UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from............to ..........................
Commission file number 1-3521
ARISTAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4128205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8900 Grand Oak Circle, Tampa, FL 33637-1050
(Address of principal executive offices) (Zip Code)
(813) 632-4500
(Registrant's telephone number, including area code)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 1998, there were 1,000 shares of Common Stock outstanding.
Registrant meets the conditions set forth in General Instruction (H)(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE> 2
ARISTAR, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
September 30, 1998, December 31, 1997, and
September 30, 1997...................................................3
Consolidated Statements of Operations, Comprehensive Income
and Retained Earnings -
Three Months and Nine Months Ended September 30, 1998 and 1997.......4
Consolidated Statements of Cash Flows -
Three Months and Nine Months Ended September 30, 1998 and 1997.......5
Notes to Consolidated Financial Statements.............................6
Item 2. Management's Analysis of the
Results of Operations for the Three Months and
Nine Months Ended September 30, 1998............................. 7 - 12
Part II. Other Information:
Item 5. Other Information............................................13
Item 6. Exhibits and Reports on Form 8-K........................14 - 15
SIGNATURE ..............................................................16
<PAGE> 3
Item 1. Financial Statements
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(Dollars in thousands) 1998 1997 1997
-------------- ----------- -------------
ASSETS
<S> <C> <C> <C>
Consumer finance receivables, net $ 2,353,441 $ 2,254,389 $ 2,129,942
Investment securities 143,316 154,475 153,124
Cash and cash equivalents 12,930 26,446 14,755
Property and equipment, less accumulated
depreciation and amortization: 1998,
$23,642; 1997, $22,310 and $22,099 11,387 9,687 9,589
Excess of cost over equity of
companies acquired, less
accumulated amortization: 1998,
$62,453; 1997, $59,702 and $57,936 46,840 49,591 51,357
Other assets 39,923 39,440 42,806
-------------- ------------ -------------
TOTAL ASSETS $ 2,607,837 $ 2,534,028 $ 2,401,573
============== ============ =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Short-term debt $ 414,934 $ 357,532 $ 445,298
Long-term debt 1,426,998 1,472,872 1,274,965
-------------- ------------ -------------
Total debt 1,841,932 1,830,404 1,720,263
Customer deposits 176,515 163,185 159,385
Accounts payable and other liabilities 54,462 47,209 48,564
Federal and state income taxes 22,414 24,628 18,087
Insurance claims and benefits reserves 9,677 7,824 7,573
Unearned insurance premiums and
commissions 70,089 62,594 57,971
-------------- ------------ -------------
Total liabilities 2,175,089 2,135,844 2,011,843
-------------- ------------ -------------
Stockholder's equity
Common stock: $1.00 par value;
10,000 shares authorized; 1,000
shares issued and outstanding 1 1 1
Paid-in capital 48,959 44,894 44,894
Retained earnings 382,647 352,756 344,721
Accumulated other comprehensive income:
Net unrealized holding gain on investment
securities 1,141 533 114
-------------- ----------- -------------
Total stockholder's equity 432,748 398,184 389,730
-------------- ------------ -------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 2,607,837 $ 2,534,028 $ 2,401,573
============== ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Operations, Comprehensive Income and
Retained Earnings
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 1998 1997 1998 1997
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Loan interest and fee income $ 102,320 $ 87,912 $ 297,215 $ 268,660
Investment securities income 3,059 2,690 8,881 7,673
----------- --------- --------- ---------
Total interest income 105,379 90,602 306,096 276,333
Interest and debt expense 33,588 32,128 99,441 95,543
----------- --------- --------- ---------
Net interest income 71,791 58,474 206,655 180,790
Provision for credit losses 21,800 16,200 58,100 47,200
----------- --------- --------- ---------
Net insurance operations 6,296 5,648 16,673 16,203
