-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VP66iezEthzEQQmPgVHxuv2zbJYDgXwNgCm8/lcOmQQGvPS7TkoDUD+67PKwnrlW SOkFSCmVgknPLxVEv6nE1A== 0000950134-00-002683.txt : 20000331 0000950134-00-002683.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950134-00-002683 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASSOCIATES FIRST CAPITAL CORP CENTRAL INDEX KEY: 0000007974 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 060876639 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11637 FILM NUMBER: 584465 BUSINESS ADDRESS: STREET 1: 250 E CARPENTER FWY CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9726524000 MAIL ADDRESS: STREET 1: P O BOX 660237 CITY: DALLAS STATE: TX ZIP: 75266-0237 FORMER COMPANY: FORMER CONFORMED NAME: ASSOCIATES FIRST NATIONAL CORP DATE OF NAME CHANGE: 19720518 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 ------------------------ 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, 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 incorporation or (I.R.S. Employer Identification No.) organization) 250 EAST CARPENTER FREEWAY 75062-2729 IRVING, TEXAS (Zip Code) (Address of principal executive offices)
Registrant's Telephone Number, including area code 972-652-4000 Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- --------------------- Class A Common Stock, New York Stock Exchange par value $0.01 per share
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 ($19.625 per share), which occurred on March 27, 2000, was $9,822,814,822. 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 March 27, 2000, 728,338,437 shares of the Company's Class A Common Stock, par value $0.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE*
DOCUMENT WHERE INCORPORATED -------- ------------------ Proxy Statement for 2000 Part III (Items 10, 11, 12 and 13) Annual Meeting of Stockholders
- --------------- * As stated under various Items of this Report, only certain specified portions of such document are incorporated by reference herein. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS. COMPANY OVERVIEW Associates First Capital Corporation ("First Capital" or the "Company"), a Delaware corporation, is a leading, diversified financial services organization providing finance, leasing, insurance and related services to individual consumers and businesses in the United States and internationally. As successor to Associates Investment Company, founded in 1918, First Capital had 2,771 offices worldwide and employed approximately 32,500 persons at December 31, 1999. Corporate headquarters are located in Irving, Texas. For the year ended December 31, 1999, First Capital had total managed revenues of $13.3 billion and net earnings of $1.5 billion. At December 31, 1999, managed finance receivables were $84.4 billion, total managed assets were $95.1 billion and stockholders' equity was $9.8 billion. The Company's finance receivables are geographically dispersed. At December 31, 1999, approximately 81% of total managed receivables were dispersed across the United States with 9% in California, 7% in Texas and 6% in Florida; no more than 4% in any other state. The remaining 19% of total managed receivables were dispersed across 13 foreign countries, with 9% in Japan and no more than 5% in any other foreign country. The Company significantly expanded its consumer finance operations with the acquisition of the assets of Avco Financial Services, Inc. (See "-- Significant 1999 Transactions"). This acquisition added over 2 million customers, over 1,200 branches at the time of the acquisition, and expanded the Company's present geographic coverage to include Ireland, Spain, France, Sweden, Hong Kong, and India. SIGNIFICANT 1999 TRANSACTIONS During 1999, First Capital completed several significant strategic acquisitions and dispositions. Set forth below is a summary of the most significant. Significant 1999 Acquisitions: - Avco Financial Services, Inc. ("Avco") - Shell Oil and British Petroleum Private Label Credit Card Programs - Newcourt Credit Group's Canadian and United Kingdom fleet leasing operations ("Newcourt") Significant 1999 Dispositions: - 128 U.S. consumer finance branches acquired from Avco - Associates recreational vehicle finance operations (Fleetwood Credit Corporation) - 41 consumer finance branches located in Canada (28 of which were former Avco branches) - The Australia and New Zealand operations acquired from Avco - The SPS Network Transaction Services electronic transaction processing services operation acquired in 1998. - Balboa Life and Casualty Insurance Companies ("Balboa") which comprised Avco's non-affiliate insurance business The Avco acquisition was the largest in Company history and is described in more detail below. The other acquisitions listed above are described in more detail in the "-- Reportable Segments" and "-- Product Information" sections and in Note 3 to the consolidated financial statements. 1 3 Acquisition of Avco Financial Services, Inc. On January 6, 1999, the Company purchased the assets and assumed the liabilities of Avco. Avco, formerly a subsidiary of Textron Inc., was a global, diversified financial services company with approximately $9 billion in assets, 8,000 employees, over 1,200 branches and over 2 million customers at the time of the acquisition. Avco's product offerings included 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 operations in Canada, the United Kingdom, Puerto Rico, Australia, Hong Kong, France, Sweden, Spain, New Zealand, Ireland and India. As described in Note 3 to the consolidated financial statements, during 1999 the Company sold Avco's operations in Australia and New Zealand, as well as 156 former Avco branches (128 domestic and 28 Canadian) and Avco's non-affiliate insurance business, Balboa Life and Casualty Insurance Companies. These sales were initiated pursuant to the Company's acquisition, integration and capital planning activities. During the first two quarters of 1999, the Company consolidated certain headquarters activities in the United States, the United Kingdom and Canada, resulting in a reduction in the Company's workforce. In the United States, Avco's headquarters in Costa Mesa, California, were closed in the second quarter of 1999, as all corporate functions were consolidated with the Company's headquarters in Irving, Texas. Most of the 400 jobs at Avco's headquarters were eliminated. Internationally, the Company closed its United Kingdom headquarters in Slough, England and consolidated functions into the existing Avco facilities in Reading, England. In addition, the Company closed its Canadian consumer finance headquarters in Toronto, Ontario and consolidated these functions into Avco's Canadian headquarters in London, Ontario. Certain other facilities including the Avco Technology Center in Costa Mesa and Avco's Denver Purchasing Center were also closed during 1999. Pending Acquisitions In December 1999, the Company announced an agreement to enter into an agent bank partnership with KeyCorp, under which the companies will jointly manage KeyCorp's credit card program. On January 31, 2000, the Company acquired KeyCorp's credit card portfolio of approximately $1.3 billion in receivables and nearly 600,000 active VISA(R) and MasterCard(R) accounts. In addition, the Company acquired the rights to market credit card related products to KeyCorp's more than 3 million customers through approximately 900 KeyCorp branches. In November 1999, the Company announced an agreement to acquire Arcadia Financial Ltd. ("Arcadia"). Arcadia is a leading U.S. independent automobile finance company which services over $5 billion in finance receivables. The acquisition is expected to close during the first half of 2000. The Company also entered into a continuous asset purchase and sale agreement under which the Company purchased from Arcadia an aggregate of approximately $500 million of retail installment sales contracts in November and December 1999. In the event of a termination of the merger agreement between the Company and Arcadia, approximately $200 million of these receivables may be repurchased by Arcadia. Additionally, the Company purchased an aggregate of approximately $350 million of retail installment sales contracts in January, February and March 2000. In August 1999, the Company announced an agreement to acquire and manage the proprietary credit card program of CITGO Petroleum Corporation. The transaction closed in March 2000 and the Company acquired approximately $130 million in receivables under this agreement. REPORTABLE SEGMENTS The Company is organized into five primary business units: U.S. credit card, U.S. consumer branch, U.S. home equity, commercial and international finance. The U.S. consumer branch and U.S. home equity business units are aggregated into one reportable U.S. consumer finance segment due to their similar operating characteristics. The Company's corporate activities include, among others, managing the operations of its domestic and foreign subsidiaries, accessing the global debt, securitization and capital markets and managing the mix of businesses in its portfolio. The Company fully allocates its corporate activities to its business segments primarily based upon managed receivables. In 1999, these allocations included gains or losses on 2 4 business dispositions and assets sold and securitized as set forth in Notes 3 and 7 to the consolidated financial statements. For additional information about specific products and services offered by the Company, see the "-- Product Information" section. Some of the information disclosed in this section 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. In addition, prior year amounts presented have been restated, as necessary, to conform to the current year presentation. U.S. CREDIT CARD SEGMENT The Company's U.S. credit card segment offers private label retail credit card and revolving programs ("Private Label Cards") and VISA(R) and Mastercard(R) retail bankcard credit card products ("Retail Bankcards") to customers throughout the United States. Various credit-related and other insurance products are also provided, including credit life, credit accident and health, accidental death and dismemberment, involuntary unemployment and personal property insurance. In addition, the U.S. credit card segment provides emergency roadside assistance and auto club services. 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 interest rates tied to movements in the prime lending rate. The Private Label Card business consists of customized revolving credit programs for oil and retail companies. The Company's retail Private Label Card program includes Radio Shack, Gateway, Goodyear, Staples, Office Depot and Office Max, among others. The Company's oil Private Label program includes Texaco, Amoco, Shell Oil and British Petroleum. The Shell Oil and British Petroleum credit card programs were acquired during 1999, establishing the Company as the leading provider of oil company credit cards in the United States. In August 1999, the Company announced an agreement to acquire and manage the proprietary credit card program of CITGO Petroleum Corporation. This transaction closed in March 2000. Retail Bankcards are issued across a wide spectrum of customers with interest rates based on customer credit profiles. Bankcard operations were expanded through the December 1998 agent bank agreement with Washington Mutual Bank, FA. As mentioned below, in January 2000 the Company acquired the bankcard portfolio from KeyCorp and entered into an ongoing agent bank partnership. The following table shows certain information regarding the Company's U.S. credit card segment: U.S. CREDIT CARD
YEAR ENDED OR AT DECEMBER 31 -------------------------------------------- 1999 1998 1997 ------------ ----------- ----------- (DOLLARS IN MILLIONS, ON A MANAGED BASIS(1)) Total revenue..................................... $ 2,542.3 $1,968.9 $1,659.2 Net interest margin............................... 1,737.9 1,377.8 1,163.0 Net losses........................................ 721.4 623.3 573.9 60+days delinquency(2)............................ 4.21% 4.79% 3.99% Segment earnings.................................. $ 441.1 $ 299.8 $ 199.7 Finance receivables............................... 10,928.3 9,622.0 7,839.3
- --------------- (1) See the "Management's Discussion and Analysis -- Managed Basis Reporting" section for more information on Managed Basis reporting. (2) As a percentage of gross managed receivables. Customers. The Company's U.S. credit card segment customers are primarily consumers who span a wide range of income levels and credit histories. The Company uses a proprietary credit scoring model to 3 5 evaluate risk and other factors in extending credit to its customers. Information considered by the Company in the credit scoring model includes, among other things, the customer's capacity to repay (e.g., income, debt ratio, and employment stability) and credit history. In addition, the U.S. credit card segment serves business customers principally through its private label products. Delivery of Products and Services. The Company distributes its U.S. credit card products through three subsidiaries, Hurley State Bank ("HSB"), Associates National Bank (Delaware) ("ANB") and Associates Capital Bank, Inc. ("ACB"). Through these subsidiaries, the Company offers a number of Private Label and Retail Bankcards directly to the public and through co-operative marketing programs with other companies. Private Label Cards are distributed through seven centralized operating centers that provide marketing support for the merchant relationship, as well as credit collection and card holder services. Retail Bankcards are distributed through one centralized operating center that provides credit and collection services, cardholder services and marketing support. A shared utility group provides cardholder fulfillment services, including credit card embossing. Emergency roadside assistance and autoclub services are provided through centralized support facilities in Dallas, Texas and Gray, Tennessee. Acquisitions. During 1999, the Company further strengthened its leadership position in the oil private label credit card market through the acquisitions of the Shell Oil and British Petroleum Private Label Cards programs. Approximately three million new active customer accounts and approximately $400 million in receivables were added through these acquisitions. Additionally, in August 1999 the Company announced an agreement to acquire approximately $130 million in receivables from CITGO Petroleum Corporation and to manage its proprietary credit card program. This transaction closed in March 2000. In December 1999, the Company announced an agreement to acquire KeyCorp's retail bankcard portfolio and jointly manage KeyCorp's credit card program. The transaction closed on January 31, 2000. In addition, the Company acquired the rights to market credit card related products to KeyCorp's more than 3 million customers through approximately 900 KeyCorp branches. U.S. CONSUMER FINANCE SEGMENT The Company's U.S. consumer finance segment offers a variety of consumer finance and insurance products and services to customers throughout the United States (excluding Hawaii and Puerto Rico, which are included in the international finance segment). Finance products and services offered by this segment include home equity loans, personal loans, automobile financing and retail sales finance. In addition, the Company, through certain subsidiaries and third parties, makes available various credit-related and other insurance products to its U.S. consumer finance customers, including credit life, credit accident and health, involuntary unemployment, personal property insurance and other non-credit products. The following table shows certain information regarding the Company's U.S. consumer finance segment: U.S. CONSUMER FINANCE
YEAR ENDED OR AT DECEMBER 31 ---------------------------------------------- 1999 1998 1997 ------------ -------------- ------------ (DOLLARS IN MILLIONS, ON A MANAGED BASIS(1)) Total revenue................................... $ 4,442.2 $ 3,828.7 $ 3,633.6 Net interest margin............................. 2,266.7 2,080.8 2,056.3 Net losses...................................... 765.2 615.7 514.8 60+days delinquency(2).......................... 3.77% 3.22% 2.73% Segment earnings................................ $ 688.7 $ 655.9 $ 665.6 Finance receivables............................. 31,566.8 26,810.5 23,985.0
- --------------- (1) See the "Management's Discussion and Analysis -- Managed Basis Reporting" section for more information on Managed Basis reporting. (2) As a percentage of gross managed receivables. 4 6 Customers. The Company's U.S. 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 and purchasers of automobiles and consumer durables (such as furniture, electronics and appliances). The Company uses credit scoring models to evaluate risk and other factors in extending credit to its customers. Information considered by the Company in the credit scoring model includes, among other things, the customer's capacity to repay (e.g., income, debt ratio and employment stability), credit history and available collateral to secure the loan, including home ownership. Delivery of Products and Services. The Company distributes its U.S. consumer finance and insurance products through branch offices and centralized consumer lending operations as described below: Branch System. At December 31, 1999, the Company's U.S. consumer finance branch system consisted of approximately 1,081 geographically dispersed offices with locations in the continental United States. These locations operate under four different nameplates -- Associates Financial Services, TranSouth Financial, First Family Financial Services and Kentucky Finance. In addition, the U.S. home equity branch system consisted of 257 direct sales offices. All former Avco branches are now operating under the Associates Financial Services nameplate. Products distributed include direct origination of home equity loans, personal loans, automobile finance and retail sales finance. Centralized Lending. At December 31, 1999, the Company distributed home equity, personal loans, sales finance and automobile lending through seven regional service centers and centralized lending operations. The Company distributes its centralized home equity products primarily 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. Home equity loans are originated through unaffiliated mortgage brokers, financial institutions and existing customer relationships targeted through direct mail and telemarketing efforts. 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 Company distributes its revolving personal lending and sales finance products through its federally insured Utah industrial thrift, ACB, and its retail auto lending products through TranSouth Financial's retail auto center. Avco Acquisition. On January 6, 1999, the Company completed the acquisition of Avco. Avco's domestic finance receivables included in the U.S. consumer finance segment were approximately $3.7 billion at December 31, 1998. These receivables primarily consisted of home equity and personal loans and retail installment contracts. The Company subsequently sold 128 branches which included approximately $525 million of finance receivables. The acquisition of Avco solidified the Company's market position in the domestic consumer finance sector by increasing the Company's customer base at the time of the acquisition 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 3 to the consolidated financial statements. COMMERCIAL SEGMENT The Company's commercial segment offers a variety of commercial finance and insurance products to customers in the United States and Canada. Finance products and services offered by this segment in the United States and Canada 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 engages in a number of other commercial activities, including auto fleet leasing and fleet management services, government guaranteed lending, employee relocation services, truck trailer rental services, warehouse lending and public finance. The Company, through certain subsidiaries and third parties, also makes available various credit-related and other insurance products to its commercial segment customers and other customers, including commercial auto and dealers' open lot physical damage, credit life and motor truck cargo insurance, and commercial and public auto liability insurance. The Company also offers specialty lines including general liability, directors and officers and errors and omission insurance, and personal lines including homeowner and recreational vehicle insurance. 5 7 The Company has a centralized warehouse lending operation, which is conducted through First Collateral Services, Inc. ("FCS"). FCS provides short-term financing, secured by real estate mortgages, to mortgage companies and other mortgage lenders. COMMERCIAL
YEAR ENDED OR AT DECEMBER 31 ---------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ (DOLLARS IN MILLIONS, ON A MANAGED BASIS(1)) Total revenue(2)................................ $ 3,285.2 $ 2,591.7 $ 2,152.9 Net interest margin............................. 1,028.4 1,008.1 875.7 Net losses(3)................................... 245.8 111.3 67.3 60+days delinquency(3)(4)....................... 1.26% 1.21% 1.02% Segment earnings(2)............................. $ 506.9 $ 510.5 $ 439.7 Finance receivables(3).......................... 27,948.6 26,469.6 22,304.2
- --------------- (1) See the "Management's Discussion and Analysis -- Managed Basis Reporting" section for more information on Managed Basis reporting. (2) Includes the revenues and earnings of the Company's non-affiliate insurance operations of $504.7 million and $35.3 million, respectively in 1999. The non affiliate insurance operations had no effect on net interest margin. (3) As described in Note 22 to the consolidated financial statements, in January 2000 the Company announced its decision to discontinue the origination of manufactured housing financing products. In addition, the Company sold its recreational vehicle business in March, 1999. Net losses, on a pro forma basis, excluding the impact of manufactured housing and recreational vehicle operations would have been $104.8 million, $53.7 million and $36.4 million for the years ended December 31, 1999, 1998 and 1997, respectively. 60+days delinquency, on a pro forma basis, excluding the impact of manufactured housing and recreational vehicle operations would have been 1.16%, 1.03% and 1.04% for the years ended December 31, 1999, 1998 and 1997, respectively. Finance receivables, on a pro forma basis, excluding the manufactured housing and recreational vehicle operations would have been $22.5 billion, $19.2 billion and $17.1 billion at December 31, 1999, 1998 and 1997, respectively. (4) As a percentage of gross managed receivables. Delivery of Products and Services. The Company distributes its commercial finance and insurance products through branch and regional offices and centralized commercial lending, leasing and service operations and general and independent insurance agents, brokers and program administrators described below: Branch System. The Company provides truck and truck trailer financing, equipment financing and leasing services, manufactured housing financing and related insurance through 85 branch 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 23 U.S. branch offices. In addition, insurance products are offered through approximately 5,500 general and independent agents and brokers. Centralized Lending, Leasing and Services. The Company utilizes ten centralized operations to distribute lending, leasing and fee-based products and services. The auto fleet leasing and fleet management services operation is directed through Associates Fleet Services. Additionally, centralized operations are used to provide material handling and industrial and communications equipment products, employee relocation services and small business lending programs. Discontinuation of Manufactured Housing Loan Origination Activities. In January 2000, the Company announced its decision to discontinue the origination of retail installment and wholesale financing products for the manufactured housing sector. The Company's decision follows disappointing operating results and the unfavorable outlook for the sector. The Company closed substantially all of its sales purchase offices in February 2000 and will close its regional loan origination centers in the second quarter of 2000. The Company will service the liquidation of the existing receivables through its centralized service facility in Knoxville, Tennessee. The Company will limit its origination activities to support of its contractual arrangements and loss mitigation initiatives. See Note 22 to the consolidated financial statements. 6 8 Sale of Recreational Vehicle Finance Business. Through March 1999, the Company offered various recreational vehicle financing products. As described in Note 3 to the consolidated financial statements, in March 1999 the Company sold its recreational vehicle finance operation to NationsBank, N.A., a unit of BankAmerica Corporation. INTERNATIONAL FINANCE SEGMENT The Company's international finance segment offers a variety of consumer finance products and services to customers in Japan, Canada, the United Kingdom, Puerto Rico, Sweden, Hong Kong, Spain, India, Mexico, Taiwan, Ireland and Costa Rica. Commercial financing products are also offered in the United Kingdom, Hong Kong, Puerto Rico, France, Mexico, Japan, India and Spain. Commercial finance products offered in Canada are managed by the Company's commercial segment, and are included in the commercial segment results. The Company, through certain 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 U.S. consumer finance, U.S. credit card and commercial segments. In January 1999, the Company acquired the operations of Avco, expanding its presence in Canada, the United Kingdom and Puerto Rico. Through the acquisition, the Company also entered new markets in Sweden, Hong Kong, Spain, France, India, Ireland, Australia and New Zealand. In June 1999, the Company completed the sale of its Australia and New Zealand operations. The following table shows certain information regarding the Company's international finance segment: INTERNATIONAL FINANCE
YEAR ENDED OR AT DECEMBER 31 -------------------------------------------- 1999 1998 1997 ------------ ----------- ----------- (DOLLARS IN MILLIONS, ON A MANAGED BASIS(1)) Total revenue..................................... $ 2,981.3 $1,640.2 $1,024.8 Net interest margin............................... 2,191.4 1,278.1 791.0 Net losses........................................ 483.7 215.7 94.0 60+days delinquency(2)............................ 2.60% 2.58% 1.93% Segment earnings.................................. $ 740.2 $ 474.3 $ 335.0 Finance receivables............................... 13,971.0 8,462.2 4,278.0
- --------------- (1) See the "Management's Discussion and Analysis -- Managed Basis Reporting" section for more information on Managed Basis reporting. (2) As a percentage of gross managed receivables. Delivery of Products and Services. The Company delivers international finance products and services through approximately 1,300 consumer and commercial branches and 25 centralized facilities. The Company's international locations employ operational policies, practices and disciplines similar to those of the Company's other segments but give appropriate consideration to local laws and customs. Set forth below is a description of the Company's international delivery systems at December 31, 1999. - Japan. The Company operates 675 consumer branches, 10 centralized consumer and credit card facilities and one commercial operation in Japan. In addition, the Company offers consumer loans through 178 automated loan machines ("ALMs"). These operations are principally conducted by AIC Corporation ("AIC") and DIC Finance Co., Ltd., ("DIC"). Products offered by AIC and DIC include home equity and personal loans, MasterCard(R) credit cards, retail sales finance contracts and commercial transportation and construction and industrial equipment financing. - Canada. The Company operates 318 consumer finance branches and five centralized consumer finance lending operations through which the Company purchases retail sales finance contracts and makes personal and home equity loans. Commercial finance products are also offered in Canada, but are 7 9 managed by the Company's commercial finance operations. Accordingly, Canada's commercial operations are included in the operations of the commercial segment. - United Kingdom. The Company operates 112 consumer and commercial branches and three centralized lending and credit facilities 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. In 1999, the consumer and commercial operations expanded through the acquisition of Avco. - Other International Operations. The Company has 83 branches in Puerto Rico; 51 in Mexico; 11 in Spain; 10 in France; eight in Hong Kong; seven in India; seven in Ireland; five in Costa Rica, two in Taiwan and one in Sweden through which various consumer and commercial finance products are provided. In February 2000, the Company discontinued loan originations in Costa Rica. Accordingly, the Company consolidated its branch operations into two offices which will liquidate the existing receivables portfolio. Also, in January 2000, the Company expanded its international operations into Norway. PRODUCT INFORMATION This section provides additional information about the products and services offered by the Company. 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 "-- U.S. Credit Card Segment", "-- U.S. Consumer Finance Segment", "-- Commercial 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)
