<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 March 31, 1999
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.....
<PAGE>
As of March 31, 1999, the registrant had 1,150,000,000 and 144,118,820
respective shares of Class A and Class B Common Stock authorized,
728,460,360 shares of Class A Common Stock issued, of which 728,094,061
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)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---- ----
<S> <C> <C>
REVENUE
Finance charges $2,283.9 $2,045.0
Insurance premiums 256.3 112.4
Investment and other income - NOTE 9 404.8 73.7
-------- --------
2,945.0 2,231.1
EXPENSES
Interest expense 960.0 757.3
Operating expenses 979.6 620.0
Provision for losses on finance
receivables - NOTE 8 362.8 365.0
Insurance benefits paid or provided 103.7 42.8
-------- --------
2,406.1 1,785.1
-------- --------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 538.9 446.0
PROVISION FOR INCOME TAXES 202.1 165.0
-------- --------
NET EARNINGS $ 336.8 $ 281.0
======== ========
NET EARNINGS PER SHARE - NOTE 4
Basic $ 0.46 $ 0.41
======== ========
Diluted $ 0.46 $ 0.40
======== ========
See notes to consolidated financial statements.
/TABLE
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars In Millions)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 1,255.0 $ 4,665.6
INVESTMENTS IN DEBT AND EQUITY SECURITIES
- NOTE 6 6,839.7 6,678.7
FINANCE RECEIVABLES, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves
- NOTES 7 and 8 64,158.8 57,496.4
OTHER ASSETS - NOTE 9 9,682.4 6,334.7
--------- ---------
Total assets $81,935.9 $75,175.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $28,259.1 $24,144.3
Bank Loans 480.6 1,565.5
ACCOUNTS PAYABLE AND ACCRUALS 3,938.3 3,342.4
LONG-TERM DEBT
Senior Notes 39,972.5 37,171.4
Subordinated and Capital Notes 425.3 425.3
--------- ---------
40,397.8 37,596.7
STOCKHOLDERS' EQUITY
Series A Junior Participating Preferred
Stock, $0.01 par value, 734,500 shares
authorized, no shares issued or
outstanding - -
Class A Common Stock, $0.01 par value,
1,150,000,000 shares authorized, 728,460,360
and 728,228,488 shares issued
in 1999 and 1998, respectively 7.3 7.3
Class B Common Stock, $0.01 par value,
144,118,820 shares authorized, no shares
issued or outstanding - -
Paid-in Capital 5,277.1 5,273.7
Retained Earnings 3,475.7 3,178.9
Accumulated Other Comprehensive Income
- NOTE 5 119.1 106.8
Less 366,299 and 980,314 shares of
Class A Common Stock held at cost in
Treasury in 1999 and 1998, respectively (19.1) (40.2)
--------- --------
Total stockholders' equity 8,860.1 8,526.5
--------- ----------
Total liabilities and stockholders' equity $81,935.9 $75,175.4
========= =========
See notes to consolidated financial statements.
/TABLE
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 336.8 $ 281.0
Adjustments to reconcile net earnings to
Net cash provided from operating activities:
Provision for losses on finance receivables 362.8 365.0
Depreciation and amortization 115.0 95.4
Other operating activities (204.2) (163.6)
---------- ----------
Net cash provided from operating
activities 610.4 577.8
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (17,766.0) (12,362.6)
Finance receivables liquidated and sold 16,649.8 10,522.5
Proceeds from businesses sold 1,482.0 -
Acquisitions of other finance businesses, net (3,708.0) (300.6)
Other investing activities 68.9 (313.8)
---------- ----------
Net cash used for investing
activities (3,273.3) (2,454.5)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 2,037.7 1,604.7
Retirement of long-term debt (1,812.4) (1,667.2)
(Decrease) increase in notes payable (973.9) 2,213.4
Other financing activities (10.0) (43.3)
---------- ----------
Net cash (used for) provided from
financing activities (758.6) 2,107.6
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH 10.9 17.6
---------- ----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (3,410.6) 248.5
<PAGE>
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,665.6 433.2
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,255.0 $ 681.7
========== ==========
See notes to consolidated financial statements.
