<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-11815
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4574983
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5480 East Ferguson Drive
Commerce, California 90022
----------------------------------------
(Address of principal executive offices)
(323) 720-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
Number of shares outstanding of the Registrant's Common Stock, as of November
16, 1998: 7,277,000.
<PAGE> 2
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 ........... 1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997.................................................................. 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997.................................................................. 3
Notes to Condensed Consolidated Financial Statements ........................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................14
Signatures...............................................................................................15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
A S S E T S
Cash $ 7,489 $ 4,794
Restricted cash 1,176 930
Finance receivables, net 85,909 102,498
Prepaid expenses and other current assets 674 2,865
Note receivable from affiliate 4,733 4,992
Deferred income taxes 3,842 3,845
Income taxes receivable -- 786
Property and equipment, net 6,640 5,880
Intangible asset, net 8,327 8,559
-------- --------
Total assets $118,790 $135,149
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 42,000 $ 62,000
Accrued expenses and other current liabilities 6,414 6,556
Income taxes payable 1,175 --
Other debt -- 850
-------- --------
Total liabilities 49,589 69,406
-------- --------
Commitments and contingencies
Stockholders' 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 shares issued and outstanding 73 73
Paid-in capital 47,903 47,903
Retained earnings 21,225 17,767
-------- --------
Total stockholders' equity 69,201 65,743
-------- --------
Total liabilities and stockholders' equity $118,790 $135,149
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Interest income on consumer finance receivables $ 5,842 $ 7,133 $18,173 $22,214
Interest income on auto finance receivables 122 333 534 1,158
Travel services 2,213 2,287 6,318 6,242
Other income 2,993 3,460 9,348 9,631
------- ------- ------- -------
Total revenues 11,170 13,213 34,373 39,245
Costs and expenses:
Operating expenses 6,404 6,397 19,829 18,584
Provision for credit losses 1,972 2,666 5,747 7,895
Interest expense 852 1,236 3,034 4,110
------- ------- ------- -------
Total costs and expenses 9,228 10,299 28,610 30,589
------- ------- ------- -------
Income before provision for income taxes 1,942 2,914 5,763 8,656
Provision for income taxes 777 1,199 2,305 3,409
------- ------- ------- -------
Net income $ 1,165 $ 1,715 $ 3,458 $ 5,247
======= ======= ======= =======
Per Share Data:
Basic earnings per share $ 0.16 $ 0.24 $ 0.48 $ 0.72
Diluted earnings per share $ 0.16 $ 0.24 $ 0.48 $ 0.72
Weighted average common shares outstanding 7,277 7,277 7,277 7,277
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,458 $ 5,247
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 727 529
Provision for credit losses 5,747 7,895
Deferred income taxes 3 5
Changes in assets and liabilities:
Note receivable from affiliate 259 --
Prepaid expenses and other current assets 2,977 (2,360)
Other receivables -- (1,150)
Restricted cash (246) --
Income taxes payable 1,175 --
Accrued expenses and other current liabilities (142) (176)
-------- --------
Net cash provided by operating activities 13,958 9,990
-------- --------
Cash flows from investing activities:
Installment contracts collected, net 10,842 8,286
Capital expenditures (1,255) (2,162)
-------- --------
Net cash provided by investing activities 9,587 6,124
-------- --------
Cash flows from financing activities:
Net repayments of notes payable (20,000) (17,024)
Net proceeds from repayment of debt (850) --
-------- --------
Net cash used in financing activities (20,850) (17,024)
-------- --------
Net increase (decrease) in cash 2,695 (910)
Cash, beginning of period 4,794 5,848
-------- --------
Cash, end of period $ 7,489 $ 4,938
======== ========
Cash paid during the period for:
Interest $ 3,163 $ 4,322
Income taxes $ 30 $ 4,244
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying condensed consolidated financial statements of Central
Financial Acceptance Corporation ("CFAC") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of only normal recurring adjustments,
considered necessary for a fair presentation of the Company's financial
condition and operating results for the interim periods presented herein have
been included. Operating results for the periods ended September 30, 1998 are
not necessarily indicative of the results that may be expected for any
subsequent period or the year ended December 31, 1998. These interim financial
statements should be read in conjunction with the Annual Report filed on Form
10-K for the year ended December 31, 1997 and the audited financial statements
and notes contained therein, filed with the Securities and Exchange Commission.