Other income 1,548 944 3,437 3,444
----------- --------- --------- ---------
Total other income 7,844 6,592 20,110 19,647
Other expenses:
Personnel costs 18,750 17,161 56,794 52,141
Occupancy expense 2,684 2,598 7,806 7,531
Advertising expense 1,707 772 4,582 3,077
Amortization of excess cost over
equity of companies acquired 866 1,766 2,751 5,298
Other operating expenses 9,315 9,524 28,241 28,538
----------- --------- --------- ---------
Total other expense 33,322 31,821 100,174 96,585
----------- --------- --------- ---------
Income before income taxes 24,513 17,045 68,491 56,652
Provision for federal and state
income taxes 9,700 6,800 27,100 22,400
----------- --------- --------- ---------
Net income 14,813 10,245 41,391 34,252
Net unrealized and realized holding gains
(losses) on securities arising during
period, net of tax 255 480 608 (262)
----------- --------- --------- --------
Comprehensive income $ 15,068 $ 10,725 $ 41,999 $ 33,990
=========== ========= ========= =========
Retained Earnings
Beginning of period $ 374,834 $ 334,476 $ 352,756 $ 323,969
Net Income 14,813 10,245 41,391 34,252
Dividends paid (7,000) (11,500) (13,500)
----------- --------- --------- ---------
End of Period $ 382,647 $ 344,721 $ 382,647 $ 344,721
=========== ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
ARISTAR, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 1998 1997 1998 1997
-------- --------- --------- ---------
Cash flows from operating activities
<S> <C> <C> <C> <C>
Net income $ 14,813 $ 10,245 $ 41,391 $ 34,252
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses 21,800 16,200 58,100 47,200
Depreciation and amortization 2,319 2,592 6,909 8,325
Deferred income taxes (171) (379) (356) 214
Increase (decrease) in
Accounts payable and other liabilities 6,738 (2,683) 7,253 2,198
Unearned insurance premiums and
commissions and insurance claims
and benefits reserves 5,914 1,116 9,348 42
Currently payable income taxes 7,684 6,580 (2,214) 4,251
Other assets (989) (5,960) (483) (775)
-------- --------- --------- ---------
Net cash provided by operating activities 58,108 27,711 119,948 95,707
-------- --------- --------- ---------
Cash flows from investing activities
Investment securities purchased (16,313) (13,529) (66,151) (53,363)
Investment securities matured or sold 47,763 8,328 78,302 36,829
Consumer finance receivables originated
or purchased (478,001) (346,137) (1,219,390) (1,044,940)
Consumer finance receivables repaid 344,881 309,362 1,059,835 989,515
Net change in property and equipment (1,153) (145) (3,014) (492)
-------- --------- --------- ---------
Net cash used in investing activities (102,823) (42,121) (150,418) (72,451)
-------- --------- --------- ---------
Cash flows from financing activities
Net change in short-term debt 100,136 (7,385) 57,402 47,292
Proceeds from issuance of long-term debt 199,657 209,657 27,500
Repayments of long-term debt (250,000) (1,500) (256,000) (105,700)
Net change in customer deposits 3,449 15,988 13,330 13,247
Dividends paid (7,000) (11,500) (13,500)
Proceeds from affiliate transfer 4,065
-------- --------- --------- ---------
Net cash provided by (used in)
financing activities 46,242 7,103 16,954 (31,161)
--------- --------- ---------- ---------
Net increase (decrease) in cash and
cash equivalents 1,527 (7,307) (13,516) (7,905)
Cash and cash equivalents
Beginning of period 11,403 22,062 26,446 22,660
-------- --------- --------- ---------
End of period $ 12,930 $ 14,755 $ 12,930 $ 14,755
======== ========= ========= =========
Supplemental disclosures of cash flow
information
Interest paid $ 31,998 $ 32,246 $ 96,571 $ 97,400
Net intercompany payment in lieu of
federal and state income taxes $ 2,017 $ 221 $ 29,317 $ 18,155
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 6
ARISTAR, INC. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements of Aristar, Inc.
and subsidiaries (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
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.
Certain amounts in prior periods have been reclassified to conform to the
current period's presentation.
Note 2 Ownership
The company is an indirect, wholly owned subsidiary of Washington Mutual, Inc.
("Washington Mutual").
