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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
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<S> <C>
DELAWARE 06-0876639
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
250 EAST CARPENTER FREEWAY 75062-2729
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code
972-652-4000
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Common Stock, New York Stock Exchange
par value $0.01 per share
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the most recent New York Stock Exchange Composite
Transaction closing price of the Class A Common Stock ($38.375 per share), which
occurred on February 11, 1999, was $23,211,407,867. For purposes of this
computation, all officers, directors, and 5% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors, and beneficial owners are, in fact,
affiliates of the registrant. At February 11, 1999, 727,794,428 shares of the
Company's Class A Common Stock, par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE*
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DOCUMENT WHERE INCORPORATED
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Proxy Statement for 1999 Part III (Items 10, 11, 12 and 13)
Annual Meeting of Stockholders
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* As stated under various Items of this Report, only certain specified portions
of such document are incorporated by reference herein.
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PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
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. As successor to Associates Investment
Company, originally founded in 1918, First Capital had 2,522 offices worldwide
and employed approximately 28,662 persons at December 31, 1998. Corporate
headquarters are located in Irving, Texas.
From October 31, 1989 to April 7, 1998, First Capital was a subsidiary of
Ford FSG, Inc. and an indirect-owned subsidiary of Ford Motor Company ("Ford").
On April 7, 1998, Ford completed a spin-off of its interest in First Capital 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 this distribution, First
Capital was no longer a subsidiary of Ford and became a fully independent
company. First Capital's Class A Common Stock is traded on the New York Stock
Exchange under the symbol "AFS".
For the year ended December 31, 1998, First Capital had total managed
revenues of $10.0 billion and net earnings of $1.2 billion. At December 31,
1998, managed finance receivables were $71.4 billion, total managed assets were
$80.9 billion and stockholders' equity was $8.5 billion. First Capital believes
that it is the largest publicly traded finance company in the United States
based on market capitalization.
The Company's finance receivables are geographically dispersed. At December
31, 1998, approximately 87% of total managed receivables were dispersed across
the United States with 9% in California, 8% in Texas, 6% in Florida, and no more
than 5% in any other state. The remaining 13% of total managed receivables were
dispersed across seven foreign countries, with 8% in Japan and no more than 4%
in any other foreign country.
AVCO ACQUISITION
On January 6, 1999, the Company purchased the assets and assumed the
liabilities of Avco Financial Services, Inc. ("Avco"). Avco, formerly a
subsidiary of Textron Inc., is a global, diversified financial services
operation with approximately $9 billion in assets, 8,000 employees, over 1,200
branches and over 2 million customers. Avco's product offerings include home
equity lending, retail sales finance and consumer loans, equipment, inventory
and vendor finance, and credit and collateral-related insurance. Prior to the
acquisition, Avco had the fourth largest U.S. consumer finance branch network
and well established operations in Canada, the United Kingdom and Puerto Rico.
It is anticipated that Avco's businesses will fit well in these core markets.
Avco also provides the Company with access to new markets in Australia, Hong
Kong, France, Sweden, Spain, New Zealand, Ireland, and India.
The Company will consolidate headquarters in the U.S., the United Kingdom
and Canada, resulting in a reduction in the work force of the combined
companies. In the U.S., Avco's headquarters in Costa Mesa, California, are
expected to close in the second quarter of 1999, as all corporate functions will
be consolidated with the Company's headquarters in Irving, Texas. Most of the
400 jobs at Avco headquarters will be eliminated. The Avco Technology Center,
also in Costa Mesa, is expected to close in the third quarter of 1999 after
Avco's information systems have been integrated with the Company's systems.
Avco's Denver Purchasing Center, which has approximately 200 employees and
duplicates many of the operations of the Company's credit processing facility in
Salt Lake City, is expected to close in the first quarter of 1999.
Internationally, the Company will close its United Kingdom headquarters in
Slough, England and consolidate functions into existing Avco facilities in
Reading. The Company will also close its Canadian consumer finance headquarters
in Toronto, Ontario and consolidate with Avco's offices in London, Ontario.
REPORTABLE SEGMENTS
The Company is organized into four primary business units: U.S. consumer
finance, credit card, commercial finance and international finance. The U.S.
consumer finance and credit card business units are
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aggregated into one domestic consumer finance reportable segment in the
discussion that follows due to their similar operating characteristics. See NOTE
17 to the consolidated financial statements for additional segment information.
For additional information about specific products and services offered by the
Company, see the "-- Product Information" section.
Certain information included herein is presented on a Managed Basis. Unless
specifically identified as managed or Managed Basis, the financial information
contained herein is presented on a basis consistent with the amounts reported in
the historical financial statements on an Owned Basis. See the "Management's
Discussion and Analysis -- Managed Basis Reporting" section for more information
on Managed Basis reporting. Certain prior year amounts presented herein have
been restated to conform to the current year methodology.
DOMESTIC CONSUMER FINANCE SEGMENT
The domestic consumer finance segment of the Company offers a variety of
consumer financing products and services to customers throughout the United
States (excluding Hawaii, which is included in the international finance
segment). Finance products and services offered by this segment include home
equity and personal loans, retail sales finance, VISA(R) and MasterCard(R)
bankcards and private label credit cards and emergency roadside assistance and
auto club services. The acquisition of SPS Transaction Services, Inc., ("SPS")
in October 1998 further enhanced the segment's consumer and commercial private
label credit card product offerings and expanded the segment's product offerings
to include point of sale network services, call center based customer services
and technical help-desk application services. See additional information
regarding the SPS acquisition in the "-- Product Information -- Credit Card
Receivables" section and NOTE 6 to the consolidated financial statements. In
addition, the Company, through certain subsidiaries and third parties, makes
available various credit-related and other insurance products to its domestic
consumer finance segment customers, including credit life, credit accident and
health, accidental death and dismemberment, involuntary unemployment and
personal property insurance.
The following table shows certain information regarding the Company's
domestic consumer finance segment:
DOMESTIC CONSUMER FINANCE
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YEAR ENDED OR AT DECEMBER 31
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1998 1997 1996
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(In millions, on a Managed Basis(1))
<S> <C> <C> <C>
Total revenue...................................... $ 5,877.8 $ 5,326.4 $ 4,528.8
Net interest margin................................ 3,505.0 3,251.7 2,723.1
Segment earnings................................... 997.3 891.8 810.1
Finance receivables................................ 37,179.4 32,338.2 27,145.1
</TABLE>
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(1) See the "Management's Discussion and Analysis -- Managed Basis Reporting"
section for more information on Managed Basis reporting.
Customers. The Company's domestic consumer finance customers span a wide
range of income levels and credit histories. These customers generally have a
history of using credit from a variety of sources and include homeowners,
purchasers of consumer durables (such as furniture, electronics and appliances)
and college students. In extending credit, the Company considers, among other
things, the customer's capacity to repay (e.g., income, debt ratio, and
employment stability), credit history and available collateral for secured loans
(including home ownership). In addition, credit scoring models are used
extensively to evaluate risk.
Delivery of Products and Services. The Company distributes its domestic
consumer finance products through branch offices and centralized consumer and
credit card lending operations described below:
Branch System. At December 31, 1998, the Company's domestic consumer
finance branch system consisted of 1,343 geographically dispersed office
locations in the continental United States and Alaska. These locations
operate under four different nameplates -- Associates Financial Services,
TranSouth
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Financial, First Family Financial Services and Kentucky Finance. Products
distributed include direct origination of home equity loans, personal loans
and retail sales finance.
Centralized Lending. The Company's centralized home equity lending
operation is conducted through Associates Home Equity Services, Inc.
("AHES"). AHES offers both fixed and variable rate closed-end loans and
lines of credit, secured by residential property. At December 31, 1998, a
majority of the home equity loans in the Company's centralized home equity
lending operation were originated through unaffiliated mortgage brokers and
financial institutions. Mortgage brokers are independent agents who match
their customers with a lender based on the customer's needs and the credit
profile requirements of the lender. The remaining home equity loans in the
centralized lending operation at December 31, 1998 were originated as a
result of existing customer relationships, direct mail and telemarketing
efforts. The Company's centralized home equity lending operation covers
most of the United States through six regional service centers and 36
district sales offices located in 24 states.
Additionally, the Company has a centralized warehouse lending
operation, which is conducted through First Collateral Services, Inc.
("FCS"). FCS provides short-term lines of credit secured by residential
mortgages to small and mid-sized mortgage brokers throughout the United
States.
The Company also conducts centralized lending operations through three
subsidiaries, Associates Capital Bank, Inc. ("ACB"), Associates National
Bank (Delaware) ("ANB") and Hurley State Bank ("HSB"). HSB, formerly a
subsidiary of SPS, was purchased by the Company in October of 1998. Through
these subsidiaries, the Company offers VISA(R) and MasterCard(R) retail
credit cards directly to the public and through co-operative marketing
programs and a number of private label retail credit card and revolving
credit programs.
Avco Acquisition. On January 6, 1999 the Company completed the acquisition
of Avco, which significantly expanded its domestic consumer lending operations.
Avco's domestic finance receivables were approximately $4 billion at December
31, 1998 and primarily consist of home equity and personal loans and retail
installment contracts. The acquisition of Avco solidifies the Company's market
position in the domestic consumer finance sector by increasing the Company's
customer base by over 2 million customers and adding over 4,000 dealers and
merchant agreements. For additional information regarding the Avco acquisition,
see the "-- Company Overview" section and NOTE 21 to the consolidated financial
statements.
Shell Acquisition. On January 13, 1999 the Company entered into an
agreement to acquire the Shell Proprietary Credit Card Program, which will
further expand the Company's position in the oil private label credit card
sector. The Shell Proprietary Credit Card Program consists of managed
receivables of approximately $270 million.
COMMERCIAL FINANCE SEGMENT
The commercial finance segment offers a variety of commercial financing
products to customers in the United States and Canada. Finance products and
services offered by this segment include retail and wholesale financing and
leasing products and services for heavy-duty (Class 8) and medium-duty (Classes
3 through 7) trucks and truck trailers and construction, material handling and
other industrial and communications equipment. The Company also provides a wide
range of retail and wholesale financing products and services to the
manufactured housing and recreational vehicle sectors. As described in NOTE 21
to the consolidated financial statements, on January 28, 1999 the Company
entered into an agreement to sell its recreational vehicle finance operation to
NationsBank, N.A., a unit of BankAmerica Corporation. In addition, the Company
engages in a number of other commercial activities, including auto fleet leasing
and fleet management services, government guaranteed lending, employee
relocation services and municipal finance. The Company, through certain
subsidiaries and third parties, also makes available various credit-related and
other insurance products to its commercial finance segment customers, including
commercial auto and dealers' open lot physical damage, credit life and motor
truck cargo insurance. The Company also offers commercial auto liability
insurance in certain states.
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The following table shows certain information regarding the Company's
commercial finance segment:
COMMERCIAL FINANCE
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YEAR ENDED OR AT DECEMBER 31
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1998 1997 1996
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(IN MILLIONS, ON A MANAGED BASIS(1))
<S> <C> <C> <C>
Total revenue......................................... $ 2,527.1 $ 2,127.0 $ 1,776.2
Net interest margin................................... 983.9 849.6 675.6
Segment earnings...................................... 471.0 392.1 303.9
Finance receivables................................... 25,722.7 21,790.3 18,053.0
</TABLE>
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(1) See the "Management's Discussion and Analysis -- Managed Basis Reporting"
section for more information on Managed Basis reporting.
Delivery of Products and Services. The Company distributes its commercial
finance products through branch and regional offices and centralized commercial
lending, leasing and service operations described below:
Branch System. The Company provides truck and truck trailer financing,
equipment financing and leasing services and manufactured housing financing
through 83 branch and six regional offices in the United States and Canada.
Additionally, approximately 300 salespeople regularly contact truck and
truck trailer dealers, construction equipment dealers and manufactured home
retailers to purchase finance contracts made between those dealers and
retailers and the ultimate end-user. The Company also provides short-term
trailer rentals through 21 U.S. branch offices.
Centralized Lending, Leasing and Services. The Company utilizes five
centralized operations to distribute lending, leasing and fee-based
products and services. The Company's centralized recreational vehicle
operation is conducted through Fleetwood Credit Corporation, and the auto
fleet leasing and fleet management services operation is directed through
United States Fleet Leasing. Additionally, the Company utilizes centralized
operations to provide material handling and other industrial and
communications equipment products, employee relocation services and
government guaranteed lending programs. Insurance products are marketed to
commercial finance customers through the same delivery systems used to
market commercial finance products and services.
INTERNATIONAL FINANCE SEGMENT
The international finance segment offers a variety of consumer financing
products and services to customers in Japan, Canada, the United Kingdom, Puerto
Rico, Hawaii, Mexico, Costa Rica and Taiwan. The Company also offers commercial
financing products in the United Kingdom, Puerto Rico and, to a lesser extent,
Mexico and Japan. Commercial finance products offered in Canada are managed by
the Company's commercial finance segment, and are included in the commercial
finance segment. The Company, through subsidiaries and other third parties, also
offers various credit-related and other insurance products to its customers,
including credit life, credit accident and health, accidental death and
dismemberment, involuntary unemployment and personal property insurance. The
characteristics of the international finance segment's customers are similar to
those of their counterparts in the domestic consumer finance and commercial
finance segments.
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The following table shows certain information regarding the Company's
international finance segment:
INTERNATIONAL FINANCE
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<CAPTION>
YEAR ENDED OR AT DECEMBER 31
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1998 1997 1996
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(IN MILLIONS, ON A MANAGED BASIS(1))
<S> <C> <C> <C>
Total revenue.......................................... $1,624.6 $1,017.1 $ 855.3
Net interest margin.................................... 1,255.9 784.7 664.6
Segment earnings....................................... 472.2 356.1 290.6
Finance receivables.................................... 8,462.2 4,278.0 3,424.7
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(1) See the "Management's Discussion and Analysis -- Managed Basis Reporting"
section for more information on Managed Basis reporting.
Delivery of Products and Services. The Company delivers international
segment products and services primarily through 1,055 consumer and commercial
branches and eight centralized facilities in Japan, Canada, the United Kingdom,
Puerto Rico, Hawaii, Mexico, Taiwan and Costa Rica. The Company's international
locations employ operational policies, practices and disciplines similar to
those of the domestic consumer and commercial finance segments. Set forth below
is a description of the Company's international delivery systems at December 31,
1998.
- Japan. The Company operates 672 consumer branches, two centralized
consumer and credit card facilities and one commercial branch in Japan.
These operations are principally conducted by AIC Corporation ("AIC") and
DIC Finance Co. Ltd., ("DIC"). First Capital acquired DIC in April 1998,
significantly expanding consumer operations in Japan. DIC had 214 branches
at December 31, 1998. Products offered by AIC and DIC include home equity
and personal loans, Mastercard credit cards, retail sales finance contracts
and commercial transportation and construction and industrial equipment
financing.
- Canada. The Company operates 196 consumer finance branches and has
three centralized consumer finance lending operations through which the
Company purchases retail sales finance contracts and makes personal and
home equity loans. In February 1998, the Canadian consumer operation
expanded through its purchase of the Canadian consumer finance subsidiary
of Beneficial Corporation. Commercial finance products are also offered in
Canada, but are managed by the Company's commercial finance segment. As a
result, Canada's commercial operations are included in the operations of
the commercial finance segment.
- United Kingdom. The Company operates 66 branches and has three
centralized lending operations through which home equity and personal
loans, credit cards, purchased consumer retail sales finance contracts and
commercial transportation and construction equipment financing products are
offered.
- Other International Operations. The Company has 54 branches in
Mexico; 43 in Puerto Rico; 18 in Hawaii; four in Costa Rica; and one in
Taiwan through which various consumer and commercial finance products are
provided.
Avco Acquisition. On January 6, 1999, the Company acquired Avco,
significantly expanding and solidifying its existing operations in Canada, the
United Kingdom and Puerto Rico. With the Avco acquisition, the Company also
entered new markets in Australia, Hong Kong, France, Sweden, Spain, New Zealand,
Ireland and India. Avco's international finance receivables were approximately
$4 billion at December 31, 1998 and primarily consist of consumer home equity
and personal loans, private label credit cards, retail installment contracts,
commercial retail and wholesale financing and leasing. For additional
information regarding the Avco acquisition, see the "-- Company Overview"
section and NOTE 21 to the consolidated financial statements.
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PRODUCT INFORMATION
This section provides additional information about the products and
services offered by the Company. Note that this information is provided on a
Company-wide product line basis. For information about the Company's reportable
business segments including selected segment financial information, product
delivery systems and customers see the "-- Domestic Consumer Finance Segment",
"-- Commercial Finance Segment" and "-- International Finance Segment" sections.
The following table shows certain information with respect to the Company's
managed receivables outstanding by product (in millions):
MANAGED RECEIVABLES OUTSTANDING(1)
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<CAPTION>
DECEMBER 31
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Home Equity Lending................... $22,622.3 $18,796.0 $16,691.4 $14,316.3 $12,449.9
Personal Lending/Retail Sales
Finance............................. 11,459.2 8,731.6 7,425.1 6,225.1 5,420.3
Truck and Truck Trailer............... 10,783.6 9,688.9 8,598.3 7,724.0 6,739.7
Credit Card........................... 10,296.8 8,323.7 6,023.8 4,984.6 4,076.5
Equipment............................. 6,114.0 5,300.5 4,571.8 3,781.7 2,947.1
Manufactured Housing.................. 5,193.5 3,526.9 2,547.5 2,049.3 1,681.1
Recreational Vehicles(2).............. 2,036.9 1,665.4 1,315.6 -- --
Auto Fleet Leasing.................... 1,589.7 1,551.1 1,090.8 330.8 303.2
Warehouse Lending and Other........... 1,268.3 822.4 358.5 290.7 67.9
--------- --------- --------- --------- ---------
Total....................... $71,364.3 $58,406.5 $48,622.8 $39,702.5 $33,685.7
========= ========= ========= ========= =========
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(1) See the "Management's Discussion and Analysis -- Managed Basis Reporting"
section for more information on Managed Basis reporting.
(2) On January 28, 1999 the Company announced the sale of its recreational
vehicle finance business to NationsBank, N.A., a unit of BankAmerica
Corporation. See NOTE 21 to the consolidated financial statements.
Home Equity Lending. Home equity lending activities consist of originating
and servicing fixed and variable rate mortgage loans that are secured primarily
by single-family residential properties. Typically, such loans are not used for
the acquisition of homes, but are made to borrowers primarily for the purpose of
debt consolidation, including the refinancing of existing mortgage loans, home
improvements and a variety of other purposes.
Home equity loans typically have initial maturities of up to 180 months.
Variable rates were charged on approximately 13% of home equity managed
receivables outstanding at December 31, 1998. Home equity loans may be secured
by either first or second mortgages. At December 31, 1998, approximately 73% of
the aggregate net outstanding balance of home equity lending receivables was
secured by first mortgages.
Personal Lending / Retail Sales Finance. The Company's personal lending
business consists of direct origination and servicing of secured and unsecured
personal loans to individuals. Personal loans are direct consumer loans that are
generally not secured by real estate. Such loans may be secured by existing
personal property (the realizable value of which may be less than the amount of
the loan secured), including automobiles and consumer durables. Personal loan
contract terms range up to 60 months and generally require payments on an
installment basis. In general, personal loans are made for debt consolidation,
home improvements, education, vacations, taxes and purchases of automobiles,
appliances and other durable goods. Personal loans are marketed through direct
mail, advertising, referrals and the solicitation of existing retail sales
finance customers.
Retail sales finance contracts are generally for the purchase of items such
as household electronics and appliances, furniture and home improvements. These
contracts are generally purchased from retailers of such items, and provide an
important source of new loan customers. The sales finance relationship often
leads to
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other types of financing for the customer based on the individual's credit
needs. The terms of retail sales finance contracts differ based on the amount
financed and the credit quality of the customer. Generally, retail sales finance
contracts have terms ranging from 24 to 36 months.
Truck and Truck Trailer Financing and Leasing. The Company believes that it
is one of the leading independent sources of financing and leasing for
heavy-duty trucks and truck trailers in the United States. The Company provides
retail financing and leasing for purchasers and users of medium-duty trucks,
heavy-duty trucks and truck trailers, as well as wholesale financing, accounts
receivable financing and working capital loans to dealers and trucking
companies. The Company also provides financing and leasing for truck and truck
trailer purchases by truck leasing and rental companies. Truck and truck trailer
customers are principally located in the United States and, to a lesser extent,
in Canada and other countries.
The Company provides retail financing of new and used medium-duty trucks,
heavy-duty trucks and truck trailers primarily on an indirect basis through
truck and truck trailer dealers. Under an installment sales contract, the dealer
and purchaser enter into a financing arrangement for the installment purchase of
a truck or truck trailer. Subject to credit approval by the Company, the dealer
assigns the installment contract to the Company. The Company funds the
transaction by a payment to the dealer for the net amount financed in the
contract. Retail truck and truck trailer financing is also sourced directly with
truck or truck trailer purchasers.
Generally, retail financing transactions provide for terms up to 60 months
for trucks and up to 84 months for truck trailers at fixed rates of interest.
The interest rate varies depending on, among other things, the credit quality of
the purchaser, the transaction size, the term and down payment, and whether the
collateral is new or used.
Fleet leasing is provided for users of medium-duty trucks, heavy-duty
trucks and truck trailers. Most truck and truck trailer leases are
non-maintenance, open-end leases. Under such leases, the customer is responsible
for the maintenance and residual value of the vehicle and the Company generally
retains the tax depreciation benefit.
The Company also provides truck trailer rental services through short-term
operating leases. Under these leases, the Company is the owner of the equipment
and the lessee enjoys the use of the equipment for periods from a few days to
several months.
In addition, new and used vehicle wholesale financing is provided to truck
and truck trailer dealers throughout the United States and to a lesser extent
Canada. Generally, such loans are short-term with variable rates (prime rate
based) and are secured by inventory.
Credit Card Receivables. Credit card receivables consist primarily of
VISA(R) and MasterCard(R) bankcards and private label credit cards which are
marketed to the public directly and through co-operative marketing programs with
other companies. Bankcards are issued across a wide spectrum of customers with
interest rates based on customer credit profiles. The private label credit card
business has principally consisted of customized revolving credit programs for
customers of Amoco and Texaco. With the purchase of SPS in October 1998,
relationships with Radio Shack, Goodyear, Staples, Office Depot and Office Max,
among others, were added to the Company's private label program. In addition, on
January 13, 1999 the Company entered into an agreement to acquire the Shell
Proprietary Credit Card Program, which will further expand the Company's
position in the oil private label credit card sector. For more information on
this acquisition, see NOTE 21 to the consolidated financial statements.
The Company's credit card related revenues are derived from finance charges
on revolving accounts, the interchange fees resulting from merchant discounts,
annual membership and other account fees, as well as, fees earned from the sale
of insurance and other fee-based products. The Company's credit card receivables
typically bear variable (prime rate based) interest rates.
Equipment Financing and Leasing. The Company believes that it is one of the
leading independent sources of financing and leasing of new and used
construction, mining, forestry, industrial, machine tool, material handling,
communications and turf maintenance equipment and golf carts in the United
States, Canada and the United Kingdom and to a lesser extent in other countries.
Wholesale and rental fleet financing
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is offered to dealers (who may either sell or rent the equipment to end-users)
and retail financing and leasing is offered to equipment end-users.
The Company provides retail financing for the purchase of new and used
equipment through installment sales contracts purchased from dealers and
distributors, and through direct loans to purchasers. Generally, retail
financing transactions for equipment provide for maturities of up to 60 months
at fixed rates of interest. The interest rate depends on, among other things,
the credit quality of the purchaser, transaction size, term, down payment and
whether the collateral is new or used.
Leasing for end-users of equipment, either directly to the customer or
through dealers is also provided. Finance leases typically include an option for
the lessee to acquire the equipment at a set time before the termination of the
lease for a specified price (designed to offer the lessee an incentive to
purchase as part of residual risk management) and typically include an option
for the lessee to acquire the equipment at the end of the lease term for the
fair market value.
In addition, the Company provides wholesale and rental fleet financing for
selected dealers. Generally, wholesale loans are short-term loans with variable
rates (prime rate based) and are secured by inventory.
Manufactured Housing. The Company believes that it is one of the leading
providers of financing to dealers and purchasers of manufactured housing in the
United States. The Company purchases manufactured housing retail installment
contracts originated by retail dealers, originates and services direct loans to
purchasers and provides wholesale financing to approved manufactured housing
dealers. In addition, commercial business loans are offered to certain
manufactured housing dealers to provide capital to build new retail sales
centers, update existing facilities or expand into community park sales.
Retail manufactured housing finance products include (i) retail installment
contracts or direct loans for the purchase of manufactured homes; (ii) retail
installment contracts or loans on manufactured homes and amenities such as
furnishings, air conditioning, skirting, appliances and patios; and (iii) loans
covering both manufactured homes and the related land. Additionally, the Company
purchases retail loans from captive finance companies of manufacturers, which
normally carry some form of loss protection. Retail financing products are
generally secured by a lien on the home and have varying maturities, down
payments and interest rates. Original loan terms range up to 25 years. Interest
rates offered include fixed, variable and graduated rate programs.
The Company also provides revolving wholesale lines of credit to approved
manufactured housing dealers in connection with their inventory purchases of
manufactured homes from pre-approved manufacturers. Generally, wholesale loans
are short-term loans with variable rates (prime rate based) and are secured by
inventory.
Recreational Vehicle Finance. As described in NOTE 21 to the consolidated
financial statements, on January 28, 1999 the Company entered into an agreement
to sell its recreational vehicle finance operations to NationsBank, N.A., a unit
of BankAmerica Corporation. Through this business, the Company provided retail
financing for purchases of recreational vehicles as well as wholesale financing
to dealers in recreational vehicles.
Auto Fleet Leasing. The Company believes it is one of the leading providers
of auto fleet leasing and management services for corporations and
municipalities in the United States and Canada with auto and light truck fleets
of generally 100 or more vehicles. Management services, which are provided
through a centralized operation, primarily include vehicle purchasing and sales,
license and title administration, vehicle maintenance management, accident
management, fuel card management, driver expense report processing and other
tailored services to allow companies to fully outsource their fleet management
operations. Auto fleet leasing receivables have increased substantially since
1995 principally due to the July 1996 acquisition of certain auto leasing assets
of USL Capital, formerly an affiliate and Ford subsidiary, and the acquisition
of the U.S. and Canada based commercial auto fleet operation of AT&T Capital
Corporation in December 1997.
8
<PAGE> 10
Warehouse Lending and Other. The Company's other activities principally
include the following:
Warehouse Lending. The Company provides short-term financing, secured
by real estate mortgages, to mortgage companies and other mortgage lenders.
Government Guaranteed Lending -- SBA and B&I Loans. The Company
extends credit to small businesses that is partially guaranteed by the
United States government under the Small Business Administration 7(a), 504,
LowDoc, and SBAExpress programs, as well as the USDA Business and
Industrial Loan program. These programs provide financing of $50,000 to $5
million for working capital, equipment, commercial real estate, debt
refinancing and business acquisitions. The Company maintains Preferred
Lender Status in eight SBA Districts in Texas and California and it plans
to extend its Preferred Lender Status to additional SBA districts in the
upcoming year.
Employee Relocation Services. The Company provides corporations and
certain federal government agencies with assistance in employee relocation,
origination of mortgages and management and disposition of residential real
estate.
Municipal Finance. The Company provides financing for the acquisition
of real and personal property by state and local government entities,
not-for-profit (sec.501(c)(3)) corporations and qualified industrial
companies in the United States.
Emergency Roadside Assistance and Auto Club Services. The Company
offers various emergency roadside assistance and related auto club services
to consumers through major corporations, primarily automobile
manufacturers.
Related Insurance. Historically the Company has offered various credit and
non-credit insurance products to its finance customers through its existing
business segment delivery systems. The Company expanded its insurance delivery
systems through the acquisitions of The Northland Company ("Northland") in
December 1998 and Avco in January 1999, as described on the following page.
Consumer related insurance products include credit life, credit accident and
health, accidental death and dismemberment, involuntary unemployment and
personal property insurance. Commercial related insurance products offered
include commercial auto and dealers' open lot physical damage, credit life and
motor truck cargo insurance. In addition to insurance underwriting, the Company
also receives compensation for certain insurance programs underwritten by other
companies. The Company underwrites liability insurance in certain states for its
commercial auto physical damage customers.
