<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 September 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 September 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 90,550,305 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>
Nine Months Ended Three Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Finance charges $5,569.4 $4,753.3 $1,935.3 $1,680.7
Insurance premiums 309.9 297.6 105.5 104.0
Investment and other
income 215.0 154.7 77.3 58.9
------- -------- ------- -------
6,094.3 5,205.6 2,118.1 1,843.6
EXPENSES
Interest expense 2,035.8 1,811.7 718.8 637.7
Operating expenses 1,705.8 1,462.9 603.0 518.5
Provision for losses on
finance receivables 1,045.6 795.4 328.5 267.4
Insurance benefits paid
or provided 107.5 109.9 34.7 38.7
-------- -------- -------- --------
4,894.7 4,179.9 1,685.0 1,462.3
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 1,199.6 1,025.7 433.1 381.3
PROVISION FOR INCOME TAXES 445.9 403.0 162.2 151.1
-------- -------- -------- --------
NET EARNINGS $ 753.7 $ 622.7 $ 270.9 $ 230.2
======== ======== ======== ========
EARNINGS PER SHARE $ 2.18 $ 1.79 $ 0.78 $ 0.66
======== ======== ======== ========
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>
September 30 December 31
1997 1996
---- ----
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 427.4 $ 446.9
INVESTMENTS IN DEBT AND EQUITY SECURITIES
- NOTE 3 1,118.5 1,051.1
FINANCE RECEIVABLES, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves - NOTE 4 50,009.8 44,236.9
OTHER ASSETS - NOTE 6 2,798.9 2,533.5
--------- ---------
Total assets $54,354.6 $48,268.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $19,546.8 $15,907.9
Bank Loans 472.3 1,167.3
ACCOUNTS PAYABLE AND ACCRUALS 1,753.7 1,726.2
LONG-TERM DEBT
Senior Notes 26,139.8 23,604.0
Subordinated and Capital Notes 425.4 425.5
--------- ---------
26,565.2 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 4,004.9 4,007.5
Retained Earnings 1,854.0 1,204.3
Foreign Currency Translation Adjustments 163.4 222.8
Unrealized Gain (Loss) on Available-for-Sale
Securities - NOTE 3 2.2 (0.6)
--------- ---------
6,028.0 5,437.5
Less 222,994 shares of Class A Common
Stock Held in Treasury in 1997, at cost (11.4)
--------- ---------
Total stockholders' equity 6,016.6 5,437.5
Total liabilities and stockholders' equity $54,354.6 $48,268.4
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 753.7 $ 622.7
Adjustments to net earnings for noncash items:
Provision for losses on finance receivables 1,045.6 795.4
Depreciation and amortization 231.2 159.1
Increase in insurance policy and claims
reserves 63.7 62.1
Deferred income taxes (48.9) (54.2)
Increase in accounts payable and accruals 6.9 125.4
Unrealized gain on trading securities (1.7) (0.3)
Purchase of trading securities (99.0)
Sales and maturities of trading securities 29.8 3.3
---------- ----------
Net cash provided from operating activities 1,981.3 1,713.5
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (37,947.7) (32,882.8)
Finance receivables liquidated 30,897.9 26,408.6
Acquisitions of other finance businesses, net (39.7) (165.6)
Purchases of available-for-sale securities (252.8) (372.7)
Excess of purchase price over historical value
of assets acquired from Ford affiliate (32.7)
Sales and maturities of available-for-sale
securities 259.9 227.8
Increase in real estate loans held for sale (15.4) (21.1)
Increase in other assets (363.5) (204.7)
---------- ----------
Net cash used for investing activities (7,461.3) (7,043.2)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 5,550.6 4,828.4
Retirement of long-term debt (2,919.2) (2,401.1)
Increase in notes payable 2,944.7 2,911.4
Cash dividends to Ford (1,897.3)
Cash dividends paid on Common Stock (103.9) (34.7)
Sale of Class A Common Stock 1,850.0
Capital contributions 47.3
Treasury stock and other (14.0)
---------- ----------
Net cash provided from financing activities 5,458.2 5,304.0
---------- ----------
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH 2.3 (84.8)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (19.5) (110.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 446.9 532.2
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 427.4 $ 421.7
========== ==========
CASH PAID FOR:
Interest $ 1,962.5 $ 1,751.7
========== ==========
Income taxes $ 549.2 $ 315.8
========== ==========
</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. See Note 10 concerning the planned spin off
of the Company by Ford.
