<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1997.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 001-11815
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4574983
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
5480 EAST FERGUSON DRIVE
COMMERCE, CALIFORNIA 90022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (213) 720-8600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01
PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 10, 1997, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was approximately $34,032,000, based upon
the closing price of the Common Stock on that date.
Number of shares of Common Stock of the registrant outstanding as of March
10, 1997: 7,277,000
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENT INCORPORATED PART OF FORM 10-K INTO WHICH INCORPORATED
--------------------- -----------------------------------------
<S> <C>
DEFINITIVE PROXY STATEMENT FOR THE PART III
1997 ANNUAL MEETING OF SHAREHOLDERS
</TABLE>
================================================================================
<PAGE> 2
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K" for the Company's financial statements, and the notes thereto, and the
financial statement schedules filed as part of this report.
2
<PAGE> 3
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS. Reference is made to the Index to
Consolidated Financial Statements on page F-1 for a list of financial statements
filed as part of this report.
(2) FINANCIAL STATEMENT SCHEDULES. All financial statement schedules are
omitted because of the absence of the conditions under which they are required
to be provided or because the required information is included in the financial
statements listed above and/or related notes.
(3) LIST OF EXHIBITS. The following is a list of exhibits filed as a part
of this report, including any management contracts or compensatory plans or
arrangements required to be filed as an exhibit to this report. Such management
contracts or compensatory plans or arrangements are identified in the list
below.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------------------
<S> <C>
2.1* Reorganization Agreement between the Company, Banner's Central Electric, Inc. and
Banner Holdings, Inc. dated as of June 24, 1996.
3.1* Certificate of Incorporation of the Registrant.
3.2* By-laws of the Registrant.
4.1* Specimen Common Stock Certificate of the Registrant.
10.1*+ 1996 Stock Option Plan dated as of June 24, 1996.
10.2*+ Indemnification Agreement between the Company and certain directors and officers
of the Company.
10.3*+ Employment Agreement between the Company and Gary M. Cypres dated as of June 24,
1996.
10.4* Financing Agreement between the Central Installment Credit Corporation, Banner's
Central Electric, Inc., Central Ram, Inc. and Banner Holdings, Inc. dated as of
June 24, 1996.
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------------------
<S> <C>
10.5* Option Agreement between the Company, Banner's Central Electric, Inc. and Banner
Holdings, Inc. dated as of June 24, 1996.
10.6* Operating Agreement between the Company, Banner's Central Electric, Inc. and
Banner Holdings, Inc. dated as of June 24, 1996.
10.7* Tax Sharing Agreement between the Company, Banner's Central Electric, Inc. and
Banner Holdings, Inc. dated as of June 24, 1996.
10.8* Indemnification Agreement between the Company, Banner's Central Electric, Inc. and
Banner Holdings, Inc. dated as of June 24, 1996.
10.9* Indemnification Agreement dated June 24, 1996 between the Company and Banner
Holdings, Inc.
10.10* Credit Agreement dated as of December 14, 1993 among Banner's Central Electric
Consumer Finance Company and Wells Fargo Bank, N.A., as amended.
10.11* Credit Agreement amended and restated as of April 29, 1996 among Banner's Central
Electric, Inc. and Bank of America National Trust and Savings Association.
10.12*+ Central Financial Acceptance Corporation Supplemental Executive Retirement Plan
dated as of June 24, 1996.
10.13*+ Central Financial Acceptance Corporation Executive Deferred Salary and Bonus Plan
dated as of June 24 , 1996.
10.14* Third Amended and Restated Loan Agreement dated as of June 24, 1996 among the
financial institutions named therein, Central Installment Credit Corporation, and
Banner's Central Electric, Inc.
10.15* Central Ram, Inc. Amended and Restated Security Agreement dated as of June 24,
1996 between Central Ram, Inc. and Bank of America National Trust and Savings
Association.
10.16* Central Installment Credit Corporation Security Agreement dated as of June 24,
1996 between Central Installment Credit Corporation and Bank of America National
Trust and Savings Association.
10.17* Central Ram, Inc. Continuing Guaranty dated as of June 24, 1996 in favor of Bank
of America National Trust and Savings Association.
10.18* Banner's Central Electric, Inc. Continuing Guaranty dated as of June 24, 1996 in
favor of Bank of America National Trust and Savings Association.
