<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
--------------
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 2-44197
ASSOCIATES FIRST CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-0876639
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 East Carpenter Freeway, Irving, Texas 75062-2729
(Address of principal executive offices)
(Zip Code)
972-652-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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.....
As of June 30, 1997, the registrant had 1,550,000,000 shares of Common Stock
authorized, 90,773,299 shares of Class A Common Stock issued, of which
90,579,947 shares were outstanding, and 255,881,180 shares of Class B Common
Stock issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
----------------------------------
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1997 1996 1997 1996
---------------- ------------------
<S> <C> <C> <C> <C>
REVENUE
Finance charges $3,634.1 $3,072.6 $1,872.4 $1,567.6
Insurance premiums 204.4 193.6 105.3 100.5
Investment and other
income 137.7 95.8 71.8 48.9
-------- -------- -------- --------
3,976.2 3,362.0 2,049.5 1,717.0
EXPENSES
Interest expense 1,317.0 1,174.0 679.6 593.5
Operating expenses 1,102.8 944.4 571.6 483.2
Provision for losses on
finance receivables 717.1 528.0 372.6 275.7
Insurance benefits paid
or provided 72.8 71.2 36.7 37.0
-------- -------- -------- --------
3,209.7 2,717.6 1,660.5 1,389.4
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 766.5 644.4 389.0 327.6
PROVISION FOR INCOME TAXES 283.7 251.9 144.0 127.4
-------- -------- -------- --------
NET EARNINGS $ 482.8 $ 392.5 $ 245.0 $ 200.2
======== ======== ======== ========
EARNINGS PER SHARE $ 1.39 $ 1.13 $ 0.71 $ 0.58
======== ======== ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING 346.5 346.7 346.4 346.7
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
--------------------------
(Dollars In Millions)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
------- -----------
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 148.3 $ 446.9
INVESTMENTS IN DEBT AND EQUITY SECURITIES
- NOTE 3 1,157.8 1,051.1
FINANCE RECEIVABLES, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves - NOTE 4 49,019.5 44,236.9
OTHER ASSETS - NOTE 6 2,715.6 2,533.5
--------- ---------
Total assets $53,041.2 $48,268.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $19,293.8 $15,907.9
Bank Loans 448.0 1,167.3
ACCOUNTS PAYABLE AND ACCRUALS 1,640.8 1,726.2
LONG-TERM DEBT
Senior Notes 25,412.2 23,604.0
Subordinated and Capital Notes 425.4 425.5
--------- ---------
25,837.6 24,029.5
STOCKHOLDERS' EQUITY
Class A Common Stock, $0.01 par value,
1,150,000,000 shares authorized,
90,773,299 shares issued 0.9 0.9
Class B Common Stock, $0.01 par value,
400,000,000 shares authorized,
255,881,180 shares issued and outstanding 2.6 2.6
Paid-in Capital 4,005.6 4,007.5
Retained Earnings 1,617.8 1,204.3
Foreign Currency Translation Adjustments 205.4 222.8
Unrealized Loss on Available-for-Sale
Securities - NOTE 3 (2.5) (0.6)
--------- ---------
5,829.8 5,437.5
--------- ---------
Less 193,352 shares of Class A Common
Stock in Treasury in 1997, at cost (8.8)
--------- ---------
Total stockholders' equity 5,821.0 5,437.5
--------- ---------
Total liabilities and stockholders' equity $53,041.2 $48,268.4
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1997 1996
------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 482.8 $ 392.5
Adjustments to net earnings for noncash items:
Provision for losses on finance receivables 717.1 528.0
Depreciation and amortization 150.2 100.5
Increase in insurance policy and claims
reserves 35.3 33.9
Deferred income taxes (30.3) (40.3)
(Decrease) increase in accounts payable and
accruals (37.5) 34.2
Unrealized gain on trading securities (0.9) (0.1)
Sales and maturities of trading securities 4.7 0.7
---------- ----------
Net cash provided from operating activities 1,321.4 1,049.4
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (25,249.5) (21,036.1)
Finance receivables liquidated 19,699.6 17,134.3
Acquisitions of other finance businesses, net (71.7)
Purchases of available-for-sale securities (174.0) (190.3)
Sales and maturities of available-for-sale
securities 60.2 75.3
(Increase) decrease in real estate loans
held for sale (10.8) 7.4
Increase in other assets (285.1) (133.4)
---------- ----------
Net cash used for investing activities (5,959.6) (4,214.5)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 3,809.1 2,197.0
Retirement of long-term debt (2,032.6) (1,753.5)
Increase in notes payable 2,650.6 2,741.8
Cash dividends to Ford (1,897.3)
Cash dividends paid on Common Stock (69.3)
Sale of Class A Common Stock 1,850.0
Capital contributions 47.3
Treasury stock and other (10.7)
---------- ----------
Net cash provided from financing activities 4,347.1 3,185.3
---------- ----------
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH (7.5) (68.2)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (298.6) (48.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 446.9 532.2