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 September 30, 1997 and December 31, 1996 was $1,037.3 million and
$1,040.8 million, respectively. Amortized cost at September 30, 1997 and
December 31, 1996 was $1,033.9 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 preferred stock
and 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 September 30, 1997 and
December 31, 1996 was $81.2 million and $10.3 million, respectively.
Historical cost at September 30, 1997 and December 31, 1996 was $78.3
million and $7.8 million, respectively.
NOTE 4 - FINANCE RECEIVABLES
At September 30, 1997 and December 31, 1996, finance receivables
consisted of the following (in millions):
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
<S>
Consumer Finance <C> <C>
Home equity lending $18,255.4 $16,691.4
Personal lending and retail sales
finance 8,581.2 7,425.1
Credit card 8,094.7 6,023.8
Manufactured housing <F1> 1,246.9 1,262.7
--------- ---------
36,178.2 31,403.0
--------- ---------
Commercial Finance
Truck and truck trailer 9,200.5 8,598.3
Equipment 5,027.9 4,571.8
Auto fleet leasing and other <F1> 2,271.2 1,939.8
--------- ---------
16,499.6 15,109.9
--------- ---------
Finance receivables, net of unearned
finance income ("net finance
receivables") 52,677.8 46,512.9
Allowance for losses on finance receivables (1,891.4) (1,563.1)
Insurance policy and claims reserves (776.6) (712.9)
--------- ---------
Finance receivables, net of unearned
finance income, allowance for credit
losses and insurance policy and claims
reserves $50,009.8 $44,236.9
========= =========
<FN>
<F1> During the nine months ended September 30, 1997 and the year ended
December 31, 1996, the Company securitized and sold approximately
$800 million and $1.3 billion of manufactured housing finance
receivables, respectively, and approximately $500 million and $200
million of recreational vehicle receivables, respectively.
</FN>
</TABLE>
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 trusts holding the receivables. Receivables sold with servicing
retained were $3.1 billion at September 30, 1997. Receivables which are
expected to be securitized and sold are included in other assets as
receivables held for sale (see Note 6). The aggregate method is used in
determining the lower of cost or market of receivables held for sale.
In September 1997, the Company acquired Superior Acceptance
Corporation Limited, a consumer finance company with 91
offices in Canada. The fair market value of total assets acquired and
liabilities assumed was approximately $136 million and $129 million,
respectively. The transaction was accounted for as a purchase.
In May 1997, the Company acquired a portfolio of proprietary credit
card receivables and stock from Texaco Refining and Marketing, Inc. and its
affiliate, Star Enterprise. The fair market value of the assets acquired was
approximately $704 million. The transaction was accounted for as a purchase.
In April 1997, the Company acquired a portfolio of bankcard credit card
receivables from J. C. Penney, Inc. The fair market 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
$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.
<PAGE>
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>
<CAPTION>
Nine Months Ended Year Ended
September 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 1,045.6 795.4 1,086.5
Recoveries on receivables
charged off 160.1 110.8 147.2
Losses sustained (1,064.7) (735.2) (1,032.5)
Reserves of acquired businesses
and other 187.3 95.5 93.3
--------- -------- ---------
Balance at end of period $ 1,891.4 $1,535.1 $ 1,563.1
========= ======== =========
</TABLE>
NOTE 6 - OTHER ASSETS
The components of other assets at September 30, 1997 and December 31,
1996 were as follows (in millions):
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
---- ----
<S> <C> <C>
Goodwill $1,159.0 $1,206.4
Property and equipment 333.0 261.3
Collateral held for resale 212.5 169.1
Relocation client advances 175.2 159.3
Securitization assets 117.1 73.5
Operating agreements and other 114.4 97.8
Finance receivables held for sale 112.0
Other 575.7 566.1
-------- --------
Total other assets $2,798.9 $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, $610.3 million was
available for dividends at September 30, 1997.
