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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-20526
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ARCADIA FINANCIAL LTD.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1664848
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7825 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55439-2435
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 942-9880
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK ($.01 PAR VALUE)
CLASS A PREFERRED STOCK RIGHTS ($.01 PAR VALUE)
(Title of Class)
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price of the Common Stock as quoted on the
New York Stock Exchange on February 17, 1998 was approximately $246.9 million.
The number of shares of the registrant's Common Stock outstanding as of
February 17, 1998 was 38,917,493.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents listed below have been incorporated by
reference into the indicated part of this Form 10-K.
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DOCUMENT INCORPORATED PART OF FORM 10-K
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<S> <C>
Proxy Statement for 1998 Annual Meeting of Shareholders Items 10, 11, 12 and 13
to be held May 28, 1998 of Part III
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PART IV
Item 14(a)(3) is hereby amended to amend and restate the following exhibits:
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EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
23.1..... Consent of Ernst & Young LLP
27.1..... Financial Data Schedule
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FORM 10-K INDEX
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PART I
Item 1. Business........................................................................ 3
Item 2. Properties...................................................................... 17
Item 3. Legal Proceedings............................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............................. 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........... 19
Item 6. Selected Financial Data......................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 22
Item 8. Financial Statements and Supplementary Data..................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrant.............................. 63
Item 11. Executive Compensation.......................................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 63
Item 13. Certain Relationships and Related Transactions.................................. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................ 63
</TABLE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements under the captions "Business," "Legal Proceedings,"
"Market for Registrant's Common Equity and Related Stockholder Matters,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements may be identified by the use of
terminology such as "may," "will," "expect," "anticipate," "estimate," "should,"
or "continue" or the negative thereof or other variations thereon or comparable
terminology. Such forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or from those results presently anticipated or projected.
Such factors include, among other things, the following: increased delinquency
and loan loss rates; modifications to the Company's retail disposition program;
accounting and regulatory changes; interest rate fluctuations; difficulties or
delays in the securitization of automobile loans; availability of adequate
short- and long-term financing; general economic and business conditions; and
other matters set forth under the caption "Cautionary Statements" in exhibit
99.1 filed herewith.
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PART I.
ITEM 1. BUSINESS
GENERAL
The Company purchases, securitizes and services consumer automobile loans
originated primarily by car dealers affiliated with major foreign and domestic
manufacturers. Loans are purchased through 18 regional buying centers located in
15 states, supplemented by a network of dealer development representatives
("DDRs") which develop and maintain relationships with car dealers operating
within each "hub's" immediate market area or in surrounding market areas
referred to as "spokes." Credit approval and loan processing are generally
performed at the "hub" or at the Company's headquarters in Minneapolis,
Minnesota. The Company acts as the servicer of all loans originated and
securitized by it in return for a monthly servicing fee. To perform its
servicing responsibilities the Company operates a national customer service
center in Minneapolis, Minnesota and four regional collection centers located in
Charlotte, North Carolina; Dallas, Texas; Denver, Colorado; and Minneapolis,
Minnesota.
The Company purchases each loan in accordance with its underwriting
procedures, which focus on a borrower's credit characteristics and collateral
value. The Company's underwriting criteria do not distinguish between new and
used vehicles, which represented approximately 16% and 84%, respectively, of the
Company's loan purchases in 1997. The Company seeks to maximize gross interest
rate spreads relative to expected net losses by maintaining a tiered pricing
system based on the borrower's credit characteristics as measured by the
Company's underwriting and proprietary credit scoring criteria. The Company
markets its loan products to dealers under two programs, designated Premier and
Classic. "Premier" and "Classic" are proprietary trademarks of the Company.
Premier borrowers generally have stronger credit characteristics than those of
Classic borrowers. The Company has been expanding the level of loan purchases
under its Classic program primarily to increase gross interest rate spreads. In
1997, 55% of the principal amount of loans purchased by the Company were
purchased under the Classic program compared with 36% in 1996 and 17% in 1995.
The Company may change its loan purchase mix at any time and from time to time.
The Company considers substantially all of the loans it purchases under both the
Premier and Classic programs to be in the "prime" or "non-prime" loan
categories, but does not consider the loans it purchases to be in the
"sub-prime" loan category.
In accordance with prevailing industry practice, the Company pays an
up-front dealer participation to the originating dealer for each loan purchased.
These dealer participations vary in amount among the Company's loan products and
are generally greater under the Premier program than under the Classic program.
The Company primarily uses warehouse facilities to fund its initial purchase
of loans. The Company securitizes purchased loans as asset-backed securities,
generally on a quarterly or more frequent basis. In its securitizations, the
Company, through a special purpose subsidiary, transfers loans to newly-formed
securitization trusts which issue one or more classes of asset-backed
securities. The asset-backed securities are simultaneously sold to investors and
the Company recognizes a gain on the sale of the loans. Each month, collections
of principal and interest on the securitized loans are used by the trustee to
pay the holders of the related asset-backed securities, to establish and
maintain spread accounts as a source of cash to cover shortfalls in collections
and to pay expenses associated with the securitizations and subsequent
servicing. After such application by the trustee, amounts in excess of those
necessary to satisfy requirements associated with the asset-backed securities
are generally distributed to the Company, subject to its agreements with
Financial Security Assurance Inc. ("FSA"). All of the Company's securitization
trusts and one of the Company's warehouse facilities are credit-enhanced through
financial guaranty insurance policies, issued by FSA, which insure payments of
principal and interest due on the related asset-backed securities. Asset-backed
securities insured by FSA have been rated AAA by Standard & Poor's and Aaa by
Moody's Investors Service, Inc.
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The Company is a Minnesota corporation, incorporated on March 8, 1990. Its
principal executive offices are located at 7825 Washington Avenue South,
Minneapolis, Minnesota 55439-2435, and its telephone number is (612)942-9880.
STRATEGIES
The Company's business objective is to deliver predictable and sustainable
profitability. To achieve this objective, the Company utilizes the following
strategies:
- EMPHASIS ON DEALER RELATIONSHIPS -- The Company believes that the volume
and quality of the loans it acquires depends upon its ability to establish
and maintain satisfactory relationships with automobile dealers. When
presented with a loan application, the Company attempts to notify the
dealer within one hour or less whether it will approve, conditionally
approve or deny the automobile loan for purchase from the dealer. The
Company's business hours generally coincide with those of the dealership
and, in some cases, the Company will provide loan processing on the
dealer's premises during dealer promotions. When the Company considers a
borrower's credit quality to be adequate, the Company may provide the
dealer with flexibility in developing loan structures to accommodate a
borrower's needs, such as extended payment terms or low down-payment
requirements. To further assist the dealer, the Company may perform more
in-depth underwriting analysis when warranted by special circumstances. A
DDR maintains frequent contacts with the dealer to assure a high level of
service. By employing consistent loan purchasing practices, the Company
believes that it provides the dealer with a reliable source of financing.
- TIERED PRICING STRATEGY -- The Company maintains a tiered pricing system,
allowing it to price different loan products according to the profiles of
borrowers' credit characteristics as measured by the Company's proprietary
credit scoring system and various analytical tools. The Company's tiered
pricing system seeks to (i) maximize gross interest rate spreads relative
to expected net losses within each credit tier, (ii) provide a greater
opportunity to expand its automobile loan market share through loan
products that address a greater variety of customer needs, and (iii)
reduce the Company's initial cash requirements for Classic loans relative
to the Premier program because the Company offers lower dealer
participations on Classic loans. The Company therefore generally obtains
significantly higher interest rates under the Classic program than under
the Premier program. The higher interest rates of the Classic program is
intended to compensate the Company for the expected greater delinquency
and default rates associated with the Classic program, which the Company
addresses through higher loan loss reserves.
- MAINTENANCE OF UNDERWRITING PROCEDURES -- The Company has developed a
proprietary credit scoring system designed to maintain consistent
underwriting procedures for its loan authorizations. The Company's credit
scoring system monitors six evaluation criteria: debt-to-income,
payment-to-income, loan-to-value, credit bureau score, credit score and
loan size. Using the results of the credit scoring system, each loan
application is reviewed by one of the Company's credit specialists and, as
appropriate under the Company's underwriting procedures, one or more
credit managers, to determine whether the loan should be approved. To
monitor the integrity of the underwriting procedures, management tracks on
a daily basis the approval rates and delinquency and loss rates by credit
specialist, buying center and dealer. In addition, the Company regularly
evaluates its underwriting procedures through the use of various
analytical tools and compares expected to actual performance outcomes to
determine if enhancements are necessary.
- SERVICING -- The Company operates a national servicing center in
Minneapolis, Minnesota and four regional collection centers located in
Charlotte, North Carolina; Dallas, Texas; Denver, Colorado; and
Minneapolis, Minnesota. These centers are staffed with trained personnel
responsible for various servicing, collection and repossession activities.
Collectors are assisted by highly automated telephone dialing systems and
a computerized collection system which improve the Company's
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ability to make early contact with delinquent obligors. The Company
regularly monitors and evaluates its servicing and collection operations
with a view to improving procedures as needed.
- FUNDING AND LIQUIDITY THROUGH WAREHOUSING AND SECURITIZATIONS -- The
Company funds the acquisition of automobile loans principally through
three warehouse facilities with asset-backed commercial paper programs.
Currently, these facilities provide sufficient capacity to handle the
Company's loan purchases. The Company securitizes purchased loans as
asset-backed securities and uses such securitizations as a cost
competitive source of capital compared to traditional sources of corporate
debt financing. Securitization enables the Company to sell automobile
loans on a regular basis, while retaining the right to receive future
servicing fees and excess cash flows. Securitization also allows the
Company to use the net proceeds from such sales to fund the purchase of
additional automobile loans.
- RETAILING OF REPOSSESSED AUTOMOBILES -- In addition to wholesale
distribution channels, the Company has regularly disposed of repossessed
vehicles through the retail markets, primarily retail used car consignment
lots. The Company believes that the greater recoveries available from the
retail market justify the costs of maintaining unsold repossession
inventory and managing the retail program. In addition, the use of retail
markets provides the Company with an opportunity to finance the sale of
repossessed automobiles to new buyers. The extent to which the Company
utilizes retail distribution channels is dependent upon numerous factors,
including but not limited to, the level of repossessed inventory, used car
market conditions and the continuing cost to maintain the strategy. The
Company may, as it has in the past, increase or decrease its use of retail
markets after considering such factors.
AUTOMOBILE DEALER PROGRAM
The Company believes that the volume and quality of the loans it acquires
depends upon its ability to establish and maintain satisfactory relationships
with automobile dealers. The Company's DDRs and other loan purchasing personnel
emphasize dealer service. The Company attempts to identify the particular
service needs of dealers and to provide a reliable source of financing for
qualified automobile buyers. DDRs are the Company's primary contact with its
dealers and are responsible for prospecting new dealerships, selling the
Company's programs and cultivating dealer relationships. DDRs train dealer
personnel in the Company's programs and meet with dealer management periodically
in an effort to ensure the dealer's needs and expectations are being satisfied.
DDRs operate out of one of the Company's regional buying centers or out of one
of the Company's "spokes," which are typically within a 200-mile radius of a
regional buying center. The Company's cost in maintaining DDRs is primarily
limited to compensation.
During 1997, the Company expanded its technical resources and developed more
in-depth analysis of loan performance and profitability by dealer. This has
helped the Company identify dealers that have consistently provided loan
applications meeting the Company's underwriting guidelines, thereby allowing the
Company to focus its marketing efforts on those dealers which provide the most
profitable origination opportunities.
LOAN PURCHASES AND UNDERWRITING
LOAN PURCHASES. Retail automobile buyers are customarily directed to a
dealer's finance and insurance department to finalize their purchase agreement
and to review potential financing sources and rates available from the dealer.
If the customer elects to pursue financing through the dealer, an application is
taken for submission to the dealer's financing sources. The Company's agreements
with its dealers are non-exclusive and, typically, a dealer will submit the
purchaser's application to more than one financing source for review. The dealer
in consultation with the borrower will decide which source will finance the
automobile purchase based upon the rates being offered, the terms for approval,
dealer
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participations or incentives that may be offered from time to time in accordance
with captive wholesale financing arrangements with the dealer's primary supplier
of automobiles.
When presented with a loan application, the Company attempts to notify the
dealer within an hour or less whether it will approve, conditionally approve or
deny the loan for purchase from the dealer. A loan purchase by the Company
generally occurs simultaneously with the purchase by the buyer of the related
automobile and the making of the loan to the buyer by the dealer. The buyer's
purchase generally is not completed until the Company or another financing
source approves a loan. If the application is approved by the Company and the
buyer accepts the terms of the financing, the buyer enters into an installment
contract or secured note with the dealer on a form prepared and provided to the
dealer by the Company. At the bottom or reverse of the contract or note is an
assignment of the loan to the Company that is signed by the dealer.
UNDERWRITING. The Company purchases each loan based on its established
underwriting procedures. The Company's underwriting procedures include scoring
the borrower's loan application in accordance with the Company's proprietary
credit scoring system and comparing such credit scores to established
underwriting criteria. For borrowers with credit scores falling outside
predetermined criteria, the Company's policies require additional review and
approval by supervisory personnel in order to determine whether to approve such
loans. These procedures are intended to assess the applicant's ability to repay
the amounts due on the loan and the adequacy of the financed vehicle as
collateral. The Company's underwriting procedures do not distinguish between new
and used vehicles. The Company maintains a tiered pricing system, allowing it to
price loans according to the borrower's credit characteristics. The Company
markets its loan products to automobile dealers through its Premier and Classic
programs. Premier borrowers generally have stronger credit characteristics than
those of Classic borrowers.
Each applicant for a loan is required to complete and sign an application
which lists the applicant's assets, liabilities, income, credit and employment
history and other personal information. Upon receipt of the completed loan
application, the Company's administrative personnel order a minimum of one
credit bureau report on the applicant to document the applicant's credit
history. The application and the credit bureau report(s) are given to one of the
Company's credit specialists for analysis under the Company's proprietary credit
scoring system.
The Company's credit scoring system evaluates the credit applicant with an
emphasis on cash flow as a principal indicator of repayment capability and
provides credit scores which are utilized by the Company as a basis to determine
if the applicant initially falls within the parameters of the Company's
underwriting criteria for a particular loan product. Assuming that the applicant
qualifies, the Company will expand its credit review procedures and purchase
from a credit bureau an additional credit bureau score which attempts to assess
the likelihood of borrower payment ability. If the applicant meets the Company's
underwriting standards, the Company generally will approve the application. For
Classic borrowers (and, if certain scoring criteria are not satisfied, for
Premier borrowers), this data is subject to further investigation. This
investigation typically consists of direct telephone confirmations, when
feasible, of the applicant's employment and may also include direct credit
references from banks and financial institutions noted on the application.
Once scoring and verifications have been completed, one of the Company's
credit specialists reviews the application to ensure that it meets the
requirements of the Company's internal system and also reviews the various
banking and employment verifications obtained. The credit specialist also
considers the amount to be financed in relation to the purchase price and market
value of the automobile. If the vehicle is used, the Company determines market
value based upon the Kelly Blue Book value or the National Automobile Dealers
Association's ("NADA") Guide on Retail and Wholesale Values. Consistent with
industry standards, this assessment does not include inspection of the
automobile. The Company does not reject an applicant solely because of the age
of the automobile.
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Objective credit scoring criteria provide the factual background for lending
decisions, but such decisions frequently require the credit judgment of the
Company's credit specialists. To the extent an applicant fails to meet one or
more of the scoring benchmarks for the proposed loan, the Company generally
requires higher levels of management scrutiny before such loans are approved. In
1996 and 1997, a substantial majority of Classic loans and a substantial number
of Premier loans purchased by the Company failed to meet at least one applicable
scoring benchmark and generally were subject to additional management review
before approval.
Upon completion of the credit analysis, the Company decides whether it will
approve, conditionally approve or deny the loan application as submitted.
Conditioning approval of the application involves amending the dealer's proposed
terms of the loan to qualify the application according to Company procedures.
Typical conditions include, but are not limited to, requiring a co-applicant,
amending the length of the proposed term, requiring additional down payment,
substantiating certain credit information, or requiring proof of resolution of
certain credit deficiencies as noted on the applicant's credit history.
Approved, declined or conditioned application decisions are promptly
communicated to the dealer by phone or facsimile. Additionally, the applicant is
informed by the Company of any credit denial or other adverse action by mail, in
compliance with applicable statutory requirements.
The Company regularly reviews the quality of the loans it purchases and
conducts internal compliance reviews on a monthly basis.
RESALE AND FINANCING OF REPOSSESSIONS. In addition to wholesale
distribution channels, the company has regularly disposed of repossessed
vehicles through retail markets, primarily retail used car consignment lots. The
Company believes that the greater recoveries available from the retail market
justify the costs of maintaining higher levels of unsold repossession inventory
and managing the retail program. In addition, the use of retail markets provides
the Company with an opportunity to finance the repossessed vehicles with new
buyers. The extent to which the Company retails its repossessed inventory is
dependent in part on inventory levels, used car market conditions, and the
continuing cost to operate such strategy. The Company may, as it has in the
past, increase or decrease its use of retail markets after considering such
factors. During 1997, such an analysis resulted in a reduction in the
utilization of retail markets (see "Management's Discussion and
Analysis--"SPECIAL CHANGES").
During 1997, approximately 46% of repossessed vehicles sold were liquidated
through retail markets, of which the Company financed approximately 94% of these
sales. During 1996, the Company sold approximately 70% of its repossession
inventory through retail markets and financed approximately 90% of these sales.
The Company believes this strategy had the effect of reducing the Company's loan
losses in 1996 and, to a lesser extent, in 1997 (relative to a wholesale-based
strategy) while delaying cash distributed from securitization trusts as a result
of slower inventory turnover. The strategic benefits of the retail program were
partially offset in 1996 and 1997 by the performance of the Company's portfolio
of financed repossessed automobiles, which experienced delinquency, default and
loss rates substantially higher than the Company's other loan products, and by
lower retail prices for used cars in 1997.
The Company applies the same underwriting methodology and procedures to the
financing of repossessed automobiles as it applies to the purchase of other loan
products, but it allows credit specialists and managers greater latitude in the
financed repossession product to approve exceptions (with appropriate management
authorization) to underwriting criteria as compared to other products in the
Premier and Classic programs. The principal amount of retail repossession sales
financed by the Company increased from $96.9 million (2.56% of the total
servicing portfolio) at December 31, 1996 to $169.7 million (3.42% of the total
servicing portfolio) at December 31, 1997. The delinquency, default and loss
rates of the Company's portfolio of repossessed automobile loans have
significantly exceeded the rates of the Company's other loan products,
accounting for a disproportionate amount of the Company's overall delinquencies,
defaults and losses in 1997. In particular, since the latter part of 1996, the
Company has taken a series of steps intended to improve the performance of its
financed repossession portfolio, including introducing
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greater verification of credit applications, tightening supervision of the
buying center process and lowering the loan-to-value ratios on loans purchased.
However, acceptable levels of delinquencies, defaults and losses in the
repossession loan portfolio, as determined by management, are likely to exceed
levels typically experienced in the Company's other loan products.
DEALER PARTICIPATIONS. The Company remits to the dealer the amount financed
pursuant to the terms of the loan and, consistent with industry practice, a
dealer participation for selling such loan to the Company. The Company computes
the dealer participation by calculating the amount of cash flow arising from the
rate differential between the interest rate charged by the automobile dealer to
the borrower and the rate offered by the Company to the dealer. The Company
generally offers two alternative methods for payment of the dealer
participation. Under the "shared participation" method, the dealer generally
receives a percentage of the total participation at the time of sale in exchange
for a shorter charge-back period. During the charge-back period the Company is
entitled to recover the upfront percentage received by the dealer in the event
of a prepayment or default during the first 90 to 180 days. Under an alternative
method, the Company pays the full participation to the dealer less approximately
1% of the outstanding loan balance which is held in reserve to allow for future
charges to the dealer in the event of early prepayment or default. Under the
alternative method, the Company is entitled to recover from the dealer the
unearned portion of the dealer participation in the event of a prepayment or
default in excess of the amount withheld at any point prior to contractual
maturity and the entire reserve amount if the loan defaults within its first 12
months. A substantial majority of the Company's dealers elect the "shared
participation" method.
MARKETS AND EXPANSION
The following table illustrates the loan purchasing volume and percentage of
total loan purchases by regional buying center during the three years ended
December 31, 1997:
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(Dollars in thousands) OPENING
REGIONAL BUYING CENTER DATE 1997 1996 1995
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<S> <C> <C> <C> <C> <C> <C> <C>
Minnesota................ 6/90 $ 163,418 5.71% $ 160,376 5.83% $ 117,253 5.71%
Colorado................. 4/92 157,525 5.50 161,880 5.89 145,552 7.09
North Texas.............. 11/92 279,580 9.77 299,673 10.90 260,775 12.71
Washington............... 3/93 166,186 5.80 198,580 7.22 176,241 8.59
Arizona.................. 7/93 184,777 6.45 204,717 7.44 124,921 6.09
Florida.................. 8/93 189,988 6.64 144,042 5.24 123,308 6.01
Georgia.................. 11/93 176,922 6.18 189,346 6.88 143,289 6.98
South Texas (1).......... 2/94 169,495 5.92 278,457 10.12 335,317 16.34
Northern California...... 6/94 147,905 5.17 192,794 7.01 149,291 7.27
Missouri................. 6/94 151,553 5.29 173,381 6.30 172,569 8.41
Massachusetts............ 8/94 131,007 4.58 131,794 4.79 108,090 5.27
Tennessee................ 10/94 191,202 6.68 141,491 5.15 99,951 4.87
Ohio..................... 3/95 102,905 3.59 57,267 2.08 9,844 0.48
North Carolina........... 5/95 241,468 8.43 202,255 7.35 85,978 4.18
Southern California...... 12/95 107,332 3.75 57,858 2.10 34 --
New York................. 3/96 78,210 2.73 44,516 1.62 -- --
West Texas............... 7/96 177,780 6.22 112,126 4.08 -- --
Maryland................. 3/97 45,568 1.59 -- -- -- --
------------ ----------- ------------ ----------- ------------ -----------
Totals............... $ 2,862,821 100.00% $ 2,750,553 100.00% $ 2,052,413 100.00%
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(1) Prior to July 1996, the West Texas region was included in the South Texas
region.
The Company regularly evaluates its "hub and spoke" strategy and from time
to time has expanded into new markets through the establishment of additional
regional buying centers and "spoke" operations. The Company's expansion program
is directed by personnel with backgrounds in credit administration,
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finance and operations, information systems, facilities development, sales and
marketing and human resources. In considering potential markets for expansion,
the Company reviews such factors as population, income per capita, retail sales
per capita, city work force, number of households, average annual income,
automobile registrations, driver licenses issued and number of dealerships in
the state and standard metropolitan statistical areas and the competitive
environment for automobile financing. The Company also considers other general
expansion criteria, including but not limited to, recruiting and staffing,
training, compensation and benefits, policies and procedures, demographics, and
legal and licensing requirements. The Company also reviews the performance of
existing buying centers to evaluate their continuing contribution to the
Company's strategy.
FINANCING
WAREHOUSE FACILITIES. The Company uses warehouse facilities to finance its
purchase of loans on a short-term basis pending securitization. At December 31,
1997, the Company had an aggregate borrowing capacity of approximately $875.0
million under three primary warehouse facilities, of which $844.0 million was
available. The Company, through a wholly-owned special purpose subsidiary,
Arcadia Receivables Finance Corp. ("ARFC"), has a $400.0 million receivables
warehouse facility with Receivables Capital Corporation ("RCC"), a commercial
paper conduit sponsored by Bank of America (the "BofA Facility"). The Company,
through its wholly-owned special purpose subsidiary, Arcadia Receivables Finance
Corp. II ("ARFC II"), has an approximately $175.0 million receivables warehouse
facility with a commercial paper conduit managed by Morgan Guaranty Trust
Company of New York (the "Morgan Guaranty Trust Facility"). The Company, through
its wholly-owned special purpose subsidiary, Arcadia Receivables Finance Corp.
III ("ARFC III"), has a $300.0 million receivables warehouse facility with DLJ
Mortgage Capital, Inc., a subsidiary of Donaldson, Lufkin & Jenrette (the "DLJ
Facility").
Under the BofA Facility, the Company, through ARFC, sells loans to another
wholly-owned special purpose subsidiary, Arcadia Receivables Conduit Corp.
("ARCC"), and ARCC purchases the loans from ARFC and agrees to transfer the
loans back to ARFC on ARFC's demand (at the time, and for the purpose, of
securitization). ARFC is also obligated to repurchase loans from ARCC on or
before the date which is twelve months following their conveyance to ARCC and
upon the occurrence of a default or certain other events. The BofA Facility
provides for the purchase of loans for an aggregate purchase price outstanding
at any time not to exceed $400.0 million. ARCC finances its purchase of loans
from ARFC by issuing an asset-backed note (the "ARCC Note") to RCC. FSA provides
credit enhancement with respect to the BofA Facility in the form of a financial
guaranty insurance policy guaranteeing certain payments on the ARCC Note. The
BofA Facility will continue until the earlier of December 2, 1999 or the
occurrence of certain events, subject to early termination as described below.
The purchase price payable to ARFC by ARCC is 98% of the principal balance of
each loan except in the case of loans used to finance the purchase of vehicles
previously repossessed by the Company, in which case the purchase price is 85%
of the principal balance of the loan. At the time the Company accesses the
public asset-backed securities market, ARFC repurchases the loans from ARCC, and
ARCC repays the Note, using proceeds from the securitization. The loans and the
collection account are pledged to secure payment of the ARCC Note. Any excess in
the collection account over certain amounts required to be retained in the
account is released to a spread account. The spread account is
cross-collateralized with the spread accounts established in connection with the
Company's securitization trusts. If no default exists with respect to the BofA
Facility, all amounts deposited into the spread account in excess of 1% of the
outstanding balance of loans in the BofA Facility are released to ARFC. In the
event that ARFC or ARCC, respectively, defaults under any payment obligation
under the BofA Facility, ARFC and ARCC are prohibited from paying dividends or
making other distributions to the Company.
RCC's purchase of the ARCC Note and concurrent issuance of commercial paper
is supported by a liquidity facility provided by financial institutions (the
"BofA liquidity banks"). This liquidity facility is a revolving obligation that
must be renewed annually. Failure by the BofA liquidity banks to renew this
9
<PAGE>
liquidity facility would lead to an early termination of the BofA Facility. The
BofA Facility also includes eligibility criteria for loans warehoused, normal
and customary representations, warranties and covenants designed to protect RCC,
FSA and the BofA liquidity banks from various risks relating to the pool of
automobile loans supporting the BofA Facility.
The Company pays usage and non-usage fees to FSA and Bank of America, in
connection with the BofA Facility. The ARCC Note bears an interest rate equal to
the rate at which funds are obtained by RCC from time to time in the commercial
paper market plus a margin. In the event the ARCC Note is funded by the BofA
liquidity banks, the rate of interest will be the reserve-adjusted interbank
offered rate in effect from time to time plus a margin.
Under the Morgan Guaranty Trust Facility, the Company, through ARFC II, may
from time to time warehouse automobile loans by selling them to an owner trust
(the "Owner Trust"). The Company may obtain up to 100% of the principal balance
of the receivables sold to the Owner Trust, but must deposit 6% of such
principal balance (subject to increase to 7% from retained excess spread, and
further increases upon the occurrence of certain events) into a spread account.
The Owner Trust simultaneously issues a Variable Funding Note ("VFN") to a
commercial paper conduit, representing 88% of the outstanding principal balance
of the receivables, and issues certificates (the "Certificates") to the Company
and an institutional investor, representing 12% of the outstanding principal
balance of the receivables. If this facility were drawn on, the Company would be
required to purchase approximately 52% of the Certificates, but it would be free
to resell such certificates if it could obtain a price satisfactory to the
Company. The purchase of the VFN will be funded through the issuance of
commercial paper by the commercial paper conduit. The Morgan Guaranty Trust
Facility will continue until the earlier of July 30, 1998 or the occurrence of
certain events. At the time the Company accesses the public asset-backed
securitization market, the Company's securitization subsidiary (currently ARFC)
purchases the loans using the proceeds from the securitization and the VFN and
the Certificates are redeemed by the Owner Trust. The Company may use the Morgan
Guaranty Trust Facility as a source of permanent funding for a designated pool
of automobile loans, but the pricing on the facility would be increased under
those circumstances.
The commercial paper conduit's purchase of the VFNs and concurrent issuance
of commercial paper is supported by a liquidity facility provided by financial
institutions (the "conduit liquidity banks"). The liquidity facility is a
revolving obligation that must be renewed annually. In addition to credit
enhancement through the subordination of the Certificates, the spread account
and the liquidity facility, the Morgan Guaranty Trust Facility includes
eligibility criteria for loans warehoused, normal and customary representations
and warranties, covenants, and portfolio triggers designed to protect the
commercial paper conduit, the liquidity providers, and the private investors
purchasing the Certificates from various risks relating to the automobile loans
supporting the warehouse facility. In addition, the Morgan Guaranty Trust
Facility contains a capital base covenant with respect to the Company, and a
purchase termination event based on a change in control of the Company.
The Company pays a commitment fee on the daily unused portion of the Morgan
Guaranty Trust Facility. The VFNs bear an interest rate equal to the rate at
which funds are obtained by the commercial paper conduit, from time to time in
the commercial paper market plus a margin. The Certificates require a higher
market rate. In the event the VFN is purchased by the conduit liquidity banks,
the rate of interest will be the applicable adjusted Eurodollar rate or base
rate (as defined) plus a margin, if applicable.
Under the DLJ Facility, the Company, through ARFC III, may from time to time
warehouse automobile loans by borrowing up to 95% of the principal balance of
Premier loans, up to 93% of the principal balance of Classic loans except in the
case of loans used to finance the purchase of vehicles previously repossessed by
the Company, and up to 85% of the principal balance of Classic loans used to
finance the purchase of vehicles previously repossessed by the Company. The
Company must deposit 1% of the amount of each borrowing (subject to increase to
2% from retained excess spread) into a reserve account. The loans, the reserve
account and the collection account are pledged to secure the loans made
10
<PAGE>
under the DLJ Facility. DLJ Mortgage Capital, Inc. (or an affiliate to which it
assigns its obligations) is the lender under the DLJ Facility, although funding
is expected to be obtained from one or more unaffiliated parties. The DLJ
Facility will continue until earlier of October 20, 1999 or the occurrence of
certain events. At the time the Company accesses the public asset-backed
securities market, the Company's securitization subsidiary (currently ARFC)
purchases the loans from ARFC III using the proceeds from the securitization and
the loans under the DLJ Facility are repaid.
In addition to the discounted advance rate for loans under the DLJ Facility
and the reserve account, the DLJ Facility also includes eligibility criteria
loans warehoused, normal and customary representations and warranties,
covenants, portfolio triggers and other facility termination events to protect
the lender and its funding sources from various risks relating to the automobile
loans securing the DLJ Facility. In addition, the DLJ Facility contains facility
termination events based on the net worth of the Company and any change in
control of the Company.
The Company pays a commitment fee on the daily unused portion of the DLJ
Facility. The loans made under the DLJ Facility bear interest at the London
Interbank Offered Rate plus a margin.
SECURITIZATION OF LOANS. The Company pursues a strategy of securitizing
loans through the sale of asset-backed securities on a quarterly or more
frequent basis, based on the availability of loans, profitability and other
relevant factors. Securitization is used as a cost-competitive source of capital
compared to traditional corporate debt financing alternatives. The Company
utilizes the net proceeds from securitizations to purchase additional automobile
loans and to pay down outstanding warehouse facilities, thereby making such
short-term sources available for future loan purchases.
In its securitizations, the Company (through its special purpose subsidiary,
ARFC) transfers automobile loans to newly-formed securitization trusts which
issue one or more classes of asset-backed securities. The asset-backed
securities are simultaneously sold to investors. Each month, collections of
principal and interest on the automobile loans are used by the trustee to pay
the holders of the related asset-backed securities, to fund spread accounts as a
source of cash to cover shortfalls in collections, if any, and to pay expenses.
The Company continues to act as the servicer of the automobile loans held by the
trust in return for a monthly fee.
To improve the level of profitability from the sale of securitized loans,
the Company uses credit enhancement to achieve a desired credit rating on the
asset-backed securities issued. The credit enhancement for the Company's
securitizations has generally taken the form of subordinated tranches of asset-
backed securities, initial deposits and financial guaranty insurance policies
issued by FSA. FSA insures payments of principal and interest due on the
asset-backed securities. Asset-backed securities insured by FSA have been rated
AAA by Standard & Poor's and Aaa by Moody's Investors Service, Inc. The Company
has limited reimbursement obligations to FSA related only to violations of
representations and warranties and not credit performance. However, spread
accounts established in connection with the securitizations provide a source of
cash to cover shortfalls in collections (as described below) and to reimburse
FSA for claims made under the policies issued with respect to the Company's
securitizations.
