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 2-44197
--------------------------------------
ASSOCIATES FIRST CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-0876639
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 East Carpenter Freeway, Irving, Texas 75062-2729
(Address of principal executive offices)
(Zip code)
972-652-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes..X.. No.....
<PAGE>
As of June 30, 2000, the registrant had 1,150,000,000 and 144,118,820
respective shares of Class A and Class B Common Stock authorized, 728,865,065
shares of Class A Common Stock issued, of which 728,407,156 shares were
outstanding; and no shares of Class B Common Stock were issued or outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS.
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(In Millions, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Finance charges $4,615.3 $4,546.0 $2,337.1 $2,262.1
Servicing related income 938.6 506.1 535.0 282.8
Insurance premiums 554.6 516.8 279.3 260.5
Investment and other
income 286.9 365.5 186.1 184.0
-------- -------- -------- --------
6,395.4 5,934.4 3,337.5 2,989.4
EXPENSES
Interest expense 2,009.2 1,925.3 1,048.1 965.3
Operating expenses 2,090.7 1,951.1 1,046.5 971.5
Provision for losses on
finance receivables 900.9 727.2 449.4 364.4
Insurance benefits paid
or provided 269.4 218.9 144.0 115.2
-------- -------- -------- --------
5,270.2 4,822.5 2,688.0 2,416.4
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 1,125.2 1,111.9 649.5 573.0
PROVISION FOR INCOME TAXES 416.3 417.0 240.3 214.9
-------- -------- -------- --------
NET EARNINGS $ 708.9 $ 694.9 $ 409.2 $ 358.1
======== ======== ======== ========
NET EARNINGS PER SHARE
Basic $ 0.97 $ 0.95 $ 0.56 $ 0.49
======== ======== ======== ========
Diluted $ 0.97 $ 0.95 $ 0.56 $ 0.49
======== ======== ======== ========
</TABLE>
See notes to consolidated interim financial statements.
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars In Millions, Except Per Share Information)
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
---------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 1,334.0 $ 1,026.3
INVESTMENTS IN DEBT AND EQUITY SECURITIES 8,010.6 7,176.5
FINANCE RECEIVABLES, net of unearned finance
income, allowance for losses and insurance
policy and claims reserves 65,723.2 65,656.8
OTHER ASSETS 12,633.2 9,097.2
--------- ---------
Total assets $87,701.0 $82,956.8
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
NOTES PAYABLE, unsecured short-term
Commercial Paper $31,034.5 $25,991.9
Bank Loans 228.5 1,261.5
ACCOUNTS PAYABLE AND ACCRUALS 3,990.7 4,498.9
LONG-TERM DEBT
Senior Notes 41,697.5 40,978.8
Subordinated and Capital Notes 455.2 425.2
--------- ---------
42,152.7 41,404.0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
---------- -----------
(Unaudited)
<S> <C> <C>
STOCKHOLDERS' EQUITY
Series A Junior Participating Preferred
Stock, $0.01 par value, 734,500 shares
authorized, no shares issued or outstanding - -
Class A Common Stock, $0.01 par value,
1,150,000,000 shares authorized, 728,865,065
and 728,747,443 shares issued in 2000 and
1999, respectively 7.3 7.3
Class B Common Stock, $0.01 par value,
144,118,820 shares authorized, no shares
issued or outstanding - -
Paid-in Capital 5,281.9 5,282.1
Retained Earnings 5,115.9 4,501.8
Accumulated Other Comprehensive (Loss) Income (75.8) 44.7
Less 457,909 and 597,785 shares of Class A
Common Stock at cost held in Treasury in 2000
and 1999, respectively, and Restricted Stock (34.7) (35.4)
--------- ---------
Total stockholders' equity 10,294.6 9,800.5
--------- ---------
Total liabilities and stockholders' equity $87,701.0 $82,956.8
========= =========
</TABLE>
See notes to consolidated interim financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
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 $ 708.9 $ 694.9
Adjustments to reconcile net earnings for
