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, 1996
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)
214-541-4000
(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, 1996, the registrant had 260 shares of Common Stock and
1,000,000 shares of Class B Common Stock issued and outstanding, all of which
were owned directly or indirectly by Associates First Capital Corporation. The
registrant meets the conditions set forth in General Instruction H.(1)(a) and
(b) to Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF EARNINGS
(In Millions)
Six Months Ended Three Months Ended
June 30 June 30
1996 1995 1996 1995
REVENUE
Finance charges $2,662.5 $2,302.8 $1,354.2 $1,181.6
Insurance premiums 169.8 165.0 88.2 83.1
Investment and other
income 134.2 124.0 69.9 63.9
2,966.5 2,591.8 1,512.3 1,328.6
EXPENSES
Interest expense 1,046.0 953.2 531.3 490.7
Operating expenses 742.4 690.2 375.7 356.7
Provision for losses on
finance receivables 477.0 347.9 246.0 176.6
Insurance benefits paid
or provided 68.0 66.0 35.0 29.7
2,333.4 2,057.3 1,188.0 1,053.7
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 633.1 534.5 324.3 274.9
PROVISION FOR INCOME TAXES 233.8 195.8 118.8 102.2
NET EARNINGS $ 399.3 $ 338.7 $ 205.5 $ 172.7
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(In Millions)
June 30 December 31
1996 1995
ASSETS
CASH AND CASH EQUIVALENTS $ 273.6 $ 309.2
INVESTMENTS IN DEBT AND EQUITY SECURITIES
- NOTE 3 958.0 884.7
FINANCE RECEIVABLES, net of unearned finance
income - NOTE 4
Consumer Finance 26,997.4 24,609.2
Commercial Finance 12,454.3 11,759.1
Total net finance receivables 39,451.7 36,368.3
ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
- NOTE 5 (1,299.9) (1,109.2)
INSURANCE POLICY AND CLAIMS RESERVES (634.9) (602.8)
OTHER ASSETS - NOTE 6 1,437.6 1,173.5
Total assets $40,186.1 $37,023.7
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $15,898.3 $12,732.7
Bank Loans 702.0
ACCOUNTS PAYABLE AND ACCRUALS 730.9 833.5
LONG-TERM DEBT, unsecured
Senior Notes 18,606.8 18,169.7
Subordinated and Capital Notes 125.5 141.8
18,732.3 18,311.5
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 1,530.6 1,530.6
Retained Earnings 3,153.5 2,754.2
Unrealized (Loss) Gain on Available-for-Sale
Securities - NOTE 3 (6.5) 12.2
Total stockholders' equity 4,824.6 4,444.0
Total liabilities and stockholders' equity $40,186.1 $37,023.7
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
Six Months Ended
June 30
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 399.3 $ 338.7
Adjustments to net earnings for noncash items:
Provision for losses on finance receivables 477.0 347.9
Depreciation and amortization 93.3 72.5
Increase in insurance policy and claims
reserves 32.1 29.6
Deferred income taxes (39.3) (7.0)
(Decrease) increase in accounts payable and
accruals (53.0) 59.4
Unrealized gain on trading securities (0.1) (3.0)
Purchases of trading securities (5.8)
Sales and maturities of trading securities 0.7 36.5
Net cash provided from operating activities 910.0 868.8
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (19,271.3) (16,155.9)
Finance receivables liquidated 15,848.5 13,191.0
Acquisition of other finance business, net (116.1)
Purchases of available-for-sale securities (175.4) (482.9)
Sales and maturities of available-for-sale
securities 72.5 212.0
Decrease in real estate loans held for sale 7.4 1.5
(Increase) decrease in other assets (311.7) 149.4
Net cash used for investing activities (3,830.0) (3,201.0)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 1,813.2 2,703.9
Retirement of long-term debt (1,392.4) (783.2)
Increase in notes payable 2,463.6 365.5
Net cash provided from financing activities 2,884.4 2,286.2
DECREASE IN CASH AND CASH EQUIVALENTS (35.6) (46.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 309.2 361.1
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 273.6 $ 315.1
CASH PAID FOR:
Interest $ 1,080.8 $ 947.8
Income taxes $ 267.4 $ 218.8
See notes to consolidated financial statements.
<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Associates Corporation of North America ("Associates" or the "Company"), a
Delaware corporation, is a wholly-owned subsidiary and principal operating
unit of Associates First Capital Corporation ("First Capital"), a majority-
owned subsidiary of Ford Motor Company ("Ford"). All the outstanding Common
Stock of Associates is owned by First Capital. All shares of Class B Common
Stock are owned by Associates World Capital Corporation, a wholly-owned
subsidiary of First Capital. Class B Common Stock is redeemable only at the
option of the issuer.
