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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER: 001-11815
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4574983
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5480 EAST FERGUSON DRIVE
COMMERCE, CALIFORNIA 90022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (323) 720-8600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant based upon the closing sale price of the Common Stock on March 31,
2000, as reported on the Over the Counter Bulletin Board, was approximately
$6,900,000. Shares of Common Stock held by each executive officer and director
and each person owning more than 5% of the outstanding Common Stock of the
Registrant have been excluded in that such persons may be deemed to be
affiliates of the Registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Number of shares outstanding of the Registrant's Common Stock, as of
March 31, 2000: 7,177,000
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED PART OF FORM 10-K INTO WHICH INCORPORATED
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DEFINITIVE PROXY STATEMENT FOR THE DEFINITIVE PROXY STATEMENT FOR THE
2000 ANNUAL MEETING OF STOCKHOLDERS PART III
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TABLE OF CONTENTS
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PAGE
PART I
<S> <C> <C>
Item 1. BUSINESS.........................................................................3
Item 2. PROPERTIES......................................................................16
Item 3. LEGAL PROCEEDINGS...............................................................16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........16
Item 6. SELECTED FINANCIAL DATA.........................................................17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................................................................19
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................31
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE......................................................................31
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT..................................32
Item 11. EXECUTIVE COMPENSATION..........................................................32
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................32
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................32
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................33
GLOSSARY....................................................................................37
SIGNATURES..................................................................................38
EXHIBIT INDEX...............................................................................39
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Certain matters discussed in this Annual Report on Form 10-K 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 Central
Financial Acceptance Corporation and its subsidiaries (the "Company" which may
be referred to as "we" or "us," or "Central" when referring only to the parent
company) operate in, projections of future performance, expectations regarding
our efforts to resolve Year 2000 issues and the effects of a failure to resolve
such issues, perceived opportunities in the market and statements regarding our
mission and vision. Our 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."
COMPANY OVERVIEW
The Company was incorporated in Delaware on April 11, 1996. Our
principal executive offices are located at 5480 East Ferguson Drive, Commerce,
California 90022, and our telephone number is (323)720-8600. In December 1999,
we announced a strategic decision to shift our business focus and resources to
our Hispanic travel business and to sell our consumer financial services
business. As a result, the financial services business is treated as
discontinued operations for financial statement reporting purposes.
DISCONTINUED OPERATIONS - CONSUMER FINANCIAL SERVICES BUSINESS
Through our consumer financial services business, we have served the
Hispanic population primarily in California and we: (1) provide small,
unsecured, personal loans; (2) purchase consumer product inventory which we hold
under a consignment arrangement and, which we finance and service when sold by
an affiliated company; (3) finance travel related services sold by our travel
business; (4) provide insurance products and insurance premium financing; (5)
provide check cashing services; and, (6) provide mortgage loan financing.
Our consumer financial services business catered to the low-income
Hispanic population during its 40 years of operation by locating our facilities
primarily in Hispanic communities, advertising in Spanish, and employing Spanish
as the primary language spoken at our locations.
Our customers typically have been between the ages of 21 and 45, earn
less than $25,000 per year, have little or no savings, and have limited or
short-term employment histories. In addition, our consumer financial services
customers typically have no or limited prior credit histories and are generally
unable to secure credit from traditional lending sources.
In 1999, our consumer financial services business had gross revenues of
approximately $37.1 million.
From 1991, when we were acquired by our current management, until our
initial public offering in June 1996, our consumer financial services business
grew primarily by introducing financial products and services we felt would well
serve the low-income Hispanic community. In 1995, we began offering
company-financed sales of airline tickets and in 1996, we began selling
automobile insurance and offering insurance premium financing and expanded our
independent retail financing business. Also, in 1996, we expanded our
distribution network through acquisitions of travel and auto insurance
businesses primarily serving the Hispanic community. Our recent expansions into
the travel and travel-related retail industries have brought us the great
success and
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permitted us to create a national business. Accordingly, in December 1999 we
determined that we could best grow our business and best serve our customers if
we placed our focus on the travel services market and discontinued our consumer
financial services business segment.
EMPLOYEES
At December 31, 1999, the Company employed a total of 206 full-time and
162 part-time employees in its consumer financial services division. Our
employees are not represented by a union or covered by a collective bargaining
agreement. Management believes that its relations with its employees are good.
Management expects that by December 31, 2000 it will no longer have employees in
its consumer financial services business due to the discontinuation of this
business.
CONTINUING OPERATIONS - TRAVEL SERVICES
Through our travel business we are a leading retail seller of discount
airline tickets to Hispanics residing in the United States who travel to Latin
America. In 1999, our travel service operations generated gross bookings of
approximately $144 million. We began our travel business in July 1995 with a
single location and through a series of acquisitions have grown to 140 travel
locations. We presently have 126 travel locations in California and also operate
in Arizona, Nevada, Illinois and Texas. In February of 2000, we opened our first
travel office in Mexico City. We cater to the Hispanic population by locating
our travel stores in Hispanic communities, advertising in Spanish and employing
Spanish as the primary language spoken at our locations.
We sell both published and non-published fares. Non-published fares are
tickets we buy from airlines, under special price contracts, and resell to
consumers at discounts off the airlines' published fares. We have rights to buy
these non-published fares under contracts from 11 airlines, including, American,
Delta, United, Continental, Mexicana, Aeromexico and Taca. Our contracts are
generally for one year or less and can be canceled on short notice. In addition,
these contracts do not require the airlines to deal with us exclusively or
provide us with a specific quantity of tickets. Under our contracts, we purchase
tickets only once we have an order and can resell them to customers, therefore
we do not have inventory costs. We also offer a full complement of regular
published fares for both domestic and Latin American air travel on which we earn
a commission. Our travel business also earns significant performance-based
incentive compensation, referred to as "override commissions" from certain
airlines with whom we do business. The price at which we purchase our tickets
and the commission we earn on published fares are determined by the individual
airlines and are subject to frequent change and cancellation.
In June 1999, we made a decision to bring our travel business on the
Internet targeting both bilingual Hispanics and English-speaking non-Hispanics,
who are increasingly utilizing the Internet to purchase travel to Latin America.
To accomplish this we: (1) hired a president and several key management
personnel for our Internet business; (2) established our call center; (3)
engaged two consulting firms to develop an online system, which would interact
with third-party reservation systems to present an integrated easy-to-use
interface to our customers to make travel purchases; and, (4) began to advertise
our two Internet sites www.VuelaBarato.com (Fly Cheap) and www.4GreatFares.com
in both Spanish and English newspapers.
We commenced our Internet business in July of 1999 and through December
31, 1999, we sold 1,867 tickets and recorded approximately $690,000 in total
bookings through our Internet business. In late 1999, we augmented our
advertising program and began advertising our travel sites through Double Click
and other Internet advertisers. In January and February 2000, we sold 636 and
1,410 tickets, respectively, representing total bookings of $236,000 and
$505,000, respectively. To date, our Internet sites are not yet interactive and
require us to book reservations by telephone. In 1999, we estimated that our
Internet business lost approximately $1,000,000 and will incur significant
losses in the foreseeable future as we continue to invest in technology and
advertising to build our brand recognition.
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DEMOGRAPHIC TRENDS AND MARKET OPPORTUNITY
HISPANICS. Since 1950, Hispanics have been the fastest growing
minority group in the United States. The Hispanic population in Latin America
has also experienced strong growth and this trend is expected to continue. As an
established retailer to the Hispanic community, we believe we are well
positioned to capitalize on the projected growth in the Hispanic population
worldwide.
- As of 1998, the U.S. Hispanic population totaled approximately 30
million people (11% of the U.S. population) and is expected to grow
to approximately 41 million people by the year 2010.
- Total U.S. Hispanic purchasing power exceeded $270 billion in 1998,
up from $94 billion in 1984, and is expected to continue to rise.
- Ten major markets account for over 60% of the Hispanic population and
purchasing power in the U.S. (Los Angeles, San Francisco/San Jose,
San Diego, New York, Houston, San Antonio, McAllen/Brownsville,
Dallas/Fort Worth, Miami and Chicago).
- Between 1994 and 1998, the percentage of U.S. Hispanic households
that owned computers increased from 13% to 30%.
- Between 1994 and 1998, the percentage of U.S. Hispanic households
with Internet access grew from 2% to 15%.
- Latin America's population totaled approximately 480 million in 1999
and is expected to grow to 562 million by the year 2010.
TRAVEL. The travel industry is large and growing. Consumers in
the United States spent $126 billion in travel through travel agencies in 1997,
up from $101 billion in 1996. Airline travel continues to be the largest segment
of the industry with $70.5 billion or 56% booked through travel agencies in
1997. Increasingly, the Internet has become an attractive method to sell travel
tickets directly to the public. Travel currently represents one of the largest
online retail categories sold over the Internet with the emergence of major
retailers such as CheapTickets, Inc., Priceline.com, Inc., Travelocity.com,
Expedia.com and Previewtravel.com. None of these companies offer their services
in Spanish on the Internet. Online air travel bookings were $1.6 billion in 1998
and are expected to grow at a compounded annual growth rate of 46%, reaching
$10.6 billion in 2003.
BUSINESS STRATEGY
Recognizing the demographic and travel trends, our strategy is to
establish ourselves as a leading Spanish-language travel provider to the
Hispanic population residing in the United States and Latin America. We intend
to achieve this objective through the following initiatives. First, we plan to
continue to acquire and open travel agencies in the United States and Latin
America, which cater to the growing Hispanic population and provide us with
local distribution facilities. Second, we plan to use our increasing market
share to continue to negotiate favorably discounted non-published fares from the
airlines. Third, we plan to sell these discounted fares through our travel
agencies and via the Internet to both Hispanics and non-Hispanics seeking travel
to Latin America and to the United States. Fourth, we intend to establish new
strategic relationships that will permit us to offer additional travel products,
hotels and tours, which we will sell through our travel stores and our Internet
sites. Fifth, we plan to continue to offer travel-related products, including
Spanish-language books, CD's, portable electronics and cameras to customers of
our travel stores and Internet sites. We plan to expand our brand recognition
through print, media and radio advertising, including, launching a major
advertising campaign in the second quarter of 2000.
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BUSINESS OPERATIONS
THIRD PARTY SYSTEMS
The travel information we utilize to conduct business is provided to
each of our travel stores and our Internet business through global distribution
systems (GDS), operated by Sabre, Amadeus, and Worldspan. Both Sabre, Amadeus
and Worldspan are world leaders in the electronic distribution of travel-related
products and services. GDS systems provide us with electronic booking systems
and databases containing flight schedules and availability, and published fares
information for approximately 400 airlines located throughout the world.
The GDS Systems are provided to us under three to five-year contracts,
without charges, as long as we maintain a certain level of booking. Our
contracts also provide for incentives if we exceed certain performance criteria.
ADVERTISING
We actively advertise primarily in Hispanic newspapers targeting both
our present and former customers, and potential customers who have used other
travel agencies to book travel. We also advertise in English newspapers to
promote our English-language Internet site.
EMPLOYEES
At December 31, 1999, the Company employed a total of 233 full-time
employees and 11 part-time employees in its travel/internet business segment.
Our employees are not represented by a union or covered by a collective
bargaining agreement. Management believes that its relations with its employees
are good.
SUPERVISION AND REGULATION
CONSUMER FINANCE OPERATIONS REGULATION
GENERAL
Our consumer finance operations are subject to extensive regulation.
Violation of statutes and regulations applicable to us may result in actions for
damages, claims for refunds of payments made, certain fines and penalties,
injunctions against certain practices and the potential forfeiture of rights to
repayment of loans. Changes in state and federal statutes and regulations may
affect us. We, together with industry associations, actively lobby in the states
in which we operate. Although we are not aware of any pending or proposed
legislation that could have a material adverse effect on our business, we cannot
assure that future regulatory changes will not adversely affect our lending
practices, operations, profitability or prospects.
STATE REGULATION
CONSUMER PRODUCT AND TRAVEL FINANCE
In California, the California Retail Installment Sales Act (the "Unruh
Act") regulates our consumer product finance portfolio and travel finance
portfolio businesses. The Unruh Act requires us to disclose to our customers,
among other matters, (1) the conditions under which we may impose a finance
charge, (2) the method of determining the balance which is subject to a finance
charge, (3) the method used to determine the amount of the finance charge, and
(4) the minimum periodic payment required. In addition, the Unruh Act provides
consumer protection against unfair or deceptive business practices by (1)
regulating the contents of retail installment sales contracts, (2) setting forth
the respective rights and obligations of buyers and sellers, and (3) regulating
the maximum legal finance rate or charge on installment credit sales.
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SMALL LOAN BUSINESS
Small loan consumer finance companies are subject to extensive
regulation, supervision and licensing under various federal and state statutes,
ordinances and regulations. In general, these statutes establish maximum loan
amounts and interest rates and the types and maximum amounts of fees and other
costs that may be charged. In addition, state laws regulate collection
procedures, the keeping of books and records and other aspects of the operation
of small-loan consumer finance companies. State agency approval generally is
required to open new branch offices. Accordingly, our ability to expand by
acquiring existing offices and opening new offices has depended, in part, on
obtaining the necessary regulatory approvals.
Each facility that offers small loans must be separately licensed under
the laws of California. Licenses granted by the regulatory agencies are subject
to renewal every year and may be revoked for failure to comply with applicable
state and federal laws and regulations. In California, licenses may be revoked
only after an administrative hearing.
INSURANCE PREMIUM FINANCE
The State of California Department of Financial Institutions regulates
our insurance premium finance business. In general, state law and regulations
set forth requirements and procedures for (1) the cancellation of policies and
collection of unearned premiums, (2) regulating the form and content of premium
finance agreements, (3) limiting the amount of finance, delinquency,
cancellation and other fees we may charge, and (4) prescribing notice periods
for the cancellation of policies for nonpayment.
INSURANCE BUSINESSES
In California, the State of California Department of Insurance regulates
our insurance businesses. In general, this agency issues regulations which
require us to, among other things, maintain fiduciary fund and trust accounts
and follow specific market, general business and claims practices.
FEDERAL REGULATION
We are subject to extensive federal regulation as well, including the
Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit
Reporting Act and the regulations thereunder and the Federal Trade Commission's
Credit Practices Rule. These laws require us to provide complete disclosure of
the principal terms of each loan to every prospective borrower, prohibit
misleading advertising, protect against discriminatory lending practices and
proscribe unfair credit practices. Among the principal disclosure items under
the Truth-in-Lending Act are the terms of repayment, the total finance charge
and the annual rate of finance charge or "Annual Percentage Rate" on each loan.
The Equal Credit Opportunity Act prohibits creditors from discriminating against
loan applicants on certain basis, including race, color, sex, national origin,
age or marital status. Regulation B issued under the Equal Credit Opportunity
Act requires creditors to make certain disclosures regarding consumer rights and
advise consumers whose credit applications are not approved of the reasons for
the rejection. The Fair Credit Reporting Act requires us to provide certain
information to consumers whose credit applications are not approved on the basis
of a report obtained from a consumer reporting agency. The Credit Practices Rule
limits the types of property a creditor may accept as collateral to secure a
consumer loan.
CHECK CASHING REGULATION
The California Department of Justice regulates our check cashing
business. In general, state law and regulations set forth requirements and
procedures which require us to, among other things, limit the amount of fees we
may charge, renew our check casher's permit annually and post a schedule of the
fees we charge for check cashing services in each of our locations.
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TRAVEL AGENCY REGULATION
Each of our travel locations are travel agencies that are regulated by
the Airline Reporting Corporation ("ARC"). The ARC represents the major
scheduled airline carriers and sets the operating rules for travel agencies. We
are required to submit weekly reports to the ARC and to meet certain procedural,
funding and bonding requirements that the ARC sets. In California, under the
Seller of Travel Act, we are required to register as a seller of travel, comply
with certain disclosure requirements and participate in the State's restitution
fund. We also are subject to regulation by the United States Department of
Transportation ("DOT"), by regulations applicable to business generally and by
laws or regulations directly applicable to access online commerce. Currently,
few laws and regulations directly apply to the Internet and commercial online
services. However, it is possible that laws and regulations may be adopted with
respect to the Internet or commercial online services covering issues such as
user privacy, pricing, content, copyrights, distribution, antitrust and
characteristics and quality of products and services. Further, the growth and
development of the market for online commerce may prompt calls for more
stringent consumer protection laws. Such laws would likely impose additional
burdens on companies conducting business online.
Moreover, in many states, there is currently great uncertainty whether
or how existing laws governing issues such as property ownership, sales and
other taxes, libel and personal privacy apply to the Internet and commercial
online services. Tax authorities in a number of states, as well as a
Congressional advisory commission, are currently reviewing the appropriate tax
treatment of companies engaged in online commerce, and new state tax regulations
may subject us to additional state sales and income taxes. Federal legislation
imposing certain limitations on the ability of states to impose taxes on
Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as this
legislation is known, imposes on electronic commerce a three-year moratorium on
state and local taxes imposed after October 1, 1998, but only where such taxes
are discriminatory on Internet access.
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS AND STOCK PRICE
INABILITY TO SELL OUR FINANCIAL SERVICE BUSINESS
We may not be able to sell our financial services business or realize
the carrying value for this business reflected on our consolidated financial
statements. If we are unable to sell our financial services business certain
covenants in our bank facility will restrict our ability to continue to fund the
losses we expect to incur in our Internet business in future periods.
RELATIONSHIPS WITH AIRLINES
We derive substantially all of our revenue from a combination of: (1)
sales of discounted air fares; (2) commissions on published fares for both
domestic travel and travel to Latin America; and, (3) performance based
compensation referred to as "override commissions."
We depend on our airlines for access to non-published fares for which
we have no long-term or exclusive contracts. Our business could be hurt if the
airlines we do business with; (1) refuse to renew our contracts for
non-published fares; (2) renew the contracts on less favorable terms; or, (3)
cancel our contracts. Non-published fares are tickets we acquire from the
airlines and resell to our customers at discounts off published fares. We have
contracts with 11 airlines that permit us to acquire non-published fares. These
contracts are typically for a short period, are cancelable on short notice and
do not require the airlines to provide us with a specific quantity of tickets or
deal with us exclusively.
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A significant portion of our revenue depends on regular and override
commissions paid to us by the airlines for bookings made through our travel
stores and Internet sites. The airlines we do business with are not obligated to
pay any specific commissions, or to pay commissions at all.
Most recently, there has been a general trend by the airlines to reduce
commissions paid to travel agents in order to reduce their distribution costs
and many travel experts believe that airlines will eliminate all commissions in
the near future. In response to these changes, many travel agencies, including
us, have begun to charge service fees to their customers.
