<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, 1999
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) (Zip Code)
(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
11, 1999: 7,177,000.
<PAGE> 2
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 ........ 1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998 .............................................................. 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 .............................................................. 3
Notes to Condensed Consolidated Financial Statements ..................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................... 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ................................................ 16
Item 6. Exhibits and Reports on Form 8-K ......................................................... 16
Signatures ....................................................................................... 17
</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,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash $ 5,877 $ 8,295
Restricted cash -- 1,195
Finance receivables, net 81,560 96,002
Prepaid expenses and other current assets 3,544 2,111
Inventory 3,763 --
Note receivable from affiliate, net 83 2,478
Deferred income taxes 2,442 2,442
Income taxes receivable, net -- 1,458
Property and equipment, net 8,210 6,677
Intangible asset, net 12,212 8,277
-------- --------
Total assets $117,691 $128,935
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 34,100 $ 52,000
Accrued expenses and other current liabilities 10,040 6,791
Income taxes payable, net 103 --
-------- --------
Total liabilities 44,243 58,791
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares issued -- --
Non-voting common stock, $.01 par value, 3,000,000
shares authorized; no shares issued -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 7,277,000 shares issued 73 73
Paid-in capital 47,903 47,903
Retained earnings 26,178 22,168
-------- --------
74,154 70,144
Less treasury stock, 100,000 shares at cost 706 --
-------- --------
Total stockholders' equity 73,448 70,144
-------- --------
Total liabilities and stockholders' equity $117,691 $128,935
======== ========
</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 EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Interest income on consumer finance receivables $ 5,425 $ 5,843 $17,077 $18,173
Interest income on auto finance receivables 44 121 180 534
Travel services income 4,567 2,212 10,241 6,317
Other income 3,481 3,008 10,776 9,398
------- ------- ------- -------
Total revenues 13,517 11,184 38,274 34,422
------- ------- ------- -------
Costs and expenses:
Operating expenses 8,267 6,418 22,541 19,957
Provision for credit losses 2,267 1,971 6,475 5,747
Interest expense 813 853 2,571 2,955
------- ------- ------- -------
Total costs and expenses 11,347 9,242 31,587 28,659
------- ------- ------- -------
Income before provision for income taxes 2,170 1,942 6,687 5,763
Provision for income taxes 868 777 2,677 2,305
------- ------- ------- -------
Net income $ 1,302 $ 1,165 $ 4,010 $ 3,458
======= ======= ======= =======
Per Share Data:
Basic earnings per share $ 0.18 $ 0.16 $ 0.55 $ 0.48
Diluted earnings per share $ 0.18 $ 0.16 $ 0.55 $ 0.48
Weighted average common shares outstanding 7,263 7,277 7,272 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,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,010 $ 3,458
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 958 761
Provision for credit losses 6,475 5,747
Changes in assets and liabilities:
Inventory (3,763) --
Note receivable from affiliate, net 2,395 259
Prepaid expenses and other current assets (1,433) 1,897
Restricted cash 1,195 (231)
Income taxes, net 1,561 1,964
Accrued expenses and other current liabilities 3,226 (11)
-------- --------
Net cash provided by operating activities 14,624 13,844
-------- --------
Cash flows from investing activities:
Installment contracts collected, net 7,967 10,726
Acquisitions (4,372) --
Capital expenditures (2,031) (1,255)
-------- --------
Net cash provided by investing activities 1,564 9,471
-------- --------
Cash flows from financing activities:
Net repayments of notes payable (17,900) (20,000)
Purchase of Treasury Stock (706) --
Repayment of debt, net -- (850)
-------- --------
Net cash used in financing activites (18,606) (20,850)
-------- --------
Net (decrease) increase in cash (2,418) 2,465
Cash, beginning of period 8,295 3,864
-------- --------
Cash, end of period $ 5,877 $ 6,329
======== ========
Cash paid during the period for:
Interest $ 2,881 $ 3,163
Income taxes $ 2,125 $ 30
</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" or the "Company") 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, 1999 are not necessarily indicative of the results that may be
expected for any subsequent period or for the year ended December 31, 1999.
