provision for income taxes
and cumulative effect of accounting change (82,000) 91,000
Provision for income taxes -- 36,000
----------- ----------
Income (loss) before cumulative effect of
accounting change (82,000) 55,000
Cumulative effect of accounting change (8,035,000) --
------------ ------------
Net income (loss) $(8,117,000) $ 55,000
============ ============
Basic and diluted net income (loss) per common
share before cumulative effect of accounting
change $ (0.01) $ 0.01
Cumulative effect of accounting change (1.15) --
------------ ------------
Basic and diluted net income (loss) per common
Share $ (1.16) $ 0.01
============ ============
Average basic and diluted common shares 6,976,000 7,166,000
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
5
HISPANIC EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------------------
2002 2001
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,117,000) $ 55,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Cumulative effect of accounting change 8,035,000 --
Gain on sale of property -- (179,000)
Depreciation and amortization 144,000 469,000
Provision for credit losses -- 2,216,000
Changes in assets and liabilities:
Prepaid expenses and other current assets 105,000 19,000
Income taxes receivable 24,000 1,207,000
Accrued expenses and other current liabilities 568,000 (37,000)
Accounts payable to related party (772,000) (140,000)
-------------- --------------
Net cash provided by (used in) operating activities (13,000) 3,610,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts and other contract receivables
collected, net of recoveries 4,641,000 8,922,000
Increase in short-term investments (9,044,000) --
Proceeds from sale of property -- 892,000
Capital expenditures (65,000) (40,000)
------------- --------------
Net cash provided by (used in) investing activities (4,468,000) 9,774,000
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable -- (13,238,000)
Repayment of capital lease obligation (26,000) --
------------- --------------
Net cash used in financing activities (26,000) (13,238,000)
------------- --------------
NET (DECREASE) INCREASE IN CASH (4,507,000) 146,000
CASH, BEGINNING OF PERIOD 11,521,000 4,528,000
------------- --------------
CASH, END OF PERIOD $ 7,014,000 $ 4,674,000
============= ==============
CASH PAID DURING THE YEAR FOR:
INTEREST $ -- $ 455,000
INCOME TAXES -- 54,000
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
6
HISPANIC EXPRESS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Nature of Operations
Basis of Presentation - The condensed consolidated financial statements of
Hispanic Express, Inc. ("Hispanic Express" or the "Company") are unaudited,
other than the consolidated balance sheet at December 31, 2001. In the opinion
of the Company's management, all adjustments of a normal recurring nature
necessary for a fair statement of interim periods presented have been included.
The results for interim periods are not necessarily indicative of results to be
expected for the entire year. These interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2001, and the notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Hispanic Express, Inc. was formed in September 2000. On September 6, 2000,
the Board of Directors of Central Financial Acceptance Corporation ("Central
Financial") approved a Plan of Complete Dissolution, Liquidation and
Distribution (the "Plan") under which Central Financial's subsidiaries were
reorganized into two public companies, 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 its 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 6), including provisions for the allocation of
certain costs and expenses. Management of Hispanic Express believes that such
agreements provide for reasonable allocation of costs and expenses between the
parties.
The formation of Hispanic Express has been accounted for at historical
cost, in a manner similar to a pooling of interest. The accompanying condensed
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.
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.
On February 9, 2001, the Company closed one of its finance centers and sold
the property for approximately $892,000. This resulted in a gain from the sale
of property of approximately $179,000 and is included in the condensed
consolidated statements of income.