Although our domestic travel business has been subject to the same
downward trends on commission rates, our commission rates on tickets to Latin
America, which account for 75% of our travel business, have not been subject to
these general trends. From time to time, however, certain airlines have reduced
commission rates on Latin American routes, but have generally reinstated them in
order to meet competitive conditions. While we believe that the pressure on
airlines to reduce their distribution costs will continue and eventually affect
our present Latin American commission rates, we believe this trend will be
implemented by the airlines more slowly, because our travel stores represent the
airlines' primary distribution channel to Hispanics living in the United States.
Despite this, we have begun to charge service fees in certain markets where
commissions have been reduced and are prepared to introduce service charges
throughout all of our travel stores should conditions warrant it.
A large percentage of our travel business depends upon a limited number
of airlines and our business could be hurt if any of these carriers temporarily
curtail operations, were shut down, or went out of business. In November of
1999, Taesa Airlines, one of the major Mexican carriers, was shut down by the
Mexican government and eventually was declared bankrupt. The suspension and
ultimate cessation of Taesa Airlines had a significant adverse effect on our
operations in the fourth quarter of 1999, our busiest travel season. Results for
the first quarter of 2000 also will be adversely impacted until the Taesa route
system is absorbed by other airline carriers. In response to the cessation of
Taesa, Mexicana and Aeromexico, which are both controlled by a common parent
company, reduced commissions on routes from Tiajuana to other parts of Mexico.
To offset this decline in commissions, we have begun to charge our customers a
service charge.
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
Our financial performance will depend in part on our ability to (1)
integrate new travel locations into our operations; (2) generate satisfactory
performance or enhance performance at these locations; (3) maintain our airline
contracts and commission rates or increase our fees; (4) broaden our online
presence and build brand recognition; (5) enter contracts with other providers
of travel and travel-related services; (6) achieve economies of scale in our
Internet business to permit profitable operations to cover required investments
in technology, technical infrastructure and the costs of building brand
recognition; and, (7) raise additional capital to cover the losses we expect to
incur in our Internet business in future periods. As a result of acquisitions in
1999, we added 38 new travel locations. Expansion of our business may negatively
impact our operating results, particularly during periods immediately following
the expansions. In addition, we cannot assure that we will be able to profitably
implement our business strategy in new geographical areas. Furthermore, we may
compete for expansion and acquisition opportunities with companies that may have
significantly greater financial resources than us. We cannot assure that we will
be able to locate suitable new locations as acquisition candidates, or that any
operations that we open or acquire will be effectively and profitably integrated
into our existing operations.
DEPENDENCE ON CALIFORNIA MARKET
A majority of our travel facilities are located in California and
substantial portions of our revenues are generated in California. Therefore, our
performance depends upon general economic conditions in California and Southern
California, in particular, and may be adversely affected by social factors or
natural disasters in California. A decline in the California economy could have
a material adverse effect on our results of operations and financial condition.
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RELIANCE ON THIRD PARTY SYSTEMS
Our travel business is limited to those airlines that provide
comprehensive travel information through the GDS systems we utilize. There can
be no assurance that the airlines we currently have contracts with will continue
to sell their services through Sabre, Amadeus and Worldspan, or that we would be
able to establish new relationships to ensure uninterrupted access to a
comprehensive supply of travel information should the airlines that we have
relationships with elect to not use the GDS, that we currently employ. In
addition, we are dependent on our GDS supplier to continue to offer and maintain
their service. Any discontinuation of its service or any reduction in its
performance, that requires us to replace such service would be disruptive to our
business and could require substantial expenditures and time to transition us to
an alternative GDS system.
SEASONALITY
Our business is seasonal, reflecting fluctuations in leisure travel
patterns. Historically, travel sales increase in the second and fourth quarter
of the year, reflecting summer and Christmas travel, and decline in the first
and third quarter. The summer and Christmas seasonal cycles are fairly
predictable, but may shift or be altered, reflecting changes in the economy,
availability of airline capacity and travel prices. These seasonal fluctuations
in our business directly impact our operating results and cash flow. Travel
sales in general may be impacted by political instability in Latin America,
terrorism, fuel price escalation, weather, airline or other travel related
strikes and news of airline disasters.
TRAVEL INDUSTRY DISRUPTIONS
A decline in leisure travel or disruptions in travel generally could
hurt our business. Leisure travel is highly sensitive to personal discretionary
spending levels and thus tends to decline during general economic downturns. In
addition, other adverse trends or events that tend to reduce leisure travel are
likely to hurt our business. These may include:
- political instability;
- regional hostilities;
- terrorism;
- fuel price escalation;
- travel-related accidents;
- bad weather; or
- airline or other travel-related strikes.
A number of airlines are currently in various stages of negotiation with
unions representing their employees. If those negotiations fail and the unions
elect to strike or effect a slowdown, our business could be harmed.
COMPETITION
We compete with traditional travel agencies, ticket consolidators,
Internet travel companies and with the airlines. In the United States Hispanic
market, we believe that we are the largest provider of leisure air travel to
Hispanic customers traveling to Latin America. We face strong competition on a
regional basis from local retail operators, and also face potential competition
from larger more traditional travel agencies, who may establish travel agencies
or form strategic alliances in Hispanic areas in the future. Some of these
agencies have greater financial and marketing resources then we do. We cannot
assure that our present or future competitors will not
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exert significant competitive pressures on us, which could have a material
adverse effect on our results of operations and financial condition.
We compete in our recently established Internet travel business with a
variety of Internet travel companies such as CheapTickets, Inc., Priceline.com,
Inc. and Previewtravel.com, all of which have greater brand recognition,
significantly greater financial, marketing and other resources than we do.
Certain of these companies may also be able to secure airline contracts from our
travel providers on more favorable terms than we can obtain. We cannot be
assured that we will be able to compete successfully against current and future
competitors. We also face competition from travel consolidators, who also sell
their services directly to customers by telephone and on the Internet. As the
market for online travel grows, there can be no assurance that our ticket
providers will permit us to continue to sell airline tickets online.
Among other factors, our success depends heavily on our access to
non-published fares, on our brand recognition and on the ability of our systems
to integrate our non-published fares with published fares to offer customers a
broad choice. Our competitors may enter into strategic or commercial
relationships with larger, established and well-financed companies. Some of our
competitors have agreements to buy non-published fares from our major suppliers.
For example, Priceline.com, Inc. recently signed an agreement to purchase
non-published tickets from Continental and, as it has in deals with other
airlines, granted warrants to Continental to purchase Priceline.com common
stock. Our competitors may be able to induce one or more of our suppliers of
non-published fares, through pricing, equity or other incentives, to cease doing
business with us, or to do business with us on less favorable terms. They might
also be able to build strong brand recognition in the Hispanic leisure travel
market, through widespread advertising and other marketing efforts. Certain of
our competitors may be able to devote greater resources to marketing and
promotional campaigns on the Internet if they began to promote Hispanic travel
opportunities. Competitors may also devote substantially more resources to
website and systems development than we do. Any or all of these developments
could bring heavy competitive pressures to bear on us.
E-COMMERCE
The success of our business will depend on continued growth of online
commerce and Internet infrastructure. Our future revenues and profits depend, to
a certain degree, upon the widespread acceptance and use of the Internet and
online services as a medium for commerce by customers and sellers. If acceptance
and growth of Internet use does not continue, it will hurt our business.
Rapid growth in the use of the Internet and online services is a recent
phenomenon. This growth may not continue. A sufficiently broad base of customers
may not accept, or continue to use, the Internet as a medium of commerce. Demand
for and market acceptance of recently introduced products and services over the
Internet are subject to a high level of uncertainty. There are few proven
products and services. For us to achieve significant growth, customers who have
historically used traditional means of commerce will instead need to elect to
purchase products and services online, and sellers of products will need to
elect to sell products and services online, and sellers of products and services
will need to accept or expand use of the Internet as a channel of distribution.
Our revenues and profits depend on customers visiting our website and actually
purchasing tickets. Customers could potentially use the site for route
information and choose to purchase tickets directly from the airlines or
elsewhere.
The Internet has experienced, and is expected to continue to experience
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity and security and timely
development of complementary products, such as high-speed modems, for providing
reliable Internet access and services.
Major online service providers and the Internet itself have experienced
outages and other delays as a result of software and hardware failures and could
face such outages and delays in the future. Outages and
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delays are likely to affect the level of Internet usage and the processing of
transactions on the VuelaBarato.com and 4GreatFares.com websites. It is unlikely
that we could make up for the level of orders lost in those circumstances by
increased phone orders. In addition, the Internet could lose its viability by
reason of delays in the development or adoption of new standards to handle
increased levels of activity or of increased government regulation. The adoption
of new standards or government regulation may require us to incur substantial
compliance costs.
BRAND RECOGNITION
Our brand may not achieve the broad recognition necessary to succeed. We
believe that we must maintain and enhance the VuelaBarato.com and
4GreatFares.com brands to continue to attract and expand our business. Failure
to maintain and enhance our brand could hurt our business.
The success of VuelaBarato.com and 4GreatFares.com brands will depend to
a certain extent on our ability to enhance our advertising programs. The number
of Internet sites that offer competing services increases the importance of
establishing and maintaining our brand name recognition. Many online sites
already have well-established brands in online services or the travel industry
generally. We intend to significantly increase our advertising expense, but
these expenditures may not result in increased business activity or the desired
enhancement of brand recognition. This could adversely affect our results of
operations.
GROWTH MANAGEMENT
We may be unable to manage our rapid growth effectively. We have rapidly
and significantly expanded our operations and anticipate further significant
expansion. Our inability to manage growth effectively could hurt our business.
We have recently added a number of key managerial and technical
employees, and we expect to add additional key personnel in the future. This
expansion has placed, and we expect it will continue to place, a significant
strain on our management, operational and financial resources. To manage the
expected growth of our operations and personnel, we plan to:
- improve and upgrade transaction-processing, operational, customer
service and financial systems and financial procedures and
controls;
- maintain and expand our relationships with various travel service
suppliers, Internet portals and other travel-related website
companies and other third parties necessary to our business;
- expand our finance, administrative and operations staff;
- continue to attract, train and manage our employee base; and
- implement a disaster recovery program.
TECHNOLOGY
We may not be able to keep up with the industry's rapid technological
and other changes. The industry in which we compete is characterized by:
- rapid technological change;
- changes in user and customer requirements and preferences;
- frequent new product and service introductions embodying new
technologies;
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<PAGE> 13
- the emergence of new industry standards and practices; and
- the emerging importance of the Internet and the proliferation of
companies offering Internet-based products and services.
These developments could quickly render our existing online sites and
proprietary technology and systems obsolete. Our inability to modify or adapt
our infrastructure in a timely manner or the expenses incurred in making such
adaptations could hurt our business.
As a result, we will be required to continually improve the performance,
features and reliability of our services, particularly in response to
competitive offerings. Our success will depend, in part, on our ability to
enhance our existing services and develop new services in a cost-effective and
timely manner. The development of proprietary technology entails significant
technical and business risks and requires substantial expenditures and
lead-time. We may not be able to adapt successfully to customer requirements or
emerging industry standards. In addition, the widespread adoption of Internet,
networking or telecommunications technologies or other technologies could
require us to incur substantial expenditures to modify or adapt our services or
infrastructure.
In addition, our computer and communications systems are vulnerable to
business interruptions. Our ability to receive and fill orders through our call
centers and provide high-quality customer service largely depends on the
efficient and uninterrupted operation of our computer and communications
hardware systems. The occurrence of interruptions, delays, loss of data or the
inability to accept and confirm customer reservations could hurt our business.
Our online servers and our call center is located in Commerce,
California; the SABRE Group's computers are located in Tulsa, Oklahoma. These
systems and operations are vulnerable to damage or interruption from power loss,
telecommunications failure, hacker break-ins, natural disasters and similar
events.
Although we have adopted network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These kinds of events could lead to interruptions, delays, loss of
data or the inability to accept and confirm customer reservations. The
occurrence of any of the foregoing risks could hurt our business.
CALL CENTER
Our current reservation systems may not be able to handle all calls
adequately. Our system's lack of capacity to handle the demands of our customers
can cause unanticipated system disruptions, slower response times, poor customer
service, impaired quality and speed of reservations and confirmations and delays
in reporting accurate financial information. These problems could hurt our
business.
DOMAIN NAMES
We currently hold the Internet domain names "www.VuelaBarato.com" and
"www.4GreatFares.com." Third parties may acquire domain names that infringe or
otherwise decrease the value of our trademarks and other proprietary rights that
may hurt our business. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in the United States and in
foreign countries is subject to change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. The relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. As a result, we may not acquire or maintain the
"www.VuelaBarato.com" and "www.4GreatFares.com" domain names in all the
countries in which we conduct business.
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SERVICE INTERRUPTIONS
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the airline
industry to make airline ticket reservations. Any interruption in these
third-party services or a deterioration in their performance could hurt our
business. If our arrangement with any of these third parties is terminated, we
may not find an alternative source of systems support on a timely basis or on
commercially reasonable terms. We rely on third parties to print our airline
tickets and arrange for their delivery. We rely on third parties to host our
online system's infrastructure, web and database servers. We currently rely on
SABRE for our general reservations system, including customer profiling, making
reservations and credit card verification and confirmations. Currently, over 90%
of our computing transactions are processed through the SABRE systems. Our
technology relationship with SABRE for Internet operations will further increase
our dependency.
If we or SABRE ever elect to terminate the existing relationship, we
would be forced to convert to another provider. This conversion could require a
substantial commitment of time and resources and hurt our business.
SECURITY BREACHES
Online security breaches could hurt our business. In our business,
secured transmission of confidential information over public networks is
essential to maintain consumer and supplier confidence. If any compromise of our
security were to occur, it could hurt our business. Concerns over the security
of transactions conducted on the Internet and the potential compromise of
customer privacy may inhibit the growth of commercial online services as a means
of conducting commercial transactions. We have expended significant resources to
protect against security breaches and to alleviate problems caused by such
breaches, and we may need to make further expenditures for this purpose in the
future. We maintain an extensive confidential database of customer profiles and
transaction information. Our current security measures may not be adequate and
advances in computer capabilities, new discoveries in the field of cryptography,
or other events or developments may result in a compromise or breach of the
methods we use to protect customer transaction and personal data.
A party who can circumvent our security might be able to misappropriate
proprietary information or cause disruptions in our operations. Security
breaches could also expose us to a risk of loss or litigation and possible
liability for failing to secure confidential customer information.
KEY EMPLOYEE DEPENDENCE
We depend substantially on the continued services and performance of our
senior management, particularly Gary Cypres, the Chairman of the Board, and
certain other key personnel. The loss of the services of any of these executive
officers or other key employees could hurt our business. If we lose our key
personnel or cannot recruit additional personnel, our business may suffer.
Our future success also depends on our ability to identify, attract,
hire, train, retain and motivate other highly skilled technical, managerial,
marketing and customer service personnel. Competition for such personnel is
intense. We may not be able to attract, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties in attracting
a sufficient number of qualified software developers for our future online
services and transaction-processing systems. The failure to retain and attract
necessary technical, managerial, marketing and customer service personnel could
hurt our business and impair our growth strategy. Although none of our employees
are represented by a labor union, our employees may join or form a labor union.
BUSINESS EXPANSION
Our business could be hurt if we do not offer new services successfully.
We plan to introduce new and expanded services. Our inability to generate
revenues from such expanded services or products sufficient to
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offset their development or offering cost could hurt our business. Such
additional products and services may include hotel, tour and cruise reservations
as well as car rentals. Our business strategy is to increase the percentage of
such travel-related products as a percentage of our revenues. We may not be able
to offer such products or services in a cost-effective or timely manner and our
efforts may not be successful.
Further, any new service that is not favorably received by customers
could damage our reputation or brand name. Expansion of our services could also
require significant additional expenses and may strain our management, financial
and operational resources. If we cannot obtain alternate travel offerings in the
future, we may not be able to benefit fully from our growth strategy.
ACQUISITION STRATEGIES
Our business could be hurt if we make acquisitions that are not
successful. We may in the future broaden the scope and content of our business
through the acquisition of existing complementary businesses. We may not be
successful in overcoming problems encountered in connection with such
acquisitions, and our inability to do so could hurt our business. We may
consider the acquisition of companies providing similar services in other
markets or in other sectors of the travel industry in the future. Future
acquisitions would expose us to increased risks. These include risks associated
with:
- the assimilation of new operations, sites and personnel; the
diversion of resources from our existing businesses, sites and
technologies;
- the inability to generate revenues from new sites or content
sufficient to offset associated acquisition costs;
- the maintenance of uniform standards, controls, procedures and
policies; and
- the impairment of relationships with employees and customers as a
result of integration of new businesses.
Acquisitions may also result in additional expenses associated with
amortization of acquired intangible assets or potential businesses.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
Certain segments of the travel industry are heavily regulated by the
United States and other governments. Accordingly, certain services offered by us
are affected by such regulations. New legislation or regulation, the application
of laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and commercial online services could hurt our business.
We are subject to federal regulations prohibiting unfair and deceptive
practices. In addition, federal regulations concerning the display and
presentation of information currently applicable to airline booking services
could be extended to us in the future, as well as other laws and regulations
aimed at protecting customers accessing online or other travel services. In
California we are required to register as a seller of travel, comply with
certain disclosure requirements and participate in the state's restitution fund.
We are also subject to regulations applicable to businesses generally and laws
or regulations applicable to online commerce.
Currently, few laws and regulations directly apply to the Internet and
commercial online services. However, it is possible that laws and regulations
may be adopted with respect to the Internet or commercial online services
covering issues such as user privacy, pricing, content, copyrights,
distribution, antitrust and characteristics and quality of products and
services. Further, the growth and development of the market for online commerce
may prompt calls for more stringent consumer protection laws. Such laws would
likely
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impose additional burdens on companies conducting business online. The adoption
of any additional laws or regulations may decrease the growth of the Internet or
commercial online services. In turn, this could decrease the demand for our
products and services and increase our cost of doing business, or otherwise hurt
our business.
Moreover, in many states, there is currently great uncertainty whether
or how existing laws governing issues such as property ownership, sales and
other taxes, libel and personal privacy apply to the Internet and commercial
online services. These issues may take years to resolve. For example, tax
authorities in a number of states, as well as a Congressional advisory
commission, are currently reviewing the appropriate tax treatment of companies
engaged in online commerce, and new state tax regulations may subject us to
additional state sales and income taxes. Federal legislation imposing certain
limitations on the ability of states to impose taxes on Internet-based sales was
enacted in 1998. The Internet Tax Freedom Act, as this legislation is known,
imposes on electronic commerce a three-year moratorium on state and local taxes
imposed after October 1, 1998, but only where such taxes are discriminatory on
Internet access. It is possible that the legislation could not be renewed when
it terminates in October 2001. Failure to renew the legislation could allow
state and local government to impose taxes on Internet-based sales, and such
taxes could hurt our business.
