<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event) FEBRUARY 9, 1996
ASSOCIATES CORPORATION OF NORTH AMERICA
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE
(State or other jurisdiction of 74-1494554
incorporation) (I.R.S. Employer Identification No.)
1-6154
(Commission File Number)
250 E. CARPENTER FREEWAY
IRVING, TEXAS 75062-2729
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (214) 541-4000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 5. OTHER EVENTS.
(a) On February 9, 1996, Associates First Capital Corporation ("AFCC"), the
immediate parent of the Associates Corporation of North America (the "Company"),
announced that a registration statement had been filed with the Securities and
Exchange Commission for a potential initial public offering (the "Offering") of
up to a 19.8% interest in AFCC's common stock. A copy of the news release dated
February 9, 1996 issued by AFCC is attached as Exhibit 20 hereto and
incorporated by reference herein.
Immediately following the Offering, Ford Motor Company, the ultimate parent
corporation of AFCC, will own a controlling interest in the common stock of
AFCC. No assurance can be made with respect to future capital contributions by
AFCC to the Company after the Offering.
(b) The Company is filing herewith its Audited Consolidated Financial Statements
as of and for the year ended December 31, 1995. The table below sets forth
certain financial information relating to the Company (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
----------------------------
1995 1994
---------- ---------
<S> <C> <C>
RESULTS OF OPERATIONS
Total revenue................................................... $ 5,384.4 $ 4,387.9
Finance charge revenue.......................................... 4,805.3 3,866.7
Interest expense................................................ 1,979.8 1,509.7
Operating expenses.............................................. 1,417.8 1,191.6
Provision for losses............................................ 729.7 569.9
Net Earnings.................................................... 708.1 603.5
BALANCE SHEET DATA
Net finance receivables:
Consumer..................................................... 24,609.2 21,159.8
Commercial................................................... 11,759.1 9,815.9
--------- ---------
Total net finance receivables................................ 36,368.3 30,975.7
========= =========
Allowance for losses............................................ (1,109.2) (932.4)
Total assets.................................................... 37,023.7 31,687.2
Total stockholders' equity...................................... 4,444.0 3,786.1
SELECTED DATA AND RATIOS
Earnings to fixed charges....................................... 1.56x 1.64x
60+Days contractual delinquency (% of outstanding finance
receivables)
Consumer..................................................... 2.24% 1.81%
Commercial................................................... 0.64 0.28
Total........................................................ 1.72 1.33
Net credit losses to average net finance receivables
Consumer..................................................... 2.34 2.31
Commercial................................................... 0.19 0.09
Total........................................................ 1.66 1.61
Allowance for losses to net finance receivables................. 3.05 3.01
</TABLE>
Contractual delinquency and net credit losses approached historical lows in
1994, reflecting similar trends in overall economic conditions. These trends
reversed across all portfolios in 1995, principally as a result of generally
less favorable trends in economic conditions. The relationship of the allowance
for losses to net finance receivables at December 31, 1995 increased from 1994,
reflecting management's opinion that delinquency and net credit losses will
continue to increase in 1996. Management believes the allowance for losses at
December 31, 1995 is sufficient to provide adequate protection against losses in
its portfolios.
-1-
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(C) Exhibits.
<TABLE>
<S> <C>
12 -- Computation of Ratios of Earnings to Fixed Charges
20 -- News release by Associates First Capital Corporation dated February
9, 1996
24 -- Consent of Independent Accountants
27 -- Financial Data Schedule
28 -- Consolidated Financial Statements of Associates Corporation of North
America and Report of Independent Accountants
</TABLE>
-2-
<PAGE> 4
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 hereunto duly authorized.
ASSOCIATES CORPORATION OF NORTH AMERICA
By: /s/ C.D. Longenecker
-----------------------------------------
Executive Vice President and General Counsel
Date: February 13, 1996
-3-
<PAGE> 5
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
12 -- Computation of Ratios of Earnings to Fixed Charges
20 -- News release by Associates First Capital Corporation dated February
9, 1996
24 -- Consent of Independent Accountants
27 -- Financial Data Schedule
28 -- Consolidated Financial Statements of Associates Corporation of North
America and Report of Independent Accountants
</TABLE>
<PAGE> 1
EXHIBIT 12
ASSOCIATES CORPORATION OF NORTH AMERICA
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed Charges (a)
Interest expense......................... $1,979.8 $1,509.7 $1,291.8 $1,222.8 $1,278.5
Implicit interest in rent................ 11.4 9.6 9.7 9.5 8.5
-------- -------- -------- -------- --------
Total fixed charges.............. $1,991.2 $1,519.3 $1,301.5 $1,232.3 $1,287.0
======== ======== ======== ======== ========
Earnings (b)............................... $1,121.4 $ 972.6 $ 834.4 $ 690.4 $ 620.3
Fixed charges.............................. 1,991.2 1,519.3 1,301.5 1,232.3 1,287.0
-------- -------- -------- -------- --------
Earnings, as defined............. $3,112.6 $2,491.9 $2,135.9 $1,922.7 $1,907.3
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges......... 1.56 1.64 1.64 1.56 1.48
======== ======== ======== ======== ========
</TABLE>
- ---------------
(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 and cumulative effect of changes in
accounting principles, plus fixed charges.
<PAGE> 1
[THE ASSOCIATES LOGO] THE ASSOCIATES(R)
- --------------------------------------------------------------------------------
NEWS
Contact: Fred Stern FOR IMMEDIATE RELEASE
The Associates
(214) 541-4042
Mary Joseph
Ford Financial Services Group
(313) 322-4466
ASSOCIATES FIRST CAPITAL CORPORATION FILES
FOR AN INITIAL PUBLIC OFFERING
DALLAS, February 9, 1996 -- Associates First Capital Corporation
announced today that a registration statement has been filed with the
Securities and Exchange Commission for a potential initial public offering of
up to 19.8% interest in the company's common stock.
The company, which is an indirect wholly owned subsidiary of Ford
Motor Company, said the planned offering would involve newly issued shares of
Associates.
"This public offering would give Associates an additional performance
measurment through the securities markets and at the same time allow us to
continue our excellent partnership with Ford," said Keith W. Hughes, chairman
and chief executive officer of Associates.
Associates First Capital Corporation is a leading diversified consumer
and commercial finance company providing finance, leasing and related services.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission but has not yet become effective.
