<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 1-6154
ASSOCIATES CORPORATION OF NORTH AMERICA
(Exact name of registrant as specified in its charter)
Delaware 74-1494554
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 East Carpenter Freeway, Irving, Texas 75062-2729
(Address of principal executive offices)
(Zip Code)
972-652-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes..X.. No.....
<PAGE>
As of March 31, 2000, the registrant had 260 shares of Common Stock and
1,000,000 shares of Class B Common Stock issued and outstanding, all of which
were owned directly or indirectly by Associates First Capital Corporation.
The registrant meets the conditions set forth in General Instruction H.(1)(a)
and (b) to Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF EARNINGS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
---- ----
<S> <C> <C>
REVENUE
Finance charges $1,447.2 $1,517.5
Servicing related income 37.1 1.5
Insurance premiums 104.2 95.2
Investment and other income 270.1 247.6
-------- --------
1,858.6 1,861.8
EXPENSES
Interest expense 743.1 720.3
Operating expenses 440.0 461.6
Provision for losses on finance
receivables 223.5 236.6
Insurance benefits paid or provided 43.0 36.6
-------- --------
1,449.6 1,455.1
-------- --------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 409.0 406.7
PROVISION FOR INCOME TAXES 146.6 145.9
-------- --------
NET EARNINGS $ 262.4 $ 260.8
======== ========
</TABLE>
See notes to consolidated interim financial statements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(Dollars In Millions, Except Share Information)
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 676.3 $ 333.3
INVESTMENTS IN DEBT AND EQUITY SECURITIES 2,883.8 2,666.9
FINANCE RECEIVABLES, net of unearned finance
income, allowance for losses and
insurance policy and claims reserves 46,150.3 47,517.5
NOTES RECEIVABLE FROM RELATED PARTIES 7,670.0 5,975.4
OTHER ASSETS 4,835.3 3,687.0
--------- ---------
Total assets $62,215.7 $60,180.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $15,092.1 $13,672.9
Bank Loans - 990.7
ACCOUNTS PAYABLE AND ACCRUALS 1,675.1 1,398.9
LONG-TERM DEBT
Senior Notes 35,493.2 34,413.1
Subordinated and Capital Notes 425.2 425.2
-------- --------
35,918.4 34,838.3
STOCKHOLDERS' EQUITY
Class B Common Stock, $100 par value,
2,000,000 shares authorized, 1,000,000
shares issued and outstanding 100.0 100.0
Common Stock, no par value, 5,000 shares
authorized, 260 shares issued and
outstanding, at stated value 47.0 47.0
Paid-in Capital 3,587.1 3,587.1
Retained Earnings 5,826.0 5,563.6
<PAGE>
Accumulated Other Comprehensive Loss (30.0) (18.4)
--------- ---------
Total stockholders' equity 9,530.1 9,279.3
--------- ---------
Total liabilities and stockholders' equity $62,215.7 $60,180.1
========= =========
</TABLE>
See notes to consolidated interim financial statements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 262.4 $ 260.8
Adjustments to reconcile net earnings for
non-cash and other operating activities:
Provision for losses on finance receivables 223.5 236.6
Depreciation and amortization 66.6 67.8
Other operating activities 245.3 (499.5)
--------- ---------
Net cash provided from operating
activities 797.8 65.7
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (9,192.1) (9,707.9)
Finance receivables liquidated and sold 7,975.3 9,809.6
Proceeds from securitization of
finance receivables 1,242.1 -
Increase in notes receivables from related
parties (1,694.6) (3,015.8)
Other investing activities (276.9) 1,957.4
--------- ---------
Net cash used for investing activities (1,946.2) (956.7)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 3,423.6 2,052.2
Retirement of long-term debt (2,343.5) (1,775.7)
Increase (decrease) in notes payable 428.5 (1,334.4)
Cash dividends - (47.9)
--------- ---------
Net cash provided from (used for)
financing activities 1,508.6 (1,105.8)
<PAGE>
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENT ON CASH (17.2) (1.4)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 343.0 (1,998.2)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 333.3 2,720.4
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 676.3 $ 722.2
========= =========
</TABLE>
See notes to consolidated interim financial statements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Associates Corporation of North America (the "Company"), a Delaware
corporation, is a wholly-owned subsidiary and the principal U.S.-based
operating unit of Associates First Capital Corporation ("First Capital").
