<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-44197
ASSOCIATES FIRST CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-0876639
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 East Carpenter Freeway, Irving, Texas 75062-2729
(Address of principal executive offices) (Zip code)
972-652-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes..X..
No.....
<PAGE>
As of June 30, 1999, the registrant had 1,150,000,000 and 144,118,820
respective shares of Class A and Class B Common Stock authorized,
728,596,571 shares of Class A Common Stock issued, of which 728,321,811
shares were outstanding; and no shares of Class B Common Stock were
issued or outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS.
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(In Millions, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Finance charges $4,546.0 $3,926.8 $2,262.1 $1,881.8
Insurance premiums 516.8 216.5 260.5 104.1
Investment and other
income 871.6 382.9 466.8 309.2
-------- -------- -------- --------
5,934.4 4,526.2 2,989.4 2,295.1
EXPENSES
Interest expense 1,925.3 1,542.8 965.3 785.5
Operating expenses 1,951.1 1,291.4 971.5 671.4
Provision for losses on
finance receivables 727.2 707.8 364.4 342.8
Insurance benefits paid
or provided 218.9 73.3 115.2 30.5
-------- -------- -------- --------
4,822.5 3,615.3 2,416.4 1,830.2
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 1,111.9 910.9 573.0 464.9
PROVISION FOR INCOME TAXES 417.0 337.0 214.9 172.0
-------- -------- -------- --------
NET EARNINGS $ 694.9 $ 573.9 $ 358.1 $ 292.9
======== ======== ======== ========
NET EARNINGS PER SHARE
Basic $ 0.95 $ 0.83 $ 0.49 $ 0.42
======== ======== ======== ========
Diluted $ 0.95 $ 0.82 $ 0.49 $ 0.42
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars In Millions)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
(Unaudited)
----------- ------------
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 3,485.4 $ 4,665.6
INVESTMENTS IN DEBT AND EQUITY SECURITIES 7,438.8 6,678.7
FINANCE RECEIVABLES, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves 64,975.9 57,496.4
OTHER ASSETS 9,994.0 6,334.7
--------- ---------
Total assets $85,894.1 $75,175.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $28,879.1 $24,144.3
Bank Loans 431.2 1,565.5
ACCOUNTS PAYABLE AND ACCRUALS 4,313.1 3,342.4
LONG-TERM DEBT
Senior Notes 42,735.6 37,171.4
Subordinated and Capital Notes 425.3 425.3
--------- ---------
43,160.9 37,596.7
STOCKHOLDERS' EQUITY
Series A Junior Participating Preferred
Stock, $0.01 par value, 734,500 shares
authorized, no shares issued or
outstanding - -
Class A Common Stock, $0.01 par value,
1,150,000,000 shares authorized, 728,596,571
and 728,228,488 shares issued
in 1999 and 1998, respectively 7.3 7.3
Class B Common Stock, $0.01 par value,
144,118,820 shares authorized, no shares
issued or outstanding - -
<PAGE>
Paid-in Capital 5,279.6 5,273.7
Retained Earnings 3,793.4 3,178.9
Accumulated Other Comprehensive Income 54.5 106.8
Less 274,760 and 980,314 shares of
Class A Common Stock at cost held in
treasury in 1999 and 1998, respectively (25.0) (40.2)
--------- ---------
Total stockholders' equity 9,109.8 8,526.5
--------- ----------
Total liabilities and stockholders' equity $85,894.1 $75,175.4
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 694.9 $ 573.9
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Provision for losses on finance receivables 727.2 707.8
Depreciation and amortization 247.8 177.7
Other operating activities (344.2) (343.0)
---------- ----------
Net cash provided from operating
activities 1,325.7 1,116.4
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (33,305.2) (26,356.1)
Finance receivables liquidated 29,692.6 21,274.0
Sale of finance businesses and branches 1,490.1 -
Acquisitions of other finance businesses, net (4,170.5) (925.1)
Proceeds from securitization of finance
receivables 664.6 2,234.9
Other investing activities (670.8) (1,044.7)
---------- ----------
Net cash used for investing
activities (6,299.2) (4,817.0)
---------- ----------
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 8,294.2 4,177.6
Retirement of long-term debt (5,295.1) (2,585.6)
(Decrease) increase in notes payable 856.3 2,071.6
Other financing activities (51.5) (84.8)
---------- ----------
Net cash provided from financing
activities 3,803.9 3,578.8
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH (10.6) 53.4
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,180.2) (68.4)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,665.6 433.2
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,485.4 $ 364.8
========== ==========
</TABLE>
See notes to consolidated financial statements.
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Associates First Capital Corporation ("First Capital" or the
"Company"), a Delaware corporation, is a leading diversified finance
organization providing finance, leasing and related services to
individual consumers and businesses in the United States and
internationally.
NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant
intercompany balances and transactions. Certain prior period financial
statement amounts have been reclassified to conform to the current
period presentation.
In the opinion of the management, all adjustments necessary to
present fairly the results of operations and financial position have
been made. The financial position and results of operations as of and
for any interim period are unaudited and not necessarily indicative of
the results of operations for a full year.