CFAC was formed in April, 1996 and consummated its initial public offering
on July 2, 1996, when it sold 2.127 million shares of common stock, which
resulted in net proceeds to the Company of approximately $22.5 million. CFAC is
a majority owned subsidiary of Banner's Central Electric, Inc. ("Banner").
Banner, which is wholly owned by Banner Holdings, Inc. ("Holdings") is a
consumer products retailer that provides its customers with financing for the
merchandise it sells.
CFAC, Banner and Holdings entered into certain agreements for the purpose
of defining the ongoing relationships among them. 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 Company (i) purchases and services consumer finance receivables
generated through the sale of high quality brand name consumer products,
appliances and furniture sold by Banner, and by independent retailers; (ii)
provides small loans to its customers; (iii) originates and services consumer
finance receivables generated by the Company's customers for purchases of
airline tickets sold by the Company; (iv) provides insurance products and
insurance premium financing to its customers; and (v) provides check cashing and
income tax return preparation services. The majority of the Company's business
is focused in Southern California, and the Company experiences the highest
demand for its products and services between October and December.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
See Note 2 of Notes to Consolidated Financial Statements in the Company's
Annual Report filed on Form 10-K for the year ended December 31, 1997.
4
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CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. EARNINGS PER SHARE
The Company reports earnings per share according to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share." The
following table presents a reconciliation of basic earnings per share and
diluted earnings per share. Options to purchase 425,000 and 538,000 shares of
common stock at $9.00-$18.25 per share, were outstanding during the first nine
months of 1997 and 1998, respectively, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
---------------------- ---------------------
(In thousands, except per share data)
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator- income from continuing operations $1,165 $1,165 $1,715 $1,715
Denominator-weighted average shares outstanding 7,277 7,277 7,277 7,277
Earnings per share $ 0.16 $ 0.16 $ 0.24 $ 0.24
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------------------- ---------------------
(In thousands, except per share data)
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator- income from continuing operations $3,458 $3,458 $5,247 $5,247
Denominator-weighted average shares outstanding 7,277 7,277 7,277 7,277
Earnings per share $ 0.48 $ 0.48 $ 0.72 $ 0.72
</TABLE>
5
<PAGE> 8
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. CONSUMER FINANCE RECEIVABLES
Consumer Finance receivables consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Consumer Product Portfolio $ 30,849 $ 38,814
Small Loan Portfolio 55,148 58,659
Automobile Finance Portfolio 3,184 6,382
Travel Finance Portfolio 4,901 6,165
Other 6,019 10,194
-------- --------
100,101 120,214
Less deferred interest 4,018 7,402
Less allowance for credit losses 7,770 7,835
Less deferred administrative fees, ATM
membership fees and insurance revenues 1,932 1,780
Less credit insurance and reserves for
policyholders' benefits 472 699
-------- --------
$ 85,909 $102,498
======== ========
</TABLE>
5. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Wells Fargo Line of Credit $42,000 $62,000
======= =======
</TABLE>
The Company entered into a credit agreement with several banks and Wells
Fargo Bank, National Association, as Agent, (the "Wells Fargo Line of Credit")
on June 13, 1997 that provides for the issuance of notes up to $100,000,000
subject to an allowable borrowing base. Holdings and all of the Company's
significant domestic subsidiaries are guarantors under the Wells Fargo Line of
Credit. In addition, the Company has pledged substantially all of its assets,
including its receivables, and the stock of all of its significant subsidiaries
as collateral for the amounts the Company borrows under the Wells Fargo Line of
Credit. 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 all receivables in the Company. The Wells Fargo Line of Credit
expires on June 12, 2000. The credit facility contains certain restrictive
covenants that require, among other things, the maintenance of certain financial
ratios and amounts. The amount of unused available credit under the facility was
approximately $21,100,000 at September 30, 1998 and was limited by the allowable
borrowing base.
6. LONG-TERM DEBT
Long-term debt consists of a promissory note payable to a bank that bears
interest at the bank's reference rate. Interest is payable monthly and the
principal which was due in July, 1998 was paid off.