The Company is a leading diversified financial services organization
providing finance, leasing, insurance and related services to individual
consumers and businesses in the United States and Puerto Rico. All of the
outstanding common stock of the Company is owned by First Capital. All
shares of Class B common stock are owned by Associates International
Holding Corporation, a wholly-owned subsidiary of First Capital. Class B
common stock is redeemable only at the option of the issuer.
On December 31, 1999, First Capital contributed its wholly-owned
subsidiary, Associates World Capital Corporation ("AWCC"), to the Company.
AWCC, through its principal operating subsidiary Associates First Capital
B.V., issues unsecured debt which is used to fund certain international
consumer and commercial finance operations of First Capital. The
consolidated financial statements of the Company have been restated to
reflect the results of this contribution in a manner similar to a pooling
of interests. Upon consummation of the contribution, these consolidated
financial statements became the historical consolidated financial
statements of the Company.
NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant
intercompany balances and transactions. These statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Certain prior period
financial statement amounts have been reclassified to conform to the
current period presentation.
In the opinion of management, all adjustments necessary to present
fairly the results of operations and financial position have been made.
The financial position and results of operations as of and for any interim
period are unaudited and not necessarily indicative of the results of
operations for a full year. This Form 10-Q should be read in conjunction
with the consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
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
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
involve matters of judgment. Actual results could differ from these
estimates.
NOTE 3 - SIGNIFICANT TRANSACTIONS
In April 2000, First Capital acquired Arcadia Financial Ltd.
("Arcadia"). Arcadia was a leading independent automobile finance company
which serviced over $5 billion in finance receivables. As part of the
agreement and prior to the closing of the acquisition, the Company entered
into a continuous asset purchase and sale agreement under which the Company
purchased from Arcadia $867 million of retail installment and sales
contracts in the fourth quarter of 1999 and the first quarter 2000.
Following the closing of the acquisition, First Capital contributed the net
assets of Arcadia of approximately $100 million, which included approximately
$470 million in senior and subordinated notes, to the Company.
The 1999 acquisitions are described in the Company's Form 10-K for
the year ended December 31, 1999.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net
of tax, are as follows (in millions):
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
-------- -----------
<S> <C> <C>
Foreign currency translation adjustments $ 34.0 $ 51.2
Net unrealized loss on available-for-sale
securities (64.0) (69.6)
------ ------
Accumulated other comprehensive loss $(30.0) $(18.4)
====== ======
</TABLE>
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
Comprehensive income for the three-month period ended March 31, 2000
and 1999 consisted of the following components, net of tax (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
---- ----
<S> <C> <C>
Net earnings $262.4 $260.8
Foreign currency translation adjustments (17.2) (1.4)
Unrealized gain (loss) on available-for-sale
securities 5.6 (2.3)
------ ------
Total comprehensive income $250.8 $257.1
====== ======
</TABLE>
NOTE 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities consist of retained securitization
interests as well as bonds, notes and preferred stock and other equity
securities. The Company generally invests in these securities with the
intention of holding them to maturity. However, if market conditions
change, the Company may sell them prior to maturity. Accordingly, the
Company classifies these securities as available-for-sale securities and
adjusts their recorded value to market. The estimated market value at
March 31, 2000 and December 31, 1999 was $2.9 billion and $2.6 billion,
respectively. The amortized cost at March 31, 2000 and December 31, 1999
was $3.0 billion and $2.8 billion, respectively. Realized gains or losses
on sales are included in investment and other income. Unrealized gains or
losses are included, net of tax, in accumulated other comprehensive income.