/TABLE
<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 leading diversified
finance organization providing finance, leasing and related services to
individual consumers and businesses in the United States and
internationally.
NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant
intercompany balances and transactions. Certain prior period financial
statement amounts have been reclassified to conform to the current
period presentation.
In the opinion of management, all adjustments necessary to present
fairly the results of operations and financial position have been made.
The results of operations for any interim period are not necessarily
indicative of the results of operations for a full year.
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires the
use of management estimates. These estimates are subjective in nature
and involve matters of judgment. Actual results could differ from
these estimates.
NOTE 3 - SIGNIFICANT TRANSACTIONS
ACQUISITIONS
On January 6, 1999, the Company purchased the assets and assumed
the liabilities of Avco Financial Services, Inc. ("Avco") for $3.9
billion. Avco, formerly a subsidiary of Textron Inc., is a global,
diversified financial services company with approximately $9 billion in
assets. Its product offerings include home equity lending, retail
sales finance and consumer loans, equipment, inventory and vendor
finance, and credit and collateral-related insurance. Avco has
operations in the U.S., Canada, Puerto Rico, Australia, the United
Kingdom, New Zealand, France, Hong Kong, Spain, Ireland, India and
Sweden. This acquisition was accounted for as a purchase.
The unaudited pro forma combined revenues, net earnings and net
earnings per basic and diluted share of the Company including the
operations of Avco and the significant 1998 acquisitions were
approximately $3.0 billion, $283 million, $0.39 and $0.39 for the
three-month period ended March 31, 1998. The 1998 acquisitions are
described in the Company's Form 10-K for the year ended December 31,
1998. These unaudited pro forma results assume that the acquisitions
occurred at the beginning of the period and include certain
adjustments, including additional common shares outstanding and
interest and amortization expenses associated with these purchases.
This information has been prepared for comparative purposes only, and
is based on the historical operating results of these entities prior to
their acquisition by the Company and does not include cost savings and
other profit enhancement initiatives introduced by the Company that
management believes will be reflected in post-acquisition operating
results. As a result, management does not believe that these pro forma
results are indicative of the actual results that would have occurred
had the acquisitions closed at the beginning of each period. Pro forma
information is not presented for the first quarter of 1999 because
there is no significant difference between pro forma and reported
revenue, earnings and earnings per share information for the quarter.
In February 1999 the Company acquired the Shell Oil Proprietary
Credit Card program. The fair market value of the private label credit
card receivables acquired was approximately $260 million.
DISPOSITIONS
In March 1999, the Company sold Fleetwood Credit Corporation
("Fleetwood"), its recreational vehicle financing subsidiary, to
NationsBank, N.A., a unit of BankAmerica Corporation for approximately
$227 million.
In March 1999, the Company sold 128 domestic consumer finance
branches to Commercial Credit Corporation, a subsidiary of Citigroup,
Inc., for approximately $640 million. All of these branches were
acquired from Avco in January 1999.
The operating results of these dispositions from January 1, 1999
through the date of the related sale were included in investment and
other income.