7
HISPANIC EXPRESS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting Change
In January 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which
requires companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life. SFAS 142 requires that goodwill and intangible
assets deemed to have an indefinite useful life be reviewed for impairment upon
adoption of SFAS 142 (January 1, 2002) and annually thereafter. Under SFAS 142,
goodwill impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. This methodology differs from the Company's
previous policy, in accordance with accounting standards existing at that time,
of using undiscounted cash flows to determine if goodwill is recoverable. Upon
adoption of SFAS 142 in the first quarter of 2002, the Company recorded a
one-time, noncash charge of approximately $8,035,000 to reduce the carrying
value of its goodwill. The charge is comprised of $7,636,000 related to goodwill
associated with our travel operations and $399,000 of goodwill associated with
our check cashing operations. Such charge is nonoperational in nature and is
reflected as a cumulative effect on an accounting change in the accompanying
condensed consolidated statements of income. In calculating the impairment
charge, the fair value of the impaired reporting units were estimated using a
market valuation model. In assessing the impairment of goodwill, management
considered the negative impact on the Company's operating units caused by a
slowdown in airline traffic as a result of the terrorist attacks on September
11, 2001 and the deteriorating economic conditions. There was no tax benefit
recorded related to the write-off of goodwill, because in the Company's judgment
it was more likely than not that the Company would not be able to utilize this
additional future tax loss benefit given the difficult economic and strategic
climate the Company has been operating in and the poor profit outlook for its
businesses.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2002, are as follows:
Consumer
Travel Finance
Segment Segment Total
------------ ------------ ------------
Balance, January 1, 2002 $ 7,636,000 $ 399,000 $ 8,035,000
Cumulative effect of accounting change (7,636,000) (399,000) (8,035,000)
------------ ------------ ------------
Balance, March 31, 2002 $ -- $ -- $ --
============ ============ ============
The following table reconciles reported net income in 2001 to adjusted net
income which excludes the effect of amortization expense, net of tax:
Net income for the three monthe ended March 31, 2001, as reported $ 55,000
Adjustment for goodwill amortization, net of tax 70,000
----------------
Net income for the three months ended March 31, 2001, as adjusted $ 125,000
================
Basic and diluted net income per common share for the three
months ended March 31, 2001, as reported $ 0.01
Adjustment for goodwill amortization, net of tax 0.01
----------------
Basic and diluted net income per common share for the
three months ended March 31, 2001, as adjusted $ 0.02
================
8
HISPANIC EXPRESS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Earnings Per Share
Basic net income (loss) per common share is computed by dividing net income
(loss) available to common shareholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted net income (loss) per
share is computed by dividing net income (loss) available to common shareholders
by the weighted-average number of shares of common stock outstanding during the
period increased to include the number of additional common shares that would
have been outstanding if dilutive potential common shares had been issued. The
dilutive effect of outstanding options is reflected in diluted net income (loss)
per share by application of the treasury stock method. Options to purchase
797,000 shares of common stock that were outstanding at March 31, 2002, were not
included in the computation of diluted net income (loss) per share for the three
months ended March 31, 2002 because the effect would be antidilutive. At March
31, 2001, the exercise price of options to purchase shares of common stock was
greater than the average market price of the Company's common stock during this
period and, therefore, the effect would be antidilutive. Basic and diluted net
income per share for the three months ended March 31, 2001 is based on the
number of shares of common stock issued by the Company pursuant to the Plan and
are assumed to be outstanding as of January 1, 2001.
4. Certain Consolidated Financial Statement Details
Finance Receivables
March 31, December 31,
2002 2001
----------- ------------
Gross finance receivables:
Small loan portfolio $ 4,095,000 $ 8,121,000
Travel finance portfolio 781,000 1,714,000
----------- ------------
4,876,000 9,835,000
----------- ------------
Less:
Allowance for credit losses 1,958,000 2,243,000
Deferred administrative, Efectiva membership
and transaction fees and insurance revenues 11,000 44,000
----------- ------------
1,969,000 2,287,000
----------- ------------
Finance receivables, net $ 2,907,000 $ 7,548,000
=========== ============
Customers are required to make monthly payments on the Company's receivable
contracts. The aggregate gross balance of accounts with payments 31 days or more
past due are:
March 31, December 31,
2002 2001
----------- ------------
Small loan portfolio:
Past due 31 days plus $ 370,000 $ 687,000
========= =========
Travel finance portfolio
Past due 31 days plus $ 30,000 $ 44,000
========= =========
9
HISPANIC EXPRESS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The allowance for credit losses includes the following:
Three Months Ended March 31,
----------------------------
2002 2001
----------- ------------
Allowance for credit losses, beginning
