<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6154
ASSOCIATES CORPORATION OF NORTH AMERICA
(Exact name of registrant as specified in its charter)
Delaware 74-1494554
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 East Carpenter Freeway, Irving, Texas 75062-2729
(Address of principal executive offices)
(Zip Code)
972-652-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes..X.. No.....
As of September 30, 1998, 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)
Nine Months Ended Three Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
REVENUE
Finance charges $4,436.6 $4,744.2 $1,388.6 $1,631.5
Insurance premiums 279.6 272.7 92.9 92.2
Investment and other
income 611.5 270.0 250.6 102.3
-------- -------- -------- --------
5,327.7 5,286.9 1,732.1 1,826.0
EXPENSES
Interest expense 2,117.2 1,862.9 714.3 655.2
Operating expenses 1,253.1 1,360.8 406.0 478.3
Provision for losses on
finance receivables
- NOTE 6 729.7 897.2 197.3 294.1
Insurance benefits paid
or provided 105.2 104.9 33.2 33.7
-------- -------- -------- --------
4,205.2 4,225.8 1,350.8 1,461.3
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 1,122.5 1,061.1 381.3 364.7
PROVISION FOR INCOME TAXES 410.6 390.0 141.4 134.7
-------- -------- -------- --------
NET EARNINGS $ 711.9 $ 671.1 $ 239.9 $ 230.0
======== ======== ======== ========
See notes to consolidated financial statements.<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(Dollars In Millions)
September 30 December 31
1998 1997
------------ -----------
ASSETS
CASH AND CASH EQUIVALENTS $ 561.1 $ 294.8
INVESTMENTS IN DEBT AND EQUITY SECURITIES
- NOTE 4 1,904.1 1,153.5
FINANCE RECEIVABLES, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves
- NOTE 5 42,701.5 45,430.2
NOTES RECEIVABLE FROM RELATED PARTIES
- NOTE 7 8,162.1 2,331.0
OTHER ASSETS - NOTE 8 1,428.9 1,321.6
--------- ---------
Total assets $54,757.7 $50,531.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $19,106.4 $17,184.5
Bank Loans - 1,202.1
ACCOUNTS PAYABLE AND ACCRUALS 1,063.4 960.4
LONG-TERM DEBT
Senior Notes 27,403.1 24,710.0
Subordinated and Capital Notes 425.3 425.4
--------- ---------
27,828.4 25,135.4
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 1,667.8 1,667.8
Retained Earnings 4,941.4 4,229.5
Accumulated Other Comprehensive Income
- NOTE 3 3.3 4.4
--------- ---------
Total stockholders' equity 6,759.5 6,048.7
--------- ---------
Total liabilities and stockholders'
equity $54,757.7 $50,531.1
========= =========
See notes to consolidated financial statements.<PAGE>
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
Nine Months Ended
September 30
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 711.9 $ 671.1
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Provision for losses on finance receivables 729.7 897.2
Increase in accounts payable and accruals 54.7 78.9
Depreciation and amortization 185.8 191.1
Unrealized gain on trading securities - (1.7)
Purchases of trading securities (550.4) (99.0)
Sales and maturities of trading securities 83.2 29.8
Deferred income taxes 48.8 (6.0)
Increase in insurance policy and claims
reserves 10.0 63.7
--------- ---------
Net cash provided from operating
activities 1,273.7 1,825.1
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (29,926.6) (32,953.2)
Finance receivables liquidated 31,581.5 27,051.8
Finance receivables sold 234.9 -
Purchases of available-for-sale securities (1,548.8) (230.5)
Sales and maturities of available-for-sale
securities 1,262.6 248.7
Increase in other assets (6,023.8) (542.5)
--------- ---------
Net cash used for investing
activities (4,420.2) (6,425.7)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 6,408.5 5,067.2
Retirement of long-term debt (3,715.5) (2,334.8)
Increase in notes payable 719.8 1,925.6
--------- ---------
Net cash provided from financing
activities 3,412.8 4,658.0
--------- ---------
<PAGE>
INCREASE IN CASH AND CASH EQUIVALENTS 266.3 57.4
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 294.8 278.4
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 561.1 $ 335.8
========= =========
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
the principal U.S.-based operating unit of Associates First Capital
Corporation ("First Capital"). Prior to April 7, 1998, First Capital
was a majority indirect-owned subsidiary of Ford Motor Company
("Ford"). On April 7, 1998, Ford completed a spin-off of its interest
in First Capital in the form of a tax-free distribution of its First
Capital shares to Ford Common and Ford Class B stockholders. Effective
with the distribution, First Capital is no longer a subsidiary of Ford.