TRADING SECURITIES
Trading securities consist of investments in equity securities which
are recorded at market value. Unrealized gains or losses on trading
securities are included in earnings. The estimated market value at March
31, 2000 and December 31, 1999 was $29.0 million and $26.8 million,
respectively. Historical cost at March 31, 2000 and December 31, 1999 was
$18.0 million and $17.1 million, respectively.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
NOTE 6 - FINANCE RECEIVABLES
At March 31, 2000 and December 31, 1999, finance receivables
consisted of the following (in millions):
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
-------- -----------
<S> <C> <C>
Home equity $21,226.0 $21,800.3
Truck and truck trailer 11,697.0 11,832.7
Personal lending and retail sales
finance (1) 7,167.6 7,905.2
Equipment 5,408.3 5,398.2
Auto fleet leasing 1,544.0 1,509.5
Credit card 34.6 54.6
Manufactured housing - 23.7
Warehouse lending and other (2) 1,290.2 1,242.5
---------- ---------
Finance receivables net of unearned
finance income ("net finance
receivables")(3) 48,367.7 49,766.7
Allowance for losses on finance receivables (1,390.6) (1,408.4)
Insurance policy and claims reserves (826.8) (840.8)
--------- ---------
Finance receivables, net of unearned
finance income, allowance for losses
and insurance policy and claims reserves $46,150.3 $47,517.5
========= =========
(1) In the first quarter of 2000, the Company transferred the unpaid principal balance related
to the $867 million of retail sales finance receivables purchased from Arcadia to finance
receivables held for sale or securitization.
(2) Includes warehouse lending, government guaranteed lending and municipal finance.
(3) Unearned finance income was approximately $4.0 billion at March 31, 2000 and December 31,
1999.
</TABLE>
In March 2000, the Company securitized and sold a $1.5 billion home
equity receivables portfolio and retained interests in the related
securitization trust totaling approximately $262 million. A pre-tax gain
of approximately $22 million was recorded on this transaction.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
NOTE 7 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables during the
periods indicated were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31 December 31
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $1,408.4 $1,378.9 $1,378.9
Provision for losses 223.5 236.6 943.2
Recoveries on receivables
charged off 37.9 40.9 154.4
Losses sustained (284.7) (266.3) (1,062.4)
Reserves of receivables sold
or held for sale (2.3) - (153.4)
Reserves of acquired businesses
and other 7.8 168.8 147.7
-------- -------- --------
Balance at end of period $1,390.6 $1,558.9 $1,408.4
======== ======== ========
</TABLE>
NOTE 8 - NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties include advances provided by
the Company to First Capital and certain affiliates. These notes are
unsecured demand notes and generally bear interest at floating rates. The
weighted average interest rate at March 31, 2000 was 5.73%. During the
three-month period ended March 31, 2000, interest income on notes
receivable from related parties was approximately $97.1 million.
<PAGE>
NOTE 9 - OTHER ASSETS
The components of other assets at March 31, 2000 and December 31,
1999 were as follows (in millions):
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
-------- -----------
<S> <C> <C>
Goodwill, net $1,702.2 $1,727.5
Finance receivables held for sale
or securitization, net (1) 830.4 -
Notes and other receivables 683.7 503.0
Collateral held for resale 418.8 303.9
Other intangible assets 413.4 385.0
Property and equipment 323.2 296.2
Relocation client advances 196.5 185.4
Other 267.1 286.0
-------- --------
Total other assets $4,835.3 $3,687.0
======== ========
(1) Includes the finance receivables acquired from Arcadia of approximately
$830 million as discussed in Note 3.
</TABLE>
NOTE 10 - DEBT RESTRICTIONS
Restrictions contained in certain syndicated credit facilities
require the Company to maintain a minimum tangible net worth, as defined,
of $2.5 billion. At March 31, 2000, the Company's tangible net worth, as
defined in the syndicated credit facilities, was approximately $7.8
billion.
