<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF EARNINGS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Finance charges $2,905.6 $2,974.0 $1,458.4 $1,456.5
Servicing related income 128.6 53.4 91.5 51.9
Insurance premiums 199.6 189.2 95.4 94.0
Investment and other
income 647.0 487.9 376.9 240.3
-------- -------- -------- --------
3,880.8 3,704.5 2,022.2 1,842.7
EXPENSES
Interest expense 1,554.8 1,443.0 811.7 722.7
Operating expenses 878.2 897.6 438.2 436.0
Provision for losses on
finance receivables 477.4 448.0 253.9 211.4
Insurance benefits paid
or provided 84.1 74.6 41.1 38.0
-------- -------- ------- -------
2,994.5 2,863.2 1,544.9 1,408.1
-------- -------- ------- -------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 886.3 841.3 477.3 434.6
PROVISION FOR INCOME TAXES 311.9 309.6 165.3 163.7
-------- -------- -------- --------
NET EARNINGS $ 574.4 $ 531.7 $ 312.0 $ 270.9
======== ======== ======== =======
</TABLE>
See notes to consolidated interim financial statements.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(Dollars In Millions, Except Share Information)
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 361.6 $ 333.3
INVESTMENTS IN DEBT AND EQUITY SECURITIES 3,514.3 2,666.9
FINANCE RECEIVABLES, net of unearned finance
income, allowance for losses and insurance
policy and claims reserves 47,587.7 47,517.5
NOTES RECEIVABLE FROM AFFILIATES 10,110.1 5,975.4
OTHER ASSETS 4,907.0 3,687.0
--------- ---------
Total assets $66,480.7 $60,180.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $19,413.4 $13,672.9
Bank Loans - 990.7
ACCOUNTS PAYABLE AND ACCRUALS 1,124.8 1,398.9
LONG-TERM DEBT
Senior Notes 35,337.6 34,413.1
Subordinated and Capital Notes 455.2 425.2
--------- ---------
35,792.8 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 3,882.2 3,587.1
Retained Earnings 6,138.0 5,563.6
Accumulated Other Comprehensive Loss (17.5) (18.4)
--------- --------
Total stockholders' equity 10,149.7 9,279.3
--------- --------
Total liabilities and stockholders' equity $66,480.7 $60,180.1
========= =========
</TABLE>
See notes to consolidated interim financial statements.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 574.4 $ 531.7
Adjustments to reconcile net earnings for
non-cash and other operating activities:
Provision for losses on finance receivables 477.4 448.0
Amortization of goodwill and other
intangible assets 40.7 35.4
Depreciation and other amortization 138.5 100.4
Other operating activities (619.7) (240.7)
--------- --------
Net cash provided from operating
activities 611.3 874.8
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated (17,715.0) (21,153.0)
Finance receivables liquidated 15,457.5 20,100.5
Acquisition of loan portfolios and other
finance businesses, net (695.7) -
Sale of finance business and branches - 643.9
Proceeds from securitization of finance
receivables 1,990.2 -
(Increase) decrease in notes receivable
from affiliates (4,690.0) 2,343.7
Other investing activities (405.3) (3,984.8)
--------- ---------
Net cash used for investing
activities (6,058.3) (2,049.7)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 6,979.6 7,217.3
Retirement of long-term debt (5,991.8) (3,954.4)
Increase (decrease) in notes payable 4,363.6 (1,865.9)
Other 125.6 (8.5)
--------- ---------
Net cash provided from financing
activities 5,477.0 1,388.5
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH (1.7) (6.2)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 28.3 207.4
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 333.3 2,720.4
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 361.6 $ 2,927.8
========= =========
</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 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, 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. 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 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")
for approximately $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 June 30, 2000, the Company managed approximately $3.4 billion of Arcadia's
serviced assets originated and sold with servicing retained prior to the
acquisition. Subsequent to the acquisition, First Capital
contributed the assets and liabilities of Arcadia to the Company.
