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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1998
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 1-3521
ARISTAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4128205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8900 Grand Oak Circle, Tampa, FL 33637-1050
(Address of principal executive offices) (Zip Code)
(813) 632-4500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
7 3/4 % Senior Notes due June 15, 2001 New York Stock Exchange
7 1/2 % Senior Subordinated Notes due July 1, 1999 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 the 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:
Not applicable
The aggregate market value of Common Stock held by non-affiliates: None As of
February 28, 1999, there were 1,000 shares of Common Stock outstanding.
Documents incorporated by reference: None
Registrant meets the conditions set forth in General Instruction (I)(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
2
ARISTAR, INC.
ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
PART I
Item 1. Business........................................................3
Item 2. Properties.....................................................11
Item 3. Legal Proceedings..............................................11
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.............................12
Item 7. Management's Analysis of the Results of Operations
for the Year Ended December 31, 1998........................12
Item 8. Financial Statements and Supplementary Data....................19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................41
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.........................................41
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 24 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 $30,000 to $60,000.
The Company makes consumer loans, both real estate secured and unsecured, and
purchases retail sales 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 subsidiary branches in Colorado and Utah. In addition to
making consumer loans and purchasing retail sales contracts, this subsidiary
also takes customers' savings deposits (insured by the Federal Deposit Insurance
Corporation ("FDIC")).
The Company is managed along two major lines of business: consumer finance and
consumer banking. The financial performance of these business lines is measured
by the Company's profitability reporting processes, which utilize various
management accounting techniques to ensure that both business line's financial
results reflect the underlying performance of that business.
Consumer loans are originated by customer application throughout the branch
network. Loan originations are a result of business development efforts
consisting of direct mail, telemarketing and branch office sales personnel.
Personal loans are typically unsecured and primarily used by the customer to
make specific purchases of consumer goods or personal debt consolidation. As of
December 31, 1998 and 1997, the average balance of a personal loan was
approximately $2,100 and $1,800, respectively.
Real estate loans are typically secured by first or second mortgages and are
primarily used by the customer for debt consolidation. The Company has focused
on high growth in this segment of the portfolio due to the high quality inherent
in the customer base. This is a result of the fact that the primary source of
these loans is the portion of the existing personal and sales contract customer
base which has maintained a high level of payment performance over an extended
period of time. In addition, the larger average balances make this loan type
more cost effective to originate and service. As of December 31, 1998 and 1997,
the average balance of a real estate secured loan was approximately $26,600 and
$24,500, respectively.
Retail sales 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. Retail installment contracts are generally
acquired through the originating merchant; the Company had such arrangements
with over 3,000 merchants at December 31, 1998. Contracts are typically written
with original terms from 3 to 60 months and for 1998 had an average original
term of 27 months. 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 exercise the "same as cash" option. At December 31, 1998 and 1997, the
average balance of a retail sales contract was $800 and $750, respectively.
4
Consumer loans written in 1998 had original terms ranging from 12 to 360 months
and averaged 63 months. As of December 31, 1998, 45.0% of the Company's total
portfolio was either unsecured or secured by automobiles or other personal
property ("personal loans") and 43.6% of the Company's total portfolio was
secured by real estate. In 1997, these loan types comprised 44.0% and 42.0% of
the portfolio, respectively. This change in portfolio mix is a result of
management's focus on growth in these higher margin components of the portfolio.
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.
During 1998, personal loans (excluding unearned finance charges and deferred
loan fees) increased $134.5 million, or 13.1%, as compared to $85.9 million, or
9.2%, in 1997. Also during 1998, real estate secured loans (excluding unearned
finance charges and deferred loan fees) increased $145.1 million, or 14.8%, as
compared to $97.6 million, or 11.1%, in 1997. This growth was achieved while
improving the net interest spread by 69 basis points over the prior year.
The following table sets forth the Company's loan originations, including
renewals, for the periods indicated:
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
----------- ------------ -----------
Real estate secured loans $ 699,175 $ 490,522 $ 453,821
Personal loans 1,398,278 1,283,553 1,090,601
Retail sales contracts 379,885 409,409 451,274
------------ ------------ -----------
$ 2,477,338 $ 2,183,484 $ 1,995,696
============ ============ ============
5
Portfolio Composition
The following table provides an analysis by type of the Company's consumer
finance receivables (excluding unearned finance charges and deferred loan fees)
at the dates shown:
December 31,
(Dollars in thousands) 1998 1997 1996
----------- ----------- ----------
Notes and contracts receivable:
Amount $ 2,574,398 $ 2,328,715 $2,193,147
Number of accounts 966,048 1,029,532 1,064,142
Type as a percent of
total receivables
Real estate secured loans 43.6% 42.0% 40.7%
Personal loans 45.0 44.0 42.6
Retail sales contracts 11.4 14.0 16.7
----------- ----------- ----------
100.0% 100.0% 100.0%
=========== ============ ==========
At December 31, 1998, the average portfolio yield written by loan type was as
follows:
Average Yield
Real estate secured loans 12.7%
Personal loans 25.1%
Retail sales contracts 19.0%
The following table sets forth the percentage of consumer finance receivables
(excluding unearned finance charges and deferred loan fees) by state at December
31, 1998.
State % State %
- ----- ---- ----- ----
Alabama 3.7% Mississippi 4.3%
California 6.0% New Mexico 1.2%
Colorado 9.2% North Carolina 9.0%
Delaware 2.9% Oklahoma 3.1%
Florida 4.2% Oregon 0.8%
Georgia 2.7% Pennsylvania 2.8%
Idaho 1.2% South Carolina 5.7%
Illinois 0.5% Tennessee 10.6%
Kansas 0.2% Texas 13.4%
Kentucky 2.1% Utah 2.7%
Louisiana 4.9% Virginia 5.1%
Maryland 1.8% West Virginia 1.9%
Geographic diversification of consumer finance receivables reduces the
concentration of credit risk associated with a recession in any one region.
6
Credit Loss Experience
The Company closely monitors portfolio delinquency and loss rates 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 generally are
charged off when they become 180 days contractually delinquent. 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.
Management of the Company 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 terms of the contract.
In order to establish the Company's allowance for credit losses, the consumer
finance receivables portfolio is segmented into two categories: real estate
secured and non-real estate secured (personal loans and retail sales contracts).
The determination of the level of the allowance for credit losses and,
correspondingly, the provision for loan losses for these homogeneous loan pools
rests upon various judgments and assumptions used to determine the risk
characteristics of the portfolio. These judgments are supported by analyses that
fall into three general categories: (i) current and anticipated economic
conditions as they relate to the Company's current customer base and geographic
distribution; (ii) a predictive analysis of the outcome of the current portfolio
(a migration analysis); and (iii) prior loan loss experience. Additionally,
every real estate secured loan that reaches 90 days delinquency is reviewed by
the Company's credit administration management to assess collectibility and
future course of action. These systematic analyses provide a self-correcting
mechanism to reduce differences between estimated and actual observed losses in
the portfolios.