AT DECEMBER 31 --------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Home Equity........................... $27,480.3 $22,622.3 $18,796.0 $16,691.4 $14,316.3 Personal Lending/Retail Sales Finance............................. 16,012.4 11,459.2 8,731.6 7,425.1 6,225.1 Truck and Truck Trailer............... 13,130.3 10,783.6 9,688.9 8,598.3 7,724.0 Credit Card........................... 11,733.6 10,296.8 8,323.7 6,023.8 4,984.6 Equipment............................. 6,977.3 6,114.0 5,300.5 4,571.8 3,781.7 Manufactured Housing(2)............... 5,494.8 5,193.5 3,526.9 2,547.5 2,049.3 Recreational Vehicles(3).............. -- 2,036.9 1,665.4 1,315.6 -- Auto Fleet Leasing.................... 2,070.1 1,589.7 1,551.1 1,090.8 330.8 Other Financial Services.............. 1,515.9 1,268.3 822.4 358.5 290.7 --------- --------- --------- --------- --------- Total(4).................... $84,414.7 $71,364.3 $58,406.5 $48,622.8 $39,702.5 ========= ========= ========= ========= =========
- --------------- (1) See the "Management's Discussion and Analysis -- Managed Basis Reporting" section for more information on Managed Basis reporting. (2) As described in Note 22 to the consolidated financial statements, in January 2000, the Company announced its intention to discontinue its manufactured housing loan origination activities. (3) In March 1999 the Company sold its recreational vehicle finance business to NationsBank, N.A., a unit of BankAmerica Corporation. See Note 3 to the consolidated financial statements. (4) Excluding manufactured housing and recreational vehicle receivables, proforma managed receivables from ongoing operations would have been $78.9 billion, $64.1 billion, $53.2 billion, $44.8 billion and $37.7 billion at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. Home Equity. 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. 8 10 Home equity loans have maturities of up to 360 months. Fixed rates were charged on approximately 93% of home equity managed receivables outstanding at December 31, 1999. Home equity loans may be secured by either first or second mortgages. At December 31, 1999, approximately 76% 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 the purpose of debt consolidation, home improvement, education and purchasing 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, automobiles, furniture and home improvements. These contracts are generally purchased from retailers of such items, and provide an important source of new customers. The sales finance relationship often leads to other types of financing for the customer based upon the individual's 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. Automobile contracts can be written for up to 72 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 based on receivables outstanding. 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 and leasing 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 and leasing 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 terminal rental adjustment clause ("TRAC") leases. Under such leases, the customer is responsible for the maintenance and terminal or 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 (prime rate based) rates and are secured by inventory. 9 11 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. Bankcard operations were expanded through the December 1998 agent bank agreement with Washington Mutual Bank, FA. In addition, in December 1999, the Company announced an agreement to acquire the bankcard operations from KeyCorp and enter into an ongoing agent bank partnership. The KeyCorp transaction closed on January 31, 2000. Combined these relationships give the Company rights to market credit card products to approximately 9 million customers through approximately 2,000 branches. The private label credit card business consists of customized revolving credit programs for retail and oil companies. The Company's retail Private Label Card program includes Radio Shack, Gateway, Goodyear, Staples, Office Depot and Office Max, among others. The Company's private label oil program includes Texaco, Amoco, Shell Oil and British Petroleum. The Shell Oil and British Petroleum credit card programs were acquired during 1999, establishing the Company as the leading provider of oil company credit cards in the United States. In August 1999, the Company announced an agreement to acquire and manage the proprietary credit card program of CITGO Petroleum Corporation. In March 2000, the Company acquired approximately $130 million in receivables under this agreement. The Company's private label relationships include approximately 38 million oil and retail customers and approximately 82,000 oil and retail outlets. These relationships allow the Company to leverage the oil and retail companies' brand names in order to cross sell related products and services to these customers. 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 interest rates tied to movements in the prime lending rate. Equipment Financing and Leasing. The Company believes that, based on receivables outstanding, it is one of the leading independent sources of financing and leasing, of new and used construction, mining, forestry, industrial, machine tool, material handling, aircraft, communications and turf maintenance equipment and golf cars in the United States, Canada, the United Kingdom, Puerto Rico and France and to a lesser extent in other countries. Wholesale and rental fleet financing 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. Under certain lease transactions, the Company retains the depreciation tax benefit. In addition, the Company provides wholesale and rental fleet financing for selected dealers. Generally, wholesale loans are short-term loans with variable (prime rate based) rates and are secured by inventory. Discontinuation of Manufactured Housing Loan Origination Activities. As described in Note 22 to the consolidated financial statements, in January 2000, the Company announced that it would discontinue its manufactured housing retail installment loan origination operations. The Company will limit its origination activities to support its contractual arrangements and loss mitigation activities. Prior to this announcement, the Company purchased manufactured housing retail installment contracts originated by retail dealers and provided wholesale financing to approved manufactured housing dealers. In addition, commercial business 10 12 loans were offered to certain manufactured housing dealers to provide capital to build new retail sales centers, update existing facilities or expand into community parks. Auto Fleet Leasing. The Company believes it is one of the leading providers of auto fleet leasing and management services for corporations in the United States, Canada and the United Kingdom with auto and light truck fleets of generally 100 or more vehicles. These operations were expanded substantially in June 1999 through the acquisition of Newcourt Credit Group's Canadian and U.K. fleet management operations. 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. Other Financial Services. 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 14 SBA Districts 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. Public 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 Products and Services. Historically the Company has offered various credit and non-credit insurance products to its finance customers through its consumer and commercial finance product delivery systems. The Company expanded its insurance products and delivery systems through the acquisitions of The Northland Company ("Northland") in December 1998 and Avco in January 1999, as described below. 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 from the Company or an alternative carrier chosen by the customer. 11 13 The following table sets forth certain information relating to the Company's insurance operations (in millions): INSURANCE STATISTICAL DATA(1)
YEAR ENDED DECEMBER 31 -------------------------------------------- 1999(2) 1998 1997 1996 1995 -------- ------ ------ ------ ------ Net Written Premium Credit life, accident and other related............................. $ 384.9 $290.1 $307.1 $282.2 $240.6 Physical damage........................ 351.2 197.8 210.3 186.2 180.3 Other casualty and liability........... 436.6 103.7 91.3 75.9 69.6 -------- ------ ------ ------ ------ Total.......................... $1,172.7 $591.6 $608.7 $544.3 $490.5 ======== ====== ====== ====== ====== Premium Revenue(3) Credit life, accident and other related............................. $ 306.6 $210.6 $201.4 $183.8 $164.8 Physical damage........................ 344.8 171.2 152.9 155.1 148.5 Other casualty and liability........... 404.3 89.7 66.4 63.2 57.3 -------- ------ ------ ------ ------ Total.......................... $1,055.7 $471.5 $420.7 $402.1 $370.6 ======== ====== ====== ====== ====== Investment Income........................ $ 198.9 $ 98.5 $ 82.6 $ 71.7 $ 68.5 ======== ====== ====== ====== ====== Benefits Paid or Provided................ $ 447.0 $158.1 $145.7 $148.2 $142.5 ======== ====== ====== ====== ======
- --------------- (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. This table also does not include the non-affiliate insurance operations of Balboa, which were sold in 1999. (2) The increase in the 1999 Net Written Premium and Premium Revenue relates primarily to the acquisition of Northland and the affiliate insurance operations of Avco. (3) 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 products. Northland operates through approximately 5,500 general agents, independent agents and brokers. 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 and non-standard auto, complemented the Company's 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 commercial finance operations. Northland completed its 13th consecutive year of underwriting profit in 1999 with a combined ratio of 92.7. Northland and its subsidiaries operate in 50 states and the District of Columbia and have approximately 750 employees at their St. Paul, Minnesota headquarters and a subsidiary in Scottsdale, Arizona. Northland is rated A+ (Superior) by A.M. Best. Avco. The acquisition of Avco included the operations of Balboa Casualty and Life Insurance Companies. Balboa operated both affiliate and non-affiliate insurance businesses. In November 1999, the Company sold its Balboa's non-affiliate insurance business to Countrywide Insurance Group, Inc. The Balboa acquisition significantly expanded the affiliate insurance business of the Company's U.S. and international operations. Affiliate insurance relates to insurance products distributed through the finance affiliates. Avco offered insurance products to consumers and businesses in the United States, Canada and the United Kingdom through its affiliated finance operations, as well as to non-credit related customers. See Note 3 to the 12 14 consolidated financial statements and the "-- Company Overview" section for more information on the Avco acquisition and related dispositions. 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 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 the present 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 evaluated on an aggregate basis considering, among other things, the relationship of the allowance to net finance receivables and historical 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. As set forth below, 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. Finance charge accruals are suspended on accounts when they become 60 days contractually delinquent. The accrual is resumed when the loan becomes contractually current. 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 the allowance for losses. For further information concerning allowance for losses, net credit losses and contractual delinquencies, see "-- Management's Discussion and Analysis of Financial Condition and Results of Operations". ALLOWANCE FOR LOSSES TO NET FINANCE RECEIVABLES
YEAR ENDED OR AT DECEMBER 31 --------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- OWNED BASIS Allowance for Losses Amount (in millions)....... $ 2,174.4 $ 1,978.7 $ 1,949.9 $ 1,563.1 $ 1,268.6 Allowance for Losses to Net Finance Receivables................................... 3.16% 3.25% 3.53% 3.36% 3.20% Allowance for Losses to Net Credit Losses(1).... 1.50x 1.74x 1.59x 1.77x 2.03x
- --------------- (1) Calculated as a ratio of the allowance for losses to related trailing or annualized net credit losses on receivables owned at the end of the period (as adjusted to exclude net credit losses related to securitized receivables and to reflect the impact of significant acquisitions). The Company's ten largest accounts at December 31, 1999 (all of which were current at December 31, 1999) represented less than 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 in some markets 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 13 15 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. U.S. Credit Card. 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. U.S. Consumer Finance. Traditional competitors in the U.S. 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, which is primarily a portfolio lender, maintains considerable product and delivery flexibility, which the Company believes is a competitive advantage. 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 operations. Commercial. In its commercial 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 the local and international 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 opera- 14 16 tions 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 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. U.S. Credit Card. HSB is regulated by the FDIC and the South Dakota Department of Commerce and Regulation -- Banking Division. 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, ANB and ACB 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. 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. U.S. Consumer Finance. These segments are 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 15 17 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 covers real estate secured loans that are subordinated to other mortgage loans. RESPA and Regulation X promulgated 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. 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. Commercial. Although most jurisdictions do not regulate commercial finance, certain jurisdictions do require licensing of lenders and financiers, 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. In December 1999, the Japanese Government enacted legislation effective June 1, 2000, which reduces the maximum allowable rate for all new loans and borrowings, after the effective date, which financial institutions may charge from 40.004% to 29.2%. As of December 31, 1999, approximately half of the Company's consumer loans in Japan were below the newly enacted rate ceiling of 29.2%. While the legislation will have the effect of decreasing the maximum rate of interest the Company may charge on new loans and borrowings, the Company believes that the change will not have a material adverse impact on the Company's operations. The Company is reviewing its products and services in Japan as well as distribution channels, new products, and expense attributes to minimize any impact of the rate change. Based on previous experiences, the Company believes the decreases in the interest rate ceiling will result in industry consolidation, creating opportunities for portfolio or business acquisitions in Japan. 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. 16 18 ITEM 2. PROPERTIES. The furniture, equipment and other physical property owned by the Company and its subsidiaries represent less than 1% of total assets at December 31, 1999 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, 1999, the Company had 2,771 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 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, 1999. 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. None. 17 19 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 of the quarterly periods indicated were as follows:
CLASS A COMMON STOCK PRICE PER SHARE(1) --------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- 1999 High..................................... 47 1/2 49 43 7/8 39 13/16 Low...................................... 36 7/16 38 1/2 33 11/16 26 3/16 Dividends per share of Class A Common Stock and Class B Common Stock......... $0.055 $0.055 $0.055 $0.065 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
- --------------- (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 March 27, 2000, stockholders of record of the Company included approximately 187,367 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. Historically, the terms of certain agreements governing outstanding indebtedness of Associates Corporation of North America ("Associates"), First Capital's principal operating subsidiary, contain certain limitations on the payment of dividends and certain other transfers of funds to the Company. The Company's banking subsidiaries, HSB, ANB and ACB, 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. The Company issued 340,668 and 115,000 restricted shares of Class A Common Stock in 1999 and 1998, respectively. The Company awarded these shares to certain employees contingent on their continued employment with the Company. Such shares vest on the fifth anniversary of the date of issuance. The 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. 18 20 ITEM 6. SELECTED FINANCIAL DATA. 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, 1999. 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, except per share information):
YEAR ENDED OR AT DECEMBER 31 ------------------------------------------------------------ 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Results of Operations Total revenue.................... $12,131.2 $ 9,376.8 $ 8,278.6 $ 7,098.2 $ 6,107.2 Finance charge revenue........... 9,106.4 7,910.4 7,560.2 6,481.0 5,560.8 Interest expense................. 3,906.5 3,196.7 2,775.2 2,456.0 2,177.9 Net interest margin.............. 5,199.9 4,713.7 4,785.0 4,025.0 3,382.9 Operating expenses............... 3,894.4 2,798.0 2,339.6 2,002.9 1,754.7 Provision for losses............. 1,506.4 1,283.5 1,378.1 1,086.5 834.0 Insurance benefits paid.......... 447.0 158.1 145.7 148.2 142.5 Earnings before provision for income taxes.................. 2,376.9 1,940.5 1,640.0 1,404.6 1,198.1 Provision for income taxes....... 886.5 717.0 608.3 547.6 475.0 Net earnings..................... 1,490.4 1,223.5 1,031.7 857.0 723.1 Basic earnings per share(1)...... 2.05 1.76 1.49 1.24 1.04 Diluted earnings per share(1).... 2.04 1.75 1.48 1.23 1.04 Balance Sheet Data Finance receivables, net of unearned finance income....... $68,817.1 $60,939.0 $55,215.6 $46,512.9 $39,702.5 Allowance for losses............. 2,174.4 1,978.7 1,949.9 1,563.1 1,268.6 Total assets..................... 82,956.8 75,175.4 57,232.7 48,268.4 41,303.9 Short-term debt (notes payable)...................... 27,253.4 25,709.8 20,970.6 17,075.2 13,747.3 Long-term debt(2)................ 41,404.0 37,596.7 28,228.0 24,029.5 21,372.6 Stockholders' equity............. 9,800.5 8,526.5 6,268.6 5,437.5 4,801.1 Stockholders' equity per share(1)(3)................... 13.46 11.72 9.05 7.84 6.92 Selected Data and Ratios Total debt to equity(4).......... 7.0:1 7.4:1 7.8:1 7.5:1 7.2:1 Total debt to tangible equity(4)(5).................. 11.3:1 9.5:1 9.5:1 9.7:1 9.9:1 Return on average assets(6)...... 1.78% 1.90% 1.95% 1.89% 1.89% Return on average equity(6)...... 16.28 17.94 17.78 18.31 15.66 Return on average adjusted equity(6)(7).................. 18.03 20.30 21.10 22.86 20.26 Allowance for losses to net finance receivables........... 3.16 3.25 3.53 3.36 3.20 Allowance for losses to net credit losses(8).............. 1.50x 1.74x 1.59x 1.77x 2.03x Number of employees................ 32,486 28,662 22,582 18,984 16,647 Number of branch offices Domestic......................... 1,470 1,478 1,568 1,634 1,543 International.................... 1,301 1,044 697 499 404 --------- --------- --------- --------- --------- Total.................... 2,771 2,522 2,265 2,133 1,947 ========= ========= ========= ========= =========
- --------------- (1) Per share information has been adjusted to give retroactive recognition to the December 23, 1998 stock dividend described in Note 20 to the consolidated financial statements. (2) Includes current portion of long-term debt. (3) Based on the basic shares outstanding for each year. (4) Calculated net of short term investments. 19 21 (5) Tangible equity is calculated as stockholders' equity minus goodwill as set forth in Note 9 to the consolidated financial statements. Total debt to tangible equity as adjusted on a pro forma basis to reflect the treatment as equity of a $500 million debt security issued in July 1999, would have been 10.40:1 at December 31, 1999. (6) 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 include the effect of these transactions. Excluding the impact of these transactions, the Company's return on average assets, on average equity and on average adjusted equity for the year ended December 31, 1996 would have been 1.93%, 17.09% and 20.94%, respectively. (7) Excludes the push-down goodwill created by Ford's acquisition of foreign affiliates of the Company in 1989. (8) Calculated as a ratio of the allowance for losses to related trailing or annualized net credit losses on receivables owned at the end of the period (as adjusted to exclude net credit losses related to securitized receivables and to reflect the impact of significant acquisitions). 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, insurance 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 income, servicing related income 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 amounts reported in the historical financial statements ("Owned Basis") adjusted on a pro forma basis to include certain effects of receivables held for securitization and receivables sold with servicing retained ("Managed Basis"). On an Owned Basis, the net earnings on the Company's retained securitization interests and receivables held for securitization, as well as gains from subsequent sales in revolving securitization structures, are included in servicing related income in the consolidated statement of earnings. On a pro forma Managed Basis, these earnings are reclassified and presented as if the receivables had neither been held for securitization nor sold. The initial gains recorded on securitization transactions are recorded in investment and other income on both an Owned and Managed Basis. Management believes the discussion of pro forma Managed Basis information is useful in evaluating the Company's operating performance. 20 22 The following table contains selected pro forma Managed Basis financial information (in millions):
YEARS ENDED DECEMBER 31 --------------------------------- 1999 1998 1997 --------- --------- --------- Finance charges............................................. $11,483.0 $ 9,215.0 $ 7,832.2 Insurance premiums.......................................... 1,055.7 471.5 420.7 Investment and other income................................. 712.3 343.0 217.6 --------- --------- --------- Total revenue............................................. 13,251.0 10,029.5 8,470.5 --------- --------- --------- Interest expense............................................ 4,258.6 3,470.2 2,946.2 Operating expenses.......................................... 3,894.4 2,798.0 2,339.6 Provision for losses........................................ 2,274.1 1,662.7 1,399.0 Insurance benefits paid or provided......................... 447.0 158.1 145.7 --------- --------- --------- Total expenses............................................ 10,874.1 8,089.0 6,830.5 --------- --------- --------- Earnings before provision for income taxes.................. 2,376.9 1,940.5 1,640.0 Provision for income taxes.................................. 886.5 717.0 608.3 --------- --------- --------- Net earnings................................................ $ 1,490.4 $ 1,223.5 $ 1,031.7 ========= ========= ========= Net Finance Receivables End of period............................................. $84,414.7 $71,364.3 $58,406.5 Average................................................... $79,088.6 $64,505.8 $53,899.7 Total Assets End of period............................................. $95,088.0 $80,878.3 $60,154.8 Average................................................... $89,575.4 $68,836.8 $55,364.3
RESULTS OF OPERATIONS Summary of Results of Operations The following table summarizes the Company's net earnings and related data (dollars in millions): EARNINGS AND RELATED DATA
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- Earnings before provision for income taxes.................. $2,376.9 $1,940.5 $1,640.0 Net earnings................................................ 1,490.4 1,223.5 1,031.7 Change in net earnings Amount.................................................... $ 266.9 $ 191.8 $ 174.7 Percent................................................... 21.8% 18.6% 20.4% Basic earnings per share.................................... $ 2.05 $ 1.76 $ 1.49 Diluted earnings per share.................................. 2.04 1.75 1.48 Return on average Managed assets............................................ 1.66% 1.78% 1.86% Equity.................................................... 16.28 17.94 17.78 Adjusted equity........................................... 18.03 20.30 21.10
Earnings before provision for income taxes and net earnings increased in each of the years ended December 31, 1999, 1998 and 1997. The principal factors that influenced the changes in the Company's net earnings are described in the sections that follow. Management believes that the overall business factors and trends affecting the profitability of the foreign subsidiaries are primarily the same as those affecting the Company taken as a whole. Any business factors that are significant and unique to international operations are discussed in this section. See also the discussion of the impact of foreign currency and regulatory related risks in the "-- Market Risk" section, the discussion in 21 23 the "-- Competition" and "-- Regulation" sections, and in Note 17 to the consolidated financial statements. As illustrated in Note 18 to the consolidated financial statements, the Company derived approximately 31%, 24% and 20% of its earnings before provision for income taxes in 1999, 1998 and 1997, respectively, from its international finance segment. Net Interest Margin -- Managed Basis The Company's Managed Basis net interest margin was as follows (dollars in millions): NET INTEREST MARGIN -- MANAGED BASIS
YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------ 1999 1998 1997 ---------------------- ---------------------- ---------------------- SEGMENT AMOUNT % OF AMR(1) AMOUNT % OF AMR(1) AMOUNT % OF AMR(1) - ------- -------- ----------- -------- ----------- -------- ----------- U.S. Credit Card............... $1,737.9 17.18% $1,377.8 17.27% $1,163.0 15.02% U.S. Consumer Finance.......... 2,266.7 7.43 2,080.8 8.14 2,056.3 9.19 Commercial..................... 1,028.4 3.91 1,008.1 4.14 875.7 4.40 International Finance.......... 2,191.4 18.04 1,278.1 19.36 791.0 20.50 -------- -------- -------- Total Company........ $7,224.4 9.13% $5,744.8 8.91% $4,886.0 9.06% ======== ======== ========