The purchase of insurance by a finance customer is optional, with the
exception of physical damage insurance on loan collateral, which is generally
required. The customer can purchase such insurance either from the Company or an
alternative carrier chosen by the customer. Premiums for insurance coverage are
generally financed as part of the insured's finance obligation.
9
<PAGE> 11
The following table sets forth certain information relating to the
Company's insurance operations (in millions):
INSURANCE STATISTICAL DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Written Premium
Credit life, accident and other related......... $290.1 $307.1 $282.2 $240.6 $242.4
Physical damage................................. 197.8 210.3 186.2 180.3 168.7
Other casualty and liability.................... 103.7 91.3 75.9 69.6 54.5
------ ------ ------ ------ ------
Total................................... $591.6 $608.7 $544.3 $490.5 $465.6
====== ====== ====== ====== ======
Premium Revenue(2)
Credit life, accident and other related......... $210.6 $201.4 $183.8 $164.8 $148.1
Physical damage................................. 171.2 152.9 155.1 148.5 136.7
Other casualty and liability.................... 89.7 66.4 63.2 57.3 44.2
------ ------ ------ ------ ------
Total................................... $471.5 $420.7 $402.1 $370.6 $329.0
====== ====== ====== ====== ======
Investment Income................................. $ 98.5 $ 82.6 $ 71.7 $ 68.5 $ 47.3
====== ====== ====== ====== ======
Benefits Paid or Provided......................... $158.1 $145.7 $148.2 $142.5 $147.9
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) This table does not reflect any direct or indirect expenses that may be
associated with the Company's insurance operations. The Company markets its
insurance products through its consumer and commercial distribution systems
and, accordingly, does not allocate overhead and related expenses to its
insurance operations.
(2) Includes compensation for insurance policies underwritten by other
companies.
As described below, the Company enhanced existing lines of insurance
products through the December 1998 acquisition of Northland and the January 1999
acquisition of Avco. The acquisition of Northland in December 1998 did not have
a significant impact on 1998 operating results.
Northland. The addition of Northland increased the Company's property
and casualty insurance business and enhanced the Company's existing lines
of insurance and financial products. Northland operates through a
comprehensive network of general agents, independent agents, brokers and
program administrators. Historically, the Company has sold credit-related
insurance, mainly to customers of its consumer finance and commercial
finance operations. Northland's insurance products, which include
commercial auto (predominantly trucking), excess and surplus lines,
non-standard auto, surety and customs bonds, complement the Company's
existing insurance business and significantly expand its distribution
capability. Nearly half of Northland's writings are in lines of businesses
the Company serves extensively through its finance operations. Northland
and its subsidiaries operate in 50 states and the District of Columbia and
have approximately 750 employees at their St. Paul headquarters and
subsidiaries in Itasca, Illinois and Scottsdale, Arizona. Northland wrote
$418 million in net premiums in 1998 and is rated A+ (Superior) by A.M.
Best. See NOTE 6 to the consolidated financial statements for more
information on the Northland acquisition.
Avco. The acquisition of Avco expanded the Company's U.S. and
international insurance business. Avco offers insurance products to
consumers and businesses in the United States, Canada, the United Kingdom
and Australia through its affiliated finance operations, as well as to
non-credit related customers. See the "-- Company Overview" section for
more information on the Avco acquisition.
ADDITIONAL INFORMATION REGARDING THE COMPANY
ALLOWANCE FOR LOSSES, CREDIT LOSSES AND CONTRACTUAL DELINQUENCY
The Company maintains an allowance for losses on finance receivables at an
amount which it believes is sufficient to provide adequate protection against
anticipated losses in the portfolios. The allowance is determined principally on
the basis of historical loss experience, and reflects management's judgment of
additional loss potential considering future economic conditions and the nature
and characteristics of the
10
<PAGE> 12
underlying finance receivables. Additions to the allowance are generally charged
to the provision for losses on finance receivables. An analysis of changes in
the allowance for losses is contained in NOTE 7 to the consolidated financial
statements.
Finance receivables are charged to the allowance for losses when they are
deemed to be uncollectible. Additionally, the Company's policy generally
provides for charge-off of various types of accounts on a contractual basis.
Consumer direct and other installment and credit card receivables are charged to
the allowance for losses when they become 180 days contractually delinquent. All
other finance receivables are charged to the allowance for losses when any of
the following conditions occur: (i) the related security has been converted or
destroyed; (ii) the related security has been repossessed and sold or held for
sale for one year; or (iii) the related security has not been repossessed and
the receivable has become contractually delinquent for one year. A contractually
delinquent account is one on which the customer has not made payments as
contractually agreed. Recoveries on losses previously charged to the allowance
are credited to the allowance at the time recovery is collected.
The following table sets forth information as of the dates shown regarding
net credit losses, allowance for losses and contractual delinquency. This
information should be read in conjunction with the discussion of the Company's
financial condition under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
60+DAYS CONTRACTUAL DELINQUENCY, NET CREDIT LOSSES, AND
ALLOWANCE FOR LOSSES TO NET FINANCE RECEIVABLES
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
MANAGED BASIS(1)
- -----------------------------------------------------
60+Days Contractual Delinquency Amount (in
millions).......................................... $1,951.9 $1,355.1 $1,122.1 $ 755.4 $ 510.3
As a Percentage of Managed Receivables............. 2.57% 2.15% 2.11% 1.71% 1.35%
Net Credit Losses (in millions)...................... $1,566.0 $1,250.0 $ 888.6 $ 624.2 $ 508.6
As a Percentage of Average Managed Receivables..... 2.43% 2.32% 2.00% 1.70% 1.64%
OWNED BASIS
- -----------------------------------------------------
Allowance for Losses Amount (in millions)............ $1,978.7 $1,949.9 $1,563.1 $1,268.6 $1,061.6
Allowance for Losses to Net Finance Receivables...... 3.25% 3.53% 3.36% 3.20% 3.15%
Allowance for Losses to Net Credit Losses(2)......... 1.74x 1.59x 1.77x 2.03x 2.09x
</TABLE>
- ---------------
(1) See the "Management's Discussion and Analysis -- Managed Basis Reporting"
section for more information on Managed Basis reporting.
(2) The 1998 figure represents the ratio of allowance for losses to annualized
second, third and fourth quarter Owned Basis losses. The 1994-1997 amounts
reflect the allowance for losses to total Owned Basis net credit losses for
the respective year. First quarter losses are not reflected in the 1998
ratio because they were incurred before the second quarter securitization of
approximately $5.2 billion of credit card receivables. Losses incurred after
this transaction are more representative of current loss levels.
The Company's ten largest accounts at December 31, 1998 (all of which were
current at December 31, 1998) represented 1% of the Company's total managed
finance receivables outstanding. All of such accounts are secured commercial
finance accounts.
COMPETITION
The markets in which the Company operates are highly competitive. Many
competitors are large companies that have substantial capital and technological
and marketing resources. Some of these competitors are larger than the Company
and may have access to capital at a lower cost than the Company. The Company
believes that the finance charge rate is one of the primary competitive factors
in many of its markets. From time to time, competitors of the Company may seek
to compete aggressively on the basis of pricing, and the Company may lose market
share to the extent it is not willing to match competitor pricing, in order to
maintain interest margins.
11
<PAGE> 13
Domestic Consumer Finance. Traditional competitors in the domestic consumer
finance segment include independent finance companies, banks and thrift
institutions, credit unions, industrial banks, credit card issuers, leasing
companies, manufacturers and vendors. On a local level, community banks and
smaller independent finance and/or mortgage companies are a competitive force.
Some competitors have substantial local market positions; others are part of
large, diversified organizations. Because of their longstanding insured deposit
base, many banks that compete with the Company are able to offer financial
services on very competitive terms.
Competition varies across products offered. While there is considerable
competition in the home equity loan market, the market is fragmented with no
single competitor claiming a significant market share. The Company, as a
portfolio lender, maintains considerable product and delivery flexibility, which
the Company believes is a competitive advantage.
Competition in the credit card industry has been intense over the last
several years. Large money-center banks have been seeking to expand their credit
card units through, among other things, aggressive pricing, marketing and
acquisitions. In addition, many non-bank competitors specialize in certain
growth strategies, such as partnership and database marketing. The Company
addresses these competitive pressures by focusing on targeted segments of the
domestic consumer market, co-branding relationships and its private label credit
card programs.
Competition also varies by delivery system and geographic region. For
example, competitors of the Company's branch system are distinct from the
competitors of the Company's centralized lending operation.
Commercial Finance. In its commercial finance segment, the Company competes
with captive and independent finance companies, commercial banks, thrifts and
other financial institutions, leasing companies, lease brokers, manufacturers,
vendors and others.
The Company believes, based on its experience in the industry, that the
primary competitive factors in the commercial finance and leasing business are
price, product quality, risk management, new account marketing and retention of
customers through emphasis on superior customer service. In addition, the
Company believes that innovation is necessary to compete in the industry,
including enhanced customer service, specialization in certain types of
equipment, use of alternative channels of distribution and, in certain lines of
business, optimization of tax treatment between owner and user. Purchasers of
equipment financed by the Company generally seek transactions that are simple,
flexible and customer responsive.
International Finance. The competitors of the Company in the international
finance segment include those types of business entities which have
traditionally competed in domestic markets. Competition varies on the basis of
product and local jurisdiction, with commercial banks, credit card issuers,
finance companies and vendors frequently constituting an established source of
competition. The Company's experience indicates that primary competitive factors
in its international markets vary from market to market but may include product
quality, customer service, risk management, and capital resources.
Insurance. The Company also competes with international, national and
regional insurance companies, as well as self-insurance programs and captive
insurers to provide its credit related and non-credit related insurance
products. Competition in the insurance business is based upon price, product
design and service levels rendered to producers and policyholders. The insurance
business is extremely competitive, in both price and services, and no single
insurer is dominant. The Company believes that its ability to market its
insurance products through its distribution systems gives it a distinct
competitive advantage over its competitors who do not have such ability.
REGULATION
The Company is subject to regulation in most of the countries in which it
has operations, and is often required to obtain governmental licensing or
approval before commencing business. The Company's operations in the United
States are subject to extensive state and federal regulation including, but not
limited to, the following federal statutes and regulations: The Consumer Credit
Protection Act of 1968, as amended (including certain provisions thereof,
commonly known as the "Truth-in-Lending Act" or "TILA"), the
12
<PAGE> 14
Equal Credit Opportunity Act of 1974, as amended (the "ECOA"), the Fair Credit
Reporting Act of 1970, as amended (the "FCRA") and the Real Estate Settlement
Procedures Act, as amended ("RESPA"). In addition, the Company is subject to
state laws and regulations with respect to the amount of interest and other
charges which lenders can collect on loans.
In the judgment of the Company, existing statutes and regulations have not
had a materially adverse effect on the operations of the Company. However, it is
not possible to forecast the nature of future legislation, regulations, judicial
decisions, orders or regulatory interpretations or their impact on the future
business, financial condition or prospects of the Company.
Domestic Consumer Finance. The Company's domestic consumer finance segment,
including its credit card business, is generally subject to detailed supervision
by governmental authorities under legislation and regulations which generally
require licensing of the lender, limitations on the amount, duration and charges
for various categories of loans, adequate disclosure of certain contract terms
and limitations on collection practices and creditor remedies. Licenses are
renewable, and may be subject to revocation for violations of such laws and
regulations. In addition, most states in the United States have usury laws which
limit interest rates. Federal legislation in the United States preempts state
interest rate ceilings on first mortgage loans and state laws which restrict
various types of alternative home equity receivables, except in those states
which have specifically opted out of such preemption.
The Company is subject to the TILA and Regulation Z promulgated thereunder
in the United States. The TILA requires, among other things, disclosure of
pertinent elements of consumer credit transactions, including the finance
charges and the comparative costs of credit expressed in terms of an annual
percentage rate. The TILA disclosure requirements are designed to provide
consumers with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to enable them to compare
credit terms. The TILA also guarantees consumers a three-day right to cancel
certain credit transactions, including purchase money loan refinancing and home
equity loans secured by a consumer's primary residence. Section 32 of Regulation
Z mandates that applicants for real estate loans which contain certain rate and
fee amounts be provided an additional three-day waiting period prior to signing
loan documents.
In addition, the Company is subject to the ECOA which, in part, prohibits
credit discrimination on the basis of race, color, religion, sex, marital
status, national origin or age. Regulation B promulgated under ECOA restricts
the type of information that may be obtained by creditors in connection with a
credit application. It also requires certain disclosures by the lender regarding
consumer rights and requires lenders to advise applicants who are denied credit
of the reasons therefor. In instances where a loan application is denied or the
rate or charge on a loan is increased as a result of information obtained from a
consumer credit agency, the FCRA requires the lender to supply the applicant
with the name and address of the reporting agency.
RESPA has been extended to cover real estate secured loans that are
subordinated to other mortgage loans. RESPA and Regulation X thereunder require
disclosure of certain information to customers within prescribed time frames and
regulate the receipt or payment of fees or charges for services performed.
ANB is under the supervision of, and subject to examination by, the Office
of the Comptroller of the Currency ("OCC"). ANB's charter limits its activities
to credit card operations. In addition, ANB is subject to the rules and
regulations of the FDIC. ACB (formerly Associates Investment Corporation) is
regulated by the FDIC and the Utah Department of Financial Institutions. HSB is
regulated by the FDIC and the South Dakota Department of Commerce and
Regulation -- Banking Division. ANB, ACB and HSB are subject to regulation
relating to capital adequacy, leverage, loans, deposits, consumer protection,
community reinvestment, the payment of dividends, transactions with affiliates
and other aspects of operations.
Federal and state legislation seeking to regulate the maximum interest rate
and/or other charges on consumer finance receivables has been introduced in the
past, and may from time to time be changed in the future. However, it is not
possible to predict the nature of future legislation with respect to the
foregoing or its impact on the future business, financial condition or prospects
of the Company.
13
<PAGE> 15
Commercial Finance. Although most jurisdictions do not regulate commercial
finance, certain jurisdictions do require licensing of lenders, limitations on
interest rates and other charges, adequate disclosure of certain contract terms
and limitations on certain collection practices and creditor remedies. In the
United States the Company is also required to comply with certain provisions of
the ECOA which are applicable to commercial loans.
Small Business Administration loans made by the Company are governed by the
United States Small Business Act and the Small Business Investment Act of 1958,
as amended, and may be subject to the same regulations by certain states in the
United States as are other commercial finance operations. The Federal statutes
and regulations specify the types of loans and loan amounts which are eligible
for the Small Business Administration's guaranty as well as the servicing
requirements imposed on the lender to maintain Small Business Administration
guarantees.
International Finance. The international segment of the Company's finance
business is subject to diverse regulatory frameworks. Regulatory qualifications,
licensing procedures, interest rates, lending practices, and regulatory
reporting requirements vary substantially from jurisdiction to jurisdiction.
Insurance. The domestic and foreign operations of the Company are subject
to detailed regulation and supervision in each state or other jurisdiction in
which they conduct insurance related business. The laws of the various
jurisdictions establish supervisory and regulatory agencies with broad
administrative powers. Generally, such laws cover, among other things, types of
insurance that may be sold, policy forms, reserve requirements, permissible
investments, premiums charged, trade practices, limitations on the amount of
dividends payable by any insurance company and guidelines and standards with
respect to dealings between insurance companies and affiliates.
Ownership Limitations. Due to the nature of the Company's business and the
various countries in which certain of the Company's businesses are domiciled,
the acquisition of its equity securities beyond certain percentage levels may
not be permitted without regulatory approval. U.S. Federal and state banking
laws and state insurance regulations may limit ownership of the Company's equity
securities by certain entities. In addition, regulations of various governing
bodies in foreign countries where the Company or a subsidiary conducts business
also may limit an entity or affiliated entity's interest in the Company. The
information set forth herein is not meant to be complete, and any person or
entity investing in the Company should consult their own legal counsel regarding
such investment.
ITEM 2. PROPERTIES.
The furniture, equipment and other physical property owned by First Capital
and its subsidiaries represent less than 1% of total assets at December 31, 1998
and are therefore not significant in relation to total assets. Branch finance
operations are generally conducted on leased premises under operating leases
with terms not normally exceeding five years. At December 31, 1998, the Company
had approximately 2,522 offices worldwide. The Company owns its administrative
headquarters in Irving, Texas, consisting of approximately 550,000 square feet,
and a centralized processing center also located in Irving, Texas, consisting of
approximately 440,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
Various legal actions and proceedings and claims are pending or may be
instituted or asserted in the future against the Company and its subsidiaries.
Certain of the pending legal actions are, or purport to be, class actions. Some
of the foregoing matters involve or may involve compensatory, punitive or treble
damage claims which, if adversely held against the Company, would require large
expenditures or could affect the manner in which the Company conducts its
business.
In addition, the Company like many other companies that operate in
regulated businesses is from time-to-time the subject of various governmental
inquiries and investigations. The Company is currently the subject of certain
investigations and inquiries by federal and state governmental authorities
relating generally to the Company's lending practices. The Company does not have
sufficient information to predict with certainty the
14
<PAGE> 16
ultimate outcome of such investigations and inquiries or their ultimate effect,
if any, on the Company's results of operations or financial condition or the
manner in which the Company operates its business.
Legal actions, governmental inquiries and investigations are subject to
many uncertainties, and the outcome of individual matters is not predictable
with assurance. Some of the matters discussed in the foregoing paragraphs could
be decided unfavorably to the Company or the subsidiary involved and could
require the Company or such subsidiary to pay damages or make other expenditures
in amounts or a range of amounts that cannot be estimated at December 31, 1998.
The Company does not reasonably expect, based on its analysis, that any adverse
outcome from such matters would have a material effect on future consolidated
financial statements for a particular year, although such an outcome is
possible.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not required.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Class A Common Stock of the Company is listed on the New York Stock
Exchange under the symbol AFS. The high and low sales prices for the Class A
Common Stock and the dividends paid per share of the Class A Common Stock for
each full quarterly period from May 8, 1996, the date the Class A Common Stock
began trading on the New York Stock Exchange, were as follows:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK PRICE PER SHARE(1)
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1998
High..................................... 41 5/16 42 3/4 43 3/8 43 11/16
Low...................................... 32 7/8 35 11/16 28 3/32 22 21/32
Dividends per share of Class A Common
Stock and Class B Common Stock(2)...... $0.050 $0.050 $0.050 $0.055
1997
High..................................... 26 5/16 29 11/16 33 1/8 36 9/32
Low...................................... 21 1/4 21 1/16 27 5/8 29 3/8
Dividends per share of Class A Common
Stock and Class B Common Stock......... $0.050 $0.050 $0.050 $0.050
1996
High..................................... N/A 19 9/16 20 13/16 24 1/4
Low...................................... N/A 16 9/16 17 3/8 20 3/8
Dividends per share of Class A Common
Stock and Class B Common Stock......... -- -- $0.050 $0.050
</TABLE>
- ---------------
(1) Prices reflect composite exchange transactions. Prices and dividends are
adjusted to give retroactive recognition to a two-for-one split distributed
in the form of a dividend (the "Split") of the Company's Class A Common
Stock on December 23, 1998. One additional common share was issued on
December 23, 1998 for every common share held by stockholders of record as
of the close of business on December 9, 1998. The Split-adjusted initial
public offering price on May 8, 1996 would have been $14.50 per share.
(2) On April 7, 1998 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 and, correspondingly no
dividends were paid on Class B Common Stock after such date.
As of February 11, 1999, stockholders of record of the Company included
approximately 198,281 holders of the Class A Common Stock. See NOTE 1 of the
consolidated financial statements regarding Ford's Spin-Off of its interest in
the Company.
The Company relies primarily on dividends and other intercompany fees from
its subsidiaries for the payment of dividends to holders of its Class A Common
Stock. The terms of the agreements governing certain outstanding indebtedness of
Associates Corporation of North America ("Associates"), First Capital's
principal domestic operating subsidiary, contain certain limitations on the
payment of dividends and certain other transfers of funds to the Company. The
principal restriction, which is contained in an issue of debt with a stated
maturity of March 15, 1999, generally limits payments of cash dividends on
Associates common stock in any year to not more than 50% of consolidated net
earnings for such year, subject to certain exceptions, plus increases in
contributed capital and extraordinary gains. Future issues of Associates debt
may also contain such a restriction. In addition, the Company's banking
subsidiaries, ANB, ACB and HSB, and the Company's insurance subsidiaries may pay
dividends and make certain other transfers of funds to the Company only up to
amounts permitted by applicable banking and insurance regulations, respectively,
and the repatriation of funds from the Company's foreign subsidiaries may be
subject to withholding taxes or other restrictions.
In 1998, the Company issued 115,000 (Split adjusted) restricted shares of
Class A Common Stock to seven employees. The Company awarded these shares to
such individuals contingent on their continued employment with the Company and
such shares vest on the fifth anniversary of the date of issuance. The
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<PAGE> 18
Company believes the issuance of the above shares of common stock was exempt
from the registration requirements of the Securities Act of 1933 (the "Act")
pursuant to Section 4(2) of the Act.
ITEM 6. SELECTED FINANCIAL DATA -- OWNED BASIS.
The following table sets forth selected consolidated financial information
regarding the Company's financial position and operating results which has been
extracted from the Company's consolidated financial statements for the five
years ended December 31, 1998. The information contained herein is presented on
a basis consistent with amounts reported in the historical financial statements
on an Owned Basis and should be read in conjunction with Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and accompanying notes included elsewhere
in this report (dollar amounts in millions):
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Results of Operations
Total revenue........................................ $ 9,376.8 $ 8,278.6 $ 7,098.2 $ 6,107.2 $ 4,925.8
Finance charge revenue............................... 7,910.4 7,560.2 6,481.0 5,560.8 4,445.2
Interest expense..................................... 3,196.7 2,775.2 2,456.0 2,177.9 1,657.3
Net interest margin.................................. 4,713.7 4,785.0 4,025.0 3,382.9 2,787.9
Operating expenses................................... 2,798.0 2,339.6 2,002.9 1,754.7 1,456.1
Provision for losses................................. 1,283.5 1,378.1 1,086.5 834.0 647.1
Insurance benefits paid.............................. 158.1 145.7 148.2 142.5 147.9
Earnings before provision for income taxes........... 1,940.5 1,640.0 1,404.6 1,198.1 1,017.4
Provision for income taxes........................... 717.0 608.3 547.6 475.0 414.1
Net earnings......................................... 1,223.5 1,031.7 857.0 723.1 603.3
Basic earnings per share(1).......................... 1.76 1.49 1.24 1.04
Diluted earnings per share(1)........................ 1.75 1.48 1.23 1.04
Balance Sheet Data
Finance receivables, net of unearned finance
income............................................. $60,939.0 $55,215.6 $46,512.9 $39,702.5 $33,685.7
Allowance for losses................................. 1,978.7 1,949.9 1,563.1 1,268.6 1,061.6
Total assets......................................... 75,175.4 57,232.7 48,268.4 41,303.9 35,283.5
Short-term debt (notes payable)...................... 25,709.8 20,970.6 17,075.2 13,747.3 12,431.9
Long-term debt(3).................................... 37,596.7 28,228.0 24,029.5 21,372.6 17,306.2
Stockholders' equity................................. 8,526.5 6,268.6 5,437.5 4,801.1 4,436.8
Stockholders' equity per share(1)(2)................. 11.72 9.05 7.84 6.92
Selected Data and Ratios
Total debt to equity................................. 7.4:1 7.8:1 7.5:1 7.2:1 6.6:1
Total debt to adjusted equity(5)..................... 8.1:1 8.8:1 8.8:1 9.0:1 8.5:1
Total debt to tangible equity........................ 9.5:1 9.5:1 9.7:1 9.9:1 9.6:1
Return on average assets(4).......................... 1.90% 1.95% 1.93% 1.89% 1.85%
Return on average equity(4).......................... 17.94 17.78 17.09 15.66 14.70
Return on average adjusted equity(4)(5).............. 20.30 21.10 20.94 20.26 19.66
Return on average tangible equity(4)................. 22.03 22.21 22.63 21.90 21.71
Allowance for losses to net finance receivables...... 3.25 3.53 3.36 3.20 3.15
Allowance for losses to net credit losses(6) 1.74x 1.59x 1.77x 2.03x 2.09x
Number of employees.................................... 28,662 22,582 18,984 16,647 15,318
Number of branch offices
Domestic............................................. 1,478 1,568 1,634 1,543 1,472
International........................................ 1,044 697 499 404 329
--------- --------- --------- --------- ---------
Total.......................................... 2,522 2,265 2,133 1,947 1,801
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Due to the change in the Company's capital structure as a result of the
Initial Public Offering, share and per share data for 1994 is not comparable
to, or meaningful in the context of, future periods. In addition, per share
information has been adjusted to give retroactive recognition to the
December 23, 1998 stock dividend described in NOTE 19 to the consolidated
financial statements.
(2) Based on the basic shares outstanding for each year.
(3) Includes current portion of long-term debt.
(4) During the first quarter of 1996, the Company paid a dividend to Ford
totaling $1.85 billion, of which $1.75 billion was in the form of an
intercompany interest bearing note. The Company repaid the $1.75 billion
intercompany note with Ford during the second quarter of 1996 and received
$1.85 billion as a result of the initial public offering. The amounts
presented for 1996 exclude the effect of these transactions. Including the
impact of these transactions, the Company's return on average assets, on
average equity, on average adjusted equity and on average tangible equity
for the year ended December 31, 1996 would have been 1.89%, 18.31%, 22.86%,
and 24.91%, respectively.
(5) Excludes the push-down goodwill created by Ford's acquisition of foreign
affiliates of the Company in 1989.
(6) The 1998 figure represents the ratio of allowance for losses to annualized
second, third and fourth quarter Owned Basis losses. The 1994-1997 amounts
reflect the allowance for losses to total Owned Basis net credit losses for
the respective year. First quarter losses are not reflected in the 1998
ratio because they were incurred before the second quarter securitization of
approximately $5.2 billion of credit card receivables. Losses incurred after
this transaction are more representative of current loss levels.
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company is a leading diversified finance organization, which provides
finance, leasing and related services to individual consumers and businesses.
The Company's revenues principally consist of finance charge income and, to a
lesser extent, insurance premiums and investment and other fee income. The
Company's primary expenses are interest expense from the funding of its finance
business, provision for loan losses and operating expenses. A principal factor
determining the profitability of the Company is finance charge revenue less
interest expense ("net interest margin").
The following discussion and analysis provides information that management
believes to be relevant to understanding the Company's consolidated financial
condition and results of operations. This discussion should be read in
conjunction with the consolidated financial statements of the Company and the
related notes thereto.
MANAGED BASIS REPORTING
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 sale and receivables sold
with servicing retained ("Managed Basis"). Unless specifically identified as
managed or Managed Basis, the financial information contained herein is
presented on a basis consistent with the amounts reported in the historical
financial statements on an Owned Basis. On an Owned Basis, finance charges and
service fee income, interest expense and credit losses on the held for sale and
servicing portfolios 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 neither had been held for sale nor sold. Because an economic
interest is retained in all receivables managed by the Company, management
believes the discussion of pro forma Managed Basis information is useful in
evaluating the Company's operating performance.