<PAGE> 7
Item 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS FOR THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Third Quarter Overview
Net income for the three months ended September 30, 1998 of $14.8 million
increased 44.6% from $10.2 million in the same quarter of 1997. However,
excluding certain one-time reductions taken in the third quarter of 1997, the
increase was $2.3 million, or 18.5%. This increase primarily reflects additional
net interest income resulting from a $223.5 million increase in net consumer
finance receivables outstanding at September 30, 1998 as compared to September
30, 1997. The third quarter of 1997 included a reduction in interest income of
$4.2 million ($2.6 million after tax) resulting from the revision of the
Company's estimate of interest earnings on "same as cash" sales finance
contracts, net of a one-time reduction in expenses of $486 thousand ($294
thousand after tax) related to the merger of the Company's former parent
company, Great Western Financial Corporation, with Washington Mutual, which took
place in the third quarter of 1997.
Consumer finance receivables consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(Dollars in thousands) 1998 1997 1997
------------ ----------- -------------
Consumer finance receivables
<S> <C> <C> <C>
Real estate secured loans $ 1,232,564 $ 1,094,061 $ 1,067,762
Other installment loans 1,244,810 1,197,788 1,088,866
Retail installment contracts 311,491 362,373 359,624
------------- ------------ -------------
Gross consumer finance receivables 2,788,865 2,654,222 2,516,252
Less: Unearned finance charges and
deferred loan fees (355,682) (325,510) (315,187)
------------- ------------ -------------
Consumer finance receivables net of unearned
finance charges and deferred loan fees 2,433,183 2,328,712 2,201,065
Less: Allowance for credit losses (79,742) (74,323) (71,123)
------------- ------------ -------------
Consumer finance receivables, net $ 2,353,441 $ 2,254,389 $ 2,129,942
============= ============ =============
</TABLE>
Results of Operations
Net income for the nine months ended September 30, 1998 of $41.4 million
increased 20.8% from $34.3 million for the same period of 1997. The improvement
is primarily due to an increase in net interest income resulting from higher
gross consumer finance receivables and net interest spread, partially offset by
higher credit and operating costs. Also contributing to the increase were the
one-time adjustments made in the third quarter of 1997 as discussed above.
The Company's net interest income before provision for credit losses increased
$25.9 million, or 14.3%, to $206.7 million for the nine months ended September
30, 1998, compared to the same period of 1997. This increase reflects growth in
average net consumer finance receivables to $2.3 billion, which is $153.4
million, or 7.1%, greater than the average balance for the same nine month
period in 1997. Approximately $110 million of the increase is in home equity
receivables, approximately 54% of which were originated in the state of Texas
following a change in legislation that expanded the availability of that product
in that state. Another cause of this growth was management's implementation of
an internal growth initiative throughout the branch network. This growth was
partially offset by a $52 million decrease in average retail installment
contracts receivable for the nine months ended September 30, 1998 as compared to
the same 1997 period. This decline was the result of management's decision to
eliminate
<PAGE> 8
Management's Analysis of the Results of Operations for the
Three Months and Nine Months Ended September 30, 1998 (Continued)
several dealer relationships for profitability reasons. As a result of these
factors, total originations, excluding renewals, for the nine month period ended
September 30, 1998 totaled $1.2 billion, which was an improvement of 16.7%
compared to the same period in 1997.
The overall portfolio yield increased 54 basis points to 16.96% from 16.42% for
the nine months ended September 30, 1998 as compared to the same 1997 period. As
a result, loan interest and fee income increased $28.6 million, or 10.6%, for
the nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997. Due to a $14.4 million increase in average investment
securities, income from investment securities increased $1.2 million, or 15.7%,
for the nine months ended September 30, 1998, as compared to the same 1997
period. As a result of the activity above, total interest income increased $29.8
million, or 10.8%, for the nine months ended September 30, 1998, as compared to
the nine months ended September 30, 1997.
In order to finance the growth in receivables, average debt outstanding
increased $107.6 million, or 5.8%, to $2 billion. As a result of this increase,
offset partially by a decrease of 11 basis points in the weighted average
interest rate paid on such debt, interest and debt expense increased $3.9
million, or 4.1%, for the nine months ended September 30, 1998 as compared to
the same 1997 period.
