<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 MARCH 31, 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 May 14,
1999: 7,277,000.
<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 March 31, 1999 and
December 31, 1998....................................................... 1
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998...................................................... 2
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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 ............................................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 12
PART II. OTHER INFORMATION
Item 5. Other Information............................................................ 13
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)
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
A S S E T S
<S> <C> <C>
Cash $ 10,921 $ 8,295
Restricted cash 1,208 1,195
Finance receivables, net 88,897 96,195
Prepaid expenses and other current assets 1,699 1,686
Note receivable from affiliate 2,379 2,478
Deferred income taxes 2,442 2,442
Income taxes receivable, net 555 1,458
Property and equipment, net 7,155 6,677
Intangible asset, net 11,137 8,659
-------- --------
Total assets $126,393 $129,085
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 47,000 $ 52,000
Accrued expenses and other current liabilities 7,895 6,941
Other debt -- --
-------- --------
Total liabilities 54,895 58,941
-------- --------
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 23,522 22,168
-------- --------
Total stockholders' equity 71,498 70,144
-------- --------
Total liabilities and stockholders' equity $126,393 $129,085
======== ========
</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
MARCH 31,
--------------------
1999 1998
------- -------
Revenues:
<S> <C> <C>
Interest income on consumer finance receivables $ 6,005 $ 6,431
Interest income on auto finance receivables 81 230
Travel services 2,243 1,858
Other income 3,635 3,555
------- -------
Total revenues 11,964 12,074
------- -------
Costs and expenses:
Operating expenses 6,648 6,908
Provision for credit losses 2,019 2,019
Interest expense 1,041 1,264
------- -------
Total costs and expenses 9,708 10,191
------- -------
Income before provision for income taxes 2,256 1,883
Provision for income taxes 902 752
------- -------
Net income $ 1,354 $ 1,131
======= =======
Per Share Data:
Basic earnings per share $ 0.19 $ 0.16
Diluted earnings per share $ 0.19 $ 0.16
Weighted average common shares outstanding 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>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,354 $ 1,131
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 326 238
Provision for credit losses 2,019 2,019
Deferred income taxes -- (56)
Changes in assets and liabilities:
Note receivable from affiliate 99 (115)
Prepaid expenses and other current assets (13) 1,182
Restricted cash (13) (223)
Income taxes receivable 903 --
Accrued expenses and other current liabilities 954 1,754
------- -------
Net cash provided by operating activities 5,629 5,930
------- -------
Cash flows from investing activities:
Installment contracts collected, net 5,279 7,091
Acquisitions (2,756) --
Capital expenditures (526) (193)
------- -------
Net cash provided by investing activities 1,997 6,898
------- -------
Cash flows from financing activities:
Net repayments of notes payable (5,000) (9,000)
------- -------
Net cash used in financing activities (5,000) (9,000)
Net increase (decrease) in cash 2,626 3,828
Cash, beginning of period 8,295 4,794
------- -------
Cash, end of period $10,921 $ 8,622
======= =======
Cash paid during the period for:
Interest $ 1,018 $ 1,253
Income taxes $ -- $ --
</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 period ended
March 31, 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 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 Holdings, Inc. ("Holdings"). Banner's
Central Electric, Inc. ("Banner"), which is wholly owned by by 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 (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; (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; and (7) provided financing for purchases of used automobiles sold
by Banner through May 30, 1997. 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 amount to conform to the current year 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 period. 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.
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 No. 128, "Earnings per Share." The
following table presents a reconciliation of basic earnings per share and
diluted earnings per share. Options to purchase 454,000 shares of common stock
at $12.00-$18.25 per share, were outstanding during the first quarter 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 586,000 shares of common stock at $5.00-$12.00 per share
were outstanding during the first quarter of 1999, 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 MARCH 31,
------------------------------------------
1999 1998
------------------------------------------
(In thousands, except earnings per share)
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 $ 1,354 $ 1,354 $ 1,131 $ 1,131
Denominator-weighted average shares outstanding 7,277 7,277 7,277 7,277
Earnings per share $ 0.19 $ 0.19 $ 0.16 $ 0.16
</TABLE>
4. CONSUMER FINANCE RECEIVABLES
Consumer Finance receivables consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Consumer Product Portfolio $ 30,511 $ 33,886
Small Loan Portfolio 58,661 62,248
Automobile Finance Portfolio 1,777 2,445
Travel Finance Portfolio 4,571 4,988
Other 4,749 4,715
-------- --------
100,269 108,282
Less deferred interest 4,051 4,657
Less allowance for credit losses 4,649 4,649
Less deferred administrative fees, ATM
membership fees and insurance revenues 2,176 2,263
Less credit insurance and reserves for
policyholders' benefits 496 518
-------- --------
$ 88,897 $ 96,195
======== ========
</TABLE>
5
<PAGE> 8
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Wells Fargo Line of Credit $ 47,000 $ 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. 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 $14,500,000 at March 31, 1999 and was limited by the allowable
borrowing base.