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires the
use of management estimates. These estimates are subjective in nature
and involve matters of judgment. Actual results could differ from these
estimates.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
On January 6, 1999, the Company purchased the assets and assumed
the liabilities of Avco Financial Services, Inc. ("Avco") for $3.9
billion. Prior to the acquisition, Avco, formerly a subsidiary of
Textron Inc., was a global, diversified financial services company with
approximately $9 billion in assets. Its product offerings included home
equity lending, retail sales finance and consumer loans, equipment,
inventory and vendor finance, and credit and collateral-related
insurance. Avco had operations in the U.S., Canada, Puerto Rico,
Australia, the United Kingdom, New Zealand, France, Hong Kong, Spain,
Ireland, India and Sweden. This acquisition was accounted for as a
purchase.
The unaudited pro forma combined revenues, net earnings and net
earnings per basic and diluted share of the Company including the
operations of Avco and significant 1998 acquisitions were approximately
$5.8 billion, $588 million, $0.81 and $0.80 for the six-month period
ended June 30, 1998, and $2.9 billion, $305 million, $0.42 and $0.42 for
the three-month period ended June 30, 1998, respectively. The 1998
acquisitions are described in the Company's Form 10-K for the year ended
December 31, 1998. These unaudited pro forma results assume that the
acquisitions occurred at the beginning of the period and include certain
adjustments, including additional common shares outstanding and interest
and amortization expenses associated with these purchases. This
information has been prepared for comparative purposes only, and is
based on the historical operating results of these entities prior to
their acquisition by the Company and does not include cost savings and
other profit enhancement initiatives introduced by the Company that
management believes will be reflected in post-acquisition operating
results. As a result, management does not believe that these pro forma
results are indicative of the actual results that would have occurred
had the acquisitions closed at the beginning of each period. Pro forma
information is not presented for the six or three-month periods ended
June 30, 1999 because there is no significant difference between pro
forma and reported revenue, earnings and earnings per share information
for each respective period.
In June 1999, the Company acquired the Newcourt Credit Group
automotive fleet management business. The transaction includes Newcourt
Fleet Services, which operates in Canada, and Newcourt Automotive
Services Limited, which operates in the United Kingdom. The fair market
value of the total assets acquired was approximately $460 million. This
acquisition was accounted for as a purchase.
In February 1999, the Company acquired the Shell Oil Proprietary
Credit Card program. The fair market value of the private label credit
card receivables acquired was approximately $260 million.
DISPOSITIONS
In June 1999, the Company sold its Avco consumer and commercial
finance operations in Australia and New Zealand to General Electric
Capital Corporation, a subsidiary of General Electric Company, for
approximately $493 million.
In June 1999, the Company sold 41 of its Canadian consumer
branches to Commercial Credit Corporation CCC Limited, a subsidiary of
Citigroup, Inc., for approximately $155 million.
In March 1999, the Company sold Fleetwood Credit Corporation, its
recreational vehicle financing subsidiary, to NationsBank, N.A., a unit
of BankAmerica Corporation for approximately $227 million.
In March 1999, the Company sold 128 domestic consumer finance
branches to Commercial Credit Corporation, a subsidiary of Citigroup,
Inc., for approximately $640 million. All of these branches were
acquired from Avco in January 1999.
On June 14, 1999, the Company announced it had reached an agreement
to sell certain assets and liabilities of Balboa Life and Casualty
Insurance Group to Countrywide Insurance Group, a subsidiary of Countrywide
Credit Industries, Inc. The assets and liabilities to be sold are included
in other assets as net assets held for sale. This transaction is expected
to close prior to the end of 1999.
The operating results of these dispositions from January 1, 1999
through the date of the related sale were included in investment and
other income.
NOTE 4 - EARNINGS PER SHARE
Earnings per share on a basic and diluted basis for the periods
indicated is calculated as follows (in millions, except per share
amounts):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net earnings per share:
Net earnings $694.9 $573.9 $358.1 $292.9
Weighted average shares
outstanding 728.0 692.9 728.4 692.7
$ 0.95 $ 0.83 $ 0.49 $ 0.42
====== ====== ====== ======
Diluted net earnings per share:
Net earnings $694.9 $573.9 $358.1 $292.9
Weighted average shares
outstanding plus assumed
conversions 732.5 697.4 732.7 697.2
$ 0.95 $ 0.82 $ 0.49 $ 0.42
====== ====== ====== ======
Calculation of weighted average
shares outstanding plus
assumed conversions:
Weighted average shares
outstanding 728.0 692.9 728.4 692.7
Effect of dilutive securities 4.5 4.5 4.3 4.5
------ ------ ------ ------
732.5 697.4 732.7 697.2
====== ====== ====== ======
</TABLE>
<PAGE>
NOTE 5 - COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of
tax, are as follows (in millions):
June 30 December 31
1999 1998
------- -----------
Foreign currency translation adjustments $102.2 $117.1
Net unrealized loss on available-for-sale
securities, net of tax (47.7) (10.3)
------ ------
Accumulated other comprehensive income $ 54.5 $106.8
====== ======
Comprehensive income for the six and three-month periods ended
June 30, 1999 and 1998 consisted of the following components, net of tax
(in millions):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $694.9 $573.9 $358.1 $292.9
Foreign currency translation
adjustments (14.9) (63.6) (22.3) (63.7)
Net unrealized (loss) gain on
available-for-sale securities (37.4) 1.1 (42.3) 4.0
------ ------ ------ ------
Comprehensive income $642.6 $511.4 $293.5 $233.2
====== ====== ====== ======
</TABLE>
NOTE 6 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities consist of retained securitization
interests as well as bonds, notes and preferred stock and other equity
securities primarily held by the Company's insurance subsidiaries. The
Company generally invests in debt securities with the intention of
holding them to maturity. However, if market conditions change, the
Company may sell them prior to maturity. Accordingly, the Company
classifies these debt and equity securities as available-for-sale
securities and adjusts their recorded value to market. The estimated
market value at June 30, 1999 and December 31, 1998 was $7.4 billion and
$6.7 billion, respectively. The amortized cost at June 30, 1999 and
December 31, 1998 was $7.5 billion and $6.7 billion, respectively.
