<PAGE> 1
As filed pursuant to Rule 424(b)(4)
under the Securities Act of 1933
Registration No. 333-3790
PROSPECTUS
1,850,000 SHARES
LOGO
FINANCIAL ACCEPTANCE CORPORATION
COMMON STOCK
All of the shares of Common Stock, $0.01 par value per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by Central Financial
Acceptance Corporation (the "Company"). Prior to this Offering, there has been
no public market for the Common Stock. The Company was formed in April 1996 to
consummate the Reorganization. See "The Reorganization and Certain Relationships
and Agreements among the Company, Banner, Holdings and Other Affiliates." See
"Underwriting" for a discussion of factors considered in determining the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "CFAC" subject to official notice of
issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS FOR A DISCUSSION
OF RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON
STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Per Share........................... $12.00 $0.84 $11.16
Total(3)............................ $22,200,000 $1,554,000 $20,646,000
</TABLE>
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- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
277,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $25,524,000, Underwriting Discount will total $1,786,680
and Proceeds to Company will total $23,737,320. See "Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the offices of
Montgomery Securities on or about July 2, 1996.
------------------------
MONTGOMERY SECURITIES
June 26, 1996
<PAGE> 2
GRAPHIC ON THE TOP TWO-THIRDS OF INSIDE FRONT COVER PAGE:
Four graphs covering the changing ethnic profile in California for
the years indicated. The first graph shows a total California population in the
year 1980 of 23.7 million people, of which 19.0% or 4.5 million are Hispanic.
A second graph shows a total California population in 1995 of 32.7 million
people, of which 28.8% or 9.4 million are Hispanic.
A third graph shows a total estimated California population in 2005 of 38.3
million people, of which 33.9% or 13 million are Hispanic.
A fourth graph shows an estimated population change from the year 1980 to
the year 2005 of 14.6 million people, of which the Hispanic population accounts
for an increase of 8.5 million people or 58.2%.
TEXT ACCOMPANYING THE GRAPHS:
For the period 1980 - 2005, it is estimated that Hispanics will account
for over 58% of the population growth in California.
By the year 2005, Hispanics are projected to account for 33.9% of the
California population.
Hispanics are projected to continue to be the fastest growing minority
with a total population of 13 million by the year 2005.
GRAPHIC ON THE BOTTOM ONE-THIRD OF THE INSIDE FRONT COVER PAGE:
A drawing of the State of California next to a heading stating "Hispanic
Population for Regions of California Where the Company Operates 1996 (In
Thousands)." The following areas and Hispanic populations are indicated on the
drawing: San Francisco Bay Area, 1,120,000; Los Angeles, 4,185,000; Orange,
736,000; San Bernardino, 504,000.
GRAPHIC ON PAGE 2:
The Registrant's logo, "Central" and the names of each of its operating
subsidiaries, Central Installment Credit Corporation; Central Consumer Finance
Company; Central Auto Sales, Inc.; Centravel, Inc.; Central Financial
Acceptance/Insurance Agency and Central Premium Finance Company.
INSIDE BACK COVER PAGES:
A montage on the top half of the pages of seven photographs of customers at
various of the Company's locations and six photographs of six of the Company's
storefronts. On the bottom half of the pages, samples of four print
advertisements; one page from each of the consumer product finance, travel
finance, small loan and used automobile businesses.
<PAGE> 3
----------------------
The Company intends to furnish its shareholders with annual reports
containing audited consolidated financial statements each fiscal year.
----------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. For purposes of this Prospectus, unless otherwise
indicated or the context otherwise requires, (i) the "Company" refers to Central
Financial Acceptance Corporation, its predecessors and its wholly-owned
subsidiaries, and (ii) the information herein (a) assumes that the Company has
been in existence and the Reorganization (as defined below) was consummated
concurrently with the 1991 Acquisition (as defined below) and (b) assumes no
exercise of the Underwriters' over-allotment option.
THE COMPANY
The Company is a specialized consumer finance company that primarily serves
the financing needs of the rapidly growing low income Hispanic population, a
market the Company believes is underserved. The Company served this market at
March 31, 1996 through 11 locations in greater Los Angeles and one location in
San Francisco. The Company (i) purchases and services consumer finance
receivables generated by the Company's customers for purchases of high quality
brand name consumer products, appliances and furniture sold by Banner's Central
Electric, Inc. ("Banner"), (ii) originates and services consumer finance
receivables generated by the Company's customers for purchases of used
automobiles and airline tickets sold by the Company, and (iii) provides other
financial services to its customers such as small loans. The Company has catered
to the low income Hispanic population during its 40 years of operation by
locating its facilities primarily in Hispanic communities, by advertising in
Spanish, and by employing Spanish as the primary language at its locations.
While the Company operates primarily in greater Los Angeles and faces
substantial competition with respect to its lines of business, the Company's
objective is to become the leading provider of consumer credit and other
financial services to the low income Hispanic population in urban areas within
California and elsewhere in the United States.
The Company's customers are typically between the ages of 21 and 45, earn
less than $25,000 per year, have little or no savings, and limited or 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 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 finance companies
or consumer finance companies that have more stringent underwriting criteria.
See "Risk Factors -- Credit Risk Associated with Customers; Lack of Collateral"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Segment Data -- Credit Quality."
Since 1950 Hispanics have been the fastest growing minority group in the
United States, increasing from 4 million in 1950 to approximately 27 million in
1996, a compound annual growth rate of 4.3%, and, according to the 1996 U.S.
Bureau of the Census Current Population Report (the "1996 Report"), this trend
is expected to continue. The 1996 Report projects that the Hispanic population
will total 36 million by 2005. California is home to the largest Hispanic
population in the United States and this population is estimated to grow from
9.4 million in 1995 to 13 million by 2005, at which time it will comprise
approximately 34% of California's total population.
Recognizing these demographic trends, current management acquired the
operations of Banner in 1991 (the "1991 Acquisition") through Banner Holdings,
Inc. ("Holdings"), the sole shareholder of Banner. At such time, Banner operated
a retail business and a consumer credit business through a single location in
downtown Los Angeles. Banner's retail business consisted of the sale of consumer
products, appliances and furniture, while the consumer credit business offered
Banner's customers financing and related credit insurance for the merchandise it
sold. Holdings' strategy since the 1991 Acquisition has been to identify new
financial products and services that Holdings believes could be introduced
successfully to the low income Hispanic population in urban areas within
California. Since 1991, Holdings has grown primarily as a result of
3
<PAGE> 5
the introduction of such financial products and services and increased pricing.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Segment Data -- Analysis of Changes in Net Interest Income."
Holdings' most significant growth has occurred as a result of the introduction
of unsecured small loans in the fourth quarter of 1992, a product which the
Company believes offers significant growth potential. At March 31, 1996,
Holdings had 59,000 small loan accounts, as compared to 55,000, 26,000 and
11,000 at December 31, 1995, 1994 and 1993, respectively. In 1995, Holdings
began offering company-financed sales of used automobiles and airline tickets.
In addition, by March 31, 1996, Holdings had expanded Banner's retail business
to six retail stores in greater Los Angeles and one store in San Francisco, and
the Company had opened four small loan and travel centers and one used
automobile facility in greater Los Angeles. See "-- Recent Developments." At
March 31, 1996, the net carrying value of the Company's receivable portfolio was
$89.9 million, consisting of $51.6 million in the portfolio of consumer product
contracts (the "Consumer Product Portfolio"), $30.0 million in the portfolio of
loan contracts (the "Small Loan Portfolio"), $5.3 million in the portfolio of
automobile finance contracts (the "Automobile Finance Portfolio") and $3.0
million in the portfolio of travel finance contracts (the "Travel Finance
Portfolio"). At March 31, 1996, the average net contract balance in the Consumer
Product Portfolio was $683, the average net contract balance in the Small Loan
Portfolio was $546, the average net contract balance in the Automobile Finance
Portfolio was approximately $6,700, and the average net contract balance in the
Travel Finance Portfolio was approximately $400.
As a result of completing the initial steps of its business strategy, total
revenues and interest income from October 31, 1992 to December 31, 1995 have
grown at an annual rate of 87.4% and 73.7%, respectively, while net income has
grown at an annual rate of 149.4% during the same period.
Because each of Holdings' businesses have different performance
characteristics and future prospects, Holdings created the Company as a
subsidiary of Banner to enable the businesses to pursue independent growth
strategies (the "Reorganization"). Pursuant to a Reorganization Agreement,
Holdings contributed its investments in its subsidiaries that operate the small
loan, used automobile, travel and related businesses (the "Holdings
Subsidiaries") to Banner, and Banner contributed its investments in the Holdings
Subsidiaries and in its subsidiary that holds the Consumer Product Portfolio
(collectively, the "Subsidiaries") to the Company. Banner retained the
operations of its retail business and certain other assets and liabilities.
Pursuant to a Financing Agreement, Banner granted the Company the exclusive
right to purchase consumer finance receivables originated by Banner for
merchandise sold at Banner locations, or the right to directly originate such
receivables. Pursuant to an Option Agreement, Holdings granted the Company an
option to purchase all of the outstanding capital stock of Banner for a period
of two years, beginning one year from the Reorganization, at a purchase price
equal to Banner's net book value. The Company, Banner and Holdings entered into
an Operating Agreement pursuant to which Holdings and its wholly-owned
subsidiaries agreed not to compete with the Company in connection with the
financing of consumer products, travel products, small loans, automobiles, or
insurance, until the earlier of December 31, 2002 or the date on which Holdings
ceases to own 25% of the outstanding voting stock of the Company,. For
additional information relating to the Reorganization, see "The Reorganization
and Certain Relationships and Agreements among the Company, Banner, Holdings and
Other Affiliates."
RECENT DEVELOPMENTS
In May 1996, the Company acquired the business of, and assumed the
leasehold interests to, six travel locations in greater Los Angeles. In
addition, in June 1996 the Company acquired the business of and assumed the
leasehold interests to 19 travel locations of which 14 are in greater Los
Angeles, two locations are in Chicago and one location is in each of Dallas, Las
Vegas and San Diego. Although such transactions are not material from a
financial point of view, the Company believes each new location provides the
Company with an additional center through which it can offer its financial
products and services, including travel finance, small loans, and the financing
of automobile insurance premiums, which the Company anticipates offering to its
customers beginning in July 1996.
In April 1996, the Company opened its second automobile sales facility in
greater Los Angeles.
To continue its growth, the Company intends to (i) open additional finance
centers through which it can offer small loans, airline tickets and other
financial products and services the Company may introduce in the future, (ii)
open additional used automobiles locations, (iii) introduce an expanded range of
financial products and services available to all segments of the population but
which will be tailored to meet the needs of the low
4
<PAGE> 6
income Hispanic population, (iv) expand the Company's unaffiliated retailer
installment finance business, and (v) selectively acquire existing businesses
that the Company believes will complement or expand its current offering of
financial products and services. See "-- Recent Developments."
The Company's principal executive offices are located at 5480 Ferguson
Drive, Commerce, California, 90022, and its telephone number is (213) 720-8600.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby.................. 1,850,000 shares
Common Stock to be outstanding
after the Offering......................... 7,000,000 shares
Use of Proceeds.............................. The net proceeds of the Offering will be used
for repayment of indebtedness, working
capital, general corporate purposes and the
expansion of the Company's business,
including possible future acquisitions. See
"Use of Proceeds."
Nasdaq National Market Symbol................ "CFAC"
</TABLE>
SUMMARY SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWO
MONTHS THREE MONTHS
YEARS ENDED ENDED YEARS ENDED ENDED
OCTOBER 31, DEC. 31, DECEMBER 31, MARCH 31,
------------------------------------- -------- --------------------------- -----------------
1991(1) 1992 1993 1994 1994 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues:
Consumer Product Portfolio
interest income......... $4,482 $ 8,145 $ 9,010 $11,444 $2,057 $ 9,420 $11,787 $12,508 $ 2,955 $ 3,205
Small Loan Portfolio
interest income......... -- -- 134 672 439 188 1,057 5,095 1,009 2,093
Automobile sales.......... -- -- -- -- -- -- -- 4,417 -- 2,038
Transaction fees on
contracts purchased from
related party........... 392 747 830 844 150 829 857 916 229 227
Other income(2)........... 652 1,253 1,457 1,756 416 1,445 1,868 3,653 654 1,722
------ ------- ------- ------- ------ ------- ------- ------- ------- -------
Total Revenues...... 5,526.. 10,145 11,431 14,716 3,062 11,882 15,569 26,589 4,847 9,285
------ ------- ------- ------- ------ ------- ------- ------- ------- -------
Costs and Expenses:
Operating expenses........ 1,980 3,986 4,519 5,009 1,025 4,461 5,170 8,150 1,522 2,504
Cost of automobiles
sold.................... -- -- -- -- -- -- -- 3,071 -- 1,355
Provision for credit
losses.................. 878 2,654 3,264 3,002 1,617 3,447 3,923 5,859 1,106 2,347
Interest expense.......... 1,776 2,306 2,279 2,523 617 2,235 2,801 4,278 1,075 1,241
------ ------- ------- ------- ------ ------- ------- ------- ------- -------
Income before taxes......... 892 1,199 1,369 4,182 (197) 1,739 3,675 5,231 1,144 1,838
Income tax expense.......... 371 503 572 1,694 (74) 727 1,493 2,112 465 735
------ ------- ------- ------- ------ ------- ------- ------- ------- -------
Net income.................. $ 521 $ 696 $ 797 $ 2,488 $ (123) $ 1,012 $ 2,182 $ 3,119 $ 679 $ 1,103
====== ======= ======= ======= ====== ======= ======= ======= ======= =======
Pro forma net income per
share(3).................. $ 0.61 $ 0.21
======= =======
Supplementary net income per
share(4).................. $ 0.58 $ 0.19
======= =======
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
AT MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................................................... $ 133 $ 500
Installment Credit Portfolio............................................................ 59,896 59,896
Small Loan Portfolio.................................................................... 30,002 30,002
Total assets............................................................................ 97,331 97,698
Total debt.............................................................................. 61,329 41,483
Stockholder's equity.................................................................... 33,532 53,745
</TABLE>
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(1) Reflects operations for the seven months ended October 31, 1991, which was
the first fiscal period of the Company's operations subsequent to the 1991
Acquisition.
(2) Includes administrative fees charged on certain small loan contracts and,
beginning in 1995, interest earned on the Automobile Finance Portfolio and
Travel Finance Portfolio and net revenues from the sales of airline tickets.
The Consumer Product Portfolio, Automobile Finance Portfolio and Travel
Finance Portfolio are hereinafter collectively referred to as the
"Installment Credit Portfolio."
(3) Pro forma net income per share is based on 5,150,000 shares of Common Stock
issued by the Company pursuant to the Reorganization that are assumed to be
outstanding as of January 1, 1995.
(4) Supplementary net income per share is based on 5,150,000 shares of Common
Stock issued by the Company pursuant to the Reorganization and 1,850,000
shares of Common Stock to be sold by the Company pursuant to the Offering as
if all such shares were outstanding as of January 1, 1995, and also gives
effect to a reduction in interest expense resulting from the reduction of
indebtedness upon application of the estimated net proceeds of the Offering
as if it had occurred on January 1, 1995.
(5) Adjusted to reflect the sale of Common Stock offered hereby, an assumed
capital contribution by Banner of $367,000 pursuant to the Reorganization,
and the application of the estimated net proceeds therefrom as set forth
under "Use of Proceeds."
CONSUMER PRODUCT PORTFOLIO
<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED THREE MONTHS
OCTOBER 31, DECEMBER 31, ENDED MARCH 31,
----------------- --------------------------- -----------------
1992 1993 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Gross receivable
(at end of period)............ $54,038 $57,250 $60,590 $67,514 $67,811 $63,466 $63,069
Deferred interest
(at end of period)............ 6,354 7,028 7,657 7,603 7,796 6,937 7,203
------- ------- ------- ------- ------- ------- -------
Net receivable (at end of
period)....................... $47,684 $50,222 $52,933 $59,911 $60,015 $56,529 $55,866
======= ======= ======= ======= ======= ======= =======
Average net receivable(1)....... $46,690 $51,907 $52,456 $53,656 $57,276 $58,214 $57,810
Net provision for credit
losses........................ 2,654 3,198 3,340 3,332 3,852 826 1,191
Provision for credit losses as a
percentage of average net
receivable.................... 5.7% 6.2% 6.4% 6.2% 6.7% 5.7% 8.2%
Net write-offs.................. $ 1,688 $ 2,834 $ 2,897 $ 2,949 $ 3,310 $ 679 $ 930
Net write-offs as a percentage
of average net receivable..... 3.6% 5.5% 5.5% 5.5% 5.8% 4.7% 6.4%
Accounts with payments 31 days
or more past due as a
percentage of end of period
gross receivable.............. 5.4% 5.1% 4.8% 7.2% 6.5% 6.1% 6.1%
Average interest rate on average
net receivable................ 17.4% 17.4% 18.0% 22.0% 21.8% 20.3% 22.2%
Net Interest Spread(2).......... 10.4% 11.1% 11.8% 15.1% 13.5% 12.1% 14.2%
</TABLE>
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<PAGE> 8
SMALL LOAN PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEARS ENDED THREE MONTHS
ENDED DECEMBER 31, ENDED MARCH 31,
OCTOBER 31, -------------------------- -----------------
1993(4) 1993 1994 1995 1995 1996
----------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gross receivable (at end of period)..... $ 705 $4,314 $16,735 $37,868 $18,267 $35,678
Deferred interest (at end of period).... 26 241 1,809 4,187 1,772 3,491
----------- ------ ------- ------- ------- -------
Net receivable (at end of period)....... $ 679 $4,073 $14,926 $33,681 $16,495 $32,187
======== ====== ======= ======= ======= =======
Average net receivable(1)............... $ 850 $1,131 $ 5,662 $20,219 $15,764 $33,335
Net provision for credit losses......... 66 107 591 1,547 280 899
Provision for credit losses as a
percentage of
average net receivable................ 8.5% 9.5% 10.4% 7.7% 7.1% 10.8%
Net write-offs.......................... -- -- 155 896 86 487
Net write-offs as a percentage of
average net
receivable............................ 0.0% 0.0% 2.7% 4.4% 2.2% 5.8%
Accounts with payments 31 days or more
past due as a percentage of end of
period gross receivable(3)............ 5.2% 1.0% 1.1% 3.0% 2.0% 3.8%
Average interest rate on average net
receivable............................ 15.8% 16.6% 18.7% 25.2% 25.6% 25.1%
Net Interest Spread(2).................. 15.8% 10.6% 11.7% 17.2% 16.8% 17.1%
</TABLE>
- ---------------
(1) Average net receivable is based upon the net receivable on the last day of
each month for the respective period.
(2) Reflects the difference between the average interest rate on average net
receivable and the average interest rate on interest bearing liabilities
(the "Net Interest Spread").
(3) The Company believes that as the Small Loan Portfolio seasons the number of
accounts with payments 31 days or more past due as a percentage of end of
period gross receivable will conform to the levels the Company has
experienced in the Consumer Product Portfolio.
(4) The Company commenced its small loan business in December 1992.
AUTOMOBILE FINANCE PORTFOLIO
The Company began offering Company-financed sales of used automobiles in
mid-1995. At December 31, 1995 and March 31, 1996, respectively, the gross
receivable of the Automobile Finance Portfolio was $5.5 million and $7.7
million, the net receivable of the portfolio was $4.2 million and $5.8 million,
and the allowance for credit losses was $410,000 and $544,000, representing 9.8%
and 9.3% of the end of period net receivable. No write-offs were charged against
the allowance for credit losses in the year ended December 31, 1995. Write-offs
of $60,000 were charged against the allowance for credit losses in the three
months ended March 31, 1996. At December 31, 1995 and March 31, 1996,
respectively, the dollar amount of accounts 31 days or more past due in the
Automobile Finance Portfolio was $117,000 and $199,000 or 2.1% and 2.6% as a
percentage of the end of period gross receivable. Due to the size and lack of
seasoning of this portfolio, there can be no assurance that the Company's
experience to date with the Automobile Finance Portfolio is indicative of future
results of this portfolio.
TRAVEL FINANCE PORTFOLIO
The Company also began offering Company-financed sales of airline tickets
in mid-1995. At December 31, 1995 and March 31, 1996, respectively, the gross
receivable of the Travel Finance Portfolio was $3.0 million and $3.4 million,
the net receivable of the portfolio was $2.7 million and $3.1 million, and the
allowance for credit losses was $50,000 and $70,000, representing 1.8% and 2.3%
of the end of period net
7
<PAGE> 9
receivable. No write-offs were charged against the allowance for credit losses
in the year ended December 31, 1995. Write-offs of $43,000 were charged against
the allowance for credit losses in the three months ended March 31, 1996. The
Company expects that write-offs in the Travel Finance Portfolio will approximate
those experienced by the Company in the Consumer Product Portfolio. At December
31, 1995 and March 31, 1996, respectively, the dollar amount of accounts 31 days
or more past due in the Travel Finance Portfolio was $87,000 and $101,000, or
2.9% and 3.0% as a percentage of the end of period gross receivable. Due to the
size and lack of seasoning of this portfolio, there can be no assurance that the
Company's experience to date with its Travel Finance Portfolio is indicative of
future results of this portfolio.
8
<PAGE> 10
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective purchasers should carefully consider the following
risk factors, among others, in evaluating an investment in the Common Stock
offered hereby.
CREDIT RISK ASSOCIATED WITH CUSTOMERS; LACK OF COLLATERAL
The Company's customers are typically between the ages of 21 and 45, earn
less than $25,000 per year, have little or no savings and limited or 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 finance companies
or consumer finance companies that have more stringent underwriting criteria.
Because the Company relies on the creditworthiness of its customers for
repayment and does not rely on collateral securing the debt (other than in the
Automobile Finance Portfolio), 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. For information concerning the Company's credit quality
experience, see "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Segment Data -- Credit Quality."
GENERAL ECONOMIC RISK
The risks associated with the Company's business become more significant in
an economic slowdown or recession. During periods of economic slowdown or
recession, the Company has experienced and may again experience a decreased
demand for its financial products and services and an increase in rates of
delinquencies and the frequency and severity of losses. The Company's 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 experienced in the consumer finance industry generally. Any sustained
period of economic slowdown or recession could materially adversely affect the
Company's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Segment Data -- Financial Trends," and "-- Credit Quality."
DEPENDENCE ON CALIFORNIA MARKET
Substantially all of the Company's facilities are located, and
substantially all of the Company's revenues are generated in California,
primarily in greater Los Angeles. Therefore, the Company's performance depends
upon economic conditions in California and may be further adversely affected by
social factors or natural disasters in California. California has experienced
adverse economic conditions over the last several years. A further decline in
the California economy could have a material adverse effect on the Company's
results of operations and financial condition.
CONCENTRATION OF CONSUMER PRODUCT PORTFOLIO WITH BANNER'S CUSTOMERS
Substantially all of the Consumer Product Portfolio consists of consumer
finance receivables generated from products sold by Banner. The Consumer Product
Portfolio accounted for 57.5% of the Company's gross receivable portfolio as of
March 31, 1996. The performance of the Consumer Product Portfolio therefore
depends substantially upon the success of Banner's stores. Although the Company
has begun to expand its installment credit business to other retailers as part
of its business strategy, Banner's customers will continue to account for a
large majority of the Company's Consumer Product Portfolio for the foreseeable
future. There can be no assurance that the Company will be able to successfully
expand its installment credit finance business to other retailers.
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INTEREST RATE RISK
The Net Interest Spread partially determines the Company's profitability.
Because the Company pays a floating interest rate on borrowings under its Lines
of Credit and has elected not to hedge its interest rate risk, increases in such
rates have at times decreased, and in the future may decrease, the Company's Net
Interest Spread and have a material adverse effect on the Company's results of
operations and financial condition. The interest rate the Company is allowed to
charge its customers on its small loans is limited under California law. The
Company presently charges the maximum interest rate permitted in California.