The table below sets forth certain percentages relative to the spread between
interest income received on the loan portfolio and interest expense:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Ratio to Average Consumer Finance
Receivables, Net:
<S> <C> <C> <C> <C>
Interest and Fee Income 17.20% 16.95% 16.96% 16.42%
Interest and Debt Expense 5.65 5.76 5.68 5.84
--------- ---------- --------- ----------
Net Interest Spread 11.55% 11.19% 11.28% 10.58%
========= ========== ========= ==========
</TABLE>
The provision for credit losses for the nine months ended September 30, 1998 was
3.32% as an annualized percentage of average net consumer finance receivables
for that period, as compared to 2.88% for the same 1997 period. This increase is
primarily related to an increase in delinquencies and charge-offs in the other
installment portion of the loan portfolio.
Personnel costs were $4.7 million, or 8.9%, higher for the nine months ended
September 30, 1998, as compared to the same 1997 period. This increase is
primarily due to normal compensation increases and higher employee benefit
costs, the latter resulting from the Company's relationship with Washington
Mutual, which provides a higher level of employee benefits than the Company's
former parent.
Efficiency, defined as the ratio of non-interest operating expenses to total
revenue, improved to 44.4% for the nine months ended September 30, 1998 as
compared to 47.8% for the same period of 1997. The improvement is primarily the
result of increased revenues from consumer finance receivable growth combined
with strong expense control.
<PAGE> 9
Management's Analysis of the Results of Operations for the
Three Months and Nine Months Ended September 30, 1998 (Continued)
Credit Quality
Net credit charge-offs for the nine months ended September 30, 1998 were $53.0
million, or 3.02% as an annualized percentage of average net consumer finance
receivables, as compared to $47.1 million, or 2.88% for the same 1997 period.
The increase was due primarily to higher net charge-offs on other installment
loans which increased $5.6 million, or 14.7%. At September 30, 1998, the
allowance for credit losses as a percentage of consumer finance receivables net
of unearned finance charges and deferred loan fees at period end equaled 3.28%
as compared to 3.23% at September 30, 1997.
Activity in the Company's allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 1998 1997 1998 1997
----- ---- ----- ----
<S> <C> <C> <C> <C>
Balance, beginning of period $ 76,099 $ 70,853 $ 74,323 $ 70,045
Provision for credit losses 21,800 16,200 58,100 47,200
Amounts charged-off
Real estate secured loans (314) (352) (1,028) (876)
Other installment loans (18,040) (15,707) (53,657) (47,338)
Retail installment contracts (3,226) (3,624) (10,554) (10,122)
--------- --------- --------- ---------
(21,580) (19,683) (65,239) (58,336)
Recoveries
Real estate secured loans 130 116 450 264
Other installment loans 2,965 2,860 9,656 8,976
Retail installment contracts 657 604 2,178 1,963
--------- --------- --------- ---------
3,752 3,580 12,284 11,203
--------- --------- --------- ---------
Net charge-offs (17,828) (16,103) (52,955) (47,133)
Allowances on notes purchased and
other adjustments (329) 173 274 1,011
--------- --------- --------- ---------
Balance, end of period $ 79,742 $ 71,123 $ 79,742 $ 71,123
========= ========= ========= =========
Allowance as a percentage of:
Consumer finance receivables net
of unearned finance charges and
deferred loan fees at period end 3.28% 3.23% 3.28% 3.23%
Current period annualized net charge-offs 111.82% 110.42% 112.94% 113.17%
</TABLE>
The following table sets forth the ratio of receivables delinquent for 60 days
or more, on a contractual basis, to gross consumer finance receivables
outstanding:
<TABLE>
September 30, December 31,September 30,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
Real estate secured loans 0.70% 0.79% 0.75%
Other installment loans 4.50 4.31 4.37
Retail installment contracts 3.55 3.17 3.14
-------------- ------------- --------------
2.72% 2.71% 2.68%
============== ============= =============
</TABLE>
<PAGE> 10
Management's Analysis of the Results of Operations for the Three Months
and Nine Months Ended September 30, 1998 (Continued)
Asset / Liability Management
The Company's philosophy is to maintain an approximate match of the interest
rate sensitivity between its interest-bearing assets and liabilities. The
Company's consumer finance receivables are primarily fixed rate and have initial
terms between 3 months and 30 years. However, loans are generally paid off or
refinanced prior to their stated maturity. Therefore, the Company's
asset/liability management requires a high degree of analysis and estimation.