non-cash and other operating activities:
Provision for losses on finance receivables 900.9 727.2
Amortization of goodwill and other
intangible assets 135.8 109.1
Depreciation and other amortization 201.8 138.7
Other operating activities (1,023.2) (344.2)
---------- ---------
Net cash provided from operating
activities 924.2 1,325.7
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated (28,679.5) (32,963.8)
Finance receivables liquidated 23,796.3 29,692.6
Sale of finance businesses and branches - 1,490.1
Acquisitions of loan portfolios and
other finance businesses, net (2,839.3) (4,511.9)
Proceeds from securitization of finance
receivables 2,327.7 664.6
Other investing activities 213.4 (670.8)
--------- ---------
Net cash used for investing
activities (5,181.4) (6,299.2)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 8,456.9 8,294.2
Retirement of long-term debt (7,491.6) (5,295.1)
Increase in notes payable 3,698.0 856.3
Other financing activities (94.7) (51.5)
--------- ---------
Net cash provided from financing
activities 4,568.6 3,803.9
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH (3.7) (10.6)
--------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 307.7 (1,180.2)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,026.3 4,665.6
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,334.0 $ 3,485.4
========== ==========
</TABLE>
See notes to consolidated interim financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Associates First Capital Corporation (the "Company"), a Delaware
corporation, is a leading diversified finance organization providing finance,
leasing, insurance and related services to consumers and businesses in the
United States and internationally.
NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant
intercompany balances and transactions. 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 January 2000, the Company entered into an agreement with KeyCorp,
under which the companies will jointly manage KeyCorp's credit card program.
Additionally, the Company 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.
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 June 30, 2000, the Company managed $3.4 billion of Arcadia's
serviced assets originated and sold with servicing retained prior to the
acquisition.
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 July 2000, the Company announced an agreement to purchase
approximately $630 million in credit card receivables from Zale Corporation
("Zale"). Additionally, the Company entered into an operating agreement for
Zale's on-going credit card business.
NOTE 4 - EARNINGS PER SHARE
Earnings per share on a basic and diluted basis for the periods
indicated is calculated as follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net earnings per share: (1)
Net earnings $708.9 $694.9 $409.2 $358.1
Weighted average shares
outstanding 727.4 728.0 727.5 728.4
$ 0.97 $ 0.95 $ 0.56 $ 0.49
====== ====== ====== ======
Diluted net earnings per share: (1)
Net earnings $708.9 $694.9 $409.2 $358.1
Weighted average shares
outstanding plus assumed
conversions 728.7 732.5 729.1 732.7
$ 0.97 $ 0.95 $ 0.56 $ 0.49
====== ====== ====== ======
Calculation of weighted average
shares outstanding plus
assumed conversions:
Weighted average shares
outstanding 727.4 728.0 727.5 728.4
Effect of dilutive securities 1.3 4.5 1.6 4.3
------ ------ ------ ------
728.7 732.5 729.1 732.7
====== ====== ====== ======
(1) Net earnings and earnings per share for the six months ended
June 30, 2000 include a special pre-tax charge of approximately
$112 million as described in Note 7. Excluding the special pre-
tax charge, net earnings would have been $779.7 million and basic
and diluted earnings per share would have been $1.07.
</TABLE>
During the six months ended June 30, 2000 and 1999, the Company declared
and paid cash dividends of $0.13 and $0.11 per common share, respectively.