The transaction described above was accounted for as a purchase. 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 this transaction is based upon preliminary estimates and may be refined
as additional information is available.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of
tax, are as follows (in millions):
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
------- -----------
<S> <C> <C>
Foreign currency translation adjustments $ 58.8 $ 51.2
Net unrealized loss on available-for-sale
securities (76.3) (69.6)
------- ------
Accumulated other comprehensive loss $(17.5) $(18.4)
====== ======
</TABLE>
Comprehensive income, net of tax, for the six- and three-month periods
ended June 30, 2000 and 1999 consisted of the following components (in
millions):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $574.4 $531.7 $312.0 $270.9
Foreign currency translation adjustment 7.6 (6.2) 24.8 (4.8)
Net unrealized loss on available-
for-sale securities (6.7) (15.6) (12.3) (13.3)
------ ------ ------ ------
Total comprehensive income $575.3 $509.9 $324.5 $252.8
====== ====== ====== ======
</TABLE>
NOTE 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
Available-for-sale securities consist of retained securitization
interests as well as bonds, notes and preferred stock and other equity
securities. The Company classifies these securities as available-for-sale
securities and adjusts their recorded value to market. The estimated market
value at June 30, 2000 and December 31, 1999 was $3.5 billion and $2.6
billion, respectively. The amortized cost at June 30, 2000 and December 31,
1999 was $3.6 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.
NOTE 6 - FINANCE RECEIVABLES
At June 30, 2000 and December 31, 1999, finance receivables consisted
of the following (in millions):
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
------- -----------
<S> <C> <C>
Home equity $22,858.2 $21,800.3
Truck and truck trailer 11,434.1 11,832.7
Personal lending and retail sales
finance 7,032.0 7,905.2
Equipment 5,432.8 5,398.2
Auto fleet leasing 1,601.9 1,509.5
Credit card 33.7 54.6
Manufactured housing - 23.7
Warehouse lending, government guaranteed
lending and municipal finance 1,420.9 1,242.5
--------- ---------
Finance receivables net of unearned
finance income of $4.1 billion and $4.0
billion at June 30, 2000 and December
31, 1999 ("net finance receivables") 49,813.6 49,766.7
Allowance for losses on finance receivables (1,407.4) (1,408.4)
Insurance policy and claims reserves (818.5) (840.8)
--------- ---------
Finance receivables, net of unearned
finance income, allowance for losses
and insurance policy and claims
reserves $47,587.7 $47,517.5
========= =========
</TABLE>
In 2000, the Company has securitized and sold a home equity receivables
portfolio and an automobile retail sales finance receivables portfolio
totaling $2.3 billion and retained interests in the related securitization
trusts approximating $400 million. Pre-tax gains of approximately $47 million
were recorded on these transactions.
NOTE 7 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables were (in
millions):
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30 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 477.4 448.0 943.2
Recoveries on receivables
charged off 84.6 79.6 154.4
Losses sustained (564.2) (515.2) (1,062.4)
Reserves of receivables sold
and held for sale (11.2) (117.4) (153.4)
Reserves of acquired
businesses and other 12.4 160.8 147.7
-------- -------- ---------
Balance at end of period $1,407.4 $1,434.7 $ 1,408.4
======== ======== =========
</TABLE>
NOTE 8 - NOTES RECEIVABLE FROM AFFILIATES
These notes are unsecured demand notes and generally bear interest at
floating rates. The weighted average interest rate at June 30, 2000 was 5.9%.
During the six-month period ended June 30, 2000, net interest income on notes
receivable from related parties, net of notes payable to related parties, was
approximately $224.9 million.
NOTE 9 - OTHER ASSETS
The components of other assets at June 30, 2000 and December 31, 1999
were as follows (in millions):
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
------- -----------
<S> <C> <C>
Goodwill $1,803.3 $1,727.5
Notes and other receivables 802.8 503.0
Finance receivables held for sale
or securitization, net 515.6 -
Other intangible assets, net 480.5 385.0
Collateral held for resale 442.2 303.9
Property and equipment 335.2 296.2
Relocation client advances 235.3 185.4
Other 292.1 286.0
-------- --------
Total other assets $4,907.0 $3,687.0
======== ========
</TABLE>
NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for the purpose of
hedging specific exposures as part of its risk management program. Such
instruments to date have been limited to foreign currency forward exchange,
currency swap, interest rate swap, interest rate option, and treasury futures
and option contracts. All of these instruments are held for purposes other
than trading.
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 at June 30, 2000 was $546.0 million. The fair value of such
agreements at June 30, 2000 would have been an asset of $3.4 million.