6
<PAGE> 9
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. 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 an 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 Company returned $5.8 million of
contracts purchased for the year ended December 31, 1997. The Company did not
return any contracts purchased for the nine months ended September 30, 1998. The
Company can terminate the Financing Agreement at any time upon one year's prior
written notice to Banner. All unpaid amounts are due within 18 months and bear
interest at the Company's borrowing rate. Interest income realized on the amount
due from Banner was approximately $271,000 for the nine months ended September
30, 1998.
In the accompanying condensed consolidated financial statements the
transaction fee is computed based upon 2.5% of the net receivables written in
the consumer product portfolio.
In August, 1996, CFAC sold its used automobile business back to Banner,
which discontinued this business in May, 1997. Under the terms of the sale
covering this transaction, 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.
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. Termination may be made
on a service-by-service basis or in total. Such allocated expenses totaled
approximately $1,113,000 and $1,175,000 for the nine months ended September 30,
1998 and 1997, respectively.
In July 1998 the Company agreed to provide financing to Banner for the
purchase of inventory and in return will receive a security interest in the
financed inventory. In connection with such financing the Company will charge
Banner interest at the Company's borrowing rate and the notes will be due on
demand. The Company has also agreed to provide third party guaranties to
selected vendors of Banner for inventory purchases. Through September 30, 1998
the Company has advanced to Banner directly or to vendors on behalf of Banner
approximately $2.7 million.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report on Form 10-Q may
constitute forward-looking statements under Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These statements may
involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, expectations regarding the
Company's efforts to resolve Year 2000 issues and the effects of a failure to
resolve such issues, perceived opportunities in the market and statements
regarding the Company's mission and vision. The Company's actual results,
performance, or achievements may differ significantly from the results,
performance, or achievements expressed or implied in such forward-looking
statements. For discussion of the factors that might cause such a difference,
see "Item 1: Business -- Business Considerations and Certain Factors that May
Affect Future Results of Operations and Stock Price" contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
The following sets forth certain information relating to the Company's
financial trends, credit quality and delinquency experienced in the Company's
consumer finance receivables portfolio, for the periods presented. Such amounts
exclude the automobile portfolio.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL TRENDS (000's omitted)
Gross receivables (at end of period) $ 96,916 $113,483 $ 96,916 $113,483
Deferred interest (at end of period) 3,700 7,763 3,700 7,763
-------- -------- -------- --------
Net receivables (at end of period) 93,216 105,720 93,216 105,720
Deferred administrative and membership fees
& insurance (at end of period) 1,932 1,493 1,932 1,493
Allowance for credit losses (at end of period) 7,770 7,360 7,770 7,360
-------- -------- -------- --------
Net carrying value $ 83,514 $ 96,867 $ 83,514 $ 96,867
======== ======== ======== ========
Average net receivables $ 93,730 $110,400 $ 98,041 $114,465
Average interest bearing liabilities(1) 40,925 62,083 49,400 66,700
Administrative and membership fee income 897 628 2,480 1,657
Total interest income(2) 5,842 7,133 18,173 22,214
Total interest expense 852 1,236 3,034 4,110
-------- -------- -------- --------
Net interest income before provision for credit losses 4,990 5,897 15,139 18,104
Net provision for credit losses 1,972 2,666 5,747 7,895
Net write-offs 1,914 2,666 5,812 7,321
Average interest rate on average net receivables 24.9% 25.8% 24.7% 25.9%
Average interest rate on interest bearing liabilities 8.3% 8.0% 8.2% 8.2%
-------- -------- -------- --------
Net interest spread 16.6% 17.8% 16.5% 17.7%
======== ======== ======== ========
</TABLE>
(1) The amounts represent borrowings and related interest expense on the
Company's lines of credit, excluding amounts related to the Company's other
borrowings.
(2) The amounts represent interest income on consumer finance receivables,
excluding administrative fees, late charges and other charges, which are
included in the Condensed Consolidated Statements of Operations.
