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 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 September 30, 2000, the registrant had 1,150,000,000 and 144,191,583,
respective shares of Class A and Class B Common Stock authorized, 729,191,583
shares of Class A Common Stock issued, of which 728,553,088 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>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Finance charges $7,115.3 $6,787.6 $2,500.0 $2,241.6
Servicing related income 1,441.2 892.2 502.6 386.1
Insurance premiums 857.1 785.5 302.5 268.7
Investment and other
income 501.4 509.7 214.5 144.2
-------- -------- -------- --------
9,915.0 8,975.0 3,519.6 3,040.6
EXPENSES
Interest expense 3,061.4 2,917.8 1,052.2 992.5
Operating expenses 3,228.4 2,900.0 1,137.7 948.9
Provision for losses on
finance receivables 1,390.7 1,096.5 489.8 369.3
Insurance benefits paid
or provided 435.7 330.2 166.3 111.3
-------- -------- -------- --------
8,116.2 7,244.5 2,846.0 2,422.0
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 1,798.8 1,730.5 673.6 618.6
PROVISION FOR INCOME TAXES 647.5 648.8 231.2 231.8
-------- -------- ------- --------
NET EARNINGS $1,151.3 $1,081.7 $ 442.4 $ 386.8
======== ======== ======== ========
NET EARNINGS PER SHARE
Basic $ 1.58 $ 1.49 $ 0.61 $ 0.53
======== ======== ======== ========
Diluted $ 1.58 $ 1.48 $ 0.61 $ 0.53
======== ======== ======== ========
</TABLE>
See notes to consolidated interim financial statements.
<PAGE>
ASSOCIATES FIRST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars In Millions, Except Per Share Information)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 3,203.4 $ 1,026.3
INVESTMENTS IN DEBT AND EQUITY SECURITIES 9,483.3 7,176.5
FINANCE RECEIVABLES, net of unearned finance
income, allowance for losses and insurance
policy and claims reserves 67,554.8 65,656.8
OTHER ASSETS 12,776.1 9,097.2
--------- ---------
Total assets $93,017.6 $82,956.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $32,844.2 $25,991.9
Bank Loans 460.0 1,261.5
ACCOUNTS PAYABLE AND ACCRUALS 5,079.7 4,498.9
LONG-TERM DEBT
Senior Notes 43,507.4 40,978.8
Subordinated and Capital Notes 425.1 425.2
--------- ---------
43,932.5 41,404.0
MINORITY INTEREST IN EQUITY OF CONSOLIDATED
SUBSIDIARY 76.7 -
STOCKHOLDERS' EQUITY
Series A Junior Participating Preferred
Stock, $0.01 par value, 734,500 shares
authorized, no shares issued or outstanding - -
Class A Common Stock, $0.01 par value,
1,150,000,000 shares authorized, 729,191,583
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 5,288.0 5,282.1
Retained Earnings 5,511.0 4,501.8
Accumulated Other Comprehensive (Loss) Income (162.4) 44.7
Less 638,495 and 597,785 shares of Class A
Common Stock at cost held in treasury in 2000
and 1999, respectively and Other (19.4) (35.4)
--------- ---------
Total stockholders' equity 10,624.5 9,800.5
--------- ---------
Total liabilities and stockholders' equity $93,017.6 $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>
Nine Months Ended
September 30
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 1,151.3 $ 1,081.7
Adjustments to reconcile net earnings for
Non-cash and other operating activities:
Provision for losses on finance receivables 1,390.7 1,096.5
Amortization of goodwill and other
intangible assets 210.5 160.6
Depreciation and other amortization 339.7 210.9
Other operating activities (109.0) (374.9)
---------- ---------
Net cash provided from operating
activities 2,983.2 2,174.8
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated (41,952.3) (48,489.4)
Finance receivables liquidated 33,686.8 43,078.8
Sale of finance businesses and branches - 1,659.4
Acquisitions of loan portfolios and other
finance businesses, net (3,984.1) (5,112.0)
Proceeds from securitization of finance
receivables 3,694.9 2,479.4
Other investing activities 576.4 (1,126.0)
--------- ---------
Net cash used for investing
activities (7,978.3) (7,509.8)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 11,514.9 9,635.8
Retirement of long-term debt (9,827.6) (7,249.6)
Increase (decrease) in notes payable 5,651.7 (943.6)
Other financing activities (141.0) (94.7)
--------- ---------
Net cash provided from financing
activities 7,198.0 1,347.9
--------- ---------
EFFECT OF FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS ON CASH (25.8) 89.5
--------- ---------
INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS 2,177.1 (3,897.6)
<PAGE>
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,026.3 4,665.6
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,203.4 $ 768.0
========= =========
</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.