10.19* Company's Continuing Guaranty dated as of June 24, 1996 in favor of Bank of
America National Trust and Savings Association.
10.20* Stock Pledge Agreement dated as of June 24, 1996 between Company and Bank of
America National Trust and Savings Association.
10.21* Banner's Central Electric, Inc. Second Amended and Restated Security Agreement
dated as of June 24, 1996 between Banner's Central Electric, Inc. and Bank of
America National Trust and Savings Association.
10.22*+ Adoption Agreement for the Qualified Benefits, Inc. Regional Prototype
Non-Standardized Profit Sharing Plan and Trust effective as of November 1, 1989.
10.23** Amendment Number One to Third Amended and Restated Loan Agreement dated as of
August 31, 1996 among the financial institutions named therein, Central
Installment Credit Corporation and Banner's Central Electric, Inc.
10.24 Eighth Amendment to Credit Agreement dated as of June 21, 1996 by and between
Central Consumer Finance Company and Wells Fargo Bank, National Association.
10.25** Ninth Amendment to Credit Agreement dated as of October 10, 1996 by and between
Central Consumer Finance Company and Wells Fargo Bank, National Association.
10.26+ Employment Agreement between the Company and Anthony Fortunato dated October 25,
1996.
10.27+ Employment Agreement between the Company and Gerard T. McMahon dated August 30,
1996.
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------------------
<S> <C>
10.28 Amendment Number Two to Third Amended and Restated Loan Agreement dated as of
December 31, 1996 among the financial institutions named therein, Central
Installment Credit Corporation and Banner's Central Electric, Inc.
10.29 Agreement to Transfer Business Operations among Banner's Central Electric, Inc.,
Central Consumer Finance Company, Central Financial Acceptance Corporation and
Central Auto Sales, Inc. dated as of July 31, 1996.
10.30 Waiver Agreement and Temporary Amendment dated as of January 31, 1997 with
reference to the Credit Agreement dated as of December 14, 1993 between Consumer
Finance Company and Wells Fargo Bank, National Association, as amended.
10.31 Amendment One to Financing Agreement between Central Installment Credit
Corporation, Banner's Central Electric, Inc., Central Ram, Inc. and Banner
Holdings, Inc., dated as of July 1, 1996.
11.0 Statement of Per Share Earnings.
21.1 Subsidiaries of the Registrant.*
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the Commission in the
Company's Registration Statement on Form S-1 (Registration No. 333-3790).
** Incorporated by reference to exhibits filed with the Commission in the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
(B) REPORTS ON FORM 8-K. On October 23, 1996, the Company filed a report
on Form 8-K under Item 4, "Changes in Registrant's Certifying Accountant." The
Company subsequently filed amendments to such report on October 30 and November
1, 1996.
(C) EXHIBITS. Reference is made to the Exhibit Index and exhibits filed as
a part of this report.
(D) ADDITIONAL FINANCIAL STATEMENTS. Not applicable.