of the year $ 2,243,000 $ 1,613,000
Provision for credit losses -- 2,216,000
Charge-offs, net of recoveries (285,000) (1,813,000)
------------ ------------
Allowance for credit losses, end of period $ 1,958,000 $ 2,016,000
============ ============
Property and Equipment
March 31, December 31,
2002 2001
---------- ------------
Land $1,568,000 $1,568,000
Buildings and improvements 3,820,000 3,768,000
Furniture, equipment and software 1,585,000 1,572,000
Equipment under capital lease 309,000 309,000
---------- ----------
7,282,000 7,217,000
Less: Accumulated depreciation 1,372,000 1,251,000
---------- ----------
$5,910,000 $5,966,000
========== ==========
Intangible and Other Assets
March 31, December 31,
2002 2001
---------- ------------
Non-compete agreements $ 408,000 $ 408,000
Other 3,000 3,000
---------- ----------
411,000 411,000
Less: Accumulated amortization 286,000 263,000
---------- ----------
$ 125,000 $ 148,000
========== ==========
Other Income
Three Months Ended March 31,
----------------------------
2002 2001
----------- ----------
Membership and administrative fees $ 32,000 $ 737,000
Late charges 219,000 450,000
Insurance products 192,000 713,000
Check cashing fees and other 128,000 356,000
---------- ----------
$ 571,000 $2,256,000
========== ==========
10
HISPANIC EXPRESS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Notes Payable and Capital Lease Obligation
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 (the "Union Bank
Line of Credit") that provided for the issuance of notes up to $35,000,000, as
amended. Borrowings under the credit facility bore interest at a weighted
average rate of 7.8% for the three months ended March 31, 2001. The Union Bank
Line of Credit was repaid on April 23, 2001, and the Company terminated the
credit facility on September 7, 2001.
At March 31, 2001, the Company had a note payable to Banner Central
Finance, a related party, in the amount of $5,325,000 which bore interest at the
prime rate (8.0% at March 31, 2001). The note payable was paid on September 30,
2001.
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 $202,000 and $228,000 at March 31, 2002 and December 31, 2001, respectively.
6. 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 and
its subsidiaries are 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
$434,000 and $525,000 for the three months ended March 31, 2002 and 2001,
respectively.
The Company, Central Financial and Banner Central Finance have entered into
a Tax Sharing Agreement which provides, among other things, for the payment of
federal, state and other income tax remittances or refunds for periods during
which the Company was included in the same consolidated group for federal income
tax purposes; the allocation of responsibility for the filing of such tax
returns and various related matters. For periods in which the Company was
included in Central Financial's consolidated federal income tax returns, the
Company will be required to pay its allocable portion of the consolidated
federal, state and other income tax liabilities of the group and will be
entitled to receive refunds determined as if the Company had filed separate
income tax returns. With respect to Central Financial's liability for payment of
taxes for all periods during which the Company was so included in Central
Financial's consolidated federal income tax returns, the Company will indemnify
Central Financial for all federal, state and other income tax liabilities of the
Company for such periods. February 28, 2001 was the last day on which the
Company was required to be included in Central Financial's consolidated federal
income tax returns.
11
HISPANIC EXPRESS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the adoption of the Plan, the Company entered into a
lease with BCE Properties II, Inc., a subsidiary of Banner Central Finance, for
its executive and administrative offices. The lease is for a period of 15 years
with annual rent of $300,000 per year subject to CPI increases. Rent expense for
this lease was $75,000 in the three months ended March 31, 2002 and 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. Rental income in connection with this lease was $50,000 for the
three months ended March 31, 2002 and 2001.
At March 31, 2002 and December 31, 2001 , the Company had amounts payable
to Banner Central Finance in the amount of $294,000 and $997,000, respectively.
7. Stockholder Loan Program
On April 25, 2002, the Company's Board of Directors approved a Stockholders
Loan Program (the "Program"). The Program permits current stockholders of the
Company to borrow funds from the Company for a maximum period of 18 months
commencing on May 15, 2002. All loans must be repaid in full by November 14,
2003. Total loans made by the Company under the Program cannot exceed $14.0
million in the aggregate (the "Loan Pool"). The Program is designed to both
maximize the earnings, with safety, the Company can achieve on its excess cash
balances, while it continues to explore strategic investments, and to permit
shareholders to have short-term access to such funds, to the extent they desire
to participate in the Program. Stockholders wishing to participate in the
Program may borrow a percentage of the Loan Pool, subject to credit approval,
which cannot exceed their proportional percentage ownership in the common stock
of the Company. However, no loans will be made for less than $10,000 and the
participant, who participates in the Program, will deliver a Promissory Note
(the "Note") to the Company with a principal amount equal to the amount of such
loan. The Program will be administered by the Company. The Board of Directors
shall have the sole authority to increase the Loan Pool and extend the Program
another 18 months upon its termination.