Realized gains or losses on sales are included in investment and other
income. Unrealized gains or losses are included, net of tax, in other
comprehensive income, a component of stockholders' equity.
TRADING SECURITIES
Trading securities consist of investments in equity securities
which are recorded at market value. Unrealized gains or losses on
trading securities are included in earnings. The estimated market value
at June 30, 1999 and December 31, 1998 was $24.0 million and $20.8
million, respectively. Historical cost at June 30, 1999 and December
31, 1998 was $16.6 million and $15.5 million, respectively.
NOTE 7 - FINANCE RECEIVABLES
At June 30, 1999 and December 31, 1998, finance receivables
consisted of the following (in millions):
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------- -----------
<S> <C> <C>
Home equity lending $24,972.0 $22,458.2
Personal lending and retail sales
finance 14,843.5 11,459.2
Truck and truck trailer 12,252.6 10,783.6
Equipment 6,723.1 6,114.0
Manufactured housing 4,201.0 3,648.2
Auto fleet leasing 2,012.0 1,589.7
Credit card (a) 1,803.4 3,138.1
Recreational vehicles - 479.7
Warehouse lending and other 1,319.4 1,268.3
--------- ---------
Finance receivables, net of unearned
finance income ("net finance
receivables") (b) 68,127.0 60,939.0
Allowance for losses on finance receivables (2,139.4) (1,978.7)
Insurance policy and claims reserves (c) (1,011.7) (1,463.9)
--------- ----------
Finance receivables, net of unearned
finance income, allowance for losses
and insurance policy and claims
reserves $64,975.9 $57,496.4
========= =========
__________
(a) In the second quarter of 1999, approximately $925 million of the
Company's private label credit card receivables were securitized and sold to a
master trust. No significant gain or loss was recorded on this transaction.
(b) Unearned finance income was approximately $4.7 billion and $4.0
billion at June 30,1999 and December 31, 1998, respectively.
(C) At December 31, 1998 insurance policy and claims reserves included
approximately $678 million of non-affiliate insurance reserves. The June 30,
1999 balance only includes affiliate insurance reserves; non-affiliate
insurance reserves of approximately $689 million are included in accounts
payable and accruals.
</TABLE>
NOTE 8 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables during
the periods indicated were as follows (in millions):
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30 December 31
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $1,978.7 $1,949.9 $ 1,949.9
Provision for losses 727.2 707.8 1,283.5
Recoveries on receivables
charged off 157.5 102.2 237.7
Losses sustained (856.9) (743.8) (1,424.6)
Reserves of receivables sold
and held for securitization (185.2) (334.7) (334.7)
Reserves of acquired
businesses 298.7 172.3 271.1
Other 19.4 (5.0) (4.2)
-------- -------- ---------
Balance at end of period $2,139.4 $1,848.7 $ 1,978.7
======== ======== =========
</TABLE>
The Company maintains an allowance for losses on finance receivables
at an amount that it believes is sufficient to provide for losses in its
existing receivables portfolios. The allowance is determined
principally on the basis of historical loss experience, and reflects
management's judgment of current loss exposure at the end of the period
considering economic conditions and the nature and characteristics of
the underlying finance receivables. The Company records an allowance
for losses when it believes the event causing the loss has occurred. 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.
<PAGE>
NOTE 9 - OTHER ASSETS
The components of other assets at June 30, 1999 and December 31,
1998 were as follows (in millions):
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
---- ----
<S> <C> <C>
Goodwill $3,741.6 $1,890.4
Notes and other receivables 1,883.0 1,172.9
Customer lists and operating agreements 1,555.0 929.8
Net assets held for sale 401.2 -
Property and equipment 631.9 608.7
Collateral held for resale 385.8 297.4
Relocation client advances 155.1 171.8
Finance receivables held for
securitization, net 714.0 812.2
Other 526.4 451.5
-------- --------
Total other assets $9,994.0 $6,334.7
======== ========
</TABLE>
NOTE 10 - DEBT RESTRICTION
A restriction contained in the revolving credit agreement dated June
30, 1998 requires the Company to maintain a minimum tangible net worth,
as defined, of $2.5 billion. At June 30, 1999, the Company's tangible
net worth was approximately $5.3 billion.
