Back to GetFilings.com
ARISTAR, INC.
ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 14
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . 14
Item 7. Management's Analysis of the Results of Operations
for the Year Ended December 31, 1997. . . . . . . . 15
Item 8. Financial Statements and Supplementary Data. . . . . 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . 40
Note: Items 4, 6, 10, 11, 12 and 13 are not included as per
conditions met by Registrant set forth in General
Instruction I(1)(a) and (b) of Form 10-K.
3
PART I
Item 1. Business
Aristar, Inc. (the "Company"), incorporated in Delaware in 1986 as a successor
to a company incorporated in 1927, is a holding company headquartered in
Tampa, Florida whose subsidiaries are engaged in the consumer financial
services business. All of the Company's equity securities are owned
indirectly by Washington Mutual, Inc. ("Washington Mutual").
The Company's operations consist principally of a network of approximately 500
branch offices located in 23 states, primarily in the Southeast and Southwest.
These offices generally operate under the names Blazer Financial Services,
City Finance Company and First Community Financial Services. The Company's
branch offices are generally located in small to medium-sized communities in
suburban or rural areas and are managed by individuals who generally have
considerable consumer lending experience. The primary market for the
Company's consumer loans consists of households with an annual income of
$20,000 to $50,000.
The Company makes consumer installment loans and purchases retail installment
contracts from local retail establishments. These consumer credit
transactions are primarily for personal, family or household purposes. The
Company also provides consumer financial services through its industrial
banking subsidiaries in Colorado and Utah. In addition to making consumer
installment loans and purchasing retail installment contracts, these
subsidiaries also take customers' savings deposits (insured by the Federal
Deposit Insurance Corporation ("FDIC")).
Customer installment loans written in 1997 had original terms ranging from 12
to 360 months and averaged 64 months. For the year ended December 31, 1997,
72% of the volume of all consumer installment loans was either unsecured or
secured by guarantors, luxury consumer goods, automobiles or other personal
property, with the remaining 28% being secured by real estate. While the
interest yield on real estate secured loans is generally lower than for other
installment loans, such loans are typically larger and the ratio of cost to
amounts loaned is lower. Additionally, credit loss experience on real estate
secured loans has been significantly lower than on other loan types.
Retail installment contracts are generally acquired without recourse to the
originating merchant and provide a vehicle for developing future loan
business. Where these contracts result from the sale of consumer goods,
payment is generally secured by such goods, and, in some cases, a portion of
the purchase price is withheld from the merchant pending satisfactory payment
of the obligation. Contracts are typically written with original terms from 3
to 60 months and for 1997 had an average original term of 26 months.
4
Also, during 1997, the Company initiated a program to issue VISA credit cards
to its qualified existing customers. At December 31, 1997, the Company had
$22.4 million in credit card receivables outstanding.
Customer installment loans are generally originated by customer application
either at the branch or by telephone with branch personnel. A portion of
other installment loans is generated through direct mail campaigns. Retail
installment contracts are generally acquired through the originating merchant;
the Company had such arrangements with over 3,000 merchants at December 31,
1997.
From time to time, the Company also makes bulk purchases of existing loans and
contracts from the originating competitors or merchants. Consumer finance
receivables acquired through such bulk purchases totaled $98.5 million in
1997, $88.1 million in 1996 and $64.7 million in 1995.
The following table sets forth the Company's loan originations including
renewals for the periods indicated:
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Real estate secured loans $ 490,522 $ 453,821 $ 365,515
Other installment loans 1,283,553 1,090,601 1,290,408
Retail installment contracts 409,409 451,274 468,445
$ 2,183,484 $ 1,995,696 $ 2,124,368
Portfolio Composition
The following table provides an analysis by type of the Company's consumer
finance receivables (net of unearned finance charges and deferred loan fees)
at the dates shown:
December 31,
(Dollars in thousands) 1997 1996 1995
Notes and Contracts Receivable:
Amount $ 2,309,403 $ 2,185,903 $ 2,133,065
Number of accounts 1,029,532 1,064,142 1,068,269
Type as a percent of
Total Receivables
Real estate secured loans 42.0% 40.7% 37.0%
Other installment loans 44.0 42.6 46.1
Retail installment contracts 14.0 16.7 16.9
100.0% 100.0% 100.0%
5
At December 31, 1997, the average portfolio yield written by loan type was as
follows:
Average Yield
Real estate secured loans 12.7%
Other installment loans 25.2%
Retail installment contracts 19.0%
The following table sets forth the percentage of net consumer finance
receivables by state at December 31, 1997.
State % Maryland 1.9%
Alabama 3.8% Mississippi 4.4%
California 8.5% New Mexico 1.3%
Colorado 8.5% North Carolina 9.2%
Delaware 2.3% Oklahoma 3.1%
Florida 5.4% Pennsylvania 2.7%
Georgia 2.6% South Carolina 5.7%
Idaho 1.2% Tennessee 10.9%
Illinois 0.6% Texas 10.7%
Kansas 0.2% Utah 3.3%
Kentucky 2.1% Virginia 4.9%
Louisiana 4.9% West Virginia 1.8%
Geographic diversification of consumer finance receivables reduces the
concentration of credit risk associated with a recession in any one region.
Credit Loss Experience
The Company closely monitors portfolio delinquency in measuring the quality of
the portfolio and the potential for ultimate credit losses. Under the
Company's policy, non-real estate secured delinquent accounts are charged off
when they become 180 days contractually delinquent (120 days prior to October
1, 1996). Collection efforts continue after an account has been charged off
until the customer obligation is satisfied or until it is determined that the
obligation is not collectible or that the cost of continuing collection
efforts will not be offset by the potential recovery.
6
The following table sets forth the credit loss experience for the past three
years and the allowance for doubtful accounts at the end of each year:
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Balance, January 1 $ 70,045 $ 55,568 $ 53,217
Provision for Credit Losses 66,600 58,800 48,500
Amounts Charged-Off Net of Recoveries:
Amount(1) (65,051) (46,418) (47,879)
Percent of Average Net Receivables(2) (3.0%) (2.2%) (2.4%)
Allowance on notes purchased 2,729 2,095 1,730
Balance, December 31 $ 74,323 $ 70,045 $ 55,568
Percent of Year-End Net Receivables 3.2% 3.2% 2.6%
(1) Under the Company's policy, non-real estate secured delinquent accounts are
charged off when they become 180 days contractually delinquent (120 days
prior to October 1, 1996). Because of this change in policy, the charge-
offs for the three years presented are not comparable. The Company is not
able to determine what the charge-offs would have been in prior years under
the new policy had it been in effect January 1, 1995.
(2) Average of consumer finance receivables (net of unearned finance
charges) at each month end during the period.
7
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Balance, January 1 $ 70,045 $ 55,568 $ 53,217
Provision 66,600 58,800 48,500
Amounts charged off
Real estate secured loans (1,292) (1,582) (1,324)
Other installment loans (64,460) (50,086) (51,208)
Retail installment contracts (13,946) (10,947) (11,404)
(79,698) (62,615) (63,936)
Recoveries
Real estate secured loans 556 442 590
Other installment loans 11,538 12,892 12,543
Retail installment contracts 2,553 2,863 2,924
14,647 16,197 16,057
Net charge-offs (65,051) (46,418) (47,879)
Allowances on notes purchased 2,729 2,095 1,730
Balance, December 31 $ 74,323 $ 70,045 $ 55,568
Due to the nature of the finance business, some customer delinquency and loss
is unavoidable. The management of the consumer finance business attempts to
control customer delinquency through careful evaluation of each borrower's
application and credit history at the time the loan is made or acquired, and
appropriate collection activity. The Company seeks to reduce its risk by
focusing on individual lending, making a greater number of smaller loans than
would be practical in commercial markets, and maintaining disciplined control
over the underwriting process. The Company has a geographically diverse
portfolio as described in Portfolio Composition. An account is considered
delinquent for financial reporting purposes when a payment is 60 days or more
past due, based on the original or extended terms of the contract. The
delinquency and loss experience on real estate-secured loans is generally more
favorable than on other installment loans.
The following table sets forth the ratio of receivables delinquent for 60 days
or more on a contractual basis to gross receivables outstanding:
December 31,
1997 1996 1995
Real estate secured loans 0.8% 0.9% 1.2%
Other installment loans 4.3 4.0 2.2
Retail installment contracts 3.2 2.6 1.7
8
Interest Rate Spreads and Cost of Borrowed Funds
A relatively high ratio of borrowings to invested capital is customary in
consumer finance activities due to the liquidity of the assets employed by the
business. The spread between the revenues received from loans and interest
expense is a significant factor in determining the net income of the Company.