Immediately upon a loan application being approved by the Company and loan
documents being executed, the participant will be required to pledge their
common shares or other collateral deemed sufficient by the Company as security
for the Note pursuant to a pledge agreement to be entered into by such
participant and the Company. Under the terms of the Note, upon the pledge of the
common shares or other collateral to the Company, the participant will cease to
have any personal liability to repay the Note and the Note will become a
non-recourse obligation of the participant secured by the shares of the
Company's common stock or other collateral owned by the participant. All notes
of the participant will bear interest at the prime rate of interest, as defined.
Interest on the Note will be paid monthly. The Note can be prepaid in whole or
in part at any time. In addition, upon prepayment of the Note, a proportional
amount of the pledged shares or other collateral will be released from the
pledge.
12
HISPANIC EXPRESS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Segment Information
The Company has identified three reporting segments in accordance with SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
Consumer Finance Business, Travel Business and Corporate. The factors
for determining the reportable segments were based on the distinct nature of
their operations. The Consumer Finance Business and Travel Business are managed
as separate business units because each requires and is responsible for
executing a unique business strategy. The Consumer Finance Business includes the
Small Loan Portfolio, Travel Finance Portfolio and insurance and other products
provided to customers of the Consumer Finance Business. The Company's Travel
Business is comprised of the retail travel stores and travel internet business.
Corporate 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 in the Company's
2001 Form 10-K. Information about these segments are summarized as
follows:Summary information by segment follows:
Revenues
Three Months Ended March 31,
---------------------------------
2002 2001
------------ ------------
Consumer Finance Business $ 1,041,000 $ 4,923,000
Travel Business 2,350,000 2,866,000
Corporate -- --
----------- ------------
Total revenues $ 3,391,000 $ 7,789,000
=========== ============
Loss From Operations
Three Months Ended March 31,
--------------------------------
2002 2001
------------ -----------
Consumer Finance Business $ 463,000 $ 1,034,000
Travel Business (38,000) (112,000)
Corporate (671,000) (1,010,000)
------------ ------------
Total loss from operations $ (170,000) $ (88,000)
============ ============
Total Assets
March 31, December 31,
2002 2001
------------ ------------
Consumer Finance Business $13,598,000 $23,850,000
Travel Business 5,027,000 12,098,000
Corporate 18,681,000 9,705,000
----------- -----------
Total assets $37,306,000 $45,653,000
============ ===========
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed in this Quarterly Report on Form 10-Q 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" or "us," when referring only to the parent company) operate in, projections
of future performance, perceived opportunities in the market and statements
regarding our mission and vision. Our actual results, performance, or
achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements. For
discussion of the factors that might cause such a difference, see "Item 1.
Business-- Business Considerations and Certain Factors that May Affect Future
Results of Operations and Stock Price" contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
Financial Trends
Portfolios
In the fourth quarter of 2000, certain of our loan 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 increased in 2001 and through the first
eight months of 2001, and in response, we tightened our credit guidelines and
implemented a program to reduce customer credit limits in our receivable
portfolios. As a result of high delinquency levels in 2001, we made a decision
in September 2001 to temporarily curtail our small loan business and in January
2002 we temporarily suspended the financing of travel tickets. The Company will
evaluate to reactivate these business activities in the Fall of 2002. As a
result of these policies and decisions, our overall portfolio of net finance
receivables has declined from $32.3 million at March 31, 2001 to $7.5 million
and $2.9 million at December 31, 2001 and March 31, 2002, respectively. The
decline in the balance of our receivable portfolios has resulted in a declining
level of interest income earned as shown under "Financial Trends."