The Company's agreements with FSA provide that the Company must maintain
specified levels of excess cash in a spread account for each insured
securitization trust during the life of the trust. The spread account for any
securitization trust is generally funded with the interest collected on the
loans that exceeds the sum of the interest payable to holders of asset-backed
securities and certain other amounts. In certain securitization trusts, the
spread account is also funded in part through an initial deposit by the Company.
Funds may be withdrawn from the spread account to cover any shortfalls in
amounts payable on insured asset-backed securities issued by the related trust
or to reimburse FSA for draws or advances under its financial guaranty insurance
policy. In addition, under cross-collateralization arrangements with FSA, the
funds on deposit in the spread account for any one securitization may be used to
cover shortfalls in amounts payable or to reimburse FSA in connection with other
FSA-insured securitizations. ARFC is entitled to receive excess cash monthly
from securitization trusts to the extent that, after payments to
11
<PAGE>
holders of asset-backed securities, the amounts deposited in spread accounts
exceed predetermined required minimum levels. The spread accounts cannot be
accessed by the Company or ARFC without the consent of FSA until such levels
have been reached.
Each month, excess cash from each securitization trust is used to fund the
Company's spread account obligations related to that securitization trust and to
replenish any spread account deficiencies under other securitization trusts
before distribution of any remaining excess cash flow from that securitization
to ARFC. The spread account for each securitization is cross-collateralized to
the spread accounts established in connection with the Company's other
securitization trusts and the BofA Facility such that excess cash flow from a
performing securitization trust may be used to support negative cash flow from,
or to replenish a deficient spread account in connection with, a nonperforming
securitization trust, thereby further restricting excess cash flow available to
ARFC. If excess cash flow from all insured securitization trusts in any month is
not sufficient to fund current spread account obligations or replenish any prior
deficiencies in all such spread accounts, no cash flow would be available to
ARFC for that month. Otherwise, excess cash flow from the securitization trusts
is distributed to ARFC and is available for dividends to the Company by ARFC.
Each insured securitization trust has certain portfolio performance tests
relating to the following: (i) the average delinquency ratio; (ii) the
cumulative default rate; and (iii) the cumulative net loss rate. In each case,
these portfolio performance tests will be triggered if the above ratios equal or
exceed an agreed-upon percentage of the principal balance of loans included in
the securitization trust related to such series for a given time period. For the
cumulative default rate and the cumulative net loss rate, the ratios applicable
to the securitization trusts reflect the relationship between loan delinquencies
and repossession rates at various stages of a loan repayment term, including the
fact that the probability of a loan becoming delinquent or going into default is
highest during the six- to fourteen-month period from the date of origination of
the loan. If any of these levels are exceeded, the amount required to be
retained in the related spread account, and not passed through to ARFC, may be
increased. FSA and the Company have an arrangement under which, if any insured
securitization trusts exceeds the specified portfolio performance tests, ARFC
may, in lieu of retaining the excess cash from that securitization trust in the
related spread account, pledge an equivalent amount of cash, which has the
effect of preventing the violation of the portfolio performance test. More
adverse portfolio performance with respect to performance tests described above
(if such performance is in excess of specified levels) would cause the requisite
minimum spread account level to be further increased and all other spread
accounts would deposit any excess cash flows sinto the affected spread account
until the requisite minimum level is reached. In such event, ARFC (and thus the
Company) might receive no excess cash from any FSA insured securitization trust
during this period. In addition, certain adverse events with respect to the
Company (including insolvency and default on certain long-term obligations)
would cause the Company to be in default under its insurance agreement with FSA
and distributions of cash flow to ARFC from the related securitization trust may
be suspended until the asset-backed securities have been paid in full or
redeemed. Such levels have periodically been exceeded and the Company has
obtained waivers from FSA to permit distributions of cash from certain accounts
to ARFC. There can be no assurance that such thresholds will not be exceeded in
the future or that, if exceeded, waivers will be available from FSA permitting
such payments to ARFC. In the event ARFC defaults under any payment obligation
with respect to any loan securitization, ARFC would be prohibited from paying
dividends or making other distributions to the Company. FSA also has a
collateral security interest in the stock of ARFC. If FSA were to foreclose on
such security interest following an event of default under an insurance
agreement with respect to a securitization trust, FSA could preclude payment of
dividends by ARFC to the Company, thereby eliminating the Company's right to
receive distributions of excess cash flow from all the FSA-insured
securitization trusts.
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<PAGE>
SERVICING
Under the terms of its warehouse facilities and securitizations, the Company
acts as servicer with respect to the automobile loans warehoused or securitized.
The Company receives servicing fees for servicing securitized loans and loans
held under certain warehouse facilities equal to one percent per annum of the
outstanding principal balance of the loans securitized prior to September 1997
and a servicing fee of 1.25 percent per annum for loans subsequently
securitized. The Company services the loans by collecting payments due from the
obligors and remitting these payments to the trusts or warehouse facility in
accordance with the terms of servicing agreements for pass through to holders of
asset-backed securities and holders of warehouse debt. The Company maintains
computerized records with respect to each loan to record all receipts and
disbursements. The Company is permitted to perform servicing activities through
subcontractors, but has not delegated servicing activities, except for the
repossession of automobiles. Delegation of duties does not relieve the Company
of its responsibility to the trusts with respect to those duties.
The following table represents the amount of the Company's servicing
portfolio and the percentage of the total servicing portfolio by state.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Arizona................. $ 242,479 4.89% $ 201,965 5.33% $ 127,292 5.61%
California.............. 331,495 6.69 226,381 5.97 99,278 4.38
Colorado................ 175,782 3.55 156,637 4.13 132,570 5.85
Connecticut............. 69,001 1.39 50,090 1.32 29,769 1.31
Florida................. 308,510 6.22 213,209 5.62 146,629 6.47
Georgia................. 326,556 6.59 269,600 7.11 161,260 7.12
Illinois................ 53,671 1.08 45,209 1.19 20,741 0.91
Kentucky................ 70,199 1.42 38,585 1.02 7,287 0.32
Massachusetts........... 115,988 2.34 103,221 2.72 63,752 2.81
Minnesota............... 116,048 2.34 107,971 2.85 105,386 4.65
Missouri................ 210,134 4.24 186,624 4.92 124,541 5.49
Nevada.................. 122,131 2.46 102,734 2.71 52,683 2.32
New Mexico.............. 75,333 1.52 65,641 1.73 27,760 1.22
New York................ 99,755 2.01 44,806 1.18 1,970 0.09
North Carolina.......... 172,221 3.47 101,957 2.69 34,035 1.50
Oklahoma................ 228,576 4.61 173,531 4.58 88,334 3.90
Oregon.................. 135,454 2.73 106,208 2.80 61,971 2.73
South Carolina.......... 181,268 3.66 118,738 3.13 54,282 2.39
Tennessee............... 254,189 5.13 160,930 4.24 81,380 3.59
Texas................... 960,842 19.40 826,749 21.80 564,606 24.91
Washington.............. 168,240 3.39 163,707 4.32 128,859 5.68
Wisconsin............... 69,013 1.39 57,035 1.50 26,497 1.17
All Other States........ 469,205 9.48 270,329 7.14 126,225 5.58
------------ --------- ------------ --------- ------------ ---------
Total............... $ 4,956,090 100.00% $ 3,791,857 100.00% $ 2,267,107 100.00%
------------ --------- ------------ --------- ------------ ---------
------------ --------- ------------ --------- ------------ ---------
</TABLE>
DELINQUENCY, COLLECTION AND REPOSSESSION ACTIVITIES. As servicer, the
Company is responsible for monitoring collections, collecting delinquent
accounts and, when necessary, repossessing and selling automobiles. Delinquency
rates for all loans purchased by each loan buyer are monitored, and loan buyers
are incented to maintain loan quality. In response to the rapid growth of its
servicing portfolio, continued expansion of its Classic program (which generally
requires greater collection efforts than its Premier program), and increases in
delinquencies and default rates on its servicing portfolio, the Company
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<PAGE>
substantially increased its servicing and collection staff and, in October 1996,
implemented a strategy to regionalize its collection activities into four
locations: Charlotte, North Carolina; Dallas, Texas; Denver, Colorado; and
Minneapolis, Minnesota. At December 31, 1997, the Company employed over 800
service representatives and collection employees who are responsible for various
aspects of the collection and repossession procedures, compared with 510 and 188
at December 31, 1996 and 1995, respectively. The Company also substantially
expanded the capacity of its highly automated telephone dialing systems (the
"autodialer") in connection with its establishment of its four regional
collection centers and continues to utilize a computerized collection system to
aid its servicing and collection employees. The Company regularly evaluates its
staffing needs based on anticipated growth in its servicing portfolio and
estimated delinquency and repossession rates. During 1997, low unemployment
driven by economic growth and the continued expansion of the consumer credit
markets contributed to an increase in employee turnover rate relative to
historical levels, especially among the Company's collection personnel.
The Company generally utilizes the autodialer in its initial contact with
delinquent obligors. Based on parameters established by the Company for each of
its loan programs, the autodialer will phone the obligor within five to ten days
after a past due date. Once the call is answered, the autodialer will
immediately transfer the call to an available customer service representative
located in one of the Company's four regional collection centers and will
automatically display the obligor's loan information on the representative's
computer screen. The autodialer will continue to follow up with obligors at
various times throughout the first 30 days after a past due date (typically
every third day) if previous efforts do not result in the account deficiency
being cured. In addition to telephone inquiries, the Company's computerized
collection system generates past due notices, which are typically mailed to the
obligor at various intervals during the first 30 days after a past due date. The
first such correspondence is generally sent approximately 13 days after a past
due date.
If the collection effort during the first 20 days after a past due date does
not result in a satisfactory resolution of the delinquent account, then the
account is forwarded to collection specialists. These collection specialists
will typically send a final demand letter to the delinquent obligor allowing the
obligor a specified number of days to bring the account current. During this
period, the collection specialist generally will make a recommendation as to
whether the automobile should be repossessed or other action, such as a contract
extension, should be taken. The Company, like other consumer finance companies,
grants extensions in the ordinary course of business, following a re-evaluation
of the obligor's creditworthiness and approval by a collection department
manager. The terms of the Company's securitization trusts and the Company's
policies restrict the number of contract extensions that the Company may grant.
When an extension is granted, the maturity of the loan is extended for one month
and the interest for the delinquent period is added to the loan balance.
Contract extensions are more frequently granted with respect to Classic and
financed repossession loans than with respect to Premier loans, and are
seasonally highest during the Christmas holiday period. Under special
circumstances, the Company, like other consumer finance companies, may agree to
other contract modifications, such as lengthening the term to maturity or
adjusting interest rates, subject to limitations set forth in securitization
trusts and agreements with FSA.
The Company uses independent contractors to perform repossessions. Once an
automobile is repossessed, a letter is sent giving the obligor a specified
number of days to pay the entire loan balance in order to recover the
automobile. At the expiration of this time period, the Company will prepare the
automobile for sale and determine the method of sale. The Company has
historically sold repossessed automobiles through retail consignment lots and
wholesale auto auctions. Under the retail method, the Company retains control of
repossessed automobiles on behalf of the relevant securitization trust until
they are resold through independent dealers. The Company has a remarketing
department responsible for the management of its repossession inventory, which
decides whether to sell each vehicle repossessed in the retail or wholesale
market, manages reconditioning and repairs when necessary, tracks vehicles until
sold
14
<PAGE>
and selects and monitors the retail consignment lots used by the Company. At
December 31, 1997, the Company had arrangements with 60 consignment lots
compared with 67 at December 31, 1996.
PROPRIETARY INFORMATION
The Company has developed a credit scoring system for evaluating loan
applications submitted by dealers. The credit scoring system ranks the credit
quality of the applicant. The system is intended by the Company to act as a
predictor of loan repayment probability or loan defaults and serves as the basis
for the Company's underwriting procedures. Although asset-based lenders utilize
a variety of scoring and credit evaluation systems, the Company considers its
credit scoring system to be proprietary and attempts to maintain the system as a
trade secret.
COMPETITION
Competition in the field of financing retail automobile sales is intense.
Competitors include banks, savings and loans, small loan companies, credit
unions, a variety of local, regional and national consumer financing
institutions and captive finance companies of automobile manufacturers, such as
Ford Motor Credit Company, Chrysler Credit Corp. and General Motors Acceptance
Corporation. Many of these competitors have substantially greater capital
resources than the Company and a number offer other forms of financing to
automobile dealers, including, but not limited to, vehicle floor plan financing
and leasing. Captive automobile finance companies also, from time to time, have
national promotions offering below-market interest rates on select vehicles to
automobile purchasers. The Company believes it competes on the basis of
providing a high level of service, offering flexible loan terms which meet
dealers' needs and maintaining good relationships with its dealers. From time to
time, competing finance companies may offer to refinance borrowers' loans
originally purchased by the Company. As a result of such an offer, a borrower
may refinance and prepay an existing loan, or the Company may agree to amend the
terms of the borrower's loan.
REGULATION
The Company's operations are subject to regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. At December 31, 1997 the Company's business operations were
conducted in 45 states, the laws and regulations of which govern the Company's
operations conducted therein. The Company is required to be, and is, licensed as
a sales finance company in 27 states. The Company is required to be, and is,
licensed under the Ohio Mortgage Loan Act. To the extent the Company expands its
operations into additional states, it will be required to comply with the laws
of those states.
CONSUMER PROTECTION LAWS. Numerous federal and state consumer protection
laws and related regulations impose substantive disclosure requirements upon
lenders and servicers involved in consumer finance. The Federal Trade Commission
("FTC") has adopted the so-called "holder-in-due-course" rule which has the
effect of subjecting persons who finance consumer credit transactions (and
certain related lenders and their assignees) to all claims and defenses which
the purchaser could assert against the seller of the goods and services. The
FTC's Rule on Sale of Used Vehicles requires that all sellers of used vehicles
prepare, complete and display a "Buyer's Guide" which explains the warranty
coverage (if any) for such vehicles. The "Credit Practices Rule" of the FTC
imposes additional restrictions on loan provisions and credit practices.
A majority of states in which the Company operates have adopted motor
vehicle retail installment sales acts or variations thereof. These laws
regulate, among other things, the interest rate and terms and conditions of
motor vehicle retail installment loans. These laws also impose restrictions on
consumer transactions, and some require loan disclosures in addition to those
required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply. In addition, the laws of
15
<PAGE>
certain states grant to the purchasers of vehicles certain rights of rescission
under so-called "lemon laws". Under such statutes, purchasers of motor vehicles
may be able to seek recoveries from, or assert defenses against, the Company. A
number of states impose interest rate limitations under applicable usury laws
and regulate the Company's ability to collect late fees and other charges.
SECURED PARTY RIGHTS AND OBLIGATIONS. In the event of default by an
obligor, the Company has all the remedies of a secured party under the Uniform
Commercial Code ("UCC"), except where specifically limited by other state laws.
The remedies of a secured party under the UCC generally include the right of
repossession by self-help means, unless such means would constitute a breach of
the peace. In the event of default by the obligor, some jurisdictions require
that the obligor be notified of the default and be given a period of time in
which to cure the default prior to repossession. In addition, courts have
applied general equitable principles to secured parties pursuing repossession or
litigation involving deficiency balances. The obligor also has the right to
redeem the collateral prior to actual sale.
The proceeds from resale of financed vehicles generally will be applied
first to the expenses of repossession and resale and then to the satisfaction of
the automobile loans. A deficiency judgment can be sought in most states subject
to satisfaction of statutory procedural requirements by the secured party and
certain limitations as to the initial sale price of the motor vehicle. Certain
state laws require the secured party to remit the surplus to any holder of a
lien with respect to the vehicle, or, if no such lienholder exists, the UCC
requires the secured party to remit the surplus to the former owner of the
financed vehicle.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including Federal bankruptcy laws and related state
laws, may interfere with or affect the ability of the Company to realize upon
collateral or enforce a deficiency judgment. The repossession process and the
costs thereof generally result in losses on the underlying automobile loans, and
such losses generally reduce the amounts available for distribution from the
spread accounts of related securitized loan pools.
EMPLOYEES
The Company employs personnel experienced in all areas of loan origination,
documentation, collection and administration. The Company employs and trains
specialists in loan processing and servicing with minimal cross-over of duties.
As of December 31, 1997, the Company had 1,598 employees. None of the Company's
employees is covered by a collective bargaining agreement.
EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the executive officers
of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------
<S> <C> <C>
Richard A. Greenawalt 54 Director, President and Chief Executive Officer
Scott H. Anderson 40 Director, Vice Chairman, Credit and Collections
James D. Atkinson III 49 Senior Vice President, Corporate Counsel and
Secretary
Robert A. Barbee, Jr. 39 Executive Vice President, Loan Origination
Duane E. White 42 Executive Vice President, Corporate Services
John A. Witham 46 Executive Vice President, Chief Financial Officer
</TABLE>
RICHARD A. GREENAWALT was appointed a Director and elected President and
Chief Executive Officer of the Company on January 27, 1997 and commenced
employment with the Company on January 29, 1997. Prior to joining the Company
Mr. Greenawalt served as President, Chief Operating Officer, and a Director of
Advanta from November 1987. Prior to joining Advanta, Mr. Greenawalt served as
President of Transamerica Financial Corp. from May 1986. From 1971 to 1986, Mr.
Greenawalt held senior positions
16
<PAGE>
with Citicorp, including Chairman and Chief Executive Officer of Citicorp
Person-to-Person and President and Chief Executive Officer of Citicorp Retail
Services.
SCOTT H. ANDERSON was appointed Vice Chairman in December 1995. Mr. Anderson
had previously functioned as Executive Vice President and has been the Company's
Credit and Collections Officer since April 1991. From 1987 until joining the
Company, Mr. Anderson served as Vice President, Division Manager of Loan
Administration for Marquette Bank Minneapolis, N.A. Prior thereto Mr. Anderson
served as a Regional Vice President for First Bank System, Inc. Mr. Anderson has
held both direct lending positions and lending supervision positions for over 15
years.
JAMES D. ATKINSON III was appointed Senior Vice President, Corporate Counsel
in December 1995 and Secretary of the Company in January 1995. Mr. Atkinson had
previously served as Vice President, corporate counsel since September 1994 and
as outside corporate counsel since 1990. Prior to joining the Company, Mr.
Atkinson practiced law for sixteen years, specializing in corporate legal issues
and compliance.
ROBERT A. BARBEE, JR. was appointed Senior Vice President, Sales and
Marketing in September 1994. In December 1995, Mr. Barbee was appointed
Executive Vice President, Loan Origination. From June 1983 to September 1994,
Mr. Barbee was employed as a Regional Vice President for Pat Ryan & Associates,
a provider of specialty insurance products.
DUANE E. WHITE was appointed Executive Vice President, Corporate Services,
in May 1997, with management responsibility for the Information Services, Human
Resources, Legal, Credit Examination and Loan Servicing functions. From 1993 to
1996 Mr. White served as President at FBS Mortgage Inc., and from 1991-1993 he
served as Senior Vice President of Acquisitions Integration at First Bank
System, Inc. From 1988 to 1991 Mr. White served as Senior Vice President of
Sales, Marketing, and Customer Service at Apertus Technologies Incorporated;
from 1984 to 1988 as a Senior Vice President of Marketing and Product
Development at First Bank System, Inc., and from 1981 to 1984 as Engagement
Manager at McKinsey and Company.
JOHN A. WITHAM was appointed Executive Vice President in December 1995 and
has served as Chief Financial Officer of the Company since February 1994. From
January 1985 to January 1994, Mr. Witham held various management positions with
subsidiaries of PHH Corporation, a diversified financial services company,
including Senior Vice President, Finance of PHH Relocation and Real Estate from
August 1992 to January 1994, Senior Vice President, Finance of PHH Europe PLC,
in Swindon, England from August 1989 to August 1992 and Senior Vice President,
Finance of PHH FleetAmerica from January 1985 to August 1989.
All executive officers of the Company hold office until they are removed or
their successors are elected and qualify.
ITEM 2. PROPERTIES
The Company's executive offices are located at 7825 Washington Avenue South,
Minneapolis, Minnesota 55439-2435. These facilities consist of 52,000 square
feet of leased space pursuant to a lease expiring in 2002. Additionally, the
Company leases a 21,000 square foot operations facility in a suburb of
Minneapolis which is utilized for customer service and loan document processing.
The Company also leases offices for its regional buying centers in Atlanta,
Baltimore, Boston, Buffalo, Charlotte, Cincinnati, Dallas, Denver, Houston,
Minneapolis, Nashville, Orlando, Phoenix, Sacramento, San Antonio, San Diego,
Seattle and St. Louis. The size of these offices range from 5,000 square feet to
13,000 square feet. Regional buying center leases are generally for a term of
five to seven years. Furthermore, the Company leases offices for a national
service center in Minneapolis, Minnesota and four regional collection centers
located in Charlotte, North Carolina; Dallas, Texas; Denver, Colorado; and
Minneapolis, Minnesota. These centers range in size from 15,000 to 22,000 square
feet and have lease terms ranging from 5 to
17
<PAGE>
10 years. See Note 10 of Notes to Consolidated Financial Statements for a
description of the Company's rental obligations under these leases.
ITEM 3. LEGAL PROCEEDINGS
On March 4, 1997 a shareholder commenced an action against the Company and
certain named directors and officers of the Company entitled Taran v. Olympic
Financial Ltd. et al. in the United States District Court for the District of
Minnesota. Four similar lawsuits, three of them in the United States District
Court for the District of Minnesota (Frank Dibella, on behalf of himself and all
others similarly situated vs. Olympic Financial Ltd. et al., Michael Diemer vs.
Olympic Financial Ltd. et al. and Howard Pisnoy vs. Olympic Financial Ltd. et
al.) and one in the United States District Court for the Eastern District of New
York (North River Trading, LLC, and Allan Farkas, and All Others Similarly
Situated vs. Olympic Financial Ltd. et al.) were filed after that time. These
suits have been consolidated in one suit, In re Olympic Financial Ltd.
Securities Litigation, in the United States District Court for the District of
Minnesota. Plaintiffs in the consolidated action allege that during the period
from July 20, 1995 through March 3, 1997 the defendants, in violation of federal
securities laws, engaged in a scheme that had the effect of artificially
inflating, maintaining and otherwise manipulating the value of the Company's
Common Stock by, among other things, making baseless, false and misleading
statements about the current state and future prospects of the Company,
particularly with respect to the Classic program and the refinancing of
repossessed automobiles. Plaintiffs allege that this scheme included making
false and misleading statements and/or concealing material adverse facts. The
consolidated action is in the preliminary stages and the parties have not begun
discovery. The Company has reviewed the complaint in the consolidated action and
believes that the consolidated action is without merit and intends to defend it
vigorously. There can, however, be no assurance that the Company will prevail in
such defense or that any order, judgment, settlement or decree arising out of
this litigation will not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Another case which was filed November 8, 1996, Powell et al. v. Arcadia
Financial Ltd. et al., involves a complaint by 200 borrowers who purchased
vehicles from a dealer which sold certain of Arcadia's repossessed vehicles on a
consignment basis. The plaintiffs in this case allege that Arcadia is either
directly or vicariously liable for damages incurred as a result of the
consignment dealer's alleged wrongful actions. The Company is seeking to resolve
the matter through the mediation process. There can, however, be no assurance
that the Company will prevail in such defense or that any order, judgment,
settlement or decree arising out of this litigation will not have a material
adverse effect on the Company's financial condition, results of operation or
liquidity.
The nature of the Company's business is such that it is routinely a party or
subject to other items of pending or threatened litigation, including litigation
involving actions against borrowers to collect amounts on loans or to repossess
vehicles and litigation challenging the terms of loans purchased by the Company.
Although the ultimate outcome of certain of these matters cannot be predicted,
management of the Company believes, based upon information currently available
and the advice of counsel, that the resolution of those various matters
currently pending will not result in any material adverse effect on the
Company's financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the quarter ended December 31, 1997.
18
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "AAC." The following table provides quarterly high and low sales
prices for the Company's Common Stock for the two years ended December 31, 1997.
The Company's Common Stock began trading on the New York Stock Exchange on March
27, 1996. The Company's Common Stock had been traded on the Nasdaq National
Market since January 30, 1992.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
First quarter....................................................... $ 19.63 $ 12.50
Second quarter...................................................... 26.25 18.25
Third quarter....................................................... 26.63 15.38
Fourth quarter...................................................... 25.00 13.13
1997
First quarter....................................................... 19.38 8.88
Second quarter...................................................... 11.38 6.75
Third quarter....................................................... 11.88 8.50
Fourth quarter...................................................... 12.44 6.25
</TABLE>
The Company has not paid dividends on its Common Stock. The current policy
of the Company's Board of Directors is to retain earnings to provide for the
Company's growth. Consequently, no cash dividends are expected to be paid on the
Company's Common Stock in the foreseeable future. In addition, the terms of the
Company's 11.5% Senior Notes due 2007 restrict the making of certain payments
with respect to the Common Stock, including cash dividends on the Common Stock,
unless certain financial tests are met. Under the most restrictive of these
covenants, approximately $4.4 million was available for cash dividends on the
Common Stock as of December 31, 1997. Additional indebtedness incurred by the
Company in the future may include similar restrictions.
In October 1996, the Board of Directors adopted a Shareholder Rights Plan in
which Preferred Stock Purchase Rights were distributed as a dividend at the rate
of one Right for each share of the Company's Common Stock on November 22, 1996
to shareholders of record as of such date. In January 1998, the Company amended
its Shareholder Rights Plan increasing the percentage of the Company's
outstanding Common Stock a person or group must beneficially own to be deemed an
Acquiring Person under the plan from 15% or more up to 18% or more. All shares
of Common Stock issued thereafter will be issued together with one Right per
share.
At January 30, 1998, the Company had 1,346 shareholders of record.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
other operating information of the Company. The following selected consolidated
information, for each of the five years in the period ended December 31, 1997,
is derived from the consolidated financial statements of the Company. The
selected consolidated financial information should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and other financial
information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
(Dollars in thousands except per share amounts) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA (1):
Net interest margin............................... $ 64,499 $ 54,083 $ 27,194 $ 9,820 $ 2,377
Gain on sale of loans (2)......................... 2,818 115,773 62,182 13,579 7,650
Servicing fee income.............................. 67,794 43,514 19,152 4,560 1,831
Other non-interest income......................... 302 125 204 829 26
----------- ----------- ----------- ----------- -----------
Total revenues................................ 135,413 213,495 108,732 28,788 11,884
Operating expenses................................ 162,017 92,298 42,727 17,342 8,691
Long term debt and other interest expense......... 41,216 25,193 17,170 5,416 1,798
----------- ----------- ----------- ----------- -----------
Total expenses................................ 203,233 117,491 59,897 22,758 10,489
----------- ----------- ----------- ----------- -----------
Operating income (loss) before income taxes and
extraordinary item.............................. (67,820) 96,004 48,835 6,030 1,395
Income tax provision (benefit).................... (25,841) 35,688 19,518 1,845 --
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary items.......... (41,979) 60,316 29,317 4,185 1,395
Extraordinary items, net of tax (3)............... (15,828) -- (3,856) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)................................. $ (57,807) $ 60,316 $ 25,461 $ 4,185 $ 1,395
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
BASIC EARNINGS PER SHARE (4):
Income (loss) per share before extraordinary
items........................................... $ (1.08) $ 1.91 $ 1.57 $ 0.19 $ 0.12
Extraordinary items per share..................... (0.41) -- (0.22) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) per share....................... $ (1.49) $ 1.91 $ 1.35 $ 0.19 $ 0.12
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
DILUTED EARNINGS PER SHARE (4):
Income (loss) per share before extraordinary
items........................................... $ (1.08) $ 1.65 $ 1.11 $ 0.19 $ 0.12
Extraordinary items per share..................... (0.41) -- (0.15) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) per share....................... $ (1.49) $ 1.65 $ 0.96 $ 0.19 $ 0.12
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................. 38,700,346 30,897,426 17,718,603 9,842,173 9,749,723
Diluted........................................... 39,256,788 36,449,995 26,435,765 16,683,380 11,186,033
FINANCIAL RATIOS AND OTHER DATA: (5)
Ratio of earnings to fixed charges................ 4.64x 3.75x 2.06x 1.72x
Deficiency in earnings to fixed charges........... $ 67,820 -- -- -- --
SELECTED CASH FLOW DATA:
Total cash used in operating activities........... $ (130,165) $ (253,127) $ (135,659) $ (78,774) $ (51,056)
Total cash used in investing activities........... (7,310) (6,600) (2,588) (917) (455)
Total cash provided by financing activities....... 138,692 274,444 122,970 93,572 31,040
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash................... $ 1,217 $ 14,717 $ (15,277) $ 13,881 $ (20,471)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents......................... $ 17,274 $ 16,507 $ 1,340 $ 16,617 $ 2,736
Finance income receivable......................... 371,985 362,916 186,001 58,540 26,247
Cash in restricted spread accounts................ 250,297 142,977 63,580 21,408 15,109
Total long-term debt.............................. 421,780 206,418 161,929 46,804 33,506
Total preferred shareholders' equity.............. -- -- 25,379 27,279 27,289
Total common shareholders' equity................. 347,942 393,093 155,434 33,583 31,410
OPERATING DATA:
Automobile loan purchases......................... $ 2,862,821 $ 2,750,553 $ 2,052,413 $ 743,256 $ 305,823
Automobile loan securitizations................... 2,864,120 2,787,412 1,933,525 712,211 336,077
Operating expenses as a percentage of average
servicing portfolio............................. 3.63% 3.06% 2.78% 3.28% 4.39%
SERVICING DATA:
Servicing portfolio (at period end)............... $ 4,956,090 $ 3,791,857 $ 2,267,107 $ 837,095 $ 316,933
Average servicing portfolio during the period..... 4,458,977 3,015,411 1,534,720 528,577 198,018
Delinquencies of more than 30 days as a percentage
of servicing portfolio (at period end).......... 3.63% 2.64% 1.33% 0.82% 0.96%
Net losses as a percentage of average servicing
portfolio during the period (6)................. 3.48% 0.99% 0.67% 0.66% 0.52%
</TABLE>
- --------------------------
(1) In conjunction with the adoption of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," effective January 1, 1997, the Company began
recognizing collection fees and interest on collection accounts earned by
the Company as servicer of the loans as a component of servicing fee income.
Previously, collection fees and interest on collection accounts had been
included as components of non-interest income and net interest margin,
respectively. All years presented have been restated for this
reclassification. This reclassification had no impact on total revenues or
net income (loss).
(2) Included in gain on sale of loans during the year ended December 31, 1997,
is a non-recurring pretax charge to gain on sale of loans of $98.0 million.
The special charge was due primarily to (i) a change in estimated recovery
rates on current repossessed inventory and anticipated future inventory
arising from existing securitizations and (ii) a change in the Company's
accounting policy with respect to the estimated recovery rate realized upon
disposition of repossessed inventory. See "Management's Discussion and
Analysis--Results of Operations-- SPECIAL CHARGES."
(3) Extraordinary items relate to prepayment fees and charge-off of capitalized
debt financing costs in connection with early extinguishment of certain debt
obligations.
(4) Earnings per share amounts for all years presented have been restated to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
per Share."
(5) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as income before taxes plus fixed charges. Fixed charges consist
of interest expense, amortization of debt discount and the interest factor
in rental expenses.
(6) A change in the Company's estimated recovery rate for repossessed inventory,
as discussed in note (2) above, resulted in a write down of existing
inventory and an increase in net losses during the year ended December 31,
1997. See "Management's Discussion and Analysis--Results of
Operations--SPECIAL CHARGES."
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company derives substantially all of its earnings from the purchase,
securitization and servicing of automobile loans. At the time of purchase of
each loan, the Company pays a portion of the annual rate of interest paid by the
obligor ("APR") to the dealer for originating the loan ("dealer participation").
To fund the purchase of loans prior to securitization, the Company utilizes its
available cash balances and short-term borrowing and repurchase arrangements
with financial institutions and institutional lenders ("warehouse facilities").
Pending securitization, automobile loans held for sale by the Company generate
net interest income resulting from the difference between the interest rate
earned on automobile loans held for sale and the interest costs associated with
the Company's short-term borrowings (the "net interest rate spread").
The Company purchases loans under a tiered pricing system, allowing it to
price loans according to the borrower's credit characteristics. The Company
prices its loan products in order to maximize gross interest rate spreads
relative to expected net losses within each tier. Classic loans purchased in
1997 represented 55% of total purchasing volume compared with 36% during 1996
and 17% during 1995 and had APRs typically ranging from 16% to 22% while loans
purchased under the Premier program had APRs typically ranging from 9% to 16%.
The higher APRs of the Classic program are intended to compensate the Company
for anticipated higher delinquency, default and loss rates associated with the
Classic program, which the Company addresses through higher reserves for loan
losses. At December 31, 1997, the Company maintained $235.6 million in loan loss
reserves, or 4.75% of its servicing portfolio, compared to $95.0 million, or
2.51%, respectively, at December 31, 1996.