In September 2000, the Company 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"), the Company and
Citigroup Inc. have agreed to merge a wholly-owned subsidiary of Citigroup
Inc. with and into the Company. Under the Agreement, holders of the Company's
common stock will receive 0.7334 shares of Citigroup Inc. common stock for
each share of the Company's common stock. The merger is expected to be
completed prior to December 31, 2000. Upon consummation of the merger, the
Company will become an indirect wholly-owned subsidiary of Citigroup Inc.
NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated interim 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 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 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 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 July 2000, the Company 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.
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.
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>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net earnings per share: (1)
Net earnings $1,151.3 $1,081.7 $442.4 $386.8
Weighted average shares
outstanding 727.6 728.0 728.0 728.1
$ 1.58 $ 1.49 $ 0.61 $0.53
======== ======= ====== ======
<PAGE>
Diluted net earnings per share: (1)
Net earnings $1,151.3 $1,081.7 $442.4 $386.8
Weighted average shares
outstanding plus assumed
conversions 729.1 732.2 730.0 731.6
$ 1.58 $ 1.48 $ 0.61 $0.53
======== ======= ====== ======
Calculation of weighted average
shares outstanding plus
assumed conversions:
Weighted average shares
outstanding 727.6 728.0 728.0 728.1
Effect of dilutive securities 1.5 4.2 2.0 3.5
-------- ------ ------ ------
729.1 732.2 730.0 731.6
======== ====== ====== ======
(1) Net earnings and earnings per share for the nine months ended September
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
$1,222.1 million and basic and diluted earnings per share would have been $1.68.
</TABLE>
During the nine months ended September 30, 2000 and 1999, the Company
declared and paid cash dividends of $0.195 and $0.165 per common share,
respectively.
NOTE 5 - COMPREHENSIVE INCOME
The components of accumulated other comprehensive (loss) income, net of
tax, are as follows (in millions):
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Foreign currency translation adjustments $ (32.8) $ 148.8
Net unrealized loss on available-for-sale
securities (129.6) (104.1)
------- -------
Accumulated other comprehensive (loss)income $(162.4) $ 44.7
======= =======
</TABLE>
Comprehensive income, net of tax, for the nine and three-month periods
ended September 30, 2000 and 1999 consisted of the following components (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $1,151.3 $1,081.7 $442.4 $386.8
Foreign currency translation
adjustments (181.6) (0.9) (67.1) 14.0
Net unrealized (loss) gain on
available-for-sale securities (25.5) (31.5) (19.5) 5.9
-------- -------- ------ ------
Comprehensive income $ 944.2 $1,049.3 $355.8 $406.7
======== ======== ====== ======
</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 estimated market value at
September 30, 2000 and December 31, 1999 was $9.5 billion and $7.1 billion,
respectively. The amortized cost at September 30, 2000 and December 31, 1999
was $9.7 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 other comprehensive income, a component of
stockholders' equity.
<PAGE>
NOTE 7 - 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 $27,344.0 $25,015.0
Personal lending and retail sales finance 17,552.1 16,012.4
Truck and truck trailer 12,404.7 13,130.3
Equipment 7,134.6 6,977.3
Credit card 2,149.8 2,247.1
Auto fleet leasing 2,196.5 2,070.1
Warehouse lending, government guaranteed
lending and municipal finance 2,046.3 1,515.9
Manufactured housing - 1,849.0
---------- ---------
Finance receivables, net of unearned finance
income of approximately $5.1 billion and $4.7
billion at September 31, 2000 and December
31, 1999 ("net finance receivables") 70,828.0 68,817.1
Allowance for losses on finance receivables (2,221.2) (2,174.4)
Insurance policy and claims reserves (1,052.0) (985.9)
--------- ---------
Finance receivables, net of unearned
finance income, allowance for losses
and insurance policy and claims
reserves $67,554.8 $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 pre-tax charge against earnings of approximately $112 million. At
September 30, 2000, the Company included such finance receivables and related
allowance for losses of $1.6 billion and $0.2 billion, respectively, in other
assets as finance receivables held for sale or securitization.
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.