NOTE 5 - 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 $ 34.3 $ 148.8
Net unrealized loss on available-for-sale
securities (110.1) (104.1)
------- -------
Accumulated other comprehensive (loss) income $ (75.8) $ 44.7
======= =======
</TABLE>
Comprehensive income, net of tax, for the six- and three-month periods
ended June 30, 2000 and 1999 consisted of (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 $708.9 $694.9 $409.2 $358.1
Foreign currency translation
adjustments (114.5) (14.9) (84.9) (22.3)
Net unrealized (loss) gain on
available-for-sale securities (6.0) (37.4) 2.2 (42.3)
------ ------ ------ ------
Total Comprehensive income $588.4 $642.6 $326.5 $293.5
====== ====== ====== ======
</TABLE>
NOTE 6 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
Available-for-sale securities consist of retained securitization
interests, notes and preferred stock and other equity securities primarily
held by the Company's insurance subsidiaries. The Company classifies these
debt and equity securities as available-for-sale securities and adjusts their
recorded value to market. The estimated market value at June 30, 2000 and
December 31, 1999 was $8.0 billion and $7.1 billion, respectively. The
amortized cost at June 30, 2000 and December 31, 1999 was $8.2 billion and
$7.3 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 7 - 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 $26,264.7 $25,015.0
Personal lending and retail sales
finance 16,371.1 16,012.4
Truck and truck trailer 12,722.4 13,130.3
Equipment 7,109.2 6,977.3
Credit card 2,358.4 2,247.1
Auto fleet leasing 2,192.6 2,070.1
Manufactured housing - 1,849.0
Warehouse lending, government guaranteed
lending and municipal finance 1,784.4 1,515.9
--------- ---------
Finance receivables, net of unearned
finance income of approximately $4.7
billion at June 30, 2000 and December
31, 1999 ("net finance receivables") 68,802.8 68,817.1
Allowance for losses on finance receivables (2,115.7) (2,174.4)
Insurance policy and claims reserves (963.9) (985.9)
--------- ---------
Finance receivables, net of unearned
finance income, allowance for losses and
insurance policy and claims reserves $65,723.2 $65,656.8
========= =========
</TABLE>
In January 2000, the Company announced it would discontinue originating
loans for manufactured housing. As a result of this decision, the Company
took a special pre-tax charge against earnings of approximately $112 million.
At June 30, 2000, the Company included such finance receivables and related
allowance for losses of $1.7 billion and $0.2 billion, respectively, in other
assets as finance receivables held for sale or securitization.
In 2000, the Company has securitized and sold a home equity receivables
portfolio, a credit card receivables portfolio and an automobile retail sales
finance receivables portfolio totaling $2.7 billion and retained interests in
the related securitization trusts approximating $473 million. Pre-tax gains
of approximately $53 million were recorded on these transactions.
NOTE 8 - 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 $2,174.4 $1,978.7 $ 1,978.7
Provision for losses 900.9 727.2 1,506.4
Recoveries on receivables
charged off 145.0 157.5 268.8
Losses sustained (937.3) (856.9) (1,717.1)
Reserves of receivables sold
and held for securitization (185.7) (185.2) (214.0)
Reserves of acquired
businesses and other 18.4 318.1 351.6
-------- -------- ---------
Balance at end of period $2,115.7 $2,139.4 $ 2,174.4
======== ======== =========
</TABLE>
<PAGE>
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, net $ 3,624.7 $3,747.8
Finance receivables held for sale
or securitization, net (1) 3,514.5 153.0
Other intangible assets, net 2,097.2 1,579.4
Notes and other receivables 1,281.7 1,877.9
Property and equipment 736.3 662.2
Collateral held for resale 606.8 431.7
Relocation client advances 235.3 185.4
Other 536.7 459.8
--------- --------
Total other assets $12,633.2 $9,097.2
========= ========
(1) At June 30, 2000, finance receivables held for sale or securitization
includes approximately $516 million of automobile finance receivables
acquired from Arcadia, approximately $1.1 billion of securitizable finance
receivables acquired from KeyCorp and approximately $1.5 billion of
manufactured housing net finance receivables as discussed in Note 7.
</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.
Instruments currently used by the Company are foreign currency forward
exchange, 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.
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 $2.9 billion and $2.8 billion at June 30, 2000 and December 31,
1999, respectively. The fair value of such agreements at June 30, 2000 and
December 31, 1999 would have been an asset of $14.5 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 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 $7.0 billion and
$5.9 billion, respectively. The fair value of such agreements at June 30,
2000 and December 31, 1999 would have been a liability of $303.0 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 asset securitization transactions. The aggregate
notional amount of interest rate swap agreements at June 30, 2000 and December
31, 1999 was $15.8 billion and $9.2 billion, respectively. The fair value of
such agreements at June 30, 2000 and December 31, 1999 would have been a
liability of $63.6 million and $46.7 million, respectively. The aggregate
notional amount of interest rate option agreements was $1.5 billion at June
30, 2000. 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 option 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.