8
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CREDIT QUALITY (000's omitted)
Average net receivables $ 93,730 $110,400 $ 98,041 $114,465
Net provision for credit losses 1,972 2,666 5,747 7,895
Net write-offs 1,914 2,666 5,812 7,321
Provision for credit losses as a % of average net receivables 8.4% 9.7% 7.8% 9.2%
Net write-offs as a % of average net receivables 8.2% 9.7% 7.9% 8.5%
END OF PERIOD (000's omitted)
Net receivables $ 93,216 $105,720
Allowance for credit losses 7,770 7,360
Allowance for credit losses as a % of net receivables 8.3% 7.0%
DELINQUENCY EXPERIENCE (000's omitted)
Past due accounts (gross receivables)
31-60 days $ 2,125 $ 3,804
61 days or more 6,950 7,314
Accounts with payments 31 days or more past due
as a percentage of end of period gross receivables 9.4% 9.8%
</TABLE>
9
<PAGE> 12
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997.
Total revenues in the three months ended September 30, 1998 decreased to
$11.2 million from $13.2 million in the three months ended September 30, 1997, a
decrease of $2.0 million.
Interest income on the consumer finance receivables portfolio in the three
months ended September 30, 1998 decreased to $5.8 million from $7.1 million in
the three months ended September 30, 1997, a decrease of $1.3 million. This
decrease was primarily attributable to a decrease in the net consumer finance
receivables portfolio which averaged $93.7 million in the three months ended
September 30, 1998, compared to $110.4 million in the three months ended
September 30, 1997. The average interest rate earned on this portfolio decreased
to 24.9% for the three months ended September 30, 1998, compared to 25.8% for
the three months ended September 30, 1997.
Interest income on the automobile finance receivables portfolio in the
three months ended September 30, 1998 decreased to $0.1 million from $0.3
million in the three months ended September 30, 1997. This decrease was due to a
decrease in the automobile finance receivables which averaged $3.3 million in
the three months ended September 30, 1998, compared to $6.9 million in the three
months ended September 30, 1997. At the present time, the Company no longer
offers automobile financing.
Revenue from travel services decreased to $2.2 million for the three months
ended September 30, 1998 compared to $2.3 for the three months ended September
30, 1997, a decrease of $0.1 million.
Other income for the three months ended September 30, 1998 decreased to
$3.0 million from $3.5 million in the three months ended September 30, 1997, a
decrease of $0.5 million. Other income in the three months ended September 30,
1998 includes an increase of $0.3 million in administrative and membership fee
income earned on small loans, and an increase of $0.3 million earned by the
Company's captive insurance company, offset by a decrease of $0.4 million in
late charges as a result of a decrease in the Company's consumer receivables
portfolio and a $0.4 million decrease in commission and broker fees on income
from the sale of automobile insurance contracts, and a decrease in other
miscellaneous income items of $0.3 million.
Operating expenses in the three months ended September 30, 1998 held
constant at $6.4 million compared to the three months ended September 30, 1997.
The provision for credit losses in the three months ended September 30,
1998 decreased to $2.0 million from $2.7 million in the three months ended
September 30, 1997, a decrease of $0.7 million. The decrease was primarily due
to the decline experienced by the Company in its consumer finance receivables
coupled with an increase in the overall credit quality of the portfolio.
Interest expense in the three months ended September 30, 1998 decreased to
$0.9 million from $1.2 million in the three months ended September 30, 1997.
This decrease was due to a decrease in the amounts borrowed under the lines of
credit which averaged $41.0 million in the three months ended September 30,
1998, compared to $62.1 million in the three months ended September 30, 1997.
As a result of the foregoing factors, net income in the three months ended
September 30, 1998 decreased to $1.2 million from $1.7 million in the three
months ended September 30, 1997.
10
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE RESULTS OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1997.
Total revenues in the nine months ended September 30, 1998 decreased to
$34.4 million from $39.2 million in the nine months ended September 30, 1997, a
decrease of $4.8 million.
Interest income on the consumer finance receivables portfolio in the nine
months ended September 30, 1998 decreased to $18.2 million from $22.2 million in
the nine months ended September 30, 1997, a decrease of $4.0 million. This
decrease was primarily attributable to a decrease in the net consumer finance
receivables portfolio which averaged $98.0 million in the nine months ended
September 30, 1998, compared to $114.5 million in the nine months ended
September 30, 1997. The average interest rate earned on this portfolio decreased
to 24.7% for the nine months ended September 30, 1998, compared to 25.9% for the
nine months ended September 30, 1997.