NOTE 11 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for the purpose of
hedging specific exposures as part of its risk management program. Such
instruments to date have been limited to foreign currency forward
exchange, currency swap, interest rate swap, treasury lock agreements
and treasury futures and option contracts.
Foreign currency forward exchange agreements are held for purposes
other than trading and have been designated for accounting purposes as
hedges of certain of the Company's foreign currency denominated net
investments and to a lesser degree, anticipated foreign currency
transactions. Under these agreements, the Company is obligated to
deliver specific foreign currencies in exchange for United States
dollars at varying times over the next 5 years. The aggregate notional
amount of these agreements at June 30, 1999 and December 31, 1998 was
$2.6 billion and $2.5 billion, respectively. The fair value of such
agreements at June 30, 1999 and December 31, 1998 would have been a
liability of $79.0 million and $134.4 million, respectively.
Foreign currency swap agreements are held for purposes other than
trading and have been designated for accounting purposes as hedges of
specific foreign currency exposures under certain debt obligations.
Under these agreements, the Company and the agreement counterparties are
obligated to exchange specific foreign currencies at varying times over
the next 4 years. The aggregate notional amount of these agreements at
June 30, 1999 and December 31, 1998 was $5.5 billion and $4.4 billion,
respectively. The fair value of such agreements at June 30, 1999 and
December 31, 1998 would have been a liability of $97.0 million and
$118.5 million, respectively.
Interest rate swap 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. The aggregate notional amount of interest
rate swap agreements at June 30, 1999 was $4.7 billion. The fair value
of such agreements would have been a liability of $8.1 million. These
agreements mature on varying dates over the next 4 years. In addition,
treasury lock agreements were used by the Company at December 31, 1998
to hedge the effect of interest rate movements on anticipated debt
issuances. The aggregate notional amount of interest rate swap and
treasury lock agreements at December 31, 1998 was $4.3 billion. The
fair value of such agreements at December 31, 1998 would have been a
liability of $81.3 million.
Treasury futures and option contracts are used to minimize
fluctuations in the value of preferred stock investments and are held
for purposes other than trading. The aggregate notional amount of
futures and option contracts at June 30, 1999 and December 31, 1998 was
$672.0 million and $720.6 million, respectively. The fair value of
these contracts would have been an asset of $7.6 million and a liability
of $5.2 million at June 30, 1999 and December 31, 1998, respectively.
Such contracts mature on varying dates through 1999.
<PAGE>
NOTE 12 - SEGMENT REPORTING
Managed basis revenue, earnings and receivables information for each
of the Company's reportable segments is presented below (in millions):
<TABLE>
<CAPTION>
Domestic
Consumer Commercial International
Finance Finance Finance Total
-------- ---------- ------------- -----
<S> <C> <C> <C> <C>
Managed basis revenue
---------------------
Six months ended:
June 30, 1999 $ 3,476.6 $ 1,546.8 $1,409.4 $
6,432.8
June 30, 1998 2,811.8 1,212.2 696.5
4,720.5
Three months ended:
June 30, 1999 $ 1,751.3 $ 785.6 $ 710.4 $
3,247.3
June 30, 1998 1,415.1 622.6 394.5
2,432.2
Segment earnings
----------------
Six months ended:
June 30, 1999 $ 536.4 $ 247.6 $ 327.9
1,111.9
June 30, 1998 475.0 229.2 206.7
910.9
Three months ended:
June 30, 1999 $ 277.1 $ 126.1 $ 169.8 $
573.0
June 30, 1998 241.1 120.5 103.3
464.9
Managed receivables
-------------------
June 30, 1999 $40,371.2 $26,103.1 $12,055.7
$78,530.0
December 31, 1998 37,179.4 25,722.7 8,462.2
71,364.3
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The discussion that follows includes comparisons of amounts reported
in the historical financial statements ("Owned Basis") and on a pro forma
basis adjusted to include the impact of receivables held for securitization
and receivables sold with servicing retained ("Managed Basis"). On an
Owned Basis, finance charges and service fee income, interest expense and
credit losses on receivables held for securitization and receivables sold
with servicing retained are included in investment and other income in the
statement of earnings. On a pro forma Managed Basis, these items are
reclassified from investment and other income and presented as if the
receivables had neither been held for securitization nor sold. Management
believes the discussion of pro forma Managed Basis information is useful
in evaluating the Company's operating performance.
