<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 September 30, 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.....
As of June 30, 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>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Finance charges $6,922.1 $6,422.0 $2,404.3 $2,166.7
Servicing related income 1,441.3 828.6 502.7 329.8
Insurance premiums 850.2 779.5 300.2 266.5
Investment and other
income 842.3 616.0 310.2 202.2
--------- -------- -------- --------
10,055.9 8,646.1 3,517.4 2,965.2
EXPENSES
Interest expense 2,922.5 2,510.7 1,061.5 855.4
Operating expenses 3,054.0 2,722.6 1,067.6 909.2
Provision for losses on
finance receivables 1,342.3 990.5 478.2 327.2
Insurance benefits paid
or provided 435.7 330.2 166.2 111.3
-------- -------- -------- ---------
7,754.5 6,554.0 2,773.5 2,203.1
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 2,301.4 2,092.1 743.9 762.1
PROVISION FOR INCOME TAXES 823.1 781.4 253.3 277.2
-------- -------- -------- --------
NET EARNINGS $1,478.3 $1,310.7 $ 490.6 $ 484.9
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(Dollars In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 2,198.6 $ 1,102.2
INVESTMENTS IN DEBT AND EQUITY SECURITIES 9,043.2 6,584.8
FINANCE RECEIVABLES, net of unearned finance
income, allowance for losses and
insurance policy and claims reserves 65,919.0 62,147.0
NOTES RECEIVABLE FROM RELATED PARTIES 8,791.1 -
OTHER ASSETS 10,599.2 8,348.8
--------- ---------
Total assets $96,551.1 $78,182.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $30,303.8 $16,366.1
Bank Loans 458.1 1,231.5
NOTES PAYABLE DUE TO RELATED PARTIES 5,758.7 3,189.6
ACCOUNTS PAYABLE AND ACCRUALS 4,742.3 4,001.2
LONG-TERM DEBT
Senior Notes 42,797.5 39,534.7
Subordinated and Capital Notes 425.2 425.2
-------- ---------
43,222.7 39,959.9
MINORITY INTEREST IN EQUITY OF CONSOLIDATED
SUBSIDIARY 76.7 -
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
<PAGE>
Paid-in Capital 6,405.8 6,106.3
Retained Earnings 5,558.0 7,126.7
Accumulated Other Comprehensive Income (122.0) 54.5
--------- ---------
Total stockholders' equity 11,988.8 13,434.5
--------- ---------
Total liabilities and stockholders' equity $96,551.1 $78,182.8
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 1,478.3 $ 1,310.7
Adjustments to reconcile net earnings for
non-cash and other operating activities:
Provision for losses on finance receivables 1,342.3 990.5
Amortization of goodwill and other
intangible assets 187.2 142.3
Depreciation and other amortization 328.8 199.6
Other operating activities 345.1 (341.9)
--------- ---------
Net cash provided from operating activities 3,681.7 2,301.2
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated (40,736.5) (42,833.6)
Finance receivables liquidated 32,450.5 37,517.1
Acquisition of loan portfolios and other
finance businesses, net (3,814.5) (1,444.8)
Proceeds from securitization of finance
receivables 3,694.9 649.0
Sale of finance businesses and branches - 1,002.8
Increase in notes receivable from related
parties (9,195.9) (2,337.2)
Other investing activities 573.5 225.0
-------- -------
Net cash used for investing activities (17,028.0) (7,221.7)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 11,292.5 9,404.4
Retirement of long-term debt (9,301.1) (6,233.9)
Increase (decrease) in notes payable 12,765.3 (3,267.9)
Increase in notes payable to related parties 2,657.5 2,057.8
Cash dividends (3,075.8) (8.4)
Cash contribution from parent 129.9 392.5
-------- --------
Net cash provided from financing
activities 14,468.3 2,344.5
--------- --------
<PAGE>
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH (25.6) 89.5
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,096.4 (2,486.5)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,102.2 3,790.1
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,198.6 $ 1,303.6
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Associates Corporation of North America (the "Company"), a Delaware
corporation, is a wholly-owned subsidiary and principal U.S.-based
operating unit of Associates First Capital Corporation ("First Capital").
The Company is a leading diversified finance organization providing
finance, leasing, insurance and related services to consumers and
businesses in the United States and internationally. All of the
outstanding common stock of the Company is directly or indirectly owned by
First Capital.