5
<PAGE> 6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTRAL FINANCIAL ACCEPTANCE
CORPORATION
By: /s/ GARY M. CYPRES
------------------------------------
Gary M. Cypres
Chief Executive Officer and
President
Date: April 10, 1997
<PAGE> 7
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1996 and 1995........................... F-4
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and
1994............................................................................. F-5
Consolidated Statements of Stockholder's Equity for the Years Ended December 31,
1996, 1995 and 1994.............................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995
and 1994......................................................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
</TABLE>
F-1
<PAGE> 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Central Financial Acceptance
Corporation:
We have audited the accompanying consolidated balance sheet of Central
Financial Acceptance Corporation, a California corporation, and subsidiaries
(the "Company") as of December 31, 1996, and the related consolidated statements
of income, stockholder's equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 19, 1997
F-2
<PAGE> 9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Central Financial Acceptance Corporation
Los Angeles, California:
We have audited the accompanying consolidated balance sheet of Central Financial
Acceptance Corporation and subsidiaries (the "Company", see Note 1, Basis of
Presentation) as of December 31, 1995, and the related consolidated statements
of income, stockholders' equity, and cash flows for 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, 1995 and the results
of their operations and their cash flows for 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 Note 1)
F-3
<PAGE> 10
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash............................................................ $ 5,848,000 $ 57,000
Finance receivables, net........................................ 120,391,000 94,674,000
Prepaid expenses and other current assets....................... 3,962,000 200,000
Net assets of discontinued operation............................ -- 1,033,000
Deferred income taxes........................................... 3,536,000 2,307,000
Property and equipment, net..................................... 3,425,000 2,060,000
Intangible assets, net.......................................... 8,725,000 1,399,000
------------ ------------
TOTAL................................................. $145,887,000 $101,730,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable................................................... $ 74,024,000 $ 63,967,000
Accrued expenses and other current liabilities.................. 8,708,000 1,688,000
Income taxes payable............................................ 952,000 1,593,000
Long-term debt.................................................. 850,000 850,000
------------ ------------
Total liabilities.......................................... 84,534,000 68,098,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares outstanding...................................... -- --
Common stock, $.01 par value, 20,000,000 shares authorized;
7,277,000 and 5,150,000 shares issued and outstanding,
respectively............................................... 73,000 52,000
Paid-in capital............................................... 47,903,000 26,082,000
Retained earnings............................................. 13,377,000 7,498,000
------------ ------------
Total stockholder's equity................................. 61,353,000 33,632,000
------------ ------------
TOTAL................................................. $145,887,000 $101,730,000
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these consolidated financial statements.
F-4
<PAGE> 11
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Interest income
Consumer product portfolio......................... $12,850,000 $12,508,000 $11,787,000
Small loan portfolio............................... 9,686,000 5,095,000 1,057,000
Automobile finance portfolio....................... 1,548,000 240,000 0
Other.............................................. 1,691,000 176,000 0
----------- ----------- -----------
Total interest income............................ 25,775,000 18,019,000 12,844,000
Travel services....................................... 2,449,000 371,000 0
Transaction fees from affiliate....................... 965,000 916,000 857,000
Other income.......................................... 7,238,000 2,857,000 1,868,000
----------- ----------- -----------
Total revenues................................... 36,427,000 22,163,000 15,569,000
----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses.................................... 12,676,000 7,288,000 5,170,000
Provision for credit losses........................... 9,105,000 5,449,000 3,923,000
Interest expense...................................... 4,697,000 4,278,000 2,801,000
----------- ----------- -----------
Total costs and expenses......................... 26,478,000 17,015,000 11,894,000
----------- ----------- -----------
Income before taxes and discontinued operations......... 9,949,000 5,148,000 3,675,000
Income tax expense...................................... 3,979,000 2,079,000 1,493,000
----------- ----------- -----------
Income from continuing operations....................... 5,970,000 3,069,000 2,182,000
Discontinued operations net income (loss)............... (91,000) 50,000 0
----------- ----------- -----------
Net income.............................................. $ 5,879,000 $ 3,119,000 $ 2,182,000
=========== =========== ===========
PER SHARE DATA: (NOTE 3)
Earnings per share from continuing operations......... $ 0.96 $ 0.60 $ 0.42
Earnings (Loss) per share discontinued operations..... (0.01) 0.01 0.00
----------- ----------- -----------
Net income per share.................................. $ 0.95 $ 0.61 $ 0.42
Weighted average common shares outstanding............ 6,213,500 5,150,000 5,150,000
Supplementary net income per share (unaudited)........ $ 0.88 $ 0.58 $ 0.43
Supplementary weighted average number of common shares
outstanding (unaudited)............................ 7,277,000 7,277,000 7,277,000
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these consolidated financial statements.
F-5
<PAGE> 12
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994..... 5,150,000 $52,000 $17,916,000 $ 2,197,000 $20,165,000
Net income................. 2,182,000 2,182,000
Capital contribution....... 1,604,000 1,604,000
--------- ------- ----------- ----------- -----------
Balance, December 31, 1994... 5,150,000 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... 5,150,000 52,000 26,082,000 7,498,000 33,632,000
Net income................. 5,879,000 5,879,000
Capital withdrawal......... (615,000) (615,000)
Net proceeds from public
offering................ 2,127,000 21,000 22,436,000 22,457,000
--------- ------- ----------- ----------- -----------
Balance, December 31, 1996... 7,277,000 $73,000 $47,903,000 $13,377,000 $61,353,000
========= ======= =========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these consolidated financial statements.
