-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E/i/MfrdnVuyAT8oH1YVVkerVKnn2iUuuX7hH/IGrQFSfmTcb6xBMryRMabFqweZ PxJuLlSmebuDzslT9nIAXA== 0000007214-96-000002.txt : 19960327 0000007214-96-000002.hdr.sgml : 19960327 ACCESSION NUMBER: 0000007214-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARISTAR INC CENTRAL INDEX KEY: 0000007214 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 954128205 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03521 FILM NUMBER: 96538547 BUSINESS ADDRESS: STREET 1: 8900 GRAND OAK CIRCLE CITY: TAMPA STATE: FL ZIP: 33637-1050 MAIL ADDRESS: STREET 1: 8900 GRAND OAK CIRCLE CITY: TAMPA STATE: FL ZIP: 33637 FORMER COMPANY: FORMER CONFORMED NAME: FAMILY FINANCE CORP QUALIFIED STOCK OPTI DATE OF NAME CHANGE: 19761222 FORMER COMPANY: FORMER CONFORMED NAME: FAMILY FINANCE CORP THRIFT CLUB DATE OF NAME CHANGE: 19731106 FORMER COMPANY: FORMER CONFORMED NAME: FAMILY FINANCE CORP DATE OF NAME CHANGE: 19730712 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from . . . .to . . . . . . . . . . Commission file number 1-3521 ARISTAR, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4128205 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 8900 Grand Oak Circle, Tampa, FL 33637-1050 (Address of principal executive offices) (Zip Code) (813) 632-4500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange Title of each class on which registered 7 3/4% Senior Notes due June 15, 2001 New York Stock Exchange 7 1/2% Senior Subordinated Notes due July 1, 1999 New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: Not applicable The aggregate market value of Common Stock held by non-affiliates: None As of February 29, 1996, there were 1,000 shares of Common Stock outstanding. Documents incorporated by reference: None Registrant meets the conditions set forth in General Instruction (J)(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. 2 ARISTAR, INC. ANNUAL REPORT ON FORM 10-K Table of Contents
Page PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 7 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . 8 Item 7. Management's Analysis of the Results of Operations for the Year Ended December 31, 1995. . . . . . . . . 8 Item 8. Financial Statements and Supplementary Data . . . . .10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . .28 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . .28
Note: Items 4, 6, 10, 11, 12 and 13 are not included as per conditions met by Registrant set forth in General Instruction J(1)(a) and (b) of Form 10-K. 3 PART I Item 1. Business Aristar, Inc. (the "Company"), incorporated in Delaware in 1986 as a successor to a company incorporated in 1927, is a holding company headquartered in Tampa, Florida whose subsidiaries are engaged in the consumer finance business. All of the Company's equity securities are owned indirectly by Great Western Financial Corporation ("GWFC"). The operations of the Company consist principally of a network of 476 consumer finance offices located in 22 states, which generally operate under the names Blazer Financial Services and City Finance Company. The Company makes direct consumer instalment loans and purchases retail instalment contracts from local retail establishments. These consumer credit transactions are primarily for personal, family or household purposes. Instalment loans written in 1995 had original terms ranging from 12 to 180 months and averaged 50 months. For the year ended December 31, 1995, 84% of the volume of all instalment loans was either unsecured or secured by guarantors, luxury consumer goods, automobiles or other personal property, with the remaining 16% being secured by real estate. While the interest yield on real estate loans is generally lower than for other direct loans, such loans are typically larger and the ratio of cost to amounts loaned is lower. Additionally, credit loss experience on real estate loans has been significantly lower than on other loan types. Retail instalment sales contracts are generally acquired without recourse to the originating merchant and provide a vehicle for developing future loan business. Where these contracts result from the sale of consumer goods, payment is generally secured by such goods, and, in some cases, a portion of the purchase price is withheld from the merchant pending satisfactory payment of the obligation. Contracts are typically written with original terms from 3 to 60 months and for 1995 had an average original term of 25 months. At December 31, 1995, the average portfolio yield written by loan type was as follows:
Average Yield Real Estate Secured Loans 14.0% Other Direct Loans 25.4% Retail Instalment Sales Contracts 18.8%
4 Portfolio Composition The following table provides an analysis by type of the Company's notes and contracts receivable (net of unearned finance charges and deferred loan fees) at the dates shown:
December 31, (Dollars in thousands) 1995 1994 1993 Notes and Contracts Receivable $ 1,681,855 $ 1,581,225 $ 1,492,232 Type as a percent of Total Receivables Real Estate Secured Loans 27.9% 27.0% 27.3% Other Direct Loans 53.5 54.3 53.4 Retail Instalment Sales Contracts 18.6 18.7 19.3 100.0% 100.0% 100.0%
Notes and contracts written including balances renewed, but excluding bulk purchases, for the years ended December 31, 1995, 1994 and 1993 totaled $1.81 billion, $1.75 billion and $1.60 billion, respectively. Credit Loss Experience The Company closely monitors portfolio delinquency in measuring the quality of the portfolio and the potential for ultimate credit losses. Under the Company's policy, non-real estate secured delinquent accounts are charged off based on the number of days contractually delinquent (120 days for closed-end loans and 180 days for open-end loans). Collection efforts continue after an account has been charged off until the customer obligation is satisfied or until it is determined that the obligation is not collectible or that the cost of continuing collection efforts will not be offset by the potential recovery. 5 The following table sets forth the credit loss experience for the past three years and the allowance for doubtful accounts at the end of each year:
Year Ended December 31, (Dollars in thousands) 1995 1994 1993 Allowance for Doubtful Accounts at End of Year $ 44,122 $ 41,311 $ 39,094 Percent of Year-End Net Receivables 2.6% 2.6% 2.6% Provision for Credit Losses 46,902 38,334 35,131 Amounts Charged-Off Net of Recoveries: Amount 45,401 37,137 33,570 Percent of Average Net Receivables(1) 2.9% 2.5% 2.4%
(1) Average of notes and contracts receivable (net of unearned finance charges) at each month end during the period. Accounts past due 60 days and over, based on contract payments, were as follows as of the end of each of the past three years:
December 31, (Dollars in thousands) 1995 1994 1993 Amount $ 37,614 $ 32,712 $ 31,883 Percent of Year-End Gross Receivables 1.9% 1.7% 1.8%
