<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 5, 1999
ARCADIA FINANCIAL LTD.
------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 0-20526 41-1664848
--------- ------- ----------
(State or other jurisdiction (Commission file number) (IRS employer
of incorporation) identification No.)
7825 Washington Avenue South, Minneapolis, Minnesota 55439-2435
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 942-9880
Not Applicable
(Former name or former address, if changed since last report)
<PAGE>
Item 5. OTHER EVENTS.
On March 5, 1999, Ernst & Young LLP ("Ernst & Young"), the Company's
independent auditors, released their report dated January 25, 1999, on the
Company's consolidated balance sheets as of December 31, 1998 and 1997 (as
restated) and the related consolidated statements of operations and
comprehensive income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998 (as restated with respect
to 1997 and 1996).
Such financial statements, together with Ernst & Young's report thereon,
are filed as Exhibit 99.1 hereto.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS.
The following exhibits are filed with this report:
EXHIBIT NO. DESCRIPTION
----------- -----------
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December
31, 1998.
27.2 Financial Data Schedule for the years ended December
31, 1997 and 1996.
27.3 Financial Data Schedule for the periods ended March
31, June 30 and September 30, 1998.
27.4 Financial Data Schedule for the periods ended March
31, June 30 and September 30, 1997.
99.1 Consolidated balance sheets as of December 31, 1998 and
1997 (as restated) and the related consolidated
statements of operations and comprehensive income,
shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998 (as
restated with respect to 1997 and 1996), together with
the report of Ernst & Young LLP thereon.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
March 8, 1999 ARCADIA FINANCIAL LTD.
By: /s/ James D. Atkinson III
---------------------------
James D. Atkinson III
Senior Vice President
<PAGE>
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 25, 1999, with respect to the consolidated financial statements of
Arcadia Financial Ltd. included in the Company's Current Report on Form 8-K
filed March 8, 1999.
<TABLE>
<CAPTION>
Registration
Form Statement No. Purpose
---- ------------- -------
<S> <C> <C>
S-3 33-94018 Warrants to Purchase Common Stock
S-3 33-98080 Warrants to Purchase Common Stock
S-3 333-60531 Subordinated Extendible and Fixed-Term Notes
S-3 333-18027 Universal Shelf
S-8 33-56782 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. 1990 Stock Option Plan, Olympic Financial
Ltd. 1992 Director Stock Option Plan, and Olympic Financial Ltd.
1994-1997 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
S-8 333-63023 Non-Statutory Stock Option Agreement Between Arcadia Financial Ltd.
And Warren Kantor
S-8 333-63025 Employee Stock Purchase Plan
S-8 333-63027 1990 Stock Option Plan
</TABLE>
Minneapolis, Minnesota
March 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME FOUND ON PAGES 2 AND 3 OF EXHIBIT 99.1 TO THE COMPANY'S
FORM 8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,827
<SECURITIES> 0
<RECEIVABLES> 667,926
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 33,397
<DEPRECIATION> 15,886
<TOTAL-ASSETS> 727,683
<CURRENT-LIABILITIES> 0
<BONDS> 421,939
0
0
<COMMON> 392
<OTHER-SE> 268,417
<TOTAL-LIABILITY-AND-EQUITY> 727,683
<SALES> 0
<TOTAL-REVENUES> 146,383
<CGS> 0
<TOTAL-COSTS> 187,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,672
<INCOME-PRETAX> (92,476)
<INCOME-TAX> (9,235)
<INCOME-CONTINUING> (83,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83,241)
<EPS-PRIMARY> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME FOUND ON PAGES 2 AND 3 OF EXHIBIT 99.1 TO THE COMPANY'S
FORM 8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 17,274 16,057
<SECURITIES> 0 0
<RECEIVABLES> 758,794 695,295
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 26,750 17,778
<DEPRECIATION> 9,379 4,148
<TOTAL-ASSETS> 825,922 754,271
<CURRENT-LIABILITIES> 0 0
<BONDS> 421,780 206,418
0 0
0 0
<COMMON> 388 370
<OTHER-SE> 335,066 377,744
<TOTAL-LIABILITY-AND-EQUITY> 825,922 754,271
<SALES> 0 0
<TOTAL-REVENUES> 133,570 198,687
<CGS> 0 0
<TOTAL-COSTS> 162,017 92,298
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 41,216 25,193
<INCOME-PRETAX> (69,663) 81,196
<INCOME-TAX> (26,473) 30,209
<INCOME-CONTINUING> (43,190) 50,987
<DISCONTINUED> 0 0
<EXTRAORDINARY> (15,828) 0
<CHANGES> 0 0
<NET-INCOME> (59,018) 50,987
<EPS-PRIMARY> (1.53) 1.61
<EPS-DILUTED> (1.53) 1.40
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED SELECTED QUARTERLY DATA FOUND IN NOTE 17 TO THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS ON PAGES 56 AND 57 OF EXHIBIT 99.1 TO THE COMPANY'S FORM
8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<CASH> 6,387 8,160 6,328
<SECURITIES> 0 0 0
<RECEIVABLES> 798,143 703,660 711,380
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 28,181 29,319 31,366
<DEPRECIATION> 11,024 12,563 14,266
<TOTAL-ASSETS> 853,044 758,801 765,176
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 420,721 420,196 419,040
0 0 0
0 0 0
<COMMON> 390 390 392
<OTHER-SE> 342,265 244,885 262,183
<TOTAL-LIABILITY-AND-EQUITY> 853,044 758,801 765,176
<SALES> 0 0 0
<TOTAL-REVENUES> 66,613 20,470 85,048
<CGS> 0 0 0
<TOTAL-COSTS> 45,834 100,525 143,878
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 12,785 25,693 38,619
<INCOME-PRETAX> 7,999 (105,748) (97,449)
<INCOME-TAX> 3,038 (9,235) (9,235)
<INCOME-CONTINUING> 4,956 (96,513) (88,214)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,956 (96,513) (88,214)
<EPS-PRIMARY> .13 (2.48) (2.26)
<EPS-DILUTED> .13 (2.48) (2.26)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED SELECTED QUARTERLY DATA FOUND IN NOTE 17 TO THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS ON PAGES 56 AND 57 OF EXHIBIT 99.1 TO THE COMPANY'S FORM
8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 23,596 28,135 17,720
<SECURITIES> 0 0 0
<RECEIVABLES> 637,729 721,446 765,707
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 21,479 22,901 24,936
<DEPRECIATION> 5,264 6,436 7,667
<TOTAL-ASSETS> 712,048 798,150 829,594
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 351,479 349,996 349,122
0 0 0
0 0 0
<COMMON> 386 387 388
<OTHER-SE> 312,092 319,533 329,349
<TOTAL-LIABILITY-AND-EQUITY> 712,048 798,150 829,594
<SALES> 0 0 0
<TOTAL-REVENUES> (49,821) 8,733 71,614
<CGS> 0 0 0
<TOTAL-COSTS> 40,643 79,568 120,269
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 7,591 18,242 28,642
<INCOME-PRETAX> (98,055) (89,077) (77,297)
<INCOME-TAX> (37,262) (33,850) (29,374)
<INCOME-CONTINUING> (60,793) (55,228) (47,923)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> (15,828) (15,828) (15,828)
<CHANGES> 0 0 0
<NET-INCOME> (76,621) (71,055) (63,751)
<EPS-PRIMARY> (2.00) (1.84) (1.65)
<EPS-DILUTED> (2.00) (1.84) (1.65)
</TABLE>
<PAGE>
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, 1998 and 1997 (as restated) and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998 (as restated with respect to 1997 and 1996). 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, 1998 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in
1998 the Company retroactively changed its method of accounting for gain on sale
of loans and the related finance income receivable.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
January 25, 1999
1
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
(Dollars in thousands, except share and per share amounts) (RESTATED)
1998 1997
---------- ----------
ASSETS
<S> <C> <C>
Cash and cash equivalents................................................................. $ 10,827 $ 17,274
Due from securitization trust............................................................. 62,081 107,207
Auto loans held for sale.................................................................. 17,899 49,133
Finance income receivable................................................................. 587,946 602,454
Furniture, fixtures and equipment......................................................... 17,511 17,371
Other assets.............................................................................. 31,419 32,483
---------- ----------
Total assets..................................................................... $ 727,683 $ 825,922
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts due under warehouse facilities..................................................... $ - $ 30,880
Senior notes............................................................................... 366,657 365,640
Subordinated notes......................................................................... 51,898 50,772
Capital lease obligations.................................................................. 3,384 5,368
Deferred income taxes...................................................................... - 11,506
Accounts payable and accrued liabilities................................................... 36,935 26,302