The table below sets forth certain percentages relative to the spread between
interest the Company received on the loan portfolio and interest expense for
each of the last three years:
Year Ended December 31,
1997 1996 1995
Ratio to Average Net Receivables:
Interest and Fee Income 16.8% 17.6% 18.1%
Interest and Debt Expense 5.7 5.6 5.6
Gross Spread 11.1% 12.0% 12.5%
The Company funds its consumer finance operations principally through net cash
flows from operating activities, short-term borrowings in the commercial paper
market, issuances of long-term debt and customer deposits. The Company had
commercial paper outstanding at December 31, 1997 of $357.5 million at a 6.1%
weighted average interest rate.
In 1996, the Company entered into a $550 million revolving credit agreement
with several domestic and foreign banks. The agreement, which replaced the
previous revolving credit agreement of $450 million, has a four-year term with
repayment in full of any balance outstanding in August, 2000. There were no
borrowings under any of the above-described revolving credit agreements in
1997 or 1996.
In June, 1997, the Company filed an $800 million shelf registration statement.
Under this registration statement, the Company issued in October, 1997, $150
million of 6.3% senior notes maturing October 1, 2002; and, in November, 1997,
$150 million of 6.5% senior notes maturing November 15, 2003.
The Company also accepts customer deposits in its industrial banks. Such
deposits totaled $163.2 million at December 31, 1997, $146.1 million at
December 31, 1996, and $160.8 million at December 31, 1995.
Provisions of certain of the Company's debt agreements restrict the payment of
dividends to a maximum prescribed proportion of cumulative earnings and
contributed capital and provide for the maintenance of minimum levels of
equity and maximum leverage ratios. At December 31, 1997, approximately $23
million was available under the debt agreement restriction for future
dividends.
9
Credit Insurance Operations
The Company makes available, at the option of its customers, credit life,
credit accident and health, and credit casualty insurance products. Credit
life insurance provides that the customer's credit obligation, to the extent
of the policy limits, is paid in the event of death. Credit accident and
health insurance provides for the payment of installments due on the
customer's credit obligation in the event of disability resulting from illness
or injury. Credit casualty insurance insures payment, to the extent of the
policy limits, of the credit obligation or cost to repair certain property
used as collateral for such obligation in the event such property is destroyed
or damaged.
Purchase of such insurance is not a condition to obtaining a loan, although
the Company may require casualty insurance covering collateral to be obtained
from unaffiliated sources by the customer. The Company does not sell
insurance to non-customers. Credit insurance sold by the Company is written
by unaffiliated insurance companies and is substantially all reinsured by the
Company, which earns reinsurance premiums thereon.
Risk Factors
In addition to the other information in this Report on Form 10-K, the
following factors should be considered carefully:
Decline of Collateral Value May Adversely Affect Loan-to-Value Ratios
Approximately 42% of the Company's finance receivables outstanding were
secured by real estate at December 31, 1997, of which approximately 59% were
first mortgages. The Company's lending policies limit the loan to value
("LTV") ratio of such loans to a maximum of 80%. Nevertheless, any material
decline in real estate values reduces the ability of borrowers to use home
equity to support borrowings and increases the LTV's of loans previously made
by the Company, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of a borrower default. Further,
delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Any sustained period of such increased
delinquencies, foreclosures and losses could adversely affect the Company's
results of operations and financial condition. At December 31, 1997, the
Company held forty-two (42) foreclosed single-family dwellings with a carrying
value of approximately $1.6 million.
10
Change in Delinquency Rate
As of December 31, 1997, total delinquent loans (60 days or more past due) as
a percentage of the Company's portfolio of finance receivables was 2.7%
compared to 2.6% as of December 31, 1996. For the year ended December 31,
1997, loan charge-offs were 3.0% of average loan receivables for the year.
While the Company employs underwriting criteria and collection methods to
mitigate the risks inherent in loans made to its customers, no assurance can
be given that such criteria or methods will afford adequate protection against
such risks. In the event that the Company's portfolio of finance receivables
experiences higher delinquencies, foreclosures or losses than anticipated, the
Company's results of operations or financial condition could be adversely
affected.
Impact of Regulation and Legislation; Regulatory Enforcement
The Company's business is subject to extensive regulation, supervision and
licensing by governmental authorities in the United States (including federal,
state and local authorities). The Company is also subject to various laws,
regulations and judicial and administrative decisions imposing requirements
and restrictions on part or all of its operations. The Company's lending
activities are subject to the Truth-in-Lending Act (including the Home
Ownership and Equity Protection Act of 1994), the Fair Housing Act, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act, the Real Estate
Settlement Procedures Act ("RESPA"), the Home Mortgage Disclosure Act and the
Fair Debt Collection Practices Act and regulations promulgated thereunder, as
well as other federal, state and local statutes and regulations affecting the
Company's activities. The Company is also subject to the rules and
regulations of, and examinations by, state regulatory authorities with respect
to originating, processing, underwriting and servicing loans. These rules and
regulations, among other things, (i) impose licensing obligations on the
Company, (ii) establish eligibility criteria for mortgage loans, (iii)
prohibit discrimination, (iv) provide for inspections and appraisals of
properties, (v) require credit reports on loan applicants, (vi) regulate
assessment, collection, foreclosure and claims handling, (vii) mandate certain
disclosures and notices to borrowers and (viii) in some cases, fix maximum
interest rates, fees and loan amounts. Failure to comply with these
requirements can lead to termination or suspension of the Company's ability to
make and collect loans, certain rights of rescission for mortgage loans, class
action lawsuits and administrative enforcement actions. Recent Federal
legislation, the Riegle Community Development and Regulatory Improvement Act
(the "Riegle Act"), has brought additional regulatory attention to mortgage
loans having relatively higher origination fees and interest rates, such as
those made by the Company, and the Company expects its business to be the
focus of additional United States federal and state legislation, regulation
and possible enforcement in the future.
Additionally, the Company's sale of credit life, credit disability, and credit
property insurance to its customers is subject to state and federal statutes
and regulations. Failure to comply with any of the foregoing state and
federal requirements could lead to imposition of civil penalties on the
Company, class action lawsuits and administrative enforcement activities.
11
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead
to regulatory investigations or enforcement actions and private causes of
action, such as class action lawsuits, with respect to the Company's
compliance with the applicable laws and regulations. As a consumer lender,
the Company has been, and expects to continue to be, subject to regulatory
enforcement actions and private causes of action from time to time with
respect to its compliance with applicable laws and regulations. The Company's
lending practices have in the past been and currently are under regulatory
review by various state authorities. Although the Company utilizes systems
and procedures to facilitate compliance with these legal requirements and
believes that it is in compliance in all material respects with applicable
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future, or that
existing laws and regulations will not be interpreted in a more restrictive
manner, which could make compliance more difficult or expensive. See
"Business- Regulation."
Risks Relating to Credit Card Program
During 1997, the Company initiated a program to issue VISA credit cards to its
qualified existing customers. At December 31, 1997, the Company had $22.4
million in credit card receivables outstanding. Due to the recent
introduction of its credit card product, the Company does not yet have a
reliable loss experience with respect to its credit card portfolio. To the
extent that actual losses in the credit card portfolio are greater than the
Company's loss experience on the balance of its portfolio, there could be a
material adverse effect on the Company's results of operations. Changes in
laws and regulations applicable to the VISA cards could adversely affect the
demand for acquisition and use of VISA cards by consumers and, therefore,
could adversely affect the benefits of the VISA card program or result in
losses to the Company.
Risk of Litigation
In the ordinary course of its business, the Company is subject to claims made
against it by borrowers arising from, among other things, losses that are
claimed to have been incurred as a result of alleged breaches of fiduciary
obligations, misrepresentations, errors and omissions of employees, officers
and agents of the Company, incomplete documentation and failures by the
Company to comply with various laws and regulations applicable to its
business. The Company believes that liability with respect to any currently
asserted claims or legal actions is not likely to be material to the Company's
consolidated results of operations or financial condition; however, any claims
asserted in the future may result in legal expenses or liabilities that could
have a material adverse effect on the Company's results of operations and
financial condition and could distract members of management from the
operations of the Company.