All the outstanding Common Stock of Associates is owned by First
Capital. All shares of the Company's 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 PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements present the
consolidated financial position and operating results of Associates and
its subsidiaries. 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 period presentation.
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.
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires the
use of management estimates. These estimates are subjective in nature
and involve matters of judgment. Actual results could differ from
these estimates.
NOTE 3 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income", on January 1,
1998. Pursuant to SFAS 130, accumulated other comprehensive income was
reported on the consolidated balance sheet and consisted of net
unrealized gains on available-for-sale securities of $3.3 million and
$4.4 million at September 30, 1998 and December 31, 1997, respectively.
<PAGE>
Comprehensive income for the nine- and three-month periods ended
September 30, 1998 and 1997 consisted of the following components (in
millions):
Nine Months Ended Three Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Net earnings $711.9 $671.1 $239.9 $230.0
Net unrealized (loss) gain
on available-for-sale
securities (1.1) 2.7 (2.2) 4.6
------ ------ ------ ------
Comprehensive income $710.8 $673.8 $237.7 $234.6
====== ====== ====== ======
NOTE 4 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
AVAILABLE-FOR-SALE SECURITIES
-----------------------------
Available-for-sale securities consist of preferred stock, bonds
and notes held by the Company's insurance subsidiaries. The Company
invests in these securities with the intention of holding them to
maturity. However, if market conditions change, the Company may sell
them prior to maturity. Accordingly, the Company classifies these
securities as available-for-sale securities and adjusts their recorded
value to market. The estimated market value at September 30, 1998 and
December 31, 1997 was $1.9 billion and $1.0 billion, respectively. The
amortized cost at both September 30, 1998 and December 31, 1997
approximated the estimated market value. 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.
TRADING SECURITIES
------------------
Trading securities consist of investments in equity securities
which are recorded at market value. Unrealized gains or losses on
trading securities are included in earnings. The estimated market
value at September 30, 1998 and December 31, 1997 was $17.1 million and
$131.0 million, respectively. Historical cost at September 30, 1998
and December 31, 1997 was $15.1 million and $126.7 million,
respectively. On July 1, 1998, the Company's preferred stock
investments of $582.5 million were redesignated by management as
available-for-sale securities. Previously, preferred stock investments
were designated as trading securities.
<PAGE>
NOTE 5 - FINANCE RECEIVABLES
At September 30, 1998 and December 31, 1997, finance receivables
consisted of the following (in millions):
September 30 December 31
1998 1997
---- ----
Consumer Finance
Home equity lending <F1> $19,963.6 $17,437.3
Personal lending and retail sales
finance 6,653.4 6,920.6
Credit card <F2> 1,401.5 7,333.6
Manufactured housing 20.1 24.1
--------- ---------
28,038.6 31,715.6
--------- ---------
Commercial Finance
Truck and truck trailer 9,722.3 9,011.1
Equipment <F3> 4,573.1 4,899.8
Fleet leasing 1,460.4 1,418.9
Warehouse lending and other 1,049.8 809.1
--------- ---------
16,805.6 16,138.9
--------- ---------
Finance receivables, net of unearned
finance income ("net finance
receivables")<F4> 44,844.2 47,854.5
Allowance for losses on finance receivables (1,370.3) (1,661.9)
Insurance policy and claims reserves (772.4) (762.4)
-------- --------
Finance receivables, net of unearned
finance income, allowance for credit
losses and insurance policy and
claims reserves $42,701.5 $45,430.2
========= =========
[FN]
<F1> In March 1998, the Company securitized and sold approximately
$235 million of home equity lending receivables. No significant
gain or loss was recorded on this transaction. The Company
retained the servicing responsibilities for these receivables.
<F2> In April 1998, the Company sold, at book value, $5.2 billion of
the Company's participation interest in the U.S. bankcard credit
card receivables of First Capital. The sale was financed by a
note between the Company and First Capital - See NOTE 7.
Immediately subsequent to the sale, First Capital securitized and
sold, at book value, substantially all of its U.S. bankcard
credit card receivables to a master trust. First Capital
received $2.0 billion in proceeds from the transaction and
retained a $3.2 billion certificated interest in the master
trust. The proceeds were used to pay down the loan between First
Capital and the Company.