ITEM 2. PROPERTIES
Our executive and administrative offices occupy approximately 17,000
square feet of a building which is owned by BCE Properties II, Inc., an
affiliate under common ownership, that is located at 5480 E. Ferguson Drive,
Commerce, California 90022. We believe that our executive and administrative
offices are adequate for current needs and that additional space in our
headquarters is available for future expansion. We own an 86,000 square foot
property in Los Angeles, on which we are building a 40,000 square foot retail
center, which we may lease to an affiliate company or other retailer. We also
purchased in July 1998, and subsequently sold in December 1999 to Central Rents,
Inc., an affiliated company through common ownership, a 4,000 square foot
building in Maywood, California and have converted that facility into one of our
travel centers. All of our other locations are leased pursuant to short-term
leases.
ITEM 3. LEGAL PROCEEDINGS
We are involved in certain legal proceedings arising in the normal
course of our business. We do not believe the outcome of these matters will have
a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
OVER-THE-COUNTER BULLETIN BOARD LISTING
Our common stock is listed on the Over-the-Counter Bulletin Board and
traded under the symbol "CFAC." The following table sets forth, in the periods
indicated, the high and low sales prices per share of our common stock, as
reported by the Nasdaq National Market or the Over-the-Counter Bulletin Board
for the periods presented. As of March 22, 2000, there were approximately, 177
holders of record of our common stock.
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<TABLE>
<CAPTION>
xx HIGH LOW
------- -------
<S> <C> <C>
Quarter ended March 31, 1998 $12.375 $ 9.50
Quarter ended June 30, 1998 $ 12.25 $ 8.625
Quarter ended September 30, 1998 $ 9.00 $ 7.00
Quarter ended December 31, 1998 $ 7.50 $ 4.00
Quarter ended March 31, 1999 $ 5.125 $ 2.50
Quarter ended June 30, 1999 $ 5.00 $ 2.75
Quarter ended September 30, 1999 $ 7.375 $ 3.50
Quarter ended December 31, 1999 $ 8.75 $ 5.625
</TABLE>
We received a letter dated February 26, 1999 from the Nasdaq National
Market advising us that based upon its review of price data for our common stock
covering the last 30 consecutive trading dates prior to the date of the letter,
our common stock had not maintained a market value of public float greater than
or equal to $5 million and, that, we would be delisted if we did not demonstrate
compliance with this requirement by May 27, 1999. Nasdaq subsequently advised us
that we did not meet this requirement by May 27, 1999, and therefore, we were
delisted on June 1, 1999. Our common stock now trades on the Over-the-Counter
Bulletin Board.
DIVIDENDS
We have never paid a cash dividend on our common stock. If we are
successful in selling our consumer financial services business, we may
distribute all or a portion of the proceeds to our shareholders subject to
Delaware Law, and subject to receiving a tax opinion that such distribution
would qualify as a capital gain. The Delaware General Corporation Law restricts
our ability to pay dividends. The Delaware General Corporation Law provides that
a Delaware Corporation may pay dividends either (1) out of the corporation's
surplus (as defined by Delaware law); or, (2) if there is no surplus, out of the
corporation's net profit for the fiscal year in which the dividend is declared
or the preceding fiscal year. Any determination in the future to pay dividends
will depend on our financial condition, capital requirements, results of
operations, contractual limitations, legal restrictions and any other factors
our Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to our
consolidated financial position as of December 31, 1999 and 1998 and our results
of operations for the years ended December 31, 1999, 1998 and 1997 has been
derived from our audited consolidated financial statements appearing elsewhere
in this Annual Report. This information should be read in conjunction with such
consolidated financial statements and the notes thereto. The selected financial
data with respect to our consolidated financial position as of December 31,
1997, 1996 and 1995 and our results of operations for the years ended December
31, 1996 and 1995 has been derived from our audited consolidated financial
statements restated to reflect the sale of the Company's consumer financial
services business as discontinued operations, but are not presented in this
Annual Report.
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SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues .................... $ 14,270 $ 8,957 $ 8,733 $ 2,437 $ 315
Costs and expenses:
Selling and administrative
expenses ...................... 11,424 7,267 7,887 3,215 293
Occupancy costs ................. 2,000 1,299 1,373 220 --
Depreciation and amortization ... 586 370 320 50 2
----------- ---------- ----------- ----------- ----------
Total costs and expenses .... 14,010 8,936 9,580 3,485 295
----------- ---------- ----------- ----------- ----------
Pre-tax income (loss) from
continuing operations ......... 260 21 (847) (1,048) 20
Provision (benefit) for income
taxes ........................... 104 8 (339) (419) 8
----------- ---------- ----------- ----------- ----------
Income (loss) from continuing
operations ...................... 156 13 (508) (629) 12
Income from discontinued
operations, net of tax (1) .... 3,981 4,388 4,898 6,508 3,107
Loss on disposal of discontinued
operations, net of operating
income during phase-out period,
net of taxes (2) .............. (1,500) -- -- -- --
----------- ---------- ----------- ----------- ----------
Net income ...................... $ 2,637 $ 4,401 $ 4,390 $ 5,879 $ 3,119
=========== ========== =========== =========== ==========
PER SHARE DATA:
BASIC EARNINGS PER SHARE:
Income (loss) from continuing
operations ...................... $ 0.02 $ 0.00 $ (0.07) $ (0.10) $ 0.00
Income from discontinued
operations, net of taxes ..... 0.55 0.60 0.67 1.05 0.61
Loss on disposal of discontinued
operations, net of operating
income during phase-out period,
net of taxes .................. (0.21) -- -- -- --
----------- ---------- ----------- ----------- ----------
Net income ...................... $ 0.36 $ 0.60 $ 0.60 $ 0.95 $ 0.61
=========== ========== =========== =========== ==========
Weighted average number of shares
outstanding ................... 7,248,000 7,277,000 7,277,000 6,213,500 5,150,000
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing
operations .................... $ 0.02 $ 0.00 $ (0.07) $ (0.10) $ 0.00
Income from discontinued
operations, net of taxes ..... 0.55 0.60 0.67 1.05 0.61
Loss on disposal of discontinued
operations, net of operating
income during phase-out period,
net of taxes................... (0.21) -- -- -- --
----------- ---------- ----------- ----------- ----------
Net income ...................... $ 0.36 $ 0.60 $ 0.60 $ 0.95 $ 0.61
=========== ========== =========== =========== ==========
Weighted average number of shares
outstanding ................... 7,261,000 7,277,000 7,277,000 6,213,500 5,150,000
BALANCE SHEET DATA:
Cash ............................ $ 5,280 $ 8,295 $ 3,855 $ 5,848 $ 57
Net assets of discontinued
operations .................... $ 52,963 $ 52,035 $ 49,496 $ 52,778 $ 33,927
Total assets .................... $ 76,693 $ 73,825 $ 68,692 $ 67,512 $ 35,698
Stockholders' equity ............ $ 72,075 $ 70,144 $ 65,743 $ 61,353 $ 33,632
OPERATING DATA (UNAUDITED):
Gross bookings (3) .............. $ 144,113 $ 91,485 $ 95,248 $ 27,774 $ 3,981
</TABLE>
- -------------------
(1) Income taxes applicable to income from discontinued operations for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995 were, $2,654, $2,925,
$3,160, $4,398 and $2,071, respectively.
(2) Includes loss on disposal of discontinued operations of $6,100 less
estimated operating income from discontinued operations during the phase-out
period of $3,600 net of applicable tax benefits of $1,000.
(3) Gross bookings represent the aggregate retail value of tickets sold under
published and non-published fares. Management uses gross bookings as a key
indicator of general business activity, success of promotional efforts, and
efficiency of reservation agents in the Company's travel store distribution
network. In addition, management believes that gross bookings provide a
useful comparison between historical periods, and year-to-year changes as
such information provides a useful measure of the expansion of the Company's
business.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
information under "Item 6. Selected Financial Data" and our Consolidated
Financial Statements and Notes thereto and other financial data, included
elsewhere in this Annual Report. Certain statements under this caption
constitute "forward-looking statements" under Section 27A of the Securities Act
and Section 21E of the Exchange Act which involve risks and uncertainties. Our
actual results may differ significantly from the results discussed in these
forward-looking statements. Factors that might cause such a difference, include
but are not limited to, our airline relationships, economic conditions,
technology issues, availability of additional capital and government regulation.
For additional information concerning these factors and others, see "Item 1.
Business -- Business Considerations and Certain Factors that May Affect Future
Results of Operations and Stock Price."
OVERVIEW
OVERVIEW OF CONTINUING OPERATIONS
In mid-1995, our market research identified the Hispanic travel business
as an industry that offered consolidation potential and increased profitability
through improved management and systems. We also concluded that this business
represented an important distribution network for certain airlines as a majority
of Hispanic customers they serve do not have credit cards, pay in cash and
prefer to acquire their tickets from travel agencies located within their
neighborhoods. In mid-1995, we commenced our air travel business with a single
travel store in Los Angeles, California. Since 1995, through a series of
acquisitions, we have grown to 140 travel stores and presently operate our
travel business in 7 states.
We derive substantially all of our revenue from a combination of: (1)
sales of discounted air fares; (2) commissions on published fares for both
domestic travel and travel to Latin America; and, (3) performance based
compensation referred to as "override commissions." The revenue we generate from
the sale of discount airline tickets and commissions we earn are recognized as
income upon issuance of the ticket. The overrides we earn are recognized as
income on an accrual basis once the amount has been confirmed by the airline,
which generally reflects the performance for a prior quarter. The rates at which
we buy our tickets from the airlines and the commissions we receive, are
determined by each individual airline we do business with and are subject to
change and cancellation.
Most recently, there has been a general trend by the airlines to reduce
commissions paid to travel agents in order to reduce their distribution costs
and many travel experts believe that airlines will eliminate all commissions in
the near future. In response to these changes, many travel agencies have begun
to charge service fees to their customers.
Although our domestic travel business has generally been subject to the
same downward trends on commission rates, our commission rates to Latin America,
which accounts for approximately 75% of our travel business, have not been
subject to these general trends. From time to time, however, certain airlines
have reduced commission rates on Latin American routes, but in certain instances
reinstated them in order to meet competitive conditions. While we believe that
the pressure on airlines to reduce their distribution costs will continue and
eventually affect our present Latin American commission rates, we believe this
trend will be slower to be implemented by the airlines, because our travel
stores represent the airlines' primary distribution channel to Hispanics living
in the United States. Despite this, in February of 2000, we have begun to charge
service fees in certain markets where commissions have been reduced and are
prepared to introduce service charges throughout all of our travel stores should
conditions warrant it.
A large percentage of our travel business depends upon a limited number
of airlines and our business could be hurt if any of these carriers temporarily
curtail operations, were shut down, or went out of business. In November 1999,
Taesa Airlines, one of the major Mexican carriers, was shut down by the Mexican
government
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and eventually was declared bankrupt. The suspension and ultimate cessation of
Taesa Airlines had a significant adverse effect on our operations in the fourth
quarter of 1999, our busiest travel season. Results for the first quarter of
2000 also will be adversely impacted until the Taesa route system is absorbed by
the other airline carriers. In response to the cessation of Taesa, Mexicana and
Aeromexico, which are both controlled by a common parent company, reduced
commissions on routes from Tijuana to other parts of Mexico. To offset this
decline in commissions, we have begun to charge our customers a service charge.
OVERVIEW OF DISCONTINUED OPERATIONS
From our inception, until December 1999, when we made a decision to
discontinue our consumer financial services business, our primary activity was
our consumer financial services business, which serves the financing needs of
the low-income Hispanic population. Through our consumer financial services
business, we: (1) provide small, unsecured, personal loans; (2) purchase and
service consumer finance receivables that our customers generate for purchase of
consumer products sold by an affiliate of the Company, and by independent
retailers; (3) finance travel related services sold by our travel business; (4)
provide insurance products and insurance premium financing; (5) provided income
tax preparation services; (6) provide check cashing services; (7) purchase
consumer product inventory which we hold under a consignment arrangement until
sold by an affiliate company; and, (8) provide mortgage loan financing. We have
catered to the low-income Hispanic population during our 40 years of operations
by locating our facilities primarily in Hispanic communities, advertising in
Spanish and employing Spanish as the primary language in our locations.
Our customers are typically between the ages of 21 and 45, earn less
than $25,000 per year, have little or no savings, and have limited or short-term
employment histories. In addition, our customers typically have no or limited
prior credit histories and are generally unable to secure credit from
traditional lending sources. We base our credit decisions on our assessment of a
customer's ability to repay the obligation. In making a credit decision, in
addition to the size of the obligation, we generally consider a customer's
income level, type and length of employment, stability of residence, personal
references, and prior credit history with us. We also obtain a credit bureau
report and rating, if available, and seek to confirm other credit-related
information. We, however, are more susceptible to the risk that our customers
will not satisfy their repayment obligations than are less specialized consumer
finance companies or consumer finance companies that have more stringent
underwriting criteria.
At December 31, 1999, our gross finance receivables were approximately
$96.8 million consisting of the following:
- Small loan portfolios
- Consumer products portfolios
- Other portfolios
SMALL LOAN PORTFOLIOS. Small, unsecured, loans are issued primarily
through our Efectiva Card, which provides our customers with the ability to
access their established lines of credit with us by withdrawing cash from our
cash dispensing machines. Our cash dispensing machines are proprietary and are
not part of any networked system. We have presently installed our cash
dispensing machines in 34 locations owned by us or an affiliate and 36 locations
owned or leased by unaffiliated parties; principally, Kmart Corporation. Under
an agreement with Kmart, as amended, we can install our cash dispensing machines
in up to 100 Kmart stores over the next two years. The agreement, which can be
terminated for any reason by either Kmart or us at any time with 30 days notice,
requires us to pay a monthly license fee to Kmart for each location, plus
certain performance incentives, related to the Efectiva Card we originate and
renew from each Kmart location, and to pay all costs and expenses related to the
installation and maintenance of our cash dispensing machines and our on-site
employees.
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<PAGE> 21
CONSUMER PRODUCTS PORTFOLIO. We purchase and service our consumer
products receivables, which are generated through an affiliate's sale of brand
name consumer products through five stores in the greater Los Angeles area.
Consumer products that we finance include televisions, stereos, refrigerators,
washers and dryers, furniture and household accessories.
OTHER PORTFOLIOS. Our other receivables primarily include the financing
of airline tickets we sell, and financing for the purchase of products and
services that independent retailers sell, and small second trust mortgage loans.
OTHER DISCONTINUED BUSINESS ACTIVITIES
We act as an intermediary for an independent insurance carrier who sells
credit life and credit accident and health insurance to our customers. Through
this arrangement, we sell policies to our customers within limitations
established by agency contracts with that insurer. Credit life insurance
provides for the payment in full of the borrower's credit obligation to the
lender if the borrower dies. Credit accident and health insurance provides for
repayment of loan installments to the lender during the insured's period of
involuntary unemployment resulting from disability, illness or injury. Premiums
for such credit insurance are at the maximum authorized rates and are stated
separately in our disclosure to customers, as required by the Truth-in-Lending
Act and applicable state statutes. We do not act as an intermediary with respect
to the sales of credit insurance to non-borrowers. We earn a commission from the
insurance carrier on the sale of credit insurance, which is based in part on the
claims experience on policies that the insurance carrier sells through us.
Beginning in mid-1996, the independent insurance carrier reinsured the credit
life and credit accident and health risk with a newly formed subsidiary of the
Company. As a result of this reinsurance arrangement, the credit risk remains
with us. In 1996, we also began our automobile insurance and insurance premium
financing businesses. Our income tax service company began servicing our
customers in January 1998. In mid-1998, we began to offer fee-based check
cashing services. In the third quarter of 1998, we established a mortgage loan
business and began to offer and write small second trust mortgage loans.
For financial reporting purposes, we have accounted for the sale of our
consumer financial services business as a discontinued operation and have
reflected the estimated sale proceeds as "Net Assets of Discontinued
Operations," on our consolidated balance sheets. We have also recorded on our
consolidated statement of income an estimated loss of $6.1 million, less
estimated operating income from discontinued operations during the phase-out
period of $3.6 million, both net of applicable tax benefits of $1.0 million in
the fourth quarter of 1999, relating to our decision to sell this business.
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<PAGE> 22
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
NET REVENUES .................................................. 100.0% 100.0% 100.0%
COSTS AND EXPENSES
Selling and administrative expenses ........................... 80.1% 81.1% 90.3%
Occupancy costs ............................................... 14.0% 14.6% 15.7%
Depreciation and amortization ................................. 4.1% 4.1% 3.7%
------ ------ ------
Total costs and expenses ...................................... 98.2% 99.8% 109.7%
------ ------ ------
Pre-tax income (loss) from continuing operations .............. 1.8% 0.2% -9.7%
Provision (benefit) for income taxes .......................... 0.7% 0.1% -3.9%
------ ------ ------
Income (loss) from continuing operations ...................... 1.1% 0.1% -5.8%
------ ------ ------
Income from discontinued operations, net of taxes ............ 27.9% 49.0% 56.1%
Loss from disposal of discontinued operations, net of operating
income during phase-out period, net of taxes .............. -10.5% -- --
------ ------ ------
Net income .................................................... 18.5% 49.1% 50.3%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUES
Net revenues for the year ended December 31, 1999 from travel stores,
wholesale operations, and Internet and call center operations were $13.6
million, $0.6 million, and $0.1 million as compared to $8.5 million, $0.5
million, and $0.0 for the year ended December 31, 1998, respectively.
Net revenues from travel stores for the year ended December 31, 1999
increased $5.1 million, or 60.0%, to $13.6 million. Of this $5.1 million
increase, $3.2 million reflected the increase in net revenues from the
acquisition of 38 travel locations during 1999. The remaining increase in net
revenues of $1.9 million was primarily the result of an increase in sales from
existing travel stores and improvement in override commissions earned in 1999.
The commission rate earned on airline tickets sold at the Company's retail
stores in 1999 decreased slightly to 10.8% from 10.9% in 1998. The decrease in
commission rate earned in 1999 was the result of lower commission rates earned
from travel locations the Company acquired during 1999, offset by increases in
override commissions earned in 1999.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the year ended December 31, 1999
increased $4.2 million, or 57.2% to $11.4 million. Of this $4.2 million
increase, $1.5 million reflected the increase in selling and administrative
expenses as a result of the acquisition of 38 travel locations in 1999. The
remaining increase is primarily the result of an increase in call center and
Internet operating expenses of $1.0 million which commenced operation in July
1999; increase in corporate overhead of $1.0 million; and an increase in
marketing expenses for the Company's travel stores of $0.2 million. Selling and
administrative expenses as a percentage of net revenues decreased to 80.1% in
1999 from 81.1% in 1998.