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 Company returned $5.8 million of
contracts purchased for the year ended December 31, 1998. The Company did not
return any contracts purchased for the three months ended March 31, 1999. 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 $45,000 for the three months ended March 31,
1999.
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
6
<PAGE> 9
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $300,000 and $433,000 for the three
months ended March 31, 1999 and 1998, 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 March 31, 1999 the
Company has advanced to Banner directly or to vendors on behalf of Banner
approximately $2.4 million.
7. ACQUISITIONS
On March 8, 1999, the Company completed the acquisition of the retail
operations of PanAmericana Travel Systems, Inc., a travel service provider
located in Southern California. The asset purchase included 24 leased
PanAmericana travel center stores. The acquisition did not have a material
impact on the Company's results of operations for the first quarter of 1999 or
the financial condition at March 31, 1999.
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, 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
------------------------
MARCH 31,
------------------------
(In thousands)
1999 1998
-------- --------
<S> <C> <C>
FINANCIAL TRENDS
Gross receivables (at end of period) $ 98,492 $ 103,723
Deferred interest (at end of period) 3,959 5,102
-------- ---------
Net receivables (at end of period) 94,533 98,621
Deferred administrative fees, membership fees,
loan fees and insurance (at end of period) 2,176 1,704
Allowance for credit losses (at end of period) 4,649 7,756
-------- ---------
Net carrying value $ 87,708 $ 89,161
======== =========
Average net receivables $ 99,216 $ 103,591
Average interest bearing liabilities(1) 51,992 58,575
Administrative and membership fee income 1,011 767
Total interest income(2) 6,005 6,430
Total interest expense(3) 1,009 1,246
-------- ---------
Net interest income before provision for credit
losses 4,996 5,184
Net provision for credit losses 2,019 2,019
Net write-offs 2,019 2,098
Average interest rate on average net receivables 24.2% 24.8%
Average interest rate on interest bearing
liabilities 7.8% 8.5%
-------- ---------
Net interest spread 16.4% 16.3%
======== =========
</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) 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.
(3) Amounts represent interest expense and loan commitment fees on the Wells
Fargo Line of Credit.
8
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31,
------------------------
(In thousands)
1999 1998
-------- --------
<S> <C> <C>
CREDIT QUALITY
Average net receivables $ 99,216 $ 103,591
Net provision for credit losses 2,019 2,019
Net write-offs 2,019 2,098
Provision for credit losses as a % of average
net receivables 8.1% 7.8%
Net write-offs as a % of average net receivables 8.1% 8.1%
END OF PERIOD
Net receivables $ 94,533 $ 98,622
Allowance for credit losses 4,649 7,756
Allowance for credit losses as a % of net
receivables 4.9% 7.9%
DELINQUENCY EXPERIENCE
Past due accounts (gross receivables)
31-60 days 1,849 2,331
61 days or more 3,089 6,356
Accounts with payments 31 days or more past due
as a percentage of end of period gross receivables 5.0% 8.4%
</TABLE>
9
<PAGE> 12
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THE RESULTS OF OPERATIONS FOR
THE THREE MONTHS ENDED MARCH 31, 1998.
Total revenues in the three months ended March 31, 1999 decreased to $12.0
million from $12.1 million in the three months ended March 31, 1998, a decrease
of $0.1 million.
Interest income on the consumer finance receivables portfolio in the three
months ended March 31, 1999 decreased to $6.0 million from $6.4 million in the
three months ended March 31, 1998, a decrease of $0.4 million. This decrease was
primarily attributable to a decrease in the net consumer finance receivables
portfolio which averaged $99.2 million in the three months ended March 31, 1999,
compared to $103.6 million in the three months ended March 31, 1998. The average
interest rate earned on this portfolio decreased to 24.2% for the three months
ended March 31, 1999, compared to 24.8% for the three months ended March 31,
1998.