NOTE 4 - 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):
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---- ----
<S> <C> <C>
Basic net earnings per share:
Net earnings $336.8 $281.0
Weighted average shares outstanding 727.7 693.1
$ 0.46 $ 0.41
====== ======
Diluted net earnings per share:
Net earnings $336.8 $281.0
Weighted average shares outstanding
plus assumed conversions 732.1 697.5
$ 0.46 $ 0.40
====== ======
Calculation of weighted average shares
outstanding plus assumed conversions:
Weighted average shares outstanding 727.7 693.1
Effect of dilutive securities 4.4 4.4
------ ------
732.1 697.5
====== ======
</TABLE>
NOTE 5 - COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of
tax, are as follows (in millions):
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
<S> <C> <C>
Foreign currency translation adjustments $124.5 $117.1
Net unrealized loss on available-for-sale
securities (5.4) (10.3)
------ ------
Accumulated other comprehensive income $119.1 $106.8
====== ======
</TABLE>
Comprehensive income for the three-month periods ended March 31,
1999 and 1998 consisted of the following components, net of tax (in
millions):
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---- ----
<S> <C> <C>
Net earnings $336.8 $281.0
Foreign currency translation adjustments 7.4 0.1
Unrealized gain (loss) on available-for-sale
securities 4.9 (2.9)
------ ------
Comprehensive income $349.1 $278.2
====== ======
</TABLE>
<PAGE>
NOTE 6 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities consist of retained securitization
interests as well as bonds, notes and preferred stock and other equity
securities primarily held by the Company's insurance subsidiaries. The
Company generally invests in debt 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 debt
and equity securities as available-for-sale securities and adjusts their
recorded value to market. The estimated market value at March 31, 1999 and
December 31, 1998 was $6.8 billion and $6.7 billion, respectively. The
amortized cost at March 31, 1999 and December 31, 1998 was $6.8 billion and
$6.7 billion, respectively. Realized gains or losses on sales are included
in investment and other income. Unrealized gains or losses are included, net
of tax, in other comprehensive income, a component of stockholders' equity.
TRADING SECURITIES
Trading securities consist of investments in equity securities
which are recorded at market value. Unrealized gains or losses on
trading securities are included in earnings. The estimated market
value at March 31, 1999 and December 31, 1998 was $22.8 million and
$20.8 million, respectively. Historical cost at March 31, 1999 and
December 31, 1998 was $16.0 million and $15.5 million, respectively.
<PAGE>
NOTE 7 - FINANCE RECEIVABLES
At March 31, 1999 and December 31, 1998, finance receivables
consisted of the following (in millions):
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
<S> <C> <C>
Home equity lending $24,614.2 $22,458.2
Personal lending and retail sales
finance 15,264.1 11,459.2
Truck and truck trailer 11,397.3 10,783.6
Equipment 6,180.6 6,114.0
Manufactured housing 3,955.4 3,648.2
Credit card 3,728.0 3,138.1
Auto fleet leasing 1,580.2 1,589.7
Recreational vehicles - NOTE 3 - 479.7
Warehouse lending and other 1,480.0 1,268.3
--------- --------
Finance receivables, net of unearned
finance income ("net finance
receivables") (1) 68,199.8 60,939.0
Allowance for losses on finance receivables (2,267.3) (1,978.7)
Insurance policy and claims reserves (1,773.7) (1,463.9)
-------- --------
Finance receivables, net of unearned
finance income, allowance for losses
and insurance policy and claims
reserves $64,158.8 $57,496.4
========= =========
(1) Unearned finance income was approximately $4.5 billion and $4.0 billion
at March 31, 1999 and December 31, 1998, respectively.
</TABLE>
NOTE 8 - 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>
Three Months Ended Year Ended
March 31 December 31
1999 1998 1998
---- ---- -----------
<S> <C> <C> <C>
Balance at beginning of period $1,978.7 $1,949.9 $ 1,949.9
Provision for losses 362.8 365.0 1,283.5
Recoveries on receivables
charged off 77.3 59.0 237.7
Losses sustained (426.4) (394.6) (1,424.6)
Reserves of receivables
sold and held for sale (27.3) - (334.7)
Reserves of acquired
businesses 295.1 25.0 271.1
Other 7.1 10.6 (4.2)
-------- -------- ---------
Balance at end of period $2,267.3 $2,014.9 $ 1,978.7
======== ======== =========
NOTE 9 - OTHER ASSETS
The components of other assets at March 31, 1999 and December 31,
1998 were as follows (in millions):
</TABLE>
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
<S> <C> <C>
Goodwill $4,057.4 $1,890.4
Notes and other receivables 1,749.2 1,172.9
Customer lists and operating agreements 1,366.7 929.8
Net assets held for sale (1) 907.2 -
Property and equipment 638.2 608.7
Collateral held for resale 319.7 297.4
Relocation client advances 150.7 171.8
Finance receivables held for
securitization - 812.2
Other 493.3 451.5
------- --------
Total other assets $9,682.4 $6,334.7
======== ========
(1) During the first quarter of 1999, the Company announced its intention to
sell Avco's non-affiliate insurance operations and Avco's operations located
in Australia and New Zealand. In addition, the Company also intends to sell
forty-one Canadian consumer finance branches (twenty-eight of which were
acquired from Avco in January 1999). Net assets held for sale includes the
assets, net of the related liabilities, attributable to these operations. The
first quarter operating results attributable to these operations are included
in investment and other income.