OCCUPANCY COSTS
The Company's occupancy costs includes costs such as rental expense,
common area maintenance, insurance, and property and real estate taxes for the
Company's travel stores.
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<PAGE> 23
Occupancy costs for the year ended December 31, 1999 increased $0.7
million, or 54.0% to $2.0 million. The increase in occupancy costs in 1999 were
primarily due to the acquisition of 38 travel locations in 1999. Occupancy costs
as a percentage of net revenues decreased to 14.0% in 1999 from 14.6% in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the year ended December 31,
1999 increased $0.2 million, or 58.4% to $0.6 million. The increase in
depreciation and amortization expenses was primarily the result of an increase
in depreciation and goodwill amortization expense from the acquisition of 38
travel locations in 1999. Depreciation and amortization expenses as a percentage
of net revenues remained unchanged at 4.1% in 1999 and 1998.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for the year ended December 31, 1999
increased $0.2 million in 1999 to $0.2 million from $0.0 million in 1998. The
increase in income from continuing operations in 1999 was primarily the result
of an increase in operating income from the acquisition of 38 travel locations
in 1999 and an increase in override commissions earned in 1999 of approximately
$1.5 million. This was offset by increases in operating expenses of $1.0 million
due to the commencement of the Company's call center and Internet operations in
July 1999. Income from continuing operations as a percentage of net revenues
increased to 1.1% in 1999 from 0.1% in 1998.
DISCONTINUED OPERATIONS
Income from discontinued operations for the year ended December 31, 1999
decreased $0.4 million, or 9.3% to $4.0 million. This decrease is attributable
to a decrease in revenues from discontinued operations of $0.8 million and a
decrease in expenses from discontinued operations of $0.2 million, discussed
below, offset by a reduction in provision for income taxes from discontinued
operations of $0.2 million for the year ended December 31, 1999.
Revenues from discontinued operations for the year ended December 31,
1999 decreased $0.8 million, or 2.2% to $37.1 million. The decrease is primarily
attributable to a decrease in interest income to $22.6 million in 1999 from
$25.5 million in 1998 earned on the Company's finance receivable portfolios, a
decrease of $2.9 million. This decrease is primarily attributable to a decrease
in the finance receivable portfolios which averaged $94.2 million for the year
ended December 31, 1999, compared to $101.5 million for the year ended December
31, 1998. The decrease in interest income was offset by an increase in other
income to $14.5 million in 1999 from $12.4 million in 1998, an increase of $2.1
million. This increase is primarily attributable to increases in administrative
and membership fees, late fees, and extension fees on the Company's loan
portfolio. A change in the law effective January 1, 1999 allowed the Company to
charge late fees on a greater portion of its small loan portfolio.
Expenses from discontinued operations for the year ended December 31,
1999 decreased $0.2 million, or 0.5% to $30.4 million. The decrease in expenses
is primarily attributable to a decrease in operating expenses to $17.8 million
in 1999 from $18.0 million in 1998, a decrease of $0.2 million; increase in
provision for credit losses to $9.2 million in 1999 from $8.8 million in 1998,
an increase of $0.4 million; offset by a decrease in interest expense to $3.4
million in 1999 from $3.8 million in 1998, a decrease of $0.4 million. The
increase in the provision for credit losses in 1999 was attributable to a slight
deterioration in the credit quality of the finance receivable portfolios. The
decrease in interest expense in 1999 was attributable to a decrease in the
amount borrowed under the lines of credit and other borrowings which averaged
$41.7 million for the year ended December 31, 1999, compared to $48.2 million
for the year ended December 31, 1998.
Loss from disposal of discontinued operations in 1999 represents
estimated loss on the sale of the Company's financial services business in the
amount of $6.1 million, less estimated operating income of $3.6
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<PAGE> 24
million during the phase-out period, less applicable income tax benefits of $1.0
million. The $6.1 million loss is primarily attributable to a write-down of
assets in the amount of $5.9 million which management does not expect to realize
on the sale of the financial services business and $0.2 million of severance
costs associated with the discontinued operations at December 31, 1999.
NET INCOME
Net income for the year ended December 31, 1999 decreased $1.8 million,
or 40.1%, to $2.6 million. The decrease in net income is primarily the result of
a decrease in income from discontinued operations and loss on disposal of
discontinued operations for a combined total of $1.9 million in 1999. On
December 1, 1999, the Company announced its decision to discontinue the
operations of the Company's financial services business. In connection with this
decision, the Company recorded a loss on disposal of discontinued operations of
$1.5 million, net of tax benefits. The decrease in income from discontinued
operations was offset by improvement in continuing operations of the Company's
travel business in 1999 as compared to 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES
Net revenues for the year ended December 31, 1998 from travel stores and
wholesale operations were $8.5 million and $0.5 million as compared to $8.2
million and $0.5 million for the year ended December 31, 1997, respectively.
Net revenues from travel stores for the year ended December 31, 1998
increased $0.3 million, or 3.7%, to $8.5 million. The increase in revenues was
primarily the result of a 0.8% increase in the commission rate earned on airline
tickets sold to 10.9% in 1998 as compared to 10.1% in 1997.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the year ended December 31, 1998
decreased $0.6 million, or 7.9% to $7.3 million. The decrease in selling and
administrative expenses in 1998 were primarily due to decrease in marketing
expenses of $0.3 million and corporate overhead of $0.2 million as compared to
1997. Selling and administrative expenses as a percentage of net revenues
decreased to 81.1% in 1998 from 90.3% in 1997.
OCCUPANCY COSTS
Occupancy costs for the year ended December 31, 1998 decreased $0.1
million, or 5.4% to $1.3 million. The decrease in occupancy costs in 1998 was
primarily due to the Company's decision to close and consolidate selected travel
locations acquired in 1996 that operated in the Company's existing markets.
Occupancy costs as a percentage of net revenues decreased to 14.6% in 1998 from
15.7% in 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the year ended December 31,
1998 increased $0.1 million, or 15.6% to $0.4 million. The increase in
depreciation and amortization expenses was primarily due to the purchase of new
equipment in 1998 for selected travel locations and the corporate offices.
Depreciation and amortization expenses as a percentage of net revenues increased
slightly to 4.1% in 1998 from 3.7% in 1997.
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<PAGE> 25
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for the year ended December 31, 1998
increased $0.5 million in 1998 to $0.0 million from a loss from continuing
operations of $0.5 million in 1997. The improvement in income from continuing
operations in 1998 was primarily the result of an increase in the commission
rate earned on airline ticket sales at the Company's travel stores combined with
a decrease in selling and administrative expenses offset by an increase in the
provision for taxes. Income from continuing operations as a percentage of net
revenues was 0.1% in 1998 as compared to a loss from continuing operations of
5.8% of net revenues in 1997.
DISCONTINUED OPERATIONS
Income from discontinued operations for the year ended December 31, 1998
decreased $0.5 million, or 10.4% to $4.4 million. This decrease is attributable
to a decrease in revenues from discontinued operations of $5.3 million, offset
by a decrease in expenses from discontinued operations of $4.6 million,
discussed below and a reduction in provision for income taxes from discontinued
operations of $0.2 million for the year ended December 31, 1998.
Revenues from discontinued operations for the year ended December 31,
1998 decreased $5.3 million, or 12.4% to $37.9 million. The decrease is
primarily attributable to a decrease in interest income to $25.5 million in 1998
from $30.3 million in 1997 earned on the Company's finance receivable
portfolios, a decrease of $4.8 million. This decrease is primarily attributable
to a decrease in the finance receivable portfolios which averaged $101.5 million
for the year ended December 31, 1998, compared to $119.6 million for the year
ended December 31, 1997. Other income decreased to $12.4 million in 1998 from
$12.9 million in 1997, a decrease of $0.5 million. This decrease is primarily
attributable to a decrease in late fees and extension fees as a result of a
decrease in the average balance of the finance receivable portfolios in 1998.
Expenses from discontinued operations for the year ended December 31,
1998 decreased $4.6 million, or 13.1% to $30.6 million. The decrease in expenses
is primarily attributable to a decrease in provision for credit losses to $8.8
million in 1998 from $12.3 million in 1997, a decrease of $3.5 million; a
decrease in interest expense to $3.8 million in 1998 from $5.4 million in 1997,
a decrease of $1.6 million; offset by an increase in operating expenses to $18.0
million in 1998 from $17.5 million in 1997, an increase of $0.5 million. The
decrease in the provision for credit losses in 1998 was attributable to
improvement in the credit quality of the finance receivable portfolios. The
decrease in interest expense in 1998 was attributable to a decrease in the
average amount borrowed under the lines of credit which averaged $48.2 million
for the year ended December 31, 1998, compared to $64.1 million for the year
ended December 31, 1997.
NET INCOME
Net income for the year ended December 31, 1998 was substantially
unchanged from net income of $4.4 million in 1997. This was primarily the result
of an increase in income from continuing operations of $0.5 million in 1998,
offset by a decrease in income from discontinued operations of $0.5 million in
1998 as compared to 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES
Net revenues for the year ended December 31, 1997 from travel stores and
wholesale operations were $8.2 million and $0.5 million as compared to $2.0
million and $0.4 million for the year ended December 31, 1996, respectively.
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<PAGE> 26
Net revenues from travel stores for the year ended December 31, 1997
increased $6.2 million, or 310.0%, to $8.2 million. The increase in net revenues
was primarily the result of acquiring 24 travel locations in June 1996 and 55
travel locations in December 1996. The commission earned on airline tickets sold
at the Company's retail stores in 1997 increased to 10.1% from 9.8% in 1996. The
increase in percentage of commission earned in 1997 was the result of
improvement in commissions earned from travel locations the Company acquired
during 1996.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the year ended December 31, 1997
increased $4.7 million, or 145.3%, to $7.9 million. Of this $4.7 million
increase, $4.3 million reflected the increase in selling and administrative
expenses as the result of acquiring 24 travel locations in June 1996 and 55
travel locations in December 1996. The remaining increase in selling and
administrative expenses was a result of increases in marketing expenses of $0.4
million in 1997. Selling and administrative expenses as a percentage of net
revenues decreased to 90.3% in 1997 from 131.9% in 1996.
OCCUPANCY COSTS
Occupancy costs for the year ended December 31, 1997 increased $1.2
million, or 524.1% to $1.4 million. The increase in occupancy costs in 1998 was
primarily the result of acquiring 24 travel locations in June 1996 and 55 travel
locations in December 1996. Occupancy costs as a percentage of net revenues
increased to 15.7% in 1997 from 9.0% of in 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the year ended December 31,
1997 increased to $0.3 million as compared to $0.0 million in 1996. The increase
in depreciation and amortization expenses was primarily the result of the 1996
acquisitions. Depreciation and amortization expenses as a percentage of net
revenues increased to 3.7% in 1997 from 2.1% in 1996.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the year ended December 31, 1997
decreased $0.1 million, or 19.2%, to $0.5 million. The decrease in loss from
continuing operations was primarily the result of acquiring the travel locations
in 1996. Loss from continuing operations as a percentage of revenues decreased
to 5.8% in 1997 from 25.8% in 1996.
DISCONTINUED OPERATIONS
Income from discontinued operations for the year ended December 31, 1997
decreased $1.6 million, or 24.7% to $4.9 million. This decrease is attributable
to an increase in revenues from discontinued operations of $9.2 million, an
increase in expenses from discontinued operations of $12.0 million, discussed
below, and a reduction in provision for income taxes from discontinued
operations of $1.2 million for the year ended December 31, 1997.
Revenues from discontinued operations for the year ended December 31,
1997 increased $9.2 million, or 27.2% to $43.2 million. The increase is
primarily attributable to an increase in interest income to $30.3 million in
1997 from $25.8 million in 1996 earned on the Company's finance receivable
portfolios, an increase of $4.5 million. This increase is primarily attributable
to an increase in the finance receivable portfolios which averaged $119.6
million for the year ended December 31, 1997, compared to $108.6 million for the
year ended December 31, 1996. Other income increased to $12.9 million in 1997
from $8.2 million in 1996, an increase of
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<PAGE> 27
$4.7 million. This increase is primarily attributable to increases in
administrative and membership fees earned on the Company's Efectiva Card which
was introduced in May 1997.
Expenses from discontinued operations for the year ended December 31,
1997 increased $12.0 million, or 52.4% to $35.2 million. The increase in
expenses is primarily attributable to an increase in operating expenses to $17.5
million in 1997 from $9.3 million in 1996, an increase of $8.2 million; increase
in provision for credit losses to $12.3 million in 1997 from $9.1 million in
1996, an increase of $3.2 million; and an increase in interest expense to $5.3
million in 1997 from $4.7 million in 1996, an increase of $0.6 million. The
increase in operating expenses in 1997 was attributable to $2.3 million incurred
in connection with the sale of auto sales business, which commenced operations
in July 1996; $4.4 million due to an increase in expenses from the expansion of
the loan businesses, including an increase in the number of employees and
related payroll; $0.6 million due to higher depreciation and amortization
expenses; and $0.7 million due to an increase in other administrative costs. The
increase in the provision for credit losses in 1997 was attributable to a
deterioration in the credit quality of the finance receivable portfolios. The
increase in interest expense in 1997 was attributable to an increase in the
amounts borrowed under the lines of credit which averaged $64.1 million for the
year ended December 31, 1997, compared to $58.7 million for the year ended
December 31, 1996.
NET INCOME
Net income for the year ended December 31, 1997 decreased $1.5 million,
or 25.3%, to $4.4 million. The decrease in net income was primarily the result
of an decrease of $1.6 million in income from discontinued operations in 1997 as
compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
CONTINUING OPERATIONS
We primarily finance our continuing operations through the cash flow
generated from operations. In June 1996, we completed an initial public offering
and prior to that we received periodic contributions to capital by Banner
Holdings, Inc. ("Holdings") and related entities.
Net cash used by continuing operations totaled $4.6 million in 1999. Net
cash provided by continuing operations totaled $2.6 million in 1998. Net cash
used in continuing operations totaled $10.2 million in 1997. During these
periods, the primary source of net cash provided by operations was depreciation
and amortization, changes in notes receivable from affiliates, changes in
accrued liabilities and income tax receivables.
In 1999, cash flows provided by the operating activities of continuing
operations of $3.6 million plus use of cash reserves were sufficient to complete
acquisitions totaling $5.0 million and capital expenditures of $2.5 million. In
addition, the Company purchased 100,000 shares of treasury stock for $0.7
million. Net cash flow used by continuing operations totaled $4.6 million in
1999.
In 1998, cash flows provided by the operating activities of continuing
operations of $2.7 million were used to purchase $0.1 million of capital
additions and betterments. Net cash flow provided by continuing operations
totaled $2.6 million in 1998.
In 1997 cash used in the operating activities of continuing operations
were $9.3 million. Of this total, $5.0 million was attributable to an increase
in notes receivable from affiliates; $2.6 million was due to the reduction in
accrued expenses and other current liabilities, and $1.7 million resulted from
an increase in income taxes receivable. During 1997 the Company purchased $0.6
million of capital additions and betterments and funded $0.3 million in
acquisitions. Net cash used in continuing operations totaled $10.2 million in
1997.
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<PAGE> 28
Our continuing operations generate sufficient capital to fund their
ongoing operating activities. Capital expenditures for renewals and betterments
for our ongoing operations can be met from the Company's existing operating cash
flow. However, development of our Internet business will require substantial
capital to support marketing, systems development and expansion. In 1999,
acquisitions of travel agencies and other capital expenditures totaled
approximately $7.5 million. Additional travel agency acquisitions and continued
development of our Internet business will require substantial capital and is
expected to be funded through the sale of our discontinued operations.
DISCONTINUED OPERATIONS
We primarily finance our discontinued operations through the cash flow
generated from the discontinued operations and with borrowings under the Line of
Credit which expires June 12, 2000. In 1999, 1998 and 1997, net cash provided by
discontinued operations totaled $1.6 million, $1.8 million and $8.2 million,
respectively.
In 1999 net cash provided from the operations of discontinued operations
totaled $12.4 million and was sufficient to pay down the line of credit by $10.2
million and fund capital expenditures and acquisitions totaling $0.8 million.
During this period net cash flow from installment contracts and other contract
receivables totaled $0.2 million. These activities produced a net cash flow of
$1.6 million in 1999.
In 1998 net cash provided from the operations of discontinued operations
totaled $18.0 million and was sufficient to pay down the line of credit and
other borrowings by $10.9 million and fund capital expenditures of $1.4 million.
During this period net cash flow used in the issuance of installment contracts
and other contract receivables totaled $3.9 million. These activities produced a
net cash flow of $1.8 million in 1998.
In 1997 net cash provided from the operations of discontinued operations
totaled $18.8 million and was sufficient to pay down the line of credit net of
other borrowings by $12.0 million and fund capital expenditures and acquisitions
totaling $2.0 million. During this period net cash flow provided through the
issuance of installment contracts and other contract receivables totaled $3.4
million. These activities produced a net cash flow of $8.2 million in 1997.
Our discontinued operations require substantial capital to finance the
business. Currently, the discontinued operations are funded with cash flow from
operations and with borrowings under the Line of Credit which expires June 12,
2000. Holdings and all of our significant domestic subsidiaries are guarantors
under the Line of Credit. In addition, we have pledged substantially all of our
assets, including our receivables, and the stock of all of our significant
subsidiaries as collateral for the amounts our discontinued operations borrow
under the Line of Credit. The maximum amount available under the Line of Credit
is $100.0 million. However, the amount of credit available at any one time under
the Line of Credit is limited to 70% of eligible contracts. Credit facilities
are typically limited to a certain percentage of such eligible contracts or
receivables. As of December 31, 1999, the total amount available to us under the
Line of Credit was $56.7 million, of which approximately $43.6 million was
outstanding, including approximately $1.8 million in letters of credit. We pay
commitment fees to the lenders for the unused portion of the Line of Credit.
These commitment fees are equal to 37.5 basis points per year times the average
daily amount by which the maximum amount available under the Line of Credit
exceeds the amount we have borrowed under the line.
Interest on amounts outstanding under the Line of Credit is, at our
option, equal to either (a) 87.5 basis points above the higher of the prime rate
Wells Fargo Bank announces or the federal funds rate plus 50 basis points or (b)
225 basis points above the interest rate per annum at which Wells Fargo Bank
offers deposits in dollars to prime banks in the London Eurodollar market. The
aggregate amount of indebtedness outstanding under the Line of Credit at
December 31, 1999 bore interest at the rate of 8.6%. We are required to maintain
interest rate hedging arrangements for at least 50% of our Senior Funded Debt
(as defined in the Line of Credit). However, this percentage may be reduced by
the amount (expressed as a percentage) of the ratio of any
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<PAGE> 29
permitted fixed rate indebtedness issued by the Company to the total Senior
Funded Debt (as defined in the Line of Credit). We have a hedge on $40.0 million
as of December 31, 1999. This hedging agreement is for the period July 21, 1997
through July 21, 2000 at a total cost of $136,000.