---------- ----------
Total liabilities................................................................ 458,874 490,468
Commitments and contingencies (Note 9)
Shareholders' equity:
Capital stock, $.01 par value, 100,000,000 shares authorized:
Common stock, 39,156,888 and 38,813,735 shares respectively, issued and outstanding...... 392 388
Additional paid-in capital................................................................. 324,565 322,819
Accumulated other comprehensive income..................................................... 18,550 3,704
Retained earnings (deficit)................................................................ (74,698) 8,543
----------- ----------
Total shareholders' equity....................................................... 268,809 335,454
---------- ----------
Total liabilities and shareholders' equity....................................... $ 727,683 $ 825,922
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
(Dollars in thousands, except per share amounts) (RESTATED) (RESTATED)
1998 1997 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
REVENUES:
Net interest margin.................................................. $ 81,867 $ 80,369 $ 59,628
Gain (loss) on sale of loans......................................... (18,499) (14,895) 95,420
Servicing fee income................................................. 83,015 68,096 43,639
---------------- ---------------- -----------------
Total revenues.................................................. 146,383 133,570 198,687
EXPENSES:
Salaries and benefits................................................ 64,949 61,756 40,751
General and administrative and other operating expenses.............. 122,238 100,261 51,547
---------------- ---------------- -----------------
Total operating expenses........................................ 187,187 162,017 92,298
Long-term debt and other interest expense............................ 51,672 41,216 25,193
---------------- ---------------- -----------------
Total expenses.................................................. 238,859 203,233 117,491
---------------- ---------------- -----------------
Operating income (loss) before income taxes and extraordinary items.. (92,476) (69,663) 81,196
Income tax provision (benefit)...................................... (9,235) (26,473) 30,209
---------------- ---------------- -----------------
Income (loss) before extraordinary items............................. (83,241) (43,190) 50,987
Extraordinary items, net of tax...................................... -- (15,828) --
---------------- ---------------- -----------------
NET INCOME (LOSS).................................................... (83,241) (59,018) 50,987
Other comprehensive income:
Net unrealized gain on finance income receivable ............ 14,846 5,975 --
Income tax provision related to other comprehensive income... -- (2,271) --
---------------- ---------------- -----------------
14,846 3,704 --
---------------- ---------------- -----------------
COMPREHENSIVE INCOME (LOSS).......................................... $ (68,395) $ (55,314) $ 50,987
---------------- ---------------- -----------------
---------------- ---------------- -----------------
BASIC EARNINGS PER SHARE:
Income (loss) per share before extraordinary items................... $ (2.13) $ (1.12) $ 1.61
Extraordinary items per share........................................ -- (0.41) --
---------------- ---------------- -----------------
Net income (loss) per share..................................... $ (2.13) $ (1.53) $ 1.61
---------------- ---------------- -----------------
---------------- ---------------- -----------------
DILUTED EARNINGS PER SHARE:
Income (loss) per share before extraordinary items $ (2.13) $ (1.12) $ 1.40
Extraordinary items per share........................................ -- (0.41) --
---------------- ---------------- -----------------
Net income (loss) per share..................................... $ (2.13) $ (1.53) $ 1.40
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Weighted average shares outstanding:
Basic.............................................................. 39,071,412 38,700,346 30,897,426
Diluted............................................................ 39,071,412 38,700,346 36,449,995
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands, except share amounts)
NUMBER OF NUMBER OF ADDITIONAL
PREFERRED COMMON PREFERRED COMMON PAID IN
SHARES SHARES PAR VALUE PAR VALUE CAPITAL
------------- ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995,
AS PREVIOUSLY REPORTED....................... 1,071,036 22,495,360 $ 11 $ 224 $ 157,200
Prior period adjustment (see Note 2)........... -- -- -- --
------------- ------------ ---------- --------------- -------------
BALANCE AT DECEMBER 31, 1995,
AS RESTATED.................................. 1,071,036 22,495,360 11 224 157,200
Issuance of Common Stock:
Public offering.............................. -- 8,050,000 -- 81 145,925
Benefit plans................................ -- 373,762 -- 4 1,161
Amortization of deferred compensation.......... -- -- -- -- 1,038
Exercise of options and warrants............... -- 1,101,269 -- 11 4,902
Preferred Stock redemption and conversion to
Common Stock................................. (1,071,036) 4,992,214 (11) 50 (45)
Payment of dividends on Preferred Stock........ -- -- -- -- --
Net income, as restated........................ -- -- -- -- --
------------- ------------ ---------- --------------- -------------
BALANCE AT DECEMBER 31, 1996, AS RESTATED...... -- 37,012,605 -- 370 310,181
Issuance of warrants........................... -- -- -- -- 8,590
Issuance of Common Stock:
Benefit plans................................ -- 292,485 -- 3 565
Amortization of deferred compensation.......... -- -- -- -- 991
Exercise of options and warrants............... -- 1,508,645 -- 15 2,492
Unrealized gain on finance income receivable... -- -- -- -- --
Net loss, as restated.......................... -- -- -- -- --
------------- ------------ ---------- --------------- -------------
BALANCE AT DECEMBER 31, 1997, AS RESTATED...... -- 38,813,735 -- 388 322,819
Issuance of Common Stock:
Benefit plans................................ -- 193,830 -- 2 495
Amortization of deferred compensation.......... -- -- -- -- 712
Exercise of options and warrants............... -- 149,323 -- 2 539
Unrealized gain on finance income receivable... -- -- -- -- --
Net loss....................................... -- -- -- -- --
------------- ------------ ---------- --------------- -------------
BALANCE AT DECEMBER 31, 1998................... -- 39,156,888 $ -- $ 392 $ 324,565
------------- ------------ ---------- --------------- -------------
------------- ------------ ---------- --------------- -------------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED
INCOME EARNINGS TOTAL
------------- ------------- ------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995,
AS PREVIOUSLY REPORTED....................... $ -- $ 23,378 $ 180,813
Prior period adjustment (see Note 2)........... -- (5,652) (5,652)
------------- ------------- ------------
BALANCE AT DECEMBER 31, 1995,
AS RESTATED.................................. -- 17,726 175,161
Issuance of Common Stock:
Public offering.............................. -- -- 146,006
Benefit plans................................ -- -- 1,165
Amortization of deferred compensation.......... -- -- 1,038
Exercise of options and warrants............... -- -- 4,913
Preferred Stock redemption and conversion to
Common Stock................................. -- -- (6)
Payment of dividends on Preferred Stock........ -- (1,152) (1,152)
Net income, as restated........................ -- 50,987 50,987
------------- ------------- ------------
BALANCE AT DECEMBER 31, 1996, AS RESTATED...... -- 67,561 378,112
Issuance of warrants........................... -- -- 8,590
Issuance of Common Stock:
Benefit plans................................ -- -- 568
Amortization of deferred compensation.......... -- -- 991
Exercise of options and warrants............... -- -- 2,507
Unrealized gain on finance income receivable... 3,704 -- 3,704
Net loss, as restated.......................... -- (59,018) (59,018)
------------- ------------- ------------
BALANCE AT DECEMBER 31, 1997, AS RESTATED...... 3,704 8,543 335,454
Issuance of Common Stock:
Benefit plans................................ -- -- 497
Amortization of deferred compensation.......... -- -- 712
Exercise of options and warrants............... -- -- 541
Unrealized gain on finance income receivable... 14,846 -- 14,846
Net loss....................................... -- (83,241) (83,241)
------------- ------------- ------------
BALANCE AT DECEMBER 31, 1998................... $ 18,550 $ (74,698) $ 268,809
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
(Dollars in thousands) (RESTATED) (RESTATED)
1998 1997 1996
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $ (83,241) $ (59,018) $ 50,987