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 148.3 $ 484.2
========== ==========
CASH PAID FOR:
Interest $ 1,334.2 $ 1,212.0
========== ==========
Income taxes $ 362.7 $ 244.6
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - THE COMPANY
Associates First Capital Corporation ("First Capital" or the "Company"),
a Delaware corporation, is a majority-owned subsidiary of Ford FSG, Inc. and a
majority indirect-owned subsidiary of Ford Motor Company ("Ford"). Associates
Corporation of North America ("Associates") is the principal U.S.-based
operating subsidiary of First Capital. AIC Corporation ("AIC") is the
principal foreign-based subsidiary of First Capital and operates in Japan.
NOTE 2 - BASIS OF PRESENTATION
On May 8, 1996 prior to an initial public offering of the common stock
of First Capital, Ford contributed to First Capital, for stock, certain
foreign finance operations that were managed by First Capital although
owned by other Ford subsidiaries (the "Associates International Group").
The entities comprising Associates International Group had operations in
Japan, the United Kingdom, Canada, Puerto Rico, Bermuda, Netherlands and
Mexico. The effect of this contribution was retroactively included, on a
fully consolidated basis, in the supplemental combined financial statements of
First Capital as part of its initial public offering. These supplemental
combined financial statements became the historical consolidated financial
statements of First Capital. The contribution was accounted for in a manner
similar to the pooling of interests method of accounting in accordance with
generally accepted accounting principles.
In the opinion of the management of First Capital, all adjustments
necessary to present fairly the results of operations and financial position
have been made and are of a normal recurring nature. The results of
operations for any interim period are not necessarily indicative of the
results of operations for a full year. Certain prior period financial
statement amounts have been reclassified to conform to the current period
presentation.
NOTE 3 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
DEBT SECURITIES
The Company invests in debt securities, principally bonds and notes held
by the Company's insurance subsidiaries, with the intention of holding them to
maturity. However, if market conditions change, the Company may sell these
securities prior to maturity. Accordingly, the Company classifies its
investments in debt securities as available-for-sale securities and adjusts
its recorded value to market. The estimated market value at June 30, 1997 and
December 31, 1996 was $1,151.3 million and $1,040.8 million, respectively.
Amortized cost at June 30, 1997 and December 31, 1996 was $1,155.0 million and
$1,041.6 million, respectively. Realized gains or losses on sales are
included in investment and other income. Unrealized gains or losses are
reported as a component of stockholders' equity, net of tax.
EQUITY SECURITIES
The Company invests in equity securities, principally units of the
Fidelity Magellan Fund, which are recorded at market value. The Company
classifies its investments in equity securities as trading securities and
includes in earnings unrealized gains or losses on such securities. The
estimated market value at June 30, 1997 and December 31, 1996 was $6.5
million and $10.3 million, respectively. Historical cost at June 30, 1997
and December 31, 1996 was $4.4 million and $7.8 million, respectively.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-----------------------------------------
NOTE 4 - FINANCE RECEIVABLES
At June 30, 1997 and December 31, 1996, finance receivables consisted of
the following (in millions):
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
------- -----------
<S> <C> <C>
Consumer Finance
Home equity lending $17,547.2 $16,691.4
Personal lending and retail sales finance 8,385.4 7,425.1
Credit card 8,240.4 6,023.8
Manufactured housing <F1> 1,373.8 1,262.7
--------- ---------
35,546.8 31,403.0
--------- ---------
Commercial Finance
Truck and truck trailer 8,970.6 8,598.3
Equipment 4,887.4 4,571.8
Auto fleet leasing and other <F1> 2,212.4 1,939.8
--------- ---------
16,070.4 15,109.9
--------- ---------
Finance receivables, net of unearned
finance income ("net finance receivables") 51,617.2 46,512.9
Allowance for losses on finance receivables (1,849.5) (1,563.1)
Insurance policy and claims reserves (748.2) (712.9)
--------- --------
Finance receivables, net of unearned
finance income, allowance for credit
losses and insurance policy and claims
reserves $49,019.5 $44,236.9
========= =========
<FN>
<F1> During the six months ended June 30, 1997 and the year ended
December 31, 1996, the Company securitized and sold approximately $400
million and $1.3 billion of manufactured housing finance receivables,
respectively, and approximately $180 million and $200 million of
recreational vehicle receivables, respectively.