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 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, 1998 of $515.8 million at a 5.7%
weighted average interest rate.
7
In 1996, the Company entered into a $550 million revolving credit agreement with
several domestic and foreign banks. The agreement has a four-year term with
repayment in full of any balance outstanding in August, 2000. There were no
borrowings under the above-described revolving credit agreement in 1998 or 1997.
The Company issues debt securities under shelf registration statements filed
with the Securities Exchange Commission ("SEC"). Borrowings under these shelf
registration statements totaled approximately $1.40 billion at December 31, 1998
and $1.45 billion at December 31, 1997.
The Company also has borrowings with the Federal Home Loan Bank ("FHLB") and
accepts customer deposits through its industrial banking subsidiary. FHLB
borrowings totaled $73.9 million at December 31, 1998 and $24.9 million at
December 31, 1997. Customer deposits totaled $187.5 million at December 31, 1998
and $163.2 million at December 31, 1997.
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, 1998, approximately $43.6 million
was available under the debt agreement restriction for future dividends.
Other products
As part of its consumer finance line of business, the Company makes available,
at the option of its customers, credit life, credit accident and health, and
credit casualty insurance products. 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.
The Company issues VISA credit cards, which are serviced by a third-party, to
its qualified existing customers. At December 31, 1998, the Company had $35.3
million in credit card receivables outstanding.
An additional service offered to existing customers is membership to a
third-party auto club. The Company earns commission income for each membership
sold, which provides emergency road-side assistance, as well as other benefits,
to its members.
Risk Factors
In addition to the other information in this Annual Report on Form 10-K, the
following factors should be considered carefully:
8
Decline of Collateral Value May Adversely Affect Portfolio Credit Quality
Approximately 44% of the Company's finance receivables outstanding were secured
by real estate at December 31, 1998. The Company's lending policies limit the
loan to value ("LTV") ratio of such loans to a maximum of 85%. 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.
Change in Delinquency Rate
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 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, 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,
has focused additional regulation on 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.
9
Additionally, the Company's sale of credit life, credit accident and health and
credit casualty 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 actions.
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 Governmental Regulation.
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 general operations of the Company.
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 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.
10
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 the 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.
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, 1998, the Company held sixty-one (61)
foreclosed single-family dwellings with a carrying value of approximately $2.6
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 it accepts
customers' deposits, the industrial banking subsidiary is subject to regulation
by the FDIC and the relevant state banking authorities.
Employees
The Company employs approximately 2,600 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.
11
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 24 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 12 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 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. In December, 1998, the Company reached a tentative
agreement to settle one such outstanding lawsuit, the total cost of which is not
expected to exceed $4.5 million. The Company's consolidated results of
operations for 1998 reflect the recording of this amount in its entirety.
12
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. 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. Dividends will be paid when
capital exceeds the amount of debt to tangible capital (leverage ratio) deemed
appropriate by management. This leverage ratio will be managed with the
intention of maintaining the existing credit ratings on the Company's
outstanding obligations. The Company declared and paid dividends totaling $36.5
million during 1998 and $17.5 million during 1997.
Item 7. Management's Analysis of the Results of Operations for the Year Ended
December 31, 1998
Results of Operations
Net income for the year ended December 31, 1998 of $52.9 million increased 14.3%
from $46.3 million for the year ended December 31, 1997. The improvement is
primarily due to an increase in net interest income resulting from higher
consumer finance receivables and net interest spread.
The Company's net interest income before provision for credit losses increased
$36.0 million, or 14.6%, to $283.2 million for 1998, as compared to 1997. This
increase reflects growth in average net consumer finance receivables to $2.4
billion, which is $173.1 million, or 7.9%, greater than the average balance for
1997. This is a result of management's implementation of an internal growth
initiative throughout the branch network. Due to management's focus on growth in
the higher margin core products, average real estate secured and personal loan
balances increased $121.4 million and $109.8 million, or 13.1% and 11.8% over
the prior year, respectively. This growth was partially offset by a $49.5
million, or 14.7% decrease in average retail sales contracts, as compared to the
prior year. This decline was the result of management's decision to eliminate
several dealer relationships for profitability reasons. As a result of these
factors, total originations, excluding renewals, for 1998 totaled $1.8 billion,
which was an improvement of 12.5%, as compared to 1997.
The overall portfolio yield increased 44 basis points to 17.04% from 16.60% for
the year ended December 31, 1998, as compared to 1997. As a result, loan
interest and fee income increased $39.2 million, or 10.7%, for the year ended
December 31, 1998, as compared to 1997. Due to a $9.6 million increase in
average investment securities, income from investment securities increased $1.1
million, or 10.4% over the prior year. As a result of the activity above, total
interest income increased $40.3 million, or 10.7% over the prior year.
13
In order to finance the growth in receivables, average debt outstanding
increased $116.5 million, or 6.2%, to $2 billion for 1998, as compared to 1997.
As a result of this increase, offset partially by a decrease of 18 basis points
in the weighted average interest rate paid on such debt, interest and debt
expense increased $4.3 million, or 3.4% over the prior year. However, as a
percentage of average consumer finance receivables (excluding unearned finance
charges and deferred loan fees), interest and debt expense decreased 25 basis
points, as compared to the prior year. This improvement, coupled with the
increased yield earned on the receivables portfolio, resulted in the significant
increase in net interest income noted above.
The table below sets forth certain percentages relative to the spread between
interest and fee income received on the loan portfolio and interest and debt
expense:
Year Ended December 31,
1998 1997 1996
-------- -------- --------
Ratio to Average Consumer Finance
Receivables, Net:
Interest and Fee Income 17.04% 16.60% 17.72%
Interest and Debt Expense 5.60 5.85 5.78
------------- ----------- ---------
Net Interest Spread 11.44% 10.75% 11.94%
============= ============ ==========
Efficiency, defined as the ratio of non-interest operating expenses, excluding
the amortization of goodwill, to total revenue, improved to 44.9% for the year
ended December 31, 1998 as compared to 45.3% for 1997. The improvement is
primarily the result of increased revenues from consumer finance receivable
growth resulting from a heightened focus on productivity and a change in product
mix to an increased emphasis on higher margin products.
Provision for Credit Losses
The provision for credit losses for the year ended December 31, 1998 was 3.36%
as a percentage of average consumer finance receivables (excluding unearned
finance charges and deferred loan fees), as compared to 3.02% for 1997.