</TABLE>
NOTE 10 - 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 March 31, 1999, the Company's
tangible net worth was approximately $4.8 billion.
NOTE 11 - 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
hedges of certain of the Company's foreign currency denominated net
investments and to a lesser degree, anticipated foreign currency
transactions. Under these agreements, the Company is obligated to
deliver Japanese yen in exchange for United States dollars at varying
times over the next 5 years. The aggregate notional amount of these
agreements at March 31, 1999 and December 31, 1998 was $2.1 billion and
$2.5 billion, respectively. The fair value of such agreements at March
31, 1999 and December 31, 1998 would have been a liability of $82.0
million and $134.4 million, respectively.
Foreign currency swap agreements are held for purposes other than
trading and have been designated for accounting purposes as hedges of
specific foreign currency exposures under certain 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 March 31, 1999 and December 31, 1998 was $5.5 billion and
$4.4 billion, respectively. The fair value of such agreements at March
31, 1999 and December 31, 1998 would have been a liability of $37.8
million and $118.5 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 March 31, 1999
and December 31, 1998 was $5.8 billion and $4.3 billion, respectively.
The fair value of such agreements at March 31, 1999 and December 31,
1998 would have been a liability of $47.7 million and $81.3 million,
respectively. Such agreements mature on varying dates over the next 4
years.
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 of
futures and option contracts at March 31, 1999 and December 31, 1998
was $639.3 million and $720.6 million, respectively. The fair value
of these contracts at March 31, 1999 would have been an asset of $17.6
million and a liability of $5.2 million at December 31,1998. Such
contracts mature on varying dates through 1999.
<PAGE>
NOTE 12 - SEGMENT REPORTING
Managed basis revenue, earnings and receivables information for
each of the Company's reportable segments is presented below (in
millions):
<TABLE>
<CAPTION>
Domestic
Consumer Commercial International
Finance Finance Finance Total
------- --------- ----------- ----
<S> <C> <C> <C> <C>
Managed basis revenue for the
three months ended:
March 31, 1999 $ 1,725.3 $ 761.2 $ 699.0 $ 3,185.5
March 31, 1998 1,396.7 589.6 302.0 2,288.3
Segment earnings for the
three months ended:
March 31, 1999 $ 259.3 $ 121.5 $ 158.1 $ 538.9
March 31, 1998 233.9 108.7 103.4 446.0
Managed receivables at:
March 31, 1999 $40,173.9 $24,601.5 $11,837.1 $76,612.5
December 31, 1998 37,179.4 25,722.7 8,462.2 71,364.3
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The discussion that follows includes comparisons of amounts reported in
the historical financial statements ("Owned Basis") and on a pro forma basis
adjusted to include the impact of receivables held for securitization and
receivables sold with servicing retained ("Managed Basis"). On an Owned
Basis, finance charges and service fee income, interest expense and credit
losses on receivables held for securitization and receivables sold with
servicing retained 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 neither been held for securitization nor 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>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
Owned Pro Forma Managed Owned Pro Forma Managed
Basis Adjustments Basis Basis Adjustments Basis
----- ----------- ------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Finance charges $2,283.9 $ 463.8 $2,747.7 $2,045.0 $ 78.0 $2,123.0
Insurance premiums 256.3 - 256.3 112.4 - 112.4
Investment and other
income 404.8 (223.3) 181.5 73.7 (20.8) 52.9
-------- -------- -------- -------- -------- --------
Total revenue 2,945.0 240.5 3,185.5 2,231.1 57.2 2,288.3
Interest expense 960.0 71.6 1,031.6 757.3 49.3 806.6
Operating expenses 979.6 - 979.6 620.0 - 620.0
Provision for losses 362.8 168.9 531.7 365.0 7.9 372.9
Insurance benefits