There is no corresponding interest rate limitation on installment credit sales.
Increases in the interest rate the Company charges its customers could reduce
demand for Banner's products and the Company's financial products and services
which, in turn, could decrease the Company's net income. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and
"Business -- Regulation."
NEED FOR ADDITIONAL FINANCING
The Company requires substantial capital to finance its business.
Consequently, the Company's ability to maintain its current level of operations
and to expand its operations will be affected by the availability of financing
and the terms thereof. Principally, the Company funds its lending activities and
operations through a $60 million line of credit with Bank of America National
Trust and Savings Association (the "Bank of America Line of Credit") and a $30
million line of credit with Wells Fargo Bank, National Association (the "Wells
Fargo Line of Credit" and, together with the Bank of America Line of Credit, the
"Lines of Credit"). The Bank of America Line of Credit may be used only for the
Company's consumer product finance business. The amount of credit available at
any one time under the Bank of America Line of Credit is limited to 75% of
eligible contracts in the Company's Consumer Product Portfolio. The total amount
available to the Company under the Bank of America Line of Credit as of March
31, 1996, was $38.5 million, of which the Company had borrowed $38.5 million.
The Bank of America Line of Credit was amended and restated as of June 24, 1996
and expires on August 30, 1996. The Wells Fargo Line of Credit may be used only
for the Company's travel finance, auto finance and small loan businesses. The
amount of credit available at any one time under the Wells Fargo Line of Credit
is limited to 70% of eligible contracts in the Small Loan, Automobile Finance
and Travel Finance Portfolios. The total amount available to the Company under
the Wells Fargo Line of Credit as of March 31, 1996, was $27.9 million, of which
the Company had borrowed $22.0 million. The Wells Fargo Line of Credit expires
on December 31, 1996. The Company is currently in discussions with Bank of
America and Wells Fargo with respect to the renewal of such Lines of Credit. The
Company believes it will be able to renew both Lines of Credit. However, there
can be no assurance that the Company will be able to renew such Lines of Credit,
that the Company will have access to additional financing sources necessary to
sustain its operations and fund its growth, or that the Company will be able to
secure financing on favorable terms. See "Use of Proceeds."
The Lines of Credit contain restrictive covenants that require the Company
to maintain, among other things, certain financial ratios and amounts. The
Company must maintain a specified tangible net worth, specific cash flow to
interest coverage ratios and specific debt to tangible net worth ratios, as such
terms are defined in the Lines of Credit. The Company must maintain other ratios
related to the performance of the Company's Combined Receivable Portfolio. At
March 31, 1996, the Company was in compliance with such restrictive covenants in
the Lines of Credit.
The Company may securitize all or portions of its Consumer Product
Portfolio, Small Loan Portfolio, Travel Finance Portfolio or Automobile Finance
Portfolio once it generates sufficient volume of such receivables.
Securitization would increase the Company's liquidity and reduce its reliance on
its Lines of Credit. However, the Company has never consummated a securitization
transaction, and the securitization markets for many of the Company's
receivables are limited. Accordingly, there can be no assurance that the Company
will successfully implement a securitization program.
The net proceeds of the Offering are expected to meet the Company's
liquidity requirements for more than 12 months if the Company were to maintain
its operations at current levels. However, the Company will need to arrange for
additional bank borrowings or additional debt or equity financing as it
continues to grow. The Company may not be able to obtain additional financing on
acceptable terms, and any such unavailability
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could have a material adverse effect on the Company's results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Liquidity and Capital Resources."
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
The financial performance of the Company will depend, in part, on the
Company's ability (i) to open and/or acquire additional locations on favorable
terms, (ii) to generate satisfactory performance or enhance performance at such
locations, (iii) to integrate new locations into the Company's operations, and
(iv) to enter into arrangements with additional third-party retailers. However,
the Company may compete for expansion and acquisition opportunities with
companies that have significantly greater financial and other resources than the
Company. There can be no assurance that the Company will be able to locate
suitable new locations or acquisition candidates, or that any operations that
the Company opens or acquires will be effectively and profitably integrated into
the Company's existing operations. New location openings and acquisitions may
negatively impact the Company's operating results, particularly during the
periods immediately following an opening or acquisition. In addition, there can
be no assurance that the Company will be able to profitably implement its
business strategy in geographic areas it does not currently serve.
The Company's financial performance also depends, in part, on the Company's
ability to manage its growing Small Loan Portfolio, Automobile Finance Portfolio
and Travel Finance Portfolio, and the Company's ability to successfully
introduce additional financial products and services. There can be no assurance
that additional financial products and services will be introduced or, if
introduced, that such financial products and services will be successful. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
COMPETITION
The installment finance credit business is highly competitive. The Company,
through its relationship with Banner and third-party retailers, competes with
department stores, discount stores and other retail outlets which also provide
credit to low income consumers. The largest national and regional competitors
have significantly greater resources than the Company, which competes only
regionally through 11 locations in greater Los Angeles and one location in San
Francisco. Additionally, new competitors with significant expertise and
resources may enter and compete in the Company's markets either through
expansion of operations or acquisitions.
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 the Company, and the entry of any such
company within the Company's markets could have a material adverse effect on the
Company's business strategy, results of operations, and financial condition.
IMPACT OF GOVERNMENT REGULATION
The operations of the Company are regulated by federal, state and local
government authorities and are subject to various laws and judicial and
administrative decisions imposing various requirements and restrictions,
including, among other things, regulating credit granting activities,
establishing maximum interest rates, and charges, requiring disclosures to
customers, governing secured transactions and setting collection, repossession
and claims handling procedures and other trade practices. Although the Company
believes that it is in compliance in all material respects with applicable
local, state and federal laws, rules and regulations, there can be no assurance
that more restrictive laws, rules and regulations will not be adopted in the
future which may make compliance more difficult or expensive, restrict the
Company's ability to purchase or finance installment sales or small loans,
further limit or restrict the amount of interest and other charges imposed in
installment sales or small loans originated by third-party retailers or the
Company, or otherwise materially adversely affect the business or prospects of
the Company. See "Business -- Government Regulation."
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SEASONAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company experiences the highest demand for its financial products and
services between October and December, and experiences the lowest demand for its
financial products and services between January and March. These significant
seasonal fluctuations in its business directly impact the Company's operating
results and cash needs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Information and Seasonality."
CONCENTRATION OF VOTING CONTROL
Banner will beneficially own or otherwise control an aggregate of
approximately 73.6% of the outstanding Common Stock of the Company after
completion of the Offering (approximately 70.8% if the Underwriters'
over-allotment option is exercised in full). Consequently, Banner will be able
to elect the entire Board of Directors, adopt amendments to the Company's
Certificate of Incorporation or effect a merger, sale of assets, or other
fundamental corporate transaction without the approval of the Company's other
stockholders. Banner will be able to control the direction and future operations
of the Company, including decisions regarding the issuance of additional shares
of Common Stock and other securities. As long as Banner is a majority
stockholder of the Company, it will be impossible for third parties to obtain
control of the Company through purchases of Common Stock not beneficially owned
or otherwise controlled by Banner. See "-- Relationships with Holdings, Banner
and Affiliates; Potential Conflicts of Interest," "The Reorganization and
Certain Relationships and Agreements among the Company, Banner, Holdings and
Other Affiliates," "Management," "Description of Capital Stock," "Principal
Shareholders" and "Shares Eligible for Future Sale."
RELATIONSHIPS WITH HOLDINGS, BANNER AND AFFILIATES; POTENTIAL CONFLICTS OF
INTEREST
Gary M. Cypres, the Company's Chairman of the Board, Chief Executive
Officer and President, is the Chairman of the Board, Chief Executive Officer,
Chief Financial Officer and President of Holdings and Banner. West Coast Private
Equity Partners, L.P. ("West Coast"), of which Mr. Cypres is the managing
general partner, controls Holdings. Mr. Cypres controls the Company, through
West Coast, Holdings and Banner. Consequently, West Coast and Mr. Cypres may
have conflicts of interest with respect to transactions concerning the Company
and its affiliates. Additionally, West Coast, through Holdings, controls two
companies other than the Company, Banner and Central Rents Holdings, Inc., all
of which may have divergent interests. Banner owns and operates six installment
credit stores in greater Los Angeles and one installment credit store in San
Francisco. Central Rents Holdings, Inc., and its wholly-owned subsidiary,
Central Rents, Inc. ("Central Rents"), owns and operates 167 rental-purchase
stores in 20 states which rent a broad range of consumer products, including
electronics, appliances and furniture. Central Rents operates 23 rental-purchase
stores in Southern California and 21 rental-purchase stores in Northern
California.
The Company, Banner and Holdings have entered into certain agreements
setting forth the ongoing relationships among them. None of these agreements is
the result of arms-length negotiations. Therefore, there can be no assurance
that any of these agreements has been effected on terms comparable to those that
would have resulted from negotiations among unaffiliated parties. Furthermore,
the Company, Banner and Holdings and their respective subsidiaries may enter
into additional or modified agreements, arrangements and transactions after the
consummation of the Offering. Any such future agreements, arrangements or
transactions will be determined through negotiations between the Company, Banner
and Holdings or their respective subsidiaries, as the case may be. See
"-- Concentration of Voting Control."
Prior to the Offering, Mr. Cypres rendered services to the Company through
a consulting agreement between Holdings and G.M. Cypres & Co., Inc., a Delaware
corporation wholly-owned by Mr. Cypres ("G.M. Cypres & Co."). Concurrent with
the Offering, Mr. Cypres will enter into a five year employment agreement with
the Company pursuant to which Mr. Cypres will act as Chairman of the Board,
Chief Executive Officer and President of the Company. In such capacities, Mr.
Cypres will spend that portion of his business time as is required to oversee
the operations of the Company and to formulate and direct the implementation of
the Company's business strategies. Mr. Cypres will continue to spend a portion
of his business time as the
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managing general partner of West Coast, as Chairman of the Board, Chief
Executive Officer, Chief Financial Officer and President of Holdings, as
Chairman of the Board, Chief Executive Officer, Chief Financial Officer and
President of Banner, and as Chairman of the Board, Chief Executive Officer and
President of Central Rents. See "-- Concentration of Voting Control," "The
Reorganization and Certain Relationships and Agreements among the Company,
Banner, Holdings and Other Affiliates," "Shares Eligible for Future Sale" and
"Management."
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends substantially on certain members of its
senior management, in particular Mr. Cypres, the Company's Chairman of the
Board, Chief Executive Officer and President. The Company's business and
financial condition could be materially adversely affected by the loss of the
services of any such individuals. The Company does not maintain key man life
insurance. See "Management" and "The Reorganization and Certain Relationships
and Agreements among the Company, Banner, Holdings and Other Affiliates."
SHARES AVAILABLE FOR FUTURE SALE
The 1,850,000 shares of Common Stock sold in the Offering will be freely
tradeable by persons other than "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), without restriction under the Securities Act. Upon
consummation of the Offering, approximately 73.6% of the outstanding shares of
Common Stock will be beneficially owned or otherwise controlled by Banner, and
all of such shares are "restricted securities" within the meaning of Rules 144
and 144A under the Securities Act. Banner will own 5,150,000 shares of Common
Stock upon completion of the Offering. Banner has agreed not to sell any shares
owned by it for 180 days following completion of the Offering without the prior
written consent of the Underwriters. Upon the expiration of the aforementioned
180-day period, Banner may be able to sell all or a portion of its shares
without registration under the Securities Act pursuant to Rules 144 and 144A
promulgated thereunder. Sale of substantial numbers of such shares in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."
IMMEDIATE DILUTION
Purchasers of the Common Stock offered hereby will experience immediate
dilution in the net tangible book value of the Common Stock in the amount of
$4.52 per share. See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK
There has been no public market for the Common Stock prior to the Offering,
and there can be no assurance that an active trading market will develop or be
sustained or that the Common Stock can be resold at or above the initial public
offering price. The initial public offering price of the Common Stock was
determined by agreement among the Company and the Underwriters and may not be
indicative of the market price for the Common Stock after the Offering. General
market conditions, including changes in interest rates, could substantially
affect the market value of the Common Stock. Moreover, numerous other factors,
such as government regulatory action, could have a significant impact on the
future market price of the Common Stock. See "Underwriting."
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THE REORGANIZATION AND CERTAIN RELATIONSHIPS AND
AGREEMENTS AMONG THE COMPANY,
BANNER, HOLDINGS AND OTHER AFFILIATES
INTRODUCTION; REORGANIZATION
The Company was formed on April 11, 1996. The Company, Banner and Holdings
have entered into an agreement (the "Reorganization Agreement") pursuant to
which on June 24, 1996, Holdings contributed to Banner its investments in its
subsidiaries that operate the small loan, automobile sales, travel, and related
businesses (the "Holdings Subsidiaries"), and Banner contributed to the Company
its investments in the Holdings Subsidiaries and in its subsidiary that holds
the Consumer Product Portfolio (collectively, the "Subsidiaries") and cash in
such amount so as to leave the Company with $500,000 on hand upon the
Reorganization. Pursuant to the Reorganization Agreement, the intercompany
accounts between the Company, Banner and Holdings have been forgiven, except
with respect to income taxes. As a result, the Company had $500,000 of cash on
hand upon the Reorganization.
In connection with the Reorganization and pursuant to the Reorganization
Agreement, the Company, Banner and Holdings entered into various agreements for
the purpose of defining the ongoing relationships among them. Because Holdings
controls the Company and Banner (see "-- Certain Relationships"), these
agreements were not the result of arm's-length negotiations. The Company
believes, however, that these agreements are at least as favorable to the
Company as those that could have been obtained from unaffiliated third parties.
The following is a summary of the material terms of the agreements, and it and
the limited summary of the Reorganization Agreement set forth above are
qualified in their entirety by reference to the complete agreements which have
been filed as exhibits to the Registration Statement of which this Prospectus
forms a part. See Notes 1 and 11 to the Company's Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
FINANCING AGREEMENT
The Company, Banner and Holdings have entered into an agreement (the
"Financing Agreement") pursuant to which Banner granted the Company the
exclusive right, at the Company's option, (i) to purchase consumer finance
receivables originated by Banner for sales of merchandise at Banner stores in
operation on the date of the Financing Agreement and for all stores which Banner
may determine to open in the future during the term of the Financing Agreement
(and any extension thereof), or (ii) to provide financing directly to Banner's
customers at all of such locations. The Company is not obligated to provide
financing to any particular Banner customer, or to offer financing at any Banner
location or locations.
The Financing Agreement has a term of 15 years commencing on the date of
the Reorganization. The Company may terminate the Financing Agreement at any
time upon one year's prior written notice to Banner.
During the term of the Financing Agreement, as long as Banner originates
its consumer finance receivables, the Company will have the right to purchase
consumer finance receivables at face value less a 1.6% transaction fee, or, if
the Company originates such receivables, Banner will be obligated to pay the
Company a fee equal to 1.6% of the face value of each such receivable.
Recognizing the value to Banner of the Company continuing to provide certain
financial products and services, including check cashing, travel and small
loans, in Banner's retail locations, the space the Company occupies in Banner's
locations is provided by Banner at no cost or charge to the Company.
OPTION AGREEMENT
The Company, Banner and Holdings have entered into an agreement (the
"Option Agreement") pursuant to which Holdings granted the Company an option to
purchase all of the outstanding capital stock of Banner (the "Option") from
Holdings at any time during the period commencing on the first anniversary of
the date of the Reorganization and ending on the third anniversary thereof (the
"Option Termination Date"). The exercise price of the Option will be equal to
the net book value of Banner as reflected on Banner's balance sheet for the
month ended immediately preceding the exercise of the Option; such balance sheet
shall have been prepared in accordance with generally accepted accounting
principles on a basis consistent with prior periods. If the Company exercises
the Option, the exercise price is payable in cash or in shares of Common
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Stock valued at the average last sale price of the Company's Common Stock during
the ten trading-day period preceding the date on which the Company delivers to
Holdings its written notice of exercise. Until the Option Termination Date,
Holdings may not, without the Company's prior written consent, sell, offer or
agree to sell, grant any option for the sale of, or otherwise dispose of any of
the capital stock of Banner (or any securities convertible into, exercisable for
or exchangeable for capital stock of Banner) nor will Banner sell substantially
all of its assets.
OPERATING AGREEMENT
The Company, Banner and Holdings have entered into an agreement (the
"Operating Agreement") setting forth certain rights and obligations of the
parties following the Reorganization. The Operating Agreement covers the
following matters:
Allocation of Business Opportunities. Due to the potential conflicts of
interest resulting from the relationships among the Company, Banner and Holdings
(see "-- Certain Relationships" below), the Operating Agreement provides that
Holdings and its subsidiaries (other than the Company and its subsidiaries) will
not, without the prior written consent of the Company, directly or indirectly
engage in or enter into any business competing with the Company and involving
the financing of consumer products, travel products, small loans, automobiles or
insurance (the "Restricted Businesses"). If Holdings shall acquire a company
engaged in a Restricted Business or shall otherwise directly or indirectly
engage in a Restricted Business, Holdings shall be obligated to sell, at the
election of the Company, such Restricted Business to the Company at a purchase
price equal to the fair market value of such Restricted Business, as determined
through an independent appraisal process. The foregoing restriction shall
terminate on December 31, 2002, or, if earlier, on the date on which Holdings
ceases to own, directly or indirectly, at least 25% of the outstanding voting
stock of the Company.
Management and Other Services. The Operating Agreement provides that
Banner, Holdings or their affiliates are obligated to provide to the Company,
and the Company is obligated to utilize, certain services, including accounting,
management information systems, employee benefits, legal, insurance, purchasing
and advertising. Except for management information systems, these arrangements
will continue until terminated by the Company, Banner, Holdings or such
affiliate upon one-year's prior written notice. Termination may be made on a
service-by-service basis or in its entirety. For the foregoing and other
services provided by Banner, Holdings or such affiliated company, and to the
extent that such services directly relate to the business of the Company, the
Company is obligated to pay Banner, Holdings or such affiliate its actual cost
of providing the same. If such services involve an allocation of expenses, such
allocation shall be determined on the basis of its percentage utilization of
such service or management's best estimate thereof. With respect to management
information systems operations and expenses, Banner and the Company agree to
allocate 50% of such expenses each to Banner and the Company for a period of
five years, subject to adjustment from time to time to reflect changing costs
and usage.
Employee Benefits. The Operating Agreement provides that the Company will
assume all liabilities of Banner, Holdings and the Subsidiaries under existing
employee welfare benefit and profit sharing plans with respect to the employees
of Banner, Holdings and the Subsidiaries who have become employees of the
Company. The Operating Agreement also provides that the employment by the
Company of individuals who were employees of Banner, Holdings and the
Subsidiaries prior to the Reorganization will not be deemed a severance of
employment from Banner, Holdings and the Subsidiaries for purposes of any
policy, plan, program or agreement that provides for the payment of severance,
salary continuation or similar benefits.
TAX SHARING AGREEMENT
The Company, Holdings and Banner have entered into an agreement (the "Tax
Sharing Agreement") providing for (i) the payment of federal, state and other
income tax remittances or refunds for periods during which the Company and
Holdings were included in the same consolidated group for federal income tax
purposes, (ii) the allocation of responsibility for the filing of such tax
returns, (iii) the conduct of tax audits and the handling of tax controversies
and (iv) various related matters. For periods during which the Company was
included in Holdings' consolidated federal income tax returns, the Company will
be required to pay Holdings its allocable portion of the consolidated federal,
state and other income tax liabilities and will be
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<PAGE> 17
entitled to receive refunds determined as if the Company and its subsidiaries
had filed separate income tax returns. With respect to Holdings' liability for
payment of taxes for all periods during which the Company was so included in
Holdings' consolidated federal income tax returns, the Company will indemnify
Holdings for all federal, state and other income tax liabilities for such
periods. The date of the consummation of the Offering will be the last day on
which the Company is required to be included in Holdings' consolidated federal
income tax returns.
INDEMNIFICATION AGREEMENTS
The Company, Holdings and Banner have entered into an indemnification
agreement (the "Indemnification Agreement") under which the Company will
indemnify and hold harmless Holdings and Banner with respect to any and all
claims, losses, damages, liabilities, costs and expenses (except when arising
from Holdings' or Banner's intentional misconduct or gross negligence or to the
extent any liability arises from a breach by Banner of its fiduciary duty to
other stockholders of the Company) that arise from or are based on the
operations of the business of the Company and its subsidiaries after the date of
the Reorganization. The Company will also indemnify and hold harmless Holdings
and Banner with respect to any and all claims, losses, damages, liabilities,
costs and expenses that arise from or are based on guarantees or undertakings
made by Holdings or Banner to third parties in respect of liabilities or
obligations of the Company, whether or not such obligations arose before or
after the Reorganization. Holdings and Banner will indemnify and hold harmless
the Company with respect to any and all claims, losses, damages, liabilities,
costs and expenses that arise from or are based on the operations of Holdings or
Banner, other than the business of the Company and its subsidiaries, before or
after the date of the Reorganization. The rights of any party under the
Indemnification Agreement are not assignable or transferable without the prior
written consent of the other parties.
The Company and Holdings have also entered into an indemnification
agreement pursuant to which the Company will indemnify and hold harmless
Holdings with respect to any and all claims, losses damages, liabilities, costs
and expenses, including liabilities arising under the Securities Act, that are
incurred by Holdings as a result of the operation of the indemnification or
contribution provisions contained in the underwriting agreement among the
Company, Holdings and the Underwriters. See "Underwriting." The Company has been
informed that, in the opinion of the Securities and Exchange Commission, the
indemnification of officers, directors or persons controlling the Company for
liabilities arising under the Securities Act is against public policy.
OTHER TRANSACTIONS WITH AFFILIATES
Additional or modified agreements, arrangements and transactions may be
entered into by the Company, Banner, Holdings or their respective subsidiaries
after the completion of the Offering. Any such future agreements, arrangements
and transactions will be determined through negotiations between the Company,
Banner, Holdings or their respective subsidiaries, as the case may be. Since the
Company will be controlled by Banner following the Offering, such negotiations
will not be at arm's-length.
CERTAIN RELATIONSHIPS
After completion of the Offering, Banner will beneficially own or otherwise
control an aggregate of approximately 73.6% of the outstanding Common Stock of
the Company (approximately 70.8% if the Underwriters' over-allotment option is
exercised in full). As such, Banner will be able to elect the entire Board of
Directors, adopt amendments to the Company's Certificate of Incorporation, or
effect a merger, sale of assets, or other fundamental corporate transaction
without the approval of the Company's other stockholders. Holdings will be able
to control the direction and future operations of the Company, including
decisions regarding the issuance of additional shares of Common Stock and other
securities. As long as Banner is a majority stockholder of the Company, it will
be impossible for third parties to obtain control of the Company through
purchases of Common Stock not beneficially owned or otherwise controlled by
Banner.
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Mr. Cypres, the Company's Chairman of the Board, Chief Executive Officer
and President, is the Chairman of the Board, Chief Executive Officer, Chief
Financial Officer and President of Holdings and Banner. West Coast, of which Mr.
Cypres is the managing general partner, controls Holdings. Mr. Cypres controls
the Company through West Coast, Holdings and Banner. West Coast and Mr. Cypres
may have conflicts of interest with respect to transactions concerning the
Company and its affiliates. Additionally, West Coast, through Holdings, controls
two companies other than the Company, Banner and Central Rents, all of which may
have divergent interests. Banner owns and operates six installment credit stores
in greater Los Angeles and one installment credit store in San Francisco.
Central Rents owns and operates 167 rental-purchase stores in 20 states which
rent a broad range of consumer products, including electronics, appliances and
furniture. Central Rents operates 23 rental-purchase stores in Southern
California and 21 rental-purchase stores in Northern California.