<F3> In March 1998, approximately $650 million of equipment finance
receivables were sold at book value to First Capital. No gain or
loss was recorded on the sale.
<F4> Unearned finance income was approximately $3.6 billion at both
September 30, 1998 and December 31, 1997, respectively.
</FN>
NOTE 6 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables during
the periods indicated were as follows (in millions):
Nine Months Ended Year Ended
September 30 December 31
1998 1997 1997
---- ---- ----
Balance at beginning of period $1,661.9 $1,371.4 $ 1,371.4
Provision for losses 729.7 897.2 1,195.6
Recoveries on receivables
charged off 122.5 133.6 190.5
Losses sustained (794.1) (950.7) (1,298.3)
Reserves of receivables sold (359.4) - -
Reserves of acquired
businesses and other 9.7 185.6 202.7
-------- -------- ---------
Balance at end of period $1,370.3 $1,637.1 $ 1,661.9
======== ======== =========
NOTE 7 - NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties include amounts due from
the Company's affiliates and First Capital. These notes are unsecured
demand notes and generally bear interest at a floating rate. The
weighted average interest rate at September 30, 1998 was 8.0%. During
the nine- and three-month periods ended September 30, 1998 interest income
on notes receivable from related parties was approximately $359 million
and $146 million, respectively.
NOTE 8 - OTHER ASSETS
The components of other assets at September 30, 1998 and December
31, 1997 were as follows (in millions):
<PAGE>
September 30 December 31
1998 1997
------------ -----------
Goodwill $ 336.0 $ 343.1
Collateral held for resale 219.0 205.6
Property and equipment 220.0 164.2
Other 653.9 608.7
-------- --------
Total other assets $1,428.9 $1,321.6
======== ========
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 issue of debt securities 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, $1.1 billion was
available for dividends at September 30, 1998.
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 $2.5 billion. At September 30, 1998, Associates tangible
net worth was approximately $6.4 billion.
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for the purpose
of hedging specific exposures as part of its risk management program.
Such instruments to date have been limited to currency swap, interest
rate swap, treasury lock agreements and treasury futures and option
contracts.
Foreign currency swap agreements are held for purposes other than
trading and have been designated for accounting purposes as hedges of
specific foreign currency exposures under certain debt obligations.
Under these agreements, the Company and the agreement counterparties
are obligated to exchange specific foreign currencies at varying times
over the next 5 years. The aggregate notional amount of these
agreements at September 30, 1998 and December 31, 1997 was $1.1 billion
and $272.7 million, respectively. The fair value of such agreements at
September 30, 1998 and December 31, 1997 was $67.9 million and $1.2
million, respectively.
Interest rate swap and treasury lock agreements are held for
purposes other than trading and are used by the Company to hedge the
effect of interest rate movements on existing debt and anticipated debt
and asset securitization transactions. The aggregate notional amount
of interest rate swap and treasury lock agreements at September 30,
1998 and December 31, 1997 was $3.0 billion and $2.0 billion,
respectively. The fair value of such agreements at September 30, 1998
and December 31, 1997 was $(67.3) million and $(6.8) million,
respectively. Interest rate swap and treasury lock agreements mature
on varying dates over the next 5 years and 2 months, respectively.
Treasury futures and option contracts are used to minimize
fluctuations in the value of preferred stock investments and are held
for purposes other than trading. The aggregate notional amount and
fair value of futures and options contracts at September 30, 1998 was
$307.0 million and $(15.6) million, respectively. Such contracts
mature in December 1998.
NOTE 10 - PENDING ACQUISITIONS
On August 11, 1998, First Capital announced a definitive
agreement to purchase the assets and assume the liabilities of Avco
Financial Services, Inc. ("Avco"), a wholly-owned subsidiary of Textron
Inc. for $3.9 billion. First Capital has not yet determined the extent
to which the Company would acquire assets or assume liabilities of
Avco. Avco is a global, diversified financial services company with
approximately $8.9 billion in total assets. The transaction is
expected to be completed in late 1998 or early 1999, subject to
regulatory approvals and other customary conditions. On
August 11, 1998, following the announcement, Fitch IBCA, Inc.
("Fitch") and Moody's Investors Service, Inc. ("Moody's") placed the
ratings of the Company's long-term debt under review for possible
downgrade due to the possible effect of the acquisition on the Company.