The Line of Credit restricts, among other things, our ability to (i)
incur additional indebtedness, (ii) pay indebtedness prior to the date when due,
(iii) pay dividends, make certain other restricted payments or consummate
certain asset sales, (iv) merge or consolidate with any other person, (v) enter
into certain transactions with affiliates, (vi) incur indebtedness that is
subordinate in priority and right of payment to amounts outstanding under the
Line of Credit, and (vii) make future acquisitions in excess of an aggregate
amount.
The Line of Credit also contains certain restrictive covenants that
require, among other things, us to maintain specific financial ratios and to
satisfy certain financial tests. These include an Interest Coverage Ratio (as
defined in the Line of Credit) as of the end of each quarter of not less than
1.85 to 1.00 and a Tangible Net Worth test (as defined in the Line of Credit) as
of the end of each quarter of not less than $50 million, plus an amount equal to
75% of Net Income (as defined in the Line of Credit) earned in each quarter
(with no deduction for a net loss in a quarter), plus an amount equal to 75% of
the aggregate increases in stockholders' equity as a result of the sale of our
capital stock. The breach of any of these covenants or other terms of the Line
of Credit could result in a default under the Line of Credit, in which event the
lenders could seek to declare all amounts outstanding under the Line of Credit,
together with accrued and unpaid interest, to be immediately due and payable. At
December 31, 1999, we were in compliance with these financial ratios and tests.
YEAR 2000
The Company uses a number of computer programs across both its
continuing and discontinued operations and has worked 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.
Subsequent to the end of 1999, the Company's continuing and discontinued
systems and operations are fully functioning and have not experienced any
significant issues related to the Year 2000. While the Company is encouraged by
the results of its Year 2000 efforts, monitoring for any potential problems will
continue throughout 2000.
Although the Company does not believe any continued exposure exists, for
either its continuing or discontinued operations, the Company has a contingency
plan for possible Year 2000 issues and will continue to update these plans based
on assessments of any subsequent Year 2000 issues as additional information
becomes available.
CONTINUING OPERATIONS
The travel systems utilized to conduct business are provided to each of
our travel stores and our Internet business through global distribution systems
(GDS), operated by Sabre, Amadeus and Worldspan. Both Sabre, Amadeus and
Worldspan are world leaders in the electronic distribution of travel-related
products and services. GDS systems provide us with electronic booking systems
and databases containing flight schedules and availability, and published fares
information for approximately 400 airlines located throughout the world. We have
received assurances from GDS that their systems are Year 2000 compliant and have
noted no problems to date.
29
<PAGE> 30
Costs associated with the Year 2000 program for our continuing
operations have been expensed as incurred, were funded from operating income and
totaled less than $0.1 million. Subsequent to the end of 1999, the Company's
continuing operations are fully functioning and have not experienced any
significant issues related to the Year 2000.
DISCONTINUED OPERATIONS
In 1998, the Company engaged an outside consulting firm 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 in the Company's discontinued operations to
evaluate, process, approve, initiate and collect on loans in the Company's
various finance portfolios.
The Company completed the required software modifications and testing in
the third quarter of 1999 for its discontinued operations. Costs associated with
the Year 2000 program for the discontinued operations have been expensed as
incurred, were funded from operating income of the discontinued operations and
totaled approximately $0.8 million. Subsequent to the end of 1999, the Company's
systems relating to discontinued operations are fully functioning and have not
experienced any significant issues related to the Year 2000.
ITEM 7A. 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.
CONTINUING OPERATIONS
We derive substantially all of our revenue from continuing operations
from a combination of: (1) sales of discounted air fares; (2) commissions on
published fares for both domestic and travel to Latin America; and, (3)
performance based compensation referred to "override commissions."
We depend on our airlines for access to non-published fares for which we
have no long-term or exclusive contracts. Our business could be hurt if the
airlines we do business with (1) refuse to renew our contracts for non-published
fares; (2) renew the contracts on less favorable terms; or, (3) cancel our
contracts. Non-published fares are tickets we acquire from the airlines and
resell to our customers at discounts off published fares. We have contracts with
11 airlines that permit us to acquire non-published fares. These contracts are
typically for a short period, are cancelable on a short notice and do not
require the airlines to provide us with a specific quantity of tickets or deal
with us exclusively.
A significant portion of our revenue depends on regular and override
commissions paid to us by the airlines for bookings made through our travel
stores and Internet sites. The airlines we do business with are not obligated to
pay any specific commissions, or to pay commissions at all.
Most recently, there has been a general trend by the airlines to reduce
commissions paid to travel agents in order to reduce their distribution costs
and many travel experts believe that airlines will eliminate all commissions in
the near future. In response to these changes, many travel agencies, including
us, have begun to charge service fees to their customers.
30
<PAGE> 31
Although our domestic travel business has been subject to the same
downward trends on commission rates, our commission rates on tickets to Latin
America, which account for 75% of our travel business, have not been subject to
these general trends. From time to time, however, certain airlines have reduced
commission rates on Latin American routes, but have generally reinstated them in
order to meet competitive conditions. While we believe that the pressure on
airlines to reduce their distribution costs will continue and eventually effect
our present Latin American commission rates, we believe this trend will be
implemented by the airlines more slowly, because our travel stores represent the
airlines' primary distribution channel to Hispanics living in the United States.
Despite this, we have begun to charge service fees in certain markets where
commissions have been reduced and are prepared to introduce service charges
throughout all of our travel stores should conditions warrant it.
A large percentage of our travel business depends upon a limited number
of airlines and our business could be hurt if any of these carriers temporarily
curtail operations, were shut down, or went out of business. In November of
1999, Taesa Airlines, one of the major Mexican carriers, was shut down by the
Mexican government and eventually was declared bankrupt. The suspension and
ultimate cessation of Taesa Airlines had a significant adverse effect on our
operations in the fourth quarter of 1999, our busiest travel season. Results for
the first quarter of 2000 also will be adversely impacted until the Taesa route
system is absorbed by other airline carriers. In response to the cessation of
Taesa, Mexicana and Aeromexico, which are controlled by a common parent company,
reduced commissions on routes from Tijuana to other parts of Mexico. To offset
this decline in commissions, we have begun to charge our customers a service
charge.
DISCONTINUING OPERATIONS
Our discontinued operations are exposed to interest rate risk in the
form of variable interest rates on our Line of Credit. During 1999, the average
interest rate charged on the Line of Credit which was $41.8 million at December
31, 1999, was 7.7% excluding commitment fees. We have hedged our interest rate
risk by purchasing a hedge agreement in the nominal amount of $40.0 million. The
interest rate hedge agreement caps our interest rate at 8.75% against $40.0
million of the $31.0 million of Libor based balance outstanding under the Line
of Credit outstanding at December 31, 1999. The remaining $10.8 million was
unprotected against interest rate fluctuations.
Our discontinued operations have an interest rate risk exposure of 0.32%
on the difference between the interest rate cap of 8.75% and the 8.43% average
interest rate for 1999 on the $31.0 million of Libor outstanding under the $40.0
million hedge agreement. We have additional interest rate risk exposure on the
$10.8 million amount outside of the interest rate hedge agreement. The 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, projected after-tax
earnings would decline approximately $0.2 million in 2000 and $0.4 million in
2001. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K" for our financial statements, and the notes thereto, and the financial
statement schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
<PAGE> 32
PART III
The Securities and Exchange Commission (the "SEC") allows us to
"incorporate by reference" the information we file with them, which means that
we can disclose important information to you by referring you to those
documents. The information incorporated by reference is considered to be part of
this Annual Report. We incorporate by reference in Items 10 to 13 below certain
sections of our definitive proxy statement, to be filed pursuant to Regulation
14A with the SEC within 120 days after December 31, 1999.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
We incorporate by reference in this Annual Report the information
required by this Item 10 contained in the sections entitled "Discussion of
Proposals Recommended by the Board -- Proposal 1: Elect Four Directors --
Nominees," "Information About Directors and Executive Officers," and
"Information About CFAC Common Stock Ownership -- Did Directors, Executive
Officers and Greater-Than-10% Stockholders Comply With Section 16(a) Beneficial
Ownership Reporting in 1999?" of our definitive proxy statement, to be filed
pursuant to Regulation 14A with the SEC within 120 days after December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference in this Annual Report the information
required by this Item 11 contained in the sections entitled "Information About
Directors and Executive Officers" and "Information About CFAC Common Stock
Ownership -- Compensation Committee Interlocks and Insider Participation" of our
definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC
within 120 days after December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference in this Annual Report the information
required by this Item 12 contained in the section entitled "Information About
CFAC Common Stock Ownership" of our definitive proxy statement, to be filed
pursuant to Regulation 14A with the SEC within 120 days after December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate herein by reference in this Annual Report the information
required by this Item 13 contained in the section entitled "Information About
Directors and Executive Officers -- Certain Relationships and Related
Transactions" of our definitive proxy statement, to be filed pursuant to
Regulation 14A with the SEC within 120 days after December 31, 1999.
32
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS. Reference is made to the Index to Consolidated
Financial Statements on page F-1 for a list of financial statements
filed as part of this report.
FINANCIAL STATEMENT SCHEDULES. All financial statement schedules, except
for Schedule II, are omitted because of the absence of the conditions
under which they are required to be provided or because the required
information is included in the financial statements listed above and/or
related notes.
LIST OF EXHIBITS. The following is a list of exhibits filed as a part of
this report, including any management contracts or compensatory plans or
arrangements required to be filed as an exhibit to this report. Such
management contracts or compensatory plans or arrangements are
identified in the list below.
DESCRIPTION
EXHIBIT NO.
- -----------
2.2(4) Agreement and Plan of Reorganization by and between Central
Financial Acceptance Corporation and Mission Savings and Loan
Association, a Federal Association, dated as of February 11, 1998.
3.1(6) Certificate of Incorporation of Central Financial Acceptance
Corporation, as amended.
3.2(1) By-laws of Central Financial Acceptance Corporation.
10.1(6)+ 1996 Stock Option Plan, as amended.
10.2(1)+ Indemnification Agreement between Central Financial Acceptance
Corporation and certain directors and officers of the Company.
10.3(1)+ Employment Agreement between Central Financial Acceptance
Corporation and Gary M. Cypres dated as of June 24, 1996.
10.4(1) Financing Agreement between Central Installment Credit
Corporation, Banner's Central Electric, Inc., Central Ram, Inc.
and Banner Holdings, Inc. dated as of June 24, 1996.
10.5(5) Option Agreement between Central Financial Acceptance
Corporation, Banner's Central Electric, Inc. and Banner Holdings,
Inc. dated as of June 24, 1996.
10.6(5) Operating Agreement between Central Financial Acceptance
Corporation, Banner's Central Electric, Inc. and Banner Holdings,
Inc. dated as of June 24, 1996.
10.7(5) Tax Sharing Agreement between Central Financial Acceptance
Corporation, Banner's Central Electric, Inc. and Banner Holdings,
Inc. dated as of June 24, 1996.
10.8(5) Indemnification Agreement between Central Financial Acceptance
Corporation, Banner's Central Electric, Inc. and Banner Holdings,
Inc. dated as of June 24, 1996.
33
<PAGE> 34
10.9(5) Indemnification Agreement dated June 24, 1996 between Central
Financial Acceptance Corporation and Banner Holdings, Inc.
10.10 Reserved.
10.11 Reserved.
10.12(5)+ Central Financial Acceptance Corporation Supplemental Executive
Retirement Plan dated as of June 24, 1996.
10.13(5)+ Central Financial Acceptance Corporation Executive Deferred
Salary and Bonus Plan dated as of June 24 , 1996.
10.14 Reserved.
10.15 Reserved.
10.16 Reserved.
10.17 Reserved.
10.18 Reserved.
10.19 Reserved.
10.20 Reserved.
10.21 Reserved.
10.22(1)+ Adoption Agreement for the Qualified Benefits, Inc. Regional
Prototype Non-Standardized Profit Sharing Plan and Trust
effective as of November 1, 1989.
10.23 Reserved.
10.24 Reserved.
10.25 Reserved.
10.26(2)+ Employment Agreement between Central Financial Acceptance
Corporation and Anthony Fortunato dated October 25, 1996.
10.27(2)+ Employment Agreement between Central Financial Acceptance
Corporation and Gerard T. McMahon dated August 30, 1996.
10.28 Reserved.
10.29(2) Agreement to Transfer Business Operations among Banner's Central
Electric, Inc., Central Consumer Finance Company, Central
Financial Acceptance Corporation and Central Auto Sales, Inc.
dated as of July 31, 1996.
10.30 Reserved.
34
<PAGE> 35
10.31(2) Amendment One to Financing Agreement between Central Installment
Credit Corporation, Banner's Central Electric, Inc., Central Ram,
Inc. and Banner Holdings, Inc., dated as of July 1, 1996.
10.32 Reserved.
10.33 Reserved.
10.34(3) Revolving Loan Agreement, dated as of June 13, 1997, by and among
the Company, each Lender who is named therein or who may
thereafter become a party to the Revolving Loan Agreement and
Wells Fargo Bank, National Association, as Agent and Arranger and
Notes executed by the Company with each of the Lenders.
10.35(3) Security Agreement, dated as of June 13, 1997, by and among the
Company and each of the Persons listed on the signature pages
thereto, together with other Persons who may become a party
thereto, jointly and severally in favor of Wells Fargo Bank,
National Association, as Agent.
10.36(3) Pledge Agreement, dated as of June 13, 1997, by and among Banner
Holdings, Inc., Banner's Central Electric, Inc. the Company and
each of the Persons listed on the signature pages thereto,
together with other Persons who may become a party thereto,
jointly and severally in favor of Wells Fargo Bank, National
Association as Agent under the Revolving Loan Agreement, and in
favor of each of the Lenders named therein.
10.37(3) Trademark Collateral Assignment, dated as of June 13, 1997, by
Banner Holdings, Inc. each of the Persons listed on the signature
pages thereto, together with other Persons who may become a party
thereto, jointly and severally in favor of Wells Fargo Bank,
National Association, as Agent for the benefit of the Lenders that
are or become a party to the Revolving Loan Agreement.
10.38(3) Subsidiary Guaranty, dated as of June 13, 1997, by each of the
Persons listed on the signature pages thereto, together with each
other Person who may become a party thereto, jointly and severally
in favor of Wells Fargo Bank, National Association, as Agent for
the benefit of the Lenders that are a party to the Revolving Loan
Agreement.
10.39(5) Amendment No. 1 to Revolving Loan Agreement, dated as of November
17, 1997, by and among the Company, the Lenders party thereto and
Wells Fargo Bank, National Association, as Agent.
10.40(5) Amendment No. 2 to Revolving Loan Agreement, dated as of
March 26, 1998, by and among the Company, the Lenders party
thereto and Wells Fargo Bank, National Association as Agent.
10.41 Amendment No. 3 to Revolving Loan Agreement, dated as of
December 31, 1998, by and among the Company, the Lenders party
thereto and Wells Fargo Bank, National Association as Agent.
10.42 Employment Agreement between Central Financial Acceptance
Corporation and Gary M. Cypres dated as of July 14, 1999.
35
<PAGE> 36
21(5) Subsidiaries of the Registrant.
27 Financial Data Schedule.
- --------
(1) Incorporated by reference to exhibits filed with the SEC in the
Company's Registration Statement on Form S-1 (Registration No.
333-3790).
(2) Incorporated by reference to exhibits filed with the SEC in the
Company's Annual Report on Form 10-K for the year ended December
31, 1996.
(3) Incorporated by reference to exhibits filed with the SEC in the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
(4) Incorporated by reference to the exhibit filed with the SEC on
February 24, 1998 in the Company's Report on form 8-K.
(5) Incorporated by reference to the exhibits filed with the SEC in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(6) Incorporated by reference to the exhibits filed with the SEC in
the Company's Quarterly Report Form 10-Q for the quarter ended
June 30, 1999.
+ Management contract or compensatory plan or arrangement required
to be filed as an exhibit.
(b) REPORTS ON FORM 8-K.
The company filed a Current Report on Form 8-K on December 6, 1999
relating to a press release announcing the Board's approval of a plan to
separate the Company's financial services and internet/travel components through
the sale of the financial services business.
(c) EXHIBITS. Reference is made to the Exhibit Index and exhibits
filed as a part of this report.
(d) Additional financial statements. Not applicable.
36
<PAGE> 37
GLOSSARY
Set forth below are definitions of some of the terms used in this Annual
Report on Form 10-K.
"ARC" Airline Reporting Corporation.
"Banner" Banner's Central Electric, Inc., an affiliate
of the Company.
"Consumer Product Portfolio" The Company's portfolio of consumer product
contracts from sales by Banner.
"Company" Central Financial Acceptance Corporation and
its subsidiaries.
"Exchange Act" Securities Exchange Act of 1934, as amended.
"GDS" Global distribution systems
"Holdings" Banner Holdings, Inc., the sole shareholder of
Banner.
"Independent Retail The Company's portfolio of consumer finance
Finance Portfolio" finance contracts from sales by independent
retailers.
"Line of Credit" Revolving loan agreement by and among the
Company and Wells Fargo Bank, N.A., as agent,
and several banks.
"Mortgage Loan Portfolio" The Company's portfolio of mortgage loan
contracts.
"Premium Finance Portfolio" The Company's portfolio of insurance premium
finance contracts.
"SEC" The Securities and Exchange Commission.
"Securities Act" Securities Act of 1933, as amended.
"Small Loan Portfolio" The Company's portfolio of loan contracts.
"Travel Finance Portfolio" The Company's portfolio of travel finance
contracts.
"Unruh Act" California Retail Installment Sales Act.
"West Coast" West Coast Private Equity Partners, L.P.
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 14 day of April
2000.
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
By: /s/ Gary M. Cypres
-----------------------------------------
Gary M. Cypres
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gary M. Cypres Chairman of the Board of Directors April 14, 2000
- ---------------------------------------- (Principal Executive Officer)
Gary M. Cypres
/s/ Anthony S. Fortunato President April 14, 2000
- ----------------------------------------
Anthony S. Fortunato
/s/ Salvatore J. Caltagirone Director April 14, 2000
- ----------------------------------------
Salvatore J. Caltagirone
/s/ Jose de Jesus Legaspi Director April 14, 2000
- ----------------------------------------
Jose de Jesus Legaspi
/s/ William R. Sweet Director April 14, 2000
- ----------------------------------------
William R. Sweet
/s/ A. Keith Wall Vice President and Chief April 14, 2000
- ---------------------------------------- Financial Officer
A. Keith Wall (Principal Financial Officer)
</TABLE>
38
<PAGE> 39
EXHIBIT INDEX
DESCRIPTION
EXHIBIT NO.