Interest Rate Spreads and Cost of Borrowed Funds A relatively high ratio of borrowings to invested capital is customary in consumer finance activities due to the liquidity of the assets employed by the business. The spread between the revenues received from loans and interest expense is a significant factor in determining the net income of the Company. 6 The table below sets forth certain percentages relative to the spread between interest the Company received on the loan portfolio and interest expense for each of the last three years:
Year Ended December 31, 1995 1994 1993 Ratio to Average Net Receivables: Interest and Fee Income 19.8% 20.0% 21.0% Interest and Debt Expense 5.8 5.8 6.2 Gross Spread 14.0% 14.2% 14.8%
Credit Insurance Operations The Company makes available, at the option of its customers, credit life, credit accident and health, and credit casualty insurance products. Credit life insurance provides that the customer's credit obligation, to the extent of the policy limits, is paid in the event of death. Credit accident and health insurance provides for the payment of instalments due on the customer's credit obligation in the event of disability resulting from illness or injury. Credit casualty insurance insures payment, to the extent of the policy limits, of the credit obligation or cost to repair certain property used as collateral for such obligation in the event such property is destroyed or damaged. Purchase of such insurance is not a condition to obtaining a loan, although the Company may require casualty insurance covering collateral to be obtained from unaffiliated sources by the customer. The Company does not sell insurance to non-customers. Credit insurance sold by the Company is written by unaffiliated insurance companies and is substantially all reinsured by the Company, which earns reinsurance premiums thereon. Ratio of Earnings to Fixed Charges The Company's ratio of earnings to fixed charges, which represents the number of times fixed charges were covered by earnings, was 1.99 in 1995, 2.02 in 1994, 1.89 in 1993, 1.83 in 1992 and 1.77 in 1991. For purposes of computing this ratio, earnings consist of income from operations before income taxes and, in 1992, before the cumulative effect of a change in accounting method, plus fixed charges. Fixed charges consist of interest and debt expense and an appropriate portion of rentals. 7 Governmental Regulation The Company's operations are, for the most part, regulated by federal and state consumer finance laws or similar legislation. All of the states in which finance subsidiaries of the Company are licensed to do business have laws, which vary from state to state, regulating the consumer finance business. These laws, among other things, typically limit the size of loans, set maximum interest rates and maximum maturities and regulate certain lending and collection activities. Although consumer finance laws have been in effect for many years, amending and new legislation is frequently proposed. The Company is unable to predict whether or when any such proposals might ultimately be enacted into law or to assess the impact any such enactment might have on the Company. The Company has been named as a defendant in a number of class action suits, in which various industry-wide practices arising from routine business activities are being challenged and various damages are being sought. The Company believes that its practices are permissible under state and federal laws and will defend these suits accordingly. At this time, the Company is unable to determine the probability of any adverse outcome or the effect, if any, of such an outcome on the Company. Competition The consumer finance business is highly competitive. The Company's principal competitors are other local, regional and national finance companies, banks, credit unions, savings associations, and other similar financial institutions. Employees The Company employs approximately 2,300 full-time employees. None of these employees are represented by a union. Management considers relations with its employees to be satisfactory. Item 2. Properties The Company completed the relocation of its headquarters from Memphis, Tennessee to Tampa, Florida in the first quarter of 1994. In connection with this relocation, the Company constructed a 71,000 square foot headquarters building on 6 acres of land at a total cost of approximately $8 million. In Memphis, Tennessee, the Company had leased approximately 62,000 square feet of office space as its headquarters; this lease, which would have expired on October 31, 1994, was terminated in the first quarter of 1994. The Company's consumer finance offices, located in 22 states, are leased typically for terms of three to five years with options to renew. Typical locations include shopping centers, office buildings and storefronts, generally of relatively small size sufficient to accommodate a staff of four to eight employees. See Note 10 to the Consolidated Financial Statements for additional information on rental expense and lease commitments. 8 Item 3. Legal Proceedings The Company and its subsidiaries are routinely involved in litigation incidental to their businesses. It is management's opinion that the aggregate liability arising from the disposition of all such pending litigation will not have a material adverse effect on the Company. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company is an indirect wholly-owned subsidiary of GWFC and the Company's common stock is not traded on any national exchange or in any other established market. Payment of dividends is within the discretion of the Company's Board of Directors; however, it is projected that the Company will pay quarterly dividends in 1996 at the approximate levels paid in prior years. Provisions of certain of the Company's debt agreements restrict the payment of dividends to a maximum prescribed proportion of cumulative earnings and contributed capital and otherwise provide for the maintenance of minimum levels of equity and maximum leverage ratios. The Company declared and paid dividends on a quarterly basis, totaling $22.5 million during 1995 and $25 million during 1994. Item 7. Management's Analysis of the Results of Operations for the Year Ended December 31, 1995 The Company's average net finance receivables grew $74.5 million, or 5.0%, in 1995, while, as a reflection of interest rate and competitive pressures, the overall portfolio yield decreased .24% as compared to the prior year. As a result, loan interest and fee income increased $11.1 million, or 3.7%, for the year ended December 31, 1995, as compared to the prior year. Income from investment securities increased $1.7 million, or 28.7%, with both the total invested balances and the yield thereon increasing over the prior year. As a result, total interest income increased by $12.8 million, or 4.2%, over the prior year. On the other hand, average debt outstanding increased $53 million or 4.5%, and the weighted average interest rate on such debt increased by 2 basis points, resulting in an