</FN>
From time to time, subsidiaries of the Company have sold manufactured
housing and recreational vehicles receivables through securitizations and
have retained collection and administrative responsibilities as servicer
for the trust holding the receivables. Receivables sold with servicing
retained were $2.5 billion at June 30, 1997.
In May 1997, the Company completed its previously announced acquisition
of proprietary credit card receivables and stock from Texaco Refining and
Marketing, Inc. and its affiliate, Star Enterprise. The fair value of the
assets acquired was approximately $704 million. The transaction was accounted
for as a purchase.
In April 1997, the Company completed its previously announced
acquisition of bankcard credit card receivables from J. C. Penney, Inc.
The fair value of the assets acquired was approximately $700 million.
The transaction was accounted for as a purchase.
In March 1997, First Capital acquired a portfolio of bankcard credit
card receivables from The Bank of New York. The fair market value of such
assets acquired totaled approximately $800 million. The transaction was
accounted for as a purchase. J. Carter Bacot, a director of the Company, is
chairman and chief executive officer of The Bank of New York. The Bank of New
York and the Company are not otherwise affiliated.
In September 1996, First Capital acquired Teletech Financial
Corporation. The assets of Teletech Financial principally consist of
equipment telecommunications receivables. The fair market value of total
assets acquired and liabilities assumed was $116.8 million and $82.6
million, respectively. The transaction was accounted for as a purchase.
In August 1996, Associates acquired $1.2 billion of net finance
receivables, principally home equity and personal lending receivables and
other assets and liabilities, from Fleet Financial Group. The fair market
value of total assets acquired and liabilities assumed was $1.3 billion and
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
$1.0 million, respectively.
In July 1996, Associates acquired $837.6 million of certain assets of
USL Capital, an affiliate and Ford subsidiary. Such assets acquired
consisted principally of vehicle fleet leasing receivables. The transaction
was accounted for at historical cost. The excess of purchase price over
the historical value of assets acquired was $31.4 million which was
recorded as an adjustment to stockholders' equity.
In May 1996, First Capital acquired Fleetwood Credit Corp., which was
engaged in the financing of recreational vehicles. The fair market value of
total assets acquired and liabilities assumed was $473.5 million and $342.1
million, respectively.
NOTE 5 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables during the
periods indicated were as follows (in millions):
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30 December 31
1997 1996 1996
------------------ -----------
<S> <C> <C> <C>
Balance at beginning of period $1,563.1 $1,268.6 $ 1,268.6
Provision for losses 717.1 528.0 1,086.5
Recoveries on receivables
charged off 104.8 73.9 147.2
Losses sustained (688.9) (456.0) (1,032.5)
Reserves of acquired businesses
and other 153.4 54.5 93.3
-------- -------- ---------
Balance at end of period $1,849.5 $1,469.0 $ 1,563.1
======== ======== =========
</TABLE>
NOTE 6 - OTHER ASSETS
The components of other assets at June 30, 1997 and December 31, 1996
were as follows (in millions):
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
------- -----------
<S> <C> <C>
Goodwill $1,198.8 $1,206.4
Property and equipment 308.1 261.3
Collateral held for resale 192.7 169.1
Relocation client advances 185.7 159.3
Operating agreements and other 110.7 97.8
Securitization assets 91.9 73.5
Other 627.7 566.1
-------- --------
Total other assets $2,715.6 $2,533.5
======== ========
</TABLE>
NOTE 7 - DEBT RESTRICTIONS
Associates, the Company's principal operating subsidiary, is subject
to various limitations under the provisions of its outstanding debt and
credit facilities. The most significant of these limitations are
summarized as follows:
LIMITATION ON PAYMENT OF DIVIDENDS
----------------------------------
A restriction contained in one issue of Associates debt securities,
which matures on March 15, 1999, generally limits payments of cash
dividends on Associates Common Stock in any year to not more than 50% of
Associates consolidated net earnings for such year, subject to certain
exceptions, plus increases in contributed capital and extraordinary gains.
