<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, 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 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, 1998, the registrant had 1,150,000,000 and 144,118,820
respective shares of Class A and Class B Common Stock authorized;
346,729,677 shares of Class A Common Stock issued, of which 346,285,431
shares were outstanding; and no shares of Class B Common Stock were
issued or outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS.
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(In Millions, Except Per Share Amounts)
Six Months Ended Three Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
REVENUE
Finance charges $3,926.8 $3,634.1 $1,881.8 $1,872.4
Insurance premiums 216.5 204.4 104.1 105.3
Investment and other
income 382.9 137.7 309.2 71.8
-------- ------- ------- -------
4,526.2 3,976.2 2,295.1 2,049.5
EXPENSES
Interest expense 1,542.8 1,317.0 785.5 679.6
Operating expenses 1,291.4 1,102.8 671.4 571.6
Provision for losses on
finance receivables
- NOTE 7 707.8 717.1 342.8 372.6
Insurance benefits paid
or provided 73.3 72.8 30.5 36.7
------- ------- ------- ------
3,615.3 3,209.7 1,830.2 1,660.5
------- ------- ------- -------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 910.9 766.5 464.9 389.0
PROVISION FOR INCOME TAXES 337.0 283.7 172.0 144.0
-------- -------- -------- --------
NET EARNINGS $ 573.9 $ 482.8 $ 292.9 $ 245.0
======== ======== ======== ========
NET EARNINGS PER SHARE
- NOTE 3
Basic $ 1.66 $ 1.39 $ 0.85 $ 0.71
======== ======== ======== ========
Diluted $ 1.65 $ 1.39 $ 0.84 $ 0.71
======== ======== ======== ========
See notes to consolidated financial statements.
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars In Millions)
June 30 December 31
1998 1997
------- -----------
ASSETS
CASH AND CASH EQUIVALENTS $ 364.8 $ 433.2
INVESTMENTS IN DEBT AND EQUITY SECURITIES
- NOTES 5 and 6 5,263.2 1,242.4
FINANCE RECEIVABLES, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves - NOTE 6 53,051.8 52,482.1
OTHER ASSETS - NOTE 8 4,730.3 3,075.0
--------- ---------
Total assets $63,410.1 $57,232.7
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $23,236.0 $19,483.5
Bank Loans 674.8 1,487.1
ACCOUNTS PAYABLE AND ACCRUALS 2,124.8 1,765.5
LONG-TERM DEBT
Senior Notes 30,269.1 27,802.6
Subordinated and Capital Notes 425.4 425.4
--------- ---------
30,694.5 28,228.0
STOCKHOLDERS' EQUITY
Series A Junior Participating Preferred
Stock, $0.01 par value, 350,000 shares
authorized, no shares issued or
outstanding - NOTE 12
Class A Common Stock, $0.01 par value,
1,150,000,000 shares authorized,
346,729,677 and 90,773,299 shares issued
in 1998 and 1997, respectively 3.5 0.9
Class B Common Stock, $0.01 par value,
144,118,820 shares authorized, no shares
issued or outstanding in 1998 and
255,881,180 shares issued and outstanding
in 1997 - NOTE 11 2.6
Paid-in Capital 4,002.1 4,004.6
Retained Earnings 2,602.0 2,097.4
Accumulated Other Comprehensive Income
- NOTE 4 110.1 172.6
Less 444,246 and 156,526 shares of
Class A Common Stock held at cost in
Treasury in 1998 and 1997, respectively (37.7) (9.5)
--------- --------
Total stockholders' equity 6,680.0 6,268.6
--------- ---------
Total liabilities and stockholders' equity $63,410.1 $57,232.7
========= =========
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
Six Months Ended
June 30
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 573.9 $ 482.8
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Provision for losses on finance receivables 707.8 717.1
Depreciation and amortization 177.7 150.2
Unrealized gain on trading securities (4.4) (0.9)
Purchases of trading securities (550.7)
Sales and maturities of trading securities 82.6 4.7
Increase (decrease) in accounts payable
and accruals 123.8 (37.5)
Increase in insurance policy and claims
reserves 11.7 35.3
Deferred income taxes (6.0) (30.3)
---------- ---------
Net cash provided from operating
activities 1,116.4 1,321.4
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (26,356.1) (25,249.5)
Finance receivables liquidated 21,274.0 19,109.6
Finance receivables sold 2,234.9 590.0
Acquisitions of other finance businesses, net (925.1)
Increase in other assets (912.0) (295.9)
Purchases of available-for-sale securities (569.0) (174.0)
Sales and maturities of available-for-sale
securities 436.3 60.2
---------- ----------
Net cash used for investing activities (4,817.0) (5,959.6)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 4,177.6 3,809.1
Retirement of long-term debt (2,585.6) (2,032.6)
Increase in notes payable 2,071.6 2,650.6
Cash dividends (69.3) (69.3)
Proceeds from exercise of stock options 12.7 3.7
Treasury stock and other (28.2) (14.4)
--------- --------
Net cash provided from financing
activities 3,578.8 4,347.1
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH 53.4 (7.5)
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (68.4) (298.6)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 433.2 446.9
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 364.8 $ 148.3
========== ==========
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Prior to April 7, 1998, Associates First Capital Corporation
("First Capital" or the "Company"), a Delaware corporation, was a
majority-owned subsidiary of Ford FSG, Inc. and a majority indirect-
owned subsidiary of Ford Motor Company ("Ford"). As described in NOTE
11, on April 7, 1998, Ford completed a spin-off of its interest in the
Company in the form of a tax-free distribution of its First Capital
shares to Ford Common and Class B stockholders. Effective with the
distribution, First Capital is no longer a subsidiary of Ford.
NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements present the
consolidated financial position and operating results of First Capital
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain prior
period financial statement amounts have been reclassified to conform to
the current period presentation.
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.
NOTE 3 - EARNINGS PER SHARE
Earnings per share on a basic and diluted basis for the periods
indicated is calculated as follows (in millions, except per share
amounts):
Six Months Ended Three Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Basic net earnings per share:
Net earnings $573.9 $482.8 $292.9 $245.0
------ ------ ------ ------
Weighted average shares
outstanding 346.5 346.5 346.4 346.4
------ ------ ------ ------
$ 1.66 $ 1.39 $ 0.85 $ 0.71
====== ====== ====== ======
Diluted net earnings per share:
Net earnings $573.9 $482.8 $292.9 $245.0
------ ------ ------ ------
<PAGE>
Weighted average shares
outstanding plus assumed
conversions 348.7 347.7 348.6 347.5
------ ------ ------ ------
$ 1.65 $ 1.39 $ 0.84 $ 0.71
====== ====== ====== ======
Calculation of weighted average
shares outstanding plus
assumed conversions:
Weighted average shares
outstanding 346.5 346.5 346.4 346.4
Effect of dilutive securities 2.2 1.2 2.2 1.1
------ ------ ------ ------
348.7 347.7 348.6 347.5
====== ====== ====== ======
NOTE 4 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income", on January 1,
1998. Pursuant to SFAS 130, accumulated other comprehensive income was
reported on the consolidated balance sheet. The components of
accumulated other comprehensive income are as follows (in millions):
June 30 December 31
1998 1997
------- -----------
Foreign currency translation adjustments $104.6 $168.2
Net unrealized gain on available-for-sale
securities 5.5 4.4
------ ------
Accumulated other comprehensive income $110.1 $172.6
====== ======
Comprehensive income for the six- and three-month periods ended
June 30, 1998 and 1997 consisted of the following components (in
millions):
Six Months Ended Three Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Net earnings $573.9 $482.8 $292.9 $245.0
Foreign currency translation
adjustments (63.6) (17.4) (63.7) 51.0
Net unrealized gain (loss) on
available-for-sale securities 1.1 ( 1.9) 4.0 8.5
------ ------ ------ ------
Comprehensive income $511.4 $463.5 $233.2 $304.5
====== ====== ====== ======
<PAGE>
NOTE 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities consist of bonds and notes held by
the Company's insurance subsidiaries, and as described in NOTE 6,
retained securitization interests. The Company invests in these
securities with the intention of holding them to maturity. However, if
market conditions change, the Company may sell them prior to maturity.
Accordingly, the Company classifies these securities as available-for-
sale securities and adjusts their recorded value to market. The
estimated market value and amortized cost at June 30, 1998 and December
31, 1997 was $4.7 billion and $1.1 billion, 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.
TRADING SECURITIES
Trading securities, principally preferred stock, are recorded at
market value. Unrealized gains or losses on trading securities are
included in earnings. The estimated market value at June 30, 1998 and
December 31, 1997 was $603.6 million and $131.0 million, respectively.
Historical cost at June 30, 1998 and December 31, 1997 was $587.0
million and $126.7 million, respectively.