The Company funds its interest-bearing assets through both internally generated
equity and external debt financing. Corporate debt is balanced between
short-term and long-term borrowings, which allows the Company to meet its
objective of properly managing the interest rate risk inherent in the balance
sheet.
Liquidity / Capital Management
The Company funds its operations through a variety of corporate borrowings which
provide the flexibility needed to properly manage the liquidity risk inherent in
consumer lending. The primary source of these borrowings is corporate debt
securities issued by the Company. At September 30, 1998, eleven different senior
debt issues totaling $1.4 billion were outstanding, with a weighted average cost
of 6.96%. To meet the Company's short-term funding needs, daily trades of
commercial paper are executed. At September 30, 1998, eighteen different
commercial paper borrowings totaling $414.9 million were outstanding, with a
weighted average cost of 5.76%. The Company's banking subsidiary raises funds
through both customer deposits and borrowings with the Federal Home Loan Bank.
At September 30, 1998, the banking subsidiary's outstanding debt totaled $205.4
million, with a weighted average cost of 5.74%. The Company also maintains a
revolving credit agreement with twenty-four syndicate lenders which provides a
credit line of up to $550 million primarily to support the commercial paper
borrowings.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,September 30,
1998 1997 1997
-------------- ------------ -------------
<S> <C> <C> <C>
Senior Notes and Debentures $ 1,298,207 $ 1,248,205 $ 1,049,239
Senior Subordinated Notes
and Debentures 99,891 199,767 199,726
Federal Home Loan Bank Notes 28,900 24,900 26,000
-------------- ------------ -------------
$ 1,426,998 $ 1,472,872 $ 1,274,965
============== ============ =============
</TABLE>
Customer deposits consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31, September 30,
1998 1997 1997
-------------- ------------ -------------
<S> <C> <C> <C>
Money market accounts $ 15,084 $ 15,883 $ 15,370
Savings accounts 1,488 1,493 1,504
Certificates of deposit under $100,000 144,363 133,041 130,215
Certificates of deposit over $100,000 15,580 12,768 12,296
-------------- ------------ -------------
$ 176,515 $ 163,185 $ 159,385
============== ============ =============
</TABLE>
The Company manages its capital by establishing equity leverage targets based
upon the ratio of debt (including customer deposits) to tangible equity. The
debt to tangible equity ratio at September 30, 1998 of 5.23 to 1 has declined
from 5.55 to 1 at September 30, 1997. The determination of the Company's
dividend payments and resulting capital leverage will be managed in a manner
consistent with the Company's desire to maintain strong and improving credit
ratings.
<PAGE> 11
Management's Analysis of the Results of Operations for the Three Months
and Nine Months Ended September 30, 1998 (Continued)
Year 2000
This section contains forward-looking statements that have been prepared on the
basis of the Company's best judgments and currently available information. These
forward-looking statements are inherently subject to significant business,
third-party and regulatory uncertainties and contingencies, many of which are
beyond the control of the Company. In addition, these forward-looking statements
are based on the Company's current assessments and remediation plans, which are
based on certain representations of third party service providers and are
subject to change. Accordingly, there can be no assurance that the Company's
results of operations will not be adversely affected by difficulties or delays
in the Company's or third parties' Year 2000 readiness efforts. See "Risks"
below for a discussion of factors that may cause such forward-looking statements
to differ from actual results.
The Company has implemented a company-wide program to renovate, test and
document the readiness ("Year 2000 readiness") of its electronic systems,
programs and processes ("Computer Systems"), and facilities to properly
recognize dates to and through the year 2000 (the "Year 2000 Project"). While
the Company is in various stages of modification and testing of individual Year
2000 Project components, the Year 2000 Project is proceeding generally on
schedule.