NOTE 11 - SEGMENT REPORTING
The Company is organized into five primary business units: U.S. credit
card, U.S. consumer branch, U.S. home equity, commercial and international
finance. The U.S. consumer branch and U.S. home equity business units are
aggregated into one reportable U.S. consumer finance segment due to their
similar operating characteristics. The Company's corporate activities
include, among others, managing the operations of its domestic and foreign
subsidiaries, accessing the global debt, securitization and capital markets
and managing the mix of businesses in its portfolio. The Company fully
allocates its corporate activities to its business segments primarily based
upon managed receivables.
The Company allocates resources to and evaluates the performance of its
segments primarily based on total revenue, net interest margin, segment
earnings and managed finance receivables adjusted to include the impact of
receivables either held for sale or sold with servicing retained ("Managed
Basis"). Managed Basis revenue, earnings and receivables information for each
of the Company's reportable segments is presented below (in millions):
<TABLE>
<CAPTION>
U.S. U.S.
Credit Consumer International
Card Finance Commercial Finance Total
------ -------- ---------- ------------- -----
<S> <C> <C> <C> <C> <C>
Total revenue
Six months ended:
June 30, 2000 $ 1,577.7 $ 2,353.3 $ 1,432.2 $ 1,662.9 $ 7,026.1
June 30, 1999 1,214.8 2,238.0 1,571.2 1,408.8 6,432.8
Three months ended:
June 30, 2000 $ 817.6 $ 1,216.7 $ 754.8 $ 856.7 $ 3,645.8
June 30, 1999 593.7 1,113.5 806.8 733.3 3,247.3
Segment earnings
Six months ended:
June 30, 2000 (2) $ 312.7 $ 299.6 $ 78.4 $ 434.5 $ 1,125.2
June 30, 1999 167.6 373.2 255.2 315.9 1,111.9
Three months ended:
June 30, 2000 (2) $ 160.3 $ 170.2 $ 80.0 $ 239.0 $ 649.5
June 30, 1999 85.3 199.2 128.6 159.9 573.0
Finance receivables (1):
June 30, 2000 $13,321.6 $34,073.1 $22,444.6 $14,959.2 $84,798.5
December 31, 1999 11,576.0 31,566.8 22,453.8 13,323.3 78,919.9
(1) Commercial finance receivables exclude the manufactured housing owned finance
receivables and
serviced assets of $1.7 billion and $3.4 billion, respectively, at June 30, 2000 and $1.8 billion
and $3.6 billion at December 31, 1999, respectively. The owned receivables have been
reclassified to finance receivables held for sale or securitization and are included in other
assets. Additionally, U.S. Consumer Finance receivables excludes the serviced assets of Arcadia
securitized prior to the acquisition of Arcadia of $3.4 billion at June 30, 2000.
(2) Excluding the special pre-tax charge, as discussed in Note 7, commercial segment earnings
and
total earnings would have been $187.8 million and $1.2 billion, respectively.
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
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 excludes the
serviced assets of Arcadia originated and sold with servicing retained prior
to the acquisition of Arcadia by the Company and the manufactured housing
owned finance receivables and serviced assets. On an Owned Basis, the net
earnings on the Company's retained securitization interests and receivables
held for securitization or sale, 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. Management believes the discussion of Managed Basis
information is useful in evaluating the Company's operating performance.