The following tables contain selected Owned Basis and pro forma
Managed Basis financial information for the six and three-month periods
ended or at June 30, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 Six Months Ended
June 30, 1998
Owned Pro Forma Managed Owned Pro
Forma Managed
Basis Adjustments Basis Basis
Adjustments Basis
----- ----------- ----- -----
- ----------- -----
<S> <C> <C> <C> <C> <C>
<C>
Finance charges $ 4,546.0 $ 1,004.5 $ 5,550.5 $ 3,926.8 $
453.9 $4,380.7
Insurance premiums 516.8 - 516.8 216.5
- - 216.5
Investment and other
income 871.6 (506.1) 365.5 382.9
(259.6) 123.3
--------- -------- ---------- ---------
- --------- --------
Total revenue 5,934.4 498.4 6,432.8 4,526.2
194.3 4,720.5
Interest expense 1,925.3 142.4 2,067.7 1,542.8
119.2 1,662.0
Operating expenses 1,951.1 - 1,951.1 1,291.4
- - 1,291.4
Provision for losses 727.2 356.0 1,083.2 707.8
75.1 782.9
Insurance benefits
paid or provided 218.9 - 218.9 73.3
- - 73.3
--------- -------- ---------- ---------
- --------- --------
Total expenses 4,822.5 498.4 5,320.9 3,615.3
194.3 3,809.6
--------- -------- ---------- ---------
- --------- --------
Earnings before
provision for income
taxes 1,111.9 - 1,111.9 910.9
- - 910.9
Provision for income
taxes 417.0 - 417.0 337.0
- - 337.0
--------- --------- --------- ----------
- ---------- --------
Net earnings $ 694.9 $ - $ 694.9 $ 573.9 $
- - $ 573.9
========= ========== ========== ==========
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION> Three Months Ended Three
Months Ended
June 30, 1999 June
30, 1998
Owned Pro Forma Managed Owned Pro
Forma Managed
Basis Adjustments Basis Basis
Adjustments Basis
----- ----------- ------ -----
- ----------- -------
<S> <C> <C> <C> <C> <C>
<C>
Finance charges $ 2,262.1 $ 540.7 $ 2,802.8 $ 1,881.8 $
375.9 $ 2,257.7
Insurance premiums 260.5 - 260.5 104.1
- - 104.1
Investment and other
income 466.8 (282.8) 184.0 309.2
(238.8) 70.4
--------- -------- --------- ---------
- --------- ---------
Total revenue 2,989.4 257.9 3,247.3 2,295.1
137.1 2,432.2
Interest expense 965.3 70.8 1,036.1 785.5
69.9 855.4
Operating expenses 971.5 - 971.5 671.4
671.4
Provision for losses 364.4 187.1 551.5 342.8
67.2 410.0
Insurance benefits
paid or provided 115.2 - 115.2 30.5
- - 30.5
--------- -------- --------- ---------
- --------- ---------
Total expenses 2,416.4 257.9 2,674.3 1,830.2
137.1 1,967.3
--------- -------- --------- ---------
- --------- ---------
Earnings before
provision for income
taxes 573.0 - 573.0 464.9
- - 464.9
Provision for income
taxes 214.9 - 214.9 172.0
- - 172.0
--------- --------- --------- ---------
- ---------- ---------
Net earnings $ 358.1 $ - $ 358.1 $ 292.9 $
- - $ 292.9
========= ========== ========== ==========
========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 December
31, 1998
Owned Pro Forma Managed Owned Pro
Forma Managed
Basis Adjustments Basis Basis
Adjustments Basis
----- ----------- ------ -----
- ----------- ------
<S> <C> <C> <C> <C> <C>
<C>
Net Finance Receivables
End of period $68,127.0 $10,403.0 $78,530.0 $60,939.0
$10,425.3 $71,364.3
Average 67,235.5 9,516.2 76,751.7 57,253.1
7,252.7 64,505.8
</TABLE>
Net Earnings
Net earnings, on both an Owned Basis and a Managed Basis, for the six-
month period ended June 30, 1999 were $694.9 million, a 21% increase over
the same period in the previous year. Net earnings for the three months
ended June 30, 1998 were $358.1 million, an increase of 22% over the same
period in the previous year. The primary factors affecting earnings and
the Company's operating results are discussed below.
Finance Charges
Finance charge revenue on a Managed Basis increased for the six and
three-month periods ended June 30, 1999, compared to the same periods in
the prior year, principally as a result of growth in average managed
finance receivables outstanding. Finance charge revenue as a percentage
of average managed finance receivables increased to 14.46% and 14.49% for
the six and three-month periods ended June 30, 1999, respectively, from
14.29% and 14.36% for the comparable periods in 1998. The increase was
primarily due to a shift in product mix toward a higher percentage of
unsecured managed finance receivables to total managed finance receivables
during both comparative periods. Unsecured portfolios generally have
higher finance charge rates than secured portfolios. In addition, higher
finance rates during both comparable periods also contributed to the
increase.
Interest Expense
Managed Basis interest expense increased to $2.1 billion and $1.0
billion for the six and three-month periods ended June 30, 1999,
respectively, from $1.7 billion and $0.9 billion for the respective six and
three-month periods ended June 30, 1998. This increase was primarily due
to an increase in average debt outstanding for each of the comparative
periods. The increase in average debt outstanding principally resulted
from the growth in average net finance receivables. Debt is the primary
source of funding to support the Company's growth in net finance
receivables. The increase in interest expense due to growth was partially
offset by the benefit of a reduction in the Company's total average
borrowing rate in both comparable periods.