12
Fluctuations in Interest Rates May Adversely Affect Profitability
The profitability of the Company is likely to be adversely affected during any
period of rapid changes in interest rates. A substantial and sustained
increase in interest rates could adversely affect the spread between the rate
of interest received by the Company on its loans and the interest rates
payable under its debt and deposit liability agreements. Such interest rate
increases could also affect the ability of the Company to originate loans. A
significant decline in interest rates could decrease the balance of the finance
receivables portfolio by increasing the level of loan prepayments.
New Market Risk
The State of Texas recently passed a constitutional amendment which permits
home equity lending. The Company anticipates that a large market for home
equity loans will develop in Texas. The Company has operated its consumer
finance business in Texas for many years and intends to introduce its home
equity products in Texas to take advantage of this new opportunity. Since
there is no industry experience with home equity lending in Texas and since no
cases interpreting the home equity lending provisions in Texas have yet been
decided, no assurance can be given that the Company's loss experience in its
home equity lending in Texas will not exceed that of its real estate secured
loan portfolio in other states.
Competition Could Adversely Affect Results of Operations
Competition in the consumer finance business is intense. The consumer lending
market is highly fragmented and has been serviced by commercial banks, credit
unions, and savings institutions, as well as by other consumer finance
companies. Many of these competitors have greater financial resources and may
have significantly lower costs of funds than the Company. Even after the
Company has made a loan to a borrower, the Company's competitors may seek to
refinance the Company's loan in order to offer additional loan amounts or
reduce payments. Furthermore, the profitability of the Company and other
similar lenders is attracting additional competitors into this market, with
the possible effect of reducing the Company's ability to charge its customary
origination fees and interest rates. In addition, if the Company expands into
new geographic markets, it will face competition from lenders with established
positions in these locations. There can be no assurance that the Company will
be able to continue to compete successfully in the markets it serves. Such an
event could have a material adverse effect on the Company's results of
operations and financial conditions. See "Business-Competition."
13
Environmental Liabilities
Substantially all of the Company's real estate receivables are secured by
single-family dwellings. In the course of its business, the Company has
acquired, and may acquire in the future, such properties securing loans that
are in default. There is a risk that hazardous substances or waste,
contaminants, pollutants or sources thereof could be discovered on such
properties after acquisition by the Company. In such event, the Company may
be required by law to remove such substances from the affected properties at
its sole cost and expense. There can be no assurance that (i) the cost of
such removal would not substantially exceed the value of the affected
properties or the loans secured by the properties, (ii) the Company would have
adequate remedies against the prior owner or other responsible parties or
(iii) the Company would not find it difficult or impossible to sell the
affected properties either prior to or following such removal. At December
31, 1997, the Company held forty-two (42) foreclosed single-family dwellings
with a carrying value of approximately $1.6 million.
Governmental Regulation
The Company's operations are, for the most part, regulated by federal and
state consumer finance laws or similar legislation. All of the states in
which finance subsidiaries of the Company are licensed to do business have
laws, which vary from state to state, regulating the consumer finance
business. These laws, among other things, typically limit the size of loans,
set maximum interest rates and maximum maturities and regulate certain lending
and collection activities. Although consumer finance laws have been in effect
for many years, amending and new legislation is frequently proposed. The
Company is unable to predict whether or when any such proposals might
ultimately be enacted into law or to assess the impact any such enactment
might have on the Company. In addition, as they accept customers' deposits,
the two banking subsidiaries are subject to regulation by the FDIC and the
relevant state banking authorities.
Competition
The consumer financial services business is highly competitive. The Company's
principal competitors are other local, regional and national finance
companies, banks, credit unions, savings associations, and other similar
financial institutions.
Ratio of Earnings to Fixed Charges
The Company's ratio of earnings to fixed charges, which represents the number
of times fixed charges were covered by earnings, was 1.57 in 1997, 1.80 in
1996, 1.91 in 1995, 1.96 in 1994 and 1.90 in 1993. For purposes of computing
this ratio, earnings consist of income from operations before income taxes
plus fixed charges. Fixed charges consist of interest and debt expense and
an appropriate portion of rentals.
14
Employees
The Company employs approximately 2,400 full-time employees. The Company also
employs part-time employees. None of these employees are represented by a
union. Management considers relations with its employees to be satisfactory.
Item 2. Properties
The Company owns its 71,000 square foot headquarters building on 6 acres of
land, which it built in 1994 at a total cost of approximately $8 million.
The Company's branch offices, located in 23 states, are leased typically for
terms of three to five years with options to renew. Typical locations include
shopping centers, office buildings and storefronts, generally of relatively
small size sufficient to accommodate a staff of four to eight employees.
See Note 14 to the Consolidated Financial Statements for additional
information on rental expense and lease commitments.
Item 3. Legal Proceedings
The Company and certain of its subsidiaries are parties to various lawsuits
and proceedings arising in the ordinary course of business. The Company has
also been named as a defendant in a number of class action suits, in which
various industry-wide practices arising from routine business activities are
being challenged and various damages are being sought. Certain of these
lawsuits and proceedings arise in jurisdictions, such as Alabama, that permit
damage awards disproportionate to the actual economic damages incurred. Based
upon information presently available, the Company believes that the total
amounts that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Company's
consolidated results of operations and financial position. However, it should
be noted that the frequency of large damage awards, including large punitive
damage awards, that bear little or no relation to actual economic damages
incurred by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company is an indirect wholly-owned subsidiary of Washington Mutual and
the Company's common stock is not traded on any national exchange or in any
other established market.
Payment of dividends is within the discretion of the Company's Board of
Directors; however, it is anticipated that the Company will pay quarterly
dividends in 1998 of 30% of net income. Provisions of certain of the
Company's debt agreements restrict the payment of dividends to a maximum
prescribed proportion of cumulative earnings and contributed capital and
otherwise provide for the maintenance of minimum levels of equity and maximum
leverage ratios. The Company declared and paid dividends totaling $17.5
million during 1997 and $116.8 million during 1996.
15
Item 7. Management's Analysis of the Results of Operations for
the Year Ended December 31, 1997
The Company's average net consumer finance receivables outstanding were $90.8
million, or 4.3%, greater in 1997. However, because real estate secured loans
made up a greater portion of the loan portfolio during 1997 as compared to
1996, and because of interest rate and competitive pressures, the overall
portfolio yield decreased 80 basis points to 16.8% from 17.6%. In the year
ended December 31, 1997, the Company reduced interest and fee income by the
pre-tax amount of $4.2 million, resulting from the revision of its estimate of
interest earnings on "same as cash" retail installment contracts. (See Note 5
to the accompanying financial statements.) As a result, loan interest and
fee income decreased $714 thousand, or 0.2%, for the year ended December 31,
1997, as compared to the prior year. Income from investment securities
increased $1.2 million, or 13.0%, over the prior year. As a result, total
interest income increased by $476 thousand, or 0.1%, over the prior year.
Average debt outstanding increased $248 thousand, or 15.1%, and the weighted
average interest rate on such debt decreased by 53 basis points, resulting in
an increase in interest and debt expense of $8.1 million, or 6.7%, for the
year ended December 31, 1997, as compared to 1996.
During 1997, the Company issued the following senior notes: in October, $150
million at 6.30% maturing in 2002; and, in November, $150 million at 6.50%
maturing in 2003. The proceeds were used to reduce borrowings of the Company
(including outstanding commercial paper) and for general corporate purposes.
The provision for credit losses for the year ended December 31, 1997 was 3.03%
as a percentage of average net finance receivables for that period, as
compared to 2.79% for 1996. The increase in provision rate reflects
management's assessment of the quality of the Company's receivables portfolio
at this time including current economic trends, loan portfolio agings,
historical loss experience and evaluation of collateral.
Delinquencies in excess of 60 days rose to 2.7% at December 31, 1997 compared
to 2.6% at December 31, 1996, and 1.8% at December 31, 1995. Correspondingly,
the charge-off rate as a percent of average net receivables moved higher in
1997, reaching 3.0% as compared to 2.2% in 1996, and 2.4% in 1995. Under the
Company's policy, non-real estate secured delinquent accounts are charged off
when they become 180 days contractually delinquent (120 days prior to October
1, 1996). Because of this change in policy, the charge-offs for the three
years presented are not comparable. The Company is not able to determine what
the charge-offs would have been in prior years under the new policy had it
been in effect January 1, 1995. This increase in delinquencies and charge-offs
reflects a continued high level of personal bankruptcies, a national
trend which has drawn the attention of federal and state legislators.