In August 2000, First Capital contributed several of its wholly-owned
subsidiaries to the Company. The consolidated financial statements of the
Company have been restated retroactively to reflect the results of these
contributions in a manner similar to a pooling-of-interests in accordance
with generally accepted accounting principles. Accordingly, the September
30, 1999 financial statements have been restated to conform to the current
period presentation.
In September 2000, the First Capital and Citigroup Inc. announced
they had entered into a definitive merger agreement. Pursuant to an
Agreement and Plan of Merger dated as of October 6, 2000 (the "Agreement"),
First Capital and Citigroup Inc. have agreed to merge a wholly-owned
subsidiary of Citigroup Inc. with and into First Capital . Under the
Agreement, holders of First Capital common stock will receive 0.7334 shares
of Citigroup Inc. common stock for each share of First Capital's common
stock. The merger is expected to be completed prior to December 31, 2000.
Upon consummation of the merger, First Capital will become an indirect
wholly-owned subsidiary of Citigroup Inc.
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 the management, all adjustments, consisting only of
normal, recurring accruals, 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. These consolidated interim financial statements should be read in
conjunction with the restated consolidated financial statements and
footnotes thereto for the year ended December 31, 1999 included in the Form
8-K dated August 30, 2000.
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires the use
of management estimates. These estimates are subjective in nature and
involve matters of judgment. Actual results could differ from these
estimates.
NOTE 3 - SIGNIFICANT TRANSACTIONS
In April 2000, the Company acquired the common stock of Arcadia
Financial Ltd. ("Arcadia") for $195 million which approximated the fair
value of the intangible assets established in the acquisition. Arcadia had
approximately $470 million in senior and subordinated notes at the time of
the acquisition. At September 30, 2000, the Company managed approximately
$3.0 billion of Arcadia's serviced assets originated and sold with
servicing retained prior to the acquisition. In addition, the Company
continues to securitize new originations.
In September 2000, the Company acquired a 73% interest (22% of which
was transferred to the Company from escrow on October 20, 2000) in Unimat
Life Kabushiki Kaisha ("Unimat") for approximately $0.6 billion. The
balance sheet reflects the minority interest in equity of consolidated
subsidiary. Goodwill and other intangibles were approximately $0.3
billion. At the time of the acquisition, the fair market value of Unimat's
net assets was approximately $0.4 billion. The Company expects to acquire
the remaining minority interest, as set forth in the purchase agreement, in
the first quarter of 2001.
All of the transactions described above were accounted for as
purchases. The results of operations are included in the consolidated
results of the Company from the respective acquisition dates. The
allocation of the purchase price for these transactions is based upon
preliminary estimates and may be refined as additional information is
available.
In January 2000, First Capital, through its subsidiary, Associates
National Bank ("ANB"), entered into an agreement with KeyCorp, under which
the companies will jointly manage KeyCorp's credit card program.
Additionally, First Capital acquired KeyCorp's credit card receivables
portfolio with a fair market value of $1.3 billion and intangible assets,
primarily related to customer lists and operating agreements, of
approximately $350 million for $1.7 billion. Although ANB maintains the
relationship with Keycorp, the Company receives revenues from
participation rights which were transferred to the Company as part of the
August 30, 2000 contribution from First Capital.
In July 2000, First Capital completed the purchase of approximately
$0.6 billion in credit card receivables from Zale Corporation ("Zale") and
entered into an operating agreement for Zale's on-going credit card
business. These receivables were participated to the Company through a
participation agreement with a subsidiary of First Capital.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net
of tax, are as follows (in millions):
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Foreign currency translation adjustments $ (32.2) $ 144.9
Net unrealized loss on available-for-sale
securities (89.8) (90.4)
------- -------
Accumulated other comprehensive (loss) income $(122.0) $ 54.5
======= =======
</TABLE
Comprehensive income, net of tax, for the nine- and three-month
periods ended September 30, 2000 and 1999 consisted of (in millions):
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $1,478.3 $1,310.7 $490.6 $484.9
Foreign currency translation
adjustments (177.1) (3.0) (59.2) 16.3
Net unrealized gain (loss) on
available-for-sale securities 0.6 (32.0) 15.2 5.9
-------- -------- ------ ------
Total Comprehensive income $1,301.8 $1,275.7 $446.6 $507.1
======== ========= ====== ======
</TABLE>
NOTE 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
Available-for-sale securities consist of retained securitization
interests, bonds, notes and preferred stock and other equity securities
primarily held by the Company's insurance subsidiaries. Accordingly, the
Company classifies these debt and equity securities as available-for-sale
securities and adjusts their recorded value to market. The estimated
market value at September 30, 2000 and December 31, 1999 was $9.0 billion
and $6.6 billion, respectively. The amortized cost at September 30, 2000
and December 31, 1999 was $9.1 billion and $6.7 billion, respectively.