Net Interest Margin
As a result of the factors discussed in the finance charges and
interest expense sections above, Managed Basis net interest margin
increased to $3.5 billion and $1.8 billion for the six and three-month
periods ended June 30, 1999, respectively, compared to $2.7 billion and
$1.4 billion for the comparable periods in the prior year. The Company's
Managed Basis net interest margin expressed as a ratio to average managed
finance receivables also improved to 9.07% and 9.14% for the six and three-
month periods ended June 30, 1999, respectively, compared to 8.87% and
8.92% for the comparable periods in the prior year.
Investment and Other Income
Investment and other income, on a Managed Basis, increased to $365.5
million and $184.0 million for the six and three-month periods ended June
30, 1999, respectively, compared to $123.3 million and $70.4 million for
the comparable periods in 1998. The Northland Company and Avco affiliated
insurance related investment portfolio income together with the earnings
of net assets held for sale and businesses sold during the first two
quarters of 1999 contributed to this increase. The Northland Company was
acquired during the fourth quarter of 1998. As described in NOTE 3 to the
consolidated financial statements, the operating results of
operations held for sale were recorded in investment and other income. In
addition, the March 1999 sale of the Company's recreational vehicle
business also contributed to the increase during the six-month period.
Operating Expenses
Six and three-month Managed Basis operating expenses for the periods
ended June 30, 1999 were higher on a dollar basis than in the corresponding
periods in 1998, reflecting growth in the size of the Company and business
mix.
Managed Basis operating expense efficiency, measured as the ratio of
total operating expenses to Managed Basis revenue net of Managed Basis
interest expense and insurance benefits paid or provided ("Efficiency
Ratio"), increased to 47.1% and 46.4% for the six and three-month periods
ended June 30, 1999, respectively, compared to 43.3% and 43.4% for the same
periods in the prior year. The Avco goodwill amortization and Avco
integration expenses were significant causes of the increase in the
Efficiency Ratio. Furthermore, a slight shift in business mix toward more
fee based businesses caused by the acquisition of The Northland Company and
SPS Transaction Services, Inc. ("SPS") during the fourth quarter of 1998
also contributed to the increase.
Provision for Losses
The Company's Managed Basis provision for losses increased to $1.1
billion for the first six months of 1999 from $782.9 million for the same
period in 1998. The provision for losses for the three-month period ended
June 30, 1999 increased to $551.5 million from $410.0 million in the prior
year period. In both periods, the provision increased principally as a
result of increased Managed Basis net credit losses.
Total Managed Basis net credit losses as a percentage of average
managed finance receivables (the "Loss Ratio") were 2.75% and 2.78% for the
six and three-month periods ended June 30, 1999, respectively, compared to
2.34% and 2.37% for the same periods in 1998. The increase in the Loss
Ratio in both periods was principally due to a shift toward a higher
percentage of unsecured managed finance receivables primarily as a result
of the SPS and Avco acquisitions. Unsecured finance receivables generally
have higher loss ratios than secured finance receivables. In addition,
higher loss levels in the Company's secured portfolios during both
comparable periods also contributed to the increase in the Loss Ratio.
Financial Condition
Receivable Growth
Managed finance receivables grew $7.2 billion and $1.9 billion during
the six and three-month periods ended June 30, 1999, respectively, compared
to $5.9 billion and $3.3 billion for the same periods in 1998. The
acquisitions and dispositions described in NOTE 3 to the consolidated
financial statements and internal growth were the primary factors driving
receivable growth during both periods.
Contractual Delinquency
Composite 60+days contractual delinquency was 2.68% of managed finance
receivables at June 30, 1999, an increase from 2.57% at December 31, 1998
and 2.29% at June 30, 1998. The aforementioned shift in product mix toward
a higher percentage of unsecured managed finance receivables is the primary
cause of the increase. Unsecured finance receivables generally have higher
delinquency rates.
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 for losses in its
existing receivables portfolios. The allowance is determined principally
on the basis of historical loss experience, and reflects management's
judgment of current loss exposure at the end of the period considering
economic conditions and the nature and characteristics of the underlying
finance receivables. The Company records an allowance for losses when it
believes the event causing the loss has occurred. 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. The
Company's allowance for loss methodology has been consistently applied for
all periods presented, although this paragraph contains clarification from
the related disclosure in the Company's 1998 Form 10-K.
The loss coverage ratio (calculated as a ratio of the allowance for
losses to related trailing net credit losses on receivables owned at the
end of the period) decreased to 1.63% at June 30, 1999 compared to 1.74%
at December 31, 1998. Accordingly, the allowance for losses to net finance
receivables declined to 3.14% at June 30, 1999 from 3.25% at December 31,
1998. This decrease is primarily a result of the shift in the Owned Basis
product mix towards more secured portfolios. Secured portfolios generally
have lower losses than unsecured portfolios. The shift in the Owned Basis
product mix was primarily caused by the securitization of approximately
$925 million private label credit card receivables in the second quarter
of 1999. Company management believes the allowance for losses at June 30,
1999 is sufficient to provide adequate coverage against existing losses in
its Owned Basis finance receivable portfolios.