NOTE 6 - FINANCE RECEIVABLES
At June 30, 1998 and December 31, 1997, finance receivables
consisted of the following (in millions):
June 30 December 31
1998 1997
------- -----------
Consumer Finance
Home equity lending $20,850.3 $18,796.0
Personal lending and retail sales
finance 10,365.2 8,731.6
Credit card 2,632.5 8,211.7
Manufactured housing 2,714.8 1,669.4
--------- ---------
36,562.8 37,408.7
--------- ---------
Commercial Finance
Truck and truck trailer 10,312.3 9,688.9
Equipment 5,790.9 5,300.5
Fleet leasing 1,602.8 1,551.1
Recreational vehicles 430.7 444.0
Warehouse lending and other 996.3 822.4
--------- --------
19,133.0 17,806.9
--------- --------
<PAGE>
Finance receivables, net of unearned
finance income ("net finance
receivables") 55,695.8 55,215.6
Allowance for losses on finance receivables (1,848.7) (1,949.9)
Insurance policy and claims reserves (795.3) (783.6)
-------- --------
Finance receivables, net of unearned
finance income, allowance for credit
losses and insurance policy and claims
reserves $53,051.8 $52,482.1
========= =========
SECURITIZATION OF FINANCE RECEIVABLES
During the year ended December 31, 1997, the Company securitized
and sold approximately $800 million of manufactured housing retail
finance receivables and approximately $533 million of recreational
vehicle retail finance receivables, respectively. In addition, during
the first quarter of 1998, approximately $235 million of home equity
lending receivables were securitized and sold. No significant gains or
losses were recorded on these transactions.
In the second quarter of 1998, approximately $5.2 billion of the
Company's U.S. bankcard credit card receivables were securitized and
sold to a master trust. The Company received $2.0 billion in proceeds
from the transaction and retained a $3.2 billion certificated interest
in the master trust. As described in NOTE 5, retained securitization
interests are classified as available-for-sale securities on the
consolidated balance sheet. No significant gain or loss was recorded
on this transaction.
The Company provides servicing for securitized receivables. At
June 30, 1998 and December 31, 1997, total finance receivables managed
by the Company consisted of the following (in millions):
June 30 December 31
1998 1997
------- -----------
Consumer Finance
Home equity lending $21,050.8 $18,796.0
Personal lending and retail sales
finance 10,365.2 8,731.6
Credit card 7,887.8 8,323.7
Manufactured housing 4,423.9 3,526.9
--------- ---------
43,727.7 39,378.2
--------- ---------
Commercial Finance
Truck and truck trailer 10,312.3 9,688.9
Equipment 5,790.9 5,300.5
Fleet leasing 1,602.8 1,551.1
Recreational vehicles 1,881.8 1,665.4
<PAGE>
Warehouse lending and other 996.3 822.4
--------- ---------
20,584.1 19,028.3
--------- ---------
Managed finance receivables $64,311.8 $58,406.5
========= =========
ACQUISITIONS
In April 1998, the Company acquired DIC Finance Co. Ltd., a
consumer finance company based in Japan. The fair market value of
total assets acquired and liabilities assumed was approximately $1.9
billion and $1.3 billion, respectively.
In February 1998, the Company acquired Beneficial Canada Holdings
Incorporated, the Canadian consumer finance subsidiary of Beneficial
Corporation. The fair market value of total assets acquired and
liabilities assumed was approximately $1.0 billion and $716 million,
respectively.
Each of the above acquisitions was accounted for as a purchase.
The pro forma effect of these acquisitions is not material to the
consolidated financial statements.
In addition, in April 1998 the Company announced an agreement to
purchase substantially all of the assets of SPS Transaction Services,
Inc. Upon closing, this acquisition will add approximately $2.3
billion in managed credit card receivables to the Company. This
transaction is expected to close in the third or fourth quarter of
1998, subject to regulatory approval.
NOTE 7 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables during
the periods indicated were as follows (in millions):
Six Months Ended Year Ended
June 30 December 31
1998 1997 1997
---- ---- -----------
Balance at beginning of period $ 1,949.9 $1,563.1 $ 1,563.1
Provision for losses 707.8 717.1 1,378.1
Recoveries on receivables
charged off 102.2 104.8 224.9
Losses sustained (743.8) (688.9) (1,454.0)
Reserves of receivables
sold(1) (334.7)
Reserves of acquired
businesses and other 167.3 153.4 237.8
--------- -------- ---------
Balance at end of period $ 1,848.7 $1,849.5 $ 1,949.9
========= ======== =========
(1) The reserves related to receivables sold during 1997 were not
significant.