Any such amounts available for the payment of dividends in such fiscal year
and not so paid, may be paid in any one or more of the five subsequent fiscal
years. In accordance with this provision, $495.3 million was available for
dividends at June 30, 1997.
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
LIMITATION ON MINIMUM TANGIBLE NET WORTH
----------------------------------------
A restriction contained in certain revolving credit agreements requires
Associates to maintain a minimum tangible net worth, as defined, of $2.0
billion. At June 30, 1997, Associates tangible net worth was approximately
$5.2 billion.
NOTE 8 - RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges of First Capital for the six
months ended June 30, 1997 and 1996 was 1.58 and 1.54, respectively. For
purposes of such computation, the term "earnings" represents earnings before
provision for income taxes, plus fixed charges. The term "fixed charges"
represents interest expense and a portion of rentals representative of an
implicit interest factor for such rentals.
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to a variety of market risks, including the
effects of movements in foreign exchange rates on its foreign currency
denominated investments, principally yen-based, and the effects of movements
in interest rates on the Company's future borrowing costs. These exposures
are monitored and managed by the Company as an integral part of its overall
risk management program, the principal goal of which is to reduce the
potential impact of such exposures on the Company's financial position and
results of operations. The Company uses derivative financial instruments for
the purpose of hedging specific exposures as part of its risk management
program. Such instruments have to date been limited to forward currency
exchange agreements, currency swap agreements, interest rate swap agreements
and treasury lock agreements. It is the Company's policy not to engage in the
use of derivative financial instruments for speculative or trading purposes.
The Company manages its exposure to counterparties credit risk by
limiting its total position with any single counterparty and monitoring the
financial condition of each counterparty. In the unlikely event that a
counterparty fails to meet the terms of an agreement, the Company's
financial exposure is limited to the fair value of the agreement. Estimated
fair values of such agreements are determined by the Company using available
market information and present value-based valuation methods.
At June 30, 1997, the Company had foreign currency forward exchange
agreements wherein the Company is obligated to deliver yen in exchange for
U.S. dollars at varying times over the next three years. The aggregate
notional amount of these agreements at June 30, 1997 was $1,059.9 million.
The fair value (measured as the difference between the spot rate at the
balance sheet date and the spot rate at the date of inception of the
contract) of such agreements at June 30, 1997 was ($57.3) million. At
December 31, 1996, the Company had one agreement in the notional amount of
$68.5 million, with a fair value of $5.7 million. Such agreements have been
designated for accounting purposes as a hedge of the Company's net
investment in AIC. Accordingly, unrealized translation gains and losses on
such agreements are recorded, net of tax, as a separate component of
stockholders' equity and the economic discounts on such agreements are
recognized over the life of the underlying contracts on a straight-line
basis as an adjustment to interest expense.
At June 30, 1997, the Company had foreign currency swap agreements
wherein the Company is obligated to deliver a specific foreign currency,
principally yen and sterling, in exchange for U.S. dollars at varying times
over the next 3 months. The aggregate notional amount of these agreements at
June 30, 1997 was $266.4 million. The fair value (measured as the difference
between the spot rate at the balance sheet date and the spot rate at the date
of inception of the contract) of such agreements at June 30, 1997 was ($4.1)
million. The Company had no currency swap agreements at December 31, 1996.
Such agreements have been designated by the Company for accounting purposes as
hedges of specific intercompany debt obligations with its foreign
subsidiaries, principally AIC. Accordingly, the differential paid or received
by the Company is recognized as an adjustment to interest expense over the
term of the underlying debt obligation. The cost of such agreements is
recognized over the life of the underlying contract on a straight-line basis
as an adjustment to interest expense.