<PAGE>
NOTE 8 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables during the
periods indicated were as follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 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 1,390.7 1,096.5 1,506.4
Recoveries on receivables
charged off 216.8 226.7 268.8
Losses sustained (1,428.7) (1,284.9) (1,717.1)
Reserves of receivables sold
or held for securitization (199.7) (178.0) (214.0)
Reserves of acquired
businesses 99.4 298.7 316.2
Other (31.7) 33.2 35.4
--------- --------- ---------
Balance at end of period $ 2,221.2 $ 2,170.9 $ 2,174.4
========= ========= =========
</TABLE>
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 $ 3,968.0 $3,747.8
Notes and other receivables 2,069.9 1,877.9
Finance receivables held for
sale or securitization, net (1) 2,375.8 153.0
Other intangible assets, net 2,137.8 1,579.4
Property and equipment 764.5 662.2
Collateral held for resale 670.9 431.7
Relocation client advances 288.8 185.4
Other 500.4 459.8
--------- --------
Total other assets $12,776.1 $9,097.2
========= ========
(1) At September 30, 2000, finance receivables held for sale or securitization
includes approximately $575 million of credit card finance receivables
acquired from Zale and approximately $1.4 billion of manufactured housing net
finance receivables as discussed in Note 7.
</TABLE>
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 obligated to exchange specific foreign currencies at
varying times over the next four 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 asset securitization transactions. The aggregate
notional amount of interest rate swap agreements at September 30, 2000 and
December 31, 1999 was $15.8 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 $96.1 million and $46.7 million, respectively. The
aggregate notional amount of interest rate option agreements was $1.5 billion
at September 30, 2000. 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 at September 30, 2000 and December 31, 1999 would have been a
liability of $0.4 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 September 30, 2000 and December 31, 1999 was $261.6
million and $180.1 million, respectively. The fair value of these contracts
at September 30, 2000 and December 31, 1999 would have been an asset of $2.7
million and $2.4 million, respectively. Such contracts mature on varying
dates through 2000.
<PAGE>
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
Nine months ended:
September 30, 2000 $ 2,752.7 $ 3,478.4 $ 2,133.9 $ 2,545.3 $10,910.3
September 30, 1999 2,097.9 3,249.0 2,330.9 2,065.2 9,743.0
Three months ended:
September 30, 2000 $ 1,014.5 $ 1,219.6 $ 749.6 $ 900.5 $3,884.2
September 30, 1999 728.8 1,070.5 790.7 720.3 3,310.3
Segment earnings
Nine months ended:
September 30, 2000 (2) $ 434.9 $ 564.5 $ 106.6 $ 692.8 $1,798.8
September 30, 1999 280.8 541.8 375.5 532.4 1,730.5
Three months ended:
September 30, 2000 $ 191.2 $ 178.6 $ 34.8 $ 269.0 $ 673.6
September 30, 1999 117.4 175.3 118.0 207.9 618.6
Finance receivables (1):
September 30, 2000 $15,848.0 $33,891.0 $22,311.5 $16,357.1 $88,407.6
December 31, 1999 13,234.9 30,091.1 22,397.9 13,196.0 78,919.9
(1) Commercial finance receivables exclude the manufactured housing owned finance receivables and
serviced assets of $1.6 billion and $3.3 billion, respectively, at September 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 $3.0 billion at September
30, 2000.
(2) Excluding the pre-tax charge for Associates Housing Finance ("AHF"),
commercial segment earnings and total earnings would have been $219.0 million and $1.9 billion,
respectively.
</TABLE>
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>
Nine Months Ended Three Months
Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Finance charges $ 9,551.8 $ 8,447.8 $ 3,367.2 $2,897.3
Insurance premiums 857.1 785.5 302.5 268.7
Investment and other income 501.4 509.7 214.5 144.2
--------- ---------- --------- ---------
Total revenue 10,910.3 9,743.0 3,884.2 3,310.2
Interest expense 3,520.2 3,142.5 1,226.4 1,074.8
Operating expenses 3,228.4 2,900.0 1,137.7 948.9
Provision for losses 1,927.2 1,639.8 680.2 556.6
Insurance benefits paid
or provided 435.7 330.2 166.3 111.3
--------- ---------- --------- ---------
Total expenses 9,111.5 8,012.5 3,210.6 2,691.6
--------- ---------- --------- ---------
Earnings before provision
for income taxes 1,798.8 1,730.5 673.6 618.6
Provision for income taxes 647.5 648.8 231.2 231.8
--------- ---------- --------- --------
Net earnings $ 1,151.3 $ 1,081.7 $ 442.4 $ 386.8
========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Net Finance Receivables (1)
End of period $ 88,407.6 $78,919.9
Average 82,959.6 73,621.8
Total Assets
End of period $107,494.5 $95,088.0
Average 100,203.3 89,575.4
(1) Excludes the manufactured housing owned finance receivables and serviced
assets of $1.6 billion and $3.3 billion, respectively, at September 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 $3.0 billion at September 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 September 30, 2000 and December 31, 1999.