Liquidity and Capital Resources
Through its asset and liability management function, the Company
maintains a disciplined approach to the management of liquidity, capital,
interest rate risk and foreign exchange rate risk. The Company has a
formal process for managing its liquidity to ensure that funds are
available at all times to meet the Company's commitments.
The Company's principal sources of cash are proceeds from the
issuance of short and long-term debt and cash provided from the Company's
operations and asset securitizations. Management believes the Company has
available sufficient liquidity, from a combination of cash provided from
operations, external borrowings and asset securitizations to support its
operations.
A principal strength of the Company is its ability to access the
global debt and equity markets in a cost-efficient manner. Continued
access to the public and private debt markets is critical to the Company's
ability to continue to fund its operations. The Company seeks to maintain
a conservative liquidity position and actively manage 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 asset securitizations. The
Company's foreign subsidiaries are principally funded through private and
public debt borrowings in the transactional currency and fully hedged
intercompany borrowings.
At June 30, 1999, the Company had short and long-term debt
outstanding of $29.3 billion and $43.2 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 principal domestic operating subsidiary, Associates
Corporation of North America, in the United States and abroad, and to a
lesser extent, private and public borrowings made by the Company's foreign
subsidiaries. During the six months ended June 30, 1999 and 1998, the
Company raised term debt aggregating $8.3 billion and $4.2 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 maturing short-term obligations as needed. At June 30, 1999,
these credit facilities were allocated to provide 75% coverage of
the Company's recurring commercial paper borrowings and utilized
uncommitted lines of credit.
The Company has access to other sources of liquidity such as the
issuance of alternative forms of capital, the issuance of common and
preferred stock and the increased use of asset securitization. Prior to
1998, the Company's securitization transactions were limited to the
manufactured housing and recreational vehicle receivable portfolios. In
1998 and 1999, the Company expanded its securitization activity to include
the home equity and credit card asset-backed classes.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date fields containing
a 2-digit year is commonly referred to as the Year 2000 Compliance issue.
As the year 2000 approaches, if such systems are not repaired they may be
unable to accurately process certain date-based information.
The Company has a company-wide initiative to address the Year 2000
Compliance issue. A team of technology professionals began addressing the
Year 2000 Compliance issue in 1995. Since then, the Company has identified
and addressed all significant third party and internal applications that
require modification to ensure Year 2000 Compliance.
The Company divides its Year 2000 Compliance initiative into two
components, information technology ("IT") and non-information technology
("Non-IT"). The IT initiative includes third party and Company mainframe
and desktop systems and applications. The Non-IT initiative includes third
party suppliers, embedded systems and the Company's larger commercial
borrowers.
The project organization, awareness, inventory and analysis,
renovation, testing, implementation and contingency planning phases of the
Year 2000 effort have been successfully completed. Results from the
testing phase were reviewed to confirm Year 2000 Compliance. In cases
where testing identified potential non-compliance, modifications were made
to the system as necessary and retested until successful. To provide added
assurance that no new Year 2000 problems have been introduced into
previously repaired systems, the Company will further develop and test Year
2000 contingency plans, perform additional testing and facilitate
independent verification and validation testing through the rest of 1999.
The Company is also developing a plan to monitor systems and critical
providers, suppliers and others with which the Company has significant
relationships to ensure that any unforeseen problems are quickly identified
and resolved.
The Company's Non-IT efforts include evaluating Year 2000 Compliance
of third party suppliers, embedded systems and the Company's larger
commercial borrowers. The Company has communicated with third party
suppliers that provide critical products or services, providers of
significant embedded systems and large commercial borrowers to determine
their Year 2000 Compliance readiness and has tested where feasible the
extent to which the Company may be vulnerable to any significant Year 2000
issues. In addition, the Company required these suppliers and borrowers
to certify that they will be Year 2000 compliant. Contingency plans are
in place and in some cases have been activated to mitigate risk of
suppliers' inability to provide adequate certification.
Contingency planning is an integral part of the Company's Year 2000
readiness project. The Company has developed and is continuing to refine
and test 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 have been converted accurately, or that
a failure to accurately 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 effect
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 potential inability of
third parties to perform as a result of Year 2000 Compliance. Any such
failure by a third party bank, regulatory agency, group of investors,
securities exchange or clearing agency, software product or service
provider, utility or other entity may have a material adverse financial or
operational effect on the Company.
From the inception of the Company's Year 2000 readiness project
through June 30, 1999 the Company incurred and expensed approximately $25
million for incremental costs primarily related to third party vendors,
outside contractors and additional staff dedicated to the Year 2000
readiness project. During the first and second quarters of 1999,
approximately $5 million and $4 million, respectively, of incremental Year
2000 project costs were incurred. The Company expects that it will incur
additional future incremental costs related to the project of approximately
$8 million. These incremental costs do not include existing resources
allocated to the project effort. The Company's Year 2000 project is
expected to continue through March of 2000. The first quarter of the Year
2000 effort is specifically designed to monitor all Year 2000 transition
activities.