NOTE 8 - OTHER ASSETS
The components of other assets at June 30, 1998 and December 31,
1997 were as follows (in millions):
June 30 December 31
1998 1997
------- -----------
Goodwill, net $1,219.9 $1,104.0
Notes and other receivables 847.4 533.0
Other intangible assets 755.9 107.5
Finance receivables held for sale 561.7 268.8
Property and equipment 504.2 383.2
Collateral held for resale 242.3 225.3
Relocation client advances 157.4 140.6
Other 441.5 312.6
-------- -------
Total other assets $4,730.3 $3,075.0
======== ========
NOTE 9 - DEBT RESTRICTION
A restriction contained in the revolving credit agreement dated
June 30, 1998 requires the Company to maintain a minimum tangible net
worth, as defined, of $2.5 billion. At June 30, 1998, the Company's
tangible net worth was approximately $5.5 billion.
NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS
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 foreign currency forward
exchange, currency swap, interest rate swap, treasury lock agreements
and treasury futures and option contracts.
Foreign currency forward exchange agreements are held for purposes
other than trading and have been designated for accounting purposes as
a hedge of the Company's yen-based net investment. Under these
agreements, the Company is obligated to deliver yen in exchange for
United States dollars at varying times over the next 5 years. The
aggregate notional amount of these agreements at June 30, 1998 and
December 31, 1997 was $1.7 billion and $921.8 million, respectively.
The fair value of such agreements at June 30, 1998 and December 31,
1997 was $127.3 million and $97.6 million, respectively.
Foreign currency swap agreements are held for purposes other than
trading and have been designated for accounting purposes as hedges of
specific debt obligations. Under these agreements, the Company and the
agreement counterparties are obligated to exchange specific foreign
currencies at varying times over the next 5 years. The aggregate
notional amount of these agreements at June 30, 1998 and December 31,
1997 was $2.6 billion and $1.1 billion, respectively. The fair value
of such agreements at June 30, 1998 and December 31, 1997 was $27.5
million and $28.8 million, respectively.
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 existing debt and anticipated debt
and asset securitization transactions. The aggregate notional amount
of interest rate swap and treasury lock agreements at June 30, 1998 and
December 31, 1997 was $2.6 billion and $2.0 billion, respectively. The
fair value of such agreements at June 30, 1998 and December 31, 1997
was $(8.6) million and $(7.3) million, respectively. Interest rate
swap and treasury lock agreements mature on varying dates over the next
5 years and 4 months, respectively.
Treasury futures and option contracts are used to minimize
fluctuations in the value of preferred stock investments and are held
for purposes other than trading. The aggregate notional amount and
fair value of futures and options contracts at June 30, 1998 was $385.9
million and $(7.3) million, respectively. Such contracts mature in
September 1998.
NOTE 11 - FORD SPIN-OFF
On April 7, 1998, Ford completed a spin-off of its interest in the
Company in the form of a tax-free distribution of its First Capital
Class A Common Stock to Ford Common and Class B stockholders.
Effective with the distribution, the Company is no longer a subsidiary
of Ford. Immediately prior to, and in connection with the spin-off,
all of the issued and outstanding shares of the Company's Class B
Common Stock were converted at par value to an equal number of the
shares of the Company's Class A Common Stock.
Effective with the spin-off, the Company and Ford entered into an
amended and restated tax sharing agreement which, among other matters,
required the Company to pay $22.4 million effectively settling certain
amounts due to and from Ford.
NOTE 12 - STOCKHOLDERS' RIGHTS PLAN
On April 13, 1998, the Company's charter was amended to authorize
the issuance of up to 350,000 shares of $0.01 par value Series A
Junior Participating Preferred Stock in connection with the adoption
of a Stockholders' Rights Plan (the "Plan"). In connection with the
Plan, a dividend of one preferred stock purchase right for each
outstanding share of the Company's Class A Common Stock was declared
and distributed in April 1998. These rights were issued to
stockholders of record as of April 13, 1998 and expire on April 13,
2008. Upon the occurance of certain events, (as described below) each
right entitles the holder to purchase one-thousandth (1/1000) of a
share of the Company's newly designated Series A Junior Participating
Preferred Stock at an exercise price of $400. In the event that any
person or entity acquires 15% or more of the outstanding shares of the
Company's Class A Common Stock, each holder of a right (other than the
acquirer) will be entitled to receive, upon payment of the exercise
price, a number of shares of Class A Common Stock having a market value
equal to two times the exercise price.