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization...................................... 8,274 7,003 4,286
Loss on sale of furniture, fixtures and equipment.................. -- 17 119
(Increase) decrease in assets:
Automobile loans held for sale:
Purchases of automobile loans................................... (2,220,507) (2,913,097) (2,750,553)
Sales of automobile loans....................................... 2,198,326 2,864,120 2,787,412
Repayments of automobile loans.................................. 53,415 36,129 45,412
Finance income receivable.......................................... 29,354 (116,817) (241,504)
Due from securitization trusts..................................... 45,126 69,869 (177,076)
Prepaid expenses and other assets.................................. 426 2,420 (5,787)
Increase (decrease) in liabilities:
Deferred income taxes........................................... (11,506) (33,902) 30,209
Accounts payable and accrued liabilities........................ 10,633 13,111 3,368
---------------- --------------- ----------------
Total cash used in operating activities.................. 30,300 (130,165) (253,127)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of furniture, fixtures and equipment............. 1,131 98 26
Purchase of furniture, fixtures and equipment........................ (7,580) (8,873) (5,108)
Purchase of subordinated certificates................................ -- -- (2,596)
Collections on subordinated certificates............................. 991 1,465 1,078
---------------- --------------- ----------------
Total cash used in investing activities.................. (5,458) (7,310) (6,600)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock........................... 1,038 3,075 152,079
Payment of dividends on Preferred Stock.............................. -- -- (1,152)
Proceeds from borrowings under warehouse facilities.................. 2,429,517 3,157,863 2,159,523
Repayment of borrowings under warehouse facilities................... (2,460,397) (3,238,123) (2,074,913)
Unsecured subordinated notes, net.................................... 1,126 (2,917) 40,684
Proceeds from issuance of long-term debt............................. -- 373,500 --
Repayments of long-term debt......................................... -- (145,000) --
Deferred debt issuance cost, net..................................... -- (7,080) (13)
Reduction of capital lease obligations............................... (2,573) (2,626) (1,764)
---------------- --------------- ----------------
Total cash provided by financing activities.............. (31,289) 138,692 274,444
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents................. (6,447) 1,217 14,717
Cash and cash equivalents at beginning of period..................... 17,274 16,057 1,340
---------------- --------------- ----------------
Cash and cash equivalents at end of period........................... $ 10,827 $ 17,274 $ 16,057
---------------- --------------- ----------------
---------------- --------------- ----------------
Supplemental disclosures of cash flow information:
Non cash activities:
Additions to capital leases..................................... $ 589 $ 265 $ 5,569
Cash paid for:
Interest........................................................ 58,225 41,248 33,448
Taxes........................................................... -- -- --
</TABLE>
See notes to consolidated financial statements.
5
<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, 1998,
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, 1997 and
1996 balances to conform to current period presentation.
USE OF ESTIMATES. In conformity with generally accepted accounting
principles, management utilizes assumptions and estimates that affect the
reported value of finance income receivable and the gain on sale of automobile
receivables. Such assumptions include, but are not limited to, estimates of loan
prepayments, defaults, recovery rates and present value discount. The Company
uses a combination of its own historical experience, industry statistics and
expectation of future performance to determine such estimates. The Company's
estimation process is evaluated on a regular basis and modified when deemed
necessary. Modifications to the estimation process may result in changes in
estimates utilized to determine the carrying value of finance income receivable.
Actual results may differ from the Company's estimates due to numerous factors
both within and beyond the control of Company management. Changes in these
factors could require the Company to revise its assumptions concerning the
amount of voluntary prepayments, the frequency and/or severity of defaults and
the recovery rates associated with the disposition of repossessed vehicles. The
range of assumptions, as well as actual performance, are reflective of the risk
characteristics of the loans within specific securitization pools.
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 ten 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 fair value. Fair 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.
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
6
<PAGE>
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 typically paid to the dealer at or near the
original purchase date of the loan. Dealer participations are expensed when the
related loan is securitized and subsequently is recovered over time as a portion
of excess cash flows released from securitization trusts. In the event of a
default or prepayment within a time period specified in the dealer agreement, a
portion of the dealer participation is generally recoverable from the dealer.
FINANCE INCOME RECEIVABLE. The Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinquishments of Liabilities" ("SFAS 125") on January 1,
1997. 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 was effective for
transactions occurring after December 31, 1996, and has been be applied
prospectively.
Finance income receivable represents the fair value of 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 between the fair
values of such loans and the fair value of the estimated future cash flows to be
received by the Company. Estimated future cash flows represent the difference
between the weighted average APR 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 discount
rate utilized in its fair value computation is based on current market
conditions and prepayment assumptions are 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, 1998.
Because the cash flows representing finance income receivable can be
contractually prepaid or otherwise settled in such a way that the holder would
not recover substantially all of its recorded investment, this asset is
accounted for in a manner similar to an available for sale security as
prescribed by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and is carried at fair
value. Any unrealized gain or loss is reported, net of applicable income taxes,
as accumulated other comprehensive income in shareholder equity until
realized. The fair value of finance income receivable is estimated by
calculating the present value of excess cash flows based on when they are
expected to be released to the Company using a discount rate commensurate with
the risks. Such fair value calculations include estimates of cumulative credit
losses and prepayment rates for the remaining term of the loans sold since these
factors impact the amount and timing of future excess cash flows. 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 charge of $98.0
million to gain on sale in March 1997. In June 1998, as a result of changes in
estimated future cash flows arising from higher default experience, lower
prepayments and the elimination of its retail disposition strategy, the Company
recorded a charge to gain on sale of loans of $114.5 million. There were no
material adjustments to finance income receivable during 1996.
A financial guaranty insurance company (the "Insurer") has provided a
financial guaranty insurance policy for the benefit of the investors in each
securitization. In connection with the issuance of the policies, the Company is
required to establish a separate cash account with a trustee for the benefit of
the Insurer for each securitization. Monthly cash collections from the pools of
receivables in excess of required principal and interest payments on the
asset-backed securities and servicing fees and other expenses are added to the
restricted cash accounts. When the credit
7
<PAGE>
enhancement levels reach specified percentages of the pools of receivables,
excess cash flows are distributed to the Company through a wholly-owned
subsidiary Arcadia Receivables Finance Corp. ("ARFC"). In the event that monthly
cash collections from any pool of receivables are insufficient to make required
principal and interest payments to the investors and pay servicing fees and
other expenses, any shortfall would be drawn from the restricted cash accounts.