These securities may not be sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. This news release shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
# # #
<PAGE> 1
EXHIBIT 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Associates Corporation of North America on Forms S-3 (File No. 33-63577 and
33-55949) of our report dated January 26, 1996, on our audits of the
consolidated financial statements of Associates Corporation of North America and
Subsidiaries as of December 31, 1995 and 1994, and for the years ended December
31, 1995, 1994, and 1993, which report is included in this Current Report on
Form 8-K.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
0 MEANS NOT APPLICABLE OR NOT SEPARATELY DISCLOSED. THIS SCHEDULE CONTAINS
SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 309
<SECURITIES> 885
<RECEIVABLES> 36,368
<ALLOWANCES> 1,109
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,024
<CURRENT-LIABILITIES> 0
<BONDS> 31,746
<COMMON> 147
0
0
<OTHER-SE> 4,297
<TOTAL-LIABILITY-AND-EQUITY> 37,024
<SALES> 5,384
<TOTAL-REVENUES> 5,384
<CGS> 0
<TOTAL-COSTS> 4,263
<OTHER-EXPENSES> 1,553
<LOSS-PROVISION> 730
<INTEREST-EXPENSE> 1,980
<INCOME-PRETAX> 1,121
<INCOME-TAX> 413
<INCOME-CONTINUING> 708
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 708
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Associates Corporation of North America
We have audited the accompanying consolidated balance sheets of Associates
Corporation of North America (a wholly owned subsidiary of Associates First
Capital Corporation) as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Associates
Corporation of North America as of December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 26, 1996
<PAGE> 2
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF EARNINGS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Finance charges.............................................. $4,805.3 $3,866.7 $3,250.7
Insurance premiums........................................... 325.1 293.5 242.2
Investment and other income.................................. 254.0 227.7 196.7
-------- -------- --------
5,384.4 4,387.9 3,689.6
EXPENSES
Interest expense............................................. 1,979.8 1,509.7 1,291.8
Operating expenses........................................... 1,417.8 1,191.6 979.6
Provision for losses on finance receivables -- NOTE 4........ 729.7 569.9 468.9
Insurance benefits paid or provided.......................... 135.7 144.1 114.9
-------- -------- --------
4,263.0 3,415.3 2,855.2
-------- -------- --------
EARNINGS BEFORE PROVISION FOR INCOME TAXES..................... 1,121.4 972.6 834.4
PROVISION FOR INCOME TAXES -- NOTE 8........................... 413.3 369.1 310.7
-------- -------- --------
NET EARNINGS................................................... $ 708.1 $ 603.5 $ 523.7
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
-------- --------
<S> <C> <C>
CASH AND CASH EQUIVALENTS............................................. $ 309.2 $ 361.1
INVESTMENTS IN DEBT AND EQUITY SECURITIES -- NOTE 16.................. 884.7 609.5
FINANCE RECEIVABLES, net of unearned finance income -- NOTE 3
Consumer Finance.................................................... 24,609.2 21,159.8
Commercial Finance.................................................. 11,759.1 9,815.9
--------- ---------
Total net finance receivables............................... 36,368.3 30,975.7
ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES -- NOTE 4................. (1,109.2) (932.4)
INSURANCE POLICY AND CLAIMS RESERVES.................................. (602.8) (545.6)
OTHER ASSETS -- NOTE 13............................................... 1,173.5 1,218.9
--------- ---------
Total assets................................................ $37,023.7 $31,687.2
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE -- NOTE 6
Commercial Paper.................................................... $12,732.7 $11,640.5
Bank Loans.......................................................... 702.0 571.4
ACCOUNTS PAYABLE AND ACCRUALS......................................... 833.5 726.0
LONG-TERM DEBT -- NOTES 7 and 9....................................... 18,311.5 14,963.2
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 1,330.6
Retained Earnings................................................... 2,754.2 2,326.1
Unrealized Gain (Loss) on Available-for-Sale Securities -- NOTES 2
and 16........................................................... 12.2 (17.6)
--------- ---------
Total stockholders' equity.................................. 4,444.0 3,786.1
--------- ---------
Total liabilities and stockholders' equity.................. $37,023.7 $31,687.2
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
AVAILABLE- TOTAL
COMMON PAID-IN RETAINED FOR-SALE STOCKHOLDERS'
STOCK CAPITAL EARNINGS SECURITIES EQUITY
------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1992........................ $147.0 $ 930.6 $1,708.9 $ 3.7 $2,790.2
Net Earnings........................... 523.7 523.7
Contributions from Parent.............. 200.0 200.0
Cash Dividends
Class B Common Shares............... (14.2) (14.2)
Common Shares....................... (225.8) (225.8)
Current Period Adjustment.............. 0.3 0.3
------ -------- -------- ------ --------
DECEMBER 31, 1993........................ 147.0 1,130.6 1,992.6 4.0 3,274.2
Net Earnings........................... 603.5 603.5
Contributions from Parent.............. 200.0 200.0
Cash Dividends
Class B Common Shares............... (14.2) (14.2)
Common Shares....................... (255.8) (255.8)
Current Period Adjustment.............. (21.6) (21.6)
------ -------- -------- ------ --------
DECEMBER 31, 1994........................ 147.0 1,330.6 2,326.1 (17.6) 3,786.1
Net Earnings........................... 708.1 708.1
Contributions from Parent.............. 200.0 200.0
Cash Dividends
Class B Common Shares............... (14.2) (14.2)
Common Shares....................... (265.8) (265.8)
Current Period Adjustment.............. 29.8 29.8
------ -------- -------- ------ --------
DECEMBER 31, 1995........................ $147.0 $1,530.6 $2,754.2 $ 12.2 $4,444.0
====== ======== ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings........................................... $ 708.1 $ 603.5 $ 523.7
Adjustments to net earnings for noncash items:
Provision for losses on finance receivables......... 729.7 569.9 468.9
Depreciation and amortization....................... 149.4 145.2 209.9
Increase (decrease) in accounts payable and
accruals.......................................... 61.3 (9.5) 187.8
Increase in insurance policy and claims reserves.... 57.2 115.8 69.3
Deferred income taxes............................... 18.5 (88.3) (69.4)
Unrealized gain on trading securities............... (3.6) (1.6)
Purchases of trading securities........................ (5.8) (23.8)
Sales and maturities of trading securities............. 38.7 17.4
Other.................................................. (6.8) (5.0)
--------- --------- ---------
Net cash provided from operating activities.... 1,753.5 1,321.8 1,385.2
--------- --------- ---------
Cash Flows from Investing Activities
Finance receivables originated or purchased............ (33,433.9) (28,127.4) (21,162.6)
Finance receivables liquidated......................... 27,772.2 23,287.1 17,903.6
Acquisitions of other finance businesses, net.......... (143.9) (463.4) (293.0)
Proceeds from sale of investment in mortgage servicing
rights.............................................. 97.1
(Increase) decrease in real estate loans held for
sale................................................ (3.7) 51.9 0.8
(Increase) decrease in other assets.................... (20.6) 67.1 (249.2)
Purchases of available-for-sale securities............. (893.9) (274.1)
Sales and maturities of available-for-sale
securities.......................................... 636.8 285.0
Purchases of marketable securities..................... (639.6)
Sales and maturities of marketable securities.......... 514.1
--------- --------- ---------
Net cash used for investing activities......... (6,087.0) (5,076.7) (3,925.9)
--------- --------- ---------
Cash Flows from Financing Activities
Issuance of long-term debt............................. 5,154.5 3,932.2 3,561.4
Retirement of long-term debt........................... (2,015.7) (2,011.5) (1,796.1)
Increase in notes payable.............................. 1,222.8 2,003.7 895.9
Capital contributions.................................. 200.0 200.0 200.0
Cash dividends......................................... (280.0) (270.0) (240.0)
--------- --------- ---------
Net cash provided from financing activities.... 4,281.6 3,854.4 2,621.2
--------- --------- ---------
(Decrease) increase in cash and cash equivalents......... (51.9) 99.5 80.5
Cash and cash equivalents at beginning of period......... 361.1 261.6 181.1
--------- --------- ---------
Cash and cash equivalents at end of period............... $ 309.2 $ 361.1 $ 261.6
========= ========= =========
Cash paid for:
Interest............................................... $ 1,950.6 $ 1,516.7 $ 1,277.9
========= ========= =========
Income taxes........................................... $ 431.8 $ 486.5 $ 406.2
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
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"), which in turn is an
indirect 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 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
Basis of Consolidation
The accompanying consolidated financial statements consolidate Associates
and its subsidiaries. Amounts of goodwill relating to acquisitions are being
amortized by the straight-line method over periods not exceeding forty years.