F-6
<PAGE> 13
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 5,879,000 $ 3,119,000 $ 2,182,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 224,000 386,000 264,000
Provision for credit losses.................... 9,105,000 5,449,000 3,923,000
Deferred income taxes.......................... (1,229,000) (663,000) (281,000)
Changes in assets and liabilities:
Prepaid expenses and other current assets...... (3,762,000) (166,000) 131,000
Net assets of discontinued operations.......... 1,033,000 (1,033,000) 0
Accrued expenses and other current liabilities
and income taxes payable.................... 6,379,000 2,135,000 521,000
------------ ------------ ------------
Net cash provided by operating activities... 17,629,000 9,227,000 6,740,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment contracts (originated and acquired)
collected, net.............................. (34,822,000) (29,795,000) (20,833,000)
Capital expenditures........................... (1,492,000) (2,124,000) (7,000)
Acquisitions................................... (7,423,000) 0 0
------------ ------------ ------------
Net cash used in investing activities....... (43,737,000) (31,919,000) (20,840,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution (withdrawal).............. (615,000) 6,562,000 1,604,000
Net Proceeds from public offering.............. 22,457,000 0 0
Proceeds from long-term debt................... 0 850,000 0
Net proceeds from notes payable................ 10,057,000 15,122,000 12,195,000
------------ ------------ ------------
Net cash provided by financing activities... 31,899,000 22,534,000 13,799,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH.................. 5,791,000 (158,000) (301,000)
CASH, BEGINNING OF YEAR.......................... 57,000 215,000 516,000
------------ ------------ ------------
CASH, END OF YEAR................................ $ 5,848,000 $ 57,000 $ 215,000
============ ============ ============
CASH PAID DURING THE YEAR FOR:
INTEREST....................................... $ 4,531,000 $ 4,250,000 $ 2,772,000
INCOME TAXES................................... $ 5,909,000 $ 1,675,000 $ 1,549,000
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these consolidated financial statements.
F-7
<PAGE> 14
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 was a wholly owned subsidiary of Banner's Central
Electric, Inc ("Banner"). 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 "Holding 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.
On July 2, 1996, CFAC consummated its initial public offering when it sold
2.127 million shares of common stock, which resulted in net proceeds to the
Company of $22.5 million.
On August 1, 1996, the business of Central Auto Sales, Inc., (a wholly
owned subsidiary of CFAC) was sold to CFAC's parent company for net book value.
The consolidated financial statements have been restated to reflect this
business as a discontinued operation.
Nature of Operations -- The Company (i) purchases and services consumer
finance receivables generated by the Company's customers for purchases of high
quality brand name consumer products, appliances and furniture sold by Banner,
and by independent retailers; (ii) provides financing for purchases of used
automobiles sold by Banner; (iii) provides small loans to its customers; (iv)
originates and services consumer finance receivables generated by the Company's
customers for purchases of airline tickets sold by the Company; and (v) provides
insurance products and insurance premium financing to its customers. The
majority of the Company's business is focused in Southern California, and the
Company experiences the highest demand for its financial products and services
between October and December.
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, Centravel, Inc., Central Financial
Acceptance/Insurance Agency, Central Premium Finance Company, Central
International, Ltd. and BCE Properties, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
Finance Receivables -- Central's finance receivables include installment
contracts that are purchased from Banner (referred to herein as the "Consumer
Product Portfolio"), receivables that arise from unsecured, small loans
(referred to herein as the "Small Loan Portfolio"), installment contracts that
are originated when
F-8
<PAGE> 15
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers buy used cars and travel tickets (referred to herein as the
"Automobile Finance Portfolio" and the "Travel Finance Portfolio,"
respectively), and installment contracts purchased from unaffiliated third party
retailers that sell products or services and receivables that arise from
automobile insurance premium contracts (referred to herein as the "Other
Portfolio.") 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 Finance Portfolio and the Other Portfolio,
which includes the independent retailers, from 1 to 12 months in the Small Loan
and Travel Finance Portfolios, and from 36 to 42 months in the Automobile
Finance Portfolio.
Certain direct loan origination costs are capitalized and recognized into
expense over the life of the related loan using a method that approximates the
interest method.