Realized gains or losses on sales are included in investment and other
income. Unrealized gains or losses are included, net of tax, in other
comprehensive income.
NOTE 6 - FINANCE RECEIVABLES
At September 30, 2000 and December 31, 1999, finance receivables
consisted of the following (in millions):
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Home equity $27,233.3 $24,893.2
Personal lending and retail sales finance 17,536.0 15,999.3
Truck and truck trailer 12,404.7 13,130.3
Equipment 6,159.9 6,301.4
Auto fleet leasing 2,196.5 2,070.1
Credit card 1,793.6 1,427.2
Manufactured housing - 46.0
Warehouse lending, government guaranteed
lending and municipal finance 1,825.0 1,320.0
--------- ---------
Finance receivables net of unearned finance
income of approximately $5.0 billion and $4.7
billion at September 30, 2000 and December
31, 1999 ("net finance receivables") 69,149.0 65,187.5
Allowance for losses on finance receivables (2,178.0) (2,054.6)
Insurance policy and claims reserves (1,052.0) (985.9)
--------- ---------
Finance receivables, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves $65,919.0 $62,147.0
========= =========
</TABLE>
During the nine months ended September 30, 2000, the Company
securitized and sold home equity, credit card and automobile retail sales
finance receivables portfolios totaling $4.4 billion and retained interests
in the related securitization trusts totaling $794 million. Pre-tax gains
of approximately $90 million were recorded on these transactions.
In September 2000, the Company was notified by certain investors in
its securitization transactions that such investors intended to exercise
put options totaling approximately $2.0 billion during the fourth quarter
of 2000.
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>
Nine Months Ended Year Ended
September 30 December 31
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $2,054.6 $1,891.2 $ 1,891.2
Provision for losses 1,342.3 990.5 1,375.6
Recoveries on receivables
charged off 212.2 186.0 240.2
Losses sustained (1,396.2) (1,157.7) (1,593.1)
Reserves of receivables sold
or held for sale (112.9) (151.2) (187.2)
Reserves of acquired
businesses 99.4 291.3
Other (21.4) 1.8 327.9
-------- -------- ---------
Balance at end of period $2,178.0 $2,051.9 $ 2,054.6
======== ======== =========
</TABLE>
NOTE 8 - RELATED PARTIES
The notes receivable from related parties initially are structured as
unsecured non-interest bearing lines of credit. If the amount advanced
remains outstanding at month-end, such amount is automatically converted
into an unsecured, interest bearing demand note. The weighted average
interest rate at September 30, 2000 and 1999 was 7.69% and 7.17%,
respectively. During the nine month period ended September 30, 2000 and
1999, interest income on notes receivable from related parties was $289.3
million and $217.8 million, respectively.
The notes payable to related parties initially are structured as
unsecured non-interest bearing lines of credit. If the amount advanced
remains outstanding at month-end, such amount is automatically converted
into an unsecured, interest bearing demand note. The weighted average
interest rate at September 30, 2000 and 1999 was 5.91% and 5.38%,
respectively. During the nine month period ended September 30, 2000 and
1999, interest expense on notes payable to related parties was $347.4
million and $90.2 million, respectively.
<PAGE>
NOTE 9 - OTHER ASSETS
The components of other assets at September 30, 2000 and December 31,
1999 were as follows (in millions):
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Goodwill $ 3,810.6 $3,581.7
Notes and other receivables 2,248.7 1,905.9
Other intangible assets 1,926.1 1,359.4
Finance receivables held for sale or
securitization 913.4 153.0
Collateral held for resale 595.4 372.5
Property and equipment 584.9 491.4
Relocation client advances 287.5 185.4
Other 232.6 299.5
--------- --------
Total other assets $10,599.2 $8,348.8
========= ========
NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to hedge specific
exposures as part of its risk management program. The Company hedges its
yen denominated net investment in its Japanese subsidiaries through the use
of forward contracts. Other instruments currently used by the Company are
currency swap, interest rate swap, interest rate option, municipal bond and
treasury futures and option contracts. All of these instruments are held
for purposes other than trading. The Financial Accounting Standards Board
has issued new standards for accounting for derivative transactions to
become effective in 2001. The Company has not completed its analysis of
the impact this pronouncement will have on future operating results.