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If the review indicates that goodwill will not
be recoverable, as determined based on undiscounted cash flows, the carrying
value of the goodwill is reduced by the estimated short-fall of discounted cash
flows.
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain prior period financial statement amounts have been
reclassified to conform to the current year presentation.
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires the use of management's
estimates. These estimates are subjective in nature and involves matters of
judgment. Actual results could differ from these estimates.
Revenue Recognition
Finance charges on receivables are recognized as revenue using the interest
(actuarial) method. Premiums and discounts on purchased receivables are
considered as yield adjustments. The unamortized balance is included in finance
receivables and the associated amortization is included in finance charge
revenue. Finance charge accruals are suspended on accounts when they become 60
days contractually delinquent. The accrual is resumed when the loan becomes
contractually current. At December 31, 1995 and 1994, net finance receivables on
which revenue was not accrued approximated $625.5 million and $418.2 million,
respectively.
Insurance premiums are recorded as unearned premiums when collected or when
written and are subsequently amortized into income based on the nature and term
of the underlying insurance contracts. The methods of amortization used are pro
rata, sum-of-the-years-digits and a combination thereof.
Gains or losses on sales of debt securities are included in revenue when
realized. Unrealized gains or losses on debt securities are reported as a
component of stockholders' equity, net of tax. Realized and unrealized gains or
losses on equity securities are included in revenue as incurred. The cost of
debt and equity securities sold is determined by the specific identification
method.
Allowance for Losses on Finance Receivables
The Company maintains an allowance for losses on finance receivables at an
amount which it believes is sufficient to provide adequate protection against
losses in the portfolios. The allowance is determined principally on the basis
of historical loss experience, and reflects management's judgment of additional
loss potential considering future economic conditions and the nature and
characteristics of the underlying finance
6
<PAGE> 7
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receivables. The allowance is managed on an aggregate basis considering the
relationship of the allowance to net finance receivables and net credit losses.
Additions to the allowance are charged to the provision for losses on finance
receivables.
Finance receivables are charged to the allowance for losses when they are
deemed to be uncollectible. Additionally, Company policy provides for charge-off
of various types of accounts on a contractual basis described as follows:
Consumer direct and other installment and credit card receivables are charged to
the allowance for losses when they become 180 days delinquent. All other finance
receivables are charged to the allowance for losses when any of the following
conditions occur: (i) the related security has been converted or destroyed; (ii)
the related security has been repossessed and sold or held for sale for one
year; or (iii) the related security has not been repossessed and the receivable
has become one year delinquent. A delinquent account is one on which the
customer has not made payments as contractually agreed. Extensions are granted
on receivables from customers with satisfactory credit and with prior approval
of management. Recoveries on losses previously charged to the allowance are
credited to the allowance at the time the recovery is collected.
Insurance Reserves
The reserves for future benefits and refunds upon cancellation of credit
life and health insurance and property and casualty insurance are provided for
in the unearned premium reserve for each class of insurance. In addition,
reserves for reported claims on credit accident and health insurance are
established based on standard morbidity tables used in the insurance business
for such purposes. Claim reserves for reported property and casualty insurance
claims are based on estimates of costs and expenses to settle each claim.
Additional amounts of reserves, based on prior experience and insurance in
force, are provided for each class of insurance for claims which have been
incurred but not reported as of the balance sheet date.
Income Taxes
Associates and its subsidiaries are included in the consolidated Federal
income tax return of Ford. The provision for income taxes is computed on a
separate-return basis. Deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
In 1993, the Company entered into a tax-sharing agreement with Ford whereby
state income taxes are provided on a separate-return basis.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The amounts reported
in the consolidated balance sheet approximate fair value.
Disclosures about Fair Value of Financial Instruments
The consolidated financial statements present the information required by
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments". Amounts disclosed represent estimates of
fair values at a particular point in time. Significant assumptions regarding
economic conditions, loss experience and risk characteristics associated with
particular financial instruments and other factors were used for purposes of
this disclosure. These assumptions are subjective in nature and involve matters
of judgment. Changes in assumptions could have a material impact on these
estimates.
7
<PAGE> 8
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Derivative Financial Instruments
The Company does not hold or issue derivative financial instruments for
trading purposes. The Company's derivative activity is limited to currency swap
transactions designed to hedge its currency risk on specific foreign currency
denominated-assets to certain foreign affiliates denominated in British
Sterling. Gains and losses on qualifying hedges are deferred and are recognized
in income or as adjustments of carrying amounts when the hedged transaction
occurs. See NOTE 15 to the consolidated financial statements for additional
information related to currency swap transactions.