The Company aggregates the automobile loans it purchases and sells them to a
trust, which in turn sells asset-backed securities to investors. By securitizing
its loans, the Company is able to fix the initial difference ("gross interest
rate spread") between the APR on automobile loans purchased and the interest
rate on the asset-backed securities sold ("securitization rate"). When the
Company securitizes its automobile loans, it records a gain on sale and
establishes an asset referred to as finance income receivable. Gain on sale is
determined by the difference between the net proceeds received and the basis of
the loans sold as defined by Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") and is adjusted for any hedging
gains and losses. Finance income receivable represents the Company's retained
interest in the loans sold and is determined by allocating the carrying amount
of loans sold based on the relative fair value of such loans and the estimated
future cash flows expected to be received by the Company discounted at a
market-based rate. The Company's estimate of future excess cash flows takes into
consideration (i) contractual obligations of the obligors, (ii) amounts due to
the investors in asset-backed securities, (iii) amounts paid to dealers for
dealer participations, (iv) various costs of the securitizations, and (v) the
effect of estimated prepayments of loans, losses incurred in connection with
defaults, and corresponding reductions in the weighted average APR of loans
sold. Subsequent to securitization, the Company continues to service the
securitized loans, for which it recognizes servicing fee income over the life of
the securitization as earned.
In addition to the present value of estimated future cash flows from
securitizations, finance income receivable includes accrued interest receivable
on automobile loans held for sale through the date of sale, which will be
returned to the Company through the securitization trust, and the interest
earned on previously discounted cash flows, calculated at the present value
discount rate used in determining the initial estimate of future cash flows. As
noted above, future servicing fee income is recognized as earned and is not
included in finance income receivable. Finance income receivable is reduced
based on distributions to the Company of excess cash flows from spread accounts.
The Company uses a combination of its own historical experience, industry
statistics and expectations of future performance to estimate the amount and
timing of prepayments, losses upon defaults and corresponding changes in the
weighted
22
<PAGE>
average APR. The Company regularly reviews the carrying amount of its finance
income receivable to assess the impact of actual prepayment and loss experience
compared with the Company's estimates. Any impairment of finance income
receivable, deemed to be permanent, is reflected as a reduction of current
period earnings. The Company recorded such an adjustment during 1997 (see
"SPECIAL CHARGES").
RESULTS OF OPERATIONS
SPECIAL CHARGES. Included in the Company's 1997 financial results are two
special charges taken in March 1997. These charges include a non-cash after-tax
charge of approximately $63.9 million, due primarily to a change in accounting
estimate and modifications to the Company's retail disposition strategy, and an
extraordinary charge of approximately $15.8 million, net of tax, due to the
early extinguishment of the Company's 13% Senior Term Notes, due 2000 (see
"EXTRAORDINARY ITEMS").
Approximately $60.8 million of the $63.9 million after-tax charge is due to
(i) a change in estimated recovery rates on current repossessed inventory and
anticipated future inventory arising from existing securitization transactions,
and (ii) a change in the Company's accounting policy with respect to the
estimated recovery rate realized upon disposition of repossessed inventory. The
remaining $3.1 million after-tax charge relates to various litigation and
severance charges (see "OPERATING EXPENSES").
The recovery rate on repossessed inventory is measured by the liquidation
amount realized on the repossessed vehicles as a percentage of the outstanding
principal balance of the charged-off loans associated with the repossessed
vehicles. The Company's change in estimated recovery rates was based, in part,
on a decline in the weighted average recovery rate experienced by the Company
during the first three months of 1997. During the first quarter of 1997, the
weighted average recovery rate on repossessed vehicles declined to approximately
70% from approximately 83% for the year ended December 31, 1996. This reduction
in recovery rates primarily reflected an increase in the Company's liquidation
of repossessed inventory through wholesale auctions. The Company increased its
use of wholesale auctions after a review by the Company's new chief executive
officer and other members of management conducted in mid-March 1997 indicated
that based on the number of retail dispositions during the first half of March
1997 the Company's retail distribution channels were not sufficient to liquidate
vehicles at a pace satisfactory to management and would not, in the foreseeable
future, be adequate to exceed the number of additional repossessions expected
each month. In order to reduce the Company's repossessed inventory to a level
more acceptable to management, the Company sold a significantly increased number
of repossessed vehicles at wholesale auctions during the last half of March
1997. As a result, the Company sold approximately 35% of first quarter sales of
repossessed vehicles through wholesale auctions, as compared with 30% during
calendar year 1996. The Company's recovery rates were also affected during the
first quarter of 1997 by lower pricing of repossessed vehicles sold through the
Company's retail distribution channels in an attempt to accelerate the
liquidation of repossessed vehicles while maintaining consistent credit quality.
Estimated recovery rates are also determined by an analysis of anticipated
recovery trends in future periods. Based on its evaluation of certain events
occurring late in the first quarter of 1997, the Company believed that recovery
rates were not likely to increase above the level experienced during the first
quarter of 1997 and that certain events might cause a further decline in these
rates in future periods. As explained above, the Company did not believe that it
had sufficient capacity to sell an increasing number of repossessed vehicles
through its existing network of retail consignment dealers. Accordingly, the
Company expects to control the size of its repossessed inventory by continuing
to increase the use of wholesale auctions to dispose of repossessed vehicles. In
April 1997, the Company's new chief executive officer completed a review of the
Company's retail disposition strategy. Consequently, based on the recommendation
of the new chief executive officer, the Company adopted modifications to its
retail disposition strategy that were intended to reduce liquidity requirements
of this strategy and establish more efficient operating procedures. The
Company's retail disposition strategy generally requires it to hold a
repossessed vehicle in inventory for a longer period of time than would a
wholesale disposition strategy, and as a consequence
23
<PAGE>
delays the receipt of excess cash flows from securitization trusts following
default of a loan. In light of this, in April 1997 the Company established a
policy that limits the length of time a repossessed vehicle may be held for
resale through retail channels. The limitation on the length of time a
repossessed vehicle is held for sale is intended to reduce delays in cash flow,
but may reduce overall recovery rates due to an increased use of wholesale
auctions. The Company intends to measure the effectiveness of the modified
retail distribution strategy by the program's profitability as compared to a
wholesale disposition strategy. Management of the retail disposition program
will be accountable for optimizing the recovery rates on the repossessed
inventory and achieving acceptable profitability levels. As a result, management
expects that the managers responsible for the modified retail disposition
program will increase the use of wholesale auctions to control inventory size
and the costs associated with the operation of the program. The Company's retail
disposition strategy, as modified, is relatively new and evolving, and
therefore, the Company's management has concluded that recoveries under the
program are uncertain and may be subject to further change.
In addition, in early 1997 the Company anticipated a continued softening of
the used car market and therefore lower retail and wholesale prices. Factors
contributing to this market softening included the start-up of superstore
competition and forecasted levels of used lease vehicles that will be available
in the market. Further, the Company considered the risk of potentially higher
interest rates, which have a direct impact on pricing of vehicles. The Company
concluded that, for the reasons described above, future recovery rates (after
giving effect to related costs) would be lower for the foreseeable future than
those reflected in the Company's prior accounting estimates. In light of these
items, the Company elected to record an after-tax charge of approximately $45.3
million in March 1997 which reflected an adjustment of current inventory and
estimated reduction to future cash flows due to lower expected recovery rates on
future repossessed inventory arising from existing securitization trusts.
At the same time as the Company changed its estimated recovery rates, the
Company also deemed it appropriate to review its accounting policy concerning
the valuation of repossessed vehicles in light of the modifications to its
retail disposition strategy and other factors. As a result of this review, the
Company decided to change its accounting policy concerning the valuation of
repossessed vehicles. This change in policy requires the Company to record all
current and expected repossessed vehicles at recovery rates that reflect
expected values to be achieved through wholesale auctions, regardless of the
specific asset disposition strategy to be employed. To the extent actual results
are more favorable than estimates, greater recoveries are reflected in current
period earnings when the vehicles are liquidated. As a consequence of this
policy change, the Company's results of operations will depend, in part, on
sales prices for used vehicles in wholesale auctions.
Declines in wholesale recovery rates may adversely affect the Company's
results unless offset by higher retail recovery rates during the period. The
Company believes that the revised accounting policy will better reflect its
modified retail disposition strategy and accommodate a better understanding by
users of the Company's financial statements. Moreover, the Company believes this
change in accounting policy provides a financial presentation that is more
comparable to that of other consumer finance companies and responds to recent
events in the consumer finance industry which, the Company believes, provide
further evidence that lower estimated recovery rates are appropriate. For these
reasons, the Company believes the change in accounting policy adopted in April
1997 reflects a preferable application of generally accepted accounting
principles. Because the change in policy is inseparable from the estimation
process referred to above, it is appropriate to reflect the effect of the change
in accounting policy of approximately $15.5 million after-tax as a reduction to
current period earnings.
NET INTEREST MARGIN. The Company's net interest margin represents the sum
of (i) net interest on loans held for sale based on the net interest rate
spread, (ii) investment earnings on short-term investments and other cash
accounts and (iii) the recognition of the interest component of previously
discounted cash
24
<PAGE>
flows, calculated at the present value discount rate used in the calculation of
gain on sale. The components of net interest margin for each of the three years
in the period ended December 31, 1997 were:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income on loans, net................................ $ 33,383 $ 29,614 $ 16,038
Interest income on short-term investments and other cash
accounts................................................... 11,047 6,353 3,945
Recognition of present value discount........................ 23,037 18,890 7,368
Provision for credit losses on loans held for sale........... (2,968) (774) (156)
--------- --------- ---------
Net interest margin...................................... $ 64,499 $ 54,083 $ 27,195
--------- --------- ---------
--------- --------- ---------
</TABLE>
The rise in net interest margin is primarily due to (i) growth in the
average balances of loans held for sale pending securitization, (ii) wider net
interest rate spreads earned on loans held for sale and (iii) interest earned on
securitization related cash accounts, partially offset by an increase in the
provision for credit losses on loans held for sale. The reduction in the rate of
increase of net interest margin during 1997 compared to 1996 reflects the slow
down in the growth of loan purchases partially offset by a rise in net interest
rate spreads.
The Company's loan purchasing and securitization volume for each of the
three years ended December 31, 1997 is set forth in the table below.
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Premier............................................. $ 1,302,380 $ 1,768,933 $ 1,699,874
Classic............................................. 1,560,441 981,620 352,539
------------ ------------ ------------
Total automobile loan purchases................. $ 2,862,821 $ 2,750,553 $ 2,052,413
------------ ------------ ------------
------------ ------------ ------------
Automobile loans securitized........................ $ 2,864,120 $ 2,787,412 $ 1,933,525
</TABLE>
In 1995, the Company initiated a program to increase the proportion of
Classic loans in its loan purchase mix in order to maximize gross interest rate
spreads relative to expected net losses within each credit tier, to expand its
share of the automobile loan market and to reduce initial cash requirements
relative to those required by the Premier program because the Company offers
lower dealer participations on Classic loans. As a result, approximately 55% of
the Company's aggregate loan purchases were being made under the Classic program
during 1997, compared with 36% in 1996 and 17% in 1995. The Company may change
its loan purchase mix at any time and from time to time.
The rise in loan purchasing volume resulted in an increase in the average
monthly balance of loans held for sale to $245.0 million during 1997, up from
$219.5 million and $162.7 million during 1996 and 1995, respectively, on which
the Company earns net interest rate spread until such loans are securitized. The
weighted average net interest rate spread earned during 1997 rose to 10.24%
compared with 8.67% and 6.71% during 1996 and 1995, respectively. The rise in
net interest spread earned on loans held for sale is principally due to higher
average annual percentage rates ("APR") paid by obligors primarily resulting
from expansion of the Company's higher rate Classic loan program.
Interest income on short-term investments increased 74% between 1996 and
1997 and 61% between 1995 and 1996. This increase is primarily due to growth in
the aggregate balance of securitization-related cash accounts associated with
the continued expansion of the securitization program. Income from the
recognition of present value discount grew due to the increased volume of
securitizations.
GAIN ON SALE OF LOANS. During 1997, the Company recognized a non-recurring
pre-tax charge to gain on sale of loans of $98.0 million (see "SPECIAL
CHARGES"). Excluding this non-recurring charge, the Company realized a gain on
sale of loans of approximately $100.8 million, compared with $115.8 million and
$62.2 million during 1996 and 1995, respectively. The reduction in gain on sale
of loans during 1997,
25
<PAGE>
before the non-recurring charge, is primarily due to increases in the loss rate,
servicing fee and discount factor assumptions utilized in the Company's
computation of estimated future cash flows (see "SPECIAL CHARGES"). This impact
was partially mitigated by a 3% increase in loan securitization volume and a 133
basis point widening of the gross interest rate spread earned on loans
securitized (see table below). The increase in gain on sale of loans in 1996
over 1995 resulted primarily from the growth in the volume of loans securitized,
increased gross interest rate spreads, and a decline in the participation rate
paid to dealers for loan originations, partially offset by an increase in the
reserve for loan losses established in connection with an increased volume of
Classic loans.
The following table summarizes the Company's gross interest rate spreads for
each of the three years in the period ended December 31, 1997.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average APR of loans securitized......................... 16.00% 14.56% 14.22%
Weighted average securitization rate.............................. 6.42 6.31 6.38
--------- --------- ---------
Gross interest rate spread (1)................................ 9.58% 8.25% 7.84%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Before gains/losses on hedge transactions.
The rise in the gross interest rate spread during 1996 and 1997 is primarily
due to an increased proportion of higher-yielding Classic loans, resulting in an
increased APR earned on loans purchased and subsequently securitized.
Any unamortized balance of participations paid to dealers is expensed at the
time the related loans are securitized and recorded as a reduction to the gain
on sale. Due to the increased proportion of Classic loan purchases, which
generally require lower participation rates than Premier loans, and a reduction
of the maximum participation rate allowable under the Premier program,
participations paid as a percentage of the principal balance of loan purchases
declined to 3.13% during 1997 from 3.45% and 4.21% during 1996 and 1995,
respectively.
Gain on sale of loans has been adjusted for $8.7 million, $0.3 million and
$11.7 million of net realized losses on hedging transactions during 1997, 1996
and 1995, respectively (see "HEDGING AND PRE-FUNDING STRATEGY").
SERVICING FEE INCOME. The components of servicing fee income for each of
the three years in the period ended December 31, 1997 were:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Contractual servicing fee income............................. $ 46,022 $ 28,284 $ 13,987
Other servicing income....................................... 21,772 15,230 5,165
--------- --------- ---------
Servicing Fee Income......................................... $ 67,794 $ 43,514 $ 19,152
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company earns contractual servicing fee income for servicing loans sold
to investors through securitizations. The servicing fee is 1% per annum of the
outstanding principal balance of the loans for all securitizations entered into
prior to September 1997 and 1.25% per annum on loans included in and subsequent
to the third quarter 1997 securitization. The growth in contractual servicing
fee income is primarily related to an increase in the average servicing
portfolio outstanding.
Other servicing income consists primarily of collection fees, such as late
payment fees and insufficient fund charges, and interest on collection accounts
earned by the Company as servicer of the loans. The rise in other servicing
income is principally due to increases in income from late fees and insufficient
fund charges reflecting the increase in delinquency rates and growth in the
Company's servicing portfolio (see
26
<PAGE>
"Delinquency, Loan Loss and Repossession Experience") and increased collection
account interest attributable to the growth in the average servicing portfolio
outstanding and related obligor repayments.
The following table reflects the growth in the Company's servicing portfolio
from 1995 to 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------
(Dollars in thousands, except as noted) 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Principal balance of automobile loans held
for sale.............................................................. $ 47,815 $ 35,365 $ 113,840
Principal balance of loans serviced under securitizations............... 4,908,275 3,756,492 2,153,267
------------ ------------ ------------
Servicing portfolio..................................................... $ 4,956,090 $ 3,791,857 $ 2,267,107
------------ ------------ ------------
------------ ------------ ------------
Average outstanding principal balance (actual dollars).................. $ 12,046 $ 12,537 $ 12,239
Number of loans serviced................................................ 411,429 302,450 185,241
</TABLE>
The Company's servicing portfolio increased 31% from 1996 to 1997 and 67%
between 1995 and 1996. This increase reflects loan purchases and subsequent
securitizations of $2.9 billion and $2.8 billion during 1997 and 1996,
respectively, partially offset by defaults and scheduled repayments. The decline
in average outstanding principal balance of loans during 1997 reflects an
increase in the proportion of used to new cars financed by the Company.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits increased to $61.8
million during 1997 from $40.8 million and $20.1 million during 1996 and 1995,
respectively, representing an increase of 51% during 1997 and 103% during 1996.
This increase is primarily due to growth in number of employees. The Company had
1,598 employees at December 31, 1997, compared with 1,230 and 650 at December
31, 1996 and 1995, respectively. Increased staffing has been necessary to
accommodate the rise in loan purchasing volume and the subsequent servicing of
such loans and reflects additional employees hired to staff four regional
collection centers opened from October through December of 1996.
GENERAL AND ADMINISTRATIVE AND OTHER OPERATING EXPENSES ("OTHER OPERATING
EXPENSES"). Other operating expenses increased during 1997 to $100.3 million,
up from $51.5 million in 1996 and $22.6 million in 1995. Other operating
expenses include occupancy and equipment leasing charges, depreciation, outside
professional fees, communication costs, servicing and collection expenses,
marketing expenses, recruiting and staffing fees, travel, office supplies and
other. The increase in other operating costs during 1997 is primarily a result
of the higher percentage of Classic program loans in the portfolio which
generally require greater collection efforts and related costs (including
increased telephone, fax, postage and repossession expenses) than Premier
program loans. In addition, an overall increase in delinquency rates during 1997
further contributed to an increase in loan and collection expenses. The Company
has also experienced an increase in operating lease expense during 1997
attributable to a shift from the utilization of capital leases to operating
leases. Also included in the operating costs during 1997 is a one-time pre-tax
charge of approximately $5.0 million primarily related to legal costs associated
with defending litigation against the Company as well as costs associated with
resolving legal issues involving alleged improper practices at certain of the
Company's initial consignment dealers. The Company has since terminated its
business relationship with such dealers. Also included in the special charge
were severance expenses for certain former executives of the Company. The
increase in other operating expenses during 1996 was driven by the growth in
loan purchasing volume and the Company's servicing portfolio, as well as an
increase in occupancy and equipment charges related to the expansion of the
regional collection and buying centers during 1995 and 1996. As a result of the
items noted above, total operating expenses, including salaries and benefits,
rose to 3.63% of average servicing portfolio during 1997 compared with 3.06% and
2.78% in 1996 and 1995, respectively.
IMPACT OF YEAR 2000. The Company recognizes that the arrival of the Year
2000 poses a unique worldwide challenge to the ability of all computer systems
to recognize the date change from December 31,
27
<PAGE>
1999 to January 1, 2000 and, like other companies, is assessing, enhancing and
updating its computer applications and business processes to provide for their
continued functionality after said date. In connection with its initiative to
replace and enhance key operating systems, the Company has engaged outside
consultants to assist in the design and implementation of various systems that
will be Year 2000 compliant. The Company anticipates that the testing and
implementation of such systems will be completed by mid-1999, which is prior to
any anticipated impact on its operating systems. The Company believes that with
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such conversions are
not made, or are not completed in a timely manner, the Year 2000 issue could
have a material impact on the operations of the Company.
The costs associated with the Year 2000 project will be primarily for the
purchase of the new software being developed to replace and enhance the
Company's current operating systems. Consistent with its capitalization policy,
the costs of the Company's new operating software will be capitalized and
amortized over its expected useful life. As such, the Company believes that the
impact of the Year 2000 issue will not have a material effect on the results of
operations.
LONG TERM DEBT AND OTHER INTEREST EXPENSE. Long-term debt and other
interest expense rose 63.6% during 1997 and 46.7% in 1996. The increase in 1997
is primarily due to the issuance of $375.0 million of 11.5% Senior Notes during
1997, partially offset by the concurrent extinguishment of $145.0 million of 13%
Senior Term Notes. The increase in 1996 was primarily due to the issuance of
$30.0 million of 10.125% Subordinated Notes in March 1996 and $145.0 million of
13% Senior Term Notes in April 1995 (subsequently extinguished in 1997).
INCOME TAX EXPENSE. Due to the difference in the basis of the finance
income receivable for financial reporting purposes and income tax purposes, the
Company continues to have available $161.8 million of tax net operating loss
carryforwards, a portion of which may be available to offset against income
taxes in 1998 and future years, subject to applicable limitations. The $35.5
million income tax benefit during 1997 (including the tax effect of an
extraordinary item) primarily reflects the Company's estimated reduction to its
deferred tax liability as of December 31, 1997 resulting primarily from a
special charge during the first quarter of 1997.
EXTRAORDINARY ITEMS. In March 1997, the Company issued $300.0 million 11.5%
Senior Notes and utilized approximately $173.5 million of the proceeds to
repurchase and covenant defease the Company's $145.0 million 13% Senior Term
Notes, including accrued interest of $7.9 million and a premium of approximately
$20.3 million. These charges and additional professional fees incurred to retire
such debt have been treated as an extraordinary item, net of tax.
In February 1995, the Company entered into a temporary financing facility
(the "Facility") under which it borrowed $55.0 million through the issuance of
senior notes during February and April of 1995, and utilized the proceeds to
retire the Company's then outstanding $30.0 million of 11.75% Senior Secured
Notes. In April 1995, the Company issued Common Stock and $145.0 million of 13%
Senior Term Notes and applied the proceeds to retire the notes issued under the
facility and the Company's then outstanding 9.875% Senior Subordinated Notes.
The prepayment fees for the early extinguishment of debt and the charge-off of
capitalized debt financing costs associated with such debt were accounted for as
extraordinary items, net of tax.
PREFERRED DIVIDENDS. The Company paid dividends on its preferred stock
outstanding of $1.2 million and $2.2 million for 1996 and 1995, respectively.
The decrease in dividends paid from 1995 to 1996 is due to the conversion of
preferred shares into common stock of the Company. As of December 31, 1996, all
preferred shares had been redeemed or converted.
28
<PAGE>
FINANCIAL CONDITION
DUE FROM SECURITIZATION TRUST. At December 31, 1997 and December 31, 1996,
the Company had delivered $107.2 million and $177.1 million, respectively, of
loans into a securitization trust for which the Company received cash from the
trust concurrent with the legal closing of the transaction in January 1998 and
January 1997, respectively. The decrease in due from securitization trust is due
to a reduction in the purchasing volume of loans during the fourth quarter of
1997 compared to the fourth quarter of 1996.
AUTOMOBILE LOANS HELD FOR SALE. The Company holds automobile loans for sale
in its portfolio prior to securitization. The Company's portfolio of loans held
for sale increased to $49.1 million at December 31, 1997 from $36.3 million at
December 31, 1996, primarily due to the timing in delivery of loans associated
with the Company's securitizations.
FINANCE INCOME RECEIVABLE. Finance income receivable increased to $372.0
million at December 31, 1997 from $362.9 million at December 31, 1996. The
increase represents amounts capitalized upon completion of securitization
transactions during 1997 related to the present value of estimated cash flows.
Finance Income Receivable at December 31, 1997 was also reduced by a
non-recurring $98.0 million pre-tax charge recorded in March of 1997 (see
"SPECIAL CHARGES"). Reserve for losses on securitized loans is included as a
component of finance income receivable.
RESTRICTED CASH IN SPREAD ACCOUNTS. Restricted cash in spread accounts
increased to $250.3 million at December 31, 1997 from $143.0 million at December
31, 1996. This increase reflects the Company's continued securitization of loan
purchases and the related accumulation of excess cash flows to levels defined
within each securitization agreement and due to initial deposits related to
certain securitizations, partially offset by the release of excess cash flows to
the Company through its wholly-owned subsidiary, Arcadia Receivables Finance
Corp.
FURNITURE, FIXTURES AND EQUIPMENT. Furniture, fixtures and equipment
increased 27% to $17.4 million at December 31, 1997 from $13.6 million at
December 31, 1996, primarily due to the Company's investment in new computer
hardware and software technology, as well as office equipment for expansion of
the regional collection and buying centers.
SENIOR NOTES. Senior notes increased to $365.6 million at December 31, 1997
compared with $145.0 million at December 31, 1996. The increase reflects the
issuance of $300.0 million and $75.0 million of 11.5% Senior Notes in March 1997
and October 1997, respectively, partially offset by the concurrent
extinguishment of $145.0 million of 13% Senior Notes in March 1997. The Senior
Notes issued in March included detachable warrants that when exercised entitle
the holders to acquire an aggregate 2,052,000 shares of the Company's Common
Stock. The value of the warrants, determined at the time of debt issuance, was
treated as a discount on the Senior Notes issued and will be amortized to
interest expense over the life of the Senior Notes.
DEFERRED INCOME TAXES. Deferred income tax assets and liabilities reflect
the tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and income tax purposes,
principally net operating loss carryforwards for income tax purposes and the
finance income receivable, respectively. The Company's estimated net deferred
tax liability at December 31, 1997, was $18.9 million, compared to $54.4 million
at December 31, 1996. This decrease reflects the recognition of a tax benefit
from the two special charges taken in March 1997 (see "SPECIAL CHARGES").
OTHER LIABILITIES. Accounts payable and accrued liabilities increased to
$26.3 million at December 31, 1997 compared to $13.2 million at December 31,
1996. This 99% increase is primarily due to interest accruals associated with
the increase in the outstanding principal amount of senior notes (see "SENIOR
TERM NOTES").
29
<PAGE>
DELINQUENCY, LOAN LOSS AND REPOSSESSION EXPERIENCE
The Company's operating performance, financial condition and liquidity are
materially affected by the performance of the automobile loans purchased,
securitized and serviced by the Company. In connection with the servicing of
automobile loans, the Company is responsible for managing delinquent loans,
repossessing the underlying collateral in the event of default and selling
repossessed collateral. The Company provides an allowance for credit losses
inherent in sold loans and includes such allowance as a component of the fair
value of finance income receivable utilized to allocate the carrying amount of
loans sold in determining gain on sale. Management believes that the Company's
allowance for estimated credit losses adequately provides for potential future
losses on securitized loans.
The following tables describe the delinquency, credit loss and repossession
experience, respectively, of the Company's servicing portfolio for the three
years in the period ended December 31, 1997. A delinquent loan may result in the
repossession and foreclosure of the collateral for the loan. Losses resulting
from repossession and disposition of automobiles are charged against applicable
allowances, which management reviews on a monthly basis. There can be no
assurance that future delinquency, credit loss and repossession experience will
be comparable to that set forth below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
DELINQUENCY EXPERIENCE (1): 1997 1996 1995
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
LOANS BALANCES LOANS BALANCES LOANS BALANCES
----------- --------- ----------- --------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio at end
of period................. 411,429 $4,956,090 302,450 $3,791,857 185,241 $2,267,107
Delinquencies:
31-60 days................ 8,297 $ 100,161 3,884 $ 47,225 1,536 17,667
61-90 days................ 3,635 45,485 1,255 15,877 520 5,694
91 days or more........... 3,019 34,047 2,911 37,019 614 6,881
----------- --------- ----------- --------- ----------- ---------
Total loans delinquent
31 or more days........... 14,951 $ 179,693 8,050 $ 100,121 2,670 $ 30,242
Delinquencies as a
percentage of number of
loans and amount
outstanding at end of
period (2)................ 3.63% 3.63% 2.66% 2.64% 1.44% 1.33%
Amount in repossession
(3)....................... 6,083 $ 55,300 4,651 $ 64,929 1,489 $ 17,676
----------- --------- ----------- --------- ----------- ---------
Total delinquencies and
amount in
repossession (2)(3)....... 21,034 $ 234,993 12,701 $ 165,050 4,159 $ 47,918
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
- ------------------------
(1) All amounts and percentages are based on the principal amount scheduled to
be paid on each loan. The information in the table includes previously sold
loans which the Company continues to service.
(2) Amounts shown do not include loans which are less than 31 days delinquent.
(3) Amount in repossession represents financed automobiles which have been
charged-off but not yet liquidated.
30
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
CREDIT LOSS/REPOSSESSION EXPERIENCE (1): 1997 1996 1995
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Average servicing portfolio outstanding during the
period................................................ $ 4,458,977 $ 3,015,411 $ 1,534,720
Average number of loans outstanding during the period... 362,626 242,419 128,783
Number of charge-offs................................... 24,616 14,403 5,020
Gross charge-offs (2)................................... $ 165,233 $ 35,642 $ 11,247
Recoveries (3).......................................... 9,855 5,653 911
------------ ------------ ------------
Net losses.............................................. $ 155,378 $ 29,989 $ 10,336
------------ ------------ ------------
------------ ------------ ------------
Gross charge-offs as a percentage of average servicing
portfolio............................................. 3.71% 1.18% 0.73%
Net losses as a percentage of average servicing
portfolio............................................. 3.48% 0.99% 0.67%
</TABLE>
- ------------------------
(1) All amounts and percentages are based on the principal amount scheduled to
be paid on each loan. The information in the table includes previously sold
loans which the Company continues to service.
(2) Gross charge-offs represent principal amounts which management estimated to
be uncollectable after the consideration of anticipated proceeds from the
disposition of repossessed assets and selling expenses.
(3) Includes post-disposition amounts received on previously charged off loans.
The increase in delinquencies, gross charge-offs and net losses during 1997
is primarily due to the continued seasoning of the Company's existing servicing
portfolio to include a greater proportion of loans in the period of highest
probability for delinquencies and defaults (generally six to 14 months from the
date of origination), especially with respect to the Company's Premier loan
portfolio. Much of the increase in performance statistics is due to performance
of loans originated in 1995 and the first half of 1996 which represent
approximately 30% of the servicing portfolio. As expected, performance
statistics have also increased during 1997 as a result of a rise in the
proportion of Classic loans in the Company's portfolio. At December 31, 1997,
the portfolio consisted of approximately 43% Classic loans compared to 29% at
the same time a year ago. Net losses during the year have been further affected
by selling an increased proportion of repossessed vehicles through wholesale
auctions. During 1997, the Company liquidated approximately 54% of all
repossessed vehicles sold through wholesale auctions compared to 30% during
1996. Because recovery rates are generally lower on vehicles sold at auction
compared to those liquidated through retail channels, the increased utilization
of auctions has increased net losses experienced by the Company. Included in the
1997 gross charge-off and net loss statistics is a special charge of
approximately $25 million resulting from a revision to the Company's inventory
valuation policy (see "SPECIAL CHARGES").
The increase in the rate of delinquencies, gross charge-offs, net losses and
repossessions during 1996, experienced by both the Premier and Classic programs,
was primarily due to (i) increased demands on the Company's servicing and
collection resources as the result of rapid growth in its servicing portfolio
and as a result of continued expansion of the Classic loan program (which
generally requires greater collection efforts than the Premier program), (ii)
the performance of the Company's discontinued Classic product for first time
automobile buyers and the Company's financed repossession program, which
experienced significantly higher delinquencies, repossessions and losses than
the Company's other products and programs and (iii) the continued seasoning of
the Company's servicing portfolio. The significant rise in repossession
inventory levels during 1996 was the result of the growth in the Company's
servicing portfolio and increased utilization of retail distribution channels to
liquidate repossessed automobiles.
31
<PAGE>
LIQUIDITY
The Company's business requires substantial cash to support its operating
activities. The principal cash requirements include (i) amounts necessary to
purchase and finance automobile loans pending securitization, (ii) dealer
participations, (iii) cash held from time to time in restricted spread accounts
to support securitizations and warehouse facilities and other securitization
expenses, (iv) interest advances to securitization trusts, (v) repossession
inventory, and (vi) interest expense. The Company also uses significant amounts
of cash for operating expenses. The Company receives cash principally from
interest on loans held pending securitization, from excess cash flow received
from securitization trusts and from fees earned through servicing of loans held
by such trusts. The Company has operated on a negative operating cash flow basis
and expects to continue to do so in the near future. The Company has
historically funded, and expects to continue to fund, these negative operating
cash flows, subject to limitations in various debt covenants, principally
through borrowings from financial institutions, sales of equity securities and
sales of senior and subordinated notes, among other resources, although there
can be no assurance that the Company will have access to capital markets in the
future or that financing will be available to satisfy the Company's operating
and debt service requirements or to fund its future growth. See "Capital
Resources".
PRINCIPAL USES OF CASH IN OPERATING ACTIVITIES
PURCHASES AND FINANCING OF AUTOMOBILE LOANS. Automobile loan purchases
represent the Company's most significant cash flow requirement. The Company
funds the purchase price of loans primarily through the use of warehouse
facilities. However, because advance rates under the warehouse facilities
generally provide funds ranging from 93% to 97% of the principal balance of the
loans, the Company is required to fund the remainder of all purchases prior to
securitization with other available cash resources. The Company purchased $2.9
billion of loans in 1997, compared with $2.8 billion in 1996 and $2.1 billion in
1995. Amounts borrowed under warehouse facilities are repaid upon securitization
of the loans. The Company regularly completes securitizations to optimize its
use of available warehouse facilities and the Company's cash investment in loans
held for sale.