Foreign currency forward exchange agreements 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 year. The aggregate notional
amount of these agreements was $5.3 billion and $2.8 billion at September
30, 2000 and December 31, 1999, respectively. The fair value of such
agreements at September 30, 2000 and December 31, 1999 would have been an
asset of $19.0 million and a liability of $389.0 million, respectively.
Foreign currency swap agreements 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 obligate to exchange specific foreign currencies at
varying times over the next 4 years. The aggregate notional amount of
these agreements at September 30, 2000 and December 31, 1999 was $5.6
billion and $5.9 billion, respectively. The fair value of such agreements
at September 30, 2000 and December 31, 1999 would have been a liability of
$330.0 million and $307.9 million, respectively.
Interest rate swap and interest rate option agreements are used by
the Company to hedge the effect of interest rate movements on existing debt
and anticipated debt and securitization transactions. The aggregate
notional amount of interest rate swap agreements at September 30, 2000 and
December 31, 1999 was $15.7 billion and $9.2 billion, respectively. The
fair value of such agreements at September 30, 2000 and December 31, 1999
would have been a liability of $95.3 million and $46.3 million,
respectively. The aggregate notional amount of interest rate option
agreements at September 30, 2000 was $1.5 billion. The fair value of such
agreements at September 30, 2000 would have been a liability of $5.2
million. Interest rate swap and interest rate option agreements mature on
varying dates over the next 30 years.
Treasury futures and option contracts are used to minimize
fluctuations in the value of preferred stock investments. The aggregate
notional amount of futures and option contracts at September 30, 2000 and
December 31, 1999 was $306.5 million and $536.2 million, respectively. The
fair value of these contracts would have been a liability of $0.4 million
and an asset of $12.4 million at September 30, 2000 and December 31, 1999,
respectively. Such contracts mature on varying dates through 2000.
Municipal bond futures are used to minimize fluctuations in the value
of municipal bond investments. The aggregate notional amount of municipal
bond futures contracts at September 30, 2000 and December 31, 1999 was
$261.6 million and $180.1 million, respectively. The fair value of these
contracts would have been an asset of $2.7 million at September 30, 2000
and $2.4 million at December 31, 1999. Such contracts mature over varying
dates through December 2000.
<PAGE>
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
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"). This
presentation also excludes the serviced assets of Arcadia originated and
sold with serving retained prior to the acquisition of Arcadia by First
Capital and subsequent contribution to the Company. Prior to the second
quarter of 2000, the Company discussed the results of operations on an
Owned Basis. Management believes the discussion of Managed Basis
information is useful in evaluating the Company's operating performance due
to increased securitization activity during 1999 and 2000. Prior period
amounts have been restated to reflect the current period presentation. On
an Owned Basis, the net earnings on the Company's retained securitization
interests and receivables held for sale or 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
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.
The following tables contain selected Managed Basis financial
information (in millions):
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Finance charges $ 9,358.6 $ 7,885.5 $ 3,271.5 $ 2,703.5
Insurance premiums 850.2 779.5 300.2 266.5
Investment and other income 842.3 616.0 310.2 202.2
--------- --------- --------- ---------
Total revenue 11,051.1 9,281.0 3,881.9 3,172.2
Interest expense 3,381.3 2,661.6 1,235.8 913.9
Operating expenses 3,054.0 2,722.6 1,067.6 909.2
Provision for losses 1,878.7 1,474.5 668.4 475.7
Insurance benefits paid
or provided 435.7 330.2 166.2 111.3
--------- --------- --------- ---------
Total expenses 8,749.7 7,188.9 3,138.0 2,410.1
--------- --------- --------- ---------
Earnings before provision
for income taxes 2,301.4 2,092.1 743.9 762.1
Provision for income taxes 823.1 781.4 253.3 277.2
--------- --------- --------- ---------
Net earnings $ 1,478.3 $ 1,310.7 $ 490.6 $ 484.9
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Net Finance Receivables
End of period $ 86,728.6 $77,139.3
Average 81,330.8 73,301.0
Total Assets
End of period $108,229.4 $86,944.3
Average 96,983.7 84,263.8
</TABLE
Net Earnings
Net earnings on an Owned and Managed Basis for the nine- and three-
month periods ended September 30, 2000 were $1.5 billion and $491 million,
respectively, compared to $1.3 billion and $485 million for the same
periods in the previous year. The primary factors affecting earnings and
the Company's operating results are discussed below.