Personnel expenses were $2.3 million, or 3.1%, lower in 1997 as compared to
1996. This is primarily due to a reduction in allocated employee benefit
costs.
16
In 1996, there was an $8.0 million insurance recovery resulting from
fraudulently over-billed marketing costs which had occurred over a number of
years. (See Note 4 to the accompanying financial statements.) Other
operating expenses before the above-described insurance recovery were $531
thousand, or 1.3%, higher in 1997 as compared to 1996. Productivity, defined
as the ratio of operating and administrative expenses (before deferral of
direct loan costs and, in 1996, the above described insurance recovery) to
average outstanding finance receivables, improved to 6.6% in 1997 as compared
to 6.8% in 1996.
The Company has initiated a program to prepare the Company's computer system
and applications for years after 1999. Many computer programs use two digits
to identify the year in a date field. When computations involve years after
1999, such programs could create erroneous results or fail. The Company is
assessing all internal programs and systems as well as contacting software
vendors and others with which it conducts business to ensure that potential
problems are identified and resolved. The Company expects to incur internal
staff costs as well as consulting and other expenses related to infrastructure
enhancements necessary to prepare the systems for the years after 1999 and to
perform appropriate testing. The Company does not believe that such process
will result in a material cost to the Company.
17
Item 8. Financial Statements and Supplementary Data
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholder of
Aristar, Inc.
We have audited the accompanying consolidated statement of financial condition
of Aristar, Inc. and subsidiaries (the "Company") as of December 31, 1997, and
the related consolidated statements of operations and retained earnings, and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of the Company for the years
ended December 31, 1996 and 1995 were audited by other auditors whose report,
dated January 17, 1997, expressed an unqualified opinion on those consolidated
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such 1997 consolidated financial statements present fairly, in
all material respects, the financial condition of the Company as of December
31, 1997, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
January 20, 1998
18
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholder of
Aristar, Inc.
In our opinion, the consolidated statements of financial condition and the
related consolidated statements of operations and retained earnings and of
cash flows as of and for each of the two years in the period ended December
31, 1996 (appearing on pages 19 through 21 of this Form 10-K Annual Report)
present fairly, in all material respects, the financial position, results of
operation and cash flows of Aristar, Inc. and it subsidiaries as of and for
each of the two years in the period ended December, 31, 1996, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and the significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Aristar,
Inc. and its subsidiaries for any period subsequent to December 31, 1996.
As described in Note 3, during 1996, the Company acquired two businesses from
affiliated companies. Both transactions were accounted for in a manner
similar to a pooling of interests, which gave retroactive effect to these
acquisitions.
PRICE WATERHOUSE LLP
Tampa, Florida
January 17, 1997
19
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Financial Condition
(Dollars in thousands) December 31, 1997 December 31, 1996
ASSETS
Consumer finance receivables, net $ 2,235,080 $ 2,115,858
Investment securities 154,475 137,072
Cash and cash equivalents 26,446 22,660
Property and equipment, less accumulated
depreciation and amortization: 1997,
$22,310; 1996, $21,528 9,687 10,338
Deferred charges 24,504 11,956
Excess of cost over equity of
companies acquired, less accumulated
amortization: 1997, $59,702; 1996, $52,638 49,591 56,655
Other assets 34,245 37,319
TOTAL ASSETS $ 2,534,028 $ 2,391,858
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Short-term debt $ 357,532 $ 398,006
Long-term debt 1,472,872 1,352,770
Total debt 1,830,404 1,750,776
Customer deposits 163,185 146,138
Accounts payable and other liabilities 47,209 46,366
Federal and state income taxes 24,628 13,836
Insurance claims and benefits reserves 7,824 7,702
Unearned insurance premiums and
commissions 62,594 57,800
Total liabilities 2,135,844 2,022,618
Commitments and contingencies
(Notes 14 and 15)
Stockholder's equity
Common stock: $1.00 par value;
10,000 shares authorized: 1,000
shares issued and outstanding 1 1
Paid-in capital 44,894 44,894
Retained earnings 352,756 323,969
Net unrealized holding gain on
investment securities 533 376
Total stockholder's equity 398,184 369,240
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 2,534,028 $ 2,391,858
See Notes to Consolidated Financial Statements.
20
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Operations and Retained Earnings
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Loan interest and fee income $ 369,600 $ 370,314 $ 363,448
Investment securities income 10,373 9,183 8,801
Total interest income 379,973 379,497 372,249
Interest and debt expense 128,887 120,758 114,917
Net interest income before
provision for credit losses 251,086 258,739 257,332
Provision for credit losses 66,600 58,800 48,500
Net interest income 184,486 199,939 208,832
Other operating income
Net insurance operations
and other income 26,555 27,205 29,235
Other expenses
Personnel expenses 69,468 71,724 67,938
Occupancy expense 10,068 9,919 10,681
Advertising expense 5,807 4,848 5,873
Amortization of excess cost over
equity of companies acquired 7,064 7,063 7,065
Other operating expenses 42,603 34,072 38,768
135,010 127,626 130,325
Income before income taxes 76,031 99,518 107,742
Provision for federal and
state income taxes 29,744 37,000 42,445
Net Income 46,287 62,518 65,297
Retained earnings
Beginning of year 323,969 428,273 385,476
Dividends (17,500) (116,800) (22,500)
Transfer to Great Western Bank,
A Federal Savings Bank (15,192)
Transfer to Great Western
Financial Corporation (34,830)
End of year $ 352,756 $ 323,969 $ 428,273
See Notes to Consolidated Financial Statements.
21
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Cash flows from operating activities
Net income $ 46,287 $ 62,518 $ 65,297
Adjustments to reconcile net income
to net cash provided by operating
activities
Provision for credit losses 66,600 58,800 48,500
Depreciation and amortization 13,750 13,523 13,148
Deferred income taxes (4,060) (16,188) (13)
Increase (decrease) in
Accounts payable and other
liabilities 843 (21,313) (30,432)
Unearned insurance premiums
and commissions and insurance
claims and benefits reserves 4,916 737 2,900
Currently payable income taxes 14,734 18,455 4,511
(Increase) decrease in other assets 3,074 (23,464) 10,021
Net cash provided by operating
activities 146,144 93,068 113,932
Cash flows from investing activities
Investment securities purchased (62,582) (40,331) (55,884)
Investment securities matured 45,454 43,317 43,223
Consumer finance receivables
originated or purchased (1,493,058) (1,407,334) (1,484,545)
Consumer finance receivables
repaid 1,293,161 1,308,184 1,299,233
Net change in property and equipment (998) (665) (602)
Net cash used in investing
activities (218,023) (96,829) (198,575)
Cash flows from financing activities
Net change in short-term borrowings (40,474) 85,130 133,791
Proceeds from issuance of
long-term debt 326,344 453,539 99,909
Long-term debt issue costs (2,952) (2,615) (1,162)
Repayments of long-term debt (206,800) (105,000) (189,000)
Net change in customer deposits 17,047 (14,634) 30,719
Net change in due to affiliate (237,576) 34,361
Dividends paid (17,500) (116,800) (22,500)
Transfer to Great Western Bank,
A Federal Savings Bank (15,192)
Transfer to Great Western
Financial Corporation (34,830)
Net cash provided by financing
activities 75,665 12,022 86,118
Net increase in cash and
cash equivalents 3,786 8,261 1,475
Cash and cash equivalents
Beginning of year 22,660 14,399 12,924
End of year $ 26,446 $ 22,660 $ 14,399
Supplemental disclosures of
cash flow information
Interest paid $ 125,841 $ 118,038 $ 113,665
Intercompany payments in lieu of
federal and state income taxes 23,011 49,612 35,339
See Notes to Consolidated Financial Statements.
22
ARISTAR, INC. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Ownership and Operations
At June 30, 1997, Aristar, Inc. was an indirect, wholly-owned subsidiary of
Great Western Financial Corporation ("GWFC"). On July 1, 1997, pursuant to an
Agreement and Plan of Merger announced March 6, 1997, GWFC merged with and
into a wholly-owned subsidiary of Washington Mutual, Inc. ("Washington
Mutual") (the "Great Western Merger"). As a result of this merger, Aristar,
Inc. became an indirect, wholly-owned subsidiary of Washington Mutual. The
Great Western Merger was accounted for as a pooling of interests.