These interim financial statements should be read in conjunction with the Annual
Report filed on Form 10-K for the year ended December 31, 1998 and the audited
financial statements and notes contained therein, filed with the Securities and
Exchange Commission.
CFAC was formed in April, 1996 and completed 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 was
a majority owned subsidiary of Banner Holdings, Inc. ("Holdings") until February
of 1999 when a plan of liquidation was adopted by Holdings whereby Holdings
distributed its ownership in CFAC to West Coast Private Equity Partners, ("West
Coast"), the parent of Holdings.
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 (1) 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; (2)
provides unsecured small loans to its customers; (3) originates and services
consumer finance receivables generated by the Company's customers for purchases
of airline tickets sold by the Company through its branch locations and over the
Internet; (4) provides insurance products and insurance premium financing to its
customers; (5) provides check cashing and income tax return preparation
services; (6) provides mortgage loan financing to its customers; (7) purchases
consumer product inventory which it holds under a consignment arrangement until
sold by Banner; (8) provided financing for purchases of used automobiles sold by
Banner through May 30, 1997; (9) provides financing for purchases of used
automobiles sold by third parties; and, (10) in the second quarter of 1999 began
development of its Internet site Todisimo.com to support various e-commerce
initiatives. 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.
Reclassification - Certain reclassifications have been made to
previously reported amounts to conform to the current periods' presentation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
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, 1998
for a summary of significant accounting principles.
4
<PAGE> 7
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 (SFAS) No. 128, "Earnings per
Share." The following table presents a reconciliation of basic earnings per
share and diluted earnings per share. Options to purchase 446,000 shares of
common stock at prices ranging from $12.00-$18.25 per share, were outstanding
during the first nine months of 1998, 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. Options to purchase from 517,000 to 787,000
shares were outstanding during the first nine months of 1999 at prices ranging
from $5.00 to $12.00 per share. None of the options were included in the
calculation of diluted earnings per share during the nine months ended September
30, 1999, because the exercise price was greater than the average market price
of the common shares. For the three months ended September 30, 1999 options to
purchase 777,000 shares at $5.00 were included in the calculation of earnings
per share because the option price was less than the average market price of the
common shares.
Following is a reconciliation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
(in thousands, expect earnings per share)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator - net income $ 1,302 $ 1,165 $ 4,010 $ 3,458
======= ======= ======= =======
Basic earnings per share:
Denominator - weighted average shares
outstanding 7,263 7,277 7,272 7,277
======= ======= ======= =======
Basic earnings per share $ 0.18 $ 0.16 $ 0.55 $ 0.48
======= ======= ======= =======
Diluted earnings per share:
Denominator - weighted average shares
outstanding 7,263 7,277 7,272 7,277
Shares assumed issued on exercise
of dilutive share equivalents 765 -- -- --
Shares assumed purchased with proceeds
of dilutive share equivalents (755) -- -- --
------- ------- ------- -------
Shares assumed issued on exercise of
dilutive share equivalents 10 -- -- --
------- ------- ------- -------
Denominator - shares applicable to diluted
earnings 7,273 7,277 7,272 7,277
======= ======= ======= =======
Diluted earnings per share $ 0.18 $ 0.16 $ 0.55 $ 0.48
======= ======= ======= =======
</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,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Consumer Product Portfolio $ 26,153 $ 33,886
Small Loan Portfolio 53,656 62,248
Automobile Finance Portfolio 1,313 2,445
Travel Finance Portfolio 5,011 4,988
Other 6,083 4,717
-------- --------
92,216 108,284
Less deferred interest 3,426 4,657
Less allowance for credit losses 4,629 4,649
Less deferred administrative fees, Efectiva
membership fees and insurance revenues 2,193 2,458
Less credit insurance and reserves for
policyholders' benefits 408 518
-------- --------
$ 81,560 $ 96,002
======== ========
</TABLE>
5. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Wells Fargo Line of Credit $34,100 $52,000
======= =======
</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. 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 held by 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 $18,700,000 at September 30, 1999 and was
limited by the allowable borrowing base.