DEALER PARTICIPATIONS. Consistent with industry practice, the Company pays
dealers participations for selling loans to the Company. When loans are
securitized, the related dealer participation is expensed and subsequently
recovered over the estimated life of the underlying loans through the return to
the Company of excess cash flow from securitization trusts. Aggregate
participations paid by the Company to dealers in 1997 were $89.7 million,
compared with $94.9 million in 1996 and $86.5 million in 1995. These
participations typically require the Company to advance an up-front amount to
dealers, which represented 3.13% of the principal balance of loans purchased
during 1997 compared to 3.45% in 1996 and 4.21% in 1995. The decrease in dealer
participations paid as a percentage of the principal balance of loans purchased
reflects the growth in volume of loans purchased under the Classic program,
which generally requires a lower participation payout rate and a reduction in
the cap on participation rates paid on Premier loans. The Company has some
limited ability to recover dealer participations from the dealers by offset
against future participations in the event of prepayment or default on the
related loan within a specified period of time. However, to the extent the loan
does not prepay or default within that period of time, the Company expects to
recover the cash used to pay dealer participations over the estimated life of
the underlying loans through the return to the Company of excess cash flows from
securitization spread accounts. This relationship between the up-front payment
of cash to the dealers and the deferred recovery through collection of excess
cash flow will continue to represent a significant demand on capital resources
to the extent the Company expands the growth of loan purchases.
SECURITIZATION OF AUTOMOBILE LOANS. In connection with securitizations, the
Company incurs certain expenses, including underwriting fees, credit enhancement
fees, trustee fees and other costs, and is required to fund spread accounts
related to each transaction. The Company funds these spread accounts by
foregoing receipt of excess cash flow until these spread accounts exceed
predetermined levels (generally
32
<PAGE>
within 14 months of the formation of the securitization trust). In certain
securitizations, the Company also has been required to provide initial cash
deposits into such accounts. The amount of time required to initially fund each
spread account varies depending on numerous factors, including, but not limited
to (i) the size of any required initial deposit, (ii) the gross interest rate
spread, (iii) defaults, (iv) delinquencies, (v) losses and (vi) turnover of
repossession inventory. The Company had $250.3 million of restricted cash in
spread accounts at December 31, 1997, compared with $143.0 million at December
31, 1996.
ADVANCES DUE TO SERVICER. As the servicer of loans sold in securitizations,
the Company periodically makes interest advances to the securitization trusts to
provide for temporary delays in the receipt of required interest payments by
borrowers. In accordance with the relevant servicing agreements, the Company
makes advances only in the event that it expects to recover such advances
through the ultimate payments from the obligor over the life of the loan.
Beginning in December 1996, the Company's servicing agreements were modified to
require interest advances only when the related loan is 31 days delinquent or
greater.
REPOSSESSION INVENTORY. At December 31, 1997, repossessed inventory managed
or owned by the Company and held for resale was $55.3 million, compared with
$64.9 million at December 31, 1996. The rate of repossessed inventory turnover
impacts cash available for spread accounts under securitization trusts and,
consequently, the excess cash available for distribution to the Company. At
December 31, 1997, repossessed inventory was 1.1% of the total servicing
portfolio compared with 1.7% at December 31, 1996. Any improvement in excess
cash flows due to an increase in the inventory turnover rate may be partially
reduced by lower recoveries realized through an increased use of wholesale
auctions.
INTEREST EXPENSE. Although the Company records net interest margin as
earned, a significant portion of the interest income component is generally
received in cash from excess cash flow, while the interest expense component
(primarily warehousing interest) is paid prior to securitization.
PRINCIPAL SOURCES OF CASH IN OPERATING ACTIVITIES
EXCESS CASH FLOW. The Company receives excess cash flow from securitization
trusts, including the realization of gain on sale, the recovery of dealer
participations, and the recovery of accrued interest receivable earned, but not
yet collected, on loans held for sale. Recovery of dealer participations and
accrued interest receivable, which occur throughout the life of the
securitization, result in a reduction of the finance income receivable and,
because they have been considered in the original determination of the gain on
sale of loans, have no effect on the Company's results of operations in the year
in which the participations and interest are recovered from the securitization
trust. During 1997, the Company received $89.0 million of excess cash flow,
compared with $43.4 million in 1996 and $21.1 million in 1995. The rate of
increase in excess cash flow during 1997 exceeded the rate of increase in loans
securitized principally because spread accounts related to 1996 securitizations
have reached required reserve levels and have begun releasing cash during the
current year. These obligations generally reach pre-determined spread account
levels within 14 months following the formation of the securitization trust.
SERVICING FEES. The Company also receives servicing fees for servicing
securitized loans included in various securitization trusts. The servicing fee
for loans in securitization trusts is equal to one percent per annum of the
outstanding principal balance of the loans for all securitizations entered into
prior to September 1997 and 1.25 percent per annum on loans subsequently
securitized. The Company received cash for such services in the amount of $65.6
million, $42.2 million and $16.2 million during 1997, 1996 and 1995,
respectively, which is reflected in the Company's revenues as earned.
CAPITAL RESOURCES
The Company finances the acquisition of automobile loans primarily through
(i) warehouse facilities, pursuant to which loans are sold or financed generally
on a temporary basis and (ii) the securitization of loans, pursuant to which
loans are sold as asset-backed securities. Additional financing is required to
fund the Company's operations.
33
<PAGE>
WAREHOUSE FACILITIES. Automobile loans held for sale are funded on a
short-term basis primarily through warehouse facilities. At December 31, 1997,
the Company had three warehouse facilities in place with various financial
institutions and institutional lenders with an aggregate capacity of $875.0
million, of which $844.0 million was available. Two of the liquidity facilities
supporting the warehouse facilities are subject to renewal or extension at
various times in 1998 at the option of the lenders. The Company has a commitment
extending into 1999 for the third facility. Proceeds from securitizations,
generally received within seven to ten days following the cut-off date
established for the securitization transaction, are applied to repay amounts
then outstanding under warehouse facilities.
SECURITIZATION PROGRAM. An important capital resource for the Company has
been its ability to sell automobile loans in the secondary markets through
securitizations. The following table summarizes the Company's securitizations
during the three years ended December 31, 1997, all of which have been publicly
issued and were rated AAA by Standard & Poor's and Aaa by Moody's Investor
Services, Inc.
<TABLE>
<CAPTION>
REMAINING
REMAINING BALANCE AS A CURRENT WEIGHTED GROSS
(Dollars in thousands) BALANCE AS PERCENTAGE WEIGHTED AVERAGE INTEREST
ORIGINAL OF DECEMBER OF ORIGINAL AVERAGE SECURITIZATION RATE
DATE BALANCE 31, 1997 BALANCE APR RATE SPREAD
- ------------------- ------------ ------------ ------------ --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
February 95 $ 158,400 $ 40,129 25.33% 13.70% 7.88% 5.82%
March 95 300,000 78,084 26.03 14.26 7.31 6.95
June 95 470,000 144,124 30.66 14.05 6.20 7.85
September 95 525,000 184,083 35.06 13.65 6.03 7.62
December 95 600,000 237,196 39.53 13.63 5.88 7.75
March 96 600,000 275,019 45.84 13.52 5.81 7.71
June 96 650,000 357,558 55.01 14.28 6.62 7.66
September 96 725,000 454,218 62.65 14.71 6.75 7.96
December 96 730,000 510,997 70.00 15.13 6.08 9.05
March 97 775,000 602,785 77.78 15.53 6.54 8.99
June 97 775,000 663,807 85.65 15.86 6.50 9.36
September 97 775,000 722,168 93.18 16.38 6.36 10.02
December 97 (1) 600,000 497,199 82.87 16.62 6.23 10.39
------------ ------------
$ 7,683,400 $4,767,367
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) At December 31, 1997, $501.7 million of automobile loans had been delivered
to the trust and $98.3 million cash remained in the pre-funded portion of
the trust. In January 1998, the Company delivered sufficient loans to the
trust and obtained the release of the remaining cash in the pre-funded
portion of the trust. See "Hedging and Pre-funding Strategy" below.
The Company utilizes net proceeds from securitizations to invest in
additional loan purchases and to repay warehouse indebtedness, thereby making
its warehouse facilities available for further purchases of automobile loans. At
December 31, 1997, the Company had securitized approximately $8.7 billion of
automobile loans since its inception in 1990, and had remaining balances of
approximately $4.9 billion.
All of the Company's securitization trusts and one of the Company's
warehouse facilities are credit-enhanced through financial guaranty insurance
policies issued by FSA, which insure payment of principal and interest due on
the related asset-backed securities. In order to obtain FSA insurance, the
Company is obligated to establish spread accounts, and to maintain such spread
accounts at pre-determined levels, in connection with each insured
securitization through the collection and restriction of excess cash flow from
the loans securitized. These spread accounts are funded through initial
deposits, when required, and out of excess cash flow from the related
securitization trust. Thereafter, during each month excess cash flow due to ARFC
from all insured securitization trusts is first used to replenish spread
accounts to predetermined
34
<PAGE>
levels and is then distributed to the Company. If excess cash flow from all
insured securitization trusts is not sufficient to replenish all spread
accounts, no cash flow would be available to the Company from ARFC for that
month. Excess cash flows include cash received from the liquidation of
repossessions under defaulted receivables. Such cash is generally received in
months subsequent to default and can therefore result in timing differences as
to when excess cash flows are released to the Company. The spread account for
each insured securitization trust is cross-collateralized with the spread
accounts established for the Company's other insured securitization trusts.
Excess cash flow from performing securitization trusts insured by FSA may be
used to support negative cash flow from, or to replenish a deficit spread
account in connection with, non-performing securitization trusts insured by FSA.
The Company's obligations to FSA in respect of insured securitizations and one
of the Company's warehouse facilities are limited to the amounts on deposit in
the spread accounts and excess cash flow.
In connection with its securitizations, the Company continually seeks to
improve its structures to reduce up-front costs and to maximize excess cash flow
available to the Company. The Company may consider alternative securitization
structures, including senior/subordinated tranches, and alternative forms of
credit enhancement, such as letters of credit and surety bonds. During 1995, the
Company realized a portion of its finance income receivable by selling an
interest-only strip in its September 1995 securitization. Proceeds from the sale
of the interest-only strips were approximately $6.1 million in 1995. There were
no interest-only strips sold during 1996 or 1997. The structure of each
securitized sale of loans will depend on market conditions, costs of
securitization and the availability of credit enhancement options to the
Company.
HEDGING AND PRE-FUNDING STRATEGY. The Company employs hedging strategies,
including the use of pre-funding accounts in connection with securitization
transactions and forward U.S. Treasuries, to manage its gross interest rate
spread. Through the use of these hedging strategies, the Company is able to
determine its approximate financing cost prior to, or near to, the purchase of
loans and thereby maintain its gross interest rate spread within a desired
range. Because interest rates on asset-backed securities for automobile loans
generally tend to rise or fall when other shorter-term interest rates fluctuate,
a material increase in interest rates prior to securitization could adversely
affect the profitability of such securitization to the Company in the absence of
a hedging strategy.
By utilizing pre-funding accounts in connection with securitization
transactions, the Company mitigates its exposure to interest rate risk through a
pre-funding strategy in which it securitizes its loans then held for sale along
with future loans in a pre-funded securitization. In a pre-funded
securitization, the principal amount of the asset-backed securities issued in
the securitization exceeds the principal balance of loans initially delivered to
the securitization trust. The proceeds from the pre-funded portion are held in
trust earning money market yields until released upon delivery of additional
loans. The Company agrees to deliver additional loans into the securitization
trust from time to time (generally monthly) equal in the aggregate to the amount
by which the principal balance of the asset-backed securities exceeds the
principal balance of the loans initially delivered. In pre-funded
securitizations, the Company predetermines the borrowing costs with respect to
loans it subsequently purchases and delivers into the securitization trust.
However, the Company incurs an expense in pre-funding securitizations equal to
the difference between the money market yields earned on the proceeds held in
trust prior to the subsequent delivery of loans and the interest rate paid on
the asset-backed securities. The Company also has some interest rate exposure to
falling interest rates to the extent that the Company's offered rates decline
after the Company has engaged in a pre-funded securitization, although the
Company's offered rates generally respond less rapidly to rate fluctuations than
financing costs.
By selling forward U.S. Treasuries that most closely parallel the average
life of its portfolio of loans held for sale, the Company is able to obtain an
inverse relationship between the loans being hedged and the U.S. Treasury
market. The hedging gain or loss is netted against the gain on sale of loans.
Such hedges include certain risks created by the cash versus non-cash
relationship of the hedging instrument and the related securitization. This
relationship arises because U.S. Treasury forward contracts are settled with
35
<PAGE>
current cash payments and the gain on sale of loans represents the present value
of estimated future cash flows. To the extent hedging gains or losses resulting
from U.S. Treasury forward contracts are significant, the resulting up-front
cash payments or receipts may impact the Company's liquidity. The Company
receives the up-front gains or losses back over time through a higher or lower
spread at the time of securitization. Hedging transactions required an initial
net use of cash of $8.7 million, $0.3 million and $11.7 million during 1997,
1996 and 1995, respectively.
Management has controls and policies in place to assess and monitor its risk
from hedging activities. Management reviews the interest rate movements in the
U.S. Treasury markets and receives a daily internal report tracking such
movements. Daily, management receives an interest rate report that describes not
only interest rate movements, but also the amount of corresponding increase or
decrease in the value of its hedged securitizations. The amount and timing of
hedging transactions are determined by members of the Company's senior
management, and are subject to approval by the Company's Chief Executive
Officer. In connection with this, management assesses factors including the
interest rate environment, loan production levels and open positions of current
hedging positions.
OTHER CAPITAL RESOURCES
Historically, the Company has utilized various debt and equity financings to
offset negative operating cash flows and support its operations.
In March 1997, the Company sold to the public $300.0 million aggregate
principal amount of 11.50% Senior Notes due 2007 (the "Senior Notes") and
received net proceeds of approximately $291.2 million. Each Senior Note included
a detachable warrant, and such warrants when exercised entitle the holders to
acquire an aggregate of 2,052,000 shares of the Company's common stock. In
October 1997, the warrants were detached from the Senior Notes and began trading
separately from the Senior Notes. The warrants are exercisable at a price of
$11.00 per share. Interest on the Senior Notes is payable semi-annually on March
15 and September 15 of each year, beginning September 15, 1997. The Senior Notes
may not be redeemed prior to March 15, 2002. At any time on such date or
thereafter, the Company may at its option elect to redeem the Senior Notes, in
whole or in part, at a premium ranging from 105.75% to 101.92% of the principal
amount of Senior Notes redeemed between the years 2002-2004, respectively, or
100% thereof on or after March 15, 2005, plus accrued interest to and including
the redemption date. The Senior Notes are general, unsecured obligations of the
Company and will rank pari passu in right of payment to all existing and future
unsecured, unsubordinated indebtedness of the Company (as defined in the
indenture governing the Senior Notes). Approximately $173.5 million of the net
proceeds from the issuance of the Senior Notes was used to repurchase and
covenant defease the Company's 13% Senior Term Notes (including a prepayment
premium and accrued interest) and the remainder was made available for working
capital. The premium paid for the early extinguishment of debt (approximately
$20.3 million) and the charge-off of remaining capitalized debt financing costs
(approximately $3.2 million) were recognized and accounted for as an
extraordinary item.
In October 1997, the Company sold to the public $75.0 million aggregate
principal amount of 11.50% Senior Notes due 2007 (the "Notes") and received net
proceeds of approximately $71.2 million. Interest on the Notes is payable
semi-annually on March 15 and September 15 of each year, beginning March 15,
1998. The Notes may not be redeemed prior to March 15, 2002. At any time on such
date or thereafter, the Company may at its option elect to redeem the Notes, in
whole or in part, at a premium ranging from 105.75% to 101.92% of the principal
amount of Notes redeemed between the years 2002-2004, respectively, or 100%
thereof on or after March 15, 2005, plus accrued interest to and including the
redemption date. The Notes are general, unsecured obligations of the Company and
will rank pari passu in right of payment to all existing and future unsecured,
unsubordinated indebtedness of the Company (as defined in the indenture
governing the Notes). The net proceeds from the issuance of the Notes are being
used to support the purchase of automobile loans, for working capital and for
other general corporate purposes.
36
<PAGE>
During 1996, the Company completed a public offering of 8,050,000 shares of
Common Stock and received net proceeds of approximately $146.0 million. In March
1996, the Company issued to the public $30.0 million aggregate principal amount
of 10.125% Subordinated Notes Series 1996-A, due 2001 and received net proceeds
of approximately $29.0 million. Proceeds from the 1996 offerings were made
available as working capital for loan purchases and general operations.
In February 1995, the Company entered into a temporary financing facility
(the "Facility") in order to provide cash pending completion of the common stock
and senior debt offerings described below and to repay $30.0 million of
outstanding Senior Secured Notes. Under the Facility, the Company borrowed $55.0
million through the issuance of Senior Unsecured Increasing Rate Notes. In April
1995, proceeds from the common stock and senior term debt offerings described
below were used to retire the notes issued under the Facility at par plus
accrued interest.
In April 1995, the Company issued to the public 9,849,900 shares of Common
Stock and $145.0 million principal amount of Senior Term Notes. The Company
received aggregate net proceeds from the issuance of the Common Stock and 13%
Senior Term Notes of approximately $231.0 million and applied $56.2 million of
such proceeds to retire the notes issued under the Facility plus accrued
interest, $15.6 million to retire the Company's 9.875% Senior Subordinated Notes
(including a prepayment fee of $0.5 million and accrued interest of $0.1
million), and $9.4 million to fund a reserve account established for future
payment of interest on the 13% Senior Term Notes. The remaining proceeds of
$149.8 million were made available as working capital for loan purchases and
general operations.
Pursuant to demand registration rights of certain holders of warrants issued
by the Company between 1992 and 1994 in connection with its issuance of Senior
Secured and Senior Subordinated Notes, the Company filed separate registration
statements during April and October 1995 covering 213,000 and 3,871,364 shares
of Common Stock, respectively, issuable upon exercise of the warrants for
secondary sale at market should the holders decide to do so. The Company has
received aggregate proceeds of approximately $12.2 million in connection with
the exercise of such warrants. As of December 31, 1997, 52,000 warrants remain
outstanding.
The Company has a program to sell up to $50.0 million of unsecured
subordinated notes (the "Junior Subordinated Notes") to be offered to the public
from time to time (the "Note Program"). Issuance of Junior Subordinated Notes
under the Note Program is subject to restrictions under the Senior Note
indenture. The Note Program includes Junior Subordinated Notes extendible by the
investor having maturities of 30, 60, 90 and 180 days and one year after the
date of issue and fixed-term Junior Subordinated Notes having maturities of one,
two, three, four, five and 10 years after the date of issue. Interest rates on
any unsold Junior Subordinated Notes are subject to change by the Company from
time to time based on market conditions. Interest rates on extendible Junior
Subordinated Notes may be adjusted at any roll-over date. At December 31, 1997,
the Company had $20.8 million of Junior Subordinated Notes outstanding.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Arcadia Financial Ltd.
We have audited the accompanying consolidated balance sheets of Arcadia
Financial Ltd. as of December 31, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arcadia
Financial Ltd. at December 31, 1997 and 1996 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
January 23, 1998
38
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
(Dollars in thousands, except share and per share amounts) 1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................... $ 17,274 $ 16,057
Due from securitization trust........................................... 107,207 177,076
Auto loans held for sale................................................ 49,133 36,285
Finance income receivable............................................... 371,985 362,916
Restricted cash in spread accounts...................................... 250,297 142,977
Furniture, fixtures and equipment....................................... 17,371 13,630
Other assets............................................................ 32,483 29,289
--------- ---------
Total assets........................................................ $ 845,750 $ 778,230
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts due under warehouse facilities.................................. $ 30,880 $ 111,140
Senior term notes....................................................... 365,640 145,000
Subordinated notes...................................................... 50,772 53,689
Capital lease obligations............................................... 5,368 7,729
Deferred income taxes................................................... 18,846 54,387
Accounts payable and accrued liabilities................................ 26,302 13,192
--------- ---------
Total liabilities................................................... 497,808 385,137
Commitments and contingencies
Shareholders' equity:
Capital stock, $.01 par value, 100,000,000 shares authorized:
Common stock, 38,813,735 and 37,012,605 shares respectively, issued
and outstanding..................................................... 388 370
Additional paid-in capital.............................................. 322,819 310,181
Retained earnings....................................................... 24,735 82,542
--------- ---------
Total shareholders' equity.......................................... 347,942 393,093
--------- ---------
$ 845,750 $ 778,230
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(Dollars in thousands, except per share amounts) 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Net interest margin................................... $ 64,499 $ 54,083 $ 27,194
Gain on sale of loans................................. 2,818 115,773 62,182
Servicing fee income.................................. 67,794 43,514 19,152
Other non-interest income............................. 302 125 204
---------- ---------- ----------
Total revenues.................................... 135,413 213,495 108,732
EXPENSES:
Salaries and benefits................................. 61,756 40,751 20,079
General and administrative and other operating
expenses............................................ 100,261 51,547 22,648
---------- ---------- ----------
Total operating expenses.......................... 162,017 92,298 42,727
Long-term debt and other interest expense............. 41,216 25,193 17,170
---------- ---------- ----------
Total expenses.................................... 203,233 117,491 59,897
---------- ---------- ----------
Operating income (loss) before income taxes and
extraordinary items................................. (67,820) 96,004 48,835
Income tax provision (benefit)........................ (25,841) 35,688 19,518
---------- ---------- ----------
Income (loss) before extraordinary items.............. (41,979) 60,316 29,317
Extraordinary items, net of tax....................... (15,828) -- (3,856)
---------- ---------- ----------
Net income (loss)..................................... $ (57,807) $ 60,316 $ 25,461
---------- ---------- ----------
---------- ---------- ----------
BASIC EARNINGS PER SHARE:
Income (loss) per share before extraordinary items.... $ (1.08) $ 1.91 $ 1.53
Extraordinary items per share......................... (0.41) -- (0.22)
---------- ---------- ----------
Net income (loss) per share....................... $ (1.49) $ 1.91 $ 1.31
---------- ---------- ----------
---------- ---------- ----------
DILUTED EARNINGS PER SHARE:
Income (loss) per share before extraordinary items $ (1.08) $ 1.65 $ 1.11
Extraordinary items per share......................... (0.41) -- (0.15)
---------- ---------- ----------
Net income (loss) per share....................... $ (1.49) $ 1.65 $ 0.96
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding:
Basic............................................... 38,700,346 30,897,426 17,718,603
Diluted............................................. 39,256,788 36,449,995 26,435,765
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF ADDITIONAL
(Dollars in thousands, except PREFERRED COMMON PREFERRED COMMON PAR PAID IN RETAINED
share amounts) SHARES SHARES PAR VALUE VALUE CAPITAL EARNINGS TOTAL
--------- --------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1994......................... 1,150,000 9,920,710 $ 12 $ 99 $ 60,621 $ 130 $ 60,862
Issuance of Common Stock:
Public offering.............. -- 9,849,900 -- 98 87,559 -- 87,657
Benefit plans................ -- 619,887 -- 6 930 -- 936
Amortization of deferred
compensation................. -- -- -- -- 837 -- 837
Exercise of options and
warrants..................... -- 1,736,735 -- 17 7,256 -- 7,273
Preferred Stock conversion to
Common Stock................. (78,964) 368,128 (1) 4 (3) -- --
Payment of dividends on
Preferred Stock.............. -- -- -- -- -- (2,213) (2,213)
Net income..................... -- -- -- -- -- 25,461 25,461
--------- --------- --- ----- --------- --------- ---------
BALANCES AT DECEMBER 31,
1995......................... 1,071,036 22,495,360 11 224 157,200 23,378 180,813
Issuance of Common Stock:
Public offering.............. -- 8,050,000 -- 81 145,925 -- 146,006
Benefit plans................ -- 373,762 -- 4 1,161 -- 1,165
Amortization of deferred
compensation................. -- -- -- -- 1,038 -- 1,038
Exercise of options and
warrants..................... -- 1,101,269 -- 11 4,902 -- 4,913
Preferred Stock redemption and
conversion to Common Stock... (1,071,036) 4,992,214 (11) 50 (45) -- (6)
Payment of dividends on
Preferred Stock.............. -- -- -- -- -- (1,152) (1,152)
Net income..................... -- -- -- -- -- 60,316 60,316
--------- --------- --- ----- --------- --------- ---------
BALANCES AT DECEMBER 31,
1996......................... -- 37,012,605 -- 370 310,181 82,542 393,093
Issuance of warrants........... -- -- -- -- 8,590 -- 8,590
Issuance of Common Stock:
Benefit plans................ -- 292,485 -- 3 565 -- 568
Amortization of deferred
compensation................. -- -- -- -- 991 -- 991
Exercise of options and
warrants..................... -- 1,508,645 -- 15 2,492 -- 2,507
Net income (loss).............. -- -- -- -- -- (57,807) (57,807)
--------- --------- --- ----- --------- --------- ---------
BALANCES AT DECEMBER 31,
1997......................... -- 38,813,735 $ -- $ 388 $ 322,819 $ 24,735 $ 347,942
--------- --------- --- ----- --------- --------- ---------
--------- --------- --- ----- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
(Dollars in thousands) 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ (57,807) $ 60,316 $ 25,461
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................ 7,003 4,286 1,881
Loss on sale of furniture, fixtures and equipment.... 17 119 153
(Increase) decrease in assets:
Automobile loans held for sale:
Purchases of automobile loans...................... (2,913,097) (2,750,553) (2,052,413)
Sales of automobile loans.......................... 2,864,120 2,787,412 1,933,525
Repayments of automobile loans..................... 36,129 45,412 24,200
Finance income receivable............................ (4,355) (176,916) (127,461)
Restricted cash in spread accounts................... (107,320) (79,397) (42,172)
Due from securitization trusts....................... 69,869 (177,076) 88,481
Prepaid expenses and other assets.................... (2,293) (5,787) (10,402)
Increase (decrease) in liabilities:
Deferred income taxes.............................. (35,541) 35,688 16,947
Accounts payable and accrued liabilities........... 13,110 3,369 6,141
------------- ------------- -------------
Total cash used in operating activities...... (130,165) (253,127) (135,659)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of furniture, fixtures and
equipment............................................ 98 26 37
Purchase of furniture, fixtures and equipment.......... (8,873) (5,108) (1,089)
Purchase of subordinated certificates.................. -- (2,596) (2,046)
Collections on subordinated certificates............... 1,465 1,078 510
------------- ------------- -------------
Total cash used in investing activities...... (7,310) (6,600) (2,588)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock............. 3,075 152,079 95,866
Payment of dividends on Preferred Stock................ -- (1,152) (2,213)
Proceeds from borrowings under warehouse facilities.... 3,157,863 2,159,523 1,605,583
Repayment of borrowings under warehouse facilities..... (3,238,123) (2,074,913) (1,685,241)
Unsecured subordinated notes, net...................... (2,917) 40,684 12,699
Proceeds from issuance of long-term debt............... 373,500 -- 200,000
Repayments of long-term debt........................... (145,000) -- (100,000)
Deferred debt issuance cost, net....................... (7,080) (13) (2,541)
Reduction of capital lease obligations................. (2,626) (1,764) (1,183)
------------- ------------- -------------
Total cash provided by financing
activities................................. 138,692 274,444 122,970
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents... 1,217 14,717 (15,277)
Cash and cash equivalents at beginning of period....... 16,057 1,340 16,617
------------- ------------- -------------
Cash and cash equivalents at end of period............. $ 17,274 $ 16,057 $ 1,340
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Non cash activities:
Additions to capital leases........................ $ 265 $ 5,569 $ 3,609
Cash paid for:
Interest........................................... 41,248 33,448 19,630
Taxes.............................................. -- -- 92
</TABLE>
See notes to consolidated financial statements
42
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Arcadia Financial Ltd. (the "Company") operates in a single industry,
purchases, securitizes and services consumer automobile retail installment loans
originated primarily by car dealers affiliated with major foreign and domestic
manufacturers. The Company does not purchase more than 1.0% of its loans from
any one dealer. Since its founding in March 1990, the Company has established 18
regional buying centers in Arizona, Northern and Southern California, Colorado,
Florida, Georgia, Maryland, Massachusetts, Minnesota, Missouri, New York, North
Carolina, Ohio, Tennessee, North, South and West Texas, and Washington. The
Company's dealer network includes dealers in 45 states. At December 31, 1997,
the Company's only significant geographic concentration in its servicing
portfolio was to borrowers in the state of Texas which consisted of
approximately 19% of the total servicing portfolio. Management does not believe
that the Company has any current material exposures to geographic or dealer
concentrations.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles.
Certain reclassifications have been made to the December 31, 1996 and 1995
balances to conform to current period presentation.
USE OF 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 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.
CASH AND CASH EQUIVALENTS
The Company considers all significant investments with an original maturity
of three months or less to be cash equivalents.
DUE FROM SECURITIZATION TRUST
Under Arcadia's securitization structures, the Company delivers loans to a
securitization trust and subsequently receives cash from the trust for such
loans concurrent with the legal closing of the transaction typically six to 10
days after delivery. All terms of the transfer of assets to the trust are fixed
and determinable at the time of delivery.
AUTOMOBILE LOANS HELD FOR SALE
Loans are carried at the lower of their principal amount outstanding
(amortized cost), including related unearned dealer participations, or market
value. Market value is estimated based on the characteristics of the loans held
for sale and the terms of recent sales of similar loans completed by the
Company. Interest on these loans is accrued and credited to interest income
based upon the daily principal amount outstanding.
43
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with Emerging Issues Task Force ("EITF") Issue 92-10, LOAN
ACQUISITIONS INVOLVING TABLE FUNDING ARRANGEMENTS, the EITF set forth specific
criteria providing the distinction between purchasers and originators of loans.
For financial reporting purposes, the Company is in substance an originator of
automobile loans. Therefore, participations paid to dealers are deferred and
amortized over the life of the underlying loan in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91, "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases." Any unamortized deferred costs remaining at the time the loan
is sold are considered a portion of the basis of loans held for sale and charged
to expense as a component of any subsequent gain or loss on sale.
Dealer participations are calculated by amortizing the customer loan at the
interest rate charged by the automobile dealer to the automobile purchaser and
at the rate offered by the Company to the dealer and recognizing the difference
between these two aggregate interest amounts as the dealer participation. This
amount is paid to the dealer at or near the original purchase date of the loan.
A portion of this amount is generally recoverable from the dealer in the event
of a default or prepayment within a time period specified in the dealer
agreement. The balance is recovered over time as a portion of excess cash flows
released from securitization trusts.
FINANCE INCOME RECEIVABLE
During 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinquishments of Liabilities" ("SFAS 125"). SFAS 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinquishments of liabilities based on the application of
a financial components approach which focuses on control of the assets and
liabilities that exist after the transfer. SFAS 125 prescribes the methodology
for recognition of gain or loss upon the transfer of assets as well as the
valuation of finance income receivable. SFAS 125 is effective for transactions
occurring after December 31, 1996, and is to be applied prospectively.
Retroactive application is not permitted. The Company adopted SFAS 125 on
January 1, 1997. During 1997, the implementation of SFAS 125 did not have a
material effect on the Company's consolidated financial statements.
Finance income receivable represents the Company's retained interest in the
estimated future cash flows of loans sold and is determined by allocating the
carrying amount of loans sold based on the relative fair values of such loans
and the estimated future cash flows to be received by the Company discounted at
a market-based rate. Estimated future cash flows represent the difference
between the weighted average coupon rate of the loans sold and the interest rate
on the asset-backed securities issued to investors less dealer participations,
contractual servicing fees, costs of securitization, estimated prepayments and
an allowance for loan losses. Accrued interest on loans through the date of
securitization, which will be returned to the Company through the securitization
trust, is also included in finance income receivable. The Company's discounted
rate is based on current market conditions and prepayments assumptions based on
historical experience.
The Company's servicing fee approximates adequate compensation as defined by
SFAS 125 and therefore, the Company has not recorded a servicing asset or
liability at December 31, 1997.
Finance income receivable is carried at the lower of its unamortized
originally allocated cost or market value based on the application of current
discount rate assumptions to the estimated remaining excess cash flows. Any
unrealized gain or loss is reported net of related income taxes as a separate
44
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
component of shareholder's equity until realized. Finance income receivable is
reviewed periodically for other than temporary impairment with such impairment,
if any, charged to current period earnings through gain on sale. As a result of
a change in the Company's accounting policy with respect to valuation of
repossessed vehicles, the Company recorded a $98.0 million charge to gain on
sale in March 1997 after determining that such change resulted in a permanent
reduction in the value of finance income receivable. There were no material
adjustments to finance income receivable during 1996 or 1995.
RESTRICTED CASH IN SPREAD ACCOUNTS
The Company is required to maintain spread accounts to protect investors in
securitization transactions and credit enhancers against credit losses. The
initial deposit, if required, and excess cash flows from securitization
transactions are retained for each securitization until the spread account
balance increases to a specified percentage of the underlying loans included in
the securitization. Funds in excess of specified percentages are remitted to the
Company, through its wholly-owned subsidiary Arcadia Receivables Finance Corp.