NOTE 3 -- NET FINANCE RECEIVABLES
Composition of Net Finance Receivables
At December 31, 1995 and 1994, net finance receivables consisted of the
following (in millions):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Consumer Finance
Home equity lending......................................... $13,190.4 $11,455.2
Personal lending and retail sales finance................... 4,752.7 4,188.9
Credit card................................................. 4,616.8 3,834.6
Manufactured housing........................................ 2,049.3 1,681.1
--------- ---------
24,609.2 21,159.8
--------- ---------
Commercial Finance
Truck and truck trailer..................................... 7,302.5 6,524.6
Equipment................................................... 4,111.6 3,088.8
Other....................................................... 345.0 202.5
--------- ---------
11,759.1 9,815.9
--------- ---------
Net finance receivables..................................... $36,368.3 $30,975.7
========= =========
</TABLE>
At December 31, 1995, contractual maturities of net finance receivables
were as follows (in millions):
<TABLE>
<CAPTION>
CONSUMER COMMERCIAL
YEAR DUE FINANCE FINANCE TOTAL
- -------- -------- ---------- --------
<S> <C> <C> <C>
1996............................................... $3,572.3 $5,298.5 $8,870.8
1997............................................... 2,966.6 2,921.8 5,888.4
1998............................................... 2,615.1 1,966.4 4,581.5
1999............................................... 1,995.8 1,056.0 3,051.8
2000 and thereafter................................ 13,459.4 516.4 13,975.8
--------- --------- ---------
$24,609.2 $11,759.1 $36,368.3
========= ========= =========
</TABLE>
It is the Company's experience that a substantial portion of the consumer
loan portfolio generally is renewed or repaid prior to contractual maturity
dates. The above maturity schedule should not be regarded as a forecast of
future cash collections.
8
<PAGE> 9
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in commercial finance receivables are direct financing leases as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1994
-------- --------
<S> <C> <C>
Minimum lease rentals........................................... $3,080.8 $2,291.4
Unguaranteed residual values.................................... 76.6 52.4
-------- --------
Future minimum lease rentals.................................. 3,157.4 2,343.8
Unearned finance income......................................... (437.1) (328.7)
-------- --------
Net investment in direct financing leases..................... $2,720.3 $2,015.1
======== ========
</TABLE>
Future net minimum lease rentals on direct financing leases for each of the
years succeeding December 31, 1995 are as follows (in millions): 1996 -- $839.4;
1997 -- $713.0; 1998 -- $567.5; 1999 -- $374.7; 2000 -- $157.4 and 2001 and
thereafter -- $68.3.
Estimated Fair Value of Net Finance Receivables
The estimated fair value of net finance receivables at December 31, 1995
and 1994 was $39.4 billion and $33.2 billion, respectively. In order to
determine the fair values of loans, the loan portfolio was segmented based on
loan type, credit quality and repricing characteristics. The fair value was
estimated by discounting the expected cash flows from such loans at discount
rates which approximate gross finance charge rates that would achieve an
expected return on assets with similar risk characteristics. The estimated fair
value of the credit card receivables was based on the Company's experience in
pricing similar portfolios for acquisition purposes.
Dispersion of Finance Receivables
The Company has geographically dispersed finance receivables. The Company's
total receivables were dispersed across the United States at December 31, 1995
as follows: 12% were in California, 7% in Florida, 6% in Texas, 4% in Georgia,
4% in Pennsylvania, 4% in North Carolina, 4% in New York, 4% in Illinois, 4% in
Ohio and 4% in Tennessee; no other individual state had more than 4%.
Acquisitions of Finance Businesses
During the years ended December 31, 1995, 1994 and 1993, the Company made
acquisitions of finance businesses accounted for as purchases, the most
significant of which were as follows:
On January 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.
In October 1995, Associates acquired the assets of LCA Corporation,
principally consisting of lease receivables. The fair market value of total
assets acquired and liabilities assumed was $253 million and $225 million,
respectively.
In September 1994, Associates acquired the credit card portfolio and
certain other assets of Amoco Oil Company. The fair market value of assets
acquired totaled $405 million.
In December 1994, Associates acquired the assets of First Collateral
Services, Inc., principally consisting of warehouse loan facilities
extended to mortgage brokers secured by mortgage contracts. The fair market
value of total assets acquired and liabilities assumed was $62 million and
$3 million, respectively.
In April 1993, Associates purchased the stock of Allied Finance
Company, with assets primarily consisting of $146 million of net consumer
finance receivables, principally comprised of home equity and
9
<PAGE> 10
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
personal lending and sales finance receivables. The fair market value of
total assets acquired and liabilities assumed was $197 million and $112
million, respectively.
In September 1993, Associates purchased the assets of Mack Financial
Corporation, the financing division of Mack Trucks, Inc., consisting of
$552 million of net commercial finance receivables, principally secured by
heavy-duty trucks and truck trailers. The fair market value of total assets
acquired and liabilities assumed was $587 million and $380 million,
respectively.
The pro forma effect of the above acquisitions was not significant to
current or prior periods.
NOTE 4 -- 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>
YEAR ENDED DECEMBER 31
------------------------------
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period.......................... $ 932.4 $ 798.0 $ 690.0
Provision for losses.................................. 729.7 569.9 468.9
Recoveries on receivables charged off................. 112.3 99.8 87.5
Losses sustained...................................... (670.0) (556.5) (475.0)
Reserves of acquired businesses and other............. 4.8 21.2 26.6
-------- ------- -------
Balance at end of period................................ $1,109.2 $ 932.4 $ 798.0
======== ======= =======
</TABLE>
NOTE 5 -- CREDIT FACILITIES
At December 31, 1995, credit facilities were as follows (in millions):
<TABLE>
<CAPTION>
FACILITY
ENTITY CREDIT FACILITY DESCRIPTION AMOUNT
- ----------- ---------------------------- ---------
<S> <C> <C>
Associates Lines of Credit $ 3,959.7*
Revolving Lines 5,105.0*
Receivables Purchase
Facilities 1,275.0
---------
$10,339.7
=========
</TABLE>
- ---------------
* Included in Associates Lines of Credit and Revolving Lines are $90.0 million
and $1,080.0 million of Lines of Credit and Revolving Lines, respectively,
that are available either to First Capital or to the Company. The Company
would not be responsible for any borrowing by First Capital thereunder.
Lines of Credit, Revolving Lines and Receivables Purchase Facilities may be
withdrawn only under certain standard conditions. None of these credit
facilities was utilized as of December 31, 1995. Associates pays fees for the
availability of its credit facilities. Bank fees incurred during 1995, 1994 and
1993 approximated $11.5 million, $11.0 million and $9.6 million, respectively,
and are .07 to .25 of 1% per annum of the amount of the facilities.
10
<PAGE> 11
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- NOTES PAYABLE
Commercial paper notes are issued by Associates in the minimum amount of
$100,000 with terms from 1 to 270 days. Bank loan terms are all 4 days.