14
The following sets forth certain information relating to our portfolios for
the periods indicated:
Small Loan Portfolio
Three Months Ended March 31,
----------------------------
2002 2001
------------ -------------
Gross receivable (at end of period) $ 4,095,000 $32,231,000
Deferred administrative fees, ATM fees and
insurance revenues (at end of period) 11,000 1,097,000
----------- ------------
Net carrying value (at end of period) $ 4,084,000 $31,134,000
=========== ============
Average net receivable (1) $ 6,277,000 $37,745,000
Number of contracts (at end of period) 17,700 61,500
Average net contract balance (at end of period) $ 354 $ 524
Total interest income (2) $ 387,000 $ 2,386,000
Late charge and extension fee income 200,000 408,000
Provision for credit loss as a percentage of
average net receivable (3) -- 22.4%
Net write-offs $ 265,000 $ 1,725,000
Net write-offs as a percentage of average net
receivable (3) 4.2% 18.3%
Average interest rate on average net
receivable (3) 24.7% 25.3%
(1) Average net receivable is defined as the average gross receivables, less
deferred administrative fees, ATM fees and insurance revenues.
(2) Amounts represent interest on the small loan portfolio, excluding
administrative and membership fees, late and other fees included in other
income in the condensed consolidated statements of income appearing
elsewhere herein.
(3) Percentages for the three months ended March 31, 2002 and 2001 are
annualized.
15
Travel Finance Portfolio
Three Months Ended March 31,
----------------------------
2002 2001
------------- ------------
Net receivable (at end of period) $ 781,000 $3,496,000
============= ============
Average net receivable $1,239,000 $3,995,000
Number of contracts (at end of period) 3,410 11,500
Average net contract balance (at end of period) $ 229 $ 304
Total interest income $ 83,000 $ 281,000
Late charge and extension fee income 19,000 42,000
Provision for credit losses $ -- $ 103,000
Provision for credit loss as a percentage of
average net receivable (1) -- 10.3%
Net write-offs $ 20,000 $ 88,000
Net write-offs as a percentage of average
net receivable (1) 6.5% 8.8%
Average interest rate on average net
receivable (1) 26.8% 28.1%
(1) Percentages for the three months ended March 31, 2002 and 2001 are
annualized.
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. 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 in ensuing
periods and in response we tightened our credit guidelines and reduced customer
credit lines.
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 losses 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 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 or statement that we provide to
them. The vast majority of our customers make their payments in cash at our
payment facilities.
16
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.
Finance Receivables (1)
Three Months Ended March 31,
-------------------------------
2002 2001
------------- --------------
Past due accounts 31 days or more
(gross receivable) $ 400,000 $ 466,000
Accounts with payments 31 days or
More past due as a percentage of end
of period gross receivables 8.2% 1.3%
Allowance for credit losses $ 1,958,000 $ 2,016,000
Allowance for credit losses as a percentage
of net receivables 40.2% 5.6%
(1) Includes receivables in our small loan and travel finance portfolios.
The accounts with payments 31 days or more past due as a percentage of end
of period gross receivables have increased to 8.2% at March 31, 2002 from 1.3%
at March 31, 2001. The increase in the percentage of accounts with payments 31
days or more past due as a percentage of end of period gross receivables is
primarily due to increases in delinquencies during 2001 and 2002. We believe the
increase in delinquencies were a result of excessive credit burdens for some
customers, due to an aggregate over extension of credit in the marketplace and a
deteriorating economic climate in the market we serve. Delinquency and write-off
trends also increased in 2001 and 2002 as the result of; (1) the Company's
decision to tighten credit guidelines in 2001; (2) the Company temporarily
suspending making unsecured small loans in September 2001; and (3) the Company
temporarily suspending the financing of travel tickets in January 2002. The
Company will evaluate to reactivate these business activities in the Fall of
2002. 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. The Company's management believes the allowance for credit losses of
$1,958,000 or 40.2% of net receivables at March 31, 2002 is sufficient to cover
losses inherent in the Small Loan and Travel Finance Portfolios until a decision
is made whether or not to reactivate these business activities.