The Company provides an allowance for credit losses in the Consumer Product
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
and independent retailers 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 indicates that collection is unlikely, the account is charged
off and turned over to a collection agency. Accounts are generally charged off
when they are between 91 and 150 days past due.
Allowance for loan losses is increased by charges to income and decreased
by chargeoffs, net of recoveries. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay and current economic conditions. The Company's
customers are typically between the ages of 21 and 45 and earn less than $25,000
per year, have little or no savings and limited short-term employment histories.
In addition, the Company's customers typically have no prior credit histories
and are unable to secure credit from traditional lending sources. The Company
makes its credit decisions primarily on its assessment of a customer's ability
to repay the obligation. In making a credit decision, in addition to the size of
the obligation, the Company generally considers a customer's income level, type
and length of employment, stability of residence, personal references and prior
credit history with the Company. As a result, the Company is more susceptible to
the risk that its customers will not satisfy their repayment obligations than
are less specialized consumer companies or consumer finance companies that have
more stringent underwriting criteria. Because the Company relies on the
creditworthiness of its customers for repayment and does not rely on collateral
securing the debt, the Company experiences actual rates of losses higher than
lenders who have collateral which they can repossess in the event of a
borrower's default.
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
F-9
<PAGE> 16
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value to its estimated fair value. Depreciation and amortization are computed
primarily using the straight-line method over the estimated lives of the assets,
as follows:
<TABLE>
<S> <C>
Furniture, equipment and software.................. Five to ten years
Leasehold improvements............................. Life of lease
Building improvements.............................. 7 to 39 years
</TABLE>
Intangible Assets -- Intangible assets primarily arose in connection with
the Company's acquisition of the net assets of certain travel and automobile
insurance businesses during 1996. The excess of the purchase price over the fair
value of net assets acquired 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 its estimated fair
value.
Income Recognition -- 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 and independent retailers is
deferred and recognized using the interest method. Transaction fees on contracts
purchased from a related party are deferred and 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. Premiums and commissions for
credit life insurance are recognized as revenue using the interest method.
Premiums and commissions for credit accident and health insurance are recognized
over the terms of the contracts based on the means of the straight line and
interest method and are included in other income in the consolidated statements
of income.
Travel Services -- Revenues from the sale of travel tickets represent
airline commissions paid to the Company.
Insurance Liabilities -- The liability for losses and loss-adjustment
expenses includes an amount determined from loss reports and individual cases
and an amount, based on past experience, for losses incurred but not reported.
Such liabilities are necessarily based on estimates and, while management
believes that the amount is adequate, the ultimate liability may be in excess of
or less than the amounts provided. The methods for making such estimates and for
establishing the resulting liability are continually reviewed, and any
adjustments are reflected in earnings in the current period.
Income Taxes -- The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 109. 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
F-10
<PAGE> 17
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. EARNINGS PER SHARE
Earnings per common share is computed by dividing net income by the average
number of common shares outstanding during the periods using the treasury stock
method. Stock options were not considered as dilutive in the earnings per share
calculation since they have less than 3% effect in the aggregate.
Supplementary net income per share is based upon 5,150,000 shares of Common
Stock issued by the Company pursuant to the Reorganization and 2,127,000 shares
of Common Stock sold by the Company in its initial public offering as if all
such shares were outstanding as of January 1, 1994, and also gives effect to a
reduction in interest expenses resulting from the reduction of indebtedness upon
application of the net proceeds of the initial public offering as if it has
occurred on January 1, 1994.
4. ACQUISITIONS
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.
During 1996, the Company acquired the business of, and assumed the leasehold
interest to 80 travel locations, and 10 automobile insurance agencies for an
aggregate purchase price of approximately $7.5 million.
These acquisitions were accounted for as purchases and the results of their
operations, which are not significant, have been included since the applicable
acquisition dates.