Interest income on the automobile finance receivables portfolio in the nine
months ended September 30, 1998 decreased to $0.5 million from $1.2 million in
the nine months ended September 30, 1997. This decrease was due to a decrease in
the automobile finance receivables which averaged $4.2 million in the nine
months ended September 30, 1998, compared to $7.8 million in the nine months
ended September 30, 1997. At the present time, the Company no longer offers
automobile financing.
Revenue from travel services increased $0.1 million for the nine months
ended September 30, 1998 to $6.3 million from $6.2 million for the nine months
ended September 30, 1997.
Other income for the nine months ended September 30, 1998 decreased to $9.3
million from $9.6 million in the nine months ended September 30, 1997, a
decrease of $0.3 million. Other income in the nine months ended September 30,
1998 includes an increase of $0.8 million in administrative and membership fee
income earned on small loans, and an increase of $0.8 million earned by the
Company's captive insurance company, offset by a decrease of $0.8 million in
late charges as a result of a decrease in the Company's consumer receivables
portfolio and a $1.0 million decrease in commission and broker fees on income
from the sale of automobile insurance contracts.
Operating expenses in the nine months ended September 30, 1998 increased to
$19.8 million from $18.6 million in the nine months ended September 30, 1997, an
increase of $1.2 million. Of this increase, $0.7 million is attributable to
operating costs and expenses incurred in connection with the Company's captive
insurance company. The remaining increase of $0.5 million was primarily due to
the expansion of the small loan business, including an increase in rent, number
of employees and related payroll expenses.
The provision for credit losses in the nine months ended September 30, 1998
decreased to $5.7 million from $7.9 million in the nine months ended September
30, 1997, a decrease of $2.2 million. This decrease was primarily due to the
decline experienced by the Company in its consumer finance receivables coupled
with an overall improvement in credit quality.
Interest expense in the nine months ended September 30, 1998 decreased to
$3.0 million from $4.1 million in the nine months ended September 30, 1997. This
decrease was due to a decrease in the amounts borrowed under the lines of credit
which averaged $49.4 million in the nine months ended September 30, 1998,
compared to $66.7 million in the nine months ended September 30, 1997.
As a result of the foregoing factors, net income in the nine months ended
September 30, 1998 decreased to $3.5 million from $5.2 million in the nine
months ended September 30, 1997.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through cash flow generated
from operations and borrowings under its lines of credit.
For the nine months ended September 30, 1998, net cash provided by
operating activities totaled $14.0 million, while investing activities provided
$9.6 million of cash flow. During this period the Company paid down $20.9
million of debt.
The Company funds its lending activities and operations with borrowings
under the Wells Fargo Line of Credit. Holdings and all of the Company's
significant domestic subsidiaries are guarantors under the Wells Fargo Line of
Credit. In addition, the Company has pledged substantially all of its assets,
including its receivables, and the stock of all of its significant subsidiaries
as collateral for the amounts the Company borrows under the Wells Fargo Line of
Credit. The amount of credit available at any one time under the Wells Fargo
Line of Credit is limited to 75% of eligible contracts. As of September 30, 1998
under the Wells Fargo Line of Credit, approximately $42.4 million was
outstanding, including letters of credit, and $21.1 million was available to the
Company.
The Wells Fargo Line of Credit also contains certain restrictive covenants
that require, among other things, that the Company maintain specific financial
ratios and satisfy certain financial tests.
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 and
borrowings under its lines of credit. However, there can be no assurance that
the Company will have access to financing sources necessary to sustain its
operations and its growth plans, or that such financing will be available to the
Company on favorable terms.
On June 26, 1998, Holdings received a dividend of approximately $6.0
million from one of its subsidiary companies, Central Rents, Inc. Holdings
loaned the $6.0 million to Banner, who in turn paid the Company $4.0 million on
the note receivable from affiliate.
In July 1998 the Company agreed to provide financing to Banner for the
purchase of inventory and in return will receive a security interest in the
financed inventory. In connection with such financing the Company will charge
Banner interest at the Company's borrowing rate and the notes will be due on
demand. The Company has also agreed to provide third party guaranties to
selected vendors of Banner for inventory purchases. Through September 30, 1998
the Company has advanced to Banner directly or to vendors on behalf of Banner
approximately $4.7 million.