paid or provided 103.7 - 103.7 42.8 - 42.8
-------- -------- ------- -------- -------- --------
Total expenses 2,406.1 240.5 2,646.6 1,785.1 57.2 1,842.3
Earnings before
provision for income
taxes 538.9 - 538.9 446.0 - 446.0
Provision for income
taxes 202.1 - 202.1 165.0 - 165.0
-------- -------- -------- -------- -------- --------
Net earnings $ 336.8 $ - $ 336.8 $ 281.0 $ - $ 281.0
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
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 $68,199.8 $8,412.7 $76,612.5 $60,939.0 $10,425.3 $71,364.3
Average 67,475.6 8,637.6 76,113.2 57,253.1 7,252.7 64,505.8
Net Earnings
Net earnings, on both an Owned Basis and a Managed Basis, for the
three-month period ended March 31, 1999 was $336.8 million, a 20% increase
over the same period in the previous year. The increase in earnings 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 for the first
quarter of 1999 to $2.7 billion compared to $2.1 billion the same quarter
in the prior year, principally as a result of growth in average managed
finance receivables outstanding. Finance charge revenue as a percentage of
average managed finance receivables (the "Finance Charge Ratio") was 14.44%
for the first quarter of 1999 compared to 14.25% for the same period in
1998. The increase in the Finance Charge Ratio was principally due to a
shift toward a higher percentage of unsecured receivables as a percentage
of total receivables. Unsecured receivables generally have higher finance
charge rates than secured receivables.
Interest Expense
Managed Basis interest expense increased to $1.0 billion for the
three-month period ended March 31, 1999 compared to $806.6 million for the
same period in 1998. Higher average outstanding debt levels, caused by the
growth in finance receivables and a slight increase in financial leverage,
were the primary cause of this increase. A modest shift toward a higher
percentage of fixed rate debt as a percentage of total debt also
contributed to the increase as fixed rate debt rates were higher than
floating rates in each period. Declining market debt rates during the
current period partially offset these increases.
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 $1.7 billion for the first quarter of 1999 compared to $1.3
billion for the prior-year quarter. The Company's net interest margin
expressed as a ratio to average managed finance receivables increased to
9.02% from 8.83% for the same period in the prior year.
Investment and Other Income
Investment and other income, on a Managed Basis, increased to $181.5
million for the first quarter of 1999 compared to $52.9 million for the
prior year quarter. The Northland Company and Avco affiliated insurance
related investment portfolio income together with the earnings of net
assets held for sale and businesses sold during the first quarter of 1999
contributed to this increase. The Northland Company was acquired during the
fourth quarter of 1998. As described in NOTES 3 and 9 to the consolidated
financial statements, the operating results of certain operations held for
sale were recorded in investment and other income. In addition, the net
proceeds resulting from the March 1999 sale of the Company's recreational
vehicle business also contributed to the increase.
Operating Expenses
First quarter Managed Basis operating expenses were higher in 1999
than in 1998 reflecting the growth in the size of the Company and business
mix. Managed Basis operating expenses as a percentage of average managed
finance receivables ("Operating Expense Ratio") increased to 5.15% in the
first quarter of 1999, compared to 4.16% in the prior year quarter. The
Company's efficiency ratio, measured as the ratio of total Managed Basis
operating expenses divided by total Managed Basis revenue net of Managed
Basis interest expense and insurance benefits paid or provided was 47.8%
for the first three months of 1999 compared to 43.1% in the same period in
the prior year. The Avco goodwill amortization and Avco integration
expenses are a significant cause of the increase in these ratios.