6
<PAGE> 9
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. 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 Financing Agreement, as
amended, also allowed the Company to return to Banner $1.5 million and $0.2
million, respectively, in 1998 and the first nine months of 1999 of previously
purchased receivable contracts. 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.
In the accompanying condensed consolidated financial statements, through
June 30, 1999, the transaction fee is computed based upon 2.5% of the net
receivables written in the consumer product portfolio. On July 1, 1999, the
transaction fee was changed to 1.75% 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.
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. 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 to Banner totaled approximately $900,000 and $1,113,000 for
the nine months ended September 30, 1999 and 1998, respectively.
In April 1999, the Company, through its subsidiary, Central Banner's
Inc., began purchasing inventory which it holds under a consignment arrangement
with Banner until sold by Banner. For the nine months ending September 30 1999,
the Company has sold, at cost, $6.0 million of inventory to Banner. At September
30, 1999, the Company has on hand $3.8 million of inventory and net receivables
from affiliates of $0.1 million.
7. INDUSTRY SEGMENTS
Effective January 1, 1998, the Company adopted the provisions of SFAS
131 "Disclosures About Segments of an Enterprise and Related Information." The
Company has identified five reportable segments through which it conducts its
continuing operations: Finance Business, Travel Business, Internet Business,
Other and Corporate. The factors for determining the reportable segments are
based on the distinct nature of their operations. They are managed as separate
business units
7
<PAGE> 10
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
because each requires and is responsible for executing a unique business
strategy. The Finance Business includes the Consumer Product Portfolio,
Automobile Finance Portfolio, Travel Finance Portfolio, Premium Finance
Portfolio, Small Loan Portfolio, Independent Retail Loan Portfolio, Mortgage
Loan Portfolio, the check cashing business and the Company's captive insurance
company. The Internet Business includes development of the Company's Internet
site Todisimo.com and associated expenses. The Travel Business includes the
Company's travel locations. Other includes the Company's insurance agency, the
income tax preparation business, the check cashing business and the inventory
consignment business. Corporate includes all corporate overhead not specifically
allocated to any business segment. Substantially all of the operations of the
above businesses are concentrated in Southern California.
The accounting policies of these reportable segments are the same as
those described in the summary of significant accounting policies. Management
evaluates and monitors segment performance primarily through revenues and
earnings before interest and taxes, (EBIT). Results of operations and financial
position of the reporting segments are shown in the table below.
NINE MONTHS ENDED SEPTEMBER 30, 1999
(in millions)
<TABLE>
<CAPTION>
FINANCE TRAVEL INTERNET UNALLOCATED
BUSINESS BUSINESS BUSINESS OTHER CORPORATE TOTAL
-------- -------- -------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 26.8 $ 10.2 $ -- $ 1.2 $ 0.1 $ 38.3
Depreciation & amortization 0.5 0.3 -- 0.1 0.1 1.0
Unallocated corporate expenses, net -- -- -- -- 3.4 3.4
Earnings before interest
and taxes (EBIT) 10.1 3.0 (0.4) (0.1) (3.3) 9.3
Total assets 94.7 13.5 0.1 8.2 1.2 117.7
Additions to property & equipment 0.6 0.3 0.1 1.0 0.2 2.2
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998
(in millions)
<TABLE>
<CAPTION>
FINANCE TRAVEL INTERNET UNALLOCATED
BUSINESS BUSINESS BUSINESS OTHER CORPORATE TOTAL
-------- -------- -------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 26.5 $ 6.3 $ -- $ 1.5 $ 0.1 $ 34.4
Depreciation & amortization 0.4 0.2 -- 0.1 0.1 0.8
Unallocated corporate expenses, net -- -- -- -- 2.5 2.5
Earnings before interest
and taxes (EBIT) 10.3 0.9 -- (0.1) (2.4) 8.7
Total assets 100.1 7.4 -- 4.2 7.0 118.7
Additions to property & equipment 0.5 -- -- 0.6 0.1 1.2
</TABLE>
8
<PAGE> 11
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMON STOCK REPURCHASE PROGRAM
In September 1999, the Company's Board of Directors authorized a stock
repurchase plan. The plan authorizes the Company to repurchase a total of up to
1.0 million shares of the Company's outstanding common stock. Based on market
conditions and other factors, repurchases may be made from time to time in the
open market or through privately negotiated transactions, at the discretion of
the Company. In September 1999, the Company acquired 0.1 million shares of its
common stock under the Company's authorized repurchase program at a cost of $0.7
million.