NOTE 11 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for the purpose of
hedging specific exposures as part of its risk management program. Such
instruments to date have been limited to currency swap, interest rate swap,
interest rate option, 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 currencies in exchange for United States dollars
at varying times over the next five years. The aggregate notional amount
of these agreements at March 31, 2000 was $483.3 million. The fair value
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
of such agreements at March 31, 2000 would have been a liability of $24.5
million.
Foreign currency swap agreements are generally held for purposes
other than trading and have been designated for accounting purposes as
hedges of specific foreign currency exposures under certain debt
obligations. Under these agreements, the Company and the agreement
counterparties are obligated to exchange specific foreign currencies at
varying times over the next four years. The aggregate notional amount of
these agreements at March 31, 2000 and December 31, 1999 was $5.2 billion
and $5.3 billion, respectively. The fair value of such agreements at March
31, 2000 and December 31, 1999 would have been a liability of $392.9
million and $250.9 million, respectively.
Interest rate swap and interest rate option agreements are held for
purposes other than trading and are used by the Company to hedge the effect
of interest rate movements on existing debt and anticipated debt and asset
securitization transactions. The aggregate notional amount of interest
rate swap agreements at both March 31, 2000 and December 31, 1999 was $7.7
billion and $7.5 billion, respectively. The fair value of such agreements
at March 31, 2000 and December 31, 1999 would have been a liability of
$49.1 million and $53.6 million, respectively. The aggregate notional
amount of interest rate option agreements at March 31, 2000 was $1.5
billion. The fair value of such agreements at March 31, 2000 would have
been an asset of $7.0 million. Interest rate swap and interest rate option
agreements mature on varying dates over the next 31 years.
Treasury futures and option contracts are used to minimize
fluctuations in the value of preferred stock investments and are held for
purposes other than trading. The aggregate notional amount of futures and
options contracts at March 31, 2000 and December 31, 1999 was $372.5
million and $536.2 million, respectively. The fair value of these
contracts at March 31, 2000 and December 31, 1999 would have been a
liability of $21.2 million and an asset of $12.4 million, 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 March
31, 2000 and December 31, 1999 was $229.9 million and $180.1 million,
respectively. The fair value of these contracts at March 31, 2000 and
December 31, 1999 would have been a liability of $4.5 million and an asset
of $2.4 million, respectively. Such contracts mature on varying dates
through 2000.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis has been prepared in accordance
with General Instruction H.(2)(a) to Form 10-Q, and should be read in
conjunction with the consolidated financial statements of the Company and
the related notes thereto.
Results of Operations
Net Earnings
Net earnings for the three-month period ended March 31, 2000 were
$262.4 million as compared to $260.8 million for the same period in the
previous year. The principal factors which influenced net earnings during
the period are described below.
Finance Charges
Finance charge revenue decreased to $1,447.2 million for the first
quarter of 2000 from $1,517.5 million for the first quarter of 1999. The
decrease was primarily caused by a decrease in average finance receivables
outstanding due to the 1999 sale of $1.7 billion in private label credit
card receivables to First Capital and the securitization and sale of a $2.4
billion home equity receivables portfolio in 1999. Revenue on finance
receivables generated from internal growth, primarily in the home equity
and truck and truck trailer portfolios, somewhat offset the effects of
these transactions.
Finance charge revenue as a percentage of average net finance
receivables (the "Finance Charge Ratio") was 11.82% for the first quarter
of 2000 compared to 12.26% for the same period in 1999. The decrease in
the Finance Charge Ratio was principally due to a shift in product mix
toward more secured receivables. Secured receivables generally have lower
finance charge rates than unsecured receivables. The shift in product mix
was principally caused by the previously mentioned sale of $1.7 billion in
private label credit card receivables.
Interest Expense
Interest expense for the first quarter of 2000 increased to $743.1
million from the $720.3 million recorded in the first quarter of 1999. The
primary cause for the change was an increase in average debt outstanding
during the three months ended March 31, 2000 as compared to the same period
in the prior year. Additionally, a slight increase in the average interest
rate for the period as compared to prior year contributed to the change.