The following table contains selected Owned Basis and pro forma Managed
Basis financial information (in millions):
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
-------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
OWNED PRO FORMA MANAGED OWNED PRO FORMA MANAGED
BASIS ADJUSTMENTS BASIS BASIS ADJUSTMENTS BASIS
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Finance charges........... $ 7,910.4 $ 1,304.6 $ 9,215.0 $ 7,560.2 $ 272.0 $ 7,832.2
Insurance premiums........ 471.5 -- 471.5 420.7 -- 420.7
Investment and other
income.................. 994.9 (651.9) 343.0 297.7 (80.1) 217.6
--------- --------- --------- --------- -------- ---------
Total revenue... 9,376.8 652.7 10,029.5 8,278.6 191.9 8,470.5
--------- --------- --------- --------- -------- ---------
Interest expense.......... 3,196.7 273.5 3,470.2 2,775.2 171.0 2,946.2
Operating expenses........ 2,798.0 -- 2,798.0 2,339.6 -- 2,339.6
Provision for losses...... 1,283.5 379.2 1,662.7 1,378.1 20.9 1,399.0
Insurance benefits paid or
provided................ 158.1 -- 158.1 145.7 -- 145.7
--------- --------- --------- --------- -------- ---------
Total
expenses...... 7,436.3 652.7 8,089.0 6,638.6 191.9 6,830.5
--------- --------- --------- --------- -------- ---------
Earnings before provision
for income taxes........ 1,940.5 -- 1,940.5 1,640.0 -- 1,640.0
Provision for income
taxes................... 717.0 -- 717.0 608.3 -- 608.3
--------- --------- --------- --------- -------- ---------
Net earnings.............. $ 1,223.5 $ -- $ 1,223.5 $ 1,031.7 $ -- $ 1,031.7
========= ========= ========= ========= ======== =========
Net Finance Receivables
End of period........... $60,939.0 $10,425.3 $71,364.3 $55,215.6 $3,190.9 $58,406.5
Average................. $57,253.1 $ 7,252.7 $64,505.8 $51,110.5 $2,789.2 $53,899.7
</TABLE>
18
<PAGE> 20
Pro forma information is not presented above for the year ended or at
December 31, 1996 because the difference between Owned and Managed Basis
financial information for this period was not significant.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS OF OPERATIONS
The following table summarizes the Company's earnings and related data
(dollars in millions):
EARNINGS AND RELATED DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Earnings before provision for income taxes.................. $1,940.5 $1,640.0 $1,404.6
Net earnings................................................ 1,223.5 1,031.7 857.0
Change in net earnings
Amount.................................................... $ 191.8 $ 174.7 $ 133.9
Percent................................................... 18.6% 20.4% 18.5%
Basic earnings per share.................................... $ 1.76 $ 1.49 $ 1.24
Diluted earnings per share.................................. 1.75 1.48 1.23
Return
On average managed assets(1).............................. 1.78% 1.86% 1.89%
On average equity(1)...................................... 17.94 17.78 17.09
On average adjusted equity(1)(2).......................... 20.30 21.10 20.94
</TABLE>
- ---------------
(1) During the first quarter of 1996, the Company paid a $1.85 billion dividend
to Ford, of which $1.75 billion was in the form of an intercompany interest
bearing note. The Company repaid the note during the second quarter of 1996
and received $1.85 billion in proceeds from its initial public offering. The
amounts presented for 1996 exclude the effect of these transactions.
(2) Excludes the push-down goodwill created by Ford's acquisition of foreign
affiliates of the Company in 1989.
Earnings before provision for income taxes and net earnings increased in
each of the years ended December 31, 1998, 1997 and 1996. The principal factor,
which influenced the changes in the Company's net earnings in each period was an
increase in earning assets. The increase in earning assets directly affects net
interest margin, operating expenses and provision for loan losses, all of which
are described in the sections that follow.
The Company derived approximately 24% of its earnings before provision for
income taxes in 1998 from its international finance segment. Management believes
that the overall economic factors and trends affecting the profitability of the
foreign subsidiaries have not materially affected the profitability of the
Company taken as a whole. See the discussion of the impact of foreign currency
translation in the "-- Market Risk" section that follows and in NOTE 16 to the
Company's consolidated financial statements.
NET INTEREST MARGIN -- MANAGED BASIS
The Company's Managed Basis net interest margin was as follows (dollars in
millions):
NET INTEREST MARGIN -- MANAGED BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------------
AMOUNT % OF AMR(1) AMOUNT % OF AMR(1) AMOUNT % OF AMR(1)(2)(3)
-------- ----------- -------- ----------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Domestic Consumer Finance
Segment....................... $3,505.0 10.27% $3,251.7 10.67% $2,723.1 10.81%
Commercial Finance Segment...... 983.9 4.14 849.6 4.34 675.6 4.20
International Finance Segment... 1,255.9 19.02 784.7 20.34 664.6 21.09
-------- -------- --------
Total Company......... $5,744.8 8.91% $4,886.0 9.06% $4,063.3 9.20%
======== ======== ========
</TABLE>
- ---------------
(1) Expressed as a percentage of Average Managed Receivables ("AMR") of the
respective segment for the period.
(2) The 1996 net interest margin excludes 0.05% non-recurring interest costs
related to the 1996 public offering (the "IPO") of the Company's Class A
Common Stock.
(3) Excludes the effect of the IPO.
19
<PAGE> 21
Managed Basis net interest margin increased on a dollar basis in each
segment primarily due to growth in average managed finance receivables. Managed
Basis net interest margin expressed as a percentage of average managed
receivables outstanding during each period declined in each segment primarily
due to declining finance charge yields, partially offset by declining borrowing
rates.
FINANCE CHARGES -- MANAGED BASIS
The finance charge revenue and yield for the Company were as follows
(dollars in millions):
FINANCE CHARGES -- MANAGED BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Finance Charge Revenue...................................... $9,215.0 $7,832.2 $6,578.1
Yield(1).................................................... 14.29% 14.53% 14.81%
</TABLE>
- ---------------
(1) Calculated as finance charge revenue as a percentage of average managed
finance receivables outstanding for the indicated period.
Finance charge revenue increased, on a dollar basis, primarily due to the
growth in the average managed finance receivables during each period. The
principal factors which influence the trend of finance charge yields are (i) the
composition of the finance receivable portfolios (i.e., "product mix"); (ii) the
interest rate environment; and (iii) the level of business competition. A
generally declining interest rate environment, changes in product mix and
increased competition were the primary causes of the movements in finance charge
yield from 1996 to 1998.
INTEREST EXPENSE -- MANAGED BASIS
Total dollars of managed interest expense increased in each of the three
years ended 1998. In each year the increase was principally due to higher
average outstanding debt as a result of the Company's growth in net finance
receivables. The increase in Managed Basis interest expense as a result of
growth in 1998 and 1997 was partially offset by a decline in the Company's
average borrowing rate in each period. Declines in the Company's average
borrowing rate were primarily caused by decreasing market interest rates and by
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
each period.
INSURANCE PREMIUM REVENUE
Insurance premium revenue was $471.5 million, $420.7 million and $402.1
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Insurance premium revenue, which is earned over the coverage term, increased
$50.8 million (12.1%) in 1998, $18.6 million (4.6%) in 1997, and $31.5 million
(8.5%) in 1996. The insurance operation is engaged in underwriting
credit-related and other specialized insurance products for customers of the
domestic consumer, commercial and international business segments. Therefore,
insurance sales, and resulting revenue, are largely dependent on business
activities and volume. The increase in insurance revenue in each of the years
was principally caused by increased sales of insurance products associated with
the increase in net finance receivables outstanding. The Company expanded its
insurance operations with the December 1998 acquisition of The Northland Company
and the January 1999 acquisition of the insurance operations of Avco Financial
Services, Inc. These acquisitions did not have a significant impact on 1998
operating results. See NOTE 6 and NOTE 21 to the consolidated financial
statements for more information about these acquisitions.
INVESTMENT AND OTHER INCOME -- MANAGED BASIS
Managed Basis investment and other income for the years ended December 31,
1998, 1997 and 1996 was $343.0 million, $217.6 million and $180.1 million,
respectively. Managed Basis investment income is derived from realized and
unrealized returns on the Company's investments in trading securities and
realized returns
20
<PAGE> 22
on investments in available-for-sale securities, both of which are principally
owned by the Company's insurance operation. Managed Basis other income is
primarily derived from fee-based services, such as employee relocation services,
emergency roadside assistance, auto club services, point of sale transaction
services and inbound telemarketing services. The increase in investment and
other income from 1996 through 1998 was principally due to higher investment
income due to the growth in the Company's investment portfolio and growth in
fee-based businesses.
OPERATING EXPENSES
Operating expenses, on an Owned and Managed Basis, were as follows (dollars
in millions):
OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
AMOUNT % AMR AMOUNT % AMR AMOUNT % AMR
-------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and Benefits................ $1,290.1 2.00% $1,110.5 2.06% $ 946.0 2.13%
Advertising.......................... 215.4 0.33 176.8 0.33 146.6 0.33
Data Processing...................... 203.0 0.32 178.1 0.33 147.0 0.33
Occupancy............................ 198.3 0.31 160.2 0.30 130.5 0.29
Other................................ 891.2 1.38 714.0 1.32 632.8 1.43
-------- ---- -------- ---- -------- ------
Total...................... $2,798.0 4.34% $2,339.6 4.34% $2,002.9 4.51%
======== ==== ======== ==== ======== ======
Managed Basis Efficiency Ratio....... 43.7% 43.5% 44.5%
==== ==== ======
</TABLE>
Total operating expenses on a dollar basis increased from 1996 to 1998,
principally due to increased levels of business volume and outstanding
receivables in each of the years. As a percentage of average managed
receivables, total operating expenses decreased from 1996 to 1997 and remained
flat in 1998. In addition, the Company's total managed operating efficiency, as
measured by the ratio of total operating expenses to Managed Basis revenues net
of Managed Basis interest expense and insurance benefits paid or provided (the
"Managed Basis Efficiency Ratio") improved from 1996 to 1997 but declined
slightly in 1998. The 1998 decline is primarily due to a decline in Managed
Basis net interest margin during 1998.
ALLOWANCE FOR LOSSES, LOSSES AND ASSET QUALITY
The Company maintains an allowance for losses on finance receivables at an
amount, which it believes is sufficient to provide adequate protection against
losses in its portfolios. The allowance is determined principally on the basis
of historical loss experience, and reflects management's judgment of additional
loss potential considering future economic conditions and the nature and
characteristics of the underlying finance receivables. For purposes of measuring
business segment profitability, each business unit establishes an allowance for
loan loss when a loan is made through a charge to the provision for losses. The
Company manages its allowance for losses on finance receivables on a
Company-wide basis taking into account actual and expected losses in each
business unit, the relationship of the allowance for losses to net finance
receivables outstanding and the relationship of the allowance for losses to
total net credit losses. The resulting charge is included in the provision for
losses.
Finance receivables are charged to the allowance for losses when they are
deemed to be uncollectible. Additionally, the Company's policy provides for
charge-off of various types of accounts on a contractual basis described as
follows: consumer direct and other installment and credit card receivables are
charged to the allowance for losses when they become 180 days contractually
delinquent. All other finance receivables are charged to the allowance for
losses when any of the following conditions occur: (i) the related security has
been converted or destroyed; (ii) the related security has been repossessed and
sold or held for sale for one year; or (iii) the related security has not been
repossessed and the receivable has become one year contractually delinquent. A
contractually delinquent account is one on which the customer has not made
payments as contractually agreed. Finance charge accruals are suspended on
accounts when they become
21
<PAGE> 23
60 days contractually delinquent. The accrual is resumed when the loan becomes
contractually current. At December 31, 1998 and 1997, net finance receivables on
which revenue was not accrued approximated $1.5 billion and $1.2 billion,
respectively. The interest income that would have been recorded in 1998 if these
nonaccruing receivables had been current was approximately $34 million.
The balance of the allowance for losses was principally influenced by the
provision for losses and by net credit loss experience. Additions to the
allowance, due to growth in finance receivables, were generally charged to the
provision for losses at the time the growth occurred. Losses were charged to the
allowance as incurred and recoveries on losses previously charged to the
allowance were credited to the allowance at the time the recovery was collected.
The components of the changes in the allowance for losses were as follows
(dollars in millions):
COMPONENTS OF CHANGES IN THE ALLOWANCE FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at Beginning of Period.............................. $ 1,949.9 $ 1,563.1 $ 1,268.6
Provision for losses...................................... 1,283.5 1,378.1 1,086.5
Recoveries on receivables charged off..................... 237.7 224.9 147.2
Losses sustained.......................................... (1,424.6) (1,454.0) (1,032.5)
--------- --------- ---------
Net credit loss experience............................. (1,186.9) (1,229.1) (885.3)
--------- --------- ---------
Reserves of receivables sold(1)........................... (334.7) -- --
Reserves of acquired businesses and other................. 266.9 237.8 93.3
--------- --------- ---------
Balance at End of Period.................................... $ 1,978.7 $ 1,949.9 $ 1,563.1
========= ========= =========
Allowance for Losses to Net Finance Receivables............. 3.25% 3.53% 3.36%
Loss Coverage Ratio(2)...................................... 1.74x 1.59x 1.77x
</TABLE>
- ---------------
(1) The reserves related to receivables sold during 1997 and 1996 were not
significant.
(2) The 1998 figure represents the ratio of allowance for losses to annualized
second, third and fourth quarter Owned Basis losses. The 1997 and 1996
amounts reflect the allowance for losses to total Owned Basis net credit
losses for the respective year. First quarter losses are not reflected in
the 1998 ratio because they were incurred before the second quarter
securitization of approximately $5.2 billion of credit card receivables.
Losses incurred after this transaction are more representative of current
loss levels.
The allowance for losses as a percent of net finance receivables increased
in 1997 and declined in 1998. The decline in 1998 was principally due to the
securitization of approximately $5.2 billion of the Company's U.S. bankcard
credit card receivables to a master trust. This transaction contributed to a
general shift in product mix during 1998 towards more secured portfolios.
Secured portfolios generally have lower losses and therefore lower allowance
requirements than unsecured portfolios.
The loss coverage ratio (allowance for losses as a percent of net credit
losses) decreased in 1997 and increased in 1998, reflecting the aforementioned
U.S. bankcard securitization transaction. Management believes the allowance for
losses at December 31, 1998 is sufficient to provide adequate protection against
losses in its portfolios. Although the allowance for losses on finance
receivables reflected in the Company's consolidated balance sheet at December
31, 1998 is considered adequate by the Company's management, there can be no
assurance that this allowance will prove to be adequate over time to cover
ultimate losses in connection with the Company's finance receivables. This
allowance may prove to be inadequate due to unanticipated adverse changes in the
economy or discrete events adversely affecting specific customers or industries.
The Company's results of operations and financial condition could be materially
adversely affected to the extent that the Company's allowance is insufficient to
cover such changes or events.
22
<PAGE> 24
The Company's Managed Basis 60+days contractual delinquency and Managed
Basis net credit losses as a percentage of average managed receivables ("AMR")
for each of these years are set forth in the following table (dollars in
millions):
MANAGED BASIS CONTRACTUAL DELINQUENCY AND NET CREDIT LOSSES
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
60+Days Contractual Delinquency
Domestic Consumer Finance Segment......................... 3.55% 2.97% 2.95%
Commercial Finance Segment................................ 1.24 1.04 1.03
International Finance Segment............................. 2.58 1.93 1.62
Total............................................. 2.57% 2.15% 2.11%
Total dollars delinquent.......................... $1,951.9 $1,355.1 $1,122.1
Net Credit Losses to AMR
Domestic Consumer Finance Segment......................... 3.62% 3.56% 3.04%
Commercial Finance Segment................................ 0.48 0.37 0.34
International Finance Segment............................. 3.26 2.42 2.14
Total............................................. 2.43% 2.32% 2.00%
Total dollars..................................... $1,566.0 $1,250.0 $ 888.6
</TABLE>
The domestic consumer finance segment's managed net credit losses to AMR
increased from 1996 to 1997 primarily due to increased consumer bankruptcy
levels. While the rate of increase in consumer bankruptcy levels slowed in 1998,
it was a primary factor contributing to higher losses in 1998. The growth in the
Company's private label receivable portfolio, due primarily to the SPS
acquisition in the fourth quarter of 1998, also contributed to higher 1998
losses. Private label receivables are unsecured and typically have higher losses
than the segment's secured portfolios. These loss increases in 1998 were
partially offset by the lower loss rates associated with the strong growth in
the home equity lending portfolio during 1998. Home equity lending receivables
typically have lower losses than unsecured receivable portfolios.
The commercial finance segment's managed net credit losses to AMR increased
in 1998 over 1997 and 1996 levels primarily due to higher losses in the retail
manufactured housing portfolio and in the truck and truck trailer financing
portfolios.
The international finance segment's managed net credit losses to AMR
increased in each comparable period. The increase in 1998 was primarily driven
by the acquisition of Beneficial Canada Holdings Incorporated during the first
quarter of 1998, and the acquisition of DIC Finance Co. Ltd., in the second
quarter of 1998. These acquisitions resulted in a shift in segment product mix
towards more unsecured portfolios. Unsecured portfolios typically have higher
losses than secured portfolios. Rising bankruptcy levels also contributed to the
1998 segment increase and was the primary cause of the increase in 1997 compared
to 1996.
INSURANCE BENEFITS PAID OR PROVIDED
Insurance benefits paid or provided were $158.1 million in 1998, $145.7
million in 1997 and $148.2 million in 1996. Benefits paid or provided are
influenced by the amount of insurance in force, underwriting standards, loss
experience, term of coverage and product mix. Benefits paid or provided
increased in 1998 as compared to 1997 and 1996, primarily as a result of more
insurance in force.
23
<PAGE> 25
PROVISION FOR INCOME TAXES
The Company's provision for income taxes and effective tax rates were as
follows (dollars in millions):
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
EFFECTIVE EFFECTIVE EFFECTIVE
TAX TAX TAX
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. statutory rate...................... $679.2 35.0% $574.0 35.0% $491.6 35.0%
State income taxes..................... 27.1 1.4 22.6 1.4 20.5 1.5
Non-deductible goodwill................ 17.9 0.9 6.1 0.4 7.1 0.5
Foreign rates in excess of U.S. rate
and other........................... (7.2) (0.3) 5.6 0.3 28.4 2.0
------ ---- ------ ---- ------ ----
Provision for income taxes............... $717.0 37.0% $608.3 37.1% $547.6 39.0%
====== ==== ====== ==== ====== ====
</TABLE>
The effective tax rate decreased in 1997 and 1998 principally due to an
increase in the utilization of foreign tax credits available to the Company. The
available foreign tax credits primarily related to estimated taxes paid or
accrued by the Company on its Japan-based earnings. In addition, the Company was
allocated $23 million and $34 million in foreign tax credits under the tax
sharing agreement with Ford in 1998 and 1997, respectively.
The increase in non-deductible goodwill in 1998 is due primarily to the
acquisition of the stock of Beneficial Canada Holdings Incorporated as described
in NOTE 6 to the consolidated financial statements.
The Company provides income taxes on its foreign earnings at the statutory
tax rate in effect for the applicable country where such earnings arise. The
principal foreign earnings of the Company arise from its operations in Japan,
where the statutory tax rate is significantly higher than the U.S. statutory tax
rate.
FINANCIAL CONDITION
GROWTH IN MANAGED FINANCE RECEIVABLES
The Company experienced growth in managed finance receivables in 1998 and
1997 as follows (dollars in millions):
GROWTH IN MANAGED FINANCE RECEIVABLES
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
--------------------------------------------------------
1998 1997
--------------------------- --------------------------
INCREASE FROM INCREASE FROM
PRIOR YEAR PRIOR YEAR
--------------- --------------
BALANCE AMOUNT % BALANCE AMOUNT %
--------- --------- --- --------- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Domestic Consumer Finance............... $37,179.4 $ 4,841.2 15 $32,338.2 $5,193.1 19
Commercial Finance...................... 25,722.7 3,932.4 18 21,790.3 3,737.3 21
International Finance................... 8,462.2 4,184.2 98 4,278.0 853.3 25
--------- --------- --------- --------
Total Managed Receivables..... $71,364.3 $12,957.8 22 $58,406.5 $9,783.7 20
========= ========= ========= ========
</TABLE>
Approximately 60% and 63% of the growth in managed net finance receivables
during 1998 and 1997, respectively, resulted from internal sources, principally
through increased penetration in its existing markets, entry into new markets
and offering of new products. The remaining growth portion, in both years, was
from the acquisition of finance receivables and businesses.
24
<PAGE> 26
DEBT
Total outstanding debt was $63.3 billion and $49.2 billion at December 31,
1998 and 1997, respectively. Such amounts of debt reflect net increases of $14.1
billion (28.7%) in 1998 and $8.1 billion (19.7%) in 1997. In both years, the
increase was primarily a result of the growth in net finance receivables. At
December 31, 1998 and 1997, short-term debt, including the current portion of
long-term debt, as a percent of total debt was 53% and 52%, respectively. The
current portion of long-term debt at December 31, 1998 and 1997 was $7.7 billion
and $4.7 billion, respectively.
STOCKHOLDERS' EQUITY
Stockholders' equity increased to $8.5 billion in 1998 from $6.3 billion in
1997. This increase was primarily due to 1998 net earnings and the issuance of
$1.3 billion of Class A Common Stock in November of 1998. This increase in
stockholders' equity was partially offset in 1998 and 1997 by dividends paid of
$142.0 million and $138.6 million, respectively and unrealized foreign currency
translation losses of $51.1 million and $54.6 million, respectively. The effects
of foreign currency movements were partially offset through the Company's use of
derivative financial instruments as described in NOTE 16 to the consolidated
financial statements. Stockholders' equity was also adjusted in 1998 and 1997 by
net unrealized (losses)/gains of $(14.7) million and $5.0 million, respectively,
related to investments in available-for-sale securities.
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 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 and, to a
lesser extent, asset securitizations. The Company's foreign subsidiaries are
principally financed through a combination of private and public debt borrowings
in the transactional currency and through fully hedged intercompany borrowings.
At December 31, 1998 and 1997, the Company had short- and long-term debt
outstanding of $63.3 billion and $49.2 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 primary
domestic operating subsidiary, Associates Corporation of North America
("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
year ended December 31, 1998 and 1997, the Company raised term debt aggregating
$13.3 billion and $8.2 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 December 31, 1998, these credit facilities
totaled $19.1 billion and were allocated to provide at least 75% backup coverage
of the Company's commercial paper borrowings and utilized uncommitted lines of
credit. See NOTE 9 to the Company's consolidated financial statements.
25
<PAGE> 27
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 its home equity and credit card asset-backed classes.
The Company has entered into various support agreements on behalf of its
foreign subsidiaries. Under these support agreements, the Company has either
guaranteed specific issues of such subsidiaries' debt or agreed to supervise
operations in a responsible manner and to provide additional support on a
lender's reasonable request. See NOTES 9, 10 and 16 to the Company's
consolidated financial statements for a further description of these borrowings
and currency hedging activities.
MARKET RISK
The risk management discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially from these projected results due to changes in the Company's product
and debt mix and developments in the global financial markets. The analytical
methods used by the Company to assess and mitigate these risks should not be
considered projections of future events or operating performance.
The Company is exposed to a variety of market risks, including the effects
of movements in interest rates and foreign currency. Interest rate and foreign
exchange rate exposures are monitored and managed by the Company as an integral
part of its overall risk management program. The principal goal of the Company's
risk management program is to reduce the potential impact of interest rate and
foreign exchange exposures on the Company's financial position and operating
performance. The Company utilizes derivative instruments, including foreign
currency forward exchange agreements and currency swaps as well as interest rate
swap and treasury lock agreements, as part of its overall risk management
program. See NOTES 2 and 16 of the consolidated financial statements for a
further discussion of the Company's use of derivative financial instruments. The
Company also believes that its overall balance sheet structure has repricing and
cash flow characteristics that mitigate the impact of interest rate movements.
INTEREST RATE RISK
Interest rate risk is measured and controlled through the use of static gap
analysis and financial forecasting, both of which incorporate assumptions as to
future events. The Company's gap position is defined as the sum of floating rate
asset balances and scheduled principal payments on fixed rate assets, less the
sum of floating rate liability balances and scheduled principal payments on
fixed rate liabilities. The Company measures its gap position at various time
horizons, ranging from one month to five years. The Company seeks to maintain a
negative three- and six-month gap, and a positive one-year gap.
The Company completed the acquisition of Avco on January 6, 1999. The
December 31, 1998 computations set forth in this section have been adjusted to
give effect to the Company's investment activities in connection with the
raising of the $3.9 billion purchase price of Avco, which activities were
initiated prior to December 31, 1998. At December 31, 1998 and 1997 the one-year
gap was a positive 4% and 8%, respectively. The Company's positive one-year gap
target range indicates that a greater percentage of assets than liabilities
reprice within a one-year time frame.
In addition to the gap analysis, the Company uses a simulation model to
evaluate the impact on earnings under a variety of scenarios. These scenarios
may include a change in the absolute level of interest rates, the shape of the
yield curve, prepayments, interest rate spread relationships and changes in the
volumes and rates of various asset and liability categories. For an immediate 1%
increase in rates, projected annual after-tax earnings would have declined by
approximately $1 million at December 31, 1998 and 1997. An immediate 1% rise in
interest rates is a hypothetical rate scenario, used to calibrate risk, and does
not currently represent management's view of future market developments.
26
<PAGE> 28
For purposes of the United States Securities and Exchange Commission
disclosure requirements, the Company has also performed an enterprise-wide value
at risk ("VAR") analysis of the Company's financial assets and liabilities and
their exposure to changes in interest rates. The VAR was calculated using an
historical simulation risk model to calculate changes in earnings due to changes
in interest rates on all significant on- and off-balance sheet exposures. The
simulation generates monthly interest rate scenarios over a forecast horizon of
12 months. The VAR analysis calculates the potential after-tax earnings at risk
associated from changes in interest rates, within a 95% confidence level. The
model assumes interest rates are normally distributed and draws volatilities
from various market sources. At December 31, 1998 and 1997, interest rate
movements would affect annual after-tax earnings by less than $12 million and
$11 million, respectively, as calculated under the VAR methodology.
FOREIGN CURRENCY RISK
The Company is exposed to foreign currency risk from changes in the value
of underlying assets and liabilities of its non-United States denominated
foreign investments. The Company has employed a variety of risk management tools
such as borrowing and lending in the local currencies as well as using
derivative instruments to hedge its investment in foreign subsidiaries. The
Company has also performed a VAR analysis on the Company's exposure to changes
in foreign currency exchange rates. The VAR is calculated using an historical
simulation model to calculate changes in earnings from foreign currency risk on
all significant on-and off-balance sheet exposures. The simulation generates
interest rate scenarios over a 12-month horizon and calculates the potential
after-tax earnings at risk associated with foreign currency fluctuations, with a
95% confidence level (as required under applicable United States Securities and
Exchange Commission rules). The model assumes currency prices are normally
distributed and draws volatility and cross currency correlation data from JP
Morgan Risk Metrics(TM). At December 31, 1998 and 1997, currency volatility
would affect annual after-tax earnings by less than $11 million and $4 million,
respectively, as calculated under the VAR methodology.
The Company utilizes a wide variety of risk management methods, including
those discussed above, and believes that no single risk model provides a
reliable method of monitoring and controlling risk. While these models are
relatively sophisticated, the quantitative risk information generated is limited
by the model parameters. Therefore, such models do not substitute for the
experience or judgment of the Company's management to adjust positions and
revise strategies as deemed necessary.
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 the Company's 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 and testing
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
27
<PAGE> 29
either are or will be Year 2000 compliant in a timely manner. On January 6, 1999
the Company purchased Avco. The Company expects all Avco IT applications to be
Year 2000 compliant by the third quarter of 1999.
The Company's Non-IT efforts include ensuring third party suppliers,
embedded systems and the Company's larger commercial borrowers are Year 2000
compliant. 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. Initial phases of contingency plans are being
activated for these suppliers and borrowers who have not provided the Company
with certification of their Year 2000 Compliance.
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.
Through December 31, 1998 the Company has incurred and expensed
approximately $17 million for incremental costs primarily related to third party
vendors, outside contractors and additional staff dedicated to the Year 2000
readiness project. The Company currently expects that it will incur future
incremental costs related to the project of approximately $10 million. These
incremental costs do not include existing resources allocated to the project
effort or the costs that will be incurred by the Company related to the
acquisitions that are expected to close during 1999. The incremental Year 2000
costs related to these future acquisitions are not expected to be material to
the Company.
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. The accounting for gains or losses resulting from
changes in the values of derivatives would depend 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.
28
<PAGE> 30
FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
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 following is a summary of the factors the Company believes important
and 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 many 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, limiting the Company's ability to
generate new finance receivables and decreasing the Company's net
interest margins.
- Increase in non-performing loans and credit losses.
- Rapid changes in receivable prepayment rates.
- The inability of the Company to access capital and financing on terms
acceptable to the Company.
- Changes in any domestic or foreign governmental regulation affecting the
Company's ability to declare and pay dividends, conduct business, the
manner in which it conducts business or the level of product pricing.
- 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, foreign currency
exchange rate fluctuations and changes in tax rates or tax laws.
- Changes in generally accepted 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.
29
<PAGE> 31
- 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.
- The Company's ability and the ability of third parties with whom the
Company has relationships to become year 2000 compliant.
- The Company's ability to integrate the operations of acquisitions into
its operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information called for by Item 7A is incorporated by reference from the
information in Item 7 under the caption "Market Risk" in this Form 10-K.