NOTE 13 - SUBSEQUENT EVENT
On August 11, 1998, the Company announced a definitive agreement
to purchase the assets and assume the liabilities of Avco Financial
Services, Inc. ("Avco"), a wholly-owned subsidiary of Textron Inc. for
$3.9 billion. Avco is a global, diversified financial services company
with approximately $8.9 billion in total assets. Products provided by
Avco include real estate loans, retail sales finance and consumer
loans, equipment, inventory and vendor finance and credit and
collateral-related insurance. Avco has operations in the United
States, Canada, Australia, the United Kingdom, New Zealand, France,
Hong Kong, Spain, Ireland, India and Sweden. The transaction is
expected to close in the fourth quarter of 1998 or the first quarter of
1999, subject to regulatory approval.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations
The discussion that follows includes comparisons to amounts
reported in the historical financial statements ("Owned Basis") and on
a pro forma basis adjusted to include the impact of receivables sold
with servicing retained ("Managed Basis"). On an Owned Basis, finance
charges, interest expense and credit losses on the servicing portfolio
are included in investment and other income in the statement of
earnings. On a pro forma Managed Basis, these items are reclassified
from investment and other income and presented as if the receivables
had not been sold. Management believes the discussion of pro forma
Managed Basis information is useful in evaluating the Company's
operating performance.
The following tables contain selected Owned Basis and pro forma
Managed Basis financial information (in millions):
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, 1998 June 30, 1998
---------------- -------------------
Owned Pro Forma Managed Owned Pro Forma Managed
Basis Adjustments Basis Basis Adjustments Basis
----- ----------- ----- ----- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Finance charges $3,926.8 $ 453.9 $4,380.7 $1,881.8 $ 375.9 $2,257.7
Insurance premiums 216.5 216.5 104.1 104.1
Investment and other
income 382.9 (259.6) 123.3 309.2 (238.8) 70.4
Interest expense (1,542.8) (119.2) (1,662.0) (785.5) (69.9) (855.4)
Operating expenses (1,291.4) (1,291.4) (671.4) (671.4)
Provision for losses (707.8) (75.1) (782.9) (342.8) (67.2) (410.0)
Insurance benefits paid
or provided (73.3) (73.3) (30.5) (30.5)
-------- ------ ------- ------- ------- -------
Earnings before pro-
vision for income taxes 910.9 910.9 464.9 464.9
<PAGE>
Provision for income
Taxes (337.0) (337.0) (172.0) (172.0)
-------- ------- -------- -------- ------- --------
Net earnings $ 573.9 $ $ 573.9 $ 292.9 $ $ 292.9
======== ======= ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------------------- ---------------------------
Owned Pro Forma Managed Owned Pro Forma Managed
Basis Adjustments Basis Basis Adjustments Basis
----- ----------- ----- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Net Finance Receivables
End of period $55,695.8 $8,616.0 $64,311.8 $55,215.6 $3,190.9 $58,406.5
Average 54,945.3 6,380.1 61,325.4 51,110.5 2,789.2 53,899.7
</TABLE>
Pro forma information is not presented for the six- and three-
month periods ended June 30, 1997 because the difference between Owned
and Managed Basis financial information for these periods was not
significant.
Net Earnings
Net earnings, on both an Owned Basis and a Managed Basis, for the
six- and three-month periods ended June 30, 1998 were $573.9 million
and $292.9 million, respectively, a 19% and 20% increase over the
respective comparable periods in the prior year. The increase in
earnings in both periods was principally due to the growth in average
managed finance receivables. The other primary factors affecting
earnings and the Company's operating results are discussed below.
Finance Charges
Finance charge revenue on a Managed Basis increased 16.51% for the
six-month period ended June 30, 1998 to $4.4 billion, compared to $3.8
billion for the prior year period. A 16.48% increase was recorded for
the three-month period ended June 30, 1998 to $2.3 billion, compared to
$1.9 billion for the prior year period. The increase in both
comparable periods was primarily a result of strong internal managed
receivables growth and the acquisitions described in NOTE 6 to the
consolidated financial statements.
Managed Basis finance charge revenue as a percentage of average
managed finance receivables (the "Finance Charge Ratio") was 14.29% and
14.36% for the six- and three-month periods ended June 30, 1998,
respectively, a decrease from 14.54% and 14.64% for the comparable
periods in the prior year. The primary cause of this decrease was a
shift in product mix toward more secured portfolios. Secured
portfolios generally have lower finance charge rates than unsecured
portfolios. A declining interest rate environment and a corresponding
industry-wide decline in consumer finance charge rates also
contributed to the decrease in finance charge ratios in both comparable
periods.
Interest Expense
Managed Basis interest expense increased to $1.7 billion for the
six-month period ended June 30, 1998 compared to $1.4 billion in the
prior year period. Managed Basis interest expense also increased to
$855.4 million for the three-month period ended June 30, 1998 compared
to $721.5 million in the prior year period. The increase in both
comparable periods was primarily due to the growth in average debt
outstanding.