However, Fitch and Moody's reaffirmed the Company's commercial paper
ratings while Standard & Poor's Rating Services and Duff & Phelps Credit
Rating Co. reaffirmed the ratings of the Company's long-term debt and
commercial paper. On November 10, 1998, Moody's confirmed the Company's
long-term debt ratings. The ratings outlook was changed to negative.
On August 31, 1998, First Capital announced a definitive
agreement to purchase certain assets and assume certain liabilities of
The Northland Company ("Northland"). Northland provides insurance
products through Jupiter Holdings, Inc., and mortgage banking, real
estate management, brokerage and related services through various other
subsidiaries. First Capital will acquire the insurance-related
businesses only, and Northland will divest the other businesses prior
to closing. First Capital has not yet determined the extent to which
the Company would acquire assets or assume liabilities of Northland. In
1997, Northland had net written premiums of approximately $388 million.
The transaction is expected to close in the fourth quarter of 1998 and
<PAGE>
is subject to approval by Northland's stockholders, regulatory approval
and other customary conditions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion and analysis has been prepared in
accordance with General Instruction H.(2)(a) to Form 10-Q, and should
be read in conjunction with the consolidated financial statements of
the Company and the related notes thereto.
Results of Operations
Net Earnings
Net earnings for the nine-month period ended September 30, 1998
were $711.9 million, a 6% increase over the same period in the
previous year. Net earnings for the three months ended September 30,
1998 were $239.9 million, an increase of 4% over the same period in the
previous year. The increase in net earnings in both periods was
primarily driven by an increase in investment and other income and
lower operating expenses and losses, somewhat offset by lower net
interest margins.
Finance Charges
Finance charge revenue decreased for the nine- and three-month
periods ended September 30, 1998, compared to the same periods in the
prior year, principally as a result of a decrease in average net
finance receivables outstanding. The sale of the Company's
participation interest in First Capital's bankcard credit card
receivables, as described in NOTE 5 of the consolidated financial
statements, was the primary cause for the decrease in average net
finance receivables outstanding.
Finance charge revenue as a percentage of average net finance
receivables (the "Finance Charge Ratio") was 13.06% and 12.53% for the
nine- and three-month periods ended September 30, 1998, respectively.
This compares to 14.09% and 14.02% for the comparable periods in 1997.
The decrease in the Finance Charge Ratio in each period was principally
due to the aforementioned credit card receivables sale which caused a
significant shift in product mix toward more secured portfolios.
Secured portfolios typically have lower finance charge rates than
unsecured portfolios.
Interest Expense
Interest expense increased for the nine- and three-month periods
ended September 30, 1998 compared to the same periods in 1997,
primarily due to an increase in average debt outstanding for each of
the comparative periods.
Net Interest Margin
As a result of the aforementioned changes in finance charge
revenue and interest expense, the Company's net interest margin
decreased to $2.3 billion and $674.3 million for the nine- and three-
month periods ended September 30, 1998, respectively, compared to $2.9
billion and $976.3 million for the comparable periods in the prior
year. In addition, the Company's net interest margin expressed as a
ratio to average net finance receivables declined to 6.83% and 6.09%
for the nine- and three-month periods ended September 30, 1998,
respectively, from the 8.56% and 8.39% reported in the comparable
periods in the prior year. The principal cause of the decline in the
Company's net interest margin ratio was the aforementioned decline in
the Company's average net finance receivables resulting in a shift in
product mix toward more secured portfolios.
Investment and Other Income
Investment and other income for the nine- and three-month periods ended
September 30, 1998 was $611.5 million and $250.6 million, respectively
compared to $270.0 million and $102.3 million for the comparable
periods in the prior year. The increase in both comparable periods is
primarily caused by higher investment income due to growth in the
Company's investment portfolio and earnings on the note receivable from
First Capital resulting from the second quarter credit card sale
described in NOTE 5 of the consolidated financial statements.
Operating Expenses
Nine- and three-month operating expenses for the periods ended
September 30, 1998 were lower than in the corresponding periods in
1997, reflecting the lower operating expenses associated with the
decrease in average net finance receivables outstanding in both
periods.
Provision for Losses
Lower average net finance receivable levels resulting from the
aforementioned second quarter credit card receivables sale was the
primary cause of the decrease in the provision for losses during both
comparable periods. A significant shift in product mix toward a higher
percentage of secured portfolios resulting from the credit card sale
was the primary cause of a decrease in the Company's total net credit
losses as a percentage of average net finance receivables ("Loss
Ratio") in both comparable periods. Secured portfolios generally have
lower loss rates than unsecured portfolios. The Company's Loss Ratio
was 1.98% and 1.71% for the nine- and three-month periods ended
September 30, 1998, respectively, compared to 2.43% and 2.47% for the
same periods in 1997.