Finance Charges
Finance charge revenue on a Managed Basis increased for the nine- and
three-month periods ended September 30, 2000, compared to the same periods
in the prior year, principally as a result of growth in average managed
finance receivables outstanding. Finance charge revenue as a percentage of
average managed finance receivables was 15.34% and 15.51% for the nine- and
three-month periods ended September 30, 2000, respectively, as compared to
14.62% and 14.86% for the comparable periods in 1999. The increase in the
Finance Charge Ratio principally was due to higher new business yields in
response to the rising interest rate environment and a shift in product mix
to business activities with higher finance charge rates.
Interest Expense
Managed Basis interest expense increased to $3.4 billion and $1.2
billion for the nine- and three-month periods ended September 30, 2000,
respectively, compared to $2.7 billion and $914 million for the same
periods in 1999. This increase was primarily due to an increase in average
debt outstanding for each of the comparative periods. The increase in
average debt outstanding principally resulted from the growth in average
net finance receivables. Debt is the primary source of funding to support
the Company's growth in net finance receivables. Additionally, the
Company's total average borrowing rate increased from 5.42% for the nine
months ended September 30, 1999 to 5.64% for the nine months ended
September 30, 2000.
Net Interest Margin
As a result of the factors discussed in the finance charges and
interest expense sections above, Managed Basis net interest margin was $6.0
billion and $2.0 billion for the nine- and three-month periods ended
September 30, 2000, respectively, compared to $5.2 billion and $1.8 billion
for the comparable periods in the prior year. The Company's Managed Basis
net interest margin expressed as a ratio of average managed finance
receivables was 9.80% and 9.65% for the nine- and three-month periods ended
September 30, 2000, respectively, compared to 9.69% and 9.84% for the
comparable periods in the prior year.
Investment and Other Income
Investment and other income, on a Managed Basis, increased to $842
million and $310 million for the nine- and three-month periods ended
September 30, 2000 compared to $616 million and $202 million for the prior
year periods. The increase in investment and other income primarily is
related to an increase in interest income on notes receivable from related
parties, investment income, fee related income and securitization gains of
$90 million as discussed in Note 6 to the consolidated financial
statements.
Operating Expenses
Managed Basis operating expenses were $3.1 billion and $1.1 billion
for the nine- and three months ended September 30, 2000 as compared to $2.7
billion and $909 million for the same periods in the prior year. Operating
expenses as a percentage of average managed finance receivables ("Operating
Expense Ratio") changed to 5.01% and 5.06% for the nine- and three-month
periods ended September 30, 2000, compared to 5.05% and 5.00% in the prior
year periods. Additionally, the Company's efficiency ratio, measured as
the ratio of total Managed Basis operating expenses divided by total
Managed Basis revenue net of Managed Basis interest expense and insurance
benefits paid or provided changed to 42.2% and 43.1% for the nine- and
three-month periods ended September 30, 2000 compared to 43.3% and 42.4% in
the same periods in the prior year. The increase in the ratios for the
three months ended September 30, 2000 as compared to the prior year period
primarily is the result of a $34 million pre-tax charge relating to change
in control features of certain benefit plans of the Company resulting from
the merger agreement with Citigroup Inc. The decline in the ratios for the
nine months ended September 30, 2000 as compared to the prior year period
primarily is related to the Avco integration and operating costs during
1999 and the pre-tax charge in the third quarter of 2000.
Provision for Losses
The Company's Managed Basis provision for losses increased to $1.9
billion and $668 million for the nine- and three-month periods ended
September 30, 2000 from $1.5 billion and $476 million for the comparable
prior year periods. The Company's total Managed Basis net credit losses as
a percentage of average managed finance receivables ("Loss Ratio") was
2.82% and 2.85% for the nine- and three-month periods ended September 30,
2000 as compared to 2.70% and 2.63% for the comparable periods in 1999.
The increase in the Loss Ratio was the result of increased losses in the
Company's personal lending and sales finance and truck and truck trailer
product lines.
Provision for Income Taxes
The estimated effective tax rate for the Company was revised to 36
percent for this year, down from 37 percent that was incorporated in the
Company's results for the first half of the year. This revision reflects
improved estimates of the Company's tax provisions based on a recent review
of its domestic and international tax positions.