Accordingly, these financial statements reflect historical cost. Aristar,
Inc. and its subsidiaries, all of which are wholly-owned, are referred to
hereinafter as the "Company."
The Company is engaged primarily in the consumer financial services business
and its operations consist principally of a network of approximately 500
branch offices located in 23 states, primarily in the Southeast and
Southwest. These offices generally operate under the names Blazer Financial
Services, City Finance Company and First Community Financial Services. The
Company makes consumer installment loans and purchases retail installment
contracts from local retail establishments. These consumer credit
transactions are primarily for personal, family or household purposes. The
Company also engages in the industrial banking business through its
subsidiaries in Colorado and Utah. In addition to making consumer installment
loans and purchasing retail installment contracts, these subsidiaries also
take customers' savings deposits.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of Aristar, Inc. and its subsidiaries, all of which are wholly-
owned, after elimination of all material intercompany balances and
transactions. Certain amounts in prior years have been reclassified to
conform to the current year's presentation.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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.
Income Recognition from Finance Operations. Unearned finance charges on all
types of consumer finance receivables are recognized on an accrual basis,
using the interest method. Accrual generally is suspended when payments are
more than three months contractually overdue. Loan fees and directly related
lending costs are deferred and amortized using the interest method over the
contractual life of the related receivables. A portion of the Company's
retail installment contracts are "same as cash". This provides a period
during which the customer is allowed to pay the account balance in full
without interest charges. The Company recognizes interest income only on the
portion of these receivables which it estimates will not be paid in full
without interest charges.
23
Provision and Allowance for Credit Losses. The Company provides, through
charges to income, an allowance for losses which, based upon management's
evaluation of numerous factors, including current economic trends, loan
portfolio agings, historical loss experience and evaluation of collateral, is
deemed adequate to cover reasonably expected losses on outstanding
receivables. The Company's consumer finance receivables are a large group of
smaller-balance homogenous loans that are collectively evaluated for
impairment.
Losses on receivables are charged to the allowance for credit losses based
upon the number of days delinquent or when collectibility becomes questionable
and the underlying collateral, if any, is considered insufficient to liquidate
the receivable balance. Non-real estate secured delinquent receivables are
generally charged off when they are 180 days contractually delinquent (120
days prior to October 1, 1996). Recoveries on previously written-off
receivables are credited to the allowance.
Investment Securities. Debt and equity securities are classified as
available for sale and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported, net of taxes, as a separate
component of stockholder's equity. Gains and losses on investment securities
are recorded when realized on a specific identity basis. Investment security
transactions are recorded using trade date accounting.
Property, Equipment and Leasehold Improvements. Property, equipment and
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are provided principally on the
straight-line method over the estimated useful life or, if less, the term of
the lease.
Deferred Charges. Expenditures that are deferred are amortized over the
period benefited. Amortization is computed principally using the straight-line
method.
Excess of Cost Over Equity of Companies Acquired. The excess of cost over
the fair value of net assets of companies acquired is amortized on a straight-
line basis, generally over periods of up to 25 years. The Company
periodically reviews intangibles to assess recoverability and impairment is
recognized in operations if permanent loss of value occurs.
Insurance Premiums and Acquisition Costs. Insurance premiums are deferred
and subsequently amortized into revenue over the terms of the related
insurance contracts. The methods of amortization used are pro rata, sum-of-the-
digits and a combination thereof. Policy acquisition costs (principally
ceding commissions and premium taxes) are deferred and charged to expense over
the terms of the related policies in proportion to premium recognition.
Insurance Claims and Benefits Reserves. Reserves for reported claims on
credit life and health insurance are established based upon standard actuarial
assumptions used in the insurance business for such purposes. Claims reserves
for reported property and casualty insurance claims are based upon estimates
of costs and expenses to settle each claim. Additional amounts of reserves,
based upon prior experience and insurance in force, are provided for each
class of insurance for claims which have been incurred but not reported as of
the balance sheet date.
24
Income Taxes. The Company is included in the consolidated Federal income tax
return filed by Washington Mutual. Currently payable Federal income taxes
will be paid to Washington Mutual. Federal income taxes are allocated between
Washington Mutual and its subsidiaries in proportion to the respective
contribution to consolidated income or loss. Allocations for state income
taxes approximate the amount the Company would have paid on a separate entity
basis. Deferred income taxes are provided on elements of income or expense
that are recognized in different periods for financial and tax reporting
purposes.
Taxes on income are determined by using the liability method as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. This approach requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS No. 109 requires the consideration of
all expected future events other than enactments of changes in the tax law or
rates.
Statement of Cash Flows. For purposes of reporting cash flows, the Company
considers all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
Fair Value Disclosures. Quoted market prices are used, where available, to
estimate the fair value of the Company's financial instruments. Because no
quoted market prices exist for a significant portion of the Company's
financial instruments, fair value is estimated using comparable market prices
for similar instruments or using management's estimates of appropriate
discount rates and cash flows for the underlying asset or liability. A change
in management's assumptions could significantly affect these estimates;
accordingly, the Company's fair value estimates are not necessarily indicative
of the value which would be realized upon disposition of the financial
instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Consumer finance receivables. The approximate fair value of consumer
finance receivables is estimated by discounting the future cash flows
using current rates at which similar loans would be made with similar
maturities to borrowers with similar credit ratings. The fair value is
not adjusted for the value of potential loan renewals from existing
borrowers.
Investment securities. Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments.
Debt. The carrying amount reported in the statement of financial
condition for short-term debt approximates its fair value given its
brief maximum term. The approximate fair value for long-term debt is
estimated using rates currently available to the Company for debt with
similar terms and remaining maturities.
25
Deposit liabilities. The fair values disclosed for fixed-rate savings
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregate expected maturities on time
deposits. The fair values disclosed for savings and money market
accounts are, by definition, equal to the amount payable on demand at
the reporting date.
Adoption of Recently Issued Accounting Standards. SFAS No. 130, Reporting
Comprehensive Income was issued in June 1997 and requires businesses to disclose
comprehensive income and its components in their financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997, and
is applicable to interim periods. This statement will not affect the results
of operations or financial position of the Company.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information was issued in June 1997 and redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. SFAS No. 131 is effective
beginning January 1, 1998. The statement will not affect the results of
operations or financial position of the Company.
Note 3 Transfers from Related Parties
On April 30, 1996, Great Western Bank, a Federal Savings Bank ("GWB"), then
also a wholly owned subsidiary of GWFC, transferred to the Company a portion
of its consumer finance business, hereinafter referred to as Great Western
Financial Services ("GWFS"). GWFS was comprised primarily of approximately
$242 million in net consumer finance receivables. The Company paid fair value
(as determined by independent appraisal) of approximately $252 million in cash
raised through the issuance of commercial paper. The Company accounted for
the approximate $10 million premium as a dividend to GWFC. Additionally, at
the purchase date, the Company recorded a transfer to GWB of approximately $15
million, representing the accumulated earnings of GWFS at that date.
On December 31, 1996, GWFC transferred to the Company a portion of its
consumer banking business, hereinafter referred to as Blazer Financial
Corporation ("BFC"). BFC was comprised primarily of approximately $229
million in net consumer finance receivables and $147 million in customer
deposits. The Company recorded, at the purchase date, a transfer to GWFC of
approximately $35 million, representing the accumulated earnings of BFC at
that time.
In accordance with Interpretation Number 39, "Transfers and Exchanges of
Companies under Common Control," to Accounting Principles Opinion Number 16,
"Business Combinations," both of the above-described acquisitions have been
accounted for in a manner similar to a pooling of interests. Accordingly, the
assets acquired and liabilities assumed have been recorded at historical cost
and prior period financial statements of the Company have been restated for
the acquisitions. Eliminations have been made for material intercompany
transactions between the combined entities.
26
Note 4 Insurance Recovery
In May 1996, the Company filed a fidelity bond claim, subsequently paid by the
insurer, in the amount of $8.0 million for the recovery of fraudulently
over-billed marketing costs which had occurred over a number of years. The $8.0
million recovery has been reflected as a reduction of other operating expenses
in the accompanying statement of operations and retained earnings for the year
ended December 31, 1996.