Interest rate swap agreements and treasury lock agreements are used by
the Company to hedge the effect of interest rate movements on present and
anticipated debt issuances of the Company. Such agreements are executed as an
integral element of specific or anticipated financing transactions. On
interest rate swap agreements, the differential paid or received by the
Company is recognized as an adjustment to interest expense over the term of
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
the underlying financing transaction. On treasury lock agreements, the
differential paid or received by the Company on maturity of such agreements is
recognized as an adjustment to interest expense over the term of the
underlying financing transaction. The aggregate notional amount of interest
rate swap and treasury lock agreements at June 30, 1997 was $1,796.7 million.
The fair value of such agreements at June 30, 1997 was $1.7 million. Interest
rate swap and treasury lock agreements mature on varying dates over the next
five years and five months, respectively. The Company had $40.2 million of
interest rate swap agreements at December 31, 1996 with a fair value of $1.7
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net earnings for the six-month period ended June 30, 1997 were $482.8
million, a 23% increase over the same period in the previous year. Net
earnings for the three months ended June 30, 1997 were $245.0 million, an
increase of 22% over the same period in the previous year. The increase in
net earnings in both comparative periods was principally due to growth in net
finance receivables, an improvement in the ratio of net interest margin to
average net receivables and an increase in operating expense efficiency, all
of which more than offset increases in the provision for losses on net finance
receivables.
Finance charge revenue, on a dollar basis, increased for the six- and
three-months ended June 30, 1997, compared to the same period in the prior
year, principally as a result of growth in average net finance receivables
outstanding. Finance charge revenue as a percentage of average net finance
receivables (the "Finance Charge Ratio") was 14.84% and 14.86% for the six-
and three-months ended June 30, 1997, respectively. This compares to 14.85%
and 14.82% for the comparable periods in 1996. The changes in the composite
portfolio finance charge ratios for both comparative periods were primarily
due to changes in the mix of net finance receivables, principally toward a
higher percentage of unsecured net finance receivables to total net finance
receivables, during the period.
Interest expense, on a dollar basis, increased for the six- and
three-month periods ended June 30, 1997 compared to the same periods in 1996,
primarily due to an increase in average debt outstanding for each of the
comparative periods, principally resulting from the aforementioned growth in
average net finance receivables. Debt is the primary source of funding to
support the Company's growth in net finance receivables. The increase in
interest expense due to growth was partially offset by the benefit of a
reduction in the Company's total average borrowing rate, in both comparable
periods. The Company's total average borrowing rate was 6.06% and 6.16% for
the six- and three-month periods in 1997, respectively, compared to 6.35% and
6.21% for the same periods in 1996. The Company's total average borrowing
rates declined principally due to favorable market conditions that allowed the
Company to replace maturing long-term debt and add incremental long-term debt
at lower prevailing market rates, and to a modest shift toward a higher
percentage of short-term debt as a percentage of total debt. Short-term debt
rates were lower than long-term debt rates in the comparable periods.
As a result of the aforementioned changes in finance charge revenue and
interest expense, the Company's net interest margin increased to $2.3
billion and $1.2 billion for the six- and three-month periods ended June 30,
1997, respectively, compared to $1.9 billion and $974.1 million for the
comparable periods in the prior year. The Company's net interest margin
expressed as a ratio to average net finance receivables also improved to 9.46%
and 9.47% for the six- and three-month periods ended June 30, 1997,
respectively, compared to 9.29% for both periods in the prior year. The 1996
net interest margin ratios have been adjusted to exclude certain one-time
charges related to the Company's initial public offering. While the Company
benefited from a shift in portfolio mix toward a higher percentage of
unsecured net finance receivables, which typically have a higher interest rate
than secured net finance receivables, the principal cause of the increase in
the Company's net interest margin ratio, in each period, was the
aforementioned decline in the Company's total average borrowing rate.
Six- and three-month operating expenses for the periods ended June 30,
1997 were higher on a dollar basis than in the corresponding periods in
1996, reflecting growth in the size of the Company. However, operating
expense efficiency, measured as the ratio of total operating expenses to
ASSOCIATES FIRST CAPITAL CORPORATION
-----------------------------------
total revenue net of interest expense and insurance benefits paid or
provided, improved to 42.6% and 42.9% for the six- and three-month periods
ended June 30, 1997, respectively, compared to 44.6% and 44.5% for the same
periods in the prior year.