5. FINANCE RECEIVABLES
Finance receivables consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Consumer Product Portfolio.............................. $ 61,848,000 $ 67,811,000
Small Loan Portfolio.................................... 57,671,000 37,868,000
Automobile Finance Portfolio............................ 11,002,000 5,545,000
Travel Finance Portfolio................................ 5,609,000 2,969,000
Other................................................... 9,349,000 0
------------ ------------
145,479,000 114,193,000
Less deferred interest.................................. 17,049,000 13,587,000
Less allowance for credit losses........................ 6,786,000 4,955,000
Less deferred administrative fees and insurance
revenues.............................................. 978,000 576,000
Less unearned premiums and unpaid claim liabilities
related to finance receivables........................ 275,000 401,000
------------ ------------
$120,391,000 $ 94,674,000
============ ============
</TABLE>
F-11
<PAGE> 18
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CONSUMER PRODUCT PORTFOLIO:
Past due 31-60 days..................................... $ 2,393,000 $ 1,943,000
Past due 61 days or more................................ 2,277,000 2,465,000
----------- -----------
$ 4,670,000 $ 4,408,000
=========== ===========
SMALL LOAN PORTFOLIO:
Past due 31-60 days..................................... $ 1,239,000 $ 500,000
Past due 61 days or more................................ 1,615,000 649,000
----------- -----------
$ 2,854,000 $ 1,149,000
=========== ===========
TRAVEL FINANCE PORTFOLIO:
Past due 31-60 days..................................... $ 129,000 $ 39,000
Past due 61 days or more................................ 213,000 48,000
----------- -----------
$ 342,000 $ 87,000
=========== ===========
OTHER:
Past due 31-60 day...................................... $ 437,000 $ 0
Past due 61 days or more................................ 252,000 0
----------- -----------
$ 689,000 $ 0
=========== ===========
</TABLE>
The allowance for credit losses in the Consumer Product Portfolio includes
the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Allowance for credit losses, beginning of $ 3,711,000 $ 3,169,000 $ 2,786,000
year......................................
Provision for credit losses................. 4,955,000 3,852,000 3,332,000
Write-offs, net of recoveries............... (4,257,000) (3,310,000) (2,949,000)
----------- ----------- -----------
Allowance for credit losses, end of year.... $ 4,409,000 $ 3,711,000 $ 3,169,000
=========== =========== ===========
</TABLE>
The allowance for credit losses in the Small Loan Portfolio includes the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Allowance for credit losses, beginning of $ 1,194,000 $ 543,000 $ 107,000
year......................................
Provision for credit losses................. 3,349,000 1,547,000 591,000
Write-offs, net of recoveries............... (2,606,000) (896,000) (155,000)
----------- ----------- -----------
Allowance for credit losses, end of year.... $ 1,937,000 $ 1,194,000 $ 543,000
=========== =========== ===========
</TABLE>
F-12
<PAGE> 19
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>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Allowance for credit losses, beginning of year............ $ 50,000 $ 0
Provision for credit losses............................... 395,000 50,000
Write-offs, net of recoveries............................. (232,000) 0
---------- ----------
Allowance for credit losses, end of year.................. $ 213,000 $ 50,000
========== ==========
</TABLE>
The allowance for credit losses in the Other Finance Portfolio, which
businesses began in 1996, includes the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1996
------------
<S> <C>
Allowance for credit losses, beginning of year.......................... $ 0
Provision for credit losses............................................. 406,000
Write-offs, net of receivables.......................................... (179,000)
----------
Allowance for credit losses, end of year................................ $ 227,000
==========
</TABLE>
The Automobile Finance Portfolio is financed by the Company with full
recourse back to Banner, and accordingly, no allowance for credit losses is
provided for by the Company.
6. PROPERTY AND EQUIPMENT
Property and equipment, net consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Land.................................................... $1,568,000 $1,568,000
Improvements............................................ 507,000 146,000
Furniture, equipment and software....................... 1,548,000 417,000
---------- ----------
3,623,000 2,131,000
Less accumulated depreciation and amortization.......... 198,000 71,000
---------- ----------
$3,425,000 $2,060,000
========== ==========
</TABLE>
7. INTANGIBLE ASSETS
Intangible assets, net consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Excess of purchase price over the fair value of net $9,085,000 $1,662,000
assets acquired.......................................