Information pertaining to the Company's commercial paper notes and bank loans is
set forth below for the periods indicated (dollar amounts in millions):
<TABLE>
<CAPTION>
COMMERCIAL BANK
PAPER NOTES LOANS
----------- ------
<S> <C> <C>
Ending balance at December 31, 1995.............................. $12,732.7 $702.0
Weighted average interest rate at December 31, 1995.............. 5.73% 6.42%
Ending balance at December 31, 1994.............................. $11,640.5 $571.4
Weighted average interest rate at December 31, 1994.............. 5.88% 6.88%
</TABLE>
The amounts reported in the consolidated balance sheet approximate fair
value.
NOTE 7 -- LONG-TERM DEBT
Outstanding balances of long-term debt at December 31 were as follows (in
millions):
<TABLE>
<CAPTION>
INTEREST
RATE RANGE MATURITIES 1995 1994
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Senior Notes.......................... 3.63-11.40% 1996-2010 $18,169.7 $14,821.4
Subordinated and Capital:
Subordinated........................ 7.63- 8.15 1998-2009 141.2 141.2
Capital............................. 4.68- 9.00 1996-2002 0.6 0.6
--------- ---------
141.8 141.8
--------- ---------
Total long-term debt............. $18,311.5 $14,963.2
========= =========
</TABLE>
The weighted average interest rate for total long-term debt was 7.08% at
December 31, 1995 and 7.26% at December 31, 1994.
The estimated fair value of long-term debt at December 31, 1995 and 1994
was $19.2 billion and $14.5 billion, respectively. The fair value was determined
by discounting expected cash flows at discount rates currently available to the
Company for debt with similar terms and remaining maturities.
Long-term borrowing maturities during the next five years, including the
current portion of notes payable after one year are: 1996, $2,611.4 million;
1997, $3,080.5 million; 1998, $3,266.3 million; 1999, $2,132.3 million; 2000,
$2,368.2 million and 2001 and thereafter, $4,852.8 million.
Certain debt issues contain call provisions or may be subject to repayment
provisions at the option of the holder on specified dates prior to the maturity
date. At December 31, 1995, 3,509 warrants were outstanding to purchase $154.8
million aggregate principal amount of senior notes at par with interest rates
ranging from 7.00% to 10.50%. The warrants are exercisable at various dates
through October 1, 1999 at prices ranging from $1,000 to $25,000,000 per
warrant. All of the above issues are unsecured.
11
<PAGE> 12
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- INCOME TAXES
The following table sets forth the components of the provision for income
taxes and deferred income tax (benefit) for the periods indicated (in millions):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -------
<S> <C> <C> <C>
Year Ended December 31, 1995
Current................................................. $ 373.9 $20.9 $ 394.8
------- ----- -------
Deferred:
Leasing transactions................................. 66.7 66.7
Finance revenue...................................... 14.0 14.0
Provision for losses on finance receivables and
other.............................................. (62.2) (62.2)
------- ----- -------
Total deferred.................................. 18.5 18.5
------- ----- -------
$ 392.4 $20.9 $ 413.3
======= ===== =======
Year Ended December 31, 1994
Current................................................. $ 426.4 $31.0 $ 457.4
------- ----- -------
Deferred:
Leasing transactions................................. 29.2 29.2
Finance revenue...................................... (5.7) (5.7)
Provision for losses on finance receivables and
other.............................................. (111.8) (111.8)
------- ----- -------
Total deferred.................................. (88.3) (88.3)
------- ----- -------
$ 338.1 $31.0 $ 369.1
======= ===== =======
Year Ended December 31, 1993
Current................................................. $ 360.0 $20.1 $ 380.1
------- ----- -------
Deferred:
Leasing transactions................................. 3.6 3.6
Finance revenue...................................... 3.4 3.4
Provision for losses on finance receivables and
other.............................................. (76.4) (76.4)
------- ----- -------
Total deferred.................................. (69.4) (69.4)
------- ----- -------
$ 290.6 $20.1 $ 310.7
======= ===== =======
</TABLE>
At December 31, 1995 and 1994, the components of the Company's net deferred
tax asset were as follows (in millions):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Provision for losses on finance receivables and other.......... $ 577.1 $ 498.6
Postretirement and other employee benefits..................... 55.9 73.9
------- -------
633.0 572.5
Deferred tax liabilities:
Leasing transactions........................................... (241.8) (175.1)
Finance revenue and other...................................... (235.4) (209.6)
------- -------
(477.2) (384.7)
------- -------
Net deferred tax asset...................................... $ 155.8 $ 187.8
======= =======
</TABLE>
12
<PAGE> 13
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Due to the Company's earnings level, no valuation allowance related to the
deferred tax asset has been recorded.
The effective tax rate differed from the statutory U.S. Federal income tax
rate as follows:
<TABLE>
<CAPTION>
% OF PRETAX INCOME
YEAR ENDED DECEMBER 31
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate............................................. 35.0% 35.0% 35.0%
State tax rate................................................. 1.2 2.1 1.6
Other non-deductible items..................................... 0.7 0.8 0.6
---- ---- ----
Effective tax rate........................................... 36.9% 37.9% 37.2%
==== ==== ====
</TABLE>
NOTE 9 -- DEBT RESTRICTIONS
Associates is subject to various limitations under the provisions of its
outstanding debt and credit facilities. The most significant of these
limitations are summarized as follows:
Limitation on Payment of Dividends
A restriction contained in one series of debt securities maturing August 1,
1996, 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, at December 31,
1995, $727.6 million was available for dividends.
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 December 31, 1995, Associates tangible net worth was $4.1 billion.
NOTE 10 -- LEASE COMMITMENTS
Leases are primarily short-term and generally provide for renewal options
not exceeding the initial term. Total rent expense for the years ended December
31, 1995, 1994 and 1993 was $67.0 million, $53.1 million, and $50.9 million,
respectively. Minimum rental commitments as of December 31, 1995 for all
noncancelable leases (primarily office leases) for the years ending December 31,
1996, 1997, 1998, 1999 and 2000 are $59.1 million, $46.9 million, $36.6 million,
$23.9 million and $11.4 million, respectively, and $2.4 million thereafter.
NOTE 11 -- EMPLOYEE BENEFITS
Defined Benefit Plans
The Company participates in various qualified and nonqualified pension
plans (the "Plan" or "Plans") sponsored by First Capital, which together cover
substantially all permanent employees who meet certain eligibility requirements.