These costs and the date on which the Company plans to complete the
Year 2000 project 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has no material changes to report from the disclosure set
forth in the Company's Form 10-K for the year ended December 31, 1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None to report.
ITEM 2. CHANGES IN SECURITIES.
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting of shareholders on May 10,
1999.
(b) The Company's shareholders elected J. Carter Bacot, Eric S.
Dobkin, Roy A. Guthrie, Keith W. Hughes, William M. Isaac, H.
James Toffey, Jr. and Kenneth Whipple to the Board of Directors.
No other director's terms continued after this meeting.
(c) The Company's shareholders voted for the election of the directors
listed in paragraph (b), as follows:
Directors Number of Votes
--------- ---------------
Keith W. Hughes 513,394,165
J. Carter Bacot 513,627,441
Eric S. Dobkin 513,412,262
Roy A. Guthrie 513,418,516
William M. Isaac 513,713,333
H. James Toffey, Jr. 513,602,415
Kenneth Whipple 513,363,463
The Company's shareholders also voted on the approval of the
selection by the Audit Committee of PricewaterhouseCoopers L.L.P.
as the Company's independent public accountants for 1999*, as follows:
Votes For Votes Against Abstain
--------- ------------- -------
609,295,171 831,621 2,052,527
* On May 28, 1999, the Company announced on Form 8-K a change in its
certifying independent public accountants.
<PAGE>
The Company's shareholders also voted on a shareholder
proposal for the discontinuance of all incentive compensation for
top management, as follows:
Votes For Votes Against Abstain
--------- ------------- -------
26,386,840 488,647,870 38,263,272
The Company's shareholders did not vote on any other matters
at the Company's annual meeting of shareholders.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995
(the "1995 Act"). The 1995 Act provides a "safe harbor" for forward-
looking statements to encourage companies to provide information
without fear of litigation so long as those statements are identified
as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual
results to differ materially from those projected. Although the
Company does not anticipate that it will make forward-looking
statements as a general policy, the Company will make forward-looking
statements as required by law or regulation, and from time to time
may make such statements with respect to management's estimation of
the future operating results and business of the Company.
The Company hereby incorporates into this report by reference
to its Form 10-K for the year ended December 31, 1998 the cautionary
statements found on pages 29-30 of such Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed
Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the second quarter ended June 30, 1999, First Capital
filed Current Reports on Form 8-K dated April 13, 1999
(announcing earnings for the first quarter of 1999); April
27, 1999 (announcing it had reached an agreement to sell 41
Canadian consumer finance branches); May 21, 1999
(announcing it had reached an agreement to sell Avco
Financial Services' Australian and New Zealand businesses);
May 28, 1999 (announcing a change in certifying
accountants); and June 14, 1999 (announcing that it had
reached an agreement to sell Balboa Life and Casualty
Insurance Group).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
August 13, 1999
ASSOCIATES FIRST CAPITAL CORPORATION
(registrant)
By /s/ John F. Stillo
---------------------------
Executive Vice President,
Comptroller and Principal
Accounting Officer
<PAGE>
EXHIBIT 12
ASSOCIATES FIRST CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
---- ----
<S> <C> <C>
Fixed Charges (a)
Interest expense $1,925.3 $1,542.8
Implicit interest in rent 18.2 12.8
-------- --------
Total fixed charges $1,943.5 $1,555.6
======== ========
Earnings (b)
Earnings before provision for income
taxes $1,111.9 $ 910.9
Fixed charges 1,943.5 1,555.6
-------- --------
Earnings, as defined $3,055.4 $2,466.5
======== ========
Ratio of Earnings to Fixed Charges 1.57 1.59
==== ====
---------------
(a) For purposes of such computation, the term "fixed charges"
represents interest expense and a portion of rentals
representative of an implicit interest factor for such rentals.
(b) For purposes of such computation, the term "earnings" represents
earnings before provision for income taxes, plus fixed charges.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<PAGE>
<ARTICLE> 5
<LEGEND>
0 MEANS NOT APPLICABLE OR NOT SEPARATELY DISCLOSED. This schedule
contains summary financial information extracted from the
Company's unaudited consolidated financial statements as of June
30, 1999 and the six months then ended and is qualified in its
entirety by reference to such consolidated financial statements.
</LEGEND>
<CIK> 0000007974
<NAME> ASSOCIATES FIRST CAPITAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,485
<SECURITIES> 7,439
<RECEIVABLES> 68,127
<ALLOWANCES> 2,139
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 85,894
<CURRENT-LIABILITIES> 0
<BONDS> 72,471
<COMMON> 7
0
0
<OTHER-SE> 9,103
<TOTAL-LIABILITY-AND-EQUITY> 85,894
<SALES> 5,934
<TOTAL-REVENUES> 5,934
<CGS> 0
<TOTAL-COSTS> 4,822
<OTHER-EXPENSES> 2,170
<LOSS-PROVISION> 727
<INTEREST-EXPENSE> 1,925
<INCOME-PRETAX> 1,112
<INCOME-TAX> 417
<INCOME-CONTINUING> 695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 695
<EPS-BASIC> 0.95
<EPS-DILUTED> 0.95
</TABLE>