- --------------- (1) Expressed as a percentage of Average Managed Receivables ("AMR") of the respective segment for the period. The Company's total Managed Basis net interest margin increased on a dollar basis in each segment in 1999 and 1998, primarily due to growth in average managed finance receivables. The 1999 acquisition of Avco and the 1998 acquisitions of Associates Commerce Solutions Inc. ("ACS") (formerly SPS Payment Systems Inc.), DIC Finance Co. Ltd, and Beneficial Canada Holdings, Inc. ("Beneficial Canada") contributed to the growth. Managed Basis net interest margin expressed as a percentage of average managed receivables outstanding ("interest margin ratio") during 1999 increased primarily due to a slight shift in product mix toward more unsecured receivables. Unsecured receivables generally have a higher net interest margin than secured finance products. The U.S. credit card segment increase in net interest margin on a dollar basis in 1998 and 1999 was due primarily to the growth in average managed receivables outstanding during both years. The increase in the interest margin ratio in 1999 and 1998 compared to 1997 was primarily due to pricing initiatives implemented during 1998 that effectively increased the amount of fee income generated from these receivables. The interest margin ratio for the U.S. consumer finance segment declined in 1999 as compared to 1998 and 1997 primarily as a result of a decline in finance charge rates and a shift in product mix toward receivables secured by real estate. Receivables secured by real estate generally have lower finance charge rates than the other unsecured receivables offered by this segment, resulting in a lower net interest margin. A general decline in finance charge rates, due primarily to competitive pressures, caused the decreases in the interest margin ratio for the commercial segment during 1999 as compared to 1998 and 1997. The effect of this decline on the 1999 ratio was somewhat offset by the impact of the Company's sale of the recreational vehicle operations during the first quarter of 1999. Recreational vehicle receivables generally had lower finance charge rates and interest margin ratios than the other receivable products offered by the commercial segment. The interest margin ratio for the international finance segment declined in 1999 as compared to 1998 and 1997, primarily as a result of the 1999 acquisition of Avco and the 1998 acquisition of Beneficial Canada. The interest margin ratio for the international finance segment is influenced by the higher margins in Japan. With the acquisitions of Avco and Beneficial Canada, the amount of receivables in Japan as a percent of total international finance receivables declined and, accordingly, the impact of Japan's higher interest margin ratio on the total international finance segment declined resulting in a lower average interest margin ratio for the segment in 1999 and 1998. See discussion of the impact of the June 2000 change in Japan's usury laws in the "-- Regulation" section of Item 1. 22 24 Finance Charges -- Managed Basis The finance charge revenue and yield for the Company were as follows (dollars in millions): FINANCE CHARGES -- MANAGED BASIS
YEAR ENDED DECEMBER 31 ------------------------------- 1999 1998 1997 --------- -------- -------- Finance Charge Revenue...................................... $11,483.0 $9,215.0 $7,832.2 Yield(1).................................................... 14.51% 14.29% 14.53%
- --------------- (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 changing interest rate environment, changes in product mix and increased competition were the primary causes of the movements in finance charge yield from 1997 to 1999. Interest Expense -- Managed Basis Total dollars of Managed Basis interest expense increased in each of the three years ended 1999. In each year, the increase was principally due to higher average outstanding managed debt as a result of the Company's growth in managed finance receivables. The increase in Managed Basis interest expense as a result of growth in 1999 and 1998 was partially offset by a decline in the Company's average borrowing rate in each period. Insurance Premium Revenue Insurance premium revenue was $1,055.7 million, $471.5 million, and $420.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. Insurance premium revenue, which is earned over the coverage term, increased $584.2 million (123.9 %) in 1999, $50.8 million (12.1%) in 1998, and $18.6 million (4.6%) in 1997. The insurance operation is engaged in underwriting credit-related and other specialized insurance products for finance customers. Therefore, a significant portion of insurance sales, and resulting revenue, are largely dependent on finance 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 managed receivables outstanding, the December 1998 acquisition of The Northland Company and the January 1999 acquisition of the insurance operations of Avco Financial Services, Inc. See Note 3 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, 1999, 1998 and 1997 was $712.3 million, $343.0 million and $217.6 million, respectively. Managed Basis investment and other income primarily is derived from fee-based businesses, such as employee relocation services, emergency roadside assistance and auto club services, real estate title and appraisal fees, trailer rental income, portfolio income and investment gains and losses. Gains and losses on asset securitizations transactions and on sales and dispositions of assets held for sale are also included in investment and other income. The increase in investment and other income in 1999 was primarily due to (i) increased investment income of approximately $100 million on the insurance portfolios principally due to the Northland and Avco acquisitions, (ii) net gains of approximately $100 million on the securitization and sale of receivables during 1999, (iii) approximately $117 million in income generated from certain businesses and assets sold during 1999 and (iv) growth in the Company's fee based businesses. The net operating results of business units and 23 25 branches held for sale were recorded in investment and other income. No such businesses were held for sale during 1998 or 1997. See Notes 3 and 7 to the consolidated financial statements. The increase in investment and other income from 1997 to 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
YEAR ENDED DECEMBER 31 ------------------------------------------------------ 1999 1998 1997 ---------------- ---------------- ---------------- AMOUNT % AMR AMOUNT % AMR AMOUNT % AMR -------- ----- -------- ----- -------- ----- Salaries and Benefits................... $1,700.2 2.15% $1,290.1 2.00% $1,110.5 2.06% Occupancy and Supplies.................. 456.4 0.58 329.1 0.51 288.9 0.54 Data Processing and Communications...... 416.8 0.53 297.3 0.46 251.9 0.47 Advertising............................. 272.2 0.34 215.4 0.33 176.8 0.33 Other................................... 1,048.8 1.32 666.1 1.04 511.5 0.94 -------- ---- -------- ---- -------- ---- Total......................... $3,894.4 4.92% $2,798.0 4.34% $2,339.6 4.34% ======== ==== ======== ==== ======== ==== Managed Basis Efficiency Ratio.......... 45.6% 43.7% 43.5% ==== ==== ====
Total operating expenses on a dollar basis increased from 1997 to 1999, 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 increased from 1998 to 1999 and remained flat from 1997 to 1998. In addition, the Company's total Managed Basis 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 "Efficiency Ratio") increased from 1997 to 1999. The increase in other expenses included approximately $140 million in goodwill and other intangible asset amortization, approximately $105 million in new business expense and approximately $35 million in Avco related integration costs. Furthermore, a slight shift in business mix toward more fee based business caused by the acquisitions of The Northland Company and ACS during the fourth quarter of 1998 also contributed to the overall increase. The Efficiency Ratio has declined during each quarter of 1999 and in the fourth quarter 1999 reached the pre-Avco acquisition level. Allowance for Losses -- Owned Basis 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 the present 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 evaluated on an aggregate basis considering, among other things, the relationship of the allowance to net finance receivables and historical 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. As set forth below, 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 24 26 payments as contractually agreed. Finance charge accruals are suspended when they become 60 days contractually delinquent. The accrual is resumed when the loan becomes contractually current. Recoveries on losses previously charged to the allowance are credited to the allowance at the time recovery is collected. At December 31, 1999 and 1998, net finance receivables on which revenue was not being accrued approximated $1.9 billion and $1.5 billion, respectively. The interest income that would have been recorded if these nonaccruing receivables had been current was approximately $51 million in 1999 and $34 million in 1998. The components of the changes in the allowance for losses were as follows (dollars in millions): COMPONENTS OF CHANGES IN THE ALLOWANCE FOR LOSSES
YEAR ENDED DECEMBER 31 --------------------------------- 1999 1998 1997 --------- --------- --------- Balance at Beginning of Period.............................. $ 1,978.7 $ 1,949.9 $ 1,563.1 Provision for losses...................................... 1,506.4 1,283.5 1,378.1 Recoveries on receivables charged off..................... 268.8 237.7 224.9 Losses sustained.......................................... (1,717.1) (1,424.6) (1,454.0) --------- --------- --------- Net credit loss experience........................ (1,448.3) (1,186.9) (1,229.1) --------- --------- --------- Reserves of receivables sold or held for securitization(1)...................................... (214.0) (334.7) -- Reserves of acquired businesses and other................. 351.6 266.9 237.8 --------- --------- --------- Balance at End of Period.................................... $ 2,174.4 $ 1,978.7 $ 1,949.9 ========= ========= ========= Allowance for Losses to Net Finance Receivables............. 3.16% 3.25% 3.53% Loss Coverage Ratio(2)...................................... 1.50x 1.74x 1.59x
- --------------- (1) The reserves related to receivables sold during 1997 were not significant. (2) Calculated as a ratio of the allowance for losses to related trailing or annualized net credit losses on receivables owned at the end of the period (as adjusted to exclude net credit losses related to securitized receivables and to reflect the impact of significant acquisitions). The allowance for losses as a percent of net finance receivables declined in both 1999 and 1998, principally due to the securitization and sale of credit card receivables. The 1999 and 1998 securitization transactions described in Note 7 to the consolidated financial statements contributed to a general shift in product mix on an owned basis from 1997 to 1999 towards more secured portfolios. Secured portfolios generally have lower loss rates and therefore lower allowance requirements than unsecured portfolios. Management believes the allowance for losses at December 31, 1999 is sufficient to provide for losses in its portfolios. Although the allowance for losses on finance receivables reflected in the Company's consolidated balance sheet at December 31, 1999 is considered adequate by 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. 25 27 Net Credit Losses and Contractual Delinquency 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
YEAR ENDED OR AT DECEMBER 31 ------------------------------ SEGMENT 1999 1998 1997 - ------- -------- -------- -------- 60+Days Contractual Delinquency(1) U.S. Credit Card.......................................... 4.21% 4.79% 3.99% U.S. Consumer Finance..................................... 3.77 3.22 2.73 Commercial(2)............................................. 1.26 1.21 1.02 International Finance..................................... 2.60 2.58 1.93 Total............................................. 2.77% 2.57% 2.15% Total dollars delinquent.......................... $2,478.7 $1,951.9 $1,355.1 Net Credit Losses to AMR U.S. Credit Card.......................................... 7.13% 7.81% 7.41% U.S. Consumer Finance..................................... 2.51 2.41 2.30 Commercial(2)............................................. 0.93 0.46 0.34 International Finance..................................... 3.98 3.27 2.44 Total............................................. 2.80% 2.43% 2.32% Total dollars..................................... $2,216.1 $1,566.0 $1,250.0
- --------------- (1) As a percentage of gross managed receivables (2) Commercial segment 60+days delinquency, on a pro forma basis, excluding the impact of manufactured housing and recreational vehicle operations would have been 1.16%, 1.03% and 1.04% for the years ended December 31, 1999, 1998 and 1997, respectively. Commercial segment managed net losses to average managed receivables, on a pro forma basis, excluding the impact of manufactured housing and recreational vehicle operations would have been 0.50%, 0.30% and 0.24% for the years ended December 31, 1999, 1998 and 1997, respectively. Managed basis contractual delinquencies and net credit losses on a dollar basis increased in 1999 and 1998 primarily as a result of the growth in finance receivables. As a percentage of AMR, managed basis contractual delinquencies and net credit losses increased in 1999 and 1998 primarily as a result of the shift in product mix toward more unsecured receivables. Unsecured receivables generally have higher losses and delinquencies. The U.S. credit card segment managed basis net credit losses to AMR declined in 1999 compared to 1998 primarily because of decreasing loss levels in private label portfolios. The increase in 1998 compared to 1997 was primarily due to generally higher loss rates caused by the increase in consumer bankruptcy levels during 1998. The U.S. consumer finance segment managed basis contractual delinquencies and net credit losses to AMR increased from 1998 to 1999 primarily as a result of the Avco acquisition. This caused a shift in product mix toward more unsecured receivables and higher losses in the home equity receivables portfolio. From 1997 to 1998, the primary factor in the increase of contractual delinquencies and net losses to AMR was higher consumer bankruptcy levels. The commercial segment managed net credit losses to AMR increased in each comparable period primarily due to higher losses in the retail manufactured housing portfolio. In January 2000, the Company announced plans to discontinue the origination of retail installment and wholesale financing products for the manufactured housing sector. See Note 22 to the consolidated financial statements. The international finance segment managed contractual delinquencies and net credit losses to AMR increased in each comparable period. The increases were primarily the result of the first quarter 1999 acquisition of Avco, the first quarter 1998 acquisition of Beneficial Canada and the second quarter 1998 26 28 acquisition of DIC Finance Co. Ltd. These acquisitions resulted in a shift in the segment product mix toward more unsecured portfolios. Unsecured portfolios typically have higher losses than secured portfolios. Rising bankruptcy levels also contributed to the increase in 1998. Insurance Benefits Paid or Provided Insurance benefits paid or provided were $447.0 million in 1999, $158.1 in 1998 and $145.7 in 1997. 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 1999 as compared to 1998 and 1997, primarily as a result of more insurance in force resulting from the acquisitions of Northland in December 1998 and Avco in January 1999. 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
YEAR ENDED DECEMBER 31 ------------------------------------------------------------ 1999 1998 1997 ------------------ ------------------ ------------------ EFFECTIVE EFFECTIVE EFFECTIVE TAX TAX TAX AMOUNT RATE AMOUNT RATE AMOUNT RATE ------ --------- ------ --------- ------ --------- U.S. statutory rate...................... $831.9 35.0% $679.2 35.0% $574.0 35.0% State income taxes..................... 26.9 1.1 27.1 1.4 22.6 1.4 Non-deductible goodwill................ 26.2 1.1 17.9 0.9 6.1 0.4 Other.................................. 1.5 0.1 (7.2) (0.3) 5.6 0.3 ------ ---- ------ ---- ------ ---- Provision for income taxes............... $886.5 37.3% $717.0 37.0% $608.3 37.1% ====== ==== ====== ==== ====== ====
The effective tax rate decreased in 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 foreign tax credits under a tax sharing agreement with Ford in 1998 and 1997. The effective tax rate increase in 1999 compared to 1998 and 1997 is due to an increase in non-deductible goodwill due primarily to the 1998 acquisitions of the stock of Beneficial Canada and Northland. The reduction in the effective state income tax rate in 1999 compared to 1998 and 1997 is attributable to an increase in foreign earnings as a percentage of total Company earnings. 27 29 FINANCIAL CONDITION Growth in Managed Finance Receivables The Company experienced growth in managed finance receivables in 1999 and 1998 as follows (dollars in millions): GROWTH IN MANAGED FINANCE RECEIVABLES
YEAR ENDED OR AT DECEMBER 31 --------------------------------------------------------- 1999 1998 --------------------------- --------------------------- INCREASE FROM INCREASE FROM PRIOR YEAR PRIOR YEAR --------------- --------------- SEGMENT BALANCE AMOUNT % BALANCE AMOUNT % - ------- --------- --------- --- --------- --------- --- U.S. Credit Card Finance............... $10,928.3 $ 1,306.3 14 $ 9,622.0 $ 1,782.7 23 U.S. Consumer Finance.................. 31,566.8 4,756.3 18 26,810.5 2,825.5 12 Commercial(1).......................... 27,948.6 1,479.0 6 26,469.6 4,165.4 19 International Finance.................. 13,971.0 5,508.8 65 8,462.2 4,184.2 98 --------- --------- --------- --------- Total Managed Receivables.... $84,414.7 $13,050.4 18 $71,364.3 $12,957.8 22 ========= ========= ========= =========
- ------------------------- (1) Excluding manufactured housing and recreational vehicle receivables, the managed receivables, dollar increase from prior year and percentage increase from prior year would have been $22.5 billion, $3.2 billion and 17%, and $19.2 billion, $2.1 billion and 12% for December 31, 1999 and 1998, respectively. The growth in managed receivables was primarily due to the January 6, 1999 acquisition of Avco. Internal managed receivable growth for 1999 adjusted for announced acquisitions and dispositions was 44%. Had the Avco acquisition closed at the end of 1998, internal managed receivable growth adjusted for announced acquisitions and dispositions in 1999 would have been approximately 90%. Debt Total outstanding debt was $68.7 billion and $63.3 billion at December 31, 1999 and 1998, respectively. Such amounts of debt reflect net increases of $5.4 billion (8.5%) in 1999 and $14.1 billion (28.7%) in 1998. In both years, the increase was primarily a result of the growth in net finance receivables. At December 31, 1999 and 1998, short-term debt, including the current portion of long-term debt, as a percent of total debt was 52% for both years. The current portion of long-term debt at December 31, 1999 and 1998 was $8.8 billion and $7.7 billion, respectively. Stockholders' Equity Stockholders' equity increased to $9.8 billion in 1999 from $8.5 billion in 1998. This increase was primarily due to 1999 net earnings and an unrealized foreign currency gain of $31.7 million. This increase in stockholders' equity was partially offset in 1999 by dividends paid of $167.5 million and unrealized loss on securities of $93.8 million. The effects of foreign currency movements were partially offset through the Company's use of derivative financial instruments as described in Note 17 to the consolidated financial statements. 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 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, cash provided from the Company's operations and asset securitizations. Management believes the Company 28 30 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 capital 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 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 December 31, 1999 and 1998, the Company had short- and long-term debt outstanding of $68.7 billion and $63.3 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 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 years ended December 31, 1999 and 1998, the Company raised term debt aggregating $9.9 billion and $13.3 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, 1999, these credit facilities were allocated to provide at least 75% coverage of the Company's recurring commercial paper borrowings and utilized uncommitted lines of credit. See Note 10 to the consolidated financial statements. 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. The Company's securitization transactions up to this point have included the manufactured housing, home equity and credit card asset-backed classes. The Company has additional asset classes in its portfolio which can be securitized, including asset classes within its foreign operations. 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 10, 11 and 17 to the consolidated financial statements for a further description of these borrowings and currency hedging activities. The Company has entered into agreements with certain debt and asset backed security holders which may require the Company to purchase such securities. See Notes 12 and 16 to the consolidated financial statements. Management believes it has sufficient liquidity to support these requirements. 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. The Company had a company-wide initiative that addressed the Year 2000 Compliance issue. A team of technology professionals began addressing the Year 2000 Compliance issue in 1995. Since then, all significant third party and internal applications that required modification to ensure Year 2000 Compliance have been identified and addressed. The transition from 1999 to 2000 was closely monitored to assure any unforeseen problems were quickly resolved. No significant Year 2000 Compliance related problems were identified. The Company will continue 29 31 monitoring through the first quarter of 2000 to assure any problem that may occur is quickly identified and resolved. 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. The Company has not yet experienced any such failure. From the inception of the Year 2000 readiness project through December 31, 1999 the Company incurred and expensed approximately $31 million for incremental costs primarily related to third party vendors, outside contractors and additional staff dedicated to the Year 2000 readiness project. The Company expects that it will incur additional future incremental costs related to the project of approximately $2 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 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. 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. Generally, changes in the fair value of derivatives must be recognized in income when they occur, except when the derivative qualifies as a hedge in accordance with the standard. This statement will be effective for the Company for the 2001 fiscal year. The Financial Accounting Standards Board is considering amending SFAS 133, as a result, the Company has not yet determined the impact SFAS 133 and any related amendment will have on its earnings or financial position. The Company has been proactive in evaluating various strategies which management believes will qualify for hedge accounting treatment under SFAS 133. 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 30 32 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, which may (i) limit the Company's ability to generate new finance receivables (ii) decrease the Company's net interest margins and (iii) adversely affect the valuation of the Company's interest sensitive assets. - Increase in contractual delinquencies, non-performing loans and credit losses. - Decline in the values of collateral securing customer obligations resulting in increased credit losses. - Rapid changes in receivable prepayment rates. - 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 inability of the Company to access capital and financing on terms acceptable to the Company. - The decline in stock price adversely affecting the Company's ability to access the equity markets. - 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 and governmental proceedings 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 affecting the Company's branches and other operating facilities. - The Company's ability and the ability of third parties with whom the Company has relationships to ensure that systems are year 2000 compliant. - The Company's ability to integrate the operations of acquisitions into its operations and to efficiently exit selected operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 31 33 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 17 to 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 long-term interest rate movements. Interest Rate Risk -- Managed Basis Beginning in 1999, the Company began measuring interest rate risk on a Managed Basis including both on- and off-balance sheet assets and liabilities. Accordingly, certain prior period interest rate risk measures have been restated to conform to the current year presentation. Interest rate risk is measured and controlled through the use of static gap analysis and financial forecasting, both of which incorporate assumptions about 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, all on a Managed Basis. The Company measures its gap position at various time horizons, ranging from three months to five years. At December 31, 1999, 1998 and 1997, the one-year gap was a negative 5%, and a positive 3% and 8%, respectively. A positive one year gap indicates that a greater percentage of assets than liabilities will reprice within a one-year time frame. The Company also 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, prepayments, interest rate spread relationships, loan rates and floors, state and national usury ceilings, and changes in the volumes and rates of various managed asset and liability categories. For an immediate 1% increase in rates, projected annual after-tax earnings on managed assets would have declined by 3.5% at December 31, 1999 and less than 1% 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 the Company's view of future market developments. 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 Managed 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 on a Managed Basis. 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 with changes in interest rates, with a 95% confidence level (as required under applicable United States Securities and Exchange Commission rules) over this forward 12-month period. The model assumes interest rates are normally distributed and draws volatilities from various market sources. At December 31, 1999, 1998 and 1997, interest rate movements would affect annual after-tax earnings by approximately $60 million, $19 million and $11 million, respectively, as calculated under the VAR methodology. This interest rate VAR averaged $23 million in 1999 and $17 million in 1998. The primary reason for the 1999 increase in the results of the simulation model and the VAR is attributed to an increase in the mix of floating rate debt at the end of 1999. 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 dollar denominated foreign investments. The Company has employed a variety of risk management tools such as borrowing and lending in local currencies, converting offshore 32 34 funding to US Dollars, 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 foreign currency exchange rate scenarios and volatilities 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) for the Company's three material currency exposures, Japanese Yen, Canadian Dollars and British Pounds Sterling. At December 31, 1999, 1998 and 1997 currency volatility would affect annual after-tax earnings by approximately $4 million, $11 million and $4 million, respectively, as calculated under the VAR methodology. This currency rate VAR averaged $1 million in 1999 and $3 million in 1998. 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 sophisticated, the quantitative risk information generated is limited by the model's parameters. Therefore, such models do not substitute for the experience or judgment of management to adjust positions and revise strategies as deemed necessary. 33 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT AUDITORS Board of Directors Associates First Capital Corporation We have audited the accompanying consolidated balance sheets of Associates First Capital Corporation and subsidiaries as of December 31, 1999 and 1998, 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, 1999. These 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 auditing standards generally accepted in the United States. 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 and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Dallas, Texas January 27, 2000 34 36 ASSOCIATES FIRST CAPITAL CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ------------------------------- 1999 1998 1997 --------- -------- -------- REVENUE Finance charges........................................... $ 9,106.4 $7,910.4 $7,560.2 Servicing related income.................................. 1,256.8 651.9 80.1 Insurance premiums........................................ 1,055.7 471.5 420.7 Investment and other income............................... 712.3 343.0 217.6 --------- -------- -------- 12,131.2 9,376.8 8,278.6 EXPENSES Interest expense.......................................... 3,906.5 3,196.7 2,775.2 Operating expenses........................................ 3,894.4 2,798.0 2,339.6 Provision for losses on finance receivables............... 1,506.4 1,283.5 1,378.1 Insurance benefits paid or provided....................... 447.0 158.1 145.7 --------- -------- -------- 9,754.3 7,436.3 6,638.6 --------- -------- -------- EARNINGS BEFORE PROVISION FOR INCOME TAXES.................. 2,376.9 1,940.5 1,640.0 PROVISION FOR INCOME TAXES.................................. 886.5 717.0 608.3 --------- -------- -------- NET EARNINGS................................................ $ 1,490.4 $1,223.5 $1,031.7 ========= ======== ======== NET EARNINGS PER SHARE Basic..................................................... $ 2.05 $ 1.76 $ 1.49 ========= ======== ======== Diluted................................................... $ 2.04 $ 1.75 $ 1.48 ========= ======== ========