increase in interest and debt expense of $4.2 million, or 4.8%, for the year ended December 31, 1995, as compared to 1994. These factors resulted in an increase in net interest income before provision for credit losses of $8.6 million, or 4.0%. In July, 1995, the Company issued $100 million of 6.30% senior notes maturing in 2000. The proceeds were used to reduce outstanding commercial paper. The provision for credit losses for the year ended December 31, 1995 was 2.97% as an annualized percentage of average net finance receivables for that period, as compared to 2.55% for 1994. The increase in provision rate reflects management's assessment of the quality of the Company's receivables portfolio at this time. 9 Income from insurance operations increased $1.3 million, or 5.9%, in 1995 as compared to 1994, paralleling the growth in net finance receivables. However, 1994 included other income of $1.2 million from a sale of a nonexclusive right to the Company s proprietary computer software; therefore, net insurance operations and other income increased $533 thousand, or 1.9%, over the prior period. Personnel expenses were $423 thousand, or 0.7%, lower in 1995 as compared to 1994, because, while 1995 includes normal compensation increases, 1994 reflected various one-time charges related to the relocation of the Company s headquarters. Productivity, defined as the ratio of operating and administrative expenses (before deferral of direct loan costs) to average outstanding finance receivables, improved to 8.1% in 1995 as compared to 8.5% in 1994. Contributing to this improvement is the fact that 1994 included $1.4 million in amortization of the cost of the Company s proprietary computer software, which became fully amortized in 1994. 10 Item 8. Financial Statements and Supplementary Data Report of Independent Certified Public Accountants To the Board of Directors and Stockholder of Aristar, Inc. In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations and retained earnings and of cash flows present fairly, in all material respects, the financial position of Aristar, Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Tampa, Florida January 15, 1996 11 ARISTAR, INC. and Subsidiaries Consolidated Statements of Financial Condition
(Dollars in thousands) December 31, 1995 December 31, 1994 ASSETS Finance receivables, net $1,637,733 $1,539,914 Investment securities 120,952 106,600 Cash and cash equivalents 7,142 9,668 Property and equipment, less accumulated depreciation and amortization: 1995, $19,249; 1994, $21,684 11,192 13,327 Deferred charges 11,570 12,605 Excess of cost over equity of companies acquired, less accumulated amortization: 1995, $45,028; 1994, $38,021 61,983 68,990 Other assets 11,350 19,832 TOTAL ASSETS $1,861,922 $1,770,936 LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Short-term debt $ 312,876 $ 179,085 Long-term debt 1,003,809 1,092,545 Total debt 1,316,685 1,271,630 Accounts payable and other liabilities 42,189 45,636 Federal and state income taxes 8,883 421 Insurance claims and benefits reserves 7,900 7,792 Unearned insurance premiums and commissions 56,604 53,890 Total liabilities 1,432,261 1,379,369 Commitments and contingencies (Notes 10 and 11) Stockholder's equity Common stock: $1.00 par value; 10,000 shares authorized: 1,000 shares issued and outstanding 1 1 Paid-in capital 44,894 44,894 Retained earnings 384,227 350,266 Net unrealized holding gain (loss) on investment securities 539 (3,594) Total stockholder's equity 429,661 391,567 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,861,922 $1,770,936
See Notes to Consolidated Financial Statements. 12 ARISTAR, INC. and Subsidiaries Consolidated Statements of Operations and Retained Earnings
Year Ended December 31, (Dollars in thousands) 1995 1994 1993 Loan interest and fee income $ 312,066 $ 300,969 $ 294,474 Investment securities income 7,744 6,018 5,854 Total interest income 319,810 306,987 300,328 Interest and debt expense 91,257 87,074 86,385 Net interest income before provision for credit losses 228,553 219,913 213,943 Provision for credit losses 46,902 38,334 35,131 Net interest income 181,651 181,579 178,812 Other operating income Net insurance operations and other income 29,212 28,679 25,816 Other expenses Personnel expenses 60,930 61,353 63,882 Occupancy expense 9,013 8,504 9,075 Advertising expense 5,208 5,240 5,027 Amortization of excess cost over equity of companies acquired 7,007 7,007 7,007 Other operating expenses 35,571 36,562 39,954 117,729 118,666 124,945 Income before income taxes 93,134 91,592 79,683 Provision for federal and state income taxes 36,673 33,395 28,560 Net Income 56,461 58,197 51,123 Retained earnings Beginning of year 350,266 317,069 286,446 Dividends (22,500) (25,000) (20,500) End of year $ 384,227 $ 350,266 $ 317,069
See Notes to Consolidated Financial Statements. 13 ARISTAR, INC. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended December 31, (Dollars in thousands) 1995 1994 1993 Cash flows from operating activities Net income $ 56,461 $ 58,197 $ 51,123 Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses 46,902 38,334 35,131 Depreciation and amortization 13,012 15,350 14,714 Deferred income taxes (53) 600 (14,900) Increase (decrease) in Accounts payable and other liabilities (3,447) (26,605) 8,970 Unearned insurance premiums and commissions and insurance claims and benefits reserves 2,822 3,152 3,012 Currently payable income taxes 6,228 (6,744) (7,212) (Increase) decrease in other assets 8,482 (8,705) 2,860 Net cash provided by operating activities 130,407 73,579 93,698 Cash flows from investing activities Securities purchased (43,989) (43,252) (51,257) Securities matured 36,134 23,278 51,153 Loans originated or purchased (1,190,878) (1,166,986) (1,039,439) Loans repaid or sold 1,045,156 1,040,918 927,335 Capital expenditures, net (394) (4,039) (5,967) Net cash used in investing activities (153,971) (150,081) (118,175) Cash flows from financing activities Net change in commercial paper and other short-term borrowings 133,791 (100,522) 76,515 Proceeds from issuance of long-term debt 99,909 249,625 149,769 Long-term debt issue costs (1,162) (1,657) (1,095) Repayments of long-term debt (189,000) (50,000) (175,000) Dividends paid (22,500) (25,000) (20,500) Net cash provided by financing activities 21,038 72,446 29,689 Net increase (decrease) in cash and cash equivalents (2,526) (4,056) 5,212 Cash and cash equivalents Beginning of year 9,668 13,724 8,512 End of year $ 7,142 $ 9,668 $ 13,724 Supplemental disclosures of cash flow information Interest paid $ 90,387 $ 88,612 $ 88,251 Intercompany payments in lieu of federal and state income taxes 27,929 40,734 53,473