Financial Condition
During the first nine months of 2000, managed finance receivables
increased $9.6 billion to $86.7 billion. The increase in managed finance
receivables was primarily caused by the previously described acquisitions
and internal growth in the home equity, credit card and personal lending
and sales finance portfolios.
Composite 60+days contractual delinquency declined to 2.60% of gross
managed finance receivables at September 30, 2000, compared to 2.83% at
December 31, 1999. This decline is primarily a result of lower delinquency
rates in the Company's home equity and personal lending and retail sales
finance portfolios.
The allowance for losses on finance receivables was $2.2 billion at
September 30, 2000 compared to $2.1 billion at December 31, 1999. The
increase in allowance for losses resulted from a $4.0 billion increase in
Owned Basis finance receivables to $69.1 billion at September 30, 2000,
primarily caused by the acquisitions described above and growth in the home
equity, credit card and personal lending and sales finance portfolios.
Company management believes the allowance for losses at September 30,
2000 is sufficient to provide adequate coverage against losses in its
portfolios.
Liquidity and Capital Resources
Through its asset and liability management function, the Company
maintains a disciplined approach to the management of liquidity, capital
and interest rate risk. The Company has a formal process for managing its
liquidity to ensure that funds are available 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 to support its operations from a combination
of cash provided from operations, external borrowings and asset
securitizations. At September 30, 2000, the Company maintained an
effective shelf registration statement for the issuance of debt related
securities with remaining capacity of $16.1 billion.
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 principally are funded through domestic
and international borrowings and asset securitizations.
At September 30, 2000, the Company had short- and long-term debt
outstanding of $30.8 billion and $43.2 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 by the
Company in the United States and abroad. During the nine months ended
September 30, 2000 and 1999, the Company raised debt aggregating $10.6
billion and $9.4 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 September
30, 2000, these credit facilities were allocated to provide at least 75%
backup coverage of the Company's recurring commercial paper borrowings.
Under a debt covenant associated with a syndicated credit facility, the
Company requires a minimum tangible net worth of $3.5 billion. At
September 30, 2000, the Company's tangible net worth, as defined in the
syndicated credit facility, was approximately $8.2 billion. 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,
credit card and auto related asset classes.
In the third quarter of 2000, the Company paid a $3.0 billion
dividend to First Capital.
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 in aggregate of up to $3.3 billion principal
amounts of certificates backed by finance receivables which requires it,
under certain circumstances, to purchase, upon request of the holder, the
securities issued. The Company has recorded a liability of $19 million in
connection with these options. In September 2000, the Company was notified
by certain investors in its securitization transactions that such investors
intended to exercise put options totaling approximately $2.0 billion during
the fourth quarter of 2000.
As part of its risk management activities, the Company hedges its net
investment in its Japanese subsidiaries through the use of forward
contracts to hedge the Yen denominated investment. The Financial
Accounting Standards Board has issued new standards for accounting for
derivative transactions to become effective in 2001. The company has not
completed its analysis of the impact this pronouncement will have on future
operating results.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has no material changes to report from the disclosure set
forth in the Company's Form 10-K for the year ended December 31, 1999.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Federal Trade Commission has referred to the Department of Justice
its investigation into the pricing practices of Detroit area mortgage brokers
doing business with a Company subsidiary in 1995 and 1996. The FTC has asked
the Justice Department to consider whether to file a lawsuit against the
Company for alleged broker loan pricing disparities based on race. Even if
the Justice Department files suit against the Company, the Company does not
believe any such suit, even if decided against the Company, would have a
material effect on the Company's financial condition or results of
operations.
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. See Item 3 - "Legal Proceedings"
on page 19 of the Form 8-K dated August 30, 2000 for further information.
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 8-K dated August 30, 2000 the cautionary statements found on page 4-5
of such Form 8-K.
<PAGE>
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 third quarter ended September 30, 2000, Associates filed
Current Reports on Form 8-K as of July 21, 2000 (announcing
earnings for the second quarter of 2000); and September 8, 2000
(announcing the contribution by First Capital of several of its
subsidiaries to the Company).
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.
November 14, 2000
ASSOCIATES CORPORATION OF NORTH AMERICA
(registrant)
By: /s/David J. Keller
--------------------------
Executive Vice President
and Principal Accounting Officer
</TABLE>