The increase in the interest rates reflect the general rising trend in
interest rates over the past year.
ASSOCIATES CORPORATION OF NORTH AMERICA
Net Interest Margin
As a result of the above fluctuations, the Company's net interest
margin decreased to $704.1 million for the first quarter of 2000 compared
to $797.2 million for the first quarter of 1999. The Company's net
interest margin expressed as a ratio to average net finance receivables
decreased to 5.75% from 6.44% for the same period in the prior year.
Servicing Related Income
Servicing related income increased to $37.1 million for the first
quarter of 2000 as compared to $1.5 million for the first quarter of 1999.
The increase is primarily due to the securitization and sale of a $2.4 billion
home equity receivables portfolio in the fourth quarter of 1999.
Investment and Other Income
Investment and other income increased to $270.1 million for the first
quarter of 2000 as compared to $247.6 million for the first quarter of
1999. The increase was primarily related to a pre-tax gain of
approximately $22 million on the first quarter of 2000 securitization and
sale of approximately $1.5 billion in home equity receivables.
Operating Expenses
Operating expenses were $440.0 million for the first quarter of 2000
compared to $461.6 million for the first quarter of 1999. The decrease was
primarily the result of the second quarter of 1999 sale of approximately
$1.7 billion of the Company's participation in First Capital's private
label credit card receivables. The private label credit card operations
generally have higher operating costs than the Company's other finance
operations.
Provision for Losses
The Company's provision for losses decreased to $223.5 million during
the first quarter of 2000 compared to $236.6 million for the same period in
1999. Total net credit losses as a percentage of average net finance
receivables (the "Loss Ratio") was 2.02% for the first quarter of 2000
compared to 1.82% for the same period in 1999. The increase in the Loss
Ratio was primarily due to an increase in loss rates in the home equity,
personal lending and truck and truck trailer receivables portfolios. A
deterioration of credit quality in certain acquired home equity portfolios
and the fourth quarter centralization of certain collection operations
related to the personal loan portfolios caused the increase in losses in
the home equity and personal lending portfolios. The increase in truck and
truck trailer net credit losses is due to increased loss severity on the
sale of repossessions and fewer loans with recourse arrangements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
Financial Condition
Net finance receivables decreased to $48.4 billion at March 31, 2000
from $49.8 billion at December 31, 1999. The Company recorded receivables
growth during the first quarter of 2000 of approximately $1 billion. The
increased growth was offset by a $1.5 billion home equity securitization in
the first quarter of 2000 and the reclassification to other assets of
approximately $867 million in automobile loan receivables held for
securitization.
The allowance for losses declined $17.8 million from $1,408.4 million
at December 31, 1999 to $1,390.6 million at March 31, 2000 principally due
to lower allowance for loss provision and the decline in finance
receivables. The allowance for losses to net finance receivables
("Allowance Ratio")increased to 2.88% at March 31, 2000 from 2.83% at
December 31, 1999. The increase in the Allowance Ratio was primarily due
to the securitization of the $1.5 billion home equity loan portfolio noted
above. Home equity loans historically have a lower loss experience and
reserve requirement than the Company's other loan products. The Company's
composite ratio of allowance for losses to trailing net credit losses
declined to 1.50x for the three-month period ended March 31, 2000 from
1.61x in the fourth quarter of 1999.
Management believes the allowance for losses at March 31, 2000 is
sufficient to provide adequate protection against losses in its portfolios.
The Company's 60+ days contractual delinquencies declined from 2.81%
at December 31, 1999 to 2.54% at March 31, 2000. The decrease in the
delinquency rate occurred primarily in the home equity, personal lending
and equipment product lines.
At March 31, 2000, stockholders' equity increased to $9.5 billion
from $9.3 billion at December 31, 1999. First quarter net earnings were the
primary causes of the increase.