Note 5 Consumer Finance Receivables
Consumer finance receivables at December 31, 1997 and 1996 are summarized as
follows:
(Dollars in thousands) 1997 1996
Consumer finance receivables
Real estate secured loans $ 1,094,061 $ 994,097
Other installment loans 1,197,788 1,109,143
Retail installment contracts 362,373 400,530
Gross consumer finance receivables 2,654,222 2,503,770
Less: Unearned finance charges and
deferred loan fees (344,819) (317,867)
Allowance for credit losses (74,323) (70,045)
Net consumer finance receivables $ 2,235,080 $ 2,115,858
The amount of gross nonaccruing consumer finance receivables included above
was approximately $50.9 million and $45.6 million at December 31, 1997 and
1996, respectively.
Contractual maturities, net of unearned finance charges and deferred loan
fees, at December 31, 1997 are as follows:
Over 1
But
Within Within Over
1 year 5 years 5 years Total
(Dollars in thousands)
Real estate secured loans $ 129,943 $ 377,591 $ 463,518 $ 971,052
Other installment loans 448,306 566,589 394 1,015,289
Retail installment contracts 123,810 199,065 187 323,062
$ 702,059 $1,143,245 $ 464,099 $ 2,309,403
27
Consumer installment loans have maximum terms of 360 months, while retail
installment contracts have maximum terms of 60 months. The weighted average
contractual term of all consumer finance receivables written during the years
ended December 31, 1997 and 1996 was 49 months and 50 months, respectively.
Experience has shown that a substantial portion of the consumer finance
receivables will be renewed or repaid prior to contractual maturity.
Therefore, the tabulation of contractual payments should not be regarded as a
forecast of future cash collections. During the years ended December 31, 1997
and 1996, the ratio of principal cash collections to average net consumer
finance receivables outstanding was 59% and 63%, respectively. The majority
of loans provide for a fixed rate of interest over the contractual life of the
loan.
The approximate fair value of the Company's consumer finance receivables (net
of unearned finance charges and deferred loan fees) as of December 31, 1997
and 1996 follows:
(Dollars in thousands) 1997 1996
Approximate Approximate
Net Book Fair Net Book Fair
Value Value Value Value
Real estate secured loans $ 971,052 $ 955,491 $ 889,970 $ 874,959
Other installment loans 1,015,289 972,488 929,977 908,762
Retail installment contracts 323,062 323,062 365,956 365,956
$2,309,403 $ 2,251,041 $ 2,185,903 $2,149,677
Because the Company primarily lends to consumers, it did not have receivables
from any industry group that comprised 10 percent or more of total consumer
finance receivables at December 31, 1997. Geographic diversification of
consumer finance receivables reduces the concentration of credit risk
associated with a recession in any one region.
28
Activity in the Company's allowance for credit losses is as follows:
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Balance, January 1 $ 70,045 $ 55,568 $ 53,217
Provision 66,600 58,800 48,500
Amounts charged off
Real estate secured loans (1,292) (1,582) (1,324)
Other installment loans (64,460) (50,086) (51,208)
Retail installment contracts (13,946) (10,947) (11,404)
(79,698) (62,615) (63,936)
Recoveries
Real estate secured loans 556 442 590
Other installment loans 11,538 12,892 12,543
Retail installment contracts 2,553 2,863 2,924
14,647 16,197 16,057
Net charge-offs (65,051) (46,418) (47,879)
Allowances on notes purchased 2,729 2,095 1,730
Balance, December 31 $ 74,323 $ 70,045 $ 55,568
During 1997, the Company reduced interest and fee income by the pre-tax amount
of $4.2 million, resulting from the revision of its estimate of interest
earnings on "same as cash" retail installment contracts. "Same as cash"
contracts provide a period during which the customer is allowed to pay the
account balance in full with no interest charges. The percentage of customers
exercising such option has been greater than originally estimated by the
Company, thereby requiring the above-described adjustment.
29
Note 6 Investment Securities
Investment securities as of December 31, 1997 and 1996 are as follows:
(Dollars in thousands) December 31, 1997
Approximate
Original Amortized Gross Unrealized Fair
Cost Cost Gains Losses Value
Government obligations $ 22,685 $ 22,284 $ 115 $ 115 $ 22,284
Corporate obligations 98,875 98,316 1,180 266 99,230
Certificates of deposit
and other 34,905 32,917 186 142 32,961
$156,465 $ 153,517 $1,481 $ 523 $ 154,475
(Dollars in thousands) December 31, 1996
Approximate
Original Amortized Gross Unrealized Fair
Cost Cost Gains Losses Value
Government obligations $ 19,628 $ 19,513 $ 110 $ 175 $ 19,448
Corporate obligations 86,339 86,255 1,060 352 86,963
Certificates of deposit
and other 30,579 30,622 171 132 30,661
$136,546 $ 136,390 $1,341 $ 659 $137,072
There were no significant realized gains or losses during 1997 or 1996.
The following table presents the maturity of the investment securities at
December 31, 1997:
(Dollars in thousands)
Approximate
Amortized Fair
Cost Value
Due in one year or less $ 33,940 $ 33,804
Due after one year through five years 71,191 71,711
Due after five years through ten years 43,519 44,091
Due after ten years 4,867 4,869
$ 153,517 $ 154,475
30
Note 7 Deferred Charges
Deferred charges, net of amortization, as of December 31, 1997 and 1996 are as
follows:
(Dollars in thousands) 1997 1996
Long-term debt issue costs $ 5,195 $ 4,711
Premiums on purchased accounts 19,309 7,245
$ 24,504 $ 11,956
Amortization of deferred charges for each of the last three years is as
follows:
(Dollars in thousands) 1997 1996 1995
Long-term debt issue costs $ 2,468 $ 1,616 $ 1,287
Premiums on purchased accounts 2,697 3,495 3,198
Note 8 Short-term Debt
Short-term debt at December 31, 1997 and 1996 consisted of commercial paper
notes. Such debt outstanding at December 31, 1997 had been issued in the
minimum amount of $1,045,000 and with a maximum original term of 74 days.
The book value of short-term debt at December 31, 1997 approximates its
estimated fair value.
Additional information concerning total short-term borrowings is as follows:
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Outstanding during the year
Maximum amount at any month end $ 471,980 $ 578,743 $ 312,876
Average amount 406,992 391,936 210,684
Weighted average interest rate 5.8% 5.2% 6.0%
Balance at end of year
Amount $ 357,532 $ 398,006 $ 312,876
Weighted average interest rate 6.1% 5.7% 5.9%
Weighted average interest rates include the effect of commitment fees.
31
Short-term notes totaling $67 million and $66 million were issued in December,
1997 and 1996, respectively. The proceeds of these notes were used to
purchase investment securities and were repaid through liquidation of these
securities in the month following issuance. This short-term debt has been
reflected net of the securities balances in the accompanying Consolidated
Statements of Financial Condition.
In 1996, the Company entered into a $550 million revolving credit agreement
with several domestic and foreign banks. The agreement, which replaced the
previous revolving credit agreement of $450 million, has a four-year term with
repayment in full of any balance outstanding in August, 2000. This revolving
credit agreement has restrictive covenants as described further in Note 9.
There were no borrowings under any of the above-described revolving credit
agreements in 1997 or 1996.
On August 16, 1996, the Company obtained a revolving credit line of $2,685,000
from the Federal Home Loan Bank ("FHLB"). Under the revolving credit line,
which expired August 15, 1997, interest was payable monthly at FHLB's cash
management rate. During 1997 and at December 31, 1996, there were no
outstanding borrowings under the line of credit. Interest expense in 1996
related to the borrowings on the revolving credit line was approximately
$14,000.