The Company has assigned its Senior Vice President of Information Systems to
oversee the Year 2000 Project, has set up a Year 2000 Project Office, and has
charged a senior management team representing all significant operational areas
of the Company to act as a Steering Committee. The Company has dedicated a
substantial amount of management and staff time on the Year 2000 Project. The
Company has, in conjunction with Washington Mutual, engaged IBM Global Services
to provide technical and management resources where necessary and has engaged
Deloitte & Touche LLP to assist in documenting certain aspects of the Year 2000
Project. Monthly progress reports are made to the Company's Board of Directors,
and Washington Mutual's Board of Directors' Audit Committee reviews Year 2000
Project progress on a quarterly basis.
(a) Project. The Company has divided its Year 2000 Project into the following
general phases, consistent with guidance issued by the Federal Financial
Institutions Examinations Council (the "FFIEC): (i) inventory and assessment;
(ii) renovation, which includes repair or replacement; (iii) validation, which
includes testing of Computer Systems and the Company's connections with other
computer systems; (iv) due diligence on third party service providers; and (v)
development of contingency plans. The Year 2000 Project is divided into four
categories: mainframe systems, non-mainframe systems, third-party service
providers, and facilities.
The inventory and assessment phases are substantially complete, and each
component that has been identified has been assigned a priority rating,
corresponding to its significance. The rating has allowed the Company to direct
its attention to those Computer Systems, third party service providers and
facilities that it deems more critical to its ongoing business and the
maintenance of good customer relationships.
The Company is currently in the process of repairing or replacing and testing
the most significant components of its Computer Systems and facilities, and it
expects to be substantially complete with this phase by December 31, 1998. The
Company has also adopted business contingency plans for the Computer Systems and
facilities that it has determined to be most critical. These plans conform to
recently issued guidance from the FFIEC on business contingency planning for
Year 2000 readiness. Contingency plans include, among other actions, manual
workarounds and extra staffing.
<PAGE> 12
Management's Analysis of the Results of Operations for the Three Months and
Nine Months Ended September 30, 1998 (Continued)
The Company continues to assess its risk from other environmental factors over
which it has little control, such as electrical power supply, and voice and data
transmission. Because of the nature of the factors, however, the Company is not
actively engaged in any repair, replacement or testing efforts for these
services.
(b) Costs. While the Company does not believe that the process of making its
Computer Systems Year 2000 ready will result in material cost, it is expected
that a substantial amount of management and staff time will be required on the
Year 2000 Project. The Company has spent approximately $2.7 million during the
first nine months of 1998 on its Year 2000 Project, and it currently expects to
spend approximately $800 thousand more before it concludes its Year 2000
readiness efforts. Prior to 1998, the Company spent approximately $360 thousand
on Year 2000 related initiatives.
(c) Risks. Based on its current assessments and its remediation plans, which are
based in part on certain representations of third party service providers, the
Company does not expect that it will experience a significant disruption of its
operations as a result of the change to the new millenium. Although the Company
has no reason to conclude that a failure will occur, the most reasonably likely
worst-case Year 2000 scenario would entail a disruption or failure of the
Company's power supply or voice and data transmission suppliers, a Computer
System, a third-party servicer, or a facility. If such a failure were to occur,
the Company would implement its contingency plan. While it is impossible to
quantify the impact of such a scenario, the most reasonably likely worst-case
scenario would entail a diminishment of service levels, some customer
inconvenience and additional costs from the contingency plan implementation,
which are not currently estimable. While the Company has contingency plans to
address a temporary disruption in these services, there can be no assurance that
any disruption or failure will be only temporary, that the Company's contingency
plans will function as anticipated, or that the results of operations of the
Company will not be adversely affected in the event of a prolonged disruption or
failure.
There can be no assurance that the FFIEC or other federal regulators will not
issue new regulatory requirements that require additional work by the Company
and, if issued, that new regulatory requirements will not increase the cost or
delay the completion of the Company's Year 2000 Project.