The average borrowing rate of the Company declined to 5.96% and
5.90% for the six- and three-month periods ended June 30, 1998,
respectively, compared to 6.06% and 6.16% in the comparable prior year
periods. This decrease was primarily caused by a decline in market
rates.
Net Interest Margin
As a result of the factors discussed in the finance charges and
interest expense sections above, Managed Basis net interest margin
increased to $2.7 billion and $1.4 billion for the six- and three-month
periods ended June 30, 1998, respectively, compared to $2.4 billion and
$1.2 billion for the same periods in the prior year. The Company's net
interest margin expressed as a ratio to average managed receivables
declined to 8.87% and 8.92% for the six- and three-month periods ended
June 30, 1998, respectively, compared to 9.14% and 9.19% for the same
periods in the prior year.
Investment and Other Income
Investment and other income, on a Managed Basis, for the six- and
three-month periods ended June 30, 1998 was $123.3 million and $70.4
million, respectively, compared to $97.8 million and $52.2 million for
the comparable periods in the prior year. The increase in both
comparable periods is primarily caused by higher investment income due
to the growth in the Company's investment portfolio.
Operating Expenses
The operating expenses increased to $1.3 billion and $671.4
million in the six- and three-month periods ended June 30, 1998,
respectively, compared to $1.1 billion and $571.6 million for the same
periods in the prior year reflecting the growth in the size of the
Company.
Operating expenses as a percentage of average managed finance
receivables declined to 4.21% and 4.27% in the six- and three-month
periods ended June 30, 1998, respectively, from 4.26% and 4.32% for the
same periods in the prior year, reflecting management's efforts to
closely manage operating expense growth. Operating expense efficiency,
measured as the ratio of total operating expenses divided by total
Managed Basis revenue net of Managed Basis interest expense and
insurance benefits paid or provided was 43.3% and 43.4% in the six- and
three-month periods ended June 30, 1998, respectively, compared to
42.5% and 42.7% for the same periods in the prior year. The change in
the efficiency ratio in both comparable periods was primarily due to
the aforementioned decline in the finance charge ratio and the
inclusion of the operating expenses of DIC Finance in the second
quarter of 1998. The acquisition of DIC Finance is described in NOTE 6
of the consolidated financial statements.
Provision for Losses
The Company's Managed Basis provision for losses increased to
$782.9 million from $724.4 million for the six-month periods ended June
30, 1998 and 1997, respectively. The Managed Basis provision for
losses increased during the three-month period ended June 30, 1998 to
$410.0 million compared to $377.0 million in the prior year period.
The increase is primarily due to growth in managed receivables during
both comparable periods.
Total Managed Basis net credit losses as a percentage of average
managed finance receivables (the "Loss Ratio") were 2.34% and 2.37% for
the six- and three-month periods ended June 30, 1998, respectively,
compared to 2.29% and 2.37% for the same periods in the prior year.
The rise in consumer bankruptcy levels and a shift in product mix
toward more secured portfolios were the primary factors driving losses
in both comparable periods. Rising consumer bankruptcy levels
generally result in higher losses in consumer portfolios, while a shift
in product mix toward more secured portfolios generally results in
lower aggregate losses. Secured portfolios typically have lower loss
rates than unsecured portfolios.
Financial Condition
Managed finance receivables grew $5.9 billion (20.2% annualized)
during the first six months of 1998. The Company had growth in
substantially all of its product lines during the period.
Approximately 53% of the total growth was from internal sources; the
remaining growth was from acquisitions.
Composite 60+days contractual delinquency was 2.29% of gross
managed finance receivables at June 30, 1998, compared to 2.15% at
December 31, 1997. The allowance for losses decreased to $1,848.7
million at June 30, 1998 compared to $1,949.9 million at December 31,
1997. The primary cause of this decrease was the credit card
receivable securitization transaction in the second quarter of 1998 (as
described in NOTE 6 of the consolidated financial statements) which
resulted in a reduction in the allowance for losses of approximately
$335 million. This transaction also was the primary cause of a shift
in the Owned Basis product mix toward a higher percentage of secured
portfolios, thereby reducing the required allowance for losses.
Secured portfolios typically have lower losses than unsecured
portfolios. Accordingly, the allowance for losses to net finance
receivables decreased to 3.32% at June 30, 1998 compared to 3.53% at
December 31, 1997. The allowance for losses divided by net credit
losses also declined from 1.59 at December 31, 1997 to 1.51 at June 30,
1998 (for the current quarter, annualized current quarter losses are
used in this calculation; for 1997, trailing four quarter losses are
used). Company management believes the allowance for losses at June
30, 1998 is sufficient to provide adequate coverage against losses in
its portfolios.