32
Note 9 Long-term Debt
Long-term debt at December 31, 1997 and 1996 was comprised of the following:
(Dollars in thousands) 1997 1996
Senior Debentures and Notes
7.375%, due February 15, 1997 $ 99,997
8.125%, due December 1, 1997 99,909
5.75%, due July 15, 1998 $ 149,972 149,922
7.875%, due February 15, 1999 99,947 99,904
6.75%, due May 15, 1999 99,992 99,986
6.3%, due July 15, 2000 99,949 99,931
6.125%, due December 1, 2000 149,702 149,610
7.75%, due June 15, 2001 149,944 149,930
7.25%, due June 15, 2001 99,885 99,857
6.75%, due August 15, 2001 99,933 99,917
6.30%, due October 1, 2002 149,561
6.50%, due November 15, 2003 149,320
Total Senior Debt 1,248,205 1,148,963
Senior Subordinated Notes and Debentures
8.875%, due August 15, 1998 99,979 99,948
7.5%, due July 1, 1999 99,788 99,659
Total Senior Subordinated Debt 199,767 199,607
Federal Home Loan Bank Notes
4.98%, due December 3, 2001 4,200
6.54%, due May 1,2001 18,900
5.39%, due June 3, 2002 6,000
Total Federal Home Loan Bank Notes 24,900 4,200
Total Long-term Debt $ 1,472,872 $ 1,352,770
33
Aggregate maturities at December 31, 1997 are as follows:
(Dollars in thousands)
Senior Federal
Senior Subordinated Home Loan
Debt Notes Bank Notes Total
1998 $ 149,972 $ 99,979 $ 249,951
1999 199,939 99,788 299,727
2000 249,651 249,651
2001 349,762 $ 18,900 368,662
2002 149,561 6,000 155,561
2003 149,320 149,320
$ 1,248,205 $ 199,767 $ 24,900 $1,472,872
The approximate fair value of the Company's long-term debt as of December 31,
1997 and 1996 is as follows:
(Dollars in thousands)
1997 1996
Book Approximate Book Approximate
Value Fair Value Value Fair Value
Senior debt $ 1,248,205 $ 1,274,620 $ 1,148,963 $ 1,192,141
Senior subordinated
notes 199,767 204,114 199,607 215,083
Federal Home Loan
Bank notes 24,900 24,913 4,200 4,200
$ 1,472,872 $ 1,503,647 $ 1,352,770 $ 1,411,431
On May 1, 1997, the Company obtained an adjustable rate advance from the FHLB
of Topeka in the amount of $21,500,000. Under the credit agreement, which
matures May 1, 2001, interest is payable monthly and adjusts every seven days
to a rate equal to the FHLB's One Week Repo rate plus 10 basis points (6.54%
at December 31, 1997). As a result of prepayments made in 1997, the
outstanding balance as of December 31, 1997 is $18,900,000.
On June 3, 1997, the Company obtained a putable advance from the FHLB of
Seattle in the amount of $6,000,000. On a specified day each quarter, the
FHLB has the option to call the advance at par. Under the credit agreements,
which matures June 3, 2002, interest is payable monthly and is determined
using a fixed annual interest rate of 5.39%.
Interest expense related to FHLB debt in 1997 and 1996 was approximately
$1,116,000 and $15,000 respectively.
34
In March, 1995, the Company filed a $600 million shelf registration statement.
Under this registration statement, the Company issued in July, 1995, $100
million of 6.3% senior notes maturing July 15, 2000; in June, 1996, the
Company issued $100 million of 7.25% senior notes maturing June 15, 2001; in
July, 1996, the Company issued $100 million of 6.75% senior notes maturing May
15, 1999; in August, 1996, the Company issued $100 million of 6.75% senior
notes maturing August 15, 2001; and in December, 1996, the Company issued $150
million of 6.125% senior notes maturing December 1, 2000. The respective
proceeds of these issues were used as follows: to reduce outstanding
commercial paper issued to pay $100 million of 8.55% senior notes at their
June 1, 1995 maturity; to reduce outstanding commercial paper issued to fund
the purchase price of the Company's acquisition of GWFS as described in Note
3; to reduce outstanding commercial paper issued to pay $100 million of 6.25%
senior notes at their July 15, 1996 maturity; to reduce outstanding
commercial paper; and, to fund the purchase price of the Company's acquisition
of BFC as described in Note 3, to repay approximately $69.6 million of
outstanding intercompany indebtedness owed by BFC and its subsidiaries to GWB,
and for general corporate purposes.
In June, 1997, the Company filed an $800 million shelf registration statement.
Under this registration statement, the Company issued in October, 1997, $150
million of 6.3% senior notes maturing October 1, 2002; and, in November, 1997,
$150 million of 6.5% senior notes maturing November 15, 2003. The proceeds of
these issues were used to reduce borrowings of the Company (including
outstanding commercial paper) and for general corporate purposes.
Provisions of certain of the Company's debt agreements restrict the payment of
dividends to a maximum prescribed proportion of cumulative earnings and
contributed capital and provide for the maintenance of minimum levels of
equity and maximum leverage ratios. At December 31, 1997, approximately $23
million was available under the debt agreement restriction for future
dividends.
35
Note 10 Customer Deposits
The net book value and approximate fair value of the Company's customer
deposits as of December 31, 1997 and 1996 are as follows:
(Dollars in thousands)
1997 1996
Book Approximate Book Approximate
Value Fair Value Value Fair Value
Certificates of deposit
$100,000 and over $ 12,768 $ 12,820 $ 10,674 $ 10,714
Certificates of deposit
under $100,000 133,041 133,373 117,588 117,943
Savings accounts 1,493 1,493 1,534 1,534
Money market accounts 15,883 15,883 16,342 16,342
$ 163,185 $ 163,569 $ 146,138 $ 146,533
Maturities of time deposits are $98,421,000 in 1998, $33,975,000 in 1999,
$7,131,000 in 2000 and $6,282,000 thereafter.
Note 11 Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Currently payable
Federal $ 28,567 $ 44,871 $ 35,739
State 5,237 8,317 6,719
Deferred (4,060) (16,188) (13)
$ 29,744 $ 37,000 $ 42,445
36
The provisions for income taxes differ from the amounts determined by
multiplying pretax income by the statutory Federal income tax rate of 35% for
1997, 1996 and 1995. A reconciliation between these amounts is as follows:
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Income taxes at statutory rates $ 26,611 $ 34,831 $ 37,709
Increase (reduction) in taxes
resulting from:
State income taxes, net of
Federal benefit 2,972 5,406 4,367
Other 161 (3,237) 369
$ 29,744 $ 37,000 $ 42,445
Deferred taxes result from temporary differences in the recognition of certain
items for tax and financial reporting purposes. Deferred tax liabilities
(assets) are comprised of the following:
December 31,
(Dollars in thousands) 1997 1996
Amortization of intangibles $ 9,537 $ 11,606
Employee benefits accruals 2,338 2,335
Depreciation 86 426
Loan interest and fee income 3,173 3,374
Other deferred income items 1,389 378
Total deferred tax liabilities 16,523 18,119
Credit loss reserves (26,391) (24,788)
Unearned insurance commissions (4,700) (3,956)
Other miscellaneous accruals (2,099) (2,598)
State taxes (4,100) (4,076)
Other deferred deduction items (3,655) (3,181)
Total deferred tax assets (40,945) (38,599)
Net deferred tax asset $ (24,422) $ (20,480)
37
Note 12 Net Insurance Operations and Other Income
Net insurance operations and other income is comprised as follows:
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Premium and commission income $ 37,422 $ 36,691 $ 37,448
Claims, ceding fees and other expenses (15,627) (14,335) (14,774)
Net Insurance 21,795 22,356 22,674
Other Income 4,760 4,849 6,561
$ 26,555 $ 27,205 $ 29,235
Note 13 Retirement and Savings Plans
Substantially all of the Company's employees participate in a noncontibutory
defined contribution pension plan maintained by Washington Mutual. Accumulated
plan benefits and annual pension cost are derived from an allocation formula
based on the Company's total participants and the Plan's total participants.
Pension cost for the Company's participants for the years ended December 31,
1997, 1996, and 1995 was $(150,000), $490,000 and $1,455,000, respectively.
Due to the Company's participation in a multi-employer defined benefit plan,
information as to separate Company participant assets and vested benefits is
not presented.
The Company's employees also participate in an employee savings plan maintained
by Washington Mutual, which allows employees to defer part of their pretax
compensation until retirement. Company contributions for the years disclosed
equaled 50% of the contributions made by employees up to 6% plus annual
discretionary amounts, if any, as determined by management. The Company's
cost is based on the actual contribution related to its participating employees.
Total expense was $1,034,000, $1,360,000 and $1,161,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company's employees who retired prior to July 1, 1997 also participate in
GWFC's defined benefit postretirement plans which cover a portion of the costs
of medical and life insurance coverage to eligible employees and dependents
based on age and length of service. Medical coverage options are the same as
available to active employees. The accumulated postretirement benefit
obligation and related expense are derived from an allocation formula based on
the Company's total participants and the Plan's total participants.
The net postretirement medical and life insurance expense allocated to the
Company for the years ended December 31, 1997, 1996 and 1995 were $358,000,
$521,000 and $532,000, respectively.