9. BENEFIT PLAN
The Company adopted a defined contribution 401(k) savings plan (the
"Plan") in February of 1999, covering all employees who are at least 21 years of
age and have completed 6 months of service. The Plan allows eligible employees
to contribute up to 20% of their eligible earnings, subject to a statutorily
prescribed annual limit. The Company may make matching contributions on a
discretionary basis to the Plan. All participants are fully vested in their
contributions and investment earnings. During the nine months ended September
30, 1999, the Company did not make any matching contributions to the Plan.
10. ACQUISITIONS
In the nine months ended September 30, 1999, the Company acquired the
assets of Panamericana Travel Systems, Inc., which included 24 leased
Panamericana travel store locations, Turamerica Travel Systems, Inc. which
included 10 leased travel store locations and the assets of two small check
cashing businesses. The acquisitions did not have a material impact on the
results of operations for the quarter or nine months ended September 30, 1999 or
the balance sheet at September 30, 1999.
9
<PAGE> 12
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, 1998.
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,
---------------------- ----------------------
(Dollars in thousands)
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
FINANCIAL TRENDS
Gross receivables (at end of period) $90,903 $97,116 $90,903 $97,116
Deferred interest (at end of period) 3,272 3,700 3,272 3,700
------- ------- ------- -------
Net receivables (at end of period) 87,631 93,416 87,631 93,416
Deferred administrative fees, membership fees, loan fees, insurance
and reserves for policyholders benefit (at end of period) 2,601 2,562 2,601 2,562
Allowance for credit losses (at end of period) 4,629 7,770 4,629 7,770
------- ------- ------- -------
Net carrying value $80,401 $83,084 $80,401 $83,084
======= ======= ======= =======
Average net receivables $89,426 $93,780 $93,919 $98,020
Average interest bearing liabilities(1) 28,214 40,925 39,365 49,400
Administrative and membership fee income 935 897 2,957 2,480
Total interest income 5,425 5,843 17,077 18,173
Total interest expense(2) 600 912 2,385 3,209
------- ------- ------- -------
Net interest income before provision for credit losses 4,825 4,931 14,692 14,964
Net provision for credit losses 2,267 1,971 6,475 5,747
Net write-offs 2,286 1,914 6,493 5,812
Effective average interest rate on average net receivables 24.3% 24.9% 24.2% 24.7%
Effective average interest rate on interest bearing liabilities 8.5% 8.9% 8.1% 8.7%
------- ------- ------- -------
Net interest spread 15.8% 16.0% 16.1% 16.0%
======= ======= ======= =======
</TABLE>
(1) The amounts represent borrowings and related interest expense on the
Company's line of credit, excluding amounts related to the Company's
other borrowings.
(2) Amounts represent interest expense and loan commitment fees on the Wells
Fargo Line of Credit.
10
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
(Dollars in thousands)
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
CREDIT QUALITY
Average net receivables $89,426 $93,780 $93,919 $98,020
Net provision for credit losses 2,267 1,971 6,475 5,747
Net write-offs 2,286 1,914 6,493 5,812
Net provision for credit losses as a % of average net receivables
(annualized) 10.1% 8.4% 9.2% 7.8%
Net write-offs as a % of average net receivables (annualized) 10.2% 8.2% 9.2% 7.9%
END OF PERIOD
Net receivables $87,631 $93,416
Allowance for credit losses 4,629 7,770
Allowance for credit losses as a % of net receivables 5.3% 8.3%
DELINQUENCY EXPERIENCE
Past due accounts (gross receivables)
31-60 days $ 1,980 $ 2,125
61 days or more 3,304 6,950
------- -------
Total 5,284 9,075
Accounts with payments 31 days or more past due
as a percentage of end of period gross receivables 5.8% 9.3%
</TABLE>
11
<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998.