NOTE 2 - BASIS OF CONSOLIDATION
The accompanying consolidated financial statements consolidate Associates and
its subsidiaries. In the opinion of the management of Associates, all
adjustments necessary to present fairly the results of operations and
financial position have been made and are of a normal recurring nature. The
results of operations for any interim period are not necessarily indicative
of the results of operations for a full year. Certain prior period financial
statement amounts have been reclassified to conform to the current period.
NOTE 3 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
DEBT SECURITIES
The Company invests in debt securities, principally bonds and notes held by
the Company's insurance subsidiaries, with the intention of holding them to
maturity. However, if market conditions change, the Company may sell these
securities prior to maturity. Accordingly, the Company classifies its
investments in debt securities as available-for-sale securities and adjusts
its recorded value to market. The estimated market value at June 30, 1996 and
December 31, 1995 was $946.0 million and $872.1 million, respectively.
Amortized cost at June 30, 1996 and December 31, 1995 was $956.1 million and
$853.4 million, respectively. Realized gains or losses on sales are included
in investment and other income. Unrealized gains or losses are reported as
a component of stockholders' equity, net of tax.
EQUITY SECURITIES
Equity security investments are recorded at market value. The Company
classifies its investments in equity securities as trading securities and
includes in earnings unrealized gains or losses on such securities. The
estimated market value at June 30, 1996 and December 31, 1995 was $12.0
million and $12.6 million, respectively. Historical cost at June 30, 1996 and
December 31, 1995 was $7.8 million and $8.5 million, respectively.
<PAGE>
NOTE 4 - NET FINANCE RECEIVABLES
At June 30, 1996 and December 31, 1995, net finance receivables consisted of
the following (in millions):
June 30 December 31
1996 1995
Consumer Finance
Home equity lending $13,951.6 $13,190.4
Personal lending and retail sales finance 5,233.8 4,752.7
Credit card 5,536.3 4,616.8
Manufactured housing 2,275.7 2,049.3
26,997.4 24,609.2
Commercial Finance
Truck and truck trailer 7,835.1 7,415.7
Equipment 4,064.3 3,959.4
Other 554.9 384.0
12,454.3 11,759.1
Net finance receivables $39,451.7 $36,368.3
On Janury 1, 1995, Associates acquired $116 million of net home equity
receivables and certain other assets from Ford Motor Credit Company, an
affiliate. The transaction was recorded at historical cost, which
approximated market.
NOTE 5 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables during the periods
indicated were as follows (in millions):
Six Months Ended Year Ended
June 30 June 30 December 31
1996 1995 1995
Balance at beginning of
period $1,109.2 $ 932.4 $ 932.4
Provision for losses 477.0 347.9 729.7
Recoveries on receivables
charged off 64.3 60.8 112.3
Losses sustained (412.3) (314.2) (670.0)
Reserves of acquired
businesses and other 61.7 1.4 4.8
Balance at end of period $1,299.9 $1,028.3 $1,109.2
NOTE 6 - OTHER ASSETS
The components of Other Assets at June 30, 1996 and December 31, 1995 were as
follows (in millions):
June 30 December 31
1996 1995
Balances with related parties $ 463.3 $ 256.3
Goodwill 337.4 345.7
Other 636.9 571.5
Total other assets $1,437.6 $1,173.5
<PAGE>
NOTE 7 - DEBT RESTRICTIONS
Associates is subject to various limitations under the provisions of its
outstanding debt and revolving credit agreements. The most significant of
these limitations are summarized as follows:
LIMITATION ON PAYMENT OF DIVIDENDS
A restriction contained in certain issues of debt securities, the latest of
which matures on March 15, 1999, generally limits payments of cash dividends
on the Company's Common Stock in any year to not more than 50% of consolidated
net earnings for such year, subject to certain exceptions, plus increases in
contributed capital and extraordinary gains. Any such amounts available for
the payment of dividends in such fiscal year and not so paid, may be paid in
any one or more of the five subsequent fiscal years. In accordance with this
provision, $199.6 million was available for dividends at June 30, 1996.
LIMITATION ON MINIMUM TANGIBLE NET WORTH
A restriction contained in certain revolving credit agreements requires
Associates to maintain a minimum tangible net worth, as defined, of $1.5
billion. At June 30, 1996, Associates tangible net worth was approximately
$4.5 billion.
NOTE 8 - RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges of Associates for the six months ended
June 30, 1996 and 1995 was 1.60 and 1.56, respectively. For purposes of such
computation, the term "earnings" represents Earnings Before Provision for
Income Taxes, plus fixed charges. The term "fixed charges" represents
interest expense and a portion of rentals representative of an implicit
interest factor for such rentals.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Six- and Three-Month Periods Ended June 30, 1996 Compared to the Six- and
Three-Month Periods Ended June 30, 1995.