- -----------
2.2(4) Agreement and Plan of Reorganization by and between Central
Financial Acceptance Corporation and Mission Savings and Loan
Association, a Federal Association, dated as of February 11, 1998.
3.1(6) Certificate of Incorporation of Central Financial Acceptance
Corporation, as amended.
3.2(1) By-laws of Central Financial Acceptance Corporation.
10.1(6)+ 1996 Stock Option Plan, as amended.
10.2(1)+ Indemnification Agreement between Central Financial Acceptance
Corporation and certain directors and officers of the Company.
10.3(1)+ Employment Agreement between Central Financial Acceptance
Corporation and Gary M. Cypres dated as of June 24, 1996.
10.4(1) Financing Agreement between Central Installment Credit
Corporation, Banner's Central Electric, Inc., Central Ram, Inc.
and Banner Holdings, Inc. dated as of June 24, 1996.
10.5(5) Option Agreement between Central Financial Acceptance
Corporation, Banner's Central Electric, Inc. and Banner Holdings,
Inc. dated as of June 24, 1996.
10.6(5) Operating Agreement between Central Financial Acceptance
Corporation, Banner's Central Electric, Inc. and Banner Holdings,
Inc. dated as of June 24, 1996.
10.7(5) Tax Sharing Agreement between Central Financial Acceptance
Corporation, Banner's Central Electric, Inc. and Banner Holdings,
Inc. dated as of June 24, 1996.
10.8(5) Indemnification Agreement between Central Financial Acceptance
Corporation, Banner's Central Electric, Inc. and Banner Holdings,
Inc. dated as of June 24, 1996.
10.9(5) Indemnification Agreement dated June 24, 1996 between Central
Financial Acceptance Corporation and Banner Holdings, Inc.
10.10 Reserved.
10.11 Reserved.
10.12(5)+ Central Financial Acceptance Corporation Supplemental Executive
Retirement Plan dated as of June 24, 1996.
39
<PAGE> 40
10.13(5)+ Central Financial Acceptance Corporation Executive Deferred
Salary and Bonus Plan dated as of June 24 , 1996.
10.14 Reserved.
10.15 Reserved.
10.16 Reserved.
10.17 Reserved.
10.18 Reserved.
10.19 Reserved.
10.20 Reserved.
10.21 Reserved.
10.22(1)+ Adoption Agreement for the Qualified Benefits, Inc. Regional
Prototype Non-Standardized Profit Sharing Plan and Trust
effective as of November 1, 1989.
10.23 Reserved.
10.24 Reserved.
10.25 Reserved.
10.26(2)+ Employment Agreement between Central Financial Acceptance
Corporation and Anthony Fortunato dated October 25, 1996.
10.27(2)+ Employment Agreement between Central Financial Acceptance
Corporation and Gerard T. McMahon dated August 30, 1996.
10.28 Reserved.
10.29(2) Agreement to Transfer Business Operations among Banner's Central
Electric, Inc., Central Consumer Finance Company, Central
Financial Acceptance Corporation and Central Auto Sales, Inc.
dated as of July 31, 1996.
10.30 Reserved.
10.31(2) Amendment One to Financing Agreement between Central Installment
Credit Corporation, Banner's Central Electric, Inc., Central Ram,
Inc. and Banner Holdings, Inc., dated as of July 1, 1996.
10.32 Reserved.
10.33 Reserved.
10.34(3) Revolving Loan Agreement, dated as of June 13, 1997, by and
among the Company, each Lender who is named therein or who may
thereafter become a party to the Revolving Loan Agreement and
Wells Fargo Bank, National
40
<PAGE> 41
Association, as Agent and Arranger and Notes executed by the
Company with each of the Lenders.
10.35(3) Security Agreement, dated as of June 13, 1997, by and among the
Company and each of the Persons listed on the signature pages
thereto, together with other Persons who may become a party
thereto, jointly and severally in favor of Wells Fargo Bank,
National Association, as Agent.
10.36(3) Pledge Agreement, dated as of June 13, 1997, by and among Banner
Holdings, Inc., Banner's Central Electric, Inc. the Company and
each of the Persons listed on the signature pages thereto,
together with other Persons who may become a party thereto,
jointly and severally in favor of Wells Fargo Bank, National
Association as Agent under the Revolving Loan Agreement, and in
favor of each of the Lenders named therein.
10.37(3) Trademark Collateral Assignment, dated as of June 13, 1997, by
Banner Holdings, Inc. each of the Persons listed on the signature
pages thereto, together with other Persons who may become a party
thereto, jointly and severally in favor of Wells Fargo Bank,
National Association, as Agent for the benefit of the Lenders that
are or become a party to the Revolving Loan Agreement.
10.38(3) Subsidiary Guaranty, dated as of June 13, 1997, by each of the
Persons listed on the signature pages thereto, together with each
other Person who may become a party thereto, jointly and severally
in favor of Wells Fargo Bank, National Association, as Agent for
the benefit of the Lenders that are a party to the Revolving Loan
Agreement.
10.39(5) Amendment No. 1 to Revolving Loan Agreement, dated as of November
17, 1997, by and among the Company, the Lenders party thereto and
Wells Fargo Bank, National Association, as Agent.
10.40(5) Amendment No. 2 to Revolving Loan Agreement, dated as of
March 26, 1998, by and among the Company, the Lenders party
thereto and Wells Fargo Bank, National Association as Agent.
10.41(7) Amendment No. 3 to Revolving Loan Agreement, dated as of
December 31, 1998, by and among the Company, the Lenders party
thereto and Wells Fargo Bank, National Association as Agent.
10.42 Employment Agreement between Central Financial Acceptance
Corporation and Gary M. Cypres dated as of July 14, 1999.
21(5) Subsidiaries of the Registrant.
27 Financial Data Schedule.
- ---------------------
(1) Incorporated by reference to exhibits filed with the SEC in the
Company's Registration Statement on Form S-1 (Registration No.
333-3790).
41
<PAGE> 42
(2) Incorporated by reference to exhibits filed with the SEC in the
Company's Annual Report on Form 10-K for the year ended December
31, 1996.
(3) Incorporated by reference to exhibits filed with the SEC in the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
(4) Incorporated by reference to the exhibit filed with the SEC on
February 24, 1998 in the Company's Report on Form 8-K.
(5) Incorporated by reference to the exhibits filed with the SEC in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(6) Incorporated by reference to the exhibits filed with the SEC in
the Company's Quarterly Report Form 10-Q for the quarter ended
June 30, 1999.
(7) Incorporated by reference to the exhibits filed with the SEC in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
+ Management contract or compensatory plan or arrangement required
to be filed as an exhibit.
42
<PAGE> 43
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1999 and 1998..................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997.............................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997........................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997.............................................................. F-6
Notes to Consolidated Financial Statements.................................... F-7
SCHEDULES SUPPORTING THE CONSOLIDATED FINANCIAL STATEMENTS
Schedule II - Valuation and Qualifying Accounts............................... F-19
</TABLE>
F-1
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Central Financial Acceptance
Corporation:
We have audited the accompanying consolidated balance sheets of Central
Financial Acceptance Corporation, a Delaware corporation, and subsidiaries, (the
"Company") as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commissions rule and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 31, 2000
F-2
<PAGE> 45
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Cash ............................................. $ 5,280,000 $ 8,295,000
Prepaid expenses and other current assets ........ 412,000 598,000
Note receivable from affiliate ................... 889,000 2,478,000
Income taxes receivable, net ..................... 1,285,000 1,458,000
Property and equipment, net ...................... 4,939,000 2,667,000
Intangible assets, net ........................... 10,925,000 6,294,000
Net assets of discontinued operations ............ 52,963,000 52,035,000
------------ -----------
TOTAL ASSETS .................................. $ 76,693,000 $73,825,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other current liabilities ... $ 3,991,000 $ 3,171,000
Deferred taxes ................................... 627,000 510,000
------------ -----------
Total liabilities ............................. 4,618,000 3,681,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares outstanding ...... -- --
Non-voting common stock, $.01 par value, 3,000,000
shares authorized; no shares outstanding ...... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 7,277,000 shares issued ........... 73,000 73,000
Paid-in capital .................................. 47,903,000 47,903,000
Retained earnings ................................ 24,805,000 22,168,000
------------ -----------
72,781,000 70,144,000
Less treasury stock, 100,000 shares at cost ...... (706,000) --
------------ -----------
Total stockholders' equity ........................ 72,075,000 70,144,000
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 76,693,000 $73,825,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 46
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ---------- -----------
<S> <C> <C> <C>
REVENUES, NET ............................................ $ 14,270,000 $8,957,000 $ 8,733,000
COSTS AND EXPENSES
Selling and administrative expenses ...................... 11,424,000 7,267,000 7,887,000
Occupancy costs .......................................... 2,000,000 1,299,000 1,373,000
Depreciation and amortization ............................ 586,000 370,000 320,000
------------ ---------- -----------
Total costs and expenses .............................. 14,010,000 8,936,000 9,580,000
------------ ---------- -----------
Pretax income (loss) from continuing operations .......... 260,000 21,000 (847,000)
Provision (benefit) for income taxes ..................... 104,000 8,000 (339,000)
------------ ---------- -----------
Income (loss) from continuing operations ................. 156,000 13,000 (508,000)
DISCONTINUED OPERATIONS
Income from operations of discontinued
operations net of applicable taxes (1) .............. 3,981,000 4,388,000 4,898,000
Loss on disposal of discontinued operations,
net of operating income during
phase-out period, net of tax benefit (2) ............ (1,500,000) -- --
------------ ---------- -----------
Net income ............................................... $ 2,637,000 $4,401,000 $ 4,390,000
============ ========== ===========
PER SHARE DATA: (NOTE 4)
Per Common share - Basic:
Income (loss) from continuing operations ................. $ 0.02 $ 0.00 $ (0.07)
Income from discontinued operations, net of taxes (1) .... 0.55 0.60 0.67
Loss on disposal of discontinued operations,
net of operating income during
phase-out period, net of tax benefit (2) ............ (0.21) -- --
------------ ---------- -----------
Net income ............................................... $ 0.36 $ 0.60 $ 0.60
============ ========== ===========
Weighted average common shares outstanding ............... 7,248,000 7,277,000 7,277,000
Per Common share - Diluted:
Income (loss) from continuing operations ................. $ 0.02 $ 0.00 $ (0.07)
Income from discontinued operations, net of taxes (1) .... 0.55 0.60 0.67
Loss on disposal of discontinued operations,
net of operating income during
phase-out period, net of tax benefit (2) ............ (0.21) -- --
------------ ---------- -----------
Net income ............................................... $ 0.36 $ 0.60 $ 0.60
============ ========== ===========
Weighted average diluted common shares outstanding ....... 7,261,000 7,277,000 7,277,000
</TABLE>
(1) Taxes applicable to discontinued operations were $2,654,000, $2,925,000
and $3,160,000, respectively in 1999, 1998 and 1997.
(2) Represents loss on disposal of discontinued operations of $6,100,000
less estimated operating income from discontinued operations during
phase-out period of $3,600,000, net of applicable tax benefit of
$1,000,000.
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 47
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock
-------------------- Paid-in Retained ---------------------
Total Shares Amount Capital Earnings Shares Cost
------------ --------- -------- ------------ ------------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ..... $ 61,353,000 7,277,000 $ 73,000 $ 47,903,000 $ 13,377,000 -- $ --
Net income ..................... 4,390,000 -- -- -- 4,390,000 -- --
------------ --------- -------- ------------ ------------ ------- -----------
Balance, December 31, 1997 ..... 65,743,000 7,277,000 73,000 47,903,000 17,767,000 -- --
Net income ..................... 4,401,000 -- -- -- 4,401,000 -- --
------------ --------- -------- ------------ ------------ ------- -----------
Balance, December 31, 1998 ..... 70,144,000 7,277,000 73,000 47,903,000 22,168,000 -- --
Purchase of treasury shares .... (706,000) -- -- -- -- 100,000 (706,000)
Net income ..................... 2,637,000 -- -- -- 2,637,000 -- --
------------ --------- -------- ------------ ------------ ------- -----------
Balance, December 31, 1999 ..... $ 72,075,000 7,277,000 $ 73,000 $ 47,903,000 $ 24,805,000 100,000 $ (706,000)
============ ========= ======== ============ ============ ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 48
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income ............................................................. $ 2,637,000 $ 4,401,000 $ 4,390,000
Less: Income from discontinued operations ......................... (3,981,000) (4,388,000) (4,898,000)
Add: Loss on sale of discontinued operations ...................... 1,500,000 -- --
----------- ----------- -----------
Income (loss) from continuing operations ........................... 156,000 13,000 (508,000)
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used in) operating activities:
Depreciation and amortization ...................................... 586,000 370,000 320,000
Provision for deferred income taxes ................................ 117,000 161,000 351,000
Changes in assets and liabilities:
Prepaid expenses and other current assets .......................... 185,000 (276,000) (105,000)
Accrued expenses and other current liabilities ..................... 820,000 574,000 (2,610,000)
Note receivable from affiliate ..................................... 1,589,000 2,514,000 (4,992,000)
Income taxes receivable ............................................ 173,000 (673,000) (1,737,000)
----------- ----------- -----------
Net cash provided by (used in) operating
activities of continuing operations ..................... 3,626,000 2,683,000 (9,281,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net .............................................. (2,479,000) (90,000) (643,000)
Acquisitions ........................................................... (5,010,000) -- (250,000)
----------- ----------- -----------
Net cash used in investing
activities of continuing operations ..................... (7,489,000) (90,000) (893,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock ............................................. (706,000) -- --
----------- ----------- -----------
Net cash used in financing
activities of continuing operations ..................... (706,000) -- --
----------- ----------- -----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS ................................. 1,554,000 1,847,000 8,181,000
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH .............................................. (3,015,000) 4,440,000 (1,993,000)
CASH, BEGINNING OF YEAR ...................................................... 8,295,000 3,855,000 5,848,000
----------- ----------- -----------
CASH, END OF YEAR ............................................................ $ 5,280,000 $ 8,295,000 $ 3,855,000
=========== =========== ===========
CASH PAID DURING THE YEAR FOR
INTEREST .................................................... $ 3,506,000 $ 3,857,000 $ 5,375,000
INCOME TAXES ................................................ $ 3,126,000 $ 1,933,000 $ 4,870,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 49
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation -- Central Financial Acceptance Corporation
("CFAC" or the "Company") was formed in April 1996 and was a wholly owned
subsidiary of Banner's Central Electric, Inc. ("Banner"). Banner was wholly
owned by Banner Holdings, Inc. ("Holdings") and is a consumer products retailer
that provides its customers with financing for the merchandise it sells. On June
24, 1996, CFAC, Banner and Holdings entered into an agreement (the
"Reorganization Agreement") whereby Holdings contributed to Banner its
investments in certain wholly owned subsidiaries, along with the subsidiaries'
operations, (the "Holding Subsidiaries") and Banner contributed to CFAC its
investments in the Holdings Subsidiaries and the finance portion of its consumer
products business, and cash in such amount so as to leave CFAC with $500,000 of
cash on hand. Pursuant to the Reorganization Agreement, the intercompany
accounts between CFAC, Banner and Holdings that arose as a result of the
Reorganization Agreement and from other transactions, except with respect to
income taxes, were forgiven and reclassified as stockholders' equity.
In addition to the Reorganization Agreement, CFAC, Banner and Holdings
entered into certain agreements for the purpose of defining the ongoing
relationships among them (see Note 9). The transactions and agreements entered
into pursuant to the Reorganization Agreement are referred to herein as the
"Reorganization." Management of CFAC believes that such agreements provide for
reasonable allocations of costs between the parties.
The Reorganization was accounted for at historical cost in a manner
similar to a pooling of interests. The accompanying consolidated financial
statements reflect the combined historical operations of CFAC and its
subsidiaries as if the Reorganization had taken place at the beginning of the
periods presented, except for the contribution of cash in such amount so as to
leave CFAC with $500,000 upon the Reorganization.
On July 2, 1996, CFAC consummated its initial public offering when it
sold 2.127 million shares of common stock, which resulted in net proceeds to the
Company of approximately $22.5 million.
CFAC is a majority owned subsidiary of Holdings. In February of 1999 a
plan of liquidation was adopted by Holdings whereby Holdings will distribute
its ownership in CFAC to West Coast Private Equity Partners, ("West Coast"),
the parent of Holdings.
Nature of Operations - The Company primarily provides discount travel
services, including airline tickets and other travel products to the leisure
traveler. The travel product offerings are available primarily through the
Company's retail stores in California, Arizona, Illinois, Nevada and Texas. In
July 1999, the Company broadened its ticket distribution by (1) opening a
toll-free telephone reservation and customer service center and (2) offering
online airline ticket prices over the Internet at "www.4GreatFares.com" and
"www.VuelaBarato.com." The Company's reservation center and customer service
center are located at the Company's corporate headquarters.
Discontinued Operations - On December 1, 1999, the Company announced
that its Board of Directors had approved a plan to discontinue its consumer
financial services business in order to focus its efforts on its Internet and
travel business, (see Note 3). Accordingly, the consumer financial services
business has been classified as discontinued operations in the consolidated
financial statements for all periods presented.
F-7
<PAGE> 50
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The discontinued operations include (1) the purchase and servicing of
consumer finance receivables generated by the Company's customers for purchases
of high quality brand name consumer products, appliances and furniture sold by
Banner, and by independent retailers; (2) the provision of small unsecured loans
to its customers; (3) the origination and servicing of consumer finance
receivables generated by the Company's customers for purchases of airline
tickets; (4) the provision of insurance products and insurance premium financing
for its customers; (5) the provision of financing for purchases of used
automobiles sold by Banner through May 30, 1997 and by third parties; (6) the
provision of income tax preparation services through December 31, 1999; (7)
check cashing services and mortgage loan financing for its customers; and (8)
purchase consumer product inventory which it holds under a consignment
arrangement until sold by Banner. The majority of the Company's discontinued
operations are focused in Southern California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of Central Financial Acceptance Corporation and
its wholly owned subsidiaries: Centravel, Inc., 4GreatFares.com, Inc., Central
Installment Credit Corporation, Central Consumer Finance Company, Inc., CFAC
Accident and Health Reinsurance Ltd., Central Financial Reinsurance Co., Ltd.,
Central Check Cashing, Inc., Central Income Tax Services, Inc., Central
Financial Acceptance/Insurance Agency, Central Premium Finance Company, BCE
Properties, Inc. and Central Banner, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.
Property and Equipment -- Property and equipment are carried at cost.
Long-lived property is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such an asset may not be
recoverable. If the carrying amount of the asset exceeds the estimated
undiscounted future cash flows to be generated by the asset, an impairment loss
would be recorded to reduce the asset's carrying value to its estimated fair
value.