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 $ 6,184.6 $ 5,550.5 $ 3,180.4 $ 2,802.8
Insurance premiums 554.6 516.8 279.3 260.5
Investment and other income 286.9 365.5 186.1 184.0
---------- ---------- --------- ---------
Total revenue 7,026.1 6,432.8 3,645.8 3,247.3
Interest expense 2,293.8 2,067.7 1,192.4 1,036.1
Operating expenses 2,090.7 1,951.1 1,046.5 971.5
Provision for losses 1,247.0 1,083.2 613.4 551.5
Insurance benefits paid
or provided 269.4 218.9 144.0 115.2
----------- ---------- -------- ---------
Total expenses 5,900.9 5,320.9 2,996.3 2,674.3
----------- ---------- -------- ---------
Earnings before provision
for income taxes 1,125.2 1,111.9 649.5 573.0
Provision for income taxes 416.3 417.0 240.3 214.9
---------- -------- --------- ---------
Net earnings $ 708.9 $ 694.9 $ 409.2 $ 358.1
========== ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
------ -----------
<S> <C> <C>
Net Finance Receivables (1)
End of period $ 84,798.5 $78,919.9
Average 81,497.5 73,621.8
Total Assets
End of period $100,943.9 $95,088.0
Average 98,197.6 89,575.4
(1) Excludes the manufactured housing owned finance receivables and serviced
assets of $1.7 billion and $3.4 billion, respectively, at June 30, 2000 and
$1.8 billion and $3.6 billion, respectively, at December 31, 1999 and the
serviced assets of Arcadia originated and sold with servicing retained prior
to the acquisition of Arcadia of $3.4 billion at June 30, 2000.
Additionally, the manufactured housing owned finance receivables and serviced
assets have been excluded from the calculation of the average net finance
receivables for the periods ended June 30, 2000 and December 31, 1999.
</TABLE>
Net Earnings
Net earnings on an owned and managed basis increased for the six-month
period ended June 30, 2000 over the same period in the previous year. In
January 2000, the Company announced its intention to discontinue the loan
origination operations of its Associates Housing Finance ("AHF") unit. As a
result of this announcement, the Company took a special pre-tax charge against
earnings of approximately $112 million in the first quarter of 2000.
Excluding the special pre-tax charge, net earnings would have increased to
$779.7 million for the six-month period ended June 30, 2000 from $694.9
million for the same period in the previous year. Net earnings increased for
the three-month period ended June 30, 2000 to $409.2 million as compared to
$358.1 million in the prior year period. The principal factors that
influenced the changes in the Company's net earnings are described in the
sections that follow.
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 ("Finance Charge Ratio") increased to 15.18% and
15.36% for the six and three-month periods ended June 30, 2000, respectively,
from 14.46% and 14.49% 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.
Interest Expense
Managed Basis interest expense increased to $2.3 billion and $1.2 billion
for the six- and three-month periods ended June 30, 2000, respectively, from
$2.1 billion and $1.0 billion for the respective six- and three-month periods
ended June 30, 1999. This increase primarily was 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 increased to $3.9
billion and $2.0 billion for the six- and three-month periods ended June 30,
2000, respectively, compared to $3.5 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 to average managed finance receivables
also improved to 9.55% and 9.60% for the six and three-month periods ended
June 30, 2000, respectively, compared to 9.07% and 9.14% for the comparable
periods in the prior year.
Investment and Other Income
Investment and other income, on a Managed Basis, was $286.9 million and
$186.1 million for the six and three-month periods ended June 30, 2000,
respectively, compared to $365.5 million and $184.0 million for the comparable
periods in 1999.
The decrease in investment and other income for the six-month period
ended June 30, 2000 as compared to the prior year period primarily relates to
the special pre-tax charge of approximately $47 million related to the write
down of the manufactured housing securitization retained interest, the
earnings of net assets held for sale and businesses sold during the first
quarter of 1999 of approximately $31 million, and the net proceeds on the sale
of the Company's recreational vehicle business which were included in
investment and other income for the three-month period ended March 31, 1999.
This was partially offset by pre-tax gains on securitizations during the six
months ended June 30, 2000 of $53 million.
Operating Expenses
Six- and three-month Managed Basis operating expenses for the periods
ended June 30, 2000 were higher on a dollar basis than in the corresponding
periods in 1999, reflecting growth in the size of the Company and business
mix. Operating expenses as a percentage of average managed finance receivables
("Operating Expense Ratio") increased to 5.13% and 5.05% for the six and three
months ended June 30, 2000, respectively, compared to 5.08% and 5.02% for the
same periods in the prior year. The increase in the Operating expense ratio
for the six months ended June 30, 2000 is primarily related to the first
quarter 2000 special pre-tax charge of approximately $25 million related to
exit costs. Excluding this charge, the Operating Expense Ratio for the six
months ended June 30, 2000 would have been 5.07%.