("ARFC"), over the remaining life of the securitization. For each securitization
trust, there is no recourse to the Company beyond the balance in the spread
accounts or the trust's future earnings.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation and amortization. Owned properties are depreciated on a
straight-line basis over their useful lives. Capital lease assets are amortized
on a straight- line basis over the lesser of their estimated useful lives or
their lease terms.
ADVANCES DUE TO SERVICER
As servicer of loans sold in securitizations, the Company periodically makes
interest advances to the securitization trusts to provide for temporary delays
in the receipt of required interest payments by borrowers. In accordance with
the Company's servicing agreements, the Company makes advances only in the event
it expects to recover them through the ultimate payments from the obligor on the
loan.
DEFERRED DEBT ISSUANCE COSTS
The Company capitalizes costs incurred related to the issuance of long-term
debt. These costs are deferred and amortized on a straight-line basis over the
contractual maturity of the related debt and recognized as a component of
interest expense.
SERVICING FEE RECEIVABLE
The Company earns a servicing fee for servicing loans sold to investors
through securitization. These fees are paid to the Company by the securitization
trust on a monthly basis.
INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax
consequences related to differences between the current carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured based on enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
45
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INTEREST MARGIN
The Company's net interest margin represents the sum of (i) net interest on
loans held for sale based on the net interest rate spread, (ii) investment
earnings on short-term investments and other cash accounts and (iii) the
recognition of the interest component of previously discounted cash flows,
calculated at the present value discount rate used in determining the gain on
sale.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effect of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into hedging transactions to manage its gross interest
rate spread on loans held for sale. The Company sells U.S. Treasuries that most
closely parallel the average life of its portfolio of loans held for sale.
Recognition of unrealized gains or losses is deferred until the sale of loans.
On the date of sale, hedging deferred gains and losses are recognized in the
consolidated statement of income as a component of the gain on sale of loans.
2. ACCOUNTING CHANGES
REPORTING COMPREHENSIVE INCOME.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
Comprehensive income is the total of net income and all nonowner changes in
shareholders' equity. The Statements is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Statement will
require new disclosures by the Company, but is not expected to have an impact on
the financial condition or results of operations.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), was issued by the Financial Accounting Standards Board in June 1997. It
introduced new guidance on segment reporting. The Statement is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. The Statement is not expected to have a material impact on the
financial condition or results of operations for the Company.
3. AUTOMOBILE LOANS HELD FOR SALE
The weighted average interest rate on automobile loans held for sale was
16.59% and 15.22% at December 31, 1997 and 1996, respectively. Accrued interest
receivable on automobile loans held for sale aggregated $0.7 million and $0.2
million as of December 31, 1997 and 1996, respectively.
46
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FINANCE INCOME RECEIVABLE
The following table sets forth the components of finance income receivable
as of December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
----------- ----------
<S> <C> <C>
Estimated cash flows on loans sold, net of estimated prepayments............... $ 735,557 $ 549,876
Deferred servicing income...................................................... (88,282) (59,473)
Reserve for loan losses........................................................ (235,599) (95,005)
----------- ----------
Undiscounted cash flows on loans sold, net of estimated prepayments............ 411,676 395,398
Discount to present value...................................................... (39,691) (32,482)
----------- ----------
$ 371,985 $ 362,916
----------- ----------
----------- ----------
Reserve for loan losses as a percentage of servicing portfolio................. 4.75% 2.51%
</TABLE>
The following represents the roll-forward of the finance income receivable
balance for the two years ended December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance, December 31, 1995................................................................. $ 186,001
Estimated cash flows on loans sold, net of estimated prepayments......................... 256,910
Recognition of present value effect of discounted cash flows............................. 18,890
Less:
Excess cash flows on loans deposited in spread accounts................................ (98,885)
-----------
Balance, December 31, 1996................................................................. 362,916
Estimated cash flows on loans sold, net of estimated prepayments......................... 250,631
Recognition of present value effect of discounted cash flows............................. 23,038
Less:
Excess cash flows on loans deposited in spread accounts................................ (166,600)
Change in estimate of future recovery rates............................................ (98,000)
-----------
Balance, December 31, 1997................................................................. $ 371,985
-----------
-----------
</TABLE>
47
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RESTRICTED CASH IN SPREAD ACCOUNTS
The following represents the roll-forward of restricted cash in spread
accounts:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance, December 31, 1995.................................................................. $ 63,580
Excess cash flows deposited to spread accounts............................................ 98,885
Initial spread account deposits........................................................... 19,377
Interest earned on spread accounts........................................................ 4,486
Less:
Excess cash flows released to the Company............................................... (43,351)
----------
Balance, December 31, 1996.................................................................. 142,977
Excess cash flows deposited to spread accounts............................................ 166,600
Initial spread account deposits........................................................... 19,375
Interest earned on spread accounts........................................................ 10,295
Less:
Excess cash flows released to the Company............................................... (88,950)
----------
Balance, December 31, 1997.................................................................. $ 250,297
----------
----------
</TABLE>
6. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment, as of December 31, consists of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
--------- ---------
<S> <C> <C>
OWNED
Office furniture and equipment.............................................................. $ 9,524 $ 6,637
Automobiles................................................................................. 368 313
Computer equipment.......................................................................... 1,853 1,003
Software.................................................................................... 4,528 --
--------- ---------
Total................................................................................... 16,273 7,953
CAPITALIZED LEASES
Office furniture and equipment.............................................................. 4,851 4,280
Computer equipment.......................................................................... 5,296 5,545
Software.................................................................................... 330 --
--------- ---------
Total................................................................................... 10,477 9,825
--------- ---------
Total furniture, fixtures and equipment..................................................... 26,750 17,778
Less:
Accumulated depreciation and amortization................................................. (9,379) (4,148)
--------- ---------
Furniture, fixtures and equipment, net...................................................... $ 17,371 $ 13,630
--------- ---------
--------- ---------
</TABLE>
Depreciation expense including amortization of assets under capital lease
obligations for the years ended December 31, 1997, 1996 and 1995 was $5.3
million, $3.2 million and $1.0 million, respectively.
48
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OTHER ASSETS
Other assets, as of December 31, consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
--------- ---------
<S> <C> <C>
Advances due to servicer.......................................................... $ 6,072 $ 8,140
Deferred debt issuance costs...................................................... 11,518 4,438
Investment in subordinated certificates........................................... 2,864 4,329
Servicing fee receivable.......................................................... 4,389 3,121
Prepaid expenses.................................................................. 1,078 2,755
Repossessed assets................................................................ 1,181 1,577
Other assets...................................................................... 5,381 4,929
--------- ---------
$ 32,483 $ 29,289
--------- ---------
--------- ---------
</TABLE>
8. AMOUNTS DUE UNDER WAREHOUSE FACILITIES
At December 31, 1997, the Company had three warehouse facilities with an
aggregate capacity of $875.0 million in place with various financial
institutions and institutional lenders of which $844.0 million was available.
Borrowings under these facilities are collateralized by certain loans held for
sale. The weighted average interest rate on outstanding borrowings under the
warehouse facilities was 5.80% and 5.90% for the years ended December 31, 1997
and 1996, respectively.
9. LONG-TERM DEBT
SENIOR NOTES
In March 1997, the Company sold to the public $300.0 million aggregate
principal amount of 11.50% Senior Notes, due 2007 (the "Senior Notes") and
received net proceeds of approximately $291.2 million. Each Senior Note included
a detachable warrant, and such warrant when exercised entitles the holder to
acquire an aggregate of 2,052,000 shares of the Company's common stock. In
October 1997, the warrants were detached from the Senior Notes and began trading
separately from the Senior Notes. The warrants are exercisable at a price of
$11.00 per share. Interest on the Senior Notes is payable semi-annually on March
15 and September 15 of each year, beginning September 15, 1997. The Senior Notes
may not be redeemed prior to March 15, 2002. At any time on such date or
thereafter, the Company may at its option elect to redeem the Senior Notes, in
whole or in part, at a premium ranging from 105.75% to 101.92% of the principal
amount of Senior Notes redeemed between the years 2002-2004, respectively, or
100% thereof on or after March 15, 2005, plus accrued interest to and including
the redemption date. The Senior Notes are general, unsecured obligations of the
Company and will rank pari passu in right of payment to all existing and future
senior debt (as defined in the indenture governing the Senior Notes).
Approximately $173.5 million of the net proceeds from the issuance of the Senior
Notes was used to repurchase and covenant defease the Company's 13% Senior Term
Notes (including a prepayment premium and accrued interest). The premium paid
for the early extinquishment of debt (approximately $20.3 million) and the
charge-off of remaining capitalized debt financing costs (approximately $3.2
million) were recognized and accounted for as an extraordinary item.
In October 1997, the Company sold to the public $75.0 million aggregate
principal amount of 11.50% Senior Notes, due 2007 (the "Notes") and received net
proceeds of approximately $71.2 million. Interest on the Notes is payable
semi-annually on March 15 and September 15 of each year, beginning March 15,
1998. The Notes may not be redeemed prior to March 15, 2002. At any time on such
date or thereafter, the
49
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
Company may at its option elect to redeem the Notes, in whole or in part, at a
premium ranging from 105.75% to 101.92% of the principal amount of Notes
redeemed between the years 2002-2004, respectively, or 100% thereof on or after
March 15, 2005, plus accrued interest to and including the redemption date. The
Notes are general, unsecured obligations of the Company and will rank pari passu
in right of payment to all existing and future senior debt (as defined in the
indenture governing the Senior Notes).
SUBORDINATED NOTES
Subordinated notes outstanding as of December 31, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
--------- ---------
<S> <C> <C>
Senior subordinated notes, Series 1996-A................................ $ 30,000 $ 30,000
Junior subordinated notes............................................... 20,772 23,689
--------- ---------
$ 50,772 $ 53,689
--------- ---------
--------- ---------
</TABLE>
In March 1996, the Company sold to the public $30.0 million aggregate
principal amount of its 10.125% Subordinated Notes, Series 1996-A due 2001 (the
"Senior Subordinated Notes"). Interest on the Senior Subordinated Notes is
payable monthly beginning May 15, 1996. The Senior Subordinated Notes may not be
redeemed prior to May 15, 1998. At any time on such date or thereafter, the
Company may at its option elect to redeem the Senior Subordinated Notes, in
whole or in part, at 101.5% of the principal amount of Senior Subordinated Notes
redeemed, or 100% thereof on or after May 15, 1999, plus accrued interest to and
including the redemption date. The Senior Subordinated Notes are unsecured
general obligations of the Company and are subordinated in right of payment to
all existing and future Senior Debt (as defined in the indenture governing the
Senior Subordinated Notes).
In September 1994, the Company completed a shelf registration to issue up to
$50.0 million of Junior Subordinated Notes. The Junior Subordinated Notes are
issued in minimum denominations of $1,000 and include extendible notes having
maturities ranging from 30 days to one year from the date of issue and fixed
term notes having maturities of one to ten years from date of issue. The Company
may adjust interest rates on unsold notes prior to sale and on extendible notes
at any roll-over date based on current market conditions. As of December 31,
1997, the weighted average maturity and interest rate of the Junin Subordinated
Notes were 14.9 months and 9.37%, respectively.
Maturities of long-term debt outstanding at December 31, 1997 were:
<TABLE>
<S> <C>
(Dollars in thousands)
YEAR ENDING
1998............................................................................ $ 8,284
1999............................................................................ 1,248
2000............................................................................ 6,529
2001............................................................................ 30,596
2002............................................................................ 737
2003 and thereafter............................................................. 369,018
----------
Total....................................................................... $ 416,412
----------
----------
</TABLE>
50
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company leases furniture, fixtures and equipment under capital and
operating leases with terms in excess of one year. Additionally, the Company
leases its office space under operating leases. Total rent expense on operating
leases was $13.5 million, $4.7 million and $1.8 million for the years ended
December 31, 1997, 1996, and 1995, respectively.
Future minimum lease payments required under capital and noncancelable
operating leases with terms of one year or more, at December 31, 1997 were:
<TABLE>
<CAPTION>
CAPITAL OPERATING
(Dollars in thousands) LEASES LEASES
--------- -----------
<S> <C> <C>
YEAR ENDING
1998................................................................... $ 2,873 $ 12,872
1999................................................................... 1,428 12,519
2000................................................................... 1,145 8,966
2001................................................................... 763 6,936
2002................................................................... 62 3,638
2003 and thereafter.................................................... -- 2,232
--------- -----------
Total.............................................................. 6,271 $ 47,163
-----------
-----------
Less amounts representing interest....................................... (903)
---------
Present value of net minimum lease payments.............................. $ 5,368
---------
---------
</TABLE>
Under the terms of sales of automobile loans completed through
securitization transactions, the Company may be obligated to repurchase certain
automobile loans due to failure of the assets to meet specifically defined
criteria. The Company may substitute other assets for those repurchased because
of failure to meet the specifically defined criteria. The Company's potential
obligation for defaulted automobile loans, if realized, is expected to be
satisfied through the use of cash collateral accounts included in the
securitization transactions. The Company may not substitute other assets for
defaulted automobile loans.
11. SHAREHOLDERS' EQUITY
The Company's authorized capital stock is 100,000,000 shares. The Company
had reserved shares of authorized but unissued Common Stock at December 31,
1997, as follows:
<TABLE>
<S> <C>
Warrants......................................... 2,104,000
Employee stock purchase plan..................... 242,139
Stock options.................................... 7,037,639
---------
9,383,778
---------
---------
</TABLE>
COMMON STOCK
In March 1997, in connection with the issuance of $300.0 million of 11.5%
Senior Notes, the Company issued warrants to purchase an aggregate of 2,052,000
shares of the Company's Common Stock. The warrants were detached and began
trading separately from the Senior Notes in October 1997. In April 1996, the
Company completed a public offering of 8,050,000 shares of its Common Stock at
$19.25 per share, including an over-allotment option of 1,050,000 shares. In
April 1995, the Company completed a secondary public offering of 9,849,900
shares of its Common Stock at $10.00 per share including an over-
51
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
allotment option of 1,284,900 shares and 65,000 shares pursuant to the exercise
of warrants. Additionally, pursuant to demand registration rights of certain
warrants issued by the Company between 1992 and 1994 in connection with its
issuance of 11.75% Senior Secured and 9.875% Senior Subordinated Notes, the
Company filed separate registration statements during April and October 1995,
covering 213,000 and 3,871,364 shares of Common Stock, respectively, issuable
upon exercise of the warrants for secondary sale at market should the holders
decide to do so. During 1996 and 1997, 754,520 and 1,421,539 shares of Common
Stock had been issued in connection with the exercise of warrants for aggregate
proceeds of $3.1 million and $5.9 million, respectively. As of December 31,
1997, the Company had remaining warrants outstanding for the purchase of
2,104,000 shares of Common Stock at exercise prices ranging from $4.75 to $11.00
per share.
8% CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
In December 1993, the Company sold 1,150,000 shares of its 8% Cumulative
Convertible Exchangeable Preferred Stock (the "Preferred Stock") at $25 per
share. In October 1996, the Company called for redemption on December 2, 1996,
all of its outstanding Preferred Stock. The total redemption price (including
accrued and unpaid dividends) was $27.12 per share. As an alternative to having
their Preferred Stock redeemed for cash, all but 200 shares of Preferred Stock
converted into Common Stock at a rate of 4.662 shares of Common Stock for each
share of preferred prior to the redemption date. The remaining 200 shares were
redeemed.
SHAREHOLDER RIGHTS PLAN
In October 1996, the Board of Directors adopted a Shareholder Rights Plan in
which Preferred Stock Purchase Rights were distributed as a dividend at the rate
of one Right for each share of the Company's Common Stock held on November 22,
1996. The Rights expire on October 28, 2006. Each Right generally will entitle
shareholders, in certain circumstances, to buy one-thousandth of a newly issued
share of Class A Preferred Stock of the Company at an exercise price of $90.00
per share. In January 1998, the Company amended its Shareholder Rights Plan
increasing the percentage of the Company's outstanding Common Stock a person or
group must beneficially own to be deemed an Acquiring Person under the plan from
15% or more up to 18% or more. Under the amended Shareholder Rights Plan, if any
person becomes an Acquiring Person, then each Right not owned by a 18% or more
shareholder or certain related parties will generally entitle its holders to
purchase, at the Right's then-current exercise price, shares of Common Stock
(or, in certain circumstances as determined by the Board, cash, other property
or other securities) having a value of twice the Right's exercise price. In
addition, if, after any person has become an Acquiring Person the Company is
involved in a merger or other business combination transaction with another
person in which its Common Stock is changed or converted, or sells 50% or more
of its assets or earning power to another person, each Right will entitle its
holder to purchase, at the Right's then-current exercise price, shares of Common
Stock of such other person having a value twice the Right's exercise price. The
Company will generally be entitled to redeem the Rights at $.01 per Right at any
time until the tenth day following public disclosure that a person or group has
become an Acquiring Person under the Plan.
52
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFITS AND STOCK INCENTIVE PLANS
RESTRICTED STOCK ELECTION PLANS
In July of 1994, the Board of Directors of the Company adopted a Restricted
Stock Election Plan (the "1994 Stock Election Plan"). The purpose of the 1994
Stock Election Plan is to reward management performance and to build each
participant's equity interest in the stock of the Company by providing long-term
incentives and rewards to officers and other key management employees of the
Company and its subsidiaries. The 1994 Stock Election Plan allows certain
employees of the Company to elect to receive all or a portion of certain bonuses
they are entitled to receive from the Company in 1994 through 1997 in the form
of shares of the Company's Common Stock. The 1994 Stock Election Plan authorizes
the granting of awards in the form of restricted shares of the Company's Common
Stock, subject to certain risks of forfeiture which may be eliminated over time
based upon achievement of certain performance criteria by the eligible employee
and/or the Company. A total of 800,000 shares of Common Stock are set aside for
awards under the 1994 Stock Election Plan. As of December 31, 1997 there have
been 520,954 shares granted under the plan, with 190,494 shares remaining
subject to restriction.
In December 1995, the Board of Directors of the Company adopted a second
Restricted Stock Election Plan (the "1998 Stock Election Plan"). The purpose of
this Plan is the same as that of the 1994 Stock Election Plan except that it is
applicable to bonuses which may be earned by certain key employees of the
Company in the years 1998 through 2000. As with the 1994 Stock Election Plan,
the 1998 Stock Election Plan authorizes the granting of awards in the form of
restricted shares of the Company's Common Stock, subject to certain risks of
forfeiture which may be eliminated over time based upon achievement of certain
performance criteria by the eligible employee and/or the Company. A total of
600,000 shares of the Common Stock have been set aside for awards under the 1998
Stock Election Plan. As of December 31, 1997 there have been 428,319 shares
granted under the 1998 Stock Election Plan, all of which remain subject to
restriction.
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees", the Company recorded deferred compensation as a reduction to
shareholders' equity for the portion of the restricted stock award not yet
earned. The deferred compensation will be amortized and recognized as
compensation expense ratably over the shorter of the period in which management
anticipates restrictions will be lifted or the maximum vesting period. In
connection with the 1994 and 1998 Stock Election Plans, the Company recognized
$1.0 million, $1.0 million and $0.8 million of compensation expense for the
years ended December 31, 1997, 1996 and 1995, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In July 1993, the Company adopted an Employee Stock Purchase Plan (the
"Plan"). This Plan is available to all employees, including officers, who are
employed for at least 20 hours per week and more than five months in a calendar
year. All employees are eligible except those who own and/or hold outstanding
options to purchase stock possessing 5% or more of the total combined voting
power or value of the capital stock of the Company. The participants purchase
stock on each exercise date (June 30 and December 31).
The exercise price is determined to be 85% of the lower of the Company's
Common Stock on January 1, at the date the participant becomes eligible, or on
each exercise date. A total of 500,000 shares of Common Stock has been reserved
for issuance under the Plan. As of December 31, 1997, 257,861 shares of Common
Stock have been issued to the Company's employees under the Plan. The Plan is
noncompensatory and results in no expense to the Company.
53
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFITS AND STOCK INCENTIVE PLANS (CONTINUED)
DIRECTOR OPTION PLAN
The 1992 Director Stock Option Plan (the "DSOP") was approved by the
shareholders at the 1992 Annual Meeting. The DSOP provides for the automatic
grant of options to purchase the Company's Common Stock to outside directors
according to fixed terms. The DSOP provides that a new outside director
automatically receives options to purchase 15,000 shares upon first becoming an
outside director and an additional 15,000 shares on each anniversary date of the
original grant, up to a maximum of 120,000 shares. During 1997, each outside
director received an additional one-time grant of options to purchase 10,000
shares. The maximum aggregate number of shares of the Company's Common Stock
which may be issued pursuant to the DSOP is 840,000. As of December 31, 1997,
275,000 options to outside directors have been issued and remain outstanding at
exercise prices ranging from $5.13 to $23.88. At December 31, 1997, 1996 and
1995 there were 160,000 options, 175,000 options and 285,000 options,
respectively, exercisable under the DSOP.
STOCK OPTION PLANS
The Company has a Stock Option Plan (the "1990 Plan") which provides for the
granting of incentive and nonqualified options to designated employees and
non-employees, including consultants of the Company, to purchase up to a maximum
of 5,000,000 shares of the Company's Common Stock. The 1990 Plan is administered
by the Compensation Committee of the Board of Directors and has the authority
and discretion to determine the employees, officers, directors and others who
are to receive options, the type of option to be granted, the number of shares
subject to each option and the exercise price of each option (not to be less
than fair market value for incentive options). Options may not be granted under
the 1990 Plan after January 17, 2001. The term of each option, which is fixed by
the Compensation Committee, generally may not exceed ten years from the date the
option is granted. The 1990 Plan is noncompensatory and results in no expense to
the Company. At December 31, 1997, 1996 and 1995, there were 1,138,724 options,
702,450 options and 548,165 options, respectively, exercisable under the 1990
Plan.
A summary of stock option activity under the 1990 Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------
RESERVED SHARES NUMBER PRICE PER SHARE
--------------- ---------- ---------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994......................................... 1,000,000 895,137 $0.48-$6.00
Granted.......................................................... 1,000,000 515,000 6.00-16.19
Exercised........................................................ -- (71,166) 3.00-6.00
Canceled......................................................... -- (48,000) 4.63-5.88
--------------- ---------- ---------------
BALANCE, DECEMBER 31, 1995......................................... 2,000,000 1,290,971 0.48-16.19
Granted.......................................................... -- 520,000 14.06-20.75
Exercised........................................................ -- (116,749) 0.48-7.63
Canceled......................................................... -- -- -- --
--------------- ---------- ---------------
BALANCE, DECEMBER 31, 1996......................................... 2,000,000 1,694,222 0.48-20.75
Granted.......................................................... 3,000,000 564,594 8.94-14.88
Exercised........................................................ -- (72,106) 0.48-7.63
Canceled......................................................... -- (112,879) 7.63-16.19
--------------- ---------- ---------------
BALANCE, DECEMBER 31, 1997......................................... 5,000,000 2,073,831 $0.48-$20.75
--------------- ---------- ---------------
--------------- ---------- ---------------
</TABLE>
54
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFITS AND STOCK INCENTIVE PLANS (CONTINUED)
In addition to stock option activity under the 1990 Plan, in 1997, 1996 and
1995, the Company granted to a director options to purchase a total of 70,160;
325,000; 40,000 shares, respectively, of the Company's Common Stock under
separate Non-statutory Stock Option Agreements. These options were granted in
connection with such director's appointment as Chairman of the Executive
Committee of the Board of Directors while the Company searched for a new chief
executive officer in 1996 and in consideration for certain consulting
arrangements entered into between the Company and the director and have exercise
prices ranging from $5.13 to $17.38. At December 31, 1997, 1996 and 1995, there
were 535,160; 240,000; 100,000 options, respectively, exercisable under such
Non-statutory Stock Option Agreements (including agreements entered into prior
to 1995).
Also in 1997, the Company granted the option to purchase 1,200,000 shares of
the Company's Common Stock under a separately adopted stock option plan in
connection with an employment agreement with its newly elected Chief Executive
Officer. The options are exercisable at $14.88 per share, ratably over a three
year period beginning in 1998.
Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). SFAS 123 provides for companies to recognize compensation expense
associated with stock based compensation plans over the anticipated service
period based on the fair value of the award on the date of grant. However, SFAS
123 allows companies to continue to measure compensation costs prescribed by APB
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Companies
electing to continue accounting for stock based compensation plans under APB 25
must make pro forma disclosures of net income and earnings per share, as if SFAS
123 had been adopted. The Company has continued to account for stock-based
compensation plans under APB 25. The pro forma disclosure of the effect of SFAS
123 on net income and earnings per share for the years ended December 31, is
presented below. The fair value of the options was estimated at date of grant
using a Black-Scholes option pricing model with the following assumptions for
1997, 1996, and 1995, respectively: weighted-average risk-free interest rate of
5.6%, 6.7%, and 6.7%, volatility factor of the expected market price of the
Company's Common Stock of .71, .68 and .68, and option lives up to ten years.
Fair value calculations assume no dividends will be paid on the Company's Common
Stock.
<TABLE>
<CAPTION>
(Dollars in thousands, expect per share data) 1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Pro forma net income (loss)................................. $ (63,059) $ 57,935 $ 24,697
Pro forma earnings (loss) per share:
Basic..................................................... $ (1.63) $ 1.84 $ 1.27
Diluted................................................... $ (1.63) $ 1.59 $ 0.93
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and
1995 was $8.75, $13.53 and $10.00, respectively.
CASH SURRENDER VALUE OF LIFE INSURANCE
In October 1995, the Company entered into split-dollar insurance agreements
with certain employees of the Company. Under the terms of the agreements, the
Company pays the premium due on life insurance policies owned by the employee
that build cash surrender value while also providing life insurance benefits for
the employee. The Company is entitled to a refund of all previously paid
premiums or the cash surrender value of the policy, whichever is lower, if the
agreement or the policy is terminated. In the event of death of the insured, the
Company will be entitled to a refund of all previously paid premiums. These
55
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFITS AND STOCK INCENTIVE PLANS (CONTINUED)
policies had cash surrender values of $759,000 and $958,000 at December 31, 1997
and 1996, respectively. Beginning in 1997, the Company began to utilize the cash
surrender value from the related life insurance policies to fund the premiums
due on the policies.
13. INCOME TAXES
The components of income tax expense (benefit) for the three years ended
December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Provision for deferred taxes:
Federal................................................... $ (21,964) $ 32,641 $ 17,078
State..................................................... (3,877) 3,047 2,440
---------- --------- ---------
Provision for income taxes.............................. (25,841) 35,688 19,518
Tax effect of extraordinary items......................... (9,700) -- (2,571)
---------- --------- ---------
Applicable income tax expense (benefit), after
extraordinary items................................... $ (35,541) $ 35,688 $ 16,947
---------- --------- ---------
---------- --------- ---------
</TABLE>
The reconciliation between income tax expense (benefit) and the amount
computed by applying the statutory federal income tax rate of 35% for the three
years ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Federal tax at statutory rate............................... $ (23,737) $ 33,601 $ 17,078
State income tax, net of federal benefit.................... (2,294) 3,715 2,440
Other....................................................... 190 (1,628) --
---------- --------- ---------
Provision for income taxes................................ (25,841) 35,688 19,518
Tax effect of extraordinary items........................... (9,700) -- (2,571)
---------- --------- ---------
Applicable income taxes, after extraordinary items........ $ (35,541) $ 35,688 $ 16,947
---------- --------- ---------
---------- --------- ---------
Effective income tax rate................................. (38.0%) 37.2% 40.0%
</TABLE>
Deferred income taxes are provided for temporary differences between pretax
income for financial reporting purposes and taxable income. The tax-effected
temporary differences and carryforwards which
56
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
comprise the significant components of the Company's deferred tax assets and
liabilities as of December 31, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Securitization expenses................................................................. $ 6,849 $ 5,089
Other................................................................................... 2,154 1,364
---------- ----------
Gross deferred tax assets............................................................... 9,003 6,453
Deferred Tax Liabilities:
Gain on securitizations................................................................. (87,301) (84,595)
Other................................................................................... (2,032) (3,796)
---------- ----------
Gross deferred tax liabilities.......................................................... (89,333) (88,391)
---------- ----------
Net temporary differences................................................................. (80,330) (81,938)
Net operating loss carryforwards (expiring 2006-2012)..................................... 61,484 27,551
---------- ----------
Net deferred tax liability.............................................................. $ (18,846) $ (54,387)
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $161.8 million which are available
to offset future federal taxable income and expire no earlier than 2006. No
valuation allowance was required as of December 31, 1997 or 1996 because it is
more likely than not that the deferred tax asset will be realized against future
taxable income. The timing of the realization of the benefits related to a
portion of the income tax net operating loss carryforwards is limited on an
annual basis under Section 382 of the Internal Revenue Code.
14. DERIVATIVE ACTIVITIES AND OFF-BALANCE SHEET RISK
During the three years ended December 31, 1997, the Company entered into
several hedging transactions to manage its gross interest rate spread on loans
held for sale. The Company agreed to sell forward U.S. Treasuries that most
closely parallel the average life of its portfolio of loans held for sale.
Hedging gains and losses are recognized as a component of the gain on sale of
loans on the date such loans are sold. As of December 31, 1997 and 1996, the
Company had entered into the following agreements to sell forward two year U.S.
Treasuries:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---------- ----------
<S> <C> <C>
Notional amount outstanding........................................... $ 800,000 $ 700,000
Unrealized gains (losses) on outstanding hedging transactions......... $ (6,071) $ 484
</TABLE>
The hedging transactions outstanding at December 31, 1997 are expected to
close in March through June 1998.
Net realized hedging gains (losses) during the three year period ended
December 31 1997 were:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Realized gains (losses)...................................... $ (8,709) $ (349) $ (11,719)
</TABLE>
See discussion of the Company's hedging policy in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Capital
Resources--Hedging and Pre-funding Strategy."
57
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107) requires the disclosure of estimated
fair values of all asset, liability and off-balance sheet financial instruments.
Fair value estimates under SFAS 107 are determined as of a specific point in
time utilizing various assumptions and estimates.
Estimated carrying values, fair values and various methods and assumptions
used in valuing the Company's financial instruments as of December 31, 1997 and
1996 are set forth below:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
CARRYING CARRYING
(Dollars in thousands) VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.................. $ 17,274 $ 17,274 $ 16,057 $ 16,057
Due from securitization trust.............. 107,207 107,207 177,076 177,076
Auto loans held for sale................... 49,133 49,133 36,285 36,285
Finance income receivable.................. 371,985 371,985 362,916 362,916
Restricted cash in spread accounts......... 250,297 250,297 142,977 142,977
Financial liabilities:
Amounts due under warehouse facilities..... 30,880 30,880 111,140 111,140
Senior term notes.......................... 365,640 372,113 145,000 161,000
Senior subordinated notes.................. 30,000 28,800 30,000 29,550
Junior subordinated notes.................. 20,772 20,772 23,689 23,689
</TABLE>
CASH AND CASH EQUIVALENTS, DUE FROM SECURITIZATION TRUST, RESTRICTED CASH IN
SPREAD ACCOUNTS, AMOUNTS DUE UNDER WAREHOUSE FACILITIES AND JUNIOR SUBORDINATED
NOTES. Due to the nature of these accounts, carrying value approximates fair
value.
FINANCE INCOME RECEIVABLE. At December 31, 1997 the carrying value is stated
at fair value in accordance with SFAS 125. At December 31, 1996 the carrying
value approximates fair value determined based upon discounting future cash
flows at market rates using historical prepayment speeds and loss provisions.
SENIOR TERM NOTES. The fair value is determined using available market
quotes.
SENIOR SUBORDINATED NOTES. The fair value is determined using available
market quotes.
58
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Numerator:
Net income (loss) before extraordinary items...................... $ (41,979) $ 60,316 $ 29,317
Preferred dividends............................................... -- (1,153) (2,213)
------------- ------------- -------------
------------- ------------- -------------
Numerator for basic earnings per share--income (loss) before
extraordinary items available to common stockholders............ (41,979) 59,163 27,104
Effect of dilutive securities:
Preferred Stock Dividends......................................... -- 1,153 2,213
------------- ------------- -------------
Numerator for diluted earnings per share--income (loss) before
extraordinary items available to common shareholders after
assumed conversions............................................. $ (41,979) $ 60,316 $ 29,317
------------- ------------- -------------
------------- ------------- -------------
Denominator:
Denominator for basic earnings per share--weighted average
shares.......................................................... 38,700,346 30,897,426 17,718,603
Effect of dilutive securities:
Options and Warrants.............................................. 556,442 2,484,195 3,723,992
Convertible Exchangeable Preferred Stock.......................... -- 3,068,374 4,993,170
------------- ------------- -------------
Dilutive potential common shares.................................... 556,442 5,552,569 8,717,162
------------- ------------- -------------
Denominator for diluted earnings per share--adjusted weighted
average shares and assumed conversions.......................... 39,256,788 36,449,995 26,435,765
------------- ------------- -------------
------------- ------------- -------------
Basic earnings (loss) per share before extraordinary items.......... $ (1.08) $ 1.91 $ 1.53
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings (loss) per share before
Extraordinary items (1)........................................... $ (1.08) $ 1.65 $ 1.11
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) In 1997, the weighted average shares under the diluted computation have an
anti-dilutive effect, therefore diluted earnings per share will be shown
equal to basic earnings per share.