13
<PAGE> 14
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost for the years indicated includes the following
components (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost............................................. $ 13.1 $ 13.7 $ 10.0
Interest cost............................................ 23.1 21.3 18.1
Actual return on Plan assets............................. (51.1) (0.4) (21.6)
Net amortization......................................... 33.9 (10.9) 7.4
------ ------ ------
Net periodic pension cost.............................. $ 19.0 $ 23.7 $ 13.9
====== ====== ======
Assumed discount rate, beginning of year................. 8.25% 7.00% 8.00%
====== ====== ======
</TABLE>
The funded status of the Plan is as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------
1995 1994
------------------------- -------------------------
QUALIFIED NONQUALIFIED QUALIFIED NONQUALIFIED
PLAN PLANS PLAN PLANS
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation:
Vested................................... $ 255.9 $ 23.7 $ 187.6 $ 16.8
Nonvested................................ 11.5 0.3 9.0 0.8
------- ------ ------- ------
Accumulated benefit obligation............. 267.4 24.0 196.6 17.6
Effect of projected future salary
increases................................ 76.1 9.3 50.4 6.2
------- ------ ------- ------
Projected benefit obligation............... 343.5 33.3 247.0 23.8
Plan assets at fair market value........... 322.0 204.7
------- ------ ------- ------
Excess of plan obligation over plan
assets................................... 21.5 33.3 42.3 23.8
Unamortized transition obligation and
amendments............................... (5.1) (3.8) (6.5) (4.3)
Unamortized net loss....................... (53.0) (8.8) (13.3) (1.5)
Adjustment required to recognize minimum
liability................................ 3.3
------- ------ ------- ------
(Prepaid)/accrued pension liability...... $ (36.6) $ 24.0 $ 22.5 $ 18.0
======= ====== ======= ======
Assumed discount rate...................... 7.00% 7.00% 8.25% 8.25%
======= ====== ======= ======
Projected compensation increases........... 6.00% 6.00% 6.00% 6.00%
======= ====== ======= ======
Expected return............................ 9.00% 9.00% 9.00% 9.00%
======= ====== ======= ======
</TABLE>
- ---------------
Amounts in the previous two tables are presented using First Capital data as all
calculations are made at the First Capital level. The corresponding amounts for
the Company are not significantly different.
A determination of the Federal income tax status related to the qualified
Pension Plan has not been received. An application was filed with the Internal
Revenue Service in March 1995. If a favorable determination letter is not
received, First Capital has agreed to make any changes required to receive a
favorable determination letter.
Retirement Savings and Profit Sharing Plan
The Company participates in a defined contribution plan sponsored by First
Capital intended to provide assistance in accumulating personal savings for
retirement and is designed to qualify under Sections 401(a) and 401(k) of the
Internal Revenue Code. An application for determination was filed with the
Internal Revenue Service in March 1995. If a favorable determination letter is
not received, First Capital has
14
<PAGE> 15
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreed to make any changes required to receive a favorable determination letter.
For the years ended December 31, 1995, 1994, and 1993, the Company's pretax
contributions to the plan were $16.6 million, $15.0 million and $13.1 million,
respectively.
Employers' Accounting for Postretirement Benefits Other Than Pensions
The Company provides certain postretirement benefits through unfunded plans
sponsored by First Capital. These benefits are currently provided to
substantially all permanent employees who meet certain eligibility requirements.
The benefits of the plan can be modified or terminated at the discretion of the
Company. The amount paid for postretirement benefits for the years ended
December 31, 1995, 1994 and 1993 was approximately $2.0 million, $1.8 million
and $1.5 million, respectively.
Net periodic postretirement benefit cost for 1995, 1994 and 1993 includes
the following components (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Service cost.................................................. $ 5.5 $ 5.5 $ 4.2
Interest cost................................................. 7.7 6.3 6.3
Net amortization.............................................. (1.3) (1.0) (0.7)
----- ----- -----
Net periodic postretirement benefit cost.................... $11.9 $10.8 $ 9.8
===== ===== =====
Assumed discount rate, beginning of year...................... 8.75% 7.50% 8.50%
===== ===== =====
</TABLE>
Accrued postretirement benefit cost at December 31, 1995 and 1994 is
composed of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1994
------ -----
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retired participants.............................................. $ 45.2 $33.9
Fully eligible participants....................................... 26.9 18.6
Other active participants......................................... 45.7 29.5
------ -----
Total APBO................................................ 117.8 82.0
Unamortized amendments.............................................. 5.4 9.8
Unrecognized actuarial loss......................................... (24.2) (2.7)
------ -----
Accrued postretirement benefit cost............................... $ 99.0 $89.1
====== =====
Assumed discount rate............................................... 7.25% 8.75%
====== =====
</TABLE>
- ---------------
Amounts in the previous two tables are presented using First Capital data as all
calculations are made at the First Capital level. The corresponding amounts for
the Company are not significantly different.
For measurement purposes, a 13.00% and 12.10% weighted average annual rate
of increase in per capita cost of covered health care benefits was assumed for
1995 and 1994, respectively, decreasing gradually to 5.50% by the year 2010.
Increasing the assumed health care cost trend rate by one percentage point each
year would increase the APBO as of December 31, 1995 and 1994 by $8.6 million
and $6.0 million, respectively, and the aggregate of the service and interest
cost components of the net periodic postretirement benefit cost by $1.0 million
and $0.9 million, respectively.
15
<PAGE> 16
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCENTIVE COMPENSATION PROGRAMS
The Company sponsors compensation plans covering certain officers and
employees.
Corporate Annual Performance Plan and Long-Term Performance Plan
The Corporate Annual Performance Plan ("CAPP") is an annual bonus plan.
CAPP bonuses are determined based on the performance of the Company, the
business unit in which a participant is employed, and the participant,
personally. The Long-Term Performance Plan ("LTPP") is a long-term cash
incentive plan. LTPP awards are determined for a performance period based on the
success of the Company in achieving a target level of profits established for
each year of the performance period, with such annual performance then averaged
for the performance period. Amounts charged to expense under CAPP and LTPP
amounted to $16.1 million, $16.2 million and $14.8 million during the years
ended December 31, 1995, 1994 and 1993, respectively.
Phantom Stock Appreciation Right Plan
The Company participates in a long-term cash plan, the Phantom Stock
Appreciation Right Plan (the "PSAR Plan"). First Capital terminated the PSAR
Plan as of December 1995 and intends to cash out all outstanding phantom stock
appreciation rights ("PSARs"). A PSAR granted under the PSAR Plan entitled the
holder thereof to receive from the Company, upon exercise of such PSAR, a
specified amount of cash. A PSAR had a term of five years and vested 100% on the
first anniversary of the date of grant. Amounts charged to expense by the
Company under the PSAR Plan amounted to $30.1 million, $4.1 million and $36.1
million during the years ended December 31, 1995, 1994 and 1993, respectively.