30
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Associates First Capital Corporation
We have audited the accompanying consolidated balance sheets of Associates
First Capital Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. Those
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Associates
First Capital Corporation as of December 31, 1998 and 1997 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Dallas, Texas
January 19, 1999
31
<PAGE> 33
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Finance charges........................................... $7,910.4 $7,560.2 $6,481.0
Insurance premiums........................................ 471.5 420.7 402.1
Investment and other income............................... 994.9 297.7 215.1
-------- -------- --------
9,376.8 8,278.6 7,098.2
EXPENSES
Interest expense.......................................... 3,196.7 2,775.2 2,456.0
Operating expenses........................................ 2,798.0 2,339.6 2,002.9
Provision for losses on finance receivables -- NOTE 7..... 1,283.5 1,378.1 1,086.5
Insurance benefits paid or provided....................... 158.1 145.7 148.2
-------- -------- --------
7,436.3 6,638.6 5,693.6
-------- -------- --------
EARNINGS BEFORE PROVISION FOR INCOME TAXES.................. 1,940.5 1,640.0 1,404.6
PROVISION FOR INCOME TAXES -- NOTE 12....................... 717.0 608.3 547.6
-------- -------- --------
NET EARNINGS................................................ $1,223.5 $1,031.7 $ 857.0
======== ======== ========
NET EARNINGS PER SHARE -- NOTES 3 AND 19
Basic..................................................... $ 1.76 $ 1.49 $ 1.24
======== ======== ========
Diluted................................................... $ 1.75 $ 1.48 $ 1.23
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 34
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH AND CASH EQUIVALENTS -- NOTE 21........................ $ 4,665.6 $ 433.2
INVESTMENTS IN DEBT AND EQUITY SECURITIES -- NOTE 5......... 6,678.7 1,242.4
FINANCE RECEIVABLES, net of unearned finance income,
allowance for credit losses and insurance policy and
claims reserves -- NOTE 6................................. 57,496.4 52,482.1
OTHER ASSETS -- NOTE 8...................................... 6,334.7 3,075.0
--------- ---------
Total assets...................................... $75,175.4 $57,232.7
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term -- NOTE 10
Commercial Paper.......................................... $24,144.3 $19,483.5
Bank Loans................................................ 1,565.5 1,487.1
ACCOUNTS PAYABLE AND ACCRUALS............................... 3,342.4 1,765.5
LONG-TERM DEBT -- NOTE 11
Senior Notes.............................................. 37,171.4 27,802.6
Subordinated and Capital Notes............................ 425.3 425.4
--------- ---------
37,596.7 28,228.0
STOCKHOLDERS' EQUITY
Series A Junior Participating Preferred Stock, $0.01 par
value, 734,500 shares authorized, no shares issued or
outstanding in 1998 and no shares issued, outstanding
or authorized in 1997.................................. -- --
Class A Common Stock, $0.01 par value, 1,150,000,000
shares authorized, 728,228,488 and 90,773,299 shares
issued in 1998 and 1997, respectively -- NOTE 19....... 7.3 0.9
Class B Common Stock, $0.01 par value, 144,118,820 shares
authorized, no shares issued or outstanding in 1998 and
400,000,000 shares authorized, 255,881,180 shares
issued and outstanding in 1997 -- NOTE 1............... -- 2.6
Paid-in Capital........................................... 5,273.7 4,004.6
Retained Earnings......................................... 3,178.9 2,097.4
Accumulated Other Comprehensive Income -- NOTE 4.......... 106.8 172.6
Less 980,314 and 156,526 shares of Class A Common Stock
held at cost in Treasury in 1998 and 1997,
respectively........................................... (40.2) (9.5)
--------- ---------
Total stockholders' equity........................ 8,526.5 6,268.6
--------- ---------
Total liabilities and stockholders' equity........ $75,175.4 $57,232.7
========= =========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 35
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY
------ -------- --------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995...................... $47.0 $2,066.0 $ 2,345.3 $ 342.8 $ -- $ 4,801.1
Comprehensive income
Net earnings....................... 857.0 857.0
Other comprehensive income, net of
tax.............................. (120.6) (120.6)
--------- ------- ---------
Total comprehensive income --
NOTE 4...................... 857.0 (120.6) 736.4
Contributions from Ford.............. 47.3 47.3
Sale of Class A Common Stock......... (43.5) 1,893.5 1,850.0
Cash dividends to Ford............... (1,928.7) (1,928.7)
Cash dividends on Common Stock ($0.10
per share)......................... (69.3) (69.3)
Other................................ 0.7 0.7
------ -------- --------- ------- ------ ---------
DECEMBER 31, 1996...................... 3.5 4,007.5 1,204.3 222.2 -- 5,437.5
Comprehensive income
Net earnings....................... 1,031.7 1,031.7
Other comprehensive income, net of
tax.............................. (49.6) (49.6)
--------- ------- ---------
Total comprehensive income --
NOTE 4...................... 1,031.7 (49.6) 982.1
Cash dividends on Common Stock ($0.20
per share)......................... (138.6) (138.6)
Treasury stock and other............. (2.9) (9.5) (12.4)
------ -------- --------- ------- ------ ---------
DECEMBER 31, 1997...................... 3.5 4,004.6 2,097.4 172.6 (9.5) 6,268.6
Comprehensive income
Net earnings....................... 1,223.5 1,223.5
Other comprehensive income, net of
tax.............................. (65.8) (65.8)
--------- ------- ---------
Total comprehensive income --
NOTE 4...................... 1,223.5 (65.8) 1,157.7
Sale of Class A Common Stock......... 0.2 1,266.5 1,266.7
Cash dividends on Common Stock
($0.205 per share)................. (142.0) (142.0)
Stock dividend -- NOTE 19............ 3.6 (3.6) --
Treasury stock and other............. 6.2 (30.7) (24.5)
------ -------- --------- ------- ------ ---------
DECEMBER 31, 1998...................... $ 7.3 $5,273.7 $ 3,178.9 $ 106.8 $(40.2) $ 8,526.5
====== ======== ========= ======= ====== =========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 36
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings........................................... $ 1,223.5 $ 1,031.7 $ 857.0
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Provision for losses on finance receivables......... 1,283.5 1,378.1 1,086.5
Depreciation and amortization....................... 340.0 322.6 224.9
Unrealized (gain) loss on trading securities........ (3.6) (3.1) 1.7
Increase in insurance policy and claims reserves.... 2.5 70.7 87.5
Purchases of trading securities..................... (0.3) (174.0) --
Sales and maturities of trading securities.......... -- 56.3 0.6
Increase in accounts payable and accruals........... 78.6 21.6 288.0
Deferred income taxes............................... 28.2 (31.7) 1.2
---------- ---------- ----------
Net cash provided from operating activities.... 2,952.4 2,672.2 2,547.4
---------- ---------- ----------
Cash Flows from Investing Activities
Finance receivables originated or purchased............ (55,346.9) (52,136.8) (43,801.4)
Finance receivables liquidated......................... 44,118.2 40,715.6 35,008.3
Finance receivables sold............................... 3,559.8 1,345.9 1,530.7
Acquisitions of other finance businesses, net.......... (2,692.4) (39.7) (165.6)
Purchases of available-for-sale securities............. (2,212.1) (319.3) (600.5)
Sales and maturities of available-for-sale
securities.......................................... 1,482.3 301.9 360.7
Increase in other assets............................... (807.4) (794.3) (409.7)
---------- ---------- ----------
Net cash used for investing activities......... (11,898.5) (10,926.7) (8,077.5)
---------- ---------- ----------
Cash Flows from Financing Activities
Issuance of long-term debt............................. 13,266.1 8,183.5 5,980.3
Retirement of long-term debt........................... (5,048.7) (3,773.3) (3,454.1)
Increase in notes payable.............................. 3,966.0 3,903.1 3,127.1
Cash dividends......................................... (142.0) (138.6) (1,998.0)
Sale of Class A Common Stock........................... 1,266.7 -- 1,850.0
Contributions from Ford................................ -- -- 47.3
Treasury stock and other............................... (17.0) (12.4) --
---------- ---------- ----------
Net cash provided from financing activities.... 13,291.1 8,162.3 5,552.6
Effect of foreign currency translation adjustments on
cash................................................... (112.6) 78.5 (107.8)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents -- NOTE
21..................................................... 4,232.4 (13.7) (85.3)
Cash and cash equivalents at beginning of period......... 433.2 446.9 532.2
---------- ---------- ----------
Cash and cash equivalents at end of period............... $ 4,665.6 $ 433.2 $ 446.9
========== ========== ==========
Cash paid for:
Interest............................................... $ 3,208.9 $ 2,741.5 $ 2,433.1
========== ========== ==========
Income taxes........................................... $ 584.6 $ 712.2 $ 387.6
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 37
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.
From October 31, 1989 to April 7, 1998, First Capital was a subsidiary of
Ford FSG, Inc. and an indirect-owned subsidiary of Ford Motor Company ("Ford").
On May 8, 1996, the Company made an initial public offering (the "Offering") of
67 million shares of its Class A Common Stock representing a 19.3% interest in
the Company. Prior to the Offering, Ford contributed to First Capital, for
stock, certain foreign finance operations that were managed by First Capital
although owned by other Ford subsidiaries. The entities included operations in
Japan, Canada, the United Kingdom, Puerto Rico, and Mexico. Subsequent to the
consummation of the contribution, 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.
On April 7, 1998, Ford completed a spin-off (the "Spin-Off") of its 80.7%
interest in First Capital in the form of a tax-free distribution of its First
Capital Class A Common Stock to Ford common and Class B stockholders.
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 shares of the Company's Class A Common Stock.
Effective with this distribution, First Capital was no longer a subsidiary of
Ford and became a fully independent company.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
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, and have been prepared in accordance with generally accepted
accounting principles. Certain prior-period amounts have been reclassified to
conform to the current period presentation.
Amounts of goodwill relating to acquisitions are being amortized by the
straight-line method over periods not exceeding forty years. The carrying value
of goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If the review indicates that goodwill will not be recoverable, as
determined based on undiscounted cash flows, the carrying value of the goodwill
is reduced by the estimated short-fall of discounted cash flows.
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.
Revenue Recognition
Finance charges on receivables are recognized as revenue using the interest
(actuarial) method. Premiums and discounts on purchased receivables are
considered as yield adjustments. The unamortized balance is included in finance
receivables and the associated amortization is included in finance charge
revenue. Finance charge accruals are suspended on accounts when they become 60
days contractually delinquent. The accrual is resumed when the loan becomes
contractually current. At December 31, 1998 and 1997, net finance receivables on
which revenue was not accrued approximated $1.5 billion and $1.2 billion,
36
<PAGE> 38
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The interest income that would have been recorded in 1998 if these
nonaccruing receivables had been current was approximately $34 million.
Insurance premiums are recorded as unearned premiums when collected or when
written and are subsequently amortized into income based on the nature and term
of the underlying insurance contracts. The methods of amortization used are pro
rata, sum-of-the-years-digits and a combination thereof.
Gains or losses on sales of securities classified as available-for-sale are
included in investment and other income when realized. Unrealized gains or
losses on securities classified as available-for-sale are reported net of tax as
a component of accumulated other comprehensive income. Realized and unrealized
gains or losses on trading securities (principally preferred stock) are included
in investment and other income as incurred. The cost basis of securities sold is
determined by the first-in, first-out method.
Receivables Sold with Servicing Retained
The Company adopted Statement of Financial Accounting Standards No. 125
("SFAS 125"), Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, on January 1, 1997. Periodically, the Company
securitizes and sells receivables although such activity has not been a
significant component of its funding plans. These transactions are recorded in
accordance with SFAS 125. Under SFAS 125, a sale is recognized when control over
the securitized receivable is relinquished. The difference between the net
proceeds received and the carrying amount of the receivable sold is recognized
as a gain or loss on sale. To date, no significant securitization related gains
or losses have been recorded by the Company.
SFAS 125 requires the amounts carried prior to the adoption of SFAS 125 as
excess servicing assets be reclassified between a servicing asset or liability
and an interest-only strip with the difference recognized as unrealized gain or
loss on securities, net of tax. On January 1, 1997, in connection with the
adoption of SFAS 125, the Company recharacterized the excess servicing asset as
an interest-only strip. No servicing asset or liability was recorded related to
the reclassification or subsequent securitization transaction because the
Company earns service fees at a rate which approximates market.
The Company generally retains a subordinated interest in the finance
receivables sold in the form of a residual or interest-only strip. The residual
or interest-only strip represents the present value of future excess cash flows,
using the "cash-out" method, resulting from the difference between the finance
charge income received from the obligors on the finance receivables and the
interest paid to the investors in the asset-backed securities, net of credit
losses, servicing fees and other expenses. Since such assets can be
contractually prepaid or otherwise settled in such a way that the holder would
not recover all of its recorded investment, the asset is classified as an
available-for-sale investment and is measured at fair value. Unrealized holding
gains are reported net of income tax effects as a component of accumulated other
comprehensive income until realized. If a decline in fair value were deemed
other than temporary, the assets would be adjusted to their net realizable value
through a charge to operations.
Finance Receivables
Receivable origination and commitment fees generally are deferred and
amortized as interest income over the life of the related receivable.
Receivables, which are expected to be securitized and sold are included in other
assets as receivables held for sale and recorded at the lower of cost or market.
The aggregate method is used in determining the lower of cost or market of
receivables held for sale.
Allowance for Losses on Finance Receivables
The Company maintains an allowance for losses on finance receivables at an
amount that it believes is sufficient to provide adequate protection against
losses in the portfolios. The allowance is determined principally on the basis
of historical loss experience, and reflects management's judgment of additional
loss
37
<PAGE> 39
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
potential considering future economic conditions and the nature and
characteristics of the underlying finance receivables. The allowance is managed
on an aggregate basis considering the relationship of the allowance to net
finance receivables and net credit losses. Additions to the allowance are
generally charged to the provision for losses on finance receivables.
Finance receivables are charged to the allowance for losses when they are
deemed to be uncollectible. Additionally, the Company's policy provides for
charge-off of various types of accounts on a contractual basis described as
follows: consumer direct and other installment and credit card receivables are
charged to the allowance for losses when they become 180 days contractually
delinquent. All other finance receivables are charged to the allowance for
losses when any of the following conditions occur: (i) the related security has
been converted or destroyed; (ii) the related security has been repossessed and
sold or held for sale for one year; or (iii) the related security has not been
repossessed and the receivable has become one year contractually delinquent. A
contractually delinquent account is one on which the customer has not made
payments as contractually agreed. Extensions are granted on receivables from
customers with satisfactory credit and with prior approval of management.
Recoveries on losses previously charged to the allowance are credited to the
allowance at the time the recovery is collected.
Although the allowance for losses on finance receivables reflected in the
Company's consolidated balance sheet at December 31, 1998 is considered adequate
by the Company's management, there can be no assurance that this allowance will
prove to be adequate over time to cover ultimate losses in connection with the
Company's finance receivables. This allowance may prove to be inadequate due to
unanticipated adverse changes in the economy or discrete events adversely
affecting specific customers or industries. The Company's results of operations
and financial condition could be materially adversely affected to the extent
that the Company's allowance is insufficient to cover such changes or events.
Insurance Reserves
The reserves for future benefits and refunds upon cancellation of credit
life and health insurance and property and casualty insurance are provided for
in the unearned premium reserve for each class of insurance. In addition,
reserves for reported claims on credit accident and health insurance are
established based on standard morbidity tables used in the insurance business
for such purposes. Claim reserves for reported property and casualty insurance
claims are based on estimates of costs and expenses to settle each claim.
Additional amounts of reserves, based on prior experience and insurance in
force, are provided for each class of insurance for claims which have been
incurred but not reported as of the balance sheet date.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the rate
of exchange in effect on the balance sheet date; income and expenses are
translated at the average rate of exchange prevailing during the year. The
related balance sheet translation adjustments are reflected in the stockholders'
equity section of the consolidated balance sheet while the impact of foreign
currency changes on income and expense items are included in earnings. Such
foreign currency changes resulted in losses of approximately $3.0 million, $2.1
million and $0.8 million during the years ended December 31, 1998, 1997 and
1996, respectively.
Income Taxes
Prior to the Spin-Off from Ford in April of 1998, the Company was included
in the consolidated federal income tax return of Ford. The Company will file a
consolidated federal income tax return for the short taxable period of April 8,
1998, through December 31, 1998. The Company, and in certain circumstances
certain subsidiaries, will be included in combined, consolidated or unitary
income tax groups for state income tax purposes for the short taxable period.
The provision for income taxes for both the period before the Spin-Off and the
period after the Spin-Off was computed on a separate-return basis. Deferred tax
assets and
38
<PAGE> 40
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The amounts reported
in the consolidated balance sheet approximate fair value.
Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 ("SFAS 131") Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The adoption of SFAS 131 did not affect results of operations
or financial position of the Company, but did affect the disclosure of segment
information as illustrated in NOTE 17.
Derivative Financial Instruments
The Company uses derivative financial instruments for the purpose of
hedging exposures as part of its risk management program and holds all
derivatives for purposes other than trading. Deferral (hedge) accounting is
applied only if the derivative reduces the risk of the underlying hedged item
and is designated at inception as a hedge with respect to the underlying hedged
item. Additionally, the derivative must result in cash flows that are expected
to be inversely correlated to those of the underlying hedged item. Such
instruments to date have been limited to foreign currency forward exchange,
currency swap, interest rate swap and treasury lock agreements and treasury
futures and option contracts. See NOTE 16 to the consolidated financial
statements for additional information related to derivative financial
instruments.
Forward currency exchange agreements are used to hedge the Company's net
investment in Japan. Accordingly, unrealized translation gains and losses on
these agreements are recorded, net of tax, as a component of accumulated other
comprehensive income. The economic discount on such agreements is recognized
over the agreement life on a straight-line basis as an adjustment to interest
expense.
Foreign currency swap and interest rate swap agreements are used to hedge
debt obligations and financing transactions. Accordingly, the differential paid
or received by the Company on these agreements is recognized as an adjustment to
interest expense over the term of the underlying transaction.
Treasury lock agreements are used to hedge anticipated asset securitization
transactions or debt issuances of the Company. Accordingly, the differential
paid or received by the Company on maturity of a treasury lock agreement is
recognized as an adjustment to interest expense over the term of the underlying
financing transaction.
Treasury futures and option contracts are used to minimize fluctuations in
the value of certain investments classified as available-for-sale. Accordingly,
unrealized translation gains and losses on these agreements are recorded, net of
tax, as a separate component of stockholders' equity.
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.
39
<PAGE> 41
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE 3 -- EARNINGS PER SHARE
Earnings per share on a basic and diluted basis as required by Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, is
calculated as follows (in millions, except per share amounts and adjusted for
the stock dividend described in NOTE 19):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Basic net earnings per share:
Net earnings.......................................... $1,223.5 $1,031.7 $857.0
Weighted average shares outstanding................... 695.8 693.0 693.3
$ 1.76 $ 1.49 $ 1.24
======== ======== ======
Diluted net earnings per share:
Net earnings.......................................... $1,223.5 $1,031.7 $857.0
Weighted average shares outstanding plus assumed
conversions........................................ 699.9 695.9 694.9
$ 1.75 $ 1.48 $ 1.23
======== ======== ======
Calculation of weighted average shares outstanding plus
assumed conversions:
Weighted average shares outstanding................... 695.8 693.0 693.3
Effect of dilutive securities options -- NOTE 14...... 4.1 2.9 1.6
-------- -------- ------
699.9 695.9 694.9
======== ======== ======
</TABLE>
NOTE 4 -- COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), Reporting Comprehensive Income, on January 1, 1998. SFAS 130
requires the reporting of all items which are required to be recognized under
generally accepted accounting standards as components of comprehensive income in
the financial statements. Accordingly, total comprehensive income for the years
ended 1998, 1997 and 1996 is reported in the Company's consolidated statement of
changes in stockholders' equity. Total accumulated other comprehensive income is
reported in the Company's consolidated balance sheet. The components of
accumulated other comprehensive income, net of tax, are as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Foreign currency translation adjustments.................... $117.1 $168.2 $222.8
Net unrealized (loss) gain on available-for-sale
securities................................................ (10.3) 4.4 (0.6)
------ ------ ------
Accumulated other comprehensive income.................... $106.8 $172.6 $222.2
====== ====== ======
</TABLE>
40
<PAGE> 42
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------
BEFORE TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------- ----------
<S> <C> <C> <C>
Foreign currency translation adjustments............ $ (81.1) $30.0 $(51.1)
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the
period......................................... (23.4) 8.6 (14.8)
Less: reclassification for gains realized in net
income......................................... 0.2 (0.1) 0.1
------- ----- ------
Net unrealized losses..................... (23.2) 8.5 (14.7)
------- ----- ------
Other comprehensive income........................ $(104.3) $38.5 $(65.8)
======= ===== ======
</TABLE>
NOTE 5 -- INVESTMENTS IN DEBT AND EQUITY SECURITIES
Available-for-Sale Securities
Available-for-sale securities consist of retained securitization interests
(as described in NOTES 2 and 6), bonds, notes and preferred stock and other
equity securities. 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.
During 1998 and 1997, gross realized gains and losses on sales amounted to
$26.0 million and $2.4 million, and $20.6 million and $3.5 million,
respectively. Unrealized gains or losses are reported as a component of
stockholders' equity, net of tax. The following tables set forth, by type of
available-for-sale security issuer, the amortized cost, gross unrealized holding
gains, gross unrealized holding losses, and estimated market value at December
31, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
1998
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Retained securitization interests........... $4,016.8 $ 0.9 $ -- $4,017.7
Preferred stock............................. 718.7 2.4 (28.7) 692.4
Other....................................... 2.5 -- -- 2.5
Insurance Subsidiaries
Mortgage-backed........................... 567.9 3.7 (0.6) 571.0
Municipal obligations..................... 431.3 2.9 -- 434.2
Corporate obligations..................... 338.7 1.5 (1.0) 339.2
Preferred stock........................... 149.9 0.8 (0.6) 150.1
U.S. government obligations............... 108.9 0.9 (1.0) 108.8
Other equity securities................... 105.9 -- -- 105.9
Other..................................... 235.4 1.1 (0.4) 236.1
-------- ----- ------ --------
Total available-for-sale
securities...................... $6,676.0 $14.2 $(32.3) $6,657.9
======== ===== ====== ========
</TABLE>
41
<PAGE> 43
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Retained securitization interests........... $ 76.4 $ -- $ -- $ 76.4
Other....................................... 1.4 -- -- 1.4
Insurance Subsidiaries
Mortgage-backed........................... 598.3 5.4 (0.3) 603.4
Corporate obligations..................... 219.5 1.1 (1.1) 219.5
U.S. government obligations............... 182.6 2.4 (0.8) 184.2
Other..................................... 26.4 0.1 -- 26.5
-------- ---- ----- --------
Total available-for-sale
securities...................... $1,104.6 $9.0 $(2.2) $1,111.4
======== ==== ===== ========
</TABLE>
The amortized cost and estimated market value of available-for-sale
securities at December 31, 1998 by contractual maturity are shown below (in
millions):
<TABLE>
<CAPTION>
1998
---------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 79.3 $ 79.7
Due after one year through five years....................... 435.8 438.9
Due after five years through ten years...................... 379.3 378.9
Due after ten years......................................... 789.3 793.3
-------- --------
Subtotal.................................................. 1,683.7 1,690.8
Retained securitization interests........................... 4,016.8 4,017.7
Equity securities........................................... 975.5 949.4
-------- --------
Total............................................. $6,676.0 $6,657.9
======== ========
</TABLE>
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 December 31, 1998 and 1997
was $20.8 million and $131.0 million, respectively. Historical cost at December
31, 1998 and 1997 was $15.5 million and $126.7 million, respectively. On July 1,
1998, the Company's preferred stock investments of $582.5 million were
redesignated by management as available-for-sale securities. Previously,
preferred stock investments were designated as trading securities.
42
<PAGE> 44
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- FINANCE RECEIVABLES
Composition of Net Finance Receivables
At December 31, 1998 and 1997, net finance receivables consisted of the
following products (in millions):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Home equity lending......................................... $22,458.2 $18,796.0
Personal lending and retail sales finance................... 11,459.2 8,731.6
Truck and truck trailer..................................... 10,783.6 9,688.9
Equipment................................................... 6,114.0 5,300.5
Manufactured housing........................................ 3,648.2 1,669.4
Credit card................................................. 3,138.1 8,211.7
Auto fleet leasing.......................................... 1,589.7 1,551.1
Recreational vehicles(1).................................... 479.7 444.0
Warehouse lending and other(2).............................. 1,268.3 822.4
--------- ---------
Finance receivables, net of unearned finance income ("net
finance receivables")(3)............................... 60,939.0 55,215.6
Allowance for losses on finance receivables................. (1,978.7) (1,949.9)
Insurance policy and claims reserves........................ (1,463.9) (783.6)
--------- ---------
Finance receivables, net of unearned finance income,
allowance for losses and insurance policy and claims
reserves............................................... $57,496.4 $52,482.1
========= =========
</TABLE>
- ---------------
(1) As described in NOTE 21 to the consolidated financial statements, on January
28, 1999 the Company announced the sale of its recreational vehicle finance
business to NationsBank, N.A., a unit of BankAmerica Corporation.
(2) Includes warehouse lending, government guaranteed lending and municipal
finance.
(3) Unearned finance income was approximately $4.0 billion at December 31, 1998
and 1997.
Securitization of Finance Receivables
During the fourth quarter of 1998, approximately $1.8 billion of the
Company's private label credit card receivables were securitized and sold to a
master trust. The Company received $1.3 billion in proceeds from the transaction
and retained a $0.5 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.
During 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.
During the first quarter of 1998, approximately $235 million of home equity
lending receivables were also securitized and sold by the Company. During 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.
No significant gains or losses were recorded on these transactions. In each
of these transactions, the Company retained servicing responsibilities for the
receivables sold.
43
<PAGE> 45
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contractual Maturities of Net Finance Receivables
At December 31, 1998, contractual maturities of net finance receivables
were as follows (in millions):
<TABLE>
<CAPTION>
YEAR DUE TOTAL
- -------- ---------
<S> <C>
1999........................................................ $14,122.4
2000........................................................ 8,755.5
2001........................................................ 6,747.7
2002........................................................ 5,141.3
2003 and thereafter......................................... 26,172.1
---------
$60,939.0
=========
</TABLE>
It is the Company's experience that a substantial portion of the consumer
loan portfolio generally is renewed or repaid prior to contractual maturity
dates. The above maturity schedule should not be regarded as a forecast of
future cash collections.
Direct Financing Leases
Included in net finance receivables are direct financing leases as follows
(in millions):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- --------
<S> <C> <C>
Minimum lease rentals....................................... $ 6,841.8 $5,953.7
Unearned finance income..................................... (1,016.0) (826.9)
--------- --------
Net investment in direct financing leases................... $ 5,825.8 $5,126.8
========= ========
</TABLE>
Future net minimum lease rentals on direct financing leases for each of the
years succeeding December 31, 1998 are as follows (in millions):
1999 -- $1,600.4; 2000 -- $1,208.2; 2001 -- $985.7; 2002 -- $756.1;
2003 -- $414.6 and 2004 and thereafter -- $860.8.
Dispersion of Finance Receivables
The Company has geographically dispersed finance receivables. At December
31, 1998, approximately 85% of the Company's Owned Basis total receivables were
dispersed across the United States, and the remaining 15% were in foreign
countries. Of the total receivables, 9% were in Japan, 8% in California, 8% in
Texas, 6% in Florida, 4% in North Carolina, 4% in Georgia, 4% in Pennsylvania;
no other individual state or foreign country had more than 4%.
Acquisitions of Finance Businesses
During the years ended December 31, 1998 and 1997, the Company made
acquisitions of finance receivables and finance businesses, the most significant
of which were as follows:
1998 Significant Acquisitions
In December 1998, the Company acquired The Northland Company ("Northland")
for approximately $660 million. Based in St. Paul, Minnesota, Northland provides
insurance products through Jupiter Holdings, Inc. and mortgage banking, real
estate management, brokerage and related services through various other
subsidiaries. The Company acquired the insurance related businesses of Northland
only. Northland divested its other businesses prior to the acquisition. The
transaction was accounted for as a purchase.