Prior to the Offering, Mr. Cypres rendered services to the Company through
an agreement between Holdings and G.M. Cypres & Co. Concurrent with the
Offering, Mr. Cypres will enter into a five year employment agreement with the
Company pursuant to which Mr. Cypres will act as Chairman of the Board, Chief
Executive Officer and President of the Company. In such capacities, Mr. Cypres
will spend that portion of his business time as is required to oversee the
operations of the Company and to formulate and direct the implementation of the
Company's business strategies. Mr. Cypres will continue to spend a portion of
his business time as the managing general partner of West Coast, as Chairman of
the Board, Chief Executive Officer, Chief Financial Officer and President of
Holdings, as Chairman of the Board, Chief Executive Officer, Chief Financial
Officer and President of Banner, and as Chairman of the Board, Chief Executive
Officer and President of Central Rents. See "Risk Factors -- Relationships with
Holdings, Banner and Affiliates; Potential Conflicts of Interest," "Management,"
"Description of Capital Stock," "Principal Shareholders" and "Shares Eligible
for Future Sale."
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RECENT DEVELOPMENTS
In May 1996, the Company acquired the business of and assumed the leasehold
interests to six travel locations in greater Los Angeles. In addition, in June
1996, the Company acquired the business of and assumed the leasehold interests
to 19 travel locations with 14 locations in greater Los Angeles, two locations
in Chicago and one location each in Dallas, Las Vegas and San Diego. Although
such transactions are not material from a financial point of view, the Company
believes each new location will provide the Company with an additional center
through which it can offer its financial products and services, including travel
finance, small loans and the financing of automobile insurance premiums, which
the Company anticipates offering to its customers beginning in July 1996.
In April 1996, the Company opened its second used automobile sales facility
in greater Los Angeles.
USE OF PROCEEDS
The net proceeds to be received by the Company from the issuance and sale
of the Common Stock offered hereby are estimated to be approximately $19,846,000
(approximately $22,937,000 if the Underwriters' over-allotment option is
exercised in full), after deducting the underwriting discount and estimated
offering expenses. The net proceeds of the Offering will be used for working
capital and general corporate purposes, primarily to fund the expansion of the
Company's business, including possible future acquisitions. While the Company
regularly considers and evaluates possible acquisition and other opportunities,
it does not currently have any agreements or understandings with respect to any
such opportunities. Pending such uses, the net proceeds of the Offering will be
used to pay down indebtedness, on a pro rata basis, under the Lines of Credit.
Indebtedness borrowed under the Bank of America Line of Credit totalled $38.5
million at March 31, 1996 at a weighted average interest rate of 7.89% per
annum, approximately $36.0 million at May 31, 1996, and is estimated to be
approximately $36.0 million at the completion of the Offering. Indebtedness
borrowed under the Wells Fargo Line of Credit totalled $22.0 million at March
31, 1996 at a weighted average interest rate of 7.71% per annum, approximately
$27.2 million at May 31, 1996, and is estimated to be approximately $29.0
million at the completion of the Offering. See "Capitalization," "Risk
Factors -- Need for Additional Financing," "Recent Developments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never paid, and has no present intention of paying, cash
dividends on its Common Stock. The Company anticipates that it will retain all
earnings for use in the Company's business, and the Company does not anticipate
paying cash dividends for the foreseeable future. Any determination in the
future to pay dividends will depend on the Company's financial condition,
capital requirements, results of operations, contractual limitations and any
other factors deemed relevant by the Board of Directors. Under the terms of the
Company's Lines of Credit, the Company is prohibited from paying cash dividends.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to an assumed capital contribution by
Banner of $367,000 pursuant to the Reorganization and the receipt by the Company
of the net proceeds from the sale of the Common Stock offered hereby and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with the financial statements of the Company and the notes
thereto appearing elsewhere in this Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DEBT:
Bank of America Line of Credit(2).................................... $38,529 $25,886
Wells Fargo Line of Credit........................................... 21,950 14,747
Long-term debt....................................................... 850 850
------- -------
Total debt........................................................... 61,329 41,483
------- -------
STOCKHOLDER'S EQUITY:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no
shares outstanding; no shares outstanding as adjusted............. -- --
Common Stock, $0.01 par value; 20,000,000 shares authorized;
5,150,000 shares outstanding; 7,000,000 shares outstanding as
adjusted.......................................................... 52 70
Additional paid-in capital........................................... 24,879 45,074
Retained earnings.................................................... 8,601 8,601
------- -------
Total stockholder's equity........................................... 33,532 53,745
------- -------
Total capitalization................................................. $94,861 $95,228
======= =======
</TABLE>
- ---------------
(1) Assumes that the estimated net proceeds of $19,846,000 are applied to pay
down, on a pro rata basis, the Lines of Credit.
(2) The Company expects that the borrowings under the Bank of America Line of
Credit will approximate $36.0 million at the closing of the Offering
(approximately $36.0 million at May 31, 1996) and that the borrowings under
the Wells Fargo Line of Credit will approximate $29.0 million at the closing
of the Offering (approximately $27.2 million at May 31, 1996).
19
<PAGE> 21
DILUTION
The net tangible book value of the Common Stock as of March 31, 1996 was
$32.1 million, or $6.24 per share. Net tangible book value per share represents
the amount of the Company's stockholder's equity, less intangible assets,
divided by the pro forma number of shares of Common Stock outstanding. Dilution
per share represents the difference between the amount per share paid by
purchasers of shares of Common Stock in the Offering and the pro forma net
tangible book value per share of Common Stock immediately after completion of
the Offering. After (i) giving effect to the sale of the 1,850,000 shares of
Common Stock offered hereby, (ii) an assumed capital contribution by Banner of
$367,000 pursuant to the Reorganization and (iii) deducting the underwriting
discount and estimated offering expenses payable by the Company, pro forma net
tangible book value of the Company as of March 31, 1996, would have been $52.4
million, or $7.48 per share. This represents an immediate increase in pro forma
net tangible book value of $1.24 per share to Banner and an immediate dilution
of $4.52 per share to new investors purchasing Common Stock in the Offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $12.00
Net tangible book value per share before the Offering............. $6.24
Increase in tangible book value per share attributable to New
Investors and capital contribution by Banner................... 1.24
Pro Forma Net tangible book value per share after the Offering...... 7.48
------
Dilution per share to New Investors................................. $ 4.52
======
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 1996
the difference between the existing stockholder and the purchasers of shares in
the Offering with respect to the number of shares purchased from the Company,
the total consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------- ------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing stockholder............. 5,150,000 73.6% $25,298 53.3% $ 4.91
New Investors.................... 1,850,000 26.4 22,200 46.7 12.00
--------- ---- ------- ----
Total.................. 7,000,000 100.0% $47,498 100.0%
========= ==== ======= ====
</TABLE>
20
<PAGE> 22
SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1994 and 1995, and
its results of operations for the fiscal years ended October 31, 1993 and 1994,
the two months ended December 31, 1993 and 1994 and the years ended December 31,
1994 and 1995 has been derived from the audited consolidated financial
statements of the Company appearing elsewhere in this Prospectus. This
information should be read in conjunction with such consolidated financial
statements and the notes thereto. The selected financial data with respect to
the Company's consolidated financial position as of October 31, 1993 and 1994
has been derived from the audited consolidated financial statements of the
Company, which are not presented herein. The selected financial data with
respect to the Company's consolidated financial position as of October 31, 1991
and 1992 and March 31, 1996 and its results of operations for the seven months
ended October 31, 1991, the year ended October 31, 1992, the year ended December
31, 1993 and the three months ended March 31, 1995 and 1996 has been derived
from unaudited financial statements, which in the opinion of the Company's
management reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
the unaudited periods. The results of operations for the interim periods are not
necessarily indicative of the results of operations for the full fiscal year.
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWO MONTHS THREE MONTHS
YEARS ENDED ENDED DECEMBER YEARS ENDED ENDED
OCTOBER 31, 31, DECEMBER 31, MARCH 31,
------------------------------------- --------------- --------------------------- ---------------
1991(1) 1992 1993 1994 1993 1994 1993 1994 1995 1995 1996
------- ------- ------- ------- ------ ------ ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Revenues:
Consumer Product
Portfolio interest
income................ $4,482 $ 8,145 $ 9,010 $11,444 $1,714 $2,057 $ 9,420 $11,787 $12,508 $2,955 $3,205
Small Loan Portfolio
interest income....... -- -- 134 672 54 439 188 1,057 5,095 1,009 2,093
Automobile sales........ -- -- -- -- -- -- -- -- 4,417 -- 2,038
Transaction fees on
contracts purchased
from related party.... 392 747 830 844 137 150 829 857 916 229 227
Other income(2)......... 652 1,253 1,457 1,756 304 416 1,445 1,868 3,653 654 1,722
------ ------- ------- ------- ------ ------ ------- ------- ------- ------ ------
Total Revenues........ 5,526 10,145 11,431 14,716 2,209 3,062 11,882 15,569 26,589 4,847 9,285
------ ------- ------- ------- ------ ------ ------- ------- ------- ------ ------
Costs and Expenses:
Operating expenses...... 1,980 3,986 4,519 5,009 864 1,025 4,461 5,170 8,150 1,522 2,504
Cost of automobiles
sold.................. -- -- -- -- -- -- -- -- 3,071 -- 1,355
Provision for credit
losses................ 878 2,654 3,264 3,002 696 1,617 3,447 3,923 5,859 1,106 2,347
Interest expense........ 1,776 2,306 2,279 2,523 339 617 2,235 2,801 4,278 1,075 1,241
------ ------- ------- ------- ------ ------ ------- ------- ------- ------ ------
Income before taxes..... 892 1,199 1,369 4,182 310 (197) 1,739 3,675 5,231 1,144 1,838
Income tax expense...... 371 503 572 1,694 127 (74) 727 1,493 2,112 465 735
------ ------- ------- ------- ------ ------ ------- ------- ------- ------ ------
Net income.............. $ 521 $ 696 $ 797 $ 2,488 $ 183 $ (123) $ 1,012 $ 2,182 $ 3,119 $ 679 $1,103
====== ======= ======= ======= ====== ====== ======= ======= ======= ====== ======
Pro forma net income
per share(3).......... $ 0.61 $ 0.21
======= ======
Supplementary net income
per share(4).......... $ 0.58 $ 0.19
======= ======
</TABLE>
- ---------------
(1) Reflects operations for the seven months ended October 31, 1991, which was
the first fiscal period of the Company's operations subsequent to the 1991
Acquisition.
21
<PAGE> 23
(2) Includes administrative fees charged on certain small loan contracts and,
beginning in 1995, interest earned on the Automobile Finance Portfolio and
Travel Finance Portfolio and net revenues from the sales of airline tickets.
(3) Pro forma net income per share is based on 5,150,000 shares of Common Stock
issued by the Company pursuant to the Reorganization that are assumed to be
outstanding as of January 1, 1995.
(4) Supplementary net income per share is based on 5,150,000 shares of Common
Stock issued by the Company pursuant to the Reorganization and 1,850,000
shares of Common Stock to be sold by the Company pursuant to the Offering as
if all such shares were outstanding as of January 1, 1995, and also gives
effect to a reduction in interest expense resulting from the reduction of
indebtedness upon application of the net proceeds of the Offering as if it
had occurred on January 1, 1995.
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31, MARCH 31, 1996
------------------------------------- ------------------ ------------------------
1991 1992 1993 1994 1994 1995 ACTUAL AS ADJUSTED(1)
------- ------- ------- ------- ------- -------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................... $ -- $ -- $ 931 $ 1,886 $ 215 $ 7 $ 133 $ 500
Installment Credit
Portfolio................ 40,541 45,094 47,026 50,626 56,337 62,353 59,896 59,896
Small Loan Portfolio....... 600 6,036 13,991 31,911 30,002 30,002
Total assets............... 43,198 48,158 51,567 61,597 73,942 101,440 97,331 97,698
Total debt................. 32,046 34,250 33,700 42,287 48,845 64,817 61,329 41,483
Stockholder's equity....... 10,852 13,399 17,146 18,560 23,951 33,632 33,532 53,745
</TABLE>
- ---------------
(1) Adjusted to reflect the sale of Common Stock offered hereby, an assumed
capital contribution by Banner of $367,000 pursuant to the Reorganization
and the application of the estimated net proceeds therefrom as set forth
under "Use of Proceeds."
SUPPLEMENTAL FINANCIAL DATA
The following table sets forth certain unaudited consolidated operating
results for each of the periods presented. This information has been prepared on
the same basis as the audited consolidated financial statements and includes all
adjustments (which consist solely of normal recurring adjustments) necessary to
present fairly the financial information of such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- ------------- ------------ --------- --------- ------------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer Product
Portfolio
interest
income......... $ 2,881 $2,772 $ 2,947 $3,187 $ 2,955 $ 3,118 $ 3,348 $ 3,087 $3,205
Small Loan
Portfolio
interest
income........ 141 164 201 551 1,009 1,126 1,327 1,633 2,093
Automobile
sales......... -- -- -- -- -- 385 2,528 1,504 2,038
Transaction fees
on contracts
purchased from
related
party......... 206 207 222 222 229 227 226 234 227
Other income.... 479 447 494 448 654 711 840 1,448 1,722
------ ------ ------ ------ ------ ------ ------ ------
Total
revenues...... 3,707 3,590 3,864 4,408 4,847 5,567 8,269 7,906 9,285
------ ------ ------ ------ ------ ------ ------ ------
Operating
expenses...... 1,109 1,179 1,366 1,516 1,522 1,751 2,266 2,611 2,504
Cost of
automobiles
sold.......... -- -- -- -- -- 274 1,685 1,112 1,355
Provision for
credit
losses........ 627 640 695 1,961 1,106 1,309 1,545 1,899 2,347
Interest
expense....... 536 610 773 882 1,075 1,097 1,027 1,079 1,241
------ ------ ------ ------ ------ ------ ------ ------
Income before
taxes......... 1,435 1,161 1,030 49 1,144 1,136 1,746 1,205 1,838
Income tax
expense....... 579 470 418 26 465 459 702 486 735
------ ------ ------ ------ ------ ------ ------ ------
Net income...... $ 856 $ 691 $ 612 $ 23 $ 679 $ 677 $ 1,044 $ 719 $1,103
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
22
<PAGE> 24
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 the Company's Consolidated Financial
Statements and Notes thereto and other financial data, included elsewhere in the
Prospectus.
OVERVIEW
In pursuit of the Company's business strategy, since 1992 the Company has
expanded its direct financing business by offering consumer financing through
additional installment credit stores opened by Banner, by increasing the number
and type of products and services financed, and by offering new financial
products and services. In 1992, the Company began offering unsecured small loans
generally ranging from $300 to $1,500 with average loan terms of 12 months, and
began offering installment credit finance to Banner's customers at three
additional installment credit stores in greater Los Angeles and one additional
installment credit store in San Francisco that were opened or acquired by Banner
in 1994. In 1995, the Company opened two finance centers offering small loans
and travel finance and one automobile sales location in greater Los Angeles, and
began offering consumer product finance to Banner's customers at one additional
installment credit store in greater Los Angeles that was opened by Banner in
1995. In 1995, the Company also began offering Company-financed sales of used
automobiles. As a result of this rapid growth, results of operations have been
impacted, are not readily comparable from year to year or from period to period,
and are not necessarily indicative of future operating results.
23
<PAGE> 25
SEGMENT DATA
Financial Trends
The following sets forth certain information relating to the Company's
financial trends for the periods indicated.
CONSUMER PRODUCT PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE CONTRACT BALANCE)
<TABLE>
<CAPTION>
TWO MONTHS ENDED THREE MONTHS
YEARS ENDED YEARS ENDED ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
----------------- ----------------- --------------------------- -----------------
1992 1993 1993 1994 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross receivable (at end
of period)............. $54,038 $57,250 $60,590 $67,514 $60,590 $67,514 $67,811 $63,466 $63,069
Deferred interest (at end
of period)............. 6,354 7,028 7,657 7,603 7,657 7,603 7,796 6,937 7,203
------- ------- ------- ------- ------- ------- ------- ------- -------
Net receivable (at end of
period)................ 47,684 50,222 52,933 59,911 52,933 59,911 60,015 56,529 55,866
Deferred insurance
revenues (at end of
period)................ 294 536 529 405 529 405 401 365 326
Allowance for credit
losses (at end of
period)................ 2,296 2,660 2,786 3,169 2,786 3,169 3,711 3,316 3,972
------- ------- ------- ------- ------- ------- ------- ------- -------
Net carrying value....... $45,094 $47,026 $49,618 $56,337 $49,618 $56,337 $55,903 $52,848 $51,568
======= ======= ======= ======= ======= ======= ======= ======= =======
Average net receivable... $46,690 $51,907 $51,473 $56,335 $52,456 $53,656 $57,276 $58,214 $57,810
Number of contracts (at
end of period)......... N/A N/A 66,353 76,984 66,353 76,984 84,555 76,067 81,798
Average net contract
balance................ N/A N/A $798 $778 $798 $778 $710 $743 $683
Average interest bearing
liabilities(1)......... 32,736 36,404 34,275 38,573 36,163 37,549 39,284 40,717 38,792
Total interest
income(2).............. 8,145 9,010 1,714 2,057 9,420 11,787 12,508 2,955 3,205
Total interest
expense(1)............. 2,306 2,279 335 534 2,231 2,579 3,242 839 780
Net interest income
before provision for
credit
losses................. 5,839 6,731 1,379 1,523 7,189 9,208 9,266 2,116 2,425
Net provision for credit
losses................. 2,654 3,198 655 1,229 3,340 3,332 3,852 826 1,191
Net write-offs........... 1,688 2,834 529 625 2,897 2,949 3,310 679 930
Average interest rate on
average net
receivable............. 17.4% 17.4% 20.0% 21.9% 18.0% 22.0% 21.8% 20.3% 22.2%
Average interest rate on
interest bearing
liabilities............ 7.0% 6.3% 5.9% 8.3% 6.2% 6.9% 8.3% 8.2% 8.0%
Net Interest Spread...... 10.4% 11.1% 14.1% 13.6% 11.8% 15.1% 13.5% 12.1% 14.2%
</TABLE>
24
<PAGE> 26
SMALL LOAN PORTFOLIO
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE CONTRACT BALANCE)
<TABLE>
<CAPTION>
YEAR ENDED TWO MONTHS ENDED THREE MONTHS
OCTOBER YEARS ENDED ENDED
31, DECEMBER 31, DECEMBER 31, MARCH 31,
---------- ---------------- -------------------------- -----------------
1993(3) 1993 1994 1993 1994 1995 1995 1996
---------- ------ ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross receivable (at end of
period)........................ $ 705 $4,314 $16,735 $4,314 $16,735 $37,868 $18,267 $35,678
Deferred interest (at end of
period)........................ 26 241 1,809 241 1,809 4,187 1,772 3,491
---- ------ ------- ------ ------- ------- ------- -------
Net receivable (at end of
period)........................ 679 4,073 14,926 4,073 14,926 33,681 16,495 32,187
Deferred administrative fees and
insurance revenues (at end of
period)........................ 13 166 392 166 392 576 352 579
Allowance for credit losses (at
end of period)................. 66 107 543 107 543 1,194 737 1,606
---- ------ ------- ------ ------- ------- ------- -------
Net carrying value............... $ 600 $3,800 $13,991 $3,800 $13,991 $31,911 $15,406 $30,002
==== ====== ======= ====== ======= ======= ======= =======
Average net receivable........... $ 850 $2,009 $10,509 $1,131 $ 5,662 $20,219 $15,764 $33,335
Number of contracts (at end of
period)........................ 3,127 10,616 26,166 10,616 26,166 55,241 32,066 58,993
Average net contract balance..... $ 217 $ 384 $ 570 $ 384 $ 570 $ 610 $ 514 $ 546
Average interest bearing
liabilities(1)................. -- 400 5,887 67 3,165 12,902 10,688 23,064
Total administrative fee
income......................... 52 13 145 65 458 1,133 263 414
Total interest income(2)......... 134 54 439 188 1,057 5,095 1,009 2,093
Total interest expense(1)........ -- 4 83 4 222 1,036 236 461
Net interest income before
provision for credit losses.... 134 50 356 184 835 4,059 773 1,632
Net provision for credit
losses......................... 66 41 388 107 591 1,547 280 899
Net write-offs................... -- -- 35 -- 155 896 86 487
Average interest rate on average
net receivable................. 15.8% 16.1% 25.1% 16.6% 18.7% 25.2% 25.6% 25.1%
Average interest rate on interest
bearing liabilities............ N/A 6.0% 8.5% 6.0% 7.0% 8.0% 8.8% 8.0%
Net Interest Spread.............. 15.8% 10.1% 16.6% 10.6% 11.7% 17.2% 16.8% 17.1%
</TABLE>
- ---------------
(1) Amounts represent borrowings and related interest expense on the Company's
Lines of Credit for the respective portfolios, excluding amounts related to
the Company's other borrowings.
(2) Amounts represent interest income on installment contracts, excluding
administrative fees, late charges and other charges, which are included in
other income in the Consolidated Statements of Income appearing elsewhere in
this Prospectus.
(3) The Company commenced its small loan business in December 1992.
AUTOMOBILE FINANCE PORTFOLIO
The Company began offering Company-financed sales of used automobiles in
mid-1995. At December 31, 1995 and March 31, 1996, respectively, the gross
receivable of the Automobile Finance Portfolio was $5.5 million and $7.7
million, the net receivable was $4.2 million and $5.8 million, and the carrying
value of the portfolio was $3.8 million and $5.3 million. In addition, the
number of contracts outstanding at December 31, 1995 and March 31, 1996,
respectively, was 624 and 877 with an average net contract balance at each date
of approximately $6,700. At December 31, 1995 and March 31, 1996, the average
interest rate on the average portfolio was approximately 21% and the Net
Interest Spread was approximately 13%. Due to the size and lack of seasoning of
this portfolio, there can be no assurance that the Company's experience to date
with the Automobile Finance Portfolio will be indicative of future results of
this portfolio.
25
<PAGE> 27
TRAVEL FINANCE PORTFOLIO
The Company also began offering Company-financed sales of airline tickets
in mid-1995. At December 31, 1995 and March 31, 1996, respectively, the gross
receivable of the Travel Finance Portfolio was $3.0 million and $3.4 million,
the net receivable was $2.7 million and $3.1 million and the carrying value of
the portfolio was $2.7 million and $3.0 million. In addition, the number of
contracts outstanding at December 31, 1995 and March 31, 1996, respectively, was
5,811 and 7,495 with an average net contract balance of approximately $460 and
$400. At December 31, 1995 and March 31, 1996, respectively, the average
interest rate on the average portfolio was approximately 26% and 25% and the Net
Interest Spread was approximately 18% and 17%. Due to the size and lack of
seasoning of this portfolio, there can be no assurance that the Company's
experience to date with its Travel Finance Portfolio will be indicative of
future results of this portfolio.
Analysis of Changes in Net Interest Income
The following table segregates the changes in net interest income between
changes in average balances ("Volume") and average rates ("Rate") for both
average net receivables and average interest bearing liabilities of the Consumer
Product Portfolio and the Small Loan Portfolio (dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED YEARS ENDED ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
VERSUS VERSUS VERSUS
DECEMBER 31, 1993 DECEMBER 31, 1994 MARCH 31, 1995
------------------------ ------------------------ ----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ------ ------ ------ ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest
income:
Consumer Product Portfolio... $215 $2,152 $2,367 $ 795 $ (74) $ 721 $ (21 ) $271 $ 250
Small Loan Portfolio......... 753 116 869 2,718 1,320 4,038 1,125 (41) 1,084
---- ------ ------ ------ ------ ------ ------ ---- ------
968 2,268 3,236 3,513 1,246 4,759 1,104 230 1,334
---- ------ ------ ------ ------ ------ ------ ---- ------
Increase (decrease) in interest
expense:
Bank of America Line of
Credit..................... 86 262 348 119 544 663 (40 ) (19) (59)
Wells Fargo Line of Credit... 185 33 218 683 131 814 273 (48) 225
---- ------ ------ ------ ------ ------ ------ ---- ------
271 295 566 802 675 1,477 233 (67) 166
---- ------ ------ ------ ------ ------ ------ ---- ------
Increase in net interest
income....................... $697 $1,973 $2,670 $2,711 $ 571 $3,282 $ 871 $297 $1,168
==== ====== ====== ====== ====== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED
OCTOBER 31, 1993 DECEMBER 31, 1994
VERSUS VERSUS
OCTOBER 31, 1992 DECEMBER 31, 1993
-------------------------- -------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Consumer Product Portfolio.............. $910 $ (45) $ 865 $162 $181 $ 343
Small Loan Portfolio.................... * * * 228 157 385
---- ----- ---- ---- ---- ----
910 (45) 865 390 338 728
---- ----- ---- ---- ---- ----
Increase (decrease) in interest expense:
Bank of America Line of Credit.......... 258 (285) (27) 42 157 199
Wells Fargo Line of Credit.............. * * * 55 24 79
---- ----- ---- ---- ---- ----
258 (285) (27) 97 181 278
---- ----- ---- ---- ---- ----
Increase in net interest income........... $652 $ 240 $ 892 $293 $157 $ 450
==== ===== ==== ==== ==== ====
</TABLE>
- ---------------
* Information not meaningful
26
<PAGE> 28
Credit Quality
The Company maintains reserves for credit losses in each of its portfolios
at levels that management believes are adequate to absorb potential losses.