See notes to consolidated financial statements. 35 37 ASSOCIATES FIRST CAPITAL CORPORATION CONSOLIDATED BALANCE SHEET (DOLLARS IN MILLIONS) ASSETS
DECEMBER 31 --------------------- 1999 1998 --------- --------- CASH AND CASH EQUIVALENTS................................... $ 1,026.3 $ 4,665.6 INVESTMENTS IN DEBT AND EQUITY SECURITIES................... 7,176.5 6,678.7 FINANCE RECEIVABLES, net of unearned finance income, allowance for credit losses and insurance policy and claims reserves........................................... 65,656.8 57,496.4 OTHER ASSETS................................................ 9,097.2 6,334.7 --------- --------- Total assets...................................... $82,956.8 $75,175.4 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY NOTES PAYABLE, unsecured short-term Commercial Paper.......................................... $25,991.9 $24,144.3 Bank Loans................................................ 1,261.5 1,565.5 ACCOUNTS PAYABLE AND ACCRUALS............................... 4,498.9 3,342.4 LONG-TERM DEBT Senior Notes.............................................. 40,978.8 37,171.4 Subordinated and Capital Notes............................ 425.2 425.3 --------- --------- 41,404.0 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, and 728,747,443 and 728,228,488 shares issued in 1999 and 1998, respectively........... 7.3 7.3 Class B Common Stock, $0.01 par value, 144,118,820 shares authorized, no shares issued or outstanding............ -- -- Paid-in Capital........................................... 5,282.1 5,273.7 Retained Earnings......................................... 4,501.8 3,178.9 Accumulated Other Comprehensive Income.................... 44.7 106.8 Less 597,785 and 980,314 shares of Class A Common Stock held at cost in Treasury in 1999 and 1998, respectively........................................... (35.4) (40.2) --------- --------- Total stockholders' equity........................ 9,800.5 8,526.5 --------- --------- Total liabilities and stockholders' equity........ $82,956.8 $75,175.4 ========= =========
See notes to consolidated financial statements. 36 38 ASSOCIATES FIRST CAPITAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
ACCUMULATED OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS INCOME STOCK EQUITY ------ -------- -------- ------------- -------- ------------- 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 loss, net of tax........................... (49.6) (49.6) -------- ------ -------- Total comprehensive income................... 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 loss, net of tax........................... (65.8) (65.8) -------- ------ -------- Total comprehensive income................... 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.................... 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 Comprehensive income Net Earnings.................... 1,490.4 1,490.4 Other comprehensive loss, net of tax........................... (62.1) (62.1) -------- ------ -------- Total comprehensive income................... 1,490.4 (62.1) 1,428.3 Cash dividends on Common Stock ($0.23 per share)............... (167.5) (167.5) Treasury stock and other.......... 8.4 4.8 13.2 ---- -------- -------- ------ ------ -------- DECEMBER 31, 1999................... $7.3 $5,282.1 $4,501.8 $ 44.7 $(35.4) $9,800.5 ==== ======== ======== ====== ====== ========
See notes to consolidated financial statements. 37 39 ASSOCIATES FIRST CAPITAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
YEAR ENDED DECEMBER 31 ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Cash Flows from Operating Activities Net earnings........................................... $ 1,490.4 $ 1,223.5 $ 1,031.7 Adjustments to reconcile net earnings for non-cash and other operating activities: Provision for losses on finance receivables......... 1,506.4 1,283.5 1,378.1 Amortization of goodwill and other intangible assets............................................ 234.0 92.9 51.6 Depreciation and other amortization................. 278.0 247.1 271.0 Increase in insurance policy and claims reserves.... 131.7 2.5 70.7 Purchases of trading securities, net of sales and maturities........................................ -- (0.3) (117.7) (Decrease) increase in accounts payable and accruals.......................................... (1,207.1) 78.6 21.6 Deferred income taxes............................... 173.3 28.2 (31.8) Net gains on sale of assets and other............... (155.2) (3.6) (3.0) ---------- ---------- ---------- Net cash provided from operating activities.... 2,451.5 2,952.4 2,672.2 ---------- ---------- ---------- Cash Flows from Investing Activities Finance receivables originated or purchased............ (64,840.7) (55,346.9) (52,136.8) Finance receivables liquidated......................... 55,705.9 44,118.2 40,715.6 Proceeds from securitizations and sales of finance receivables......................................... 7,285.7 3,559.8 1,345.9 Sale of finance businesses and branches................ 2,216.8 -- -- Acquisitions of other finance businesses, net.......... (4,170.5) (2,692.4) (39.7) Purchases of available-for-sale securities............. (2,503.5) (2,212.1) (319.3) Sales and maturities of available-for-sale securities.......................................... 1,497.6 1,482.3 301.9 Increase in other assets............................... (925.9) (807.4) (794.3) ---------- ---------- ---------- Net cash used for investing activities......... (5,734.6) (11,898.5) (10,926.7) ---------- ---------- ---------- Cash Flows from Financing Activities Issuance of long-term debt............................. 9,892.7 13,266.1 8,183.5 Retirement of long-term debt........................... (9,015.7) (5,048.7) (3,773.3) (Decrease) increase in notes payable................... (1,279.3) 3,966.0 3,903.1 Cash dividends......................................... (167.5) (142.0) (138.6) Sale of Class A Common Stock........................... -- 1,266.7 -- Treasury stock and other............................... 22.4 (17.0) (12.4) ---------- ---------- ---------- Net cash (used for) provided from financing activities................................... (547.4) 13,291.1 8,162.3 Effect of foreign currency translation adjustment on cash................................................... 191.2 (112.6) 78.5 ---------- ---------- ---------- (Decrease) increase in cash and cash equivalents......... (3,639.3) 4,232.4 (13.7) Cash and cash equivalents at beginning of year........... 4,665.6 433.2 446.9 ---------- ---------- ---------- Cash and cash equivalents at end of year................. $ 1,026.3 $ 4,665.6 $ 433.2 ========== ========== ========== Cash paid for: Interest............................................... $ 3,889.4 $ 3,208.9 $ 2,741.5 ========== ========== ========== Income taxes........................................... $ 641.1 $ 584.6 $ 712.2 ========== ========== ==========
See notes to consolidated financial statements. 38 40 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 financial services organization providing finance, leasing, insurance 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 of 67 million shares of its Class A Common Stock representing a 19.3% interest in the Company. 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. Certain prior period amounts have been reclassified to conform to the current period presentation. 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 generally suspended when the accounts become 60 days contractually delinquent. The accrual is resumed when the loan becomes contractually current. At December 31, 1999 and 1998, net finance receivables on which revenue was not being accrued approximated $1.9 billion and $1.5 billion, respectively. The interest income that would have been recorded in 1999 and 1998 if these nonaccruing receivables had been current was approximately $51 million and $34 million, respectively. 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. 39 41 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Advertising Costs Advertising costs are expensed as incurred. The advertising costs for 1999, 1998 and 1997 were $272 million, $215 million and $177 million, respectively. Receivables Sold with Servicing Retained The Company periodically securitizes certain pools of receivables in both public and private markets and accounts for such transactions in accordance with Statement of Financial Accounting Standards No. 125 ("SFAS 125"), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Under SFAS 125, a sale is recognized when control over the receivables is relinquished. In applying SFAS 125, the Company recognizes the resulting gains at the time of initial sale and each subsequent sale for revolving receivable arrangements. Initial gains on securitization transactions are recorded in the consolidated statement of earnings as investment and other income. The income earned on securitization related securities retained by the Company, including the recognition of the yield on such securities as well as subsequent sales for revolving receivable arrangements, is recorded in the consolidated statement of earnings as servicing related income. Initial gains on securitization transactions represent the difference between the net proceeds received and the allocated carrying amount of the receivables sold. The allocation of carrying amount is based on the relative fair value of the individual financial components sold and retained pursuant to the transaction. The financial components typically consist of such items as the interests sold, retained senior securities, retained subordinated securities, retained interest only strips and retained servicing rights. No servicing asset or liability has been recorded related to the securitization transactions because the Company earns service fees at rates which approximate adequate compensation. Senior securities are typically valued at par while subordinated securities are typically valued at a discount using an estimated market discount rate and cash flow estimates which consider the effects prepayments and losses will have on the timing of the subordinated interest cash flows. The fair value of interest only strips represents the present value of future excess cash flows, using the "cash-out" method. Such future cash flows are estimated using valuation assumptions appropriate for the type of receivable and transaction structure. The resulting estimated cash flows represent the difference between the finance charge and fee income received from the obligors on the finance receivables and the sum of the interest paid to the investors in the asset-backed securities, credit losses, servicing fees and other expenses. Significant valuation assumptions relate to the average lives of the receivables sold, including the anticipated prepayment speeds and the anticipated credit losses, as well as the appropriate market discount rate. Significant changes in these assumptions could impact the recorded value of retained securitization interests. The securitization related securities are accounted for under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Marketable Securities. Because 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 assets are classified as available-for-sale investments and measured at fair value. Any unrealized holdings gains or losses are reported, net of income tax effects, as a component of accumulated other comprehensive income in the consolidated balance sheet until realized. On a quarterly basis, the Company assesses the carrying value of its securitization related securities for impairment. If a decline in fair value is deemed other than temporary, the securities are adjusted to their fair value through a charge to operations. There can be no assurance that the Company's estimates used to determine the fair value of the securitization related securities, including those used to determine the related gains, will remain appropriate for the life of each securitization. 40 42 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Finance Receivables Receivables origination and commitment fees and loan origination costs generally are deferred and amortized as a component of finance charges 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. Finance receivables include the Company's share of aggregate rentals on lease financing transactions and residual values, net of related unearned income. Lease financing transactions are principally direct financing leases. Unearned income is amortized under a method which substantially results in an approximately level rate of return when related to the unrecovered lease investment. Gains and losses from sales of residual values of leased equipment are included in finance income. 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 the present 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 evaluated on an aggregate basis considering, among other things, the relationship of the allowance to net finance receivables and historical 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. As set forth below, 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 the recovery is collected. Although the allowance for losses on finance receivables reflected in the Company's consolidated balance sheet at December 31, 1999 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 for the affiliate insurance business are provided for in the unearned premium reserve for each class of insurance. Affiliate insurance relates to insurance products distributed through the finance affiliates. The Company classifies its affiliated insurance reserves as a component of finance receivables because the related policy benefits are generally included in the financed receivable balance as shown in Note 7. The reserves for future benefits and refunds upon cancellation of credit life and health insurance and property and casualty insurance for the non-affiliate insurance business are provided for in accounts payable and accruals for each class of insurance. In addition, reserves for reported claims on credit accident and health 41 43 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Intangible Assets Amounts of goodwill relating to acquisitions are being amortized using the straight-line method over periods not exceeding forty years. Other intangible assets, which are made up primarily of customer lists, operating agreements, trademarks and credit card customer relationships are amortized using the straight-line method over the assets' estimated useful lives ranging from five to twenty years. The carrying value of goodwill and other intangible assets is reviewed if the facts and circumstances suggest that it may be impaired. If the review indicates that goodwill or the other intangible assets will not be recoverable, as determined based on undiscounted cash flows, the carrying value of the goodwill or the other intangible asset is reduced by the estimated short-fall of discounted cash flows. Foreign Currency 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. Foreign currency transactions resulted in net gains of approximately $3.2 million and $3.0 million during the years ended December 31, 1999 and 1998, respectively, and a net loss of approximately $2.1 million during the year ended December 31, 1997. Income Taxes Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using statutory 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 Statement of Financial Accounting Standards No. 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 18. 42 44 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Derivative Financial Instruments The Company uses derivative financial instruments for the purpose of hedging specific exposures as part of its risk management program and generally holds 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. See Note 17 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 separate 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 gains and losses on these agreements are recorded, net of tax, as a separate component of accumulated other comprehensive income. 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. Generally, changes in the fair value of derivatives must be recognized in income when they occur, except when the derivative qualifies as a hedge in accordance with the standard. This statement will be effective for the Company for the 2001 fiscal year. The Financial Accounting Standards Board is considering amending SFAS 133, as a result, the Company has not yet determined the impact SFAS 133 and any related amendment will have on its earnings or financial position. The Company has been proactive in evaluating various strategies which management believes will qualify for hedge accounting treatment under SFAS 133. NOTE 3 -- SIGNIFICANT ACQUISITIONS AND DISPOSITIONS 1999 Significant Acquisitions In June 1999, the Company acquired the Newcourt Credit Group automotive fleet management business. The transaction included 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. 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. 43 45 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Founded in 1927, Avco's product offerings included home equity lending, retail sales finance and consumer loans, equipment, inventory and vendor finance, and credit and collateral-related insurance. At the date of acquisition, Avco had operations in the U.S., Canada, Puerto Rico, Australia, the United Kingdom, New Zealand, France, Hong Kong, Spain, Ireland, India and Sweden. All intangibles resulting from this transaction, primarily consisting of goodwill, customer lists and trademarks, are being amortized using the straight-line method. As described in the "Significant Dispositions" section that follows, certain of these operations were subsequently sold by First Capital. The Company assumed from Avco approximately $7.5 billion in debt and, after giving effect for the sale of these operations, acquired approximately $6.0 billion in finance receivables, $2.1 billion in goodwill and $690 million in other intangible assets. In 1999 the Company expensed approximately $100 million in Avco related goodwill and other intangible asset amortization and approximately $35 million in Avco related integration costs. In addition, the Company established an integration plan that identified the activities that would not be continued after the acquisition and the cost of exiting those activities. Those costs primarily consisted of severance costs and related expenses, lease termination costs and other contractual liabilities. The total amount of the integration cost reserve was approximately $146 million at the date of the Avco acquisition. At December 31, 1999, the remaining integration reserve balance was approximately $44 million. This amount was primarily comprised of unpaid lease termination costs. 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 business of Northland only. Northland divested its other businesses prior to acquisition. 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 total 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. In April 1998, the Company acquired DIC Finance Co. Ltd., a consumer finance company based in Japan. The fair market value of total assets acquired and liabilities assumed was approximately $1.9 billion and $1.3 billion, respectively. In February 1998, the Company acquired Beneficial Canada Holdings Incorporated, the Canadian consumer finance subsidiary of Beneficial Corporation. The fair market value of total assets acquired and liabilities assumed was approximately $1.0 billion and $716 million, respectively. All of the transactions described above were accounted for as purchases, and as such, the results of these operations are included in the consolidated results of the Company from the respective acquisition dates. The unaudited pro forma combined revenues, net earnings and net earnings per basic and diluted share of the Company including the above transactions were approximately $12.2 billion, $1.5 billion, $2.04 and $2.03, respectively, for the year ended December 31, 1999 and $11.8 billion, $1.2 billion, $1.71 and $1.70, respectively, for the year ended December 31, 1998. These unaudited pro forma results include the historical 44 46 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operating results of the significant 1999 and 1998 acquisitions and dispositions related to these acquisitions and assume that these transactions occurred at the beginning of each applicable period. Certain adjustments, including additional common shares outstanding and interest and amortization expenses associated with these purchases are reflected in the pro forma results. 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 the 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. Pending Acquisitions In December 1999, the Company announced an agreement to enter into an agent bank partnership with KeyCorp, under which the companies will jointly manage KeyCorp's credit card program. Under the terms of the agreement, First Capital also will acquire KeyCorp's credit card portfolio of approximately $1.3 billion in receivables and nearly 600,000 active VISA(R) and MasterCard(R) accounts. The transaction closed on January 31, 2000 (unaudited) and will be accounted for as a purchase. In November 1999, the Company announced an agreement to acquire Arcadia Financial Ltd. ("Arcadia"). Arcadia is a leading U.S. independent automobile finance company which services over $5 billion in finance receivables. The acquisition is expected to close during the first half of 2000. The Company entered into a continuous asset purchase and sale agreement under which the Company purchased from Arcadia approximately $500 million of retail installment sales contracts in November and December 1999. In the event of a termination of the merger between the Company and Arcadia, approximately $200 million of these receivables may be repurchased by Arcadia. Additionally, the Company purchased approximately $350 million of retail installment sales contracts in January, February and March 2000 (unaudited). In August 1999, the Company announced an agreement to acquire and manage the proprietary credit card program of CITGO Petroleum Corporation. The transaction closed in March 2000 (unaudited) and the Company acquired approximately $130 million in receivables. Significant Dispositions In November 1999, the Company closed the sale of its Balboa Life and Casualty Insurance Group ("Balboa") to a subsidiary of Countrywide Credit Industries, Inc. for approximately $425 million. First Capital acquired Balboa when it purchased Avco Financial Services, Inc. in January 1999. In July 1999, the Company sold the Network Transaction Services unit of its Associates Commerce Solutions, Inc. subsidiary (formerly SPS Payment Systems, Inc.) to Alliance Data Systems, a leading provider of electronic transaction processing services for approximately $169 million. In June 1999, the Company sold its Avco consumer and commercial finance operations in Australia and New Zealand, which were acquired in the Avco transaction, 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. All of these branches were acquired from Avco in January 1999. 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. 45 47 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In March 1999, the Company sold 128 domestic consumer finance branches to Commercial Credit Corporation, a subsidiary of Citigroup, Inc., for approximately $640 million. All of these branches were acquired from Avco in January 1999. The operating income recorded on the above dispositions was included in investment and other income from January 1, 1999 through the date of the related sale. The operating income and any related net gains or losses on the above dispositions recorded in investment and other income during 1999 was approximately $117 million. NOTE 4 -- EARNINGS PER SHARE Earnings per share on a basic and diluted basis is calculated as follows (in millions, except per share amounts and adjusted for the stock dividend described in Note 20):
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- Basic net earnings per share: Net earnings......................................... $1,490.4 $1,223.5 $1,031.7 Weighted average shares outstanding.................. 728.1 695.8 693.0 $ 2.05 $ 1.76 $ 1.49 ======== ======== ======== Diluted net earnings per share: Net earnings......................................... $1,490.4 $1,223.5 $1,031.7 Weighted average shares outstanding plus assumed conversions....................................... 731.5 699.9 695.9 $ 2.04 $ 1.75 $ 1.48 ======== ======== ======== Calculation of weighted average shares outstanding plus assumed conversions: Weighted average shares outstanding.................. 728.1 695.8 693.0 Effect of dilutive securities options(1)............. 3.4 4.1 2.9 -------- -------- -------- 731.5 699.9 695.9 ======== ======== ========
(1) At December 31, 1999, 12,251,465 outstanding stock options were not included in the computation of 1999 diluted net earnings per share because these options' exercise price was greater than the average market price of common shares outstanding. NOTE 5 -- COMPREHENSIVE INCOME (LOSS) 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 (loss) in the financial statements. Accordingly, total comprehensive income for the years ended 1999, 1998 and 1997 is reported in the Company's consolidated statement of changes in stockholders' equity. Total 46 48 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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):
DECEMBER 31 ------------------------- 1999 1998 1997 ------- ------ ------ Foreign currency translation adjustments.................. $ 148.8 $117.1 $168.2 Net unrealized (loss) gain on available-for-sale securities.............................................. (104.1) (10.3) 4.4 ------- ------ ------ Accumulated other comprehensive income.................. $ 44.7 $106.8 $172.6 ======= ====== ======
The components of other comprehensive income (loss) are as follows:
YEAR ENDED DECEMBER 31, 1999 --------------------------------------- BEFORE TAX TAX (EXPENSE) NET-OF-TAX AMOUNT BENEFIT AMOUNT ---------- ------------- ---------- Foreign currency translation adjustments.......... $ 50.6 $(18.9) $ 31.7 Unrealized losses on available-for-sale securities: Unrealized holding losses arising during the period....................................... (140.7) 50.4 (90.3) Less: reclassification for gains realized in net income....................................... (5.5) 2.0 (3.5) ------- ------ ------ Net unrealized losses................... (146.2) 52.4 (93.8) ------- ------ ------ Other comprehensive income (loss)............... $ (95.6) $ 33.5 $(62.1) ======= ====== ======