44
<PAGE> 46
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1998, the Company purchased substantially all of the assets of
SPS Transaction Services, Inc. ("SPS"), including its wholly-owned subsidiaries,
SPS Payment Systems Inc. and Hurley State Bank. In addition, the Company
purchased certain receivables managed by SPS that were owned by an affiliate of
SPS, Mountain West Financial Corporation. The purchase price was approximately
$1.4 billion. SPS processes credit card transactions, administers consumer
private-label credit card programs, processes commercial accounts receivable and
handles inbound telemarketing services. The Company completed this transaction
in October 1998, which added approximately $2.1 billion in managed credit card
receivables. The transaction was accounted for as a purchase.
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. The transaction was accounted for as a purchase.
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. The
transaction 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 1998 acquisitions, for
the years ending December 31, 1998 and 1997 were $10.4 billion, $1.2 billion,
$1.77 and $1.76 for 1998 and $9.8 billion, $1.0 billion, $1.49 and $1.49 for
1997, respectively. These unaudited pro forma results assume that the 1998
acquisitions occurred at the beginning of each year and include certain
adjustments, including additional interest expense 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 year.
1997 Significant Acquisitions
In December 1997, the Company acquired the United States and Canada based
commercial auto fleet leasing operation of AT&T Capital Corporation. The fair
market value of the assets acquired was approximately $369 million. 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, the Company 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. A director of the Company was chairman and chief executive
officer of The Bank of New York during 1997. The Bank of New York and the
Company are not otherwise affiliated.
The pro forma effect of the 1997 acquisitions, when taken individually or
in the aggregate, was not significant.
45
<PAGE> 47
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period..................... $ 1,949.9 $ 1,563.1 $ 1,268.6
Provision for losses............................. 1,283.5 1,378.1 1,086.5
Recoveries on receivables charged off............ 237.7 224.9 147.2
Losses sustained................................. (1,424.6) (1,454.0) (1,032.5)
Reserves of receivables sold(1).................. (334.7) -- --
Reserves of acquired businesses and other........ 266.9 237.8 93.3
--------- --------- ---------
Balance at end of period........................... $ 1,978.7 $ 1,949.9 $ 1,563.1
========= ========= =========
</TABLE>
- ---------------
(1) The reserves related to receivables sold during 1997 and 1996 were not
significant.
NOTE 8 -- OTHER ASSETS
The components of other assets at December 31, 1998 and 1997 were as
follows (in millions):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Goodwill.................................................... $1,890.4 $1,104.0
Notes and other receivables................................. 1,172.9 533.0
Customer lists and operating agreements..................... 929.8 90.9
Finance receivables held for sale........................... 812.2 268.8
Property and equipment...................................... 608.7 383.2
Collateral held for resale.................................. 297.4 225.3
Relocation client advances.................................. 171.8 140.6
Other....................................................... 451.5 329.2
-------- --------
Total other assets................................ $6,334.7 $3,075.0
======== ========
</TABLE>
Additions to goodwill due to acquisitions were $870.8 million and $39.5
million in 1998 and 1997, respectively. Reductions as a result of goodwill
amortization were $67.1 million and $42.7 million for 1998 and 1997,
respectively. Other changes in the amount of goodwill were principally due to
changes in foreign exchange rates which impact the translation of foreign
currency denominated goodwill carried on the books of the Company's
international subsidiaries.
46
<PAGE> 48
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- CREDIT FACILITIES
At December 31, 1998, the Company and Associates Corporation of North
America ("Associates"), First Capital's principal domestic operating subsidiary,
had the following credit facilities (in millions):
<TABLE>
<CAPTION>
FACILITY
AMOUNTS(1)
----------
<S> <C>
Domestic
Lines of credit........................................... $ 5,668.1
Syndicated credit facilities.............................. 12,405.0
---------
Total domestic......................................... 18,073.1
Foreign
Lines of credit........................................... 185.3
Syndicated credit facilities.............................. 871.0
---------
Total foreign.......................................... 1,056.3
---------
Total domestic and foreign........................ $19,129.4
=========
</TABLE>
- ---------------
(1) Included in these amounts are $310.0 million and $3.7 billion of lines of
credit and syndicated credit facilities, respectively, that are available to
either First Capital or Associates.
These credit facilities are used to support commercial paper borrowings and
utilized uncommitted lines of credit.
Lines of credit and syndicated credit facilities may be withdrawn only
under certain standard conditions, including, as to the credit facilities of
Associates identified above, failure to pay principal or interest when due,
breach of representations, warranties or covenants, default on other debt, or
bankruptcy or other insolvency-type proceedings. As to the credit facilities of
the foreign operations, in addition to the foregoing standard conditions,
certain facilities contain provisions which prohibit withdrawals as a result of
any material adverse changes in the financial conditions of such operations.
Associates principally pays fees for the availability of its credit facilities
ranging from 0.06 to 0.125 of 1% per annum of the facility amount.
NOTE 10 -- NOTES PAYABLE
Commercial paper notes are issued by Associates and First Capital in the
minimum amount of $100,000 with terms from one to 270 days. Bank loan terms
range from one to 365 days. Information pertaining to the Company's commercial
paper notes and bank loans is set forth below for the periods indicated (dollar
amounts in millions):
<TABLE>
<CAPTION>
COMMERCIAL BANK
PAPER NOTES LOANS
----------- --------
<S> <C> <C>
Domestic Notes Payable
Ending balance at December 31, 1998....................... $20,578.6 $1,070.7
Weighted average interest rate at December 31, 1998....... 5.18% 6.05%
Ending balance at December 31, 1997....................... $18,625.4 $1,202.1
Weighted average interest rate at December 31, 1997....... 5.91% 7.51%
Foreign Notes Payable
Ending balance at December 31, 1998....................... $ 3,565.7 $ 494.8
Weighted average interest rate at December 31, 1998....... 5.28% 4.29%
Ending balance at December 31, 1997....................... $ 858.1 $ 285.0
Weighted average interest rate at December 31, 1997....... 4.66% 7.80%
Total Notes Payable
Ending balance at December 31, 1998....................... $24,144.3 $1,565.5
</TABLE>
47
<PAGE> 49
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMMERCIAL BANK
PAPER NOTES LOANS
----------- --------
<S> <C> <C>
Weighted average interest rate at December 31, 1998....... 5.20% 5.49%
Ending balance at December 31, 1997....................... $19,483.5 $1,487.1
Weighted average interest rate at December 31, 1997....... 5.85% 7.56%
</TABLE>
At December 31, 1998, $15.4 billion and $1.1 billion of total commercial
paper notes and bank loans, respectively, represented obligations of Associates.
NOTE 11 -- LONG-TERM DEBT
Outstanding balances of long-term debt at December 31 were as follows (in
millions):
<TABLE>
<CAPTION>
1998 1998
INTEREST WEIGHTED
RATE AVERAGE MATURITIES
RANGE RATE THROUGH 1998 1997
-------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Senior Debt:
Domestic:
Notes......................... 4.73% - 11.40% 6.36% 2037 $32,585.2 $25,067.8
Investment notes.............. 6.10% - 7.38% 7.29% 2001 104.3 179.4
--------- ---------
32,689.5 25,247.2
--------- ---------
Foreign:
Japan......................... 0.79% - 7.63% 3.06% 2004 2,346.6 1,707.0
All other foreign............. 1.19% - 39.80% 5.56% 2003 2,135.3 848.4
--------- ---------
4,481.9 2,555.4
--------- ---------
Total senior notes....... 37,171.4 27,802.6
--------- ---------
Subordinated and Capital Notes:
Domestic:
Subordinated.................. 6.88% - 8.15% 7.25% 2009 425.0 425.0
Capital....................... 4.68% - 9.00% 6.73% 2002 0.3 0.4
--------- ---------
Total subordinated and
capital debt notes..... 425.3 425.4
--------- ---------
Total long-term debt............... $37,596.7 $28,228.0
========= =========
</TABLE>
The weighted average interest rate for total long-term debt was 6.12% at
December 31, 1998 and 6.58% at December 31, 1997.
Long-term borrowing maturities during the next five years, including the
current portion of notes payable after one year are: 1999, $7,654.6 million;
2000, $4,649.4 million; 2001, $5,810.1 million; 2002, $5,029.8 million; 2003,
$5,690.9 million and 2004 and thereafter, $8,761.9 million. Certain debt issues
are subject to put or call redemption provisions whereby repayment may be prior
to the maturity date. As applicable, the amount of the option premium received
by the Company is deferred and amortized over the expected life of the debt
obligation.
At December 31, 1998, $32.2 billion of total long-term debt represented
obligations of Associates.
48
<PAGE> 50
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Associates and First Capital are subject to various limitations under the
provisions of their 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. Future issues of
Associates' debt may also contain such a restriction. 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, $1.0 billion was available for dividends at December 31, 1998.
Limitation on Minimum Tangible Net Worth
A restriction contained in certain revolving credit agreements requires
Associates and First Capital to maintain a minimum tangible net worth, as
defined, of $2.5 billion. At December 31, 1998, Associates and First Capital's
tangible net worth was approximately $6.4 billion and $6.6 billion,
respectively.
NOTE 12 -- INCOME TAXES
The following table sets forth the components of the provision for income
taxes and deferred income tax (benefit) for the periods indicated (in millions):
<TABLE>
<CAPTION>
UNITED STATES
---------------
FEDERAL STATE FOREIGN TOTAL
------- ----- ------- ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Current........................................... $463.2 $41.7 $183.9 $688.8
Deferred.......................................... 22.1 -- 6.1 28.2
------ ----- ------ ------
$485.3 $41.7 $190.0 $717.0
====== ===== ====== ======
Year Ended December 31, 1997
Current........................................... $443.5 $34.8 $161.8 $640.1
Deferred.......................................... (14.5) -- (17.3) (31.8)
------ ----- ------ ------
$429.0 $34.8 $144.5 $608.3
====== ===== ====== ======
Year Ended December 31, 1996
Current........................................... $358.8 $31.5 $156.1 $546.4
Deferred.......................................... 41.0 -- (39.8) 1.2
------ ----- ------ ------
$399.8 $31.5 $116.3 $547.6
====== ===== ====== ======
</TABLE>
At December 31, 1998 and 1997, the components of the Company's net deferred
tax asset were as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Deferred tax assets:
Provision for losses on finance receivables and other..... $ 1,040.3 $ 714.9
Foreign tax credits....................................... 27.9 34.4
Post-retirement and other employee benefits............... 66.4 57.3
--------- -------
$ 1,134.6 $ 806.6
</TABLE>
49
<PAGE> 51
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Deferred tax liabilities:
Leasing transactions...................................... $ (513.6) $(397.1)
Unamortized tax deductible goodwill....................... (269.0) (167.8)
Finance revenue and other................................. (223.6) (178.8)
--------- -------
(1,006.2) (743.7)
--------- -------
Net deferred tax asset............................ $ 128.4 $ 62.9
========= =======
</TABLE>
Prior to the Spin-Off in April of 1998, First Capital and its subsidiaries
were included in the consolidated federal income tax return of Ford. First
Capital and its subsidiaries will file a consolidated First Capital federal
income tax return for the period of April 8, 1998 through December 31, 1998. The
provision for income taxes for both the period before the Spin-Off and after the
Spin-Off was computed on a separate-return basis. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
The effective tax rate differed from the statutory United States federal
income tax rate as follows:
<TABLE>
<CAPTION>
% OF PRETAX INCOME
YEAR ENDED DECEMBER 31
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate.......................................... 35.0% 35.0% 35.0%
State tax rate.............................................. 1.4 1.4 1.5
Non-deductible goodwill..................................... 0.9 0.4 0.5
Foreign rates in excess of United States rate and other..... (0.3) 0.3 2.0
---- ---- ----
Effective tax rate................................ 37.0% 37.1% 39.0%
==== ==== ====
</TABLE>
Effective with the April 1998 Spin-Off, Ford and the Company entered into
an amended and restated tax sharing agreement which, among other matters,
required the Company to pay a net amount of $22.4 million effectively settling
certain amounts due to and from Ford.
NOTE 13 -- LEASE COMMITMENTS
Leases on the Company's branch and operating center facilities are
primarily short-term and generally provide for renewal options not exceeding the
initial term. Total rent expense for the years ended December 31, 1998, 1997 and
1996 was $145.2 million, $123.8 million, and $103.7 million, respectively.
Minimum rental commitments as of December 31, 1998 for all noncancelable leases
(primarily office leases) for the years ending December 31, 1999, 2000, 2001,
2002 and 2003 are $96.1 million, $69.1 million, $47.5 million, $32.1 million and
$19.2 million, respectively, and $43.2 million thereafter.
NOTE 14 -- EMPLOYEE BENEFITS
Pension and Other Post-Retirement Benefits
The Company sponsors various qualified and non-qualified pension plans,
which together cover substantially all United States-based employees who meet
certain eligibility requirements. The Company also provides certain
post-retirement benefits through unfunded plans. These benefits are currently
provided to substantially all United States-based employees who meet certain
eligibility requirements. The benefits of such plans can be modified or
terminated at the discretion of the Company. The health care plans are
contributory, with participants' contributions adjusted annually; the life
insurance plans are also contributory.
50
<PAGE> 52
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of these plans is as follows (dollars in millions):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year......... $492.7 $400.8 $ 129.8 $ 115.2
Service cost.................................... 24.7 20.1 5.9 7.1
Interest cost................................... 32.7 29.4 7.4 8.2
Plan participants' contributions................ -- -- 0.2 0.2
Actuarial (gains)/losses........................ 24.6 53.9 (16.7) 2.0
Benefits paid................................... (11.9) (11.5) (3.2) (2.9)
------ ------ ------- -------
Benefit obligation at end of year....... $562.8 $492.7 $ 123.4 $ 129.8
====== ====== ======= =======
Change in plan assets:
Fair value of plan assets at beginning of
year......................................... $473.5 $376.1 $ -- $ --
Actual return on plan assets.................... 75.8 76.1 -- --
Employer contribution........................... 1.2 32.8 3.0 2.7
Plan participants' contributions................ -- -- 0.2 0.2
Benefits paid................................... (11.9) (11.5) (3.2) (2.9)
------ ------ ------- -------
Fair value of plan assets at end of
year.................................. $538.6 $473.5 $ -- $ --
====== ====== ======= =======
Funded status................................... $(24.2) $(19.2) $(123.4) $(129.8)
Unrecognized net transition liability........... 1.7 1.9 -- --
Unrecognized net actuarial (gain)/loss.......... 13.8 30.0 (6.7) 9.8
Unrecognized prior service cost................. 1.5 3.2 (0.9) (2.5)
------ ------ ------- -------
Net amount recognized................... $ (7.2) $ 15.9 $(131.0) $(122.5)
====== ====== ======= =======
Amounts recognized in the consolidated balance
sheet:
Prepaid benefit cost............................ $ 25.4 $ 43.7 $(131.0) $(122.5)
Accrued benefit liability....................... (41.6) (36.7) -- --
Intangible asset................................ 8.9 8.9 -- --
------ ------ ------- -------
Net amount recognized................... $ (7.3) $ 15.9 $(131.0) $(122.5)
====== ====== ======= =======
Weighted-average assumptions as of December 31:
Discount rate................................... 6.50% 6.75% 6.50% 7.00%
Expected return on plan assets.................. 9.00% 9.00% -- --
Rate of compensation increase................... 5.00% 5.00% -- --
</TABLE>
For measurement purposes, an 11.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998. The rate was
assumed to decrease gradually to 5.5% by 2010 and remain at that level
thereafter. Additionally, no future increase in retiree premium was assumed.
51
<PAGE> 53
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net periodic pension cost for the years indicated includes the
following components (in millions):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------ ---------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost........................ $ 24.7 $ 20.1 $ 18.8 $ 5.9 $ 7.1 $ 7.5
Interest cost....................... 32.7 29.4 26.4 7.4 8.2 8.2
Expected return on plan assets...... (37.1) (31.2) (27.6) -- -- --
Amortization of transition
liability........................ 0.3 0.3 0.3 -- -- --
Amortization of prior service
cost............................. 1.6 1.6 1.6 (1.5) (1.5) (1.5)
Recognized net actuarial gain
(loss)........................... 2.2 2.6 5.1 (0.2) 0.1 0.8
------ ------ ------ ----- ----- -----
Net periodic benefit cost... $ 24.4 $ 22.8 $ 24.6 $11.6 $13.9 $15.0
====== ====== ====== ===== ===== =====
</TABLE>
For the pension plans with accumulated benefit obligations in excess of
plan assets, the projected benefit obligation and accumulated benefit obligation
were $53.5 million and $41.6 million, respectively as of December 31, 1998 and
$47.8 million and $36.7 million, respectively as of December 31, 1997. The
assets of these plans had no fair value as of December 31, 1998 and 1997.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects (in
millions):
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------ ------------------
<S> <C> <C>
Effect on total of service and interest cost
components........................................ $1.0 $(1.1)
Effect on post-retirement benefit obligation........ 8.4 (9.0)
</TABLE>
Associates Savings and Profit-Sharing Plan
The Company sponsors a defined contribution plan that covers substantially
all United States-based employees who meet certain eligibility requirements, is
intended to provide assistance in accumulating personal savings for retirement
and is designed to qualify for favorable tax treatment under Sections 401(a) and
401(k) of the United States Internal Revenue Code of 1986, as amended. For the
years ended December 31, 1998, 1997 and 1996, the Company's pre-tax
contributions to the plan were $31.9 million, $25.6 million and $21.3 million,
respectively.
INCENTIVE COMPENSATION PROGRAMS
The Company sponsors compensation plans covering certain officers and
employees.
Incentive Compensation Plan and Long-Term Performance Plan
The Company sponsors the Incentive Compensation Plan (the "ICP"), which
beginning in 1997 has provided for corporate annual performance pay bonuses, in
addition to other types of compensation. The bonuses are paid out of one of two
pools. The size of each bonus pool is determined based, in part, on the
performance of the Company. Prior to 1997, corporate annual performance pay
bonuses were provided under the Corporate Annual Performance Plan which was a
separate plan prior to being incorporated into the ICP in 1997. The Long Term
Performance Plan ("LTPP") for 1998 was a long term cash incentive plan. The size
of the LTPP incentive pool was determined for the performance period ending
December 31, 1998, based, in part, on the success of the Company in achieving a
target level of profits established for each year of the performance period,
with such annual performance then averaged for the performance period. Bonuses
reflect
52
<PAGE> 54
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
individual participants' performances during the applicable performance period.
Amounts charged to expense for these bonus plans amounted to $29.0 million,
$25.1 million and $23.3 million during the years ended December 31, 1998, 1997
and 1996, respectively.
Stock-Based Compensation Plans
The Company sponsors the ICP, formerly known as the Long-Term Equity
Compensation Plan, which was established in 1996 and amended and renamed
effective January 1, 1998. The Company had no outstanding grants under any other
stock-based compensation plan prior to 1996. The ICP allows the Company to issue
to eligible employees awards of up to 41,598,536 shares of its Class A Common
Stock ("Common Stock"). In addition to awards of corporate annual performance
pay, awards may be made as nonqualified or incentive stock options, stock
appreciation rights, restricted stock, performance units or performance shares.
Through December 31, 1998, the Company had only issued stock options and
restricted stock under the ICP.
Stock Options -- Stock options have contractual terms of 10 years and an
exercise price equal to the fair market value of the stock underlying the option
at grant. Options generally vest at 33.33% each year beginning on the first
anniversary of the date of grant. A summary of the activity of option grants by
the Company under the ICP for the years ended December 31, 1998, 1997 and 1996
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- --------------------------
WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG.
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 8,389,702 $18.31 4,748,880 $14.54 -- $ --
Granted................................ 6,503,140 35.37 4,772,050 21.80 4,872,580 14.54
Exercised.............................. (1,083,794) 18.18 (433,208) 15.05 -- --
Forfeited.............................. (870,296) 29.02 (698,020) 18.48 (123,700) 14.50
---------- ---------- ---------
Outstanding at end of year............... 12,938,752 $26.17 8,389,702 $18.31 4,748,880 $14.54
========== ====== ========== ====== ========= ======
Options exercisable at year end.......... 3,206,324 $17.28 1,040,838 $14.55 -- $ --
========== ====== ========== ====== ========= ======
Weighted-average fair value of options
granted during the year................ $ 8.90 $ 5.62 $ 4.66
====== ====== ======
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
ASSUMPTIONS 1998 1997 1996
----------- ----- ----- -----
<S> <C> <C> <C>
Expected Term in years...................................... 4.00 4.00 4.55
Expected Volatility......................................... 21.28% 22.00% 30.44%
Expected Dividend Yield..................................... 0.58% 0.51% 1.38%
Risk-Free Interest Rate..................................... 5.59% 6.24% 6.53%
</TABLE>
The weighted average remaining life and weighted average exercise price for
total options outstanding and exercisable options outstanding at December 31,
1998 is summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- ---------------------------
RANGE OF WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG.
EXERCISE PRICE OPTIONS REMAINING LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
-------------- ---------- -------------- -------------- --------- --------------
(YEARS)
<S> <C> <C> <C> <C> <C>
$14.50 to $21.63........... 6,838,462 7.35 $18.13 3,159,438 $17.12
21.64 to 31.10........... 204,870 8.24 28.32 46,886 27.32
31.11 to 39.88........... 5,895,420 9.84 35.42 -- --
---------- ---------
14.50 to 39.88........... 12,938,752 8.50 26.17 3,206,324 17.27
========== =========
</TABLE>
53
<PAGE> 55
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Stock -- Under the ICP, in 1998, 1997 and 1996 the Company
issued 115,000, 84,000 and 339,260 respective shares of restricted Common Stock
to employees, of which 465,780 were outstanding at December 31, 1998.
Restrictions generally will lapse on the fifth anniversary of the date of
issuance.
Deemed Investment in Stock -- Prior to 1996, the Company sponsored a
long-term cash incentive plan, the Phantom Stock Appreciation Right Plan (the
"PSAR Plan"). The Company terminated the PSAR Plan as of December 1995 and
extinguished, principally by cash payment, all outstanding phantom stock
appreciation rights ("PSAR"). A PSAR granted under the PSAR Plan entitled the
holder to receive a specified amount of cash upon the exercise of the PSAR. Upon
termination of the PSAR Plan, certain officers of the Company were required to
defer a portion of the amount payable in satisfaction of the termination of the
PSAR Plan. The amounts deferred are administered in accordance with the terms of
the Equity Deferral Plan (the "EDP"), sponsored by the Company.
In 1998 and 1997 under the EDP, the Company credited PSAR amounts deferred
by selected employees to unfunded accounts that are deemed to be invested in
shares of Common Stock, which amounts are then deemed to be reinvested in Common
Stock. Amounts deferred are fully vested and payable beginning in May 2001,
subject to earlier distribution upon a participant's death, disability,
retirement or termination of employment, in cash and/or shares of Common Stock.
Approximately 1,160, 1,720 and 263,780 deemed shares were issued during 1998,
1997 and 1996, respectively, including 1,160, 1,720 and 1,216 respective shares
related to the reinvestment of dividends, of which 205,348 were outstanding at
December 31, 1998. The value of all such shares at year end based on $42 3/8 per
common share was $8.7 million.
Accounting for Stock-Based Compensation Plans -- The Company has elected to
apply Accounting Principles Board Opinion 25 ("APB 25") rather than the optional
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123")
in accounting for its stock-based compensation plans. Had the compensation cost
of the Company's stock-based compensation plans been determined based on the
optional provisions of SFAS 123, in the years ended December 31, 1998, 1997 and
1996 the Company's net income, basic earnings per share and diluted earnings per
share would have been $1,204.4 million, $1,022.9 million and $854.4 million;
$1.73, $1.48 and $1.23; and $1.72, $1.47 and $1.23, respectively.
All share, per share, option and fair value amounts, as applicable, in this
NOTE have been adjusted to reflect the Stock Dividend described in NOTE 19.
NOTE 15 -- COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
The Company grants revolving lines of credit to certain of its credit card
and other revolving customers. At December 31, 1998, the unused portion of these
lines aggregated $47.7 billion. The potential risk associated with, and the
estimated fair value of, the unused credit lines are not considered to be
significant.
The Company also grants lines of credit to certain dealers of trucks,
construction equipment and manufactured housing. At December 31, 1998, the
unused portion of these lines aggregated $942 million. The potential risk
associated with, and the estimated fair value of, the unused credit lines are
not considered to be significant.
Various legal actions and proceedings and claims are pending or may be
instituted or asserted in the future against the Company and its subsidiaries.
Certain of the pending legal actions are, or purport to be, class actions. Some
of the foregoing matters involve or may involve compensatory, punitive or treble
damage claims which, if adversely held against the Company, would require large
expenditures or could affect the manner in which the Company conducts its
business.
In addition, the Company like many other companies that operate in
regulated businesses is from time to time the subject of various governmental
inquiries and investigations. The Company is currently the subject of certain
investigations and inquiries by federal and state governmental authorities
relating generally to the Company's lending practices. The Company does not have
sufficient information to predict with certainty the
54
<PAGE> 56
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ultimate outcome of such investigations and inquiries or their ultimate effect,
if any, on the Company's results of operations or financial condition or the
manner in which the Company operates its business.
Legal actions, governmental inquiries and investigations are subject to
many uncertainties, and the outcome of individual matters is not predictable
with assurance. Some of the matters discussed in the foregoing paragraphs could
be decided unfavorably to the Company or the subsidiary involved and could
require the Company or such subsidiary to pay damages or make other expenditures
in amounts or a range of amounts that cannot be estimated at December 31, 1998.
The Company does not reasonably expect, based on its analysis, that any adverse
outcome from such matters would have a material effect on future consolidated
financial statements for a particular year, although such an outcome is
possible.
NOTE 16 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISKS
The Company maintains cash, cash equivalents, investments and certain other
financial instruments with various major financial institutions. To the extent
such deposits exceed maximum insurance levels, they are uninsured.
The Company uses derivative financial instruments for the purpose of
hedging 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.
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 Company's experience there has never been
a failure by a counterparty; however, 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.
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 five years. The aggregate
notional amount of these agreements at December 31, 1998 and 1997 was $2.5
billion and $921.8 million, respectively. The fair value of such agreements at
December 31, 1998 and 1997 was $(134.4) 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 foreign currency
exposures under certain debt obligations. Under these agreements, the Company
and the agreement counterparties are obligated to exchange foreign currencies at
varying times over the next five years. The aggregate notional amount of these
agreements at December 31, 1998 and 1997 was $4.4 billion and $1.1 billion,
respectively. The fair value of such agreements at December 31, 1998 and 1997
was $(118.5) 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 December 31, 1998 and 1997 was $4.3 billion and $2.0 billion,
respectively. The fair value of such agreements at December 31, 1998 and 1997
was $(81.3) million and $(7.3) million, respectively. Interest rate swap and
treasury lock agreements mature on varying dates over the next five years and
two 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 option
contracts at December 31, 1998 was $720.6 million and $(5.2) million,
respectively. Such
55
<PAGE> 57
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contracts mature on varying dates through 1999. The Company had no treasury
futures or option contracts outstanding on December 31, 1997.
NOTE 17 -- BUSINESS SEGMENT INFORMATION
As described in NOTE 2, the Company adopted SFAS 131 in 1998. Prior year
segment information has been restated on a basis consistent with the 1998
presentation. The Company has three reportable business segments: domestic
consumer finance, commercial finance and international finance.
Reportable Segment Overview
The domestic consumer finance reportable segment includes the Company's
U.S. consumer and credit card business units. These business units have been
aggregated into one reportable segment because they have similar operating
characteristics. The domestic consumer finance segment is primarily engaged in
home equity, credit card, personal loan and sales finance lending in the United
States. The commercial finance segment is principally engaged in the financing
and leasing of transportation, industrial and communication equipment, auto
fleet leasing and fleet management services, manufactured housing financing,
recreational vehicle financing, warehouse lending, government guaranteed
lending, municipal finance and employee relocation services in the United States
and Canada. The international finance segment is primarily engaged in consumer
lending, and to a lesser extent, credit card and commercial lending activities
internationally.