38
Note 14 Leases
At December 31, 1997, the Company was lessee of office space, principally for
loan offices, computer and other office equipment and automobiles, generally
for terms of five or fewer years.
The Company has no material capital leases. Under operating leases that have
initial or remaining noncancelable lease terms in excess of one year,
approximate aggregate annual minimum rentals are $7,576,000 in 1998;
$5,402,000 in 1999; $2,730,000 in 2000; $1,375,000 in 2001; and $576,000 in
2002. Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$10,804,000, $9,975,000, and $9,274,000, respectively.
Note 15 Contingencies
The Company and certain of its subsidiaries are parties to various lawsuits
and proceedings arising in the ordinary course of business. The Company has
also been named as a defendant in a number of class action suits, in which
various industry-wide practices arising from routine business activities are
being challenged and various damages are being sought. Certain of these
lawsuits and proceedings arise in jurisdictions, such as Alabama, that permit
damage awards disproportionate to the actual economic damages incurred. Based
upon information presently available, the Company believes that the total
amounts that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Company's
consolidated results of operations and financial position. However, it should
be noted that the frequency of large damage awards, including large punitive
damage awards, that bear little or no relation to actual economic damages
incurred by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any give suit.
Note 16 Transactions with Related Parties
Significant transactions with Washington Mutual or its subsidiaries in
addition to those described in Note 3 are identified as follows:
Washington Mutual Bank FA, another subsidiary of Washington
Mutual, provided the Company with certain administrative
services, including human resources and cash management, for
which the Company paid management fees of $1,900,000 in
1997, $1,770,000 in 1996 and $1,358,000 in 1995.
The Company made payments to Washington Mutual pursuant to a
tax allocation policy and in connection with the retirement
and savings plans.
39
Note 17 Approximate Fair Values of Financial Instruments
A summary of the approximate fair values of the Company's financial instruments,
as compared to their carrying values, is set forth in the following table:
(Dollars in thousands)
December 31, 1997 December 31, 1996
Carrying Approximate Carrying Approximate
Value Fair Value Value Fair Value
Consumer finance receivables Note 5 $2,309,403 $2,251,041 $2,185,903 $2,149,677
Investment securities Note 6 153,517 154,475 136,390 137,072
Short-term debt Note 8 357,532 357,532 398,006 398,006
Long-term debt Note 9 1,472,872 1,503,647 1,352,770 1,411,431
Customer deposits Note 10 163,185 163,569 146,138 146,533
See Note 2 and the referenced Notes for additional information.
Note 18 Selected Quarterly Financial Data (Unaudited)
A summary of the quarterly results of operations for the years ended
December 31, 1997 and 1996 is set forth below:
Quarter Ended
March 31, June 30, September 30, December 31,
(Dollars in thousands) 1997 1996 1997 1996 1997 1996 1997 1996
Revenue $ 99,723 $102,688 $100,836 $ 99,806 $ 97,991 $ 99,605 $107,978 $104,603
Interest and other
expenses 66,298 64,756 63,654 53,931 64,746 63,314 69,199 66,383
Provision for credit
losses 15,400 14,500 15,600 13,600 16,200 15,300 19,400 15,400
Total expenses 81,698 79,256 79,254 67,531 80,946 78,614 88,599 81,783
Income before taxes 18,025 23,432 21,582 32,275 17,045 20,991 19,379 22,820
Income tax provision 7,100 9,200 8,500 12,800 6,800 8,200 7,344 6,800
Net income $ 10,925 $ 14,232 $ 13,082 $ 19,475 $ 10,245 $ 12,791 $ 12,035 $ 16,020
40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Index of Documents filed as a part of this Report:
1. Financial Statements
Included in Part II of this Report:
PAGE
Reports of Independent Certified Public Accountants . . . . . . . 17
Aristar, Inc. and Subsidiaries:
Consolidated Statements of Financial Condition
at December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Operations and Retained Earnings
for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . 20
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . 21
Notes to Consolidated Financial Statements . . . . . . . . . . . 22
2. Financial Statement Schedules
All schedules are omitted because of the absence of the
conditions under which they are required or because the required
information is set forth in the financial statements or related
notes.
3. Exhibits
Included in Part IV of this Report:
Exhibit
Number
(2) (a) Agreement dated as of April 30, 1996, between Great Western
Bank and First Community Financial Services, Inc. (1)
(b) Amendment to Exhibit (2) (a) dated as of August 31, 1996.(2)
(c) Agreement dated as of April 30, 1996, between Great Western
Bank and Blazer Financial Services, Inc. (1)
(d) Amendment to Exhibit (2) (c) dated as of August 31, 1996.(2)
41
(e) Agreement dated as of April 30, 1996, between Great Western
Bank and Blazer Financial Services, Inc. of Florida. (1)
(f) Amendment to Exhibit (2) (e) dated as of August 31, 1996.(2)
(g) Agreement dated as of December 31, 1996, between Great
Western Financial Corporation and Aristar, Inc. (3)
(3) (a) Certificate of Incorporation of Aristar, Inc. as presently
in effect.(4)
(b) By-Laws of Aristar, Inc. as presently in effect.(4)
(4) (a) Indenture dated as of July 15, 1984, between
Aristar, Inc. and Bank of Montreal Trust
Company, as trustee.(5)
(b) First supplemental indenture to Exhibit (4)(a) dated as of
June 1, 1987.(5)
(c) Indenture dated as of August 15, 1988 between Aristar, Inc.
and Bank of Montreal Trust Company, as trustee.(6)
(d) Indenture dated as of May 1, 1991 between Aristar, Inc.
and Security Pacific National Bank, as trustee.(7)
(e) Indenture dated as of May 1, 1991 between Aristar, Inc.
and The First National Bank of Boston, as trustee. (7)
(f) Indenture dated as of October 1, 1997 between Aristar, Inc.
and First Union National Bank, as trustee. (8)
(g) Indenture dated as of November 15,1997 between Aristar, Inc.
and First Union National Bank, as trustee. (9)
(h) The registrant hereby agrees to furnish the Securities and
Exchange Commission upon request with copies of all
instruments defining rights of holders of long-term debt
of Aristar and its consolidated subsidiaries.
(10) Income Tax Allocation Agreement dated as of December 15, 1995
between Aristar, Inc. and Great Western Financial Corporation. (10)
(12) Statement Re: Computation of Ratios.
(23) Consents of Independent Certified Public Accountants.
(24) Power of Attorney included on Page 43 of the Form 10-K.
(27) Financial Data Schedule.
42
(1) Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, Commission file number
1-3521.
(2) Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, Commission file
number 1-3521.
(3) Incorporated by reference to Registrant's
Current Report on Form 8-K dated December 31,
1996, Commission file number 1-3521.
(4) Incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1987, Commission file number 1-3521.
(5) Incorporated by reference to Registrant's
Current Report on Form 8-K dated May 29,
1991, Commission file number 1-3521.
(6) Incorporated by reference to Registrant's
Current Report on Form 8-K dated June
24,1992, Commission file number 1-3521.
(7) Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, Commission file number
1-3521.
(8) Incorporated by reference to Registrant's
Current Report on Form 8-K dated October 6,
1997, Commission file number 1-3521.
(9) Incorporated by reference to Registrant's
Report on Form 424B2 dated November 6, 1997,
Commission file number 1-3521.
(10) Incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995, Commission file number 1-3521.
(b) Reports on Form 8-K
On October 8, 1997, the Company filed a Current Report on
Form 8-K, dated October 6, 1997, disclosing, under item
(7) thereof, the terms of the issuance of $150,000,000
aggregate principal amount of its 6.3% senior notes
maturing October 1, 2002.
43
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.
ARISTAR, INC.
By /s/ James R. Hillsman March 31, 1998
James R. Hillsman, Senior Vice President Date
and Deputy Chief Financial Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes James R. Hillsman
as attorney-in-fact to sign on his behalf as an individual and in every
capacity stated below, and to file all amendments to the registrant's Form 10-K,
and the registrant hereby confers like authority to sign and file in its behalf.
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 indicated on March 31, 1998.
/s/ Craig E. Tall
Craig E. Tall, President and Director
(Principal Executive Officer)
/s/ Fay L. Chapman
Fay L. Chapman, Director
/s/ Wayne L. Evans
Wayne L. Evans, Director
/s/ James B. Fitzgerald
James B. Fitzgerald, Director
/s/ William A. Longbrake
William A. Longbrake, Director