Financial Condition
As described in NOTE 5 of the consolidated financial statements,
during the first nine months of 1998 the Company sold net finance
receivables of approximately $6 billion. These sales more than offset
internal receivables growth during the period resulting in a net
decrease in net finance receivables of $3.0 billion during the nine-
month period ended September 30, 1998.
Composite 60+day contractual delinquency was 2.38% of gross
finance receivables at September 30, 1998, comparable to the 2.35%
reported at December 31, 1997. The allowance for losses to net
finance receivables decreased to 3.06% at September 30, 1998 from 3.47%
at December 31, 1997 due principally to the aforementioned sale, at
book value, of the Company's participation interest in First Capital's
bankcard receivables. Company management believes the allowance for
losses at September 30, 1998 is sufficient to provide adequate coverage
against losses in its portfolios.
Liquidity and Capital Resources
Through its asset and liability management function, the Company
maintains a disciplined approach to the management of liquidity,
capital and interest rate risk. The Company has a formal process for
managing its liquidity to ensure that funds are available at all times
to meet the Company's commitments.
The principal sources of cash for the Company are proceeds from
the issuance of short- and long-term debt and cash provided from the
Company's operations. While First Capital has made periodic capital
contributions to the Company in the past, no assurance can be made with
respect to future capital contributions by First Capital to the
Company. Nevertheless, management believes that the Company has
available sufficient liquidity, from a combination of cash provided
from operations and external borrowings, to support its operations.
A principal strength of the Company is its ability to access the
global debt markets in a cost-efficient manner. Continued access to
the public and private debt markets is critical to the Company's
ability to continue to fund its operations. The Company seeks to
maintain a conservative liquidity position and actively manages its
liability and capital levels, debt maturities, diversification of
funding sources and asset liquidity to ensure that it is able to meet
its obligations as they mature. The Company's operations are
principally funded through commercial paper borrowings made
domestically and long-term debt borrowings made both domestically and
internationally.
At September 30, 1998, the Company had short- and long-term debt
outstanding of $19.1 billion and $27.8 billion, respectively. Short-
term debt principally consists of commercial paper and represents the
Company's primary source of short-term liquidity. Long-term debt
principally consists of senior unsecured long-term debt issued publicly
and privately by the Company in the United States and abroad. During
the nine months ended September 30, 1998 and 1997, the Company raised
term debt aggregating $6.4 billion and $5.1 billion, respectively,
through public and private offerings.
Substantial additional liquidity is available to the Company's
operations through established credit facilities in support of its
commercial paper program. Such credit facilities provide a means of
refinancing its maturing short-term obligations as needed. At
September 30, 1998, these credit facilities totaled $16.3 billion, of
which $1.8 billion was allocated for use by First Capital. These
credit facilities provide at least 75% coverage of commercial paper
outstanding at September 30, 1998.
Additionally, the Company believes it has access to other sources
of liquidity, which to date have either been accessed only on a limited
basis, such as securitization of assets, or not accessed, such as the
issuance of alternative forms of capital, including preferred stock.
Year 2000 Compliance
The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process date fields
containing a 2 digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, if such systems are not
repaired they may be unable to accurately process certain date-based
information.
The Company has a company-wide initiative to address the Year
2000 Compliance issue. A team of technology professionals began
addressing the Year 2000 Compliance issue in 1995. Since then, the
Company has identified all significant third party and internal
applications that require modification to ensure Year 2000 compliance.
The Company divides its Year 2000 Compliance initiative into two
components, information technology ("IT") and non-information
technology ("Non-IT"). The IT initiative includes third party and
Company mainframe and desktop systems and applications. The Non-IT
initiative includes third party suppliers, embedded systems and the
Company's larger commercial borrowers.
Internal and external resources are being used to make the
required IT modifications and test Year 2000 compliance. The
modification process of all critical applications is substantially
complete. The Company is currently on schedule to complete the testing
processes for these applications by December 31, 1998. These
applications will undergo additional testing during 1999. In addition,
the Company is utilizing both internal and external resources to
provide independent system verification and validation of Year 2000
compliance. This process will continue through the end of 1999. The
Company acquires businesses from time to time. During its review of a
potential acquisition, the Company performs a Year 2000 readiness
review to determine that the potential acquisition's systems either are
or will be Year 2000 compliant.