Liquidity and 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 to ensure that funds are
available at all times to meet the Company's commitments.
The Company's principal sources of cash are proceeds from the
issuance of short- and long-term debt, asset securitizations 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, external borrowings and asset securitizations
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 manages its
liability and capital levels, debt maturities, diversification of
funding sources and asset liquidity to ensure that it is able to meet
its obligations as they mature. The Company's domestic operations are
principally funded through domestic and international borrowings made
by Associates, asset securitizations 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 in the transactional currency and, to a lesser extent, fully
hedged intercompany borrowings.
At June 30, 1998, the Company had short- and long-term debt
outstanding of $23.9 billion and $30.7 billion, respectively. Short-
term debt principally consists of commercial paper and represents the
Company's primary source of short-term liquidity. Long-term debt
principally consists of senior 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 six months ended June 30, 1998 and
1997, the Company raised term debt aggregating $4.2 billion and $3.8
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,
1998, these bank lines, revolving credit facilities and receivable
purchase facilities totaled $17.4 billion; $16.7 billion of these
facilities were allocated to provide 75% backup coverage of the
Company's domestic and European commercial paper outstanding. The
remaining $666.5 million was available to First Capital's foreign
subsidiaries, of which $474.3 million was in use.
The Company has access to other sources of liquidity such as the
issuance of alternative forms of capital, the issuance of common and
preferred stock and the use of asset securitization. Prior to 1998,
the Company's securitization transactions were limited to the
manufactured housing and recreational vehicle receivable portfolios.
In 1998, the Company expanded its securitization activity to include
the home equity and credit card asset-backed classes.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date fields
containing a 2 digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, if such systems are not
repaired they may be unable to accurately process certain date-based
information.
The Company has identified all significant applications that
require modification to ensure Year 2000 Compliance. Internal and
external resources are being used to make the required modifications
and test Year 2000 Compliance. The modification process of all
significant applications is substantially complete. The Company is on
schedule to complete the testing processes for these applications by
December 31, 1998.
In addition, the Company has communicated with others with whom it
does significant business to determine their Year 2000 Compliance
readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues. However, there can be no guarantee that
the systems of other companies on which the Company's systems rely will
be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
Through June 30, 1998 the Company has incurred and expensed
approximately $14 million for incremental costs primarily related to
third-party vendors, outside contractors and additional staff dedicated
to the Year 2000 readiness project. The Company expects that it will
incur future incremental costs related to the project of approximately
$8 million. These incremental costs do not include existing resources
allocated to the project effort.
These costs and the date on which the Company plans to complete
the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities", was
issued by the Financial Accounting Standards Board in June 1998. This
Statement requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of derivatives would be accounted
for depending on the use of the derivatives and whether they qualify
for hedge accounting treatment. This statement is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged.
The Company has not yet determined the impact SFAS 133 will have on its
earnings or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Management has no material changes to report from the disclosure
set forth in the Company's Form 10-K for the year ended December 31,
1997.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None to report.
ITEM 2. CHANGES IN SECURITIES.
On April 13, 1998, the Company's charter was amended to authorize
the issuance of up to 350,000 shares of $0.01 par value Series A
Junior Participating Preferred Stock in connection with the adoption
of a Stockholders' Rights Plan (the "Plan"). In connection with the
Plan, a dividend of one preferred stock purchase right for each
outstanding share of the Company's Class A Common Stock was declared
and distributed in April 1998. These rights were issued to
stockholders of record as of April 13, 1998 and expire on April 13,
2008. Upon the occurance of certain events (as described below), each
right entitles the holder to purchase one-thousandth (1/1000) of a
share of the Company's newly designated Series A Junior Participating
Preferred Stock at an exercise price of $400. In the event that any
person or entity acquires 15% or more of the outstanding shares of the
Company's Class A Common Stock, each holder of a right (other than the
acquirer) will be entitled to receive, upon payment of the exercise
price, a number of shares of Class A Common Stock having a market value
equal to two times the exercise price.