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 September 30, 1997, Associates tangible net worth was
approximately $5.4 billion.
NOTE 8 - RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges of First Capital for the nine
months ended September 30, 1997 and 1996 was 1.58 and 1.56, 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 to date have been limited to
forward currency exchange, currency swap, interest rate swap and treasury
lock agreements.
The Company manages its exposure to counterparty 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 September 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 September 30, 1997 was
$959.9 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 September 30, 1997 was
$10.4 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 are held for purposes other than trading and 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 discount on such agreements is
recognized over the life of the underlying contracts on a straight-line
basis as an adjustment to interest expense.
At September 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 September 30, 1997 was $480.0 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 September 30, 1997 was $6.1 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, and are held for purposes other than trading. 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.
Interest rate swap and treasury lock agreements are held for purposes
other than trading and 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 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 September 30, 1997 was $1,070.2 million. The
fair value of such agreements at September 30, 1997 was $(0.02) million.
Interest rate swap and treasury lock agreements mature on varying dates
over the next four years and two 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.
NOTE 10 - SUBSEQUENT EVENT
On October 8, 1997, Ford announced plans to spin off its 80.7%
interest in the Company in the form of a distribution of its First Capital
shares to Ford common and class B stockholders. The transaction is subject
to a ruling from the U.S. Internal Revenue Service that the transaction
will be tax-free to Ford and its stockholders. The ruling process is
expected to take several months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net earnings for the nine-month period ended September 30, 1997 were
$753.7 million, a 21% increase over the same period in the previous year.
Net earnings for the three months ended September 30, 1997 were $270.9
million, an increase of 18% 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, and an improvement in the ratios of net
interest margin to average net receivables and 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 nine-
and three-months ended September 30, 1997, compared to the same periods 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 14.79% for the
nine- and three-month periods ended September 30, 1997. This compares to
14.84% for both comparable periods in 1996. The decreases in the composite
portfolio finance charge ratios for both comparative periods were driven by
slight declines in the finance charge rates in consumer and commercial
operations, partially offset by increases in credit card portfolio finance
charge rates.
Interest expense, on a dollar basis, increased for the nine- and
three-month periods ended September 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
6.12% and 6.22% for the nine- and three-month periods in 1997,
respectively, compared to 6.32% and 6.30% 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 floating
rate debt as a percentage of total debt. Floating rate debt rates were
lower than long-term debt rates in both comparable periods.
As a result of the aforementioned changes in finance charge revenue
and interest expense, the Company's net interest margin increased to $3.5
billion and $1.2 billion for the nine- and three-month periods ended
September 30, 1997, respectively, compared to $2.9 billion and $1.0 billion
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 9.39% and 9.30% for the nine- and three-month periods ended
September 30, 1997, respectively, compared to 9.25% and 9.21% for the
comparable 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. The principal causes of the increase in
the Company's net interest margin ratio, in each period, were the
aforementioned decline in the Company's total average borrowing rate and a
decline in the Company's debt-to-equity ratio.
Nine- and three-month operating expenses for the periods ended
September 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 total revenue net of interest expense and insurance benefits
paid or provided, improved to 43.2% and 44.2% for the nine- and three-month
periods ended September 30, 1997, respectively, compared to 44.5% and 44.4%
for the same periods in the prior year.
The Company's provision for losses increased from $795.4 million for
the first nine months of 1996 to $1,045.6 million for the same period in
1997. The provision for losses for the three-month period ended September
30, 1997 increased from $267.4 million in the prior-year period to $328.5
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 2.40% and 2.45% for the nine- and three-month periods ended
September 30, 1997, respectively, compared to 1.95% and 2.14% 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 the Company's
unsecured and real estate 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 higher consumer debt levels and increased
bankruptcies.