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 obligated to exchange specific foreign currencies at
varying times over the next four years. The aggregate notional amount of
these agreements at June 30, 2000 and December 31, 1999 was $6.5 billion and
$5.3 billion, respectively. The fair value of such agreements at June 30,
2000 and December 31, 1999 would have been a liability of $263.6 million and
$250.9 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 asset securitization transactions. The aggregate
notional amount of interest rate swap agreements at June 30, 2000 and December
31, 1999 was $11.5 billion and $7.5 billion, respectively. The fair value of
such agreements at June 30, 2000 and December 31, 1999 would have been a
liability of $54.7 million and $53.6 million, respectively. The aggregate
notional amount of interest rate option agreements at June 30, 2000 was $1.5
billion. The fair value of such agreements at June 30, 2000 would have been
an asset of $1.2 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 options contracts at June 30, 2000 and December 31, 1999 was
$308.9 million and $536.2 million, respectively. The fair value of these
contracts at June 30, 2000 and December 31, 1999 would have been a liability
of $1.9 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. The aggregate notional amount of municipal
bond futures contracts at June 30, 2000 and December 31, 1999 was $243.7
million and $180.1 million, respectively. The fair value of these contracts
at June 30, 2000 and December 31, 1999 would have been a liability of $5.0
million and an asset of $2.4 million, respectively. Such contracts mature on
varying dates through 2000.
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>
<CAPTION>
Six Months Ended June 30 Three Months Ended June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Finance charges $ 3,130.0 $ 3,049.7 $ 1,600.2 $ 1,528.2
Insurance premiums 199.6 189.2 95.4 94.0
Investment and other income 647.0 487.9 376.9 240.3
--------- --------- --------- ---------
Total revenue 3,976.6 3,726.8 2,072.5 1,862.5
Interest expense 1,641.7 1,447.7 863.8 724.9
Operating expenses 878.2 897.6 438.2 436.0
Provision for losses 486.3 465.6 252.1 229.0
Insurance benefits paid
or provided 84.1 74.6 41.1 38.0
--------- --------- --------- ---------
Total expenses 3,090.3 2,885.5 1,595.2 1,427.9
--------- --------- --------- ---------
Earnings before provision
for income taxes 886.3 841.3 477.3 434.6
Provision for income taxes 311.9 309.6 165.3 163.7
--------- --------- --------- ---------
Net earnings $ 574.4 $ 531.7 $ 312.0 $ 270.9
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
---------- ------------
<S> <C> <C>
Net Finance Receivables
End of period $54,604.0 $52,373.0
Average 53,229.8 50,525.1
Total Assets
End of period $69,956.9 $62,391.6
Average 65,999.0 62,389.7
</TABLE>
Net Earnings
Net earnings on an Owned and Managed Basis for the six- and three-
month periods ended June 30, 2000 were $574.4 million and $312.0 million,
respectively, compared to $531.7 million and $270.9 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 six- and
three-month periods ended June 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 11.76% and 11.89% for the six- and
three-month periods ended June 30, 2000, respectively, as compared to
12.29% and 12.33% for the comparable periods in 1999. A shift in product
mix towards more secured portfolios was the primary cause for the decrease,
as secured portfolios generally have lower finance charge rates than
unsecured receivables.
Interest Expense
Managed Basis interest expense increased to $1.6 billion and $863.8
million for the six- and three-month periods ended June 30, 2000,
respectively, compared to $1.4 billion and $724.9 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. In addition, an increase in the Company's
total average borrowing rate in both comparable periods also contributed to
the increase.
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 $1.5 billion and
$736.4 million for the six- and three-month periods ended June 30, 2000,
respectively, compared to $1.6 billion and $803.3 million for the comparable
periods in the prior year. The Company's Managed Basis net interest margin
expressed as a ratio to average managed finance receivables was 5.59% and
5.47% for the six- and three-month periods ended June 30, 2000, respectively,
compared to 6.46% and 6.48% for the comparable periods in the prior year.
Investment and Other Income
Investment and other income, on a Managed Basis, increased to $647.0
million and $376.9 million for the six- and three-month periods ended June 30,
2000 compared to $487.9 million and $240.3 million for the prior year periods.
These increases were primarily caused by the pre-tax gains on securitization
of finance receivables as discussed in Note 6 to the consolidated financial
statements, as well as, increases in investment income and fee income.