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 April
6, 1998.
b. The Company's stockholders elected Keith W. Hughes, J. Carter
Bacot, Eric S. Dobkin, Roy A. Guthrie, William M. Isaac,
Harold D. Marshall and H. James Toffey, Jr. to the Board of
Directors. No other director's terms continued after this
meeting.
c. The Company's stockholders voted for the election of the
directors listed in paragraph (b), as follows:
Directors Number of Votes
--------- ---------------
Keith W. Hughes 1,345,971,874
J. Carter Bacot 1,345,906,796
Eric S. Dobkin 1,346,087,304
Roy A. Guthrie 1,345,893,129
William M. Isaac 1,346,023,194
Harold D. Marshall 1,345,904,618
H. James Toffey, Jr. 1,346,088,354
The Company's stockholders also voted on the approval of the
selection by the Audit Committee of Coopers & Lybrand L.L.P. (effective
July 1, 1998 Coopers & Lybrand L.L.P. merged with Price Waterhouse
L.L.P.; the combined firm is named PricewaterhouseCoopers LLP) as the
Company's independent public accountants for 1998, as follows:
Votes For Votes Against Abstain
1,346,139,500 32,205 55,528
The company's stockholders did not vote on any other matters at
the Company's annual meeting of stockholders.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements
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 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 Company hereby incorporates into this report by reference to
its Form 10-K for the year ended December 31, 1997 the cautionary
statements found on pages 27-28 of such Form 10-K.
Stockholder Proposals
Proposals of stockholders intended to be presented at the
Company's 1999 annual meeting of stockholders must be received at the
Company's principal executive offices not later than December 2, 1998
in order to be included in the Company's proxy statement and form of
proxy relating to the 1999 annual meeting.
Pursuant to new amendments to Rule 14a-4(c) of the Securities
Exchange Act of 1934, as amended, if a stockholder who intends to
present a proposal at the 1999 annual meeting of stockholders does not
notify the Company of such proposal on or prior to 45 days before the
date on which the Company first mailed proxy materials for the 1998
annual meeting of stockholders (or the date as specified by an advance
notice provision), then management proxies would be allowed to use
their discretionary voting authority to vote on the proposal when the
proposal is raised at the annual meeting, even though there is no
discussion of the proposal in the 1999 proxy statement.
The Company's Bylaws contain an advance notice provision, which
provides that proposals of stockholders intended to be presented at the
Company's 1999 annual meeting of stockholders must be received by the
Secretary of the Company at the Company's principal executive offices
not earlier than the 90th day prior to the date of the annual meeting
nor later than the 60th day prior to the date of the annual meeting in
order to be brought before the meeting. (Although, as stated above,
the proposal must be received no later than December 2, 1998 in order
to be included in the proxy statement relating to the 1999 annual
meeting). The Company currently believes that the 1999 annual meeting
of stockholders will be held on May 27, 1999.
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, 1998, First Capital
filed Current Reports on Form 8-K dated April 8, 1998
(announcing the completion of the spin-off of the Company by
Ford); April 13, 1998 (announcing the adoption of a
shareholders' rights plan); April 14, 1998 (announcing
earnings for the first quarter of 1998); April 20, 1998
(announcing the Company's definitive agreement to purchase SPS
Transaction Services, Inc.); June 18, 1998 (pro forma managed
basis information and key data for each quarter of and for the
years ended December 31, 1997 and 1996 and for the quarter
ended March 31, 1998).<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.
August 14, 1998
ASSOCIATES FIRST CAPITAL CORPORATION
(registrant)
By/s/ John F. Stillo
------------------------------------
Senior Vice President, Comptroller and
Principal Accounting Officer
<PAGE>
EXHIBIT 12
ASSOCIATES FIRST CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Millions)
Six Months Ended
June 30
1998 1997
---- ----
Fixed Charges (a)
Interest expense $1,542.8 $1,317.0
Implicit interest in rent 12.8 11.9
-------- --------
Total fixed charges $1,555.6 $1,328.9
======== ========
Earnings (b)
Earnings before provision for income
taxes $ 910.9 $ 766.5
Fixed charges 1,555.6 1,328.9
-------- --------
Earnings, as defined $2,466.5 $2,095.4
======== ========
Ratio of Earnings to Fixed Charges 1.59 1.58
==== ====
(a) 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.
(b) For purposes of such computation, the term "earnings" represents
earnings before provision for income taxes, plus fixed charges.
<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 June 30, 1998 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-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 365
<SECURITIES> 5,263
<RECEIVABLES> 55,696
<ALLOWANCES> 1,849
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 63,410
<CURRENT-LIABILITIES> 0
<BONDS> 54,605
<COMMON> 4
0
0
<OTHER-SE> 6,676
<TOTAL-LIABILITY-AND-EQUITY> 63,410
<SALES> 4,526
<TOTAL-REVENUES> 4,526
<CGS> 0
<TOTAL-COSTS> 3,615
<OTHER-EXPENSES> 1,364
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<INCOME-PRETAX> 911
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</TABLE>