As a result of the aforementioned increase in net credit losses, the
Company increased its allowance for losses to 3.59% of net finance
receivables at September 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
1.62 times losses at September 30, 1997 compared to 1.77 times losses at
December 31, 1996. Company management believes the allowance for losses at
September 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 nine- and three-month periods ended September 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 nine- and three-month periods of
1997 was 37.17% and 37.47%, respectively, compared to 39.29% and 39.63% 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 primarily related to estimated taxes paid or accrued by
the Company on its Japan-based earnings. The amount of estimated foreign
tax credits available are based upon the Company's tax sharing agreement
with Ford and may be subject to change once the federal tax return for the
Ford consolidated group has been completed.
Financial Condition
Net finance receivables managed by the Company grew $7.1 billion
(19.5% annualized) and $1.7 billion (12.3% annualized) during the nine- and
three-month periods ended September 30, 1997, respectively, compared to
$8.1 billion (27.2% annualized) and $3.5 billion (31.6% annualized) for the
same periods in 1996. The higher growth levels in each 1996 period
compared to 1997 was primarily due to the timing of major acquisitions.
Managed net finance receivables at September 30, 1997 includes
approximately $3.1 billion of securitized manufactured housing and
recreational vehicle receivables. The Company had growth in both consumer
and commercial operations in both periods. However, of the total growth,
44% in the nine-month and 6% in the three-month periods ended September 30,
1997, respectively, resulted from major acquisitions.
Composite 60+days contractual delinquency was 2.38% of gross finance
receivables at September 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 most of the Company's portfolios.
During the nine months ended September 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
stockholders totaling $104.0 million, unrealized foreign currency
translation losses of $59.4 million, principally related to the Company's
yen-denominated investment in its Japan operation, treasury stock purchases
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 nine-month
period ended September 30, 1997 was 1.94%, 17.65% and 22.19%, respectively.
This compares to a return on average assets, average equity and average
tangible equity for the nine months ended September 30, 1996 of 1.87%,
18.57% and 25.72%, respectively. The 1996 returns have been restated to
exclude certain one-time 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 available 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 and public debt
borrowings made directly by each foreign entity in its transactional
currency and, to a lesser extent, fully hedged intercompany borrowings.
At September 30, 1997, the Company had short- and long-term debt
outstanding of $20.0 billion and $26.6 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 and public borrowings made by the Company's foreign
subsidiaries. During the nine- and three-month periods ended September 30,
1997 and 1996, the Company raised debt aggregating $5.6 billion and $1.8
billion, and $4.8 billion and $2.6 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 September
30, 1997, these short-term bank lines, revolving credit facilities and
receivable purchase facilities totaled $14.8 billion. This amount was
allocated as short-term debt for purposes of providing 75% coverage for
Associates of $13.4 billion and First Capital of $1.0 billion. First
Capital's foreign subsidiaries were attributed the remaining $0.4 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
neutralize the potential impact of such exposures on the Company's
financial position and results of operations. The Company primarily 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, interest
rate swap and treasury lock agreements. See NOTE 9 of the consolidated
financial statements 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
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 earnings per share would have
been reported at $2.18 and $0.78, and diluted earnings per share would have
been reported at $2.17 and $0.78 for the nine- and three-month periods
ended September 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
plans to adopt SFAS 131 in the year ended December 31, 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.
None to report.
ITEM 5. OTHER INFORMATION.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Associates First Capital Corporation (the "Company"), desires to take
advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "1995 Act"). The 1995 Act provides a
"safe harbor" for forward-looking statements to encourage companies to
provide information without fear of litigation so long as those statements
are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected. Although the Company
does not anticipate that it will make forward-looking statements as a
general policy, the Company will make forward-looking statements as
required by law or regulation, and may from time to time may make such
statements with respect to management's estimation of the future operating
results and business of the Company.
The following is a summary of the factors the Company believes important
that could cause actual results to differ from the Company's expectations.