Charge-offs, as a percentage of average consumer finance receivables (excluding
unearned finance charges and deferred loan fees), increased to 3.12% in 1998 as
compared to 2.96% in 1997. Net credit charge-offs for the year ended December
31, 1998 were $73.9 million as compared to $65.1 million for 1997. The increase
was due primarily to higher net charge-offs on personal loans, which increased
$7.7 million.
At December 31, 1998, the allowance for credit losses as a percentage of
consumer finance receivables (excluding unearned finance charges and deferred
loan fees) at period end equaled 3.13% as compared to 3.19% at December 31,
1997. This decrease is primarily a reflection of the increased collection
efforts which have resulted in a modest 20 basis point decrease in the over 60
day delinquency rate as compared to the prior year. As of December 31, 1998,
total delinquent loans (60 days or more past due) as a percentage of the
Company's portfolio of finance receivables was 2.53% compared to 2.73% as of
December 31, 1997.
14
Activity in the Company's allowance for credit losses is as follows:
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
----------- ----------- -----------
Balance, January 1 $ 74,323 $ 70,045 $ 55,568
Provision for credit losses 79,760 66,600 58,800
Amounts charged off:
Real estate secured loans (2,125) (1,292) (1,582)
Personal loans (73,210) (64,460) (50,086)
Retail sales contracts (14,417) (13,946) (10,947)
------------ ----------- -----------
(89,752) (79,698) (62,615)
Recoveries:
Real estate secured loans 521 556 442
Personal loans 12,593 11,538 12,892
Retail sales contracts 2,774 2,553 2,863
----------- ----------- -----------
15,888 14,647 16,197
----------- ----------- -----------
Net charge-offs (1) (73,864) (65,051) (46,418)
Allowances on notes purchased 274 2,729 2,095
----------- ----------- -----------
Balance, December 31 $ 80,493 $ 74,323 $ 70,045
=========== =========== ===========
Allowance for credit losses as a
percentage of December 31 consumer
finance receivables (excluding
unearned finance charges and
deferred loan fees) 3.13% 3.19% 3.19%
Net charge-offs as a percentage of
average consumer receivables
(excluding unearned finance charges
and deferred loan fees) 3.12% 2.96% 2.20%
(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 1996 under the new policy had it been in
effect January 1, 1996.
15
The following table sets forth the ratio of receivables delinquent for 60 days
or more, on a contractual basis, to gross consumer finance receivables
outstanding:
December 31,
1998 1997 1996
---------- --------- ---------
Real estate secured loans 0.64% 0.79% 0.88%
Personal loans 4.14 4.32 4.01
Retail sales contracts 3.10 3.17 2.65
--------- --------- ---------
Total 2.53% 2.73% 2.56%
========= ========== ==========
Asset / Liability Management
The Company's philosophy is to maintain an approximate match of the interest
rate sensitivity between its interest-bearing assets and liabilities. The
Company's consumer finance receivables are primarily fixed rate and have initial
terms ranging from 3 to 360 months. However, loans are generally paid off or
refinanced prior to their stated maturity. Therefore, the Company's
asset/liability management requires a high degree of analysis and estimation.
The Company funds its interest-bearing assets through both internally generated
equity and external debt financing.
Liquidity / Capital Management
The Company funds its operations through a variety of corporate borrowings which
provide the flexibility needed to properly manage the liquidity risk inherent in
consumer lending. The primary source of these borrowings is corporate debt
securities issued by the Company. At December 31, 1998, eleven different senior
debt issues totaling $1.4 billion were outstanding, with a weighted average cost
of 6.72%. To meet the Company's short-term funding needs, daily trades of
commercial paper are executed. At December 31, 1998, twenty-three different
commercial paper borrowings totaling $515.8 million were outstanding, with a
weighted average cost of 5.67%. The Company's banking subsidiary raises funds
through both customer deposits and borrowings with the Federal Home Loan Bank.
At December 31, 1998, the banking subsidiary's outstanding debt totaled $261.4
million, with a weighted average cost of 5.51%. The Company also maintains a
revolving credit agreement with twenty-four syndicate lenders which provides a
credit line of up to $550 million primarily to support the commercial paper
borrowings. There were no borrowings under this revolving credit agreement in
1998 or 1997.
Long-term debt at December 31, 1998 and 1997 consisted of the following:
(Dollars in thousands) 1998 1997
------------- ------------
Senior Notes and Debentures $ 1,298,342 $ 1,248,205
Senior Subordinated Notes
and Debentures 99,925 199,767
Federal Home Loan Bank Notes 28,900 24,900
-------------- ------------
$ 1,427,167 $ 1,472,872
============== ============
16
Customer deposits at December 31, 1998 and 1997 consisted of the following:
(Dollars in thousands) 1998 1997
-------------- ------------
Money market accounts $ 15,382 $ 15,883
Savings accounts 1,340 1,493
Certificates of deposit under $100,000 155,287 133,041
Certificates of deposit $100,000 and over 15,509 12,768
-------------- ------------
$ 187,518 $ 163,185
============== ============
The Company manages its capital by establishing equity leverage targets based
upon the ratio of debt (including customer deposits) to tangible equity. The
debt to tangible equity ratio at December 31, 1998 of 5.86 to 1 has increased
from 5.72 to 1 at December 31, 1997. The determination of the Company's dividend
payments and resulting capital leverage will be managed in a manner consistent
with the Company's desire to maintain strong and improving credit ratings.
Year 2000
This section contains forward-looking statements that have been prepared on the
basis of the Company's best judgments and currently available information and
constitutes a Year 2000 Readiness Disclosure within the meaning of the Year 2000
Readiness Disclosure Act of 1998. These forward-looking statements are
inherently subject to significant business, third-party and regulatory
uncertainties and contingencies, many of which are beyond the control of the
Company. In addition, these forward-looking statements are based on the
Company's current assessments and remediation plans, which are based on certain
representations of third party service providers and are subject to change.
Accordingly, there can be no assurance that the Company's results of operations
will not be adversely affected by difficulties or delays in the Company's or
third parties' Year 2000 readiness efforts. See Risks below for a discussion of
factors that may cause such forward-looking statements to differ from actual
results.
The Company has implemented a company-wide program to renovate, test and
document the readiness ("Year 2000 readiness") of its electronic systems,
programs and processes ("Computer Systems"), and facilities to properly
recognize dates to and through the year 2000 (the "Year 2000 Project"). While
the Company is in various stages of modification and testing of individual Year
2000 Project components, the Year 2000 Project is proceeding generally on
schedule.
The Company has assigned its Senior Vice President of Information Systems to
oversee the Year 2000 Project, has set up a Year 2000 Project Office, and has
charged a senior management team representing all significant operational areas
of the Company to act as a Steering Committee. The Company has dedicated a
substantial amount of management and staff time on the Year 2000 Project. The
Company has, in conjunction with Washington Mutual, engaged IBM Global Services
to provide technical and management resources where necessary and has engaged
Deloitte Consulting Group LLC to assist in documenting certain aspects of the
Year 2000 Project. Monthly progress reports are made to the Company's Board of
Directors, and Washington Mutual's Board of Directors' Audit Committee reviews
Year 2000 Project progress on a quarterly basis.