Furthermore, the acquisitions of The Northland Company and SPS Transaction
Services, Inc. during the fourth quarter of 1998 also contributed to the
increase in these ratios due to the fee oriented structure of these
businesses.
Provision for Losses
The Company's Managed Basis provision for losses increased to $531.7
million during the first quarter of 1999 from $372.9 million for the first
quarter of 1998. Total Managed Basis net credit losses as a percentage of
average managed finance receivables (the "Loss Ratio") were 2.72% for the
first quarter of 1999 compared to 2.31% for the same period in 1998. The
increase in the Loss Ratio was primarily due to a shift in product mix
toward more unsecured portfolios as a result of the SPS Transaction
Services and Avco acquisitions. Unsecured portfolios generally have higher
losses than secured portfolios.
Financial Condition
Managed finance receivables grew $5.2 billion (29.4% annualized)
during the first quarter of 1999 compared to growth of $2.6 billion (18.1%
annualized) in the first quarter of 1998 primarily due to the January 1999
Avco acquisition. The sale, during the first quarter of 1999, of the
Company's recreational vehicle finance subsidiary and 128 consumer
branches, as described in NOTE 3 to the consolidated financial statements,
partially offset receivable growth during the quarter.
Composite 60+days contractual delinquency was 2.70% of gross managed
finance receivables at March 31, 1999, compared to 2.57% at December 31,
1998. Accordingly, the allowance for losses to net finance receivables
increased to 3.32% at March 31, 1999 from 3.25% at December 31, 1998.
Company management believes the allowance for losses at March 31, 1999 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 and cash provided from the Company's
operations, and, to a lesser extent, asset securitizations. 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 and equity 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 and, to a lesser extent, asset
securitizations. The Company's foreign subsidiaries are principally
financed through private and public debt borrowings in the transactional
currency and fully hedged intercompany borrowings.
At March 31, 1999, the Company had short- and long-term debt
outstanding of $28.7 billion and $40.4 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 the Company's principal domestic operating subsidiary, Associates
Corporation of North America, in the United States and abroad, and to a
lesser extent, private and public borrowings made by the Company's foreign
subsidiaries. During the three months ended March 31, 1999 and 1998, the
Company raised term debt aggregating $2.0 billion and $1.6 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 March 31,
1999, these credit facilities totaled $22.1 billion and were allocated to
provide at least 75% backup coverage of the Company's commercial paper
borrowings and utilized uncommitted lines of credit.
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 increased 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 a company-wide initiative to address the Year 2000
Compliance issue. A team of technology professionals began addressing the
Year 2000 Compliance issue in 1995. Since then, the Company has identified
all significant third party and internal applications that require
modification to ensure Year 2000 Compliance.
The Company divides its Year 2000 Compliance initiative into two
components, information technology ("IT") and non-information technology
("Non-IT"). The IT initiative includes third party and Company mainframe
and desktop systems and applications. The Non-IT initiative includes third
party suppliers, embedded systems and the Company's larger commercial
borrowers.
Internal and external resources are being used to make the required IT
modifications and test Year 2000 Compliance. While the modification
process of all critical applications is substantially complete these
applications will undergo additional testing during 1999. In addition, the
Company is utilizing both internal and external resources to provide
independent system verification and validation of Year 2000 Compliance.
The Company acquires businesses from time to time. During its review of a
potential acquisition, the Company performs a Year 2000 readiness review to
determine that the potential acquisition's systems either are or will be
Year 2000 compliant in a timely manner.
The Company's Non-IT efforts include evaluating Year 2000 Compliance
of third party suppliers, embedded systems and the Company's larger
commercial borrowers. The Company has communicated with third party
suppliers that provide critical products or services, providers of
significant embedded systems and large commercial borrowers to determine
their Year 2000 Compliance readiness and is testing and monitoring the
extent to which the Company may be vulnerable to any significant Year 2000
issues. In addition, the Company required these suppliers and borrowers to
certify that they will be Year 2000 compliant. If they could not make this
certification, or the Company's testing shows potential Year 2000
Compliance problems, contingency plans are being implemented.