The Company is publishing these factors pursuant to the 1995 Act. Such
factors should not be construed as exhaustive or as an admission regarding
the adequacy of disclosure made by the Company prior to the effective date
of the 1995 Act. Readers should understand that several factors govern
whether any forward-looking statement will be or can be achieved. Any one
of those factors could cause actual results to differ materially from those
projected. No assurance is or can be given that any important factor set
forth below will be realized in a manner so as to allow the Company to
achieve the desired or projected results. The words "believe," "expect,"
"anticipate," "intend," "aim," "will" and similar words identify
forward-looking statements. The Company cautions readers that the following
important factors, among others, could affect the Company's actual results
and could cause the Company's actual consolidated results to differ
materially from those expressed in any forward-looking statements made by
or on behalf of the Company.
* Rapid changes in interest rates, which could limit the Company's
ability to generate new finance receivables or decrease the
Company's net interest margins.
* Increase in non-performing loans and credit losses.
* The inability of the Company to access capital and financing on
terms acceptable to the Company.
* Changes in governmental regulation affecting the Company's
ability to conduct business, the manner in which it conducts
business or the level of the interest rates charged by the
Company.
* Heightened competition, including the intensification of price
competition, the entry of new competitors, and the introduction
of new products by new and existing competitors.
* Adverse publicity and news coverage about the Company or about
any of its proposed products or services.
* Adverse results in litigation matters involving the Company.
* General economic and inflationary conditions affecting consumer
debt levels and credit losses, and overall increases in the cost
of doing business.
* Changes in social and economic conditions such as increasing
consumer bankruptcies, inflation and monetary fluctuations, and
changes in tax rates or tax laws.
* Changes in accounting policies and practices, and the
application of such policies and practices to the Company.
* Loss or retirement of key executives, employees or technical
personnel.
* The effect of changes within the Company's organization or in
compensation and benefit plans and the ability of the Company to
attract and retain experienced and qualified management
personnel.
* Natural events and acts of God such as earthquakes, fires or
floods.
* Adverse changes, or any announcement relating to a possible or
contemplated adverse change, in the ratings obtained from any of
the independent rating agencies relating to the Company's debt
securities or other financial instruments.
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 third quarter ended September 30, 1997, First
Capital filed a Current Report on Form 8-K dated July 15,
1997, related to the release of second quarter earnings.
<PAGE>
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.
November 13, 1997
ASSOCIATES FIRST CAPITAL CORPORATION
(registrant)
By/s/ John F. Stillo
--------------------------
John F. Stillo
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>
Nine Months Ended
September 30
1997 1996
---- ----
<S> <C> <C>
Fixed Charges <F1>
Interest expense $2,035.8 $1,811.7
Implicit interest in rent 18.1 15.0
-------- --------
Total fixed charges $2,053.9 $1,826.7
======== ========
Earnings <F2>
Earnings before provision for income
taxes $1,199.6 $1,025.7
Fixed charges 2,053.9 1,826.7
------- -------
Earnings, as defined $3,253.5 $2,852.4
======== ========
Ratio of Earnings to Fixed Charges 1.58 1.56
==== ====
- ---------
<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>
<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 September 30, 1997 and the nine
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 427
<SECURITIES> 1,119
<RECEIVABLES> 52,678
<ALLOWANCES> 1,891
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,355
<CURRENT-LIABILITIES> 0
<BONDS> 46,584
<COMMON> 4
0
0
<OTHER-SE> 6,013
<TOTAL-LIABILITY-AND-EQUITY> 54,355
<SALES> 6,094
<TOTAL-REVENUES> 6,094
<CGS> 0
<TOTAL-COSTS> 4,894
<OTHER-EXPENSES> 1,813
<LOSS-PROVISION> 1,045
<INTEREST-EXPENSE> 2,036
<INCOME-PRETAX> 1,200
<INCOME-TAX> 446
<INCOME-CONTINUING> 754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 754
<EPS-PRIMARY> 2.18
<EPS-DILUTED> 2.17
</TABLE>