</TABLE>
Net Earnings
Net earnings on an owned and managed basis increased for the nine- and
three-month periods ended September 30, 2000 over the same periods in the
previous year. 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 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 ("Finance Charge Ratio") increased to 15.35% and
15.68% for the nine and three-month periods ended September 30, 2000,
respectively, from 14.47% and 14.51% 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 $3.5 billion and $1.2 billion
for the nine- and three-month periods ended September 30, 2000, respectively,
from $3.1 billion and $1.1 billion for the respective nine- and three-month
periods ended September 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. Additionally, the
Company's total average borrowing rate increased from 5.48% for the nine
months ended September 30, 1999 to 5.82% 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 increased to $6.0
billion and $2.1 billion for the nine- and three-month periods ended September
30, 2000, respectively, compared to $5.3 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
also improved to 9.69% and 9.97% for the nine and three-month periods ended
September 30, 2000, respectively, compared to 9.09% and 9.13% for the
comparable periods in the prior year.
Investment and Other Income
Investment and other income, on a Managed Basis, was $501.4 million and
$214.5 million for the nine and three-month periods ended September 30, 2000,
respectively, compared to $509.7 million and $144.2 million for the comparable
periods in 1999.
The increase in investment and other income for the three-month period
ended September 30, 2000 as compared to the prior year period primarily
relates to an increase in investment and fee related income and securitization
gains. The decrease in investment and other income for the nine-month period
ended September 30, 2000 as compared to the prior year period primarily
relates to the special pre-tax charge 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, 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 nine months ended September 30, 2000.
Operating Expenses
Nine- and three-month Managed Basis operating expenses for the periods
ended September 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 5.19% and 5.30%
for the nine and three months ended September 30, 2000, respectively, compared
to 4.97% and 4.75% for the same periods in the prior year. The increase in the
Operating expense ratio for the nine and three months ended September 30, 2000
is primarily 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. and a $25 million charge in the first
quarter of 2000 related to the discontinuation of the manufactured housing
loan origination business. 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, adjusted to exclude the $34 million and
$25 million pre-tax charge as described above, was 45.3% and 44.3% for the
nine and three-month periods ended September 30, 2000, respectively compared
to 46.3% and 44.7% for the same periods in the prior year.
Provision for Losses
The Company's Managed Basis provision for losses increased to $1.9
billion for the first nine months of 2000 from $1.6 billion for the same
period in 1999. The provision for losses for the three-month period ended
September 30, 2000 increased to $680.2 million from $556.6 million in the
prior year period. In both periods, the provision increased as a result of
increased credit losses.
Total Managed Basis net credit losses from on-going operations, which
excludes the Company's Associates Housing Finance ("AHF") unit, as a
percentage of average managed finance receivables (the "Loss Ratio") were
2.81% and 2.84% for the nine and three-month periods ended September 30, 2000,
respectively, compared to 2.78% and 2.73% for the same periods in 1999. The
increase in the Loss Ratio for the three months ended September 30, 2000 was
primarily due to higher loss rates in the personal lending and sales finance
and truck and truck trailer portfolios.
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
Managed finance receivables increased $9.5 billion during the nine-month
period ended September 30, 2000 to $88.4 billion. The increase in managed
finance receivables primarily was the result of the previously described
acquisitions and internal growth in the home equity portfolio and personal
lending and sales finance portfolios. 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
2.58% of managed finance receivables at September 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 3.14% at
September 30, 2000 from 3.16% at December 31, 1999. Composite 60+days
contractual delinquency for the Company's AHF unit was 1.97% of managed
receivables at September 30, 2000. The loss ratio for the Company's AHF unit
was 3.23% of managed receivables for the nine months ended September 30, 2000
compared to 2.28% for the prior year period.
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,
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 $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 September 30, 2000, the Company had short- and long-term debt
outstanding of $33.3 billion and $43.9 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 nine months ended September 30,
2000 and 1999, the Company raised term debt aggregating $10.8 billion and $9.6
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 September 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 September 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 $22 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.
In the second quarter of 2000, the Company's board of directors
authorized the repurchase of up to 50 million shares of the Company's stock,
to be implemented over time and funded through excess capital formation. On
Sept. 6, 2000, the Company and Citigroup Inc. announced they entered into a
merger agreement as discussed in Note 1 to the consolidated financial
statements. Subsequent to the announcement of the Agreement, the Company's
board of directors rescinded the authorization to repurchase up to 50 million
shares of company stock. No company stock was repurchased under the Company's
board of directors initial authorization.
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 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.
None to report.
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 third quarter ended September 30, 2000, The Company
filed a Current Report on Form 8-K as of July 18, 2000
announcing earnings for the second quarter of 2000);
and September 6, 2000 (announcing it
entered into an agreement to merge with Citigroup).
20
<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.
November 14, 2000
ASSOCIATES FIRST CAPITAL CORPORATION
(registrant)
By: /s/ David J. Keller
------------------------------
Executive Vice President
and Principal Accounting Officer