Net earnings for the six-month period ended June 30, 1996 were $399.3
million, a 17.9% increase over the same period in the previous year. Net
earnings for the three months ended June 30, 1996 were $205.5 million, an
increase of 19.0% over the same period in the previous year. The increase in
earnings in both comparative periods was principally due to growth in net
finance receivables, an improvement in the ratio of net interest margin to
average net receivables and an increase in operating expense efficiency, all
of which more than offset increases in the provision for losses.
Finance charge revenue, on a dollar basis, increased for the six and three
months ended June 30, 1996, compared to the same period in the prior year,
principally as a result of growth in average net finance receivables
outstanding. Finance charge revenue as a percentage of average net finance
receivables (the "Finance Charge Ratio") was 14.05% and 14.07% for the six
months and three months ended June 30, 1996, respectively. This compares to
14.23% and 14.32% for the comparable periods in 1995, respectively. The
decreases in the composite portfolio finance charge ratios for both
comparative periods were principally due to changes in the mix of finance
receivables during the period.
Interest expense increased for the six- and three-month periods ended June
30, 1996 compared to the same periods in 1995, primarily due to an increase
in average debt outstanding for each of the comparative periods, principally
resulting from the aforementioned growth in average net finance receivables.
Debt is the primary source of funding to support the Company's growth in net
finance receivables. The increase, due to growth in both comparative periods,
was partially offset by declines in the Company's average short- and long-term
borrowing rates, principally due to changes in market conditions. The
Company's total average borrowing rate for the six- and three-month periods
ended June 30, 1996 were 6.30% and 6.33%, respectively, compared to 6.73% and
6.81% for the same periods in the prior year.
As a result of the aforementioned changes in finance charge revenue and
interest expense, the Company's net interest margin increased to $1.6 billion
and $822.9 million for the six- and three-month periods ended June 30, 1996,
respectively, compared to $1.3 billion and $690.9 million for the comparable
periods in the prior year. The Company's net interest margin expressed as a
ratio to average net finance receivables also improved to 8.53% and 8.55% for
the six- and three-month periods ended June 30, 1996, respectively, compared
to 8.34% and 8.37% for the same periods in the prior year. The principal
cause of the increase in each of the comparable periods was the Company's
ability to maintain its lending rates on new loans in a period during which
its average borrowing rates decreased.
Six- and three-month operating expenses as of June 30, 1996 were greater
than in the corresponding periods in 1995, reflecting growth in the size of
the Company. However, operating expense efficiency, measured as the ratio of
total operating expenses to total revenue net of interest expense and
insurance benefits paid or provided, improved to 40.1% and 39.7% for the six-
and three-month periods ended June 30, 1996, respectively, compared to 43.9%
and 44.1% for the same periods in the prior year. The improvement in both
comparable periods principally reflects the benefit from certain initiatives
designed to improve operating efficiency.
The Company's provision for losses increased from $347.9 million for the
first six months of 1995 to $477.0 million for the same period in 1996. The
provision for losses for the three-month period ended June 30, 1996 increased
from $176.6 million in the prior period to $246.0 million for the current
period. In both cases, the provision increased principally as a result of
increased losses. Total net losses as a percentage of average net finance
receivables (the "Loss Ratio") were 1.84% and 1.94% for the six- and three-
month periods of 1996, respectively, compared to 1.57% and 1.50% for the same
periods in 1995. The Loss Ratio increased in substantially all of the
Company's portfolios, the most significant of which were in the Company's
credit card and personal loan portfolios, primarily driven by increased losses
resulting from customer bankruptcies.
<PAGE>
The provision for income taxes increased for both the six- and three-month
periods ended June 30, 1996 as a result of the aforementioned favorable
changes over 1995.
Financial Condition
Net finance receivables grew $3.1 billion and $1.9 billion during the six-
and three-month periods ended June 30, 1996, respectively, compared to $2.8
billion and $1.5 billion for the same period in 1995. The Company had growth
in substantially all of its portfolios in both periods. However, of the total
growth, 49.9% in the six-month period and 30.1% in the three-month period,
resulted from major acquisitions, principally of credit card and other
commercial portfolios and businesses.
Total 60+days contractual delinquency was 1.83% at June 30, 1996, which
was higher than the 1.79% reported at March 31, 1996 and 1.72% at December 31,
1995. Consumer delinquency was 2.29% at June 30, 1996, which was higher than
the 2.28% and 2.24% reported at March 31, 1996 and December 31, 1995,
respectively. Commercial delinquency was 0.84% at June 30, 1996 compared to
0.74% and 0.64% at March 31, 1996 and December 31, 1995, respectively, also
reflecting an increase. Although the Company experienced increased
delinquency in substantially all of its portfolios, the highest increase was
in the credit card portfolio. The Company attributes the increased
delinquency to generally less favorable trends in economic conditions,
including among other factors, the increased leverage of consumer borrowers.