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 was 46.9% and
45.3% for the six and three-month periods ended June 30, 2000, respectively
compared to 47.1% and 46.4% for the same periods in the prior year. Excluding
the special pre-tax charge, the efficiency ratio declined to 45.8% for the six
months ended June 30, 2000. The decrease in the efficiency ratio for both
periods is primarily related to integration and other costs of the Avco
acquisition during the six and three months ended June 30, 1999.
Provision for Losses
The Company's Managed Basis provision for losses increased to $1.2
billion for the first six months of 2000 from $1.1 billion for the same period
in 1999. The provision for losses for the three-month period ended June 30,
2000 increased to $613.4 million from $551.5 million in the prior year period.
In both periods, the provision increased principally as a result of increased
Managed Basis net credit losses.
Total Managed Basis net credit losses from on-going operations, which
excludes the Company's AHF unit, as a percentage of average managed finance
receivables (the "Loss Ratio") were 2.79% and 2.73% for the six and three-
month periods ended June 30, 2000, respectively, compared to 2.81% and 2.84%
for the same periods in 1999. The decrease in the Loss Ratio for the three
months ended June 30, 2000 was primarily due to a decrease in loss rates in
the home equity, personal lending and credit card receivables portfolios.
Financial Condition
Managed finance receivables increased slightly during the six-month
period ended June 30, 2000. This change was primarily the result of the
acquisitions and receivables growth of $4.2 billion. The Company did not
include manufactured housing receivables in total managed receivables because
it had discontinued these loan origination operations. The Company will
continue to service manufactured housing accounts and report manufactured
housing receivables as a component of total managed assets.
Composite 60+days contractual delinquency from ongoing operations was
2.59% of managed finance receivables at June 30, 2000, compared to 2.81% at
December 31, 1999. This decrease is primarily a result of lower delinquencies
in the home equity, personal lending and credit card portfolios. The
allowance for losses to net finance receivables declined to 3.07% at June 30,
2000 from 3.16% at December 31, 1999. Composite 60+days contractual
delinquency for the Company's AHF unit was 1.69% at June 30, 2000. The loss
ratio for the Company's AHF unit was 2.84% at June 30, 2000 compared to 2.58%
at December 31, 1999.
Liquidity and Capital Resources
Through its asset and liability management function, the Company
maintains a disciplined approach to the management of liquidity, capital,
interest rate risk and foreign exchange 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. 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. The
Company maintains a universal shelf registration statement with remaining
capacity of $5.7 billion. A subsidiary of the Company also maintains 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 and equity markets in a cost-efficient manner. Continued access to the
public and private debt markets is critical to the Company's ability to
continue to fund its operations. The Company seeks to maintain a conservative
liquidity position and actively manages its liability and capital levels, debt
maturities, diversification of funding sources and asset liquidity to ensure
that it is able to meet its obligations as they mature. The Company's
domestic operations principally are funded through domestic and international
borrowings and asset securitizations. The Company's foreign subsidiaries
principally are financed through private and public debt borrowings in the
transactional currency and fully hedged intercompany borrowings.
At June 30, 2000, the Company had short- and long-term debt outstanding
of $31.3 billion and $42.2 billion, respectively. Short-term debt principally
consists of commercial paper and represents the Company's primary source of
short-term liquidity. Long-term debt principally consists of senior unsecured
long-term debt issued by the Company's principal domestic operating
subsidiary, and to a lesser extent, private and public borrowings made by the
Company's foreign subsidiaries. During the six months ended June 30, 2000 and
1999, the Company raised term debt aggregating $8.5 billion and $8.3 billion,
respectively, through public and private offerings.
Substantial additional liquidity is available to the Company's
operations through established credit facilities in support of its net short-
term borrowings. Such credit facilities provide a means of refinancing its
maturing short-term obligations as needed. At June 30, 2000, these credit
facilities were allocated to provide at least 75% backup coverage of the
Company's recurring commercial paper borrowings and utilized uncommitted lines
of credit. 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 $6.7 billion.