There is no recourse to the Company beyond the balance in the restricted spread
accounts or the trusts' future cash flows.
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.
INTEREST ADVANCES TO SECURITIZATION TRUSTS. 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 obligors on the loans.
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 contractual 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. The Company uses the liability method of accounting for
income taxes. Under the liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. This method also requires the
recognition of future tax benefits such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
included the enactment date.
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.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company periodically enters into
hedging transactions to manage its gross interest rate spread on securitization
transactions. The Company sells forward U.S. Treasury rate locks that most
closely parallel the average life of the loans expected to be sold. Gains or
losses on these arrangements are deferred and recognized as a component of gain
on sale at the time the loans are transferred to the securitization trust.
COMPREHENSIVE INCOME. The Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
effective January 1, 1998. SFAS 130 establishes standards for reporting
comprehensive income and its components in a full set of financial statements.
The new standard requires that all items that are required to be recognized
under accounting standards as components of comprehensive income, including an
amount representing total comprehensive income, be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Pursuant to SFAS 130, the Company has reported comprehensive income
in the accompanying consolidated financial statements. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
8
<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June 1997, the
FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way companies report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports. The
new pronouncement, also establishes standards for related disclosures about
products and services, geographic areas and major customers. The statement is
effective for financial statements for periods beginning after December 15,
1997. The Company's auto finance business is currently the only segment
reportable under SFAS 131.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The new standard requires that all derivatives be recognized
as either assets or liabilities in the consolidated balance sheets and that
those instruments be measured at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedging instrument. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. The statement is effective for financial statements for fiscal
years beginning after June 15, 1999. While the new standard will apply to the
Company's derivative financial instruments, the Company does not believe that
adoption of SFAS 133 will have a material effect on the Company's consolidated
financial position or results of operations.
2. ACCOUNTING CHANGE
Pursuant to the FASB's Special Report, "A Guide to Implementation of
Statement 125 on Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, Second Edition," dated December 1998, and public
comments from the Securities and Exchange Commission released on December 8,
1998, during the fourth quarter of 1998 the Company changed its accounting
policy with respect to the valuation and accounting for its finance income
receivable to the "cash-out" method. As previously discussed in Note 1, finance
income receivable represents the Company's retained interest in estimated future
cash flows from securitization transactions. Under the "cash-in" method
previously used by the Company, (i) the assumed discount period for measuring
the present value of future cash flows ended when these cash flows were
deposited into the securitization trust accounts and (ii) any initial deposits
to spread accounts were recorded at face value. Under the "cash-out" method, the
assumed discount period for measuring the present value of future cash flows
from the trusts ends when cash, including return of the initial deposits, is
distributed to the Company on an unrestricted basis. Prior period financial
statements have been restated to reflect this change on a retroactive basis. The
effects of the restatement on the consolidated balance sheet at December 31,
1997 and the consolidated statements of operations and shareholders' equity for
the years ended December 31, 1997 and 1996 are as follows:
9
<PAGE>
<TABLE>
<CAPTION>
(In millions, except per share data) 1997 1996
----------------------------- -----------------------------
ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance Sheet:
Finance income receivable $ 622,282 602,454
Deferred income taxes 18,846 11,506
Shareholders' equity 347,942 335,454
Statement of Operations:
Revenues $ 135,413 133,570 $ 213,495 198,687
Income tax expense (benefit) (25,841) (26,473) 35,688 30,209
Net Income (loss) (57,807) (59,018) 60,316 50,987
Basic earnings per share $ (1.49) (1.53) $ 1.91 1.61
Diluted Earnings per share (1.49) (1.53) 1.65 1.40
</TABLE>
Additionally, the Statement of Shareholders' Equity reflects a decrease in
consolidated retained earnings of $5.7 million as of December 31, 1995.
Restated Unaudited Selected Quarterly Data for the year ended December 31,
1997 and the nine months ended September 30, 1998 are presented in Note 16.
3. AUTOMOBILE LOANS HELD FOR SALE
The weighted average interest rate on automobile loans held for sale
was 14.65% and 15.68% at December 31, 1998 and 1997, respectively. Accrued
interest receivable on automobile loans held for sale aggregated $0.4 million
and $0.7 million as of December 31, 1998 and 1997, respectively.
4. FINANCE INCOME RECEIVABLE
The following table sets forth the components of finance income
receivable as of December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) (RESTATED)
1998 1997
--------------- --------------
<S> <C> <C>
Estimated cash flows on loans sold, net of estimated prepayments (1)....................... $ 1,195,466 $ 1,009,800
Deferred servicing income.................................................................. (101,996) (88,282)
Reserve for loan losses.................................................................... (415,401) (235,599)
--------------- --------------
Undiscounted cash flows on loans sold, net of estimated prepayments........................ 678,069 685,919
Discount to present value.................................................................. (90,123) (83,465)
--------------- --------------
$ 587,946 $ 602,454
--------------- --------------
--------------- --------------
Reserve for loan losses as a percentage of servicing portfolio............................. 8.15% 4.75%
</TABLE>
(1) Includes restricted cash deposits in securitization spread accounts of
$227.7 million and $250.3 million at December 31, 1998 and 1997,
respectively.
10
<PAGE>
The following represents the roll-forward of the finance income
receivable balance for the two years ended December 31, 1998:
<TABLE>
<S> <C>
(Dollars in thousands)
BALANCE AT DECEMBER 31, 1996, AS RESTATED............................................................... $ 481,934
Present value of estimated future cash flows from current period securitizations....................... 252,293
Interest earned on spread accounts..................................................................... 10,295
Recognition of present value effect of discounted cash flows, as restated.............................. 38,907
Unrealized gain on retained assets..................................................................... 5,975
Less:
Excess cash flows released to the Company............................................................. (88,950)
Change in estimate of future recovery rates........................................................... (98,000)
-------------
BALANCE AT DECEMBER 31, 1997, AS RESTATED............................................................... 602,454
Present value of estimated future cash flows from current period securitizations....................... 227,198
Interest earned on spread accounts..................................................................... 14,035
Recognition of present value effect of discounted cash flows........................................... 49,672
Unrealized gain on retained assets..................................................................... 14,846
Less:
Spread account recourse reduction amount (1).......................................................... (60,000)
Excess cash flows released to the Company (2)......................................................... (145,759)
Change in estimates of charge-offs, recovery rates and prepayments.................................... (114,500)
-------------
BALANCE AT DECEMBER 31, 1998............................................................................ $ 587,946
-------------
-------------
</TABLE>
- -------------
(1) During 1998, the Company and its provider of asset-backed securities
insurance entered into two separate arrangements whereby the Company was
allowed to receive an aggregate $60 million of cash from certain spread
accounts sooner than it would have absent such arrangement. The
arrangements, entered into in May and October, respectively, may be
extended on an annual basis upon mutual arrangement by and between the
Company and its provider of asset-backed securities insurance. The
Company pays a monthly fee to its provider of asset-backed securities
insurance to maintain the arrangement. The $60 million will be
replenished in the relevant spread accounts by means of a $3 million
reduction in the level of monthly cash releases from the spread accounts
beginning in May 1999, unless the terms of the arrangements are extended.