IMPACT OF THE YEAR 2000 ISSUE
The Company is addressing its Year 2000 issues under a three pronged
approach. These are identified as material internally developed software,
purchased software and microcontrollers and computers.
Last year the Company engaged an outside consulting firm to evaluate,
assess and make compliant the Company's material internally developed software
with the Year 2000. The Company's internally developed code is the principal
software used to evaluate, process, approve, initiate and collect on loans in
the Company's various finance portfolios.
The outside consultants are responsible for evaluating the existing
software, modifying the code, delivering the revised code and assisting in the
installation and testing of the modified software. Such modifications are
primarily focused on the Company's smaller declining portfolios. The Company's
larger and growing Efectiva portfolio is already substantially Year 2000
compliant. The Company has received the required modifications from the outside
consultants for these smaller portfolios. The Company is expected to begin
installing the modifications and will then begin testing. Testing is expected to
take about six months, is expected to be completed by June of 1999 and will
include technical testing as well as user testing including various dates both
before and after the Year 2000.
12
<PAGE> 15
Testing and compliance work has begun on the Company's purchased software.
Most of the purchased software is ancillary in nature to the Company's primary
business activities, supporting non-core business functions such as new product
offerings and peripheral activities. The Company has already received compliance
certification from most of the third party developers or vendors and indications
from most of the remaining vendors that their software will be compliant by the
Year 2000.
The Company has evaluated its mid range AS/400 computer, the various
microcontrollers and other computers and determined that relatively few systems
will need to be replaced to support the Year 2000. Where such replacements are
necessary, they will occur in the normal course of business prior to the Year
2000. The Company does not anticipate accelerating the replacement of these
systems due to the Year 2000 issues.
COST TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The following schedule shows the Company's actual or estimated
expenditures, which have been and are expected to be funded by operating cash
flows, to make the Company's systems compliant with the Year 2000.
<TABLE>
<CAPTION>
CUMULATIVE 1998 4TH QUARTER 1999 2000
THROUGH 9/30/98 ESTIMATE ESTIMATE ESTIMATE
--------------- ---------------- -------- --------
<S> <C> <C> <C> <C>
YEAR 2000 COSTS($000's omitted) $387 $137 $171 $ 0
</TABLE>
THE COMPANY'S YEAR 2000 CONTINGENCY PLANS
The most reasonably likely worst case Year 2000 scenario for the Company is
failure to complete the required modifications to the internally developed
software for the Company's smaller declining portfolios. It is likely, that if
such a failure were to occur the Company would experience an inability to
correctly age accounts in these portfolios and may therefore experience some
deterioration in the customer receivable quality and an increase in credit
losses.
The Company believes that it will successfully complete the installation
and testing of the required modifications to its internally developed software
for the Company's smaller declining portfolios prior to the Year 2000.
As a contingency, in the event the Company is unable to successfully
complete such installation and testing of the modifications for these smaller
portfolios, they will be transferred to the Company's Efectiva portfolio which
at the present time is substantially Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
<TABLE>
<S> <C>
November 16, 1998 /s/ Gary M Cypres
----------------
Gary M. Cypres
Chairman of the Board
November 16, 1998 /s/ Anthony S. Fortunato
------------------------
Anthony S. Fortunato
President
November 16, 1998 /s/ A. Keith Wall
------------------
A. Keith Wall
Chief Financial Officer
November 16, 1998 /s/ Neal E. Gower
-----------------
Neal E. Gower
Principal Accounting Officer
</TABLE>
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,489
<SECURITIES> 0
<RECEIVABLES> 85,909
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,640
<DEPRECIATION> 0
<TOTAL-ASSETS> 118,790
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 69,128
<TOTAL-LIABILITY-AND-EQUITY> 118,790
<SALES> 0
<TOTAL-REVENUES> 34,373
<CGS> 0
<TOTAL-COSTS> 28,610
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,034
<INCOME-PRETAX> 5,763
<INCOME-TAX> 2,305
<INCOME-CONTINUING> 3,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,458
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