The Company's Non-IT efforts include ensuring third party
suppliers, embedded systems and the Company's larger commercial
borrowers are Year 2000 compliant. The Company has communicated with
third party suppliers that provide critical products or services,
providers of significant embedded systems and large commercial
borrowers to determine their Year 2000 compliance readiness and is
testing and monitoring the extent to which the Company may be
vulnerable to any significant Year 2000 issues. In addition, the
Company is requiring these suppliers and borrowers to certify that they
will be Year 2000 compliant by December 31, 1998. If they cannot make
this certification, or the Company's testing shows potential Year 2000
compliance problems, contingency plans will be implemented.
Contingency planning is an integral part of the Company's Year
2000 readiness project. The Company is developing contingency plans
that will be in place in 1999 which will document the processes
necessary to maintain critical business functions should a significant
third party system or critical internal system fail. These contingency
plans generally include the repair of existing systems and, in some
instances, the use of alternative systems or procedures.
There can be no guarantee that the systems of other companies on
which the Company's systems rely will be converted in a timely manner,
or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material
adverse effect on the Company. In addition, there are many risks
associated with the Year 2000 Compliance issue, including but not
limited to the possible failure of the Company's computer and
information technology systems. Any such failure could have a material
adverse affect on the Company including the inability to properly bill
and collect payments from customers and errors or omissions in
accounting and financial data. In addition, the Company is exposed to
the inability of third parties to perform as a result of Year 2000
Compliance. Any such failure by a third party bank, regulatory agency,
group of investors, securities exchange or clearing agency, software
product or service provider, utility or other entity may have a
material adverse financial or operational effect on the Company.
Through September 30, 1998 the Company has incurred and expensed
approximately $15 million for incremental costs primarily related to
third party vendors, outside contractors and additional staff dedicated
to the Year 2000 readiness project. The Company currently expects that
it will incur future incremental costs related to the project of
approximately $7 million. These incremental costs do not include
existing resources allocated to the project effort or the costs that
will be incurred by the Company related to the acquisitions that are
expected to close during the fourth quarter of 1998 or in 1999. The
incremental Year 2000 costs related to these future acquisitions are
not expected to be material to the Company.
These costs and the date on which the Company plans to complete
the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Management has no material changes to report from the disclosure
set forth in the Company's Form 10-K for the year ended December 31,
1997.<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.
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 (the
"1995 Act"). The 1995 Act provides a "safe harbor" for forward-looking
statements to encourage companies to provide information without fear
of litigation so long as those statements are identified as forward
looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected. Although the Company does not
anticipate that it will make forward-looking statements as a general
policy, the Company will make forward-looking statements as required by
law or regulation, and from time to time may make such statements with
respect to management's estimation of the future operating results and
business of the Company.
The Company hereby incorporates into this report by reference to
its Form 10-K for the year ended December 31, 1997 the cautionary
statements found on pages 23-24 of such Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the third quarter ended September 30, 1998,
Associates filed Current Reports on Form 8-K as of July 14, 1998
(announcing earnings for the second quarter of 1998); July 28,
1998 and August 26, 1998 (each related to a debt issuance or
registration pursuant to Rule 415); August 11, 1998 (announcing
a definitive agreement to purchase the assets and liabilities
of Avco Financial Services, Inc.); and September 29, 1998
(announcing the retirement of Harold D. Marshall in early 1999
as President and Chief Operating Officer of the Company).
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
November 12, 1998
ASSOCIATES CORPORATION OF NORTH AMERICA
(registrant)
By /s/ John F. Stillo
-------------------------------
Senior Vice President, Comptroller
and Principal Accounting Officer
<PAGE>
EXHIBIT 12
ASSOCIATES CORPORATION OF NORTH AMERICA
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Millions)
Nine Months Ended
September 30
1998 1997
---- ----
Fixed Charges (a)
Interest expense $2,117.2 $1,862.9
Implicit interest in rent 13.8 13.3
-------- --------
Total fixed charges $2,131.0 $1,876.2
======== ========
Earnings (b)
Earnings before provision for income
taxes $1,122.5 $1,061.1
Fixed charges 2,131.0 1,876.2
-------- --------
Earnings, as defined $3,253.5 $2,937.3
======== ========
Ratio of Earnings to Fixed Charges 1.53 1.57
==== ====
(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 September 30, 1998
and the nine 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
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