(2) Includes $0.6 million that has been restricted pursuant to an arrangement
between the Company and its provider of asset-backed securities
insurance. Such arrangement provides that, if any insured securitization
trust exceeds the specified portfolio performance test as defined within
the trust agreement, the Company may, in lieu of retaining excess cash
from that securitization trust in the related spread accounts, pledge an
equivalent amount of cash, which has the effect of preventing the
violation of the portfolio performance test. Such pledged amounts are
included in cash and cash equivalents. Restrictions on the pledged
amounts may be lifted if the portfolio performance tests are met and
maintained for the related securitization trusts as defined in the
arrangement, the violations are waived, or the loans within the
securitization trust are repurchased by the Company.
11
<PAGE>
5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment, as of December 31, consists of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
-------------- -------------
<S> <C> <C>
OWNED
Furniture, fixtures and leasehold improvements............................................ $ 10,351 $ 9,524
Automobiles............................................................................... 194 368
Computer equipment........................................................................ 3,894 1,853
Software.................................................................................. 9,278 4,528
-------------- -------------
Total................................................................................ 23,717 16,273
CAPITALIZED LEASES
Furniture and fixtures.................................................................... 4,376 4,851
Computer equipment........................................................................ 4,918 5,296
Software.................................................................................. 386 330
-------------- -------------
Total................................................................................ 9,680 10,477
-------------- -------------
Total furniture, fixtures and equipment................................................... 33,397 26,750
Less:
Accumulated depreciation and amortization............................................... (15,886) (9,379)
-------------- -------------
Furniture, fixtures and equipment, net.................................................... $ 17,511 $ 17,371
-------------- -------------
-------------- -------------
</TABLE>
Depreciation expense including amortization of assets under capital lease
obligations for the years ended December 31, 1998, 1997 and 1996 was $6.9
million, $5.3 million and $3.2 million, respectively.
6. OTHER ASSETS
Other assets, as of December 31, consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
------------- -------------
<S> <C> <C>
Interest advances to securitization trusts.................................................. $ 5,967 $ 6,072
Deferred debt issuance costs................................................................ 10,110 11,518
Investment in subordinated certificates..................................................... 1,873 2,864
Servicing fee receivable.................................................................... 4,841 4,389
Prepaid expenses............................................................................ 1,717 1,078
Repossessed assets.......................................................................... 148 1,181
Other assets................................................................................ 6,763 5,381
------------- -------------
$ 31,419 $ 32,483
------------- -------------
------------- -------------
</TABLE>
7. AMOUNTS DUE UNDER WAREHOUSE FACILITIES
At December 31, 1998, the Company had three warehouse facilities with
an aggregate capacity of $700.0 million in place with various financial
institutions and institutional lenders of which $700.0 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 5.90% and 5.80% for the years ended December 31, 1998
and 1997, respectively.
8. 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 warrants when exercised entitle the holders to
acquire an aggregate of 2,052,000 shares of the
12
<PAGE>
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 an additional $75.0
million aggregate principal amount of Senior Notes having substantially the same
terms as those issued in March 1997 (but no additional warrants) and received
net proceeds of approximately $71.2 million.
SUBORDINATED NOTES
Subordinated notes outstanding as of December 31, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
------------ ------------
<S> <C> <C>
Senior subordinated notes, Series 1996-A......... $ 30,000 $ 30,000
Junior subordinated notes........................ 21,898 20,772
------------ ------------
$ 51,898 $ 50,772
------------ ------------
------------ ------------
</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 could 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. In August 1998, the Company
increased its shelf registration to $100.0 million. The Junior Subordinated
Notes are issued in minimum denominations of $1,000 and include extendible notes
having maturities ranging from 90 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, 1998, the weighted average maturity and interest rate of the Junior
Subordinated Notes were 15.3 months and 9.69%, respectively.
Maturities of long-term debt outstanding at December 31, 1998 were:
<TABLE>
<CAPTION>
(Dollars in thousands)
YEAR ENDING
<S> <C>
1999....................................................................................... $ 9,115
2000....................................................................................... 1,906
2001....................................................................................... 35,089
2002....................................................................................... 697
2003....................................................................................... 907
2004 and thereafter........................................................................ 370,841
--------------
Total................................................................................... $ 418,555
--------------
--------------
</TABLE>
13
<PAGE>
9. 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 $13.4 million, $13.5 million and $4.7 million for the years ended
December 31, 1998, 1997, and 1996, respectively.
Future minimum lease payments required under capital and noncancelable
operating leases with terms of one year or more, at December 31, 1998 were:
<TABLE>
<CAPTION>
CAPITAL OPERATING
(Dollars in thousands) LEASES LEASES
----------- -----------
YEAR ENDING
<S> <C> <C>
1999..................................................................... $ 1,578 $ 12,581
2000..................................................................... 1,329 8,494
2001..................................................................... 876 6,639
2002..................................................................... 83 3,159
2003..................................................................... 11 1,401
2004 and thereafter...................................................... - 781
----------- -----------
Total..................................................... 3,877 $ 33,055
-----------
-----------
Less amounts representing interest............................................ (493)
-----------
Present value of net minimum lease payments................................... $ 3,384
-----------
-----------
</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.
10. SHAREHOLDERS' EQUITY
The Company's authorized capital stock is 100,000,000 shares. The
Company had reserved but unissued shares of authorized Common Stock at December
31, 1998, as follows:
<TABLE>
<S> <C>
Warrants............................................................. 2,103,214
Employee stock purchase plan......................................... 639,283
Stock options........................................................ 6,989,102
---------------
9,731,599
---------------
---------------
</TABLE>
COMMON STOCK
In March 1997, in connection with the issuance of $300.0 million of
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-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, 1997 and 1998, 754,520 shares, 1,421,539 shares
and 786 shares of Common Stock, respectively, had been issued in connection with
the exercise of warrants for aggregate proceeds of $3.1 million, $5.9 million
and $8,649, respectively. As of December 31, 1998, the Company had remaining
warrants outstanding for the purchase of 2,103,214 shares of Common Stock at
exercise prices ranging from $4.75 to $11.00 per share.
14
<PAGE>
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 to increase 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. The Shareholders Rights Plan was
further amended in November 1998 to increase the percentage of the Company 's
outstanding Common Stock which a person or group must beneficially own to be
deemed an Acquiring Person from 18% or more up to 20% or more. Under the amended
Shareholder Rights Plan, if any person becomes an Acquiring Person, then each
Right not owned by a 20% 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.
11. EMPLOYEE BENEFITS AND STOCK INCENTIVE PLANS
RESTRICTED STOCK ELECTION PLANS
In July 1994 and December 1995, the Board of Directors of the Company
adopted two separate Restricted Stock Election Plans (the "1994 Stock Election
Plan" and the "1995 Stock Election Plan," respectively). The purpose of the
Restricted Stock Election Plans 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 Restricted Stock Election Plans allow
certain employees of the Company to receive all or a portion of certain bonuses
they are entitled to receive from the Company through the year 2000 in the form
of shares of the Company's Common Stock. The Restricted Stock Election Plans
authorize 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. In January 1998, the Company's
Compensation Committee approved the forfeiture, cancellation and reissuance of
all then outstanding restricted shares under the 1995 Stock Election Plan as
well as the concurrent grant of 153,923 additional restricted shares to certain
plan participants. At such time the Compensation Committee also amended the 1994
Stock Election Plan to permit the accelerated vesting during the years 1998,
1999 and 2000 of restricted shares granted under such plan. In November, 1998,
the Compensation Committee approved the forfeiture, cancellation and reissuance
of all then outstanding restricted shares under the 1994 Stock Election Plan and
the 1995 Stock Election Plan as well as the restructuring of grants to
participants in those plans. The Board of Directors of the Company approved
amendments to the 1994 Stock Election Plan and the 1995 Stock Election Plan to
permit the actions taken by the Compensation Committee in January and November
of 1998.