17
The following tables summarize the results of operations of the Company for
the three months ended March 31, 2002 and 2001:
Three Months Ended
March 31,
----------------------------
2002 2001
----------- -------------
Revenues
Interest income
Small loan portfolio $ 387,000 $ 2,386,000
Travel finance portfolio 83,000 281,000
----------- ------------
Total interest income 470,000 2,667,000
Travel services, net 2,350,000 2,866,000
Other income 571,000 2,256,000
----------- ------------
Total revenues 3,391,000 7,789,000
----------- ------------
Costs and Expenses
Operating expenses 3,417,000 4,820,000
Provision for credit losses -- 2,216,000
Interest expense -- 372,000
----------- ------------
Total costs and expenses 3,561,000 7,877,000
----------- ------------
Loss from operations (170,000) (88,000)
Other Income
Other income, net 88,000 --
Gain on sale of property -- 179,000
----------- ------------
Income (loss) before provision for income taxes
and cumulative effect of accounting change (82,000) 91,000
Provision for income taxes -- 36,000
----------- ------------
Income (loss) before cumulative effect of
accounting change (82,000) 55,000
Cumulative effect of accounting change (8,035,000) --
------------ ------------
Net income (loss) $(8,117,000) $ 55,000
============ ============
18
Three Months Ended March 31, 2002 Compared With The Results of Operations For
The Three Months Ended March 31, 2001
Total revenues in the three months ended March 31, 2002 decreased to $3.4
million from $7.8 million in the three months ended March 31, 2001, a decrease
of $4.4 million or 56.5%.
Total interest income for the three months ended March 31, 2002 decreased
to $0.5 million from $2.7 million in the three months ended March 31, 2001, a
decrease of $2.2 million or 82.4%. This decrease was primarily due to a decrease
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 $6.3 million for
the three months ended March 31, 2002 compared to the average balance of $37.7
million for the three months ended March 31, 2001, reflecting the affect of our
tightened credit guidelines and our suspension of making small loans in
September of 2001. In January 2002, the Company temporarily suspending the
financing of travel tickets. The Company will evaluate to reactivate these
business activities in the Fall of 2002.
Revenues earned on the sales of travel services decreased to $2.4 million
for the three months ended March 31, 2002 compared to $2.9 million in the three
months ended March 31, 2001, a decrease of $0.5 million or 18.0%. This decrease
was primarily due to a decrease in commissions earned from the sale of airline
tickets in 2002 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 three months ended March 31, 2002 decreased to $0.6
million from $2.3 million in the three months ended March 31, 2001, a decrease
of $1.7 million or 74.7%. 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 $0.7 million, a
decrease of $0.2 million of late charge income, and a decrease of $0.2 million
in check cashing fees.
The decrease in income from our Efectiva membership and administrative fees
and late charge income was primarily due to a decrease in the average balance of
the small loan portfolio in the three months ended March 31, 2002 compared to
the three months ended March 31, 2001. The average interest rate earned on the
small loan portfolio was 24.7% for the three months ended March 31, 2002
compared to 25.3% in the three months ended March 31, 2001. The decrease in
check cashing fees was primarily attributable to the operation of fewer check
cashing facilities in the three months ended March 31, 2002 as compared to the
same period in 2001.
Operating expenses for the three months ended March 31, 2002 decreased to
$3.4 million from $4.8 million in the three months ended March 31, 2001, a
decrease of $1.4 million or 29.1%. The decrease was primarily attributable to a
decrease of $0.8 million in credit and collection costs and corporate overhead
expenses, a decrease of $0.5 million in expenses related to the travel
operations and a decrease of $0.1 million in insurance claims expenses.
There was no provision for credit losses in the three months ended March
31, 2002 compared to a provision for credit losses of $2.2 million in the three
months ended March 31, 2001, a decrease of $2.2 million. This decrease was
primarily attributable to the Company's decision in September 2001 to
temporarily curtail our small loan business and in January 2002 to temporarily
suspend the financing of travel tickets. In response to these decisions and
concerns we had about the impact this would have on delinquency trends, we
provided an additional allowance for credit losses in 2001. The Company's
management believes the allowance for credit losses at March 31, 2002 is
sufficient to cover losses inherent in the Small Loan and Travel Finance
Portfolios until a decision is made in the Fall of 2002 whether or not to
reactivate these business activities.