Under the Company's guidelines, an account is deemed uncollectible and generally
is charged off at the earliest of such time the account is 91 days past due or
the account is otherwise deemed by the Company to be uncollectible. The
following sets forth the Company's charge-off experience and allowance for
credit losses. The Company does not believe that its credit quality experience
can be readily compared to less specialized consumer finance companies due to
the Hispanic orientation and uniform credit profile of its customers.
CONSUMER PRODUCT PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS ENDED THREE MONTHS
YEARS ENDED YEARS ENDED ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------------- ------------------- ------------------------------- -------------------
1992 1993 1993 1994 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average net
receivable............ $46,690 $51,907 $51,473 $56,335 $52,456 $53,656 $57,276 $58,214 $57,810
Net provision for credit
losses................ 2,654 3,198 655 1,229 3,340 3,332 3,852 826 1,191
Net write-offs.......... 1,688 2,834 529 625 2,897 2,949 3,310 679 930
Provision for credit
losses as a percentage
of average net
receivable............ 5.7% 6.2% 7.6% 13.1% 6.4% 6.2% 6.7% 5.7% 8.2%
Net write-offs as a
percentage of average
net receivable........ 3.6% 5.5% 6.2% 6.7% 5.5% 5.5% 5.8% 4.7% 6.4%
END OF PERIOD
Net receivable.......... $47,684 $50,222 $52,933 $59,911 $52,933 $59,911 $60,015 $56,529 $55,866
Allowance for credit
losses................ 2,296 2,660 2,786 3,169 2,786 3,169 3,711 3,316 3,972
Allowance for credit
losses as a percentage
of net receivable..... 4.8% 5.3% 5.3% 5.3% 5.3% 5.3% 6.2% 5.9% 7.1%
</TABLE>
SMALL LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS ENDED THREE MONTHS
YEAR ENDED YEARS ENDED ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ------------------ ------------------------------ -------------------
1993(2) 1993 1994 1993 1994 1995 1995 1996
------------ ------ ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average net receivable......... $850 $2,009 $10,509 $1,131 $ 5,662 $20,219 $15,764 $33,335
Net provision for credit
losses....................... 66 41 388 107 591 1,547 280 899
Net write-offs(1).............. 0 0 35 0 155 896 86 487
Provision for credit losses as
a percentage of average net
receivable................... 8.5% 12.2% 22.2% 9.5% 10.4% 7.7% 7.1% 10.8%
Net write-offs as a percentage
of average net
receivable(1)................ 0.0% 0.0% 2.0% 0.0% 2.7% 4.4% 2.2% 5.8%
END OF PERIOD
Net receivable................. $679 $4,073 $14,926 $4,073 $14,926 $33,681 $16,495 $32,187
Allowance for credit losses.... 66 107 543 107 543 1,194 737 1,606
Allowance for credit losses as
a percentage of net
receivable................... 9.7% 2.6% 3.6% 2.6% 3.6% 3.5% 4.5% 5.0%
</TABLE>
- ---------------
(1) The Company believes that as the Small Loan Portfolio seasons the net
write-offs and net write-offs as a percentage of average net receivable will
approximate those experienced by the Company in the Consumer Product
Portfolio.
(2) The Company commenced its small loan business in December 1992.
27
<PAGE> 29
AUTOMOBILE AND TRAVEL FINANCE PORTFOLIOS
At December 31, 1995 and March 31, 1996, respectively, the allowance for
credit losses in the Automobile Finance Portfolio was $410,000 and $544,000,
representing 9.8% and 9.3% of the end of period net receivable. At December 31,
1995 and March 31, 1996, respectively, the allowance for credit losses in the
Travel Finance Portfolio was $50,000 and $70,000, representing 1.8% and 2.3% of
the end of period net receivable.
Delinquency Experience
Borrowers under the Company's contracts are required to make monthly
payments. The following sets forth the Company's delinquency experience for
accounts with payments 31 days or more past due.
CONSUMER PRODUCT PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31, MARCH 31,
--------------------- -------------------------- ----------------
1992 1993 1993 1994 1995 1995 1996
----------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Past due accounts (gross receivable):
31-60 days.............................. $ 1,485 $1,453 $1,316 $2,264 $1,943 $1,520 $1,552
61 days or more......................... 1,412 1,483 1,576 2,610 2,465 2,334 2,269
Accounts with payments 31 days or more
past due as a percentage of end of
period gross receivable................. 5.4% 5.1% 4.8% 7.2% 6.5% 6.1% 6.1%
</TABLE>
SMALL LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31, MARCH 31,
----------- ---------------------------- -----------------
1993 1993 1994 1995 1995 1996
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Past due accounts (gross receivable):
31-60 days................................ $ 10 $ 9 $ 76 $ 500 $ 175 $ 572
61 days or more........................... 27 36 105 649 188 799
Accounts with payments 31 days or more past
due as a percentage of end of period gross
receivable(1)............................. 5.2% 1.0% 1.1% 3.0% 2.0% 3.8%
</TABLE>
- ---------------
(1) The Company believes that as the Small Loan Portfolio seasons the number of
accounts with payments 31 days or more past due as a percentage of end of
period gross receivable will conform to the levels the Company has
experienced in the Consumer Product Portfolio.
AUTOMOBILE AND TRAVEL FINANCE PORTFOLIOS
At December 31, 1995 and March 31, 1996, respectively, the dollar amount of
accounts 31 days or more past due in the Automobile Finance Portfolio was
$117,000 and $199,000 or 2.1% and 2.6% as a percentage of the end of period
gross receivable. At December 31, 1995 and March 31, 1996, respectively, the
dollar amount of accounts 31 days or more past due in the Travel Finance
Portfolio was $87,000 and $101,000 or 2.9% and 3.0% as a percentage of the end
of period gross receivable. Due to the size of and lack of seasoning of these
portfolios, there can be no assurance that the performance of the Company's
experience to date will be indicative of future results.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
Total revenues in the three months ended March 31, 1996 increased to $9.3
million from $4.8 million in the three months ended March 31, 1995, an increase
of $4.4 million or 91.6%.
28
<PAGE> 30
Consumer Product Portfolio interest income in the three months ended March
31, 1996 increased to $3.2 million from $3.0 million in the three months ended
March 31, 1995, an increase of $0.3 million or 8.5%. All of this increase was
attributable to a rise in the average interest rate the Company earned on this
portfolio to 22.2% in the three months ended March 31, 1996 from 20.3% in the
three months ended March 31, 1995. The Consumer Product Portfolio averaged $57.8
million or $683 per contract in the three months ended March 31, 1996 compared
to $58.2 million or $743 per contract in the three months ended March 31, 1995.
The Company believes that this reduction may be attributable to a number of
factors, including general economic conditions in California.
Small Loan Portfolio interest income in the three months ended March 31,
1996 increased to $2.1 million from $1.0 million in the three months ended March
31, 1996, an increase of $1.1 million or 107.4%. All of this gain was
attributable to an increase in the Small Loan Portfolio, which averaged $33.3
million in the three months ended March 31, 1996 compared to $15.8 million in
the three months ended March 31, 1995. The average interest rate the Company
charged on this portfolio decreased slightly for the three months ended March
31, 1996 to 25.1% compared to 25.6% for the three months ended March 31, 1995.
The Company believes that this reduction is attributable to an increase in the
size of the loans it made in the three months ended March 31, 1996, which
averaged $546 at March 31, 1996 compared to $514 at March 31, 1995. Under
California law the interest rate the Company is allowed to charge decreases as
the amount of the small loan increases. The Company currently charges the
maximum interest rate permitted under California law on its small loans.
For the three months ended March 31, 1996, revenues from the sale of
automobiles, which business commenced in June 1995, amounted to $2.0 million.
Other income for the three months ended March 31, 1996 increased to $1.7
million from $0.7 million in the three months ended March 31, 1995, an increase
of $1.1 million or 163.3%. Other income in the three months ended March 31, 1996
includes $0.2 million of net revenues earned from the sale of airline tickets,
which commenced in July 1995, and $0.4 million of interest income earned on the
Travel Finance Portfolio and Automobile Finance Portfolio. The remaining
increase in other income was primarily due to an increase of $0.2 million in
administrative fee income earned on the Small Loan Portfolio, and a $0.3 million
increase in late charges the Company earned on all of its receivable portfolios.
Operating expenses in the three months ended March 31, 1996 increased to
$2.5 million from $1.5 million in the three months ended March 31, 1995, an
increase of $1.0 million or 64.5%. Of this increase, $0.6 million is
attributable to operating costs and expenses incurred in connection with the
sale of automobiles and airline tickets which business commenced in July of
1995. The remaining increase of $0.4 million was primarily due to the expansion
of the small loan business, including an increase in the number of employees and
related payroll expenses.
The cost of automobiles sold for the three months ended March 31, 1996 was
$1.4 million.
The provision for credit losses in the three months ended March 31, 1996
increased to $2.3 million from $1.1 million in the three months ended March 31,
1995, an increase of $1.2 million or 112.2%. This increase was due to the growth
experienced by the Company in its Small Loan Portfolio, which generated a
provision of $0.9 million in the three months ended March 31, 1996 compared to
$0.3 million in the comparable period of 1995. The remaining increase of $0.6
million was primarily attributable to an increase of $0.4 million in the
provision for credit losses on the Company's Consumer Product Portfolio as a
result of increased write-offs in such portfolio, and $0.2 million provision for
credit losses provided on the Company's Automobile Finance Portfolio which its
operation commenced in June of 1995.
Interest expense in the three months ended March 31, 1996 increased to $1.2
million from $1.1 million in the three months ended March 31, 1995, an increase
of $0.2 million or 15.4%. This increase was primarily due to a higher level of
borrowings under the Lines of Credit used to support the growth in the Company's
Small Loan Portfolio, Travel Finance Portfolio and Automobile Finance Portfolio.
As a result of the foregoing factors, net income in the three months ended
March 31, 1996 increased to $1.1 million from $0.7 million in the three months
ended March 31, 1995, an increase of $0.4 million or 62.4%.
29
<PAGE> 31
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues in the year ended December 31, 1995 increased to $26.6
million from $15.6 million in the year ended December 31, 1994, an increase of
$11.0 million or 70.8%.
Consumer Product Portfolio interest income in the year ended December 31,
1995 increased to $12.5 million from $11.8 million in the year ended December
31, 1994, an increase of $0.7 million or 6.1%. Of this increase, $0.8 million
was attributable to an increase in the size of the Consumer Product Portfolio,
which averaged $57.3 million in the year ended December 31, 1995 compared to
$53.7 million in the year ended December 31, 1994. For the year ended December
31, 1995, the number of active contracts outstanding in the Consumer Product
Portfolio increased to 84,600, an increase of 9.8% over the comparable period in
1994. For the year ended December 31, 1995, the average balance in such
portfolio decreased to $710 from $778 in the year ended December 31, 1994, a
decrease of 8.7%. The Company believes that this reduction may be attributable
to a number of factors, including general economic conditions in California. The
average interest rate the Company earned on its Consumer Product Portfolio in
the year ended December 31, 1995 decreased to 21.8% from 22.0% in the year ended
December 31, 1994.
Small Loan Portfolio interest income in the year ended December 31, 1995
increased to $5.1 million from $1.1 million in the year ended December 31, 1994,
an increase of $4.0 million or 382.0%. Of this increase, $2.7 million was
attributable to an increase in loan demand and $1.3 million was attributable to
an increase in the average interest rate the Company earned on the average Small
Loan Portfolio. The average interest rate increased to 25.2% for the year ended
December 31, 1995 from 18.7% for the year ended December 31, 1994. The Company
currently charges the maximum interest rate permitted under California law on
its small loans. The average size of the Small Loan Portfolio increased to $20.2
million in the year ended December 31, 1995 from $5.7 million in the year ended
December 31, 1994, an increase of $14.6 million.
In the year ended December 31, 1995, revenues include $4.4 million
generated from the sale of automobiles, which business commenced in June 1995.
Other income in the year ended December 31, 1995 increased to $3.7 million
from $1.9 million in the year ended December 31, 1994, an increase of $1.8
million or 95.6%. Other income includes $0.4 million of net revenues earned from
the sale of airline tickets, which business commenced in July of 1995, and $0.4
million interest income earned on the Travel Finance Portfolio and Automobile
Finance Portfolio. The remaining increase in other income was primarily due to
an increase of $0.7 million in administrative fee income earned on the Small
Loan Portfolio.
Operating expenses in the year ended December 31, 1995 increased to $8.2
million from $5.2 million in the year ended December 31, 1994, an increase of
$3.0 million or 57.6%. Of this increase, $1.2 million is attributable to
operating expenses and costs incurred in connection with the sale of airline
tickets and used automobiles which began in the year ended December 31, 1995.
The remaining increase of $1.8 million was primarily due to the expansion of the
small loan business, including an increase in the number of employees and
related payroll expenses of $0.9 million, and to an increase in advertising
expenses of $0.3 million.
The cost of automobiles sold in the year ended December 31, 1995 was $3.1
million.
The provision for credit losses in the year ended December 31, 1995
increased to $5.9 million from $3.9 million in the year ended December 31, 1994,
an increase of $1.9 million or 49.3%. This increase was primarily due to the
growth experienced by the Company in its Small Loan Portfolio, which generated a
provision of $1.5 million for the year ended December 31, 1995 compared to $0.6
million in the comparable period of 1994. The Automobile Finance Portfolio and
Travel Finance Portfolio accounted for $0.5 million of the provision for credit
losses during 1995. The remaining increase was attributable to growth in the
Company's Consumer Product Portfolio and a higher provision level on this
portfolio in 1995 as compared to 1994.
Interest expense in the year ended December 31, 1995 increased to $4.3
million from $2.8 million in the year ended December 31, 1994, an increase of
$1.5 million or 52.7%. This increase was primarily due to a higher level of
borrowings under the Lines of Credit used to support the growth in the Company's
Installment
30
<PAGE> 32
Credit Portfolio and Small Loan Portfolio, and to a higher level of interest
charged by the lenders under the respective Lines of Credit, as a result of
increases in their borrowing rates.
As a result of the foregoing factors, net income in the year ended December
31, 1995 increased to $3.1 million from $2.2 million for the year ended December
31, 1994, an increase of $0.9 million or 42.9%.
Year and Two Months Ended December 31, 1994 Compared to Year and
Two Months Ended December 31, 1993
Total revenues in the year ended December 31, 1994 increased to $15.6
million from $11.9 million in the year ended December 31, 1993, an increase of
$3.7 million or 31.0%. For the two months ended December 31, 1994, total
revenues increased to $3.1 million from $2.2 million for the two months ended
December 31, 1993, an increase of $0.9 million or 38.6%.
Consumer Product Portfolio interest income in the year ended December 31,
1994 increased to $11.8 million from $9.4 million in the year ended December 31,
1993, an increase of $2.4 million or 25.1%. Of this increase, $2.2 million was
attributable to an increase in the average interest rate the Company earned on
the Consumer Product Portfolio, which increased to 22.0% in the year ended
December 31, 1994 from 18.0% in the year ended December 31, 1993. The remaining
increase of $0.2 million was attributable to an increase in the size of the
Consumer Product Portfolio, which averaged $53.7 million in the year ended
December 31, 1994 compared to $52.5 million in the year ended December 31, 1993.
Consumer Product Portfolio interest income for the two months ended December 31,
1994 increased to $2.1 million from $1.7 million for the two months ended
December 31, 1993, an increase of $0.3 million or 20.0%. Of this increase, $0.2
million was due to an increase in the average size of the Consumer Product
Portfolio which averaged $56.3 million for the two months ended December 31,
1994 compared to $51.5 million for the two months ended December 31, 1993. The
remaining increase of $0.2 million was attributable to an increase in the
interest rate the Company earned on the Consumer Product Portfolio, which
increased to 21.9% for the two months ended December 31, 1994 from 20.0% for the
two months ended December 31, 1993.
Small Loan Portfolio interest income in the year ended December 31, 1994
increased to $1.1 million from $0.2 million in the year ended December 31, 1993,
an increase of $0.9 million or 462.2%. Of this increase, $0.8 million was
attributable to an increase in loan demand and $0.1 million was attributable to
an increase in the average interest rate the Company earned on the average Small
Loan Portfolio. The average interest rate increased to 18.7% for the year ended
December 31, 1994 from 16.6% for the year ended December 31, 1993. The average
size of the Small Loan Portfolio increased to $5.7 million in the year ended
December 31, 1994 from $1.1 million in the year ended December 31, 1993, an
increase of $4.5 million. Small Loan Portfolio interest income for the two
months ended December 31, 1994 increased to $0.4 million from $0.1 million for
the two months ended December 31, 1993, an increase of $0.4 million or 713.0%.
Of this increase, $0.2 million was due to an increase in loan demand and $0.2
million was attributable to an increase in the average interest rate the Company
earned on the Small Loan Portfolio. The average size of the Small Loan Portfolio
increased to $10.5 million for the two months ended December 31, 1994 from $2.0
million for the two months ended December 31, 1993, an increase of $8.5 million.
The average interest rate the Company earned on the Small Loan Portfolio
increased to 25.1% for the two months ended December 31, 1994 from 16.1% for the
two months ended December 31, 1993.
Other income in the year ended December 31, 1994 increased to $1.9 million
from $1.4 million in the year ended December 31, 1993, an increase of $0.4
million or 29.3%. For the two months ended December 31, 1994, other income
increased to $0.4 million from $0.3 million for the two months ended December
31, 1993, an increase of $0.1 million or 36.8%. This increase was primarily due
to an increase in administrative fee income and to increased late fee income.
Operating expenses in the year ended December 31, 1994 increased to $5.2
million from $4.5 million in the year ended December 31, 1993, an increase of
$0.7 million or 15.9%. Operating expenses for the two months ended December 31,
1994 increased to $1.0 million from $0.9 million for the two months ended
December 31, 1993, an increase of $0.1 million or 18.6%. This increase was
primarily due to increased expenses in connection with the Company's development
of its small loan business, which include an increase
31
<PAGE> 33
in the number of employees and related payroll necessary to accommodate the
increased number of contracts associated with the expansion of this business.
The provision for credit losses in the year ended December 31, 1994
increased to $3.9 million from $3.4 million in the year ended December 31, 1993,
an increase of $0.5 million, or 13.8%. This increase was attributable to the
growth in the Company's Small Loan Portfolio. The Company's provision for credit
losses on its Consumer Product Portfolio was $3.3 million for both of the years
ended December 31, 1994 and 1993. The provision for credit losses as a
percentage of the average Consumer Product Portfolio was 6.2% in the year ended
December 31, 1994 compared to 6.4% in the year ended December 31, 1993. The
provision for credit losses for the two months ended December 31, 1994 increased
to $1.6 million from $0.7 million for the two months ended December 31, 1993, an
increase of $0.9 million or 132.3%. For the two month period ended December 31,
1994, the provision for credit losses as a percentage of average net receivable
in the Consumer Product Portfolio was 13.1% compared to 7.6% in the comparable
period of 1993, and the provision for credit losses as a percentage of average
net receivable in the Small Loan Portfolio was 22.2% compared to 12.2%,
respectively, for those same periods. These increases reflect the Company's
decision to provide additional provision for credit losses in light of the
significant increase in the Company's Combined Receivable Portfolio in the two
months ended December 31, 1994, and the Company's concern that the California
economy would continue to be depressed in 1995.
Interest expense in the year ended December 31, 1994 increased to $2.8
million from $2.2 million during the year ended December 31, 1993, an increase
of $0.6 million or 25.3%. Interest expense for the two months ended December 31,
1994 increased to $0.6 million from $0.3 million for the months ended December
31, 1993, an increase of $0.3 million or 82.0%. These increases were due to a
higher level of bank borrowings used to support the growth on the Company's
Combined Receivable Portfolio and to higher interest rates on the Company's
Lines of Credit.
As a result of the foregoing factors, net income in the year ended December
31, 1994 increased to $2.2 million compared to $1.0 million in the year ended
December 31, 1993, an increase of $1.2 million or 115.6%. The Company incurred a
net loss for the two months ended December 31, 1994 of $0.1 million compared to
net income of $0.2 million for the two months ended December 31, 1993.
Year Ended October 31, 1993 Compared to Year Ended October 31, 1992
Total revenues in the year ended October 31, 1993 increased to $11.4
million from $10.1 million in the year ended October 31, 1992, an increase of
$1.3 million or 12.7%.
Consumer Product Portfolio interest income in the year ended October 31,
1993 increased to $9.0 million from $8.1 million in the year ended October 31,
1992, an increase of $0.9 million or 10.6%. This increase was attributable to an
increase in the size of the Consumer Product Portfolio, which averaged $51.9
million in the year ended October 31, 1993 compared to $46.7 million in the year
ended October 31, 1992. The average interest rate the Company earned on the
Consumer Product Portfolio did not materially change during the year ended
October 31, 1993, averaging 17.4% during each of the years ended October 31,
1993 and October 31, 1992.
Other income in the year ended October 31, 1993 increased to $1.5 million
from $1.3 million in the year ended October 31, 1992, an increase of $0.2
million or 16.3%. This increase was attributable to an increase in late fees and
sales of insurance products.
Operating expenses in the year ended October 31, 1993 increased to $4.5
million from $4.0 million in the year ended October 31, 1992, an increase of
$0.5 million or 13.4%. This increase was primarily due to additional costs
incurred in managing a higher level of outstanding contracts and to certain
expenses incurred in connection with the introduction of the small loan
business.
The provision for credit losses in the year ended October 31, 1993
increased to $3.3 million compared to $2.7 million in the year ended October 31,
1992, an increase of $0.6 million or 23.0%. Although the Company's average
Consumer Product Portfolio in the year ended October 31, 1993 increased to $51.9
million compared to $46.7 million in the year ended October 31, 1992, the
increase in the provision was primarily due
32
<PAGE> 34
to the recession that the California economy entered into in the year ended
October 31, 1993. The effect of the unfavorable economy is reflected in the
provision for credit losses expressed as a percentage of the average net
receivable in the Consumer Product Portfolio, which rose to 6.2% in the year
ended October 31, 1993 compared to 5.7% in the year ended October 31, 1992.
Interest expense in the year ended October 31, 1993 was $2.3 million, which
was unchanged from the year ended October 31, 1992.
As a result of the foregoing factors, net income in the year ended October
31, 1993 increased to $0.8 million from $0.7 million, an increase of $0.1
million or 14.5%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through the cash flow
generated from operations, borrowings under its Lines of Credit, and from
periodic contributions to capital made by Holdings and related entities. See
"The Reorganization and Certain Relationships and Agreements among the Company,
Banner, Holdings and Other Affiliates" and "Principal Shareholders."