Interest income on the automobile finance receivables portfolio in the
three months ended March 31, 1999 decreased to $0.1 million from $0.2 million in
the three months ended March 31, 1998, a decrease of $0.1 million. This decrease
was due to a decrease in the automobile finance receivables which averaged $2.0
million in the three months ended March 31, 1999, compared to $5.1 million in
the three months ended March 31, 1998. At the present time, the Company no
longer offers automobile financing.
Revenue from travel services increased to $2.2 million for the three months
ended March 31, 1999 compared to $1.9 million for the three months ended March
31, 1998, an increase of $0.3 million. The increase is due primarily to the
acquisition of 24 PanAmericana Travel System stores on March 8, 1999, which
increased revenue for the quarter by $0.1 million, and an increase in total
system ticket sales, which increased net ticket revenue by $0.2 million.
Other income for the three months ended March 31, 1999 remained constant at
$3.6 million compared to $3.6 million in the three months ended March 31 1998.
Other income in the three months ended March 31, 1999 includes an increase of
$0.2 million in administrative and membership fee income earned on small loans,
and an increase of $0.3 million in late and extension fees, offset by a decrease
of $0.4 million in other miscellaneous income, and a decrease of $0.1 million in
insurance agency income.
Operating expenses in the three months ended March 31, 1999 decreased to
$6.6 million compared to $6.9 million for the three months ended March 31, 1998,
a decrease of $0.3 million. The decrease is due primarily to a reduction in
employee and related costs of $0.1 million and a decrease in other overhead of
$0.2 million.
The provision for credit losses in the three months ended March 31, 1999
held constant at $2.0 million compared to the three months ended March 31, 1998.
During the three months ended March 31, 1999, the Company wrote-off $2.0 million
of bad debts, or 8.1%, annualized, of the average net receivables, as compared
to $2.1 million in bad debt write-offs or 8.1%, annualized, of the average net
receivables for first quarter of 1998. At March 31, 1999, the Company had an
allowance for credit losses of $4.6 million as compared to $7.8 million at March
31, 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 quarter 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 March 31, 1999 decreased to $1.0
million from $1.3 million in the three months ended March 31, 1998. This
decrease was due to a decrease in the amounts borrowed under the lines of credit
which averaged $52.0 million in the three months ended March 31, 1999, compared
to $58.6 million in the three months ended March 31, 1998, and a decrease in the
effective borrowing rate to 7.4% for the three months ended March 31, 1999
compared to 8.2% for the three months ended March 31, 1998.
As a result of the foregoing factors, net income in the three months ended
March 31, 1999 increased to $1.4 million from $1.1 million in the three months
ended March 31, 1998, an increase of $0.3 million.
10
<PAGE> 13
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 three months ended March 31, 1999, net cash provided by operating
activities totaled $5.6 million, while investing activities provided $2.0
million of cash flow. During this period the Company paid down $5.0 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 70% of eligible contracts. As of March 31, 1999
under the Wells Fargo Line of Credit, approximately $47.3 million was
outstanding, including $0.3 million in letters of credit, and $14.5 million was
available to the Company under the 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 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 March 31, 1999, the
Company has advanced to Banner directly or to vendors on behalf of Banner
approximately $2.4 million. Interest income recognized on those advances for the
three months ended March 31, 1999 amounted to $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's 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.
The Company, with the help of the outside consultants, is responsible for
evaluating the existing software, modifying the code, delivering the revised
code and installation and testing 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
11
<PAGE> 14
already substantially Year 2000 compliant. The Company has received the required
modifications from the outside consultants for these smaller portfolios. The
Company has installed the modified software and is currently performing
technical and user 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.
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 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 Company has budgeted expenditures of approximately $0.7 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 $0.4 million of its Year 2000 budget expenditures through March
31, 1999 and will incur an additional $0.3 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.
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 is substantially Year 2000 compliant.
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
on our Wells Fargo Line of Credit. During the first quarter of 1999, the average
interest rate charged on the Wells Fargo Line of Credit, which was $47.0 million
at March 31, 1999,
12
<PAGE> 15
was 7.43%. We have hedged our interest rate risk by purchasing a hedge agreement
in the notional amount of $40.0 million. The interest rate hedge agreement caps
our interest rate at 8.75% against $40.0 million of the $47.0 million Wells
Fargo Line of Credit which was outstanding at March 31, 1999. The remaining $7.0
million was unprotected against interest rate fluctuations.