Measurement
The Company allocates resources to and evaluates the performance of its
segments primarily based on total revenue, net interest margin, segment earnings
and managed finance receivables adjusted to include the impact of receivables
either held for sale or sold with servicing retained ("Managed Basis"). The
table below presents this Managed Basis information for each reportable segment
(in millions):
<TABLE>
<CAPTION>
DOMESTIC
CONSUMER COMMERCIAL INTERNATIONAL TOTAL
FINANCE FINANCE FINANCE COMPANY
--------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
Year Ended or at December 31, 1998
Total revenue......................... $ 5,877.8 $ 2,527.1 $1,624.6 $10,029.5
Net interest margin................... 3,505.0 983.9 1,255.9 5,744.8
Segment earnings...................... 997.3 471.0 472.2 1,940.5
Finance receivables................... 37,179.4 25,722.7 8,462.2 71,364.3
Year Ended or at December 31, 1997
Total revenue......................... $ 5,326.4 $ 2,127.0 $1,017.1 $ 8,470.5
Net interest margin................... 3,251.7 849.6 784.7 4,886.0
Segment earnings...................... 891.8 392.1 356.1 1,640.0
Finance receivables................... 32,338.2 21,790.3 4,278.0 58,406.5
Year Ended or at December 31, 1996
Total revenue......................... $ 4,528.8 $ 1,776.2 $ 855.3 $ 7,160.3
Net interest margin................... 2,723.1 675.6 664.6 4,063.3
Segment earnings...................... 810.1 303.9 290.6 1,404.6
Finance receivables................... 27,145.1 18,053.0 3,424.7 48,622.8
</TABLE>
56
<PAGE> 58
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of Segment and Consolidated Information
A reconciliation of total Company revenue, net interest margin and net
finance receivables as of and for the years ended December 31, 1998, 1997 and
1996 to the related consolidated totals is as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Total Revenue
Total Company Managed Basis revenue.............. $ 10,029.5 $ 8,470.5 $ 7,160.3
Managed Basis adjustments........................ (652.7) (191.9) (62.1)
---------- --------- ---------
Consolidated revenue..................... $ 9,376.8 $ 8,278.6 $ 7,098.2
========== ========= =========
Net Interest Margin
Total Company Managed Basis net interest
margin........................................ $ 5,744.8 $ 4,886.0 $ 4,063.3
Managed Basis adjustments........................ (1,031.1) (101.0) (38.3)
---------- --------- ---------
Consolidated net interest margin......... $ 4,713.7 $ 4,785.0 $ 4,025.0
========== ========= =========
Finance Receivables
Total Company Managed Basis receivables.......... $ 71,364.3 $58,406.5 $48,622.8
Managed Basis adjustments........................ (10,425.3) (3,190.9) (2,109.9)
---------- --------- ---------
Consolidated net finance receivables..... $ 60,939.0 $55,215.6 $46,512.9
========== ========= =========
</TABLE>
Segment earnings and consolidated earnings before income taxes are equal;
therefore, no reconciliation is presented.
Information About Geographic Areas
The following is finance charge information by geographic area as of and
for the years ended December 31, 1998, 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Finance charges
United States........................................ $6,305.8 $6,563.4 $5,660.6
Japan................................................ 1,042.7 696.1 620.7
All other............................................ 561.9 300.7 199.7
-------- -------- --------
Consolidated finance charges................. $7,910.4 $7,560.2 $6,481.0
======== ======== ========
</TABLE>
Information About Products and Services
The Company manages its product and service offering primarily through
these reportable segments. Therefore, pursuant with the provisions of SFAS 131,
no enterprise-wide disclosures of information about products and services are
necessary.
Information About Major Customers
The Company has no customer that represents greater than 10% of total
revenue.
NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The information provided below is required by Statement of Financial
Accounting Standards No. 107, ("SFAS 107"), Disclosures about Fair Value of
Financial Instruments. Amounts disclosed represent estimates of fair values at a
particular point in time. Significant assumptions regarding economic conditions,
loss experience and risk characteristics associated with particular financial
instruments and other factors were
57
<PAGE> 59
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
used for purposes of this disclosure. These assumptions are subjective in nature
and involve matters of judgment. Changes in assumptions could have a material
impact on these estimates.
At December 31, 1998 and 1997, the carrying value and estimated fair value
of certain of the Company's financial instruments were as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------
1998 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents(1)............. $ 4,665.6 $ 4,665.6 $ 433.2 $ 433.2
Investment securities(2)................. 6,678.7 6,678.7 1,242.4 1,242.4
Net finance receivables(3)............... 60,939.0 64,770.2 55,215.6 59,051.5
Notes payable(1)
Commercial paper....................... 24,144.3 24,144.3 19,483.5 19,483.5
Bank loans............................. 1,565.5 1,565.5 1,487.1 1,487.1
Long-term debt(4)........................ 37,596.7 38,904.2 28,228.0 28,992.8
</TABLE>
- ---------------
(1) The estimated fair value approximates their carrying value.
(2) Estimated market values of investment securities are based on quoted market
prices, if available. If quoted prices are not available, the fair value was
estimated by discounting the expected cash flows from the investments at
discount rates which approximate the rates that would achieve an expected
return on assets with similar risk characteristics.
(3) In order to determine the fair values of loans, the loan portfolio was
segmented based on loan type, credit quality and repricing characteristics.
The fair value was estimated by discounting the expected cash flows from
such loans at discount rates which approximate gross finance charge rates
that would achieve an expected return on assets with similar risk
characteristics. The estimated fair value of the credit card receivables was
based on the Company's experience in pricing similar portfolios for
acquisition purposes.
(4) The fair value of long-term debt was determined by discounting expected cash
flows at discount rates currently available to the Company for debt with
similar terms and remaining maturities.
See NOTE 16 for fair value information regarding derivative financial
instruments.
NOTE 19 -- STOCK DIVIDEND
On October 6, 1998 the Company announced a two-for-one split of the
Company's Class A Common Stock to be distributed in the form of a dividend (the
"Stock Dividend"). One additional common share was issued on December 23, 1998
for every common share held by stockholders of record as of the close of
business on December 9, 1998. All per share and related weighted average share
amounts in this report have been restated to reflect the Stock Dividend.
NOTE 20 -- TRANSACTIONS AND BALANCES WITH RELATED PARTIES
The Company paid cash dividends to Ford of $25.6 million, $111.8 million
and $1,928.7 million during the years ended December 31, 1998, 1997 and 1996,
respectively. Of the 1996 cash dividend paid on Common Stock, $55.9 million was
paid to Ford after the Offering. In 1996, Ford made a cash capital contribution
to the Company of $47.3 million. No capital contributions were made by Ford in
1998 or 1997.
The Company provides certain emergency roadside assistance and auto club
services and employee relocation services to Ford. Revenues related to these
services were $33.8 million, $36.0 million and $33.4 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
58
<PAGE> 60
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the Spin-Off, the Company paid fees for certain administrative
services provided by its Ford-affiliated parent. Such fees were $2.3 million,
$8.0 million and $9.7 million for the years ended December 31, 1998, 1997 and
1996, respectively.
At December 31, 1997, the Company's current income taxes payable to its
Ford-affiliated parent amounted to $24.7 million. In connection with the
Spin-Off, Ford and the Company 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.
In March of 1997, the Company acquired a portfolio of approximately $800
million in credit card receivables from The Bank of New York. A director of the
Company was Chairman and Chief Executive officer of The Bank of New York during
1997. The Bank of New York and the Company are not otherwise affiliated.
NOTE 21 -- SUBSEQUENT EVENTS
On January 6, 1999 the Company purchased the assets and assumed the
liabilities of Avco Financial Services, Inc. ("Avco") for $3.9 billion. The
Company used cash equivalents on hand as of December 31, 1998 to fund this
purchase. 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.
On January 13, 1999 the Company and Equilon Enterprises and Motiva
Enterprises, joint venture companies of Shell, Texaco and Saudi Aremco, reached
an agreement whereby the Company will acquire the Shell Proprietary Credit Card
Program. The sale is expected to close during February of 1999. The Shell
Proprietary Credit Card Program consists of approximately $270 million in
managed receivables, and the Company will manage the program on a prospective
basis.
On January 28, 1999, the Company entered into an agreement to sell
Fleetwood Credit Corp., its recreational vehicle financing subsidiary, to
NationsBank, N.A., a unit of BankAmerica Corporation. The sale is expected to
close during the first quarter of 1999.
NOTE 22 -- UNAUDITED QUARTERLY FINANCIAL DATA
The following table sets forth the unaudited quarterly results of
operations (in millions, except earnings per share):
<TABLE>
<CAPTION>
1998
-----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance charges............................. $2,053.0 $1,930.6 $1,881.8 $2,045.0
======== ======== ======== ========
Interest expense............................ $ 846.6 $ 807.3 $ 785.5 $ 757.3
======== ======== ======== ========
Earnings before provision for income
taxes..................................... $ 525.1 $ 504.5 $ 464.9 $ 446.0
Provision for income taxes.................. 193.1 186.9 172.0 165.0
-------- -------- -------- --------
Net earnings................................ $ 332.0 $ 317.6 $ 292.9 $ 281.0
======== ======== ======== ========
Net earnings per share
Basic..................................... $ 0.47 $ 0.46 $ 0.42 $ 0.41
======== ======== ======== ========
Diluted................................... $ 0.47 $ 0.46 $ 0.42 $ 0.40
======== ======== ======== ========
</TABLE>
59
<PAGE> 61
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997
-----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance charges............................. $1,990.8 $1,935.3 $1,872.4 $1,761.7
======== ======== ======== ========
Interest expense............................ $ 739.4 $ 718.8 $ 679.6 $ 637.4
======== ======== ======== ========
Earnings before provision for income
taxes..................................... $ 440.4 $ 433.1 $ 389.0 $ 377.5
Provision for income taxes.................. 162.4 162.2 144.0 139.7
-------- -------- -------- --------
Net earnings................................ $ 278.0 $ 270.9 $ 245.0 $ 237.8
======== ======== ======== ========
Net earnings per share
Basic..................................... $ 0.40 $ 0.39 $ 0.35 $ 0.35
======== ======== ======== ========
Diluted................................... $ 0.40 $ 0.39 $ 0.35 $ 0.34
======== ======== ======== ========
</TABLE>
NOTE 23 -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
Condensed unconsolidated financial information of First Capital as of or
for the years ended December 31, 1998, 1997 and 1996 was as follows:
CONDENSED STATEMENT OF EARNINGS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Revenue
Interest and other income............................ $ 217.1 $ 58.8 $ 20.6
Dividends from subsidiaries.......................... 231.9 52.5 370.4
-------- -------- ------
449.0 111.3 391.0
Expenses
Interest expense..................................... 128.6 44.4 99.7
Operating expenses................................... 47.3 34.9 24.9
Provision for losses on finance receivables.......... 2.9 -- --
-------- -------- ------
178.8 79.3 124.6
-------- -------- ------
Income before credit for federal income taxes and
equity in undistributed earnings of subsidiaries..... 270.2 32.0 266.4
Credit for federal income taxes resulting from tax
agreements with subsidiaries......................... 36.7 40.2 36.3
-------- -------- ------
Earnings before equity in undistributed earnings of
subsidiaries......................................... 306.9 72.2 302.7
Equity in undistributed earnings of subsidiaries....... 916.6 959.5 554.3
-------- -------- ------
Net earnings........................................... $1,223.5 $1,031.7 $857.0
======== ======== ======
</TABLE>
See notes to condensed financial information.
60
<PAGE> 62
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- --------
<S> <C> <C>
Assets
Investment in subsidiaries................................ $10,158.2 $7,167.8
Finance receivables, net of unearned income and allowance
for credit losses...................................... 662.4 --
Advances to subsidiaries, eliminated in consolidation, and
other.................................................. 4,299.1 1,185.6
--------- --------
Total assets...................................... $15,119.7 $8,353.4
========= ========
Liabilities and Stockholders' Equity
Accounts payable and accruals............................. $ 310.7 $ 32.2
Short-term notes payable.................................. 5,473.2 1,628.2
Long-term debt............................................ 809.3 424.4
Stockholders' equity...................................... 8,526.5 6,268.6
--------- --------
Total liabilities and stockholders' equity........ $15,119.7 $8,353.4
========= ========
</TABLE>
See notes to condensed financial information.
The estimated fair value of notes payable and long-term debt at December
31, 1998 and 1997 was $1,494.9 million and $631.0 million, respectively. Fair
values were estimated by discounting expected cash flows at discount rates
currently available to the Company for debt with similar terms and remaining
maturities.
61
<PAGE> 63
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings.............................................. $ 1,223.5 $1,031.7 $ 857.0
Adjustments to net earnings for non-cash items:
Provision for losses on finance receivables............ 2.9 -- --
Depreciation and amortization.......................... 0.4 -- --
Increase (decrease) in accounts payable and accruals... 123.5 (12.9) (7.4)
Equity in undistributed earnings of subsidiaries....... (916.6) (959.5) (554.3)
Other..................................................... (370.8) 1.2 (16.8)
--------- -------- ---------
Net cash provided from operating activities............ 62.9 60.5 278.5
--------- -------- ---------
Cash Flows from Investing Activities
Finance receivables originated or purchased............... (1,207.3) -- --
Finance receivables liquidated............................ 542.0 -- --
Acquisition of other finance businesses................... (1,767.4) -- --
Cash dividends from subsidiaries.......................... 231.9 52.5 370.4
Increase in investments in and advances to subsidiaries... (3,011.1) (717.6) (894.6)
--------- -------- ---------
Net cash used for investing activities................. (5,211.9) (665.1) (524.2)
--------- -------- ---------
Cash Flows from Financing Activities
Increase in notes payable and long-term debt.............. 4,345.0 891.6 853.0
Sale of Class A Common Stock.............................. 1,266.7 -- 1,850.0
Cash contributions from Ford.............................. -- -- 47.3
Cash dividends............................................ (142.0) (138.6) (1,998.0)
Retirement of long-term debt.............................. (115.1) (214.0) (395.2)
Treasury stock and other.................................. (17.0) (12.4) --
--------- -------- ---------
Net cash provided from financing activities............ 5,337.6 526.6 357.1
Effect of foreign currency translation adjustments on
cash...................................................... (112.6) 78.5 (107.8)
--------- -------- ---------
Increase in cash and cash equivalents....................... 76.0 0.5 3.6
Cash and cash equivalents at beginning of period............ 1.2 0.7 (2.9)
--------- -------- ---------
Cash and cash equivalents at end of period.................. $ 77.2 $ 1.2 $ 0.7
========= ======== =========
</TABLE>
See notes to condensed financial information.
62
<PAGE> 64
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO CONDENSED FINANCIAL INFORMATION:
(1) The ability of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends is restricted pursuant to the terms of
certain debt agreements entered into by the Company's principal domestic
operating subsidiary, Associates Corporation of North America. See NOTE 11 to
the consolidated financial statements for a summary of the most significant of
these restrictions.
(2) Notes payable and long-term debt bear interest at rates from 5.62% to
6.95%. The estimated maturities of the notes outstanding, at December 31, 1998,
during subsequent years were as follows (in millions):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------
<S> <C>
1999........................................................ $156.4
2000........................................................ 90.9
2001........................................................ 62.0
2002........................................................ --
2003........................................................ --
Thereafter.................................................. 500.0
------
$809.3
======
</TABLE>
63
<PAGE> 65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by Item 10 is incorporated by reference from the
information under the caption "Election of Directors" and "Executive Officers
and Compensation" in the Company's Proxy Statement for its 1999 annual meeting
of stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by Item 11 is incorporated by reference from the
information under the caption "Executive Officers and Compensation" in the
Company's Proxy Statement for its 1999 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by Item 12 is incorporated by reference from the
information under the caption "Security Ownership" in the Company's Proxy
Statement for its 1999 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Item 13 is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Company's Proxy Statement for its 1999 annual meeting of stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants................. 31
Consolidated Statement of Earnings for the years
ended December 31, 1998, 1997 and 1996............ 32
Consolidated Balance Sheet at December 31, 1998
and 1997.......................................... 33
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1998, 1997
and 1996.......................................... 34
Consolidated Statement of Cash Flows for the years
ended December 31, 1998, 1997 and 1996............ 35
Notes to consolidated financial statements........ 36
</TABLE>
64
<PAGE> 66
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, First Capital filed Current
Reports on Form 8-K dated October 1, 1998 (related to the issuance of
debt securities pursuant to Rule 415); October 6, 1998 (related to the
announcement of a two-for-one split common stock split in the form of a
one-for-one stock dividend); October 13, 1998 and October 14, 1998
(related to the release of third quarter earnings); October 19, 1998
(related to the completion of the SPS acquisition); November 12, 1998
(announcing plans to make public an offering of 15 million shares of
Class A common stock); November 23, 1998 (related to fourth quarter
earnings estimates); November 24, 1998 (announcing the pricing of the
offering of 15 million shares of Class A common stock); November 25,
1998 (related to the underwriting agreement for equity securities in
connection with registration statement no. 333-62875 on Form S-3); and
December 15, 1998 (related to the acquisition of The Northland
Company).
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3.1 -- Restated Certificate of Incorporation. (3.1)*
3.2 -- By-laws (3.2)+
4.1 -- Instruments with respect to issues of long-term debt have
not been filed as exhibits to this annual report on Form
10-K as the authorized principal amount of any one of
such issues does not exceed 10% of the total assets of
the registrant and its consolidated subsidiaries.
Registrant agrees to furnish to the Commission a copy of
each such instrument upon its request.
4.2 -- Rights Agreement dated as of April 13, 1998, between the
Company and First Chicago Trust Company of New York as
Rights Agent.(4)**
10.1 -- Form of Employment Agreement.
10.2 -- The Company's Equity Deferral Plan(10.7)*
10.3 -- The Company's Incentive Compensation Plan.****
10.4 -- The Company's Long-Term Performance Plan. (10.12)*
10.5 -- The Company's Supplemental Retirement Income Plan.
(10.16)*
10.6 -- The Company's Excess Benefits Plan. (10.17)*
10.7 -- The Company's Long-Term Equity Compensation Plan Stock
Option Award Agreement -- IPO.(10.19)*
10.8 -- The Company's Long-Term Equity Compensation Plan Stock
Option Award Agreement -- 1996.(10.20)*
10.9 -- The Company's Long-Term Equity Compensation Plan Stock
Option Award Agreement -- 1997.(10.21)*
10.10 -- The Company's Incentive Compensation Plan Stock Option
Award Agreement -- 1998.****
10.11 -- The Company's Incentive Compensation Plan Stock Option
Award Agreement -- 1999.
10.12 -- Form of Restricted Stock Award Agreement.(10.23)****
12. -- Computation of Ratio of Earnings to Fixed Charges.
21. -- Subsidiaries of the Registrant.
23. -- Consent of Independent Accountants.
24. -- Powers of Attorney.
27. -- Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to the exhibit listed in parenthesis contained in
the Company's registration statement on Form S-1 filed with the Securities
and Exchange Commission on February 8, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Commission on April 13, 1998.
65
<PAGE> 67
*** Incorporated by reference to the exhibit listed in parentheses contained in
the Company's Registration Statement on Form S-8 as filed with the
Commission on March 31, 1998.
**** Incorporated by reference to the exhibit listed in parentheses contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
+ Incorporated by reference to the exhibit listed in parenthesis contained in
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
66
<PAGE> 68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ASSOCIATES FIRST CAPITAL CORPORATION
By /s/ JOHN F. STILLO
--------------------------------------
John F. Stillo
Senior Vice President and Comptroller
February 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KEITH W. HUGHES* Chairman of the Board,
- ----------------------------------------------------- Principal Executive
(Keith W. Hughes) Officer and Director
/s/ J. CARTER BACOT* Director
- -----------------------------------------------------
(J. Carter Bacot)
/s/ ERIC S. DOBKIN* Director
- -----------------------------------------------------
(Eric S. Dobkin)
/s/ WILLIAM M. ISAAC* Director
- -----------------------------------------------------
(William M. Isaac)
/s/ H. JAMES TOFFEY, JR.* Director
- -----------------------------------------------------
(H. James Toffey, Jr.)
/s/ KENNETH WHIPPLE* Director
- -----------------------------------------------------
(Kenneth Whipple)
/s/ ROY A. GUTHRIE* Director, Senior Executive
- ----------------------------------------------------- Vice President and
(Roy A. Guthrie) Principal Financial
Officer
/s/ JOHN F. STILLO Senior Vice President, February 24, 1999
- ----------------------------------------------------- Comptroller and Principal
(John F. Stillo) Accounting Officer
</TABLE>
By signing his name hereto, John F. Stillo signs this document on behalf of
himself and each of the other persons indicated above pursuant to powers of
attorney duly executed by such persons.
*By /s/ JOHN F. STILLO
----------------------------------
Attorney-in-fact
67
<PAGE> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Restated Certificate of Incorporation. (3.1)*
3.2 -- By-laws (3.2)+
4.1 -- Instruments with respect to issues of long-term debt have
not been filed as exhibits to this annual report on Form
10-K as the authorized principal amount of any one of
such issues does not exceed 10% of the total assets of
the registrant and its consolidated subsidiaries.
Registrant agrees to furnish to the Commission a copy of
each such instrument upon its request.
4.2 -- Rights Agreement, dated as of April 13, 1998, between the
Company and First Chicago Trust Company of New York as
Rights Agent.(4)**
10.1 -- Form of Employment Agreement.
10.2 -- The Company's Equity Deferral Plan(10.7)*
10.3 -- The Company's Incentive Compensation Plan.****
10.4 -- The Company's Long-Term Performance Plan. (10.12)*
10.5 -- The Company's Supplemental Retirement Income Plan.
(10.16)*
10.6 -- The Company's Excess Benefits Plan. (10.17)*
10.7 -- The Company's Long-Term Equity Compensation Plan Stock
Option Award Agreement -- IPO.(10.19)*
10.8 -- The Company's Long-Term Equity Compensation Plan Stock
Option Award Agreement -- 1996.(10.20)*
10.9 -- The Company's Long-Term Equity Compensation Plan Stock
Option Award Agreement -- 1997.(10.21)*
10.10 -- The Company's Incentive Compensation Plan Stock Option
Award Agreement -- 1998.****
10.11 -- The Company's Incentive Compensation Plan Stock Option
Award Agreement -- 1999.
10.12 -- Form of Restricted Stock Award Agreement.(10.23)****
12. -- Computation of Ratio of Earnings to Fixed Charges.
21. -- Subsidiaries of the Registrant.
23. -- Consent of Independent Accountants.
24. -- Powers of Attorney.
27. -- Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to the exhibit listed in parenthesis contained in
the Company's registration statement on Form S-1 filed with the Securities
and Exchange Commission on February 8, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Commission on April 13, 1998.
*** Incorporated by reference to the exhibit listed in parentheses contained in
the Company's Registration Statement on Form S-8 as filed with the
Commission on March 31, 1998.
**** Incorporated by reference to the exhibit listed in parentheses contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
+ Incorporated by reference to the exhibit listed in parenthesis contained in
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT 12/1/98
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT, effective as of
December 1, 1998, (the "Agreement") between ASSOCIATES CORPORATION OF NORTH
AMERICA (A Texas Corporation), a corporation existing under the laws of the
State of Texas (the "Company"), and ________________________ (the "Executive"),
WITNESSETH:
WHEREAS, the Company and the Executive entered into an agreement dated
as of October 15, 1997, relating to the employment of the Executive with the
Company;
WHEREAS, the Company and the Executive now desire to revise certain
terms of that agreement and to enter into an amended and restated agreement
related to the employment of the Executive;
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT
1.1. Effective as of December 1, 1998 (the "Effective Date"), the
Executive hereby agrees to serve, upon the terms and conditions herein
contained, as an executive of the Company, which is the management company for
Associates First Capital Corporation ("AFCC") and its controlled group of
corporations. The Executive shall have such duties as the Board of Directors of
AFCC, or its delegee, may determine.
1.2. Unless automatically renewed, the Agreement and the term of
employment hereunder shall commence on the Effective Date and, subject to the
terms hereof, shall terminate on the day immediately prior to the third
anniversary of such date. This Agreement and the three-year term of employment
shall automatically renew on the first day of each calendar month following the
Effective Date, unless either party provides written notice of non-renewal prior
to the first day of each such month. The original three-year term and any
renewals thereof are referred to as the "Employment Term."
1.3. During the Executive's employment hereunder, the Executive shall
devote the Executive's best efforts and substantially all of the Executive's
time and services
<PAGE> 2
during normal business hours (subject to vacations, sick leave and other
absences in accordance with the policies of the Company as in effect from time
to time for other senior executives of the Company who are of a comparable
status to the Executive) to the business and affairs of the Company.
2. SALARY
2.1. During the Executive's employment hereunder, the Executive shall
be entitled to receive an annual base salary of at least $ , payable in
accordance with the Company's payroll policy as in effect from time to time.
Such base salary shall include any salary reduction contributions on behalf of
the Executive to (a) any plan sponsored by the Company or any of its affiliates
that includes a cash-or-deferred arrangement under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code"), (b) any other plan of
deferred compensation sponsored by the Company or any of its affiliates, (c) any
"cafeteria plan" under Code Section 125 that is sponsored by the Company or any
of its affiliates, or (d) any other policy, plan, program or arrangement of the
Company or any of its affiliates pursuant to which the Executive has agreed to a
salary reduction contribution.
2.2. The Company may, in its sole discretion, increase the Executive's
annual base salary.
3. INCENTIVE COMPENSATION
During the Executive's employment hereunder, the Executive shall be
entitled to participate in any incentive, profit-sharing, bonus, stock option or
similar or comparable policy, plan, program or arrangement applicable generally
to other senior executives of the Company who are of a comparable status to the
Executive, subject to the terms and conditions of any such policy, plan, program
or arrangement, as such policy, plan, program or arrangement may now exist or
may be adopted or amended hereafter by the Company or any of its affiliates, as
applicable. In the event that a Change in Control occurs during the Employment
Term, then for the calendar year in which the Change in Control occurs and for
each subsequent full calendar year that remains in the Employment Term and
throughout which the Executive remains employed by the Company, the Executive
shall receive (a) an award of corporate annual performance pay ("CAPP") under
the Associates First Capital Corporation Incentive Compensation Plan (or any
predecessor or successor plan) (the "ICP") in an amount at least equal to 80% of
the norm award calculated for the Executive for the year, and (b) an award of
long-term performance pay ("LTPP") under the Associates First Capital
Corporation Long-Term Performance Plan (or any successor plan) in an amount at
least equal to
2
<PAGE> 3
80% of the norm award calculated for the Executive for the year. For purposes of
the immediately preceding sentence, the Executive's "norm award" for any year
shall be calculated in accordance with the Company's normal administrative
procedures, as in effect immediately prior to the Change in Control, for
determining CAPP and LTPP norm awards. Any bonuses, including CAPP and LTPP
awards, payable pursuant to this Section 3 shall be payable to the Executive at
the same time and in the same manner as such bonuses are generally payable to
other executives of the Company and subject to the terms and conditions of the
applicable policy, plan, program or arrangement.
4. EXECUTIVE BENEFITS
During the Executive's employment hereunder, the Executive shall be
entitled to participate in and receive benefits under any and all employee
retirement income, welfare benefit and fringe benefit policies, plans, programs
or arrangements applicable generally to the Company's employees or generally to
other senior executives of the Company who are of a comparable status to the
Executive, subject to the terms and conditions of any such policies, plans,
programs or arrangements, as such policies, plans, programs or arrangements may
now exist or may be adopted or amended hereafter by the Company or AFCC, as
applicable.
5. EXPENSES
During the Executive's employment hereunder, the Executive is
authorized to incur, and shall be reimbursed for all, reasonable expenses for
promoting the business of the Company and its affiliates, including expenses for
travel and similar items, in accordance with the policies of the Company as in
effect from time to time for other senior executives of the Company who are of a
comparable status to the Executive.
6. TERMINATION
6.1. The Company may terminate the Executive's employment hereunder at
any time, with or without Cause. As used herein, the term "Cause" shall be
limited to (a) action by the Executive involving willful malfeasance, (b) the
Executive's unreasonable neglect or refusal to perform the executive duties
assigned to the Executive pursuant to this Agreement, (c) the Executive's being
convicted of a felony, (d) the Executive's engaging in any activity that is
directly or indirectly in competition with the Company or any affiliate or in
any activity that is inimical to the best interests of the Company or any
affiliate, or (e) the Executive's violation of Company policy covering standards
of corporate conduct. Notwithstanding anything to the contrary in this
3
<PAGE> 4
Agreement, if the Company terminates the Executive's employment with Cause, all
of the Company's obligations under this Agreement shall cease, and this
Agreement shall terminate, on the effective date of the Executive's termination
of employment.