For the three months ended March 31, 1996, net cash provided from
operations totalled $2.9 million, while investing activities provided an
additional $2.0 million of cash flow. During this period the Company repaid $3.5
million of notes payable and made a return of capital of $1.2 million to Banner.
Net cash provided from operations totaled $4.3 million, $6.7 million and
$9.2 million for the year ended October 31, 1993, and the years ended December
31, 1994 and 1995, respectively. During these periods, the primary source of net
cash provided from operations was net income before non-cash charges,
principally the provision for credit losses.
For the years ended October 31, 1993 and December 31, 1994 and 1995, net
cash flow generated from operations was insufficient to fund the Company's
outlays for capital expenditures and the significant growth it experienced in
its combined receivable portfolio, which required cash outflows of $5.8 million
in the year ended October 31, 1993, and of $20.8 million and $29.8 million in
the year ended December 31, 1994 and 1995, respectively. To fund its
expenditures and support the growth in its combined receivable portfolio, the
Company relied on capital contributions from Holdings and bank borrowings made
under its credit facilities. Capital contributions amounted to $3.0 million,
$1.6 million and $6.6 million in the year ended October 31, 1993 and the years
ended December 31, 1994 and 1995, respectively. Bank borrowings provided cash of
$12.2 million and $15.1 million in the years ended December 31, 1994 and 1995,
respectively.
Currently, the Company funds its lending activities and operations in part
with borrowings under the Bank of America Line of Credit and Wells Fargo Line of
Credit. Borrowings under the Bank of America Line of Credit may be used only to
finance the Company's consumer product finance business. Banner is a guarantor
under the Bank of America Line of Credit. The amount of credit available at any
one time under the Bank of America Line of Credit is limited to 75% of eligible
contracts in the Company's Consumer Product Portfolio. As of March 31, 1996, the
total amount available to the Company under the Bank of America Line of Credit
was $38.5 million, all of which was outstanding. The Bank of America Line of
Credit was amended and restated as of June 24, 1996 and expires on August 30,
1996. Borrowings under the Wells Fargo Line of Credit may be used only to
finance the Company's travel finance, auto finance and small loan businesses.
The amount of credit available at any one time under the Wells Fargo Line of
Credit is limited to 70% of eligible contracts in Small Loan, Automobile Finance
and Travel Finance Portfolios. As of March 31, 1996, the total amount available
to the Company under the Wells Fargo Line of Credit was $27.9 million, of which
$22.0 million was outstanding. The Wells Fargo Line of Credit expires on
December 31, 1996. The Company believes it will be able to renew both of its
Lines of Credit. However, there can be no assurance that the Company will be
able to renew such Lines of Credit. See "Risk Factors -- Need for Additional
Financing." The Company intends to use a portion of the net proceeds of the
Offering to reduce outstanding borrowings, on a pro rata basis, under the Lines
of Credit, thereby increasing the amount available to the Company under such
Lines of Credit.
The Lines of Credit each contain certain restrictive covenants that
require, among other things, the maintenance of certain financial ratios and
amounts. The Bank of America Line of Credit requires the Company to maintain a
specified tangible net worth, specific cash flow to interest coverage ratios and
specific
33
<PAGE> 35
debt to tangible net worth coverage ratios for one of its subsidiaries and
Banner combined, as such terms are defined in the Bank of America Line of
Credit. Other ratios related to the performance of the Company's Consumer
Product Portfolio must be maintained within limits, including maximum ratios of
past due accounts to eligible contracts and net write-offs to average net
receivables, and a minimum ratio of the allowance for credit losses to net
receivables, in all cases as such terms are defined in the Bank of America Line
of Credit. The Wells Fargo Line of Credit requires the Company to maintain
specified levels of tangible net worth, net income, and cash flow to interest
coverage ratios for one of its subsidiaries, and cannot exceed a specified ratio
of debt to tangible net worth for such subsidiary, as such terms are defined in
the Wells Fargo Line of Credit. In addition, the ratio of the net provision for
credit losses to net receivables for the Company's Small Loan, Automobile
Finance and Travel Finance portfolios must be maintained below a specified level
as such terms are defined in the Wells Fargo Line of Credit. At March 31, 1996,
the Company was in compliance with such restrictive covenants in the Lines of
Credit.
The Company may securitize all or portions of its gross receivable
portfolio when it generates sufficient volume of such receivables.
Securitization would increase the Company's liquidity and reduce its reliance on
its Lines of Credit. However, the Company has never consummated a securitization
transaction, and the securitization markets for many of the Company's
receivables are limited. Accordingly, there can be no assurance that the Company
will successfully implement a securitization program.
The Company requires substantial capital to finance its business.
Consequently, the Company's ability to grow and the future of its operations
will be affected by the availability of financing and the terms thereof. The
amount of debt the Company requires from time to time depends on the Company's
needs for cash, as determined by its operating performance and its ability to
borrow under the terms of its various loan agreements. The Company intends to
meet its short-term liquidity needs with cash flow from operations, a portion of
the proceeds from the Offering and borrowings under its Lines of Credit.
The estimated net proceeds of the Offering of approximately $19.8 million
are expected to be sufficient to fund the Company's liquidity requirements for
more than 12 months if the Company were to maintain its operations at current
levels. However, the Company may need to arrange for additional bank borrowings
or additional debt or equity financing as it continues to grow. The Company
believes that its Lines of Credit can be renewed, that the increase in equity
resulting from the Offering will facilitate the Company's ability to incur
increased indebtedness, and that it can obtain alternative financing sources
that, together with cash flow from operations and the net proceeds from the
Offering, would provide the Company sufficient resources to meet its capital
requirements. However, there can be no assurance that the Company will be able
to renew its Lines of Credit, that the Company will have access to additional
financing sources necessary to sustain its operations and its growth plans, or
that such financing will be available to the Company on favorable terms.
The Company is prohibited from paying cash dividends under its various debt
agreements.
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BUSINESS
COMPANY OVERVIEW
The Company is a specialized consumer finance company that primarily serves
the financing needs of the rapidly growing low income Hispanic population, a
market the Company believes is underserved. The Company served this market at
March 31, 1996 through 11 locations in greater Los Angeles and one location in
San Francisco. The Company (i) purchases and services consumer finance
receivables generated by the Company's customers for purchases of high quality
brand name consumer products, appliances and furniture sold by Banner, (ii)
originates and services consumer finance receivables generated by the Company's
customers for purchases of used automobiles and airline tickets sold by the
Company, and (iii) provides other financial services to its customers such as
small loans. The Company has catered to the low income Hispanic population
during its 40 years of operation by locating its facilities primarily in
Hispanic communities, by advertising in Spanish, and by employing Spanish as the
primary language at its locations. While the Company operates primarily in
greater Los Angeles and faces substantial competition with respect to its lines
of business, the Company's objective is to become the leading provider of
consumer credit and other financial services to the low income Hispanic
population in urban areas in California and elsewhere in the United States.
The Company's customers are typically between the ages of 21 and 45, earn
less than $25,000 per year, have little or no savings, and limited or 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 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 finance companies
or consumer finance companies that have more stringent underwriting criteria.
Demographic Trends and Market Opportunity
Since 1950, Hispanics have been the fastest growing minority group in the
United States, increasing from 4 million in 1950 to approximately 27 million in
1996, a compound annual growth rate of 4.3%, and, according to the 1996 Report,
this trend is expected to continue. The 1996 Report projects that the Hispanic
population will total 36 million by 2005. California is home to the largest
Hispanic population in the United States and this population is estimated to
grow from 9.4 million in 1995 to 13 million by 2005, at which time it will
comprise approximately 34% of California's total population. The Company
believes that, despite the current size and projected population growth of the
Hispanic population in the United States, this segment of the population will
continue to have limited access to traditional sources of credit.
The Company has identified certain metropolitan markets in which the
Company believes it can successfully introduce its financial products and
services. Specifically, the Company has determined that there exist significant
opportunities in markets having large Hispanic populations but in which such
populations account for less than 30% of such area's total population. The
Company believes that Hispanic consumers in these markets are more likely to be
underserved than Hispanics in locations in which they comprise a greater
proportion of an area's total population. In its target markets, the Company
believes it could expand through selective acquisitions or by establishing its
own financial product and service centers. The Company believes that selective
acquisitions, rather than the introduction of its own financial product and
service centers would be the most efficient method to enter markets in which
Hispanics comprise more than 30% of a metropolitan area's total population.
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The United States Hispanic population is concentrated in the following nine
states:
<TABLE>
<CAPTION>
ESTIMATED HISPANIC
POPULATION 1996
------------------
(IN MILLIONS)
<S> <C>
California.................................. 9.8
Texas....................................... 5.6
New York.................................... 2.6
Florida..................................... 2.0
Illinois.................................... 1.1
New Jersey.................................. 0.9
Arizona..................................... 0.9
New Mexico.................................. 0.7
Colorado.................................... 0.5
</TABLE>
- ---------------
Source: 1996 U.S. Hispanic Market Study performed by the Strategy Research
Corporation.
BUSINESS SEGMENTS
Installment Credit Business
The Company provides credit to low-income consumers who desire to purchase
consumer products on credit. By granting credit, the Company provides low income
consumers with an increased number of purchasing options. The Company purchases
and services consumer finance receivables generated through purchases of brand
name consumer products sold by Banner, including special order items, and
originates and services consumer finance receivables generated through purchases
of used automobiles and airline tickets.
Consumer Product Finance. The Company purchases and services consumer
finance receivables generated through purchases of brand name consumer products
sold by Banner through six stores in greater Los Angeles and one store in San
Francisco. Consumer products financed by the Company include televisions,
stereos, refrigerators, washers and dryers, ovens, freezers, furniture,
household accessories and special order items. The average net contract balance
in the Company's Consumer Product Portfolio at March 31, 1996 was $683.
Automobile Finance. In mid-1995, the Company opened its first used
automobile facility and commenced its automobile finance business at one
location adjacent to Banner's flagship installment credit store in downtown Los
Angeles, and, in April 1996, opened a second used automobile facility in greater
Los Angeles. The Company offers used automobiles for sale at prices generally
ranging from $6,500-$7,500 with financing terms of up to 42 months. The number
of vehicles sold monthly by the Company has increased from 54 during June 1995
to 150 during March 1996. From commencement of this business through March 31,
1996, the Company sold 877 vehicles for an aggregate sales price of $6.5
million, of which $5.8 million was financed. The average net contract balance in
the Company's Automobile Finance Portfolio at March 31, 1996 was approximately
$6,700.
California is the largest vehicle market in the United States. The used
vehicle market that caters to the Hispanic customer operates on a highly
fragmented and localized basis with few dealers having more than one sales
location. As part of the Company's strategy to distinguish itself from its
competitors, the Company does not negotiate the sales prices of its vehicles and
includes a twelve-month warranty with all vehicles at no extra charge. To cover
potential warranty claims, the Company establishes a reserve with respect to
each used automobile it sells. Although the Company believes it has adequately
reserved for potential warranty claims, there can be no assurance that such
reserved amounts will be sufficient to cover the costs of the Company's warranty
claims.
Travel Finance. As a complimentary business line, the Company in mid-1995
commenced its travel finance business, offering Company-financed sales of
airline tickets, primarily for travel to Mexico and Central America. At March
31, 1996, the Company was conducting this business at five of Banner's
installment credit
36
<PAGE> 38
stores in greater Los Angeles and two finance centers offering small loans and
travel finance in greater Los Angeles that were opened in December 1995. The
Company believes that both its small loan and travel product lines can be
offered out of 1,000-1,500 square foot locations, and that such locations can
efficiently offer additional financial products and services which the Company
anticipates it will make available in the future. Since commencing this
business, the Company has sold and financed approximately $5.5 million of
airline tickets. The average net contract balance in the Company's Travel
Finance Portfolio at March 31, 1996 was approximately $400. See "Recent
Developments."
Unaffiliated Retailer Installment Finance. Also in mid-1995, the Company
began a program of providing financing to consumers for the purchase of products
and services sold by unaffiliated retailers. At present, the Company has
unaffiliated retailer installment financing arrangements with approximately 25
retailers in greater Los Angeles, most with one or two locations, and one with
approximately 15 locations. The Company's unaffiliated retailer installment
finance business currently represents an immaterial portion of the Company's
gross receivable portfolio. However, the Company regularly considers and
evaluates additional unaffiliated retailer installment financing arrangements.
Small Loan Business
In December 1992, the Company began offering unsecured closed-end small
loans generally ranging from $350 to $1,500 for personal, family or household
purposes at Banner's flagship installment credit store. Prior to commencing this
business, the Company determined that there was a significant demand for small
loans, and that financial institutions in its geographic market were not making
loans of less than $1,500 and did not have adequate underwriting experience to
serve the low income Hispanic population. By December 31, 1995, the Company was
originating small loans through eight facilities in greater Los Angeles, four of
which were operated at Banner's installment credit stores and four of which were
operated as finance centers offering small loans and travel finance which opened
in December 1995. See "Recent Developments."
Since inception, the small loan business has experienced significant
growth. The Company had approximately 11,000 active small loan accounts at
December 31, 1993, approximately 26,000 accounts at December 31, 1994 and
approximately 59,000 accounts at March 31, 1996. At March 31, 1996, the Company
had an outstanding net portfolio balance of $32.2 million, the average net
contract balance in the Small Loan Portfolio was $546 and the average contract
term was approximately 12 months. The Company estimates that approximately 50%
of the small loan customers at March 31, 1996 were also current installment
credit customers. Management believes that the lack of greater overlap between
small loan customers and installment credit customers presents the Company with
significant cross-selling and marketing opportunities.
Other Business Activities
The Company acts as an intermediary for an unaffiliated insurance carrier
with respect to the sale of credit life and credit accident and health insurance
to its customers and, as such, sells policies 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 in the event
of the borrower's death. 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 the Company's disclosure to customers, as required by the
Truth-in-Lending Act and applicable state statutes. The Company does not act as
an intermediary with respect to the sale of credit insurance to non-borrowers.
The Company earns a commission from the insurance carrier on the sale of credit
insurance which is based in part on the claims experience on policies sold by
the insurance carrier through the Company. The Company recently formed a
wholly-owned subsidiary to provide similar insurance directly, which it
anticipates providing to its customers in the near future.
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<PAGE> 39
COMPANY OPERATIONS
Credit Procedures
The Company has developed uniform guidelines and procedures for evaluating
credit applications for installment credit sales and small loans. Currently, the
Company's five senior credit managers and five senior approvers have an average
of 19 years and 12 years of experience, respectively, with the Company.
Credit applications are taken at all of the Company's locations and at each
of Banner's stores and are transmitted electronically through the Company's
computer system to the Company's credit processing facility, where all credit
approval and verification is centralized. The Company believes that its
underwriting policies and procedures allow it to respond quickly to credit
requests. The Company typically responds to credit applicants within one hour.
Management believes that because of its prompt response, many customers prefer
to deal with the Company instead of its competitors.
The Company's credit managers and credit approvers make their decisions on
a case by case basis and are influenced by, among other things, whether an
applicant is a new or existing customer. New applicants complete standardized
credit applications which contain information concerning income level,
employment history, stability of residence, driver's license or state
identification card, social security number, capacity to pay and personal
references. The Company also obtains a credit bureau report and rating, if
available, and seeks to confirm various information. For an established
customer, the credit process includes a review of the customer's credit and
payment history with the Company. In instances where the applicant has no or
limited credit history, the Company may require a co-signer with appropriate
credit status to sign the contract and may, in the installment credit business,
also require a down payment. Depending on the size of the transaction and other
relevant factors, the applicant's employment and residence may also be verified
by the Company's credit verifiers. See "Risk Factors -- Credit Risk Associated
with Customers; Lack of Collateral."
The Company maintains reserves for credit losses in each of its portfolios
at levels that management believes are adequate to absorb potential losses. The
Company regularly reviews its Installment Credit Portfolio and Small Loan
Portfolio to determine the adequacy of its allowances for credit losses. Major
considerations in determining the adequacy of the allowances for credit losses
include reviewing credit loss experience, the level of delinquencies, the impact
of general economic conditions and trends, and the size of the portfolios.
Payment and Collections
Industry studies estimate that more than 25% of the adult population in the
United States does not maintain a checking account with a depository
institution, a standard prerequisite for obtaining a consumer loan, credit card
or other form of credit from most consumer credit sources. The Company's
customers are required to make their monthly payments using a payment schedule
provided to them by the Company. The vast majority of the Company's customers
make their payments in cash at the Company's locations or at the Company's
payment facilities in Banner's stores. For the Company's customers who are paid
their wages by check but who do not maintain checking accounts, the Company
cashes such checks at no charge in order to facilitate account payments.
Payments are considered 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 signed by the customer. The Company typically contacts borrowers
whose payments are not received by the due date within 10 days after such due
date. Such contacts are made by the Company both by letter and telephone.
Thereafter, if no payment is remitted to the Company, additional contacts are
made every 7 days, and, after a loan becomes 31 days delinquent, the account is
generally turned over to the Company's credit collectors. Under the Company's
guidelines, an account is deemed uncollectible and generally is charged off at
the earlier of the time the account is 91 days past due or the account is
otherwise deemed by the Company to be uncollectible. In addition, the delinquent
account is generally turned over to either an attorney or collection agency for
further processing once it becomes 91 days past due.
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Finance Contracts
The Company utilizes different types of financing contracts, depending on
the dollar amount of the financing and the product financed. Each of the
contracts is in Spanish and English and requires monthly financing payments.
Many of the terms, conditions and disclosures in the finance contracts are
governed by state and federal regulations. See "-- Regulation." When a
qualifying customer with an open account balance increases the amount
outstanding with an additional purchase or loan, the customer executes a new
contract for the new aggregate balance and, with the proceeds, pays off the
original contract.
Insurance
The Company maintains various insurance policies of the type, and in the
amounts, which are usual for its business. The Company maintains coverage for
business interruptions, including interruptions resulting from computer failure.
The Company believes that its insurance coverage is adequate.
Management Information Systems
Pursuant to the Operating Agreement, the Company will utilize Banner's
management information systems and be granted a license to use Banner's
management information systems' software. Banner has invested significant
resources to develop a proprietary system that integrates all major aspects of
the businesses of the Company and Banner. The computer system utilizes a
mid-range IBM AS-400 as its central server, which provides on-line, real-time
information processing services to terminals located in each of Banner's
locations and in the Company's centralized credit processing facility. The
system allows for complete processing of the Company's consumer product finance,
automobile finance, travel finance and small loan businesses, including
application processing and credit-approval, referral of credit bureau reports,
accessing the payment history of all active accounts, preparation of contracts,
payment posting, and all other collection monitoring activity. In addition, the
system provides customized reports to analyze each of the Company's portfolios
on a daily, weekly and monthly basis. The Company believes that the computer
system is sufficient to permit significant growth in each of the Company's
business lines and portfolios without the need for a material additional
investment in management information systems. Banner has adopted procedures
designed to minimize the effect of systems failures and other types of potential
problems, including routine backup and off-site storage of computer tapes, as
well as redundancy and "mirroring" of certain computer processes.
COMPETITION
The installment credit business is highly competitive. The Company, through
its relationship with Banner and other retailers, competes with those department
stores, discount stores and other retail outlets which also provide credit to
low income consumers. The largest national and regional competitors have
significantly greater resources than the Company, which competes only regionally
through 11 locations in the greater Los Angeles area and one in San Francisco.
Competition may arise from new sources having the expertise and resources to
enter the Company's markets either through expansion of operations or
acquisitions.
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 the Company, and the entry or expansion of
any such company within the Company's markets could have a material adverse
effect on the Company's business strategy and results of operations and
financial condition. The Company does not believe it competes with commercial
banks, savings and loans and most other consumer finance lenders, because these
institutions typically make loans greater than $1,500 with maturities greater
than one year.
REGULATION
General
As a consumer finance company, the Company is subject to extensive
regulation. Violation of statutes and regulations applicable to the Company may
result in actions for damages, claims for refunds of payments
39
<PAGE> 41
made, certain fines and penalties, injunctions against certain practices and the
potential forfeiture of rights to repayment of loans. The Company may be
affected by changes in state and federal statutes and regulations. The Company,
in conjunction with industry associations, actively participates in lobbying
efforts in the states in which it operates. Although the Company is not aware of
any pending or proposed legislation that could have a material adverse effect on
the Company's business, there can be no assurance that future regulatory changes
will not adversely affect the Company's lending practices, operations,
profitability or prospects.
State Regulation
Consumer Product and Travel Finance. The Company's consumer product
finance and Travel Finance businesses are regulated in California by the
California Retail Installment Sales Act (the "Unruh Act"). The Unruh Act
requires the Company to disclose to its customers the conditions under which the
Company may impose a finance charge, the method of determining the balance which
is subject to a finance charge, the method used to determine the amount of the
finance charge, and the minimum periodic payment required. In addition, the
Unruh Act provides consumer protection against unfair or deceptive business
practices by regulating the contents of retail installment sales contracts,
setting forth the respective rights and obligations of buyers and sellers, and
regulating the maximum legal finance rate or charge on installment credit sales.
Automobile Finance. The Rees-Levering Motor Vehicle Sales and Financing
Act (the "Rees-Levering Act") governs the Company's automobile finance business
in California. The Rees-Levering Act requires the Company to provide its
customers with information such as an itemization of the amount financed,
including items such as document preparation fees, taxes imposed on the sale,
and the amount charged for a service contract. The Rees-Levering Act also
requires that the Company's sales contracts comply with the disclosure
requirements of Federal Truth-in-Lending Regulation Z. In addition, the
Rees-Levering Act protects consumers against unfair or deceptive sales practices
by setting forth the respective rights and obligations of buyers and sellers of
motor vehicles, and regulating the maximum legal finance rate or charge for
motor vehicle 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. Generally, state regulations
also establish minimum capital requirements for each local office. State agency
approval generally is required to open new branch offices. Accordingly, the
ability of the Company to expand by acquiring existing offices and opening new
offices will depend 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. The Company's insurance businesses are regulated in
California by the State of California Department of Insurance. In general, these
regulations require the Company to, among other things, maintain fiduciary fund
and trust accounts and follow specific market, general business and claims
practices.
Federal Regulation
The Company is 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 the Company to provide complete
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 principal 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
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<PAGE> 42
prohibits creditors from discriminating against loan applicants on the basis of
race, color, sex, age or marital status. Pursuant to Regulation B promulgated
under the Equal Credit Opportunity Act, creditors are required to make certain
disclosures regarding consumer rights and advise consumers whose credit
applications are not approved of the reasons for the rejection. The Fair Credit
Reporting Act requires the Company 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.
ADVERTISING
Banner actively advertises primarily on Hispanic television and through
direct mail, targeting both its present and former customers and potential
customers who have used other sources of consumer credit. Banner advertises
extensively during the October through December holiday season and in connection
with new store openings. The Company also advertises its other financial
products and services in cooperation with Banner and the related costs are
allocated to each of the parties. The Company believes that Banner's advertising
and its own advertising contributes significantly to its ability to compete
effectively with other providers of consumer credit.
EMPLOYEES
At March 31, 1996, the Company had 217 hourly employees and 29 salaried
employees. The Company provides life, accidental death and dismemberment,
medical, vision and dental coverage to eligible employees. None of the Company's
employees is covered by a collective bargaining agreement. The Company considers
its relations with its employees to be good.
PROPERTIES
The Company's executive and administrative offices occupy approximately
17,000 square feet of a building owned by Holdings that is located at 5480 East
Ferguson Drive, Commerce, California 90022. The Company believes that its
executive and administrative offices are adequate for current needs and that
additional space in its headquarters is available for future expansion. All of
the Company's finance centers are leased pursuant to leases that generally have
five year terms with options to renew. The Company's payment centers located in
Banner's stores are adequate for the Company's present and anticipated needs.
The Company owns an 86,000 square foot property on which it operates its
automobile sales facility in Los Angeles and leases an approximately one acre
property in greater Los Angeles on which it opened a second automobile sales
facility in April 1996.
LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings arising in the normal
course of its business. Management believes the outcome of these matters will
not have a material adverse effect on the Company.