Liquidity / Capital Resources
Through its asset and liability management function, the Company
maintains a disciplined approach to the management of liquidity, capital
and interest 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. While First Capital has made
periodic capital contributions to the Company in the past, no assurance can
be made with respect to future capital contributions by First Capital to
the Company. Nevertheless, management believes that the Company has
available sufficient liquidity, from a combination of cash provided from
ASSOCIATES CORPORATION OF NORTH AMERICA
operations, external borrowings and asset securitizations to support its
operations.
A principal strength of the Company is its ability to access the
global debt markets in a cost-efficient manner. Continued access to the
public and private debt markets is critical to the Company's ability to
continue to fund its operations. The Company seeks to maintain a
conservative liquidity position and actively manage its liability and
capital levels, debt maturities, diversification of funding sources and
asset liquidity to ensure that it is able to meet its obligations as they
mature. The Company's operations are principally funded through domestic
and international borrowings and asset securitizations.
At March 31, 2000, the Company had short- and long-term debt
outstanding of $15.1 billion and $35.9 billion, respectively. Short-term
debt principally consists of commercial paper issued by the Company 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 in the United States and abroad.
During the three months ended March 31, 2000 and 1999, the Company raised
debt aggregating $3.4 billion and $2.1 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
commercial paper program. Such credit facilities provide a means of
refinancing its maturing short-term obligations as needed. At March 31,
2000, these credit facilities were allocated to provide at least 75% backup
coverage of the Company's recurring commercial paper borrowings. In
addition, the Company has access to other sources of liquidity such as the
issuance of capital securities and asset securitizations. The Company's
securitization transactions to date have been limited to the home equity
asset class.
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. Additionally, the Company
has written put options during the first quarter of 2000 in aggregate of up
to $1.5 billion principal amounts of certificates backed by home equity
receivables which, under certain circumstances, requires it to purchase, upon
request of the holder, the securities issued. The Company has recorded a
liability of $7 million in connection with these options.
During the first quarter of 2000, the credit rating of the Company
was lowered. Fitch IBCA ("Fitch") lowered the long-term and short-term
credit rating of the Company to AA-/F1+. The rating of the Company remains
on a negative outlook. In addition,Standard & Poors lowered its long-term and
short-term credit rating of the
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
Company to A+/A1 with a stable outlook. The Company believes the impact of
the downgrade will not be significant.
Related Party Transaction
The Company, through its subsidiary Associates World Capital
Corporation ("AWCC"), is a party to an income sharing agreement with AIC
Corporation ("AIC"), a Japan affiliate. The Japanese National Tax
Authority ("NTA") has reviewed the income sharing agreement and recommended
an adjustment to AIC's Japanese income tax. The Company expects the final
determination of this matter to be concluded later this year and does not
expect there will be a material affect on the Company's effective tax rate.
It is currently the intention of management to amend the income sharing
agreement on a prospective basis to reflect the final arrangement with the
NTA. For financial reporting purposes, the impact of such an amendment may
reduce the amount of income allocable to AWCC in future periods. For
comparative purposes, the pre-tax income recorded by the Company as a
result of this agreement was $47.9 million and $40.3 million for the three
months ended March 31, 2000 and 1999, respectively. Such income for the
years ended December 31, 1999 and 1998 was $169.4 million and $41.2
million, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion that follows reflects material changes in the
"Quantitative and Qualitative Disclosure About Market Risk" reported at
year end, and, as such, should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. Estimated
amounts generated from the analysis that follows are forward-looking
statements of market risk assuming certain adverse market conditions occur.
Actual results in the future may differ materially from these projected
results due to changes in the Company's product and debt mix and
developments in the global financial markets.
Interest Rate Risk-Managed Basis
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. At March 31, 2000, the one-year gap was a
positive 6%, a decrease from positive 11% at December 31, 1999. A positive
one-year gap indicates that a greater percentage of assets versus
liabilities will reprice within a one-year time frame.
The Company also uses a simulation model to evaluate the impact on
earnings. For an immediate 1% increase in rates, projected annual after-tax
earnings on managed assets would have declined by 1% at March 31, 2000 and
increased by 2% at December 31, 1999. 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.