We have an interest rate risk exposure of 1.32% on the difference between
the interest rate cap of 8.75% and the 7.43% average interest rate for the first
quarter of 1999 on the $40.0 million hedge agreement. We have additional
interest rate risk exposure on the $7.0 million amount above the interest rate
hedge agreement. The Wells Fargo Line of Credit agreement terminates on June 12,
2000, and the interest rate hedge agreement terminates on July 31, 2000.
For an immediate 1.0% increase in interest rates effective January 1, 1999,
projected after-tax earning would decline approximately $0.3 million in 1999 and
$0.1 million in 2000. An immediate 1.0% rise 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 5. OTHER INFORMATION
The Company received a letter dated February 26, 1999 from the Nasdaq Stock
Market advising it that based upon its review of price data for the Company's
common stock covering the last 30 consecutive trading dates prior to the date of
the letter, the common stock had not maintained a market value of public float
greater than or equal to $5 million.
Market value of public float greater than or equal to $5 million is
required for continued listing of our common stock on the Nasdaq National
Market. Recognizing that this may be a temporary situation, Nasdaq advised the
Company that it is not taking delisting action with respect to the market value
of public float deficiency at this time. Rather, Nasdaq advised the Company that
it would have 90 calendar days, or until May 27, 1999, to rectify the
deficiency.
If at any time within this 90 calendar day period, the closing bid price of
the common stock allows for the maintenance greater than $5 million of public
float for ten consecutive trading days, the Company will have complied with the
market value of the public float requirement. Nasdaq also advised the Company
that if it is unable to demonstrate compliance with the minimum $5 million
market value of public float requirement on or before May 27, 1999, the
Company's securities will be delisted at the opening of business on June 1,
1999, unless prior to May 27, 1999, the Company avails itself of available
procedural remedies to stay the delisting of its common stock.
Nasdaq defines public float as shares of common stock that are not held
directly or indirectly by any officer or director of the Company or by any other
person who is the beneficial owner of more than 10% of total shares of common
stock outstanding. In July 1996, the Company sold approximately 29% of its
outstanding common shares, or 2,127,000 shares, to the public. However,
presently the Company believes that its public float is only approximately
1,081,000 shares of common stock as a result of a single shareholder, which has
accumulated and has reported beneficial ownership of approximately 1,019,000
common shares.
Through the date of this filing the Company believes that the minimum $5
million public float requirement as stipulated by Nasdaq has not been met.
The date of the Company's 1999 Annual Meeting of Stockholders has been
delayed more than 30 days from the date of the previous year's Annual Meeting
which was held on May 27, 1998. The proxy materials for the Company's 1998
Annual Meeting originally indicated that proposals of stockholders must be
received by the Company by December 28, 1998 in order to be included in proxy
materials for the 1999 Annual Meeting. However, because of the delay in the
convening of the 1999 Annual Meeting, the Company will accept stockholder
proposals after December 28, 1998. At this time, the Company anticipates that
the Annual Meeting will be held on July 12, 1999. As a result, in accordance
with the rules and regulations promulgated under the Exchange Act, stockholder
proposals intended to be included in the proxy materials for the 1999 Annual
Meeting must be received by the Company a reasonable time before the Company
begins to print and mail its proxy materials for the 1999 Annual Meeting. In
addition, in the event a stockholder proposal is not submitted to the Company in
a reasonable time before the Company begins to print and mail proxy materials,
the proxy to be solicited by the Board of Directors for the 1999 Annual Meeting
will confer authority on the holders of the proxy to vote shares in accordance
with their best judgment and discretion if the proposal is presented at the 1999
Annual Meeting without any discussion of the proposal in the proxy statement for
such meeting.
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<PAGE> 16
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
May 14, 1999 /s/ Gary M Cypres
----------------------------------------
Gary M. Cypres
Chairman of the Board
May 14, 1999 /s/ Anthony S. Fortunato
----------------------------------------
Anthony S. Fortunato
President
May 14, 1999 /s/ A. Keith Wall
----------------------------------------
A. Keith Wall
Chief Financial Officer
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,921
<SECURITIES> 0
<RECEIVABLES> 88,897
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 7,155
<DEPRECIATION> 0
<TOTAL-ASSETS> 126,393
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 71,425
<TOTAL-LIABILITY-AND-EQUITY> 126,393
<SALES> 0
<TOTAL-REVENUES> 11,964
<CGS> 0
<TOTAL-COSTS> 6,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,019
<INTEREST-EXPENSE> 1,041
<INCOME-PRETAX> 2,256
<INCOME-TAX> 902
<INCOME-CONTINUING> 1,354
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,354
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