Contingency planning is an integral part of the Company's Year 2000
readiness project. The Company has and is continuing to develop
contingency plans which document the processes necessary to maintain
critical business functions should a significant third party system or
critical internal system fail. These contingency plans generally include
the repair of existing systems and, in some instances, the use of
alternative systems or procedures.
There can be no guarantee that the systems of other companies on which
the Company's systems rely will be converted in a timely manner, 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. In addition, there are many risks associated with the Year 2000
Compliance issue, including but not limited to the possible failure of the
Company's computer and information technology systems. Any such failure
could have a material adverse affect on the Company including the inability
to properly bill and collect payments from customers and errors or
omissions in accounting and financial data. In addition, the Company is
exposed to the inability of third parties to perform as a result of Year
2000 Compliance. Any such failure by a third party bank, regulatory
agency, group of investors, securities exchange or clearing agency,
software product or service provider, utility or other entity may have a
material adverse financial or operational effect on the Company.
From the inception of the Year 2000 readiness project through March
31, 1999 the Company incurred and expensed approximately $21 million for
incremental costs primarily related to third party vendors, outside
contractors and additional staff dedicated to the project. The Company
currently expects that it will incur future incremental costs related to
the project of approximately $13 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.
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, 1998.
<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.
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, 1998 the cautionary statements
found on pages 29-30 of such Form 10-K.
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 first quarter ended March 31, 1999, First Capital filed
a Current Report on Form 8-K dated January 6, 1999 (announcing the
purchase of Avco Financial Services, Inc.); January 7, 1999
(announcing the Company's plans for integrating Avco Financial
Services, Inc., with the Company); January 19, 1999 (announcing
financial results for the year ended December 31, 1998); March 10,
1999 (announcing the potential sale of the non-affiliate business
of Balboa Insurance Company and Balboa Life Insurance Company and
the Company's Australian and New Zealand finance and insurance
operations); March 15, 1999 (announcing that the Company has
reached an agreement to sell 128 of its United States consumer
finance branches to Commercial Credit, Inc.); and March 16, 1999
(announcing that the Company publicly released a 1998 annual
report supplement containing financial information and key data as
of and for the years ended December 31, 1994 through December 31,
1998).
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.
May 13, 1999
ASSOCIATES FIRST CAPITAL CORPORATION
(registrant)
By /s/ John F. Stillo
---------------------
Executive Vice President, Comptroller and
Principal Accounting Officer
</TABLE>
<PAGE>
EXHIBIT 12
ASSOCIATES FIRST CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---- ----
<S> <C> <C>
Fixed Charges (a)
Interest expense $ 960.0 $ 757.3
Implicit interest in rent 9.2 6.5
-------- --------
Total fixed charges $ 969.2 $ 763.8
Earnings (b)
Earnings before provision for income
taxes $ 538.9 $ 446.0
Fixed charges 969.2 763.8
-------- --------
Earnings, as defined $1,508.1 $1,209.8
Ratio of Earnings to Fixed Charges 1.56 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>
<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 March 31, 1999 and the three 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,255
<SECURITIES> 6,840
<RECEIVABLES> 68,200
<ALLOWANCES> 4,041
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 81,936
<CURRENT-LIABILITIES> 0
<BONDS> 69,138
<COMMON> 7
0
0
<OTHER-SE> 8,853
<TOTAL-LIABILITY-AND-EQUITY> 81,936
<SALES> 2,945
<TOTAL-REVENUES> 2,945
<CGS> 0
<TOTAL-COSTS> 2,406
<OTHER-EXPENSES> 1,083
<LOSS-PROVISION> 363
<INTEREST-EXPENSE> 960
<INCOME-PRETAX> 539
<INCOME-TAX> 202
<INCOME-CONTINUING> 337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 337
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