6.2. The Executive may terminate employment hereunder at any time by
written notice to the Company. If the Executive terminates employment hereunder
for any reason whatsoever, including without limitation by retirement, all of
the Company's obligations under the Agreement shall cease, to the extent
permitted by applicable law and other than pursuant to a policy, plan, program
or arrangement provided to the Executive in accordance with Section 4 hereof, as
of the effective date of the termination of the Executive's employment;
provided, however, that the Executive's termination of employment with the
Company as a result of an event constituting Constructive Termination shall not
be considered a termination by the Executive under this Section 6.2. In the
event that the Executive's employment hereunder terminates due to the
Executive's becoming Totally Disabled or due to the Executive's death, the
Company's obligation under this Agreement shall be determined in accordance with
Section 7 hereof.
6.3. In the event that either the Company terminates the Executive's
employment hereunder without Cause or, within the period beginning six months
prior to and ending 15 months after a Change in Control (the "Window Period"),
the Executive terminates employment as a result of an event constituting
Constructive Termination, the Executive shall be entitled, in lieu of any other
compensation or benefits provided for under this Agreement (to the extent
permitted by applicable law and other than pursuant to a policy, plan, program
or arrangement provided to the Executive in accordance with Section 4 hereof):
(a) to receive a lump-sum cash payment in an amount equal
to (i) [two/three] times the sum of the Executive's
then-current annual base salary and an amount equal
to the average of the CAPP (or, if applicable, other
annual bonus) awards paid to the Executive by the
Company for each of the three calendar years
immediately preceding the year of termination of the
Executive's employment (or, if the Executive has not
been employed by the Company or one of its affiliates
for at least three calendar years immediately
preceding the year of termination, for such years as
the Executive has been employed by the Company or one
of its affiliates immediately preceding the year of
termination; provided, however, that if the Executive
is terminated prior to receiving any CAPP or other
annual bonus award from the Company, any CAPP or
other
4
<PAGE> 5
annual bonus award guaranteed to such Executive
pursuant to the Executive's engagement letter with
the Company shall be taken into account for purposes
of this Section 6.3), plus (ii) a pro rata amount,
based on the portion of the current performance year
preceding termination, equal to the average of the
CAPP (or, if applicable, other annual bonus) and LTPP
awards paid to the Executive by the Company for each
of the three calendar years immediately preceding the
year of termination of the Executive's employment
(or, if the Executive has not been employed by the
Company or one of its affiliates for at least three
calendar years immediately preceding the year of
termination, for such years as the Executive has been
employed by the Company or one of its affiliates
immediately preceding the year of termination;
provided, however, that if the Executive is
terminated prior to receiving any CAPP (or other
annual bonus) or LTPP awards from the Company, any
CAPP (or other annual bonus) and LTPP awards
guaranteed to such Executive pursuant to his
engagement letter with the Company shall be taken
into account for purposes of this Section 6.3);
(b) to be vested in full as of the termination date in
any outstanding stock options granted under the ICP
and to have all restrictions lapse as of the
termination date on any restricted stock awarded to
the Executive under the ICP; and
(c) to continue to receive, for [two/three] years from
the date of termination of the Executive's employment
hereunder, at the Company's expense, life insurance
and medical, dental, disability and other welfare
benefits at least comparable to those provided by the
Company to the Executive, and in which the Executive
is enrolled, on the date of termination of the
Executive's employment hereunder (the "Company
Welfare Benefits"), provided that such Company
Welfare Benefits shall cease if the Executive obtains
other employment with benefits that are similar in
the aggregate to the Company Welfare Benefits.
To the extent permitted by applicable provisions of the Code as then in
effect, the Company shall treat the value of premiums for the Company Welfare
Benefits as taxable income to the Executive for each year during which the
Company provides such Company Welfare Benefits to the Executive pursuant to
Section 6.3(c).
5
<PAGE> 6
Notwithstanding the foregoing, with respect to the Executive's continued
coverage under any plans subject to the continued coverage requirements of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the
Executive's "qualifying event" for purposes of COBRA shall be the date of
termination of the Executive's employment with the Company. Any termination
payments hereunder shall not be taken into account for purposes of any
retirement plan or other benefit plan sponsored by the Company or any of its
affiliates, except as otherwise expressly required by any such plan or
applicable law. The Company may withhold from any amounts payable under this
Agreement all federal, state, city or other taxes as the Company is required to
withhold pursuant to any law or government regulation or ruling.
6.4. Notwithstanding any other provision, the right of the Executive to
any compensation or benefits provided for under this Agreement shall cease (to
the extent permitted by applicable law) if the Board of Directors of the Company
(or, in the event that the Executive is a member of the Board of Directors of
the Company, the Board of Directors of AFCC) determines that the Executive has
violated Sections 8.2 or 8.3 hereof, or has engaged in any activity that is
inimical to the best interests of the Company or any of its affiliates.
6.5. For purposes of this Agreement, a "Change in Control" shall have
occurred if at any time during the Employment Term any of the following events
shall occur:
(a) AFCC is merged, consolidated or reorganized into or
with another corporation or other legal person, and
as a result of such merger, consolidation or
reorganization into or with another corporation or
another legal person, less than a majority of the
combined voting power of the then-outstanding
securities of such corporation or person immediately
after such transaction are held in the aggregate by
the holders of Voting Stock (as that term is
hereafter defined) of AFCC immediately prior to such
transaction;
(b) AFCC sells or otherwise transfers all or
substantially all of its assets to any other
corporation or other legal person, and as a result of
such sale or transfer, less than a majority of the
combined voting power of the then-outstanding voting
securities of such corporation or person are held in
the aggregate by the holders of Voting Stock of AFCC
immediately prior to such sale or transfer;
6
<PAGE> 7
(c) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report),
each as promulgated pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act"), disclosing
that any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) or the Exchange
Act) has become the beneficial owner (as the term
"beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the
Exchange Act) of securities representing 20% or more
of the combined voting power of the then-outstanding
securities of AFCC entitled to vote generally in the
election of Directors of AFCC ("Voting Stock");
(d) AFCC files a report or proxy statement with the
Securities and Exchange Commission pursuant to the
Exchange Act disclosing in response to Form 8-K or
Schedule 14A (or any successor schedule, form or
report or item therein) that a change in control of
AFCC has or may have occurred or will or may occur in
the future pursuant to any then-existing contract or
transaction; or
(e) If during any period of two consecutive years
individuals who at the beginning of any such period
constituted the Directors of AFCC cease for any
reason to constitute at least a majority thereof
unless the election, or the nomination for election
by AFCC's stockholders, of each Director of AFCC
first elected during such period was approved by a
vote of at least two-thirds of the Directors of AFCC
(or, in the case of a nomination for election, by a
vote of at least two-thirds of the members of the
Nominating Committee of the Board of Directors of
AFCC) then still in office who were Directors of AFCC
at the beginning of any such period.
Notwithstanding the foregoing provisions of Section 6.5(c) or (d)
hereof, unless otherwise determined in a specific case by a majority vote of the
Board of Directors of AFCC, a "Change in Control" shall not be deemed to have
occurred for purposes of this Agreement solely because AFCC, an entity in which
AFCC directly or indirectly beneficially owns 50% or more of the voting
securities of such entity, any employee stock ownership plan or any other
employee benefit plan of AFCC or any of its affiliates either files or becomes
obligated to file a report or a proxy statement under or in response to Schedule
13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) under the Exchange Act, disclosing
7
<PAGE> 8
beneficial ownership by it of shares of voting securities of AFCC, whether in
excess of 20% or otherwise, or because AFCC reports that a change in control of
AFCC has or may have occurred or will or may occur in the future by reason of
such beneficial ownership.
6.6. If a Change in Control occurs during the Employment Term, then as
of the date of such Change in Control, (a) the Executive shall be vested in full
in any outstanding stock options granted under the ICP, (b) all restrictions
shall lapse on any restricted stock awarded to the Executive under the ICP, (c)
the Executive's rights and interests shall be vested in full and nonforfeitable
in any accounts or benefits payable under any of the Company's nonqualified
plans in which the Executive participates or has participated prior to the
Change in Control, and (d) the Company shall fund a trust, subject to the claims
of creditors of the Company and its affiliates, with sufficient funds to
guarantee payment of all benefits payable to the Executive under any of the
Company's nonqualified plans in which the Executive participates or has
participated prior to the Change in Control.
6.7. For purposes of this Agreement, the occurrence of any of the
following events shall be considered to constitute "Constructive Termination,"
unless such event is expressly consented to in advance in writing by the
Executive:
(a) The assignment to the Executive of any duties
inconsistent in any respect with the Executive's
position (including status, offices, titles
and reporting requirement), authority, duties or
responsibilities, or any other action that results in
a substantial diminution in such position, authority,
duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied
by the Company promptly after receipt of notice
thereof given by the Executive;
(b) Any failure to (i) continue to provide the Executive
with the opportunity to participate, on terms
substantially comparable in the aggregate to those in
effect immediately prior to the Window Period, in
substantially the same incentive compensation,
employee retirement income, welfare benefit and
fringe benefit policies, plans, programs and
arrangements in which the Executive was participating
(or entitled to participate pursuant to Sections 3
and 4 hereof) immediately prior to the Window Period,
or their equivalent, except to the extent any such
failure to continue to
8
<PAGE> 9
provide any of the above is applicable generally to
all of the Company's employees, or (ii) provide the
Executive with the incentive compensation, employee
retirement income, welfare benefit and fringe benefit
policies, plans, programs and arrangements (or their
equivalent) as in effect from time to time for other
senior executives of the Company who are of a
comparable status to the Executive;
(c) A substantial reduction, without good business
reasons, of the facilities and perquisites available
to the Executive immediately prior to such reduction;
or
(d) A relocation of the Executive's principal location of
work to any location that is more than 50 miles from
the location of such principal location of work
immediately prior to such relocation.
6.8. In the event that it shall be determined (as hereinafter provided)
that any payment or distribution by the Company pursuant to this Agreement to or
for the benefit of the Executive (determined without regard to any additional
payments required under this Section 6.8) (a "Payment") would be subject to the
excise tax imposed by Code Section 4999 (or any successor provision thereto) or
to any similar tax imposed by state or local law, or to any interest or
penalties with respect to such excise tax (such tax or taxes, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Company shall pay to the Executive an additional amount
(a "Gross-Up Payment") such that, after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payment.
6.9. Subject to the provisions of Section 6.10, all determinations
required to be made under Section 6.8, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether and when
a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by a nationally recognized firm of certified public accountants (the
"Accounting Firm") selected by the Company in its sole discretion. The Company
and the Executive shall each provide the Accounting Firm access to and copies of
any books, records and documents in the possession of the Company or the
Executive, as the case may be, reasonably requested by the Accounting Firm and
otherwise cooperate with the Accounting Firm in connection with the preparation
and issuance of the determination contemplated by
9
<PAGE> 10
Section 6.8 and this Section 6.9. The Accounting Firm shall submit its
determination and detailed supporting calculations both to the Company and to
the Executive within 15 business days after the effective date of termination of
the Executive's employment hereunder, if applicable, or at such earlier time as
may be requested by the Company. All fees and expenses of the Accounting Firm
shall be borne solely by the Company. If the Accounting Firm determines that any
Excise Tax is payable by the Executive, the Company shall pay the required
Gross-Up Payment to the Executive within five business days after receipt of
such determination and calculations. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall, at the same time as it makes
such determination, furnish the Executive with an opinion that the Executive has
substantial authority not to report any Excise Tax on the Executive's federal,
state, local income or other tax return. Any determination by the Accounting
Firm as to the amount of the Gross-Up Payment shall be binding upon the Company
and the Executive. As a result of possible uncertainty in the application of
Code Section 4999 (or any successor provision thereto) and the possibility of
similar uncertainty regarding applicable state or local tax law at the time of
any determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments will not have been made by the Company that should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 6.10 hereof and the Executive thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred, and the Company shall promptly pay any such
Underpayment to or for the benefit of the Executive within five business days
after the Company's receipt of the Accounting Firm's determination and
calculations.
6.10. The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of a Gross-Up Payment. Such notification shall be given as promptly
as practicable but no later than 10 business days after the Executive actually
receives notice of such claim and the Executive shall further apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid (in each case, to the extent known by the Executive). The
Executive shall not pay such claim prior to the earlier of (a) the expiration of
the 30-calendar-day period following the date on which the Executive gives such
notice to the Company and (b) the date that any payment of amount with respect
to such claim is due. If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:
10
<PAGE> 11
(i) provide the Company with any written records or
documents in the Executive's possession relating to such claim as such
records or documents are reasonably requested by the Company;
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to
time, including without limitation accepting legal representation with
respect to such claim by an attorney competent in respect of the
subject matter and reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section 6.10, the Company shall control all proceedings taken in connection with
the contest of any claim contemplated by this Section 6.10 and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at the
Executive's own cost and expense) and may, at its option, either direct the
Executive to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
the tax claimed and sue for a refund, the Company shall advance the amount of
such payment to the Executive on an interest-free basis and shall indemnify and
hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to such advance; and provided further, however, that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which the contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
any such
11
<PAGE> 12
contested claim shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to settle
or contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
6.11. The federal, state and local income or other tax returns filed by
the Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive shall make proper payment of the amount of any
Excise Tax and, at the request of the Company, provide to the Company true and
correct copies (with any amendments) of the Executive's federal income tax
return as filed with the Internal Revenue Service and corresponding state and
local tax returns, if relevant, as filed with the applicable taxing authority,
and such other documents reasonably requested by the Company, evidencing such
payment. If prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, the
Executive shall within five business days of such determination pay to the
Company the amount of such reduction. If, after the receipt by the Executive of
an amount advanced by the Company pursuant to Section 6.8 or 6.10 hereof, the
Executive receives any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of Section 6.10
hereof) promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereof after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant to
Section 6.8 or 6.10 hereof, a determination is made that the Executive shall not
be entitled to any refund with respect to such claim and the Company does not
notify the Executive in writing of its intent to contest such denial or refund
prior to the expiration of 30 calendar days after such determination, then such
advance shall be forgiven and shall not be required to be repaid, and the amount
of such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid pursuant to Section 6.8.
7. DISABILITY OR DEATH
7.1. In the event that the Executive becomes Totally Disabled during
the Executive's employment hereunder, (a) the Executive's employment with the
Company shall be deemed to have terminated employment with the Company effective
as of the first date on which the Executive is determined to be Totally
Disabled, and (b) in lieu of any other compensation or benefits provided for
under this Agreement (to the extent permitted by applicable law and other than
pursuant to a policy, plan, program or
12
<PAGE> 13
arrangement provided to the Executive in accordance with Section 4 hereof), the
Executive shall receive on or about the first day of each calendar month,
beginning with the first calendar month immediately following the date on which
the Executive is first determined to be Totally Disabled and continuing for five
additional months (a total of six months), a cash payment equal to the
Executive's monthly base salary (determined as of the date on which the
Executive is first determined to be Totally Disabled) plus one-twelfth of the
average of the CAPP (or, if applicable, other annual bonus) awards paid to the
Executive by the Company for each of the three calendar years immediately
preceding the year in which the Executive is first determined to be Totally
Disabled (or, if the Executive has not been employed by the Company or one of
its affiliates for at least three calendar years immediately preceding the year
in which the Executive is first determined to be Totally Disabled, for such
years as the Executive has been employed by the Company or one of its affiliates
immediately preceding the year in which the Executive is first determined to be
Totally Disabled; provided, however, that if the Executive is determined to be
Totally Disabled prior to receiving any CAPP or other annual bonus award from
the Company, any CAPP or other annual bonus award guaranteed to such Executive
pursuant to the Executive's engagement letter with the Company shall be taken
into account for purposes of this Section 7.1), less any amounts received
through any disability or salary continuation plan provided pursuant to Section
4 hereof. For purposes of this Agreement, the Executive shall be considered to
be "Totally Disabled" as of such date as the Executive is determined to have a
physical or mental impairment that prevents the Executive from performing the
duties of the Executive's regular job.
7.2. In the event that the Executive dies while employed hereunder, the
Executive's beneficiary (or beneficiaries) shall receive, in lieu of any other
compensation or benefits provided for under this Agreement (to the extent
permitted by applicable law and other than pursuant to a policy, plan, program
or arrangement provided to the Executive in accordance with Section 4 hereof),
the Executive's beneficiary or beneficiaries shall receive within 30 days of the
date of the Executive's death a lump-sum cash payment equal to the Executive's
annual base salary (determined as of the date of the Executive's death) plus the
average of the CAPP (or, if applicable, other annual bonus) awards paid to the
Executive by the Company for each of the three calendar years immediately
preceding the year in which the Executive dies (or, if the Executive has not
been employed by the Company or one of its affiliates for at least three
calendar years immediately preceding the year in which the Executive dies, for
such years as the Executive has been employed by the Company or one of its
affiliates immediately preceding the year of death; provided, however, that if
the Executive dies prior to receiving any CAPP (or other annual bonus) award
from the
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<PAGE> 14
Company, any CAPP or other annual bonus award guaranteed to such Executive
pursuant to the Executive's engagement letter with the Company shall be taken
into account for purposes of this Section 7.2). The Executive may designate, at
any time and from time to time, a beneficiary or beneficiaries, in such form as
specified by the Company, to receive the payment provided for herein, provided
that any designation or change of a prior designation must be received in
writing by the Company prior to the Executive's death and provided, further,
that if no such designation is received by the Company prior to the Executive's
death, the Executive's beneficiary shall be deemed to be the Executive's estate.
8. RESTRICTIVE COVENANTS
8.1. The Executive agrees to execute and deliver from time to time the
Company's standard confidentiality, conflict of interest and proprietary
information agreements.
8.2. The Executive and the Executive's agents shall not, during the
12-month period following any termination of employment hereunder, or in
contemplation of termination of employment, induce, entice or solicit any
employee of the Company or its affiliates, to leave employment with the Company
or its affiliates.
8.3. If the Executive receives benefits or compensation of any kind
from the Company pursuant to Section 6.3, the Executive will not, either
directly or indirectly, for a 12-month period following termination of
employment with the Company, compete with the Company in any manner or capacity
(e.g., as an employee, advisor, principal, agent, partner, officer or director)
in any phase of any business which the Company or any of its affiliates conduct
during the Employment Term. The obligations of this covenant not to compete
("Covenant") shall apply to any geographic area in which the Company and its
affiliates have engaged in business during the Employment Term. The Executive
agrees and acknowledges that it would be difficult to fully compensate the
Company for the damages resulting from a breach of this Covenant, and that the
Company will, therefore, be entitled to temporary and permanent injunctive
relief in the event of any actual or threatened breach. Such relief may be
granted without the necessity of proving actual damages, but this provision does
not diminish the Company's right to recover damages in addition to injunctive
relief.
14
<PAGE> 15
9. NOTICE
For all purposes of this Agreement, all communications, including
without limitation notices, consents, requests or approvals, required or
permitted to be given hereunder, shall be in writing, and shall be deemed to
have been duly given when hand-delivered or dispatched by electronic facsimile
transmission (with receipt thereof confirmed), or five business days after
having been mailed by United States registered or certified mail, return receipt
requested, postage prepaid, or three business days after having been sent by a
nationally recognized overnight courier service such as Federal Express or UPS,
addressed to the Company (to the attention of its General Counsel) at its
principal executive offices and to the Executive at the Executive's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of changes of address
shall be effective only upon receipt.
10. SEPARABILITY
If any provision of this Agreement shall be declared to be invalid or
unenforceable, in whole or in part, such provision shall be modified, to the
extent practical, consistent with the intent of the parties, in order to render
it enforceable, but such invalidity or unenforceability shall not affect the
remaining provisions hereof, which shall remain in full force and effect.
11. ASSIGNMENT
11.1. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business or assets of the Company, by agreement
in form and substance satisfactory to the Executive, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent the
Company would have been required to perform if no such succession had taken
place. This Agreement shall be binding upon and inure to the benefit of the
Company and any successor to the Company, including without limitation any
persons acquiring directly or indirectly all or substantially all of the
business or assets of the Company whether by purchase, merger, consolidation,
reorganization or otherwise (and such successor shall thereafter be deemed the
"Company" for the purposes of this Agreement), but shall not otherwise be
assignable, transferable or delegable by the Company.
11.2. This Agreement shall inure to the benefit of , and be enforceable
by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
15
<PAGE> 16
11.3. This Agreement is personal in nature, and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 11.1 and 11.2. Without limiting the generality or effect of
the foregoing, the Executive's right to receive payments hereunder shall not be
assignable, transferable or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by the Executive's will or by
the laws of descent and distribution; and, in the event of any attempted
assignment or transfer contrary to this Section 11.3, the Company shall have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
12. ENTIRE AGREEMENT; AMENDMENT
This Agreement supersedes any and all other agreements, either oral or
in writing, between the parties hereto with respect to the subject matter hereof
and contains all of the covenants and agreements between the parties with
respect to such subject matter. Each party to this Agreement acknowledges that
no representations, inducements, promises or other agreements, orally or
otherwise, have been made by any party, or anyone acting on behalf of any party,
pertaining to the subject matter hereof, which are not embodied herein, and that
no other agreement, statement, or promise pertaining to the subject matter
hereof that is not contained in this Agreement shall be valid or binding on
either party. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at any
time of any breach by the other party hereto or compliance with any condition or
provision of this Agreement to be performed by such other party will be deemed a
waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. Unless otherwise noted, references to "Sections" are
to sections of this Agreement. The captions used in this Agreement are designed
for convenient reference only and are not to be used for the purpose of
interpreting any provision of this Agreement.
13. DISPUTE RESOLUTION.
13.1. Any dispute between the Executive and the Company under this
Agreement shall be resolved (except as provided otherwise in this Section 13)
through binding arbitration conducted by the American Arbitration Association,
pursuant to the American Arbitration Association Employment Arbitration rules,
or other mutually agreeable arbitration service or rules. The arbitrator shall
be selected by mutual agreement, through alternative strikes from a designated
list, or as required by the
16
<PAGE> 17
American Arbitration Association. The arbitrator shall be duly licensed to
practice law in the State of Texas and shall have experience in employment law
arbitration. All proceedings shall be conducted in the City of Dallas, State of
Texas, unless otherwise agreed by all parties.
13.2. The arbitrator shall permit reasonable pre-hearing discovery of
facts, to the extent necessary to establish a claim or a defense to a claim,
subject to supervision by the arbitrator. Each party shall be entitled to
present evidence and argument to the arbitrator. Each party shall have the right
to be represented by legal counsel of the party's choosing. The arbitrator shall
have the right only to interpret and apply the provisions of this Agreement and
may not change any of its provisions. The arbitrator does not have authority (a)
to render a decision that contains a reversible error of state or federal law,
or (b) to apply a cause of action or remedy not otherwise provided for under
applicable state or federal law. The arbitrator shall be required to state in a
written opinion all facts and conclusions of law relied upon to support the
decision rendered and shall give written notice to the parties of the decision
and furnish each party a signed copy of such decision. The determination of the
arbitrator shall be conclusive and binding upon the parties, and judgment upon
the same may be entered in any court having jurisdiction thereof. The parties
shall resolve any dispute over the enforceability of an award through
declaratory relief to be disposed of through motion proceedings in the
applicable court of law. Either party may move for dismissal through summary
judgment in accordance with the Federal Rules of Civil Procedure and the
standard of proof under federal law for a motion for summary judgment. The
expenses of arbitration, including reasonable expenses of legal counsel retained
by the Executive in connection with such arbitration, shall be borne by the
Company.
13.3. Notwithstanding the foregoing, the Company shall not be required
to seek or participate in arbitration regarding any breach of the Executive's
obligations pursuant to Sections 8.2 or 8.3 hereof, but may pursue its remedies
for such breach in a court of competent jurisdiction in the City of Dallas,
State of Texas.
14. GOVERNING LAW
This Agreement shall be construed, interpreted and governed in
accordance with the laws of Texas.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of December 1, 1998.
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<PAGE> 18
- ----------------------------
[Executive]
ASSOCIATES CORPORATION OF
NORTH AMERICA (A Texas
Corporation)
By:
------------------------
Michael E. McGill
Executive Vice President
18
<PAGE> 1
EXHIBIT 10.11
Associates First Capital Corporation
Incentive Compensation Plan
Stock Option Award Agreement - 1999
You have been selected to become a Participant in the Associates First Capital
Corporation Incentive Compensation Plan (the "Plan") for 1999, through this
grant of a nonqualified stock option (the "Stock Option" or "Option") as
specified below:
PARTICIPANT:
--------------------------------------------------
ADDRESS:
------------------------------------------------------
------------------------------------------------------
OPTION NO.:
--------------------------------
DATE OF GRANT:
-----------------------------
NUMBER OF SHARES COVERED BY THIS AGREEMENT:
-------------------------------
OPTION PRICE:
------------------------------
DATE OF EXPIRATION:
------------------------
Except as hereinafter provided, you may exercise this Option in accordance with
the following vesting schedule:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Percentage Number of Shares Available Cumulative Number of Shares
Date Exercisable for Purchase as of this Date* Available for Purchase*
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
331/3% _______________Shares _______________Shares
- ------------------------------------------------------------------------------------------
662/3% _______________Shares _______________Shares**
- ------------------------------------------------------------------------------------------
100% _______________Shares _______________Shares**
- ------------------------------------------------------------------------------------------
</TABLE>
THIS AGREEMENT, effective as of the Date of Grant set forth above,
represents the grant of an Option to purchase shares of the Class A Common Stock
("Shares") of Associates First Capital Corporation, a Delaware corporation (the
"Company"), to the Participant named above, pursuant to the provisions of the
Plan.
- --------
* Number of Shares may reflect rounding to extent necessary to
avoid fractional Shares.
** Numbers listed assume no exercise has yet occurred under this
Option.
<PAGE> 2
The Plan provides a description of certain terms and conditions
governing the Option. In the event of any inconsistency between the terms of
this Agreement and the terms of the Plan, the Plan's terms shall completely
supersede and replace the conflicting terms of this Agreement. All capitalized
terms shall have the meanings ascribed to them in the Plan, unless specifically
set forth otherwise herein. The parties hereto agree as follows:
1. GRANT OF STOCK OPTION. The Participant is hereby granted an Option to
purchase the number of Shares set forth above, at the stated Option
Price (as set forth on page 1 of this Agreement), which is 100 percent
of the Fair Market Value of a Share on the Date of Grant, in the manner
and subject to the applicable terms and conditions of the Plan and this
Agreement.
2. EXERCISE OF STOCK OPTION. Except as otherwise provided in this
Agreement, the Participant may exercise this Option as provided in
Section 3 of this Agreement and according to the vesting schedule set
forth on page 1 of this Agreement, provided that no exercise may occur
prior to the end of one (1) year following the Date of Grant or
subsequent to the close of business on the Date of Expiration (as set
forth on page 1 of this Agreement).
This Option may be exercised in whole or in part, but not for less than
25 Shares at any one time, unless fewer than 25 Shares then remain
subject to the Option, and the Option is then being exercised as to all
such remaining Shares. The Option may be exercised only for full
Shares; no Option is exercisable for fractional Shares.
3. PROCEDURE FOR EXERCISE OF OPTION. Exercise of this Option may be
initiated on any business day by delivery of a notice of exercise (on
such form as may be specified and provided by the Company or its
designee) (the "Notice of Exercise") to the Company or its designee, or
by such other method as the Company specifies. The Company may at any
time change the time and/or manner in which the Option may be
exercised.
(a) Payment of Option Price: The Option Price shall be payable (i)
in cash in the form of currency or check or other cash
equivalent acceptable to the Company; (ii) by tendering
previously acquired, nonforfeitable, nonrestricted Shares
(provided that any Shares so tendered must have been owned by
the Participant for at least six months prior to their
tender); or (iii) by a combination of the foregoing methods.
The requirement of payment in cash may be satisfied through a
"cashless exercise" as described in Section 3(b).
(b) Cashless Exercise: A Participant may direct, through the
Company's designee or in such other manner as the Company may
specify from time to time, a broker that is a member of the
National Association of Securities Dealers, Inc. to sell a
sufficient number of the Shares being purchased pursuant to
the exercise so that the net proceeds of the sale transaction
will at least equal the aggregate Option Price, plus interest
(if any) at the applicable federal rate (as "applicable
federal rate" is defined in Section 1274 of the Code) for the
period from the date of exercise to the date of payment, and
to deliver the aggregate Option Price, plus
2
<PAGE> 3
such interest (if any), to the Company not later than the date
on which the sale transaction will settle in the ordinary
course of business (such a broker-assisted transaction to be
referred to herein as a "cashless exercise").