First Capital also amended the PSAR Plan to provide that certain officers of the
Company (all of whom were granted PSARs in 1995) are required to defer one-half
of the amount payable in satisfaction of their respective PSARs granted in 1995.
The amounts so deferred will be administered by the Company in accordance with
the terms of the Associates First Capital Corporation Equity Deferral Plan.
Long-Term Equity Compensation Plan
The Long-Term Equity Compensation Plan ("ECP") is a stock-based incentive
plan sponsored by First Capital in which the Company will participate and which
will be adopted in 1996. The ECP provides for the grant of incentive and
nonqualified stock options, stock appreciation rights, restricted stock,
performance shares and performance units of First Capital. Awards granted under
the ECP are based on shares of Class A Common Stock of First Capital.
NOTE 12 -- COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits arising in the ordinary
course of its business. The Company aggressively manages its litigation and
assesses appropriate responses to its lawsuits in light of a number of factors,
including potential impact of the actions on the conduct of the Company's
operations. In the opinion of management, the resolution of any of these matters
is not expected to have a material adverse effect on the Company's financial
condition or results of operations.
16
<PAGE> 17
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- OTHER ASSETS
The components of Other Assets at December 31, 1995 and 1994 were as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
-------- --------
<S> <C> <C>
Balances with related parties -- NOTE 14........................ $ 256.3 $ 385.8
Goodwill........................................................ 345.7 362.0
Other........................................................... 571.5 471.1
-------- --------
Total other assets.................................... $1,173.5 $1,218.9
======== ========
</TABLE>
NOTE 14 -- TRANSACTIONS AND BALANCES WITH RELATED PARTIES
Associates provides debt financing or advances to certain of its former
foreign subsidiaries. At December 31, 1995 and 1994, amounts due from foreign
affiliates totaled $70.7 million and $68.7 million, respectively, and were
included in Other Assets. These receivables or advances bear fluctuating
interest rates (as applicable) and are payable on demand. Interest income
related to these transactions was $7.9 million, $14.4 million and $21.3 million
for the years ended December 31, 1995, 1994 and 1993, respectively. The
estimated fair value of these receivables was $72.2 million and $70.4 million at
December 31, 1995 and 1994, respectively.
Associates, from time to time, invests a portion of its working capital
funds in variable rate demand notes of First Capital. The balances of its
investment at December 31, 1995 and 1994 were $3.7 million and $195.5 million,
respectively, and were included in Other Assets. Income from such investments
totaled $14.3 million, $16.4 million and $10.7 million for the years ended
December 31, 1995, 1994, and 1993, respectively.
Associates occasionally makes advances to Associates National Bank
(Delaware) ("ANB Delaware"), a wholly-owned subsidiary of First Capital. The
balances of such advances at December 31, 1995 and 1994 were $181.9 million and
$124.1 million, respectively, and were included in Other Assets. Income from
such advances totaled $6.9 million, $4.2 million and $2.9 million for the years
ended December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995 and 1994, the net consumer finance receivables
included participations in credit card receivables owned or originated by ANB
Delaware, an affiliate of Associates. The balances of these receivables were
$4.6 billion and $3.8 billion at December 31, 1995 and 1994, respectively, and
were included in Finance Receivables.
The Company provides certain services of an administrative nature, use of
certain tangible and intangible assets, including trademarks, guarantees of debt
and related interest, and other management services to certain of its foreign
affiliates in Japan, Canada, Puerto Rico and the United Kingdom. Services and
usage are charged to the affiliates based on the nature of the service. Fees for
financial accommodations range from .25% to 1% of the average outstanding debt
guaranteed. Management believes such charges reflect the market value for such
services, usage and guarantees. The amounts paid or accrued under these
arrangements for the years ended December 31, 1995, 1994 and 1993 were $68.4
million, $53.7 million, and $40.1 million, respectively.
The Company provides certain auto club and relocation services to Ford.
Revenues related to these services were $29.7 million, $19.4 million and $12.1
million for the years ended December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995 and 1994, the Company was a guarantor on debt and
related accrued interest of its foreign affiliates in Canada and Puerto Rico
amounting to $487.2 million and $339.9 million, respectively.
17
<PAGE> 18
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Associates receives a fee for services it provides to First Capital. During
each of the years ended December 31, 1995, 1994 and 1993, Associates received
$6.0 million in fees for these services.
At December 31, 1995 and 1994, Associates current income taxes
(receivable)/payable to First Capital amounted to $(9.0) million and $11.1
million, respectively.
NOTE 15 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISKS
The Company maintains cash, cash equivalents, investments, and certain
other financial instruments with various major financial institutions. To the
extent such deposits exceed maximum insurance levels, they are uninsured.
As explained in NOTE 2 to the consolidated financial statements, the
Company does not hold or issue derivative financial instruments for trading
purposes. The Company's derivative activity is limited to currency swap
transactions designed to hedge its currency risk on specific foreign
currency-denominated assets to certain subsidiaries denominated in British
Sterling. One interest rate swap transaction for $40.0 million, assumed in 1993
as part of a business acquisition, matured in April 1995 and is no longer
outstanding. The Company is a buyer in each transaction.
The Company's currency swap transactions are not material to its
consolidated balance sheet and do not represent a material exposure to its
consolidated net earnings. Amounts under currency and interest rate swap
contracts at December 31, 1995 and 1994 were $55.7 million and $95.7 million,
respectively. At December 31, 1995, the Company was at market risk for any
currency differential should a counterparty to these contracts fail to meet the
terms of the contracts. The contracts expire in October 1996. At December 31,
1995, the Company's estimated exposure to loss resulting from currency
differentials, in the event of nonperformance by certain counterparties, was
$1.1 million; the Company estimates its benefit resulting from currency
differentials, in the event of nonperformance by certain counterparties, was
$0.2 million. The estimated fair value of amounts under contract approximated
$0.9 million and $0.7 million at December 31, 1995 and 1994, respectively. Such
value was determined based on the foreign currency exchange rates/interest rate
for similar transactions in effect at the balance sheet date. It is the
Company's policy that each counterparty's public debt rating must be rated Aa3,
AA- or better by at least two nationally recognized rating agencies at the time
any such contract is entered into. The Company monitors such ratings on an
ongoing basis. The Company does not employ other methods to assess credit risk,
because swap transactions are not a significant part of its operating activities
and because the Company does not enter into complex derivative transactions.
The consumer finance business grants revolving lines of credit to certain
of its customers. At December 31, 1995 and 1994, the unused portion of these
lines aggregated $661.1 million and $455.2 million, respectively. The potential
risk associated with, and the estimated fair value of, the unused credit lines
are not considered to be significant.