A total of 800,000 shares of Common Stock are set aside for awards
under the 1994 Stock Election Plan, of which, 508,623 shares have been granted
and are outstanding under the plan, with 61,434 shares remaining subject to
restriction at December 31, 1998. A total of 600,000 shares are set aside for
awards under the 1995 Stock Election Plan, all of which, have been granted and
remain outstanding. At December 31, 1998, the Company had committed to the
granting of 2,732 additional shares under the 1995 Stock Election Plan, subject
to shareholders' approval. At December 31, 1998, all shares under the 1995 Stock
Election Plan remain subject to restrictions.
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), 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 1995 Stock Election Plans, the Company recognized
$0.7 million, $1.0 million and $1.0 million of compensation expense for the
years ended December 31, 1998, 1997 and 1996, respectively.
15
<PAGE>
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, or on each exercise date. The Plan was
amended in May 1998 to increase the number of shares of Common Stock available
for issuance to 1,000,000 shares. As of December 31, 1998, an aggregate 360,717
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.
DIRECTOR OPTION PLAN
The 1992 Director Stock Option Plan (the "DSOP") provides for the
automatic grant of options to purchase the Company's Common Stock to outside
directors. Pursuant to amendments to the DSOP adopted January 28, 1998, on
that date (i) each outside director received an option to purchase 25,000
shares; and (ii) the options granted to such outside directors in 1997 for
15,000 shares were cancelled on a prorata basis to reflect the change in the
annual grant dates from the anniversary of the outside director's receipt of
his or her initial grant to January 28th of each year. Pursuant to the DSOP
as amended January 1998, each outside director will receive an option to
purchase 25,000 shares on January 28th of each year he or she serves as an
outside director up to a maximum of 250,000 shares to be issued to an outside
director upon exercise of options granted under the DSOP. In January, 1999,
the DSOP was amended to provide that commencing 1999 and continuting each
year thereafter, the Compensation Committee of the Board will determine the
number of option shares to be granted to each outside director for such year.
During 1997, each outside director received options to purchase 25,000 shares
in two separate grants (10,000 on January 2, 1997 and 15,000 on the
anniversary date of the first grant under the plan to the director). 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, 1998, there were
330,125 options issued to outside directors under the DSOP that remained
outstanding at exercise prices ranging from $5.13 to $21.50. At December 31,
1998, 1997 and 1996 there were 229,225 options, 160,000 options and 175,000
options, respectively, exercisable under the DSOP.
STOCK OPTION PLANS
The Company has a Stock Option Plan (as amended, 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. On January 28, 1998, the Compensation
Committee approved the cancellation and reissuance of options for 858,594 shares
at an exercise price of $7.20 per share with a prorata three year vesting
schedule. None of the canceled and reissued options were granted to the
Company's Chief Executive Officer, Vice Chairman, or Executive Vice Presidents.
The 1990 Plan is noncompensatory and results in no expense to the Company. At
December 31, 1998, 1997 and 1996, there were 1,016,578 options, 1,138,724
options and 702,450 options, respectively, exercisable under the 1990 Plan.
16
<PAGE>
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, 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
Authorized.......................................... 3,000,000 -- --
Granted............................................. -- 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
Granted............................................. -- 1,959,094 5.50 -- 9.31
Exercised........................................... -- (133,537) 0.48 -- 5.75
Canceled............................................ -- (1,057,260) 6.00 -- 20.75
--------------------- --------------------- --------------------
BALANCE, DECEMBER 31, 1998............................ 5,000,000 2,842,128 $ 3.00 -- $16.19
--------------------- --------------------- --------------------
--------------------- --------------------- --------------------
</TABLE>
In addition to stock option activity under the 1990 Plan, in 1998, 1997
and 1996, the Company granted to a director options to purchase a total of
100,000 shares, 70,160 shares and 325,000 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. Including agreements entered into prior to
1996 for 140,000 stock options, in aggregate, there were 635,160 options,
535,160 options, and 240,000 options, exercisable under such Non-statutory Stock
Option Agreements at December 31, 1998, 1997 and 1996, respectively.
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 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
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 1998, 1997, and 1996, respectively: weighted-average risk-free
interest rate of 4.6%, 5.6%, and 6.7%, volatility factor of the expected market
price of the Company's Common Stock of 89%, 71% 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) (RESTATED) (RESTATED)
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net income (loss) $(91,897) $(67,503) $46,047
Pro forma earnings (loss) per share:
Basic.................................................................. $ (2.35) $ (1.74) $ 1.49
Diluted................................................................ $ (2.35) $ (1.74) $ 1.29
</TABLE>
The weighted average fair value of options granted during 1998, 1997
and 1996 was $7.98, $8.75 and $13.53, respectively.
17
<PAGE>
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 may pay the annual 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 policies had cash surrender values of $442,000
and $759,000 at December 31, 1998 and 1997, 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.
12. INCOME TAXES
The components of income tax expense (benefit) for the three years
ended December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) (RESTATED) (RESTATED)
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Provision for deferred taxes:
Federal............................................................... $ (5,914) $ (22,502) $ 25,678
State................................................................. (3,321) (3,971) 4,531
------------- ------------ ------------
Provision for income taxes.......................................... (9,235) (26,473) 30,209
Tax effect of extraordinary items..................................... -- (9,700) --
------------- ------------ ------------
Applicable income tax expense (benefit), after extraordinary items.. $ (9,235) $ (36,173) $ 30,209
------------- ------------ ------------
------------- ------------ ------------
</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, 1998 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) (RESTATED) (RESTATED)
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal tax at statutory rate........................................... $ (32,367) $ (24,382) $ 28,419
State income tax, net of federal benefit................................ (3,115) (2,281) 3,418
Change in valuation allowance........................................... 26,124 -- --
Other................................................................... 123 190 (1,628)
------------ ------------ ------------
Provision for income taxes............................................ (9,235) (26,473) 30,209
Tax effect of extraordinary items....................................... -- (9,700) --
------------ ------------ ------------
Applicable income taxes, after extraordinary items.................... $ (9,235) $ (36,173) $ 30,209
------------ ------------ ------------
------------ ------------ ------------
Effective income tax rate............................................. (10.0%) (38.0%) 37.2%
</TABLE>
18
<PAGE>
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 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) (RESTATED)
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred Tax Assets:
Securitization expenses.................................................... $ 8,070 $ 7,168
Other...................................................................... 5,188 2,347
Net operating loss carryforwards (expiring 2008-2018)..................... 86,517 61,793
--------------- ---------------
Gross deferred tax assets................................................ 99,775 71,308
Less valuation allowance................................................... (26,124) --
--------------- ---------------
Net deferred tax asset................................................... 73,651 71,308
--------------- ---------------
Deferred Tax Liabilities:
Gain on securitizations.................................................... (72,137) (78,379)
Unrealized gain on finance income receivable............................... -- (2,271)
Other...................................................................... (1,514) (2,164)
--------------- ---------------
Gross deferred tax liabilities........................................... (73,651) (82,814)
--------------- ---------------
Net deferred tax liability............................................... $ -- $ (11,506)
--------------- ---------------
--------------- ---------------
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $227.7 million which are
available to offset future federal taxable income and expire no earlier than
2008. Due to the uncertainty of the realization of the net operating loss
carryforward, the Company established a valuation allowance against the
carryforward benefit in the amount of $26.1 million. 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.