The Company's provision for losses increased from $528.0 million for the
first six months of 1996 to $717.1 million for the same period in 1997. The
provision for losses for the three-month period ended June 30, 1997 increased
from $275.7 million in the prior-year period to $372.6 million for
the current period. In both cases, the provision increased principally as a
result of increased net credit losses. Total net credit losses as a
percentage of average net finance receivables (the "Loss Ratio") were 2.38%
and 2.45% for the six- and three-month periods ended June 30, 1997,
respectively, compared to 1.85% and 1.95% for the same periods in 1996. The
increase in the Loss Ratio in both periods was principally due to a shift
toward a higher percentage of unsecured net finance receivables and to
increased net credit losses across substantially all of the Company's
portfolios. Unsecured finance receivables generally have higher loss ratios
than secured finance receivables. Company management attributes the overall
increase in net credit losses to a number of factors including the elevated
leverage of consumer borrowers and the increased use of bankruptcy to
extinguish debt obligations.
As a result of the aforementioned increase in net credit losses, the
Company increased its allowance for losses to 3.58% of net finance
receivables at June 30, 1997 compared to 3.36% of net finance receivables at
December 31, 1996. The allowance for losses divided by net credit losses
(trailing four quarter losses), one measurement used by Company management
to assess the adequacy of the allowance for losses, was 1.70 times losses at
June 30, 1997 compared to 1.77 times losses at December 31, 1996. Company
management believes the allowance for losses at June 30, 1997 is sufficient
to provide adequate coverage against losses in its portfolios.
The provision for income taxes, expressed in dollars, increased for both
the six- and three-month periods ended June 30, 1997 compared to the same
periods in 1996, principally as a result of an increase in pretax earnings.
The effective tax rate for the six- and three-month periods of 1997 was
37.01%, compared to 39.09% and 38.88% for the comparable periods of 1996.
The decline in the effective tax rates for each period in 1997 compared to
1996 was principally due to the amount of foreign tax credits available to
the Company under its tax sharing agreement with Ford related to estimated
taxes paid or accrued by the Company on its Japan-based earnings.
Financial Condition
Net finance receivables managed by the Company grew $5.5 billion
(22.5% annualized) and $3.8 billion (30.1% annualized) during the
six- and three-month periods ended June 30, 1997, respectively,
compared to $4.6 billion (23.2% annualized) and $3.2 billion
(31.5% annualized) for the same periods in 1996. Managed net
finance receivables at June 30, 1997 includes approximately $2.5
billion of securitized manufactured housing and recreational vehicle
receivables. The Company had growth in substantially all of its product
lines in both periods. However, of the total growth, 56% in the
six-month period and 49% in the three-month period, resulted from
significant acquisitions, principally of credit card portfolios.
Composite 60+days contractual delinquency was 2.25% of gross finance
receivables at June 30, 1997, which was higher than the 2.20% at December
31, 1996. The increase in the composite delinquency ratio was principally
due to shifts in the mix of the Company's finance receivables portfolios and
increased delinquency in several of the Company's individual portfolios.
However, a number of the Company's portfolios experienced declines in
60+days contractual delinquency at June 30, 1997 compared to December 31,
1996.
During the six months ended June 30, 1997, stockholders' equity
increased principally as a result of the aforementioned increase in net
earnings. The increase was partially offset by dividends paid to
shareholders totaling $69.3 million, unrealized foreign currency translation
losses of $17.4 million, principally related to the Company's yen-denominated
investment in its Japan operation and treasury stock acquisitions and other
capital account activity.
As a result of the aforementioned, the Company's return on average
assets, average equity and average tangible equity for the six-month period
ended June 30, 1997 was 1.91%, 17.28% and 22.24%, respectively. This
compares to a return on average assets, average equity and average tangible
equity for the six months ended June 30, 1996 of 1.83%, 18.87% and 26.97%,
respectively. The 1996 returns have been restated to exclude certain one-time
ASSOCIATES FIRST CAPITAL CORPORATION
-----------------------------------
charges related to the Company's initial public offering which was
consummated in May, 1996.