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<PAGE> 43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company, their ages (at April 1, 1996) and their
positions and offices with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- ---- --------------------------------------------------
<S> <C> <C>
Gary M. Cypres......................... 52 Chairman of the Board, President and Chief
Executive Officer
Ran Birkins............................ 46 Senior Vice President of Credit and Collections
Ed Valdez.............................. 43 Senior Vice President of Credit
Russell J. Grisanti.................... 49 Senior Vice President and Chief Financial Officer
Louis Caldera.......................... 40 Director
Jose de Jesus Legaspi.................. 43 Director
</TABLE>
Messrs. Caldera and Legaspi have each consented to be elected to the Board
of Directors upon consummation of the Offering. Pursuant to the terms of the
Company's Articles of Incorporation and Bylaws, the Board of Directors consists
of three persons. Members of the Board of Directors are elected for one-year
terms expiring at the next annual meeting of shareholders and hold office until
their successors are duly elected and qualified. All officers are appointed by
and serve at the discretion of the Board of Directors.
GARY M. CYPRES has been Chairman of the Board, Chief Executive Officer and
President of the Company since its formation. Mr. Cypres has been Chairman of
the Board, Chief Executive Officer, Chief Financial Officer and President of
Holdings and Banner since February 1991, Chairman of the Board and President of
Central Rents since June 1994 and managing general partner of West Coast since
March 1990. Prior to that, Mr. Cypres was a general partner of SC Partners, a
private investment banking and consulting firm. From 1983 to 1985, Mr. Cypres
was Chief Financial Officer of The Signal Companies. From 1973 to 1983 Mr.
Cypres was Senior Vice President of Finance at Wheelabrator-Frye Inc. Mr. Cypres
was a member of the Board of Trustees and a faculty member of The Amos Tuck
School of Business at Dartmouth College.
It is contemplated that after the Offering, Mr. Cypres will spend that
portion of his business time as may be required to oversee the operations of the
Company and to direct or implement the Company's business strategies. Mr. Cypres
will continue to spend a portion of his business time as the managing general
partner of West Coast, as Chairman of the Board, Chief Executive Officer, Chief
Financial Officer and President of Holdings, as Chairman of the Board, Chief
Executive Officer, Chief Financial Officer and President of Banner, and as
Chairman of the Board and President of Central Rents. See "Risk
Factors-Concentration of Voting Control; Relationships with Holdings, Banner and
Affiliates; Conflicts of Interest."
RAN BIRKINS has been Senior Vice President of Credit and Collections of the
Company since its formation and Vice President of Credit of the Company's
consumer product finance business and small loan business since September 1994.
From November 1992 to September 1994, Mr. Birkins was Director of Credit of the
Company's small loan business. From December 1989 to September 1994, Mr. Birkins
was Director of Credit of the Company's consumer product finance business.
ED VALDEZ has been Senior Vice President of Credit of the Company since its
formation, Senior Credit Manager of the Company's consumer product finance
business since 1986 and Senior Credit Manager of the Company's small loan
business since November 1992. Mr. Valdez has been working for the Company for
over 28 years.
RUSSELL J. GRISANTI has been Senior Vice President and Chief Financial
Officer of the Company since its formation and President of the Company's
automobile business since September 1995. From September 1994 to September 1995,
Mr. Grisanti was an independent consultant to various businesses. From April
1991 to September 1994, Mr. Grisanti was President of Kars-Yes Finance Inc., a
used car finance company. From June 1983 to March 1991, Mr. Grisanti served as
President of Brookland Financial
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<PAGE> 44
Corporation, Vice President of The Estes Co., Executive Vice President and Chief
Financial Officer of Home Federal Savings and Loan of Arizona and Chief
Financial Officer of Security Savings and Loan of Arizona.
LOUIS CALDERA has agreed to become a director of the Company upon
consummation of the Offering. Mr. Caldera has been an Assemblyman in the
California Legislature since November 1992, having been reelected in November
1994. Mr. Caldera is currently the Vice-Chair of the Assembly Banking and
Finance Committee and also serves on the Revenue and Taxation Committee, the
Environmental Safety and Toxic Materials Committee, the Higher Education
Committee, and the Select Committee on California's Health Care Safety Net. From
February 1991 to November 1992, Mr. Caldera was Deputy County Counsel for the
County of Los Angeles. Prior thereto, Mr. Caldera was an attorney in private
practice.
JOSE DE JESUS LEGASPI has agreed to become a director of the Company upon
consummation of the Offering. Since 1980, Mr. Legaspi has been a principal of
and broker at The Legaspi Company, a full service commercial real estate
brokerage firm. In addition, since 1992, Mr. Legaspi has been a principal of the
FINCA Property Management Company, a residential and commercial real estate
management company. Mr. Legaspi is also a Commissioner of the Los Angeles
Department of Water and Power.
OTHER SIGNIFICANT EMPLOYEES
ALAN E. SCHENEMAN, 44, has been Senior Vice President of the Company since
its formation. Mr. Scheneman joined the Company's consumer product finance
business in 1992 as Vice President of Management Information Services. From 1988
to 1992, Mr. Scheneman was the director of Product Development at JDA Software
Services where, in 1989, he managed the implementation of the Company's
management information system.
MARVIN A. TORRES, 33, has been President of the Company's travel finance
business since December 1995. From April 1995 to December 1995, Mr. Torres was
Vice President of Operations for the Company's travel finance business. From
1984 to 1995, Mr. Torres was Vice President of Operations and General Manager at
Solano Travel Service and Costa Rica Holiday Tours in Los Angeles, California.
ANGEL LOPEZ, 48, has been Vice President of the Company since May 1996.
From 1995 until joining the Company, Mr. Lopez was Vice President of Marketing
and Business Development at the Sacred Heart Hospital in Chicago, Illinois. From
1992 to 1995, Mr. Lopez was the Director of Ethnic Marketing for Sears
Merchandise Group in Hoffman Estates, Illinois. From 1990 to 1992, Mr. Lopez was
the General Manager for the Latin American Buying Office of Sears in Mexico
City, Mexico.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon consummation of the Offering, the Board of Directors will establish a
Compensation Committee and an Audit Committee. The Compensation Committee will
consist of at least two directors who are "disinterested persons" within the
meaning of Rule 16b-3, as amended from time to time, under the Exchange Act and
"outside directors" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986, as amended, and will have the authority to determine compensation
for the Company's executive officers and to administer the Company's 1996 Plan
(defined below). The Audit Committee will consist of Mr. Caldera and Mr. Legaspi
and will have the authority to make recommendations concerning the engagement of
independent public accountants, review with the independent public accountants
the plans and results of the audit engagement, approve professional services
provided by the independent public accountants, review the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls.
COMPENSATION OF THE BOARD OF DIRECTORS
The Company intends to pay to its Board of Directors who are not also
employees of the Company (the "NonEmployee Directors") an annual fee of $15,000.
Members of the Board of Directors who are employees of the Company will not be
paid any Directors' fees. In addition, the Company may reimburse members of the
Board of Directors for expenses incurred in connection with their activities on
behalf of the Company. Non-
43
<PAGE> 45
Employee Directors will also each receive options to purchase 7,000 shares of
Common Stock at an exercise price of $12.00 per share, the initial public
offering price of the Common Stock offered hereby, under the 1996 Plan (defined
below), effective upon the consummation of the Offering. All options granted to
the Non-Employee Directors vest in equal annual installments over 5 year periods
beginning on the date of grant, subject to continued service on the Board of
Directors; however, no option can be exercised until at least six months after
the date of grant. The Company has entered into agreements with all directors
pursuant to which the Company has agreed to indemnify them against certain
claims arising out of their services as directors. Directors are also entitled
to the protection of certain indemnification provisions in the Company's
Certificate of Incorporation and Bylaws. See "Compensation Pursuant to Plans and
Arrangements -- Stock Option Plan" and "-- Indemnification Arrangements."
EXECUTIVE COMPENSATION
The following table summarizes the compensation for the year ended December
31, 1995 of the Company's Chief Executive Officer and each of the other
executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
-------------------- -------------------
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS
- ---------------------------------------------------- -------- ------- -------------------
<S> <C> <C> <C>
Gary M. Cypres(2)................................... $175,000 -- --
Chairman of the Board,
Chief Executive Officer and President
Ran Birkins(3)...................................... 97,262 $12,000 --
Senior Vice President of Credit
and Collections
Ed Valdez(4)........................................ 84,615 10,000 --
Senior Vice President of Credit
Russell J. Grisanti(5).............................. 54,788 -- --
Senior Vice President and
Chief Financial Officer
</TABLE>
- ---------------
(1) Certain of the Company's executive officers receive benefits in addition to
salary and cash bonuses. The aggregate amount of such benefits, however, do
not exceed the lesser of $50,000 or 10% of the total annual salary and bonus
of such Named Executive Officer.
(2) Mr. Cypres' compensation was paid to G.M. Cypres & Co. by Holdings for
services rendered to it.
(3) Mr. Birkins became an executive officer of the Company upon its formation.
(4) Mr. Valdez became an executive officer of the Company upon its formation.
(5) Mr. Grisanti became an executive officer of the Company upon its formation.
Mr. Grisanti joined the Company in September 1995 at an annual salary of
$180,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company will establish a Compensation Committee upon consummation of
the Offering. The Compensation Committee will consist of Mr. Caldera and Mr.
Legaspi. Prior to the establishment of the Compensation Committee, decisions
concerning the compensation of executive officers were made by Mr. Cypres, the
Company's Chairman of the Board, Chief Executive Officer and President. None of
the executive officers of the Company currently serves as a director or member
of the Compensation Committee of another entity or of any other committee of the
board of directors of another entity performing similar functions. See "The
Reorganization and Certain Relationships and Agreements among the Company,
Banner, Holdings and Other Affiliates."
44
<PAGE> 46
COMPENSATION PURSUANT TO PLANS AND ARRANGEMENTS
Set forth below is information with respect to certain benefit plans and
employment arrangements of the Company pursuant to which cash and non-cash
compensation is proposed to be paid or distributed in the future to the
directors and executive officers of the Company. Base compensation does not
include compensation pursuant to any of the plans and arrangements described
herein.
Stock Option Plan
Concurrent with the Offering, the Company will adopt the 1996 Stock Option
Plan (the "1996 Plan"). The 1996 Plan has been approved by the stockholder of
the Company. The 1996 Plan will provide that it is to be administered by a
committee of the Board of Directors (the "Option Committee") consisting of at
least two directors. The Compensation Committee is expected to function as the
Option Committee. The Option Committee has the authority, within limitations as
set forth in the 1996 Plan, to establish rules and regulations concerning the
1996 Plan, to determine the persons to whom options may be granted, the number
of shares of Common Stock to be covered by each option, and the terms and
provisions of the option to be granted. The Option Committee has the right to
cancel any outstanding options and to issue new options on such terms and upon
such conditions as may be consented to by the optionee affected.
A total of 700,000 shares are reserved for issuance under the 1996 Plan. No
individual may be granted options under the 1996 Plan with respect to more than
350,000 shares during the duration of the 1996 Plan. It is expected that options
to purchase 290,000 shares of Common Stock will be granted to eligible
participants under the 1996 Plan effective upon the closing of the Offering with
an exercise price equal to the price to the public set forth on the cover page
of this Prospectus, including to certain executive officers as set forth below.
Upon the effectiveness of these grants, 410,000 shares of Common Stock will
remain available for future grants of options under the 1996 Plan.
The number of shares which may be granted under the 1996 Plan or under any
outstanding options will be proportionately adjusted in the event of any stock
dividend or if the Common Stock shall be split, converted, exchanged,
reclassified or in any way substituted. Notwithstanding any other provision of
the 1996 Plan, in the event of a recapitalization, merger, consolidation, rights
offering, separation, reorganization or liquidation, or any other change in the
Company's corporate structure or outstanding shares, the Option Committee may
make such equitable adjustments to the number and class of shares available
under the 1996 Plan or to any outstanding options as it shall deem appropriate
to prevent dilution or enlargement of rights. The maximum term of any option
granted pursuant to the 1996 Plan is ten years. In general, shares subject to
options granted under the 1996 Plan which expire, terminate or are canceled
without having been exercised in full become available again for option grants.
The class of eligible persons under the 1996 Plan will consist of directors
and employees of, and consultants to, the Company or a parent or subsidiary
thereof, as determined by the Option Committee, except that Non-Employee
Directors can only receive fixed grants of options under the terms set forth in
the 1996 Plan. See "Compensation of the Board of Directors." Options granted
under the 1996 Plan may be incentive stock options ("ISOs") or non-qualified
options, at the discretion of the Option Committee; however, ISOs can only be
granted to employees of the Company or a parent or subsidiary. The 1996 Plan
provides that the exercise price of an option (other than a Non-Employee
Director's option) will be fixed by the Option Committee on the date of grant;
however, the exercise price of an ISO must be not less than the fair market
value of the Common Stock on the date of the grant. The exercise price of an ISO
granted to any participant who owns stock possessing more than 10% of the total
combined voting power of all classes of outstanding stock of the Company must be
at least equal to 110% of the fair market value of the Common Stock on the date
of grant. Any ISOs granted to such participants also must expire within five
years from the date of grant. Additionally, options granted under the 1996 Plan
will not be ISOs to the extent that the aggregate fair market value of the
shares with respect to which ISOs under the 1996 Plan (or under any other plan
maintained by the Company or a parent or subsidiary thereof) first become
exercisable in any year exceeds $100,000. No options shall be granted under the
1996 Plan on or after the tenth anniversary of the adoption of the 1996 Plan.
45
<PAGE> 47
Options will be non-transferable and non-assignable; provided, however,
that the estate of a deceased holder can exercise options. Options (other than
Non-Employee Directors' options) are exercisable by the holder thereof subject
to terms fixed by the Option Committee. However, no option can be exercised
until at least six months after the date of grant.
Notwithstanding the above, an option will be exercisable immediately upon
the happening of any of the following (but in no event during the six-month
period following the date of grant or subsequent to the expiration of the term
of an option): (i) the holder's retirement on or after attainment of age 65;
(ii) the holder's disability or death; (iii) a "change of control" (as defined
in the 1996 Plan) of the Company while the holder is in the employ or service of
the Company; or (iv) the occurrence of such special circumstances or events as
the Option Committee determines merits special consideration, except with
respect to Non-Employee Directors' options. Under the 1996 Plan, an option
holder generally may pay the exercise price in cash, by check, by delivery to
the Company of shares of Common Stock already owned by the holder or, except
with respect to Non-Employee Directors' options, by such other method as the
Option Committee may permit from time to time.
If an option holder terminates employment with the Company or service as a
director of or consultant to the Company while holding an unexercised option,
the option will terminate 30 days after such termination of employment or
service unless the option holder exercises the option within such 30-day period.
However, all options held by an option holder will terminate immediately if the
termination is a result of a violation of such holder's duties. If cessation of
employment or service is due to retirement on or after attainment of age 65,
disability or death, the option holder or such holder's successor-in-interest,
as the case may be, is permitted to exercise any option within three months
after retirement or within one year after disability or death.
The 1996 Plan may be terminated and may be modified or amended by the
Option Committee or the Board of Directors at any time; provided, however, that
(i) no modification or amendment either increasing the aggregate number of
shares which may be issued under options or to any individual or modifying the
requirements as to eligibility to receive options will be effective without
stockholder approval within one year of the adoption of such amendment and (ii)
no such termination, modification or amendment of the 1996 Plan will alter or
affect the terms of any then outstanding options without the consent of the
holders thereof.
The table below sets forth certain information with respect to options to
be granted under the 1996 Plan upon the closing of the Offering to all current
executive officers and proposed directors:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDER OPTIONS
NAME TO BE GRANTED
--------------------------------------------------------------------- ----------------
<S> <C>
Gary M. Cypres....................................................... 75,000
Ran Birkins.......................................................... 25,000
Ed Valdez............................................................ 30,000
Russell J. Grisanti.................................................. 20,000
Louis Caldera........................................................ 7,000
Jose de Jesus Legaspi................................................ 7,000
</TABLE>
Profit Sharing Plan
The Company participates along with other affiliated employers in Banner's,
a California Corporation dba Central Electric Profit Sharing Plan (the "Profit
Sharing Plan") which is intended to qualify under Section 401(a) of the Internal
Revenue Code. All employees of the Company who are at least 18 years of age and
who complete six months of service are eligible to participate in the Profit
Sharing Plan. The Company makes discretionary profit sharing contributions on
behalf of each participant who completes at least 1,000 hours of service during
each year and is employed on the last day of each year (except that a
participant who dies, is disabled or retires during the year shall be entitled
to such contributions, if any).
Profit sharing contributions generally vest at the rate of 20% per year
beginning with the third year of service except that such contributions vest
immediately upon a participant's reaching age 65 or the fifth
46
<PAGE> 48
anniversary of participation, whichever is later. Vested amounts credited to a
participant's account generally are not distributed to such participant until
the termination of his employment with the Company. The Profit Sharing Plan
provides for loans to participants in a manner which is uniform and
nondiscriminatory. Under the Internal Revenue Code, Company profit sharing
contributions are not taxable to the employee until such amounts are distributed
to the employee, and are tax deductible to the Company.
Supplemental Executive Retirement Plan
Concurrent with the Offering, the Company will adopt a defined benefit
Supplemental Executive Retirement Plan (the "SERP Plan") which will provide
supplemental retirement benefits to certain key management employees.
To vest in the SERP Plan, an employee must have at least 10 years of
service with the Company, including five years subsequent to the adoption of the
plan. Upon completion of the Offering, Mr. Cypres will be credited with ten
years of service with the Company and will be treated as having fulfilled his
post-adoption service on December 31, 1997 by acting as the Company's President
and Chief Executive Officer until such date. Participation in the SERP Plan will
be determined by the Board of Directors. The SERP Plan benefits are a function
of length of service with the Company and Final Average Compensation (average
monthly compensation during the 36 consecutive months of the last 60 months of
the participant's employment that produces the highest average compensation,
including salary and bonus).
Benefits are equal to a targeted percentage of Final Average Compensation
as determined by the Board of Directors upon selection of the employee to
participate in the SERP Plan. In no case will the rate exceed fifty (50%)
percent of the Final Average Compensation as of the date of the participant's
retirement or termination of employment, multiplied by the ratio of the actual
years of service as of the applicable event to the participant's years of
service projected to the participant's Normal Retirement Date (the first day of
the month after the participant attains age 60). A vested participant who
terminates employment at or after his Normal Retirement Date will receive the
full targeted percentage of his Final Average Compensation. The SERP Plan
benefit is reduced, however, by the annuity value of the participant's benefit
under the Profit Sharing Plan. Mr. Cypres will participate in the SERP Plan.
Executive Incentive Bonus Program
The Compensation Committee may grant contingent performance bonuses to
certain executive officers of the Company, including the Named Executive
Officers. The amounts of most incentive bonuses will be payable to the extent
that a recipient or the Company achieves performance goals established by the
Company's Board of Directors.
Executive Deferred Salary and Bonus Plan
Concurrent with the Offering, the Company will adopt the Executive Deferred
Salary and Bonus Plan ("EDP"), which will cover the Named Executive Officers and
certain other executives of the Company. Pursuant to the EDP, a participant may
elect to defer up to 35% of the participant's base salary and up to 100% of any
bonus awarded pursuant to the Company's Executive Incentive Bonus Program.
Elections under the EDP to defer base salary and bonus are made annually prior
to the commencement of each year. Any amounts deferred under the EDP earn
interest based upon the prime rate and are generally payable in a lump sum
within 30 days after the participant's termination of employment with the
Company for any reason. Following the completion of the Offering, the EDP will
be administrated by the Compensation Committee of the Board of Directors.
Employment Agreement
Concurrent with the Offering, the Company will enter into an employment
agreement with Mr. Cypres, and the present arrangement under which G.M. Cypres &
Co. is paid $250,000 per annum for Mr. Cypres' services will terminate. Under
the new employment agreement, Mr. Cypres will serve as the Company's Chairman of
the Board for a period of five years at a base salary of $175,000 per year and
will be eligible to
47
<PAGE> 49
participate in the Company's executive compensation plans. Mr. Cypres will also
agree to serve as the Company's President and Chief Executive Officer until
December 31, 1997. If the Company has not named a new President and Chief
Executive Officer by December 31, 1997, Mr. Cypres will continue in this
capacity for a period of up to three additional years and will receive an
adjustment of his compensation as determined by the Board of Directors. The
employment agreement also provides that Mr. Cypres will participate in the
Company's SERP Plan and be credited with eight and one-half years of service for
his contribution to the Company since the 1991 Acquisition and for entering into
the employment agreement. In addition, on December 31, 1997 Mr. Cypres will be
treated as satisfying his post-adoption service requirement under the SERP Plan.
If Mr. Cypres is terminated "for cause," which definition generally
includes termination by the Company due to the executive's willful failure to
perform his duties under the employment agreement, Mr. Cypres's personal
dishonesty or breach of his fiduciary duties or the employment agreement, then
the Company will be obligated to pay him only his base salary up to the date
upon which the Company notifies him of his termination "for cause." If Mr.
Cypres is terminated without "cause," becomes disabled or dies, then the Company
will be obligated to pay him or his estate, commencing immediately, a lump sum
payment equal to his base salary for the remaining term of the employment
agreement and to pay him under the SERP Plan as if he had worked to his Normal
Retirement Date, which the employment agreement provides is December 31, 2000.
Mr. Cypres will agree not to solicit employees of or compete with the
Company in any manner following his resignation or termination from the Company
for any period for which a lump sum has been paid by the Company in accordance
with the employment agreement, which period shall be no less than 12 months. The
Company does not have employment agreements with any other of its executive
officers or other members of management.
Indemnification Arrangements
Concurrent with the Offering, the Company will enter into Indemnification
Agreements pursuant to which it will agree to indemnify certain of its directors
and officers against judgments, claims, damages, losses and expenses incurred as
a result of the fact that any director or officer, in his capacity as such, is
made or threatened to be made a party to any suit or proceeding. Such persons
will be indemnified to the fullest extent now or hereafter permitted by the
Delaware General Corporations Law (the "DGCL"). The Indemnification Agreements
will also provide for the advancement of certain expenses to such directors and
officers in connection with any such suit or proceeding. The Company's
Certificate of Incorporation and Bylaws provide for the indemnification of the
Company's directors and officers to the fullest extent permitted by the DGCL.
See "Description of Capital Stock -- Limitation of Liability."
48
<PAGE> 50
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of April 15, 1996, and as adjusted to reflect the
sale of the shares of Common Stock offered hereby, of (i) each person known by
the Company to own beneficially five percent or more of the outstanding Common
Stock immediately prior to the Offering; (ii) each member and proposed member of
the Board of Directors; (iii) each executive officer of the Company; and (iv)
all members and proposed members of the Board of Directors and the executive
officers of the Company as a group. The address of each person listed below is
5480 East Ferguson Drive, Commerce, California 90022 unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
------------------- -------------------
NAME OF BENEFICIAL OWNERS AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Banner's Central Electric, Inc.(1)..................... 5,150,000 100.0% 5,150,000 73.6%
Gary M. Cypres(2)...................................... 5,150,000 100.0% 5,150,000 73.6%
Ran Birkins............................................ -- N/A -- N/A
Ed Valdez.............................................. -- N/A -- N/A
Russell J. Grisanti.................................... -- N/A -- N/A
Louis Caldera.......................................... -- N/A -- N/A
Jose de Jesus Legaspi.................................. -- N/A -- N/A
All Directors and executive officers as a group (6
persons)............................................. 5,150,000 100.0% 5,150,000 73.6%
</TABLE>
- ---------------
(1) Banner is a wholly-owned subsidiary of Holdings. West Coast controls
Holdings. Wells Fargo & Company owns all the outstanding non-voting common
stock of Holdings. Mr. Cypres is Chairman of the Board, Chief Executive
Officer, Chief Financial Officer and President of Holdings and Banner and
the managing general partner of West Coast. Mr. Cypres controls the Company
through West Coast, Holdings and Banner. See "Risk Factors -- Concentration
of Voting Control; Potential Conflicts of Interest" and "The Reorganization
and Certain Relationships and Agreements among the Company, Banner, Holdings
and Other Affiliates."