Total revenues in the three months ended September 30, 1999 increased to
$13.5 million from $11.2 million in the three months ended September 30, 1998,
an increase of $2.3 million.
Interest income on the consumer finance receivables portfolio in the
three months ended September 30, 1999 decreased to $5.4 million from $5.8
million in the three months ended September 30, 1998, a decrease of $0.4
million. This decrease was primarily attributable to a decrease in the net
consumer finance receivables portfolio which averaged $89.4 million in the three
months ended September 30, 1999, compared to $93.8 million in the three months
ended September 30, 1998. The average interest rate earned on this portfolio
decreased to 24.3% for the three months ended September 30, 1999, compared to
24.9% for the three months ended September 30, 1998.
Interest income on the automobile finance receivables portfolio in the
three months ended September 30, 1999 decreased to $0.0 million from $0.1
million in the three months ended September 30, 1998, a decrease of $0.1
million. This decrease was due to a decrease in the automobile finance
receivables portfolio which averaged $1.3 million in the three months ended
September 30, 1999, compared to $3.3 million in the three months ended September
30, 1998. In July 1999, the Company began offering automobile financing on
vehicles sold at Banner locations by a non-related automobile dealer.
Revenue from travel services increased to $4.6 million for the three
months ended September 30, 1999 compared to $2.2 million for the three months
ended September 30, 1998, an increase of $2.4 million. The increase was due
primarily to acquisitions, which increased revenue for the quarter by $1.0
million, and an increase in total system ticket sales, which increased net
ticket revenue by $1.3 million.
Other income for the three months ended September 30, 1999 increased to
$3.5 million compared to $3.0 million in the three months ended September 30,
1998, an increase of $0.5 million. Other income in the three months ended
September 30, 1999 included an increase of $0.5 million in late and extension
fees, and an increase of $0.3 million in check cashing operations income, offset
by a decrease of $0.2 million in insurance income.
Operating expenses for the three months ended September 30, 1999
increased by $1.9 million to $8.3 million compared to $6.4 million for the three
months ended September 30, 1998. The increase was primarily due to $0.7 million
of labor and related benefits of which $0.3 was related to acquisitions, $0.4
million of occupancy expenses of which $0.3 was related to acquisitions, $0.4
million of professional fees and $0.4 million of expenses related to the new
Internet business.
The provision for credit losses in the three months ended September 30,
1999 increased to $2.3 million compared to $2.0 million for the three months
ended September 30, 1998. During the three months ended September 30, 1999, the
Company wrote-off $2.3 million of bad debts, or 10.2%, annualized, of the
average net receivables, as compared to $2.0 million in bad debt write-offs or
8.2%, annualized, of the average net receivables for the third quarter of 1998.
At September 30, 1999, the Company had an allowance for credit losses of $4.6
million as compared to $7.8 million at September 30, 1998. In the fourth quarter
of 1998, the Company changed its policy regarding write-offs and began to
write-off receivables, which were greater than 151 days past due. The change in
write-off policy and resultant write-offs in the fourth quarter of 1998 and,
first nine months of 1999 accounted for the majority of the decrease in
allowance for credit losses in 1999 as compared to 1998.
Interest expense in the three months ended September 30, 1999 decreased
to $0.8 million from $0.9 million in the three months ended September 30, 1998,
a decrease of $0.1 million. This decrease was due to a decrease in the amounts
borrowed under the lines of credit which averaged $28.2 million in the three
months ended September 30, 1999, compared to $41.0 million in the three months
ended September 30, 1998, and a decrease in the effective borrowing rate to 8.5%
for the three months ended September 30, 1999 compared to 8.9% for the three
months ended September 30, 1998.
As a result of the foregoing factors, net income in the three months
ended September 30, 1999 increased to $1.3 million compared to $1.2 million for
the three months ended September 30, 1998.