The Company has access to other sources of liquidity such as the issuance
of alternative forms of capital, the issuance of common and preferred stock
and the increased use of asset securitization. The Company's securitization
transactions have included the manufactured housing, home equity, credit card
and automobile financing related asset-backed classes. The Company has
additional asset classes in its portfolio which can be securitized, including
asset classes within its foreign operations.
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 $5.3 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 $27 million in connection with these options.
As part of its risk management activities, the Company hedges its net
investment in its Japanese subsidiaries. To date the Company has used forward
contracts to hedge the Yen denominated investment. Beginning in the second
quarter of 2000, the Company has begun to transition to other hedging
instruments by shortening the maturity of its forward contracts. 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. It is not anticipated
that the implementation of the statement will cause a material impact on the
Company's operating results. This statement will be effective for the Company
for the 2001 fiscal year.
The Company's board of directors authorized the repurchase of up to 50
million shares of the Company's stock. This program allows the Company at any
time in the future to repurchase securities at attractive prices should
favorable market conditions occur. At June 30, 2000, no shares have been
repurchased under this program.
During the six months ended June 30, 2000 and 1999, the Company declared
and paid cash dividends of $0.13 and $0.11 per common share, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in
interest rates. 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 June 30, 2000, the one-year gap was a negative 4%, as
compared to a negative 10% and 5% at March 31, 2000 and December 31, 1999,
respectively. A negative one-year gap indicates that a greater percentage of
liabilities versus assets 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 5% at June 30, 2000, 6% at
March 31, 2000 and 4% 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 $77 million, as
compared to $69 million and $60 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.
ITEM 2. CHANGES IN SECURITIES.
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting of shareholders on May 22,
2000.
(b) The Company's shareholders elected J. Carter Bacot, Eric S.
Dobkin, Roy A. Guthrie, Keith W. Hughes, William M. Isaac, Judy
Jolley Mohraz, H. James Toffey, Jr. and Kenneth Whipple to the
Board of Directors. No other director's terms continued after
this meeting.
(c) The Company's shareholders voted for the election of the
directors listed in paragraph (b), as follows:
Directors Number of Votes
--------- ---------------
Keith W. Hughes 585,157,408
J. Carter Bacot 634,361,565
Eric S. Dobkin 620,069,349
Roy A. Guthrie 634,473,957
William M. Isaac 621,838,642
Judy Jolley Mohraz 634,129,333
H. James Toffey, Jr. 634,412,009
Kenneth Whipple 626,352,124
The Company's shareholders also voted on the approval of the
selection by the Audit Committee of Ernst & Young L.L.P. as the
Company's independent public accountants for 2000, as follows:
Votes For Votes Against Abstain
--------- ------------- -------
638,203,240 860,671 2,003,606
The Company's shareholders also voted on a proposal for increasing
the Class A Common shares available under the Incentive Compensation
Plan, as follows:
Votes For Votes Against Abstain
--------- ------------- -------
338,816,341 235,013,744 3,535,456
The Company's shareholders also voted on a shareholder proposal
to establish a committee to monitor the Company's lending practices, as
follows:
Votes For Votes Against Abstain
--------- ------------- -------
44,748,203 448,700,751 83,916,587
The Company's shareholders did not vote on any other matters at
the Company's annual meeting of shareholders.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 (the
"1995 Act"). The 1995 Act provides a "safe harbor" for forward-looking
statements to encourage companies to provide information without fear
of litigation so long as those statements are identified as forward-
looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected. Although the Company does not
anticipate that it will make forward-looking statements as a general
policy, the Company will make forward-looking statements as required by
law or regulation, and from time to time may make such statements with
respect to management's estimation of the future operating results and
business of the Company.
The Company hereby incorporates into this report by reference to
its Form 10-K for the year ended December 31, 1999 the cautionary
statements found on pages 30-31 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.
(99) Residual Value Obligation
(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 11, 2000
(announcing financial results for the quarter ended March 31,
2000); April 17, 2000 (announcing the completion of the
acquisition of Arcadia Financial Ltd.); and May 2, 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 December 31,
1999).
<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.
August 10, 2000
ASSOCIATES FIRST CAPITAL CORPORATION
(registrant)
By: /s/ David J. Keller
------------------------------
Executive Vice President
and Principal Accounting Officer