(2) Includes the 5,150,000 shares of Common Stock owned by Banner. Mr. Cypres
disclaims beneficial ownership of these shares. Mr. Cypres is Chairman of
the Board, Chief Executive Officer, Chief Financial Officer and President of
Holdings and Banner and the managing general partner of West Coast. West
Coast controls Holdings, the sole shareholder of Banner. Mr. Cypres controls
the Company through West Coast, Holdings and Banner. See "Risk
Factors -- Concentration of Voting Control; Potential Conflicts of Interest"
and "The Reorganization and Certain Relationships and Agreements among the
Company, Banner, Holdings and Other Affiliates."
49
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock").
COMMON STOCK
At the time the Company was formed, there were 5,150,000 shares of Common
Stock outstanding which were held of record by Banner. Holders of Common Stock
are entitled to receive dividends when, as and if declared by the Board of
Directors from funds legally available therefor.
Each share of Common Stock entitles the holder thereof to one vote.
Cumulative voting for the election of directors is not permitted, which means
that the holders of the majority of shares voting for the election of directors
can elect all members of the Board of Directors. Except as otherwise required by
law, a majority vote is sufficient for any act of the stockholders. The holders
of Common Stock do not have any preemptive, subscription, redemption or
conversion rights.
Upon liquidation of the Company, subject to the rights of holders of any
Preferred Stock outstanding, the holders of Common Stock are entitled to receive
the Company's assets remaining after payment of liabilities proportionate to
their pro rata ownership of the outstanding shares of Common Stock. The holders
of Common Stock have no preemptive or conversion rights or other subscription
rights, and there are no redemption or sinking fund provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are fully paid and
nonassessable, and all of the Common Stock offered hereby, when issued, will be
fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action of the
stockholders of the Company, to issue, from time to time, shares of Preferred
Stock in one or more series and with such relative rights, powers, preferences,
limitations and as the Board of Directors may determine at the time of issuance.
Such shares may be converted into Common Stock and may be superior to the Common
Stock in the payment of dividends, liquidation, voting and other rights,
preferences and privileges.
There are 5,000,000 authorized and unissued shares of Preferred Stock. The
existence of authorized but unissued Preferred Stock may enable the Board of
Directors to render more difficult or to discourage an attempt to obtain control
of the Company by means of a merger, tender offer, proxy consent or otherwise.
For example, if in the due exercise of its fiduciary obligations, the Board of
Directors were to determine that a takeover proposal is not in the Company's
best interests, the Board of Directors could cause shares of Preferred Stock to
be issued without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group or create a substantial
voting block in institutional or other hands that might undertake to support the
position of the incumbent Board of Directors. In this regard, the Certificate of
Incorporation grants the Board of Directors broad power to establish the rights
and preferences of authorized and unissued Preferred Stock. The issuance of
shares of Preferred Stock pursuant to the Board of Director's authority
described above could decrease the amount of earnings and assets available for
distribution to holders of Common Stock and adversely affect the rights and
powers, including voting rights, of such holders and may have the effect of
delaying, deterring or preventing a change in control of the Company. The Board
of Directors does not currently intend to seek stockholder approval prior to any
issuance of Preferred Stock, unless otherwise required by law.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, subject to certain exceptions,
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder,
unless (i) prior to such date the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder, or (ii) upon consummation of the
transaction which resulted
50
<PAGE> 52
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for purposes of
determining the number of shares outstanding those shares owned by (x) persons
who are directors and also officers and (y) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plans will be tendered in a tender or exchange
offer), or (iii) on or subsequent to such date the business combination is
approved by the board of directors and authorized at any annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66-2/3% of the outstanding voting stock which is not owned by the
interested stockholder. Section 203 defines a "business combination" to include
certain mergers, consolidations, asset sales and stock issuances and certain
other transactions resulting in a financial benefit to an "interested
stockholder." In addition, Section 203 defines an "interested stockholder" to
include any entity or person beneficially owning 15% or more of the outstanding
voting stock of the corporation and any entity or person affiliated with such an
entity or person.
LIMITATION OF LIABILITY
The DGCL allows a Delaware corporation to limit a director's personal
liability for monetary damages for breaches of certain fiduciary duties owed to
the corporation and its stockholders. The Certificate of Incorporation contains
a provision that limits the liability of its directors for monetary damages for
any breach of fiduciary duty as a director to the maximum extent permitted by
the DGCL. This provision, however, does not eliminate a director's liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for a transaction
from which the director derived an improper personal benefit or (iv) in respect
of certain unlawful dividend payments or stock purchases or redemptions. The
inclusion of this provision in the Certificate of Incorporation may reduce the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breaches of their fiduciary duties, even though such an action, if successful,
might otherwise have benefitted the Company and its stockholders. This provision
does not prevent the Company or its stockholders from seeking injunctive relief
or other equitable remedies against its directors under applicable state law,
although there can be no assurance that such remedies, if sought, would be
obtained.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
51
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of the Offering, the Company will have outstanding
7,000,000 shares of Common Stock (7,277,000 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full). The 1,850,000 shares
of Common Stock to be sold in the Offering, and any of the 277,000 shares which
may be sold upon exercise of the Underwriters' over-allotment option, will be
freely tradeable by persons other than "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act, without restriction or
registration under the Securities Act. The remaining 5,150,000 shares (the
"Restricted Shares") will be held by Banner. The Restricted Shares may not be
sold unless they are registered under the Securities Act or sold pursuant to an
applicable exemption from registration, including an exemption pursuant to Rule
144 under the Securities Act.
As currently in effect, Rule 144 generally permits the public sale in
ordinary trading transactions of Restricted Securities and of securities owned
by "affiliates" beginning 90 days after the date of this Prospectus if the other
restrictions enumerated in Rule 144 are met. Restricted Securities are
securities acquired directly or indirectly from an issuer or an affiliate of the
issuer in action not involving a public offering. In general, under Rule 144, if
a period of at least two years has elapsed since the later of the date the
Restricted Securities were acquired from the Company or an affiliate, as
applicable, then the holder of such Restricted Securities (including an
affiliate) is entitled, subject to certain conditions, to sell within any
three-month period a number of shares which does not exceed the greater of: (i)
1% of the Company's then outstanding shares of Common Stock; or (ii) the share's
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions
and requirements as to notice and the availability of current public information
about the Company. Affiliates may sell shares not constituting Restricted
Securities in accordance with the foregoing limitations and requirements but
without regard to the two-year period. However, a person who is not and has not
been an affiliate of the Company at any time during the 90 days preceding the
sale of the shares, and who has beneficially owned Restricted Securities for at
least three years, is entitled to sell such shares under Rule 144 without regard
to the volume limitations, manner-of-sale provisions and notice and public
information requirements of Rule 144. The holder of the Restricted Shares has
agreed during the 180-day period immediately following the date of this
Prospectus not to sell or otherwise dispose of any securities of the Company
without the consent of the Representative of the Underwriters.
For information concerning shares that may be issued under the Company's
stock option plans and agreements, see "Management-Stock Option Plan."
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that sales or the
availability of shares for sale will have on the market price prevailing from
time to time. Nevertheless, sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices.
52
<PAGE> 54
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities (the
"Representative"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names, at
the initial offering price, less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of such shares if any are
purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------------------------------------------------------- ----------------
<S> <C>
Montgomery Securities...................................... 1,265,000
Bear, Stearns & Co. Inc. .................................. 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated......... 75,000
PaineWebber Incorporated................................... 75,000
William Blair & Company, L.L.C. ........................... 45,000
The Chicago Corporation.................................... 45,000
Crowell, Weedon & Co. ..................................... 45,000
Equitable Securities Corporation........................... 45,000
Janney Montgomery Scott Inc. .............................. 45,000
McDonald & Company Securities, Inc. ....................... 45,000
Principal Financial Securities, Inc. ...................... 45,000
The Robinson-Humphrey Company, Inc. ....................... 45,000
----------------
Total............................................ 1,850,000
=============
</TABLE>
The Representative has advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers a
concession of not more than $0.48 per share, and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $0.10 per share to
certain other dealers. The concession to selected dealers and the reallowances
to other dealers may be changed by the Representative and, after the initial
public offering, the offering price and other selling terms may be changed by
the Representative. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject an order in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of the Prospectus, to purchase up to a maximum
of 277,000 additional shares of Common Stock to cover over-allotments, if any,
at the offering price less the underwriting discount set forth on the cover page
of this Prospectus. To the extent that the Underwriters exercise this option,
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
table above. The Underwriters may purchase such shares only to cover
over-allotments made in connection with the Offering.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
The Underwriting Agreement provides that the Company and Holdings will
indemnify the Underwriters against certain liabilities, including civil
liabilities under the Securities Act, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company's executive officers, directors and shareholder have agreed
that they will not, without the prior written consent of the Representative,
directly or indirectly offer to sell, sell or otherwise dispose of any shares of
Common Stock of the Company owned by them for a period of 180 days after the
date of this Prospectus. In addition, the Company has agreed that for a period
of 180 days after the date of this Prospectus, it will not, without the prior
written consent of the Representative, directly or indirectly offer to sell,
sell, issue, distribute or otherwise dispose of any equity securities or
securities convertible into or
53
<PAGE> 55
exercisable for equity securities or any options, rights or warrants with
respect to any equity securities, except that the Company may, without such
consent, grant options and securities pursuant to employee benefit plans
described in this Prospectus.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial offering price was determined by negotiations
between management and the Underwriters. Among the factors considered in such
negotiations were the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of management, the Company's past
and present operations, its past and present earnings and the trend of such
earnings, the prospects for future earnings of the Company, the present state of
the Company's development, the general condition of the securities market at the
time of the Offering and the market prices of publicly traded common stock of
comparable companies in recent periods.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Stroock & Stroock & Lavan, 2029 Century Park East, Los Angeles,
California. Certain legal matters will be passed upon for the Underwriters by
Manatt, Phelps & Phillips, LLP, 11355 West Olympic Boulevard, Los Angeles,
California.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995 and
for the years ended October 31, 1993 and 1994, the two months ended December 31,
1993 and 1994, and the years ended December 31, 1994 and 1995 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act, including the rules and
regulations promulgated thereunder, with respect to the shares of Common Stock
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. All of these documents
may be inspected without charge at the office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies may be obtained therefrom at
prescribed rates.
54
<PAGE> 56
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT.......................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1994 and 1995 and March 31, 1996
(Unaudited)...................................................................... F-3
Consolidated Statements of Income for the Years Ended October 31, 1993 and 1994, the
Two Months Ended December 31, 1993 and 1994, the Years Ended December 31, 1994
and 1995, and the Three Months Ended March 31, 1995 and 1996 (Unaudited)......... F-4
Consolidated Statements of Stockholder's Equity for the Years Ended October 31, 1993
and 1994, the Two Months Ended December 31, 1994, the Year Ended December 31,
1995, and the Three Months Ended March 31, 1996 (Unaudited)...................... F-5
Consolidated Statements of Cash Flows for the Years Ended October 31, 1993 and 1994,
the Two Months Ended December 31, 1993 and 1994, the Years Ended December 31,
1994 and 1995, and the Three Months Ended March 31, 1995 and 1996 (Unaudited).... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Central Financial Acceptance Corporation
Los Angeles, California:
We have audited the accompanying consolidated balance sheets of Central
Financial Acceptance Corporation and subsidiaries (the "Company", see Note 1,
Basis of Presentation) as of December 31, 1994 and 1995, and the related
consolidated statements of income, stockholder's equity, and cash flows for the
years ended October 31, 1993 and 1994, the two months ended December 31, 1993
and 1994, and the years ended December 31, 1994 and 1995. 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Central Financial
Acceptance Corporation and subsidiaries as of December 31, 1994 and 1995 and the
results of their operations and their cash flows for the years ended October 31,
1993 and 1994, the two months ended December 31, 1993 and 1994, and the years
ended December 31, 1994 and 1995 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 12, 1996
(June 25, 1996 as to the effects
of the reorganization described
in Notes 1 and 11)
F-2
<PAGE> 58
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash............................................. $ 215,000 $ 7,000 $ 133,000
Finance receivables.............................. 70,328,000 94,264,000 89,898,000
Prepaid expenses and other current assets........ 294,000 1,237,000 1,344,000
Deferred income taxes............................ 1,644,000 2,473,000 2,473,000
Property and equipment, net...................... 7,000 2,060,000 2,098,000
Intangible asset, net............................ 1,454,000 1,399,000 1,385,000
----------- ------------ -----------
TOTAL.............................................. $73,942,000 $101,440,000 $97,331,000
=========== ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable.................................... $48,845,000 $ 63,967,000 $60,479,000
Accrued expenses and other current liabilities... 836,000 1,415,000 1,330,000
Income taxes payable............................. 310,000 1,576,000 1,140,000
Long-term debt................................... 850,000 850,000
----------- ------------ -----------
Total liabilities........................ 49,991,000 67,808,000 63,799,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock; $0.01 par value; 5,000,000
shares authorized; no shares outstanding......
Common stock; $0.01 par value; 20,000,000 shares
authorized; 5,150,000 shares issued and
outstanding................................... 52,000 52,000 52,000
Paid-in capital.................................. 19,520,000 26,082,000 24,879,000
Retained earnings................................ 4,379,000 7,498,000 8,601,000
----------- ------------ -----------
Total stockholder's equity............... 23,951,000 33,632,000 33,532,000
----------- ------------ -----------
TOTAL.............................................. $73,942,000 $101,440,000 $97,331,000
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 59
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------------------- ----------------------- ------------------------- -----------------------
1993 1994 1993 1994 1994 1995 1995 1996
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Consumer Product
Portfolio interest
income............ $ 9,010,000 $11,444,000 $1,714,000 $2,057,000 $11,787,000 $12,508,000 $2,955,000 $3,205,000
Small Loan Portfolio
interest
income............ 134,000 672,000 54,000 439,000 1,057,000 5,095,000 1,009,000 2,093,000
Automobile sales.... 4,417,000 2,038,000
Transaction fees on
contracts
purchased from
related party..... 830,000 844,000 137,000 150,000 857,000 916,000 229,000 227,000
Other income........ 1,457,000 1,756,000 304,000 416,000 1,868,000 3,653,000 654,000 1,722,000
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Total
revenues.... 11,431,000 14,716,000 2,209,000 3,062,000 15,569,000 26,589,000 4,847,000 9,285,000
COSTS AND EXPENSES:
Operating
expenses.......... 4,519,000 5,009,000 864,000 1,025,000 5,170,000 8,150,000 1,522,000 2,504,000
Cost of automobiles
sold.............. 3,071,000 1,355,000
Provision for credit
losses............ 3,264,000 3,002,000 696,000 1,617,000 3,923,000 5,859,000 1,106,000 2,347,000
Interest expense.... 2,279,000 2,523,000 339,000 617,000 2,801,000 4,278,000 1,075,000 1,241,000
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Total costs
and
expenses.... 10,062,000 10,534,000 1,899,000 3,259,000 11,894,000 21,358,000 3,703,000 7,447,000
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE
PROVISION (BENEFIT)
FOR INCOME TAXES.... 1,369,000 4,182,000 310,000 (197,000) 3,675,000 5,231,000 1,144,000 1,838,000
PROVISION (BENEFIT)
FOR INCOME TAXES.... 572,000 1,694,000 127,000 (74,000) 1,493,000 2,112,000 465,000 735,000
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
NET INCOME (LOSS)..... $ 797,000 $ 2,488,000 $ 183,000 $ (123,000) $ 2,182,000 $ 3,119,000 $ 679,000 $1,103,000
=========== =========== ========== ========== =========== =========== ========== ==========
UNAUDITED PRO FORMA
AND SUPPLEMENTARY
DATA (Note 1)
Pro forma net income
per share......... $ 0.61 $ 0.21
=========== ==========
Pro forma weighted
average number of
common shares
outstanding....... 5,150,000 5,150,000
=========== ==========
Supplementary net
income............ $ 4,043,000 $1,330,000
=========== ==========
Supplementary net
income per
share............. $ 0.58 $ 0.19
=========== ==========
Supplementary
weighted average
number of common
shares
outstanding....... 7,000,000 7,000,000
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 60
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, NOVEMBER 1, 1992................. $52,000 $12,130,000 $1,217,000 $13,399,000
Net income.............................. 797,000 797,000
Capital contribution.................... 2,950,000 2,950,000
------- ----------- ---------- -----------
BALANCE, OCTOBER 31, 1993................. 52,000 15,080,000 2,014,000 17,146,000
Net income.............................. 2,488,000 2,488,000
Capital withdrawal...................... (1,074,000) (1,074,000)
------- ----------- ---------- -----------
BALANCE, OCTOBER 31, 1994................. 52,000 14,006,000 4,502,000 18,560,000
Net loss................................ (123,000) (123,000)
Capital contribution.................... 5,514,000 5,514,000
------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1994................ 52,000 19,520,000 4,379,000 23,951,000
Net income.............................. 3,119,000 3,119,000
Capital contribution.................... 6,562,000 6,562,000
------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1995................ 52,000 26,082,000 7,498,000 33,632,000
Net income.............................. 1,103,000 1,103,000
Capital withdrawal...................... (1,203,000) (1,203,000)
------- ----------- ---------- -----------
BALANCE, MARCH 31, 1996 (Unaudited)....... $52,000 $24,879,000 $8,601,000 $33,532,000
======= =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 61
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
-------------------------- -------------------------- --------------------------- -------------------------
1993 1994 1993 1994 1994 1995 1995 1996
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS
FROM
OPERATING
ACTIVITIES:
Net income
(loss).... $ 797,000 $ 2,488,000 $ 183,000 $ (123,000) $ 2,182,000 $ 3,119,000 $ 679,000 $ 1,103,000
Adjustments
to
reconcile
net income
(loss) to
net cash
provided
by
operating
activities:
Depreciation
and
amortization... 361,000 260,000 64,000 68,000 264,000 386,000 108,000 36,000
Provision
for
credit
losses... 3,264,000 3,002,000 696,000 1,617,000 3,923,000 5,859,000 1,106,000 2,347,000
Deferred
income
taxes... (276,000) 61,000 (47,000) (389,000) (281,000) (829,000)
Changes in
assets
and
liabilities:
Prepaid
expenses
and
other
current
assets... (31,000) (358,000) (513,000) (24,000) 131,000 (1,203,000) (26,000) (109,000)
Accrued
expenses
and
other
liabilities... 212,000 29,000 (96,000) 396,000 521,000 1,845,000 65,000 (521,000)
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
Net
cash
provided
by
operating
activities... 4,327,000 5,482,000 287,000 1,545,000 6,740,000 9,177,000 1,932,000 2,856,000
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
CASH FLOWS
FROM
INVESTING
ACTIVITIES:
Installment
contracts
(originated
and
acquired)
collected,
net....... (5,796,000) (12,038,000) (6,488,000) (15,283,000) (20,833,000) (29,795,000) 965,000 2,019,000
Capital
expenditures... (2,000) (5,000) (7,000) (2,124,000) (10,000) (58,000)
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
Net
cash
(used
in)
provided
by
investing
activities... (5,796,000) (12,040,000) (6,488,000) (15,288,000) (20,840,000) (31,919,000) 955,000 1,961,000
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
CASH FLOWS
FROM
FINANCING
ACTIVITIES:
Capital
contribution
(withdrawal).. 2,950,000 (1,074,000) 2,836,000 5,514,000 1,604,000 6,562,000 (4,229,000) (1,203,000)
Proceeds
from
promissory
notes
payable... 850,000
Net
(repayments
of)
proceeds
from notes
payable... (550,000) 8,587,000 2,950,000 6,558,000 12,195,000 15,122,000 1,248,000 (3,488,000)
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
Net
cash
provided
by
(used
in)
financing
activities... 2,400,000 7,513,000 5,786,000 12,072,000 13,799,000 22,534,000 (2,981,000) (4,691,000)
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
NET INCREASE
(DECREASE)
IN CASH..... 931,000 955,000 (415,000) (1,671,000) (301,000) (208,000) (94,000) 126,000
CASH,
BEGINNING OF
PERIOD...... 931,000 931,000 1,886,000 516,000 215,000 215,000 7,000
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
CASH, END OF
PERIOD...... $ 931,000 $ 1,886,000 $ 516,000 $ 215,000 $ 215,000 $ 7,000 $ 121,000 $ 133,000
=========== ============ =========== ============ ============ ============ =========== ===========
SUPPLEMENTAL
DISCLOSURES
OF CASH FLOW
INFORMATION:
Interest
paid...... $ 2,162,000 $ 2,498,000 $ 437,000 $ 711,000 $ 2,772,000 $ 4,250,000 $ 1,140,000 $ 1,246,000
Income taxes
paid...... $ 848,000 $ 1,452,000 $ 89,000 $ 186,000 $ 1,549,000 $ 1,675,000 $ 218,000 $ 1,178,000
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 62
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation -- Central Financial Acceptance Corporation ("CFAC")
was formed in April 1996 and is a wholly owned subsidiary of Banner's Central
Electric, Inc. Banner's Central Electric, Inc. is wholly owned by Banner
Holdings, Inc. ("Holdings") and is a consumer products retailer that provides
its customers with financing for the merchandise it sells. On June 24, 1996
CFAC, Banner's Central Electric, Inc. and Holdings entered into an agreement
(the "Reorganization Agreement") whereby Holdings contributed to Banner its
investments in certain wholly owned subsidiaries, along with the subsidiaries'
operations, (the "Holdings Subsidiaries") and Banner's Central Electric, Inc.
contributed to CFAC its investments in the Holdings Subsidiaries and the finance
portion of its consumer products business, and cash in such amount so as to
leave CFAC with $500,000 of cash on hand. Pursuant to the Reorganization
Agreement, the intercompany accounts between CFAC, Banner's Central Electric,
Inc. and Holdings that arose as a result of the Reorganization Agreement and
from other transactions, except with respect to income taxes, were forgiven and
reclassified as stockholder's equity.
In addition to the Reorganization Agreement, CFAC, Banner's Central
Electric, Inc. and Holdings entered into certain agreements for the purpose of
defining the ongoing relationships among them (see Note 11). The transactions
and agreements entered into pursuant to the Reorganization Agreement are
referred to herein as the "Reorganization." Management of CFAC believes that
such agreements provide for reasonable allocations of costs between the parties.
The Reorganization was accounted for at historical cost in a manner similar
to a pooling of interests. The accompanying consolidated financial statements
reflect the combined historical operations of CFAC and its subsidiaries as if
the Reorganization had taken place at the beginning of the periods presented,
except for the contribution of cash in such amount so as to leave CFAC with
$500,000 upon the Reorganization. CFAC and its subsidiaries, as reorganized, are
referred to herein as "Central" or the "Company." Banner's Central Electric,
Inc., including the operations of Banner's Central Electric, Inc. that remain
after contributing the finance portion of its consumer products business to
CFAC, is referred to herein as "Banner."
Unaudited pro forma net income per share is based on the number of common
shares issued by the Company pursuant to the Reorganization that are assumed to
be outstanding as of January 1, 1995. Unaudited supplementary net income per
share is based on the number of common shares issued by the Company pursuant to
the Reorganization and the number of shares to be sold by the Company in the
proposed offering, as if all such shares were outstanding as of January 1, 1995,
and also gives effect to a reduction in interest expense, net of income tax
expense, resulting from the reduction of indebtedness upon application of the
net proceeds of the proposed offering as if it had occurred on January 1, 1995.
Nature of Operations -- The Company provides unsecured small loans and
financing for the purchase of consumer products for customers in greater Los
Angeles and San Francisco, and beginning in 1995, sells and finances the
purchases of used cars and travel tickets. Substantially all of the consumer
product purchases that are financed by the Company are made by customers of
affiliated companies.