Options to purchase 4.9 million shares of common stock at prices between
$10.50 and $23.88 per share were outstanding during 1997 but were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidulitive. For additional disclosures
regarding the employee stock options and the warrants, see Notes 11 and 12 to
the Consolidated Financial Statements.
59
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. UNAUDITED SELECTED QUARTERLY DATA
FOURTH QUARTER RESULTS OF OPERATIONS
The Company purchased $582.1 million of automobile loans in the fourth
quarter of 1997 compared to $740.9 million for the same period in 1996, and
securitized $587.8 million in 1997 compared to $720.2 million in 1996. Net
income in the fourth quarter of 1997 was $4.0 million compared to $17.4 million
in 1996. The reduction in loan securitization volume, as well as an increase in
the loss rate, servicing fee and discount factor assumptions utilized in the
Company's computation of gain on sale in the fourth quarter of 1997, resulted in
a decrease in gain on sale to $25.5 million from $35.0 million in the same
period a year ago. Servicing fee income increased to $20.3 million in the fourth
quarter of 1997 from $12.6 million for the same period in 1996 primarily due to
an increase in the average servicing portfolio outstanding to $4.9 billion
during the fourth quarter of 1997 compared with $3.6 billion in the same period
of 1996. Operating expenses increased to $41.7 million in the fourth quarter of
1997 from $29.0 million in the same period of 1996 primarily due to increased
salaries and benefits reflecting an increase in employees as well as increased
servicing and collection costs associated with an increase in the proportion of
Classic loans included in the Company's servicing portfolio and an increase in
the seasoning of the overall servicing portfolio.
60
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. UNAUDITED SELECTED QUARTERLY DATA (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
(Dollars in thousands except per share DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
amounts) 1997 1997 1997 1997 1996 1996
------------ ------------- --------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES: (1)
Net interest margin........................... $ 14,942 $ 17,157 $ 16,328 $ 16,072 $ 15,240 $ 15,571
Gain on sale of auto loans.................... 25,458 28,788 26,459 (77,887) 34,979 30,113
Service fee income............................ 20,311 17,614 15,992 13,877 12,551 11,465
Other non-interest income..................... 62 105 60 75 114 (77)
------------ ------------- --------- --------- ------------ -------------
Total revenues.............................. 60,773 63,664 58,839 (47,863) 62,884 57,072
EXPENSES:
Salaries and benefits......................... 15,933 16,230 15,115 14,478 12,555 10,286
General and administrative and other operating
expenses.................................... 25,815 24,471 23,810 26,165 16,397 13,107
Long-term debt and other interest expense..... 12,574 10,400 10,651 7,591 6,584 6,660
------------ ------------- --------- --------- ------------ -------------
Total expenses.............................. 54,322 51,101 49,576 48,234 35,536 30,053
------------ ------------- --------- --------- ------------ -------------
Operating income (loss) before income tax and
extraordinary item.......................... 6,451 12,563 9,263 (96,097) 27,348 27,019
Income tax provision (benefit)................ 2,451 4,774 3,520 (36,586) 9,982 9,862
------------ ------------- --------- --------- ------------ -------------
Income (loss) before extraordinary item....... 4,000 7,789 5,743 (59,511) 17,366 17,157
Extraordinary item, net of tax................ -- -- -- (15,828) -- --
------------ ------------- --------- --------- ------------ -------------
Net income (loss)........................... $ 4,000 $ 7,789 $ 5,743 $ (75,339) $ 17,366 $ 17,157
------------ ------------- --------- --------- ------------ -------------
------------ ------------- --------- --------- ------------ -------------
BASIC EARNINGS PER SHARE: (2)
Income (loss) per share before extraordinary
item........................................ $ 0.10 $ 0.20 $ 0.15 $ (1.55) $ 0.48 $ 0.50
Extraordinary item per share.................. -- -- -- (0.41) -- --
------------ ------------- --------- --------- ------------ -------------
Net income (loss) per share................. $ 0.10 $ 0.20 $ 0.15 $ (1.96) $ 0.48 $ 0.50
------------ ------------- --------- --------- ------------ -------------
------------ ------------- --------- --------- ------------ -------------
DILUTED EARNINGS PER SHARE: (2)
Income (loss) per share before extraordinary
item........................................ $ 0.10 $ 0.20 $ 0.15 $ (1.55) $ 0.45 $ 0.44
Extraordinary item per share.................. -- -- -- (0.41) -- --
------------ ------------- --------- --------- ------------ -------------
Net income (loss) per share................. $ 0.10 $ 0.20 $ 0.15 $ (1.96) $ 0.45 $ 0.44
------------ ------------- --------- --------- ------------ -------------
------------ ------------- --------- --------- ------------ -------------
Weighted average shares outstanding:
Basic....................................... 38,806,897 38,740,078 38,702,011 38,358,743 35,883,440 33,478,304
Diluted..................................... 39,242,445 39,231,962 39,182,748 38,358,743 38,935,961 39,260,562
<CAPTION>
(Dollars in thousands except per share JUNE 30, MARCH 31,
amounts) 1996 1996
--------- ---------
<S> <C> <C>
REVENUES: (1)
Net interest margin........................... $ 13,391 $ 9,881
Gain on sale of auto loans.................... 25,452 25,229
Service fee income............................ 10,657 8,841
Other non-interest income..................... 43 45
--------- ---------
Total revenues.............................. 49,543 43,996
EXPENSES:
Salaries and benefits......................... 8,813 9,097
General and administrative and other operating
expenses.................................... 11,124 10,919
Long-term debt and other interest expense..... 6,433 5,516
--------- ---------
Total expenses.............................. 26,370 25,532
--------- ---------
Operating income (loss) before income tax and
extraordinary item.......................... 23,173 18,464
Income tax provision (benefit)................ 8,458 7,386
--------- ---------
Income (loss) before extraordinary item....... 14,715 11,078
Extraordinary item, net of tax................ -- --
--------- ---------
Net income (loss)........................... $ 14,715 $ 11,078
--------- ---------
--------- ---------
BASIC EARNINGS PER SHARE: (2)
Income (loss) per share before extraordinary
item........................................ $ 0.46 $ 0.46
Extraordinary item per share.................. -- --
--------- ---------
Net income (loss) per share................. $ 0.46 $ 0.46
--------- ---------
--------- ---------
DILUTED EARNINGS PER SHARE: (2)
Income (loss) per share before extraordinary
item........................................ $ 0.40 $ 0.37
Extraordinary item per share.................. -- --
--------- ---------
Net income (loss) per share................. $ 0.40 $ 0.37
--------- ---------
--------- ---------
Weighted average shares outstanding:
Basic....................................... 31,019,492 23,138,424
Diluted..................................... 37,178,197 29,931,178
</TABLE>
- ------------------------------
(1) As of January 1, 1997, in conjunction with the adoption of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", the Company began
recognizing collection fees and interest on collection accounts earned by
the Company as servicer of the loans as a component of servicing fee income.
This change affects the presentation of net interest margin, other
non-interest income and servicing fee income for all quarters presented.
This reclassification had no impact on total revenue or net income (loss).
(2) Earnings per share amounts for all quarters presented have been restated to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
per Share."
61
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. UNAUDITED SELECTED QUARTERLY DATA (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
(Dollars in thousands) 1997 1997 1997 1997 1996
------------- ------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 17,274 $ 17,720 $ 28,135 $ 23,596 $ 16,057
Due from securitization trust.................... 107,207 149,430 168,211 157,694 177,076
Auto loans held for sale......................... 49,133 55,630 47,472 40,037 36,285
Finance income receivable........................ 371,985 353,019 338,092 301,045 362,916
Restricted cash in spread accounts............... 250,297 226,566 189,643 164,091 142,977
Other assets..................................... 49,854 49,891 51,041 52,086 42,919
------------- ------------- --------- ----------- -------------
Total assets................................... $ 845,750 $ 852,256 $ 822,594 $ 738,549 $ 778,230
------------- ------------- --------- ----------- -------------
------------- ------------- --------- ----------- -------------
LIABILITIES & EQUITY
Amounts due under warehouse facilities........... $ 30,880 $ 126,263 $ 97,722 $ 30,927 $ 111,140
Senior notes..................................... 365,640 291,886 291,671 291,457 145,000
Subordinated notes............................... 50,772 51,294 51,742 52,804 53,689
Capital lease obligations........................ 5,368 5,942 6,583 7,218 7,729
Deferred income taxes............................ 18,846 16,394 11,620 8,100 54,387
Accounts payable and accrued liabilities......... 26,302 16,495 27,986 18,940 13,192
Shareholders' equity............................. 347,942 343,982 335,270 329,103 393,093
------------- ------------- --------- ----------- -------------
Total liabilities and equity................... $ 845,750 $ 852,256 $ 822,594 $ 738,549 $ 778,230
------------- ------------- --------- ----------- -------------
------------- ------------- --------- ----------- -------------
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31,
(Dollars in thousands) 1996 1996 1996
------------- --------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 3,593 $ 22,575 $ 22,552
Due from securitization trust.................... 188,373 151,635 115,000
Auto loans held for sale......................... 18,925 52,300 82,857
Finance income receivable........................ 307,953 264,466 232,007
Restricted cash in spread accounts............... 122,071 101,948 79,779
Other assets..................................... 42,910 37,735 33,542
------------- --------- -----------
Total assets................................... $ 683,825 $ 630,659 $ 565,737
------------- --------- -----------
------------- --------- -----------
LIABILITIES & EQUITY
Amounts due under warehouse facilities........... $ 38,486 $ 17,837 $ 127,224
Senior notes..................................... 145,000 145,000 145,000
Subordinated notes............................... 53,563 52,288 46,595
Capital lease obligations........................ 8,049 7,446 6,635
Deferred income taxes............................ 44,405 34,543 26,085
Accounts payable and accrued liabilities......... 20,059 16,748 21,633
Shareholders' equity............................. 374,263 356,797 192,565
------------- --------- -----------
Total liabilities and equity................... $ 683,825 $ 630,659 $ 565,737
------------- --------- -----------
------------- --------- -----------
</TABLE>
62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated herein by
reference to the descriptions set forth under the caption "Election of
Directors" in the Proxy Statement for the Annual Meeting of Shareholders to be
held May 28, 1998 (the "1998 Proxy Statement"). Information regarding executive
officers of the Company is incorporated herein by reference to Item 1 of this
Form 10-K under the caption "Executive Officers" on page 16.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference to the descriptions set forth under the caption "Executive
Compensation" in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management of the Company is incorporated herein by reference to the information
set forth under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
the Company is incorporated herein by reference to the information set forth
under the caption "Certain Transactions" in the 1998 Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
(1) Financial Statements of Arcadia Financial Ltd.:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Financial statement schedules have been omitted because they are not
applicable or because the required information is contained in the
financial statements or notes thereto.
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(3) Exhibits
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3.1 Restated Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit No. 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
3.2 Restated Bylaws of the Registrant, as amended (incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
4.1 Rights Agreement dated as of November 1, 1996, between the Registrant and
Norwest Bank Minnesota, National Association, as Rights Agent
(incorporated by reference to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A filed November 7, 1996).
4.2 Amendment No. 1 to Rights Agreement, dated January 16, 1998, to Rights
Agreement, dated as of November 1, 1996 between Arcadia Financial Ltd. And
Norwest Bank Minnesota, N.A. (incorporated by reference to exhibit 4.1 to
the Registrant's current report on Form 8-K dated January 8, 1998 and
filed January 20, 1998).
4.3 First Amendment and Restatement, dated as of April 28, 1995, of Indenture,
dated July 1, 1994, between the Registrant and Norwest Bank Minnesota,
National Association, as Trustee, relating to the Registrant's unsecured
Extendible Notes and Fixed-Term Notes, including forms of Notes
(incorporated by reference to Exhibit No. 4.8.1 to Post-Effective
Amendment No. 2 on Form S-3 to Registrant's Registration Statement on Form
S-1, File No. 33-81512).
4.4 Second Supplemental Indenture dated as of March 11, 1997 to Indenture dated
as of April 28, 1995 between the Registrant and Norwest Bank Minnesota,
National Association (incorporated by reference to Exhibit 4.7 to the
Registrant's current report on Form 8-K dated March 12, 1997 and filed
March 18, 1997).
4.5 Indenture dated as of March 15, 1996, between the Registrant and Norwest
Bank Minnesota, National Association, as Trustee, relating to the
Registrant's Subordinated Notes, Series 1996-A due 2001 (incorporated by
reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
4.6 First Supplemental Indenture, dated as of March 15, 1996, to Indenture,
dated as of March 15, 1996, between the Registrant and Norwest Bank
Minnesota, National Association, as Trustee, relating to the Registrant's
Subordinated Notes, Series 1996-A due 2001 (incorporated by reference to
Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
4.7 Indenture dated as of March 12, 1997, between the Registrant and Norwest
Bank Minnesota, National Association, as Trustee (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
dated March 12, 1997 and filed March 18, 1997).
4.8 First Supplemental Indenture, dated as of March 12, 1997 between the
Registrant and Norwest Bank Minnesota, National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to the Registrant's Current
Report on Form 8-K dated March 12, 1997 and filed March 18, 1997).
4.9 Warrant Agreement, dated as of March 12, 1997 by and between the Registrant
and Norwest Bank Minnesota, National Association, as Warrant Agent
(incorporated by reference to Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated March 12, 1997 and filed March 18, 1997).
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4.10 Form of Unit (incorporated by reference to Exhibit 4.4 to the Registrant's
Current Report on Form 8-K dated March 12, 1997 and filed March 18, 1997).
4.11 Form of 11.5% Senior Notes due March 15, 2007 (incorporated by reference to
Exhibit 4.5 to the Registrant's Current Report on Form 8-K dated March 12,
1997 and filed March 18, 1997).
4.12 Form of Initial Warrant Certificate (incorporated by reference to Exhibit
4.6 to the Registrant's Current Report on Form 8-K dated March 12, 1997
and file March 18, 1997).
4.13 Second Supplemental Indenture, dated as of October 8, 1997, to Indenture,
dated as of March 12, 1997, between the Registrant and Norwest Bank
Minnesota, National Association, as Trustee, including Form of Notes
(incorporated by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated October 8, 1997, filed October 15, 1997).
10.1 Amended and Restated Trust Agreement, dated as of July 31, 1997, between
Arcadia Receivables Finance Corp. II and Wilmington Trust Company
(incorporated by reference to Exhibit 10.5 to the Registrant's Current
Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.2 Amended and Restated Indenture, dated as of July 31, 1997, between Olympic
Automobile Receivables Warehouse Trust and Norwest Bank Minnesota,
National Association (incorporated by reference to Exhibit 10.6 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed
October 1, 1997).
10.3 Amended and Restated Receivables Purchase Agreement and Assignment, dated as
of July 31, 1997, between Arcadia Receivables Finance Corp. II and Arcadia
Financial Ltd. (incorporated by reference to Exhibit 10.7 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed
October 1, 1997).
10.4 Amended and Restated Sale and Servicing Agreement, dated as of July 31,
1997, among Olympic Automobile Receivables Warehouse Trust, Arcadia
Receivables Finance Corp. II, Arcadia Financial Ltd. and Norwest Bank
Minnesota, National Association (incorporated by reference to Exhibit 10.8
to the Registrant's Current Report on Form 8-K dated October 1, 1997,
filed October 1, 1997).
10.5 Amended and Restated Note Purchase Agreement, dated as of July 31, 1997,
among Olympic Automobile Receivables Warehouse Trust, Arcadia Financial
Ltd., Delaware Funding Corporation and Morgan Guaranty Trust Company of
New York (incorporated by reference to Exhibit 10.10 to the Registrant's
Current Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.6 Amended and Restated Certificate Purchase Agreement, dated as of July 31,
1997, among Olympic Automobile Receivables Warehouse Trust, Arcadia
Financial Ltd., each Purchaser (as defined) and Morgan Guaranty Trust
Company of New York (incorporated by reference to Exhibit 10.11 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed
October 1, 1997).
10.7 Asset Purchase Agreement, dated as of July 31, 1997, among Morgan Guaranty
Trust Company of New York and certain parties listed therein (incorporated
by reference to Exhibit 10.12 to the Registrant's Current Report on Form
8-K dated October 1, 1997, filed October 1, 1997).
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10.8 Receivables Purchase Agreement and Assignment between Olympic Receivables
Finance Corp. ("ORFC") and the Registrant (incorporated by reference to
Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.9 Repurchase Agreement dated as of December 3, 1996 among Arcadia Receivables
Conduit Corp. ("ARCC") and ORFC (incorporated by reference to Exhibit
10.30 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.10 First Amendment, dated as of August 4, 1997, to Repurchase Agreement, dated
as of December 3, 1996, by and between Arcadia Receivables Conduit Corp.
and Arcadia Receivables Finance Corp. (incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated October
1, 1997, filed October 1, 1997).
10.11 Second Amendment, dated as of November 14, 1997, to the Receivables Purchase
Agreement and Assignment between Olympic Receivables Finance Corp. and the
Registrant (filed herewith).
10.12 Servicing Agreement dated as of December 3, 1996 among ARCC, ORFC, the
Registrant, in its individual capacity and as Servicer, Bank of America
National Trust and Savings Association, as agent, and Norwest Bank
Minnesota, National Association, as backup servicer, collateral agent and
indenture trustee (incorporated by reference to Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996).
10.13 First Amendment, dated as of August 4, 1997 to Servicing Agreement, dated as
of December 3, 1996, among Arcadia Receivables Conduit Corp., Arcadia
Financial Ltd. (formerly known as Olympic Financial Ltd.), in its
individual capacity and as Servicer, and Bank of America National Trust
and Savings Association (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed
October 1, 1997).
10.14 Second Amendment, dated as of November 14, 1997 to Servicing Agreement,
dated as of December 3, 1996, among Arcadia Receivables Conduit Corp.,
Arcadia Financial Ltd. (formerly known as Olympic Financial Ltd.), in its
individual capacity and as Servicer, and Bank of America National Trust
and Savings Association (filed herewith).
10.15 Third Amended and Restated Stock Pledge Agreement dated as of December 3,
1996 among the Registrant and Norwest Bank Minnesota, National
Association, as collateral agent (incorporated by reference to Exhibit
10.32 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.16 Amended and Restated Custodian Agreement, dated as of July 31, 1997, among
Arcadia Financial Ltd., Norwest Bank Minnesota, National Association, and
Olympic Automobile Receivables Warehouse Trust (incorporated by reference
to Exhibit 10.9 to the Registrant's Current Report on Form 8-K dated
October 1, 1997, filed October 1, 1997).
10.17 Security Agreement dated as of December 3, 1996 among the Registrant, ORFC,
ARCC, Financial Security Assurance Inc. ("FSA"), Bank of America National
Trust and Savings Association and Norwest Bank Minnesota, National
Association, as indenture trustee and collateral agent (incorporated by
reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
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10.18 Indenture dated as of December 3, 1996 between ARCC and Norwest Bank
Minnesota, National Association, as trustee and collateral agent
(incorporated by reference to Exhibit 10.34 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.19 First Supplemental Indenture, dated as of November 14, 1997, to the
Indenture dated as of December 3, 1996 between ARCC and Norwest Bank
Minnesota, National Association, as trustee and collateral agent (filed
herewith).
10.20 Insurance and Indemnity Agreement dated as of December 3, 1996 among FSA,
the Registrant, ORFC and ARCC (incorporated by reference to Exhibit 10.35
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1996).
10.21 First Amendment, dated as of August 1, 1997 to the Insurance and Idemnity
Agreement, dated as of December 3, 1996, among Financial Security
Assurance Inc., Arcadia Receivables Conduit Corp., Arcadia Receivables
Finance Corp. and Arcadia Financial Ltd. (formerly known as Olympic
Financial Ltd.), as Servicer, and Bank of America National Trust and
Savings Association (incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed
October 1, 1997).
10.22 Second Amendment, dated as of November 14, 1997 to the Insurance and
Idemnity Agreement, dated as of December 3, 1996, among Financial Security
Assurance Inc., Arcadia Receivables Conduit Corp., Arcadia Receivables
Finance Corp. and Arcadia Financial Ltd. (formerly known as Olympic
Financial Ltd.), as Servicer (filed herewith).
10.23 US $300,000,000 Floating Rate FSA Insured Automobile Receivables-backed Note
Purchase Agreement dated as of December 3, 1996 among ARCC, Receivables
Capital Corporation, and Bank of America National Trust and Savings
Association, as administrator of Receivables Capital Corporation and as
agent for the liquidity providers (incorporated by reference to Exhibit
10.36 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.24 First Amendment, dated as of August 9, 1997 to Note Purchase Agreement,
dated as of December 3, 1996, among Arcadia Financial Ltd. (formerly known
as Olympic Financial Ltd.), Arcadia Receivables Conduit Corp., Receivable
Capital Corporation and Bank of America National Trust and Savings
Association (incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated October 1, 1997 and filed October 1,
1997).
10.25 Second Amendment, dated as of November 14, 1997, to Note Purchase Agreement,
dated as of December 3, 1996, among Arcadia Financial Ltd. (formerly known
as Olympic Financial Ltd.), Arcadia Receivables Conduit Corp., Receivable
Capital Corporation and Bank of America National Trust and Savings
Association (filed herewith).
10.26 Spread Account Agreement dated as of March 25, 1993, as amended and restated
as of December 16, 1997, among the Registrant, Arcadia Receivables Finance
Corp. ("ARFC"), Financial Security Assurance Inc. ("FSA"), The Chase
Manhattan Bank, as Trustee and Norwest Bank Minnesota, National
Association, as Collateral Agent (filed herewith).
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10.27 Warehousing Series Supplement dated as of December 3, 1996 to Spread Account
Agreement dated as of March 25, 1993, as amended and restated as of
December 3, 1996, among the Registrant, ORFC, FSA and Norwest Bank
Minnesota, National Association, as trustee and collateral agent
(incorporated by reference to Exhibit 10.38 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.28 Amendment, dated as of December 16, 1997, among the Registrant, ARFC, FSA
and Norwest Bank Minnesota, National Association, to the Series 1997-C
Supplement, Series 1997-B Supplement, Series 1997-A Supplement, Series
1996-D Supplement, Series 1996-C Supplement, Series 1996-B Supplement,
Series 1996-A Supplement, Series 1995-E Supplement, Series 1995-D
Supplement, Series 1995-C Supplement, Series 1995-B Supplement, Series
1995-A Supplement, Series 1994-B Supplement, Series 1994-A Supplement,
Series 1993-C Supplement, and Series 1993-B Supplement to the Spread
Account Agreement (filed herewith).
10.29 Series 1997-A Supplement, dated March 20, 1997, to Spread Account Agreement,
dated as of March 25, 1993, as amended and restated as of March 1, 1997,
among the Registrant, Olympic Receivables Finance Corp., Financial
Security Assurance Inc. and Norwest Bank Minnesota, National Association,
as Trustee and Collateral Agent (incorporated by reference to Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).
10.30 Series 1997-B Supplement, dated June 19, 1997, to Spread Account Agreement,
dated as of March 25, 1993, as amended and restated as of June 1, 1997,
among the Registrant, Arcadia Receivables Finance Corp., Financial
Security Assurance Inc., The Chase Manhattan Bank, as Trustee, and Norwest
Bank Minnesota, National Association, as Collateral Agent (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
10.31 Series 1997-C Supplement, dated as of September 18, 1997, to Spread Account
Agreement, dated as of March 25, 1993, as amended and restated as of June
1, 1997, among Arcadia Financial Ltd., Arcadia Receivables Finance Corp.,
Financial Security Assurance Inc., The Chase Manhattan Bank and Norwest
Bank Minnesota, National Association (incorporated by reference to Exhibit
10.13 to the Registrant's Current Report on Form 8-K dated October 1,
1997, filed October 1, 1997).
10.32 Series 1997-D Supplement, dated as of December 16, 1997, to Spread Account
Agreement, dated as of March 25, 1993, as amended and restated as of June
1, 1997, among Arcadia Financial Ltd., Arcadia Receivables Finance Corp.,
Financial Security Assurance Inc., The Chase Manhattan Bank and Norwest
Bank Minnesota, National Association (filed herewith).
10.33 Insurance and Indemnity Agreement, dated as of March 20, 1997, among the
Registrant, Financial Security Assurance Inc., Olympic Automobile
Receivables Trust, 1997-A, Olympic First GP Inc., Olympic Second GP Inc.,
and Olympic Receivables Finance Corp. (incorporated by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
10.34 Insurance and Indemnity Agreement, dated as of June 19, 1997, among the
Registrant, Financial Security Assurance Inc., Arcadia Automobile
Receivables Trust, 1997-B and Arcadia Receivables Finance Corp.
(incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
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10.35 Insurance and Indemnity Agreement, dated as of September 18, 1997, among
Financial Assurance Inc., Arcadia Automobile Receivables Trust, 1997-C,
Arcadia Receivables Finance Corp. and Arcadia Financial Ltd. (incorporated
by reference to Exhibit 10.14 to the Registrant's Current Report on Form
8-K dated October 1, 1997 and filed October 1, 1997).
10.36 Insurance and Indemnity Agreement, dated as of December 16, 1997, among
Financial Assurance Inc., Arcadia Automobile Receivables Trust, 1997-D
Arcadia Receivables Finance Corp. and Arcadia Financial Ltd. (filed
herewith).
10.37 Amendment, dated as of December 16, 1997, to the Series 1997-C Insurance and
Indemnity Agreement, the Series 1997-B Insurance and Indemnity Agreement,
the Series 1997-A Insurance and Indemnity Agreement, the Series 1996-D
Insurance and Indemnity Agreement, the Series 1996-C Insurance and
Indemnity Agreement, the Series 1996-B Insurance and Indemnity Agreement,
the Series 1996-A Insurance and Indemnity Agreement, the Series 1995-E
Insurance and Indemnity Agreement, the Series 1995-D Insurance and
Indemnity Agreement, the Series 1995-C Insurance and Indemnity Agreement,
the Series 1995-B Insurance and Indemnity Agreement, the Series 1995-A
Insurance and Indemnity Agreement, the Series 1994-B Insurance and
Indemnity Agreement, the Series 1994-A Insurance and Indemnity Agreement,
the Series 1993-D Insurance and Indemnity Agreement, the Series 1993-C
Insurance and Indemnity Agreement, the Series 1993-B Insurance and
Indemnity Agreement, the Series 1993-A Insurance and Indemnity Agreement
(filed herewith).
10.38 Receivables Purchasing Agreement and Assignment, dated as of October 17,
1997, between Arcadia Receivables Finance Corp. III ("ARFC III") and the
Registrant (filed herewith).
10.39 Receivables Funding and Servicing Agreement, dated as of October 17, 1997,
among ARFC III, the Registrant, DLJ Mortgage Capital, Inc. ("DLJM"), as
Lenders and DLJM, as agent (filed herewith).
10.40 Collateral Agent Agreement, dated October 17, 1997, among DLJM, as agent,
Norwest Bank Minnesota, National Association, as collateral agent, the
Registrant and ARFC III (filed herewith).
10.41 Employment Agreement, dated as of January 6, 1997, between the Registrant
and Richard A. Greenawalt (incorporated by reference to Exhibit 10.59 to
the Registrant's Annual Report Form 10-K for the year ended December 31,
1996).
10.42 Employment Agreement, dated April 1, 1991, between the Registrant and Scott
H. Anderson and Amendment, dated September 3, 1991 (incorporated by
reference to Exhibit No. 10.29 to Registrant's Registration Statement on
Form S-18, File No. 33-43270C).
10.43 Extension and Amendment of Employment Agreement, dated July 1, 1993, between
the Registrant and Scott H. Anderson (incorporated by reference to Exhibit
No. 10.107 to Registrant's Annual Report on Form 10-K for the year ended
June 30, 1992).
10.44 Extension and Amendment of Employment Agreement, dated July 1, 1994, by and
between Scott H. Anderson and the Registrant (incorporated by reference to
Exhibit No. 10.36 to Registrant's Registration Statement on Form S-4, File
No. 33-81588).
10.45 Extension and Amendment of Employment Agreement, dated as of July 31, 1995,
between the Registrant and Scott H. Anderson (incorporated by reference to
Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
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10.46 Amendment of Employment Agreement, dated as of December 20, 1995, by and
between the Registrant and Scott H. Anderson (incorporated by reference to
Exhibit 10.71 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.47 Employment Retention Agreement, dated as of November 7, 1996, between the
Registrant and Scott H. Anderson (incorporated by reference to Exhibit
10.72 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.48 Employment Agreement, dated February 1, 1994, between the Registrant and
John A. Witham (incorporated by reference to Exhibit No. 10.111 to the
Registrant's Registration Statement on Form S-1, File No. 33-81512).
10.49 Extension and Amendment of Employment Agreement, dated as of December 20,
1995, by and between the Registrant and John A. Witham (incorporated by
reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.50 Employment Retention Agreement, dated as of November 7, 1996, between the
Registrant and John A. Witham (incorporated by reference to Exhibit 10.75
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1996).
10.51 Employment Agreement, dated December 5, 1994, between the Registrant and A.
Mark Berlin, Jr. (incorporated by reference to Exhibit 10.35 to
Registrant's Registration Statement on Form S-2, File No. 33-90108).
10.52 Extension and Amendment of Employment Agreement, dated as of December 20,
1995, by and between the Registrant and A. Mark Berlin, Jr. (incorporated
by reference to Exhibit 10.41 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995).
10.53 Employment Retention Agreement, dated as of November 7, 1996, between the
Registrant and A. Mark Berlin, Jr. (incorporated by reference to Exhibit
10.78 to the Registrant's Annual Report on form 10-K for the year ended
December 31, 1996).
10.54 Employment and Non-Compete Agreement, dated August 29, 1994, by and between
the Registrant and James D. Atkinson III (incorporated by reference to
Exhibit 10.43 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.55 Extension and Amendment of Employment Agreement, dated as of July 31, 1995,
by and between the Registrant and James D. Atkinson III (incorporated by
reference to Exhibit 10.44 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.56 Amendment of Employment Agreement, dated as of December 20, 1995, by and
between the Registrant and James D. Atkinson III (incorporated by
reference to Exhibit 10.81 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.57 Employment Retention Agreement, dated as of November 7, 1996, between the
Registrant and James D. Atkinson III (incorporated by reference to Exhibit
10.82 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.58 Amendment of Employment Retention Agreement, dated as of December 31, 1996,
by and between the Registrant and James D. Atkinson III (incorporated by
reference to Exhibit 10.83 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
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10.59 Employment and Non-Compete Agreement, dated September 21, 1994, by and
between the Registrant and Robert A. Barbee (incorporated by reference to
Exhibit 10.49 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.60 Extension and Amendment of Employment Agreement, dated as of November 1,
1995, by and between the Registrant and Robert A. Barbee (incorporated by
reference to Exhibit 10.50 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.61 Amendment of Employment Agreement, dated as of December 20, 1995, by and
between the Registrant and Robert A. Barbee (incorporated by reference to
Exhibit 10.86 to the Registrant's Annual Report on form 10-K for the year
ended December 31, 1996).
10.62 Employment Retention Agreement, dated as of November 7, 1996, between the
Registrant and Robert A. Barbee (incorporated by reference to Exhibit
10.87 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.63 Consulting Agreement, dated December 19, 1994, between the Registrant and
Warren Kantor (incorporated by reference to Exhibit 10.36 to Registrant's
Registration Statement on Form S-2, File No. 33-90108).
10.64 Consulting Agreement, dated as of January 1, 1996 between the Registrant and
Warren Kantor (incorporated by reference to Exhibit 10.89 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996).
10.65 Letter Agreement, dated August 26, 1996, between the Registrant and Warren
Kantor (incorporated by reference to Exhibit 10.90 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.66 Letter Agreement, dated December 18, 1996, between the Registrant and Warren
Kantor (incorporated by reference to Exhibit 10.91 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.67 Consulting Agreement, dated as of January 1, 1997, by and between the
Registrant and Warren Kantor (incorporated by reference to Exhibit 10.92
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1996).
10.68 Non-Statutory Stock Option Agreement, dated December 19, 1994, between the
Registrant and Warren Kantor (incorporated by reference to Exhibit 10.37
to Registrant's Registration Statement on Form S-2, File No. 33-90108).
10.69 Non-Statutory Stock Option Agreement, dated January 1, 1996, by and between
the Registrant and Warren Kantor (incorporated by reference to Exhibit
10.60 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.70 Non-Statutory Stock Option Agreement, dated August 26, 1996, between the
Registrant and Warren Kantor (incorporated by reference to Exhibit 10.95
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1996).