YEAR ENDED DECEMBER 31, 1998 --------------------------------------- BEFORE TAX TAX (EXPENSE) NET-OF-TAX AMOUNT BENEFIT AMOUNT ---------- ------------- ---------- 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 losses realized in net income................................... 0.2 (0.1) 0.1 ------- ------- ------- Net unrealized losses................... (23.2) 8.5 (14.7) ------- ------- ------- Other comprehensive income (loss)............... $(104.3) $ 38.5 $ (65.8) ======= ======= =======
NOTE 6 -- 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 7), bonds, notes and preferred stock and other equity securities. As applicable, 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 1999, gross realized gains and losses on sales of investments in debt and equity securities amounted to $6.3 million and $11.4 million, respectively. During 1998, gross realized gains and losses on sales of investments in debt and equity securities amounted to $26.0 million and $2.4 million, respectively. Unrealized gains or losses are reported as a component of accumulated other comprehensive income, net of tax. During the fourth quarter of 1999, the Company wrote down its retained interests in certain manufactured housing transactions by approximately $26 million. This write down represented a permanent impairment in the value of these investments. Accordingly, the loss resulting from this write down was recorded in investment and other income. 47 49 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1999 and 1998 (in millions):
1999 ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED HOLDING HOLDING MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Retained securitization interests........... $4,040.7 $ -- $ (25.9) $4,014.8 Preferred stock............................. 708.3 13.5 (93.6) 628.2 Municipal bonds............................. 250.1 3.0 (4.1) 249.0 Other....................................... 33.0 -- -- 33.0 Insurance Subsidiaries Mortgage-backed........................... 602.1 0.1 (15.9) 586.3 Municipal obligations..................... 417.1 0.1 (23.6) 393.6 Corporate obligations..................... 573.4 0.1 (17.9) 555.6 Preferred stock........................... 200.9 1.1 (16.2) 185.8 U.S. government obligations............... 317.9 0.2 (10.3) 307.8 Other equity securities................... 5.2 1.0 (0.3) 5.9 Other..................................... 194.4 0.4 (5.1) 189.7 -------- ----- ------- -------- Total available-for-sale securities...................... $7,343.1 $19.5 $(212.9) $7,149.7 ======== ===== ======= ========
1998 ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED HOLDING HOLDING MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- 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 ======== ===== ======= ========
48 50 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and estimated market value of available-for-sale securities at December 31, 1999 by contractual maturity are shown below (in millions):
1999 --------------------- ESTIMATED AMORTIZED MARKET COST VALUE --------- --------- Due in one year or less..................................... $ 112.9 $ 115.1 Due in one year through five years.......................... 638.3 625.3 Due after five years through ten years...................... 642.1 615.2 Due after ten years......................................... 977.7 942.4 -------- -------- Subtotal............................................... 2,371.0 2,298.0 Retained securitization interests........................... 4,040.7 4,014.8 Equity securities........................................... 931.4 836.9 -------- -------- Total............................................. $7,343.1 $7,149.7 ======== ========
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, 1999 and 1998 was $26.8 million and $20.8 million, respectively. Historical cost at December 31, 1999 and 1998 was $17.1 million and $15.5 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. NOTE 7 -- FINANCE RECEIVABLES Composition of Net Finance Receivables At December 31, 1999 and 1998, net finance receivables consisted of the following products (in millions):
1999 1998 --------- --------- Home equity................................................. $25,015.0 $22,458.2 Personal lending and retail sales finance................... 16,012.4 11,459.2 Truck and truck trailer..................................... 13,130.3 10,783.6 Equipment................................................... 6,977.3 6,114.0 Credit card................................................. 2,247.1 3,138.1 Auto fleet leasing.......................................... 2,070.1 1,589.7 Manufactured housing(1)..................................... 1,849.0 3,648.2 Recreational vehicles(2).................................... -- 479.7 Warehouse lending and other(3).............................. 1,515.9 1,268.3 --------- --------- Finance receivables, net of unearned finance income ("net finance receivables")(4)............................... 68,817.1 60,939.0 Allowance for losses on finance receivables................. (2,174.4) (1,978.7) Insurance policy and claims reserves(5)..................... (985.9) (1,463.9) --------- --------- Finance receivables, net of unearned finance income, allowance for losses and insurance policy and claims reserves............................................... $65,656.8 $57,496.4 ========= =========
- --------------- (1) As described in Note 22, in January 2000, the Company announced its intention to discontinue its manufactured housing loan origination operations. 49 51 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) As described in Note 3, the Company sold its recreational vehicle finance business in March 1999. (3) Includes warehouse lending, government guaranteed lending and municipal finance. (4) Unearned finance income was approximately $4.7 billion and $4.0 billion at December 31, 1999 and 1998, respectively. (5) At December 31, 1998, insurance policy and claims reserves included approximately $678 million of non-affiliate insurance reserves. The December 31, 1999 balance only includes affiliate insurance reserves: non-affiliate insurance reserves of approximately $721 million are included in accounts payable and accruals. Securitizations and Sales of Finance Receivables During 1999 approximately $1.6 billion of the Company's private label credit card receivables were securitized and sold to a master trust. Additionally, approximately $2.3 billion of the Company's investment in the Bankcard securitization master trust formed in 1998 was sold during 1999. The Company received $3.2 billion in proceeds from these transactions, of which $2.6 billion was in the fourth quarter, and retained securitization interests in the master trust of approximately $770 million. During the fourth quarter of 1999, the Company securitized and sold approximately $2.4 billion of home equity receivables. The Company received approximately $2.0 billion in proceeds from this transaction and retained approximately $460 million in interests in the securitization trusts. Also during the fourth quarter of 1999, the Company sold a home equity receivables portfolio of approximately $80 million. During the third quarter of 1999, approximately $2.5 billion of the Company's manufactured housing receivables were securitized and sold to a trust. The Company received $2.0 billion in proceeds from this transaction and retained $500 million in interests in the trust. 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. 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. 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. In the aggregate, the Company recorded a net gain of approximately $100 million in 1999 on the above transactions, of which approximately $68 million was recorded in the fourth quarter. No significant net gain or loss was recorded in the 1998 or 1997 securitization transactions. In each of these transactions, the Company retained servicing responsibilities for the receivables sold. The retained securitization interests, as described in Notes 2 and 6, are classified as available-for-sale investment securities on the consolidated balance sheet. 50 52 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The table below summarizes the significant assumptions used to value the Company's retained securitization interests at December 31, 1999:
CREDIT HOME EQUITY MANUFACTURED CARD LENDING HOUSING ------ ----------- ------------ Weighted average discount rate(1)........................... 12% 10% 11% Projected prepayment rate................................... n/m 20-30% 10-12% Projected loss rate(2)...................................... 8-10% 8% 9-12%
- --------------- (1) Represents the weighted average discount rate used to value the retained interest components which include interest only strips and subordinated and other retained interests. (2) Loss rates are annualized and exclude recoveries for credit card and cumulative for home equity and manufactured housing. The above assumptions are consistent with those used to determine the initial retained interest valuation and the gains on 1999 securitization transactions. In addition to the assumptions noted above, the Company utilized certain transaction structures that included written put options to the investors. These put options had the impact of reducing the securitization gains recognized in 1999 by approximately $23 million. See Note 16 for additional information. Contractual Maturities of Net Finance Receivables At December 31, 1999, contractual maturities of net finance receivables were as follows (in millions):
YEAR DUE TOTAL - -------- --------- 2000........................................................ $15,889.9 2001........................................................ 10,609.7 2002........................................................ 8,072.5 2003........................................................ 6,436.5 2004 and thereafter......................................... 27,808.5 --------- $68,817.1 =========
It is the Company's experience that a substantial portion of the 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):
DECEMBER 31 --------------------- 1999 1998 --------- --------- Minimum lease rentals....................................... $ 7,766.4 $ 6,841.8 Unearned finance income..................................... (1,143.5) (1,016.0) --------- --------- Net investment in direct financing leases................... $ 6,622.9 $ 5,825.8 ========= =========
51 53 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future net minimum lease rentals on direct financing leases for each of the years succeeding December 31, 1999 are as follows (in millions): 2000 -- $1,884.9; 2001 -- $1,333.9; 2002 -- $1,231.1; 2003 -- $1,111.4; 2004 -- $619.1 and 2005 and thereafter -- $442.5. Dispersion of Finance Receivables The Company has geographically dispersed finance receivables. At December 31, 1999, approximately 77% of the Company's Owned Basis total receivables were dispersed across the United States, and the remaining 23% were in foreign countries. Of the total receivables, 11% were in Japan, 8% in California, 6% in Canada, 6% in Texas and 5% in Florida; no other individual state or foreign country had more than 4%. 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):
YEAR ENDED DECEMBER 31 --------------------------------- 1999 1998 1997 --------- --------- --------- Balance at beginning of period...................... $ 1,978.7 $ 1,949.9 $ 1,563.1 Provision for losses.............................. 1,506.4 1,283.5 1,378.1 Recoveries on receivables charged off............. 268.8 237.7 224.9 Losses sustained.................................. (1,717.1) (1,424.6) (1,454.0) Reserves of receivables sold or held for securitization(1).............................. (214.0) (334.7) -- Reserves of acquired businesses and other......... 351.6 266.9 237.8 --------- --------- --------- Balance at end of period............................ $ 2,174.4 $ 1,978.7 $ 1,949.9 ========= ========= =========
- --------------- (1) The reserves related to receivables sold during 1997 were not significant. NOTE 9 -- OTHER ASSETS The components of other assets at December 31, 1999 and 1998 were as follows (in millions):
1999 1998 -------- -------- Goodwill, net............................................... $3,747.8 $1,890.4 Notes and other receivables................................. 1,877.9 1,172.9 Other intangible assets, net................................ 1,579.4 929.8 Property and equipment...................................... 662.2 608.7 Collateral held for resale.................................. 431.7 297.4 Relocation client advances.................................. 185.4 171.8 Finance receivables held for sale or securitization, net.... 153.0 812.2 Other....................................................... 459.8 451.5 -------- -------- Total............................................. $9,097.2 $6,334.7 ======== ========
Reductions as a result of goodwill amortization were $128.8 million and $67.1 million for 1999 and 1998, respectively. Reductions as a result of other intangible asset amortization were $105.2 million and $25.8 million for 1999 and 1998, respectively. Goodwill and other intangible assets are net of accumulated amortization of $644.3 million and $396.0 million at December 31, 1999 and 1998, respectively, and related deferred tax liabilities. 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 recorded on the books of the Company's international subsidiaries. 52 54 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- CREDIT FACILITIES At December 31, 1999, the Company had the following credit facilities (in millions):
FACILITY AMOUNTS(1) ---------- Domestic Lines of credit........................................... $ 4,272.8 Syndicated credit facilities.............................. 14,455.0 --------- Total domestic.................................... 18,727.8 Foreign Lines of credit........................................... 45.0 Syndicated credit facilities.............................. 2,821.1 --------- Total foreign..................................... 2,866.1 --------- Total domestic and foreign........................ $21,593.9 =========
- --------------- (1) Included in these amounts are $210 million and $2.2 billion of lines of credit and syndicated credit facilities, respectively, that are available to either First Capital or Associates Corporation of North America. Lines of credit and syndicated credit facilities may be withdrawn only under certain standard conditions, including, as to the credit facilities 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. The Company principally pays fees for the availability of its credit facilities. These credit facilities are used to support commercial paper borrowings and utilized uncommitted lines of credit. Limitation on Minimum Tangible Net Worth Restrictions defined in certain syndicated credit facilities require the Company to maintain a minimum tangible net worth, as defined, of $2.5 billion. At December 31, 1999, the Company's tangible net worth, as defined in the syndicated credit facilities, was approximately $6.1 billion. NOTE 11 -- NOTES PAYABLE Commercial paper notes are issued by the Company in the minimum amount of $100,000 with terms generally 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):
COMMERCIAL BANK PAPER NOTES LOANS ----------- -------- Domestic Notes Payable Ending balance at December 31, 1999....................... $18,991.0 $ 990.7 Weighted average interest rate at December 31, 1999....... 5.62% 4.92% Ending balance at December 31, 1998....................... $20,578.6 $1,070.7 Weighted average interest rate at December 31, 1998....... 5.18% 6.05%
53 55 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMERCIAL BANK PAPER NOTES LOANS ----------- -------- Foreign Notes Payable Ending balance at December 31, 1999....................... $ 7,000.9 $ 270.8 Weighted average interest rate at December 31, 1999....... 5.58% 4.01% Ending balance at December 31, 1998....................... $ 3,565.7 $ 494.8 Weighted average interest rate at December 31, 1998....... 5.28% 4.29% Total Notes Payable Ending balance at December 31, 1999....................... $25,991.9 $1,261.5 Weighted average interest rate at December 31, 1999....... 5.61% 4.72% Ending balance at December 31, 1998....................... $24,144.3 $1,565.5 Weighted average interest rate at December 31, 1998....... 5.20% 5.49%
NOTE 12 -- LONG-TERM DEBT Outstanding balances of long-term debt at December 31 were as follows (in millions):
1999 1999 INTEREST WEIGHTED RATE AVERAGE MATURITIES RANGE RATE THROUGH 1999 1998 -------------- -------- ---------- --------- --------- Senior Notes: Domestic: Notes......................... 5.25% - 11.40% 6.10% 2037 $34,128.5 $32,585.2 Investment notes.............. 6.10% - 7.37% 7.37% 2001 50.9 104.3 --------- --------- 34,179.4 32,689.5 --------- --------- Foreign: Japan......................... 1.23% - 8.00% 2.57% 2004 2,062.2 2,346.6 All other foreign............. 0.22% - 32.00% 5.04% 2004 4,737.2 2,135.3 --------- --------- 6,799.4 4,481.9 --------- --------- Total senior notes....... 40,978.8 37,171.4 --------- --------- 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 0.2 0.3 --------- --------- Total subordinated and capital debt notes..... 425.2 425.3 --------- --------- Total long-term debt..... $41,404.0 $37,596.7 ========= =========
The weighted average interest rate for total long-term debt was 5.82% at December 31, 1999 and 6.12% at December 31, 1998. In 1999, the Company issued a $500 million senior note to a trust which in turn issued $500 million in trust securities to an institutional investor in a private transaction. The trust securities and senior notes mature in 2002. In 1997, the Company issued a $500 million senior note to a trust which in turn issued $500 million in trust securities to institutional investors. The trust securities and senior notes mature in September 2000. 54 56 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-term borrowing maturities during the next five years, including the current portion of notes payable after one year are: 2000, $8,758.9 million; 2001, $7,313.2 million; 2002, $7,943.5 million; 2003, $5,815.1 million; 2004, $3,514.4 million and 2005 and thereafter, $8,058.9 million. Certain debt issues are subject to put or call redemption provisions whereby repayment may be required 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. NOTE 13 -- 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):
UNITED STATES --------------- FEDERAL STATE FOREIGN TOTAL ------- ----- ------- ------ Year Ended December 31, 1999 Current........................................... $438.8 $38.0 $236.4 $713.2 Deferred.......................................... 90.8 3.3 79.2 173.3 ------ ----- ------ ------ $529.6 $41.3 $315.6 $886.5 ====== ===== ====== ====== 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 ====== ===== ====== ======
At December 31, 1999 and 1998, the components of the Company's net deferred tax asset were as follows (in millions):
1999 1998 -------- -------- Deferred tax assets: Provision for losses on finance receivables and other..... $1,439.2 $1,040.3 Foreign tax credits....................................... 87.7 27.9 Postretirement and other employee benefits................ 112.4 66.4 -------- -------- 1,639.3 1,134.6 Deferred tax liabilities: Leasing transactions...................................... (579.0) (513.6) Goodwill.................................................. (373.6) (269.0) Finance revenue and other................................. (563.0) (223.6) -------- -------- (1,515.6) (1,006.2) -------- -------- Net deferred tax asset................................. $ 123.7 $ 128.4 ======== ========
Prior to the Spin-Off in April 1998, First Capital and its subsidiaries were included in the consolidated federal income tax return of Ford. First Capital and its subsidiaries filed 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 consolidated, stand-alone basis. 55 57 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The effective tax rate differed from the statutory United States federal income tax rate as follows:
% OF PRETAX INCOME YEAR ENDED DECEMBER 31 ----------------------- 1999 1998 1997 ---- ----- ----- Statutory tax rate.......................................... 35.0% 35.0% 35.0% State tax rate.............................................. 1.1 1.4 1.4 Non-deductible goodwill..................................... 1.1 0.9 0.4 Other....................................................... 0.1 (0.3) 0.3 ---- ---- ---- Effective tax rate........................................ 37.3% 37.0% 37.1% ==== ==== ====
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 14 -- 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, 1999, 1998 and 1997 was $198.5 million, $145.2 million, and $123.8 million, respectively. Minimum rental commitments as of December 31, 1999 for all noncancelable leases (primarily office leases) for the years ending December 31, 2000, 2001, 2002, 2003 and 2004 are $108.8 million, $81.9 million, $57.6 million, $37.4 million and $44.9 million, respectively, and $45.1 million thereafter. NOTE 15 -- 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. The funded status of these Plans is as follows (dollars in millions):
PENSION BENEFITS OTHER BENEFITS ---------------- ----------------- 1999 1998 1999 1998 ------- ------ ------- ------- Change in benefit obligation: Benefit obligation at beginning of year............... $ 562.8 $492.7 $ 123.4 $ 129.8 Service cost.......................................... 36.5 24.7 9.0 5.9 Interest cost......................................... 37.5 32.7 10.2 7.4 Plan participants' contributions...................... -- -- 0.4 0.2 Plan amendment........................................ (1.2) -- (18.3) -- Acquisition........................................... -- -- 32.5 -- Actuarial (gains)/losses.............................. (88.7) 24.6 (20.6) (16.7) Benefits paid......................................... (15.1) (11.9) (4.5) (3.2) ------- ------ ------- ------- Benefit obligation at end of year............. $ 531.8 $562.8 $ 132.1 $ 123.4 ======= ====== ======= =======
56 58 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS OTHER BENEFITS ---------------- ----------------- 1999 1998 1999 1998 ------- ------ ------- ------- Change in plan assets: Fair value of plan assets at beginning of year........ $ 538.6 $473.5 $ -- $ -- Actual return on plan assets.......................... 101.2 75.8 -- -- Employer contributions................................ 29.9 1.2 4.1 3.0 Plan participants' contributions...................... -- -- 0.4 0.2 Benefits paid......................................... (15.1) (11.9) (4.5) (3.2) ------- ------ ------- ------- Fair value of plan assets at end of year...... $ 654.6 $538.6 $ -- $ -- ======= ====== ======= ======= Funded status......................................... $ 122.8 $(24.2) $(132.1) $(123.4) Unrecognized net transition obligation................ 1.4 1.7 -- -- Unrecognized net actuarial (gain)/loss................ (137.8) 13.8 (27.4) (6.7) Unrecognized prior service cost....................... -- 1.5 (17.7) (0.9) ------- ------ ------- ------- Net amount recognized......................... $ (13.6) $ (7.2) $(177.2) $(131.0) ======= ====== ======= ======= Amounts recognized in the consolidated balance sheet: Prepaid benefit cost.................................. $ 25.4 $ 25.4 $ -- $ -- Accrued benefit liability............................. (46.0) (41.6) (177.2) (131.0) Intangible asset...................................... 7.0 9.0 -- -- ------- ------ ------- ------- Net amount recognized......................... $ (13.6) $ (7.2) $(177.2) $(131.0) ======= ====== ======= ======= Weighted-average assumptions as of December 31: Discount rate......................................... 7.75% 6.50% 7.75% 6.50% Expected return on plan assets........................ 9.00% 9.00% --% --% Rate of compensation increase......................... 5.00% 5.00% --% --%
For measurement purposes, a 10.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.5% by 2010 and remain at that level thereafter. Additionally, no future increase in retiree premiums was assumed. The pension plan assets are allocated 72.1% to equity securities and 27.9% to debt securities at December 31, 1999. The net periodic pension cost for the years indicated includes the following components (in millions):
PENSION BENEFITS OTHER BENEFITS ------------------------ --------------------- 1999 1998 1997 1999 1998 1997 ------ ------ ------ ----- ----- ----- Components of net periodic benefit cost: Service cost....................... $ 36.5 $ 24.7 $ 20.1 $ 9.0 $ 5.9 $ 7.1 Interest cost...................... 37.5 32.7 29.4 10.2 7.4 8.2 Expected return on plan assets..... (43.0) (37.1) (31.2) -- -- -- Amortization of transition liability....................... 0.3 0.3 0.3 -- -- -- Amortization of prior service cost............................ 0.3 1.6 1.6 (1.5) (1.5) (1.5) Recognized net actuarial (gain) loss............................ 4.6 2.2 2.6 0.1 (0.2) 0.1 ------ ------ ------ ----- ----- ----- Net periodic benefit cost..................... $ 36.2 $ 24.4 $ 22.8 $17.8 $11.6 $13.9 ====== ====== ====== ===== ===== =====
For the pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation and accumulated benefit obligation were $54.9 million and $40.8 million, respectively as of 57 59 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1999 and $53.5 million and $41.6 million, respectively as of December 31, 1998. The assets of these plans had no fair value as of December 31, 1999 and 1998. 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):
1-PERCENTAGE- 1-PERCENTAGE- POINT POINT INCREASE DECREASE ------------------ ------------------ Effect on total of service and interest cost components........................................... $ 1.9 $ (1.9) Effect on post-retirement benefit obligations.......... 10.7 (10.6)
The Company also sponsors two qualified pension plans, which cover substantially all of the employees of its Japan operations who meet certain eligibility requirements. For the year ended December 31, 1999 the Company's net periodic benefit cost of these plans was $4.7 million. As of December 31, 1999 the total benefit obligation and fair value of plan assets was $26.7 million and $28.3 million respectively. 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, 1999, 1998 and 1997, the Company's pre-tax contributions to the plan were $43.7 million, $32.4 million and $25.6 million, respectively. Among other options, the plan provides as an investment option the Associates Stock Fund which invests principally in the Company's Class A Common Stock. Associates Discounted Employee Stock Purchase Plan The Company sponsors a discounted employee stock purchase plan which, beginning in 1999, allows employees to purchase Class A Common Stock of the Company at a discount. The price of the stock is discounted 15% from the closing price at the lower of the beginning or the end of the offering period. INCENTIVE COMPENSATION PROGRAMS The Company sponsors the following 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 1999 was a long term cash incentive plan. The size of the LTPP incentive pool was determined for the performance period ending December 31, 1999, 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 individual participants' performances during the applicable performance period. Amounts charged to expense for these bonus plans amounted to $31.6 million, $29.0 million and $25.1 million during the years ended December 31, 1999, 1998 and 1997, respectively. 58 60 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred Compensation Plan The Company sponsors the Deferred Compensation Plan (the "DCP"), a non-qualified defined contribution plan. Under the DCP, participants may elect to defer payment of current cash compensation. Deferred amounts are deemed invested as the participants elect among available investment measures, but no actual investments are made. Among the available investment measures is a deemed investment in Class A Common Stock, with the value of the deferred amount adjusted to reflect the performance of Class A Common Stock. Stock-Based Compensation Plans The ICP also includes an equity compensation plan, formerly known as the Long-Term Equity Compensation Plan, which was established in 1996 and amended and merged into the ICP effective January 1, 1997. 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, 1999, the Company had only issued non-qualified 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, 1999, 1998 and 1997 is presented below.