ASSOCIATES CORPORATION OF NORTH AMERICA
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. At March 31,
2000, interest rate movements would affect annual after-tax earnings by
approximately $21 million, as compared to $8 million at December 31, 1999,
as calculated under the VAR methodology.
In April 2000, the Company initiated $1.7 billion of transactions,
which reduced its interest rate risk position, to a level similar to the
December 1999 risk profile. Including the effect of these April
transactions, the projected April 30, 2000 one-year gap was a positive 8%.
Similarly, using a simulation model, an immediate 1% increase in rates
would result in an increase in projected annual after-tax earnings on
managed assets of 1%.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None to report.
In accordance with General Instruction H.(2)(b), the following items
have been omitted: Item 2, Changes in Securities; Item 3, Defaults Upon
Senior Securities; and Item 4, Submission of Matters to a Vote of Security
Holders.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "1995 Act").
The 1995 Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide information without fear of litigation so
long as those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
projected. Although the Company does not anticipate that it will make
forward-looking statements as a general policy, the Company will make
forward-looking statements as required by law or regulation, and from time
to time may make such statements with respect to management's estimation of
the future operating results and business of the Company.
The Company hereby incorporates into this report by reference to its
Form 10-K for the year ended December 31, 1999 the cautionary statements
found on pages 21-22 of such Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the first quarter ended March 31, 2000, The Company filed
Current Reports on Form 8-K as of January 7, 2000 (announcing
Associates First Capital Corporation's contribution of Associates
World Capital Corporation to Associates Corporation of North
America); February 4, 2000 (announcing financial results for the
year ended December 31, 1999); March 15, 2000 (amending an exhibit
to Form 10-K); and February 22, 2000 and March 14, 2000 (related
to a debt issuance or registration pursuant to Rule 415).
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 15, 2000
ASSOCIATES CORPORATION OF NORTH AMERICA
(registrant)
By /s/ John F. Stillo
------------------------------------
Executive Vice President, Comptroller
and Principal Accounting Officer
EXHIBIT 12
ASSOCIATES CORPORATION OF NORTH AMERICA
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
---- ----
<S> <C> <C>
Fixed Charges (a)
Interest expense $ 743.1 $ 720.3
Implicit interest in rent 4.7 4.6
-------- --------
Total fixed charges $ 747.8 $ 724.9
======== ========
Earnings (b)
Earnings before provision for income
taxes $ 409.0 $ 406.7
Fixed charges 747.8 724.9
-------- --------
Earnings, as defined $1,156.8 $1,131.6
======== ========
Ratio of Earnings to Fixed Charges 1.55 1.56
======== ========
- ---------------
(a) For purposes of such computation, the term "fixed charges" represents
interest expense and a portion of rentals representative of an
implicit interest factor for such rentals.
(b) For purposes of such computation, the term "earnings" represents
earnings before provision for income taxes, plus fixed charges.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
0 MEANS NOT APPLICABLE OR NOT SEPARATELY DISCLOSED. This schedule contains
summary financial information extracted from the Company's unaudited
consolidated financial statements as of March 31, 2000 and the three months
then ended and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<CIK> 0000007973
<NAME> ASSOCIATES CORPORATION OF NORTH AMERICA
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 676
<SECURITIES> 2,884
<RECEIVABLES> 48,368
<ALLOWANCES> 1,391
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,216
<CURRENT-LIABILITIES> 0
<BONDS> 51,010
<COMMON> 100
0
0
<OTHER-SE> 9,430
<TOTAL-LIABILITY-AND-EQUITY> 62,216
<SALES> 1,859
<TOTAL-REVENUES> 1,859
<CGS> 0
<TOTAL-COSTS> 1,450
<OTHER-EXPENSES> 483
<LOSS-PROVISION> 224
<INTEREST-EXPENSE> 743
<INCOME-PRETAX> 409
<INCOME-TAX> 147
<INCOME-CONTINUING> 262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