Less accumulated amortization........................... 360,000 263,000
---------- ----------
$8,725,000 $1,399,000
========== ==========
</TABLE>
F-13
<PAGE> 20
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Bank of America line of credit........................ $35,208,000 $40,317,000
Wells Fargo line of credit............................ 38,816,000 23,650,000
----------- -----------
$74,024,000 $63,967,000
=========== ===========
</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 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 April 30,
1997 and contains certain restrictive covenants that 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 9.13% and 8.21% per annum as of December 31, 1996 and December 31, 1995,
respectively. The amount of unused credit under the facility was limited by the
allowable borrowing base and was approximately $1,572,000 at December 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 $50,000,000, 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 April 30,
1997. The credit facility contains certain restrictive covenants that 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 7.89% and 8.11% per annum as of December 31, 1996 and December
31, 1995, respectively. The amount of unused credit under the facility was
limited by the allowable borrowing base and was approximately $6,624,000 at
December 31, 1996. The Company believes that the Lines of Credit can be renewed
or that it can obtain alternative financing.
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 $179,000 for the
years ended December 31, 1996 and 1995, and $78,000 for the year ended December
31, 1994, and are included in operating expenses in the consolidated statements
of income.
F-14
<PAGE> 21
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company was not in compliance with certain financial covenants as of
December 31, 1996; however, a waiver has been received from each of Bank of
America National Trust and Savings Association and Wells Fargo Bank, National
Association.
9. LONG-TERM DEBT
Long-term debt consists of a promissory note payable to a bank that bears
interest at the bank's reference rate of 8.25% at December 31, 1996. Interest is
payable monthly and the principal is due July 1998. The note is secured by a
deed of trust.
10. INCOME TAXES
The Company has agreed to indemnify Holdings for all federal, state, and
other income taxes for periods prior to July 2, 1996, when it was included as
part of Holdings consolidated tax group.
Subsequent to July 2, 1996, the Company and its subsidiaries will file a
consolidated federal income tax return. For California and certain other states,
the Company will continue to file on a combined or separate company tax basis,
as appropriate. The income tax provisions as presented in the accompanying
financial statements are based upon the amount the Company would have paid as if
it filed separate income tax returns for the entire periods presented.
The provision (benefit) for income taxes from continuing operations
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
CURRENT:
Federal..................................... $ 4,127,000 $2,121,000 $1,373,000
State....................................... 1,081,000 621,000 401,000
----------- ---------- ----------
5,208,000 2,742,000 1,774,000
----------- ---------- ----------
DEFERRED:
Federal..................................... (1,041,000) (521,000) (220,000)
State....................................... (188,000) (142,000) (61,000)
----------- ---------- ----------
(1,229,000) (663,000) (281,000)
----------- ---------- ----------
Provision for income taxes.................... $ 3,979,000 $2,079,000 $1,493,000
=========== ========== ==========
</TABLE>
A reconciliation of the provision for income taxes from continuing
operations to the statutory rates is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income taxes at statutory rates........................ 35.0% 35.0% 35.0%
State franchise taxes, net of federal benefit.................. 5.8 6.0 6.0
Amortization of the excess purchase price
over the fair value of assets acquired....................... 0.2 0.4 0.5
Other.......................................................... (1.0) (1.0) (0.9)
---- ---- ----
40.0% 40.4% 40.6%
==== ==== ====
</TABLE>
F-15
<PAGE> 22
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences giving rise to the deferred income
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS (LIABILITIES):
Allowance for credit losses............................... $2,908,000 $2,157,000
Deferred revenue.......................................... 466,000 162,000
Other..................................................... 162,000 (12,000)
---------- ----------
$3,536,000 $2,307,000
========== ==========
</TABLE>
11. RELATED PARTY TRANSACTIONS
In connection with its formation, the Company, Banner and Holdings, entered
into the Reorganization Agreement and certain other agreements (the "Financing
Agreement", the "Option Agreement", and the "Operating Agreement").
The Financing Agreement, as amended, grants the Company exclusive right to
provide financing to Banner customers for a term of fifteen years from the date
of the Reorganization and provides that any contracts purchased pursuant to this
Agreement will be at face value less a transaction fee, which is subject to
renegotiation at six month intervals. The Agreement also provides that for the
years ended December 31, 1996 and 1997, up to $1.5 million of contracts
purchased can be returned to Banner at amortized principal balance. The Company
can 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 upon 1.6% of average net receivables in the Consumer Product
Portfolio prior to July 2, 1996, and 2.5% thereafter. During 1996, Banner sold
approximately $55 million of Consumer Product Receivables, net of $1.5 million
which the Company returned pursuant to the Financing Agreement.