17
(a) Project. The Company has divided its Year 2000 Project into the following
general phases, consistent with guidance issued by the Federal Financial
Institutions Examinations Council (the "FFIEC): (i) inventory and assessment;
(ii) renovation, which includes repair or replacement; (iii) validation, which
includes testing of Computer Systems and the Company's connections with other
computer systems; (iv) due diligence on third party service providers; and (v)
development of contingency plans. The Year 2000 Project is divided into four
categories: mainframe systems, non-mainframe systems, third-party service
providers, and facilities.
The inventory and assessment phases are substantially complete, and each
component that has been identified has been assigned a priority rating,
corresponding to its significance. The rating has allowed the Company to direct
its attention to those Computer Systems, third party service providers and
facilities that it deems more critical to its ongoing business and the
maintenance of good customer relationships.
The Company has substantially completed the process of repairing or replacing
and testing the most significant components of its Computer Systems and
facilities. The Company has also adopted business contingency plans for the
Computer Systems and facilities that it has determined to be most critical.
These plans conform to recently issued guidance from the FFIEC on business
contingency planning for Year 2000 readiness. Contingency plans include, among
other actions, manual workarounds and extra staffing.
The Company continues to assess its risk from other environmental factors over
which it has little control, such as electrical power supply, and voice and data
transmission. Because of the nature of the factors, however, the Company is not
actively engaged in any repair, replacement or testing efforts for these
services.
(b) Costs. While the Company does not believe that the process of making its
Computer Systems Year 2000 ready will result in material cost, it is expected
that a substantial amount of management and staff time will be required on the
Year 2000 Project. The Company has spent approximately $2.9 million in 1998 on
its Year 2000 Project, and it currently expects to spend approximately $750
thousand more before it concludes its Year 2000 readiness efforts. Prior to
1998, the Company spent approximately $360 thousand on Year 2000 related
initiatives.
(c) Risks. Based on its current assessments and its remediation plans, which are
based in part on certain representations of third party service providers, the
Company does not expect that it will experience a significant disruption of its
operations as a result of the change to the new millenium. Although the Company
has no reason to conclude that a failure will occur, the most reasonably likely
worst-case Year 2000 scenario would entail a disruption or failure of the
Company's power supply or voice and data transmission suppliers, a Computer
System, a third-party servicer, or a facility. If such a failure were to occur,
the Company would implement its contingency plan. While it is impossible to
quantify the impact of such a scenario, the most reasonably likely worst-case
scenario would entail a diminishment of service levels, some customer
inconvenience and additional costs from the contingency plan implementation,
which are not currently estimable. While the Company has contingency plans to
address a temporary disruption in these services, there can be no assurance that
18
any disruption or failure will be only temporary, that the Company's contingency
plans will function as anticipated, or that the results of operations of the
Company will not be adversely affected in the event of a prolonged disruption or
failure.
There can be no assurance that the FFIEC or other federal regulators will not
issue new regulatory requirements that require additional work by the Company
and, if issued, that new regulatory requirements will not increase the cost or
delay the completion of the Company's Year 2000 Project.
19
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 statements of financial condition
of Aristar, Inc. and subsidiaries (the "Company") as of and for each of the two
years in the period ended December 31, 1998, and the related consolidated
statements of operations, comprehensive income and retained earnings, and of
cash flows for the years 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 audits. The
consolidated financial statements of the Company for the year ended December 31,
1996 were audited by other auditors whose report, dated January 17, 1997,
expressed an unqualified opinion on those consolidated statements.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial condition of the Company as of and for the two
years in the period ended December 31, 1998, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
January 19, 1999
20
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholder of
Aristar, Inc.
In our opinion, the consolidated statements of operations, comprehensive income
and retained earnings and of cash flows for the year ended December 31, 1996
(appearing on pages 21 through 40 of this Form 10-K Annual Report) present
fairly, in all material respects, the results of operations and cash flows of
Aristar, Inc. and its subsidiaries for the year 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 audit. We conducted our audit 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 audit provides 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.
PricewaterhouseCoopers LLP
Tampa, Florida
January 17, 1997
21
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Financial Condition
(Dollars in thousands, except par value and December 31, 1998 December 31, 1997
share information) ----------------- ------------------
ASSETS
Consumer finance receivables, net $ 2,493,903 $ 2,254,389
Investment securities 150,820 154,475
Cash and cash equivalents 24,180 26,446
Property, equipment and leasehold improvements,
less accumulated depreciation and amortization:
1998, $24,120; 1997, $22,310 12,411 9,687
Goodwill, less accumulated amortization:
1998, $63,319; 1997, $59,702 48,166 49,591
Other assets 15,230 15,018
----------- -----------
TOTAL ASSETS $ 2,744,710 $ 2,509,606
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Short-term debt $ 560,823 $ 357,532
Long-term debt 1,427,167 1,472,872
----------- -----------
Total debt 1,987,990 1,830,404
Customer deposits 187,518 163,185
Accounts payable and other liabilities 145,430 117,627
Federal and state income taxes 4.442 206
----------- -----------
Total liabilities 2,325,380 2,111,422
----------- -----------
Commitments and contingencies
(Notes 12 and 13)
Stockholder's equity
Common stock: $1.00 par value;
10,000 shares authorized; 1,000
shares issued and outstanding 1 1
Paid-in capital 48,960 44,894
Retained earnings 369,143 352,756
Accumulated other comprehensive income:
Net unrealized holding gains on
investment securities, net of tax 1,226 533
----------- -----------
Total stockholder's equity 419,330 398,184
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 2,744,710 $ 2,509,606
=========== ===========
See Notes to Consolidated Financial Statements.