13. DERIVATIVE ACTIVITIES AND OFF-BALANCE SHEET RISK
During the three years ended December 31, 1998, 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 and
forward U.S. Treasury rate locks that most closely parallel the average life of
its anticipated securitization transactions. 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, 1998 and 1997, the Company had entered into the
following agreements to sell forward two year U.S. Treasuries:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
---------------- ----------------
<S> <C> <C>
Notional amount outstanding................................................... $ - $ 800,000
Unrealized gains (losses) on outstanding hedging transactions................. $ - $ (6,071)
</TABLE>
Net realized hedging gains (losses) during the three year period ended
December 31 1998 were:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Realized gains (losses)................................................ $ (21,559) $ (8,709) $ (349)
</TABLE>
14. 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.
19
<PAGE>
The estimated carrying values, fair values and various methods and
assumptions used in valuing the Company's financial instruments as of December
31, 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
(RESTATED)
1998 1997
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Financial assets:
Cash and cash equivalents...... $ 10,827 $ 10,827 $ 17,274 $ 17,274
Due from securitization trust.. 62,081 62,081 107,207 107,207
Auto loans held for sale....... 17,899 17,899 49,133 49,133
Finance income receivable...... 587,946 587,946 602,454 602,454
Financial liabilities:
Amounts due under warehouse
facilities................. - - 30,880 30,880
Senior notes................... 366,657 273,750 365,640 372,113
Senior subordinated notes...... 30,000 22,500 30,000 28,800
Junior subordinated notes...... 21,898 21,898 20,772 20,772
</TABLE>
CASH AND CASH EQUIVALENTS, DUE FROM SECURITIZATION TRUST, AMOUNTS DUE UNDER
WAREHOUSE FACILITIES AND JUNIOR SUBORDINATED NOTES. Due to the nature of these
accounts, carrying value approximates fair value.
FINANCE INCOME RECEIVABLE. The fair value is determined in accordance with SFAS
125.
SENIOR NOTES AND SENIOR SUBORDINATED NOTES. The fair value is determined using
available market quotes.
20
<PAGE>
15. 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) (RESTATED) (RESTATED)
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Numerator:
Net income (loss) before extraordinary items.......... $ (83,241) $ (43,190) $ 50,987
Preferred dividends................................... -- -- (1,153)
--------------- ---------------- ----------------
Numerator for basic earnings per share - income
(loss) before extraordinary items available to
common stockholders............................. (83,241) (43,190) 49,834
Effect of dilutive securities:
Preferred Stock Dividends............................ -- -- 1,153
--------------- ---------------- ----------------
Numerator for diluted earnings per share - income
(loss) before extraordinary items available to
common shareholders after assumed conversions... $ (83,241) $ (43,190) $ 50,987
--------------- ---------------- ----------------
--------------- ---------------- ----------------
Denominator:
Denominator for basic earnings per share - weighted
average shares....................................... 39,071,412 38,700,346 30,897,426
Effect of dilutive securities:
Options and Warrants (1)............................. -- -- 2,484,195
Convertible Exchangeable Preferred Stock............. -- -- 3,068,374
--------------- ---------------- ----------------
Dilutive potential common shares...................... -- -- 5,552,569
--------------- ---------------- ----------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions........................................ 39,071,412 38,700,346 36,449,995
--------------- ---------------- ----------------
--------------- ---------------- ----------------
Basic earnings (loss) per share before
extraordinary items.................................. $ (2.13) $ (1.12) $ 1.61
--------------- ---------------- ----------------
--------------- ---------------- ----------------
Diluted earnings (loss) per share before
Extraordinary items.................................. $ (2.13) $ (1.12) $ 1.40
--------------- ---------------- ----------------
--------------- ---------------- ----------------
</TABLE>
- ---------------------
(1) At December 31, 1998 and 1997, there were options and warrants
outstanding to purchase an aggregate 7.1 million and 6.2 million
common shares, respectively. All of these potential common shares have
been excluded from the computation of diluted earnings per share
because their inclusion would have been anti-dilutive.
16. UNAUDITED SELECTED QUARTERLY DATA
FOURTH QUARTER RESULTS OF OPERATIONS
The Company purchased $466.5 million of automobile loans in the fourth
quarter of 1998 compared to $582.1 million for the same period in 1997, and
securitized $483.6 million in 1998 compared to $587.8 million in 1997. Net
income in the fourth quarter of 1998 was $5.0 million compared to $4.7 million
in 1997. During the fourth quarter of 1998, the Company changed its accounting
policy with respect to the valuation and accounting for its finance income
receivable to the "cash-out" method and, accordingly, has restated the following
quarterly financial statements (see Note 2 for additional discussion).
21
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. UNAUDITED SELECTED QUARTERLY DATA (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------------------
(Dollars in thousands except per share amounts) (RESTATED)
DECEMBER 31, 1998 SEPTEMBER 30, 1998
------------------- --------------------
<S> <C> <C>
REVENUES:
Net interest margin..................................................... $ 18,274 $ 22,675
Gain on sale of auto loans.............................................. 21,132 20,667
Service fee income...................................................... 21,929 21,236
------------------- --------------------
Total revenues........................................................ 61,335 64,578
EXPENSES:
Salaries and benefits................................................... 16,171 15,658
General and administrative and other operating expenses................. 27,138 27,695
Long-term debt and other interest expense............................... 13,053 12,926
------------------- --------------------
Total expenses........................................................ 56,362 56,279
------------------- --------------------
Operating income (loss) before income tax and extraordinary item........ 4,973 8,299
Income tax provision (benefit).......................................... -- --
------------------- --------------------
Income (loss) before extraordinary item................................. 4,973 8,299
Extraordinary item, net of tax.......................................... -- --
------------------- --------------------
Net income (loss)..................................................... $ 4,973 $ 8,299
------------------- --------------------
------------------- --------------------
BASIC EARNINGS PER SHARE:
Income (loss) per share before extraordinary item....................... $ 0.13 $ 0.21
Extraordinary item per share............................................ -- --
------------------- --------------------
Net income (loss) per share........................................... $ 0.13 $ 0.21
------------------- --------------------
------------------- --------------------
DILUTED EARNINGS PER SHARE:
Income (loss) per share before extraordinary item....................... $ 0.13 $ 0.21
Extraordinary item per share............................................ -- --
------------------- --------------------
Net income (loss) per share........................................... $ 0.13 $ 0.21
------------------- --------------------
------------------- --------------------
Weighted average shares outstanding:
Basic................................................................. 39,156,888 39,142,050
Diluted............................................................... 39,183,495 39,279,813
<CAPTION>
QUARTER ENDED
----------------------------------------------------
(Dollars in thousands except per share amounts) (RESTATED) (RESTATED) (RESTATED)
JUNE 30, 1998 MARCH 31, 1998 DECEMBER 31, 1997
--------------- ---------------- -------------------
<S> <C> <C> <C>
REVENUES:
Net interest margin..................................................... $ 20,971 $ 19,947 $ 20,311
Gain on sale of auto loans.............................................. (87,298) 27,000 21,310
Service fee income...................................................... 20,184 19,666 20,335
--------------- ---------------- -------------------
Total revenues........................................................ (46,143) 66,613 61,956
EXPENSES:
Salaries and benefits................................................... 15,773 17,347 15,933
General and administrative and other operating expenses................. 38,918 28,487 25,815
Long-term debt and other interest expense............................... 12,908 12,785 12,574
--------------- ---------------- -------------------
Total expenses........................................................ 67,599 58,619 54,322
--------------- ---------------- -------------------
Operating income (loss) before income tax and extraordinary item........ (113,742) 7,994 7,634
Income tax provision (benefit).......................................... (12,273) 3,038 2,901
--------------- ---------------- -------------------
Income (loss) before extraordinary item................................. (101,469) 4,956 4,733
Extraordinary item, net of tax.......................................... -- -- --
--------------- ---------------- -------------------
Net income (loss)..................................................... $ (101,469) $ 4,956 $ 4,733
--------------- ---------------- -------------------
--------------- ---------------- -------------------
BASIC EARNINGS PER SHARE:
Income (loss) per share before extraordinary item....................... $ (2.60) $ 0.13 $ 0.12
Extraordinary item per share............................................ -- -- --
--------------- ---------------- -------------------
Net income (loss) per share........................................... $ (2.60) $ 0.13 $ 0.12
--------------- ---------------- -------------------
--------------- ---------------- -------------------
DILUTED EARNINGS PER SHARE:
Income (loss) per share before extraordinary item....................... $ (2.60) $ 0.13 $ 0.12
Extraordinary item per share............................................ -- -- --
--------------- ---------------- -------------------
Net income (loss) per share........................................... $ (2.60) $ 0.13 $ 0.12
--------------- ---------------- -------------------
--------------- ---------------- -------------------
Weighted average shares outstanding:
Basic................................................................. 38,966,697 38,988,885 38,806,897
Diluted............................................................... 38,966,697 39,360,968 39,242,445
<CAPTION>
-----------------------------------------------------
(Dollars in thousands except per share amounts) (RESTATED) (RESTATED) (RESTATED)
SEPTEMBER 30, 1997 JUNE 30, 1997 MARCH 31, 1997
-------------------- --------------- ----------------
<S> <C> <C> <C>
REVENUES:
Net interest margin..................................................... $ 21,179 $ 20,821 $ 18,058
Gain on sale of auto loans.............................................. 23,954 21,672 (81,831)
Service fee income...................................................... 17,748 16,061 13,952
-------------------- --------------- ----------------
Total revenues........................................................ 62,881 58,554 (49,821)
EXPENSES:
Salaries and benefits................................................... 16,230 15,115 14,478
General and administrative and other operating expenses................. 24,471 23,810 26,165
Long-term debt and other interest expense............................... 10,400 10,651 7,591
-------------------- --------------- ----------------
Total expenses........................................................ 51,101 49,576 48,234
-------------------- --------------- ----------------
Operating income (loss) before income tax and extraordinary item........ 11,780 8,978 (98,055)
Income tax provision (benefit).......................................... 4,476 3,412 (37,262)
-------------------- --------------- ----------------
Income (loss) before extraordinary item................................. 7,304 5,566 (60,793)
Extraordinary item, net of tax.......................................... -- -- (15,828)
-------------------- --------------- ----------------
Net income (loss)..................................................... $ 7,304 $ 5,566 $ (76,621)
-------------------- --------------- ----------------
-------------------- --------------- ----------------
BASIC EARNINGS PER SHARE:
Income (loss) per share before extraordinary item....................... $ 0.19 $ 0.14 $ (1.59)
Extraordinary item per share............................................ -- -- (0.41)
-------------------- --------------- ----------------
Net income (loss) per share........................................... $ 0.19 $ 0.14 $ (2.00)
-------------------- --------------- ----------------
-------------------- --------------- ----------------
DILUTED EARNINGS PER SHARE:
Income (loss) per share before extraordinary item....................... $ 0.19 $ 0.14 $ (1.59)
Extraordinary item per share............................................ -- -- (0.41)
-------------------- --------------- ----------------
Net income (loss) per share........................................... $ 0.19 $ 0.14 $ (2.00)
-------------------- --------------- ----------------
-------------------- --------------- ----------------
Weighted average shares outstanding:
Basic................................................................. 38,740,078 38,702,011 38,358,743
Diluted............................................................... 39,231,962 39,182,748 38,358,743
</TABLE>
22
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in thousands) (RESTATED) (RESTATED) (RESTATED)
DECEMBER 31, 1998 SEPTEMBER 30, 1998 JUNE 30, 1998 MARCH 31, 1998
------------------- -------------------- --------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................... $ 10,827 $ 6,328 $ 8,160 $ 6,387
Due from securitization trust................ 62,081 98,384 133,551 122,223
Auto loans held for sale..................... 17,899 20,045 15,480 20,582
Finance income receivable.................... 587,946 592,951 554,629 655,338
Other assets................................. 48,930 47,468 46,981 48,514
------------------- -------------------- --------------- ----------------
Total assets............................... $ 727,683 $ 765,176 $ 758,801 $ 853,044
------------------- -------------------- --------------- ----------------
------------------- -------------------- --------------- ----------------
LIABILITIES & EQUITY
Amounts due under warehouse facilities....... $ - $ 57,843 $ 53,962 $ 53,919
Senior notes................................. 366,657 366,403 366,149 365,894
Subordinated notes........................... 51,898 48,902 49,681 49,845
Capital lease obligations.................... 3,384 3,735 4,366 4,982
Deferred income taxes........................ - - - 15,313
Accounts payable and accrued liabilities..... 36,935 25,718 39,368 20,437
Shareholders' equity......................... 268,809 262,575 245,275 342,654
------------------- -------------------- --------------- ----------------
Total liabilities and equity............... $ 727,683 $ 765,176 $ 758,801 $ 853,044
------------------- -------------------- --------------- ----------------
------------------- -------------------- --------------- ----------------
<CAPTION>
(Dollars in thousands) (RESTATED) (RESTATED) (RESTATED) (RESTATED)
DECEMBER 31, 1997 SEPTEMBER 30, 1997 JUNE 30, 1997 MARCH 31, 1997
------------------- -------------------- --------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................... $ 17,274 $ 17,720 $ 28,135 $ 23,596
Due from securitization trust................ 107,207 149,430 168,211 157,694
Auto loans held for sale..................... 49,133 55,630 47,472 40,037
Finance income receivable.................... 602,454 560,647 505,763 439,998
Other assets................................. 49,854 46,167 48,569 50,723
------------------- -------------------- --------------- ----------------
Total assets............................... $ 825,922 $ 829,594 $ 798,150 $ 712,048
------------------- -------------------- --------------- ----------------
------------------- -------------------- --------------- ----------------
LIABILITIES & EQUITY
Amounts due under warehouse facilities....... $ 30,880 $ 126,263 $ 97,722 $ 30,927
Senior notes................................. 365,640 291,886 291,671 291,457
Subordinated notes........................... 50,772 51,294 51,742 52,804
Capital lease obligations.................... 5,368 5,942 6,583 7,218
Deferred income taxes........................ 11,506 7,977 2,526 (1,776)
Accounts payable and accrued liabilities..... 26,302 16,495 27,986 18,940
Shareholders' equity......................... 335,454 329,737 319,920 312,478
------------------- -------------------- --------------- ----------------
Total liabilities and equity............... $ 825,922 $ 829,594 $ 798,150 $ 712,048
------------------- -------------------- --------------- ----------------
------------------- -------------------- --------------- ----------------
</TABLE>
23