Depreciation and amortization are computed primarily using the straight-line
method over the estimated lives of the assets, as follows:
Furniture, equipment and software.............................. 5 to 10 years
Leasehold improvements......................................... Life of lease
Building improvements.......................................... 7 to 39 years
Intangible Assets -- Intangible assets primarily arose in connection
with the Company's acquisition of the net assets of certain travel businesses
during 1996 and 1999. The excess of the purchase price over the fair value of
net assets acquired is being amortized using the straight-line method over no
more than 30 years. The recoverability of the excess of the purchase price over
the fair value of net assets acquired is analyzed annually based on undiscounted
future cash flows. If the carrying value of the intangible asset exceeds the
estimated undiscounted future cash flows, an impairment loss would be recorded
to reduce the asset's carrying value to its estimated fair value. No impairment
loss on continuing operations was recorded during 1999, 1998 or 1997.
Revenue Recognition - The Company recognizes revenues and commissions
when earned, which is at the time the travel reservation is ticketed. Such
revenues are reported net of an allowance for cancellations and
refunds.Generally, ticket sales are nonrefundable and cancellations and refunds
are not significant. Volume bonus and override commissions are recognized at the
end of each monthly or quarterly measurement period once the specified target
has been achieved.
Income Taxes - Income tax expense includes income taxes payable for the
current year and the change in deferred income tax assets and liabilities for
the future tax consequences of events that have been recognized in the Company's
financial statements or income tax returns. A valuation allowance is recognized
to reduce the carrying value of the deferred tax assets if it is more likely
than not that some or all of the deferred tax assets will not be realized.
F-8
<PAGE> 51
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising - The Company advertises primarily on Hispanic radio and
newspapers. Additionally, the Company has contracted with Internet content
providers to display banner ads for the Company on the content provider's web
sites. All advertising costs are expensed as incurred. Advertising expense for
the years ended December 31, 1999, 1998 and 1997 were $868,000, $325,000 and
$619,000, respectively.
Concentration of Credit Risk - The Company places its temporary cash and
cash investments with high quality financial institutions. Management monitors
the financial creditworthiness of these financial institutions. As of December
31, 1999, such investments were in excess of insured limits.
Use of Estimates - The preparation of financial statements, in
conformity with accounting principles generally accepted in the United States,
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.
Accounting for Stock Based Compensation - The Company has elected to
continue to utilize the accounting method prescribed by Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"),
under which no compensation cost has been recognized, and adopt the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." As a
result, SFAS No. 123 has no effect on the financial condition or results of
operations of the Company at December 31, 1999, 1998 and 1997 (see Note 10 for
required disclosures).
Competition - The markets for the travel products and services offered
by the Company are intensely competitive. The Company competes with both
traditional distribution channels and online services. The Company currently or
potentially competes with a variety of companies with respect to each product or
service offered. The Company potentially faces competition from a number of
large online services that have expertise in developing online commerce and in
facilitating Internet traffic. Many competitors have significant competitive
advantages. For example, airlines, hotels and other suppliers also sell their
products and services directly to consumers and have established web sites.
Internet directories, search engines and large traditional retailers have
significantly greater operating histories, financial resources, customer bases,
technical expertise, brand recognition and/or online commerce experience than
the Company. In addition, certain competitors may be able to devote
significantly greater resources than the Company to furthering their business.
Dependence on Airline Industry and Certain Carriers - Sales of airline
tickets from the Company's three largest airline suppliers accounted for
approximately 48% of airline ticket revenue for the year ended December 31,
1999. As a result, currently the Company is substantially dependent upon the
continued participation of these three airlines in order to maintain and
continue to grow its total airline ticket revenues. In November of 1999, Taesa
Airlines, one of the major Mexican carriers, was shut down by the Mexican
government and eventually was declared bankrupt.
Risks Associated with Brand Development - The Company intends to
continue to pursue an aggressive brand-enhancement strategy, which will include
mass market and multimedia advertising, promotional programs and public
relations activities. To increase awareness of the Company's brand and expand it
to a wide range of products and services, the Company will need to continue to
spend significant amounts on advertising and promotions. These expenditures may
not result in a sufficient increase in revenues to cover such advertising and
promotional expenses.
Reclassifications - Certain reclassifications have been made to
previously reported amounts to conform to the current year presentation.
Accounting Changes - In January 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position No. 98-1 -
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1") which provides guidance on accounting for the costs
of computer software developed or obtained for internal use. The Company
implemented SOP 98-1 during 1998. There was no material effect of such change on
the accompanying consolidated financial statements. Costs incurred to develop
and install management information systems have been capitalized and amortized
over a period of five to seven years in accordance with the requirements of SOP
98-1.
F-9
<PAGE> 52
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DISCONTINUED OPERATIONS
On December 1, 1999, the Company announced that its Board of Directors
had approved a plan to discontinue its consumer financial services business in
order to focus its efforts on its Internet and travel business. Management
anticipates that the sale or eventual wind down of the consumer financial
services business will be completed by the end of 2000.
In accordance with Accounting Principles Board Opinion ("APB") No. 30,
"Reporting the Results of Operations- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," the Company has presented the following lines of its
consumer financial services business as discontinued operations: (1) the finance
receivables business, which includes the following finance portfolios: Consumer
Product Portfolio, Small Loan Portfolio, Travel Finance Portfolio, Independent
Retail Finance Portfolio, Premium Finance Portfolio, Automobile Finance
Portfolio and the Mortgage Loan Portfolio; (2) the check cashing business; (3)
the insurance business including the Company's captive insurance company; (4)
the income tax preparation business; and (5) the inventory consignment business.
These businesses are reported as discontinued operations for all periods
presented.
The consolidated financial statements of the Company have been restated
to reflect the pending disposition of the financial services businesses as
discontinued operations. Accordingly, the revenues, costs and expenses, assets
and liabilities, and cash flows of these discontinued operations have been
excluded from the respective captions in the Consolidated Statements of Income,
Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have
been reported as "Income from operations of discontinued operations net of
applicable taxes;" as "Loss on disposal of discontinued operations, net of
operating income during phase-out period, net of tax benefit;" as "Net assets of
discontinued operations," and as "Net cash provided by discontinued operations"
for all periods presented.
In connection with the Company's decision to discontinue operations of
its financial services businesses, the Company recorded a write-down of $6.1
million against the assets of the discontinued operations. The write-down is
reflected in the consolidated financial statements net of estimated income from
operations of the discontinued operations during the phase-out period of $3.6
million, all net of a tax benefit of $1.0 million. The $6.1 million write-down
on the discontinued operations includes: a write-down of fixed assets, $3.7
million; a write-down of goodwill, $1.1 million; and other valuation allowances
and write-downs totaling $1.3 million.
Management believes that net assets of discontinued operations
represents a reasonable estimate of the net realizable value of such businesses.
This estimate is subject to change based on market conditions, interest rates
and other factors that could cause the ultimate amount to be significantly
different.
The operating results of the discontinued operations are summarized on
the following page:
F-10
<PAGE> 53
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating results of the discontinued operations are presented
below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Interest income ................................. $ 22,568,000 $25,471,000 $30,312,000
Other income .................................... 14,488,000 12,422,000 12,927,000
------------ ----------- -----------
Total revenues ................................ 37,056,000 37,893,000 43,239,000
EXPENSES
Operating expenses .............................. 17,808,000 17,968,000 17,457,000
Provision for credit losses, net ................ 9,250,000 8,814,000 12,296,000
Interest expense ................................ 3,363,000 3,798,000 5,428,000
------------ ----------- -----------
Total costs and expenses ...................... 30,421,000 30,580,000 35,181,000
Income from operations of
discontinued operations before taxes ...... 6,635,000 7,313,000 8,058,000
Provision for income taxes ...................... 2,654,000 2,925,000 3,160,000
------------ ----------- -----------
Income from operations of
discontinued operations ................... 3,981,000 4,388,000 4,898,000
Loss on disposal of discontinued
operations, net of operating income
during phase-out period, net of tax benefit (1,500,000) -- --
------------ ----------- -----------
Net income of discontinued operations .......... $ 2,481,000 $ 4,388,000 $ 4,898,000
============ =========== ===========
</TABLE>
The net assets of the discontinued operations are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Finance receivables, net ............. $85,194,000 $ 96,002,000
Other assets, net .................... 13,278,000 11,652,000
----------- ------------
Total assets ....................... 98,472,000 107,654,000
LIABILITIES
Notes Payable ........................ 41,800,000 52,000,000
Accrued expenses and other liabilities 3,709,000 3,619,000
----------- ------------
Total liabilities .................. 45,509,000 55,619,000
----------- ------------
NET ASSETS OF DISCONTINUED OPERATIONS $52,963,000 $ 52,035,000
=========== ============
</TABLE>
F-11
<PAGE> 54
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EARNINGS PER SHARE
The following table presents a reconciliation of basic earnings per
share and diluted earnings per share. Options to purchase 425,000 shares of
common stock at prices ranging from $12.00-$18.25, were outstanding during the
second half of 1997. Options to purchase 586,000 shares of common stock at a
repriced value of $5.00-$12.00, which all expire on December 31, 2008, were
outstanding at the end of 1998. Options to purchase 795,000 shares of common
stock at a value of $5.00 to $12.00 were outstanding at the end of 1999. In
1999 options to purchase 781,000 shares of common stock were included in the
calculation of diluted earnings per share because the option price was less
than the average market price of the common shares. None of the options were
included in the computation of diluted earnings per share during 1998 or 1997
because the options' exercise price was greater than the average market price
of the common shares.
Following is a reconciliation between basic and diluted earnings per
share. All amounts except earnings per share are in thousands:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Numerator
Net income (loss) from continuing operations.. $ 156 $ 156 $ 13 $ 13 $ (508) $ (508)
Income from discontinued operations .......... 3,981 3,981 4,388 4,388 4,898 4,898
Loss on disposal of discontinued operations .. (1,500) (1,500) -- -- -- --
-------- -------- -------- -------- -------- --------
$ 2,637 $ 2,637 $ 4,401 $ 4,401 $ 4,390 $ 4,390
======== ======== ======== ======== ======== ========
Denominator
Weighted average shares outstanding .......... 7,248 7,248 7,277 7,277 7,277 7,277
Shares assumed issued on
exercise of dilutive share equivalents .. -- 13 -- -- -- --
-------- -------- -------- -------- -------- --------
Weighted average shares outstanding ........ 7,248 7,261 7,277 7,277 7,277 7,277
-------- -------- -------- -------- -------- --------
Basic and diluted earnings per share
Net income (loss) from continuing operations.. $ 0.02 $ 0.02 $ 0.00 $ 0.00 $ (0.07) $ (0.07)
Income from discontinued operations .......... 0.55 0.55 0.60 0.60 0.67 0.67
Loss on disposal of discontinued operations .. (0.21) (0.21) -- -- -- --
-------- -------- -------- -------- -------- --------
Earnings per share ......................... $ 0.36 $ 0.36 $ 0.60 $ 0.60 $ 0.60 $ 0.60
======== ======== ======== ======== ======== ========
</TABLE>
F-12
<PAGE> 55
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACQUISITIONS
During 1999, the Company completed the acquisition of the retail
operations of 24 leased PanAmericana Travel Systems, Inc. travel stores located
in Southern California, 10 leased TurAmerica Travel Systems, Inc., stores
located in Central California and 4 leased travel locations from Viajes Latinos
Travel located in the Dallas/Ft. Worth area for an aggregate purchase price of
approximately $5.0 million. The purchase price was allocated to the net assets
acquired based upon their estimated fair values. This allocation resulted in
approximately $4.6 million of goodwill and $0.4 million of non-compete
covenants.
These acquisitions were accounted for as purchases and the results of
their operations have been included since the applicable acquisition dates.
6. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Land and building ..................... $4,333,000 $2,396,000
Improvements .......................... 86,000 35,000
Furniture, equipment and software ..... 835,000 418,000
---------- ----------
5,254,000 2,849,000
Less: accumulated depreciation ...... 315,000 182,000
---------- ----------
$4,939,000 $2,667,000
========== ==========
</TABLE>
7. INTANGIBLE ASSETS
Intangible assets, net, consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Excess of purchase price over the
fair value of net assets acquired .... $11,432,000 $6,793,000
Non-compete agreements .................... 370,000 --
----------- ----------
11,802,000 6,793,000
Less: accumulated amortization .......... 877,000 499,000
----------- ----------
$10,925,000 $6,294,000
=========== ==========
</TABLE>
F-13
<PAGE> 56
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The Company has agreed to indemnify Holdings for all federal, state, and
other income taxes for periods prior to July 2, 1996, when it was included as
part of Holdings consolidated tax group.
Subsequent to July 2, 1996, the Company and its subsidiaries began to
file a consolidated federal income tax return. For California and certain other
states, the Company will continue to file on a combined or separate company tax
basis, as appropriate. The income tax provisions as presented in the
accompanying consolidated financial statements are based upon the amount the
Company would have paid as if it filed separate income tax returns for the
entire periods presented.
The provision for income taxes from continuing operations consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CURRENT:
Federal .................. $ (15,000) $(113,000) $(553,000)
State .................... 2,000 (39,000) (138,000)
--------- --------- ---------
(13,000) (152,000) (691,000)
DEFERRED:
Federal .................. 98,000 109,000 269,000
State .................... 19,000 51,000 83,000
--------- --------- ---------
117,000 160,000 352,000
--------- --------- ---------
Provision for income taxes $ 104,000 $ 8,000 $(339,000)
========= ========= =========
</TABLE>
A reconciliation of the provision for income taxes from continuing
operations to the statutory rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal income taxes at statutory rate ...... 35.0% 35.0% 35.0%
State franchise taxes, net of federal benefit 5.0% 5.0% 5.0%
-------- -------- --------
40.0% 40.0% 40.0%
======== ======== ========
</TABLE>
F-14
<PAGE> 57
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences giving rise to the deferred
income tax assets and liabilities from continuing operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
DEFERRED INCOME TAX ASSETS AND (LIABILITIES)
<S> <C> <C>
Intangibles .............................. $(744,000) $(598,000)
Fixed assets ............................. 7,000 (40,000)
Accrued expenses ......................... 58,000 49,000
State taxes, net ......................... 52,000 79,000
--------- ---------
Net deferred tax liabilities .......... $(627,000) $(510,000)
========= =========
</TABLE>
9. 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 discontinued operations
of the Company the 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, also allowed the Company to return to Banner $1.5 million
and $0.2 million, respectively in 1998 and 1999 of previously purchased
receivable contracts. The Company can terminate the Financing Agreement at any
time upon one year's written notice to Banner. All unpaid amounts are due within
18 months and bear interest at the Company's borrowing rate.
In the accompanying 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. On December 31, 1999, the transaction fee was
discontinued.
The Company had notes receivable of $0.9 million and $2.5 million
outstanding at December 31, 1999 and 1998, respectively, which bore interest of
8.25% and 7.75% as of December 31, 1999 and 1998, respectively. Interest charged
during 1999, 1998 and 1997 were $0.2 million, $0.4 million and $0.1 million,
respectively. During various times in 1999 the Company had notes payable due
Central Rents, Inc., ("Rents") an affiliate through common ownership. The
balance at December 31, 1999 was zero and interest charged to the Company during
1999 was $0.6 million.
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 and
management information systems. 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.
Accounting expenses are allocated approximately 50% to the Company. The
operating costs of Banner's management information systems function are
allocated approximately 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 $1.2 million, $1.3 million and $1.4
million, respectively, for the years ended December 31, 1999, 1998 and 1997 and
relate primarily to the discontinued operations of the Company.
F-15
<PAGE> 58
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The financial services segment of the discontinued operations has
provided financing of airline tickets for the continuing operations of the
travel business. Such tickets financed during the three years ended December 31,
1999, 1998 and 1997 totaled $9.5 million, $9.5 million and $11.3 million,
respectively.
In December 1999, the Company completed the sale of an improved real
estate parcel to Central Rents, Inc., an affiliated company under common
ownership, for $0.7 million. The Company had previously operated a travel store
out of this location and will continue to do so under a lease agreement with
Central Rents, Inc.
10. STOCK OPTION PLAN
In connection with its initial public offering the Company adopted the
1996 Stock Option Plan, under which 700,000 shares of authorized common stock
have been reserved for issuance pursuant to terms and conditions as determined
by the Board of Directors. During 1999, the 1996 Stock Option Plan was amended
to increase to 1,000,000 the number of shares reserved for issuance. The options
have a maximum duration of ten years and are subject to certain vesting and
cancellation provisions, and may not be granted at less than the market value of
the Company's Common Stock on the date of grant of the option. During 1997, the
Company had outstanding options to purchase 425,000 shares of stock at prices
ranging from $12.00 to $18.25 per share. No shares were granted, exercised or
forfeited during 1997. In 1998, an additional 161,000 shares, net of forfeitures
of 58,000 shares, were issued at prices ranging from $5.00 to $12.00 per share.
At December 31, 1998, options to purchase 586,000 shares were outstanding at a
repriced value of $5.00 to $12.00. In 1999, an additional 209,000 shares, net of
forfeitures of 79,000 shares, were issued at a price of $5.00 to $6.50 per
share. No shares were exercised in 1999 or 1998. All options vest over a period
of five years from issue date and expire 10 years after the issue date. Options
exercisable were 105,000 and 3,000 as of December 31, 1999 and 1998,
respectively.
SFAS 123 defines a fair value based method of accounting for employee
stock compensation plans, but allows for the continuation of the intrinsic value
based method of accounting to measure compensation cost prescribed by Accounting
Principles Board Opinion No. 25. For companies electing not to change their
accounting, SFAS 123 requires pro-forma disclosures of earnings and earnings per
share as if the change in accounting provision of SFAS 123 has been adopted.
F-16
<PAGE> 59
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for this plan been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations .... As Reported $ 156,000 $ 13,000 $ (508,000)
Net income .................................. As Reported $ 2,637,000 $ 4,401,000 $ 4,390,000
Loss from continuing operations ............. Pro forma $ (241,000) $ (572,000) $ (891,000)
Net income .................................. Pro forma $ 2,240,000 $ 3,816,000 $ 4,007,000
Per Common share - Basic:
Income (loss) from continuing operations .... As Reported $ 0.02 $ 0.00 $ (0.07)
Net income .................................. As Reported $ 0.36 $ 0.60 $ 0.60
Loss from continuing operations ............. Pro forma $ (0.03) $ (0.08) $ (0.12)
Net income .................................. Pro forma $ 0.31 $ 0.52 $ 0.55
Per Common share - Diluted:
Income (loss) from continuing operations .... As Reported $ 0.02 $ 0.00 $ (0.07)
Net income .................................. As Reported $ 0.36 $ 0.60 $ 0.60
Loss from continuing operations ............. Pro forma $ (0.03) $ (0.08) $ (0.12)
Net income .................................. Pro forma $ 0.31 $ 0.52 $ 0.55
</TABLE>
The fair value of each option grant is estimated on the date of grant
using an option pricing model with the following weighted average assumptions
used for grants: dividend yield of 0.0%, expected volatility of 68.4%, risk free
interest rate of 5.5% and lives of five years. The weighted average remaining
contractual life is 9.4 years. The weighted average exercise price of the
options at December 31, 1999, 1998 and 1997 was $5.05, $6.82 and $14.40,
respectively.
11. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
During 1996, the Company adopted a Supplemental Executive Retirement
Plan (the "SERP Plan") which will provide supplemental retirement benefits to
certain key management employees. To vest in the SERP Plan, an employee must
have at least ten years of service with the Company, including five years
subsequent to the adoption of the plan.
The unfunded Supplemental Executive Retirement Plan expense for the
years ended December 31, 1999, 1998 and 1997, amounted to approximately $77,000
each year.
12. 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.
F-17
<PAGE> 60
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. 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 year ended December 31, 1999
the Company did not make any matching contributions to the Plan.
14. COMMITMENTS AND CONTINGENCIES
Aggregate minimum lease commitments under the Company's real property
and equipment leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C>
2000 ................................... $ 1,976,000
2001 ................................... 1,457,000
2002 ................................... 894,000
2003 ................................... 343,000
2004 ................................... 173,000
Beyond 2004 ............................ 25,000
-----------
$ 4,868,000
===========
</TABLE>
Aggregate rental expense for the years ended December 31, 1999, 1998 and
1997 were $1,750,000, $1,276,000 and $1,546,000, respectively.
The Company has an employment agreement with the Chairman of the Board
of Directors for a period of five years, expiring in June 2004, at an annual
base salary of $245,000 in 2000, $270,000 in 2001, $295,000 in 2002, $320,000 in
2003 and $345,000 in 2004 with eligibility to participate in the Company's
executive compensation plans. Any changes to the agreement require approval of
the Board of Directors.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. Management of the Company believes
that litigation currently pending will not have a material adverse effect on the
Company's financial position or results of operations.
F-18
<PAGE> 61
CENTRAL FINANCIAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The following valuation accounts are included in net assets of
discontinued operations in the accompanying consolidated balance sheets:
<TABLE>
<CAPTION>
RESERVE FOR
LOSS ON ALLOWANCE
DISCONTINUED FOR BAD
OPERATIONS DEBTS
------------ -------------
<S> <C> <C>
Balance, December 31, 1996 ......... $ -- $ 6,786,000
Charges to expense ........ -- 13,192,000
Write-offs ................ -- (12,143,000)
------------ ------------
Balance, December 31, 1997 ......... -- 7,835,000
Charges to expense ........ -- 10,138,000
Write-offs ................ -- (13,324,000)
------------ ------------
Balance, December 31, 1998 ......... -- 4,649,000
Charges to expense ........ 800,000 10,595,000
Write-offs ................ -- (10,595,000)
------------ ------------
Balance, December 31, 1999 ......... $ 800,000 $ 4,649,000
============ ============
</TABLE>
* * * * * *
F-19
<PAGE> 1
EXHIBIT 10.42
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 14th day of July 1999, by and between Central
Financial Acceptance Corporation, a Delaware corporation with its principal
offices at 5480 East Ferguson Drive, Commerce, California 90022 (the
"Corporation"), and Gary M. Cypres (the "Executive").
W I T N E SS E T H :
In consideration of the mutual covenants contained herein, the parties
hereto agree as follow:
1. TERM: The Corporation hereby employs the Executive as Chairman
of the Board and Chief Executive Officer of the Corporation, and
the Executive agrees to serve the Corporation as such, upon the
terms and conditions hereof for a period of five years
commencing on the date hereof.
2. DUTIES:
(a) Executive shall serves as the Chairman of the Board of the
Corporation, with such duties and authority as are generally
incident to such positions, or shall serve in such other senior
management positions as the Corporation shall determine, provided
that such other positions shall be comparable in authority and
responsibility to the positions specified above. The Executive
will hold such senior offices in the Corporation and/or its
subsidiaries or affiliates to which he may be elected or
appointed from time to time, provided that such offices shall not
be inconsistent with his duties and authority as aforesaid.
(b) The Executive agrees that he will devote substantially all of
his time and attention to the affairs of the Corporation, and
will use his best efforts to promote the business and interests
of the Corporation. It is understood, however, that the foregoing
will not prohibit the Executive from engaging, conducting, or
participating, either directly or indirectly, in businesses that
do business with or are related to Banner's Central Electric,
Inc., West Coast Private Equity Partners, L.P., Central Rents
Holdings, Inc., Central Rents, Inc. and/or any of their
subsidiaries or affiliates. It is further understood that the
terms of this Agreement will not prohibit the Executive from
engaging in personal investment and business activities for
himself and his family which do not interfere with the
performance of his duties hereunder.
3. COMPENSATION: The Corporation will pay the Executive a salary as
set forth below, payable in equal installments in accordance with
customary payroll practices for senior executives of the
Corporation, in consideration for all services to be rendered by
the Executive hereunder (including, without limitation, all
services to be rendered by him as an officer of the Corporation
and/or its Subsidiaries and affiliates).
BASE SALARY
-----------
September 16, 1999 to September 15, 2000 $245,000
September 16, 2000 to September 15, 2001 $270,000
September 16, 2001 to September 15, 2002 $295,000
September 16, 2002 to September 15, 2003 $320,000
1
<PAGE> 2
September 16, 2003 to September 15, 2004 $345,000
The Company may also pay the Executive an annual bonus with
respect to each fiscal year of the Corporation, either on an "ad
hoc" basis, or pursuant to any bonus plan or arrangement for
senior executives of the Corporation as may be established at the
Corporation's discretion.
Nothing contained herein shall prohibit the Board of Directors of
the Corporation, in its sole discretion, from increasing the
compensation payable to the Executive pursuant to this Agreement
and/or making available to the Executive other benefits in
addition to those benefits which the Executive is entitled to
hereunder.
4. EXPENSES: The Executive shall be entitled to reimbursement by the
Corporation, in accordance with the Corporation's policies then
applicable to senior executives at the Executive's level, against
appropriate vouchers or other receipts for authorized travel,
entertainment and other business expenses reasonably incurred by
him in the performance of his duties hereunder.
5. EXECUTIVE BENEFITS:
(a) SERP PLAN BENEFITS: The Executive shall continue to
participate in the Corporation's Supplemental Executive
Retirement Plan (the "SERP Plan"), and is fully vested in the
SERP Plan (including credit for five Post-Effective Date Years of
Service, as such term is defined in the SERP Plan) and his Normal
Retirement Date for all purposes shall be deemed to be December
31, 2000. If the Executive is terminated without "cause", as
defined in Paragraph 8 below, becomes disabled, or dies at any
time after the date hereof, then the Corporation will commence
immediately to pay the Executive or his estate under the SERP
Plan a benefit equal to his full vested interest (including
credit for five Post-Effective Date Years of Service) as if he
had worked to his Normal Retirement Date (the first day of the
month after the Executive attains age 60). Thus, by way of
example of the above contained provisions, if Executive retires
on December 31, 2000, the numerator of the fraction referred to
in the definition of Accrued Benefits in Section 2 (a) of the
SERP Plan shall be 13 and the denominator shall be 13. Further,
for purposes of the definition of Final Average Compensation in
Section 2 (j) of the SERP Plan, if the Executive's Final Average
Compensation must be calculated before July 14, 2004, his Final
Average Compensation shall be the higher of (i) as determined
pursuant to the SERP Plan and the provisions of this Agreement;
(ii) if he dies or becomes disabled, $245,000, or his then
current salary on an annualized basis, plus a pro rata estimate
of his bonus award for the current year pursuant to the Company's
Incentive Bonus Plan; or, (iii) if he is terminated without
cause, $345,000, plus an estimate of his bonus award for the
current year pursuant to the Company's Incentive Bonus Plan, but
in no event shall the bonus be less than $30,000. To the extent
of any inconsistency between this Agreement and the SERP Plan,
the terms of this Agreement shall prevail.
(b) GENERAL BENEFITS: The Executive shall be entitled to
participate in, and receive benefits under, any pension, profit
sharing, insurance, hospitalization, medical,
2
<PAGE> 3
disability, vacation or other employee benefit plan, program or
policy of the Corporation which may be in effect at any time
during the course of his employment by the Corporation, and which
shall be generally available to senior executives of the
Corporation occupying positions of comparable status or
responsibility, subject to the terms of such plans, programs or
policies. Notwithstanding the foregoing, the Corporation may in
its discretion and at any time, change or evoke any of its
employee benefits plans, programs or policies, other than the
SERP Plan and the Executive shall not be deemed, by virtue of
this Agreement, to have any vested interest in any such plans,
programs or policies, except as otherwise provided herein. The
Corporation will also provide the Executive, at the Corporation's
expense, with an automobile reasonably appropriate to the
Executive's position, as determined by the Corporation, for use
by the Executive in connection with the performance of his duties
hereunder.
(c) STOCK OPTIONS: The Executive is awarded an additional grant
of 100,000 at $5.00 per share, stock options pursuant to the
provision of the Company's 1996 Stock Option Plan, as amended.
Vesting in such options shall accrue over a five year period in
equal yearly amounts. Should the Company terminate the Executive
without cause during the term of the contract, then the remaining
unvested portion of such options shall vest immediately.
6. WITHHOLDING: All payment required to be made by the Corporation
to the Executive hereunder shall be subject to the withholding
of such amounts relating to taxes and other governmental
assessments as the Corporation may reasonable determine it is
obligated to withhold pursuant to any applicable law, rule or
regulation.
7. DEATH; PERMANENT DISABILITY: This Agreement shall terminate upon
the death of the Executive during the term of this Agreement,
except as otherwise provided herein. If the Executive fails to
perform the services required hereunder during the term of this
Agreement because of illness or other incapacity for any
consecutive period of more than 180 days, or for shorter periods
aggregating more than 180 days in any consecutive twelve-month
period (any such illness or incapacity being hereinafter
referred to as "permanent disability"), then the Corporation, in
its discretion, may at any time thereafter terminate this
Agreement upon not less than 10 days written notice thereof to
the Executive, and this agreement shall terminate and come to an
end upon the date set forth in said notice as if said date were
the termination date of this Agreement; provided, however, that
such termination shall not become effective if, prior to the
date when such notice is given, the Executive's illness or
incapacity shall end and he shall be physically and mentally
able to perform the services required hereunder, and shall have
taken up and begun performing such duties.
If the Executive's employment shall be terminated by reason of
his death or permanent disability, the Corporation shall be
obligated to pay the Executive or his estate, commencing
immediately, (i) a lump sum payment equal to the Executive's
base salary for the remaining term of this Agreement; (ii) a pro
rata portion of any annual bonus which the Executive would
otherwise have been entitled to receive
3
<PAGE> 4
pursuant to any bonus plan or arrangement for senior executives
of the Corporation (such pro rata portion to be payable at the
time such annual bonus would otherwise have been payable to the
Executive); and, (iii) subject to the terms thereof, any
benefits which may be due to the Executive on the date of
termination by reason of death or disability under the
provisions of this Agreement, or any employee benefit plan,
program or policy.
8. TERMINATION:
(a) TERMINATION FOR CAUSE: The Corporation may at any time during
the term of this Agreement terminate the employment of the
Executive for cause. Termination for cause shall be by written
notice which specifies the cause for termination, and termination
of employment shall be immediately effective upon the Corporation
giving the Executive such notice. For purposes of this Agreement,
"cause" shall mean (i) willful failure, gross neglect, or
unreasonable refusal to perform the Executive's duties hereunder;
and, (ii) conviction in connection with any felony involving
moral turpitude. If the Executive is terminated for cause, the
Corporation will be obligated to pay the Executive (i) only his
base salary up to the date upon which the Corporation notifies
him of his termination for cause, and (ii) subject to the terms
thereof, any benefits which may be due to the Executive under the
provisions of this Agreement, or any employee benefit plan,
program, or policy.
(b) TERMINATION WITHOUT CAUSE: If the Executive is terminated
without cause, then the Corporation will be obligated to pay him
or his estate, commencing immediately, his base salary, plus a
reasonable estimate of the Executive's bonus pursuant to the
Company's Incentive Bonus Plan for the remaining term of this
Agreement, in addition to any other compensation and /or benefits
herein provided. If the Executive becomes disabled or dies, then
the Company will be obligated to pay him or his estate,
commencing immediately, a lump sum payment equal to his base
salary for the remaining term of this Agreement, in addition to
any other compensation and/or benefits herein provided.
9. INSURANCE:
The Executive agrees that the Corporation may insure the life of
the Executive in such amounts as the Corporation may in its
discretion determine, and may designate the Corporation as the
beneficiary under such policy or policies. The Executive agrees
that he will submit to a physical examination upon the
Corporation's request, and will execute any applications or other
documents as may be required to procure such life insurance.
10. NON-COMPETITION; SOLICITATION:
(a) The Executive agrees that during his employment with the
Corporation and for any period following his termination which
period is greater than 12 months and for which the Executive has
been paid a lump sum by the Corporation in accordance with this
Agreement, he shall not, without the written consent of the
Corporation and except as otherwise provided herein, directly or
indirectly, either individually or as
4
<PAGE> 5
an employee, agent, partner, shareholder, option holder, lender
of money, or guarantor, participate in, engage in or have a
financial interest or management position or other interest in
any business, firm, corporation or management position or other
interest in any business, firm, corporation or other entity if
it competes directly with any business operation conducted by
the Corporation or its subsidiaries or affiliates or any
successor or assignor thereof, during the employment period or
at the time of termination. The foregoing provisions of this
Section 10(a) shall not prohibit the ownership by the Executive
of 10% or less of any class of capital stock of a corporation
which is regularly traded on a national securities exchange or
over-the-counter on the NASDAQ System.
(b) The Executive further agrees that at any time during his
employment with the Corporation and for any period following his
resignation or termination which period is greater than 12 months
and for which the Executive has been paid a lump sum by the
Corporation in accordance with this Agreement, he shall not
solicit (or assist or encourage the solicitation of ) any
employee of the Corporation or any of its subsidiaries or
affiliates to work for Executive or for any business, firm,
corporation or other entity in which the Executive, directly or
indirectly, in any capacity described in Section 10(a) hereof,
participates or engages (or expects to participate or engage) or
has (or expects to have) a financial interest or management
position.
(c) If any covenant contained in this Section 10, or any part
thereof, is held by a court of competent jurisdiction to be
unenforceable because of the duration of such provision, the
activity limited by such provision, or the subject and /or area
covered by such provision, then the court making such
determination shall construe such restriction so as to thereafter
limit or reduce the scope or duration of such provision or part
thereof to be valid and enforceable to the greatest extent
permissible under applicable law.
11. TRADE SECRETS, ETC.: The Executive agrees that he shall not,
during or after the termination of this Agreement, divulge,
furnish or make accessible to any person, firm, corporation or
other business entity, any information, trade secrets, technical
data or know-how relating to the business, business practices,
methods, products, processes, equipment, clients' prices or
other confidential or secret aspect of the business of the
Corporation and/or any subsidiary or affiliate, except as may be
required in good faith in the course of his employment with the
Corporation or by law, without the prior written consent of the
Corporation, unless such information shall become public
knowledge (other than by reason of Executive's breach of the
provisions hereof).
12. ACCEPTANCE BY EXECUTIVE: The Executive accepts all of the terms
and provisions of this Agreement and agrees to perform all of
the covenants on his part to be performed hereunder.
13. EQUITABLE REMEDIES: The Executive acknowledges that he has been
employed for his unique talents and that his leaving the employ
of the Corporation would seriously hamper the business of the
Corporation and that the Corporation will suffer irreparable
damage if any provisions of Sections 10 or 11 hereof are not
performed strictly in accordance with their terms or are
otherwise breached. The Executive
5
<PAGE> 6
hereby expressly agrees that the Corporation shall be entitled
as a matter of right to injunctive or other equitable relief, in
addition to all other remedies permitted by law, to prevent a
breach or violation by the Executive and to secure enforcement
of the provisions of Sections 10 or 11 hereof. Resort to such
equitable relief, however, shall not constitute a waiver or any
other rights or remedies which the Corporation may have.
14. ENTIRE AGREEMENT: This Agreement constitutes the entire
agreement between the parties hereto and there are no other
terms other than those contained herein. No variation hereof
shall be deemed valid unless in writing and signed by the
parties hereto, and no discharge of the terms hereof shall be
deemed valid unless by full performance of the parties hereto or
by a writing signed by the parties hereto. No waiver by the
Corporation or any breach by the Executive of any provision or
condition of this agreement to be performed by him shall be
deemed a waiver of a breach of a similar or dissimilar provision
or condition at the same time or any prior or subsequent time.
15. SEVERABILITY: The validity and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or
impaired in the event that any provision in this agreement shall
be declared invalid, illegal or unenforceable by any court of
competent jurisdiction.
16. NOTICES: All notices, request, demands and other communications
provided for by this Agreement shall be in writing and shall be
deemed to have been given at the time when mailed in the United
States enclosed in a registered or certified post-paid envelope,
return receipt requested, and addressed to the appropriate
parties at the address stated below, or to such changed
addresses as such parties may designate by notice;
Correspondence to: 5480 E. Ferguson Drive, 3rd Floor
Commerce, CA 90022
provided, however, that any notice of change of address shall be
effective only upon receipt.
17. SUCCESSORS AND ASSIGNS: This Agreement in personal in its nature
and neither of the parties hereto shall, without the consent of
the other, assign or transfer this Agreement or any rights or
obligations hereunder (except for an assignment or transfer by
the Corporation to a successor as contemplated by the following
proviso); provided, however, that the provisions hereto shall
inure to the benefit of, and be binding upon, any successor of
the Corporation, whether by merger, consolidation, transfer of
all or substantially all of the assets of the Corporation, or
otherwise, and upon the Executive, his heirs, executors,
administrators and legal representatives.
18. GOVERNING LAW: This agreement and its validity, construction and
performance shall be governed in all respects by the internal
laws of the State of California without giving effect to any
principles of conflict of laws.
6
<PAGE> 7
19. HEADINGS: The headings in this agreement are for convenience of
reference only and shall not control or affect the meaning or
construction of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunder set their
hands and seals the day and year first above written.
CENTRAL FINANCIAL ACCEPTANCE CORPORATION
By:
-----------------------------------------
Gary M. Cypres, Chairman of the Board
--------------------------------------
Executive
7
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<PERIOD-START> JAN-01-1999
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