22
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Operations, Comprehensive Income
and Retained Earnings
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
--------- --------- ---------
Loan interest and fee income $ 404,954 $ 365,719 $ 366,750
Investment securities income 11,449 10,373 9,183
--------- --------- ---------
Total interest income 416,403 376,092 375,933
Interest and debt expense 133,211 128,887 120,758
--------- --------- ---------
Net interest income before
provision for credit losses 283,192 247,205 255,175
Provision for credit losses 79,760 66,600 58,800
--------- --------- ---------
Net interest income 203,432 180,605 196,375
--------- --------- ---------
Other income 27,147 26,555 27,205
--------- --------- ---------
Other expenses
Personnel expenses 76,664 69,468 71,724
Occupancy expense 10,434 10,068 9,919
Advertising expense 6,516 5,807 4,848
Goodwill amortization expense 3,617 7,064 7,063
Other operating expenses 45,761 38,722 30,508
--------- --------- ---------
142,992 131,129 124,062
--------- --------- ---------
Income before income taxes 87,587 76,031 99,518
Provision for federal and state
income taxes 34,700 29,744 37,000
--------- --------- ---------
Net Income 52,887 46,287 62,518
Net unrealized holding gains
(losses) on securities arising
during period, net of tax 693 157 (140)
--------- --------- ---------
Comprehensive income $ 53,580 $ 46,444 $ 62,378
========= ========= =========
Retained earnings
Beginning of year $ 352,756 $ 323,969 $ 428,273
Net income 52,887 46,287 62,518
Dividends (36,500) (17,500) (116,800)
Transfer to Great Western Bank,
A Federal Savings Bank (15,192)
Transfer to Great Western
Financial Corporation (34,830)
--------- --------- ---------
End of year $ 369,143 $ 352,756 $ 323,969
========= ========= =========
See Notes to Consolidated Financial Statements.
23
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
---------- ----------- -----------
Cash flows from operating activities
Net income $ 52,887 $ 46,287 $ 62,518
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for credit losses 79,760 66,600 58,800
Depreciation and amortization 6,611 11,282 11,907
Increase (decrease) in
Accounts payable and other liabilities 27,803 5,759 (20,576)
Federal and state income taxes payable 3,819 6,732 (14,243)
(Increase) decrease in other assets (212) 6,533 (7,954)
----------- ----------- ----------
Net cash provided by operating activities 170,668 143,193 90,452
---------- ----------- ----------
Cash flows from investing activities
Investment securities purchased (91,477) (62,582) (40,331)
Investment securities matured and sold 96,275 45,454 43,317
Consumer finance receivables originated
or purchased (1,627,907) (1,493,059) (1,407,333)
Consumer finance receivables repaid 1,305,915 1,293,161 1,308,184
Net change in property, equipment and
leasehold improvements (4,583) (998) (665)
---------- ----------- ----------
Net cash used in investing activities (321,777) (218,024) (96,828)
---------- ----------- ----------
Cash flows from financing activities
Net change in customer deposits 24,333 17,047 (14,634)
Net change in short-term debt 203,291 (40,474) 85,130
Proceeds from issuance of long-term debt 209,653 326,344 453,539
Repayments of long-term debt (256,000) (206,800) (105,000)
Net change in due to affiliate (237,576)
Dividends paid (36,500) (17,500) (116,800)
Transfer to Great Western Bank,
A Federal Savings Bank (15,192)
Transfer to Great Western Financial Corporation (34,830)
Proceeds from affiliate transfer 4,066
---------- ----------- -----------
Net cash provided by financing activities 148,843 78,617 14,637
---------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (2,266) 3,786 8,261
Cash and cash equivalents
Beginning of year 26,446 22,660 14,399
---------- ----------- -----------
End of year $ 24,180 $ 26,446 $ 22,660
========== =========== ===========
Supplemental disclosures of cash flow
information
Interest paid $ 133,160 $ 125,841 $ 118,038
Intercompany payments in lieu of federal
and state income taxes $ 30,881 $ 23,011 $ 49,612
See Notes to Consolidated Financial Statements.
24
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 24 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 subsidiary with branches in Colorado and
Utah. In addition to making consumer installment loans and purchasing retail
installment contracts, this subsidiary also takes 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 exercise the "same as cash" option.
25
Provision and Allowance for Credit Losses. The Company provides, through charges
to income, an allowance for credit losses which, based upon management's
evaluation of numerous factors, including current and anticipated economic
conditions, a predictive analysis of the outcome of the current portfolio (a
migration analysis) and prior loan loss experience, 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. Additionally, every real estate
secured loan that reaches 90 days delinquency is reviewed by the Company's
credit administration management to assess collectibility and future course of
action. These systematic analyses provide a self-correcting mechanism to reduce
differences between estimated and actual observed losses in the portfolio.
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. 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 and comprehensive income. 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.
Depreciation is provided for principally on the straight-line method over the
estimated useful life, ranging from three to thirty years, or, if less, the term
of the lease.
Goodwill. 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.
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 asset and liability method as
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FAS 109"). 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, FAS 109 requires the
consideration of all expected future events other than enactments of changes in
the tax law or rates.
26
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.
Customer deposits. 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. Statement of Financial
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. This statement has been
incorporated into these financial statements and does 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 and has been incorporated into these financial
statements. The statement does not affect the results of operations or financial
position of the Company.
27
Recently Issued Accounting Standard Not Yet Adopted. SFAS No.133, "Accounting
for Derivative Instruments and Hedging", was issued in June 1998 and establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for fiscal periods beginning after June 15, 1999. The
impact of the adoption of the provisions of this statement on the results of
operations or financial condition of the Company has not yet been determined.
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
consumer finance receivables, net. 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 consumer
finance receivables, net 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 were been
accounted for in a manner similar to a pooling of interests.
On May 1, 1998, Washington Mutual transferred to the Company a portion of its
consumer finance business, hereinafter referred to as Western Credit Services
("WCS"). WCS was comprised primarily of approximately $4 million in consumer
finance receivables, net. The Company paid fair value (as determined by
independent appraisal) of approximately $4 million in cash. The transfer was
accounted for as a purchase in which the Company made a capital contribution for
the amount of the purchase price.
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 comprehensive income and
retained earnings for the year ended December 31, 1996.
28
Note 5 Consumer Finance Receivables
Consumer finance receivables at December 31, 1998 and 1997 are summarized as
follows:
(Dollars in thousands) 1998 1997
-------------- ---------------
Consumer finance receivables
Real estate secured loans $ 1,269,439 $ 1,094,061
Personal loans 1,361,820 1,197,788
Retail sales contracts 328,254 362,373
-------------- ---------------
Gross consumer finance receivables 2,959,513 2,654,222
Less: Unearned finance charges and
deferred loan fees (385,117) (325,510)
Allowance for credit losses (80,493) (74,323)
-------------- ---------------
Consumer finance receivables, net $ 2,493,903 $ 2,254,389
============== ===============
Activity in the Company's allowance for credit losses is as follows:
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
----------- ----------- -----------
Balance, January 1 $ 74,323 $ 70,045 $ 55,568
Provision for credit losses 79,760 66,600 58,800
Amounts charged off:
Real estate secured loans (2,125) (1,292) (1,582)
Personal loans (73,210) (64,460) (50,086)
Retail sales contracts (14,417) (13,946) (10,947)
------------ ----------- -----------
(89,752) (79,698) (62,615)
Recoveries:
Real estate secured loans 521 556 442
Personal loans 12,593 11,538 12,892
Retail sales contracts 2,774 2,553 2,863
----------- ----------- -----------
15,888 14,647 16,197
----------- ----------- -----------
Net charge-offs (1) (73,864) (65,051) (46,418)
Allowances on notes purchased 274 2,729 2,095
----------- ----------- -----------
Balance, December 31 $ 80,493 $ 74,323 $ 70,045
=========== =========== ===========
<
- -------
(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 1996 under the new policy had it been in
effect January 1, 1996.