10.71 Non-Statutory Stock Option Agreement, dated December 18, 1996, between the
Registrant and Warren Kantor (incorporated by reference to Exhibit 10.96
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1996).
10.72 Non-Statutory Stock Option Agreement, dated January 1, 1997, between the
Registrant and Warren Kantor (incorporated by reference to Exhibit 10.97
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1996).
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10.73 Employment Agreement, dated as of May 1, 1997, between the Registrant and
Duane E. White (incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997).
10.74 Form of Identification Agreement by and between the Registrant and certain
of its officers and directors (incorporated by reference to Exhibit 10.15
to the Registrant's Current Report on Form 8-K dated October 1, 1997,
filed October 1, 1997).
10.75 Olympic Financial Ltd. 1990 Stock Option Plan, as amended to date
(incorporated by reference to Exhibit 10.12 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
10.76 1992 Director Option Plan, as amended to date (incorporated by reference to
Exhibit 10.13 to the Registrant's Quarterly Report on form 10-Q for the
quarter ended June 30, 1997).
10.77 Olympic Financial Ltd. Stock Purchase Plan (incorporated by reference to
Exhibit No. 10.90 to Registrant's Annual Report on Form 10-K for the year
ended June 30, 1992).
10.78 1994-1997 Restricted Stock Election Plan (incorporated by reference to
Exhibit 10.41 to Registrant's Registration Statement on Form S-2, File No.
33-90108).
10.79 1998-2000 Restricted Stock Election Plan, as amended to date (incorporated
by reference to Exhibit 10.102 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.80 Warrant to Purchase Common Stock, dated August 11, 1992, between the
Registrant and Lincoln National Life Insurance Company (incorporated by
reference to Exhibit No. 10.85 to Registrant's Annual Report on Form 10-K
for the year ended June 30, 1992).
10.81 Warrant to Purchase Common Stock, dated August 11, 1992, between the
Registrant and Security Connecticut Life Insurance Company (incorporated
by reference to Exhibit No. 10.86 to Registrant's Annual Report on Form
10-K for the year ended June 30, 1992).
10.82 Warrant to Purchase Common Stock, dated June 24, 1992, between the
Registrant and NAP & Company (incorporated by reference to Exhibit No.
10.87 to Registrant's Annual Report on Form 10-K for the year ended June
30, 1992).
10.83 Warrant to Purchase Common Stock, dated June 24, 1992, between the
Registrant and Fuelship & Company (incorporated by reference to Exhibit
No. 10.88 to Registrant's Annual Report on Form 10-K for the year ended
June 30, 1992).
10.84 Warrant to Purchase Common Stock, dated June 24, 1992, between the
Registrant and BCI Growth L.P. (incorporated by reference to Exhibit No.
10.89 to Registrant's Annual Report on Form 10-K for the year ended June
30, 1992).
10.85 Warrant to Purchase Common Stock, dated December 17, 1993, between the
Registrant and John G. Kinnard and Company, Incorporated (incorporated by
reference to Exhibit 10.47 to Registrant's Registration Statement on Form
S-2, File No. 33-90108).
10.86 Warrant to Purchase Common Stock, dated September 1, 1994, between the
Registrant and Cede & Co. (incorporated by reference to Exhibit 10.48 to
Registrant's Registration Statement on Form S-2, File No. 33-90108).
10.87 Warrant to Purchase Common Stock, dated September 1, 1994, between the
Registrant and Booth & Co. (incorporated by reference to Exhibit 10.49 to
Registrant's Registration Statement on Form S-2, File No. 33-90108).
</TABLE>
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10.88 Warrant to Purchase Common Stock, dated September 1, 1994, between the
Registrant and Sun Life Insurance Company of America (incorporated by
reference to Exhibit 10.50 to Registrant's Registration Statement on Form
S-2, File No. 33-90108).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends (filed herewith).
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Ernst & Young LLP (filed herewith).
27.1 Financial Data Schedule (filed herewith).
99.1 Cautionary Statement (filed herewith).
</TABLE>
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(a) On October 1, 1997, the Registrant filed a Current Report on Form 8-K, dated
October 1, 1997, reporting the $75 million 11 1/2% Senior Notes Indenture.
On October 6, 1997, the Registrant filed a Current Report on Form 8-K, dated
October 3, 1997, reporting that the Registrant agreed to sell $75 million of
the Registrant's 11.5% Senior Notes due 2007.
On October 7, 1997, the Registrant filed an amendment to the Current Report
on Form 8-K dated October 3, 1997, reporting the legal opinion of Dorsey &
Whitney LLP in connection with the Registrant's 11.5% Senior Notes due 2007.
On November 13, 1997, the Registrant filed a Current Report in Form 8-K,
dated October 8, 1997 reporting the Second Supplemental Indenture to the
Indenture dated as of March 12, 1997, relating to the Registrant's 11 1/2%
Senior Notes due 2007.
On November 24, 1997, the Registrant filed a Current Report on Form 8-K,
dated November 5, 1997, reporting certain information with regard to the
Registrant's performance as servicer of Olympic Automobile Receivables
Trust, 1997-A.
On November 24, 1997, the Registrant filed a Current Report on Form 8-K,
dated November 5, 1997, reporting certain information with regard to the
Registrant's performance as servicer of Arcadia Automobile Receivables
Trust, 1997-B.
On November 24, 1997, the Registrant filed a Current Report on Form 8-K,
dated November 5, 1997, reporting certain information with regard to the
Registrant's performance as servicer of Arcadia Automobile Receivables
Trust, 1997-C.
73
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
ARCADIA FINANCIAL LTD.
Date: March 30, 1998 By: /s/ RICHARD A. GREENAWALT
------------------------------------------
Richard A. Greenawalt
PRESIDENT, CHIEF EXECUTIVE OFFICER
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(3) EXHIBITS
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3.1 Restated Articles of Incorporation of the Registrant, as amended (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997).
3.2 Restated Bylaws of the Registrant, as amended (incorporated by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
4.1 Rights Agreement dated as of November 1, 1996, between the Registrant and Norwest Bank Minnesota,
National Association, as Rights Agent (incorporated by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-A filed November 7, 1996).
4.2 Amendment No. 1 to Rights Agreement, dated January 16, 1998, to Rights Agreement, dated as of
November 1, 1996 between Arcadia Financial Ltd. and Norwest Bank Minnesota, N.A. (incorporated
by reference to Exhibit 4.1 to the Registrant's current report on Form 8-K dated January 8,
1998 and filed January 20, 1998).
4.3 First Amendment and Restatement, dated as of April 28, 1995, of Indenture, dated July 1, 1994,
between the Registrant and Norwest Bank Minnesota, National Association, as Trustee, relating
to the Registrant's unsecured Extendible Notes and Fixed-Term Notes, including forms of Notes
(incorporated by reference to Exhibit No. 4.8.1 to Post-Effective Amendment No. 2 on Form S-3
to Registrant's Registration Statement on Form S-1, File No. 33-81512).
4.4 Second Supplemental Indenture dated as of March 11, 1997 to Indenture dated as of April 28, 1995
between the Registrant and Norwest Bank Minnesota, National Association (incorporated by
reference to Exhibit 4.7 to the Registrant's current report on Form 8-K dated March 12, 1997
and filed March 18, 1997).
4.5 Indenture dated as of March 15, 1996, between the Registrant and Norwest Bank Minnesota, National
Association, as Trustee, relating to the Registrant's Subordinated Notes, Series 1996-A due
2001 (incorporated by reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
4.6 First Supplemental Indenture, dated as of March 15, 1996, to Indenture, dated as of March 15,
1996, between the Registrant and Norwest Bank Minnesota, National Association, as Trustee,
relating to the Registrant's Subordinated Notes, Series 1996-A due 2001 (incorporated by
reference to Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
4.7 Indenture dated as of March 12, 1997, between the Registrant and Norwest Bank Minnesota, National
Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated March 12, 1997 and filed March 18, 1997).
4.8 First Supplemental Indenture, dated as of March 12, 1997 between the Registrant and Norwest Bank
Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the
Registrant's Current Report on Form 8-K dated March 12, 1997 and filed March 18, 1997).
</TABLE>
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4.9 Warrant Agreement, dated as of March 12, 1997 by and between the Registrant and Norwest Bank
Minnesota, National Association, as Warrant Agent (incorporated by reference to Exhibit 4.3 to
the Registrant's Current Report on Form 8-K dated March 12, 1997 and filed March 18, 1997).
4.10 Form of Unit (incorporated by reference to Exhibit 4.4 to the Registrant's Current Report on Form
8-K dated March 12, 1997 and filed March 18, 1997).
4.11 Form of 11.5% Senior Notes due March 15, 2007 (incorporated by reference to Exhibit 4.5 to the
Registrant's Current Report on Form 8-K dated March 12, 1997 and filed March 18, 1997).
4.12 Form of Initial Warrant Certificate (incorporated by reference to Exhibit 4.6 to the Registrant's
Current Report on Form 8-K dated March 12, 1997 and filed March 18, 1997).
4.13 Second Supplemental Indenture, dated as of October 8, 1997, to Indenture, dated as of March 12,
1997, between the Registrant and Norwest Bank Minnesota, National Association, as Trustee,
including Form of Notes (incorporated by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated October 8, 1997, filed October 15, 1997).
10.1 Amended and Restated Trust Agreement, dated as of July 31, 1997, between Arcadia Receivables
Finance Corp. II and Wilmington Trust Company (incorporated by reference to Exhibit 10.5 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.2 Amended and Restated Indenture, dated as of July 31, 1997, between Olympic Automobile Receivables
Warehouse Trust and Norwest Bank Minnesota, National Association (incorporated by reference to
Exhibit 10.6 to the Registrant's Current Report on Form 8-K dated October 1, 1997, filed
October 1, 1997).
10.3 Amended and Restated Receivables Purchase Agreement and Assignment, dated as of July 31, 1997,
between Arcadia Receivables Finance Corp. II and Arcadia Financial Ltd. (incorporated by
reference to Exhibit 10.7 to the Registrant's Current Report on Form 8-K dated October 1, 1997,
filed October 1, 1997).
10.4 Amended and Restated Sale and Servicing Agreement, dated as of July 31, 1997, among Olympic
Automobile Receivables Warehouse Trust, Arcadia Receivables Finance Corp. II, Arcadia Financial
Ltd. And Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit
10.8 to the Registrant's Current Report on Form 8-K dated October 1, 1997, filed October 1,
1997).
10.5 Amended and Restated Note Purchase Agreement, dated as of July 31, 1997, among Olympic Automobile
Receivables Warehouse Trust, Arcadia Financial Ltd., Delaware Funding Corporation and Morgan
Guaranty Trust Company of New York (incorporated by reference to Exhibit 10.10 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.6 Amended and Restated Certificate Purchase Agreement, dated as of July 31, 1997, among Olympic
Automobile Receivables Warehouse Trust, Arcadia Financial Ltd., each Purchaser (as defined) and
Morgan Guaranty Trust Company of New York (incorporated by reference to Exhibit 10.11 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
</TABLE>
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10.7 Asset Purchase Agreement, dated as of July 31, 1997, among Morgan Guaranty Trust Company of New
York and certain parties listed therein (incorporated by reference to Exhibit 10.12 to the
Registrant's Current Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.8 Receivables Purchase Agreement and Assignment between Olympic Receivables Finance Corp. ("ORFC")
and the Registrant (incorporated by reference to Exhibit 10.29 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.9 Repurchase Agreement dated as of December 3, 1996 among Arcadia Receivables Conduit Corp.
("ARCC") and ORFC (incorporated by reference to Exhibit 10.30 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
10.10 First Amendment, dated as of August 4, 1997, to Repurchase Agreement, dated as of December 3,
1996, by and between Arcadia Receivables Conduit Corp. and Arcadia Receivables Finance Corp.
(incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated
October 1, 1997, filed October 1, 1997).
10.11 Second Amendment, dated as of November 14, 1997, to the Repurchase Agreement and Assignment
between Olympic Receivables Finance Corp. and the Registrant (filed herewith).
10.12 Servicing Agreement dated as of December 3, 1996 among ARCC, ORFC, the Registrant, in its
individual capacity and as Servicer, Bank of America National Trust and Savings Association, as
agent, and Norwest Bank Minnesota, National Association, as backup servicer, collateral agent
and indenture trustee (incorporated by reference to Exhibit 10.31 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.13 First Amendment, dated as of August 4, 1997 to Servicing Agreement, dated as of December 3, 1996,
among Arcadia Receivables Conduit Corp., Arcadia Financial Ltd. (formerly known as Olympic
Financial Ltd.), in its individual capacity and as Servicer, and Bank of America National Trust
and Savings Association (incorporated by reference to Exhibit 10.3 to the Registrant's Current
Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.14 Second Amendment, dated as of November 14, 1997 to Servicing Agreement, dated as of December 3,
1996, among Arcadia Receivables Conduit Corp., Arcadia Financial Ltd. (formerly known as
Olympic Financial Ltd.), in its individual capacity and as Servicer, and Bank of America
National Trust and Savings Association (filed herewith)........................................
10.15 Third Amended and Restated Stock Pledge Agreement dated as of December 3, 1996 among the
Registrant and Norwest Bank Minnesota, National Association, as collateral agent (incorporated
by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.16 Amended and Restated Custodian Agreement, dated as of July 31, 1997, among Arcadia Financial
Ltd., Norwest Bank Minnesota, National Association, and Olympic Automobile Receivables
Warehouse Trust (incorporated by reference to Exhibit 10.9 to the Registrant's Current Report
on Form 8-K dated October 1, 1997, filed October 1, 1997).
</TABLE>
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10.17 Security Agreement dated as of December 3, 1996 among the Registrant, ORFC, ARCC, Financial
Security Assurance Inc. ("FSA"), Bank of America National Trust and Savings Association and
Norwest Bank Minnesota, National Association, as indenture trustee and collateral agent
(incorporated by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996).
10.18 Indenture dated as of December 3, 1996 between ARCC and Norwest Bank Minnesota, National
Association, as trustee and collateral agent (incorporated by reference to Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996).
10.19 First Supplemental Indenture, dated as of November 14, 1997, to the Indenture dated as of
December 3, 1996 between ARCC and Norwest Bank Minnesota, National Association, as trustee and
collateral agent (filed herewith)..............................................................
10.20 Insurance and Indemnity Agreement dated as of December 3, 1996 among FSA, the Registrant, ORFC
and ARCC (incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.21 First Amendment, dated as of August 1, 1997, to the Insurance and Indemnity Agreement, dated as
of December 3, 1996, among Financial Security Assurance Inc., Arcadia Receivables Conduit
Corp., Arcadia Receivables Finance Corp. and Arcadia Financial Ltd. (formerly known as Olympic
Financial Ltd.), as Servicer (incorporated by reference to Exhibit 10.4 to the Registrant's
Current Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.22 Second Amendment, dated as of November 14, 1997, to the Insurance and Indemnity Agreement, dated
as of December 3, 1996, among Financial Security Assurance Inc., Arcadia Receivables Conduit
Corp., Arcadia Receivables Finance Corp. and Arcadia Financial Ltd. (formerly known as Olympic
Financial Ltd.), as Servicer (filed herewith)..................................................
10.23 US $300,000,000 Floating Rate FSA Insured Automobile Receivables-backed Note Purchase Agreement
dated as of December 3, 1996 among ARCC, Receivables Capital Corporation, and Bank of America
National Trust and Savings Association, as administrator of Receivables Capital Corporation and
as agent for the liquidity providers (incorporated by reference to Exhibit 10.36 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996).
10.24 First Amendment, dated as of August 9, 1997, to Note Purchase Agreement, dated as of December 3,
1996, among Arcadia Financial Ltd. (formerly known as Olympic Financial Ltd.), Arcadia
Receivables Conduit Corp., Receivable Capital Corporation and Bank of America National Trust
and Savings Association (incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.25 Second Amendment, dated as of November 14, 1997, to Note Purchase Agreement, dated as of December
3, 1996, among Arcadia Financial Ltd. (formerly known as Olympic Financial Ltd.), Arcadia
Receivables Conduit Corp., Receivable Capital Corporation and Bank of America National Trust
and Savings Association (filed herewith).......................................................
10.26 Spread Account Agreement, dated as of March 25, 1993, as amended and restated as of December 16,
1997 among the Registrant, Arcadia Receivables Finance Corp. ("ARFC"), Financial Security
Assurance Inc. ("FSA"), The Chase Manhattan Bank, as Trustee, and Norwest Bank Minnesota,
National Association, as Collateral Agent (filed herewith).....................................
</TABLE>
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10.27 Warehousing Series Supplement dated as of December 3, 1996 to Spread Account Agreement dated as
of March 25, 1993, as amended and restated as of December 3, 1996, among the Registrant, ORFC,
FSA and Norwest Bank Minnesota, National Association, as trustee and collateral agent
(incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996).
10.28 Amendment, dated as of December 16, 1997, among the Registrant, ARFC, FSA and Norwest Bank
Minnesota, National Association, to the Series 1997-C Supplement, Series 1997-B Supplement,
Series 1997-A Supplement, Series 1996-D, Supplement, series 1996-C Supplement, Series 1996-B
Supplement, Series 1996-A Supplement, Series 1995-E Supplement, Series 1995-D Supplement,
Series 1995-C Supplement, Series 1995-B Supplement, Series 1995-A Supplement, Series 1994-B
Supplement, Series 1994-A Supplement, Series 1993-C Supplement, and Series 1993-B Supplement to
the Spread Account Agreement (filed herewith)..................................................
10.29 Series 1997-A Supplement, dated March 20, 1997, to Spread Account Agreement, dated as of March
25, 1993, as amended and restated as of March 1, 1997, among the Registrant, Olympic
Receivables Finance Corp., Financial Security Assurance Inc. and Norwest Bank Minnesota,
National Association, as Trustee and Collateral Agent. (incorporated by reference to Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)
10.30 Series 1997-B Supplement, dated June 19, 1997, to Spread Account Agreement, dated as of March 25,
1993, as amended and restated as of June 1, 1997, among the Registrant, Arcadia Receivables
Finance Corp., Financial Security Assurance Inc., The Chase Manhattan Bank, as Trustee, and
Norwest Bank Minnesota, National Association, as Collateral Agent (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997).
10.31 Series 1997-C Supplement, dated as of September 18, 1997, to Spread Account Agreement dated as of
March 25, 1993, as amended and restated as of June 1, 1997, among Arcadia Financial Ltd.,
Arcadia Receivables Finance Corp., Financial Security Assurance, Inc., The Chase Manhattan Bank
and Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit 10.13 to
the Registrant's Current Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.32 Series 1997-D Supplement, dated as of December 16, 1997, to Spread Account Agreement dated as of
March 25, 1993, as amended and restated as of June 1, 1997, among Arcadia Financial Ltd.,
Arcadia Receivables Finance Corp., Financial Security Assurance, Inc., The Chase Manhattan Bank
and Norwest Bank Minnesota, National Association (filed herewith)..............................
10.33 Insurance and Indemnity Agreement, dated as of March 20, 1997, among the Registrant, Financial
Security Assurance Inc., Olympic Automobile Receivables Trust, 1997-A, Olympic First GP Inc.,
Olympic Second GP Inc. and Olympic Receivables Finance Corp. (incorporated by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
10.34 Insurance and Indemnity Agreement, dated as of June 19, 1997, among the Registrant, Financial
Security Assurance Inc., Arcadia Automobile Receivables Trust, 1997-B and Arcadia Receivables
Finance Corp. (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997).
</TABLE>
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10.35 Insurance and Indemnity Agreement, dated as of September, 18, 1997, among Financial Assurance
Inc., Arcadia Automobile Receivables Trust, 1997-C, Arcadia Receivables Finance Corp. and
Arcadia Financial Ltd. (incorporated by reference to Exhibit 10.14 to the Registrant's Current
Report on Form 8-K dated October 1, 1997, filed October 1, 1997).
10.36 Insurance and Indemnity Agreement, dated as of December 16, 1997, among Financial Assurance Inc.,
Arcadia Automobile Receivables Trust, 1997-D, Arcadia Receivables Finance Corp. and Arcadia
Financial Ltd. (filed herewith)................................................................
10.37 Amendment, dated as of December 16, 1997, to the Series 1997-C Insurance and Indemnity Agreement,
the Series 1997-B Insurance and Indemnity Agreement, the Series 1997-A Insurance and Indemnity
Agreement, the Series 1996-D Insurance and Indemnity Agreement, the Series 1996-C Insurance and
Indemnity Agreement, Series 1996-B Insurance and Indemnity Agreement, the Series 1996-A
Insurance and Indemnity Agreement, the Series 1995-E Insurance and Indemnity Agreement, the
Series 1995-D Insurance and Indemnity Agreement, the Series 1995-C Insurance and Indemnity
Agreement, the Series 1995-B Insurance and Indemnity Agreement, the Series 1995-A Insurance and
Indemnity Agreement, the Series 1994-B Insurance and Indemnity Agreement, the Series 1994-A
Insurance and Indemnity Agreement, the Series 1993-D Insurance and Indemnity Agreement, the
Series 1993-C Insurance and Indemnity Agreement, the Series 1993-B Insurance and Indemnity
Agreement and the Series 1993-A Insurance and Indemnity Agreement (filed herewith).............
10.38 Receivables Purchase Agreement and Assignment, dated as of October 17, 1997, between Arcadia
Receivables Finance Corp. III ("ARFC III") and the Registrant (filed herewith)
10.39 Receivables Funding and Servicing Agreement, dated as of October 17, 1997, among ARFC III, the
Registrant, DLJ Mortgage Capital, Inc. ("DLJM"), as Lenders and DLJM, as agent (filed herewith)
10.40 Collateral Agent Agreement, dated October 17, 1997, among DLJM, as agent, Norwest Bank Minnesota,
National Association, as collateral agent, the Registrant and ARFC III (filed herewith)
10.41 Employment Agreement, dated as of January 6, 1997, between the Registrant and Richard A.
Greenawalt (incorporated by reference to Exhibit 10.59 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.42 Employment Agreement, dated April 1, 1991, between the Registrant and Scott H. Anderson and
Amendment, dated September 3, 1991 (incorporated by reference to Exhibit No. 10.29 to
Registrant's Registration Statement on Form S-18, File No. 33-43270C).
10.43 Extension and Amendment of Employment Agreement, dated July 1, 1993, between the Registrant and
Scott H. Anderson (incorporated by reference to Exhibit No. 10.107 to Registrant's Annual
Report on Form 10-K for the year ended June 30, 1992).
10.44 Extension and Amendment of Employment Agreement, dated July 1, 1994, by and between Scott H.
Anderson and the Registrant (incorporated by reference to Exhibit No. 10.36 to Registrant's
Registration Statement on Form S-4, File No. 33-81588).
</TABLE>
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10.45 Extension and Amendment of Employment Agreement, dated as of July 31, 1995, between the
Registrant and Scott H. Anderson (incorporated by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
10.46 Amendment of Employment Agreement, dated as of December 20, 1995, by and between the Registrant
and Scott H. Anderson (incorporated by reference to Exhibit 10.71 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.47 Employment Retention Agreement, dated as of November 7, 1996, between the Registrant and Scott H.
Anderson (incorporated by reference to Exhibit 10.72 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.48 Employment Agreement, dated February 1, 1994, between the Registrant and John A. Witham
(incorporated by reference to Exhibit No. 10.111 to the Registrant's Registration Statement on
Form S-1, File No. 33-81512).
10.49 Extension and Amendment of Employment Agreement, dated as of December 20, 1995, by and between
the Registrant and John A. Witham (incorporated by reference to Exhibit 10.39 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
10.50 Employment Retention Agreement, dated as of November 7, 1996, between the Registrant and John A.
Witham (incorporated by reference to Exhibit 10.75 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.51 Employment Agreement, dated December 5, 1994, between the Registrant and A. Mark Berlin, Jr.
(incorporated by reference to Exhibit 10.35 to Registrant's Registration Statement on Form S-2,
File No. 33-90108).
10.52 Extension and Amendment of Employment Agreement, dated as of December 20, 1995, by and between
the Registrant and A. Mark Berlin, Jr. (incorporated by reference to Exhibit 10.41 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
10.53 Employment Retention Agreement, dated as of November 7, 1996, between the Registrant and A. Mark
Berlin, Jr. (incorporated by reference to Exhibit 10.78 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.54 Employment and Non-Compete Agreement, dated August 29, 1994, by and between the Registrant and
James D. Atkinson (incorporated by reference to Exhibit 10.43 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995).
10.55 Extension and Amendment of Employment Agreement, dated as of July 31, 1995, by and between the
Registrant and James D. Atkinson III (incorporated by reference to Exhibit 10.44 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
10.56 Amendment of Employment Agreement, dated as of December 20, 1995, by and between the Registrant
and James D. Atkinson III (incorporated by reference to Exhibit 10.81 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.57 Employment Retention Agreement, dated as of November 7, 1996, between the Registrant and James D.
Atkinson III (incorporated by reference to Exhibit 10.82 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996).
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10.58 Amendment of Employment Retention Agreement, dated as of December 31, 1996, by and between the
Registrant and James D. Atkinson III (incorporated by reference to Exhibit 10.83 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996).
10.59 Employment and Non-Compete Agreement, dated September 21, 1994, by and between the Registrant and
Robert A. Barbee (incorporated by reference to Exhibit 10.49 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995).
10.60 Extension and Amendment of Employment Agreement, dated as of November 1, 1995, by and between the
Registrant and Robert A. Barbee (incorporated by reference to Exhibit 10.50 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995).
10.61 Amendment of Employment Agreement, dated as of December 20, 1995, by and between the Registrant
and Robert A. Barbee (incorporated by reference to Exhibit 10.86 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.62 Employment Retention Agreement, dated as of November 7, 1996, between the Registrant and Robert
A. Barbee (incorporated by reference to Exhibit 10.87 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.63 Consulting Agreement, dated December 19, 1994, between the Registrant and Warren Kantor
(incorporated by reference to Exhibit 10.36 to Registrant's Registration Statement on Form S-2,
File No. 33-90108).
10.64 Consulting Agreement, dated as of January 1, 1996 between the Registrant and Warren Kantor
(incorporated by reference to Exhibit 10.89 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996).
10.65 Letter Agreement, dated August 26, 1996, between the Registrant and Warren Kantor (incorporated
by reference to Exhibit 10.90 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.66 Letter Agreement, dated December 18, 1996, between the Registrant and Warren Kantor (incorporated
by reference to Exhibit 10.91 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.67 Consulting Agreement, dated as of January 1, 1997, by and between the Registrant and Warren
Kantor (incorporated by reference to Exhibit 10.92 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.68 Non-Statutory Stock Option Agreement, dated December 19, 1994, between the Registrant and Warren
Kantor (incorporated by reference to Exhibit 10.37 to Registrant's Registration Statement on
Form S-2, File No. 33-90108).
10.69 Non-Statutory Stock Option Agreement, dated January 1, 1996, by and between the Registrant and
Warren Kantor (incorporated by reference to Exhibit 10.60 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.70 Non-Statutory Stock Option Agreement, dated August 26, 1996, between the Registrant and Warren
Kantor (incorporated by reference to Exhibit 10.95 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.71 Non-Statutory Stock Option Agreement, dated December 18, 1996, between the Registrant and Warren
Kantor (incorporated by reference to Exhibit 10.96 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
</TABLE>
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10.72 Non-Statutory Stock Option Agreement, dated January 1, 1997, between the Registrant and Warren
Kantor (incorporated by reference to Exhibit 10.97 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.73 Employment Agreement, dated as of May 1, 1997, between the Registrant and Duane E. White
(incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
10.74 Form of Indemnification Agreement by and between the Registrant and certain of its officers and
directors (incorporated by reference to Exhibit 10.15 to the Registrant's Current Report on
Form 8-K dated October 1, 1997, filed October 1, 1997).
10.75 Olympic Financial Ltd. 1990 Stock Option Plan, as amended to date (incorporated by reference to
Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997).
10.76 1992 Director Option Plan, as amended to date (incorporated by reference to Exhibit 10.13 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
10.77 Olympic Financial Ltd. Stock Purchase Plan (incorporated by reference to Exhibit No. 10.90 to
Registrant's Annual Report on Form 10-K for the year ended June 30, 1992).
10.78 1994-1997 Restricted Stock Election Plan (incorporated by reference to Exhibit 10.41 to
Registrant's Registration Statement on Form S-2, File No. 33-90108).
10.79 1998-2000 Restricted Stock Election Plan, as amended to date (incorporated by reference to
Exhibit 10.102 to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1996).
10.80 Warrant to Purchase Common Stock, dated August 11, 1992, between the Registrant and Lincoln
National Life Insurance Company (incorporated by reference to Exhibit No. 10.85 to Registrant's
Annual Report on Form 10-K for the year ended June 30, 1992).
10.81 Warrant to Purchase Common Stock, dated August 11, 1992, between the Registrant and Security
Connecticut Life Insurance Company (incorporated by reference to Exhibit No. 10.86 to
Registrant's Annual Report on Form 10-K for the year ended June 30, 1992).
10.82 Warrant to Purchase Common Stock, dated June 24, 1992, between the Registrant and NAP & Company
(incorporated by reference to Exhibit No. 10.87 to Registrant's Annual Report on Form 10-K for
the year ended June 30, 1992).
10.83 Warrant to Purchase Common Stock, dated June 24, 1992, between the Registrant and Fuelship &
Company (incorporated by reference to Exhibit No. 10.88 to Registrant's Annual Report on Form
10-K for the year ended June 30, 1992).
10.84 Warrant to Purchase Common Stock, dated June 24, 1992, between the Registrant and BCI Growth L.P.
(incorporated by reference to Exhibit No. 10.89 to Registrant's Annual Report on Form 10-K for
the year ended June 30, 1992).
10.85 Warrant to Purchase Common Stock, dated December 17, 1993, between the Registrant and John G.
Kinnard and Company, Incorporated (incorporated by reference to Exhibit 10.47 to Registrant's
Registration Statement on Form S-2, File No. 33-90108).
</TABLE>
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10.86 Warrant to Purchase Common Stock, dated September 1, 1994, between the Registrant and Cede & Co.
(incorporated by reference to Exhibit 10.48 to Registrant's Registration Statement on Form S-2,
File No. 33-90108).
10.87 Warrant to Purchase Common Stock, dated September 1, 1994, between the Registrant and Booth & Co.
(incorporated by reference to Exhibit 10.49 to Registrant's Registration Statement on Form S-2,
File No. 33-90108).
10.88 Warrant to Purchase Common Stock, dated September 1, 1994, between the Registrant and Sun Life
Insurance Company of America (incorporated by reference to Exhibit 10.50 to Registrant's
Registration Statement on Form S-2, File No. 33-90108).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed herewith)...............................
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (filed
herewith)......................................................................................
21.1 Subsidiaries of the Registrant (filed herewith)..................................................
23.1 Consent of Ernst & Young LLP (filed herewith)....................................................
27.1 Financial Data Schedule (filed herewith).........................................................
99.1 Cautionary Statement (filed herewith)............................................................
</TABLE>
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(b)
On January 14, 1997, the Registrant filed a Current Report on Form 8-K,
dated January 6, 1997, reporting that Richard A. Greenawalt has accepted the
position of President and Chief Executive Officer and Warren Kantor was elected
as Chairman of the Board of Directors.
The Registrant filed a Current Report on Form 8-K, filed and dated March 7,
1997, reporting that the Registrant was served with a complaint in Texas state
court alleging that it originated loans above the maximum allowed rate by Texas
law.
On March 10, 1997, the Registrant filed a Current Report on Form 8-K, dated
March 7, 1997, reporting that the Registrant agreed to sell $300 million, 11.5%
Senior Notes due 2007 and 300,000 Warrants to purchase an aggregate of 2,052,000
shares of its Common Stock.
On March 11, 1997, the Registrant filed a Current Report on Form 8-K, dated
March 10, 1997, reporting the legal opinion of Dorsey & Whitney LLP in
connection with the Registrant's 11.5% Senior Notes.
On March 12, 1997, the Registrant filed a Current Report on Form 8-K, dated
March 7, 1997, reporting a Form T-1 Statement of Eligibility of Norwest Bank,
Minnesota National Association, as Trustee, relating to the Registrant's $300
million, 11.5% Senior Notes.
On March 18, 1997, the Registrant filed a Current Report on Form 8-K, dated
March 12, 1997, reporting the $300 million 11.5% Senior Notes Indenture.
On September 24, 1997, the Registrant filed a Current Report on Form 8-K,
dated June 5, 1997, reporting certain information with regard to the
Registrant's performance as servicer of Olympic Automobile Receivables Trust,
1996-C.
On October 1, 1997, the Registrant filed a Current Report on Form 8-K, dated
October 1, 1997, reporting the $75 million 11 1/2% Senior Notes Indenture.
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On October 6, 1997, the Registrant filed a Current Report on Form 8-K, dated
October 3, 1997, reporting that the Registrant agreed to sell $75 million of the
Registrant's 11.5% Senior Notes due 2007.