12
<PAGE> 15
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE RESULTS OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998.
Total revenues in the nine months ended September 30, 1999 increased to
$38.3 million from $34.4 million in the nine months ended September 30, 1998, an
increase of $3.9 million.
Interest income on the consumer finance receivables portfolio in the
nine months ended September 30, 1999 decreased to $17.1 million from $18.2
million in the nine months ended September 30, 1998, a decrease of $1.1 million.
This decrease was primarily attributable to a decrease in the net consumer
finance receivables portfolio which averaged $93.9 million in the nine months
ended September 30, 1999, compared to $98.0 million in the nine months ended
September 30, 1998. The average interest rate earned on this portfolio decreased
to 24.2% for the nine months ended September 30, 1999, compared to 24.7% for the
nine months ended September 30, 1998.
Interest income on the automobile finance receivables portfolio in the
nine months ended September 30, 1999 decreased to $0.2 million from $0.5 million
in the nine months ended September 30, 1998, a decrease of $0.3 million. This
decrease was due to a decrease in the automobile finance receivables portfolio
which averaged $1.6 million in the nine months ended September 30, 1999,
compared to $4.2 million in the nine months ended September 30, 1998. In July
1999, the Company began offering automobile financing on vehicles sold at Banner
locations by a non-related automobile dealer.
Revenue from travel services increased to $10.2 million for the nine
months ended September 30, 1999 compared to $6.3 million for the nine months
ended September 30, 1998, an increase of $3.9 million. The increase was due
primarily to acquisitions, which increased revenue by $1.7 million, and an
increase in total system ticket sales, which increased net ticket revenue by
$2.2 million.
Other income for the nine months ended September 30, 1999 increased to
$10.8 million compared to $9.4 million in the nine months ended September 30,
1998, an increase of $1.4 million. Other income in the nine months ended
September 30, 1999 included an increase of $0.5 million in administrative and
membership fee income earned on small loans, and an increase of $1.2 million in
late and extension fees, offset by a decrease of $0.3 million in other
miscellaneous income.
Operating expenses for the nine months ended September 30, 1999
increased by $2.5 million to $22.5 million from $20.0 million for the same
period last year. The increase was primarily due to $0.5 million of labor and
related benefits due to acquisitions, $1.0 million of occupancy costs of which
$0.5 million was related to acquisitions, $0.6 million of professional fees and
$0.4 million of expenses attributable to the new Internet business.
The provision for credit losses in the nine months ended September 30,
1999 increased to $6.5 million compared to $5.8 million for the nine months
ended September 30, 1998. During the nine months ended September 30, 1999, the
Company wrote-off $6.5 million of bad debts, or 9.2%, annualized, of the average
net receivables, as compared to $5.8 million in bad debt write-offs or 7.9%,
annualized, of the average net receivables for the first nine months of 1998. At
September 30, 1999, the Company had an allowance for credit losses of $4.6
million as compared to $7.8 million at September 30, 1998. In the fourth quarter
of 1998, the Company changed its policy regarding write-offs and began to
write-off receivables, which were greater than 151 days past due. The change in
write-off policy and resultant write-offs in the fourth quarter of 1998 and,
first nine months of 1999 accounted for the majority of the decrease in
allowance for credit losses in 1999 as compared to 1998.
Interest expense in the nine months ended September 30, 1999 decreased
to $2.6 million from $3.0 million in the nine months ended September 30, 1998, a
decrease of $0.4 million. This decrease was due to a decrease in the amounts
borrowed under the lines of credit which averaged $39.4 million in the nine
months ended September 30, 1999, compared to $49.4 million in the nine months
ended September 30, 1998, and a decrease in the effective borrowing rate to 8.1%
for the nine months ended September 30, 1999 compared to 8.7% for the nine
months ended September 30, 1998.
As a result of the foregoing factors, net income in the nine months
ended September 30, 1999 increased to $4.0 million from $3.5 million in the nine
months ended September 30, 1998, an increase of $0.5 million.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through cash flow
generated from operations and borrowings under its line of credit.