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,
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.
F-16
<PAGE> 23
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Termination may be made on a service-by-service basis or in total. Such
allocated expenses totaled $1,338,000, $1,000,000, and $559,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
In August 1996, following CFAC's initial public offering, CFAC, Central
Auto Sales, Inc., Central Consumer Finance Company and Banner entered into an
Agreement to Transfer Business Operations (the "Automobile Financing
Agreement"), under which CFAC sold its used car sales business to Banner for
approximately its net book value, or $865,000. Under the provisions of the
Automobile Financing Agreement, Banner will operate the used car sales business
while the Company will have the exclusive right for a fifteen year period to
provide financing for all cars that Banner sells or to purchase automobile
finance contracts generated by Banner. In addition, all financing extended by
the Company on automobiles sold by Banner will be with full recourse back to
Banner in the event of default by the customer. Accordingly, Banner will not
provide any dealers discount for cars sold pursuant to the Automobile Financing
Agreement.
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
December 31, 1996, 1995 and 1994 was $27,000, 55,000 and $48,000, respectively.
13. STOCK OPTION PLAN
In connection with its initial public offering the Company adopted the 1996
Stock Option Plan, under which 700,000 shares of authorized common stock have
been reserved for issuance pursuant to terms and conditions as determined by the
Board of Directors. The options have a maximum duration of ten years and are
subject to certain vesting and cancellation provisions, and may not be granted
at less than the market value of the Company's Common Stock on the date of grant
of the option. During 1996, the Company granted options to acquire an aggregate
of 425,000 shares of common stock with exercise prices ranging from $12.00 to
$18.25 per share. As of December 31, 1996, no options were exercisable.
In October 1995, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 defines a fair value based method of
accounting for employee stock compensation plans, but allows for the
continuation of the intrinsic value based method of accounting to measure
compensation cost prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). For companies electing
not to change their accounting, SFAS 123 requires pro-forma disclosures of
earnings and earnings per share as if the change in accounting provision of SFAS
123 has been adopted.
The Company has elected to continue to utilize the accounting method
prescribed by APB 25, under which no compensation cost has been recognized, and
adopt the disclosure requirements of SFAS 123. As a result, SFAS 123 has no
effect on the financial condition or results of operations of the Company at
December 31, 1996.
Had compensation cost for this plan been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts.
<TABLE>
<S> <C> <C>
Net Income...................................... As Reported $5,879,000
Pro Forma $5,496,000
Primary EPS..................................... As Reported $ 0.95
Pro Forma $ 0.88
</TABLE>
F-17
<PAGE> 24
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes information about the stock option plan
outstanding as of December 31, 1996:
<TABLE>
<S> <C>
Range of exercise price................................... $12.00 - $18.25
Number outstanding........................................ 425,000
Weighted average remaining contractual life............... 9.5 years
</TABLE>
14. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
During 1996, the Company adopted a 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 ten years of service with the Company, including five years subsequent to
the adoption of the plan.
The Supplemental Executive Retirement Plan, which is unfunded, expense for
the year ended December 31, 1996 amounted to approximately $80,000.
15. COMMITMENTS AND CONTINGENCIES
The Company is allocated 50% of the cost of various computer equipment
operating leases from Banner. These leases expire at various times from 1997
through 2001. The Company's stand-alone loan and travel centers are leased under
noncancelable operating leases that generally have two to 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>
YEAR ENDING DECEMBER 31, BANNER OTHERS
---------------------------------------------------- ---------- ----------
<S> <C> <C>
1997................................................ $ 609,000 $1,212,000
1998................................................ 520,000 765,000
1999................................................ 384,000 444,000
2000................................................ 340,000 255,000
2001................................................ 222,000 157,000
Thereafter.......................................... 0 101,000
---------- ----------
$2,075,000 $2,934,000
========== ==========
</TABLE>
Aggregate rental expense for the years ended December 31, 1996, 1995 and
1994 were $1,039,000, $458,000 and $348,000, respectively.
Employment Agreement -- The Company has an agreement with the Chairman of
the Board of Directors for a period of five years at a base salary of $175,000
per year with eligibility to participate in the Company's executive compensation
plans. Any changes to the agreement require approval of the Board of Directors.
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-18