On October 7, 1997, the Registrant filed an amendment to the Current Report
on Form 8-K dated October 3, 1997, reporting the legal opinion of Dorsey &
Whitney LLP in connection with the Registrant's 11.5% Senior Notes due 2007.
On November 13, 1997, the Registrant filed a Current Report on Form 8-K,
dated October 8, 1997, reporting the Second Supplemental Indenture to the
Indenture dated as of March 12, 1997, relating to the Registrant's 11 1/2%
Senior Notes due 2007.
On November 24 1997, the Registrant filed a Current Report on Form 8-K,
dated November 5, 1997, reporting certain information with regard to the
Registrant's performance as servicer of Olympic Automobile Receivables Trust,
1997-A.
On November 24 1997, the Registrant filed a Current Report on Form 8-K,
dated November 5, 1997, reporting certain information with regard to the
Registrant's performance as servicer of Olympic Automobile Receivables Trust,
1997-B.
On November 24 1997, the Registrant filed a Current Report on Form 8-K,
dated November 5, 1997, reporting certain information with regard to the
Registrant's performance as servicer of Olympic Automobile Receivables Trust,
1997-C.
On January 20, 1998, the Registrant filed a Current Report on Form 8-K,
dated January 8, 1998, reporting Amendment No. 1 to Rights Agreement, dated
January 16, 1998, to Rights Agreement, dated as of November 1, 1996 between
Arcadia Financial Ltd. and Norwest Bank Minnesota, N.A.
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CAUTIONARY STATEMENT
ARCADIA FINANCIAL LTD. (THE "COMPANY"), OR PERSONS ACTING ON BEHALF OF THE
COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING STATEMENTS ON
BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S SECURITIES, FROM TIME TO
TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING STATEMENTS" AS DEFINED
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "ACT"). THIS
CAUTIONARY STATEMENT, WHEN USED IN CONJUNCTION WITH AN IDENTIFIED
FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE "SAFE
HARBOR" PROVISIONS OF THE ACT AND IS INTENDED TO BE A READILY AVAILABLE WRITTEN
DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE RESULTS TO DIFFER MATERIALLY
FROM SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS ARE IN ADDITION TO ANY OTHER
CAUTIONARY STATEMENTS, WRITTEN OR ORAL, WHICH MAY BE MADE OR REFERRED TO IN
CONNECTION WITH ANY SUCH FORWARD-LOOKING STATEMENT.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON
THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
LIQUIDITY AND ACCESS TO CAPITAL RESOURCES
NEGATIVE OPERATING CASH FLOWS. The Company's business requires substantial
cash to support the payment of dealer participations, the funding of spread
accounts in connection with securitizations, the purchase of loans pending
securitization, the financing of repossessed inventory and other cash
requirements, in addition to debt service and dividends. These cash requirements
increase as the volume of the Company's loan purchases increases. To the extent
that increases in the volume of loan purchases and securitizations provide
income, a substantial portion of such income is received by the Company in cash
over the life of the loans. The Company has operated historically on a negative
operating cash flow basis and expects to continue to do so for so long as the
Company's volume of loan purchases continues to grow. As a result of the
Company's historical growth rate, the Company has used increasingly larger
amounts of cash than it has generated from its operating activities. The Company
has funded these negative operating cash flows principally through borrowings
from financial institutions, sales of equity securities and sales of senior and
subordinated notes. The Company's ability to execute its growth strategy depends
upon its continued ability to obtain substantial additional long-term debt and
equity capital through access to the capital markets or otherwise. There can be
no assurance that the Company will have access to the capital markets when
needed or will be able to obtain financing upon terms reasonably satisfactory to
the Company. Factors which could affect the Company's access to the capital
markets, or the costs of such capital, include changes in interest rates,
general economic conditions, the perception in the capital markets of the
Company's business, results of operations, leverage, financial condition and
business prospects, and the performance of the Company's securitization trusts.
In addition, covenants with respect to the Company's debt securities and credit
facilities may significantly restrict the Company's ability to incur additional
indebtedness and to issue new classes of preferred stock.
POTENTIAL INABILITY TO REFINANCE EXISTING INDEBTEDNESS. The Company's
ability to repay its outstanding indebtedness at maturity may depend on its
ability to refinance such indebtedness, which could be adversely affected if the
Company does not have access to the capital markets for the sale of additional
debt or equity through public offerings or private placements on terms
reasonably satisfactory to the Company. See "Negative Operating Cash Flows"
above.
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DEPENDENCE ON WAREHOUSE FINANCING. The Company depends on warehouse
facilities with financial institutions or institutional lenders to finance its
purchase of loans on a short-term basis pending securitization. At August 31,
1997, the Company had $647.7 million of warehouse facilities through
institutionally managed asset-backed commercial paper conduits, of which $287.8
million was available. These facilities expire in December 1997 and July 1998,
subject to renewal or extension at the lenders' option. Implementation of the
Company's growth strategy requires continued availability of warehouse
facilities and may require increases in the capacity of warehouse facilities.
There can be no assurance that such financing will be available on terms
reasonably satisfactory to the Company. The inability of the Company to arrange
additional warehouse facilities or to extend or replace existing facilities when
they expire would have a material adverse effect on the Company's business,
financial condition and results of operations and on the Company's outstanding
securities.
DEPENDENCE ON SECURITIZATION. The Company has relied upon its ability to
aggregate and sell loans as asset-backed securities in the secondary market to
generate cash proceeds for repayment of warehouse facilities and to purchase new
loans from dealers. Since inception, the Company has securitized approximately
$8.7 billion of automobile loans. At December 31, 1997, approximately $4.9
billion of these loans were outstanding. Accordingly, adverse changes in the
Company's asset-backed securities program or in the asset-backed securities
market for automobile receivables generally could materially adversely affect
the Company's ability to purchase and resell loans on a timely basis and upon
terms reasonably satisfactory to the Company. The Company endeavors to effect
public securitizations of its loans on at least a quarterly basis. However,
market and other considerations, including the conformity of loans to insurance
company and rating agency requirements, could affect the timing of such
transactions. Any delay in the sale of loans beyond a quarter-end would
eliminate the related gain on sale in the given quarter and adversely affect the
Company's reported earnings for such quarter. All of the Company's
securitizations since March 1993 and one of the Company's warehouse facilities
have utilized credit enhancement in the form of financial guaranty insurance
policies issued by FSA to achieve "AAA/Aaa" ratings with respect to the
asset-backed securities. The Company believes that financial guaranty insurance
policies reduce the costs of the securitizations and such warehouse facility
relative to alternative forms of credit enhancements available to the Company.
The Company has committed to use FSA for future credit enhancement on insured
securitizations through 1998 in consideration for certain limitations on FSA
insurance premiums. FSA is not required to insure Company-sponsored
securitizations and there can be no assurance that it will continue to do so or
that future Company-sponsored securitizations will be similarly rated.
LOAN PERFORMANCE RISKS
POTENTIAL NEGATIVE EFFECTS ON FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY. The Company's business, financial condition, results of operations
and liquidity depend, to a material extent, on the performance of loans
purchased and sold by the Company. When such loans are sold in securitizations,
the Company recognizes gain on sale. Finance income receivable, the Company's
principal asset, has been calculated using assumptions concerning future
default, prepayment and net loss rates on securitized loans that are consistent
with the Company's historical experience and market conditions and present value
discount rates that the Company believes would be requested by an unrelated
purchaser of an identical stream of estimated cash flows. Management believes
that the Company's estimates of excess cash flow were reasonable at the time
each gain on sale of loans was recorded. However, the actual rates of default
and/or prepayment and/or net loss on such loans may exceed those estimated for
purposes of calculating the Company's finance income receivable and consequently
may adversely affect anticipated future excess cash flow. The Company
periodically reviews its default, prepayment and net loss assumptions in
relation to current performance of the loans and market conditions, and, if
necessary, writes down the balance of finance income receivable. The Company
made a significant adjustment to its finance income receivable at March 31, 1997
after completing such a review, primarily relating to the recovery rates on
repossessed vehicles and the Company's disposition strategy. The Company's
business, financial condition, results of operations and liquidity could be
materially adversely affected by such adjustments in the future. No
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assurance can be given that loan losses and prepayments will not exceed the
Company's estimates or that finance income receivable could be sold at its
stated value on the balance sheet, if at all.
POSSIBLE RESTRICTIONS ON CASH FLOW FROM SECURITIZATIONS. The Company's
future liquidity and financial condition, and its ability to finance the growth
of its business and to repay or refinance its indebtedness, will depend to a
material extent on distributions of excess cash flow from securitization trusts.
The Company's agreements with FSA provide that the Company must maintain in a
spread account for each insured securitization trust specified levels of excess
cash during the life of the trust. These spread accounts are initially funded
out of initial deposits or cash flows from the related trust. Thereafter, during
each month, excess cash flow due to Arcadia Receivables Finance Corp. (formerly
Olympic Receivables Finance Corp.) ("ARFC"), from all insured securitization
trusts is first used to replenish any spread account deficiencies and is then
distributed to the Company. The timing and amount of distributions of excess
cash from securitization trusts varies based on a number of factors, including
but not limited to loan delinquencies, defaults and net losses, the rate of
turnover of repossession inventory and recovery rates, the ages of loans in the
portfolio, prepayment experience and required spread account levels. A
deterioration of the Company's loan delinquencies, cumulative defaults or net
losses, or a build-up in repossession inventory, or the continuing increase in
the proportion of repossession inventory sold in the wholesale auction markets,
or the increase in loans entering the seasoning period, could reduce excess cash
available to the Company. At December 31, 1997, the Company had an aggregate of
$250.3 million of restricted cash in spread accounts. There can be no assurance
that in the future the Company will not experience an interruption of excess
cash flow from ARFC, which could adversely affect the Company's ability to pay
its obligations, including the Notes.
Each insured securitization trust has certain portfolio performance tests
relating to levels of delinquency, defaults and net losses on the loans in such
trust based in part on the relative percentage of Premier and Classic loans.
Portfolio performance tests require that the loan portfolio of each insured
securitization trust (i) have an average delinquency ratio not equal to or in
excess of a specified percentage, (ii) have a cumulative default rate not equal
to or in excess of specified percentages which vary based on the aging of the
loan portfolio, and (iii) have a cumulative net loss rate not equal to or in
excess of specified percentages which vary based on the aging of the loan
portfolio. If any of these tests are exceeded (a "violation"), the amount
required to be retained in the spread account related to such securitization
trust will be increased to an amount generally equal to the greater of 10% of
the outstanding balance of loans or 1% of the original balance of loans held by
the securitization trust. As a consequence, a violation generally will decrease
excess cash flow available from such securitization trust until loan portfolio
performance has returned to the required limits for a specified period,
generally three to five months, unless waived by FSA. FSA and the Company have
an arrangement under which, if any insured securitization trust exceeds the
specified portfolio performance tests, ARFC may, in lieu of retaining the excess
cash from that securitization trust in the related spread account, pledge an
equivalent amount of cash, which has the effect of preventing the violation of
the portfolio performance test. Although certain trusts, primarily those that
contained loans originated in 1995, exceeded portfolio performance tests in the
first eight months of 1997 and are still in excess of such tests, this
arrangement with FSA has prevented a violation, although it has reduced the
amount of cash that would otherwise have been available to the Company if the
Company had sought and received a waiver of such violation from FSA. A
deterioration of the Company's delinquencies, cumulative defaults or net losses
would result in one or more additional existing securitization trusts exceeding
one or more of these tests in the absence of changes to the trigger levels.
There can be no assurance that, in such event, waivers will be available from
FSA permitting payments to ARFC.
Upon the occurrence of certain events with respect to any series of
asset-backed securities insured by FSA, including the failure to meet loan
portfolio performance tests of the nature described above but at significantly
higher levels, or upon a breach of the collateral coverage requirements of the
FSA-insured warehouse facility (an "Insurance Agreement Event of Default"), the
Company will be in default under its insurance agreement with FSA. Upon an
Insurance Agreement Event of Default, unless waived by FSA,
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FSA may suspend distributions of cash flow from the related securitization trust
and all other FSA-insured trusts (including the FSA-insured warehouse facility)
until the asset-backed securities have been redeemed, capture excess cash flow
from performing trusts, increase its premiums and replace the Company as
servicer with respect to all FSA-insured trusts. There can be no assurance that
a further deterioration of the Company's loan delinquencies, gross charge-offs
and net losses would not result in an Insurance Agreement Event of Default,
which could adversely affect the Company's ability to satisfy its obligations,
including the Notes. Certain of the Company's securitization trusts exceeded
such insurance agreement thresholds prior to 1996 and the Company obtained
waivers from FSA to permit distributions of cash to ARFC. There can be no
assurance that in the future, if such thresholds are exceeded, waivers will be
available.
In addition, the spread account for each securitization is
cross-collateralized to the spread accounts established in connection with the
Company's other securitization trusts (including the FSA-insured warehouse
facility) such that excess cash flow from a performing securitization trust may
be used to support negative cash flow from, or to replenish a deficient spread
account in connection with, a nonperforming securitization trust, thereby
further restricting excess cash flow available to ARFC. If excess cash flow from
all insured securitization trusts is not sufficient to replenish all such spread
accounts, no cash flow would be available to the Company from ARFC for that
month. In January 1996, approximately $0.5 million of the Company's $63.6
million of restricted cash in spread accounts at December 31, 1995 under insured
securitization trusts was utilized for payments on related asset-backed
securities due to insufficient current cash flow in four such securitization
trusts. Excess cash flows from the other securitization trusts were not
sufficient to replenish such withdrawals and, consequently, the Company did not
receive excess cash flow from Olympic Receivables Finance Corp. (the predecessor
of ARFC) during that month. In February 1996, current excess cash flows again
began releasing to the Company. There can be no assurance that in the future the
Company will not experience an interruption of excess cash flow from ARFC such
as occurred in January 1996, which could adversely affect the Company's ability
to pay its obligations, including the Notes. FSA also has a collateral security
interest in the stock of ARFC. If FSA were to foreclose on such security
interest following an event of default under an insurance agreement with respect
to a securitization trust (including the FSA-insured warehouse facility), FSA
could preclude payment of dividends by ARFC to the Company, thereby eliminating
the Company's right to receive distributions of excess cash flow from all the
FSA-insured securitization trusts. The Company's right to service the loans sold
in securitizations insured by FSA is also generally subject to the discretion of
FSA. Accordingly, there can be no assurance that the Company will continue as
servicer for such loans and receive related servicing fees.
Any increase in limitations on cash flow available to the Company from ARFC
(including any increase in the amount of cash pledged under the arrangement with
FSA), inability to obtain any necessary waivers from FSA or termination of
servicing arrangements could materially adversely affect the Company's cash flow
and liquidity, and, ultimately, its business, financial condition and results of
operations and its outstanding securities.
IMPACT OF PORTFOLIO GROWTH AND PRODUCT MIX. The Company has experienced
rapid growth in its loan servicing portfolio, although the rate of such growth
slowed in 1997. Historically, the statistical incidence of delinquencies and
defaults in connection with automobile loans tends to vary over the age of the
loan. For example, statistically, loans that are between six and fourteen months
old have had a higher likelihood of being delinquent or defaulting than loans
with similar credit characteristics that are three months old. Accordingly, to
the extent that portfolio growth results in a servicing portfolio containing
disproportionately more loans originated within the prior six months, the
current and historical delinquency and default rates of loans in the servicing
portfolio may understate future delinquency and default rates. Also, there can
be no assurance that the Company's transition from centralized to regional
servicing and collection will not adversely affect the rate of loan
delinquencies and defaults.
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In addition, to the extent the Company offers new loan products which
involve different underwriting policies, the delinquency and default rates of
the Company's servicing portfolio may change. The Company has instituted a
tiered pricing system and has periodically increased the authorized amount of
loans purchased under its Classic program involving borrowers who do not meet
all of the underwriting standards in the Company's Premier program and are
charged rates of interest higher than those under the Company's Premier program.
The Company increased its purchase of loans under the Classic program from 17%
of the principal amount of loans purchased in 1995 to 36% in 1996 and to 55% in
1997. As a result of the increases in Classic loans as a proportion of the
Company's portfolio, there has been an increase in the rates of, and reserves
for, delinquencies, repossessions and losses historically reported by the
Company. The expansion of the Classic loan program and seasoning of the
Company's existing servicing portfolio will likely continue to cause the
Company's loan performance statistics to show higher delinquencies, gross
charge-offs and net losses when compared with historical performance even if
such loan performance statistics are consistent with the Company's reserves for
loan losses.
To estimate future delinquency, repossession and loss experience on its
loans, the Company uses a combination of factors, including actual loan
performance experience for that loan program, and industry experience on loans
with similar credit characteristics. However, there can be no assurance that its
loans will perform under varying economic conditions in the manner estimated by
the Company. Any increase in delinquency, repossession and loss rates related to
its loans above the rates estimated by the Company could have a material adverse
effect on the Company's business, financial condition and results of operations,
as well as its liquidity. In addition, certain of the Company's loan products
which produce higher delinquency, repossession and loss rates than initially
expected may continue to have an impact on the Company's overall loan
performance, even after being discontinued or modified, until the initially
generated loans mature beyond the six- to fourteen-month period. In 1996, the
Company discontinued a Classic loan product directed at first-time credits and
modified a Classic program for financing the sale of its repossessed inventory
in retail markets, each of which had experienced higher than expected
delinquency, repossession and loss rates.
EXTENSIONS AND AMENDMENTS. Like others in the industry, the Company gives
certain obligors extensions or amendments to loan terms in certain
circumstances, including when the Company believes such obligors will thereby be
more likely to repay their loans, and losses on such loans can be reduced. Loans
that have been extended or amended generally present substantially higher
default risks than loans that have neither of these characteristics. Primarily
as a result of the expansion of the Classic program (which involves higher
credit risks than the Premier program), the portion of the Company's servicing
portfolio which exhibits one or both of these characteristics has increased.
Extensions and amendments (in the aggregate) averaged approximately 2.7% of the
servicing portfolio per month in 1996 and 1.9% per month in 1995, and with
seasonal peaks occurring during the Christmas holiday season. Extensions and
amendments (in the aggregate) averaged approximately 3.4% per month for the
first eight months of 1997, compared to 2.7% per month for the first eight
months of 1996, and in the months of July and August 1997 were 3.0% and 2.7%,
respectively, compared to 2.9% and 2.8% in the months of July and August 1996,
respectively. The Company believes that one reason for the 1997 increase in
extensions and amendments as a percentage of the servicing portfolio is the
slower rate of growth in the size of the Company's portfolio, which results in a
higher percentage of loans of the age that are more likely to be extended or
amended. Any continued slowing of growth could contribute to a further increase
in such statistics. The Company considers these characteristics when
establishing its loss reserves. In certain circumstances, loans that have been
extended or amended have the effect of removing the related loan from delinquent
status.
POTENTIAL NEGATIVE IMPACT OF COVENANTS UNDER FINANCE AGREEMENTS. Increases
in loan delinquency and loss rates with respect to any securitization trust may
result in the trust's portfolio exceeding the various pool performance levels
established by FSA, thereby restricting or cutting off cash distributions to
ARFC from the securitization spread accounts. See "Cash Flow from
Securitizations" above. In addition, such
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increases may cause the Company to exceed certain pool performance tests
established in other agreements governing its indebtedness. If at the end of any
month the Portfolio Loss Ratio (as defined) exceeds 3.5% (which is calculated
excluding the effect of the Company's March 1997 special charge), the Company's
Delinquency Rates (as defined) exceed 3.5%, the Warehousing Loss Ratio (as
defined) exceeds 1.0%, or the Average Net Excess Spread (as defined) is not less
than 4.0%, an event of default will occur under one of the Company's outstanding
warehouse facilities. The delinquency level is calculated as a percentage of
outstanding principal balance of all automobile loans owned or securitized by
the Company as to which a payment is more than thirty days past due. Upon the
occurrence of an event of default under such warehouse facility, the lending
banks under such facility would have no further obligation to extend additional
credit. Furthermore, any such event of default or acceleration may trigger
cross-defaults under other outstanding indebtedness of the Company and may
result in the acceleration of amounts due thereunder. The increase in Classic
loans, among other things, has increased the risk that the Company may trigger
its Portfolio Loss Ratio covenants in the future.
RESALE AND FINANCING OF REPOSSESSIONS In addition to wholesale distribution
channels, the Company has regularly disposed of repossessed vehicles through
retail markets, primarily retail used car consignment lots. During 1997,
approximately 46% of repossessed vehicles sold were liquidated through retail
markets, compared with 70% in 1996 and 40% in 1995. This strategy delays the
Company's excess cash flow during the period repossessions are held in inventory
pending resale, which is typically a longer period of time than for wholesale
auctions. In addition, the Company's repossession inventory has increased as a
percentage of its servicing portfolio due to the increase in the rate of loan
defaults and the Company's transition from using a few large retail consignment
lots for repossession sales to using multiple retail consignment lots. At
December 31, 1997, the Company had $55.3 million of repossessed inventory,
compared with $49.0 million at June 30, 1997, $64.9 million at December 31,
1996, and $17.7 million at December 31, 1995.
As of March 31, 1997, the Company took an after-tax charge of $60.8 million
due primarily to a reduction in the estimated recovery rates on then current
repossessed inventory and anticipated future inventory arising from then
existing securitization transactions to 60% of principal balance outstanding (as
discussed in the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997). The Company selected this 60% recovery rate
on the basis of the recovery rate the Company believes it could achieve if all
of its repossession inventory, including those higher value vehicles that are
ultimately sold through retail channels, were sold through wholesale channels.
In addition, the Company changed its accounting policy with respect to the
estimated recovery rate realized upon disposition of repossessed inventory to
estimate recovery rates based on such wholesale values and to record any
recoveries in excess of such levels at the time such excess recoveries are
realized. Since the Company changed its strategy at the end of the first quarter
of 1997, the Company's overall recovery rate (for both wholesale and retail
sales) has averaged approximately 62.5%. There can be no assurance that a change
in the proportions of vehicles sold through retail and wholesale channels or any
further softening of used car markets will not require additional adjustments to
repossession inventory or estimated recovery rates used to calculate finance
income receivable, which could be required if the Company's recovery rate were
to decline further. Futhermore, with the significant increase in the number of
repossessions, the Company has increased purchases of loans that finance resales
of repossessions to new buyers. Delinquency, gross charge-off and net loss rates
associated with loans on repossessed automobiles have historically been
substantially in excess of the same statistics associated with the Company's
remaining servicing portfolio. There can be no assurance that management's
recent efforts to improve the Company's retail repossession finance program will
be successful. If and to the extent the Company further modifies its current
disposition strategy with respect to use of the wholesale auction markets, this
modification could decrease recovery rates and increase net losses.
POTENTIAL NEGATIVE IMPACT OF INCREASE IN PERSONAL BANKRUPTCIES. Recent
media reports have suggested an increase in the number of personal bankruptcy
filings and the Company has in recent months
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experienced a slight increase in the proportion of its servicing portfolio
representing loans to borrowers who have filed for bankruptcy protection. A
continuation or increase in such trend could contribute to greater default and
net loss rates than the Company has historically experienced.
ECONOMIC CONDITIONS
MARKET CONDITIONS. Periods of economic slowdown or recession, whether
general, regional or industry-related, may increase the risk of default on
automobile loans and may have an adverse effect on the Company's business,
financial condition and results of operations. Such periods also may be
accompanied by decreased consumer demand for automobiles, resulting in reduced
demand for automobile loans and declining values of automobiles securing
outstanding loans, thereby weakening collateral coverage and increasing the
possibility of losses in the event of default. In addition, recent reports of
increases in consumer bankruptcy filings and default rates on consumer credit
during a period of economic growth indicate that the impact of consumer behavior
on default rates is not limited to periods of economic slowdown or recession.
The increased proportion of loans under the Company's Classic program has
increased the Company's sensitivity to changes in economic conditions.
Significant increases in the inventory of used automobiles during recessionary
economies may depress the prices at which repossessed automobiles may be sold or
delay the timing of such sales. A continuation of the recent softening of the
used car market as the result of factors including the recent start-up of
superstore competition or forecasted levels of used lease vehicles that will be
available in the market could have a similar effect on prices for and timing of
sales of repossession inventory. There can be no assurance that the used
automobile markets will be adequate for the sale of the Company's repossessed
automobiles and any material deterioration of such markets could increase the
Company's loan losses or reduce recoveries from the sale of repossession
inventory. In addition, the Company has channeled a significant portion of its
repossession inventory through retail resale markets instead of wholesale
markets, including the financing of such retail sales through its Classic
program, which had the effect of reducing the Company's loan losses while
increasing repossession inventory and delaying cash flow recovered from
inventory turnover. There can be no assurance that the Company will continue to
use such retail resale channels, that it will be able to realize such benefits
to loan losses in the future or that its inventories will not reach levels at
which they cannot readily be liquidated through such channels. Any such event
might have an adverse effect on loan loss levels.
INTEREST RATES. The Company's profitability may be directly affected by the
level of and fluctuations in interest rates, which affect the Company's gross
interest rate spread. The Company monitors the interest rate environment and
employs prefunding or other hedging strategies designed to mitigate the impact
of changes in interest rates on its gross interest rate spread. However, there
can be no assurance that the profitability of the Company would not be adversely
affected during any period of changes in interest rates.
LABOR MARKET CONDITIONS. The Company's ability to manage portfolio
delinquency, default and loss rates is dependent on its ability to attract and
retain qualified servicing and collection personnel. In recent months, low
unemployment rates driven by economic growth and the continued expansion of the
consumer credit markets have contributed to an increase in employee turnover
rate, especially among the Company's collection personnel. Continued high
turnover relative to historical levels, or an inability to attract and retain
replacement personnel, could have an adverse effect on the Company's portfolio
delinquency, default and net loss rates and, ultimately, its financial
condition, results of operations and liquidity.
LITIGATION
On March 4, 1997 a shareholder commenced an action against the Company and
certain named directors and officers of the Company entitled Taran v. Olympic
Financial Ltd. et al. in the United States District Court for the District of
Minnesota. Four similar lawsuits, three of them in the United States District
Court for the District of Minnesota (Frank Dibella, on behalf of himself and all
others similarly
92
<PAGE>
situated vs. Olympic Financial Ltd. et al., Michael Diemer vs. Olympic Financial
Ltd. et al. and Howard Pisnoy vs. Olympic Financial Ltd. et al.) and one in the
United States District Court for the Eastern District of New York (North River
Trading, LLC, and Allan Farkas, and All Others Similarly Situated vs. Olympic
Financial Ltd. et al.) were filed after that time. These suits have been
consolidated in one suit, In re Olympic Financial Ltd. Securities Litigation, in
the United States District Court for the District of Minnesota. Plaintiffs in
the consolidated action allege that during the period from July 20, 1995 through
March 3, 1997 the defendants, in violation of federal securities laws, engaged
in a scheme that had the effect of artificially inflating, maintaining and
otherwise manipulating the value of the Company's Common Stock by, among other
things, making baseless, false and misleading statements about the current state
and future prospects of the Company, particularly with respect to the Classic
program and the refinancing of repossessed automobiles. Plaintiffs allege that
this scheme included making false and misleading statements and/or concealing
material adverse facts. The consolidated action is in the preliminary stages and
the parties have not begun discovery. The Company has reviewed the complaint in
the consolidated action and believes that the consolidated action is without
merit and intends to defend it vigorously. There can, however, be no assurance
that the Company will prevail in such defense or that any order, judgment,
settlement or decree arising out of this litigation will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
MANAGEMENT OF GROWTH
The growth of the Company's servicing portfolio has resulted in increased
demands on the Company's personnel and systems. The Company's ability to
support, manage and control continued growth is dependent upon, among other
things, its ability to hire, train, supervise and manage its larger workforce.
Furthermore, the Company's ability to manage portfolio delinquency and loss
rates is dependent upon the maintenance of efficient collection and repossession
procedures and adequate staffing therefor. There can be no assurance that the
Company will have trained personnel and systems adequate to support such growth.
In 1996 the Company opened four regional collection centers and has taken a
number of initiatives to improve its servicing and collection performance. There
can be no assurance that these efforts will be successful.
COMPETITION
The business of financing automobiles is highly competitive. Existing and
potential competitors include well-established financial institutions, such as
banks, other automobile finance companies, small loan companies, thrifts,
leasing companies and captive finance companies owned by automobile
manufacturers, such as General Motors Acceptance Corporation, Chrysler Credit
Corp. and Ford Motor Credit Company. Many of these competitors have greater
financial, technical and marketing resources than the Company and from time to
time offer special buyer incentives in the form of below-market interest rates
on certain classes of vehicles. Many of such competitors also have longstanding
relationships with automobile dealers and some of such major competitors provide
other forms of financing to automobile dealers, including dealer floor plan
financing and leasing, which is not provided by the Company. There can be no
assurance that the Company will be able to compete successfully with such
competitors.
REGULATION
The Company's business is subject to numerous federal and state consumer
protection laws and regulations, which, among other things: (i) require the
Company to obtain and maintain certain licenses and qualifications; (ii) limit
the interest rates, fees and other charges the Company is allowed to charge;
(iii) limit or prescribe certain other terms of the Company's automobile loan
contracts; (iv) require specific disclosures; and (v) define the Company's
rights to repossess and sell collateral. The Company believes it is in
substantial compliance with all such laws and regulations, and that such laws
and regulations have had no material effect on the Company's ability to operate
its business. Changes in existing laws or regulations,
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<PAGE>
or in the interpretation thereof, or the promulgation of any additional laws or
regulations, could have a material adverse effect on the Company's business,
financial condition and results of operations and upon its outstanding
securities.
SHARES ELIGIBLE FOR FUTURE SALES
Additional shares of Common Stock may be issued upon the exercise of
outstanding stock options and the exercise of outstanding warrants. Certain
holders thereof have registration rights with respect to such shares. The
Company has registered pursuant to such rights the sale from time to time of up
to 5,923,364 shares of Common Stock when, as and if issued upon the exercise of
outstanding warrants. Such issuances, or the resale of the Common Stock so
acquired, could have an adverse effect on the market price of the Company's
Common Stock.
UNDESIGNATED SHARES; ANTI-TAKEOVER CONSIDERATIONS
The authorized and unissued stock of the Company, other than shares reserved
for issuance pursuant to options and warrants, consists of undesignated shares.
The Board of Directors, without any action by the Company's shareholders, is
authorized to designate and issue the undesignated shares in such classes or
series as it deems appropriate and to establish the rights, preferences and
privileges of such shares, including dividend, liquidation and voting rights.
The Company has adopted a shareholder rights plan to deter a hostile takeover.
Further, certain provisions of the Minnesota Business Corporation Act may
operate to discourage a negotiated acquisition or unsolicited takeover of the
Company. Each or any of the foregoing could have the effect of entrenching the
Company's directors, impeding or deterring an unsolicited tender offer or
takeover proposal regarding the Company and thereby depriving the then current
shareholders of the ability to sell their shares at a premium over the market
price, or otherwise adversely affecting the voting power, dividend, liquidation
and other rights of holders of Common Stock.
94
<PAGE>
Exhibit 23.1, Consent of Ernst & Young LLP, is amended and restated as
follows.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of Arcadia Financial Ltd. and related Prospectuses of our report
dated January 23, 1998, with respect to the consolidated financial statements
of Arcadia Financial Ltd., included in the Annual Report (Form 10-K) for
the year ended December 31, 1997.
<TABLE>
<CAPTION>
Registration
Form Statement No. Purpose
- ---- ------------- -------
<S> <C> <C>
S-3 333-01126 Universal Shelf
S-3 33-94018 Warrants to Purchase Common Stock
S-3 33-98080 Warrants to Purchase Common Stock
S-3 33-81512 Subordinated Extendible and Fixed-Term Notes
S-3 333-18027 Universal Shelf
S-8 33-53670 Olympic Financial Ltd. 1990 Stock Option Plan, the
Olympic Financial Ltd. 1992 Director Stock Option
Plan, and the Employee Stock Purchase Plan
S-8 33-86484 Olympic Financial Ltd. 1994-1997 Restricted Stock
Election Plan
S-8 333-03801 Olympic Financial Ltd. 1998-2000 Restricted Stock
Election Plan
S-8 333-05387 Olympic Financial Ltd. Employee Stock Purchase Plan
S-8 333-08599 Olympic Financial Ltd. 401(k) Profit Sharing Plan
S-8 33-94228 Olympic Financial Ltd. 1998-2000 Restricted Stock
Election Plan
S-8 333-09229 Non-Statutory Stock Option Agreements between
Olympic Financial Ltd. and Warren Kantor
S-8 333-28909 Letter Agreement dated August 26, 1996, as amended,
between Arcadia Financial Ltd. (formerly Olympic
Financial Ltd.) and Warren Kantor
S-8 333-28911 Non-Statutory Stock Option Agreements between
Arcadia Financial Ltd. (formerly Olympic Financial
Ltd.) and each of Richard A. Greenawalt and
Warren Kantor
</TABLE>
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 10, 1998
<TABLE> <S> <C>
<PAGE>
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<PERIOD-START> JAN-01-1996 JAN-01-1996
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