1999 1998 1997 --------------------------- --------------------------- -------------------------- WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG. OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- -------------- ---------- -------------- --------- -------------- Outstanding at beginning of year... 12,938,752 $26.17 8,389,702 $18.31 4,748,880 $14.54 Granted.......................... 7,767,630 42.27 6,503,140 35.37 4,772,050 21.80 Exercised........................ (1,294,758) 22.05 (1,083,794) 18.18 (433,208) 15.05 Forfeited........................ (1,215,557) 38.25 (870,296) 29.02 (698,020) 18.48 ---------- ---------- --------- Outstanding at end of year......... 18,196,067 32.55 12,938,752 26.17 8,389,702 18.31 ========== ========== ========= Options exercisable at year end.... 6,253,629 22.82 3,206,324 17.28 1,040,838 14.55 Weighted-average fair value of options granted during the year............................. 13.83 8.90 5.62
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:
ASSUMPTIONS 1999 1998 1997 - ----------- ----- ----- ----- Expected Term in years...................................... 4.00 4.00 4.00 Expected Volatility......................................... 34.83% 21.28% 22.00% Expected Dividend Yield..................................... 0.52% 0.58% 0.51% Risk-Free Interest Rate..................................... 4.72% 5.59% 6.24%
59 61 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average remaining life and weighted average exercise price for total options outstanding and exercisable options outstanding at December 31, 1999 is summarized below:
OPTIONS OUTSTANDING ------------------------------ OPTIONS EXERCISABLE WEIGHTED-AVG. -------------------------- RANGE OF REMAINING WEIGHTED-AVG. WEIGHTED-AVG. EXERCISE PRICES OPTIONS LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE - --------------- ---------- ------------- -------------- --------- -------------- (YEARS) $14.50 to $24.50....... 5,770,402 6.70 $18.20 4,425,157 $17.73 27.63 to 35.31....... 5,260,756 8.04 35.12 1,762,419 35.00 37.50 to 44.69....... 7,164,909 9.01 42.23 66,053 38.50 ---------- --------- 14.50 to 44.69....... 18,196,067 8.00 32.55 6,253,629 22.82 ========== ====== =========
Restricted Stock -- Under the ICP, in 1999, 1998 and 1997 the Company issued 340,668, 115,000 and 84,000 respective shares of restricted Common Stock to employees. At December 31, 1999, 789,988 were outstanding. Restrictions generally will not lapse until 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 1999, 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. Approximately 1,129, 1,160 and 1,720 deemed shares were issued during 1999, 1998 and 1997, respectively, and related to the reinvestment of dividends. On December 31, 1999, the EDP was merged into the DCP and the PSAR amounts were reinvested in the DCP. At December 31, 1999, there were no PSAR amounts outstanding. 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, 1999, 1998 and 1997 the Company's net income, basic earnings per share and diluted earnings per share would have been $1,451 million, $1,204 million and $1,023 million; $1.99, $1.73 and $1.48; and $1.98, $1.72 and $1.47, 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 20. NOTE 16 -- 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, 1999, the unused portion of these lines aggregated $56.1 billion. The Company also grants lines of credit to certain dealers of trucks, construction equipment and manufactured housing. At December 31, 1999, the unused portion of these lines aggregated $865 million. 60 62 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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, 1999. 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. To broaden its investor base and improve execution in connection with its asset securitization program, the Company wrote "put options" which require it to purchase, upon request of the holders, securities issued in four securitization transactions. These put options include: a put option, exercisable any time after February 17, 2000, with respect to an aggregate of up to $500 million principal amounts of certificates backed by credit card receivables; a put option, exercisable in October of each year beginning in October 2000, with respect to an aggregate of up to approximately $2 billion principal amount of certificates backed by manufactured housing contract receivables; a put option, exercisable at any time after June 15, 2000, with respect to an aggregate of up to approximately $1 billion principal amount of notes secured by home equity loan receivables, only to the extent the securitization trust cannot meet its obligation under a separate put option by the trust which is exercisable at any time after March 15, 2000, and a put option, exercisable at any time after June 15, 2000, with respect to an aggregate of up to approximately $1 billion of notes secured by home equity loan receivables only to the extent the securitization trust cannot meet its obligation under a separate put option issued by the trust. In each case, if exercised, the Company will be obligated to purchase the certificates or notes at par plus accrued interest. The Company has recorded liabilities totaling approximately $23 million in connection with these options. Subsequent to their initial issuance, such options are marked to market with the fluctuation being reflected in the statement of earnings. NOTE 17 -- 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 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, municipal bond futures and treasury futures and option contracts. Foreign currency forward exchange agreements are generally 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. Under these agreements, the Company is obligated to deliver specific foreign 61 63 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) currencies in exchange for United States dollars at varying times over the next five years. The aggregate notional amount of these agreements at December 31, 1999 and 1998 was $2.8 billion and $2.5 billion, respectively. The fair value of such agreements at December 31, 1999 and 1998 would have been a liability of $389.0 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 counter parties are obligated to exchange specific foreign currencies at varying times over the next four years. The aggregate notional amount of these agreements at December 31, 1999 and 1998 was $5.9 billion and $4.4 billion, respectively. The fair value of such agreements at December 31, 1999 and 1998 would have been a liability of $307.9 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 December 31, 1999 was $9.2 billion. The fair value of such agreements at December 31, 1999 would have been a liability of $46.7 million. These agreements mature on varying dates over the next 19 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 December 31, 1999 and 1998 was $536.2 million and $720.6 million, respectively. The fair value of these contracts would have been an asset of $12.4 million and a liability of $5.2 million at December 31, 1999 and 1998, respectively. Such contracts mature on varying dates through 2000. Municipal bond futures are used to minimize fluctuations in the value of municipal bond investments and are held for purposes other than trading. The aggregate notional amount of municipal bond futures contracts at December 31, 1999 was $180.1 million. The fair value of these contracts would have been an asset of $2.4 million at December 31, 1999. Such contracts mature on varying dates through 2000. The Company did not hold municipal bond futures during 1998. NOTE 18 -- BUSINESS SEGMENT INFORMATION Reportable Segment Overview The Company is organized into five primary business units: U.S. credit card, U.S. consumer branch, U.S. home equity, commercial and international finance. The U.S. consumer branch and U.S. home equity business units are aggregated into one reportable U.S. consumer finance segment due to their similar operating characteristics. The Company's corporate activities include, among others, managing the operations of its domestic and foreign subsidiaries, accessing the global debt, securitization and capital markets and managing the mix of businesses in its portfolio. The Company fully allocates its corporate activities to its business segments primarily based upon managed receivables. In 1999, these allocations included gains or losses on business dispositions and assets sold and securitized as set forth in Notes 3 and 7. U.S. Credit Card The U.S. credit card finance segment offers bankcard, private label credit card and related insurance products to customers throughout the United States. 62 64 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. Consumer Finance The U.S. consumer finance reportable segment includes the Company's U.S. consumer branch and U.S. home equity lending business units. These business units have been aggregated into one reportable segment because they have similar operating characteristics. Finance products and services offered by this segment include home equity loans, personal loans, automobile financing, retail sales finance and related insurance products in the United States (excluding Hawaii and Puerto Rico, which are included in the international finance segment). Commercial The commercial 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, warehouse lending, government guaranteed lending, municipal finance, employee relocation services and insurance products in the United States and Canada. International Finance The international finance segment is primarily engaged in consumer lending, and to a lesser extent, credit card and commercial lending activities and related insurance products in Japan, Canada, the United Kingdom, Puerto Rico, Hawaii, Sweden, Hong Kong, Spain, France, India, Mexico, Taiwan, Ireland and Costa Rica. 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):
U.S. U.S. CREDIT CONSUMER INTERNATIONAL TOTAL CARD FINANCE COMMERCIAL(1) FINANCE COMPANY --------- ---------- ------------- ------------- --------- Year Ended or at December 31, 1999 Total revenue........................ $ 2,542.3 $ 4,442.2 $ 3,285.2 $ 2,981.3 $13,251.0 Net interest margin.................. 1,737.9 2,266.7 1,028.4 2,191.4 7,224.4 Segment earnings..................... 441.1 688.7 506.9 740.2 2,376.9 Finance receivables.................. 10,928.3 31,566.8 27,948.6 13,971.0 84,414.7 Year Ended or at December 31, 1998 Total revenue........................ $ 1,968.9 $ 3,828.7 $ 2,591.7 $ 1,640.2 $10,029.5 Net interest margin.................. 1,377.8 2,080.8 1,008.1 1,278.1 5,744.8 Segment earnings..................... 299.8 655.9 510.5 474.3 1,940.5 Finance receivables.................. 9,622.0 26,810.5 26,469.6 8,462.2 71,364.3 Year Ended or at December 31, 1997 Total revenue........................ $ 1,659.2 $ 3,633.6 $ 2,152.9 $ 1,024.8 $ 8,470.5 Net interest margin.................. 1,163.0 2,056.3 875.7 791.0 4,886.0 Segment earnings..................... 199.7 665.6 439.7 335.0 1,640.0 Finance receivables.................. 7,839.3 23,985.0 22,304.2 4,278.0 58,406.5
- --------------- (1) 1999 total revenue and earnings include the results of the non-affiliate insurance operations of $504.7 million and $35.3 million, respectively. The non-affiliate insurance operations had no affect on net margin. 63 65 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, 1999, 1998 and 1997 to the related consolidated totals is as follows (in millions):
1999 1998 1997 ---------- ---------- --------- Total Revenue Total Company Managed Basis revenue............. $ 13,251.0 $ 10,029.5 $ 8,470.5 Managed Basis adjustments....................... (1,119.8) (652.7) (191.9) ---------- ---------- --------- Consolidated revenue.................... $ 12,131.2 $ 9,376.8 $ 8,278.6 ========== ========== ========= Net Interest Margin Total Company Managed Basis net interest margin....................................... $ 7,224.4 $ 5,744.8 $ 4,886.0 Managed Basis adjustments....................... (2,024.5) (1,031.1) (101.0) ---------- ---------- --------- Consolidated net interest margin........ $ 5,199.9 $ 4,713.7 $ 4,785.0 ========== ========== ========= Finance Receivables Total Company Managed Basis finance receivables.................................. $ 84,414.7 $ 71,364.3 $58,406.5 Managed Basis adjustments....................... (15,597.6) (10,425.3) (3,190.9) ---------- ---------- --------- Consolidated net finance receivables.... $ 68,817.1 $ 60,939.0 $55,215.6 ========== ========== =========
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, 1999, 1998 and 1997 (in millions):
1999 1998 1997 -------- -------- -------- Finance charges United States........................................ $6,361.0 $6,305.8 $6,563.4 Japan................................................ 1,628.5 1,042.7 696.1 Canada............................................... 553.8 256.5 94.7 United Kingdom....................................... 470.6 215.6 146.0 All other............................................ 92.5 89.8 60.0 -------- -------- -------- Consolidated finance charges................. $9,106.4 $7,910.4 $7,560.2 ======== ======== ========
Information About Products and Services The Company manages its product and service offering primarily through these reportable segments. Therefore, pursuant to 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. 64 66 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 19 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The information provided below is required by Statement of Financial Accounting Standards No. 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 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, 1999 and 1998, the carrying value and estimated fair value of certain of the Company's financial instruments were as follows (in millions):
1999 1998 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE -------- ---------- --------- ---------- Cash and cash equivalents(1)............. $ 1,026.3 $ 1,026.3 $ 4,665.6 $ 4,665.6 Investment securities(2)................. 7,176.5 7,176.5 6,678.7 6,678.7 Net finance receivables(3)............... 68,817.1 72,740.7 60,939.0 64,770.2 Notes payable(1) Commercial paper....................... 25,991.9 25,991.9 24,144.3 24,144.3 Bank Loans............................. 1,261.5 1,261.5 1,565.5 1,565.5 Long-term debt(4)........................ 41,404.0 40,961.9 37,596.7 38,904.2
- --------------- (1) The estimated fair value approximates their carrying value. (2) Estimated market values of investment securities are based on quoted market prices. 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 17 for fair value information regarding derivative financial instruments. NOTE 20 -- 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 21 -- TRANSACTIONS AND BALANCES WITH RELATED PARTIES The Company paid cash dividends to Ford of $25.6 million and $111.8 million during the years ended December 31, 1998 and 1997, respectively. The Company provided certain emergency roadside assistance and auto club services and employee relocation services to Ford. Revenues related to these services while the Company was a subsidiary of Ford were $33.8 million and $36.0 million for the years ended December 31, 1998 and 1997, respectively. 65 67 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 and $8.0 million for the years ended December 31, 1998 and 1997, respectively. NOTE 22 -- SUBSEQUENT EVENT (UNAUDITED) In January 2000, the Company announced its intention to discontinue the loan origination operations of its Associates Housing Finance ("AHF") unit. AHF originates and services loans for manufactured homes. As a result, the Company plans to take a special pre-tax charge against first quarter 2000 earnings of approximately $112 million. This charge will cover exit costs, including severance, noncancellable contractual obligations and related costs, as well as a provision for increased losses on the disposition of repossessions and fair-value adjustments of related assets. The Company closed substantially all of its sales purchase offices in February 2000 and will close its regional loan origination centers in the second quarter of 2000. The Company will service the liquidation of the existing receivables through its centralized service facility in Knoxville, Tennessee. The Company will limit its origination activities to support of its contractual arrangements and loss mitigation activities. NOTE 23 -- UNAUDITED QUARTERLY FINANCIAL DATA The following table sets forth the unaudited quarterly results of operations (in millions, except earnings per share):
1999 ----------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Finance charges.............................. $2,318.8 $2,241.6 $2,262.1 $2,283.9 ======== ======== ======== ======== Interest expense............................. $ 988.7 $ 992.5 $ 965.3 $ 960.0 ======== ======== ======== ======== Earnings before provision for income taxes... $ 646.4 $ 618.6 $ 573.0 $ 538.9 Provision for income taxes................... 237.7 231.8 214.9 202.1 -------- -------- -------- -------- Net earnings................................. $ 408.7 $ 386.8 $ 358.1 $ 336.8 ======== ======== ======== ======== Net earnings per share Basic...................................... $ 0.56 $ 0.53 $ 0.49 $ 0.46 ======== ======== ======== ======== Diluted.................................... $ 0.56 $ 0.53 $ 0.49 $ 0.46 ======== ======== ======== ========
1998 ----------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 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 ======== ======== ======== ========
66 68 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 24 -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) Condensed unconsolidated financial information of First Capital as of or for the years ended December 31, 1999, 1998 and 1997 was as follows (in millions): CONDENSED STATEMENT OF EARNINGS (IN MILLIONS)
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- Revenue Interest and other income............................ $ 448.5 $ 217.1 $ 58.8 Dividends from subsidiaries.......................... 658.7 231.9 52.5 -------- -------- -------- 1,107.2 449.0 111.3 Expenses Interest expense..................................... 701.7 128.6 44.4 Operating expenses................................... 97.4 47.3 34.9 Provision for losses on finance receivables.......... 6.5 2.9 -- -------- -------- -------- 805.6 178.8 79.3 -------- -------- -------- Income before credit for federal income taxes and equity in undistributed earnings of subsidiaries..... 301.6 270.2 32.0 Tax benefit............................................ 237.2 36.7 40.2 -------- -------- -------- Earnings before equity in undistributed earnings of subsidiaries......................................... 538.8 306.9 72.2 Equity in undistributed earnings of subsidiaries, net of tax............................................... 951.6 916.6 959.5 -------- -------- -------- Net earnings........................................... $1,490.4 $1,223.5 $1,031.7 ======== ======== ========
See notes to condensed financial information. 67 69 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED BALANCE SHEET (IN MILLIONS)
DECEMBER 31 --------------------- 1999 1998 --------- --------- Assets Investment in subsidiaries................................ $13,665.8 $10,158.2 Finance receivables, net of unearned income and allowance for credit losses...................................... 668.8 662.4 Advances to subsidiaries, eliminated in consolidation, and other.................................................. 7,238.8 4,299.1 --------- --------- Total assets...................................... $21,573.4 $15,119.7 ========= ========= Liabilities and Stockholders' Equity Accounts payable and accruals............................. $ 759.6 $ 310.7 Short-term notes payable.................................. 9,625.9 5,473.2 Long-term debt............................................ 1,387.4 809.3 Stockholders' equity...................................... 9,800.5 8,526.5 --------- --------- Total liabilities and stockholders' equity........ $21,573.4 $15,119.7 ========= =========
The estimated fair value of notes payable and long-term debt at December 31, 1999 and 1998 was $11,003.1 million and $6,268.1 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. See notes to condensed financial information. 68 70 ASSOCIATES FIRST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS (IN MILLIONS)
YEARS ENDED DECEMBER 31 --------------------------------- 1999 1998 1997 --------- --------- --------- Cash Flows from Operating Activities Net earnings.............................................. $ 1,490.4 $ 1,223.5 $ 1,031.7 Adjustments to net earnings for non-cash items: Provision for losses on finance receivables............ 6.5 2.9 -- Depreciation and amortization.......................... 10.5 0.4 -- Increase (decrease) in accounts payable and accruals... 263.0 123.5 (12.9) Equity in undistributed earnings of subsidiaries....... (951.6) (916.6) (959.5) --------- --------- --------- Net cash provided from operating activities............ 818.8 433.7 59.3 --------- --------- --------- Cash Flows from Investing Activities Finance receivables originated or purchased............... (584.3) (1,207.3) -- Finance receivables liquidated............................ 571.4 542.0 -- Acquisition of other finance businesses, net.............. (4,170.5) (1,767.4) -- Sale of other finance businesses.......................... 2,162.8 -- -- Cash dividends from subsidiaries.......................... 658.7 231.9 52.5 Increase in investments in and advances to subsidiaries... (3,647.2) (3,011.1) (717.6) (Increase) decrease in other assets....................... (495.1) (370.8) 1.2 --------- --------- --------- Net cash used for investing activities................. (5,504.2) (5,582.7) (663.9) --------- --------- --------- Cash Flows from Financing Activities Increase in notes payable and long-term debt.............. 5,805.7 4,345.0 891.6 Retirement of long-term debt.............................. (1,074.9) (115.1) (214.0) Sale of Class A Common Stock.............................. -- 1,266.7 -- Cash dividends............................................ (167.5) (142.0) (138.6) Treasury stock and other.................................. 22.4 (17.0) (12.4) --------- --------- --------- Net cash provided from financing activities............ 4,585.7 5,337.6 526.6 Effect of foreign currency translation adjustments on cash...................................................... 191.2 (112.6) 78.5 --------- --------- --------- Increase in cash and cash equivalents....................... 91.5 76.0 0.5 Cash and cash equivalents at beginning of year.............. 77.2 1.2 0.7 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 168.7 $ 77.2 $ 1.2 ========= ========= =========
See notes to condensed financial information. 69 71 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 10 for a summary of the most significant of these restrictions. (2) Notes payable and long-term debt bear interest at rates from 5.50% to 8.87%. The estimated maturities of the notes outstanding, at December 31, 1999, during subsequent years were as follows (in millions):
YEAR AMOUNT - ---- -------- 2000........................................................ $ 727.0 2001........................................................ 260.4 2002........................................................ 200.0 2003........................................................ -- 2004........................................................ -- Thereafter.................................................. 200.0 -------- Total....................................................... $1,387.4 ========
(3) Effective January 1, 1999, First Capital entered into a tax sharing agreement with certain of its subsidiaries included in First Capital's consolidated return, which requires an allocation of the consolidated tax liability among these subsidiaries. 70 72 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on May 28, 1999. 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 2000 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 2000 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 2000 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 2000 annual meeting of stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. (a) Financial Statements (1)
PAGE ---- Report of Independent Auditors............... 34 Consolidated Statement of Earnings for the years ended December 31, 1999, 1998 and 1997.......................................... 35 Consolidated Balance Sheet at December 31, 1999 and 1998................................. 36 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.............. 37 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................................... 38 Notes to consolidated financial statements... 39
(2) The financial statement schedules required by regulation S-X are either not applicable or are included in the information provided in the notes to the consolidated financial statements which are filed as part of this report. 71 73 (b) Reports on Form 8-K During the quarter ended December 31, 1999, First Capital filed Current Reports on Form 8-K dated October 12, 1999 (announcing 3rd quarter 1999 earnings); November 15, 1999 (announcing a definitive agreement to acquire Arcadia Financial Ltd.); and December 16, 1999 (announcing the naming of Michael C. Lenora as head of its International Operations, replacing Wilfred Y. Horie). (c) Exhibits
EXHIBIT NUMBER ------- 3.1 -- Restated Certificate of Incorporation. (3.1)* 3.2 -- By-laws. 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 Deferred Compensation Plan. (4)*** 10.3 -- The Company's Incentive Compensation Plan. (10.8)**** 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 -- Form of Company's Incentive Compensation Plan Stock Option Award Agreement. 10.8 -- 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 Auditors. 24. -- Powers of Attorney. 27. -- Financial Data Schedule.
- --------------- * Incorporated by reference to the exhibit listed in parentheses 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. 72 74 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/ ROY A. GUTHRIE -------------------------------------- Roy A. Guthrie Senior Executive Vice President, Principal Financial Officer and Director March 28, 2000 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.
SIGNATURE TITLE DATE --------- ----- ---- /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/ JUDY JOLLEY MOHRAZ* Director - ----------------------------------------------------- (Judy Jolley Mohraz) /s/ H. JAMES TOFFEY, JR.* Director - ----------------------------------------------------- (H. James Toffey, Jr.) /s/ KENNETH WHIPPLE* Director - ----------------------------------------------------- (Kenneth Whipple) /s/ ROY A. GUTHRIE Senior Executive Vice - ----------------------------------------------------- President, Principal (Roy A. Guthrie) Financial Officer and Director /s/ JOHN F. STILLO* Executive Vice President, - ----------------------------------------------------- Comptroller and Principal (John F. Stillo) Accounting Officer
By signing his name hereto, Roy A. Guthrie 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/ ROY A. GUTHRIE ---------------------------------- Attorney-in-fact March 28, 2000 75 INDEX TO EXHIBITS
EXHIBIT NUMBER ------- 3.1 -- Restated Certificate of Incorporation. (3.1)* 3.2 -- By-laws. 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 Deferred Compensation Plan. (4)*** 10.3 -- The Company's Incentive Compensation Plan. (10.8)**** 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 -- Form of Company's Incentive Compensation Plan Stock Option Award Agreement. 10.8 -- 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 Auditors. 24. -- Powers of Attorney. 27. -- Financial Data Schedule.
- --------------- * Incorporated by reference to the exhibit listed in parentheses 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. EX-3.2 2 BY-LAWS 1 EXHIBIT 3.2 BY-LAWS OF ASSOCIATES FIRST CAPITAL CORPORATION (THE "COMPANY") ADOPTED APRIL 30, 1996 AS AMENDED SEPTEMBER 25, 1996 AS AMENDED MARCH 2, 1998 AS AMENDED FEBRUARY 24, 2000 ARTICLE I. OFFICES The registered office of the Company shall be in the City of Wilmington, County of New Castle, State of Delaware. The Company may also have one or more offices at such other places, either inside or outside of the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Company may require. The books and records of the Company may be kept (subject to the provisions of the laws of the State of Delaware) at any place, either inside or outside of the State of Delaware, as from time to time may be determined by the Board of Directors. ARTICLE II. STOCKHOLDERS SECTION 1. PLACE OF MEETING. Meetings of stockholders (whether annual or special) shall be held at such place, either inside or outside of the State of Delaware, as the Board of Directors shall from time to time determine. SECTION 2. ANNUAL MEETING. The annual meeting of stockholders shall be held on the last Thursday of May of each year or at such other time as shall be determined by the Board of Directors. Should said day be a legal holiday, such annual meeting shall be held on the preceding regular business day. If, for any reason, the annual meeting be not held at the time aforesaid, the directors shall fix another date for such meeting. SECTION 3. SPECIAL MEETINGS. Unless otherwise prescribed by law or by the Company's Restated Certificate of Incorporation, as amended from time to time (the "Charter"), special meetings of stockholders may be held at any time on call of the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President, or, at the request in writing of a majority of the Board of Directors, any officer. Such request shall state the purpose or purposes of the proposed meeting. SECTION 4. NOTICE OF MEETINGS. Except as otherwise provided by law, at least ten (10) days' notice of stockholders' meetings stating the time and place and the objects thereof shall be given by the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President, the Secretary or an Assistant Secretary to each stockholder of record having voting power in respect of the business to be transacted thereat. Subject to Section 5 of this Article II, no business other than that stated in the notice shall be transacted at any meeting. SECTION 5. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (A) Annual Meetings of Stockholders. 2 (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Company's notice of meeting delivered pursuant to Section 4 of this Article II, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Company who is entitled to vote at the meeting, who complied with the notice procedures set forth in paragraphs (A)(2) and (A)(3) of this Section 5 and who was a stockholder of record at the time such notice is delivered to the Secretary of the Company. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 5, the stockholder must have given timely notice thereof in writing to the Secretary of the Company and such business must be a proper subject for stockholder action under the General Corporation Law of the State of Delaware. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Company not less than sixty (60) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the sixtieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner and (ii) the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 5 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Company at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting, a stockholders's notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the tenth day following the day on which such public announcement is first made by the Company. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Company's notice of meeting pursuant to Section 4 of this Article II. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Company's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Company who is entitled to vote at the meeting, who complies with the notice procedures set forth in this Section 5 and who is a stockholder of record at the time such notice is delivered to the Secretary of the Company. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by paragraph (A)(2) of this Section 5 shall be delivered to the Secretary at the principal executive offices of the Company not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of the sixtieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. -2- 3 (C) General. (1) Only persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the Charter or these By-laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with this Section 5 and, if any proposed nomination or business is not in compliance with this Section 5, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 5, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 5. Nothing in this Section 5 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. SECTION 6. QUORUM. At any meeting of stockholders, the number of shares the holders of which shall be present or represented by proxy in order to constitute a quorum for, and the votes that shall be necessary for, the transaction of any business shall be as expressly provided in Article 4 of the Charter. At any meeting of stockholders at which a quorum is not present, the person serving as chairman of the meeting or the holders of shares entitled to cast a majority of all of the votes which could be cast at such meeting by the holders of outstanding shares of stock of the Company who are present in person or by proxy and who are entitled to vote on every matter that is to be voted on without regard to class at such meeting may adjourn the meeting from time to time. SECTION 7. ORGANIZATION AND CONDUCT OF BUSINESS. The Chairman of the Board of Directors shall act as chairman of meetings of the stockholders. The Board of Directors may designate any other officer or director of the Company to act as chairman of any meeting in the absence of the Chairman of the Board of Directors, and the Board of Directors may further provide for determining who shall act as chairman of any stockholders' meeting in the absence of the Chairman of the Board of Directors and such designee. The person serving as chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The Secretary of the Company shall act as secretary of all meetings of the stockholders, but in the absence of the Secretary the presiding officer may appoint any other person to act as secretary of any meeting. SECTION 8. PROXIES AND VOTING. At any meeting of stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. -3- 4 All voting, including on the election of directors but excepting where otherwise required by law, may be a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or by his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. SECTION 9. STOCK LISTS. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. SECTION 10. RATIFICATION. Any transaction questioned in any stockholders' derivative suit, or any other suit to enforce alleged rights of the Company or any of its stockholders, on the ground of lack of authority, defective or irregular execution, adverse interest of any director, officer or stockholder, nondisclosure, miscomputation or the application of improper principles or practices of accounting may be approved, ratified and confirmed before or after judgment by the Board of Directors or by the holders of the Company's Class A Common Stock, par value $.01 per share ("Class A Common Stock") and the holders of the Company's Class B Common Stock, par value $.01 per share ("Class B Common Stock") voting as provided in paragraph (g) of Article 4 of the Charter, and, if so approved, ratified or confirmed, shall have the same force and effect as if the questioned transaction had been originally duly authorized, and said approval, ratification or confirmation shall be binding upon the Company and all of its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction. SECTION 11. INSPECTORS OF ELECTION. The Board of Directors may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting, decide upon the qualification of voters, count the votes, decide the results and make a written report thereof in accordance with the General Corporation Law of the State of Delaware. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. Every vote taken by ballots hall be counted by an inspector or inspectors appointed by the chairman of the meeting. ARTICLE III. BOARD OF DIRECTORS SECTION 1. NUMBER, TERM OF OFFICE AND ELIGIBILITY. Subject to any rights of holders of Preferred Stock to elect additional directors under specified circumstances, as provided in Article 5 of the Charter, the number of directors of the Company shall be fixed from time to time exclusively by resolution of the Board of Directors adopted by the affirmative vote of directors constituting not less than a majority of the total number of directors that the Company would have it there were no vacancies on the Company's -4- 5 Board of Directors, but shall consist of not more than twelve (12) nor less than three (3) directors. Each director shall be elected annually by ballot by the holders of Class A Common Stock and the holders of Class B Common Stock voting as provided in paragraph (g) of Article 4 of the Charter at the annual meeting of stockholders, to serve until his or her successor shall have been elected and shall have qualified, except as provided in this Section 1. No person may be elected or re-elected a director of the Company if at the time of his or her election or re-election he or she shall have attained the age of seventy-five years, and the term of any director who shall have attained such age while serving as a director shall terminate as of the time of the first annual meeting of stockholders following his or her seventieth birthday; provided, however, that the Board of Directors by resolution may waive such age limitation in any year and from year to year with respect to any director or directors. Subject to any rights of holders of Preferred Stock, and unless the Board of Directors otherwise determines, any vacancy occurring in the Board of Directors caused by death, resignation, increase in number of directors or otherwise may be filled by the affirmative vote of a majority of the remaining members of the Board of Directors, though less than a quorum, or by a sole remaining director, and except as otherwise provided by law, any such vacancy may not be filled by the stockholders of the Company, and any director so elected shall hold office until the next election of directors and until his or her successor is duly elected and qualified, or until his or her earlier death, resignation or removal. SECTION 2. MEETINGS. Meetings of the Board of Directors may be held at such place, either inside or outside of the State of Delaware, as may from time to time be designated by the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President or resolution of the Board of Directors or as may be specified in the call of any meeting. In the absence of any such designation, the meetings shall be held at the principal office of the Company in Irving, Texas. An annual meeting of the Board of Directors shall be held on the same day as, and as soon as practicable following the annual meeting of stockholders or at such other time or place as shall be determined by the Board of Directors at its regular meeting next preceding said annual meeting of stockholders. Regular meetings of the Board of Directors shall be held on the last Thursday of February, May, August and November of each year or at such other time as shall be determined by the Board of Directors. Should said day be a legal holiday, such regular meeting shall be held on the next Thursday that is not a legal holiday. Special meetings of the Board of Directors may be held at any time on the call of the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President or the Board of Directors. Meetings may be held at any time or place without notice if all the directors are present or if those not present waive notice of the meeting in writing. SECTION 3. NOTICE OF MEETINGS. The Secretary or an Assistant Secretary shall give notice of the time and place of meetings of the Board of Directors (excepting the annual meeting of directors) by (i) mailing or sending via courier such notice not later than during the second day preceding the day on which such meeting is to be held, or (ii) by (a) sending a facsimile transmission or other form of electronic communication containing such notice or (b) delivering such notice personally or by telephone, in each case, not later than during the first day preceding the day on which such meeting is to be held to each director. Unless otherwise stated in the notice thereof any and all business may be transacted at any meeting. SECTION 4. QUORUM AND ORGANIZATION OF MEETINGS. One-third of the total number of members of the Board of Directors as constituted from time to time, but in no event less than three, shall constitute a quorum for the transaction of business; but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice or waiver. Except as otherwise provided by law or by the Charter or these By-laws, a majority of the directors present at any duly constituted meeting may decide any question brought before such meeting. Meetings shall be presided over by the Chairman of the Board of Directors or, in his or her absence, by such other person as the Board of Directors may designate or the members present may select. -5- 6 SECTION 5. POWERS. In addition to the powers and authorities by these By-laws expressly conferred upon them, the Board of Directors shall have and may exercise all such powers of the Company and do all such lawful acts and things that are not by statute, the Charter or these By-laws directed or required to be exercised or done by the stockholders. Without prejudice to or limitation of such general powers and any other powers conferred by statute, the Charter or these By- laws, the Board of Directors shall have the following powers: (1) To determine, subject to the requirements of law and of paragraph (c)(2) of Article 4 of the Charter, what, if any, dividends shall be declared and paid to the stockholders out of net profits, current or accumulated, or out of surplus or other assets of the Company available for dividends. (2) To fix, and from time to time to vary, the amount of working capital of the Company, and to set aside from time to time out of net profits, current or accumulated, or surplus of the Company such amount or amounts as they in their discretion may deem necessary and proper as, or as a safeguard to the maintenance of working capital, as a reserve for contingencies, as a reserve for repairs, maintenance, or rehabilitation, as a reserve for revaluation of profits of the Company or for such other proper purpose as may in the opinion of the directors be in the best interests of the Company, and in their sole discretion to abolish or modify any such provision for working capital or any such reserve, and to credit the amount thereof to net profits, current or accumulated, or to the surplus of the Company. (3) To purchase, or otherwise acquire for the Company, any business, property, rights or privileges which the Company may at the time be authorized to acquire, at such price or consideration and generally on such terms and conditions as they think fit; and at their discretion to pay therefor either wholly or partly in money, stock, bonds, debentures or other securities of the Company. (4) To create, make and issue mortgages, bonds, deeds of trust, trust agreements or negotiable or transferable instruments or securities, secured by mortgage or otherwise, and to do every other act and thing necessary to effect the same. (5) To appoint any person or corporation to accept and hold in trust for the Company any property belonging to the Company, or in which it is interested, or for any other purpose, and to execute such deeds and do all things requisite in relation to any such trust. (6) To remove any officer of the Company with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being. (7) To confer upon any officer of the Company the power to appoint, remove and suspend subordinate officers, agents and employees. (8) To determine who shall be authorized on the Company's behalf, either generally or specifically, to make and sign bills, notes, acceptances, endorsements, checks, releases, receipts, contracts, conveyances, and all other written instruments executed on behalf of the Company. (9) To make and change regulations, not inconsistent with these By-laws, for the management of the Company's business and affairs. (10) To adopt and, unless otherwise provided therein, to amend and repeal, from time to time, bonus and supplemental compensation plans for employees (including employees who are officers or directors) of the Company or any subsidiary. Power to construe, interpret, administer, modify or suspend any such plan shall be vested in the Board of directors or a committee thereof. (11) To adopt a retirement plan, or plans, for the purpose of making retirement payments to employees -6- 7 (including employees who are officers or directors) of the Company or of any subsidiary thereof; and to adopt a group insurance plan, or plans, for the purpose of enabling employees (including employees who are officers or directors) of the Company or of any subsidiary thereof to acquire insurance protection; any such retirement plan or insurance plan, unless otherwise provided therein, shall be subject to amendment or revocation by the Board of Directors. (12) To delegate any of the powers of the Board of Directors in the course of the business of the Company to any officer, employee or agent, and to appoint any person the agent of the Company, with such powers (including the power to subdelegate) and upon such terms as the Board of Directors may think fit. SECTION 6. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors and each officer, in the performance of his or her duties, shall be fully protected in relying in good faith upon such information, opinions, reports or statements presented to the Company by any of its officers or employees, or by committees of the Board of Directors, or by any other person, as to matters such director, member or officer, as the case may be, reasonably believes are within such person's professional or expert competence and who has been selected with reasonable care by the Board of Directors or by any such committee, or in relying in good faith upon other records of the Company. SECTION 7. COMPENSATION OF DIRECTORS. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, services as members of committees of the Board of Directors; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Company in any other capacity and receiving compensation therefor. SECTION 8. MEETINGS BY MEANS OF CONFERENCE TELEPHONE. Unless otherwise provided by the Charter or these By-laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 8 shall constitute presence in person at such meeting. ARTICLE IV. COMMITTEES SECTION 1. COMMITTEES OF THE BOARD OF DIRECTORS. There are hereby established as committees of the Board of Directors an Audit Committee, a Compensation Committee and a Nominating Committee, each of which shall have the powers and functions set forth in Sections 2, 3 and 4 hereof, respectively, and such additional powers as may be delegated to it by the Board of Directors. The Board of Directors may from time to time establish additional standing committees or special committees of the Board of Directors, each of which shall have such powers and functions as may be delegated to it by the Board of Directors. The Board of Directors may abolish any committee established by or pursuant to this Section 1 as it may deem advisable. Each such committee shall consist of two or more directors, the exact number being determined from time to time by the Board of Directors. Designations of the chairman and members of each such committee, and, if desired, a vice chairman and alternates for members, shall be made by the Board of Directors. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Each committee shall have a secretary who shall be designated by its chairman. A vice chairman -7- 8 of a committee shall act as the chairman of the committee in the absence or disability of the chairman. SECTION 2. AUDIT COMMITTEE. The Audit Committee shall select and engage, on behalf of the Company, independent public accountants to (1) audit the books of account and other corporate records of the Company and (2) perform such other duties as the Audit Committee may from time to time prescribe. The Audit Committee shall transmit financial statements certified by such independent public accountants to the Board of Directors after the close of each fiscal year. The selection of independent public accountants for each fiscal year shall be made in advance of the annual meeting of stockholders in such fiscal year and shall be submitted for ratification or rejection at such meeting. The Audit Committee shall confer with such accountants and review and approve the scope of the audit of the books of account and other corporate records of the Company. The Audit Committee shall have the power to confer with and direct the officers of the Company to the extent necessary to review the internal controls, accounting practices, financial structure and financial reporting of the Company. From time to time the Audit Committee shall report to and advise the Board of Directors concerning the results of its consultation and review and such other matters relating to the internal controls, accounting practices, financial structure and financial reporting of the Company as the Audit Committee believes merit review by the Board of Directors. The Audit Committee also shall perform such other functions and exercise such other powers as may be delegated to it from time to time by the Board of Directors. SECTION 3. COMPENSATION COMMITTEE. The Compensation Committee shall fix from time to time the compensation of members of the Board of Directors who are officers or employees of the Company and of all members of the Management Committee of the Company who are officers or employees of the Company. The Compensation Committee shall also perform such functions as may be delegated to it under the provisions of any bonus, supplemental compensation, special compensation or stock option plan of the Company. SECTION 4. NOMINATING COMMITTEE. The Nominating Committee from time to time shall consider and make recommendations to the Board of Directors with respect to nominations or elections of directors and officers of the Company and the appointments of such other employees of the Company as shall be referred to the Nominating Committee. The Nominating Committee from time to time shall consider the size and composition of the Board of Directors and make recommendations to the Board of Directors with respect to such matters. Prior to the annual meeting of stockholders each year, and prior to any special meeting of stockholders at which a director is to be elected, the Nominating Committee shall recommend to the Board of Directors persons proposed to constitute the nominees whose election at such meeting will be recommended by the Board of Directors. The authority vested in the Nominating Committee by this Section 4 shall not derogate from the power of individual members of the Board of Directors to recommend or place in nomination persons other than those recommended by the Nominating Committee. The Nominating Committee also shall perform such other functions and exercise such other powers as may be delegated to it from time to time by the Board of Directors. SECTION 5. OTHER COMMITTEES. The Board of Directors, or any committee, officer or employee of the Company may establish additional standing committees or special committees to serve in an advisory capacity or in such other capacities as may be permitted by law, the Charter and these By-laws. The members of any such committee need not be members of the Board of Directors. Any committee established pursuant to this Section 5 may be abolished by the Board of Directors or by the person or body by whom it was established as he, she or it may deem advisable. Each such committee shall consist of two or more members, the exact number being determined from time to time by such person or body. -8- 9 Designations of members of each such committee and, if desired, alternates for members, shall be made by such person or body, at whose will all such members and alternates shall serve. The chairman of each such committee shall be designated by such person or body. Each such committee shall have a secretary who shall be designated by the chairman. SECTION 6. RULES AND PROCEDURES. Each committee may fix its own rules and procedures and shall meet at such times and places as may be provided by such rules, by resolution of the committee or by call of the chairman or vice chairman. Notice of meeting of each committee, other than of regular meetings provided for by its rules or resolutions, shall be given to committee members. The presence of one-third of its members, but not less than two, shall constitute a quorum of any committee, and all questions shall be decided by a majority vote of the members present at the meeting. All action taken at each committee meeting shall be recorded in minutes of the meeting. SECTION 7. APPLICATION OF ARTICLE. Whenever any provision of any other document relating to any committee of the Company named therein shall be in conflict with any provision of this Article IV, the provisions of this Article IV shall govern, except that if such other document shall have been approved by the stockholders, voting as provided in the Charter, or by the Board of Directors, the provisions of such other document shall govern. ARTICLE V. OFFICERS SECTION 1. OFFICERS. The Officers of the Company shall include a Chairman of the Board of Directors and may include one or more Vice Chairmen of the Board of Directors, each of whom shall be chosen from among the directors, a President and a Secretary, each of whom shall be elected by the Board of Directors to hold office until his or her successor shall have been chosen and shall have qualified. The Chairman of the Board of Directors or the President may elect or appoint one or more Senior Executive Vice Presidents, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer, a Comptroller, a General Counsel, one or more Assistant Vice Presidents, one or more Assistant Treasurers, one or more Assistant Comptrollers, one or more Assistant General Counsels, one or more Assistant Secretaries, and the Chairman of the Board of Directors or President may elect or appoint such other officers as such officer may deem necessary, or desirable, each of whom shall have such authority, shall perform such duties and shall hold office for such term as may be prescribed by the Board of Directors from time to time. Any person may hold at one time more than one office, excepting that the duties of the President and Secretary shall not be performed by one person. SECTION 2. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Company. Subject to the provisions of these By-laws and to the direction of the Board of Directors, he or she shall have ultimate authority for decisions relating to the general management and control of the affairs and business of the Company and shall perform all other duties and exercise all other powers commonly incident to the position of Chief Executive Officer or which are or from time to time may be delegated to him or her by the Board of Directors, or which are or may at any time be authorized or required by law. He or she shall preside at all meetings of the Board of Directors. He or she may redelegate from time to time and to the full extent permitted by law, in writing, to officers or employees of the Company any or all of such duties and powers, and any such redelegation may be either general or specific. Whenever he or she so shall delegate any of his or her authority, he or she shall file a copy of the redelegation with the Secretary of the Company. -9- 10 SECTION 3. VICE CHAIRMEN OF THE BOARD OF DIRECTORS. Subject to the provisions of these By-laws and to the direction of the Board of Directors and of the Chief Executive Officer, the Vice Chairmen of the Board of Directors shall have such powers and shall perform such duties as from time to time may be delegated to them by the Board of Directors or by the Chief Executive Officer, or which are or may at any time be authorized or required by law. SECTION 4. PRESIDENT. Subject to the provisions of these By-laws and to the direction of the Board of Directors and of the Chief Executive Officer, the President shall have such powers and shall perform such duties as from time to time may be delegated to him or her by the Board of Directors or by the Chief Executive Officer, or which are or may at any time be authorized or required by law. SECTION 5. SENIOR EXECUTIVE VICE PRESIDENTS, EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. Each of the Senior Executive Vice Presidents, each of the Executive Vice Presidents, each of the Senior Vice Presidents and each of the other Vice Presidents shall have such powers and shall perform such duties as may be delegated to him or her by the Board of Directors, the Chairman of the Board of Directors, the President or such other officer or officers to whom he or she is directly responsible. SECTION 6. TREASURER AND ASSISTANT TREASURER. The Treasurer, subject to the direction of the Board of Directors, shall have the care and custody of all funds and securities of the Company which may come into his or her hands. When necessary or proper he or she shall endorse on behalf of the Company, for collection, checks, notes and other obligations, and shall deposit all funds of the Company in such banks or other depositaries as may be designated by the Board of Directors or by such officers or employees as may be authorized by the Board of Directors so to designate. He or she shall perform all acts incident to the office of Treasurer, subject to the control of the Board of Directors and such other officer or officers to whom he or she is directly responsible. He or she may be required to give a bond for the faithful discharge of his or her duties, in such sum and upon such conditions as the Board of Directors may require. At the request and direction of the Treasurer or, in the case of his or her absence or inability to act, any Assistant Treasurer may act in his or her place. In the case of the death of the Treasurer, or in the case of his or her absence or inability to act without having designated an Assistant Treasurer to act temporarily in his or her place, the Assistant Treasurer so to perform the duties of the Treasurer shall be designated by the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President or an Executive Vice President. SECTION 7. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall keep full and accurate minutes of the meetings of the stockholders and of the Board of Directors in the proper record book of the Company provided therefor, and, when required, the minutes of meetings of the committees, and shall be responsible for the custody of all such minutes. Subject to the direction of the Board of Directors, the Secretary shall have custody of the stock ledgers and documents of the Company. He or she shall have custody of the corporate seal of the Company and shall affix and attest such seal to any instrument whose execution under seal shall have been duly authorized. He or she shall give due notice of meetings and, subject to the direction of the Board of Directors, shall perform all other duties commonly incident to his or her office or as properly required of him or her by the Chairman of the Board of Directors and such other officer or officers to whom he or she is directly responsible and shall enjoy all other powers commonly incident to his or her office. At the request and direction of the Secretary or, in the case of his or her absence or inability to act, any Assistant Secretary may act in his or her place. In the case of the death of the Secretary, or in the case of his or her absence or inability to act without having designated an Assistant Secretary to act temporarily in his or her place, the Assistant Secretary or other person so to perform the duties of the Secretary shall be designated by the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President or an Executive Vice President. -10- 11 SECTION 8. ASSISTANT VICE PRESIDENTS AND OTHER OFFICERS. Each assistant vice president and other officers shall perform such duties commonly incident to his or her office or as properly required of him or her by the Chairman of the Board of Directors and such other officer or officers to whom he or she is directly responsible. SECTION 9. GENERAL COUNSEL. The General Counsel shall have general supervision of all matters of a legal nature concerning the Company. He or she shall perform all such duties commonly incident to his or her office or as properly required of him or her by the Chairman of the Board of Directors and such other officer or officers to whom he or she is directly responsible. SECTION 10. COMPTROLLER. The Comptroller shall keep and maintain the books of account of the Company in such manner that they fairly present the financial condition of the Company and its subsidiaries. The Comptroller shall have such powers and shall perform such duties as may be delegated to him or her by the Board of Directors, the Chairman of the Board of Directors, the President or the appropriate Executive Vice President, Senior Vice President or Vice President or such other officer or officers to whom he or she is directly responsible. SECTION 11. SALARIES. Salaries of officers, agents or employees shall be fixed from time to time by the Board of Directors or by such committee or committees, or person or persons, if any, to whom such power shall have been delegated by the Board of Directors. An employment contract, whether with an officer, agent or employee, if expressly approved or specifically authorized by the Board of Directors, may fix a term of employment thereunder; and such contract, if so approved or authorized, shall be valid and binding upon the Company in accordance with the terms thereof, provided that this provision shall not limit or restrict in any way the right of the Company at any time to remove from office, discharge or terminate the employment of any such officer, agent or employee prior to the expiration of the term of employment under any such contract. SECTION 12. VACANCIES. A vacancy in any office filled by election of the Board of Directors may be filled by the Board of Directors by the election of a new officer who shall hold office, subject to the provisions of this Article V, until the regular meeting of the directors following the next annual meeting of the stockholders and until his or her successor is elected. SECTION 13. REMOVAL OR DISCHARGE. Any officer may be removed or discharged by the Chairman of the Board of Directors at any time excepting an officer who is also a director. Any officer who also is a director may be discharged at any time by the Board of Directors. ARTICLE VI. RESIGNATIONS Any director, officer or agent of the Company, or any member of any committee, may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President or the Secretary of the Company. Any such resignation shall take effect at the time specified therein, or if the time be not specified therein, then upon receipt thereof. The acceptance of such resignation shall not be necessary to make it effective. -11- 12 ARTICLE VII. CAPITAL STOCK - DIVIDENDS - SEAL SECTION 1. CERTIFICATES OF SHARES. The certificates for shares of the capital stock of the Company shall be in such form, not inconsistent with the Charter, as shall be approved by the Board of Directors. The certificates shall be numbered and signed by the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President, an Executive Vice President, a Senior Vice President or a Vice President, and also by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. Any and all signatures may be facsimiles. All certificates shall bear the name of the persons owning the shares represented thereby, shall state the number of shares represented by such certificate and the date of issue; and such information shall be entered in the Company's original stock ledger. SECTION 2. ADDRESSES OF STOCKHOLDERS. It shall be the duty of every stockholder to notify the Company of his or her post office address and of any change therein. The latest address furnished by each stockholder shall be entered on the original stock ledger of the Company and the latest address appearing on such original stock ledger shall be deemed conclusively to be the post office address and the last-known post office address of such stockholder. If any stockholder shall fail to notify the Company of his or her post office address, it shall be sufficient to send corporate notices to such stockholder at the address, if any, understood by the Secretary to be his or her post office address, or in the absence of such address, to such stockholder, at the General Post Office in the City of Wilmington, State of Delaware. SECTION 3. LOST, DESTROYED OR STOLEN CERTIFICATE. Any person claiming a stock certificate in lieu of one lost, destroyed or stolen, shall give the Company an affidavit as to his, her or its ownership of the certificate and of the facts which go to prove that it has been lost, destroyed or stolen. If required by the Board of Directors, he, she or it also shall give the Company a bond, in such form as may be approved by the Board of Directors, sufficient to indemnify the Company against any claim that may be made against it on account of the alleged loss of the certificate or the issuance of a new certificate. A new certificate shall be issued upon receipt of such an affidavit and, if required, upon the giving of such a bond. SECTION 4. RECORD OF HOLDER OF SHARES. The Company shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claims to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the General Corporation Law of the State of Delaware. The Company shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner. SECTION 5. RECORD DATE. In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock (other than conversions or exchanges pursuant to Article 4 of the Charter) or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of -12- 13 rights or to exercise any rights of change, conversion or exchange of stock (other than conversions or exchanges pursuant to Article 4 of the Charter) or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. If stockholders are entitled to consent to corporate action in writing without a meeting in accordance with the General Corporation Law of the State of Delaware and the Charter, in order that the Company may determine the stockholders entitled to so consent, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall be not more than ten (10) days after the date upon which the resolution fixing the record date is adopted and no record date has been fixed by the Board of Directors and if no prior action by the Board of Directors is required by the General Corporation Law of the State of Delaware, the record date shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company in the manner prescribed by Article 12 of the Charter. If stockholders are entitled to consent to corporate action in writing without a meeting in accordance with the General Corporation Law of the State of Delaware and the Charter, and no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law of the State of Delaware with respect to the proposed action by written consent of the stockholders, the record date for determining stockholders entitled to consent to corporate action in writing shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. SECTION 6. REGULATIONS. The Board of Directors shall have power and authority to make all such rules and regulations not inconsistent with any of the provisions of Article 4 of the Charter, as it may deem expedient, concerning the issue, transfer and registration of certificates for shares of the stock of the Company. SECTION 7. CORPORATE SEAL. The corporate seal shall be in such form as shall from time to time be approved by the Board of Directors. If and when so authorized by the Board of Directors, a duplicate of the seal may be kept and used by the Secretary or Treasurer or by any Assistant Secretary or Assistant Treasurer. ARTICLE VIII. EXECUTIVE OF CONTRACTS AND OTHER DOCUMENTS SECTION 1. CONTRACTS, ETC. Except as otherwise prescribed in these By-laws, such officers, employees or agents of the Company as shall be specified by the Board of Directors shall sign, in the name and on behalf of the Company, all deeds, bonds, contracts, mortgages and other instruments or