(c) Share Price: Any Share purchased (and sold, in the case of a
cashless exercise) pursuant to exercise of the Option shall be
valued on the basis of such Share's fair market value as of
the date on which exercise of the Option is completed (or, if
exercise of the Option is completed over a period of more than
one day, on the basis of the average fair market value during
such period). Any Share tendered by the Participant in payment
of all or any part of the Option Price shall be valued on the
basis of such Share's fair market value as of the date on
which such Share is exchanged in order to effectuate exercise
of the Option.
(d) Delivery to Participant: As soon as practicable following the
date on which the purchase (and sale, in the case of a
cashless exercise) of Shares pursuant to the Option will
settle in the ordinary course of business, the Company shall
cause, in accordance with the Participant's election and in
any case net of transaction fees (if any) and tax withholding
(if applicable pursuant to Section 3(e)), the following to
occur:
(i) Certificates for the Shares purchased to be delivered
to the Participant;
(ii) The number of Shares purchased to be credited to a
brokerage account specified by the Participant on the
Notice of Exercise; or
(iii) In the event of a cashless exercise, any proceeds of
the sale transaction remaining after delivery to the
Company of the aggregate Option Price (plus any
interest, as described in Section 3(b)) to be
delivered to the Participant in the manner specified
by the Participant on the Notice of Exercise.
If a Participant elects either (i) or (ii), to the extent such
Participant has elected a cashless exercise of the Option, the
number of Shares subject to this Section 3(d) shall be only
the number of Shares remaining after the sale transaction
described in Section 3(b).
(e) Withholding: If the Company is required by law to withhold
any federal, state, local or foreign taxes in connection with
exercise of an Option, the Participant shall either (i) pay
such taxes, in addition to the Option Price, in conjunction
with electing exercise of the Option or (ii) elect either (A)
to have such taxes withheld from any cash payment of proceeds
pursuant to a cashless exercise or (B) to satisfy all or any
part of any such withholding obligation by surrendering to the
Company (either directly or through its designee) a portion of
the Shares issued or transferred to the Participant pursuant
to exercise of the Option. To the extent that a Participant
elects to meet any withholding obligation by surrendering
Shares, the Shares so surrendered shall be credited against
any such withholding obligation at the fair market value per
Share on the date of such surrender; provided,
3
<PAGE> 4
however, if the Participant is subject to Section 16 of the
Exchange Act, such election shall be subject to approval by
the Committee if such approval is then required by Rule 16b-3
of the General Rules and Regulations promulgated under the
Exchange Act. All withholding elections shall be irrevocable.
4. TERMINATION OF EMPLOYMENT.
(a) By Retirement, Disability or death: In the event of a
Participant's termination of employment due to Retirement,
Disability or death ("Retirement" and "Disability" as
hereinafter defined), the Option shall continue in effect and
shall become fully vested and exercisable during the
applicable periods in accordance with the provisions hereof.
For purposes of this Agreement, termination of a Participant's
employment due to "Retirement" shall mean a voluntary
termination of employment with the Company on or after such
date as the Participant is eligible for a pension under the
Company's defined benefit pension plan as then in effect. The
term "Disability" when used herein shall mean complete and
total disability as determined under the Company's long-term
disability plan as in effect at the time of such
determination. In the event of the Participant's death prior
to exercise of this Option in whole, the beneficiary
designated or deemed to be designated pursuant to Section 8
hereof or, if such beneficiary is an estate, the executor or
administrator of the estate or the person or persons to whom
the Option shall have been validly transferred by the executor
or the administrator pursuant to will or the laws of descent
and distribution, shall have the right to exercise the Option,
when vested, in accordance with the provisions hereof.
(b) By termination for Cause or resignation: In the event of the
resignation of employment by the Participant or termination of
the Participant's employment by the Company for Cause (as
hereinafter defined), the Option shall be forfeited effective
as of the date of such resignation or termination, and the
Participant's right to exercise this Option shall cease. For
purposes of this Agreement, a termination by the Company for
"Cause" shall mean a termination resulting from (a) action by
the Participant involving willful malfeasance, (b) the
Participant's unreasonable neglect or refusal to perform such
Participant's duties for the Company, (c) the Participant
being convicted of a felony, (d) the Participant engaging in
any activity that is directly or indirectly in competition
with the Company or any affiliate or in any activity that is
inimical to the best interests of the Company or any
affiliate, or (e) the Participant's violation of Company
policy covering standards of corporate conduct. If the Company
terminates the Participant's employment for Cause, all of the
Company's obligations under this Agreement shall thereupon
cease and terminate.
(c) By termination other than for Cause: In the event of a
termination of the Participant's employment for reasons other
than Retirement, Disability, death, termination by the Company
for Cause or resignation, the portion of the Option that is
vested as of the date of termination of active employment may
be exercised to the extent permitted under the provisions
hereof until the earlier of (i) the Date
4
<PAGE> 5
of Expiration (as set forth on page 1 of this Agreement) or
(ii) the close of business on the 90th day following the date
of termination of employment. No other rights under this
Agreement shall continue in effect or continue to accrue from
the date of termination forward.
5. EFFECT OF COMPETITIVE ACTIVITY OR INIMICAL CONDUCT.
(a) Anything contained herein to the contrary notwithstanding, the
right of the Participant to exercise the Option shall remain
effective only if, during the entire period from the Date of
Grant (as set forth on page 1 of this Agreement) to the date
of such exercise, the Participant shall have earned the Option
by refraining from engaging in any activity that is directly
or indirectly in competition with any activity of the Company
or any Company Subsidiary (as hereinafter defined) or
affiliate thereof. The term "Company Subsidiary" when used
herein shall mean any corporation a majority of the voting
stock of which is owned directly or indirectly by the Company.
(b) In the event of the Participant's nonfulfillment of the
condition set forth in Section 5(a), the Participant's right
to exercise such Option shall cease; provided, however, that
the nonfulfillment of such condition may at any time be waived
by the Committee upon its determination, in its sole judgment,
that there shall not have been and will not be any substantial
adverse effect upon the Company or any Company Subsidiary or
affiliate thereof by reason of the nonfulfillment of such
condition.
(c) The right of the Participant to exercise the Option shall
cease on and as of the date on which it has been determined by
the Committee that the Participant at any time acted in a
manner inimical to the best interests of the Company or any
Company Subsidiary or affiliate thereof. Conduct that
constitutes engaging in an activity that is directly or
indirectly in competition with any activity of the Company or
any Company Subsidiary or affiliate thereof shall be governed
by Sections 5(a) and 5(b) and shall not be subject to any
determination under this Section 5(c).
6. RESTRICTIONS ON EXERCISE AND TRANSFER. This Option (a) shall be
exercisable during the Participant's lifetime only by the Participant
or, in the event of the Participant's legal incapacity, by the
Participant's legal guardian or representative acting in a fiduciary
capacity on behalf of the Participant under state law and court
supervision, and (b) may not be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated, other than by will or by the laws
of descent and distribution.
7. RECAPITALIZATION. In the event of any change in capitalization of the
Company (such as a stock split, stock dividend or combination of
shares), corporate transaction (such as any merger, consolidation,
separation, including a spin-off, or other distribution of stock or
property of the Company), reorganization (whether or not such
reorganization comes within the definition of such term in Code Section
368) or partial or complete liquidation of the Company, an adjustment
may be made in the number and class of Shares subject to
5
<PAGE> 6
this Option, as well as the Option Price, as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to
reflect such change in capitalization, corporate transaction,
reorganization or partial or complete liquidation.
8. BENEFICIARY DESIGNATION. The Participant may designate a beneficiary or
beneficiaries (who may be named contingently or successively) who, in
the event of the Participant's death prior to exercise of this Option
in whole, shall be entitled to exercise any unexercised portion of the
Option. Any such beneficiary designation shall be made by the
Participant in writing (on the appropriate form as provided by the
Company) and shall automatically revoke all prior designations by the
Participant. The Participant may, at any time and from time to time,
change or revoke such designation. A beneficiary designation, or
revocation of a prior beneficiary designation, shall be effective only
if it is signed by the Participant and received by the Company prior to
the Participant's death. If the Participant does not designate a
beneficiary or all beneficiaries die prior to exercise of any
unexercised portion of the Option, the Participant's estate shall be
deemed to be the beneficiary. If a beneficiary dies after having
exercised at least a portion of the Option, the beneficiary's estate
shall be deemed to be the beneficiary of any remaining unexercised
portion of the Option.
9. RIGHTS AS A STOCKHOLDER. The Participant shall have no rights as a
stockholder of the Company with respect to the Shares subject to this
Agreement until such time as the Option Price has been paid and the
Shares have been issued and delivered to him or her.
10. NO RIGHT OF EMPLOYMENT. Nothing in this Agreement shall interfere with
or limit in any way the right of the Company to terminate the
employment of the Participant at any time, with or without reason; nor
shall anything in this Agreement be deemed to create or confer upon the
Participant or any other individual any rights to employment of any
kind or nature whatsoever for any period of time or at any particular
rate of compensation, including, without limitation, any right to
continue in the employ of the Company.
11. COMPLIANCE WITH LAW. The Company shall make reasonable efforts to
comply with all applicable federal and state securities laws or other
applicable securities laws; provided, however, notwithstanding any
other provision of this Agreement, the Option shall not be exercisable
if the exercise thereof would result in a violation of any such law.
The Committee may impose such restrictions, including restrictions on
transferability, on any Shares acquired pursuant to the exercise of
this Option as the Committee may deem advisable, including, without
limitation, restrictions under United States federal securities laws or
other applicable securities laws, under the requirements of any
securities exchange or market upon which such Shares are then listed
and/or traded and/or under any blue sky or state securities laws
applicable to Shares.
12. MISCELLANEOUS.
(a) This Agreement and the rights of the Participant hereunder are
subject to all the terms and conditions of the Plan, as the
same may be amended from time to time, as well as to such
rules and regulations as the Committee may adopt for
administration of the Plan. It is expressly understood that
the Committee is authorized to administer, construe and make
all determinations necessary or
6
<PAGE> 7
appropriate to the administration of the Plan and this
Agreement, all of which shall be binding upon the Participant.
(b) Pursuant to the terms of the Plan, (i) the Board may at any
time, and from time to time, in its sole discretion alter,
amend, suspend or terminate the Plan in whole or in part for
any reason or for no reason, and (ii) the Committee may make
adjustments to this Option and Agreement in recognition of
unusual or nonrecurring events affecting the Company or the
financial statements of the Company and/or changes in
applicable laws, regulations or accounting principles whenever
the Committee determines that such adjustments are
appropriate; provided, however, that no alteration, amendment,
suspension or termination of the Plan shall adversely affect
in any material way the Participant's vested rights under this
Agreement without the written consent of the Participant.
Notwithstanding the foregoing, the Committee may modify,
without the Participant's consent, this Option and Agreement
to recognize differences in local law, tax policy or custom if
the Participant is a foreign national or employed outside the
United States.
(c) The Participant agrees to take all steps necessary to comply
with all applicable provisions of federal and state securities
law and other applicable securities laws in exercising his or
her rights under this Agreement.
(d) This Agreement shall be subject to all applicable laws, rules,
and regulations, and to such approvals by any governmental
agencies or national securities exchanges as may be required.
(e) All obligations of the Company under the Plan and this
Agreement, with respect to this Option, shall be binding on
any successor to the Company, whether the existence of such
successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially
all of the business and/or assets of the Company.
(f) To the extent not preempted by United States federal law or
other comparable law, this Agreement shall be construed in
accordance with and governed by the laws of the State of
Texas.
(g) The grant of the Option to the Participant is completely
discretionary. Neither the Participant nor any other
individual shall have any right to be selected to receive a
grant under the Plan or, having been so selected, to be
selected to receive a future grant; nor shall anything in this
Agreement create or confer, or be deemed to create or confer,
upon any Employee or other individual any such right.
7
<PAGE> 8
IN WITNESS WHEREOF, this Agreement is executed effective as of the Date
of Grant.
ASSOCIATES FIRST CAPITAL CORPORATION
By:
---------------------------------------------
Michael E. McGill, Executive Vice President
The undersigned Participant hereby acknowledges receipt of this Agreement and
accepts the Option subject to the applicable terms and conditions set forth
herein and in the Plan.
Participant's Signature: Date:
------------------------- ----------------------
Note: Please sign the Agreement, make a copy for your records, and return the
original to:
Compensation Committee
c/o John W. Lee
Associates First Capital Corporation
P.O. Box 660237
Dallas, TX 75266-0237
j:\corpleg\plans\icp\98all.soa
8
<PAGE> 1
EXHIBIT 12
ASSOCIATES FIRST CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts In Millions)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Charges (a)
Interest expense ............. $ 3,196.7 $ 2,775.2 $ 2,456.0 $ 2,177.9 $ 1,657.3
Implicit interest in rent .... 22.9 20.3 17.1 13.8 11.7
---------- ---------- ---------- ---------- ----------
Total fixed charges ..... $ 3,219.6 $ 2,795.5 $ 2,473.1 $ 2,191.7 $ 1,669.0
========== ========== ========== ========== ==========
Earnings (b) ...................... $ 1,940.5 $ 1,640.0 $ 1,404.6 $ 1,198.1 $ 1,017.4
Fixed charges ..................... 3,219.6 2,795.5 2,473.1 2,191.7 1,669.0
---------- ---------- ---------- ---------- ----------
Earnings, as defined ......... $ 5,160.1 $ 4,435.5 $ 3,877.7 $ 3,389.8 $ 2,686.4
========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges 1.60 1.59 1.57 1.55 1.61
========== ========== ========== ========== ==========
</TABLE>
- ----------
(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 and cumulative effect of changes in
accounting principles, plus fixed charges.
<PAGE> 1
EXHIBIT 21
Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Incorporation
---------------------------------------------------
Name
- ---- Jurisdiction Country
- ------------------------------------------------------------------------------ ------------------------ ------------------------
<S> <C> <C>
Associates First Capital Corporation ("AFCC") Delaware United States
- ------------------------------------------------------------------------------ ------------------------ ------------------------
[The names of 74 subsidiaries of AFCC operating in the United States in
the consumer finance business, 3 subsidiaries operating in the commercial
finance business, and 40 subsidiaries operating in the insurance business
are omitted pursuant to Rule 601(b)(21)(ii)]
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
ACONA B.V. Netherlands Netherlands
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Holdco L.L.C. Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Financial Corporation Limited England & Wales United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Capital Corporation plc England & Wales United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Group Limited United Kingdom United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Limited United Kingdom United Kingdom
Avco Financial Services (U.K.) Limited United Kingdom United Kingdom
AFS (Pension Trustees) Limited United Kingdom United Kingdom
Red Dragon Securities Limited United Kingdom United Kingdom
Avco Limited United Kingdom United Kingdom
First Affinity Limited United Kingdom United Kingdom
Avco Capital Plc United Kingdom United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Trust Plc United Kingdom United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Everyday Finance Limited Ireland Ireland
Steeple Finance (Guernsey) Limited Guernsey, C.I. Guernsey, C.I.
Avco Financial Services (Asia) Limited Hong Kong Hong Kong
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
ERA Master Limited Hong Kong Hong Kong
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Steeple Finance Limited Jersey, C.I. Jersey, C.I.
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Funding Limited United Kingdom United Kingdom
Avco Leasing Limited United Kingdom United Kingdom
Castle Loss Adjusters Limited United Kingdom United Kingdom
CMA ComCap Limited United Kingdom United Kingdom
CMA Invest Limited United Kingdom United Kingdom
CMA (UK) Limited United Kingdom United Kingdom
ComCap Business Systems Limited United Kingdom United Kingdom
ComCap Group Services Limited United Kingdom United Kingdom
ComCap Motor Acceptances Limited United Kingdom United Kingdom
ComCap plc United Kingdom United Kingdom
ComCap UK Limited United Kingdom United Kingdom
Commercial Finance Capital plc United Kingdom United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Advanced Machining Systems Ltd. United Kingdom United Kingdom
Commercial Finance (Eng.) Limited United Kingdom United Kingdom
Impress Graphics Equipment Ltd. United Kingdom United Kingdom
Print Skills Holdings Limited United Kingdom United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Computer Capital International Limited United Kingdom United Kingdom
Textron Finance Company Limited United Kingdom United Kingdom
Textron Leasing Limited United Kingdom United Kingdom
TFC Leasing Limited United Kingdom United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Textron Finance Compagnie, SA France France
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Textron Finance Compagnie SAS France France
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 1
<PAGE> 2
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Incorporation
---------------------------------------------------
Name
- ---- Jurisdiction Country
- ------------------------------------------------------------------------------ ------------------------ ------------------------
<S> <C> <C>
TFC Location S.A. France France
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Capital (Jersey) Limited Jersey United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Capital (Guernsey) Limited Guernsey United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates (Isle of Man) Limited England United Kingdom
Autoclub International Limited England & Wales United Kingdom
Prestige Property Co. Limited Guernsey United Kingdom
Wessex Finance Corporation Limited England United Kingdom
CEF Limited England & Wales United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Construction Equipment Finance Limited England & Wales United Kingdom
Construction Machinery Finance Limited England & Wales United Kingdom
Construction Plant Finance Limited England & Wales United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Mortgage Corporation Limited England & Wales United Kingdom
Cumberland Insurance Company Limited England & Wales United Kingdom
Cumberland Life Assurance Co. Limited Scotland United Kingdom
Medens Trust Limited England & Wales United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Medens (Jersey) Limited Jersey United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
AIC Associates Canada Holdings, Inc. Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
AIC Corporation Japan Japan
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
AIC Credit Card Services, Inc. Japan Japan
Nissen Co., Ltd. Japan Japan
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Capital Corporation of Canada Canada Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
177462 Canada Inc. Canada Canada
177463 Canada Inc. Canada Canada
2659158 Canada Inc. Canada Canada
Associates Commercial Corporation of Canada Ltd. Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Teletech Financial Corporation Canada Canada
The Associates Corporation Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Credit Corporation of Canada Ltd. Canada Canada
Associates Financial Services of Canada Ltd. Canada Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
113612 Ontario Inc. Ontario Canada
Avco D.C. Corporation Delaware United States
AFS Corporation Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Canada Limited Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Canada East Company Nova Scotia Canada
Avco Financial Services Central Limited Ontario Canada
Avco Financial Services Quebec Limited Quebec Canada
Avco Financial Services Realty Limited Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Realty East Company Nova Scotia Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Carter Shields Funding, Inc. Canada-Federal Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Lorne-Bruce Motors Limited Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Insurex Canada, Inc. Alberta Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Payplan Canada, Inc. Canada Canada
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 2
<PAGE> 3
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Incorporation
---------------------------------------------------
Name
- ---- Jurisdiction Country
- ------------------------------------------------------------------------------ ------------------------ ------------------------
<S> <C> <C>
London and Midland General Insurance Company Canada-Federal Canada
Megson Holdings Ltd. Canada (Alberta) Canada
Provincial Trust Company Prince Edward Is Canada
Textron Financial Corporation (Canada) Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
1154247 Ontario, Inc. Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Mortgage Corporation Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
1140186 Ontario Inc. Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Leasing (Canada) Ltd. Ontario Canada
VT Finance (Canada) Inc. Ontario Canada
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services of Hawaii, Inc. Hawaii United States
Avco Financial Services One, Inc. Hawaii United States
Home Mortgage Company, Inc. Hawaii United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Corporation of North America Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Corporation of North America (A Texas Corporation) Texas United States
AFC Securities Inc. Delaware United States
Associates Credit Services, Inc. Delaware United States
Associates Capital Bank, Inc. Utah United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Real Estate Financial Services Company, Inc. Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Relocation Management Company, Inc. Colorado United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Relocation Management Company of Texas Texas United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates First Capital Mortgage Corporation Delaware United States
Corporate America Realty, Inc. New Jersey United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
The Associates Payroll Management Service Company, Inc. Delaware United States
Financial Reassurance Company, Ltd. Bermuda Bermuda
Associates Financial Services Company of Puerto Rico, Inc. Puerto Rico United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Commercial Corporation of Puerto Rico Puerto Rico United States
Associates Financial Services Company, Inc. Puerto Rico United States
Associates Time Plan, Inc. Puerto Rico United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Investment Company Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Diversified Services, Inc. Delaware United States
Associates Financial Services Company, Inc. ("AFSCI") Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
[The names of 115 subsidiaries of AFSCI operating in the United
States in the consumer finance business and 34 subsidiaries
operating in the insurance business are omitted pursuant to Rule
601(b)(21)(ii)]
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Commercial Corporation ("ACC") Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
[The names of 11 subsidiaries of ACC operating in the United
States in the commercial finance business and 1 subsidiary in
the insurance business are omitted pursuant to Rule
601(b)(21)(ii)]
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Credit Card Services, Inc. Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Credit Card Receivables Corp. Delaware United States
Associates Private Label Receivables Corp. Delaware United States
Voyager Fleet Systems, Inc. Delaware United States
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 3
<PAGE> 4
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Incorporation
---------------------------------------------------
Name
- ---- Jurisdiction Country
- ------------------------------------------------------------------------------ ------------------------ ------------------------
<S> <C> <C>
Associates First Capital Trust I Delaware United States
Associates First Capital Trust II Delaware United States
Associates First Capital Trust III Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Housing Finance, LLC Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Information Services, Inc. Delaware United States
Associates National Bank (Delaware) (a national banking association) Delaware United States
Associates World Capital Corporation Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates World Credit Corporation Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates First Capital BV Netherlands Netherlands
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates International Holdings Corporation New York United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Servicio de Credito Asociados de Costa Rica, S.A. Costa Rica Costa Rica
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
DIC Finance Co., Ltd. Japan Japan
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
DIC Agency Co. Ltd. Japan Japan
JACOF Co. Ltd. Japan Japan
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Grupo Financiero Associates, S.A. de C.V. Mexico Mexico
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Arrendadora Financiera Associates, S.A. de C.V. Mexico Mexico
Associates Servicios de Mexico, S.A. de C.V. Mexico Mexico
Hipotecaria Associates, S.A. de C.V. Mexico Mexico
Servicios de Credito Associates, S.A. de C.V. Mexico Mexico
Servicios de Factoraje Associates, S.A. de C.V. Mexico Mexico
Sociedad Financiera Associates, S.A. de C.V. Mexico Mexico
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Associates Finance Taiwan, Inc. Taiwan Rep. of China
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Sociedade Gestora de Participacoes Sociais, S.A. Madeira Portugal
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services (Mauritius) LLC Mauritius Mauritius
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services India Private Limited India India
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services International, Inc. Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Atlantic General Insurance Limited Bermuda Bermuda
Atlantic Reinsurance Limited Bermuda Bermuda
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Ltd. Bermuda Bermuda
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Australia Pty Ltd. (Dual Incorporation) Victoria Australia
Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Ltd. ACT Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Hallmark Life Insurance Company Ltd. ACT Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Hallmark General Insurance Company Ltd. ACT Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Insurance Services Limited New Zealand New Zealand
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Frenzeal Pty Limited ACT Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Access Ltd. New South Wales Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
BFC Finance Limited Victoria Australia
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 4
<PAGE> 5
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Incorporation
---------------------------------------------------
Name
- ---- Jurisdiction Country
- ------------------------------------------------------------------------------ ------------------------ ------------------------
<S> <C> <C>
Eastrock Finance Corporation Pty Ltd. Victoria Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Heritage General Insurance Limited New South Wales Australia
Heritage Life Insurance Limited New South Wales Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Leasing Limited New South Wales Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Intercity Lease Management Pty Ltd New South Wales Australia
Textron Australia Deposits Pty Ltd. New South Wales Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Textron Financial Corporation (Australia) Pty. Ltd. New South Wales Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Finance Corporation of America Pty. Limited Tasmania Australia
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services of Puerto Rico, Inc. Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services of San Sebastian, Inc. Puerto Rico United States
Avco Financial Services of San Juan, Inc. Puerto Rico United States
Avco Financial Services of Santurce, Inc. Puerto Rico United States
Metro Finance Company, Inc. Puerto Rico United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Limited Hong Kong Hong Kong
Hallmark General Insurance Company Limited Hong Kong Hong Kong
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Hallmark General Insurance Company Limited. New Zealand New Zealand
Hallmark Pacific Life Insurance Company Limited New Zealand New Zealand
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Limited New Zealand New Zealand
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Financial Services Limited Northern Ireland United Kingdom
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Avco Bank, an industrial bank Colorado United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
The Northland Company Minnesota United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Jupiter Holdings, Inc. Minnesota United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
Hurley State Bank South Dakota United States
SPS Payment Systems, Inc. Delaware United States
- ----- ------------------------------------------------------------------------ ------------------------ ------------------------
MedCash, Inc. Delaware United States
MedCash Health Systems, L.P. Delaware United States
Med-Link Technologies Inc. Delaware United States
Quality Asset Management, Inc. Delaware United States
SPS Commercial Services, Inc. Delaware United States
SPS Newco, Inc. Delaware United States
SPS Receivables Financing Corporation Delaware United States
Ruf Corporation Kansas United States
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAGE 5
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Associates First Capital Corporation on Form S-8 (File Nos.
333-09215, 333-12145, 333-12147, 333-19417, 333-49049 and 333-68245) and on Form
S-3 (File Nos. 333-62875, 333-62875-01, 333-62875-02 and 333-92875-03) of our
report dated January 19, 1999, on our audits of the consolidated financial
statements of Associates First Capital Corporation and Subsidiaries as of
December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and
1996, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
February 24, 1999
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or
a director of ASSOCIATES FIRST CAPITAL CORPORATION (the "Company"), has made,
constituted and appointed and by these presents does hereby, make constitute and
appoint ROY A. GUTHRIE, KEITH W. HUGHES, FREDERIC C. LISKOW, CHESTER D.
LONGENECKER and JOHN F. STILLO, and each of them, his true and lawful attorneys,
for him and in the name, place and stead, and in his office and capacity as
aforesaid, to sign and file the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, and any and all amendments thereto and any
and all other documents to be signed and filed with the Securities and Exchange
Commission in connection therewith, hereby granting to said ROY A. GUTHRIE,
KEITH W. HUGHES, FREDERIC C. LISKOW, CHESTER D. LONGENECKER and JOHN F. STILLO,
and each of them, full power and authority to do and perform each and every act
and that whatsoever requisite and necessary to be done in the premises, as
fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects of all that said ROY A.
GUTHRIE, KEITH W. HUGHES, FREDERIC C. LISKOW, CHESTER D. LONGENECKER and JOHN F.
STILLO, or any of them, as said attorneys, may or shall lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed his or her
name this 24th day of February, 1999.
<TABLE>
<C> <S> <S> <S>
Signature: /s/ KEITH W. HUGHES Signature: /s/ WILLIAM M. ISAAC
--------------------------------- ---------------------------------
Name: Keith W. Hughes Name: William M. Isaac
Title: Chairman of the Board, Principal Title: Director
Executive Officer and Director
Signature: /s/ J. CARTER BACOT Signature: /s/ JOHN F. STILLO
--------------------------------- ---------------------------------
Name: J. Carter Bacot Name: John F. Stillo
Title: Director Title: Senior Vice President, Comptroller
and Principal Accounting Officer
Signature: /s/ ERIC S. DOBKIN Signature: /s/ H. JAMES TOFFEY, JR.
--------------------------------- ---------------------------------
Name: Eric S. Dobkin Name: H. James Toffey, Jr.
Title: Director Title: Director
Signature: /s/ ROY A. GUTHRIE Signature: /s/ KENNETH WHIPPLE
--------------------------------- ---------------------------------
Name: Roy A. Guthrie Name: Kenneth Whipple
Title: Director, Senior Executive Vice Title: Director
President and Chief Financial
Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
O MEANS NOT APPLICABLE OR NOT SEPARATELY DISCLOSED. THIS SCHEDULE CONTAINS
SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,666
<SECURITIES> 6,679
<RECEIVABLES> 60,939
<ALLOWANCES> 1,979
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 609
<DEPRECIATION> 0
<TOTAL-ASSETS> 75,175
<CURRENT-LIABILITIES> 0
<BONDS> 63,307
0
0
<COMMON> 7
<OTHER-SE> 8,520
<TOTAL-LIABILITY-AND-EQUITY> 75,175
<SALES> 9,376
<TOTAL-REVENUES> 9,376
<CGS> 0
<TOTAL-COSTS> 7,436
<OTHER-EXPENSES> 2,956
<LOSS-PROVISION> 1,283
<INTEREST-EXPENSE> 3,197
<INCOME-PRETAX> 1,940
<INCOME-TAX> 717
<INCOME-CONTINUING> 1,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,223
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.75
</TABLE>