Operating Expenses
Managed Basis operating expenses were $878.2 million and $438.2 million
for the six- and three months ended June 30, 2000 as compared to $897.6
million and $436.0 million for the same periods in the prior year. Operating
expenses as a percentage of average managed finance receivables ("Operating
Expense Ratio") decreased to 3.30% and 3.26% for the six- and three-month
periods ended June 30, 2000, compared to 3.62% and 3.52% 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 decreased to 39.0% and 37.5% for the six- and three-month periods
ended June 30, 2000 compared to 40.7% and 39.7% in the same periods in the
prior year. The decline in these ratios primarily was the result of the
second quarter 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 Managed Basis provision for losses increased to $486.3
million and $252.1 million for the six- and three-month periods ended June 30,
2000 from $465.6 million and $229.0 million for the comparable prior year
periods. This was primarily due to an increase in the net losses on a dollar
basis in the Company's managed home equity portfolio as a result of growth in
that receivables portfolio. Accordingly, the Company's total Managed Basis
net credit losses as a percentage of average managed finance receivables
("Loss Ratio") was 1.84% and 1.72% for the six- and three-month periods ended
June 30, 2000 as compared to 1.83% and 1.84% for the comparable periods in
1999. The decline in the Loss Ratio for the three-month period ended June 30,
2000, as compared to the prior year period, primarily was due to lower loss
rates in the Company's home equity and personal lending portfolios.
Financial Condition
During the first six months of 2000, managed finance receivables
increased by $2.2 billion to $54.6 billion. The increase in managed finance
receivables was primarily caused by the Arcadia transaction described in Note
3 to the consolidated financial statements and growth in the home equity
portfolio.
Composite 60+days contractual delinquency declined to 2.45% of gross
managed finance receivables at June 30, 2000, compared to 2.74% 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 $1.4 billion at both
June 30, 2000 and December 31, 1999. Accordingly, the allowance for losses
to net finance receivables was 2.83% at both June 30, 2000 and December 31,
1999. The composite ratio of allowance for losses to trailing net credit
losses ("Loss Coverage") declined to 1.48x at June 30, 2000 from 1.61x at
December 31, 1999. The decline in the Loss Coverage ratio primarily was the
result of a decline in losses since the fourth quarter of 1999.
Company management believes the allowance for losses at June 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 June 30, 2000,
the Company maintained an effective shelf registration statement for the
issuance of debt related securities with remaining capacity of $1.1 billion.
In July 2000, the Company filed a shelf registration statement for the
issuance of debt related securities with a 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 June 30, 2000, the Company had short- and long-term debt outstanding
of $19.4 billion and $35.8 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 six months ended June 30, 2000 and 1999,
the Company raised debt aggregating $7.0 billion and $7.2 billion,
respectively, through public and private offerings.
Substantial additional liquidity is available to the Company's
operations through established credit facilities in support of its commercial
paper program. Such credit facilities provide a means of refinancing its
maturing short-term obligations as needed. At June 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 June 30, 2000, the Company's tangible
net worth, as defined in the syndicated credit facility, was approximately
$8.3 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 and auto related asset classes.
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 June 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 138 ("SFAS 138"). This Statement which
is an amendment to SFAS 133, addresses a limited number of issues causing
implementation difficulties for numerous entities that apply SFAS 133.
Subsequent to evaluating the impact of the amendment, the Company has
completed the process of evaluating various strategies which management
believes will qualify for hedge accounting treatment under SFAS 133. During
the remainder of the year, the Company will transition to new strategies and
systems as necessary in order to be fully compliant. The balance sheet of the
Company will be impacted as this Statement requires companies to record
derivatives on the balance sheet measured at fair value. It is not
anticipated that the implementation of the statement will cause a material
impact to the income statement. This statement will be effective for the
Company for the 2001 fiscal year.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in
interest rates. he 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 June 30, 2000, the one-year gap was a positive 9%, as
compared to a positive 6% and 11% at March 31, 2000 and December 31, 1999,
respectively. 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 both June 30, 2000 and
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.
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 June 30, 2000, interest
rate movements would affect annual after-tax earnings by $28 million, as
compared to $21 million and $8 million at March 31, 2000 and December 31,
1999, respectively, as calculated under the VAR methodology.
<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 the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 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 10-K for the year ended December 31, 1999 the cautionary statements found
on page 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 second quarter ended June 30, 2000, the Company filed
Current Reports on Form 8-K dated April 3, May 5, and June 23, 2000
(2) (related to a debt issuance or registration pursuant to Rule
415); April 14, 2000 (announcing earnings for the first quarter of
2000); and May 3, 2000 (announcing the Company publicly released a
1999 annual report supplement containing financial information and
key data as of and for the years ended December 31,1995 through
1999).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 10, 2000
ASSOCIATES CORPORATION OF NORTH AMERICA
(registrant)
By: /s/David J. Keller
--------------------------
Executive Vice President
and Principal Accounting Officer