documents, the execution of which shall be authorized by the Board of Directors; and such authority may be general or confined to specific instances. Except as so authorized by the Board of Directors, no officer, agent or employee of the Company shall have power or authority to bind the Company by any contract or engagement or to pledge, mortgage, sell or otherwise dispose of its credit or any of its property or to render it pecuniarily liable for any purpose or in any amount. SECTION 2. CHECKS, DRAFTS, ETC. Except as otherwise provided in these By-laws, all checks, drafts, notes, bonds, bills of exchange or other -13- 14 orders, instruments or obligations for the payment of money shall be signed by such officer or officers, employee or employees, or agent or agents, as the Board of Directors shall by resolution direct. The Board of Directors may, in its discretion, also provide by resolution for the countersignature or registration of any or all such orders, instruments or obligations for the payment of money. ARTICLE IX. FISCAL YEAR The fiscal year of the Company shall begin the first day of January in each year. ARTICLE X. MISCELLANEOUS SECTION 1. ORIGINAL STOCK LEDGER. As used in these By-laws and in the Charter, the words "original stock ledger" shall mean the record maintained by the Secretary of the Company of the name and address of each of the holders of shares of any class of stock of the Company, and the number of shares and the numbers of the certificates for such shares held by each of them, taking into account transfers at the time made by and recorded on the transfer sheets of each of the Transfer Agents of the Company although such transfers may not have been posted in the record maintained by the Secretary. SECTION 2. NOTICES AND WAIVERS THEREOF. Whenever any notice whatever is required by these By-laws, the Charter or any of the laws of the State of Delaware to be given to any stockholder, director or officer, such notice, except as otherwise provided by the laws of the State of Delaware, may be given personally or by telephone or be given by facsimile transmission or other form of electronic communication, addressed to such stockholder at the address set forth as provided in Section 2 of Article VII of these By-laws, or to such director or officer at his or her Company location, if any, or at such address as appears on the books of the Company, or the notice may be given in writing by depositing the same in a post office, or in a regularly maintained letter box, or by sending it via courier in a postpaid, sealed wrapper addressed to such stockholder at the address set forth in Section 2 of Article VII of these By-laws, or to such director or officer at his or her Company location, if any, or such address as appears on the books of the Company. Any notice given by facsimile transmission or other form of electronic communication shall be deemed to have been given when it shall have been transmitted. Any notice given by mail or courier shall be deemed to have been given when it shall have been mailed or delivered to the courier. A waiver of any such notice in writing, including by facsimile transmission, signed or dispatched by the person entitled to such notice or by his or her duly authorized attorney, whether before or after the time stated therein, shall be deemed equivalent to the notice required to be given, and the presence at any meeting of any person entitled to notice thereof shall be deemed a waiver of such notice as to such person. SECTION 3. VOTING UPON STOCKS. The Board of Directors (whose authorization in this connection shall be necessary in all cases) may from time to time appoint an attorney or attorneys or agent or agents of the Company, or may at any time or from time to time authorize the Chairman of the Board of Directors, any Vice Chairman of the Board of Directors, the President, any Senior Executive Vice President, any Executive Vice President, any Senior Vice President, any Vice President, the Treasurer or the Secretary to appoint an attorney or attorneys or agent or agents of the Company, in the name and on behalf of the Company, to cast the votes which the Company may be entitled to cast as a stockholder or otherwise in any other corporation or association, any of the stock or securities of which may be held by the Company, at meetings of the holders of the stock or other securities of such other corporation or association, or to consent in writing to any -14- 15 action by any such other corporation or association and the Board of Directors or any aforesaid officer so authorized may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and the Board of Directors or any aforesaid officer so authorized may from time to time authorize the execution and delivery, on behalf of the Company and under its corporate seal, or otherwise, of such written proxies, consents, waivers or other instruments as may be deemed necessary or proper in the premises. ARTICLE XI. AMENDMENTS These By-laws may be altered, amended or repealed at any meeting of the Board of Directors or of the stockholders, provided that notice of such alteration, amendment or repeal be contained in the notice of such meeting of the Board of Directors or stockholders (subject, in the case of meetings of stockholders, to the provisions of Article II of these By-laws), as the case may be. All such amendments must be approved by the affirmative vote of the holders of at least 75% of the total voting power of all classes of outstanding capital stock, voting together as a single class (if effected by action of the stockholders), or by the affirmative vote of directors constituting not less than a majority of the total number of directors that the Company would have if there were no vacancies on the Company's Board of Directors (if effected by action of the Board of Directors). -15- EX-10.1 3 FORM OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, effective as of _______________, 1999 (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 Executive (the "Executive"), WITNESSETH: WHEREAS, the Company and the Executive desire to enter into an agreement relating 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 _________________, 1999 (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 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 2 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 $Salary, 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 2 3 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 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 3 4 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 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 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, 4 5 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 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 5 6 (c) to continue to receive, for two 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). 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: 6 7 (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; (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 7 8 (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 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 8 9 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 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 9 10 (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 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 10 11 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: (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; 11 12 (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 contested claim shall be limited to issues with respect to which a Gross-Up Payment 12 13 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 13 14 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 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 14 15 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 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 24-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 24-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 15 16 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. 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 16 17 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. 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 11.4. 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 17 18 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 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 18 19 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 ________________, 1999. ----------------------------------- (Executive) ASSOCIATES CORPORATION OF NORTH AMERICA (A Texas Corporation) By: -------------------------------- Michael E. McGill Executive Vice President 19 EX-10.7 4 INCENTIVE COMPENSATION PLAN STOCK OPTION AWARD 1 EXHIBIT 10.7 ASSOCIATES FIRST CAPITAL CORPORATION INCENTIVE COMPENSATION PLAN STOCK OPTION AWARD AGREEMENT - 2000 You have been selected to become a Participant in the Associates First Capital Corporation Incentive Compensation Plan (the "Plan") for 2000, 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:
- ------------------------------------------------------------------------------------------------ Percentage Number of Shares Available Cumulative Number of Shares Date Exercisable for Purchase as of this Date* Available for Purchase* - ------------------------------------------------------------------------------------------------ 33 1/3% ______________ Shares ______________ Shares 66 2/3% ______________ Shares ______________ Shares** 100% ______________ Shares ______________ Shares** - ------------------------------------------------------------------------------------------------
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. 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. Further, the Company reserves the right to limit the manner in which the Option may be exercised at any time, and from time to time, for Participants in a given country to facilitate or ensure compliance with local law or for reasons of administrative ease. (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 such interest (if any), to the Company not later than the date on which the sale transaction will settle in the 2 3 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 or a Company Subsidiary (as hereinafter defined) is required by law to withhold any federal, state, national, provincial or other tax, pension or insurance withholding obligations imposed by any governmental authority under applicable law 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 or the Company Subsidiary (either directly or through their respective designees) 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, 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 3 4 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. 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. 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 a Participant's employment with the Company or a Company Subsidiary on or after such date as the Participant is eligible to commence pension payments under the Company's defined benefit pension plan (excluding any payment of benefits attributable to a prior employer's plan) or, if applicable, separate pension plan sponsored by the Company or a Company Subsidiary or other pension benefit plan as may be required under applicable law in effect in any jurisdiction outside the United States, in each case as such plan is then in effect. The term "Disability" when used herein shall mean a Participant's complete and total disability as determined under the Company's long-term disability plan or, if applicable, separate similar plan in effect or as may be required under applicable law in any jurisdiction outside the United States, in each case as such plan is 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 or a Company Subsidiary 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 or a Company Subsidiary 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, Company Subsidiary or any of their affiliates, (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, Company Subsidiary or any of their affiliates or in any activity that is inimical to the best interests of the Company, Company Subsidiary or any of their affiliates, or (e) the Participant's violation of Company policy covering standards of corporate conduct. If the Company or a Company Subsidiary terminates the Participant's employment for 4 5 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 or Company Subsidiary for Cause or resignation, the portion of the Option that is vested as of the date of termination of employment may be exercised to the extent permitted under the provisions hereof until the earlier of (i) the Date 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 or any of their affiliates. (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 any of their affiliates 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 any of their affiliates. 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 any of their affiliates 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 applicable law and court supervision, if legally required, 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 5 6 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 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 or a Company Subsidiary) 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 or a Company Subsidiary 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. The grant of the Option to the Participant does not create a right to continued employment with the Company or any Company Subsidiary. Nothing in this Agreement shall interfere with or limit in any way the right of the Company or a Company Subsidiary 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 or any Company Subsidiary. 11. COMPLIANCE WITH LAW. The Company shall make reasonable efforts to comply with all applicable federal, state, national and provincial securities laws or other 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 under any of the aforementioned securities laws or other requirements, including, without limitation, restrictions of any securities exchange or market upon which such Shares are then listed and/or traded. 12. DATA PROTECTION. By executing this Agreement, the Participant consents to the Company or the Company Subsidiary that directly employs the Participant and any agent or independent 6 7 contractor appointed by the Company to administer the Stock Option Awards under the Plan and this Agreement to obtain and maintain any personal information from the Participant's employer, and to disclose and transfer such information to each other and/or third parties as may be required, whether locally or abroad, for the effective administration of the Stock Option Awards. Neither the Company, the Company Subsidiary nor any agent or independent contractor shall be liable for any loss or damage, whether direct or indirect or consequential, incurred by the Participant and arising from the use of such personal information as authorized herein. 13. 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 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, state, national and provincial securities law and other 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. 7 8 (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 in nature and is not to be considered part of any Participant's salary or compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-term service awards, pension or retirement benefits, or similar payments except as otherwise required under local law. 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. 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 8 EX-12 5 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 ASSOCIATES FIRST CAPITAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollar Amounts In Millions)
Year Ended December 31 ---------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Fixed Charges (a) Interest expense ............. $3,906.5 $3,196.7 $2,775.2 $2,456.0 $2,177.9 Implicit interest in rent .... 30.0 22.9 20.3 17.1 13.8 -------- -------- -------- -------- -------- Total fixed charges ..... $3,936.5 $3,219.6 $2,795.5 $2,473.1 $2,191.7 ======== ======== ======== ======== ======== Earnings (b) ...................... $2,376.9 $1,940.5 $1,640.0 $1,404.6 $1,198.1 Fixed charges ..................... 3,936.5 3,219.6 2,795.5 2,473.1 2,191.7 -------- -------- -------- -------- -------- Earnings, as defined ......... $6,313.4 $5,160.1 $4,435.5 $3,877.7 $3,389.8 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 1.60 1.60 1.59 1.57 1.55 ======== ======== ======== ======== ========
- ---------- (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. EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Subsidiaries
Incorporation Name ---------------------------------------------- Jurisdiction Country ---------------------- ----------------------- Associates First Capital Corporation Delaware United States Associates Financial Services (Asia) Limited Hong Kong Hong Kong ERA Master Limited Hong Kong Hong Kong ACONA B.V. Netherlands Netherlands Associates Financial Corporation Limited England & Wales United Kingdom Associates Capital Corporation plc England & Wales United Kingdom ACC Locavia SA France France ACC Locavia SAS France France EXMAT France France Prestige Property Co. Limited Guernsey, C.I. Guernsey, C.I. Steeple Finance Limited Jersey, C.I. Jersey, C.I. ACC Print Limited England & Wales United Kingdom Associates Capital (Guernsey) Limited Guernsey, C.I. United Kingdom Associates Commercial Corporation Limited United Kingdom United Kingdom Associates Fleet Services (Ltd) Newcourt United Kingdom United Kingdom Associates (Isle of Man) Limited England United Kingdom Autoclub International Limited England & Wales United Kingdom Associates Relocation Management Company Europe Limited United Kingdom United Kingdom Avco Group Limited United Kingdom United Kingdom AFS (Pension Trustees) Limited United Kingdom United Kingdom Avco Trust Plc United Kingdom United Kingdom Associates Capital (Jersey) Limited Jersey, C.I. United Kingdom Medens (Jersey) Limited Jersey, C.I. United Kingdom
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Incorporation Name ---------------------------------------------- Jurisdiction Country ---------------------- ----------------------- Steeple Finance (Guernsey) Limited Guernsey, C.I. Guernsey, C.I. Everyday Finance Limited Ireland Ireland Castle Loss Adjusters Limited United Kingdom United Kingdom ACC Leasing Limited United Kingdom United Kingdom Associates leasing Limited United Kingdom United Kingdom Associates Mortgage Corporation Limited England & Wales United Kingdom Avco Capital Limited United Kingdom United Kingdom Avco Financial Services Limited United Kingdom United Kingdom Avco Financial Services (U.K.) Limited United Kingdom United Kingdom Avco Funding Limited United Kingdom United Kingdom Avco Leasing Limited United Kingdom United Kingdom Avco Limited United Kingdom United Kingdom CEF Limited England & Wales 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 Construction Equipment Finance Limited England & Wales United Kingdom Construction Machinery Finance Limited England & Wales United Kingdom Medens Trust Limited England & Wales United Kingdom Red Dragon Securities Limited United Kingdom United Kingdom Wessex Finance Corporation Limited England United Kingdom Cumberland Insurance Company Limited Scotland United Kingdom Cumberland Life Assurance Co. Limited England & Wales United Kingdom Avco Financial Services Limited Hong Kong Hong Kong Hallmark General Insurance Company Limited Hong Kong Hong Kong Avco Financial Services Ltd. New Zealand New Zealand 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 177463 Canada Inc. Canada Canada Associates Commercial Corporation of Canada Ltd. Ontario Canada Associates Capital Limited Ontario Canada Insurex Canada, Inc. Alberta Canada Payplan Canada, Inc. Canada Canada
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Incorporation Name ---------------------------------------------- Jurisdiction Country ---------------------- ----------------------- Teletech Financial Corporation Canada Canada The Associates Corporation Delaware United States Associates Financial Services of Canada Ltd. Canada Canada 1113612 Ontario Inc. Ontario Canada 177462 Canada Inc. Canada Canada 2659158 Canada Inc. Canada Canada Associates Financial Services of Canada East Company Nova Scotia Canada London and Midland General Insurance Company Canada-Federal Canada Provincial Trust Company Canada-Federal Canada Associates Mortgage Corporation Ontario Canada 1140186 Ontario Inc. Ontario Canada Associates Mortgage East Corporation Nova Scotia 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 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 Capital Investments, L.L.C. Delaware United States Associates Commercial Corporation of Delaware Delaware United States Associates Credit Services, Inc. Delaware United States Associates Capital Bank, Inc. Utah United States Associates Insurance Group, Inc. Delaware United States Associates Life Insurance Group, Inc. Delaware United States Associates Financial Life Insurance Company Tennessee United States Associates Insurance Company Indiana United States Commercial Guaranty Insurance Company Delaware United States Capco General Agency, Inc. Illinois United States Capco General Agency, Inc. New York United States Capco General Agency, Inc. Virginia United States AFSC General Agency, Inc. Texas United States Associates Financial Life Insurance Company of Texas Texas 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 Associates World Capital Corporation Delaware United States Associates World Credit Corporation Delaware United States Associates First Capital BV Netherlands Netherlands
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Incorporation Name ---------------------------------------------- Jurisdiction Country ---------------------- ----------------------- 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 Finance, Inc. Puerto Rico United States Associates Financial Services Company, Inc. Puerto Rico United States Associates Time Plan, Inc. Puerto Rico United States 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 Associates Investment Company Delaware United States Associates Diversified Services, Inc. Delaware United States Associates Financial Services Company, Inc. Delaware United States AFSC Agency of Alabama, Inc. Alabama United States Associates Financial Services Company, Inc. Alabama United States Associates Financial Services Company of Alabama, Inc. Alabama United States AFSC Agency, Inc. Arizona United States AFSC Agency, Inc. Arkansas United States AFSC Agency, Inc. California United States Associates Financial Services Company of California, Inc. California United States A.R.C. Escrow Co. California United States Dove Escrow Co. California United States Northwest Escrow Company Colorado United States Associates Financial Services Company of Connecticut, Inc. Connecticut United States Avco Financial Services of Connecticut, Inc. Connecticut United States Associates Financial Services of America, Inc. Connecticut United States AFSC Agency, Inc. Delaware United States Associates Lloyds Insurance Company Texas United States Associates Consumer Finance Company Delaware United States Associates Consumers Money Order, Inc. Delaware United States Associates Financial Services Company of Texas, Inc. Delaware United States EnTerra Settlement Services, Inc. Delaware United States EnTerra Settlement Services of Texas, Inc. Texas United States RentMart Rent to Own, Inc. Delaware United States Signal Credit Corporation Delaware United States Signal Finance Mortgage Company, Inc. Delaware United States Associates Financial Services Company of Florida, Inc. Florida United States Associates Financial Services of America, Inc. Florida United States Southern Escrow Company Florida United States
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Incorporation Name ---------------------------------------------- Jurisdiction Country ---------------------- ----------------------- Associates Financial Services Corporation Georgia United States Associates Financial Services of America, Inc. Georgia United States First Family Home Equity, Inc. Georgia United States First Family Financial Services Management Corp. Georgia United States First Family Financial Services, Inc. Alabama United States First Family Financial Services, Inc. Florida United States First Family Home Equity, Inc. Florida United States First Family Financial Services of Georgia, Inc. Georgia United States First Family Financial Services, Inc. Indiana United States First Family Financial Services, Inc. Louisiana United States First Family Financial Services, Inc. Mississippi United States First Family Financial Services, Inc. South Carolina United States First Family Financial Services, Inc. Tennessee United States AFSC Agency, Inc. Hawaii United States Associates Financial Services Company of Hawaii, Inc. Hawaii United States AFSC Agency, Inc. Idaho United States Associates Finance, Inc. Illinois United States Northern Insurance Agency, Inc. Illinois United States AFSC Insurance Company, Inc. Indiana United States Associates Auto Club Services, Inc. Indiana United States Associates Auto Club Services International, Inc. Delaware United States Associates Autoclub, S. de R.L. de C.V. Mexico Mexico Associates Auto Club Services Company Nova Scotia Canada United States Auto Club, Motoring Division, Inc. Indiana United States Associates Financial Services Company of Tennessee, Inc. Indiana United States Watchguard Registration Services, Inc. Indiana United States Associates Finance, Inc. Iowa United States AFSC Agency, Inc. Kentucky United States Associates Financial Services Company of Kentucky, Inc. Kentucky United States Associates Mortgage Company Kentucky United States Kentucky Finance Co., Inc. Kentucky United States Capital Insurance Agency, Inc. Kentucky United States First Insurance Agency, Inc. Kentucky United States Kentucky Finance, Inc. Kentucky United States Kentucky Finance Equity Services, Inc. Kentucky United States Third Insurance Agency, Inc. Kentucky United States Second Insurance Agency, Inc. Missouri United States KFC Mortgage Loans, Inc. Virginia United States Kentucky Finance, Inc. West Virginia United States AFSC Agency, Inc. Louisiana United States Associates Financial Services Company of Maine, Inc. Maine United States Allied Financial Services Insurance Agency, Inc. Massachusetts United States Associates Financial Services Company of Massachusetts, Inc.. Massachusetts United States Associates Financial Services of America, Inc. Massachusetts United States
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Incorporation Name ---------------------------------------------- Jurisdiction Country ---------------------- ----------------------- Capco General Agency, Inc. Michigan United States Associates Industrial Loan Company Minnesota United States AFSC Agency, Inc. Mississippi United States Associates Financial Services Company of Missouri, Inc. Missouri United States Associates Financial Services of America, Inc. Missouri United States AFSC Agency, Inc. Montana United States AFSC Agency, Inc. Nevada United States Associates Financial Life Insurance Company of Nevada Nevada United States Associates Financial Services Company of Nevada, Inc. Nevada United States Associates Insurance Agency, Inc. Nevada United States Associates Mortgage Corporation Nevada United States Associates Financial Services Company of New Jersey, Inc. New Jersey United States Associates Financial Services Corporation New Jersey United States AFSC Agency, Inc. New Mexico United States Associates Financial Services Company of New York, Inc. New York United States Associates Home Equity Services, Inc. New York United States AHES REIT Corporation Delaware United States Associates Home Equity Receivables Corp. Delaware United States Associates Home Equity Loan Corporation Florida United States Associates Home Equity Industrial Loan Company Minnesota United States Associates Home Equity Consumer Discount Company, Inc. Pennsylvania United States AFSC Agency, Inc. North Carolina United States Associates Financial Services Company of North Carolina, Inc. North Carolina United States Associates Financial Services of America, Inc. North Carolina United States Morco General Agency, Inc. Ohio United States Associates Financial Services Company of Oregon, Inc. Oregon United States Associates Consumer Discount Company Pennsylvania United States Signal Finance Consumer Discount Company Pennsylvania United States Associates Financial Services Company of Rhode Island, Inc. Rhode Island United States Avco Financial Services of Rhode Island, Inc. Rhode Island United States Associates Financial Services Corporation Rhode Island United States TranSouth Financial Corporation South Carolina United States TranSouth Leasing Corporation Delaware United States TranSouth Financial Corporation of Iowa Iowa United States TranSouth Mortgage Corporation South Carolina United States AFSC Agency, Inc. South Dakota United States Associates REO Realty, Inc. Texas United States Liquidation Collections, Inc. Texas United States Shoppers Mart, Inc. Texas United States
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Incorporation Name ---------------------------------------------- Jurisdiction Country ---------------------- ----------------------- AFSC Agency, Inc. Virginia United States Associates Financial Services Company of Virginia, Inc. Virginia United States Associates Financial Services of America, Inc. Virginia United States AFSC Agency, Inc. Washington United States Associates Financial Services Company of Washington, Inc. Washington United States Associates Financial Services of America, Inc. Washington United States Associates Financial Services Company of West Virginia, Inc. West Virginia United States Associates Financial Services of America, Inc. West Virginia United States AFSC Agency, Inc. Wyoming United States Associates Commercial Corporation Delaware United States Associates Commercial Corporation Alabama United States Associates Commercial Leasing Company, Inc. Delaware United States Great Dane Finance Company Delaware United States Premium Lease & Finance, LLC Delaware United States VT Finance, Inc. Delaware United States Associates Capital Services Corporation Indiana United States Associates Leasing, Inc. Indiana United States United States Fleet Leasing, Inc. California United States Associates Rental Systems, Inc. Delaware United States Associates/Trans-National Leasing, Inc. Delaware United States Fleetmark, Inc. Tennessee United States Capco General Agency, Inc. Indiana United States Associates Commercial Corporation of Louisiana Louisiana United States Fruehauf Finance Company Michigan United States Associates Credit Card Services, Inc. Delaware United States Associates Credit Card Receivables Corp. Delaware United States Associates Private Label Receivables Corp. Delaware United States 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 Atlantic General Insurance Limited Bermuda Bermuda Atlantic Reinsurance Limited Bermuda Bermuda Avco Financial Services Ltd. Bermuda Bermuda 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
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Incorporation Name ---------------------------------------------- Jurisdiction Country ---------------------- ----------------------- 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 Associates Credit Card Taiwan Inc. Taiwan Rep. of China Avco Sociedade Gestora de Participacoes Sociais, S.A. Madeira Portugal Avco Financial Services (Mauritius) LLC Mauritius Mauritius Associates India Financial Services Private Limited India India Associates Finance of Virgin Islands, L.L.C. Delaware United States Avco Financial Services Limited Northern Ireland United Kingdom Avco Foundation California United States Family Insurance Corporation Wisconsin United States The Northland Company Minnesota United States Jupiter Holdings, Inc. Minnesota United States Alternative Market Specialists, LLP Minnesota United States American Equity Insurance Company Arizona United States American Equity Specialty Insurance Company California United States Mendota Insurance Company Minnesota United States Mendakota Insurance Company Minnesota United States Northland Insurance Company Minnesota United States Northland Casualty Company Minnesota United States Northfield Insurance Company Missouri United States Northland Risk Management Services, Inc. Minnesota United States Hurley State Bank South Dakota United States Associates Commerce Solutions, Inc. Delaware United States ACS Teleservices, Inc. Delaware United States MedCash, Inc. Delaware United States MedCash Health Systems, L.P. Delaware United States Quality Asset Management, Inc. Delaware United States AFCC Newco, Inc. Minnesota United States Associates Asset Backed Securities Corp. Delaware United States
Page 8 EX-23 7 CONSENT OF INDEPENDENT PUBLIC AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-86745, Form S-8 No. 333-86497, Form S-8 No. 333-09215, Form S-8 No. 333-12145, Form S-8 No. 333-19417, Form S-8 No. 333-24727, Form S-8 No. 333-49049, Form S-8 No. 333-68245, Form S-3 No. 333-62875, Form S-3 No. 333-62875-01, Form S-3 No. 333-62875-02 and Form S-3 No. 333-92875-03) of our report dated January 27, 2000, with respect to the consolidated financial statements of Associates First Capital Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ ERNST & YOUNG LLP Dallas, Texas March 28, 2000 EX-24 8 POWER OF ATTORNEY 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, 1999, 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, 2000. Signature: /s/ KEITH W. HUGHES Signature: /s/ JUDY JOLLEY MOHRAZ --------------------------- -------------------------- Name: Keith W. Hughes Name: Judy Jolley Mohraz 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: Executive 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 Signature: /s/ WILLIAM M. ISAAC --------------------------- Name: William M. Isaac Title: Director
EX-27 9 FINANCIAL DATA SCHEDULE
5 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, 1999 AND THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1999 DEC-31-1999 1,026 7,177 68,817 2,174 0 0 662 0 82,957 0 68,657 0 0 7 9,793 82,957 12,131 12,131 0 9,754 4,341 1,506 3,907 2,377 887 1,490 0 0 0 1,490 2.05 2.04
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