LIQUIDITY/CAPITAL RESOURCES
Through its asset and liability management function, the Company
maintains a disciplined approach to the management of liquidity, capital,
interest rate risk and foreign exchange risk. The Company has a formal
process for managing its liquidity in the U.S. and internationally to ensure
that funds are available at all times to meet the Company's commitments.
The principal sources of cash for the Company are proceeds from issuance
of short- and long-term debt and cash provided from the Company's
operations. Management believes that the Company has sufficient liquidity,
from a combination of cash provided from operations and external borrowings,to
support its operations.
A principal strength of the Company is its ability to access the global
debt markets in a cost-efficient manner. Continued access to the public and
private debt markets is critical to the Company's ability to continue to
fund its operations. The Company seeks to maintain a conservative liquidity
position and actively manage its liability and capital levels, debt
maturities, diversification of funding sources and asset liquidity to ensure
that the Company is able to meet its obligations. The Company's U.S.
operations are principally funded through domestic and international
borrowings made by Associates and, to a lesser extent, borrowings made
directly by the Company. The Company's foreign subsidiaries are principally
financed through private debt borrowings made directly by each foreign
entity in its transactional currency and, to a lesser extent, fully hedged
intercompany borrowings.
At June 30, 1997, the Company had short- and long-term debt outstanding
of $19.7 billion and $25.8 billion, respectively. Short-term debt
principally consists of commercial paper issued by the Company and
represents the Company's primary source of short-term liquidity. Long-term
debt principally consists of unsecured long-term debt issued publicly and
privately by Associates in the United States and abroad, and to a lesser
extent, private borrowings made by the Company's foreign subsidiaries.
During the six- and three-month periods ended June 30, 1997 and 1996, the
Company raised debt aggregating $3.8 billion and $3.3 billion, and $2.2
billion and $1.1 billion, respectively, through public and private
offerings.
Substantial additional liquidity is available to the Company's
operations through established credit facilities in support of its net
short-term borrowings. Such credit facilities provide a means of
refinancing its maturing short-term obligations as needed. At June 30,
1997, these short-term bank lines, revolving credit facilities and
receivable purchase facilities totaled $14.4 billion. This amount was
allocated as short-term debt for purposes of providing 75% coverage for
Associates of $13.2 billion and First Capital of $0.9 billion. First
Capital's foreign subsidiaries utilized the remaining $0.3 billion.
Additionally, the Company believes it has access to other sources of
liquidity, which to date it has either accessed only on a limited basis,
such as securitization of assets, or has not accessed, such as the issuance
of alternative forms of capital, including preferred stock.
The Company is exposed to a variety of market risks, including the
effects of movements in foreign exchange rates on its foreign currency
denominated investments, principally yen-based, and the effects of movements
in interest rates on the Company's future borrowing costs. These exposures
are monitored and managed by the Company as an integral part of its overall
risk management program, the principal goal of which is to reduce the
potential impact of such exposures on the Company's financial position and
results of operations. The Company uses derivative financial instruments
for the purpose of hedging specific exposures as part of its risk management
program. Such instruments have to date been limited to forward currency
exchange and currency swap agreements, interest rate swap agreements and
treasury lock agreements. It is the Company's policy not to engage in the
use of derivative financial instruments for speculative or trading purposes.
See NOTE 9 for a further discussion of the Company's use of derivative
financial instruments.
Year 2000 Compliance
The Company has a formal program to ensure it will be year 2000
compliant. The ultimate cost of this program has not been and is not
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
-----------------------------------
anticipated to be material to the Company's financial position or results of
operations.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS 128"). SFAS 128 specifies new requirements for the computation,
presentation and disclosure of earnings per share information effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. On adoption, it will require the restatement of
all prior period earnings per share data. The Company will adopt SFAS 128
in the fourth quarter of 1997. At such time, all prior period earnings per
share data will be restated. The adoption of SFAS 128 is not expected to
have a significant effect on the Company's previously reported earnings per
share data. Under the new standard, basic and diluted earnings per share
would have been reported at $1.39 and $0.71 for the six- and three-month
periods ended June 30, 1997, respectively.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", was issued by the Financial Accounting
Standards Board in June 1997. This Statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The Company will
adopt SFAS 130 beginning January 1, 1998. The effect of adopting this
standard is not expected to be material.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information", was
issued by the Financial Accounting Standards Board in June 1997. This
Statement establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
will adopt SFAS 131 beginning January 1, 1998. The effect of adopting this
standard is not expected to be material.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None to report.