For the nine months ended September 30, 1999, net cash provided by
operating activities totaled $14.6 million, while investing activities provided
$1.6 million of cash flow. During this period the Company paid down $17.9
million of debt and acquired 100,000 shares of its common stock for $0.7
million.
The Company funds its lending activities and operations with borrowings
under the Wells Fargo Line of Credit. 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 70% of eligible receivables
contracts. As of September 30, 1999 under the Wells Fargo Line of Credit,
approximately $35.9 million was outstanding, including $1.8 million in letters
of credit, and $18.7 million was available to the Company under the Wells Fargo
Line of Credit.
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.
In April 1999, the Company, through its subsidiary, Central Banner's
Inc., began purchasing inventory which it holds under a consignment arrangement
with Banner until sold by Banner. For the nine months ending September 30 1999,
the Company has sold, at cost, $6.0 million of inventory to Banner. At September
30, 1999, the Company has on hand $3.8 million of inventory and net receivables
from affiliates of $0.1 million.
IMPACT OF THE YEAR 2000 ISSUE
STATE OF READINESS
The Company is working to resolve the potential impact of the Year 2000
on the ability of its computerized information systems to accurately process
information that may be date-sensitive. Any of the Company's programs that
recognize a date using "00" as the Year 1900 rather than the Year 2000 could
result in error or system failures. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities which may have a material adverse effect on the Company's
financial condition, results of operations or liquidity. The Company uses a
number of computer programs across its entire operations. At this time, the
Company is unable to predict with any certainty the estimated lost revenue it
may experience as a result of such failure or disruption. The Company is
addressing its Year 2000 issues under a three pronged approach. These are
identified as (1) material internally developed software; (2) purchased
software; and, (3) microcontrollers and computers.
In 1998, the Company engaged an outside consulting firm, JCR &
Associates, to help the Company 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.
14
<PAGE> 17
The Company, with help from outside consultants, is responsible for
evaluating the existing software, modifying code where applicable, testing such
modifications and installation of the modified software. Such modifications are
primarily focused on the Company's smaller declining portfolios. Based on its
testing, the Company believes its larger and growing Efectiva portfolio is
already substantially Year 2000 compliant. The Company has completed the
required software modifications for the smaller declining portfolios, tested and
installed those modifications and is now operating, based on its testing, in
what it believes is a Year 2000 compliant computing environment. Further
evaluation is underway and will include technical testing as well as user
testing covering a range of dates both prior to and after the year 2000.
Testing and compliance work began on the Company's purchased software in
1998. 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 initiated formal
communications with its vendors in August 1998 to determine the extent to which
it may be affected by the failure of these parties to correct their own Year
2000 issues. The Company's borrowers and customers are generally consumers,
which mitigates much of the Year 2000 risk. The Company has already received
compliance certification from the majority of the third party developers or
vendors and indications from most of the remaining vendors that their software
will be compliant before 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 Company has budgeted expenditures of approximately $0.8 million in
1998 and 1999 to ensure that its systems are ready for processing information in
the Year 2000. The majority of these expenditures relate to the cost of software
development and testing. The Company estimates that it has incurred
approximately $0.7 million of its Year 2000 budget expenditures through
September 30, 1999 and will incur an additional $0.1 million by the end of 1999.
In addition, the Company incurred, and will continue to incur, certain costs
relating to the temporary reallocation of its internal resources to address Year
2000 issues. These expenditures have been and are expected to be funded by
operating cash flows and are expensed as incurred.
RISKS PRESENTED BY THE YEAR 2000 ISSUE
Should the Company and/or its third party developers or vendors fail to
timely identify, address and correct material Year 2000 issues, such failure
could have a material adverse impact on the Company's ability to operate. The
adverse impacts may include the requirement to pay significant overtime to
manually process certain transactions and added costs to process certain
financing activity. Despite the Company's activities in regards to the Year 2000
issue, there can be no assurance that partial or total systems interruptions or
the costs necessary to update hardware and software will not have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects.
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.
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 the Company believes is Year 2000 compliant.