29
The amount of gross nonaccruing consumer finance receivables included above was
approximately $53.4 million and $50.9 million at December 31, 1998 and 1997,
respectively.
Contractual maturities, net of unearned finance charges and deferred loan fees,
at December 31, 1998 are as follows:
Over 1
But
Within Within Over
(Dollars in thousands) 1 year 5 years 5 years Total
--------- ---------- ----------- -----------
Real estate secured loans $ 159,646 $ 359,859 $ 603,368 $ 1,122,873
Personal loans 413,579 743,815 2,459 1,159,853
Retail sales contracts 118,050 171,555 2,067 291,672
--------- ---------- ----------- ------------
$ 691,275 $1,275,229 $ 607,894 $ 2,574,396
========= ========== =========== ===========
Consumer loans have maximum terms of 360 months, while retail sales contracts
have maximum terms of 60 months. The weighted average contractual term of all
consumer finance receivables written during the years ended December 31, 1998
and 1997 was 56 months and 49 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, 1998 and 1997, the ratio of principal cash
collections to average net consumer finance receivables outstanding was 55% and
59%, 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, 1998 and
1997 follows:
(Dollars in thousands) 1998 1997
------------------------------ ----------------------------
Approximate Approximate
Net Book Fair Net Book Fair
Value Value Value Value
Real estate secured loans $ 1,122,873 $ 1,092,170 $ 977,810 $ 962,249
Personal loans 1,159,851 1,149,797 1,025,330 982,529
Retail sales contracts 291,672 288,519 325,572 325,572
-------------- ------------- ------------- ------------
$ 2,574,396 $ 2,530,486 $ 2,328,712 $ 2,270,350
============== ============= ============= ============
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, 1998. Geographic diversification of consumer
finance receivables reduces the concentration of credit risk associated with a
recession in any one region.
30
Note 6 Investment Securities
Investment securities as of December 31, 1998 and 1997 are as follows:
(Dollars in thousands) December 31, 1998
Approximate
Original Amortized Gross Unrealized Fair
Cost Cost Gains Losses Value
--------- --------- ------- -------- ----------
Government obligations $ 18,637 $ 18,649 $ 183 $ 42 $ 18,790
Corporate obligations 95,813 96,075 1,739 93 97,721
Certificates of deposit
and other 34,489 34,028 443 162 34,309
--------- --------- ------- -------- ----------
$ 148,939 $ 148,752 $ 2,365 $ 297 $ 150,820
========= ========= ======= ======== ==========
(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
========= ========= ======= ======== ========
There were no significant realized gains or losses during 1998 or 1997.
The following table presents the maturity of the investment securities at
December 31, 1998:
(Dollars in thousands)
Approximate
Amortized Fair
Cost Value
---------- -----------
Due in one year or less $ 22,292 $ 22,242
Due after one year through five years 83,258 84,414
Due after five years through ten years 39,074 40,034
Due after ten years 4,128 4,130
---------- -----------
$ 148,752 $ 150,820
========== ===========
31
Note 7 Short-term Debt
Short-term debt at December 31, 1998 and 1997 consisted primarily of commercial
paper notes. Interest expense in 1998 and 1997 related to the commercial paper
was $20.6 million and $23.0 million, respectively.
In addition, on December 28, 1998, the Company obtained a fixed advance of $45
million from the FHLB. Under the agreement, which has a maturity date of March
26, 1999, interest is payable monthly at a fixed rate of 5.15%. Interest expense
in 1998 related to this borrowing was $26 thousand.
The book value of short-term debt at December 31, 1998 approximates its
estimated fair value.
Additional information concerning total short-term borrowings is as follows:
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
----------- ------------ ---------
Outstanding during the year
Maximum amount at any month end $ 560,823 $ 471,980 $ 578,743
Average amount $ 372,317 $ 406,992 $ 391,936
Weighted average interest rate 5.5% 5.8% 5.2%
Balance at end of year
Amount $ 560,823 $ 357,532 $ 398,006
Weighted average interest rate 5.7% 6.1% 5.7%
Weighted average interest rates include the effect of commitment fees.
Short-term notes totaling $74 million and $67 million were issued in December,
1998 and 1997, 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 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 8. There
were no borrowings under this revolving credit agreement in 1998 or 1997.
32
Note 8 Long-term Debt
Long-term debt at December 31, 1998 and 1997 was comprised of the following:
(Dollars in thousands) 1998 1997
------------- -------------
Senior notes and debentures
5.75%, due July 15, 1998 $ $ 149,972
7.875%, due February 15, 1999 99,995 99,947
6.75%, due May 15, 1999 99,998 99,992
6.3%, due July 15, 2000 99,968 99,949
6.125%, due December 1, 2000 149,800 149,702
7.75%, due June 15, 2001 149,959 149,944
7.25%, due June 15, 2001 99,916 99,885
6.0%, due August 1, 2001 199,697
6.75%, due August 15, 2001 99,950 99,933
6.30%, due October 1, 2002 149,644 149,561
6.50%, due November 15, 2003 149,415 149,320
------------- -------------
Total senior debt 1,298,342 1,248,205
------------- -------------
Senior subordinated notes and debentures
8.875%, due August 15, 1998 99,979
7.5%, due July 1, 1999 99,925 99,788
------------- -------------
Total senior subordinated debt 99,925 199,767
------------- -------------
Federal Home Loan Bank notes
4.91%, due May 1, 2001 18,900 18,900
5.39%, due June 3, 2002 6,000
5.30%, due March 20, 2003 10,000
------------- -------------
Total Federal Home Loan Bank notes 28,900 24,900
------------- -------------
Total long-term debt $ 1,427,167 $ 1,472,872
============= =============
33
Aggregate maturities at December 31, 1998 are as follows:
(Dollars in thousands)
Senior Federal
Senior Subordinated Home Loan
Debt Debt Bank Notes Total
----------- ----------- ---------- ----------
1999 $ 199,993 $ 99,925 $ 299,918
2000 249,768 249,768
2001 549,522 $ 18,900 568,422
2002 149,644 149,644
2003 149,415 10,000 159,415
----------- ----------- ---------- ----------
$ 1,298,342 $ 99,925 $ 28,900 $1,427,167
=========== =========== ========== ==========
The approximate fair value of the Company's long-term debt as of December 31,
1998 and 1997 is as follows:
(Dollars in thousands)
1998 1997
-------------------------- -------------------------
Book Approximate Book Approximate
Value Fair Value Value Fair Value
Senior debt $ 1,298,342 $ 1,321,822 $ 1,248,205 $ 1,274,620
Senior subordinated
debt 99,925 100,940 199,767 204,114
Federal Home Loan
Bank notes 28,900 28,942 24,900 24,913
------------- ----------- ------------ -----------
$ 1,427,167 $ 1,451,704 $ 1,472,872 $ 1,503,647
============= =========== ============ ===========
On May 1, 1997, the Company obtained an adjustable rate advance from the FHLB in
the amount of $21.5 million. 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 (4.91% at December 31,
1998). As a result of prepayments made in 1997, the outstanding balance as of
December 31, 1998 is $18.9 million.