ITEM 2. CHANGES IN SECURITIES.
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting of stockholders on May 29,
1997.
(b) The Company's stockholders elected Keith W. Hughes, J. Carter
Bacot, John M. Devine, Harold D. Marshall, H. James Toffey,
Jr. and Kenneth Whipple to the Board of Directors. No other
directors terms continued after this meeting.
(c) The Company's stockholders voted for the election of directors
listed in paragraph (b), as follows:
Director Number of Votes
Keith W. Hughes 1,360,776,075
J. Carter Bacot 1,360,806,397
John M. Devine 1,360,808,910
Harold D. Marshall 1,360,817,803
H. James Toffey, Jr. 1,361,013,772
Kenneth Whipple 1,360,809,240
The Company's stockholders voted on the approval of the Company's
Incentive Compensation Plan, as follows:
Votes For Votes Against Abstain
1,348,575,602 6,714,068 113,553
The Company's Incentive Compensation Plan provides the terms under which
annual performance pay, stock options, performance shares and performance
units, restricted stock and stock appreciation rights may be granted to
certain officers, directors and other employees of the Company.
The Company's stockholders also voted on the approval of the selection
by the Audit Committee of Coopers and Lybrand L.L.P. as the Company's
independent public accountants for 1997, as follows:
Votes For Votes Against Abstain
1,361,254,759 23,870 40,846
The Company's stockholders did not vote on any other matters at the
Company's annual meeting of stockholders.
(d) Not applicable.
ITEM 5. OTHER INFORMATION.
None to report.
<PAGE>
PART II - OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the second quarter ended June 30, 1997, First Capital
filed a Current Report on Form 8-K dated April 15, 1997,
related to the release of first quarter earnings.
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.
August 13, 1997
ASSOCIATES FIRST CAPITAL CORPORATION
(registrant)
By/s/ Kevin P. Hegarty
Senior Vice President, Comptroller and
Principal Accounting Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER EXHIBIT PAGE
-----------------------------------------------------------------------------
<S> <C> <C>
12 -- Computation of Ratio of Earnings to Fixed Charges
27 -- Financial Data Schedule
</TABLE>
------------
<PAGE>
EXHIBIT 12
ASSOCIATES FIRST CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1997 1996
--------------------
<S> <C> <C>
Fixed Charges <F1>
Interest expense $1,317.0 $1,174.0
Implicit interest in rent 11.9 9.8
Total fixed charges $1,328.9 $1,183.8
Earnings <F2>
Earnings before provision for income
taxes $ 766.5 $ 644.4
Fixed charges 1,328.9 1,183.8
Earnings, as defined $2,095.4 $1,828.2
Ratio of Earnings to Fixed Charges 1.58 1.54
<FN>
<F1> For purposes of such computation, the term "fixed charges" represents
interest expense and a portion of rentals representative of an
implicit interest factor for such rentals.
<F2> For purposes of such computation, the term "earnings" represents
earnings before provision for income taxes, plus fixed charges.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<PAGE>
<ARTICLE> 5
<LEGEND>
0 MEANS NOT APPLICABLE OR NOT SEPARATELY DISCLOSED. This schedule contains
summary financial information extracted from the Company's unaudited
consolidated financial statements as of June 30, 1997 and the six months
then ended and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<CIK> 0000007974
<NAME> ASSOCIATES FIRST CAPITAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 148
<SECURITIES> 1,158
<RECEIVABLES> 51,617
<ALLOWANCES> 1,850
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,041
<CURRENT-LIABILITIES> 0
<BONDS> 45,579
<COMMON> 4
0
0
<OTHER-SE> 5,818
<TOTAL-LIABILITY-AND-EQUITY> 53,041
<SALES> 3,976
<TOTAL-REVENUES> 3,976
<CGS> 0
<TOTAL-COSTS> 3,209
<OTHER-EXPENSES> 1,175
<LOSS-PROVISION> 717
<INTEREST-EXPENSE> 1,317
<INCOME-PRETAX> 767
<INCOME-TAX> 284
<INCOME-CONTINUING> 483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 483
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
</TABLE>