The aforementioned increase in delinquency, net losses and the generally
less favorable economic conditions, led the Company to increase its allowance
for losses to 3.29% of net finance receivables at June 30, 1996, compared to
3.21% at March 31, 1996 and 3.05% at December 31, 1995. The allowance for
losses to annualized net credit losses was 1.87 times net losses at June 30,
1996, compared to 1.87 and 1.99 times losses at March 31, 1996 and December
31, 1995, respectively. Management believes the allowance for losses at June
30, 1996, is sufficient to provide adequate protection against losses in its
portfolios.
During the six and three months ended June 30, 1996, stockholders' equity
increased principally as a result of the aforementioned increase in net
earnings, partially offset as a result of recording unrealized losses on its
insurance subsidiaries' investments in marketable debt securities of $18.7
million and $5.0 million, respectively.
As a result of the aforementioned, the Company's return on average assets,
average equity and average tangible equity for the six-month period ended June
30, 1996 was 2.07%, 17.23% and 18.60%, respectively. This compares to a
return on average assets, average equity and average tangible equity for the
six months ended June 30, 1995 of 2.05%, 17.08% and 18.77%, respectively.
LIQUIDITY
The principal sources of cash for the Company are proceeds from issuance
of short- and long-term debt and cash provided from the Company's operations.
Management believes that the Company has sufficient liquidity, from a
combination of cash provided from operations and external borrowing, to
support its operations.
At June 30, 1996, the Company had short- and long-term debt outstanding
of $15.9 billion and $18.7 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 unsecured long-term debt issued publicly and privately by the
Company in the United States. During the six- and three-month periods ended
June 30, 1996, and 1995, the Company raised debt aggregating $1.8 billion and
$901.9 million, and $2.7 billion and $1.2 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 net short-term
borrowings. Such credit facilities provide a means of refinancing its
maturing short-term obligations as needed. At June 30, 1996, short-term bank
lines, revolving credit facilities and receivable purchase facilities totaled
$12.0 billion, none of which was in use at that date. These facilities
represent 75% of net short-term indebtedness outstanding at June 30, 1996.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None to report
In accordance with General Instruction H.(2)(b), the following items have been
omitted: Item 2, Changes in Securities; Item 3, Defaults Upon Senior
Securities; and Item 4, Submission of Matters to a Vote of Security Holders.
ITEM 5. OTHER INFORMATION.
On May 10, 1996, First Capital, the parent corporation of the
Company, sold a portion of its common stock, representing
approximately a 19.3% economic interest, to the public.
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, 1996, Associates filed
Current Reports on Form 8-K dated April 18, 1996, related to the
release of first quarter earnings, and May 20, 1996, related to
issuances of debt securities pursuant to Rule 415.
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 12, 1996
ASSOCIATES CORPORATION OF NORTH AMERICA
(registrant)
By/s/ Roy A. Guthrie
Executive Vice President, Comptroller,
Principal Accounting Officer and
Chief Financial Officer
11
<PAGE>
EXHIBIT 12
ASSOCIATES CORPORATION OF NORTH AMERICA
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Millions)
Six Months Ended
June 30
1996 1995
Fixed Charges (a)
Interest expense $1,046.0 $ 953.2
Implicit interest in rent 7.4 6.6
Total fixed charges $1,053.4 $ 959.8
Earnings (b)
Earnings before provision for income
taxes $ 633.1 $ 534.5
Fixed charges 1,053.4 959.8
Earnings, as defined $1,686.5 $1,494.3
Ratio of Earnings to Fixed Charges 1.60 1.56
(a) For purposes of such computation, the term "fixed charges" represents
interest expense and a portion of rentals representative of an implicit
interest factor for such rentals.
(b) For purposes of such computation, the term "earnings" represents earnings
before provision for income taxes, plus fixed charges.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
0 MEANS NOT APPLICABLE OR NOT SEPARATELY DISCLOSED. This schedule contains
summary financial information extracted from the Company's unaudited
consolidated financial statements as of June 30, 1996 and the six months then
ended and is qualified in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<CIK> 0000007973
<NAME> ASSOCIATES CORPORATION OF NORTH AMERICA
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 274
<SECURITIES> 958
<RECEIVABLES> 39,452
<ALLOWANCES> 1,300
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,186
<CURRENT-LIABILITIES> 0
<BONDS> 34,631
<COMMON> 147
0
0
<OTHER-SE> 4,678
<TOTAL-LIABILITY-AND-EQUITY> 40,186
<SALES> 2,967
<TOTAL-REVENUES> 2,967
<CGS> 0
<TOTAL-COSTS> 2,334
<OTHER-EXPENSES> 811
<LOSS-PROVISION> 477
<INTEREST-EXPENSE> 1,046
<INCOME-PRETAX> 633
<INCOME-TAX> 234
<INCOME-CONTINUING> 399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 399
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