On June 3, 1997, the Company obtained a putable advance from the FHLB in the
amount of $6 million. On a specified day each quarter, the FHLB had the option
to call the advance at par, which was exercised in March 1998. On March 20,
1998, the Company obtained a similar putable advance from the FHLB in the amount
of $10 million. On a specified day each quarter, the FHLB has the option to call
the advance at par. Under the credit agreement, which matures March 20, 2003,
interest is payable monthly and is determined using a fixed annual interest rate
of 5.30%.
Interest expense related to long-term FHLB debt in 1998 and 1997 was $1.7
million and $1.1 million, respectively.
34
The Company's senior debt securities are issued under shelf registration
statements filed with the SEC. Under various registration statements, the
Company issued: in February, 1992, $100 million of 7.875% senior notes maturing
February 15, 1999; in July, 1992, $100 million of 7.5% senior subordinated notes
maturing July 1, 1999; in July, 1994, $150 million of 7.75% senior notes
maturing June 15, 2001; in July, 1995, $100 million of 6.3% senior notes
maturing July 15, 2000; in June, 1996, $100 million of 7.25% senior notes
maturing June 15, 2001; in August, 1996, $100 million of 6.75% senior notes
maturing May 15, 1999; in August, 1996, $100 million of 6.75% senior notes
maturing August 15, 2001; in December, 1996, $150 million of 6.125% senior notes
maturing December 1, 2000; in October, 1997, $150 million of 6.3% senior notes
maturing October 1, 2002; in November, 1997, $150 million of 6.5% senior notes
maturing November 15, 2003; and in July, 1998, $200 million of 6.0% senior notes
maturing August 1, 2001. The proceeds of these issues were generally used to
reduce borrowings of the Company (including outstanding commercial paper) and
for general corporate purposes except as follows: the June, 1996 issue was
primarily used to reduce outstanding commercial paper issued to fund the
purchase price of the Company's acquisition of GWFS as described in Note 3; and
the December, 1996 issue was primarily used to fund the purchase price of the
Company's acquisition of BFC as described in Note 3 and to repay approximately
$69.6 million of outstanding intercompany indebtedness owed by BFC and its
subsidiaries.
Interest expense related to the above-mentioned senior notes in 1998 and 1997
was $100.9 million and $95.6 million, respectively.
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, 1998, approximately $43.6 million
was available under the debt agreement restriction for future dividends.
Note 9 Customer Deposits
The book value and approximate fair value of the Company's customer deposits as
of December 31, 1998 and 1997 are as follows:
(Dollars in thousands)
1998 1997
---------------------------- -------------------------
Book Approximate Book Approximate
Value Fair Value Value Fair Value
Money market accounts $ 15,382 $ 15,382 $ 15,883 $ 15,883
Savings accounts 1,340 1,340 1,493 1,493
Certificates of deposit
under $100,000 155,287 157,286 133,041 133.373
Certificates of deposit
$100,000 and over 15,509 15,709 12,768 12,820
--------- ----------- --------- ----------
$ 187,518 $ 189,717 $ 163,185 $ 163,569
========= =========== ========= ==========
Maturities of time deposits are $119.4 million in 1999, $31.1 million in 2000,
$11.0 million in 2001 and $9.2 million thereafter.
35
Note 10 Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
-------- ------- -------
Currently payable
Federal $ 38,808 $ 28,567 $ 44,871
State 6,900 5,237 8,317
Deferred (11,008) (4,060) (16,188)
--------- -------- --------
$ 34,700 $ 29,744 $ 37,000
========= ======== ========
The provisions for income taxes differ from the amounts determined by
multiplying pre-tax income by the statutory Federal income tax rate of 35% for
1998, 1997 and 1996. A reconciliation between these amounts is as follows:
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
----------- ----------- -----------
Income taxes at statutory rates $ 30,655 $ 26,611 $ 34,831
Increase (reduction) in taxes
resulting from:
State income taxes, net of
Federal benefit 4,485 2,972 5,406
Other (440) 161 (3,237)
----------- ----------- -----------
$ 34,700 $ 29,744 $ 37,000
=========== =========== ===========
36
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) 1998 1997
--------- ----------
Amortization of intangibles $ 11,614 $ 9,537
Employee benefits accruals (577) 2,338
Depreciation (81) 86
Loan interest and fee income 511 3,173
Other deferred income items 1,652 1,389
--------- ----------
Total deferred tax liabilities 13,119 16,523
--------- ----------
Credit loss reserves (31,564) (26,391)
Unearned insurance commissions (7,466) (4,700)
Other miscellaneous accruals (2,269) (2,099)
State taxes (2,543) (4,100)
Other deferred deduction items (6,400) (3,655)
---------- ----------
Total deferred tax assets (50,242) (40,945)
---------- ----------
Net deferred tax asset $ (37,123) $ (24,422)
========= ==========
Note 11 Retirement and Savings Plans
Substantially all of the Company's employees participate in a noncontributory
defined contribution pension plan maintained by Washington Mutual ("the Plan").
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 (recovery) cost for the Company's participants for the years ended
December 31, 1998, 1997, and 1996 was ($150,000), ($150,000) and $490,000,
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 pre-tax
compensation until retirement. Company contributions equal 50% of the
contributions made by employees up to 6% of salary 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
$2.5 million, $1.0 million and $1.4 million for the years ended December 31,
1998, 1997 and 1996, respectively.
37
The Company's employees who retired prior to July 1, 1997 also participate in
GWFC's defined benefit postretirement plan ("the Benefit Plan") which covers 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 Benefit
Plan's total participants.
The net postretirement medical and life insurance expense allocated to the
Company for the years ended December 31, 1998, 1997 and 1996 were $344,000,
$358,000 and $521,000, respectively.
Note 12 Leases
At December 31, 1998, 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 $7.4 million in 1999; $4.7
million in 2000; $3.0 million in 2001; $1.9 million in 2002; and $880 thousand
in 2003. Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$11.3 million, $10.8 million and $10.0 million, respectively.
Note 13 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 given suit. In December, 1998, the Company
reached a tentative agreement to settle one such outstanding lawsuit, the total
cost of which is not expected to exceed $4.5 million. The Company's consolidated
results of operations for 1998 reflect the recording of this amount in its
entirety.