The commercial finance business grants lines of credit to certain dealers
of truck, construction equipment and manufactured housing. At December 31, 1995
and 1994, the unused portion of these lines aggregated $1.2 billion and $849.7
million, respectively. The potential risk associated with, and the estimated
fair value of, the unused credit lines are not considered to be significant.
NOTE 16 -- 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, concurrent with the adoption of SFAS
No. 115 in 1994, the Company classified its investments in debt securities as
available for sale and adjusted its
18
<PAGE> 19
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded value to market. Prior to adoption of this standard, the Company
carried these investments at amortized cost. During 1995, gross realized gains
on sales amounted to $0.2 million. Gross realized gains and losses on sales
during 1994 amounted to $2.1 million and $0.3 million, respectively. Unrealized
gains or losses are reported as a component of stockholders' equity, net of tax.
The following tables set forth, by type of security issuer, the amortized cost,
gross unrealized holding gains, gross unrealized holding losses, and estimated
market value at December 31, 1995 and 1994 (in millions):
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government obligations.............. $ 400.2 $ 14.4 $ $ 414.6
Corporate obligations.................... 222.3 3.5 225.8
Mortgage-backed.......................... 215.6 0.8 216.4
Other.................................... 15.3 15.3
------- ------ ------ -------
Total debt securities.......... $ 853.4 $ 18.7 $ -- $ 872.1
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government obligations.............. $ 422.4 $ 0.7 $(25.2) $ 397.9
Corporate obligations.................... 66.8 0.2 (0.5) 66.5
Mortgage-backed.......................... 96.3 (2.3) 94.0
Other.................................... 9.2 9.2
------- ------ ------ -------
Total debt securities.......... $ 594.7 $ 0.9 $(28.0) $ 567.6
======= ====== ====== =======
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1995 and 1994, by contractual maturity, are shown below (in
millions):
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less...................... $ 158.5 $ 159.0 $ 95.7 $ 94.5
Due after one year through five years........ 384.3 394.9 386.8 372.1
Due after five years through ten years....... 187.2 194.3 110.2 99.0
Due after ten years.......................... 123.4 123.9 2.0 2.0
------- ------- ------- -------
$ 853.4 $ 872.1 $ 594.7 $ 567.6
======= ======= ======= =======
</TABLE>
Equity Securities
Equity security investments are recorded at market value. Concurrent with
the adoption of SFAS No. 115 in 1994, the Company classified its investments in
equity securities as trading securities and included in earnings unrealized
gains or losses on such securities. Prior to adoption, unrealized gains or
losses were reported as a component of stockholders' equity, net of tax. The
estimated market value at December 31, 1995 and 1994 was $12.6 million and $41.9
million, respectively. Historical cost at December 31, 1995 and 1994 was $8.5
million and $38.9 million, respectively.
Estimated market values of debt and equity securities are based on quoted
market prices.
19
<PAGE> 20
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- BUSINESS SEGMENT INFORMATION
Associates primary business activities are consumer finance and commercial
finance. The consumer finance operation is engaged in making and investing in
home equity, personal lending and sales finance receivables, credit card
receivables, and providing sales financing for manufactured housing. The
commercial finance operation is principally engaged in financing sales of
transportation and industrial equipment and leasing, and sales of other
financial services, including auto fleet leasing and management, relocation
services and auto club and roadside assistance services. The Company has an
insurance operation which is engaged in underwriting credit life, credit
accident and health, property and casualty, and accidental death and
dismemberment insurance, principally for customers of the finance operations.
Such insurance activity is conducted by the Company's licensed insurance agents
and managed as a separate activity. Insurance sales are dependent on the
business activities and volumes of the consumer and commercial business.
Accordingly, insurance revenues and related claims are included in the consumer
and commercial business to which they relate.
The following table sets forth information by business segment (in
millions):
<TABLE>
<CAPTION>
BUSINESS SEGMENT
-----------------------
CONSUMER COMMERCIAL
FINANCE FINANCE(A) CONSOLIDATED
--------- ---------- ------------
<S> <C> <C> <C>
Year Ended or at December 31, 1995
Revenue.......................................... $ 3,882.4 $ 1,502.0 $ 5,384.4
========= ========= ==========
Operating income(b).............................. $ 795.9 $ 325.5 $ 1,121.4
========= ========= ==========
Total assets..................................... $23,278.0 $13,745.7 $ 37,023.7
========= ========= ==========
Year Ended or at December 31, 1994
Revenue.......................................... $ 3,147.6 $ 1,240.3 $ 4,387.9
========= ========= ==========
Operating income(b).............................. $ 665.1 $ 307.5 $ 972.6
========= ========= ==========
Total assets..................................... $20,032.4 $11,654.8 $ 31,687.2
========= ========= ==========
Year Ended or at December 31, 1993
Revenue.......................................... $ 2,604.1 $ 1,085.5 $ 3,689.6
========= ========= ==========
Operating income(b).............................. $ 557.0 $ 277.4 $ 834.4
========= ========= ==========
Total assets..................................... $17,427.9 $ 9,937.2 $ 27,365.1
========= ========= ==========
</TABLE>
- ---------------
(a) Includes information pertaining to the financing of manufactured housing
purchases which are managed by the commercial operation.
(b) Includes operating income pertaining to the Company's non-operating
subsidiaries.
Capital expenditures and depreciation and amortization expense are not
significant.
20
<PAGE> 21
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- UNAUDITED QUARTERLY FINANCIAL DATA
The following table sets forth the unaudited quarterly results of
operations (in millions):
<TABLE>
<CAPTION>
1995
-----------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance charges........................... $1,268.3 $1,234.2 $1,181.6 $1,121.2
======== ======== ======== ========
Interest expense.......................... $ 519.1 $ 507.5 $ 490.7 $ 462.5
======== ======== ======== ========
Earnings before provision for income
taxes................................... $ 288.2 $ 298.7 $ 274.9 $ 259.6
Provision for income taxes................ 107.0 110.5 102.2 93.6
-------- -------- -------- --------
Net earnings.............................. $ 181.2 $ 188.2 $ 172.7 $ 166.0
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance charges........................... $1,072.1 $ 984.6 $ 917.9 $ 892.1
======== ======== ======== ========
Interest expense.......................... $ 426.8 $ 391.2 $ 358.3 $ 333.4
======== ======== ======== ========
Earnings before provision for income
taxes................................... $ 259.9 $ 257.8 $ 230.2 $ 224.7
Provision for income taxes................ 100.7 96.0 88.2 84.2
-------- -------- -------- --------
Net earnings.............................. $ 159.2 $ 161.8 $ 142.0 $ 140.5
======== ======== ======== ========
</TABLE>
21