<PAGE> 13
PART II. OTHER INFORMATION
Item 5. Other Information
The calculation of the Company's ratio of earnings to fixed charges as of the
dates indicated is shown below:
<TABLE>
Nine Months Year Nine Months
Ended Ended Ended
September 30, December 31, September 30,
(Dollars in thousands) 1998 1997 1997
-------------- ---------------- -------------
<S> <C> <C> <C>
Income before income taxes $ 68,491 $ 76,031 $ 56,652
-------------- ---------------- -------------
Fixed charges:
Interest and debt expense on
all indebtedness 99,441 128,887 95,543
Appropriate portion of
rentals (33%) 2,788 3,565 2,612
-------------- ---------------- -------------
Total fixed charges 102,229 132,452 98,155
-------------- ---------------- -------------
Earnings available for
fixed charges $ 170,720 $ 208,483 $ 154,807
============== ================ =============
Ratio of earnings
to fixed charges 1.67 1.57 1.58
============== ================ =============
</TABLE>
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(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 May 1, 1991 between Aristar, Inc.
and Security Pacific National Bank, as trustee. (2)
(b) Indenture dated as of May 1, 1991 between Aristar, Inc.
and The First National Bank of Boston, as trustee. (2)
(c) Indenture dated as of July 1, 1992 between Aristar, Inc.
and the Chase Manhattan Bank, N.A., as trustee. (3)
(d) Indenture dated as of July 1, 1992 between Aristar, Inc.
and Citibank, N.A., as trustee. (3)
(e) Indenture dated as of July 1, 1995 between Aristar, Inc.
and the Bank of New York, as trustee. (4)
(f) Indenture dated as of October 1, 1997 between Aristar,
Inc. and First Union National Bank, as trustee. (5)
(g) 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, Inc. and its consolidated subsidiaries.
(27) Financial Data Schedule
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
Cont.
(1) Incorporated by reference to Registrant=s Quarterly Report on
Form 10-K for the year ended December 31, 1987, Commission file
number 1-3521.
(2) Incorporated by reference to Registrant's Current Report on Form
8-K dated May 29, 1991, Commission file number 1-3521.
(3) Incorporated by reference to Registrant's Current Report on Form
8-K dated June 24, 1992, Commission file number 1-3521.
(4) Incorporated by reference to Registrant=s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, Commission file
number 1-3521.
(5) Incorporated by reference to Registrant's Current Report on Form
8-K dated October 6, 1997, Commission file number 1-3521.
(b) Reports on Form 8-K
On July 29, 1998, the Company filed a Current Report on Form 8-K, dated
July 27, 1998, disclosing, under item (7) thereof, the terms of the
issuance of $200,000,000 aggregate principal amount of its 6.0% senior
notes maturing August 1, 2001.
On September 10, 1998, the Company filed a Current Report on Form 8-K/A,
dated July 27, 1998, disclosing, under item (7) thereof, the terms of
the issuance of $200,000,000 aggregate principal amount of its 6.0%
senior notes maturing August 1, 2001.
<PAGE> 16
SIGNATURE
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 thereunto duly authorized.
ARISTAR, INC.
Date: November 13, 1998 By: /s/ Douglas G. Wisdorf
------------------------------ --------------------------------------
Douglas G. Wisdorf
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's financial statements filed as part of its Report on Form 10-Q for the
nine months ended September 30, 1998 and is qualified in its entirety by
reference to sch financial statements
</LEGEND>
<CIK> 0000007214
<NAME> Aristar
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 12,930
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 143,316
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,433,183
<ALLOWANCE> (79,742)
<TOTAL-ASSETS> 2,607,837
<DEPOSITS> 176,515
<SHORT-TERM> 414,934
<LIABILITIES-OTHER> 54,462
<LONG-TERM> 1,426,998
0
0
<COMMON> 1
<OTHER-SE> 432,747
<TOTAL-LIABILITIES-AND-EQUITY> 2,607,837
<INTEREST-LOAN> 297,215
<INTEREST-INVEST> 8,881
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 306,096
<INTEREST-DEPOSIT> 7,444
<INTEREST-EXPENSE> 99,441
<INTEREST-INCOME-NET> 206,655
<LOAN-LOSSES> 58,100
<SECURITIES-GAINS> 326
<EXPENSE-OTHER> 100,174
<INCOME-PRETAX> 68,491
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,391
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.91
<LOANS-NON> 55,050
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 74,323
<CHARGE-OFFS> (65,239)
<RECOVERIES> 12,284
<ALLOWANCE-CLOSE> 79,742
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 79,742
<FN>
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 nine months ended September 30, 1998 using the
Article 9 format.
</FN>
</TABLE>