38
Note 14 Transactions with Related Parties
Significant transactions with Washington Mutual or its subsidiaries in addition
to those described in Note 3 are identified as follows:
o 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 $1.1
million in 1998, $1.9 million in 1997 and $1.8 million in 1996.
o The Company made payments to Washington Mutual pursuant to a tax allocation
policy and in connection with the retirement and savings plans.
Note 15 Lines of Business
The Company is managed along two major lines of business: consumer finance and
consumer banking. The financial performance of these business lines is measured
by the Company's profitability reporting processes, which utilize various
management accounting techniques to ensure that both business line's financial
results reflect the underlying performance of that business.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued effective for fiscal years ending after
December 15, 1998. This standard requires the Company to provide information on
the performance of its reportable business segments, noted above, which are
strategic lines of business managed by the Executive Committee under the
direction of the Chief Executive Officer.
The Company's business segments are managed through its Executive Committee,
which is the senior decision making group of the Company. The Executive
Committee is comprised of eleven members including the President and Chief
Executive Officer and Executive Vice Presidents who manage key business and
operational areas within the Company.
Both segments are managed by an executive team that is responsible for sales,
marketing, sales support, operations and certain administrative functions. Back
office support is provided to each segment through executives responsible for
lending administration, information systems, finance, legal and administration.
The accounting policies of the segments are the same as those described in Note
2, "Summary of Significant Accounting Policies". All operating revenues and
expenses are directly assigned to business segments in determining their
operating income. Significant intersegment transactions are quantified in the
table below.
Since SFAS No. 131 requires no segmentation or methodology standardization, the
organizational structure of the institution and the allocation methodologies it
employs result in business line financial results that are not necessarily
comparable across companies. As such, the Company's business line performance
may not be directly comparable with similar information from other consumer
finance companies.
39
Financial highlights by lines of business were as follows:
(Dollars in thousands) Year Ended December 31,
1998 1997 1996
--------------------- --------------------- ----------------------
Consumer Consumer Consumer Consumer Consumer Consumer
Finance Banking Finance Banking Finance Banking
Condensed income statement:
Net interest income
after provision for
loan losses $188,051 $ 15,381 $ 165,702 $ 14,903 $ 182,585 $ 13,790
Other operating income 26,380 767 26,063 492 26,782 423
Operating expenses 136,275 6,717 124,554 6,575 117,902 6,160
--------- --------- --------- --------- --------- --------
Income before income
taxes 78,156 9,431 67,211 8,820 91,465 8,053
Income taxes 31,092 3,608 26,370 3,374 33,868 3,132
--------- --------- --------- --------- --------- -----------
Net income $ 47,064 $ 5,823 $ 40,841 $ 5,446 $ 57,597 $ 4,921
========= ========= ========= ========= ========= ===========
Other disclosures:
December 31,
1998 1997
---------------------- ---------------------
Consumer Consumer Consumer Consumer
Finance Banking Finance Banking
Total assets $ 2,415,476 $ 329,234 $ 2,231,257 $ 278,349
The financial results of each segment are derived from the Company's general
ledger system. Certain adjustments have been made to recorded general ledger
accounts to appropriately reflect results of operations and financial position
transfers among segments.
40
Note 16 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, 1998 December 31, 1997
------------------------- -----------------------
Carrying Approximate Carrying Approximate
Value Fair Value Value Fair Value
Consumer finance receivables Note 5 $ 2,574,396 2,530,486 $ 2,328,712 $ 2,270,350
Investment securities Note 6 150,820 150,820 154,475 154,475
Short-term debt Note 7 560,823 560,823 357,532 357,532
Long-term debt Note 8 1,427,167 1,451,704 1,472,872 1,503,647
Customer deposits Note 9 187,518 189,717 163,185 163,569
See Note 2 and the referenced Notes for additional information.
Note 17 Selected Quarterly Financial Data (Unaudited)
A summary of the quarterly results of operations for the years ended December
31, 1998 and 1997 is set forth below:
Quarter Ended
March 31, June 30, September 30, December 31,
(Dollars in thousands) 1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
before provision for
credit losses $66,907 $60,932 $67,957 $61,384 $71,791 $58,474 $76,537 $66,415
------- ------- ------- ------- ------- ------- ------- -------
Provision for credit
losses 18,000 15,400 18,300 15,600 21,800 16,200 21,660 19,400
Other income 6,489 6,066 5,777 6,989 7,844 6,592 7,037 6,908
Other expenses 32,941 31,807 32,026 29,425 32,456 30,055 41,952 32,778
Goodwill amortization
expense 1,019 1,766 866 1,766 866 1,766 866 1,766
------- ------- ------- ------ -------- -------- ------- -------
Income before income taxes 21,436 18,025 22,542 21,582 24,513 17,045 19,096 19,379
Income tax provision 8,500 7,100 8,900 8,500 9,700 6,800 7,600 7,344
------- ------- ------- ------- -------- -------- ------- -------
Net income $ 12,936 $10,925 $13,642 $13,082 $ 14,813 $10,245 $11,496 $12,035
======== ======= ======= ======= ======== ======= ======= =======
41
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.................19
Aristar, Inc. and Subsidiaries:
Consolidated Statements of Financial Condition
at December 31, 1998 and 1997....................................21
Consolidated Statements of Operations, Comprehensive Income
and Retained Earnings for the Years Ended December 31, 1998,
1997 and 1996....................................................22
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1998, 1997 and 1996.............23
Notes to Consolidated Financial Statements........................24
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)
42
(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 July 1, 1992 between Aristar, Inc. and
The Chase Manhattan Bank, N.A., as trustee. (5)
(g) Indenture dated as of July 1, 1995 between Aristar, Inc. and
The Bank of New York, as trustee. (6)
(h) Indenture dated as of October 1, 1997 between Aristar, Inc.
and First Union National Bank, as trustee. (7)
(i) Indenture dated as of November 15, 1997 between Aristar, Inc.
and First Union National Bank, as trustee. (9)
(j) 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 44 of the Form 10-K.
(27) Financial Data Schedule.
43
(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
No reports on Form 8-K were filed during the period covered by this
Report.
44
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/ Douglas G. Wisdorf March 24, 1999
Douglas G. Wisdorf, Senior Vice President Date
and Chief Financial Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Douglas G.
Wisdorf 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 24, 1999.
/s/ Craig J. Chapman
Craig J. Chapman, President and Director
(Principal Executive Officer)
/s/ Craig E. Tall
Craig E. Tall, Director
/s/ Fay L. Chapman
Fay L. Chapman, Director
/s/ James B. Fitzgerald
James B. Fitzgerald, Director
/s/ William A. Longbrake
William A. Longbrake, Director