15
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk management discussion and the estimated amounts generated from
the analysis that follows are forward-looking statements of interest rate risk
assuming certain adverse market conditions occur. Actual results in the future
may differ materially from these projected results due to changes in our debt
mix and developments in the global financial markets. The analytical methods we
use to assess and mitigate these risks should not be considered projections of
future events or operating performances.
We are exposed to interest rate risk in the form of variable interest
rates dependent on the type of borrowing outstanding on our Wells Fargo Line of
Credit. During the first nine months of 1999 the effective interest rate for all
forms of borrowing under the Wells Fargo Line of Credit was 8.08%. We have
hedged a portion of the interest rate risk by purchasing a hedge agreement in
the notional amount of $40.0 million against the LIBOR portion of the Wells
Fargo Line of Credit. The interest rate hedge agreement caps our interest rate
at 8.75% on up to $40.0 million of the $22.0 million LIBOR portion of the $34.1
million which was outstanding at September 30, 1999.
We have interest rate risk exposure of 1.31% on the difference between
the interest rate cap of 8.75% on the LIBOR hedge agreement and the interest
rate of 7.44% on the LIBOR borrowings outstanding at September 30, 1999. We have
unlimited interest rate risk exposure on the $12.1 million of non-LIBOR
borrowings outstanding at September 30, 1999. The Wells Fargo Line of Credit
agreement expires on June 12, 2000, and the hedge agreement expires on July 31,
2000.
An immediate 1.0% increase in interest rates effective October 1, 1999
would cause projected after-tax earnings to decline approximately $0.1 million
for 1999 and $0.2 million for all of 2000. An immediate 1.0% increase in
interest rates is a hypothetical rate scenario, used to estimate risk, and does
not currently represent management's expectations of future market developments.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 19, 1999, the Company filed a Certificate of Amendment of its
Certificate of Incorporation.
The amendment to the Certificate of Incorporation created a new class of
non-voting common stock designated as Non-Voting Common Stock, par value $0.01
per share, with 3,000,000 shares being authorized for issuance.
The terms, rights and privileges of the Non-Voting Common Stock are
identical to those of the Common Stock, par value $0.01 per share, except that
the Non-Voting Common Stock will have no right to vote on any matter to be
presented to the stockholders, except to amend the Certificate of Incorporation
or as required by law. The Non-Voting Common Stock has dividend and distribution
rights and rights on dissolution that are identical to those of the Common
Stock. The Non-Voting Common Stock, like the Common Stock, does not have
preemptive, subscription, redemption or conversion rights. Any holder of
Non-Voting Common Stock will be entitled to received dividends when, as and if
declared by the Board of Directors from funds legally available therefor. Upon
liquidation of the Company, subject to the rights of holders of any preferred
stock outstanding, the holders of Non-Voting Common Stock are entitled to
receive assets remaining after payment of liabilities proportionate to their
prorata ownership of the outstanding shares of Common Stock and Non-Voting
Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE> 19
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
November 11, 1999 /s/ Gary M Cypres
-----------------------------
Gary M. Cypres
Chairman of the Board
November 11, 1999 /s/ Anthony S. Fortunato
-----------------------------
Anthony S. Fortunato
President
November 11, 1999 /s/ A. Keith Wall
-----------------------------
A. Keith Wall
Chief Financial Officer
November 11, 1999 /s/ Wanda Anesh
-----------------------------
Wanda Anesh
Controller
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,877
<SECURITIES> 0
<RECEIVABLES> 81,560
<ALLOWANCES> 0
<INVENTORY> 3,763
<CURRENT-ASSETS> 0
<PP&E> 8,210
<DEPRECIATION> 0
<TOTAL-ASSETS> 117,691
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 73,375
<TOTAL-LIABILITY-AND-EQUITY> 117,691
<SALES> 0
<TOTAL-REVENUES> 13,517
<CGS> 0
<TOTAL-COSTS> 8,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,267
<INTEREST-EXPENSE> 813
<INCOME-PRETAX> 2,170
<INCOME-TAX> 868
<INCOME-CONTINUING> 1,302
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,302
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