See Notes to Consolidated Financial Statements. 14 ARISTAR, INC. and Subsidiaries Notes to Consolidated Financial Statements Note 1 Ownership and Operations Aristar, Inc. is an indirect, wholly-owned subsidiary of Great Western Financial Corporation ( GWFC ). Aristar, Inc. and its subsidiaries, all of which are wholly-owned, are referred to hereinafter as the Company. The Company is engaged primarily in the consumer finance business and its operations consist principally of a network of 476 consumer finance offices located in 22 states, primarily in the Southeastern United States, which generally operate under the names Blazer Financial Services and City Finance Company. The Company makes direct consumer instalment loans and purchases retail instalment contracts from local retail establishments. Theses consumer credit transactions are primarily for personal, family or household purposes. Note 2 Summary of Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of Aristar, Inc. and its subsidiaries, all of which are wholly- owned, after elimination of all material intercompany balances and transactions. Certain amounts in prior years have been reclassified to conform to the current year's presentation. Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Recognition from Finance Operations. Unearned finance charges on all types of consumer notes and contracts receivable are recognized on an accrual basis, using the interest method. Accrual generally is suspended when payments are more than three months contractually overdue. Loan fees and directly related lending costs are deferred and amortized using the interest method over the contractual life of the related loans. Provision and Allowance for Credit Losses. The Company provides, through charges to income, an allowance for losses which, based upon management's evaluation of numerous factors, including current economic trends, loan portfolio agings, historical loss experience and evaluation of collateral, is deemed adequate to cover reasonably expected losses on outstanding loans. Losses on loans are charged to the allowance for credit losses based upon the number of days delinquent or when collectibility becomes questionable and the underlying collateral, if any, is considered insufficient to liquidate the loan balance (see Note 3). Recoveries on previously written-off loans are credited to the allowance. 15 Investment Securities. Debt and equity securities are classified as available for sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as a separate component of stockholder's equity. Gains and losses on investment securities are recorded when realized on a specific identity basis. Investment security transactions are recorded using trade date accounting. Property, Equipment and Leasehold Improvements. Property, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided principally on the straight-line method over the estimated useful life or, if less, the term of the lease. Deferred Charges. Expenditures that are deferred are amortized over the period benefited. Amortization is computed principally using the straight- line method. Excess of Cost Over Equity of Companies Acquired. The excess of cost over the fair value of net assets of companies acquired is amortized on a straight- line basis, generally over periods of up to 25 years. Insurance Premiums and Acquisition Costs. Insurance premiums are deferred and subsequently amortized into revenue over the terms of the related insurance contracts. The methods of amortization used are pro rata, sum-of- the-digits and a combination thereof. Policy acquisition costs (principally ceding commissions and premium taxes) are deferred and charged to expense over the terms of the related policies in proportion to premium recognition. Insurance Claims and Benefits Reserves. Reserves for reported claims on credit life and health insurance are established based upon standard actuarial assumptions used in the insurance business for such purposes. Claims reserves for reported property and casualty insurance claims are based upon estimates of costs and expenses to settle each claim. Additional amounts of reserves, based upon prior experience and insurance in force, are provided for each class of insurance for claims which have been incurred but not reported as of the balance sheet date. Income Taxes. The Company is included in the consolidated Federal income tax return filed by GWFC. Currently payable Federal income taxes will be paid to GWFC. Federal income taxes are allocated between GWFC and its subsidiaries in proportion to the respective contribution to consolidated income or loss. Allocations for state income taxes approximate the amount the Company would have paid on a separate entity basis. Deferred income taxes are provided on elements of income or expense that are recognized in different periods for financial and tax reporting purposes. Taxes on income are determined by using the liability method as prescribed by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, FAS 109 requires the consideration of all expected future events other than enactments of changes in the tax law or rates. 16 Statement of Cash Flows. For purposes of reporting cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Fair Value Disclosures. Quoted market prices are used, where available, to estimate the fair value of the Company s financial instruments. Because no quoted market prices exist for a significant portion of the Company's financial instruments, fair value is estimated using comparable market prices for similar instruments or using management's estimates of appropriate discount rates and cash flows for the underlying asset or liability. A change in management's assumptions could significantly affect these estimates; accordingly, the Company's fair value estimates are not necessarily indicative of the value which would be realized upon disposition of the financial instruments. 17 Note 3 Finance Receivables Finance receivables at December 31, 1995 and 1994 are summarized as follows:
(Dollars in thousands) 1995 1994 Consumer finance receivables Real estate secured loans $ 567,377 $ 518,757 Other consumer finance instalment loans 1,097,334 1,055,723 Retail instalment contracts 343,902 331,424 Gross consumer finance receivables 2,008,613 1,905,904 Less: Unearned finance charges and deferred loan fees (326,758) (324,679) Allowance for credit losses (44,122) (41,311) Net consumer finance receivables $1,637,733 $1,539,914
The amount of gross nonaccruing receivables included above was approximately $21.9 million and $19.8 million at December 31, 1995 and 1994, respectively. Contractual maturities, net of unearned finance charges and deferred loan fees, at December 31, 1995 are as follows:
Over 1 But Within Within Over 1 year 5 years 5 years Total (Dollars in thousands) Real estate secured loans $ 55,014 $176,460 $238,024 $ 469,498 Other consumer finance instalment loans 352,323 547,708 278 900,309 Retail instalment contracts 121,190 190,454 404 312,048 $528,527 $914,622 $238,706 $1,681,855