On a historical basis for the periods presented, Central's major source of
revenues has been its portfolio of installment contracts acquired from Banner.
Lesser in terms of revenues, but of growing significance, is Central's small
loan business. Beginning in 1995, Central began its used car and travel agency
businesses. Central's finance receivables portfolio comprises a high volume of
low-principal loans to customers who cannot secure credit through traditional
lending sources.
F-7
<PAGE> 63
CENTRAL FINANCIAL ACCEPTANCE CORPORATION 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 Central Financial Acceptance Corporation and
its wholly owned subsidiaries, Central Installment Credit Corporation, Central
Consumer Finance Company, Central Auto Sales, Inc., Centravel, Inc., Central
Financial Acceptance/Insurance Agency and Central Premium Finance Company. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Interim Financial Data -- The interim consolidated financial data as of
March 31, 1996 and for the three months ended March 31, 1995 and 1996 is
unaudited. The information reflects all adjustments, consisting only of normal
recurring entries that, in the opinion of management, are necessary to present
fairly the financial position and results of the Company's operations for the
periods indicated. The results of operations for the interim periods are not
necessarily indicative of the results of operations for the full fiscal year.
Finance Receivables -- Central's finance receivables include installment
contracts that are purchased from Banner and unaffiliated third-party retailers
that sell the products or services (referred to herein as the "Consumer Product
Portfolio"), receivables that arise from unsecured, small loans (referred to
herein as the "Small Loan Portfolio") and installment contracts that are
originated when customers buy used cars and travel tickets (referred to herein
as the "Automobile Finance Portfolio" and the "Travel Finance Portfolio,"
respectively). Add-on interest of 11% to 13% per annum is included in the face
amount of the finance receivables together with administrative fees that 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 contracts provide for scheduled monthly payments and mature generally from 1
to 24 months in the Consumer Product Portfolio, from 1 to 12 months in the Small
Loan and Travel Finance Portfolios, and from 36 to 42 months in the Automobile
Finance Portfolio.
The Company provides an allowance for credit losses in the Consumer
Product, Automobile Finance and Travel Finance Portfolios at the time that the
contract is purchased or the retail sale is made. The allowance for credit
losses in the Small Loan Portfolio is provided for following the origination of
the loans over the period that the events giving rise to the credit losses are
estimated to occur. The Company's portfolios comprise 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 to cover losses in the existing portfolios. Collection
of past due accounts is pursued by the Company, and when the characteristics of
an individual account indicate that collection is unlikely, the account is
charged off and turned over to a collection agency. Accounts are generally
charged off when they are 91 days past due.
Deferred insurance revenue arises from the deferral of the recognition of
revenue from certain credit insurance contracts. Insurance premium revenue is
recognized over the life of the related contract using a method that
approximates the interest method.
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. 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 it's estimated fair
value. Depreciation and amortization are computed primarily using the
straight-line method over the estimated lives of the assets, as follows:
<TABLE>
<S> <C>
Furniture, equipment and software................. Five to ten years
Leasehold improvements............................ Life of lease
Building improvements............................. 7 to 39 years
</TABLE>
Intangible Asset -- The intangible asset arose in March 1991 when the
Company acquired all of the outstanding stock of its predecessor. The excess of
the purchase price over the fair value of net assets acquired
F-8
<PAGE> 64
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is being amortized using the straight-line method over 30 years. The
recoverability of the intangible asset 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 it's estimated fair value.
Revenues -- Interest income on the Consumer Product, Automobile Finance and
Travel Finance Portfolios is deferred and recognized over the lives of the
contracts using the "Rule of 78s," which approximates the interest method.
Interest income on the Small Loan Portfolio is deferred and recognized using the
interest method. Transaction fees on contracts purchased from a related party
are recognized using the interest method. Administrative fees are deferred and
recognized over the estimated average life of the Small Loan Portfolio using the
"Rule of 78s," which approximates the interest method. Administrative fees are
included in other income in the consolidated statements of income. Interest
income on the Automobile Finance and Travel Finance Portfolios, which began in
1995, is included in other income in the consolidated statements of income.
Travel Commissions -- Included in other income are revenues from the sale
of travel tickets. For the year ended December 31, 1995 and the three months
ended March 31, 1996 (unaudited), net travel ticket commissions totaled $371,000
and $221,000, respectively.
Income Taxes -- As of November 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109. The effect of adoption was not
material. For the year ended October 31, 1993, the Company computed income taxes
on the deferred method in accordance with Accounting Principles Board Opinion
No. 11. Under SFAS No. 109, income tax expense includes income taxes payable for
the current year and the change in deferred income tax assets and liabilities
for the future tax consequences of events that have been recognized in the
Company's financial statements or income tax returns. A valuation allowance is
recognized to reduce the carrying value of the deferred tax assets if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
Fair Value of Financial Instruments -- The carrying value of the Company's
finance receivables approximates their fair value due to their short term nature
and generally stable rates of interest currently being charged in comparison to
the rates reflected in the existing portfolios. The carrying value of the
Company's notes payable approximates their fair value, as these notes represent
a series of short-term notes at floating interest rates. The carrying value of
the Company's long-term debt approximates its fair value, as the promissory note
bears interest at a floating rate.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles 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.
3. ACQUISITION OF RECEIVABLES PORTFOLIO
During 1994, the Company acquired the receivables portfolio of a furniture
retailer in the San Francisco area that provided installment credit for its
customers. The receivables portfolio was acquired for approximately $6,125,000.
The performance of the receivables portfolio was guaranteed by the seller. The
Company does not expect to have any continuing relationship with the seller of
this furniture retailer.
F-9
<PAGE> 65
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCE RECEIVABLES AND INTEREST INCOME
Finance receivables consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Consumer Product Portfolio......................... $67,514,000 $67,811,000 $ 63,069,000
Small Loan Portfolio............................... 16,735,000 37,868,000 35,678,000
Automobile Finance Portfolio....................... 5,545,000 7,660,000
Travel Finance Portfolio........................... 2,969,000 3,367,000
----------- ----------- ------------
84,249,000 114,193,000 109,774,000
Less deferred interest............................. 9,412,000 13,587,000 12,779,000
Less allowance for credit losses................... 3,712,000 5,365,000 6,192,000
Less deferred administrative fees and insurance
revenues......................................... 797,000 977,000 905,000
----------- ----------- ------------
$70,328,000 $94,264,000 $ 89,898,000
=========== =========== ============
</TABLE>
Customers are required to make monthly payments on installment contracts.
The aggregate gross balance of accounts with payments 31 days or more past due
are:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Customer Product Portfolio:
Past due 31-60 days.................................. $2,264,000 $1,943,000 $ 1,552,000
Past due 61 days or more............................. 2,610,000 2,465,000 2,269,000
---------- ---------- ----------
$4,874,000 $4,408,000 $ 3,821,000
========== ========== ==========
Small Loan Portfolio:
Past due 31-60 days.................................. $ 76,000 $ 500,000 $ 572,000
Past due 61 days or more............................. 105,000 649,000 799,000
---------- ---------- ----------
$ 181,000 $1,149,000 $ 1,371,000
========== ========== ==========
Automobile Finance Portfolio:
Past due 31-60 days.................................. $ 87,000 $ 114,000
Past due 61 days or more............................. 30,000 85,000
---------- ----------
$ 117,000 $ 199,000
========== ==========
Travel Finance Portfolio:
Past due 31-60 days.................................. $ 39,000 $ 54,000
Past due 61 days or more............................. 48,000 47,000
---------- ----------
$ 87,000 $ 101,000
========== ==========
</TABLE>
F-10
<PAGE> 66
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest income for the combined portfolios is as follows:
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------------------- ----------------------- ------------------------- -----------------------
1993 1994 1993 1994 1994 1995 1995 1996
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer Product
Portfolio........... $ 9,010,000 $11,444,000 $1,714,000 $2,057,000 $11,787,000 $12,508,000 $2,955,000 $3,205,000
Small Loan
Portfolio........... 134,000 672,000 54,000 439,000 1,057,000 5,095,000 1,009,000 2,093,000
Automobile Finance
Portfolio........... 240,000 261,000
Travel Finance
Portfolio........... 176,000 181,000
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
$ 9,144,000 $12,116,000 $1,768,000 $2,496,000 $12,844,000 $18,019,000 $3,964,000 $5,740,000
=========== =========== ========== ========== =========== =========== ========== ==========
</TABLE>
The allowance for credit losses in the Consumers Product Portfolio includes
the following:
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------------------- ----------------------- ------------------------- -----------------------
1993 1994 1993 1994 1994 1995 1995 1996
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for credit
losses, Beginning of
period.............. $ 2,296,000 $ 2,660,000 $2,660,000 $2,565,000 $ 2,786,000 $ 3,169,000 $3,169,000 $3,711,000
Provision for credit
losses.............. 3,198,000 2,758,000 655,000 1,229,000 3,332,000 3,852,000 826,000 1,191,000
Write-offs, net of
recoveries.......... (2,834,000) (2,853,000) (529,000) (625,000) (2,949,000) (3,310,000) (679,000) (930,000)
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Allowance for credit
losses, End of
period.............. $ 2,660,000 $ 2,565,000 $2,786,000 $3,169,000 $ 3,169,000 $ 3,711,000 $3,316,000 $3,972,000
=========== =========== ========== ========== =========== =========== ========== ==========
</TABLE>
The allowance for credit losses in the Small Loan Portfolio includes the
following:
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------------------- ----------------------- ------------------------- -----------------------
1993 1994 1993 1994 1994 1995 1995 1996
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for credit
losses, Beginning of
period.............. $ 66,000 $ 66,000 $ 190,000 $ 107,000 $ 543,000 $ 543,000 $1,194,000
Provision for credit
losses.............. $ 66,000 244,000 41,000 388,000 591,000 1,547,000 280,000 899,000
Write-offs, net of
recoveries.......... (120,000) (35,000) (155,000) (896,000) (86,000) (487,000)
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Allowance for credit
losses, End of
period.............. $ 66,000 $ 190,000 $ 107,000 $ 543,000 $ 543,000 $ 1,194,000 $ 737,000 $1,606,000
=========== =========== ========== ========== =========== =========== ========== ==========
</TABLE>
The allowance for credit losses in the Automobile Finance Portfolio, which
began in 1995, includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED 1996
DECEMBER 31, ------------------
1995
------------ (UNAUDITED)
<S> <C> <C>
Allowance for credit losses, beginning of period...... $ -- $410,000
Provision for credit losses........................... 410,000 194,000
Write-offs, net of recoveries......................... -- (60,000)
-------- --------
Allowance for credit losses, end of period............ $410,000 $544,000
======== ========
</TABLE>
F-11
<PAGE> 67
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The allowance for credit losses in the Travel Finance Portfolio, which
began in 1995, includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED 1996
DECEMBER 31, ------------------
1995
------------ (UNAUDITED)
<S> <C> <C>
Allowance for credit losses, beginning of period.......... $ -- $ 50,000
Provision for credit losses............................... 50,000 63,000
Write-offs, net of recoveries............................. -- (43,000)
------- --------
Allowance for credit losses, end of period................ $ 50,000 $ 70,000
======= ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, net consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................................. $ -- $1,568,000 $ 1,568,000
Improvements...................................... 146,000 154,000
Furniture, equipment and software................. 8,000 417,000 467,000
------ ---------- ----------
8,000 2,131,000 2,189,000
Less accumulated depreciation and amortization.... 1,000 71,000 91,000
------ ---------- ----------
$7,000 $2,060,000 $ 2,098,000
====== ========== ==========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Excess of purchase price over the fair value
of net assets acquired.................... $ 1,662,000 $ 1,662,000 $ 1,662,000
Less accumulated amortization............... 208,000 263,000 277,000
----------- ----------- -----------
$ 1,454,000 $ 1,399,000 $ 1,385,000
=========== =========== ===========
</TABLE>
7. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Bank of America line of credit.............. $38,825,000 $40,317,000 $38,529,000
Wells Fargo line of credit.................. 10,020,000 23,650,000 21,950,000
----------- ----------- -----------
$48,845,000 $63,967,000 $60,479,000
=========== =========== ===========
</TABLE>
The Company has a line of credit agreement with Bank of America National
Trust and Savings Association (the "Bank of America Line of Credit") that, as
amended, provides for the issuance of notes up to $60,000,000, subject to an
allowable borrowing base. The amounts outstanding under these notes bear
interest
F-12
<PAGE> 68
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at rates that are determined by the type of borrowing. Borrowings under the
notes are collateralized by the Consumer Product Portfolio and Banner is a
guarantor. The Bank of America Line of Credit, as amended, matures on August 30,
1996 and contains certain restrictive covenants that prohibit the Company from
paying dividends and require, among other things, the maintenance of certain
financial ratios and amounts. The Company is required to maintain specified
levels of tangible net worth and cash flow to interest coverage ratios for one
of its subsidiaries and Banner combined, and cannot exceed a specified ratio of
debt to tangible net worth for such subsidiary and Banner combined, as such
terms are defined in the line of credit agreement. Other ratios related to the
performance of the Company's Consumer Product Portfolio must be maintained
within limits, including maximum ratios of past due accounts to eligible
contracts, net write-offs to average net receivables, and a minimum ratio of the
allowance for credit losses to net receivables, in all cases as such terms are
defined in the line of credit agreement. Borrowings under the facility bore
interest at weighted average rates of 8.21% and 7.89% per annum as of December
31, 1995 and March 31, 1996 (unaudited), respectively. The amount of unused
credit under the facility was limited by the allowable borrowing base and was
approximately $962,000 at December 31, 1995. The credit facility was fully
utilized at March 31, 1996.
The Company has a line of credit agreement with Wells Fargo Bank National
Association (the "Wells Fargo Line of Credit") that, as amended, provides for
the issuance of notes up to $30,000,000, subject to an allowable borrowing base.
The amounts outstanding under these notes bear interest at rates that are
determined by the type of borrowing. Borrowings under the notes are
collateralized by the Small Loan, Automobile Finance and Travel Finance
Portfolios. The Wells Fargo Line of Credit, as amended, expires on July 1, 1996.
The credit facility contains certain restrictive covenants that prohibit the
Company from paying dividends and require, among other things, the maintenance
of certain financial ratios and amounts. The Company is required to maintain
specified levels of tangible net worth, net income, and cash flow to interest
coverage ratios for one of its subsidiaries, and cannot exceed a specified ratio
of debt to tangible net worth for such subsidiary, as such terms are defined in
the line of credit agreement. In addition, the ratio of the net provision for
credit losses to net receivables for the Company's Small Loan, Automobile
Finance and Travel Finance Portfolios must be maintained below a specified level
as such terms are defined in the line of credit agreement. Borrowings under the
facility bore interest at weighted average rates of 8.11% and 7.71% per annum as
of December 31, 1995 and March 31, 1996 (unaudited), respectively. The amount of
unused credit under the facility was limited by the allowable borrowing base and
was approximately $4,134,000 and $5,996,000 at December 31, 1995 and March 31,
1996 (unaudited), respectively.
The Company is required to pay a commitment fee of 0.375% per annum for
unused portions of its lines of credit. These fees totaled $118,000, $88,000,
$24,000, $14,000, $78,000, $179,000, $19,000 and $54,000 for the years ended
October 31, 1993 and 1994, the two months ended December 31, 1993 and 1994, the
years ended December 31, 1994 and 1995, and the three months ended March 31,
1995 and 1996 (unaudited), respectively, and are included with operating
expenses in the consolidated statements of income.
8. LONG-TERM DEBT
Long-term debt consists of a promissory note payable to a bank that bears
interest at the bank's reference rate (8.25% at March 31, 1996 (unaudited)).
Interest is payable monthly and the principal is due July 1998. The note is
secured by a deed of trust.
9. INCOME TAXES
The Company pays federal and state income taxes as part of its parent
company's consolidated group. Income tax obligations are paid by an affiliated
company and allocated to the Company based upon separate computations of Central
and its subsidiaries' taxable income.
F-13
<PAGE> 69
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31,
---------------------- -------------------- -----------------------
1993 1994 1993 1994 1994 1995
--------- ---------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Currently payable:
Federal................... $ 653,000 $1,266,000 $136,000 $ 243,000 $1,373,000 $2,289,000
State..................... 195,000 367,000 38,000 72,000 401,000 652,000
--------- ---------- -------- --------- ---------- ----------
848,000 1,633,000 174,000 315,000 1,774,000 2,941,000
--------- ---------- -------- --------- ---------- ----------
Deferred:
Federal................... (213,000) 44,000 (37,000) (301,000) (220,000) (661,000)
State..................... (63,000) 17,000 (10,000) (88,000) (61,000) (168,000)
--------- ---------- -------- --------- ---------- ----------
(276,000) 61,000 (47,000) (389,000) (281,000) (829,000)
--------- ---------- -------- --------- ---------- ----------
Provision (benefit) for
income taxes.............. $ 572,000 $1,694,000 $127,000 $ (74,000) $1,493,000 $2,112,000
========= ========== ======== ========= ========== ==========
</TABLE>
A reconciliation of the provision for income taxes to the statutory rates
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
TWO MONTHS
YEARS ENDED ENDED YEARS ENDED ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------- -------------- ------------- -------------
1993 1994 1993 1994 1994 1995 1995 1996
---- ---- ---- ----- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal income taxes at statutory rates............. 34.0% 35.0% 35.0% (35.0)% 35.0% 35.0% 35.0% 35.0%
State franchise taxes, net of federal benefit....... 6.4 6.0 5.9 (5.1) 6.0 6.0 6.0 6.1
Amortization of the excess purchase price over the
fair value of assets required..................... 1.4 0.5 1.0 1.6 0.5 0.4 0.4 0.2
Other............................................... (1.0) (0.9) 0.9 (0.9) (1.0) (0.8) (1.3)
---- ---- ---- ---- ----
- - - - -
-----
41.8% 40.5% 41.0% (37.6)% 40.6% 40.4% 40.6% 40.0%
===== ===== ===== ===== ===== =====
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Allowance for credit losses............................... $1,607,000 $2,323,000
Deferred revenue.......................................... 145,000 162,000
Los Angeles Revitalization Zone credit carryforward....... 320,000 526,000
Other..................................................... (108,000) (12,000)
Valuation Allowance....................................... (320,000) (526,000)
---------- ----------
$1,644,000 $2,473,000
========== ==========
</TABLE>
The Company has available state income tax credit carryforwards that arise
from operating in the Los Angeles Revitalization Zone. A valuation allowance was
recorded to reduce the carrying value of these tax credit carryforwards to zero
because it is more likely than not that some portion of the carryforwards will
not be realized.
11. RELATED PARTY TRANSACTIONS
As discussed in Note 1, on June 24, 1996, the Company entered into the
Reorganization Agreement and certain other agreements with Banner, the
predominant source of the Company's consumer product contracts,
F-14
<PAGE> 70
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and Holdings (the "Financing Agreement," the "Option Agreement," and the
"Operating Agreement"). The accompanying consolidated financial statements have
been prepared as if such agreements and the Reorganization Agreement were in
place from 1991.
The Financing Agreement grants the Company the exclusive right to provide
financing to Banner's customers for a term of fifteen years from the date of the
Reorganization and provides that the Company will purchase the contracts from
Banner at face value less a 1.6% transaction fee, or, if the Company originates
such receivables, Banner will be obligated to pay the Company a fee of 1.6% on
each such receivable originated by the Company. The Company may terminate the
Financing Agreement at any time upon one year's prior written notice to Banner.
In the accompanying consolidated financial statements, the transaction fee was
computed based on 1.6% of the average net receivables in the Consumer Product
Portfolio, which approximates the transaction fee that would be computed based
on 1.6% of net contracts purchased from Banner recognized using the interest
method. The transaction fee totaled $830,000, $844,000 $137,000, $150,000,
$857,000, $916,000, $229,000 and $227,000 for the years ended October 31, 1993
and 1994, the two months ended December 31, 1993 and 1994, the years ended
December 31, 1994 and 1995, and the three months ended March 31, 1995 and 1996
(unaudited), respectively.
Pursuant to the Option Agreement, Holdings granted the Company an option,
exercisable for a two-year period commencing one year from the date of the
Reorganization, to acquire all of the outstanding capital stock of Banner (the
"Option") at an exercise price equal to the book value of Banner for the month
ended immediately preceding the exercise. If the Company exercises the Option,
the exercise price is payable in cash or in shares of the Company's common
stock.
The Operating Agreement provides, among other things, that Banner, Holdings
or their affiliates are obligated to provide to the Company, and the Company is
obligated to utilize, certain services, including accounting, management
information systems and employee benefits. 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 Banner to the Company, or to the
extent that other costs are incurred by Banner, Holdings or their affiliates
that directly relate to the Company, the Company is obligated to pay Banner's,
Holdings' or their affiliates' actual cost of providing such services or
incurring such costs. Employee benefit expenses are allocated to the Company
based on the ratio of actual payroll expenses of employees in the consumer
products business contributed by Banner to the Company compared to total actual
payroll expenses of Banner before such allocation. Accounting expenses are
allocated 50% to the Company. The operating costs of Banner's management
information systems function are allocated initially 50% to the Company for a
period of five years, subject to adjustment from time to time to reflect
changing costs and usage. Except for management information systems services,
the Operating Agreement continues until terminated by either the Company,
Holdings or Banner upon one year's prior written notice. Termination may be made
on a service-by-service basis or in total.
12. PROFIT-SHARING PLAN
The Company participates along with other affiliated companies, in a
profit-sharing plan that covers substantially all employees who meet certain age
and length-of-service requirements. Annual contributions are contingent upon
current and accumulated profits and are at the sole discretion of the Board of
Directors. Profit-sharing expense allocated to the Company for the years ended
October 31, 1993 and 1994, the two months ended December 31, 1993 and 1994, the
years ended December 31, 1994 and 1995, and the three months ended March 31,
1995 and 1996 (unaudited) was $62,000, $53,000, $16,000, $11,000, $48,000,
$55,000, $7,000 and $11,000, respectively.
F-15
<PAGE> 71
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
The Company is allocated 50% of the cost of various computer equipment
operating leases from Banner, an affiliated company (see Note 11). These leases
expire at various times from 1997 through 2000. The Company's stand-alone loan
and travel centers are leased under noncancelable operating leases that
generally have five-year terms with options to renew.
Aggregate minimum lease commitments under the location leases and one-half
of the computer equipment minimum lease commitments of Banner are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1996
YEAR ENDING DECEMBER 31, ----------
DECEMBER 31 1995
----------------------------------------------------------- ------------ (UNAUDITED)
<S> <C> <C>
1996.................................................... $ 520,000 $ 552,000
1997.................................................... 384,000 502,000
1998.................................................... 245,000 349,000
1999.................................................... 109,000 194,000
2000.................................................... 43,000 106,000
---------- ----------
$ 1,301,000 $1,703,000
========== ==========
</TABLE>
Aggregate rental expense for the years ended October 31, 1993 and 1994, the
two months ended December 31, 1993 and 1994, the years ended December 31, 1994
and 1995, and the three months ended March 31, 1995 and 1996 (unaudited) was
$240,000, $320,000, $39,000, $67,000, $348,000, $458,000, $110,000 and $191,000,
respectively.
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. Management of the Company believes that
litigation currently pending will not have a material adverse effect on the
Company's financial position or results of operations.
* * * * * *
F-16
<PAGE> 72
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than the shares of Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
Common Stock by anyone in any jurisdiction in which such offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
The Reorganization and Certain
Relationships and Agreements Among
the Company, Banner, Holdings and
Other Affiliates.................... 14
Recent Developments................... 18
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 35
Management............................ 42
Principal Shareholders................ 49
Description of Capital Stock.......... 50
Shares Eligible Available for Future
Sale................................ 52
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Additional Information................ 54
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
----------------------------
Until July 21, 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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1,850,000 SHARES
LOGO
FINANCIAL ACCEPTANCE
CORPORATION
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PROSPECTUS
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MONTGOMERY SECURITIES
June 26, 1996
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