There was no interest expense for the three months ended March 31, 2002
compared to interest expense of $0.4 million in the three months ended March 31,
2001. This decrease is primarily due to the Company's repayment of notes payable
in 2001.
Depreciation and amortization for the three months ended March 31, 2002
decreased to $0.1 million from $0.5 million in the three months ended March 31,
2001, a decrease of $0.4 million or 69.3%. The decrease was primarily the result
of increased amortization of deferred loan costs due to the Company's decision
to decrease the commitment under the line of credit in the three months ended
March 31, 2001 and the implementation of SFAS 142 in the first quarter of 2002.
There was no amortization of deferred loan fees in the three months ended March
31, 2002 due to the termination of the line of credit on September 30, 2001
compared to $150,000 amortization in the three months ended March 31, 2001. SFAS
142 requires companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life. The adoption of SFAS 142 required the Company to
stop amortizing goodwill resulted in a decrease in amortization of goodwill of
$116,000 in the three months ended March 31, 2002.
19
Loss from operations increased to $0.2 million in the three months ended
March 31, 2002 from $0.1 million in the three months ended March 31, 2001 as a
result of the foregoing factors.
Gain on sale of property in the amount of $0.2 million in the three months
ended March 31 2001 resulted from the sale of the property of one of the
Company's check cashing locations.
Net loss was $8.1 million in the three months ended March 31, 2002 compared
to net income of $0.1 million in the three months ended March 31, 2001. In 2002,
the Company recorded a one-time, noncash charge upon the adoption of SFAS 142 in
the amount of $8.0 million to reduce the carrying value of its goodwill. The
charge is comprised of $7.6 million related to goodwill associated with our
travel operations and $0.4 million of goodwill associated with our check cashing
operations.
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 $25.9 million at March 31, 2002. These cash
balances and cash flows generated from operations and contraction of our
receivable portfolios will be used to finance our operations and to fund future
investments which the Company may make.
Net cash used in operations was $0.1 million for the three months ended
March 31, 2002 compared to net cash provided from operations of $3.6 million for
the three months ended March 31, 2001. In each of these periods, the source of
cash primarily consisted of net operating income after non-cash items. Non-cash
items included cumulative effect of accounting change, depreciation and
amortization, gain on sale of property and provision for credit losses. Other
items affecting cash flows from operating activities in the periods included
cash flows from increases (decreases) in prepaid expenses and other assets,
income taxes receivable, accrued expenses and other current liabilities, and
accounts payable to related party.
Net cash used by investing activities was $4.5 million in the three months
ended March 31, 2002 compared to net cash provided by investing activities of
$9.8 million for the three months ended March 31, 2001. In 2002, net cash used
by investing activities included $9.0 million of cash used to purchase
short-term investments. Net cash provided by and used in investing activities in
each of the periods consisted of installment contracts and other contract
receivables collected and capital expenditures. The decrease in our finance
portfolios generated net cash flow of $4.6 million and $8.9 million in the three
months ended March 31, 2002 and 2001, respectively.
Net cash used in financing activities totaled $0.1 million and $13.2
million in the three months ended March 31, 2002 and 2001, respectively. Net
cash used in financing activities consisted of repayment of capital lease
obligation of $0.1 million in 2002 and repayment of notes payable of $13.2
million in 2001
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 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" of Form 10-K for the year ended December 31, 2001.
20
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The risk management discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of interest rate risk
assuming certain adverse market conditions occur. Actual results in the future
may differ materially from these projected results due to changes in our debt
mix and developments in the global financial markets. The analytical methods we
use to assess and mitigate these risks should not be considered projections of
future events or operating performances.
We are not currently exposed to interest rate risk in the form of variable
interest rates since the Company does not currently have any debts or notes
payable with variable interest rates. However, if the Company were to obtain
financing in the future the Company may be exposed to interest rate risk
depending on the terms and conditions of the financing agreements.
21
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HISPANIC EXPRESS, INC.
May 14, 2002 /s/ Gary M Cypres
------------------------------------
Gary M.Cypres
Chairman of the Board, Chief
Executive Officer and President
May 14, 2002 /s/ Howard Weitzman
------------------------------------
Howard Weitzman
Vice President and Chief Financial
Officer