Consumer finance receivables have maximum terms of 180 months, while retail contracts have maximum terms of 60 months. The weighted average contractual term of all loans and contracts written during the years ended December 31, 1995 and 1994 was 44 months and 41 months, respectively. Experience has shown that a substantial portion of the receivables will be renewed or repaid prior to contractual maturity. Therefore, the tabulation of contractual payments should not be regarded as a forecast of future cash collections. During the years ended December 31, 1995 and 1994, the ratio of principal cash collections to average net consumer finance receivables outstanding was 66% and 69%, respectively. The majority of loans provide for a fixed rate of interest over the contractual life of the loan. 18 The approximate fair value of the Company's net finance receivables as of December 31, 1995 and 1994 follows:
(Dollars in thousands) 1995 1994 Approximate Approximate Net Book Fair Net Book Fair Value Value Value Value Real estate secured loans $ 469,498 $ 469,885 $ 426,234 $ 417,456 Other consumer finance instalment loans 900,309 895,181 858,981 855,318 Retail instalment contracts 312,048 312,048 296,010 296,010 $1,681,855 $1,677,114 $1,581,225 $1,568,784
The approximate fair value of finance receivables is estimated by discounting the future cash flows using current rates at which similar loans would be made with similar maturities to borrowers with similar credit ratings. The current rates for finance receivables approximate the weighted average rates of the portfolio at December 31, 1995 and 1994; therefore, there is no significant difference between the estimated fair value of the loan portfolio and its net book value. The fair value is not adjusted for the value of potential loan renewals from existing borrowers. Because the Company primarily lends to consumers, it did not have receivables from any industry group that comprised 10 percent or more of total consumer finance receivables at December 31, 1995. Activity in the Company's allowance for credit losses is as follows:
Year Ended December 31, (Dollars in thousands) 1995 1994 1993 Balance, January 1 $ 41,311 $ 39,094 $ 36,046 Provision for credit losses 46,902 38,334 35,131 Amounts charged off (60,822) (52,197) (48,635) Recoveries 15,421 15,060 15,065 Allowances on notes purchased 1,310 1,020 1,487 Balance, December 31 $ 44,122 $ 41,311 $ 39,094
19 Note 4 Investment Securities Investment securities as of December 31, 1995 and 1994 are as follows:
(Dollars in thousands) December 31, 1995 Approximate Original Amortized Gross Unrealized Fair Cost Cost Gains Losses Value Government obligations $ 14,481 $ 14,484 $ 33 $ 146 $ 14,371 Corporate obligations 93,742 93,353 984 24 94,313 Certificates of deposit and other 12,462 12,223 163 118 12,268 $120,685 $120,060 $1,180 $ 288 $120,952
(Dollars in thousands) December 31, 1994 Approximate Original Amortized Gross Unrealized Fair Cost Cost Gains Losses Value Government obligations $ 18,357 $ 18,352 $ 2 $ 1,487 $ 16,867 Corporate obligations 89,763 89,237 107 4,023 85,321 Certificates of deposit and other 4,525 4,540 37 165 4,412 $112,645 $112,129 $ 146 $ 5,675 $106,600
There were no significant realized gains or losses during 1995 or 1994. The following table presents the maturity of the investment securities at December 31, 1995:
(Dollars in thousands) Approximate Amortized Fair Cost Value Due in one year or less $ 24,289 $ 24,275 Due after one year through five years 66,631 66,934 Due after five years through ten years 24,313 24,929 Due after ten years 4,827 4,814 $ 120,060 $ 120,952
20 Note 5 Deferred Charges Deferred charges, net of amortization, as of December 31, 1995 and 1994 are as follows:
(Dollars in thousands) 1995 1994 Long-term debt issuance costs $ 3,712 $ 3,838 Premiums on purchased accounts 7,858 8,767 $ 11,570 $ 12,605
Amortization of deferred charges for each of the last three years is as follows:
(Dollars in thousands) 1995 1994 1993 Long-term debt issuance costs $ 1,287 $ 1,268 $ 1,581 Premiums on purchased accounts 3,128 3,385 3,667 System development costs 1,378 2,052
Note 6 Short-term Debt Short-term debt at December 31, 1995 and 1994 consisted of commercial paper notes. Such debt outstanding at December 31, 1995 had been issued in the minimum amount of $405,000 and with a maximum original term of 90 days. The book value of short-term debt at December 31, 1995 approximates its estimated fair value. Additional information concerning total short-term borrowings is as follows:
Year Ended December 31, (Dollars in thousands) 1995 1994 1993 Outstanding during the year Maximum amount at any month end $ 312,876 $ 287,793 $ 279,607 Average amount 210,684 235,682 170,852 Weighted average interest rate 6.0% 4.2% 3.6% Balance at end of year Amount $ 312,876 $ 179,085 $ 279,607 Weighted average interest rate 5.9% 6.0% 3.8%
Weighted average interest rates include the effect of commitment fees. 21 Short-term notes totaling $75 million and $74 million were issued in December, 1995 and 1994, respectively. The proceeds of these notes were used to purchase investment securities and were repaid through liquidation of these securities in the month following issuance. This short-term debt has been reflected net of the securities balances in the accompanying Consolidated Statements of Financial Condition. In 1994, the Company entered into a $450 million revolving credit agreement with several domestic and foreign banks. The agreement, which replaced previous revolving credit agreements of $120 million and $200 million, has a four-year term with repayment in full of any balance outstanding in October, 1998. This revolving credit agreement has restrictive covenants as described further in Note 7. There were no borrowings under any revolving credit agreements in 1995 or 1994. 22 Note 7 Long-term Debt Long-term debt at December 31, 1995 and 1994 was comprised of the following:
(Dollars in thousands) 1995 1994 Senior Debentures and Notes 9.47%, due April 6, 1995 $ 50,000 8.55%, due June 1, 1995 100,000 9.5%, due July 30, 1995 21,000 6.25%, due July 15, 1996 $ 99,995 99,986 7.375%, due February 15, 1997 99,974 99,953 8.125%, due December 1, 1997 99,812 99,722 5.75%, due July 15, 1998 149,875 149,830 7.875%, due February 15, 1999 99,864 99,827 6.3%, due July 15, 2000 99,913 7.75%, due June 15, 2001 149,917 149,905 Medium Term Notes, Series C, due through 1996, at interest rates of 8.75% to 8.90% 5,000 10,000 Medium Term Notes, Series D, due through 1995, at interest rate of 9.72% 13,000 Total Senior Debt 804,350 893,223 Senior Subordinated Notes and Debentures 8.875%, due August 15, 1998 99,920 99,894 7.5%, due July 1, 1999 99,539 99,428 Total Senior Subordinated Debt 199,459 199,322 Total Long-term Debt $1,003,809 $1,092,545
23 Aggregate maturities at December 31, 1995 are as follows:
(Dollars in thousands) Senior Senior Subordinated Debt Notes Total 1996 $ 104,995 $ 104,995 1997 199,786 199,786 1998 149,875 $ 99,920 249,795 1999 99,864 99,539 199,403 2000 99,913 99,913 Thereafter 149,917 149,917 $ 804,350 $ 199,459 $1,003,809
The approximate fair value of the Company's long-term debt as of December 31, 1995 and 1994 is as follows:
(Dollars in thousands) 1995 1994 Book Approximate Book Approximate Value Fair Value Value Fair Value Senior debt $ 804,350 $ 834,130 $ 893,223 $ 869,781 Senior subordinated notes 199,459 213,600 199,322 196,035 $1,003,809 $1,047,730 $1,092,545 $1,065,816
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the approximate fair value of existing debt. The Company issued in July, 1994, $150 million of 7.75% senior notes maturing June 15, 2001; and in December, 1994, $100 million of 8.125% senior notes maturing December 1, 1997. In March, 1995, the Company filed a $600 million shelf registration statement. Under this registration statement, the Company issued in July, 1995, $100 million of 6.3% senior notes maturing July 15, 2000. The proceeds of each of these issues were used principally to reduce outstanding commercial paper. Provisions of certain of the Company's long and short-term debt agreements restrict the payment of dividends to a maximum prescribed proportion of cumulative earnings and contributed capital and provide for the maintenance of minimum levels of equity and maximum leverage ratios. At December 31, 1995, approximately $101 million was available under the debt agreement restriction for future dividends. 24 Note 8 Income Taxes The components of income tax expense are as follows:
Year Ended December 31, (Dollars in thousands) 1995 1994 1993 Currently payable Federal $ 30,995 $ 27,562 $ 37,270 State 5,731 5,233 6,190 Deferred (53) 600 (14,900) $ 36,673 $ 33,395 $ 28,560
Deferred taxes result from temporary differences in the recognition of certain items for tax and financial reporting purposes. Deferred tax liabilities (assets) are comprised of the following:
December 31, (Dollars in thousands) 1995 1994 Amortization of intangibles $ 17,837 $ 19,649 Employee benefits accruals 1,599 1,613 Depreciation 678 1,175 Loan interest and fee income 3,087 272 Other deferred income items 399 91 Total deferred tax liabilities 23,600 22,800 Credit loss reserves (14,080) (12,852) Unearned insurance commissions (2,980) (2,833) Other miscellaneous accruals (2,415) (2,392) State taxes (3,162) (4,898) Other deferred deduction items (2,863) (3,960) Total deferred tax assets (25,500) (26,935) Net deferred tax asset $ (1,900) $ (4,135)
25 The provisions for income taxes differ from the amounts determined by multiplying pretax income by the statutory Federal income tax rate of 35% for 1995, 1994 and 1993. A reconciliation between these amounts is as follows:
Year Ended December 31, (Dollars in thousands) 1995 1994 1993 Income taxes at statutory rates $ 32,597 $ 32,057 $ 27,889 Increase (reduction) in taxes resulting from: State income taxes, net of Federal benefit 3,725 3,467 3,024 Other 351 (2,129) (2,353) $ 36,673 $ 33,395 $ 28,560
Note 9 Retirement and Savings Plans GWFC's non-contributory defined benefit pension plan covers substantially all of the Company's employees. Accumulated plan benefits and annual pension cost are derived from an allocation formula based on the Company's total participants and the Plan's total participants. Pension cost for the Company's participants for the years ended December 31, 1995, 1994, and 1993 was $1,455,000, $1,717,000 and $1,492,000, respectively. Due to the Company's participation in a multi-employer defined benefit plan, information as to separate Company participant assets and vested benefits is not presented. The Company's employees also participate in GWFC's employee savings plan, which allows employees to defer part of their pretax compensation until retirement. Company contributions equal 50% of the contributions made by employees up to 6% plus annual discretionary amounts, if any, as determined by management. The Company's cost is based on the actual contribution related to its participating employees. Total expense was $1,112,000, $1,277,000 and $1,342,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company's employees also participate in GWFC's defined benefit postretirement plans which provide medical and life insurance coverage to eligible employees and dependents based on age and length of service. Medical coverage options are the same as available to active employees. The accumulated postretirement benefit obligation and related expense are derived from an allocation formula based on the Company's total participants and the Plan's total participants. The net postretirement medical and life insurance expense allocated to the Company for the years ended December 31, 1995, 1994 and 1993 were $495,000, $737,000 and $1,300,000, respectively. 26 Note 10 Leases At December 31, 1995, the Company was lessee of office space, principally for loan offices, computer and other office equipment and automobiles, generally for terms of five or fewer years. The lease for the Company's former headquarters was terminated in the first quarter of 1994 due to the purchase of its new headquarters in Tampa, Florida. The Company has no material capital leases. Under operating leases that have initial or remaining noncancelable lease terms in excess of one year, approximate aggregate annual minimum rentals are $6,600,000 in 1996; $5,200,000 in 1997; $2,600,000 in 1998; $1,400,000 in 1999; and $600,000 in 2000. Rent expense for the years ended December 31, 1995, 1994 and 1993 was $8,713,000, $7,687,000, and $8,560,000, respectively. Note 11 Contingencies The Company is routinely involved in litigation incidental to its businesses. It is management's opinion that the aggregate liability arising from the disposition of all such pending litigation will not have a material adverse effect on the Company. Note 12 Transactions with Related Parties Significant transactions with GWFC or its subsidiaries are identified as follows: * The Company provides supervisory and administrative services to affiliates engaged in industrial banking and other consumer finance activities at no cost to such affiliates. The Company also provides data processing services to such affiliates, and revenue from these services totaled approximately $572,000 in 1995, $757,000 in 1994, and $768,000 in 1993. From time to time, the Company advances funds to these operations. At December 31, 1995 and 1994, there were outstanding advances of $1,426,000 and $7,981,000, respectively. * A subsidiary of GWFC provides the Company with certain administrative services, including human resources and cash management. The Company paid this affiliate management fees of $1,358,000 in 1995, $1,365,000 in 1994, and $1,239,000 in 1993. * The Company makes payments to GWFC in accordance with GWFC's tax allocation policy and in connection with the retirement and savings plans. 27 Note 13 Approximate Fair Values of Financial Instruments A summary of the approximate fair values of the Company's financial instruments, as compared to their carrying values, is set forth in the following table:
(Dollars in thousands) December 31, 1995 December 31, 1994 Carrying Approximate Carrying Approximate Value Fair Value Value Fair Value Finance receivables Note 3 $1,681,855 $1,677,114 $1,581,225 $1,568,784 Investment securities Note 4 120,952 120,952 106,600 106,600 Short-term debt Note 6 312,876 312,876 179,085 179,085 Long-term debt Note 7 1,003,809 1,047,730 1,092,545 1,065,816
See the referenced Notes for additional information. Note 14 Selected Quarterly Financial Data (Unaudited) A summary of the quarterly results of operations for the years ended December 31, 1995 and 1994 is set forth below:
Quarter Ended March 31, June 30, September 30, December 31, (Dollars in thousands) 1995 1994 1995 1994 1995 1994 1995 1994 Revenue $85,815 $83,032 $86,048 $82,062 $86,719 $83,400 $90,440 $87,172 Interest and other expenses 54,227 51,868 53,211 51,775 51,378 51,853 50,170 50,244 Provision for credit losses 9,892 8,552 9,938 7,621 10,805 9,513 16,267 12,648 Total expenses 64,119 60,420 63,149 59,396 62,183 61,366 66,437 62,892 Income before taxes 21,696 22,612 22,899 22,666 24,536 22,034 24,003 24,280 Income tax provision 8,542 8,143 9,116 8,183 9,686 7,695 9,329 9,374 Net income $13,154 $14,469 $13,783 $14,483 $14,850 $14,339 $14,674 $14,906
28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Index of Documents filed as a part of this Report: 1. Financial Statements Included in Part II of this Report: PAGE Report of Independent Certified Public Accountants. . . . . .10 Aristar, Inc. and Subsidiaries: Consolidated Statements of Financial Condition at December 31, 1995 and 1994. . . . . . . . . . . . . . . .11 Consolidated Statements of Operations and Retained Earnings for the Years Ended December 31, 1995, 1994 and 1993 . . . .12 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 . . . .13 Notes to Consolidated Financial Statements . . . . . . . . .14
2. Financial Statement Schedules All schedules are omitted because of the absence of the conditions under which they are required or because the required information is set forth in the financial statements or related notes. 3. Exhibits Included in Part IV of this Report: Exhibit Number (3) (a) Certificate of Incorporation of Aristar, Inc. as presently in effect. (1) (b) By-Laws of Aristar, Inc. as presently in effect. (1) (4) (a) Indenture dated as of July 15, 1984, between Aristar, Inc. and Bank of Montreal Trust Company, as trustee. (2) (b) First supplemental indenture to Exhibit (4)(a) dated as of June 1, 1987. (2) 29 (c) Indenture dated as of August 15, 1988 between Aristar, Inc. and Bank of Montreal Trust Company, as trustee. (3) (d) Indenture dated as of May 1, 1991 between Aristar, Inc. and Security Pacific National Bank, as trustee. (4) (e) Indenture dated as of May 1, 1991 between Aristar, Inc. and The First National Bank of Boston, as trustee. (4) (f) Indenture dated as of July 1, 1992 between Aristar, Inc. and The Chase Manhattan Bank, N.A., as trustee. (5) (g) Indenture dated as of July 1, 1992 between Aristar, Inc. and Citibank, N.A., as trustee. (5) (h) Indenture dated as of July 1, 1995 between Aristar, Inc. and The Bank of New York, as trustee. (6) (i) The registrant hereby agrees to furnish the Securities and Exchange Commission upon request with copies of all instruments defining rights of holders of long-term debt of Aristar and its consolidated subsidiaries. (10) Income Tax Allocation Agreement dated as of December 15,1995 between Aristar, Inc. and Great Western Financial Corporation. (12) Statement Re: Computation of Ratios. (23) Consent of Independent Certified Public Accountants. (24) Power of Attorney included on Page 31 of the Form 10-K. (27) Financial Data Schedule. 30 (1) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987, Commission file number 1-3521. (2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission file number 1-3521. (3) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, Commission file number 1-3521. (4) Incorporated by reference to Registrant's Current Report on Form 8-K dated May 29, 1991, Commission file number 1-3521. (5) Incorporated by reference to Registrant's Current Report on Form 8-K dated June 24, 1992, Commission file number 1-3521. (6) Incorporated by reference to Registrant s Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, Commission file number 1-3521. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the period covered by this report. 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARISTAR, INC. By /s/ James A. Bare March 26, 1996 James A. Bare, Executive Vice President Date and Chief Financial Officer (and Principal Accounting Officer) POWER OF ATTORNEY Each person whose signature appears below hereby authorizes James A. Bare as attorney-in-fact to sign on his behalf as an individual and in every capacity stated below, and to file all amendments to the registrant's Form 10-K, and the registrant hereby confers like authority to sign and file in its behalf. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 26, 1996. /s/ Michael M. Pappas Michael M. Pappas, President and Director (Principal Executive Officer) /s/ James A. Bare James A. Bare, Director /s/ Carl F. Geuther Carl F. Geuther, Director /s/ J. Lance Erikson J. Lance Erikson, Director EX-12 2 Exhibit 12 ARISTAR, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
Year Ended December 31, (Dollars in Thousands) 1995 1994 1993 1992 1991 Income from operations before income taxes and, in 1992, cumulative effect of a change in accounting principle $ 93,134 $ 91,592 $ 79,683 $ 75,728 $ 63,430 Fixed charges: Interest and debt expense on all indebtedness 91,257 87,074 86,385 89,005 80,261 Appropriate portion of rentals (33%) 2,875 2,537 2,825 2,358 2,157 Total fixed charges 94,132 89,611 89,210 91,363 82,418 Earnings available for fixed charges $187,266 $181,203 $168,893 $167,091 $145,848 Ratio of earnings to fixed charges 1.99 2.02 1.89 1.83 1.77
EX-23 3 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-23185) of Aristar, Inc. and subsidiaries of our report dated January 15, 1996 appearing on page 10 of this Form 10-K. PRICE WATERHOUSE LLP Tampa, Florida March 26, 1996 EX-27 4
9 This Schedule contains summary financial information extracted from the Company's financial statements filed as part of its Report on Form 10-K for the year ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1995 DEC-31-1995 7,142 0 0 0 120,952 0 0 1,681,855 (44,122) 1,861,922 0 312,876 42,189 1,003,809 0 0 1 429,660 1,861,922 312,066 7,744 0 319,810 0 91,257 228,553 46,902 0 117,729 93,134 0 0 0 56,461 0 0 10.71 21,870 0 0 0 41,311 (60,822) 15,421 44,122 0 0 44,122 Aristar, Inc. is technically a Commercial and Industrial Company subject to Article 5 of Regulation S-X. However, as its primary business is consumer finance, the Company, although not a bank holding company, is engaged in similar lending activities. Therefore, in accordance with Staff Accounting Bulletin Topic 11-K, "Application of Article 9 and Guide 3," the Company has prepared its Financial Data Schedule for the year ended December 31, 1995 using the Article 9 format.
EX-10 5 Exhibit 10 INCOME TAX ALLOCATION AGREEMENT This Income Tax Allocation Agreement ( Agreement ) dated January 1, 1996 is made between Great Western Financial Corporation ( GWFC ) and Aristar, Inc. ( Aristar ). WHEREAS, GWFC has established an Income Tax Allocation Policy dated December 15, 1995, set forth in Exhibit A for the purpose of prescribing procedures to be followed for allocating income taxes and tax benefits among the corporate affiliates of GWFC, including Aristar and for the payment of the allocated tax and tax benefits by and to the affiliates; WHEREAS, GWFC and Aristar desire to abide by the procedures prescribed in the Income Tax Allocation Policy; NOW, THEREFORE, GWFC and Aristar agree as follows: Beginning with the taxable year ending December 31, 1995, GWFC and Aristar will allocate income taxes and benefits in accordance with the terms of the Income Tax Allocation Policy and any amendments thereto. IN WITNESS WHEREOF, the parties have duly executed this Agreement by authorized officers as of the date first written above. GREAT WESTERN FINANCIAL CORPORATION BY: /s/ Carl F. Geuther Carl F. Geuther, Executive Vice President and Chief Financial Officer ARISTAR, INC. BY: /s/ James A. Bare James A. Bare Director, Senior Vice President and Chief Financial Officer 1 Exhibit A GREAT WESTERN FINANCIAL CORPORATION ( GWFC ) INCOME TAX ALLOCATION POLICY This Income Tax Allocation Policy is for the purpose of establishing procedures to be followedfor allocating taxes based on income and related tax benefits among the corporate affiliates ( Members ) of GWFC (the Group ) and for the payment of the allocated tax and tax benefits by and to the Members. I. Federal Income Taxes A. Regular Tax The consolidated Federal income tax liability of the Group will be allocated to Members included in consolidated Federal income tax returns as follows: (1) Each Member that would pay tax on a separate return basis (the Income Members ) will be allocated the amount of tax it would have paid for the taxable year if its tax were computed on a separate return basis, adjusted upward or downward, as appropriate, for limitations on items of income, deductions, and credits that are modified in consolidation. Revised December 15, 1995 2 (2) The excess of the amount of tax allocation to the Income Members in (1) above over the consolidated regular tax liability of the Group (the Excess Tax Payments Pool ) shall be allocated as a tax benefit to each of the other Members of the Group (the Loss Members ) in a consistent manner that fairly reflects the losses and credits provided by the Loss Members and any applicable consolidated return limitations. (3) If the Group has a consolidated net operating loss or excess tax credits for a year, the amounts determinable in (1) above will be based on the current year tax rate and the amount determinable in (2) above shall include the taxes recoverable from prior years resulting from the carryback of the consolidated net operating loss and excess tax credits, to consolidated return years and, where applicable, to the separate return years (as defined in the consolidated tax return regulations) of the Loss Members. (4) A Loss Member will be allocated tax benefits for its net operating loss and excess tax credits determined only as they cause a reduction in the Group s consolidated tax liability for the current, past, or future year(s) in which they are utilized or they recover taxes from a separate return year of the Loss Member. 3 (5) A Loss Member will not be allocated a tax benefit for a tax loss in an amount that exceeds the amount determined by reference to its separate return loss reflecting consolidated limitations and applicable statutory tax rate for the year in which the loss is utilized. A balance remaining in the Excess Tax Payments pool after full benefits have been allocated to all Loss Members on the basis of this rule will be allocated back to Income Members in proportion to, and in reduction of, the amounts of tax allocated in (1) above. B. Alternative Minimum Tax ( AMT ) The difference between the AMT and the regular tax ( AMT allocation ) will be allocated as follows: each Member will be allocated the lesser of 1) its separate company AMT,1 or 2) its portion of AMT Allocation based on the ratio of its separate company AMT to total AMT due if each Member of the Group were to file a separate Federal return. Any excess of consolidated AMT over the total separate company AMT will be allocated to Loss Members based on the ratio of its separate company loss to the total loss of all Loss Members. ______________________________________________ 1 Separate company AMT is defined as the AMT that would be due if the Member were to file a separate Federal income tax return. 4 When a credit for a prior year minimum tax liability reduces the consolidated regular tax for a year, such benefit will be allocated to the Members that were allocated AMT in the prior year in accordance with the preceding paragraph in a fair and equitable manner. II. State Income Taxes Except as provided below, each Member will be allocated a share of the state taxes on income as follows: (1) The Great Western Corporate Tax Department ( Tax Department ) will calculate a consolidated blended state effective tax rate ( Blended Rate ) by dividing the projected state income tax on state adjusted book income2 by book taxable income. (2) Each Member s state tax provision or benefit will be calculated by: a) adjusting its beginning of the year deferred tax liability or asset account to reflect the most current Blended Rate, and ___________________________________ 2 State adjusted book income takes into consideration adjustments for prior years and for California and Florida permanent differences, apportionment factors and taxation rules. Consideration will be given to other state adjustments when, in the opinion of the Tax Department, they become significant. 5 b) multiplying its pre-tax book income (loss) by the final Blended Rate for the year. c) For the Consumer Finance Group ( CFG ), it is intended that the amount of state income tax or tax benefit charged or credited to CFG will approximate the amount that would have been payable or recoverable by CFG if it s Members had filed their state income tax returns on a separate entity basis (or separate subgroup basis for combined state returns). Any deficit or benefit arising therefrom will be allocated to GWFC. The Tax Department will utilize a reasonable method to estimate the amount that would have been payable or recoverable by CFG on a separate entity basis (or separate subgroup basis for combined state returns). The Tax Department will review, on an annual basis, the state income taxes allocated to CFG under the above to ascertain that the methodology used by the Tax Department is consistent with the intent of this subparagraph and is reasonable in relationship to the taxes paid or owed by CFG to taxing authorities. (3) After the tax returns for the year are filed and the provision-to-return reconciliation is completed, the Tax Department will calculate each 6 Member's total California cumulative temporary differences as of December 31 of the prior year.3 This total will be multiplied by the most current Blended Rate to derive the correct balance in each Member s deferred tax account. (4) The balances in the current and deferred tax liability accounts less the current year provision will be adjusted to the deferred tax balance computed in (3) above, and the difference will be settled through the intercompany accounts. (5) The amount of tax benefit allocated to a Loss Member by GWFC will not exceed the actual tax reduction or refund allowed to be recognized under Generally Accepted Accounting Principles by the Group due to the Member's loss. ____________________________________ 3 Current year deferred tax items are excluded from this analysis due to their tentative nature. 7 (6) If a Member s operations are conducted wholly within a state that does not impose a tax based on corporate income, no consolidated state income tax or tax benefit will be allocated to it. Any deficit or benefit arising therefrom will be allocated to GWFC. (7) The amount of tax or tax benefit charged or credited to a regulated corporation by GWFC will not exceed the amount that would have been payable or recoverable by the regulated corporation if it had filed its tax returns on a separate entity basis. Any deficit or benefit arising therefrom will be allocated to GWFC. In addition, the regulated corporation will not pay deferred tax liabilities to the holding company. This paragraph takes precedent over all other provisions of the agreement. (8) An insurance company Member will not be allocated income tax or tax benefit related to a state that imposes a gross receipts tax in lieu of a tax on income. Any deficit or benefit arising therefrom will be allocated to GWFC. (9) The Tax Department will review, on an annual basis, the state income taxes allocated and the state tax liabilities determined under this policy to assure that the results are consistent with Generally Accepted Accounting Principles and reasonable in relationship to the taxes paid. 8 III. Amended Returns and Audit Adjustments Any change in the tax liability due to the filing of an amended return or an audit by a taxing authority will be allocated among the Members in accordance with the above rules. IV. Tax Payments A Member may be required to make a payment under this policy at such time as GWFC is required to make related payments to the government or to other Members. If a payment is to be made to a Member under this policy, such payment shall be made as soon as possible after the filing of the related return, receipt of refund, or calculation of correction of prior payment. -----END PRIVACY-ENHANCED MESSAGE-----